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 JUNE 30, 2002
Commission File Number 0-9314
ACCESS PHARMACEUTICALS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 83-0221517
- ------------------------ --------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
2600 Stemmons Frwy, Suite 176, Dallas, TX 75207
-----------------------------------------------
(Address of principal executive offices)
Telephone Number (214) 905-5100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirement for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of each of the issuer's classes of
common stock, as of August 14, 2002 was 13,160,043 shares of common
stock, $0.01 par value per share.
Total No. of Pages 17
------
PART I -- FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
The response to this Item is submitted as a separate section of this report.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are an emerging pharmaceutical company focused on developing both novel
low development risk product candidates and technologies with longer-term
major product opportunities. We are a Delaware corporation in the
development stage.
Together with our subsidiaries, we have proprietary patents or rights to
six drug delivery technology platforms: synthetic polymer targeted delivery,
vitamin mediated targeted delivery (including oral), bioerodible hydrogel
technology, nanoparticles and nanoparticle networks, Residerm (R) A topical
delivery technology and carbohydrate targeting technology. In addition we
have acquired the amlexanox patents and licensed patents for the treatment
of mucosal and skin disorders.
We use our proprietary technology to develop products and product candidates.
Our patents protect our marketed products, amlexanox 5% paste (marketed under
the trade names Aphthasol (R) and Aptheal (R)) and Zindaclin (R), and our
products that are currently in the development phase, polymer platinate
(AP 5280), DACH platinum (AP 5346), OraDisc (TM) and the mucositis technology.
On July 22, 2002, we acquired from GlaxoSmithKline the patents and trademarks
covering the use of amlexanox for the treatment of mucosal and skin disorders.
The two major components of the acquisition are the US marketing rights to
amlexanox 5% paste which is currently marketed for the treatment of canker
sores under the trademark Aphthasol (R), and the remaining worldwide
marketing rights for this indication which were the subject of a prior
licensing agreement between the companies.
Under the terms of the agreement, we made an initial upfront payment of
$750,000 and we will make additional payments over time of $500,000 and
future possible milestone payments based on the commercial success of
amlexanox. The commercial terms of the previously announced mucositis
agreement between the companies which granted worldwide rights for this
indication to Access will remain in place.
We contract with third party contract research organizations to complete
our large clinical trials and for data management of all of our clinical
trials. Generally, we manage the smaller Phase I and II trials ourselves.
Currently we have one Phase I and one Phase III trial in process and a
Phase I and Phase III trial planned for later this year.
2
Except for the historical information contained herein, the following
discussions and certain statements in this Form 10-Q are forward-looking
statements that involve risks and uncertainties. In addition to the risks
and uncertainties set forth in this Form 10-Q, other factors could cause
actual results to differ materially, including but not limited to
uncertainties associated with research and development activities, clinical
trials, the integration of acquired companies and technologies, the timing
of regulatory approvals, dependence on others, collaborations, future cash
flow, the timing and receipt of licensing revenues, the future success of
our marketed products, amlexanox 5% paste and Zindaclin (R) and product
candidates including the polymer platinate program, and other risks
detailed in our reports filed under the Securities Exchange Act of 1934, as
amended, including but not limited to our Annual Report on Form 10-K for the
year ended December 31, 2001.
Since our inception, we have devoted our resources primarily to fund our
research and development programs. We have been unprofitable since inception
and to date have received limited revenues from the sale of products. We
cannot assure you that we will be able to generate sufficient product
revenues to attain profitability on a sustained basis or at all. We may
incur losses for the next several years as we continue to invest in product
research and development, preclinical studies, clinical trials and regulatory
compliance. As of June 30, 2002, our accumulated deficit was $42,082,000, of
which $8,894,000 was the result of the write-off of excess purchase price.
