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, 1998
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)
33 Wood Avenue South, Suite 466
Iselin, NJ 08830
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 603-3526
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 7, 1998, the Registrant had outstanding 36,663,797 shares of its $.03
par value Common Stock.
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
================================================================================
March 31, December 31,
1998 1997
Assets
Cash and cash equivalents $ 5,579,262 $ 4,423,389
Inventory 1,804,627 1,804,627
Grants and other receivables 198,957 237,655
Prepaid royalties 143,333 143,333
Prepaid expenses and other current assets 255,239 171,299
------------ ------------
Total current assets 7,981,417 6,780,303
Fixed assets, net 734,610 703,428
Prepaid royalties, net of current portion 573,334 573,334
Intangible assets, net 287,385 291,262
Other assets 74,379 73,514
------------ ------------
Total assets $ 9,651,125 $ 8,421,841
============ ============
Liabilities and Shareholders' Equity
Long term debt, current portion 42,077 55,253
Accounts payable 409,803 2,576,968
Accrued expenses 861,436 809,869
Accrued wages and other compensation 441,685 401,285
Advances against future sales 1,000,000 1,000,000
------------ ------------
Total current liabilities 2,755,002 4,843,375
Advances against future sales, net of current portion 4,000,000 4,000,000
Other liabilities 100,000 100,000
------------ ------------
Total liabilities 6,855,002 8,943,375
------------ ------------
Shareholders' equity
Preferred stock, $.03 par value, 1,250,000 shares authorized
Series B convertible, with a $1,000 liquidation preference,
0 and 2,755 shares outstanding, respectively -- 83
Series C convertible, with a $1,000 liquidation preference,
5,000 and 0 shares outstanding, respectively 150 --
Common stock, $.03 par value; 60,000,000 shares authorized,
36,265,119 and 34,391,638 shares issued and outstanding
(excluding $551 in 1998 and 1997, held in Treasury)
in 1998 and 1997, respectively 1,087,402 1,031,197
Paid in capital in excess of par 75,410,994 70,516,913
Accumulated deficit (73,702,422) (72,069,727)
------------ ------------
Total shareholders' (deficit) equity 2,796,124 (521,534)
------------ ------------
Total liabilities and shareholders' equity $ 9,651,125 $ 8,421,841
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
================================================================================
Three Months Ended
March 31, March 31,
1998 1997
------------ ------------
Expenses
Research and development, net $ 1,055,537 $ 1,325,815
Marketing expenses -- 569,981
Patents 49,631 32,388
General and administrative 532,873 494,318
Depreciation and amortization 50,339 70,570
------------ ------------
Total operating expenses 1,688,379 2,493,072
------------ ------------
Loss from operations (1,688,379) (2,493,072)
Other income (expenses):
Interest income 106,074 61,455
Other income (expenses), net 7,203 (4,399)
Interest expense (2,821) --
------------ ------------
Other income (expense), net 110,456 57,056
------------ ------------
Net loss ($ 1,577,923) ($ 2,436,016)
Less: Dividend embedded in convertible preferred stock ($ 590,248) ($ 156,110)
Preferred stock dividends ($ 106,399) ($ 18,250)
============ ============
Net loss applicable to common shareholders ($ 2,274,570) ($ 2,610,376)
============ ============
Net loss per share applicable
to common stockholders - basic and diluted ($ 0.06) ($ 0.08)
============ ============
Weighted average shares outstanding-basic and diluted 35,549,037 31,016,871
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
Pharmos Corporation
(Unaudited)
Consolidated Statements of Cash Flows
================================================================================
Three Months Ended
March 31, March 31,
1998 1997
------------ ------------
Cash flows from operating activities
Net loss ($ 1,577,923) ($ 2,436,016)
------------ ------------
Adjustments to reconcile net loss to net
cash flow used in operating activities
Depreciation and amortization 50,339 70,570
Changes in operating assets and liabilities
Grants receivable 38,698 --
Prepaid expenses and other current assets (83,940) 154,941
Advanced royalties -- (143,333)
Other assets (865) --
Accounts payable (2,167,165) 522,417
Accrued expenses 51,567 444,398
Accrued wages 40,400 --
------------ ------------
Total adjustments (2,070,964) 1,048,993
------------ ------------
