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, 1998
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, 1998 3,430,266 shares, $0.01 par value
----------------- ---------
Total No. of Pages 15
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
Access Pharmaceuticals, Inc. ("Access" or the "Company") is a Delaware
corporation in the development stage. The Company is a site-directed drug
targeting company using bioresponsive carriers to target and control the release
of therapeutic agents into sites of disease activity and significantly improve
the side effect profile of the agents. The Company has proprietary patents or
rights to four technology platforms: synthetic polymers, Residerm TM,
carbohydrate targeting technology and selective muscle and nerve delivery
systems. In addition, Access' partner Block Drug Company is marketing
Aphthasol TM in the United States, the first FDA approved product for the
treatment of canker sores. Access is currently licensing this product in
international markets and developing new delivery forms.
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 Access' research and
development focus, uncertainties associated with research and development
activities, uncertainty associated with preclinical and clinical testing,
future capital requirements, anticipated option and licensing revenues,
dependence on others, ability to raise capital, the year 2000 issue, 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, 1997.
Since its inception, Access has devoted its resources primarily to fund its
research and development programs. The Company has been unprofitable since
inception and to date has not received any revenues from the sale of products.
No assurance can be given that the Company will be able to generate
sufficient product revenues to attain profitability on a sustained
basis or at all. The Company expects to incur losses for the next several
years as it continues to invest in product research and development,
preclinical studies, clinical trials and regulatory compliance. At September
30, 1998, the Company's accumulated deficit was approximately $22.4 million.
RECENT DEVELOPMENTS
On June 18, 1998, in conjunction with the first closing of a private placement,
the Company effected a recapitalization of the Company through a one-for-
twenty reverse stock split of its common stock, $0.04 par value per share,
which decreased the number of authorized shares of common stock from 60.0
million, at $0.04 par value per share, to 20.0 million shares, $0.01 par
value per share (the "Common Stock"), and decreased the authorized shares of
preferred stock of the Company from 10.0 million to 2.0 million (the
"Recapitalization"). The Recapitalization decreased the number of outstanding
shares of Common Stock from approximately 41.5 million to 2.1 million.
2
An investment bank has been engaged to assist the Company in raising funds to
support the Company's research and development activities. As discussed below,
from March to July 1998, the Company raised an aggregate of $5.0 million. Up
to an additional $4.0 million may be raised. There can be no assurances that any
additional closings of the private placement will take place.
The Company, assisted by an investment bank, raised $1,200,000 in gross
proceeds ($725,000 received on March 20, 1998 and $475,000 received on
April 11, 1998) less cash issuance costs of $47,000, from the placement of 48
units, each unit consisting of 8,333 shares of Common Stock and warrants to
purchase 8,333 shares of Common Stock at an exercise price of $3.00 per share.
The placement agent received warrants to purchase 44,527 shares of Common
Stock at $3.00 per share, in accordance with the offering terms and elected to
receive 45,277 shares of Common Stock in lieu of certain sales commissions
and expenses.
On June 18, 1998, the Company, assisted by the same investment bank, raised
an aggregate of $2.9 million in gross proceeds, less cash issuance costs of
$202,000, from the first closing of a private placement of 953,573 shares of
Common Stock at $3.00 per share. The placement agent for such offering
received warrants to purchase 101,653 shares of Common Stock at $3.00 per
share, in accordance with the offering terms and elected to receive 62,949
shares of Common Stock in lieu of certain sales commissions and expenses.
On July 30, 1998, the Company, assisted by the same investment bank, raised an
aggregate of $900,000 in gross proceeds, less cash issuance costs of $24,000,
from the second closing of a private placement of 300,000 shares of Common
Stock at $3.00 per share. The placement agent for such offering received
warrants to purchase 33,445 shares of Common Stock at $3.00 per share, in
accordance with the offering terms and elected to receive 34,450 shares of
Common Stock in lieu of certain sales commissions and expenses.
Through September 30, 1998, issuance costs for all placements totaled
$405,000. The proceeds of the offering will be used to fund research and
development, working capital, acquisitions of complementary companies or
technologies and general corporate purposes.
If and when the Company satisfies all listing requirements, the Company intends
to submit an application for listing on NASDAQ or an alternate exchange. There
can be no assurances that the Company will be listed on NASDAQ or an
alternate exchange.
All share numbers and prices referenced herein have been adjusted to reflect the
Recapitalization.