OTHER DEVELOPMENTS
Our recently created wholly owned subsidiary, Access Pharmaceuticals
Australia Pty. Limited acquired the targeted therapeutic technology business
of Biotech Australia Pty. Ltd under an Asset Sale Agreement dated February
26, 2002. Under the terms of the Asset Sale Agreement, Access Pharmaceuticals
Australia Pty. Limited acquired the patents to three targeted therapeutics
technologies and retained the scientific group that has developed this
technology. The total consideration payable by us will be paid in a
combination of cash and stock over a three-year period and is dependent
on the achievement of certain technology milestones. $500,000 was paid
at closing and an additional total of up to $525,000 will be paid over
a three-year period. Additionally, up to $350,000 may be payable if events
occur that result in certain new agreements. We also issued as consideration
172,584 shares of our common stock and 25,000 warrants to purchase our
common stock at an exercise price of $5.00 per share were issued. The
stock issued is subject to restriction and cannot be sold until
February 27, 2003.
The three patented targeted therapeutic technologies acquired are:
* folate conjugates of polymer therapeutics to enhance tumor delivery
by targeting folate receptors which are upregulated in certain tumor types;
* the use of vitamin B12 to target the transcobalamin II receptor which
is upregulated in numerous diseases including cancer, rheumatoid arthritis
and certain neurological and autoimmune disorders; and
* oral delivery of a wide variety of molecules, which cannot otherwise
be orally administered, using the active transport mechanism which
transports vitamin B12 into the systemic circulation.
In addition, through the acquisition we acquired an internal capability
to perform biological studies
3
which we previously out-sourced. We expect that this capability will
enhance our ability to identify lead compounds more rapidly and develop
the necessary preclinical data for regulatory filings.
RESEARCH PROJECTS, PRODUCTS AND PRODUCTS IN DEVELOPMENT
ACCESS DRUG PORTFOLIO
Licensing Clinical
Compound Originator Partner Indication FDA Filing Stage (1)
- -------------------------- ---------- ----------- --------------- ------------- ---------
Cancer
- ------
Polymer Platinate Access-
(AP5280) (2) U London - Anti-tumor Development(7) Phase I
Polymer Platinate Access- Colorectal
(AP5346) (2) U London - cancer Development Pre-Clinical
Mucositis technology Access - Mucositis IND Phase III
Topical Delivery
- ----------------
Amlexanox (3) Takeda Strakan, Aphthous NDA Approved
Esteve, Meda, ulcers
Mipharm,
Paladin
OraDisc (TM) Access Strakan, Aphthous IND Phase III
Amlexanox (3) Esteve, Meda, ulcers
Biodegradable Mipharm,
Polymer Disc Palidin
Residerm (R) A Access Strakan, Acne PLA(8) Approved (9)
Zinc Clindamycin (4) Healthpoint,
Fujisawa
Vitamin Mediated Delivery
- -------------------------
Oral Delivery System Access - Various Research Pre-Clinical
Folate Targeted Access - Anti-tumor Research Pre-Clinical
Therapeutics
Vitamin B12 Targeted Access - Anti-tumor Research Pre-Clinical
Therapeutics
Antiviral
- ---------
Anti viral compound(5)(6) NIH - HIV Development Pre-Clinical
Anti viral compound(6) Rockefeller - HTLV type I Development Pre-Clinical
and II
(1) For more information, see "Government Regulation" in our Annual Report
on Form 10-K for the year ended December 31, 2001 for description of
clinical stages.
(2) Licensed from the School of Pharmacy, The University of London. Subject
to royalty and milestone payments.
4
(3) Acquired from GlaxoSmithKline. Amlexanox licensing agreements executed
with the following parties for the prevention and treatment of aphthous
ulcers:
* Strakan Limited for UK and Ireland manufacturing and marketing rights.
* Laboratories Dr. Esteve SA for Spain, Portugal and Greece manufacturing and
marketing rights.
* Mipharm SpA for Italy, Switzerland, Turkey and Lebanon manufacturing and
marketing rights.
* Meda, AB for Scandinavia, the Baltic states and Iceland marketing rights.
