UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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 May 12, 1999 3,429,402 shares, $0.01 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
OVERVIEW
Access Pharmaceuticals, Inc. (together with its subsidiaries,
"Access" or the "Company") is a Delaware corporation in the
development stage. The Company is an emerging pharmaceutical
company focused on developing both novel low development risk
product candidates and technologies with longer-term major
product opportuntities. 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
("Block") is marketing Aphthasol TM in the United States, the first
FDA approved product for the treatment of canker sores. Access has
licensed for evaluation in additional clinical indications this product,
from Block, in certain international markets for oral diseases including
mucositis and topical diseaeses and is developing new delivery forms.
In connection with the merger ("Merger") of Access Pharmaceuticals,
Inc., a Texas corporation ("API"), with and into Chemex
Pharmaceuticals, Inc. ("Chemex") on January 25, 1996, the name of
Chemex was changed to Access Pharmaceuticals, Inc. ("Access" or the
"Company").
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, 1998.
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 received limited
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. As of March 31, 1999, the
Company's accumulated deficit was $23,944,000.
RECENT DEVELOPMENTS
On March 1, 1999, the Company and a wholly owned subsidiary of the
Company entered into a
2
merger agreement with Virologix Corporation ("Virologix"), whereby
Virologix will become a wholly owned subsidiary of the Company. The
closing of the merger is subject to certain conditions, including the
condition that the Company raise at least $3.0 million in equity financing.
Virologix is a privately held company focused on the development
of product candidates for the prevention and treatment of viral
diseases, including HIV. Under the terms of the agreement, the
Virologix shareholders will receive 1,000,000 shares of common
stock of the Company. It is anticipated that the closing of the
acquisition will take place during the second quarter of 1999.
On January 11, 1999, the Company announced that it has signed a
license agreement with Block Drug Company ("Block") for the rights
to develop amlexanox for use in chemotherapy and radiation induced
mucositis. Mucositis is a debilitating condition involving
extensive inflammation of the oral cavity that affects an estimated
400,000 cancer patients in the United States undergoing
chemotherapy and radiation therapy. Amlexanox is currently the only
prescription drug approved by the FDA for the treatment of aphthous
ulcers (canker sores), and is marketed by Block in the United
States under the trade name Aphthasol TM.
Liquidity and Capital Resources
As of March 31, 1999 the Company's principal source of liquidity
is $887,000 of cash and cash equivalents. Working capital as of
March 31, 1999 was $376,000, representing an decrease in the
working capital of $633,000 as compared to the working capital as
of December 31, 1998 of $1,009,000. The decrease in working capital
was due to losses from operations in the first quarter.
Since its inception, the Company's expenses have significantly
exceeded its revenues, resulting in an accumulated deficit of
$23,944,000 as of March 31, 1999. The Company has funded its
operations primarily through private sales of its equity
securities, contract research payments from corporate alliances and
the merger of API and Chemex.
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 current 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 prior to the end of the second quarter of 1999, the Company is
unsuccessful in raising additional capital the Company would be
required to curtail research and development and general and
administrative expenditures so that working capital could 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. If the Company is unable to raise additional
capital in the near term, it may be forced to suspend operations.
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
3
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 effected.
An investment bank has been engaged to assist the Company in
raising funds to support the Company's research and development
activities, working capital, acquisitions of complementary
companies or technologies and general corporate purposes. The
Company is currently seeking between $3.0 and $8.0 million to
support these activities. There can be no assurance, however, that
any such equity offerings will occur, or that additional financing
will be available from any of these sources or, if available, will
be available on acceptable or affordable terms.
First Quarter 1999
Compared to
First Quarter 1998
Total research spending for the first quarter of 1999 was $377,000,
as compared to $435,000 for the same period in 1998, a decrease of
$58,000. The decrease in expenses was the result of lower external
contract research costs- $133,000; and lower other costs- $4,000;
offset by higher external development costs- $42,000; and
scientific consulting costs- $37,000. 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 commence clinical
studies to develop the Company's product candidates. If the
Company is not successful in raising additional capital, research
spending will be curtailed.
Total general and administrative expenses were $383,000 for the
first quarter of 1999, a decrease of $8,000 as compared to the same
period in 1998. The decrease in spending was due primarily to the
following: lower patent costs- $41,000; lower salary expenses-
$34,000; lower business consulting- $23,000; and other decreases-
$27,000; offset by higher legal fees for private placement and
merger expenses- $89,000; higher shareholder expenses due to
additional investor relations expenses and internet web design- $44,000.
If the Company is not successful in raising additional capital, general
4
and administrative spending will be curtailed.
