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 March 31, 2001
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 May 1, 2001, the Registrant had outstanding 54,352,861 shares of its $.03
par value Common Stock.
Part I. Financial Information
Item 1 Financial Statements
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------------
March 31, December 31,
2001 2000
------------- -------------
Assets
Cash and cash equivalents $ 20,276,582 $ 22,480,777
Inventories 794,541 796,550
Receivables 1,262,219 1,188,502
Prepaid royalties -- 6,591
Restricted cash 4,060,949 --
Prepaid expenses and other current assets 307,972 281,109
------------- -------------
Total current assets 26,702,263 24,753,529
Fixed assets, net 1,928,524 1,681,390
Prepaid royalties, net of current portion 143,000 143,000
Intangible assets, net 140,059 151,690
Restricted cash -- 4,035,414
Other assets 18,086 18,086
------------- -------------
Total assets $ 28,931,932 $ 30,783,109
============= =============
Liabilities and Shareholders' Equity
Accounts payable $ 1,486,856 $ 458,504
Accrued expenses 1,209,542 1,162,098
Accrued wages and other compensation 909,101 768,975
Convertible debentures, net 6,884,974 --
Advances against future sales 386,605 619,702
------------- -------------
Total current liabilities 10,877,078 3,009,279
Advances against future sales, net of current portion 1,000,000 1,000,000
Convertible debentures, net -- 6,580,872
Other liabilities 100,000 100,000
------------- -------------
Total liabilities 11,977,078 10,690,151
------------- -------------
Commitments and contingencies
Shareholders' equity
Common stock, $.03 par value; 80,000,000
shares authorized, 54,352,861 and
54,063,897 shares issued and outstanding
(excluding $551 in 2001 and
2000, held in Treasury)
in 2001 and 2000, respectively 1,630,585 1,621,916
Deferred compensation (115,537) --
Paid in capital 108,684,219 108,965,351
Accumulated deficit (93,244,413) (90,494,309)
------------- -------------
Total shareholders' equity 16,954,854 20,092,958
------------- -------------
Total liabilities and shareholders' equity $ 28,931,932 $ 30,783,109
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
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Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
- ---------------------------------------------------------------------------------------------
Three Months Ended March 31,
2001 2000
------------- -------------
Revenues
Product sales $ 1,025,058 $ 663,580
License fee 80,000 --
------------- -------------
Total Revenues 1,105,058 663,580
Cost of Goods Sold 411,341 280,529
------------- -------------
Gross Margin 693,717 383,051
Expenses
Research and development, net 2,099,631 1,436,975
Selling, general and administrative 1,020,526 859,069
Patents 70,967 31,960
Depreciation and amortization 159,221 97,060
------------- -------------
Total operating expenses 3,350,345 2,425,064
============= =============
Loss from operations (2,656,628) (2,042,013)
Other income (expense)
Interest income 322,080 152,971
Other income (expense), net 10,457 (6,102)
Interest expense (426,012) --
------------- -------------
Other income (expense), net (93,475) 146,869
------------- -------------
Net loss ($ 2,750,103) ($ 1,895,144)
============= =============
Net loss per share applicable
to common stockholders - basic and diluted ($ 0.05) ($ 0.04)
============= =============
Weighted average shares outstanding - basic and diluted 54,171,988 48,982,681
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
3
Pharmos Corporation
(Unaudited)
Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------------------------
Three Months Ended March 31,
2001 2000
------------- -------------
Cash flows from operating activities
Net loss ($ 2,750,103) ($ 1,895,144)
Adjustments to reconcile net loss to net
cash flow used in operating activities
Depreciation and amortization 159,221 97,060
Amortization of Debt Discount and Issuance costs 304,102 --
Non-cash compensation charge -
consultant compensation 10,395 --
Changes in operating assets and liabilities
Inventory 2,009 139,368
Receivables (73,717) 458,454
Prepaid expenses and other current assets (26,863) (56,806)
Advanced royalties 6,591 50,415
Accounts payable 1,028,352 (105,149)
Accrued expenses 47,444 (252,884)
Accrued wages and other compensation 140,126 144,192
------------- -------------
Total adjustments 1,597,660 474,650
------------- -------------
Net cash flows used in operating activities (1,152,443) (1,420,494)
Cash flows from investing activities
Purchases of fixed assets, net (394,724) (128,393)
------------- -------------
Net cash flows used in investing activities (394,724) (128,393)
Cash flows from financing activities
Advances against future sales (233,097) (231,727)
Proceeds from issuances of common stock
and exercise of warrants, net 185,500 16,695,838
Pricing adjustment for private placement, net (583,896) --
Proceeds from exercise of equity credit line -- 1,592,250
Increase in restricted cash (25,535) --
Decrease in notes payable -- (338,128)
------------- -------------
Net cash provided (used) by financing activities (657,028) 17,718,233
Net increase (decrease) in cash and cash equivalents (2,204,195) 16,169,346
Cash and cash equivalents at beginning of year 22,480,777 2,918,554
------------- -------------
Cash and cash equivalents at end of period $ 20,276,582 $ 19,087,900
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
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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 period ended March 31, 2001, are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2001.