On June 8, 1998, the Company entered into an agreement to license from Block
Drug Company the rights to amlexanox oral paste 5% for certain international
markets. Amlexanox oral paste 5% was jointly developed by the Company and
Block Drug Company, and was subsequently purchased by Block Drug
Company with the Company receiving an up front fee and future royalty
payments. Amlexanox oral paste 5% is currently marketed in the United States
by Block Drug under the trademark AphthasolTM. AphthasolTM was launched to
the dental market in December 1997 and was launched to the general practice
physician market in June 1998.
Access has announced agreements or letters of intent with the following
international partners to market amlexanox 5% paste: In the UK and Ireland
Access signed an agreement on August 18, 1998 with Strakan Limited. Under
the terms of the agreement, Strakan will bear all costs
3
associated with the regulatory process in the UK and the European community,
and will pay milestones based on cumulative sales and a royalty on sales. On
August 20, 1998 Access announced it had signed a Letter of Intent with Paladin
Labs, Inc. for marketing rights for amlexanox in Canada. Paladin will bear all
costs associated with gaining regulatory approval in Canada, and will pay
milestones based on cumulative sales revenue and a royalty on sales. Paladin is
a subsidiary of PharmaScience. Access signed a Letter of Intent on October 2,
1998 with Meda AB of Sweden for licensing rights in Sweden, Finland,
Norway, Denmark, Latvia, Estonia, Lithuania and Iceland. Under the terms of
the agreement, Meda will make an up-front license payment, pay milestone
payments and a royalty on sales. Access also announced on October 15, 1998
the signing of a Letter of Intent with Laboratoios Dr. Esteve to license
amlexanox for Italy, Spain, Portugal and Greece. Esteve will make an up-front
license payment, pay milestone payments and will pay a royalty on sales.
Access signed an agreement on August 25, 1998 with ViroTex Corporation
("ViroTex") to incorporate amlexanox in the proprietary mucoadhesive
technologies being developed by ViroTex. ViroTex is developing an innovative
bioerodiable mucoadhesive ("BEMA") delivery system, which is a thin film that
adheres to the oral mucosa and erodes over time delivering the drug into the
tissue. Also under development is a film forming mucocutaneous adsorption
("MCA") gel that deposits a film upon application to mucosal surfaces adhering
well to wet or damp skin, this technology can also be adapted to an aerosal
spray delivery system.
It is anticipated that within nine months a formulation could be ready for
clinical testing. Access will fund the ViroTex project development activities;
however, Block Drug Company will share in the development costs by way of a
reduction in the royalty Access will pay Block for international sales. The
international rights to any product resulting from the collaboration with
ViroTex will be out-licensed by Access to its amlexanox licensing
partners. ViroTex will receive a royalty on all worldwide sales of products
incorporating its propriety technology.
Liquidity and Capital Resources
As of September 30, 1998 the Company's principal source of liquidity is
$2,230,000 of cash and cash equivalents. Working capital as of September 30,
1998 was $1,768,000, representing an increase in working capital of $1,984,000
as compared to the working capital deficit as of December 31, 1997 of
$216,000. The increase in working capital at September 30, 1998 was due to
$4.6 million in net proceeds received from the private placement of the
Company's Common Stock sold in June and July 1998 and the private placement
of units in March and April 1998 net of monthly operating expenses.
Since its inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $22,384,000 at September 30,
1998. The Company has funded its operations primarily through private sales
of its equity securities, contract research payments from corporate alliances
and the January 1996 merger.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts. The
Company expects that its existing capital resources will be adequate to fund the
Company's operations through the second quarter of 1999. The Company is
dependent on raising additional capital to fund the development of its
technology and to implement its business plan. Such dependence will continue
at least until the Company begins marketing its new technologies.
4
If anticipated revenues are delayed or do not occur or the Company is
unsuccessful in raising additional capital on acceptable terms, the Company
would be required to curtail research and development and general and
administrative expenditures so that working capital would cover reduced
operations into the third quarter of 1999. There can be no assurance, however
that changes in the Company's operating expenses will not result in the
expenditure of such resources before such time.
The Company will require substantial funds to conduct research and
development programs, preclinical studies and clinical trials of its potential
products. The Company's future capital requirements and adequacy of available
funds will depend on many factors, including the successful commercialization
of amlexanox; the ability to establish and maintain collaborative arrangements
for research, development and commercialization of products with corporate
partners; continued scientific progress in the Company's 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; and the ability to establish and maintain effective
commercialization activities and arrangements.
