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, 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 August 2, 2001, the Registrant had outstanding 55,074,648 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,
2001 2000
------------- -------------
Assets
Cash and cash equivalents $ 17,342,534 $ 22,480,777
Inventories 607,641 796,550
Receivables 1,652,921 1,188,502
Prepaid royalties -- 6,591
Restricted cash 4,085,511 --
Prepaid expenses and other current assets 223,133 281,109
------------- -------------
Total current assets 23,911,740 24,753,529
Fixed assets, net 1,860,491 1,681,390
Prepaid royalties, net of current portion 143,000 143,000
Intangible assets, net 128,428 151,690
Restricted cash -- 4,035,414
Other assets 18,087 18,086
------------- -------------
Total assets $ 26,061,746 $ 30,783,109
------------- -------------
Liabilities and Shareholders' Equity
Accounts payable $ 281,793 $ 458,504
Accrued expenses 1,566,163 1,162,098
Accrued wages and other compensation 967,569 768,975
Convertible debentures, net 7,189,072 --
Advances against future sales 220,375 619,702
------------- -------------
Total current liabilities 10,224,972 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 11,324,972 10,690,151
------------- -------------
Commitments and contingencies
Shareholders' equity
Common stock, $.03 par value; 80,000,000 shares authorized,
54,391,611 and 54,063,897 shares issued and outstanding
(excluding $551 in 2001 and 2000, held in Treasury)
in 2001 and 2000, respectively 1,631,747 1,621,916
Deferred compensation (273,495) --
Paid in capital 108,989,680 108,965,351
Accumulated deficit (95,611,158) (90,494,309)
------------- -------------
Total shareholders' equity 14,736,774 20,092,958
------------- -------------
Total liabilities and shareholders' equity $ 26,061,746 $ 30,783,109
============= =============
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,
2001 2000
------------ ------------
Revenues
Product sales $ 1,480,737 $ 1,414,837
Cost of Goods Sold 453,908 477,162
------------ ------------
Gross Margin 1,026,829 937,675
------------ ------------
Expenses
Research and development, net 1,858,841 898,331
Selling, general and administrative 1,110,604 1,014,783
Patents 55,971 49,937
Depreciation and amortization 164,066 112,158
------------ ------------
Total operating expenses 3,189,482 2,075,209
------------ ------------
Loss from operations (2,162,653) (1,137,534)
Other income (expense):
Interest income 226,208 277,509
Other income (expense), net (4,315) 12,924
Interest expense (425,985) (2,831)
------------ ------------
Other (expense) income, net (204,092) 287,602
------------ ------------
Net loss ($ 2,366,745) ($849,932)
============ ============
Net loss per share
- basic and diluted ($.04) ($.02)
============ ============
Weighted average shares outstanding - basic and diluted 54,356,721 52,507,373
============ ============
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,
2001 2000
------------ ------------
Revenues
Product sales $2,505,795 $2,078,417
License fee 80,000 --
------------ ------------
Total Revenues 2,585,795 2,078,417
Cost of Goods Sold 865,249 757,691
------------ ------------
Gross Margin 1,720,546 1,320,726
------------ ------------
Expenses
Research and development, net 3,958,472 2,335,306
Selling, general and administrative 2,131,130 1,873,852
Patents 126,938 81,897
Depreciation and amortization 323,287 209,218
------------ ------------
Total operating expenses 6,539,827 4,500,273
------------ ------------
Loss from operations (4,819,281) (3,179,547)
Other income (expense):
Interest income 548,288 424,440
Other income, net 6,142 10,031
Interest expense (851,997) --
------------ ------------
Other (expense) income, net (297,567) 434,471
------------ ------------
Net loss ($5,116,848) ($2,745,076)
============ ============
Net loss per share
- basic and diluted ($.09) ($.05)
============ ============
Weighted average shares outstanding - basic and diluted 54,265,381 50,754,764
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
Pharmos Corporation
(Unaudited)
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Six Months Ended June 30,
2001 2000
------------ ------------
Cash flows from operating activities
Net loss ($ 5,116,848) ($ 2,745,076)
Adjustments to reconcile net loss to net
cash flow used in operating activities
Depreciation and amortization 323,287 209,218
Amortization of Debt Discount and 608,200 --
Issuance costs
Non-cash compensation charge - consultant compensation 108,198 --
Changes in operating assets and liabilities
Inventory 188,909 408,358
Receivables (464,419) 3,106
Prepaid expenses and other current assets 57,976 (158,813)
Advanced royalties 6,591 112,682
Accounts payable (176,711) (252,671)
Accrued expenses 404,065 (184,584)
Accrued wages 198,594 167,866
------------ ------------
Total adjustments 1,254,690 305,162
------------ ------------
Net cash flows used in operating activities (3,862,158) (2,439,914)
Cash flows from investing activities
Purchases of fixed assets, net (479,126) (381,017)
------------ ------------
Net cash flows used in investing activities (479,126) (381,017)
