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, 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 May 11, 1998 41,514,581 shares, $0.04 par value ------------ ---------- Total No. of Pages 12
PART I -- FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS The response to this Item is submitted as a separate section of this report. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS The Company, assisted by an investment bank, raised an aggregate of $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 $22,250, from the placement of 48 units, each unit consisting of 166,667 shares Common Stock and warrants to purchase 166,667 shares of Common Stock at $0.15 per share. The placement agent elected to receive 905,555 shares of Common Stock in lieu of certain sales commissions and expenses and warrants to purchase 890,555 shares of Common Stock at an exercise price of $0.15 per share, per the offering terms. The proceeds of the offering will be used to fund the Company's activities until further funds are raised. The investment bank has been engaged to assist the Company in raising up to an additional $7,800,000 to fund the Company's research and development activities. On April 14, 1998 the Company's Shareholders gave their approval to amend Access' Certificate of Incorporation, as amended, to effect a recapitalization of the Company through a one-for-twenty reverse stock split of Access common stock, $.04 par value per share (the "Common Stock"), decrease the number of authorized shares of Common Stock from 60.0 million to 20.0 million shares, par value $0.01 per share, and decrease the authorized shares of preferred stock of the Company from 10.0 million to 2.0 million (the "Recapitalization"). This proposal, if and when effected, will decrease the number of outstanding shares of Common Stock from approximately 41.5 million to 2.1 million. In addition, if and when the Recapitalization becomes effective and if 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 market price of the Common Stock immediately after the implementation of the proposed reverse stock split will increase, and if it does increase, there can be no assurance that such increase can be maintained for any period of time, or that such market price will approximate twenty times the market price before the proposed reverse stock split. There can be no assurances that the Company will be listed on NASDAQ or an alternate exchange. On February 26, 1998, the Company entered into a license agreement with Strakan Limited ("Strakan") relating to the Company's zinc technology. Strakan has agreed to fund the development costs of Zinc Clindamycin, for the treatment of acne, and any additional compounds developed utilizing the zinc patent, and will share equally with the Company all milestone payments received from the sublicensing of the compound. In addition, Access will receive a royalty on sales of products based on this technology. 2
Liquidity and Capital Resources As of April 30, 1998 the Company's principal source of liquidity is $295,000 of cash and cash equivalents. Working capital deficit as of March 31, 1998 was $(444,000), representing an increase in the deficit of $228,000 as compared to the working capital deficit as of December 31, 1997 of $(216,000). The decrease in working capital was due to the current year's operations, offset partially by the $725,000 in gross proceeds received from the private placement of units sold as of March 31, 1998. Since its inception, the Company's expenses have significantly exceeded its revenues, resulting in an accumulated deficit of $20,645,000 at March 31, 1998. 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 operations through the next two to three months. 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 products from 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. 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; and the cost of manufacturing and scale-up. 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 3
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. First Quarter 1998 Compared to First Quarter 1997 The Company had $138,000 in licensing revenue in 1997 as compared to no revenue in the first quarter 1998. First quarter 1997 revenues were comprised of licensing income from an ongoing agreement with an emerging pharmaceutical company which made certain milestone payments and provides for royalty payments if a product is developed from the technology. Total research spending for the first quarter of 1998 was $435,000, as compared to $504,000 for the same period in 1997, a decrease of $69,000. The decrease in expenses was the result of lower salary and related costs- $57,000; lower equipment rent- $17,000; lower other costs- $22,000; offset by higher external contract research costs- $27,000. 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. Total general and administrative expenses were $391,000 for the first quarter of 1998, a decrease of $14,000 as compared to the same period in 1997. The decrease in spending was due primarily to the following: decreased general business consulting fees- $49,000; other decreases- $10,000; offset by increased patent costs due to the filing of new patents- $45,000. If the Company is not successful in raising additional capital, general and administrative spending will be curtailed. Depreciation and amortization was $64,000 for the first quarter 1998 as compared to $32,000 for the same period in 1997 reflecting the additional depreciation of the assets acquired in the Tacora merger. Interest and miscellaneous income was $2,000 for the first quarter of 1998 as compared to $47,000 for the same period in 1997, a decrease of $45,000. The decrease in interest income was due to lower cash balances in 1998. Total expenses in the first quarter of 1998 were $899,000 with interest income of $2,000, resulting in a loss for the quarter of $897,000 or ($0.03) basic and diluted loss per share. Certain statements in this Form 10-Q including Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements that involve risks and uncertainties. In addition to the risks and uncertainties set forth in this Form 10-Q, other factors could cause actual results to differ materially, including but not limited to the Company's research and development focus, uncertainties associated with research and development activities, future capital requirements, anticipated option and licensing revenues, dependence on others, ability to raise capital, 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. 4
