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, 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 October 14, 1998, the Registrant had outstanding 39,040,772 shares of its
$.03 par value Common Stock.
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
September 30, December 31,
1998 1997
------------ ------------
Assets
Cash and cash equivalents $ 4,299,791 $ 4,423,389
Product sales and grants receivable, net 372,074 237,655
Inventory 1,869,285 1,804,627
Prepaid royalties 203,571 143,333
Prepaid expenses and other current assets 217,269 171,299
------------ ------------
Total current assets 6,961,990 6,780,303
Fixed assets, net 1,036,349 703,428
Prepaid royalties, net of current portion 435,934 573,334
Intangible assets, net 279,631 291,262
Other assets 76,989 73,514
------------ ------------
Total assets $ 8,790,893 $ 8,421,841
============ ============
Liabilities, Redeemable Convertible Preferred Stock and
Shareholders' Equity
Long term debt, current portion $ 11,260 $ 55,253
Accounts payable 572,507 2,576,968
Accrued expenses 874,548 809,869
Accrued wages and other compensation 500,444 401,285
Advances against future sales 1,439,557 1,000,000
------------ ------------
Total current liabilities 3,398,316 4,843,375
Advances against future sales, net of current portion 3,082,716 4,000,000
Other liabilities 100,000 100,000
------------ ------------
Total liabilities 6,581,032 8,943,375
------------ ------------
Redeemable Convertible Preferred Stock Series C
Redeemable Convertible Preferred Stock, with a
$1,000 liquidation preference, 2,500 and 0 shares
outstanding, respectively 2,044,483
------------ ------------
Shareholders' equity (deficit)
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
Common stock, $.03 par value; 60,000,000 shares authorized,
38,655,962 and 34,391,638 shares issued and outstanding
(excluding $551 in 1998 and 1997, held in Treasury)
in 1998 and 1997, respectively 1,159,678 1,031,197
Paid in capital in excess of par 75,547,399 70,516,913
Accumulated deficit (76,541,699) (72,069,727)
------------ ------------
Total shareholders' equity (deficit) 165,378 (521,534)
------------ ------------
Total liabilities, redeemable convertible preferred
stock and shareholders' equity (deficit) $ 8,790,893 $ 8,421,841
============ ============
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, September 30,
1998 1997
------------ ------------
Revenues
Product sales $90,743
License fee 1,663
------------ ------------
$92,406 --
Cost of Goods Sold 32,447 --
------------ ------------
Gross Margin 59,959 --
Expenses
Research and development, net 675,807 1,236,604
Selling, general and administration 552,466 528,984
Patents 55,675 56,027
Depreciation and amortization 64,002 72,898
------------ ------------
Total operating expenses 1,347,950 1,894,513
------------ ------------
Loss from operations (1,287,991) (1,894,513)
Other income (expenses):
Interest income, net 87,450 100,072
Other income (expenses), net (1,603) (8,056)
------------ ------------
Other income (expense), net 85,847 92,016
------------ ------------
Net loss before extraordinary gain (1,202,144) (1,802,497)
Extraordinary gain from forgiveness of debt,
(see note 4), net of $0 in income taxes -- 416,249
------------ ------------
Net loss (1,202,144) (1,386,248)
Less: Dividend embedded in convertible preferred stock -- (651,895)
Preferred stock dividends (62,500) (62,500)
------------ ------------
Net loss applicable to common shareholders ($1,264,644) ($2,100,643)
============ ============
Net loss per share applicable
to common stockholders - basic and diluted ($0.03) ($0.06)
------------ ------------
Weighted average shares outstanding 37,405,455 32,853,545
------------ ------------
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, September 30,
1998 1997
------------ ------------
Revenues
Product sales $983,899
License fee 351,663
------------ ------------
1,335,562 --
Cost of Goods Sold 372,299 --
------------ ------------
Gross Margin 963,263 --
Expenses
Research and development, net 2,738,259 4,189,687
Selling, general and administration 1,712,941 2,059,948
Patents 168,007 188,029
Depreciation and amortization 167,717 215,318
------------ ------------
Total operating expenses 4,786,924 6,652,982
------------ ------------
Loss from operations (3,823,661) (6,652,982)
Other income (expenses):
Interest income, net 260,445 286,461
Other income (expenses), net 27,412 (9,647)
------------ ------------
Other income (expense), net 287,857 276,814
------------ ------------
Net loss before extraordinary gain (3,535,804) (6,376,168)
Extraordinary gain from forgiveness of debt,
(see note 4), net of $0 in income taxes -- 416,249
------------ ------------
Net loss (3,535,804) (5,959,919)
Less: Dividend embedded in convertible preferred stock (642,648) (1,927,169)