1. The Company
Pharmos Corporation (the "Company") is a bio-pharmaceutical company that
discovers and develops novel therapeutics to treat a range of inflammatory
and neurological disorders such as traumatic brain injury and stroke. The
Company has an expansive portfolio of drug candidates under development, as
well as discovery, preclinical and clinical capabilities. The Company has
executive offices in Iselin, New Jersey and conducts research and
development through its wholly owned subsidiary, Pharmos, Ltd., in Rehovot,
Israel.
The Company received approval for three separate New Drug Applications
("NDA") from the U.S. Food and Drug Administration ("FDA") in 1998. 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 March 31, 2001, the Company has an accumulated deficit of
$93,244,413. 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 $20.3 million as of March 31, 2001, combined with
anticipated cash inflows from revenues derived from sales of Lotemax and
Alrex, will be sufficient to 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 equity
offerings, strategic corporate alliances, 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 the transfer of the title and rights 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.
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Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
Inventories
Inventories consist of 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 2000 have been reclassified to conform to the fiscal
2001 presentation. Such reclassifications did not have an impact on the
Company's financial position or results of operations.
4. Collaborative Agreements
In 1995, the Company entered into a marketing agreement (the "Marketing
Agreement") with Bausch & Lomb Pharmaceuticals, Inc. ("Bausch & Lomb"), a
shareholder of the Company, 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 other loteprednol etabonate based
product, LE-T. Under the Marketing Agreement, Bausch & Lomb will purchase
the active drug substance (loteprednol etabonate) from the Company. A
second agreement, covering Europe, Canada and other selected countries, was
signed in 1996 ("the New Territories Agreement").
Through March 31, 2001, Bausch and Lomb has provided the Company with $5
million in cash advances against future sales, of which approximately $1.4
million is outstanding at March 31, 2001. An additional $1 million is due
from Bausch and 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 in 2001, based on management's estimate of product sales to
Bausch & Lomb in 2001, has been presented as a current liability in the
accompanying balance sheet at March 31, 2001.
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.
Total receivables from Bausch & Lomb as of March 31, 2001 and December 31,
2000 were $724,365 and $870,043, respectively.
5. Common Stock Transactions
During the first quarter of 2001, the Company paid $572,539 and issued
182,964 shares (valued at $400,325 at the date of issue) of the common
stock of the Company to the investors in the September 2000 private
placement of convertible debentures and common stock. The payment of cash
and stock were the options chosen by the Company and represent adjustments
to the pricing based upon the Company's stock price during the adjustment
period. Under the terms of the agreements, no further adjustments are due.
During the first quarter of 2001, the Company issued 106,000 shares of its
common stock upon the exercise of warrants, and received consideration of
$185,500.
