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 September 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 November 1, 2001, the Registrant had outstanding 55,356,307 shares of its
$.03 par value Common Stock.
Part I. Financial Information
Item 1 Financial Statements
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
September 30, December 31,
2001 2000
------------- -------------
Assets
Cash and cash equivalents $ 17,878,769 $ 22,480,777
Inventories 473,930 796,550
Receivables 1,736,771 1,188,502
Prepaid royalties -- 6,591
Restricted cash 4,106,813 --
Prepaid expenses and other current assets 358,100 281,109
------------- -------------
Total current assets 24,554,383 24,753,529
Fixed assets, net 1,857,171 1,681,390
Prepaid royalties, net of current portion 143,000 143,000
Intangible assets, net 116,798 151,690
Restricted cash -- 4,035,414
Other assets 18,086 18,086
------------- -------------
Total assets $ 26,689,438 $ 30,783,109
============= =============
Liabilities and Shareholders' Equity
Accounts payable $ 875,929 $ 458,504
Accrued expenses 1,290,209 1,162,098
Accrued wages and other compensation 970,787 768,975
Convertible debentures, net 7,493,170 --
Advances against future sales -- 619,702
------------- -------------
Total current liabilities 10,630,095 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 11,730,095 10,690,151
------------- -------------
Commitments and contingencies
Shareholders' equity
Common stock, $.03 par value; 80,000,000 shares authorized,
55,074,648 and 54,063,897 shares issued and outstanding
(excluding $551 in 2001 and 2000, held in Treasury)
in 2001 and 2000, respectively 1,652,238 1,621,916
Deferred compensation (97,313) --
Paid in capital 111,012,622 108,965,351
Accumulated deficit (97,608,204) (90,494,309)
------------- -------------
Total shareholders' equity 14,959,343 20,092,958
------------- -------------
Total liabilities and shareholders' equity $ 26,689,438 $ 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 September 30,
2001 2000
------------ ------------
Revenues
Product sales $ 1,712,646 $ 1,661,735
License fee -- 100,000
------------ ------------
Total Revenues 1,712,646 1,761,735
Cost of Goods Sold 403,340 580,202
------------ ------------
Gross Margin 1,309,306 1,181,533
------------ ------------
Expenses
Research and development, net 2,169,132 1,362,475
Selling, general and administrative 686,587 999,987
Patents 68,368 46,536
Depreciation and amortization 169,524 167,620
------------ ------------
Total operating expenses 3,093,611 2,576,618
------------ ------------
Loss from operations (1,784,305) (1,395,085)
Other income (expense)
Interest income 194,396 314,905
Other income (expense), net 18,419 (9,192)
Interest expense (425,556) (441,787)
------------ ------------
Other expense, net (212,741) (136,074)
------------ ------------
Net loss ($ 1,997,046) ($ 1,531,159)
============ ============
Net loss per share
- basic and diluted ($ .04) ($ .03)
============ ============
Weighted average shares outstanding - basic and diluted 54,872,472 52,986,170
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
2001 2000
------------ ------------
Revenues
Product sales $ 4,218,441 $ 3,740,152
License fee 80,000 100,000
------------ ------------
Total Revenues 4,298,441 3,840,152
Cost of Goods Sold 1,268,589 1,337,893
------------ ------------
Gross Margin 3,029,852 2,502,259
------------ ------------
Expenses
Research and development, net 6,127,604 3,733,144
Selling, general and administrative 2,817,717 2,838,476
Patents 195,306 128,433
Depreciation and amortization 492,811 376,838
------------ ------------
Total operating expenses 9,633,438 7,076,891
------------ ------------
Loss from operations (6,603,586) (4,574,632)
Other income (expense)
Interest income 742,684 739,345
Other income (expense), net 24,561 (2,370)
Interest expense (1,277,553) (438,578)
------------ ------------
Other (expense) income, net (510,308) 298,397
------------ ------------
Net loss ($ 7,113,894) ($ 4,276,235)
============ ============
Net loss per share
- basic and diluted ($ .13) ($ .08)
============ ============
Weighted average shares outstanding - basic and diluted 54,470,720 51,506,739
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
Pharmos Corporation
(Unaudited)
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
2001 2000
------------ ------------
Cash flows from operating activities
Net loss ($ 7,113,894) ($ 4,276,235)
Adjustments to reconcile net loss to net
cash flow used in operating activities
Depreciation and amortization 492,811 376,838
Amortization of Debt Discount and Issuance costs 912,296 --
Non-cash compensation charge - consultant compensation 122,993 --
Changes in operating assets and liabilities
Inventory 322,620 723,328
Receivables (548,269) (292,468)
Prepaid expenses and other current assets (76,991) (88,368)
Advanced royalties 6,591 202,363
Accounts payable 417,425 (380,555)
Accrued expenses 128,111 160,799
Accrued wages 201,812 173,354
------------ ------------
Total adjustments 1,979,399 875,291
------------ ------------
Net cash flows used in operating activities (5,134,495) (3,400,944)
Cash flows from investing activities
Purchases of fixed assets, net (633,699) (550,440)
------------ ------------
Net cash flows used in investing activities (633,699) (550,440)
------------ ------------