Preferred stock dividends (231,399) (149,375)
------------ ------------
Net loss applicable to common shareholders ($4,409,851) ($8,036,463)
============ ============
Net loss per share applicable
to common stockholders - basic and diluted ($0.12) ($0.25)
------------ ------------
Weighted average shares outstanding 36,621,907 31,852,139
------------ ------------
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, September 30,
1998 1997
----------- -----------
Cash flows from operating activities
Net loss ($3,535,804) ($5,959,919)
----------- -----------
Adjustments to reconcile net loss to net
cash flow used in operating activities
Depreciation and amortization 167,717 215,318
Changes in operating assets and liabilities
Inventory (64,658)
Product sales and grants receivable (134,419) 158,518
Prepaid expenses and other current assets (45,970) (5,815)
Advanced royalties 77,162 (143,333)
Other assets (3,475) 118,388
Accounts payable (2,004,461) (473,486)
Accrued expenses & other liabilities 64,679 1,079,006
Accrued wages 99,159 (116,521)
----------- -----------
Total adjustments (1,844,266) 832,075
----------- -----------
Net cash flows used in operating activities (5,380,070) (5,127,844)
----------- -----------
Cash flows from investing activities
Purchases of fixed assets, net (489,007) (94,998)
----------- -----------
Net cash flows used in investing activities (489,007) (94,998)
----------- -----------
Cash flows from financing activities
Proceeds from issuances of common stock
and exercise of warrants, net 1,678,333 67,500
Proceeds from issuances of preferred stock, net 4,588,866 5,740,000
Advances against future sales, net (477,727) 1,000,000
Increase (decrease) in loans payable (43,993) (200,562)
----------- -----------
Net cash flows provided by financing activities 5,745,479 6,606,938
----------- -----------
Net increase (decrease) in cash and cash equivalents (123,598) 1,384,096
Cash and cash equivalents at beginning of year 4,423,389 5,132,906
----------- -----------
Cash and cash equivalents at end of period $4,299,791 $6,517,002
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
5
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 nine month period
ended September 30, 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 pharmaceutical company incorporated
under the laws of the State of Nevada and is engaged in the design, development
and commercialization of novel pharmaceutical products in various fields
including: site specific drugs for ophthalmic indications, neuroprotective
agents for treatment of central nervous system ("CNS") disorders, anticancer
compounds designed to improve efficacy while avoiding CNS and other related side
effects, and drug delivery systems, submicron emulsions ("SME") and emulsomes
for topical and systemic applications. The Company uses a variety of patented
and proprietary technologies to improve the efficacy and/or safety of drugs. Two
of the Company's compounds are being actively marketed while others are in
various stages of development, from preclinical to advanced clinical trials. On
March 9, 1998, the Company received approval for three separate New Drug
Applications ("NDA") from the U.S. Food and Drug Administration ("FDA"). These
approvals were for Lotemax(R) and Alrex(R). Lotemax received two approvals, one
for the treatment of steroid responsive inflammatory indications, including
uveitis and the other for post-operative inflammation. Alrex has been approved
for the treatment of seasonal allergic conjunctivitis. In conjunction with its
development efforts, the Company has in the past also undertaken research and
development contracts. The Company's administrative offices are located in
Iselin, New Jersey and conducts research and development through its wholly
owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.
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 inception. At
September 30, 1998, the Company has an accumulated deficit of $76,541,699
(unaudited). This deficit is primarily the result of costs incurred in research
and development and from selling, 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 $4.3 million as of September 30, 1998, combined with anticipated cash
inflows, including revenues expected to be derived from sales of Lotemax and
Alrex will be sufficient to support operations into the second 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 candidates.
6
3. Significant Accounting Policies
Revenue
Revenue from license fees and royalties are recognized when earned in accordance
with the underlying agreements. Sales revenue is recognized upon shipment of
products.
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 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 Financial Accounting Standards Board ("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.
