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, 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 August 14, 1998 3,426,695 shares, $0.01 par value --------------- --------- Total No. of Pages 14
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. ("Access" or the "Company") is a Delaware corporation in the development stage. The Company is a site-directed drug targeting company using bioresponsive carriers to target and control the release of therapeutic agents into sites of disease activity and significantly improve the side effect profile of the agents. The Company has proprietary patents or rights to four technology platforms: synthetic polymers, Residerm(TM), carbohydrate targeting technology and selective muscle and nerve delivery systems. In addition, Access' partner Block Drug Company is marketing Aphthasol(TM) in the United States, the first FDA approved product for the treatment of canker sores. Access is currently licensing this product in international markets and developing new delivery forms. 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, 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, 1997. Since its inception in February 1988, Access has devoted its resources primarily to fund its research and development programs. The Company has been unprofitable since inception and to date has not received any 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. At June 30, 1998, the Company's accumulated deficit was approximately $21.6 million. RECENT DEVELOPMENTS On June 18, 1998, in conjunction with the first closing of a private placement, the Company effected a recapitalization of the Company through a one-for- twenty reverse stock split of its common stock, $0.04 par value per share (the "Common Stock"), which decreased the number of authorized shares of Common Stock from 60.0 million, at $0.04 par value per share, to 20.0 million shares, $0.01 par value per share, and decreased the authorized shares of preferred stock 2
of the Company from 10.0 million to 2.0 million (the "Recapitalization"). The Recapitalization decreased the number of outstanding shares of Common Stock from approximately 41.5 million to 2.1 million. An investment bank has been engaged to assist the Company in raising funds to support the Company's research and development activities. As discussed below, from March to July 1998, the Company raised an aggregate of $5.0 million. Up to an additional $4.0 million may be raised. There can be no assurances that any additional closings of the private placement will take place. The Company raised $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 $33,750, from the placement of 48 units, each unit consisting of 8,333 shares of Common Stock and warrants to purchase 8,333 shares of Common Stock at an exercise price of $3.00 per share. The placement agent received warrants to purchase 44,527 shares of Common Stock at $3.00 per share, in accordance with the offering terms and elected to receive 45,277 shares of Common Stock in lieu of certain sales commissions and expenses. On June 18, 1998, the Company, assisted by an investment bank, raised an aggregate of $2.9 million in gross proceeds, less cash issuance costs of $202,000, from the first closing of a private placement of 953,573 shares of Common Stock at $3.00 per share. The placement agent for such offering received warrants to purchase 101,653 shares of Common Stock at $3.00 per share, in accordance with the offering terms and elected to receive 62,949 shares of Common Stock in lieu of certain sales commissions and expenses. Legal fees and other issuance costs were $122,000 through June 30, 1998. 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 July 30, 1998, the Company raised an aggregate of $900,000 in gross proceeds, less cash issuance costs of $24,000, from the second closing of a private placement of 300,000 shares Common Stock at $3.00 per share. The placement agent for such offering received warrants to purchase 33,445 shares of Common Stock at $3.00 per share, in accordance with the offering terms and elected to receive 34,450 shares of Common Stock in lieu of certain sales commissions and expenses. 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. All share numbers and prices referenced herein have been adjusted to reflect the Recapitalization. On June 8, 1998, the Company entered into an agreement to license from Block Drug Company the rights to amlexanox oral paste 5% for certain international markets. Amlexanox oral paste 5% was jointly developed by the Company and Block Drug Company, and was subsequently purchased by Block Drug Company with the Company receiving an up front fee and future royalty payments. Amlexanox oral paste 5% is currently marketed in the United States by Block Drug under the trademark Aphthasol TM. Aphthasol TM was launched to the dental market in December 1997 and was launched to the general practice physician market in June 1998. On July 3