* Paladin Labs Inc. for Canada manufacturing and marketing rights.
(4) Licensed worldwide manufacturing and marketing rights to Strakan who
sublicensed to:
* Healthpoint, Ltd for United States, Canada, Mexico and the Caribbean
manufacturing and marketing rights.
* Fujisawa GmbH for continental Europe marketing rights.
(5) Licensed from NIH subject to royalty and milestone payments.
(6) Licensed from The Rockefeller University subject to royalty and milestone
payments.
(7) Clinical studies being conducted in Europe prior to a FDA filing.
(8) United Kingdom ("U.K.") equivalent of an NDA.
(9) Marketing approval received from the Medicines Control Agency in the U.K.
and product launched in March 2002.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of June 30, 2002 was $13,697,000 representing a decrease
in working capital of $4,822,000 as compared to the working capital as of
December 31, 2001 of $18,519,000. The decrease in working capital was due
to the loss from operations for the first half of 2002 and payments for the
acquisition of the drug delivery assets of Biotech Australia Pty. Limited.
Since inception, our expenses have significantly exceeded revenues,
resulting in an accumulated deficit as of March 31, 2002 of $42,082,000.
We have funded our operations primarily through private sales of common
stock and convertible notes. Contract research payments and licensing fees
from corporate alliances and mergers have also provided funding for
operations.
We have incurred negative cash flows from operations since inception, and
have expended, and expect to continue to expend in the future, substantial
funds to complete our planned product development efforts. We expect that
our existing capital resources and expected payments to be received under
executed license agreements will be adequate to fund our current level of
operations through June 2004.
Our $13,530,000 convertible notes are due September 13, 2005. The note bears
interest of 7.7% per annum with $1,041,000 of interest due September 13, 2002.
We will expend substantial funds to conduct research and development programs,
preclinical studies and clinical trials of potential products, including
research and development with respect to our newly acquired and developed
technology. Our success and our future capital requirements and adequacy of
available funds will depend on many factors, including:
* the successful commercialization of amlexanox and Zindaclin(R);
* the ability to establish and maintain collaborative arrangements
with corporate partners
5
for the research, development and commercialization of products;
* the successful integration of our newly created subsidiary, Access
Pharmaceuticals Australia Pty. Limited;
* continued scientific progress in our research and development programs;
* the magnitude, scope and results of preclinical testing and clinical trials;
* the costs involved in filing, prosecuting and enforcing patent claims;
* competing technological developments;
* the cost of manufacturing and scale-up;
* the ability to establish and maintain effective commercialization
arrangements and activities; and
* successful regulatory filings.
SECOND QUARTER 2002 COMPARED TO SECOND QUARTER 2001
Revenue in the second quarter of 2002 was $263,000, as compared to $10,000
in the same period of 2001. We recognized upfront licensing fees for the
exclusive marketing rights for Zindaclin (R) for continental Europe which
was granted in May 2002. Also, other revenue was recognized in both of the
second quarters from several licensing agreements that we are a party to for
various amlexanox projects.
Total research spending for the second quarter of 2002 was $1,711,000,
as compared to $1,032,000 for the same period in 2001, an increase of
$679,000. The increase in expenses was the result of:
* higher development costs for the polymer platinate projects ($323,000)
and the OraDisc (TM) project ($277,000);
* higher clinical development costs ($190,000) for the start-up of the
second Phase III OraDisc (TM) clinical trial;
* higher scientific salary cost ($174,000) principally due to
additional employees;
* costs associated with our new Australian laboratory which we acquired
in February 2002 ($57,000); and
* other net increases ($45,000).
The increase in expenses was partially offset by:
* lower scientific consulting expenses ($121,000) which relates to the
completion of various projects where consultants were engaged; and
* lower development costs ($266,000) for other amlexanox projects that
were completed in 2001.
