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, 1997
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)
2 Innovation Drive
Alachua, Florida 32615
(Address of principal executive offices)
Registrant's telephone number, including area code: (904) 462-1210
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 5, 1997, the Registrant had outstanding 31,464,302 shares of its $.03
par value Common Stock.
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
March 31, December 31,
1997 1996
Assets
Cash and cash equivalents $ 10,503,316 $ 5,132,906
R & D reimbursements receivable 122,786 359,019
Prepaid expenses and other current assets 338,725 247,363
------------ ------------
Total current assets 10,964,827 5,739,288
Fixed assets, net 606,376 629,413
Prepaid royalties 716,667 573,334
Intangible assets, net 326,155 337,786
Other assets 178,402 188,472
------------ ------------
Total assets $ 12,792,427 $ 7,468,293
============ ============
Liabilities and Shareholders' Equity
Accounts payable $ 1,369,830 $ 847,415
Accrued expenses and other liabilities 799,220 451,136
Accrued wages and other compensation 434,338 357,981
Current portion of long term debt 127,406 115,244
------------ ------------
Total current liabilities 2,730,794 1,771,776
Advances against future sales 5,000,000 4,000,000
Long term debt 130,806 157,133
Other liabilities 71,076 51,119
------------ ------------
Total liabilities 7,932,676 5,980,028
------------ ------------
Shareholders' Equity
Preferred stock, $.03 par value, 1,250,000 shares authorized.
Series A convertible, with a $1,000 liquidation preference, 44 57
1,460 and 1,900 shares outstanding, respectively.
Series B convertible, with a $1,000 liquidation preference, 180 0
6,000 and 0 shares outstanding, respectively.
Common stock, $.03 par value; 50,000,000 shares authorized,
31,121,366 and 30,727,525 shares issued, and 31,103,010 and
30,709,169 shares outstanding, respectively. 933,641 921,825
Paid in capital in excess of par 68,497,686 62,668,886
Accumulated deficit (64,571,249) (62,101,952)
------------ ------------
4,860,302 1,488,816
Less: Common stock held in treasury, at par (551) (551)
------------ ------------
Total shareholders' equity 4,859,751 1,488,265
------------ ------------
Total liabilities and shareholders' equity $ 12,792,427 $ 7,468,293
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
Three Months Ended
March 31, March 31,
1997 1996
Expenses
Research and development, net $ 1,181,600 $ 1,138,738
Drug substance purchase(see note 2) 569,981 0
Patents 32,388 52,370
General and administrative 638,533 537,139
Depreciation and amortization 70,570 86,333
---------- ----------
2,493,072 1,814,580
---------- ----------
Loss from operations (2,493,072) (1,814,580)
---------- ----------
Interest income, net of interest
expense of $4,399 and
$18,598, respectively 57,056 60,003
---------- ----------
Net loss ($ 2,436,016) ($ 1,754,577)
============ ============
Loss per share ($ .08) ($ .06)
============ ============
Weighted average shares outstanding 31,016,871 29,210,048
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, March 31,
1997 1996
Cash flows from operating activities
Net loss ($ 2,436,016) ($ 1,754,577)
------------ ------------
Adjustments to reconcile net loss to net cash flow
provided by (used in) operating activities
Depreciation and amortization 70,570 86,333
Changes in operating assets and liabilities
Prepaid expenses and other current assets 154,941 (93,520)
Accounts payable 522,417 (77,961)
Accrued expenses, wages and other liabilities 444,398 11,526
Prepaid royalties (143,333)
Advances against future sales 1,000,000 2,122,859
------------ ------------
Total adjustments 2,048,993 2,049,237
------------ ------------
Net cash flows used in operating activities (387,023) 294,660
------------ ------------
Cash flows from investing activities
(Purchases) disposal of fixed assets, net (35,901) (40,394)
------------ ------------
Net cash flows provided by (used in) investing activities (35,901) (40,394)
------------ ------------
Cash flows from financing activities
Proceeds from issuance of Preferred Stock, net 5,740,000
Proceeds from exercise of warrants 67,500 51,000
Decrease in loans payable, net (14,166) (32,725)
------------ ------------
Net cash flows provided by (used in) financing 5,793,334 18,275
------------ ------------
Net increase (decrease) in cash and cash equivalents 5,370,410 272,541
Cash and cash equivalents at beginning of period 5,132,906 7,442,791
------------ ------------
Cash and cash equivalents at end of period $ 10,503,316 $ 7,715,332
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
1. The Company
Pharmos Corporation (the "Company") is an emerging pharmaceutical company
incorporated under the laws of the state of Nevada and is engaged in the
discovery, design, development and commercialization of pharmaceuticals to
meet significant therapeutic needs in major markets. The Company is
developing pharmaceuticals in various fields including: site specific drugs
for ophthalmic indications, neuroprotective agents for treatment of central
nervous system ("CNS") disorders, newly designed molecules to treat cancer,
and emulsion-based products for topical and systemic applications. The
Company uses a variety of patented and proprietary technologies to improve
the efficacy and/or safety of drugs. The Company's compounds are in various
stages of development, from preclinical to advanced clinical trials. The
Company has submitted two separate New Drug Applications ("NDA") to the
U.S. Food & Drug Administration ("FDA"): Lotemax(TM) for the treatment of
several ocular inflammatory diseases and LE-A, a product for the treatment
of seasonal allergic conjunctivitis. The Company conducts operations in
Alachua, Florida and through its wholly-owned subsidiary, Pharmos, Ltd., in
Rehovot, Israel.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and 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,
1997, are not necessarily indicative of the results that may be expected
for the year ended December 31, 1997.