28, 1998, the Company announced that it signed a binding Letter of Intent with Strakan Limited to license amlexanox 5% paste for the treatment of canker sores for the United Kingdom and Ireland. Under the terms of the agreement, Strakan Limited will be responsible for and bear all costs associated with the regulatory approval process in the United Kingdom and European Community, will pay milestones based on cumulative sales revenue and will pay a royalty on sales. Liquidity and Capital Resources As of July 30, 1998 the Company's principal source of liquidity is $2,850,000 of cash and cash equivalents. Working capital as of June 30, 1998 was $1,712,000, representing an increase in working capital of $1,928,000 as compared to the working capital deficit as of December 31, 1997 of $216,000. The increase in working capital at June 30, 1998 was due to $4.1 million in gross proceeds received from the private placement of the Company's Common Stock sold on June 18, 1998 and the private placement of units on March 20 and April 11, 1998. Since its inception, the Company's expenses have significantly exceeded its revenues, resulting in an accumulated deficit of $21,570,000 at June 30, 1998. The Company has funded its operations primarily through private sales of its equity securities, contract research payments from corporate alliances and the January 1996 merger. 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 second quarter of 1999. The Company is dependent on raising additional capital to fund its development of technology and to implement its business plan. Such dependence will continue at least until the Company begins marketing its new technologies. If 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 so that working capital would cover reduced operations into the third quarter of 1999. There can be no assurance, however that changes in the Company's operating expenses will not result in the expenditure of such resources before such time. 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; 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 4
arrangements with potential corporate partners, public or private financing, or from other sources. The Company does not have any committed sources of additional financing and there can be no assurance that additional financing will be available on favorable terms, if at all. In the event that adequate funding is not available, the Company may be required to delay, reduce or eliminate one or more of its research or development programs or obtain funds through arrangements with corporate collaborators or others that may require the Company to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than the Company would otherwise seek. Insufficient financing may also require the Company to relinquish rights to certain of its technologies that the Company would otherwise develop or commercialize itself. If adequate funds are not available, the Company's business, financial condition and results of operations will be materially and adversely affected. Second Quarter 1998 Compared to Second Quarter 1997 The Company had $50,000 in licensing revenue in the second quarter of 1997 as compared to no revenues in the second quarter 1998. Second quarter 1997 revenues were comprised of licensing income from an ongoing agreement with an emerging pharmaceutical company which made certain milestone payments and will make royalty payments in the future if a product is developed from the technology. Total research spending for the second quarter of 1998 was $501,000, as compared to $538,000 for the same period in 1997, a decrease of $37,000. The decrease in expenses was the result of lower salary and related costs- $55,000; lower equipment rent- $26,000; and lower other net costs totaling- $35,000; offset by higher internal lab costs- $57,000; higher external contract research costs- $22,000. 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 $359,000 for the second quarter of 1998, a decrease of $65,000 as compared to the same period in 1997. The decrease in spending was primarily due to the following: decreased general business consulting fees- $107,000; and lower director and officer insurance costs- $51,000; offset by increased patent costs due to the filing of new patents- $90,000; and other net increases totalling- $3,000. If the Company is not successful in raising additional capital, general and administrative spending will be curtailed. Depreciation and amortization was $66,000 for the second quarter 1998 as compared to $30,000 for the same period in 1997 reflecting the additional depreciation of the assets acquired in the Tacora merger and amortization of licenses. Interest and miscellaneous income was $6,000 for the second quarter of 1998 as compared to $37,000 for the same period in 1997, a decrease of $31,000. The decrease was due to lower interest income from lower cash balances in 1998. Total operating expenses in the second quarter of 1998 were $926,000 with interest income of $6,000, and interest expense of $5,000 resulting in a loss for the quarter of $926,000 or a $0.42 basic and diluted loss per common share. 5