------------ ------------
Cash flows from financing activities
Advances against future sales (399,327) (790,592)
Proceeds from issuance of common stock
and exercise of warrants, net 236,363 17,095,571
Pricing adjustment for private placement, net (583,896) --
Proceeds from exercise of equity credit line -- 2,145,905
Increase in restricted cash (50,099) --
Increase (decrease) in notes payable -- (338,128)
------------ ------------
Net cash provided by financing activities (796,959) 18,112,756
Net increase (decrease) in cash and cash equivalents (5,138,243) 15,291,825
Cash and cash equivalents at beginning of year 22,480,777 2,918,554
------------ ------------
Cash and cash equivalents at end of period $ 17,342,534 $ 18,210,379
============ ============
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, 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's main product in development, dexanabinol, is in a Phase III,
860-patient clinical trial for the treatment of severe traumatic brain injury
currently underway in Europe and Israel. New chemical entities from its
library of synthetic, non-psychotropic cannabinoid compounds are being
studied for possible efficacy in stroke, pain, multiple sclerosis, and other
neurological and anti-inflammatory conditions.
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 June 30, 2001, the Company has an accumulated deficit of $95,611,158. 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 $17.3
million as of June 30, 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. Additionally, as of June 30,
2001, $1.7 million remained available under the Company's equity line of
credit.
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.
6
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
The Company's revenues are principally derived from one customer.
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.
New Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141 "Business Combinations"
("SFAS 141") and Statement No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 141 states that the use of the pooling-of-interest method
is prohibited for business combinations initiated after June 30, 2001. SFAS
142 is effective for fiscal years beginning after December 15, 2001 and
applies to all goodwill and other intangible assets recognized in an entity's
statement of financial position at that date, regardless of when those assets
were initially recognized. The Company is currently evaluating the provisions
of SFAS 141 and SFAS 142 and has not yet determined the effects of these
changes 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 June 30, 2001, Bausch and Lomb has provided the Company with $5
million in cash advances against future sales, of which approximately $1.2
million is outstanding at June 30, 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 June 30, 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 June 30, 2001 and December 31,
2000 were $1,060,600 and $870,043, respectively.
5. Common Stock Transactions
During the second quarter of 2001, the Company issued 38,750 shares of its
common stock upon the exercise of warrants, and received consideration of
$50,863.
During the second quarter of 2001, the Company modified the terms of certain
incentive and nonqualified stock options granted to one of the Company's
former employees who entered into a consulting relationship with the Company.
Additionally, certain incentive and nonqualified stock options granted to two
of the Company's former employees who previously entered into consulting
relationships with the Company were revalued to reflect the market value of
those options. Accordingly, the Company expensed $97,803 as consultant
compensation for the value of the currently vested options and recorded
$157,958 as deferred compensation for the value of the unvested options. In
total, for the six months ended June 30, 2001 the Company expensed $108,198
as consultant compensation for the value of the vested options.
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
7
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
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.
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, 2001 and
2000 are as follows:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net revenues
United States $ 1,480,737 $ 1,414,837 $ 2,585,795 $ 2,078,417
Israel -- -- -- --
----------- ----------- ----------- -----------
$ 1,480,737 $ 1,414,837 $ 2,585,795 $ 2,078,417
=========== =========== =========== ===========
Net loss
United States ($2,225,782) ($ 699,150) ($4,854,713) ($2,568,044)
Israel (140,963) (150,782) (262,135) (177,032)
----------- ----------- ----------- -----------
($2,366,745) ($ 849,932) ($5,116,848) ($2,745,076)
=========== =========== =========== ===========
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarters ended June 30, 2001 and 2000
Product sales revenue totaled $1,480,737 for the quarter ended June 30, 2001, a
5% increase from $1,414,837 for the quarter ended June 30, 2000. Product sales
increases reflect market share gains for the Company's Lotemax and Alrex
ophthalmic products.
