UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 13, 1999 6,035,619 shares, $0.01 par value
--------------- ---------
Total No. of Pages 14
<PAGE>
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 opportunities. The Company has proprietary patents or rights to five
technology platforms: synthetic polymers, Residerm TM, carbohydrate targeting
technology, selective muscle and nerve delivery systems and prevention and
treatment of viral disease, including HIV. In addition, Access' partner Block
Drug Company ("Block") is marketing in the United States Aphthasol TM, the first
FDA approved product for the treatment of canker sores. New formulations and
delivery forms are being developed to evaluate this product in additional
clinical indications. Access has licensed from Block the rights to this
product for additional indications including mucositis, oral and topical
diseases.
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 June 30, 1999, the Company's
accumulated deficit was $24,832,000 of which $8,894,000 was the result of the
write-off of purchased research.
RECENT DEVELOPMENTS
The Company has engaged an investment bank to assist the Company in raising
funds to support the Company's research and development activities, working
capital requirements, acquisitions of
2
<PAGE>
complementary companies or technologies
and general corporate purposes. On July 20, 1999, the Company completed the
first closing of the offering of up to $8 million of common stock at a per share
price of $2.00, with gross proceeds of $3.0 million in such first closing, less
issuance costs of $244,000, from the private placement of 1,500,000 shares of
Common Stock. The placement agent for such offering received warrants to
purchase 160,721 shares of Common Stock at $2.00 per share, in accordance with
the offering terms and elected to receive 106,217 shares of Common Stock in lieu
of certain sales commissions and expenses. There can be no assurances that any
additional closings of the private placement will take place.
The first closing of the offering, raised an aggregate of $3.0 million in gross
proceeds 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.
On February 23, 1999, the Company, entered into an Agreement of Merger and
Plan of Reorganization, as amended (the "Agreement") with Virologix
Corporation, a Delaware corporation ("Virologix"), and Access Holdings, Inc.,
a Delaware corporation and a wholly-owned subsidiary of the Company (the
"Merger Sub"). Pursuant to the terms of the Agreement, and simultaneously with
the first closing of the equity financing, on July 20, 1999 the Merger Sub
merged with and into Virologix, the separate existence of the Merger Sub
ceased, and Virologix became a wholly-owned subsidiary of the Company and
each outstanding share of Virologix' common stock was converted into 0.231047
shares of the Company's common stock, representing 1,000,000 shares of common
stock of the Company. The transaction will be accounted for as a purchase.
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.
Liquidity and Capital Resources
As of July 30, 1999 the Company's principal source of liquidity is $2,450,000 of
cash and cash equivalents. Working capital deficit as of June 30, 1999 was
$310,000, representing a decrease in working capital of $1,319,000 as compared
to the working capital as of December 31, 1998 of $1,009,000. The decrease in
working capital at June 30, 1999 was due to losses from operations in the first
two quarters of 1999.
Since its inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $24,832,000 at June 30, 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 operations through the first quarter of 2000. 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 products resulting from its
technologies.
If prior to the end of the fourth quarter of 1999, the Company is unsuccessful
in raising additional capital on acceptable terms, the Company would be required
to curtail research and development
3
<PAGE>
and general and administrative expenditures
so that working capital would cover reduced operations into the second quarter
of 2000. 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,
including research and development with respect to the newly acquired
technology resulting from the acquisition of Virologix. 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, including the sale of up to an additional $5 million of
common stock at a price of $2 per share in the Company's current equity
offering, 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 or that any additional
closings in its current equity offering will occur. 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.
An investment bank has been engaged to assist the Company in raising funds to
support the Company's research and development activities, working capital
requirements, acquisitions of complementary companies or technologies and
general corporate purposes. The Company is currently seeking an additional $5.0
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.
Second Quarter 1999
Compared to
Second Quarter 1998
Total research spending for the second quarter of 1999 was $316,000, as
compared to $501,000 for the same period in 1998, a decrease of $185,000. The
decrease in expenses was the result of lower external contract research costs
due to the completion of research contracts- $175,000; lower internal lab costs-
$38,000; and lower scientific consulting costs- $22,000 offset by higher salary
and related costs- $48,000; and higher other net costs totaling- $2,000. If the
Company is successful in raising additional capital, research spending is
expected to increase in future quarters as the Company intends to commence
clinical trials, hire additional scientific management and staff and
4
<PAGE>
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 $529,000 for the second quarter
of 1999, an increase of $170,000 as compared to the same period in 1998. The
increase in spending was primarily due to the following: increased business
consulting expense primarily due to the issuance of warrants issued in
connection with a consulting agreement- $198,000; increased shareholder
expenses- $41,000; increased other expenses- $27,000; offset by lower patent
costs due to the filing of fewer new patents in 1999- $56,000; lower salary
and related costs- $28,000; and other net decreases totaling- $12,000. If the
Company is not successful in raising additional capital, general and
administrative spending will be curtailed.
