SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended June 30, 2000
Commission file number 0-11550
Pharmos Corporation
(Exact name of registrant as specified in its charter)
Nevada 36-3207413
(State or other jurisdiction of (IRS Employer Id. No.)
incorporation or organization)
99 Wood Avenue South, Suite 301
Iselin, NJ 08830
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 452-9556
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
requirements for the past 90 days. Yes _X_ No ___.
As of July 31, 2000, the Registrant had outstanding 52,699,947 shares of its
$.03 par value Common Stock.
Part I. Financial Information
Item 1 Financial Statements
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
June 30, December 31,
2000 1999
------------- -------------
Assets
Cash and cash equivalents $ 18,210,378 $ 2,918,554
Inventories 1,429,393 1,837,751
Receivables 958,663 961,769
Prepaid royalties 297,970 284,193
Prepaid expenses and other current assets 381,204 222,391
------------- -------------
Total current assets 21,277,608 6,224,658
Fixed assets, net 1,378,920 1,183,859
Prepaid royalties, net of current portion 40,018 166,477
Intangible assets, net 174,952 198,214
Other assets 18,087 18,086
------------- -------------
Total assets $ 22,889,585 $ 7,791,294
------------- -------------
Liabilities and Shareholders' Equity
Note payable $ -- $ 338,128
Accounts payable 427,384 680,054
Accrued expenses 526,605 711,189
Accrued wages and other compensation 717,408 549,542
Advances against future sales 2,113,000 2,010,000
------------- -------------
Total current liabilities 3,784,397 4,288,913
Advances against future sales, net of current portion 283,973 1,177,565
Other liabilities 100,000 100,000
------------- -------------
Total liabilities 4,168,370 5,566,478
------------- -------------
Shareholders' equity
Common stock, $.03 par value; 80,000,000 shares
authorized, 52,683,303 and 45,424,401 shares
issued and outstanding (excluding $551 in 2000
and 1999, held in Treasury) in 2000 and 1999,
respectively 1,580,135 1,362,181
Paid in capital 102,396,263 83,372,742
Accumulated deficit (85,255,183) (82,510,107)
------------- -------------
Total shareholders' equity 18,721,215 2,224,816
------------- -------------
Commitments and contingencies
Total liabilities and shareholders' equity $ 22,889,585 $ 7,791,294
------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
2
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
Three Months Ended June 30,
2000 1999
------------ ------------
Revenues
Product sales $ 1,414,837 $ 858,834
Cost of Goods Sold 477,162 209,537
------------ ------------
Gross Margin 937,675 649,297
------------ ------------
Expenses
Research and development, net 898,331 818,658
Selling, general and administrative 1,014,783 694,367
Patents 49,937 55,488
Depreciation and amortization 112,158 86,776
------------ ------------
Total operating expenses 2,075,209 1,655,289
------------ ------------
Loss from operations (1,137,534) (1,005,992)
Other income
Interest income 277,509 29,445
Other income (expense), net 12,924 (6,509)
Interest expense (2,831) (10,543)
------------ ------------
Other income, net 287,602 12,393
------------ ------------
Net loss (849,932) (993,599)
Less: Preferred stock dividends -- (5,178)
------------ ------------
Net loss applicable to common shareholders ($ 849,932) ($ 998,777)
============ ============
Net loss per share applicable
to common stockholders - basic and diluted ($.02) ($.02)
============ ============
Weighted average shares outstanding - basic and diluted 52,507,373 42,367,356
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
Six Months Ended June 30,
2000 1999
------------ -------------
Revenues
Product sales $ 2,078,417 $ 1,191,211
Cost of Goods Sold 757,691 298,795
------------ ------------
Gross Margin 1,320,726 892,416
------------ ------------
Expenses
Research and development, net 2,335,306 1,752,332
Selling, general and administrative 1,873,852 1,245,303
Patents 81,897 91,393
Depreciation and amortization 209,218 168,111
------------ ------------
Total operating expenses 4,500,273 3,257,139
------------ ------------
Loss from operations (3,179,547) (2,364,723)
Other income
Interest income 424,440 63,145
Other income (expense), net 6,822 (22,686)
Interest expense 3,209 (11,912)
------------ ------------
Other income, net 434,471 28,547
------------ ------------
Net loss (2,745,076) (2,336,176)
Less : Preferred stock dividends -- (22,007)
------------ ------------
Net loss applicable to common shareholders ($ 2,745,076) ($ 2,358,183)
============ ============
Net loss per share applicable
to common stockholders - basic and diluted ($.05) ($.06)
============ ============
Weighted average shares outstanding - basic
and diluted 50,754,764 41,281,450
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