The Company intends to seek additional funding through research and
development or licensing arrangements with potential corporate partners, public
or private financing, or from other sources. The Company does not have any
committed sources of additional financing and there can be no assurance that
additional financing will be available on favorable terms, if at all. In the
event that adequate funding is not available, the Company may be required to
delay, reduce or eliminate one or more of its research or development programs
or obtain funds through arrangements with corporate collaborators or others that
may require the Company to relinquish greater or all rights to product
candidates at an earlier stage of development or on less favorable terms than
the Company would otherwise seek. Insufficient financing may also require the
Company to relinquish rights to certain of its technologies that the Company
would otherwise develop or commercialize itself. If adequate funds are not
available, the Company's business, financial condition and results of operations
will be materially and adversely affected.
Third Quarter 1998
Compared to
Third Quarter 1997
The Company had $113,000 in licensing revenue in the third quarter of 1997
as compared to no revenues in the third quarter 1998. Third quarter 1997
revenues were comprised of licensing income from an ongoing agreement with
an emerging pharmaceutical company which made certain milestone payments
and will make royalty payments in the future if a product is developed from
the technology.
Total research spending for the third quarter of 1998 was $481,000, as
compared to $787,000 for the same period in 1997, a decrease of $306,000. The
decrease in expenses was the result of lower external contract research costs
due primarily to the expiration of an agreement with the University of London
and research funding of the Dow project in 1997- $263,000; lower consulting
expenses - $29,000; lower equipment rent- $23,000; and lower other net costs
totaling- $7,000; offset by higher salaries and related costs - $16,000. If the
Company is successful in raising additional capital, research spending is
expected to increase in future quarters as the Company intends to hire
additional scientific management and staff and will accelerate activities to
develop the Company's product candidates. If the Company is not successful in
raising additional capital, research spending will be curtailed.
5
Total general and administrative expenses were $319,000 for the third quarter
of 1998, a decrease of $106,000 as compared to the same period in 1997. The
decrease in spending was primarily due to the following: lower patent costs-
$79,000; decreased general business consulting fees- $63,000; offset by
increased shareholder expenses- $14,000; increased rent- $13,000; and other net
increases totaling- $9,000. If the Company is not successful in raising
additional capital, general and administrative spending will be curtailed.
Depreciation and amortization was $39,000 for the third quarter 1998 as
compared to $31,000 for the same period in 1997 reflecting the additional
depreciation of the assets acquired in the Tacora merger and amortization of
licenses.
Interest and miscellaneous income was $29,000 for the third quarter of 1998 as
compared to $23,000 for the same period in 1997, an increase of $6,000. The
increase was due to higher interest income from higher cash balances in 1998.
Total operating expenses in the third quarter of 1998 were $839,000 with
interest income of $29,000, and interest expense of $4,000 resulting in a loss
for the quarter of $814,000 or a $0.24 basic and diluted loss per common share.
Nine Months ended September 30, 1998
Compared to
Nine Months ended September 30, 1997
Net revenues for the nine months ended September 30, 1997 were $301,000 as
compared to no revenues for the same period in 1998. 1997 revenues were
comprised of licensing income from an ongoing agreement with an emerging
pharmaceutical company which made certain milestone payments and will make
royalty payments in the future if a product is developed from the technology.
Research spending for the nine months ended September 30, 1998 was
$1,417,000 as compared to $1,829,000 for the same period in 1997, a decrease
of $412,000. The decrease in expenses was due to: lower external contract
research costs- $154,000; lower salary and related costs- $132,000; lower
equipment rent- $78,000; lower travel expenses- $39,000; and other net
decreases totaling- $9,000. If the Company is successful in raising additional
capital, research spending is expected to increase in future quarters as the
Company intends to hire additional scientific management and staff and will
accelerate activities to develop the Company's product candidates. If the
Company is not successful in raising additional capital, research spending will
be curtailed.
General and administrative expenses were $1,069,000 for the nine months ended
September 30, 1998, a decrease of $185,000 as compared to the same period
in 1997. The decrease was primarily due to the following: lower general
business consulting fees and expenses- $210,000; and lower director and officer
insurance costs- $56,000; offset by higher patent expenses- $51,000; higher
shareholder expenses- $14,000 and other net increases totaling- $16,000.