Cash flows from financing activities
Advances against future sales (619,702) (1,429,199)
Proceeds from issuance of common stock
and exercise of warrants, net 2,429,826 22,219,549
Proceeds from issuance of convertible debentures, net -- 6,178,324
Pricing adjustment for private placement, net (572,539) --
Proceeds from exercise of equity credit line -- 2,145,905
Increase in restricted cash (71,399) (4,006,294)
Decrease in notes payable -- (338,128)
------------ ------------
Net cash provided by financing activities 1,166,186 24,770,157
Net increase (decrease) in cash and cash equivalents (4,602,008) 20,818,773
Cash and cash equivalents at beginning of year 22,480,777 2,918,554
------------ ------------
Cash and cash equivalents at end of period $ 17,878,769 $ 23,737,327
============ ============
Supplemental disclosure:
Interest Paid $ 240,000 $-
============ ============
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 nine-month periods ended September 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 September 30, 2001, the Company has an accumulated deficit of
$97,608,204. 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 $17.9 million as of September 30, 2001, combined with
the cash received of approximately $25 million during October 2001 from the
sale of the Company's ophthalmic business (see Note 7), will be sufficient
to support the Company's continuing operations through at least the middle
of 2004. Additionally, as of September 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 September 30, 2001, Bausch and Lomb has provided the Company with
$5 million in cash advances against future sales, of which approximately
$1.0 million is outstanding at September 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.
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 September 30, 2001 and December
31, 2000 were $1,360,977 and $870,043, respectively.
In October 2001, the Company sold its ophthalmic business, including the
Company's rights under the above agreements to Bausch & Lomb (see Note 7).
5. Common Stock Transactions
During the third quarter of 2001, the Company issued 140,738 shares of its
common stock upon the exercise of warrants, and received consideration of
$308,071.
During the third quarter of 2001, the Company issued 542,299 shares of the
common stock of the Company and issued warrants to purchase up to 285,587
shares of the Company's common stock (at a price of $2.18 per share
exercisable through February 2002), to one of the investors in the
September 2000 private placement of convertible debentures and common
stock. Under the terms of the private Placement, the investor had the right
to purchase these additional shares. The Company received consideration of
$1,896,749.
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 first quarter of 2001, the Company paid $572,539 and issued
7
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
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.
During the first nine months of 2001, the Company modified the terms of
certain incentive and nonqualified stock options granted to three of the
Company's former employees who entered into consulting relationships with
the Company. Accordingly, the Company expensed $122,993 as consultant
compensation for the value of the currently vested options and recorded
$97,313 as deferred compensation for the value of the unvested options.
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 nine months ending September 30,
2001 and 2000 are as follows:
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Net revenues
United States $ 1,712,646 $ 1,761,735 $ 4,298,441 $ 3,840,152
Israel -- -- -- --
----------- ----------- ----------- -----------
$ 1,712,646 $ 1,761,735 $ 4,298,441 $ 3,840,152
=========== =========== =========== ===========
Net loss
United States ($1,880,750) ($1,432,454) ($6,735,463) ($4,000,498)
Israel (116,296) (98,705) (378,431) (275,737)
----------- ----------- ----------- -----------
($1,997,046) ($1,531,159) ($7,113,894) ($4,276,235)
=========== =========== =========== ===========
7. Subsequent Event
In October 2001, Bausch & Lomb purchased all rights to the Company's
loteprednol etabonate (LE) ophthalmic business for cash and assumption of
certain ongoing obligations. The Company received approximately $25 million
in cash for its rights to Lotemax(R) and Alrex(R), prescription products
that are made and marketed by Bausch & Lomb under a 1995 Marketing
Agreement with the Company. The Company will not have any product sales
beginning in the fourth quarter of 2001.
Bausch & Lomb also is acquiring future extensions of LE formulations
including LE-T, a product currently in Phase III clinical trial. Bausch &
Lomb will pay the Company approximately $14 million, with the actual
payment price based on
8
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
the date of FDA approval of this new combination therapy. An additional
milestone payment of up to $10 million could be paid to the Company to the
extent sales of the new product exceed an agreed-upon forecast in the first
two years. The Company continues to participate in the clinical development
of LE-T and, consistent with the Company's 1995 Marketing Agreement with
Bausch & Lomb, will contribute up to 50% of the first $3 million of
clinical costs and 100% thereafter.