Six Months ended June 30, 1998 Compared to Six Months ended June 30, 1997 Net revenues for the six months ended June 30, 1997 were $188,000 as compared to no revenues for the same period in 1998. 1997 revenues were comprised of licensing income from an ongoing agreement with an emerging pharmaceutical company which made certain milestone payments and will make royalty payments in the future if a product is developed from the technology. Research spending for the six months ended June 30, 1998 was $936,000 as compared to $1,042,000 for the same period in 1997, a decrease of $106,000. The decrease in expenses was due to: lower salary and related costs- $113,000; lower equipment rent- $55,000; lower travel expenses- $26,000; and other net decreases totaling- $21,000; offset by higher internal lab costs- $72,000; and higher external lab costs- $37,000. If the Company is successful in raising additional capital, research spending is expected to increase in future quarters as the Company intends to hire additional scientific management and staff and will 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 $750,000 for the six months ended June 30, 1998, a decrease of $79,000 as compared to the same period in 1997. The decrease was primarily due to the following: lower general business consulting fees and expenses- $159,000; and lower director and officer insurance costs- $58,000; offset by higher patent expenses- $130,000; and other net increases totalling- $8,000. Depreciation and amortization was $130,000 for the six months ended June 30, 1998 as compared to $62,000 for the same period in 1997 reflecting the additional depreciation of the assets acquired in the Tacora merger and amortization of licenses. Interest and miscellaneous income was $8,000 for the six months ended June 30, 1998 as compared to $84,000 for the same period in 1997, a decrease of $76,000. The decrease was due to lower interest income from lower cash balances in 1998. Accordingly, this resulted in a loss for the six months ended June 30, 1998 of $1,822,000, or a $0.95 basic and diluted loss per common share. Year 2000 Issue The Company relies on PC-based systems and does not expect to incur material costs to transition to Year 2000 compliant systems in its internal operations. However, even if the internal systems of the Company are not materially affected by the Year 2000 Issue, the Company could be affected through disruptions in the operations of enterprises with which the Company interacts. As such, there can be no assurance that the Year 2000 Issue will not have a material adverse effect on the Company's business, financial condition or results of operations. 6
PART II -- OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS None ITEM 2 CHANGES IN SECURITIES On June 18, 1998, in conjunction with the first closing of a private placement, the Company effected a recapitalization of the Company through a one-for- twenty reverse stock split of its common stock, $0.04 par value per share (the "Common Stock"), decreased the number of authorized shares of Common Stock from 60.0 million shares, $0.04 par value per share, to 20.0 million shares, par value $0.01 per share, and decreased the authorized shares of preferred stock of the Company from 10.0 million to 2.0 million (the "Recapitalization"). The Recapitalization decreased the number of outstanding shares of Common Stock from approximately 41.5 million to 2.1 million. On June 18, 1998 the Company sold to 25 individual accredited investors an aggregate of 953,573 shares of Common Stock at $3.00 per share. The placement agent for such offering received warrants to purchase 101,650 shares of Common Stock at $3.00 per share in accordance with the offering terms and elected to receive 62,949 shares of Common Stock in lieu of certain sales commissions and expenses. The Company raised an aggregate of $2,900,000 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 no 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. 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. 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 12, 1998 in Tarrytown, 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: * Herbert H McDade, Jr., Kerry P. Gray and J. Michael Flinn were reelected Directors for three year terms. The votes were: McDade 25,075,818 - - For and 196,290 - Withheld Authority; Gray 25,099,746 - For and 172,362 - Withheld Authority; and, Flinn 25,230,408 - For and 41,700 - Withheld Authority. 7
* A proposal to amend the Company's 1995 stock option plan, as amended, was approved with 19,175,592 - For, 499,504 - Against, and 48,636 - Abstain. * A proposal to ratify the appointment of KPMG Peat Marwick LLP as independent certified public accountants for the Company for the fiscal year ending December 31, 1998 was approved with 25,176,882 - For 38,773 - Against and 56,453 - Abstain. ITEM 5 OTHER INFORMATION None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K Exhibits: 3.8 Certificate of Amendment of Certificate of Incorporation filed June 18, 1998 10.13 Agreement between Access Pharmaceuticals, Inc. and Block Drug Company, Inc. 10.14 Sales Agency Agreement 10.15 Registration Rights Agreement 27.1 Financial Data Schedule Reports on Form 8-K: None 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 14, 1998 By: /s/ Kerry P. Gray --------------- ------------------ Kerry P. Gray President and Chief Executive Officer (Principal Executive Officer) Date: August 14, 1998 By: /s/ Stephen B. Thompson --------------- ------------------------ Stephen B. Thompson Chief Financial Officer (Principal Financial and Accounting Officer) 8