Pharmos Corporation
(Unaudited)
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Six Months Ended June 30,
2000 1999
------------ ------------
Cash flows from operating activities
Net loss $ (2,745,076) $ (2,336,176)
Adjustments to reconcile net loss to net
cash flow used in operating activities
Depreciation and amortization 209,218 168,111
Changes in operating assets and liabilities
Inventory 408,358 (447,471)
Receivables 3,106 36,271
Prepaid expenses and other current assets (158,813) 5,164
Advanced royalties 112,682 60,171
Other assets (1) (16,309)
Accounts payable (252,670) (594,494)
Accrued expenses (184,584) (48,483)
Accrued wages 167,866 63,373
------------ ------------
Total adjustments 305,162 (773,667)
------------ ------------
Net cash flows used in operating activities (2,439,914) (3,109,843)
Cash flows from investing activities
Purchases of fixed assets, net (381,017) (173,099)
------------ ------------
Net cash flows used in investing activities (381,017) (173,099)
------------ ------------
Cash flows from financing activities
Advances against future sales (790,592) (447,795)
Proceeds from issuance of common stock
and exercise of warrants, net 17,095,571 --
Proceeds from exercise of equity credit line 2,145,905 2,897,517
Increase (decrease) in notes payable (338,128) 537,134
------------ ------------
Net cash provided by financing activities 18,112,756 2,986,856
Net increase (decrease) in cash and cash equivalents 15,291,825 (296,086)
Cash and cash equivalents at beginning of year 2,918,554 3,452,915
------------ ------------
Cash and cash equivalents at end of period $ 18,210,379 $ 3,156,829
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information pursuant to the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accrual adjustments,
considered necessary for a fair presentation have been included. Operating
results for the three-month and six-month periods ended June 30, 2000, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2000.
1. The Company
Pharmos Corporation (the "Company") is a bio-pharmaceutical company that
develops and commercializes products for the ophthalmic, central nervous
system, neurological and other key healthcare markets. The Company has a
diverse product pipeline that includes marketed products with superior
therapeutic indices, and drug candidates with enhanced molecular structures
that display improved safety and/or efficacy properties compared to the
parent molecules or to competing products. The Company has executive
offices in Iselin, New Jersey and also conducts operations through its
wholly owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.
In March 1998, the Company received approval for three separate New Drug
Applications ("NDA") from the U.S. Food and Drug Administration ("FDA").
These approvals were for Lotemax(R) and Alrex(R). Lotemax has been approved
for the treatment of several ocular inflammatory indications, including
uveitis, and for post-operative inflammation. Alrex has been approved for
the treatment of seasonal allergic conjunctivitis.
2. Liquidity and Business Risks
While the Company has generated revenue through the sale of its approved
products in the market, it has incurred operating losses since its
inception. At June 30, 2000, the Company has an accumulated deficit of
$85,255,183. Such losses have resulted principally from costs incurred in
research and development and from general and administrative expenses. The
Company has funded its operations through the use of cash obtained
principally from third party financing. Management believes that cash and
cash equivalents of $18.2 million as of June 30, 2000, combined with
anticipated cash inflows from revenues derived from sales of Lotemax and
Alrex, can support the Company's continuing operations.
In order to finance the development of its drug pipeline, the Company is
continuing to actively pursue various funding options, including strategic
corporate alliances, equity offerings, business combinations, and the
establishment of research and development partnerships. There can be no
assurance that the Company will be successful in commercializing its new
product candidates.
3. Significant Accounting Policies
Revenue recognition
Sales revenue is recognized upon shipment of products to customers, less
allowances for estimated returns and discounts. License fees and royalties
are recognized when earned in accordance with the underlying agreements.
Revenue for contracted research and development services is recognized as
performed. Revenue from these contracts is recognized as costs are incurred
(as defined in the contract), generally direct labor and supplies plus
agreed overhead rates. Any advance payments on contracts are deferred until
the related services are performed.
The Company's revenues are principally derived from one customer.