Depreciation and amortization was $169,000 for the nine months ended
September 30, 1998 as compared to $93,000 for the same period in 1997
reflecting the additional depreciation of the assets acquired in the Tacora
merger and amortization of licenses.
Interest and miscellaneous income was $37,000 for the nine months ended
September 30, 1998 as compared to $107,000 for the same period in 1997, a
decrease of $70,000. The decrease was due to lower interest income from lower
cash balances in 1998.
Accordingly, this resulted in a loss for the nine months ended September 30,
1998
6
of $2,636,000, or a $1.10 basic and diluted loss per common share.
Year 2000 Issue
The Year 2000 ("Y2K") issue is the result of computer programs using two
instead of four digits to represent the year. These computer programs may
erroneously interpret dates beyond the year 1999, which could cause system
failures or other computer errors, leading to disruptions in operations.
We have begun to develop a three-phase program to limit or eliminate Y2K
exposures. Phase I is to identify those systems, applications and third-party
relationships from which we have exposure to Y2K disruptions in operations.
Phase II is the development and implementation of action plans to achieve Y2K
compliance in all areas prior to the end of the third quarter of 1999. Also
included in Phase II is the development of contingency plans which would be
implemented should Y2K compliance not be achieved in order to minimize
disruptions in operations. Phase III is the final testing or equivalent
certification of testing of each major area of exposure to ensure compliance.
We intend to complete all phases before the end of the third quarter of 1999.
We have identified three major areas determined to be critical for successful
Y2K compliance: Area 1, which includes financial, research and development
and administrative informational systems applications reliant on system
software; Area 2, which includes research, development and quality applications
reliant on computer programs embedded in microprocessors; and Area 3, which
includes third-party relationships which may be affected by Area 1 and 2
exposures which exist in other companies.
With respect to Area 1, we are completing an internal review and contacting all
software suppliers to determine major areas of Y2K exposure. In research,
development and quality applications (Area 2), we are working with equipment
manufactures to identify our exposures. With respect to Area 3, we are in the
process of evaluating our reliance on third parties in order to determine
whether their Y2K compliance will adequately assure our uninterrupted
operations.
We have yet to complete Phase I of our Y2K program with respect to all three
of the major areas. The Company relies on PC-based systems and does not
expect to incur material costs to transition to Y2K compliant systems in its
internal operations. However, even if the internal systems of the Company are
not materially affected by the Y2K Issue, the Company could be affected by
third-party relationships which, if not Y2K compliant prior to the end of 1999,
could have a material adverse impact on our operations. Because we have not
completed Phase II contingency planning, we can not describe what action we
would take in any of the areas should Y2K compliance not be achievable in
time. As such, there can be no assurance that the Y2K Issue will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
As of September 30, 1998, we have not identified any costs related to
replacement or remediation and testing of our Area 1 computer information
systems. Not having completed our Phase I and Phase II evaluations, at this
time we have no basis for estimating the potential cost of our Y2K compliance
programs. The funds for these costs will be part of our cash flow from
operations and expenditures.
7
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES
On July 30, 1998 the Company sold to 16 individual accredited
investors an aggregate of 300,000 shares of Common Stock at
$3.00 per share. The placement agent for such offering received
warrants to purchase 33,445 shares of Common Stock at $3.00 per
share in accordance with the offering terms and elected to receive
34,450 shares of Common Stock in lieu of certain sales
commissions and expenses. The Company raised an aggregate of
$900,000 in gross proceeds. The shares issued in the Private
Placement have not been registered; however, the Company has
filed, on August 30, 1998, a registration statement for the resale
of such shares. The Company relied on Section 4(2) and/or 3(b) of
the 1933 Securities Act of 1933 and the provisions of Regulation
D as exemptions from the registration thereunder. The proceeds of
the offering will be used to fund research and development,
working capital, acquisitions of complementary companies or
technologies and general corporate purposes.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: 27.1 Financial Data Schedule
Reports on Form 8-K:
On October 29, 1998, the Registrant filed a Current Report on
Form 8-K related to Changes in the Registrant's Certifying
Accountants. The Company's previous auditors, KPMG Peat
Marwick LLP, resigned as of October 22, 1998. The Board of Directors
of the Company has begun the process of seeking to retain an
accounting firm to audit the Company's consolidated financial
statements for the current fiscal year ending December 31, 1998. The
Board of Directors expects to complete its search and retain a new
accounting firm prior to the end of this accounting year.