We expect research spending to increase in future quarters and remain
higher than it has been in prior quarters as we intend to hire additional
scientific and clinical staff, commence additional clinical trials and
accelerate preclinical development activities as we continue to develop
our product candidates.
6
Total general and administrative expenses were $571,000 for the second
quarter of 2002, an increase of $108,000 as compared to the same period
in 2001. The increase in general and administrative expenses was due
primarily to:
* higher compensation expenses ($58,000) due to the addition of new staff;
* higher taxes and fees ($49,000) due to higher state franchise expenses
and higher fees for our exchange listing; and
* higher patent costs ($39,000).
These general and administrative expenses increases were partially offset by:
* lower shareholder expenses ($32,000); and
* other net decreases ($6,000).
Depreciation and amortization was $99,000 for the second quarter of 2002 as
compared to $99,000 for the same period in 2001 reflecting no change in
overall expenses for the period. Amortization decreased due to goodwill not
being amortized in 2002 ($61,500), offset by an increase in depreciation due
to additional capital assets and amortization of patents acquired in the
Biotech Australia Pty. Limited transaction.
We adopted Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets", in January 2002. Annual and quarterly goodwill
amortization of $246,000 and $61,500 will no longer be recognized. In
June 2002, we completed a transitional fair value based impairment test
of goodwill. No impairment losses were recognized from the impairment test.
We will continue to test annually and when any event occurs that may
warrant a new test.
Total operating expenses in the second quarter of 2002 were $2,381,000
as compared to total operating expenses of $1,594,000 for the same period
in 2001.
Loss from operations in the second quarter of 2002 was $2,118,000 as compared
to a loss of $1,584,000 for the same period in 2001.
Interest and miscellaneous income was $127,000 for the second quarter of 2002 as
compared to $350,000 for the same period in 2001, a decrease $223,000. The
decrease in interest income was due to lower cash balances and lower
interest rates in 2002 as compared with 2001.
Interest expense was $317,000 for the second quarter of 2002 as compared to
$283,000 for the same period in 2001, an increase of $34,000. The increase in
interest expense was due to higher interest accrued on the $13.5 million
convertible notes and the note payable ($522,000) we entered into in
September 2001.
Net loss in the second quarter of 2002 was $2,308,000, or a $0.18 basic
and diluted loss per common share, compared with a loss of $1,517,000,
or a $0.12 basic and diluted loss per common share for the same period
in 2001.
7
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Revenue in the first six months of 2002 was $379,000, as compared to $221,000
in the same period of 2001. We recognized upfront licensing fees for the
exclusive marketing rights for Zindaclin(R) for continental Europe which
was granted in May 2002. Also, other revenue was recognized in both of
the first six month periods from several licensing agreements that we
are a party to for various amlexanox projects.
Total research spending for the first six months of 2002 was $3,034,000,
as compared to $2,035,000 for the same period in 2001, an increase of
$999,000. The increase in expenses was the result of:
* higher development costs for our polymer platinate programs ($609,000)
and OraDisc (TM) ($242,000) program;
* higher scientific salary costs ($303,000) principally due to additional
employees;
* costs associated with our new Australian laboratory which we acquired
in February 2002 ($89,000); and
* other net increases ($55,000).
The increase in expenses was partially offset by:
* lower scientific consulting expenses ($165,000) which relates to the
completion of various projects where consultants were engaged; and
* lower net development costs for other amlexanox projects ($134,000)
that were completed in 2001.
We expect research spending to increase in future quarters and remain higher
than it has been in prior quarters as we intend to hire additional
scientific and clinical staff, commence additional clinical trials
and accelerate preclinical development activities as we continue to
develop our product candidates.
Total general and administrative expenses were $1,070,000 for the first
six months of 2002, an increase of $171,000 as compared to the same period
in 2001. The increase in general and administrative expenses was due
primarily to the following:
* higher compensation expenses ($102,000) principally due to the hiring
of additional staff;
* higher taxes and fees ($80,000);
* higher equipment rental fees ($19,000); and
* other net increases ($29,000).