Depreciation and amortization was $47,000 for the first quarter
1999 as compared to $64,000 for the same period in 1998 reflecting
the full depreciation of some assets as of the first quarter 1999.
Interest and miscellaneous income was $13,000 for the first quarter
of 1999 as compared to $2,000 for the same period in 1998, an
increase of $11,000. The increase in interest income was due to
higher cash balances in 1999.
Net loss in the first quarter of 1999 was $807,000 or a loss of
$0.23 basic and diluted loss per 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.
The Company has developed a three-phase program to limit or
eliminate Y2K exposures. Phase I involved the identification of
those systems, applications and third-party relationships from
which the Company has 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. The
Company intends to complete all phases before the end of the third
quarter of 1999.
The Company has 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, the Company has completed an internal
review and contacted all software suppliers to determine major
areas of Y2K exposure. In research, development and quality
applications (Area 2), the Company has worked with equipment
manufactures to identify our exposures. With respect to Area 3, the
Company has evaluated our reliance on third parties in order to
determine whether their Y2K compliance will adequately assure our
uninterrupted operations.
The Company has completed 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 the
Company has not completed Phase II contingency planning, the
Company can not describe what action the Company would take in
any of the areas should Y2K compliance not be achievable in time. As
such, there can be no
5
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 March 31, 1999, we have identified costs related to
replacement or remediation and testing of our Area 1 computer
information systems. Having completed the Phase I evaluation, total
costs to date are $5,000. We estimate the potential future cost of
our Y2K compliance programs is $25,000. The funds for these costs
will be part of our current working capital. These costs will be
expensed as incurred except for equipment related costs.
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
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 April 1, 1999, the Registrant filed a Current Report on Form 8-K
related to Other Events. The Company announced that it has entered
into an agreement to acquire Virologix Corporation ("Virologix"),
a private company focused on the development of product candidates
for the prevention and treatment of viral diseases including HIV.
Under terms of the acquisition agreement the Virologix shareholders
will receive 1,000,000 shares of common stock of the Company. It
is anticipated that the closing of the acquisition will take place
within the next 60 days. The transaction has been approved by the
Boards of Directors of both companies and the closing is subject
to the approval of the Virologix's shareholders, the completion of
a private placement by Access and other customary closing
conditions.
6
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: May 14, 1999 By:/s/ Kerry P. Gray
-----------------
Kerry P. Gray
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999 By:/s/ Stephen B. Thompson
------------------------
Stephen B. Thompson
Chief Financial Officer
(Principal Financial and Accounting
Officer)
7
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Balance Sheets
March 31, 1999 December 31, 1998
-------------- --------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ 887,000 $ 1,487,000
Accounts receivable 12,000 -
Prepaid expenses and other current assets 45,000 54,000
-------------- --------------
Total current assets 944,000 1,541,000
-------------- --------------
Property and equipment, at cost 1,007,000 1,007,000
Less accumulated depreciation (815,000) (780,000)
-------------- --------------
192,000 227,000
-------------- --------------
Licenses, net 413,000 425,000
Investments 150,000 150,000
Other assets 8,000 8,000
-------------- --------------
Total assets $ 1,707,000 $ 2,351,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 459,000 $ 395,000
Accrued insurance premiums 19,000 38,000
Deferred revenues 88,000 -
Current portion of obligations under
capital leases 90,000 99,000
-------------- --------------
Total current liabilities 656,000 532,000
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Obligations under capital leases, net
of current portion 8,000 24,000
-------------- --------------
Total liabilities 664,000 556,000
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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 20,000,000 shares;
issued and outstanding, 3,429,402
at March 31, 1999 and December 31,1998 34,000 34,000
Additional paid-in capital 24,953,000 24,906,000
Deficit accumulated during the
development stage (23,944,000) (23,145,000)
-------------- --------------
Total stockholders' equity 1,043,000 1,795,000
-------------- --------------
Total liabilities and stockholders' equity $ 1,707,000 $ 2,351,000
============== ==============
The accompanying notes are an integral part of these statements
8
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Statements of Operations
(unaudited)
February 24,
Three Months ended March 31, 1988
-------------------------- (inception) to
1999 1998 March 31, 1999
------------ ------------ -------------
Revenues
Research and development $ - $ - $ 2,711,000
Option income - - 2,149,000
Licensing revenues - - 325,000
------------ ------------ -------------
Total revenues - - 5,185,000
------------ ------------ -------------
Expenses
Research and development 377,000 435,000 10,742,000
General and administrative 383,000 391,000 8,710,000
Depreciation and amortization 47,000 64,000 1,316,000
Write-off of excess purchase price - - 8,894,000
------------ ------------ -------------
Total expenses 807,000 890,000 29,662,000
------------ ------------ -------------
Loss from operations (807,000) (890,000) (24,477,000)
------------ ------------ -------------
Other income (expense)
Interest and miscellaneous income 13,000 2,000 845,000
Interest expense (5,000) (9,000) (185,000)
------------ ------------ -------------
8,000 (7,000) 660,000
------------ ------------ -------------
Loss before income taxes (799,000) (897,000) (23,817,000)
Provision for income taxes - - 127,000
------------ ------------ -------------
Net loss $ (799,000) $ (897,000) $(23,944,000)
============ ============ =============
Basic and diluted loss per
common share $(0.23) $(0.55)
Weighted average basic and diluted
common shares outstanding 3,429,402 1,628,140
============ ============
The accompanying notes are an integral part of these statements.