PART II -- OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS None ITEM 2 CHANGES IN SECURITIES On March 20 and April 1, 1998 the Company sold to several individual investors an aggregate of 48 units, each unit consisting of 166,667 shares of Common Stock and warrants to purchase 166,667 shares of Common Stock at $0.15 per share. The placement agent for such offering was issued 905,555 shares of Common Stock and warrants to purchase 890,555 shares of Common Stock at $0.15 per share. The Company raised an aggregate of $1,200,000 in gross proceeds. The shares issued in the Private Placement have not been registered; however, the Company has agreed to file a registration statement for the resale of such shares not later than August 30, 1998. 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. ITEM 3 DEFAULTS UPON SENIOR SECURITIES None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special meeting of stockholders was held on April 14, 1998 in New York, NY. At that meeting the following matter was submitted to a vote of the stockholders of record. The proposal was approved by the stockholders, as follows: A proposal to amend the Company's Certificate Incorporation to effect the Recapitalization was approved with 22,481,235 - For, 4,252,719 - Against and 42,230 - Abstain. ITEM 5 OTHER INFORMATION None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K Exhibits: 10.12 License Agreement between Strakan Limited and the Company dated February 26, 1998 (Confidential Treatment Requested) 27.1 Financial Data Schedule Reports on Form 8-K: None 5
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ACCESS PHARMACEUTICALS, INC. Date: May 15, 1998 By: /s/ Kerry P. Gray ------------ -------------------- Kerry P. Gray President and Chief Executive Officer (Principal Executive Officer) Date: May 15, 1998 By: /s/ Stephen B. Thompson ------------ ----------------------- Stephen B. Thompson Chief Financial Officer (Principal Financial and Accounting Officer) 6
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY a development stage company Condensed Consolidated Balance Sheets <TABLE> <CAPTION> Assets March 31, 1998 December 31, 1997 - ------- --------------- --------------- <S> <C> <C> Current Assets Cash and cash equivalents $ 105,000 $ 438,000 Accounts receivable 12,000 1,000 Prepaid expenses and other current assets 45,000 51,000 --------------- --------------- Total Current Assets 162,000 490,000 Property and Equipment, at cost 1,047,000 1,047,000 Less accumulated depreciation (677,000) (625,000) --------------- --------------- 370,000 422,000 Licenses, net 463,000 475,000 Other Assets 59,000 60,000 --------------- --------------- Total Assets $ 1,054,000 $ 1,447,000 =============== =============== Liabilities and Stockholders' Equity - ------------------------------------ Current Liabilities Accounts payable and accrued expenses $ 390,000 $ 434,000 Royalties payable 58,000 53,000 Accrued insurance premium 26,000 38,000 Current portion of obligations under capital leases 132,000 181,000 --------------- --------------- Total Current Liabilities 606,000 706,000 --------------- --------------- Obligations under capital leases, net of current portion 116,000 142,000 --------------- --------------- Total Liabilities 722,000 848,000 --------------- --------------- Stockholders' Equity Preferred stock, $.01 par value, authorized 10,000,000 shares, none issued or outstanding - - Common stock, $.04 par value, authorized 60,000,000 shares, 37,442,353 and 32,609,010, issued and outstanding at March 31, 1998 and December 31,1997, respectively 1,498,000 1,304,000 Additional paid-in capital 19,479,000 19,043,000 Deficit accumulated during the development stage (20,645,000) (19,748,000) --------------- --------------- Total Stockholders' Equity 332,000 599,000 --------------- --------------- Total Liabilities and Stockholders' Equity $ 1,054,000 $ 1,447,000 =============== =============== </TABLE> - -------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements 7
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY a development stage company Condensed Consolidated Statements of Operations (unaudited) <TABLE> <CAPTION> Three Months ended March 31, February 24, 1988 ---------------------------- (inception) to 1998 1997 March 31, 1998 ------------ ------------ ------------- <S> <C> <C> <C> Revenues Research and development $ - $ - $ 2,711,000 Option income - - 2,149,000 Licensing revenues - 138,000 325,000 ------------ ------------ ------------- Total Revenues - 138,000 5,185,000 ------------ ------------ ------------- Expenses Research and development 435,000 504,000 9,044,000 General and administrative 391,000 405,000 7,254,000 Depreciation and amortization 64,000 32,000 1,120,000 Write-off of excess purchase price - - 8,894,000 ------------ ------------ ------------- Total Expenses 890,000 941,000 26,312,000 ------------ ------------ ------------- Loss From Operations (890,000) (803,000) (21,127,000) ------------ ------------ ------------- Other Income (Expense) Interest and miscellaneous income 2,000 47,000 776,000 Interest expense (9,000) (8,000) (167,000) ------------ ------------ ------------- (7,000) 39,000 609,000 ------------ ------------ ------------- Loss Before Income Taxes (897,000) (764,000) (20,518,000) Provision for Income Taxes - - 127,000 ------------ ------------ ------------- Net Loss $ (897,000) $ (764,000) $(20,645,000) ============ ============ ============= Basic and Diluted Loss Per Common Share $ (0.03) $ (0.02) ============ ============ Weighted Average Basic and Diluted Common Shares Outstanding 32,562,805 31,391,324 ============ ============ </TABLE> - --------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements 8