8
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 12, 1998 By: /s/ Kerry P. Gray
-----------------
Kerry P. Gray
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1998 By: /s/ Stephen B. Thompson
-----------------------
Stephen B. Thompson
Chief Financial Officer
(Principal Financial and Accounting
Officer)
9
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY
a development stage company
Condensed Consolidated Balance Sheets
September 30, 1998 December 31, 1997
------------- -------------
(unaudited)
Assets
- ------
Current Assets
Cash and cash equivalents $ 2,230,000 $ 438,000
Accounts receivable - 1,000
Prepaid expenses and other current assets 12,000 51,000
------------- -------------
Total Current Assets 2,242,000 490,000
------------- -------------
Property and Equipment, at cost 1,007,000 1,047,000
Less accumulated depreciation and amortization (749,000) (625,000)
------------- -------------
258,000 422,000
------------- -------------
Licenses, net of accumulated amortization
of $37,000 and $25,000 at September 30,
1998 and December 31, 1997, respectively 438,000 475,000
Other Assets 108,000 60,000
------------- -------------
Total Assets $ 3,046,000 $ 1,447,000
============= =============
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities
Accounts payable and accrued expenses $ 380,000 $ 434,000
Royalties payable - 53,000
Accrued insurance premium - 38,000
Current portion of obligations under
capital leases 94,000 181,000
------------- -------------
Total Current Liabilities 474,000 706,000
------------- -------------
Obligations under capital leases,
net of current portion 53,000 142,000
------------- -------------
Total Liabilities 527,000 848,000
------------- -------------
Stockholders' Equity
Preferred stock, $.01 par value, authorized
2,000,000 shares, none issued or outstanding
at September 30, 1998; $.01 par value,
authorized 10,000,000 shares, none issued
or outstanding at December 31, 1997 - -
Common stock, $.01 par value, authorized
20,000,000 shares, 3,439,266, issued and
outstanding at September 30, 1998;
authorized 3,000,000 shares, 1,630,450
issued and outstanding at December 31,1997 34,000 16,000
Additional paid-in capital 24,869,000 20,331,000
Deficit accumulated during the
development stage (22,384,000) (19,748,000)
------------- -------------
Total Stockholders' Equity 2,519,000 599,000
------------- -------------
Total Liabilities and Stockholders' Equity $ 3,046,000 $ 1,447,000
============= =============
- ---------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
10
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY
a development stage company
Condensed Consolidated Statements of Operations
(unaudited)
Three Months ended Nine Months ended
September 30, September 30, February 24, 1988
--------------------------- --------------------------- (inception) to
1998 1997 1998 1997 September 30, 1998
------------ ------------ ------------ ------------ -------------
Revenues
Research and development $ - $ - $ - $ - $ 2,711,000
Option income - - - - 2,149,000
Licensing revenues - 113,000 - 301,000 325,000
------------ ------------ ------------ ------------ -------------
Total Revenues - 113,000 - 301,000 5,185,000
------------ ------------ ------------ ------------ -------------
Expenses
Research and development 481,000 787,000 1,417,000 1,829,000 10,026,000
General and administrative 319,000 425,000 1,069,000 1,254,000 7,932,000
Depreciation and amortization 39,000 31,000 169,000 93,000 1,225,000
Write-off of excess purchase price - - - - 8,894,000
------------ ------------ ------------ ------------ -------------
Total Expenses 839,000 1,243,000 2,655,000 3,176,000 28,077,000
------------ ------------ ------------ ------------ -------------
Loss From Operations (839,000) (1,130,000) (2,655,000) (2,875,000) (22,892,000)
------------ ------------ ------------ ------------ -------------
Other Income (Expense)
Interest and miscellaneous income 29,000 23,000 37,000 107,000 811,000
Interest expense (4,000) (5,000) (18,000) (20,000) (176,000)
------------ ------------ ------------ ------------ -------------
25,000 18,000 19,000 87,000 635,000
------------ ------------ ------------ ------------ -------------
Loss Before Income Taxes (814,000) (1,112,000) (2,636,000) (2,788,000) (22,257,000)
Provision for Income Taxes - - - - 127,000
------------ ------------ ------------ ------------ -------------
Net Loss $ (814,000) $(1,112,000) $(2,636,000) $(2,788,000) $(22,384,000)
============ ============ ============ ============ =============
Basic and Diluted Loss Per
Common Share $ (0.24) $ (0.70) $ (1.10) $ (1.77)
============ ============ ============ ============
Weighted Average Basic and Diluted
Common Shares Outstanding 3,322,668 1,595,979 2,393,068 1,578,467
============ ============ ============ ============
- ---------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