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY a development stage company Condensed Consolidated Balance Sheets <TABLE> <CAPTION> June 30, 1998 December 31, 1997 ------------- ------------- Assets (unaudited) - ------ <S> <C> <C> Current Assets Cash and cash equivalents $ 2,174,000 $ 438,000 Accounts receivable 2,000 1,000 Prepaid expenses and other current assets 27,000 51,000 ------------- ------------- Total Current Assets 2,203,000 490,000 ------------- ------------- Property and Equipment, at cost 1,007,000 1,047,000 Less accumulated depreciation and amortization (722,000) (625,000) ------------- ------------- 285,000 422,000 ------------- ------------- Licenses, net of accumulated amortization of $50,000 and $25,000 at June 30, 1998 and December 31, 1997, respectively 450,000 475,000 Other Assets 108,000 60,000 ------------- ------------- Total Assets $ 3,046,000 $ 1,447,000 ============= ============= Liabilities and Stockholders' Equity - ------------------------------------ Current Liabilities Accounts payable and accrued expenses $ 390,000 $ 434,000 Royalties payable - 53,000 Accrued insurance premium 13,000 38,000 Current portion of obligations under capital leases 88,000 181,000 ------------- ------------- Total Current Liabilities 491,000 706,000 ------------- ------------- Obligations under capital leases, net of current portion 75,000 142,000 ------------- ------------- Total Liabilities 566,000 848,000 ------------- ------------- Stockholders' Equity Preferred stock, $.01 par value, authorized 2,000,000 Shares, none issued or outstanding at June 30, 1998; $.01 par value, authorized 10,000,000 shares, none issued or outstanding at December 31, 1997 - - Common stock, $.01 par value, authorized 20,000,000 Shares, 3,092,245, issued and outstanding at June 30, 1998; Authorized 3,000,000 shares, 1,630,450 issued and outstanding at December 31,1997 31,000 16,000 Additional paid-in capital 24,019,000 20,331,000 Deficit accumulated during the development stage (21,570,000) (19,748,000) ------------- ------------- Total Stockholders' Equity 2,480,000 599,000 ------------- ------------- Total Liabilities and Stockholders' Equity $ 3,046,000 $ 1,447,000 ============= ============= </TABLE> - --------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements 9
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY 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 1998 1997 1998 1997 June 30, 1998 ------------ ------------ ------------ ------------ --------------- <S> <C> <C> <C> <C> <C> Revenues Research and development $ - $ - $ - $ - $ 2,711,000 Option income - - - - 2,149,000 Licensing revenues - 50,000 - 188,000 325,000 ------------ ------------ ------------ ------------ ------------ Total Revenues - 50,000 - 188,000 5,185,000 ------------ ------------ ------------ ------------ ------------- Expenses Research and development 501,000 538,000 936,000 1,042,000 9,545,000 General and administrative 359,000 424,000 750,000 829,000 7,613,000 Depreciation and amortization 66,000 30,000 130,000 62,000 1,186,000 Write-offexcess purchase price - - - - 8,894,000 ------------ ------------ ------------ ------------ ------------- Total Expenses 926,000 992,000 1,816,000 1,933,000 27,238,000 ------------ ------------ ------------ ------------ ------------- Loss From Operations (926,000) (942,000) (1,816,000) (1,745,000) (22,053,000) ------------ ------------ ------------ ------------ ------------- Other Income (Expense) Interest and miscellaneous income 6,000 37,000 8,000 84,000 782,000 Interest expense (5,000) (7,000) (14,000) (15,000) (172,000) ------------ ------------ ------------ ------------ ------------- 1,000 30,000 (6,000) 69,000 610,000 ------------ ------------ ------------ ------------ ------------- Loss Before Income Taxes (925,000) (912,000) (1,822,000) (1,676,000) (21,443,000) Provision for Income Taxes - - - - 127,000 ------------ ------------ ------------ ------------ ------------- Net Loss $ (925,000) $ (912,000) $(1,822,000) $(1,676,000) $(21,570,000) ============ ============ ============ ============ ============= Basic and Diluted Loss Per Common Share $ (0.42) $ (0.58) $ (0.95) $ (1.07) ============ ============ ============ ============ Weighted Average Basic and Diluted Common Shares Outstanding 2,209,775 1,569,566 1,920,564 1,569,566 ============ ============ ============ ============ </TABLE> - --------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements 10
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY a development stage company Condensed Consolidated Statements of Cash Flows (unaudited) <TABLE> <CAPTION> Six Months ended June 30, February 24, 1988 -------------------------- (inception) to 1998 1997 June 30, 1998 ------------ ------------ ------------- <S> <C> <C> <C> Cash Flows From Operating Activities Net Loss $(1,822,000) $(1,676,000) $(21,570,000) 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 and donated equipment 8,000 - 108,000 Depreciation and amortization 130,000 62,000 1,186,000 Unearned revenue - - (110,000) Change in operating assets and liabilities: Accounts receivable (1,000) (9,000) (3,000) Prepaid expenses and other current assets 24,000 46,000 (28,000) Other assets 2,000 - (6,000) Accounts payable and accrued expenses (122,000) (288,000) 110,000 ------------ ------------ -------------- Net Cash Used In Operating Activities (1,781,000) (1,865,000) (10,887,000) ------------ ------------ -------------- Cash Flows From Investing Activities Capital expenditures (3,000) (24,000) (1,167,000) Sales of capital equipment - - 6,000 