Net cash flows used in operating activities (3,648,888) (1,387,023)
------------ ------------
Cash flows from investing activities
Purchases of fixed assets, net (77,644) (35,901)
------------ ------------
Net cash flows used in investing activities (77,644) (35,901)
------------ ------------
Cash flows from financing activities
Proceeds from issuances of common stock
and exercise of warrants, net 237,088 67,500
Proceeds from issuances of preferred stock, net 4,658,494 5,740,000
Advances against future sales, net -- 1,000,000
Increase (decrease) in loans payable (13,176) (14,166)
------------ ------------
Net cash flows provided by financing activities 4,882,405 6,793,334
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,155,873 5,370,411
Cash and cash equivalents at beginning of year 4,423,389 5,132,906
------------ ------------
Cash and cash equivalents at end of period $ 5,579,262 $ 10,503,316
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information pursuant to the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accrual adjustments, considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 1998, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998,
1. The Company
Pharmos Corporation (the "Company") is a bio-pharmaceutical company incorporated
under the laws of the state of Nevada and is engaged in the design and
development of novel pharmaceutical products in various fields including: site
specific drugs for ophthalmic indications, neuroprotective agents for treatment
of central nervous system ("CNS") disorders, systemic drugs designed to avoid
CNS related side effects, 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. On March 9, 1998, the Company received approval for two
separate New Drug Applications ("NDA") from the U.S. Food and Drug
Administration ("FDA"). These approvals were for Lotemax(TM) and Alrex(TM).
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. In
conjunction with its development efforts, the Company has also undertaken
research and development contracts in the past and has sold fine chemicals to
the pharmaceutical research community. The Company's administrative offices are
located in Iselin, New Jersey and conducts operations through its wholly owned
subsidiary, Pharmos, Ltd., in Rehovot, Israel.
2. Liquidity and Business Risks
The Company currently has had no sources of recurring revenues and has incurred
operating losses since its inception. At March 31, 1998, the Company has an
accumulated deficit of $73,702,422 (unaudited). Such losses have resulted
principally from costs incurred in research and development and from general and
administrative expenses. The Company had funded its operations through the use
of cash obtained principally from third party financing. Management believes
that cash and cash equivalents of $5.6 million as of March 31, 1998, combined
with anticipated cash inflows, including revenues expected to be derived from
sales of Lotemax and Alrex will be sufficient to support operations through
first quarter of 1999. The Company's success depends upon many factors that are
beyond the Company's immediate control, including market acceptance of Lotemax
and Alrex, competition, and the ability to obtain additional financing. 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. There can be no assurance that Lotemax or
Alrex will achieve market acceptance or that the Company will be successful in
obtaining additional financing or commercializing its product candidate.
3. Significant Accounting Policies
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.
In accordance with its obligations under the Marketing Agreements to supply
Bausch & Lomb with certain specified quantities of loteprednol etabonate ("LE"),
the active drug substance, the Company purchased quantities of LE and smaller
quantities of a key reagent required for the manufacture of LE in the amount of
$2,403,012. Certain quantities of LE, totaling $598,385 ($569,981 as of March
31, 1997) were purchased during 1997 for use in testing, manufacturing and
various marketing activities, and were charged to results of operations in 1997.
Purchases of $1,804,627 of LE which were made subsequent to the company being
advised by the FDA that LE was an approvable drug have been recorded as
inventory at March 31, 1998.
Reclassifications
Certain amounts for 1997 have been reclassified to conform to the fiscal 1998
presentation. Such reclassifications did not have an impact on the Company's
financial position or results of operations.