These financial statements and notes should be read in conjunction with the
Company's audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
In the first quarter of 1997, the Company, in anticipation of approval by
the FDA of either or both of the NDAs submitted (see note 1) and in
accordance with its obligations under the Marketing Agreements (see note 4)
to supply Bausch & Lomb with certain specified quantities of the active
drug substance ("Loteprednol etabonate"), purchased bulk quantities of
Loteprednol etabonate in the amount of $569,981. However, until the FDA
approves either of the Company's NDAs that use Loteprednol etabonate (see
note 3), the Company has taken a valuation allowance of $569,981 against
these purchases to the lower of cost
5
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
or market value as there are currently no alternative uses for such
quantities of this drug substance.
3. Liquidity and Business Risks
The Company currently has no sources of recurring revenues and has incurred
operating losses since its inception. At March 31, 1997, the Company has an
accumulated deficit of $64,571,249 (unaudited). Such losses have resulted
principally from costs incurred in research and development and from
general and administrative expenses. The Company expects that operating
losses will continue as product development, clinical testing and other
normal operations continue. The Company currently funds its operations
through the use of cash obtained principally from third party financing.
Management believes that cash and cash equivalents of $10.5 million as of
March 31, 1997, combined with anticipated cash inflows from investment
income and research & development grants, will be sufficient to support
operations into the first quarter of 1998. 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 to obtain the additional financing
necessary to complete the development of its product candidates and bring
them to commercial markets.
As described in Note 1, the Company has submitted two NDAs to the FDA. It
is possible that FDA approval for these product candidates will not be
granted on a timely basis or at all. Any delay in obtaining approval or
failure to obtain such approvals would materially and adversely affect the
Company's business, financial position and results of operations.
4. Collaborative Agreements
The Company has entered into marketing agreements (the "Marketing
Agreements") granting Bausch & Lomb Pharmaceuticals, Inc. ("Bausch & Lomb")
rights to market Lotemax(TM), the Company's lead product candidate, on an
exclusive basis in the United States and in certain territories outside of
the U.S. The Marketing Agreements also cover the Company's two other
Loteprednol etabonate based products, which are referred to as LE-A and
LE-T. Under the Marketing Agreements, Bausch & Lomb will purchase the
active drug substance (Loteprednol etabonate) from the Company and, through
March 31, 1997, has provided the Company with $5 million in cash advances
against future sales. Bausch & Lomb also collaborates in the development of
products by making available amounts up to 50% of the Phase III clinical
trial costs.
Bausch & Lomb will be entitled to credits against future purchases of the
active drug substance based on the advances and future advances until the
advances have been repaid. The Company may be obligated to repay such
advances if it is unable to supply Bausch &
6
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
Lomb with certain specified quantities of the active drug substance.
Advances received through March 31, 1997 are reflected as a long term
liability in the accompanying balance sheet.
For the three month periods ended March 31, 1997 and 1996, net R&D
reimbursements from Bausch & Lomb were $15,080 and $133,104, respectively,
and were offset against research and development expense in the
accompanying consolidated statement of operations.
5. Common & Preferred Stock Transactions
On February 12, 1997, the Company issued warrants to purchase an aggregate
of 1,055,000 shares of common stock at an exercise price of $1.59 per share
to 17 employees of the Company. Such warrants become exercisable in
increments of 25% each on February 12, 1998, February 12, 1999, February
12, 2000 and February 12, 2001. All of such warrants expire on February 12,
2007. Also on February 12, 1997, the Company issued warrants to purchase an
aggregate of 100,000 shares of common stock at an exercise price of $1.59
per share to the Company's five outside directors. These warrants become
exercisable on the same basis as the warrants issued to employees, but
expire on February 12, 2003. Upon termination of employment or termination
as a director, all warrants held by such employee or director will expire,
except that any warrant that was exercisable on the date of termination
may, to the extent then exercisable, be exercised within three months
thereafter (or one year thereafter if the termination is the result of
death or permanent disability of such employee or director).
