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, 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 August 5, 1997, the Registrant had outstanding 32,378,881 shares of its
$.03 par value Common Stock.
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1997 1996
------------ ------------
Assets
--------------------------------------------------------------------------------
Cash and cash equivalents $ 7,978,163 $ 5,132,906
R & D reimbursements receivable 234,776 359,019
Prepaid expenses and other current assets 337,925 247,363
------------ ------------
Total current assets 8,550,864 5,739,288
Fixed assets, net 552,911 629,413
Prepaid royalties 716,667 573,334
Intangible assets, net 314,524 337,786
Other assets 162,094 188,472
------------ ------------
Total assets $ 10,297,060 $ 7,468,293
============ ============
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Liabilities and Shareholders' Equity
Accounts payable $ 755,009 $ 847,415
Accrued expenses and other liabilities 1,258,058 451,136
Accrued wages and other compensation 288,870 357,981
Current portion of long term debt 127,406 115,244
------------ ------------
Total current liabilities 2,429,343 1,771,776
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Advances against future sales 5,000,000 4,000,000
Long term debt 99,137 157,133
Other liabilities 46,485 51,119
------------ ------------
Total liabilities 7,574,965 5,980,028
------------ ------------
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Shareholders' Equity
Preferred stock, $.03 par value, 1,250,000 shares authorized.
Series A convertible, with a $1,000 liquidation preference, 475 and
1,900 shares outstanding, respectively 14 57
Series B convertible, with a $1,000 liquidation preference, 6,000
and 0 shares outstanding, respectively 180 --
Common stock, $.03 par value; 50,000,000 shares authorized, 32,068,627 and
30,727,525 shares issued, and 32,050,271 and
30,709,169 shares outstanding, respectively 962,058 921,825
Paid in capital in excess of par 69,763,986 62,668,886
Accumulated deficit (68,003,592) (62,101,952)
------------ ------------
2,722,646 1,488,816
Less: Common stock held in treasury, at par (551) (551)
------------ ------------
Total shareholders' equity 2,722,095 1,488,265
------------ ------------
Total liabilities and shareholders' equity $ 10,297,060 $ 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
June 30, June 30,
1997 1996
--------------------------------------------------------------------------------
Expenses
Research and development, net $ 1,482,657 $ 1,450,961
------------ ------------
Drug substance purchase -- --
Patents 99,614 69,016
General and administrative 611,276 563,972
Depreciation and amortization 71,850 76,749
------------ ------------
2,265,397 2,160,698
-------------------------------------------------------------------------------- ------------ ------------
Loss from operations (2,265,397) (2,160,698)
------------ ------------
Interest income, net of interest and other expense of $62,359 and
$26,082, respectively 127,742 98,145
-------------------------------------------------------------------------------- ------------ ------------
Net loss ($ 2,137,655) ($ 2,062,553)
-------------------------------------------------------------------------------- ------------ ------------
Dividend embedded in convertible preferred stock (see note 5) (1,275,274) --
Net loss applicable to common stockholders ($ 3,412,929) ($ 2,062,553)
============ ============
------------ ------------
Loss per share applicable to common stockholders ($ .11) ($ .07)
============ ============
Weighted average shares outstanding 31,671,717 29,219,969
------------ ------------
--------------------------------------------------------------------------------
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, June 30,
1997 1996
------------------------------------------------------------------------------------
Expenses
Research and development, net $ 2,664,257 $ 2,589,699
Drug substance purchase (see note 2) 569,981 --
Patents 132,002 121,386
General and administrative 1,249,809 1,101,111
Depreciation and amortization 142,420 163,082
------------ ------------
4,758,469 3,975,278
------------ ------------
------------------------------------------------------------------------------------
Loss from operations (4,758,469) (3,975,278)
------------ ------------
Interest income, net of interest and other expense of $66,758 and
$44,680, respectively 184,798 158,148
------------ ------------
------------------------------------------------------------------------------------
Net loss ($ 4,573,671) ($ 3,817,130)
------------ ------------
------------------------------------------------------------------------------------
Dividend embedded in convertible preferred stock (see note 5) ($ 1,275,274) --
Net loss applicable to common stockholders ($ 5,848,945) ($ 3,817,130)
============ ============
Net loss per share applicable to common stockholders ($ .19) ($ .13)
============ ============
------------------------------------------------------------------------------------
Weighted average shares outstanding 31,344,772 29,215,036
------------ ------------
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, June 30,
1997 1996
--------------------------------------------------------------------------
Cash flows from operating activities