Recent Accounting Standards
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130")
On June 30, 1997, the FASB issued SFAS No. 130. This statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statement. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of a
statement of financial position.
This statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The adoption of SFAS No. 130 did not have a
material impact on the Company.
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise" ("SFAS 131")
In June of 1997, the FASB issued SFAS No. 131. This statement requires that
public business enterprises report certain information about operating segments
in complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods to shareholders. It also requires that
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. This statement
is effective for fiscal years beginning after December 15, 1997. The adoption
did not have a significant impact on the Company.
4. Collaborative Agreements
In June 1995, the Company entered into a marketing agreement (the "Marketing
Agreement") wit Bausch & Lomb Pharmaceuticals, Inc. ("Bausch & Lomb") to market
Lotemax, on an exclusive basis in the United States following receipt of FDA
approval. The Marketing Agreement also covers the Company's two other
Loteprednol etabonate-based products, which are referred to as Alrex and LE-T.
Under the Marketing Agreement, Bausch & Lomb will purchase the active drug
substance (loteprednol etabonate) from the Company. Through March 31, 1998,
Bausch & Lomb has provided the Company with $5 million in cash advances against
future sales. An additional $1million is due upon the receipt of regulatory
approval for LE-T in the United States. Bausch & Lomb will be entitled to
credits against future purchases or sales 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
advance expected to be recouped by Bausch and Lomb in 1998, based on
management's estimate of product sales to Bausch & Lomb in 1998, has been
presented as a current liability in the accompanying balance sheet at March 31,
1998 and December 31, 1997.
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.
5. Common and Preferred Stock Transactions
In January 1998, the shareholders of the Company approved the increase in the
number of authorized shares of common stock from 50,000,000 to 60,000,000 and
adopted the 1997 Incentive and Non-Qualified Stock Option Plan, which has
reserved for issuance up to 600,000 shares of common stock upon the exercise of
stock options to be granted to employees, directors, consultants and other key
personnel.
On February 4, 1998, the Company completed a private placement with
institutional investors of Series C Convertible Preferred Stock and warrants to
purchase 650,000 shares of common stock, generating gross proceeds of $5
million. The preferred stock carries a 5% premium payable in common stock, and
is convertible in to common shares of the Company 60 days subsequent to the date
of issuance. For the period ending 180 days after the date of issuance, the
conversion price is 90% of the average of the low trade prices of the Common
Stock for the five consecutive trading days ending on the day immediately prior
to the conversion date (the "Variable Conversion Price"). Following such period,
the conversion price is the lower of the Variable Conversion Price or 120% of
the average of the closing bid prices of the Common Stock for the trading days
beginning on the date which is 151 days, and ending on the date which is 180
days, following the date of issuance. Until converted into common stock, the
preferred stock has no voting rights. The warrants issued to the investors are
exercisable at prices ranging from $2.28 to $2.67 per share, commencing one year
after the closing for a three- year period.
During the first quarter of 1998, the Company issued 1,704,978 shares of its
common stock upon conversion of 2,755 shares of the Company's Series B
Convertible Preferred Stock. The shares were issued with conversion prices
ranging from $1.41 per share to $1.78 per share. The Company also issued 34,904
shares of common stock in payment of dividends of the Series B Convertible
Preferred stock. As of the date of such issuances, these dividends are valued at
$68,624.
During the first quarter of 1998, the Company issued 133,599 shares of its
common stock upon the exercise of warrants, and received consideration of
$237,088.
As of March 31, 1998, cumulative dividends in arrears on the Company's
outstanding Series C convertible
preferred stock are $37,775. The dividends are payable in common stock of the
Company. Additionally, the Company has recorded a Preferred Stock Dividend in
the amount of $68,624 ($18,250 as of March 31, 1997), representing the value of
the common shares issued during the first quarter of 1998 upon conversion of the
remaining outstanding balance of 5% Series B Convertible Preferred Stock.
