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ACCP > SEC Filings for ACCP > Form 10-K on 26-Mar-2014All Recent SEC Filings

Show all filings for ACCESS PHARMACEUTICALS INC

Form 10-K for ACCESS PHARMACEUTICALS INC


26-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes included in this Form 10-K.

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., China and Korea. We also have additional products and platform technologies in various stages of development where we are seeking partners to continue development and/or to license the technology.

Results of Operations

Comparison of Years Ended December 31, 2013 and 2012

Product sales of MuGard in the U. S. totaled $1,529,000 for the year ended December 31, 2013 as compared with $2,865,000 for the same period of 2012, a decrease of $1,336,000. 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 year ended December 31, 2013 was $435,000 as compared to $1,446,000 for the same period of 2012, a decrease of $1,011,000. 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 for the year ended December 31, 2013 of $78,000 as compared to $93,000 for the same period of 2012, a decrease of $15,000. Prior to the license of MuGard in the U.S. 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 $93,000 for the year ended December 31, 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 year ended December 31, 2013 was $884,000, as compared to $2,010,000 for the same period of 2012, a decrease of $1,126,000. The net decrease in research and development expenses was primarily due to:

∑ decreased salary and related costs ($433,000) from reduced scientific staff;

∑ decreased clinical development due to completed trials for MuGard, ProLindac and Thiarabine ($433,000);

∑ decreased laboratory costs due to the closing of our laboratory ($90,000);

∑ decreased stock compensation expense from lower expense of option grants for research and development employees ($62,000); and

∑ other net decreases in research spending ($108,000).

Product costs for MuGard in the U. S. were $125,000 for the year ended December 31, 2013 as compared to $267,000 for the same period in 2012, a decrease of $142,000. 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 $4,834,000 for the year ended December 31, 2013, as compared to $6,024,000 for the same period of 2012, a decrease of $1,190,000. The net decrease in expenses was due primarily to the following:


∑ decreased MuGard product selling expenses ($1,238,000);

∑ decreased salary and related costs ($415,000) from reduced general and administrative salaries and staff;

∑ lower investor relations expenses ($102,000);

∑ increased legal fees ($315,000);

∑ increased general business consulting expenses for MuGard licensing and transition costs ($147,000); and

∑ increased net other general and administrative expenses ($103,000).

Depreciation and amortization was $3,000 for the year ended December 31, 2013 as compared to $419,000 for the same period in 2012, a decrease of $416,000. Amortization expense related to intangible assets was $362,000 in 2012 and was fully amortized. Depreciation was $54,000 lower in 2013 due to the closing of our lab and the sale of our furniture and equipment.

Total operating expenses for the year ended December 31, 2013 were $5,846,000 as compared to total operating expenses of $8,720,000 for the same period of 2012, a decrease of $2,874,000 for the reasons listed above.

Interest and miscellaneous income was $251,000 for the year ended December 31, 2013 as compared to $242,000 for the same period of 2012, an increase of $9,000. Miscellaneous income was higher in 2013 due to sale of certain platinum and monomer inventory and write-offs and settlements of certain accounts payables.

Interest and other expense was $279,000 for the year ended December 31, 2013 as compared to $608,000 in the same period of 2012, a decrease of $329,000. 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 year ended December 31, 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 $271,000 for the year ended December 31, 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 to liabilities per the requirements of accounting guidance as a result of the repricing feature. These warrants expired in February 2014.

We recorded a gain for the derivative liability related to preferred stock of $8,010,000 for the year ended December 31, 2013 and a loss of $4,770,000 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 $2,898,000 were accrued for the year ended December 31, 2013 and $1,999,000 for the same period of 2012, an increase of $899,000 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 year ended December 31, 2013 was $1,551,000, or a $0.06 basic income per common share and a $0.06 diluted income per common share as compared to a net loss of $12,531,000, or a $0.52 basic and diluted loss per common share, for the same period in 2012, an increased income of $14,082,000.


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 year ended December 31, 2013. As of December 31, 2013, our cash and cash equivalents were $424,000 and our net cash expenditures for the year ended December 31, 2013, was approximately $289,000 per month. As of December 31, 2013, our working capital deficit was $8,386,000. Our working capital deficit at December 31, 2013 represented an increase of $3,438,000 as compared to our working capital deficit as of December 31, 2012 of $4,948,000. The increase in the working capital deficit at December 31, 2013 reflects twelve months of net operating costs and changes in current assets and liabilities and the license fee from AMAG.

As of March 26, 2014, 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 December 31, 2013 of $266,421,000. We expect that our capital resources, royalties from MuGard and expected receipts due under our license agreements will be adequate to fund our current level of operations for the next twelve months. 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.

We plan to expend substantial funds to conduct research and development programs, preclinical studies and clinical trials of potential products, including research and development with respect to our acquired and developed technology. Our future capital requirements and adequacy of available funds will depend on many factors, including:
∑ the successful development and commercialization of MuGardô and our other product candidates;

∑ the ability to establish and maintain collaborative arrangements with corporate partners for the research, development and commercialization of products;

∑ continued scientific progress in our 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;

∑ the costs involved in conducting clinical trials;

∑ competing technological developments;

∑ the cost of manufacturing and scale-up;

∑ the ability to establish and maintain effective commercialization arrangements and activities; and

∑ successful regulatory filings.