Net loss ($4,573,671) ($3,817,130)
----------- -----------
Adjustments to reconcile net loss to net cash flow
provided by (used in) operating activities
Depreciation and amortization 142,420 163,082
--------------------------------------------------------------------------
Changes in operating assets and liabilities
Prepaid expenses and other current assets 60,059 (193,042)
Accounts payable (92,404) 108,181
Accrued expenses, wages and other liabilities 733,177 (222,846)
Prepaid royalties (143,333) (573,334)
Advances against future sales 1,000,000 2,122,859
----------- -----------
Total adjustments 1,699,919 1,404,900
----------- -----------
--------------------------------------------------------------------------
Net cash flows used in operating activities (2,873,752) (2,412,230)
----------- -----------
Cash flows from investing activities
(Purchases) disposal of fixed assets, net (42,656) (47,701)
----------- -----------
--------------------------------------------------------------------------
Net cash flows provided by (used in) investing activities (42,656) (47,701)
----------- -----------
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 (45,835) (68,178)
----------- -----------
--------------------------------------------------------------------------
Net cash flows provided by (used in) financing 5,761,665 (17,178)
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,845,257 (2,477,109)
--------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 5,132,906 7,442,791
----------- -----------
--------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 7,978,163 $ 4,965,682
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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 six-month period ended June 30, 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 or market value as there are currently
no alternative uses for such quantities of this drug substance.
6
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. Liquidity and Business Risks
The Company currently has no sources of recurring revenues and has incurred
operating losses since its inception. At June 30, 1997, the Company has an
accumulated deficit of $68,003,592 (unaudited). Such losses have resulted
principally from costs incurred in research and development and from
general and administrative expenses. The Company expects those 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 $8.0 million as of
June 30, 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 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
June 30, 1997, has provided the Company with $5 million in cash advances
against future sales.
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 & Lomb with certain specified
quantities of the active drug substance. Advances received through June 30,
1997 are reflected as a long term liability in the accompanying balance
sheet.
7
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
Bausch & Lomb collaborates in the development of products by making
available amounts up to 50% of the Company's Phase III clinical trial
costs. The Company has also agreed to reimburse Bausch & Lomb for certain
R&D expenses related to the development of the Company's products. As of
June 30, 1997, the Company has accrued $400,000 in such reimbursements. The
Company is also contingently liable to reimburse Bausch & Lomb for an
additional $400,000 of R&D expenses that are to be deducted from future
purchases of the active drug substance.
For the three month period and six month period ended June 30, 1997 and
1996, R&D expense reimbursements from Bausch & Lomb, net of the Company's
R & D expense obligations to Bausch & Lomb, were ($246,515) and $546,637,
and ($231,432) and $679,744, respectively. The net reimbursements are
included in 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 has issued
8
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
239,473 warrants to certain parties who assisted in the completion of the
private placement. The warrants vest March 31, 1998 and 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 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 second quarter of 1997, the Company issued 929,404 shares of its
common stock upon conversion of 985 shares of the Company's Series A
convertible preferred stock. The shares were issued at conversion prices
ranging from $0.93 per share to $1.37 per share. The Company also issued
17,857 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 $19,414.
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.
As of June 30, 1997, cumulative dividends in arrears on the Company's
outstanding Series A and Series B convertible preferred stock are $23,373
and $74,795, respectively. The dividends are payable in either cash or
common stock at the option of the Company.
In connection with the issuances of the Series A and B convertible
preferred stock, the Company was required to recognize in the EPS
calculation, the value of the conversion discount as a dividend to the
preferred stockholders. The dividend has been recognized in the EPS
calculation on a pro rata basis over the period beginning with issuance to
the date that conversion can occur. During the quarter ended June 30, 1997,
the Company recorded a preferred stock dividend of $1,275,274 on the
outstanding shares of Series A and B convertible preferred stock in
connection with the conversion discount.