6
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
Inventories
Inventories primarily consist of raw loteprednol etabonate, the compound
used in the Company's products, Lotemax and Alrex, and is stated at the
lower of cost or market with cost determined on a weighted average basis.
Reclassifications
Certain amounts for 1999 have been reclassified to conform to the fiscal
2000 presentation. Such reclassifications did not have an impact on the
Company's financial position or results of operations.
4. Collaborative Agreements
In June 1995, the Company entered into a marketing agreement (the
"Marketing Agreement") with Bausch & Lomb Pharmaceuticals, Inc. ("Bausch &
Lomb") to market Lotemax and Alrex, on an exclusive basis in the United
States following receipt of FDA approval. The Marketing Agreement also
covers the Company's third loteprednol etabonate based product, LE-T. Under
the Marketing Agreement, Bausch & Lomb purchases the active drug substance
(loteprednol etabonate) from the Company. A second agreement, covering
Europe, Canada and other selected countries, was signed in December 1996
("the New Territories Agreement").
Through June 30, 2000, Bausch and Lomb has provided the Company with $5
million in cash advances against future sales, of which approximately $2.4
million was outstanding at June 30, 2000. An additional $1 million is due
from Bausch & Lomb upon the receipt of regulatory approval for LE-T in the
United States. Bausch & Lomb is entitled to recoup the advances by
withholding certain amounts against payments for future purchases of the
active drug substance, based on the advances made, until all the advances
have been repaid. The Company may be obligated to repay such advances if it
is unable to supply Bausch & Lomb with certain specified quantities of the
active drug substance. The portion of advances expected to be recouped by
Bausch and Lomb during the following twelve months, based on management's
estimate of product sales to Bausch & Lomb, has been presented as a current
liability in the accompanying balance sheet at June 30, 2000 and December
31, 1999.
Bausch & Lomb also collaborates in the development of products by making
available amounts up to 50% of the Phase III clinical trial costs. The
Company has retained certain conditional co-marketing rights to all of the
products covered by the Marketing Agreement and the New Territories
Agreement.
5. Common and Preferred Stock Transactions
During the second quarter of 2000, the Company issued 55,750 shares of its
common stock upon the exercise of stock options and warrants, and received
consideration of $334,061.
During the first quarter of 2000, the Company issued 4,500,000 shares of
its common stock in various private equity sales, and received
consideration, net of offering costs and expenses, of $12,648,383.
During the first quarter of 2000, the Company issued 2,184,728 shares of
its common stock upon the exercise of stock options and warrants, and
received consideration of $4,035,855.
The Company entered into a Private Equity Line of Credit Agreement (the
"Credit Agreement") as of December 10, 1998, and as amended on December 18,
1998, with Dominion Capital Fund, Ltd., which subsequently assigned its
rights to Centennial Parkway LLC (the "Investor"). Pursuant to the terms of
the Credit Agreement, the Company may, from time to time during a specified
term, cause the Investor to purchase up to an aggregate of $10,000,000 of
the Company's common stock, par value $.03 per share (the "Common Stock").
The price per share of Common Stock to be paid by the Investor is to be
determined at the time of each purchase according to a specified formula
which is based upon the average closing bid price of the Common Stock on
the principal trading exchange or market for the Common Stock (the
"Principal Market") over a prescribed, five-day period. With each purchase
of Common Stock, the Investor is also to receive warrants exercisable for a
number of shares of Common Stock equal to ten percent of the number of
7
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
shares of Common Stock purchased at an exercise price per share equal to
125% of the closing bid price of the Common Stock on the Principal Market
on a specified date.
During the second quarter of 2000, under terms of the Credit Agreement, the
Company issued 150,000 shares of its Common Stock and warrants to purchase
12,574 shares of its Common Stock to the Investor for consideration of
$553,655, net of fees. The warrants have an exercise price of $5.00 per
share and expire in the second quarter of 2003.
During the first quarter of 2000, under terms of the Credit Agreement, the
Company issued 368,424 shares of its Common Stock and warrants to purchase
38,588 shares of its Common Stock to the Investor for consideration of
$1,592,250, net of fees. The warrants have exercise prices ranging from
$2.19 to $16.80 per share and expire in the first quarter of 2003.
During the second quarter of 2000, the Company issued warrants to purchase
16,000 shares of its common stock as compensation to a consultant. The
warrants were immediately exercisable, have an exercise price of $1.19 per
share and expire by June 2005.