Purchase of Tacora, net of cash acquired - - (124,000) Other assets (50,000) - (100,000) ------------ ------------ -------------- Net Cash Used In Investing Activities (53,000) (24,000) (1,385,000) ------------ ------------ -------------- Cash Flows From Financing Activities Proceeds from notes payable - - 721,000 Payments of principal on obligations under capital leases (133,000) (77,000) (587,000) Cash acquired in merger with Chemex - - 1,587,000 Proceeds from stock issuances, net 3,703,000 - 12,725,000 ------------ ------------ -------------- Net Cash Provided By (Used In) Financing Activities 3,570,000 (77,000) 14,446,000 ------------ ------------ -------------- Net Increase (Decrease) in Cash and Cash Equivalents 1,736,000 (1,966,000) 2,174,000 Cash and Cash Equivalents at Beginning of Period 438,000 4,428,000 - ------------ ------------ -------------- Cash and Cash Equivalents at End of Period $ 2,174,000 $ 2,462,000 $ 2,174,000 ============ ============ ============== Cash paid for interest $ 14,000 $ 15,000 $ 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 11
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY a development stage company Notes to Condensed Consolidated Financial Statements Six Months Ended June 30, 1998 and 1997 (unaudited) (1) Interim Financial Statements The consolidated balance sheet as of June 30, 1998 and the consolidated statements of operations for the three and six months ended and cash flows for the six months ended June 30, 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 June 30, 1998 presentation. The accompanying Consolidated Balance Sheets and Statements of Operations have been retroactively restated to reflect the Recapitalization including the one-for-twenty reverse stock split. 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, 1997. The results of operations for the period ended June 30, 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. 12
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. (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 second quarter of 1999. The Company is dependent on raising additional capital to fund its development of technology and to implement its business plan. Such dependence will continue at least until the Company begins marketing its new technologies. If 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 so that working capital would cover reduced operations into the third quarter of 1999. There can be no assurance, however that changes in the Company's operating expenses will not result in the expenditure of such resources before such time. 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) Recapitalization On June 18, 1998, in conjunction with the first closing of a private placement, the Company effected 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"), which decreased the number of authorized shares of Common Stock from 60.0 million shares, at $0.04 par value per share, to 20.0 million shares, par value $0.01 per share, and decreased the authorized shares of preferred stock of the Company from 10.0 million to 2.0 million (the "Recapitalization"). The Recapitalization decreased the number of outstanding shares of Common Stock from approximately 41.5 million to 2.1 million. 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) Private Placement The Company raised $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 $33,750, from the placement of 48 units, each unit consisting of 8,333 shares of Common Stock and warrants to purchase 8,333 shares of Common Stock at an exercise price of $3.00 per share. The placement agent received warrants to purchase 44,527 shares of Common Stock at $3.00 per share, in accordance with the offering terms and elected to receive 45,277 shares of Common Stock in lieu of certain sales commissions and expenses. 13
On June 18, 1998, the Company, assisted by an investment bank, raised an aggregate of $2.9 million in gross proceeds, less cash issuance costs of $202,000, from the first closing of a private placement of 953,573 shares Common Stock at $3.00 per share. The placement agent for such offering received warrants to purchase 101,653 shares of Common Stock at $3.00 per share, in accordance with the offering terms and elected to receive 62,949 shares of Common Stock in lieu of certain sales commissions and expenses. Legal fees and other issuance costs were $122,000 through June 30, 1998. 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 July 30, 1998, the Company raised an aggregate of $900,000 in gross proceeds, less cash issuance costs of $24,000, from the second closing of a private placement of 300,000 shares Common Stock at $3.00 per share. The placement agent for such offering received warrants to purchase 33,445 shares of Common Stock at $3.00 per share, in accordance with the offering terms and elected to receive 34,450 shares of Common Stock in lieu of certain sales commissions and expenses. 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. The investment bank has been engaged to assist the Company in raising up to an additional $4.0 million to fund research and development, working capital, acquisitions of complementary companies or technologies and general corporate purposes. There can be no assurances that any additional closings of the private placement will take place. 14