These general and administrative expense increases were partially offset by:
* lower shareholder expenses ($37,000); and
* lower professional fees ($29,000).
Depreciation and amortization was $156,000 for the first six months of 2002
as compared to
8
$201,000 for the same period in 2001 reflecting a decrease of $45,000.
The decrease in amortization was due to goodwill not being amortized
in 2002 ($123,000), offset by an increase in depreciation due to
additional capital assets and amortization of patents acquired in the
Biotech Australia Pty. Limited transaction.
Total operating expenses in the first six months of 2002 were $4,260,000
as compared to total operating expenses of $3,135,000 for the same period
in 2001.
Loss from operations in the first six months of 2002 was $3,881,000 as
compared to a loss of $2,914,000 for the same period in 2001.
Interest and miscellaneous income was $341,000 for the first six months
of 2002 as compared to $792,000 for the same period in 2001, a decrease
of $451,000. The decrease in interest income was due to lower cash balances
and lower interest rates in 2002 as compared with 2001.
Interest expense was $634,000 for the first six months of 2002 as compared
to $566,000 for the same period in 2001, an increase of $68,000. The
increase in interest expense was due to higher interest accrued on the
$13.5 million convertible notes and the note payable ($522,000) we
entered into in September 2001.
Net loss in the first six months of 2002 was $4,174,000, or a $0.32 basic
and diluted loss per common share, compared with a loss of $2,688,000,
or a $0.21 basic and diluted loss per common share for the same period
in 2001.
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2 CHANGES IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 20, 2002 in New York, NY.
At that meeting the following matters were submitted to a vote of the
stockholders of record. The proposals were approved by the stockholders,
as follows:
* Three directors were re-elected for three year terms with the
following votes:
9
Max Link; 8,472,770 - For; and 158,989 - Withheld Authority
John J. Meakem, Jr.; 8,553,095 - For; and 78,664 - Withheld Authority
* The terms of office as a director of Access of each of J. Michael Flinn,
Kerry P. Gray, Stephen B. Howell, and Herbert H. McDade, Jr. continued
after the meeting.
* A proposal to ratify the appointment of Grant Thornton LLP as independent
certified public accountants for the Company for the fiscal year ending
December 31, 2002 was approved with 7,957,860 - For; 663,567 - Against;
and 10,331 - Abstain.
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: None
Reports on Form 8-K: None
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ACCESS PHARMACEUTICALS, INC.
Date: August 14, 2002 By: /s/ Kerry P. Gray
--------------------------
Kerry P. Gray
President and Chief Executive Officer
Date: August 14, 2002 By: /s/ Stephen B. Thompson
--------------------------
Stephen B. Thompson
Vice President and
Chief Financial Officer
10
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Balance Sheets
June 30, 2002 December 31, 2001
-------------- --------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ 5,608,000 $ 7,426,000
Short term investments, at cost 9,800,000 12,700,000
Accounts receivable 577,000 83,000
Accrued interest receivable 92,000 110,000
Prepaid expenses and other current assets 581,000 611,000
-------------- --------------
Total current assets 16,658,000 20,930,000
Property and equipment, net 730,000 477,000
Debt issuance costs, net 587,000 679,000
Patents, net 1,640,000 -
Licenses, net 718,000 774,000
Goodwill, net 1,868,000 1,868,000
Other assets 681,000 759,000
-------------- --------------
Total assets $ 22,882,000 $ 25,487,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,358,000 $ 1,486,000
Accrued interest payable 831,000 310,000
Deferred revenues 487,000 508,000
Current portion of note payable and
future obligations 285,000 107,000
-------------- --------------
Total current liabilities 2,961,000 2,411,000
Long-term obligations for
purchased technology 303,000 -
Note payable, net of current portion 412,000 468,000
Convertible notes 13,530,000 13,530,000
-------------- --------------
Total liabilities 17,206,000 16,409,000
-------------- --------------
Commitments and contingencies - -
Stockholders' equity
Preferred stock - $.01 par value;
authorized 2,000,000 shares;
none issued or outstanding - -
Common stock - $.01 par value;
authorized 50,000,000 shares;
issued, 13,160,043 at June 30, 2002
and 12,909,344 at December 31, 2001 132,000 132,000
Additional paid-in capital 48,992,000 48,057,000
Notes receivable from stockholders (1,045,000) (1,045,000)
Unamortized value of restricted stock grants (317,000) (154,000)
Treasury stock, at cost - 819 shares (4,000) (4,000)
Deficit accumulated during the
development stage (42,082,000) (37,908,000)
-------------- --------------
Total stockholders' equity 5,676,000 9,078,000
-------------- --------------
Total liabilities and
stockholders' equity $ 22,882,000 $ 25,487,000
============== ==============
The accompanying notes are an integral part of these statements.