11
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY
a development stage company
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months ended September 30, February 24, 1988
-------------------------- (inception) to
1998 1997 September 30, 1998
------------ ------------ -------------
Cash Flows From Operating Activities:
Net Loss $(2,636,000) $(2,788,000) $(22,384,000)
Adjustments to reconcile net loss to
cash used in operating activities:
Write-off of excess purchase price - - 8,894,000
Consulting expense related to
warrants granted - - 532,000
Research expenses related to common
stock granted and donated equipment 9,000 100,000 109,000
Depreciation and amortization 169,000 93,000 1,225,000
Unearned revenue - - (110,000)
Change in operating assets
and liabilities:
Accounts receivable 1,000 (87,000) (1,000)
Prepaid expenses and
other current assets 39,000 60,000 (13,000)
Other assets 2,000 1,000 (6,000)
Accounts payable and
accrued expenses (145,000) (309,000) 87,000
------------ ------------ -------------
Net Cash Used In Operating Activities (2,561,000) (2,930,000) (11,667,000)
------------ ------------ -------------
Cash Flows From Investing Activities:
Capital expenditures (4,000) (24,000) (1,168,000)
Sales of capital equipment - - 6,000
Purchase of Tacora, net of cash acquired - - (124,000)
Other Assets (50,000) - (100,000)
------------ ------------ -------------
Net Cash Used In Investing Activities (54,000) (24,000) (1,386,000)
------------ ------------ -------------
Cash Flows From Financing Activities:
Proceeds from notes payable - - 721,000
Payments of principal on obligations
under capital leases (149,000) (126,000) (603,000)
Cash acquired in merger with
Chemex Pharmaceuticals - - 1,587,000
Proceeds from stock issuances, net 4,556,000 - 13,578,000
------------ ------------ -------------
Net Cash Provided By (Used In)
Financing Activities 4,407,000 (126,000) 15,283,000
------------ ------------ -------------
Net Increase (Decrease) in Cash and
Cash Equivalents 1,792,000 (3,080,000) 2,230,000
Cash and Cash Equivalents at
Beginning of Period 438,000 4,428,000 -
------------ ------------ -------------
Cash and Cash Equivalents at
End of Period $ 2,230,000 $ 1,348,000 $ 2,230,000
============ ============ =============
Cash paid for interest $ 18,000 $ 20,000 $ 173,000
Cash paid for income taxes - - 127,000
Supplemental disclosure of
noncash transactions
Payable accrued for fixed
asset purchase $ - $ - $ 47,000
Elimination of note payable
to Chemex Pharmaceuticals
due to merger - - 100,000
Stock issued for License on patents - 500,000 500,000
Equipment purchases financed
through capital leases - 72,000 82,000
Net liabilities assumed in
acquisition of Tacora Corporation - - 455,000
- ----------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
12
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY
a development stage company
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 1998 and 1997
(unaudited)
(1)Interim Financial Statements
The consolidated balance sheet as of September 30, 1998 and the consolidated
statements of operations for the three and nine months ended and cash flows for
the nine months ended September 30, 1998 and 1997 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. Certain reclassifications have been made to
prior year financial statements to conform with the September 30, 1998
presentation. The accompanying Consolidated Balance Sheets and Statements of
Operations have been retroactively restated to reflect the Recapitalization
including the one-for-twenty reverse stock split effected June 18, 1998.
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 audited consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. The results of operations for
the period ended September 30, 1998 are not necessarily indicative of the
operating results which may be expected for a full year. The consolidated
balance sheet as of December 31, 1997 contains financial information taken
from the audited financial statements as of that date.
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share." In accordance with SFAS No. 128, the Company has
presented basic loss per share, computed on the basis of the weighted average
number of common shares outstanding during the period, and diluted loss per
share, computed on the basis of the weighted average number of common shares
and all dilutive potential common shares outstanding during the period. The
adoption of this new accounting standard, which required the restatement of all
presented periods' earnings per share data, did not have a material impact on
previously reported earnings per share. Potentially dilutive effect of the
Company's outstanding options and common stock warrants have not been
considered in the computation of diluted net loss per common share since
their inclusion would be anti-dilutive.