As a result of this transaction, the Company incurred transaction and
royalty costs of approximately $2 million. The Company also compensated the
LE patent owner approximately $2.7 million ($1.2 million of this amount is
to be paid in October 2002) from the proceeds of the sale of Lotemax and
Alrex in return for his consent to the Company's assignment of its rights
under the license agreement to Bausch & Lomb. Additionally, the patent
owner will receive a portion of the proceeds payable to the Company
following FDA approval of LE-T, as well as a portion of its milestone
payment.
9
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarters ended September 30, 2001 and 2000
Product sales revenue totaled $1,712,646 for the quarter ended September 30,
2001, a 3% increase from $1,661,735 for the quarter ended September 30, 2000.
Product sales increases reflect market share gains and a change in the product
mix for the Company's Lotemax and Alrex ophthalmic products.
Cost of goods sold for the quarter ended September 30, 2001 totaled $403,340,
decreasing 30% from $580,202 for the quarter ended September 30, 2000. The lower
cost of goods sold is principally due to the lower cost of Drug Substance. The
lower cost of Drug Substance reflects the change in product mix as sales of the
Company's Alrex product increased substantially over the year ago period. Alrex
utilizes less of the Company's Drug Substance than Lotemax.
Total operating expenses increased $516,993 or 20%, from $2,576,618 in 2000 to
$3,093,611 in 2001. The increase is primarily due to increased research and
development costs partially offset by lower general and administrative expenses.
Net research and development expenses increased by $806,657 or 59%, from
$1,362,475 in 2000 to $2,169,132 in 2000. 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.
Selling, general and administrative expenses decreased by $313,400 or 32%, from
$999,987 in 2000 to $686,587 in 2001. The decrease is primarily due to a shift
of resources from administrative functions to research and development
functions, as well as lower investor relation spending.
Other expense, net, increased by $76,667, from $136,074 in 2000 to $212,741 in
2001. Interest expense was similar in both periods, however, lower interest
income, resulting from lower average cash balances and lower interest rates, was
the primary reason for the increase in net expense.
Nine Months ended September 30, 2001 and 2000
Product sales revenue totaled $4,218,441 for the nine months ended September 30,
2001, a 13% increase from $3,740,152 for the nine months ended September 30,
2000. Product sales increases reflect market share gains and a change in the
product mix for the Company's Lotemax and Alrex ophthalmic products.
Cost of goods sold for the nine months ended September 30, 2001 totaled
$1,268,589, decreasing 5% from $1,337,893 for the nine months ended September
30, 2000. The lower cost of goods sold is principally due to the lower cost of
Drug Substance related to the change in product mix. The decrease in Cost of
goods sold was partially offset by higher license expense resulting from
increased product sales.
Total operating expenses increased $2,556,547 or 36%, from $7,076,891 in 2000 to
$9,633,438 in 2001. The increase is principally due to higher research and
development expenses, and, to a lesser extent, increased depreciation expense.
Net research and development expenses increased by $2,394,460 or 64%, from
$3,733,144 in 2000 to
10
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
$6,127,604 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.
Depreciation and amortization expenses increased by $115,973, or 31%, from
$376,838 in 2000 to $492,811 in 2001, reflecting increased depreciation expense
relating to laboratory equipment purchases.
Other income / expense, net, decreased by $808,705, from income of $298,397 in
2000 to expense of $510,308 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 September
2000.
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
September 30, 2001, the Company has an accumulated deficit of $97,608,204. The
Company has financed its operations with public and private offerings of
securities, advances and other funding pursuant to a marketing agreement with
Bausch & Lomb, research contracts, license fees, royalties and sales, and
interest income.
The Company had working capital of $13.9 million, including cash and cash
equivalents of $17.9 million, as of September 30, 2001. During the nine months
ended September 30, 2001, the Company received $2.4 million from the exercise of
previously outstanding warrants and options to purchase the Company's common
stock. Management believes that cash and cash equivalents of $17.9 million as of
September 30, 2001, combined with the cash received of approximately $25 million
during October 2001 from the sale of the Company's ophthalmic business, will be
sufficient to support the Company's continuing operations through at least the
middle of 2004. Additionally, as of September 30, 2001, $1.7 million remained
available under the Company's 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.
11
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 NONE
Item 5 Other Information NONE
Item 6 Exhibits and Reports on Form 8-K NONE
12
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: November 13, 2001
by: /s/ Robert W. Cook
---------------------------------
Robert W. Cook
Executive Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
13