11
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Statements of Operations
(unaudited)
February 24,
Three months ended June 30, Six months ended June 30, 1988
-------------------------- -------------------------- (inception) to
2002 2001 2002 2001 June 30, 2002
------------ ------------ ------------ ------------ -------------
Revenues
Research and development $ - $ - $ - $ - $ 2,711,000
Option income - - - - 2,164,000
Licensing revenues 263,000 10,000 379,000 221,000 1,054,000
------------ ------------ ------------ ------------ -------------
Total revenues 263,000 10,000 379,000 221,000 5,929,000
Expenses
Research and development 1,711,000 1,032,000 3,034,000 2,035,000 23,188,000
General and administrative 571,000 463,000 1,070,000 899,000 14,690,000
Depreciation and amortization 99,000 99,000 156,000 201,000 2,550,000
Write-off of excess purchase price - - - - 8,894,000
------------ ------------ ------------ ------------ -------------
Total expenses 2,381,000 1,594,000 4,260,000 3,135,000 49,322,000
------------ ------------ ------------ ------------ -------------
Loss from operations (2,118,000) (1,584,000) (3,881,000) (2,914,000) (43,393,000)
Other income (expense)
Interest and miscellaneous income 127,000 350,000 341,000 792,000 3,649,000
Interest and debt expense (317,000) (283,000) (634,000) 566,000 (2,338,000)
------------ ------------ ------------ ------------ -------------
(190,000) 67,000 (293,000) 226,000) 1,311,000
------------ ------------ ------------ ------------ -------------
Net loss $(2,308,000) $(1,517,000) $(4,174,000) $(2,688,000) $(42,082,000)
============ ============ ============ ============ =============
Basic and diluted loss per
common share $(0.18) $(0.12) $(0.32) $(0.21)
============ ============ ============ ============
Weighted average basic and diluted
common shares outstanding 13,159,728 12,853,923 13,047,618 12,851,149
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
12
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Statements of Cash Flows
(unaudited)
February 24,
Six months ended June 30, 1988
--------------------------(inception) to
2002 2001 June 30, 2002
------------ ------------ -------------
Cash flows form operating activities:
Net loss $(4,174,000) $(2,688,000) $(42,082,000)
Adjustments to reconcile net loss to
cash used in operating activities:
Write-off of excess purchase price - - 8,894,000
Warrants issued in payment of
consulting expenses 37,000 41,000 1,007,000
Research expenses related to
common stock granted - - 100,000
Amortization of restricted
stock grants 27,000 - 54,000
Depreciation and amortization 159,000 201,000 2,551,000
Amortization of debt costs 92,000 91,000 328,000
Deferred revenue (21,000) (21,000) 377,000
Change in operating assets and
liabilities:
Accounts receivable (494,000) 250,000 (577,000)
Accrued interest receivable 18,000 128,000 (92,000)
Prepaid expenses and other
current assets 30,000 65,000 (581,000)
Licenses - - (525,000)
Other assets 78,000 (1,000) 71,000
Accounts payable and
accrued expenses (128,000) (543,000) 596,000
Accrued interest payable 521,000 473,000 831,000
------------ ------------ ------------
Net cash used in operating activities (3,855,000) (2,004,000) (29,048,000)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (316,000) (34,000) (1,980,000)
Sales of capital equipment - - 15,000
Redemptions (purchases) of short term
investments and certificates
of deposit, net 2,900,000 (780,000) (10,400,000)
Purchase of businesses, net of
cash acquired (526,000) - (752,000)
Other investing activities - - (150,000)
------------ ------------ ------------
Net cash provided by (used in)
investing activities 2,058,000 (814,000) (13,267,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable
and obligations - - 1,321,000
