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ACCP > SEC Filings for ACCP > Form 10-Q on 14-Nov-2013All Recent SEC Filings

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Form 10-Q for ACCESS PHARMACEUTICALS INC


14-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


OVERVIEW

Access Pharmaceuticals, Inc. (together with our subsidiaries, "We," "Access" or the "Company") is a Delaware corporation. We are an emerging biopharmaceutical company focused on developing a range of pharmaceutical products primarily based upon our nanopolymer chemistry technologies and other drug delivery technologies. We currently have one marketed product licensed in the U.S. and China. We also have additional products and platform technologies in development where we are seeking partners to continue development and/or to license the technology.

Marketed Product
· MuGard™ is our marketed product for the management of oral mucositis, a frequent side-effect of cancer therapy for which there is no established treatment. The market for mucositis treatment is estimated to be in excess of $1.0 billion world-wide. MuGard, a proprietary nanopolymer formulation, has received marketing allowance in the U.S. from the FDA. We launched MuGard in the U.S. in 2010. On June 6, 2013 we entered into an exclusive license agreement with AMAG Pharmaceuticals, Inc. ("AMAG") related to the commercialization of MuGard in the U.S. and its territories. Under the terms of the licensing agreement we received an upfront licensing fee of $3.3 million and a tiered, double-digit royalty on net sales of MuGard in the licensed territories. We receive quarterly royalty payments from AMAG.

Our China partners have received an acceptance letter from the State Food and Drug Administration of the People's Republic of China, which provides marketing approval in China. MuGard has been manufactured in the U.S. and shipped to China for sale.

We are actively seeking partners to license MuGard in other territories.

For the following products we are seeking partners to continue development and/or are seeking partners to license the technology.

Product Candidates
· We are working on additional products using our proprietary mucoadhesive hydrogels as the delivery vehicle.

· Our candidate for the treatment of cancer is ProLindac™, a nanopolymer Diamino Cyclohexane ("DACH")-platinum prodrug. No additional trials are planned and none have been initiated this year in the U.S. or in Europe. We are working with our partners in China towards the initiation of clinical trials of ProLindac in China. Clinical studies of other indications including liver, colorectal and ovarian cancer are under consideration by Jiangsu Aosaikang Pharmaceutical Co., Ltd, our licensee for ProLindac in China. The DACH-platinum incorporated in ProLindac is the same active moiety as that in oxaliplatin (e.g. Eloxatin; Sanofi-Aventis), which has had annual sales in excess of $2.0 billion. ProLindac is available for partnering.

· CobOral® is our proprietary preclinical nanopolymer oral drug delivery technology based on the natural vitamin B12 oral uptake mechanism. We have developed products based upon the CobOral delivery technology, and have conducted sponsored development of a product for oral delivery of a number of peptides and RNAi therapeutics. The CobOral platform technology is available for partnering.


· CobaCyte®-mediated targeted delivery is a preclinical technology that makes use of the fact that cell surface receptors for vitamins such as B12 are often overexpressed by certain cells including many cancers. This technology uses nanopolymer constructs to deliver more anti-cancer drug to tumors while protecting normal tissues. The CobaCyte platform technology is available for partnering.

Products and Product Candidates

We use our drug delivery technologies to develop the following products and
product candidates:


Access Drug Portfolio

                                                                Clinical
Compound              Originator   Technology     Indication    Stage (1)

MuGard™               Access       Mucoadhesive   Mucositis     Launched
                                   liquid                        U.S.
                                                                Licensed to
                                                                 AMAG
                                                                Pharmaceuticals
                                                                Regulatory
                                                                Approval
                                                                 China
                                                                Licensed to
                                                                 RHEI
                                                                Pharmaceuticals

Mucoadhesive          Access       Mucoadhesive   Various       Pre-clinical
hydrogel technology                hydrogel
                                   technology

ProLindacTM           Access       Synthetic      Cancer        Phase 2
(Polymer Platinate,                polymer
AP5346)


CobOral® Delivery     Access       Cobalamin      Various       Pre-clinical
System

CobaCyte®-Targeted    Access       Cobalamin      Anti-tumor    Pre-clinical
Therapeutics

(1) For more information, see "Government Regulation" in our Annual Report on Form 10-K for a description of clinical stages.