We have devoted substantially all of our efforts and resources to research and development conducted on our own behalf. The following table summarizes research and development spending by project category, which spending includes, but is not limited to, payroll and personnel expense, lab supplies, preclinical expense, development cost, clinical trial expense, outside manufacturing expense and consulting expense:


(in thousands)      Twelve Months ended December 31,         Inception To Date (1)
Project              2013                    2012
MuGard           $        725         $            1,033     $                5,015
Others (2)                159                        977                     39,988
Total            $        884         $            2,010     $               45,003

(1) Cumulative spending from inception of the Company or project through December 31, 2013.

(2) Includes: CobOral, CobaCyte and other projects.

Due to uncertainties and certain of the risk factors described above, including those relating to our ability to successfully commercialize our drug candidates, our ability to obtain necessary additional capital to fund operations in the future, our ability to successfully manufacture our products and our product candidates in clinical quantities or for commercial purposes, government regulation to which we are subject, the uncertainty associated with preclinical and clinical testing, intense competition that we face, market acceptance of our products and protection of our intellectual property, it is not possible to reliably predict future spending or time to completion by project or product category or the period in which material net cash inflows from significant projects are expected to commence. If we are unable to timely complete a particular project, our research and development efforts could be delayed or reduced, our business could suffer depending on the significance of the project and we might need to raise additional capital to fund operations, as discussed in the risk factors above, including without limitation those relating to the uncertainty of the success of our research and development activities and our ability to obtain necessary additional capital to fund operations in the future. As discussed in such risk factors, delays in our research and development efforts and any inability to raise additional funds could cause us to eliminate one or more of our research and development programs.

We plan to continue our policy of investing any available funds in certificates of deposit, money market funds, government securities and investment-grade interest-bearing securities. We do not invest in derivative financial instruments.

We do not believe inflation or changing prices have had a material impact on our revenue or operating income in the past three years.

Climate Change

We do not believe there is anything unique to our business which would result in climate change regulations having a disproportional effect on us as compared to U.S. industry overall.

Sources and Availability of Raw Materials and Components

In addition, we also are subject to rules promulgated by the Securities Exchange Commission (SEC) in 2012 pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that require us to conduct due diligence on and disclose if we are able to determine whether certain materials (including tantalum, tin, gold and tungsten), known as conflict minerals, that originate from mines in the Democratic Republic of Congo or certain adjoining countries (DRC), are used in our products. The first DRC minerals report is due in the second quarter of 2014 for the 2013 calendar year and we are conducting appropriate diligence measures to comply with such requirements.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. In applying our accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. As you might expect, the actual results or outcomes are often different than the estimated or assumed amounts. These differences are usually minor and are included in our consolidated financial statements as soon as they are known. Our estimates, judgments


and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

Receivables
Receivables are reported in the balance sheets at the outstanding amount net of an allowance for doubtful accounts. We continually evaluate the creditworthiness of our customers and their financial condition and generally do not require collateral. The allowance for doubtful accounts is based upon reviews of specific customer balances, historic losses, and general economic conditions. As of December 31, 2013 and 2012, no allowance was recorded as all accounts are considered collectible.

Derivative liability
In order to calculate the Level 3 Derivative liability - preferred stock, we used the Monte Carlo simulation to estimate future stock prices. The use of valuation techniques requires the Company to make various key assumptions for inputs into the model, including assumptions about the expected future volatility of the price of the Company's stock. In estimating the fair value at December 31, 2013, we based our selected volatility on the one-year historic volatility of the Company's stock as we believe this is most representative of the expected volatility in the near future for the Company.

Product sales and allowances
We sold MuGard to wholesalers, and specialty and retail pharmacies. We began shipping to customers in September 2010 through June 6, 2013 when we licensed MuGard to AMAG Pharmaceuticals. Since June 6, 2013 we receive royalties from AMAG Pharmaceuticals from their sales of MuGard. 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 was recognized. Product sales allowances were 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 varied from our estimates, we may have needed to adjust these estimates, which could have had an effect on product sales and earnings in the period of adjustment. Our product sales allowances included:

∑ Wholesaler and Specialty and Retail Pharmacy Discounts - we offered 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 offered 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 offered discount card programs in which patients receive certain discounts off their prescription.

∑ Managed Care Rebates - we offered 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 were settled within a short period of time.

License Revenues and Royalties
Our revenues are generated from licensing, research and development agreements, royalties and product sales. We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition. License revenue is recognized over the remaining life of the underlying patent. Research and development revenues are recognized as services are performed. Royalties are recognized in the period of sales.

Stock Based Compensation Expense
We account for stock based compensation expense in accordance with FASB ASC 718, Stock Based Compensation. We have several stock-based compensation plans under which incentive and non-incentive qualified stock options and restricted shares may be granted to employees, directors and consultants. We measure the cost of the employee/director/consultant services received in exchange for an award of equity instruments based on the grant date fair value of the award. We use the Black-Scholes option pricing model to value our options.


Stock-based compensation expense recognized for the years ended December 31, 2013 and 2012 was approximately $439,000 and $390,000, respectively.

Off-Balance Sheet Transactions

None.

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