Depreciation and amortization was $46,000 for the second quarter 1999 as
compared to $66,000 for the same period in 1998 reflecting that some major
assets have been fully depreciated.
Total operating expenses in the second quarter of 1999 were $891,000 with
interest income of $6,000, and interest expense of $3,000 resulting in a loss
for the quarter of $888,000 or a $0.26 basic and diluted loss per common share.
Six Months ended June 30, 1999
Compared to
Six Months ended June 30, 1998
Research spending for the six months ended June 30, 1999 was $693,000 as
compared to $936,000 for the same period in 1998, a decrease of $243,000. The
decrease in expenses was due to: lower external lab costs due to the completion
of research contracts- $308,000; offset by higher salary and related costs-
$45,000; higher scientific consulting costs- $15,000; and other net increases
totaling- $5,000. If the Company is successful in raising additional capital,
research spending is expected to increase in future quarters as the Company
intends to commence clinical trials, 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 $912,000 for the six months ended June
30, 1999, an increase of $162,000 as compared to the same period in 1998. The
increase was primarily due to the following: increased business consulting
expense primarily due to the issuance of warrants issued in connection with a
consulting agreement- $240,000; and higher shareholder expenses- $85,000 offset
by lower patent expenses- $97,000; lower salary and related expenses- $63,000;
and other net decreases totaling- $3,000.
Depreciation and amortization was $93,000 for the six months ended June 30,
1999 as compared to $130,000 for the same period in 1998 reflecting that some
major assets have been fully depreciated.
Interest and miscellaneous income was $19,000 for the six months ended June 30,
1999 as compared to $8,000 for the same period in 1998, an increase of $11,000.
The increase was due to higher interest income from slightly higher cash
balances in 1999.
Accordingly, this resulted in a loss for the six months ended June 30, 1999 of
$1,687,000, or a $0.49 basic and diluted loss per common share.
5
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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 identified three major areas determined to be critical for
successful Y2K compliance: Area 1 includes financial, research and development
and administrative informational systems applications reliant on system
software; Area 2 includes research, development and quality applications
reliant on computer programs embedded in microprocessors; and Area 3 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 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 worked with
equipment manufactures to identify our exposures. With respect to Area 3, the
Company 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. The Company has completed
Phase II contingency planning and continues to monitor its third party
relationships. Most if not all of the third parties have informed the Company
that they will be in compliance by the end of the year. Contingency plans for
the Company will be continually refined, as additional information becomes
available.
As of June 30, 1999, we have identified costs related to replacement or
remediation and testing of our Area 1 computer information systems. Having
completed the Phase I and Phase II evaluation, total costs to date are $6,000.
We estimate the potential future cost of our internal Y2K compliance programs is
$25,000. The funds for these costs will be part of our current working capital
requirements. These costs will be expensed as incurred except for equipment
related costs.
6
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PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The annual meeting of stockholders was held on June 28, 1999 in New York, NY.
At that meeting the following matters were submitted to a vote of the
stockholders of record. The proposals were approved by the stockholders,
as follows:
Max Link was reelected Director for a three year term. The votes were:
2,120,697 - For; and 12,213 - Withheld Authority.
A proposal to amend the Company's 1995 stock option plan, as amended, to
increase the number of shares issuable under this plan was approved with
1,594,260 - For; 107,092 - Against; and 5,014 - Abstain.
A proposal to amend the Company's 1995 stock option plan, as amended, to
adjust the number of options to be granted to non-employee directors was
approved with 2,012,005 - For; 107,003 - Against; and 5,746 - Abstain.
A proposal to ratify the appointment of Grant Thornton LLP as independent
certified public accountants for the Company for the fiscal year ending
December 31, 1999 was approved with 2,032,117 - For; 89,453 - Against;
and 6,564 - Abstain.