Payments of notes payable (53,000) - (828,000)
Purchase of treasury stock - - (754,000)
Cash acquired in merger with Chemex - - 1,587,000
Notes receivable from shareholders - - (1,045,000)
Proceeds from convertible note, net - - 12,615,000
Proceeds from stock issuances, net 32,000 18,000 35,027,000
------------ ------------ ------------
Net cash provided by (used in)
financing activities (21,000) 18,000 47,923,000
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (1,818,000) (2,800,000) 5,608,000
Cash and cash equivalents at
beginning of period 7,426,000 8,415,000 -
------------ ------------ ------------
Cash and cash equivalents at
end of period $ 5,608,000 $ 5,615,000 $ 5,608,000
============ ============ ============
The accompanying notes are an integral part of these statements.
13
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2002 and 2001
(unaudited)
(1) Interim Financial Statements
The consolidated balance sheet as of June 30, 2002 and the consolidated
statements of operations and cash flows for the three and six months
ended June 30, 2002 and 2001 were prepared by management without audit.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, except as otherwise disclosed, necessary for the
fair presentation of the financial position, results of operations, and
changes in financial position for such periods, have been made.
Certain amounts have been reclassified to conform with current period
classification.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in our Annual Report on Form 10-K for the year
ended December 31, 2001. The results of operations for the period ended
June 30, 2002 are not necessarily indicative of the operating results
which may be expected for a full year. The consolidated balance sheet as
of December 31, 2001 contains financial information taken from the audited
financial statements as of that date.
(2) Acquisition
Our recently created wholly owned subsidiary, Access Pharmaceuticals
Australia Pty. Limited acquired the targeted therapeutic technology
business of Biotech Australia Pty. Ltd under an Asset Sale Agreement
dated February 26, 2002. Under the terms of the Asset Sale Agreement,
Access Pharmaceuticals Australia Pty. Limited acquired the patents to three
targeted therapeutics technologies and retained the scientific group
that has developed this technology. The total consideration payable by us
will be paid in a combination of cash and stock over a three-year period and
is dependent on the achievement of certain technology milestones. $500,000
was paid at closing and an additional total of up to $525,000 will be paid
over a three-year period. Additionally up to $350,000 may be payable if
events occur that result in certain new agreements. We also issued as
consideration 172,584 shares of our common stock (valued at $633,000)
and 25,000 warrants (valued at $43,000 using Black-Scholes option pricing
model) to purchase our common stock at an exercise price of $5.00 per share.
The stock issued is subject to restriction and cannot be sold until
February 27, 2003.
The three patented targeted therapeutic technologies acquired are:
* folate conjugates of polymer therapeutics to enhance tumor delivery
by targeting folate receptors which are upregulated in certain tumor types;
14
(2) Acquisition - continued
* the use of vitamin B12 to target the transcobalamin II receptor which
is upregulated in numerous diseases including cancer, rheumatoid
arthritis and certain neurological and autoimmune disorders; and
* oral delivery of a wide variety of molecules, which cannot otherwise
be orally administered, using the active transport mechanism which
transports vitamin B12 into the systemic circulation.
The cost of the acquisition has been assigned to patents and will be
amortized over the useful life of the patents.