Effective with fiscal years beginning after December 15, 1997, companies are
required to adopt Statement of Financial Accounting Standards ("SFAS") No.
130 "Reporting Comprehensive Income." The Statement establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income includes net
income and other comprehensive income, which comprises certain specific items
previously reported directly in stockholders' equity. Other comprehensive
income comprises items such as unrealized gains and losses on debt and equity
securities classified as available-for-sale securities, minimum pension
liability adjustments, and foreign currency translation adjustments. Since the
Company does not currently have any of these other comprehensive income items,
SFAS No. 130 has no impact on the way the Company reports or has reported its
financial statements.
(2)Liquidity
The Company has incurred negative cash flows from operations since its
inception, and has expended,
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and expects to continue to expend in the future, substantial funds to
complete its planned product development efforts. The Company expects that
its existing capital resources will be adequate to fund the Company's
operations through the second quarter of 1999. The Company is dependent on
raising additional capital to fund its development of technology and to
implement its business plan. Such dependence will continue at least
until the Company begins marketing its new technologies.
If the anticipated revenues are delayed or do not occur or the Company is
unsuccessful in raising additional capital on acceptable terms, the Company
would be required to curtail research and development and general and
administrative expenditures so that working capital would cover reduced
operations into the third quarter of 1999. There can be no assurance, however,
that changes in the Company's operating expenses will not result in the
expenditure of such resources before such time.
The Independent Auditor's Report on the Company's 1997 consolidated financial
statements included an emphasis paragraph regarding the uncertainty of the
Company's ability to continue as a going concern.
(3)Recapitalization
On June 18, 1998, in conjunction with the first closing of a private placement,
the Company effected a recapitalization of the Company through a one-for-twenty
reverse stock split of Access common stock, $.04 par value per share, which
decreased the number of authorized shares of common stock from 60.0 million
shares, at $0.04 par value per share, to 20.0 million shares, par value $0.01
per share (the "Common Stock"), and decreased the authorized shares of
preferred stock of the Company from 10.0 million to 2.0 million (the
"Recapitalization"). The Recapitalization decreased the number of outstanding
shares of Common Stock from approximately 41.5 million to 2.1 million.
If and when the Company satisfies all listing requirements, the Company intends
to submit an application for listing on NASDAQ or an alternate exchange. There
can be no assurances that the Company will be listed on NASDAQ or an alternate
exchange.
(4)Private Placement
The Company, assisted by an investment bank, raised $1,200,000 in gross
proceeds ($725,000 received on March 20, 1998 and $475,000 received on April
11, 1998) less cash issuance costs of $47,000, from the placement of 48 units,
each unit consisting of 8,333 shares of Common Stock and warrants to purchase
8,333 shares of Common Stock at an exercise price of $3.00 per share. The
placement agent received warrants to purchase 44,527 shares of Common Stock
at $3.00 per share, in accordance with the offering terms and elected to
receive 45,277 shares of Common Stock in lieu of certain sales commissions
and expenses.
On June 18, 1998, the Company, assisted by the same investment bank, raised an
aggregate of $2.9 million in gross proceeds, less cash issuance costs of
$202,000, from the first closing of a private placement of 953,573 shares
Common Stock at $3.00 per share. The placement agent for such offering received
warrants to purchase 101,653 shares of Common Stock at $3.00 per share, in
accordance with the offering terms and elected to receive 62,949 shares of
Common Stock in lieu of certain sales commissions and expenses.
On July 30, 1998, the Company, assisted by the same investment bank, raised an
aggregate of $900,000 in gross proceeds, less cash issuance costs of $24,000,
from the second closing of a private
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placement of 300,000 shares of Common Stock at $3.00 per share. The placement
agent for such offering received warrants to purchase 33,445 shares of Common
Stock at $3.00 per share, in accordance with the offering terms and elected
to receive 34,450 shares of Common Stock in lieu of certain sales commissions
and expenses. The proceeds of the offering will be used to fund research and
development, working capital, acquisitions of complementary companies or
technologies and general corporate purposes.
Through September 30, 1998, issuance costs for all placements totaled $405,000.
The proceeds of the offering will be used to fund research and development,
working capital, acquisitions of complementary companies or technologies and
general corporate purposes.
The investment bank has been engaged to assist the Company in raising up to an
additional $4.0 million to fund research and development, working capital,
acquisitions of complementary companies or technologies and general corporate
purposes. There can be no assurances that any additional closings of the
private placement will take place.
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