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.
9
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto.
Results of Operations
Quarter ended June 30, 1997 and 1996
Total operating expenses increased $104,699, or 5%, from $2,160,698 in 1996 to
$2,265,397 in 1997 primarily due to an increase in research and development
costs, general and administrative expenses and patent costs.
Net research and development expenses increased by $31,696, or 2%, from
$1,450,961 in 1996 to $1,482,657 in 1997. The increase in R&D expense is due
mainly to increases in regulatory filing fees and R&D activities to advance the
manufacturing of drug substance, partially offset by a decrease in clinical
trial costs associated with the Company's NDA submissions.
Patent expenses increased by $30,598, or 44%, from $69,016 in 1996 to $99,614 in
1997 due to patent filings in various foreign countries.
General and administrative expense increased by $47,304, or 8%, from $563,972 in
1996 to $611,276 in 1997, due to certain administrative costs.
Depreciation and amortization expenses decreased by $4,899, or 6%, from $76,749
in 1996 to $71,850 in 1997, reflecting reduced depreciation expense relating to
the Alachua, Florida operation.
Interest income, net of interest and other expense, increased by $29,597, or
30%, from $98,145 in 1996 to $127,742 in 1997. Interest income increased as a
result of higher average cash balances partially offset by increased other
expenses.
Six Months ended June 30, 1997 and 1996
Total operating expenses increased $783,191, or 20%, from $3,975,278 in 1996 to
$4,758,469 in 1997 primarily due to the purchase of drug substance for the
manufacture of Lotemax(TM), as well as increases in general and administrative
expenses and research and development costs. Excluding the drug substance
purchase, operating expenses increased by $213,210, or 5% from $3,975,278 in
1996 to $4,188,488 in 1997.
Net research and development expenses increased by $74,558, or 3%, from
$2,589,699 in 1996 to $2,664,257 in 1997. The increase in R&D expense is due
mainly to increases in regulatory filing fees and R&D activities to advance the
manufacturing of drug substance, partially offset by a decrease in clinical
trial costs with the Company's NDA submissions.
10
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 increased by $10,616, or 9%, from $121,386 in 1996 to $132,002
in 1997. This increase is due to patent filings in various foreign countries
partially offset by the fact that the Company has retained in-house patent
counsel to undertake work previously executed by external patent attorneys.
General and administrative expenses increased by $148,698, or 14%, from
$1,101,111 in 1996 to $1,249,809 in 1997, due to certain administrative costs.
Depreciation and amortization expenses decreased by $20,662, or 13%, from
$163,082 in 1996 to $142,420 in 1997, reflecting reduced depreciation expense
relating to the Alachua, Florida operation.
Interest income, net of interest and other expense, increased by $26,650, or
17%, from $158,148 in 1996 to $184,798 in 1997. Interest income increased as a
result of higher average cash balances partially offset by increased other
expenses.
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 $6.1 million, including cash and cash
equivalents of $8.0 million, as of June 30, 1997. On March 31, 1997, the Company
completed a private placement of convertible preferred stock and warrants that
generated $6 million in gross proceeds. Management believes that existing cash
and cash equivalents combined with anticipated 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 product candidates and bring them to commercial markets.
In connection with the issuances of the Series A and B convertible preferred
stock, the
11
Company recognized in the EPS calculation, in compliance with the SECs position
on accounting for conversion discounts embedded in preferred stock, the value of
the conversion discount as a dividend to the preferred stockholders. The
dividend has been recognized in the EPS calculation on a pro rata basis over the
period beginning with issuance to the date that conversion can occur. During the
quarter ended June 30, 1997, the Company recorded a preferred stock dividend of
$1,275,274 on the outstanding shares of Series A and B convertible preferred
stock in connection with the conversion discount.
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 June 30, 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.
12
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
13
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 14, 1997 by: /s/ Shaun Marcus
-------------------
Shaun Marcus
Vice President - Finance
(Principal Accounting Officer)
14