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 August 3, 1999, the Company filed a Current Report on Form 8-K related to
Acquisition or Disposition of Assets. On February 23, 1999, the Company
entered into an Agreement of Merger and Plan of Reorganization, as amended (the
"Agreement") with Virologix Corporation, a Delaware corporation ("Virologix"),
and Access Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary
of the Company
7
<PAGE>
(the "Merger Sub"). Pursuant to the terms of the Agreement, on
July 20, 1999 the Merger Sub merged with and into Virologix, the separate
existence of the Merger Sub ceased, and Virologix became a wholly-owned
subsidiary of the Company and each outstanding share of Virologix' common
stock was converted into 0.231047 shares of the Company's common stock,
representing 1,000,000 shares of common stock of the Company. The transaction
will be accounted for as a purchase.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACCESS PHARMACEUTICALS, INC.
Date: August 13, 1999 By: /s/ Kerry P. Gray
--------------- -------------------
Kerry P. Gray
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999 By: /s/ Stephen B. Thompson
--------------- -------------------------
Stephen B. Thompson
Chief Financial Officer
(Principal Financial and Accounting
Officer)
8
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Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 258,000 $ 1,487,000
Accounts receivable 32,000 -
Prepaid expenses and other current assets 128,000 54,000
-------------- --------------
Total current assets 418,000 1,541,000
-------------- --------------
Property and equipment, at cost 1,007,000 1,007,000
Less accumulated depreciation and amortization (848,000) (780,000)
-------------- --------------
159,000 227,000
-------------- --------------
Licenses, net 400,000 425,000
Investments 150,000 150,000
Other assets 8,000 8,000
-------------- --------------
Total assets $ 1,135,000 $ 2,351,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 558,000 $ 395,000
Accrued insurance premiums 9,000 38,000
Deferred revenues 88,000 -
Current portion of obligations
under capital leases 73,000 99,000
-------------- --------------
Total current liabilities 728,000 532,000
-------------- --------------
Obligations under capital leases,
net of current portion 3,000 24,000
-------------- --------------
Total liabilities 731,000 556,000
-------------- --------------
Commitments and contingencies - -
Stockholders' equity
Preferred stock - $.01 par value;
authorized 2,000,000 shares;
none issued or outstanding - -
Common stock - $.01 par value;
authorized 20,000,000 shares;
issued and outstanding, 3,429,402
at June 30, 1999 and December 31,1998 34,000 34,000
Additional paid-in capital 25,202,000 24,906,000
Deficit accumulated during the
development stage (24,832,000) (23,145,000)
-------------- --------------
Total stockholders' equity 404,000 1,795,000
-------------- --------------
Total liabilities and stockholders' equity $ 1,135,000 $ 2,351,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30, February 24, 1988
--------------------------- --------------------------- (inception) to
1999 1998 1999 1998 June 30,1999
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
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 316,000 501,000 693,000 936,000 11,058,000
General and administrative 529,000 359,000 912,000 750,000 9,239,000
Depreciation and amortization 46,000 66,000 93,000 130,000 1,362,000
Write-off of excess purchase price - - - - 8,894,000
------------ ------------ ------------ ------------ -------------
Total expenses 891,000 926,000 1,698,000 1,816,000 30,553,000
------------ ------------ ------------ ------------ -------------
Loss from operations (891,000) (926,000) (1,698,000) (1,816,000) (25,368,000)
------------ ------------ ------------ ------------ -------------
Other income (expense)
Interest and miscellaneous income 6,000 6,000 19,000 8,000 851,000
Interest expense (3,000) (5,000) (8,000) (14,000) (188,000)
------------ ------------ ------------ ------------ -------------
3,000 1,000 11,000 (6,000) 663,000
------------ ------------ ------------ ------------ -------------
Loss before income taxes (888,000) (925,000) (1,687,000) (1,822,000) (24,705,000)
Provision for income taxes - - - - 127,000
------------ ------------ ------------ ------------ -------------
Net loss $ (888,000) $ (925,000) $ (1,687,000) $ (1,822,000) $(24,832,000)
============ ============ ============= ============= =============
Basic and diluted loss per
common share $ (0.26) $ (0.42) $ (0.49) $ (0.95)
============ ============ ============= =============
Weighted average basic and diluted
common shares outstanding 3,429,402 2,209,775 3,429,402 1,920,564
============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE>
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
February 24, 1988
Six Months ended June 30, (inception) to
1999 1998 June 30, 1999
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows form operating activities:
Net loss $(1,687,000) $(1,822,000) $(24,832,000)
Adjustments to reconcile net loss to
cash used in operating activities:
Write-off of excess purchase price - - 8,894,000
Warrants issued in payment of
consulting expenses 296,000 - 865,000
Research expenses related to
common stock granted - 8,000 100,000
Depreciation and amortization 93,000 130,000 1,362,000
Deferred revenue 88,000 - (22,000)
Change in operating assets
and liabilities:
Accounts receivable (32,000) (1,000) (33,000)
Prepaid expenses and other
current assets (74,000) 24,000 (129,000)
Other assets - 2,000 (6,000)
Accounts payable and accrued
expenses 134,000 (122,000) 274,000
------------ ------------ -------------
Net cash used in operating activities (1,182,000) (1,781,000) (13,527,000)
------------ ------------ -------------
Cash flows from investing activities:
Capital expenditures - (3,000) (1,168,000)
Sales of capital equipment - - 15,000
Purchase of Tacora, net of cash acquired - - (124,000)
Other investing activities - (50,000) (150,000)
------------ ------------ -------------
Net cash used in investing activities - (53,000) (1,427,000)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from notes payable - - 721,000
Payments of principal on obligations
under capital leases (47,000) (133,000) (674,000)
Cash acquired in merger with Chemex - - 1,587,000
Proceeds from stock issuances, net - 3,703,000 13,578,000
------------ ------------ -------------
Net cash (used in) provided by
financing activities (47,000) 3,570,000 15,212,000
------------ ------------ -------------
Net (decrease) increase in cash
and cash equivalents (1,229,000) 1,736,000 258,000
Cash and cash equivalents
at beginning of period 1,487,000 438,000 -
------------ ------------ -------------
Cash and cash equivalents
at end of period $ 258,000 $ 2,174,000 $ 258,000
============ ============ =============
Cash paid for interest $ 19,000 $ 14,000 $ 196,000
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>
The accompanying notes are an integral part of these statements.
11
<PAGE>
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 1999 and 1998
(unaudited)
(1) Interim Financial Statements
The consolidated balance sheet as of June 30, 1999 and the consolidated
statements of operations for the three and six months ended and cash flows for
the six months ended June 30, 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 audited consolidated 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 June 30,
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 operations through the first quarter of 2000. 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 products resulting from its
technologies.
If prior to the end of the fourth quarter of 1999 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 second quarter of
2000. 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,
including research and development with respect to the newly acquired
technology resulting from the acquisition of Virologix. 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
12
<PAGE>
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, including the sale of up to an additional $5 million of
common stock at a price of $2 per share in the Company's current equity
offering, 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 or that any additional
closings in its current equity offering will occur. 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.
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
The Company has engaged an investment bank to assist the Company in raising
funds to support the Company's research and development activities, working
capital requirements, acquisitions of complementary companies or technologies
and general corporate purposes. On July 20, 1999, the Company completed the
first closing of the offering of up to $8 million of common stock at a per share
price of $2.00, with gross proceeds of $3.0 million in such first closing, less
issuance costs of $244,000, from the private placement of 1,500,000 shares of
Common Stock. The placement agent for such offering received warrants to
purchase 160,721 shares of Common Stock at $2.00 per share, in accordance with
the offering terms and elected to receive 106,217 shares of Common Stock in lieu
of certain sales commissions and expenses. There can be no assurances that any
additional 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 February 23, 1999, the Company, entered into an Agreement of Merger and
Plan of Reorganization, as amended (the "Agreement") with Virologix
Corporation, a Delaware corporation ("Virologix), and Access Holdings, Inc.,
a Delaware corporation and a wholly-
13
<PAGE>
owned subsidiary of the Company (the
"Merger Sub"). Pursuant to the terms of the Agreement, and simultaneously with
the first closing of the equity financing, on July 20, 1999 the Merger Sub
merged with and into Virologix, the separate existence of the Merger Sub
ceased, and Virologix became a wholly-owned subsidiary of the Company and each
outstanding share of Virologix' common stock was converted into 0.231047 shares
of the Company's common stock, representing 1,000,000 shares of common stock
of the Company. The transaction will be accounted for as a purchase.
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE CONSOLIDATED
BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 258
<SECURITIES> 0
<RECEIVABLES> 32
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 418
<PP&E> 1,007
<DEPRECIATION> 848
<TOTAL-ASSETS> 1,135
<CURRENT-LIABILITIES> 728
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 370
<TOTAL-LIABILITY-AND-EQUITY> 1,135
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,698
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (1,687)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,687)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,687)
<EPS-BASIC> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