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY a development stage company Condensed Consolidated Statements of Cash Flows (unaudited) <TABLE> <CAPTION> Three Months ended March 31, February 24, 1988 --------------------------- (inception) to 1998 1997 March 31, 1998 ------------ ------------ ------------- <S> <C> <C> <C> Cash Flows form Operating Activities Net Loss $ (897,000) $ (764,000) $(20,645,000) 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 - - 100,000 Depreciation and amortization 64,000 32,000 1,120,000 Unearned revenue - - (110,000) Change in operating assets and liabilities: Accounts receivable (11,000) (1,000) (13,000) Prepaid expenses and other current assets 6,000 19,000 (46,000) Other assets 1,000 - (7,000) Accounts payable and accrued expenses (51,000) (186,000) 181,000 ----------- ------------ ------------- Net Cash Used In Operating Activities (888,000) (900,000) (9,994,000) ----------- ------------ ------------- Cash Flows From Investing Activities Capital expenditures - (5,000) (1,164,000) Sales of capital equipment - - 6,000 Purchase of Tacora, net of cash acquire - - (124,000) Other investing activities - - (50,000) ----------- ------------ ------------- Net Cash Used In Investing Activities - (5,000) (1,332,000) ----------- ------------ ------------- Cash Flows From Financing Activities Proceeds from notes payable - - 721,000 Payments of principal on obligations under capital leases (75,000) (38,000) (529,000) Cash acquired in merger with Chemex - - 1,587,000 Proceeds from stock issuances, net 630,000 - 9,652,000 ------------ ------------ ------------- Net Cash Provided By (Used In) Financing Activities 555,000 (38,000) 11,431,000 ------------ ------------ ------------- Net Increase (Decrease) in Cash and Cash Equivalents (333,000) (943,000) 105,000 Cash and Cash Equivalents at Beginning of Period 438,000 4,428,000 - ------------ ------------ ------------- Cash and Cash Equivalents at End of Period $ 105,000 $ 3,485,000 $ 105,000 ============ ============= ============= Cash paid for interest $ 9,000 $ 8,000 $ 164,000 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 </TABLE> - --------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements 9
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY a development stage company Notes to Condensed Consolidated Financial Statements Three Months Ended March 31, 1998 and 1997 (unaudited) (1) Interim Financial Statements The consolidated balance sheet as of March 31, 1998 and the consolidated statements of operations and cash flows for the three months ended March 31, 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 March 31, 1998 presentation. 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, 1997. The results of operations for the period ended March 31, 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 has 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. 10
(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 operations through the next two to three months. 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 products from 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. 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) Private Placement The Company, assisted by an investment bank, raised an aggregate of $1,200,000 in gross proceeds ($725,000 received on March 20, 1998 and $475,000 received on April 1, 1998), less cash issuance costs of $22,250, from the placement of 48 units, each unit consists of 166,667 shares Common Stock and warrants to purchase 166,667 shares of Common Stock at $0.15 per share. The placement agent elected to receive 905,555 shares of Common Stock in lieu of certain sales commissions and expenses and warrants to purchase 890,555 shares of Common Stock at an exercise price of $0.15 per share, per the offering terms. The proceeds of the offering will be used to fund the Company's activities until further funds are raised. The investment bank has been engaged to assist the Company in raising up to an additional $7,800,000 to fund the Company's research and development activities. (4) Recapitalization On April 14, 1998 the Company's Shareholders gave their approval to amend Access' Certificate of Incorporation, as amended, to effect a recapitalization of the Company through a one-for-twenty reverse stock split of Access common stock, $.04 par value per share (the "Common Stock"), decrease the number of authorized shares of Common Stock from 60.0 million to 20.0 million shares, par value $0.01 per share, and decrease the authorized shares of preferred stock of the Company from 10.0 million to 2.0 million (the Recapitalization"). This proposal, when effective, will decrease the number of outstanding shares of Common Stock from approximately 41.5 million to 2.1 million. In addition, if and when the Recapitalization becomes effective and if the Company satisfies all listing 11
requirements, the Company intends to submit an application for listing on NASDAQ or an alternate exchange. There can be no assurances that the market price of the Common Stock immediately after the implementation of the proposed reverse stock split will increase, and if it does increase, there can be no assurance that such increase can be maintained for any period of time, or that such market price will approximate twenty times the market price before the proposed reverse stock split. There can be no assurances that the Company will be listed on NASDAQ or an alternate exchange. 12