Also, during the first quarter of 2001, the Company modified the terms of
certain incentive and nonqualified stock options granted to two of the
Company's former employees who entered into consulting relationships with
the Company. Accordingly, the Company expensed $10,395 as consultant
compensation for the value of the currently vested options and recorded
$115,537 as deferred compensation for the value of the unvested options.
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Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
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 months ending March 31, 2001 and 2000
are as follows:
2001 2000
---- ----
Net revenues
United States $ 1,105,058 $ 663,580
Israel -- --
----------- -----------
$ 1,105,058 $ 663,580
=========== ===========
Net loss
United States ($2,628,931) ($1,868,894)
Israel (121,172) (26,250)
----------- -----------
($2,750,103) ($1,895,144)
=========== ===========
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarters ended March 31, 2001 and 2000
Product sales revenue totaled $1,025,058 for the quarter ended March 31, 2001, a
54% increase from $663,580 for the quarter ended March 31, 2000. Product sales
increases reflect market share gains and higher pricing for the Company's
Lotemax and Alrex ophthalmic products. Additionally, License Fee revenues were
$80,000 compared to zero for the same period in 2000. The license income was
primarily generated from the licensing of a technology of the Company for use in
Japan.
Cost of goods sold for the quarter ended March 31, 2001 totaled $411,341,
increasing 47% from $280,529 for the quarter ended March 31, 2000. The higher
cost of goods sold is due to higher sales volumes and higher royalty and
licensing costs. The gross margin on product sales was 60% for the quarter ended
March 31, 2001 and 58% for the quarter ended March 31, 2000.
Total operating expenses increased $925,281 or 38%, from $2,425,064 in 2000 to
$3,350,345 in 2001. The increase is primarily due to higher research and
development expenses, as well as increased general and administrative expenses.
Net research and development expenses increased by $662,656 or 46%, from
$1,436,975 in 2000 to $2,099,631 in 2001. The increase in R&D expense is
primarily due to increased expenditures, including increased employee staffing
levels, related to the development of dexanabinol for the treatment of traumatic
brain injury and to increased activity in the Company's cannabinoid program to
treat various central nervous system and inflammation-based conditions.
General and administrative expenses increased by $161,457 or 19%, from $859,069
in 2000 to $1,020,526 in 2001. The increase is primarily due to higher staffing
levels.
Depreciation and amortization expenses increased by $62,161, or 64%, from to
$97,060 in 2000 to $159,221 in 2001, reflecting increased depreciation expense
relating to laboratory equipment purchases.
Other income (expense), net, decreased by $240,344, from income of $146,869 in
2000 to expense of $93,475 in 2001. The primary cause of this change was the
interest expense, including the amortization of debt discount and issuance
costs, related to the Convertible debentures issued by the Company in the third
quarter of 2000. The higher interest expense was partially offset by increased
interest income 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
March 31, 2001, the Company has an accumulated deficit of $93,244,413. 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 $15.8 million, which included cash and cash
equivalents of $20.3 million, as of March 31, 2001. During the quarter ended
March 31, 2001, the Company received $.2 million from the exercise of previously
outstanding warrants and options to purchase the Company's common stock.
8
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
continuing operations. As of March 31, 2001, $1.7 million remained available
under the equity line of credit. The Company continues to actively pursue
various funding options, including additional equity offerings, strategic
corporate alliances, 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.
Quantitative and Qualitative Disclosures about Market Risk
We have assessed our vulnerability to certain market risks, including interest
rate risk associated with financial instruments included in cash and cash
equivalents and our convertible debentures. Due to the short-term nature of
these investments we have determined that the risks associated with interest
rate fluctuations related to these financial instruments do not pose a material
risk to us.
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.
9
Part II
Other Information
Item 1 Legal Proceedings NONE
Item 2 Changes in Securities NONE
Item 3 Defaults upon Senior Securities NONE
Item 4 Submission of Matters to Vote of Security Holders NONE
Item 5 Other Information NONE
Item 6 Exhibits and Reports on Form 8-K NONE
10
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: May 10, 2001
by: /s/ Robert W. Cook
Robert W. Cook
Executive Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
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