During the first quarter of 2000, the Company issued warrants to purchase
8,000 shares of its common stock as compensation to a consultant. The
warrants were immediately exercisable, have an exercise price of $1.19 per
share and expire by February 2005.
6. Segment and Geographic Information
The Company is active in one business segment: designing, developing,
selling and marketing pharmaceutical products. The Company maintains
development operations in the United States and Israel. The Company's
selling operations are maintained in the United States.
Geographic information for the three and six months ending June 30, 2000
and 1999 are as follows:
Three months ended June 30, Six months ended June 30,
-------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net revenues
United States $ 1,414,837 $ 858,834 $ 2,078,417 $ 1,191,211
Israel -- -- -- --
----------- ----------- ----------- -----------
$ 1,414,837 $ 858,834 $ 2,078,417 $ 1,191,211
=========== =========== =========== ===========
Net loss
United States ($ 699,150) ($ 986,511) ($2,568,044) ($2,294,996)
Israel (150,782) (7,088) (177,032) (41,210)
----------- ----------- ----------- -----------
($ 849,932) ($ 993,599) ($2,745,076) ($2,336,176)
=========== =========== =========== ===========
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarters ended June 30, 2000 and 1999
Product sales revenue totaled $1,414,837 for the quarter ended June 30, 2000, a
65% increase from $858,834 for the quarter ended June 30, 1999. Product sales
increases reflect market share gains for the Company's Lotemax and Alrex
ophthalmic products and additional stocking in response to a promotional
program.
Cost of goods sold for the quarter ended June 30, 2000 totaled $477,162,
increasing 128% from $209,537 for the quarter ended June 30, 1999. The higher
cost of goods sold is due to higher sales volumes, product sample expenses and
higher royalty and licensing costs.
Total operating expenses increased $419,920 or 25%, from $1,655,289 in 1999 to
$2,075,209 in 2000. The increase is primarily due to higher general and
administrative expenses, as well as increased research and development costs.
Net research and development expenses increased by $79,673 or 10%, from $818,658
in 1999 to $898,331 in 2000. The Company experienced increased costs as a result
of a higher level of activity in early discovery programs and higher spending on
the Company's dexanabinol (HU-211) drug candidate. The increased spending was
partially offset by increased funding from research grants and lower costs for
ophthalmic research programs.
Selling, general and administrative expenses increased by $320,416 or 46%, from
$694,367 in 1999 to $1,014,783 in 2000. The increase is primarily due to higher
employee costs, increased investor relations activities and higher professional
fees.
Depreciation and amortization expenses increased by $25,382, or 29%, from to
$86,776 in 1999 to $112,158 in 2000, reflecting increased depreciation expense
relating to laboratory equipment purchases.
Other income, net, increased by $275,209, from $12,393 in 1999 to $287,602 in
2000. Interest income increased as a result of higher average cash balances.
Six Months ended June 30, 2000 and 1999
Product sales revenue totaled $2,078,417 for the six months ended June 30, 2000,
a 75% increase from $1,191,211 for the six months ended June 30, 1999. Product
sales increases reflect market share gains for the Company's Lotemax and Alrex
ophthalmic products, additional stocking of Alrex in advance of a price increase
effective April 2000 and additional stocking in response to a promotional
program.
Cost of goods sold for the six months ended June 30, 2000 totaled $757,691,
increasing 154% from $298,795 for the six months ended June 30, 1999. The higher
cost of goods sold is due to higher sales volumes, product sample expenses and
higher royalty and licensing costs.
Total operating expenses increased $1,243,134 or 38%, from $3,257,139 in 1999 to
$4,500,273 in 2000. The increase is due to higher research and development
expenses, as well as increased general and administrative expenses.
Net research and development expenses increased by $582,974 or 33%, from
$1,752,332 in 1999 to $2,335,306 in 2000. Cost increases partially resulted from
higher regulatory costs for the Company's ophthalmic products, including filing
fees for product approvals in Europe. Also, the Company experienced higher costs
as a result of an increased level of activity in early discovery programs and
higher spending on the Company's dexanabinol (HU-211)
9
drug candidate. The increased spending was partially offset by increased funding
from research grants and lower costs for ophthalmic research programs.