Cost of goods sold for the quarter ended June 30, 2001 totaled $453,908,
decreasing 5% from $477,162 for the quarter ended June 30, 2000. The lower cost
of goods sold is due to lower cost of Drug Substance, partially offset by higher
royalty and licensing costs.
Total operating expenses increased $1,114,273 or 54%, from $2,075,209 in 2000 to
$3,189,482 in 2001. The increase is primarily due to increased research and
development costs. Depreciation expense and general and administrative expenses
increased to a lesser extent.
Net research and development expenses increased by $960,510 or 107%, from
$898,331 in 2000 to $1,858,841 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) development program.
Selling, general and administrative expenses increased by $95,821 or 9%, from
$1,014,783 in 2000 to $1,110,604 in 2001. The increase is primarily due to
higher staffing levels.
Depreciation and amortization expenses increased by $51,908, or 46%, from to
$112,158 in 2000 to $164,066 in 2001, reflecting increased depreciation expense
relating to laboratory equipment purchases.
Other income / expense, net, decreased by $491,694, from income of $287,602 in
2000 to expense of $204,092 in 2001. 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, was the primary
reason for this change, partially offset by increased interest income as a
result of higher average cash balances.
Six Months ended June 30, 2001 and 2000
Product sales revenue totaled $2,505,795 for the six months ended June 30, 2001,
a 21% increase from $2,078,417 for the six months ended June 30, 2000. Product
sales increases reflect market share gains 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 six months ended June 30, 2001 totaled $865,249,
increasing 14% from $757,691 for the six months ended June 30, 2000. The higher
cost of goods sold is primarily due to higher licensing and royalties associated
with the higher sales volumes.
Total operating expenses increased $2,039,554 or 45%, from $4,500,273 in 2000 to
$6,539,827 in 2001. The increase is principally due to higher research and
development expenses, and, to a lesser extent, increased depreciation and
general and administrative expenses.
Net research and development expenses increased by $1,623,166 or 70%, from
$2,335,306 in 2000 to $3,958,472 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
9
brain injury and to increased activity in the Company's cannabinoid program to
treat various central nervous system and inflammation-based conditions.
Selling, general and administrative expenses increased by $257,278 or 14%, from
$1,873,852 in 2000 to $2,131,130 in 2001. The increase is primarily due to
higher staffing levels.
Depreciation and amortization expenses increased by $114,069, or 55%, from
$209,218 in 2000 to $323,287 in 2001, reflecting increased depreciation expense
relating to laboratory equipment purchases.
Other income / expense, net, decreased by $732,038, from income of $434,471 in
2000 to expense of $297,567 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
June 30, 2001, the Company has an accumulated deficit of $95,611,158. 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 $13.7 million, including cash and cash
equivalents of $17.3 million, as of June 30, 2001. During the six months ended
June 30, 2001, the Company received $0.2 million from the exercise of previously
outstanding warrants and options to purchase the Company's common stock.
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 June 30, 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.
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 Corporation's Annual Meeting of Stockholders held on July 12, 2001,
the stockholders of the Corporation elected the following persons as
directors of the Corporation to serve until the next annual meeting of
stockholders and until their successors are duly elected and qualified:
Haim Aviv, Elkan R. Gamzu, 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 42,272,069 431,763
Elkan R. Gamzu 42,279,742 424,090
Mony Ben Dor 42,281,039 422,793
Samuel D. Waksal 42,183,724 520,108
David Schlachet 42,283,942 419,890
Georges Anthony Marcel 42,282,822 421,010
Also at the Annual Meeting, the stockholders approved the adoption of the
2001 Employee Stock Purchase Plan, with 41,594,111 votes for approval,
1,030,636 votes against approval, and 79,085 abstentions.
Also at the Annual Meeting, the stockholders ratified the Board's
selection of PricewaterhouseCoopers LLP as the Corporation's independent
auditors for the fiscal year ending December 31, 2001, with 42,602,484
votes for ratification, 54,831 votes against ratification, and 46,517
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 13, 2001
by: /s/ Robert W. Cook
----------------------------
Robert W. Cook
Executive Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)