On March 31, 1997, the Company completed a private placement of Series B
Convertible Preferred Stock and warrants to purchase common stock, with
institutional investors generating gross proceeds of $6 million. The
preferred stock carries a 5% dividend rate payable in cash or common stock,
at the option of the Company, and is convertible into common shares of the
Company based on the share price at the time of conversion less discounts
ranging from 17% to 20%. Until converted into common stock, the preferred
stock has no voting rights. The 159,000 warrants issued to the investors
are exercisable at a price of $1.75 per share, commencing one year after
the closing for a three year period. The investors were granted limited
rights to approve certain financing by the Company for 180 days from
closing. The Company will also issue approximately 240,000 warrants to
certain parties who assisted in the completion of the private placement.
The warrants will be immediately vested and each warrant is estimated by
the Company to possess a fair market value of $.88. These warrants will
expire in 2008.
During the first quarter of 1997, the Company issued 330,884 shares of its
common stock upon conversion of 440 shares of the Company's Series A
convertible preferred stock. The
7
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
shares were issued at conversion prices ranging from $1.27 per share to
$1.46 per share. The Company also issued 25,457 shares of common stock in
payment of dividends on the Series A convertible preferred stock. As of the
date of such issuances, these dividends are valued at $33,282.
During the first quarter of 1997, the Company issued 37,500 shares of its
common stock upon exercise of warrants to purchase shares of the Company's
common stock at $1.80 per share.
6. Legal Proceedings
Management has reviewed with counsel all actions and proceedings pending
against or involving the Company. Although the ultimate outcome of such
actions and proceedings cannot be predicted with certainty at this time,
management believes that losses, if any, in excess of amounts accrued
resulting from those actions will not have a significant impact on the
Company's financial position or results of operations.
8
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Quarters ended March 31, 1997 and 1996
Total operating expenses increased $678,492, or 37%, from $1,814,580 in
1996 to $2,493,072 in 1997 primarily due to the purchases of drug substance
for the manufacture of Lotemax(TM), as well as an increase in general and
administrative expenses and research and development costs. Excluding those
purchases, operating expenses increase by $108,511, or 6%, from $1,814,580
in 1996 to $1,923,091 in 1997.
Net research and development expenses increased by $42,862, or 4%, from
$1,138,738 in 1996 to $1,181,600 in 1997. The increase in R & D expense is
mainly due to clinical trial costs, including the preparation of the
Company's NDAs submissions.
In 1997, the Company, in anticipation of approval by the FDA of either or
both of the NDAs submitted and in accordance with its obligations under the
Marketing Agreements to supply Bausch & Lomb with certain specified
quantities of the active drug-substance, purchased bulk quantities of
Loteprednol etabonate in the amount of $569,981. However, until the FDA
approves either of the Company's NDAs that use Loteprednol etabonate, the
Company has taken a valuation allowance of $569,981 against these purchases
to lower of cost or market value as there are currently no alternative uses
for such quantities of this drug substance.
Patent expenses decreased by $19,982, or 38%, from $52,370 in 1996 to
$32,388 in 1997. This decrease is due in part to the timing of completion
of certain patent applications and due to the fact that the Company's
in-house patent counsel undertakes work previously executed by external
patent attorneys.
General and administrative expenses increased by $101,394, or 19%, from
$537,139 in 1996 to $638,533 in 1997, due to certain administrative costs.
Depreciation and amortization expenses decreased by $15,763, or 18%, from
$86,333 in 1996 to $70,570 in 1997, reflecting reduced depreciation expense
relating to the Alachua, Florida operation.
Net interest income decreased by $2,947, or 5%, from $60,003 in 1996 to
$57,056 in 1997. Interest income decreased as a result of lower average
cash balances partially offset by lower interest expense.
9
Liquidity and Capital Resources
The Company currently has no sources of recurring revenues and has incurred
operating losses since its inception and has financed its operations with
public and private offerings of securities, advances and other funding
pursuant to marketing and co-development agreements with Bausch and Lomb,
research contracts, license fees, royalties and sales, and interest income.
The Company has working capital of $8.3 million, including cash and cash
equivalents of $10.5 million, as of March 31, 1997. On March 31, 1997 the
Company completed a $6 million private placement of convertible preferred
stock and warrants. Management believes that existing cash and cash
equivalents combined with additional cash inflows from investment income
and R&D grants will be sufficient to support operations into the first
quarter of 1998. Management believes that additional funding will be
required to fund operations until, if ever, profitable operations can be
achieved. Therefore, the Company will continue 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 required to continue the development of its products and bring
them to commercial markets.
Pursuant to the U.S. Marketing agreement with Bausch & Lomb and following
the NDA submission for LE-A, the Company received in March 1997, an
additional $1 million in advances against future sales of the active drug
substance (needed to manufacture the drug), $143,333 of which was advanced
to the license holder. Cumulative advances from Bausch & Lomb as of March
31, 1997 total $5 million. Bausch & Lomb will be entitled to recoup the
advances by way of credits from future sales of Lotemax(TM) and line
extension products. 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.
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 Submission of Matters to Vote of Security Holders NONE
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: May 14, 1997 by: /s/ Alan M. Mark
------------------------------
Alan M. Mark
Acting Chief Financial Officer
12