Selling, general and administrative expenses increased by $628,549 or 50%, from
$1,245,303 in 1999 to $1,873,852 in 2000. The increase is primarily due to
higher employee costs, increased investor relations activities and higher
professional fees.
Depreciation and amortization expenses increased by $41,107, or 27%, from to
$168,111 in 1999 to $209,218 in 2000, reflecting increased depreciation expense
relating to laboratory equipment purchases.
Other income, net, increased by $405,924, from $28,547 in 1999 to $434,471 in
2000. Interest income increased as a result of higher average cash balances.
Liquidity and Capital Resources
While the Company has generated revenue through the sale of its approved
products in the market, it has incurred operating losses since its inception. At
June 30, 2000, the Company has an accumulated deficit of $85,255,183. The
Company has financed its operations with public and private offerings of
securities, advances and other funding pursuant to a marketing agreement with
BLP, research contracts, license fees, royalties and sales, and interest income.
The Company had working capital of $17.5 million, including cash and cash
equivalents of $18.2 million, as of June 30, 2000. During the six months ended
June 30, 2000, the Company raised $12.6 million from various equity transactions
and $4.4 million from the exercise of previously outstanding warrants and
options to purchase the Company's common stock.
On December 10, 1998, the Company obtained a $10 million equity line of credit
with a single institutional investor. During the six months ended June 30, 2000,
the Company raised $2.1 million from the equity line of credit. As of June 30,
2000, $1.7 million remained available under the equity line of credit.
Management believes that existing cash and cash equivalents combined with
anticipated cash inflows from proceeds from sales of the drug substance for
Lotemax and Alrex to BLP, investment income, R&D grants and the availability of
the equity line of credit, will be sufficient to support the Company's regular
operations. During the second half of 2000, the Company expects to commence the
final phase of clinical development on the Company's dexanabinol (HU-211) drug
candidate. The total cost of this phase of development is expected to range
between $15 million and $25 million over the next 3 years. The Company continues
to actively pursue various funding options, including strategic corporate
alliances, additional equity offerings, business combinations and the
establishment of product related research and development limited partnerships,
to obtain the additional financing that is required to continue the development
of its products and bring them to commercial markets.
Statements made in this document related to the development, commercialization
and market expectations of its drug products, to the establishment of corporate
collaborations, and to the Company's operational projections are forward-looking
and are made pursuant to the safe harbor provisions of the Securities Litigation
Reform Act of 1995. Such statements involve risks and uncertainties which may
cause results to differ materially from those set forth in these statements.
Among the factors that could result in a materially different outcome are the
inherent uncertainties accompanying new product development, action of
regulatory authorities and the results of further trials. Additional economic,
competitive, governmental, technological, marketing and other factors identified
in Pharmos' filings with the Securities and Exchange Commission could affect
such results.
10
Part II
Other Information
Item 1 Legal Proceedings NONE
Item 2 Changes in Securities NONE
Item 3 Defaults upon Senior Securities NONE
Item 4 Submissions of Matters to Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on July 20, 2000, the
stockholders of the Company elected the following persons as directors of
the Company to serve until the next annual meeting of stockholders and
until their successors are duly elected and qualified: Haim Aviv, Elkan R.
Gamzu, E. Andrews Grinstead, Samuel D. Waksal, David Schlachet, Mony Ben
Dor and Georges Anthony Marcel. The results of the voting were as follows:
VOTES FOR VOTES WITHHELD
Haim Aviv 41,159,667 366,908
Elkan R. Gamzu 41,159,667 366,908
E. Andrews Grinstead 41,159,667 366,908
Samuel D. Waksal 41,159,192 367,383
David Schlachet 41,183,667 342,908
Mony Ben Dor 41,158,417 368,158
Georges Anthony Marcel 41,253,667 272,908
Also at the Annual Meeting, the stockholders approved the adoption of the
Company's 2000 Stock Option Plan, with 40,192,603 votes cast for approval,
1,269,711 votes cast against and 64,261 abstentions.
Item 5 Other Information NONE
Item 6 Exhibits and Reports on Form 8-K NONE
11
SIGNATURE PAGE
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.
PHARMOS CORPORATION
Dated: August 11, 2000
by: /s/ Robert W. Cook
------------------------------------
Robert W. Cook
Vice President Finance and Chief
Financial Officer
(Principal Accounting and
Financial Officer)
12