RECENT EVENTS

On June 6, 2013 we entered into an exclusive license agreement with AMAG Pharmaceuticals, Inc. ("AMAG") related to the commercialization of MuGard in the U.S. and its territories. Under the terms of the licensing agreement, we received an upfront licensing fee of $3.3 million and will receive a tiered, double-digit royalty on net sales of MuGard in the licensed territories. AMAG also purchased our existing MuGard inventory. The $3.3 million license fee is accounted for as deferred revenue and is recognized over ten years which is the life of the license agreement.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations primarily through private sales of common stock, preferred stock, convertible notes and through licensing agreements. Our principal source of liquidity is cash and cash equivalents. Product sales, licensing payments and royalty revenues provided limited funding for operations during the nine months ended September 30, 2013. As of September 30, 2013, our cash and cash equivalents were $899,000 and our net cash expenditures for the nine months ended September 30, 2013, was approximately $336,000 per month. As of September 30, 2013, our working capital deficit was $6,966,000. Our working capital deficit


at September 30, 2013 represented an increase of $2,018,000 as compared to our working capital deficit as of December 31, 2012 of $4,948,000. The increase in the working capital deficit at September 30, 2013 reflects nine months of net operating costs and changes in current assets and liabilities and the license fee from AMAG.

As of November 14, 2013, we did not have enough capital to achieve our long-term goals. If we raise additional funds by selling equity securities, the relative equity ownership of our existing investors will be diluted and the new investors could obtain terms more favorable than previous investors. A failure to obtain necessary additional capital in the future could jeopardize our operations and our ability to continue as a going concern.

We have incurred negative cash flows from operations since inception, and have expended, and expect to continue to expend in the future, substantial funds to complete our planned product development efforts. Since inception, our expenses have significantly exceeded revenues, resulting in an accumulated deficit as of September 30, 2013 of $264,650,000. We expect that our capital resources, revenues from MuGard sales and expected receipts due under our license agreements will be adequate to fund our current level of operations into the first quarter of 2014. However, our ability to fund operations over this time could change significantly depending upon changes to future operational funding obligations or capital expenditures. As a result, we may be required to seek additional financing sources within the next twelve months. We cannot provide assurance that we will ever be able to generate sufficient product revenue or royalty revenue to achieve profitability on a sustained basis or at all.

Since our inception, we have devoted our resources primarily to fund our research and development programs. We have been unprofitable since inception and to date have received limited revenues from the sale of products. We expect to incur losses for the next several years as we continue to invest in product research and development, preclinical studies, clinical trials and regulatory compliance.

THIRD QUARTER 2013 COMPARED TO THIRD QUARTER 2012

Product sales of MuGard in the U. S. totaled $781,000 for the third quarter of 2012 as compared with none for the same period of 2013, a decrease of $781,000. On June 6, 2013, MuGard was licensed to AMAG and revenue is now recorded as royalties. See sales table in "Critical Accounting Policies and Estimates Relating to MuGard" below.

Our licensing revenue for the third quarter of 2013 was $144,000 as compared to $62,000 for the same period of 2012, an increase of $82,000. We recognize licensing revenue over the period of the performance obligation under our licensing agreements.

We recorded royalty revenue for MuGard in the U.S. for the third quarter of 2013 of $45,000 and none for the same period of 2012. Prior to the license of MuGard to AMAG on June 6, 2013 we recorded product sales for MuGard. We recorded royalty revenue for MuGard in Europe of $28,000 for the third quarter of 2012 and none in the same period of 2013. In the first quarter of 2012, we finalized the negotiations for the termination of the license to our European partner for MuGard.