(3) New Accounting Pronouncements
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, SFAS No. 142, Goodwill
and Intangible Assets, and SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets.
SFAS No. 141 and SFAS No. 142
Major provisions of these statements and their effective dates are as follows:
* intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights and are separable from the acquired entity and can be sold
transferred, licensed, rented or exchanged, either individually or
as part of a related contract, asset or liability;
* effective January 1, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be subject
to amortization;
* effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually or whenever
there is an impairment indicator; and
* all acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting.
We amortized goodwill assets acquired prior to July 1, 2001 until
December 31, 2001. Beginning January 1, 2002, quarterly and annual
goodwill amortization is no longer recognized. In June 2002, we
completed a transitional fair value based impairment test of goodwill.
No impairment losses were recognized from the impairment test. We will
continue to test annually and when any event occurs that may warrant a
new test. Impairment losses, if any, resulting from the transitional
testing will be recognized as a cumulative effect of a change in
accounting principle.
15
(3) New Accounting Pronouncements - continued
Intangible assets consist of the following (in thousands):
June 30, 2002 December 31, 2001
-------------------- ---------------------
Gross Gross
carrying Accumulated carrying Accumulated
value amortization value amortization
----------- ----------- ----------- -----------
Amortizable intangible assets
Patents $ 1,680 40 $ - -
Licenses 1,130 412 4,130 356
----------- ----------- ----------- -----------
Total $ 2,810 452 $ 1,130 356
=========== =========== =========== ===========
Intangible assets not subject to
amortization
Goodwill $ 2,464 596 $ 2,464 596
----------- ----------- ----------- -----------
Total intangible assets not
subject to amortization $ 2,464 596 $ 2,464 596
=========== =========== =========== ==========
Amortization expense related to intangible assets totaled $60,000 and
$89,000 during the three months ended and $88,000 and $179,000 during
the six months ended June 30, 2002 and 2001, respectively. The aggregate
estimated amortization expense for intangible assets remaining as of
June 30, 2002 is as follows (in thousands):
Remainder of 2002 $ 136
2003 272
2004 272
2005 272
2006 272
Thereafter 1,134
-------
Total $2,358
=======
Net loss and loss per share for the three and six months ended June 30,
2002 and 2001, adjusted to exclude amortization expense, is as follows:
16
(3) New Accounting Pronouncements - continued
Three months ended June 30, Six months ended June 30,
-------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net loss
Reported net loss allocable
to common stockholders $ (2,308) $ (1,517) $ (4,174) $ (2,688)
Goodwill amortization - 61 - 123
------------ ------------ ------------ ------------
Adjusted net loss allocable
to common stockholders $ (2,308) $ (1,456) $ (4,174) $ (2,565)
============ ============ ============ ============
Basic and diluted loss per share
Reported basic and diluted
loss per share $(.18) $(.12) $(.32) $(.20)
Goodwill amortization - .01 - -
------------ ------------ ------------ ------------
Adjusted basic and diluted
loss per share $(.18) $(.11) $(.32) $(.20)
============ ============ ============ ============
SFAS No. 144
SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The implementation of
this standard did not have an effect on our financial position, results
of operations, or cash flows.
(4) Subsequent Event
On July 22, 2002, we acquired from GlaxoSmithKline the patents and
trademarks covering the use of amlexanox for the treatment of mucosal
and skin disorders. The two major components of the acquisition are the
US marketing rights to amlexanox 5% paste which is currently marketed for
the treatment of canker sores under the trademark Aphthasol (R), and the
remaining worldwide marketing rights for this indication which were the
subject of a prior licensing agreement between the companies.
Under the terms of the agreement, we made an initial upfront payment
of $750,000 and we will make additional payments over time of $500,000
and future possible milestone payments based on the commercial success
of amlexanox. The commercial terms of the previously announced mucositis
agreement between the companies which granted worldwide rights for this
indication to Access will remain in place.
17