In connection with the issuances of the Series A, B and C 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 March 31, 1998, the Company recorded a preferred stock dividend of
$590,248 ($156,110 as of March 31, 1997) on the outstanding shares of
convertible preferred stock in connection with the conversion discount.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Quarters ended March 31, 1998 and 1997
Total operating expenses decreased $804,693 or 32%, from $2,493,072 in 1997 to
$1,688,379 in 1998. The decrease is primarily due to bulk material purchases of
loteprednol etabonate ("LE"), the active drug substance of Lotemax and Alrex,
made in the 1997 quarter. Reduced research and development expenses in 1998 also
contributed to lower total operating expenses.
Net research and development expenses decreased by $270,278, or 20%, from
$1,325,815 in 1997 to $1,055,537 in 1998. The decrease in R&D expense is
primarily due to the closure of the company's R&D facilities in Florida in the
fourth quarter of 1997, partially offset by increased spending on Phase II human
clinical studies of the Company's dexanabinol (HU-211) product.
Marketing expenses decreased by $569,981, or 100%, from $569,981 in 1997 to $0
in 1998. In accordance with its obligations under the Marketing Agreements to
supply Bausch & Lomb with certain specified quantities of the active
drug-substance, the Company purchased bulk quantities of LE in the amount of
$569,981 during the first quarter of 1997. These purchases were expensed in 1997
since the material is to be used in testing, manufacturing and various marketing
programs.
Patent expenses increased by $17,243, or 53%, from $32,388 in 1997 to $49,631 in
1998. This increase is due in part to the timing of completion of certain patent
applications.
General and administrative expenses increased by $38,555 or 8 %, from $494,318
in 1997 to $532,873 in 1998. The increase is primarily due to costs associated
with the commencement of marketing of Lotemax and Alrex. In March 1998, the
Company, together with Bausch & Lomb Pharmaceuticals, Inc., announced the
receipt of approval from the Food and Drug Administration (FDA) to manufacture
and market Lotemax and Alrex.
Depreciation and amortization expenses decreased by $20,231, or 29%, from
$70,570 in 1997 to $50,339 in 1998, reflecting reduced depreciation expense
relating to the Alachua, Florida operation.
Other income, net, increased by $53,400, or 94%, from $57,056 in 1997 to
$110,456 in 1998. Interest income increased as a result of higher average cash
balances and net foreign exchange transaction gains.
Liquidity and Capital Resources
The Company currently has no sources of recurring revenues, 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 $5.2 million, including cash and cash
equivalents of $5.6 million, as of March 31, 1998. On February 4, 1998 the
Company completed a $5 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 and
proceeds from sales of the drug substance for Lotemax and Alrex to Bausch & Lomb
will be sufficient to support operations through the first quarter of 1999. 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. The
Company's success depends upon many factors that are beyond the Company's
immediate control, including market acceptance of Lotemax and Alrex,
competition, and the ability to obtain financing. There can be no assurance that
Lotemax or Alrex will achieve market acceptance or that the Company will be
successful in obtaining additional financing or commercializing product
candidates.
Pursuant to the U.S. Marketing agreement with Bausch & Lomb the Company has
received cumulative advances from Bausch & Lomb as of March 31, 1998 of $5
million. Bausch & Lomb will be entitled to recoup the advances by way of credits
from future sales of Lotemax, Alrex 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.
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
Reports on Form 8-K
The Company's Current Report on Form 8-K, dated February 4, 1998, filed pursuant
to Section 13 of the Exchange Act.
The Company's Current Report on Form 8-K, dated March 10, 1998, filed pursuant
to Section 13 of the Exchange Act.
Exhibits
None
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 12, 1998 by: /s/ Robert W. Cook
------------------
Robert W. Cook
Vice President - Finance and Chief
Financial Officer