Total research and development spending for the third quarter of 2013 was $236,000, as compared to $308,000 for the same period of 2012, a decrease of $72,000. The net decrease in expenses was primarily due to:


· decreased salary and related costs ($27,000) from reduced scientific staff;

· decreased clinical development with trials completed for MuGard, ProLindac and Thiarabine ($10,000);

· decreased laboratory costs due to the closing of our laboratory ($38,000); and

· other net increases in research spending ($3,000).

Product costs for MuGard in the U. S. were $7,000 for the third quarter of 2013 as compared to $79,000 for the same period in 2012, a decrease of $72,000. On June 6, 2013, MuGard was licensed to AMAG and product costs after that date are incurred by AMAG.

Total selling, general and administrative expenses were $642,000 for the third quarter of 2013, as compared to $1,422,000 for the same period of 2012, a decrease of $780,000. The net decrease in expenses was due primarily to the following:

· decreased MuGard product selling expenses ($748,000);

· decreased stock compensation expense from expense of option grants for selling, general and administrative employees ($60,000);

· decreased salary and related costs ($59,000) from reduced general and administrative salaries and staff;

· increased legal fees ($73,000); and

· increased net other general and administrative expenses ($14,000).

Depreciation and amortization was $0 for the third quarter of 2013 as compared to $18,000 for the same period in 2012, a decrease of $18,000, due to the closing of the lab and the sale of the furniture and equipment.

Total operating expenses for the third quarter of 2013 year were $885,000 as compared to total operating expenses of $1,827,000 for the same period of 2012, a decrease of $942,000 for the reasons listed above.

Interest and miscellaneous income was $46,000 for the third quarter of 2013 as compared to $111,000 for the same period of 2012, a decrease of $65,000. Most of the income was miscellaneous income due to write-offs and settlement of certain accounts payables.

Interest and other expense was $96,000 for the third quarter of 2013 as compared to $186,000 in the same period of 2012, a decrease of $90,000. The decrease in interest and other expense was due to a pay down in the secured promissory note of $2.75 million in 2012.

We recorded a gain related to warrants classified as derivative liabilities of $168,000 for the third quarter of 2013 as compared to $64,000 for the same period of 2012. We recorded a derivative for warrants when the fair value of the warrants that were issued with our Series A Convertible Preferred Stock were reclassified from equity per the requirements of accounting guidance as a result of the repricing feature.

We recorded a gain for the derivative liability related to preferred stock of $421,000 for the third quarter of 2013 and a loss of $13,900,000 for the same period of 2012. We recorded a derivative per the requirements of accounting guidance due to the possibility of resetting the conversion price of our Series A Convertible Preferred Stock if we sold our common stock at a price below the conversion price.


Preferred stock dividends of $742,000 were accrued for the third quarter of 2013 and $444,000 for the same period of 2012, an increase of $298,000 due to the issuance of the Series B Preferred Stock. Dividends are due semi-annually in either cash or common stock for the Series A Preferred Stock and due quarterly in either cash or preferred stock for the Series B Preferred Stock.

Net loss allocable to common stockholders for the third quarter of 2013 was $899,000, or a $0.04 basic and diluted loss per common share, compared with a net loss of $15,311,000, or a $0.63 basic and diluted loss per common share, for the same period in 2012, a decreased loss of $14,412,000.

NINE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2012

Product sales of MuGard in the U. S. totaled $1,542,000 for the first nine months of 2013 as compared with $1,950,000 for the same period of 2012, a decrease of $408,000. On June 6, 2013, MuGard was licensed to AMAG and revenue is now recorded as royalties. See sales table in "Critical Accounting Policies and Estimates Relating to MuGard" below.