9
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Statements of Cash Flows
(unaudited)
February 24,
Three Months ended March 31, 1988
-------------------------- (inception) to
1999 1998 March 31, 1999
------------ ------------ -------------
Cash flows form operating activities:
Net loss $ (799,000) $ (897,000) $(23,944,000)
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 47,000 - 616,000
Research expenses related to
common stock granted - - 100,000
Depreciation and amortization 47,000 64,000 1,316,000
Deferred revenue 88,000 - (22,000)
Change in operating assets and
liabilities:
Accounts receivable (12,000) (11,000) (13,000)
Prepaid expenses and other
current assets 9,000 6,000 (46,000)
Other assets - 1,000 (6,000)
Accounts payable and
accrued expenses 45,000 (51,000) 185,000
------------ ------------ -------------
Net cash used in operating activities (575,000) (888,000) (12,920,000)
------------ ------------ -------------
Cash flows from investing activities:
Capital expenditures - - (1,168,000)
Sales of capital equipment - - 15,000
Purchase of Tacora, net of cash acquired - - (124,000)
Other investing activities - - (150,000)
------------ ------------ -------------
Net cash used in investing activities - - (1,427,000)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from notes payable - - 721,000
Payments of principal on obligations
under capital leases (25,000) (75,000) (652,000)
Cash acquired in merger with Chemex - - 1,587,000
Proceeds from stock issuances, net - 630,000 13,578,000
------------ ------------ -------------
Net cash (used in) provided by
financing activities (25,000) 555,000 15,284,000
------------ ------------ -------------
Net increase (decrease) in cash and
cash equivalents (600,000) (333,000) 887,000
Cash and cash equivalents at
beginning of period 1,487,000 438,000 -
------------ ------------ -------------
Cash and cash equivalents at
end of period $ 887,000 $ 105,000 $ 887,000
============ ============ =============
Cash paid for interest $ 5,000 $ 9,000 $ 182,000
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
Equipment purchases financed through
capital leases - - 82,000
Net liabilities assumed in acquisition
of Tacora Corporation - - 455,000
The accompanying notes are an integral part of these statements.
10
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 1999 and 1998
(unaudited)
(1) Interim Financial Statements
The consolidated balance sheet as of March 31, 1999 and the consolidated
statements of operations and cash flows for the three months ended March 31,
1999 and 1998 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 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, 1998. The results of operations for the period ended March 31, 1999 are not
necessarily indicative of the operating results which may be expected for a full
year. The consolidated balance sheet as of December 31, 1998 contains financial
information taken from the audited financial statements as of that date.
(2) Liquidity
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 current 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 prior to the end of the second quarter of 1999 the Company is unsuccessful
in raising additional capital the Company would be required to curtail research
and development and general and administrative expenditures so that working
capital could 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. If the
Company is unable to raise additional capital in the near term, it may be forced
to suspend operations.
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
11
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 effected.
The Independent Auditor's Report on the Company's 1998 consolidated financial
statements included an emphasis paragraph regarding the uncertainty of the
Company's ability to continue as a going concern.
(3) Private Placement
An investment bank has been engaged to assist the Company in raising between
$3.0 and $8.0 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 closings of the private placement
will take place.
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) Merger
On March 1, 1999, the Company and a wholly owned subsidiary of the
Company entered into a merger agreement with Virologix Corporation
("Virologix"), whereby Virologix will become a wholly owned subsidiary of the
Company. The closing of the merger is subject to certain conditions, including
the condition that the Company raise at least $3.0 million in equity financing.
Virologix is a privately held company focused on the development of product
candidates for the prevention and treatment of viral diseases, including HIV.
Under the terms of the agreement, the Virologix shareholders will receive
1,000,000 shares of common stock of the Company. It is anticipated that the
closing of the acquisition will take place during the second quarter of 1999.