Our licensing revenue for the first nine months of 2013 was $290,000 as compared to $1,384,000 for the same period of 2012, a decrease of $1,094,000. We recognize licensing revenue over the period of the performance obligation under our licensing agreements. In the first quarter of 2012, we finalized the negotiations for the termination of the license from our European partner for MuGard and recognized all of the previously received license fees ($706,000) that were recorded in deferred revenue and a $500,000 termination fee.

We recorded royalty revenue for MuGard in the U.S. for the first nine months of 2013 of $48,000 and none for the same period of 2012. Prior to the license of MuGard to AMAG on June 6, 2013 we recorded product sales for MuGard and no royalty revenue. We recorded royalty revenue for MuGard in Europe of $64,000 for the first nine months of 2012 and none in the same period of 2013. In the first quarter of 2012, we finalized the negotiations for the termination of the license to our European partner for MuGard.

Total research and development spending for the first nine months of 2013 was $756,000, as compared to $1,712,000 for the same period of 2012, a decrease of $956,000. The net decrease in research and development expenses was primarily due to:

· decreased salary and related costs ($478,000) from reduced scientific staff;

· decreased clinical development with trials for MuGard, ProLindac and Thiarabine ($235,000);

· decreased laboratory costs due to the closing of our laboratory ($159,000);

· decreased stock compensation expense from lower expense of option grants for research and development employees ($55,000); and

· other net decreases in research spending ($29,000).

Product costs for MuGard in the U. S. were $125,000 for the first nine months of 2013 as compared to $201,000 for the same period in 2012, a decrease of $76,000. On June 6, 2013, MuGard was licensed to AMAG and product costs after that date are incurred by AMAG.


Total selling, general and administrative expenses were $4,117,000 for the first nine months of 2013, as compared to $4,491,000 for the same period of 2012, a decrease of $374,000. The net decrease in expenses was due primarily to the following:

· decreased MuGard product selling expenses ($602,000);

· decreased salary and related costs ($268,000) from reduced general and administrative salaries and staff;

· lower patent fees ($65,000) due to no new patents being filed in 2013;

· increased legal fees ($380,000);

· increased general business consulting expenses for MuGard licensing and transition costs ($132,000);

· increased stock compensation expense from expense of option grants for selling, general and administrative employees ($102,000); and

· decreased net other general and administrative expenses ($53,000).

Depreciation and amortization was $2,000 for the first nine months of 2013 as compared to $91,000 for the same period in 2012, a decrease of $89,000, due to the closing of our lab and the sale of our furniture and equipment.

Total operating expenses for the first nine months of 2013 were $5,000,000 as compared to total operating expenses of $6,495,000 for the same period of 2012, a decrease of $1,495,000 for the reasons listed above.

Interest and miscellaneous income was $215,000 for the first nine months of 2013 as compared to $112,000 for the same period of 2012, an increase of $103,000. Miscellaneous income was higher in 2013 due to sale of certain platinum inventory and to write-offs of certain accounts payables.

Interest and other expense was $182,000 for the first nine months of 2013 as compared to $524,000 in the same period of 2012, a decrease of $342,000. The decrease in interest and other expense was due to the pay-off of the secured promissory note of $2.75 million in November 2012.

We recorded a one-time expense of $2,316,000 in the first nine months of 2012 for amendment agreements for 4,581,816 currently outstanding warrants which extended the expiration dates of such warrants to February 16, 2015 for 3,818,180 warrants; to October 24, 2015 for 386,364 warrants; and to December 6, 2015 for 377,272 warrants. The holders of such warrants include unaffiliated warrant holders as well as SCO Capital Partners LLC, Lake End Capital LLC and Beach Capital LLC. Such holders may be deemed to be affiliates of Jeffrey B. Davis and Steven H. Rouhandeh, our Chief Executive Officer and a director, respectively. The warrants that were amended were for the purchase of an aggregate of 4,581,816 shares of our common stock. In connection with the amendments, the holders of such warrants agreed to waive any damages that they may have incurred relating to the Company's inability to register the shares of common stock issuable upon exercise of the warrants, other than liquidated damages that may have already accrued relating to such inability to register such shares.

We recorded a gain related to warrants classified as derivative liabilities of $140,000 for the first nine months of 2013 as compared to a gain of $1,236,000 for the same period of 2012. We recorded a derivative for warrants when the fair value of the warrants that were issued with


our Series A Preferred Stock were reclassified from equity per the requirements of accounting guidance as a result of the repricing feature.

We recorded a gain for the derivative liability related to preferred stock of $8,471,000 for the first nine months of 2013 and a loss of $25,770,000 for the same period of 2012. We recorded a derivative per the requirements of accounting guidance due to the possibility of resetting the conversion price of our Series A Preferred Stock if we sold our common stock at a price below the original price.

Preferred stock dividends of $2,202,000 were accrued for the first nine months of 2013 and $1,323,000 for the same period of 2012, an increase of $879,000 due to the issuance of the Series B Preferred Stock. Dividends are due semi-annually in either cash or common stock for the Series A Preferred Stock and due quarterly in either cash or preferred stock for the Series B Preferred Stock.

Net income allocable to common stockholders for the first nine months of 2013 was $3,322,000, or a $0.13 basic income per common share and a $0.13 diluted income per common share as compared to a net loss of $31,682,000, or a $1.31 basic and diluted loss per common share, for the same period in 2012, an increased income of $35,004,000.

Critical Accounting Policies and Estimates Relating to MuGard

We sold MuGard in the U.S. to wholesalers, and specialty and retail pharmacies from September 2010 until June 6, 2013. On June 6, 2013 we licensed MuGard in the U.S. to AMAG Pharmaceuticals. Per the license agreement we will receive royalties from AMAG Pharmaceuticals after that date for its sales of MuGard. We accrued $48,000 of royalties for the nine months ended September 30, 2013. The $3.3 million license fee is accounted for as deferred revenue and is recognized over ten years which is the life of the license agreement. We recognized revenue for MuGard product sales at the time title transferred to our customers, which occurred at the time product was shipped to our customers.

We recognized product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements with customers, rebates or discounts taken. If actual future results vary from our estimates, we may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. Our product sales allowances include:

· Wholesaler and Specialty and Retail Pharmacy Discounts - we offer contractually determined discounts to certain wholesale distributors and specialty and retail pharmacies that purchase directly from us. These discounts are either taken off the invoice at the time of shipment or paid to the customer on a monthly or quarterly basis.

· Prompt Pay Discounts - we offer cash discounts to our customers, generally 2% of the sales price, as an incentive for prompt payment. Based on our experience many of the customers comply with the payment terms to earn the cash discount.

· Patient Discount Programs - we offer discount programs in which patients receive certain discounts off their prescription.

· Managed Care Rebates - we offer discounts under contracts with certain managed care providers who do not purchase directly from us.


We believe our estimates related to gross-to-net sales adjustments for MuGard do not have a high degree of estimation complexity or uncertainty as the related amounts are settled within a short period of time.

                                              Three
                                             months                          Three months
                                              ended        Three months          ended
                                            March 31,          ended         September 30,     Nine months ended
             (in thousands)                   2013         June 30, 2013         2013          September 30, 2013
Gross sales                                $     1,255     $         508     $           -              1,763
Cash discounts                                      10                36                 -                 46
Contract discounts                                  83                92                 -                175
                                           $     1,162     $         380     $           -   $          1,542


                                              Three
                                             months                          Three months
                                              ended        Three months          ended
                                            March 31,          ended         September 30,     Nine months ended
                                              2012         June 30, 2012         2012          September 30, 2012
Gross sales                                $       577     $         712     $         877   $          2,166
Cash discounts                                       5                13                 7                 25
Contract discounts                                  18                84                89                191
                                           $       554     $         615     $         781   $          1,950

1) Sales are thru June 6, 2013, the date of the license of MuGard to AMAG Pharmaceuticals.

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