7
4. Collaborative Agreements
In June 1995, the Company entered into a marketing agreement (the "Marketing
Agreement") with Bausch & Lomb Pharmaceuticals, Inc. ("Bausch & Lomb") to market
Lotemax, Alrex and a combination of loteprednol etabonate and the anti-infective
tobramycin ("LE-T") on an exclusive basis in the United States following receipt
of FDA approval. A second agreement, ("the New Territories Agreement"), signed
December 12,1996, extends Bausch & Lomb's rights to market these products in
Europe, Canada and other selected countries pending regulatory approval. The
Marketing Agreement also covers the Company's two other loteprednol
etabonate-based products, Alrex and a combination of loteprednol etabonate and
the anti-infective tobramycin ("LE-T"). Under the Marketing Agreement, Bausch &
Lomb will purchase the active drug substance (loteprednol etabonate) from the
Company. Through September 30, 1998, Bausch & Lomb has provided the Company with
$5 million in cash advances against future sales, of which approximately $4.5
million is outstanding at September 30, 1998. Another $1 million is due upon the
receipt of regulatory approval for LE-T in the United States. An additional $1.6
million in advances against future sales of Bausch & Lomb will be payable to the
Company following receipt of regulatory clearance in certain markets outside of
the United States. Bausch & Lomb is 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 advances expected to be recouped by Bausch
and Lomb over the upcoming twelve month period, based on management's estimate
of product sales to Bausch & Lomb in 1998 and 1999, has been presented as a
current liability in the accompanying balance sheet at September 30, 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 and the New Territories Agreement.
As part of its September, 1997 agreement with the University of Florida Research
Foundation (the "University"), the Company received a non-recurring license fee
of $350,000 during the quarter ended June 30,1998 in exchange for the transfer
of certain drug technology. Under terms of the agreement, the Company, during
the quarter ended September 30, 1997, returned rights to technologies the
Company previously ceased developing, and the University forgave $416,249 in
debts owed by the Company.
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.
In September 1998, the shareholders of the Company approved an increase in the
number of shares of common stock reserved for issuance under the 1997 Incentive
and Non-Qualified Stock Option Plan from 600,000 to 1,000,000.
In May 1998, the Company, under provisions of the 1997 Incentive and
Non-Qualified Stock Option Plan, issued options to employees, directors,
consultants and other key personnel for the purchase of 500,000 shares of common
stock. The options are exercisable over a ten-year period and will expire on May
18, 2008. The options will vest in four annual installments of 25% each on May
18, 1999, 2000, 2001 and 2002, respectively. The options are exercisable at a
strike price of $2.781 per share, which represents the closing market value of
the common stock on the date the options were awarded.
8
On February 4, 1998, the Company completed a private placement with
institutional investors of Series C Redeemable Convertible Preferred Stock
("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 into 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 the lower of
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") or $2.89 per share. Until converted into
common stock, the preferred stock has no voting rights. The warrants issued to
the investor and the finders are exercisable at prices ranging from $2.28 to
$2.67 per share, commencing one year after the closing for four and five year
periods. Under certain circumstances the holders of the Series C Convertible
Preferred Stock may require the Company to redeem the outstanding shares of the
Series C Convertible Preferred Stock.
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 were valued
at $68,624.
During the second quarter of 1998, the Company also issued 215,063 shares of
common stock upon conversion of 500 shares of its Series C Convertible Preferred
Stock.
During the third quarter of 1998, the Company issued 1,357,013 shares of common
stock upon conversion of 2,000 shares of its Series C Convertible Preferred
Stock.
During the first nine months of 1998, the Company issued 970,728 shares of its
common stock upon the exercise of warrants, and received consideration of
$1,678,334.
As of September 30, 1998, cumulative dividends in arrears on the Company's
outstanding Series C Convertible Preferred Stock are $162,775. The dividends are
payable in common stock of the Company.
In connection with the issuances of the Series A, B and C convertible preferred
stock, the Company was required to recognize, in its earnings per share ("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 earliest date that
conversion can occur. During the quarter ended September 30, 1998, the Company
recorded a preferred stock dividend of $0 ($651,895 for the quarter ended
September 30, 1997) on the outstanding shares of convertible preferred stock in
connection with the conversion discount.
9
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Quarters ended September 30, 1998 and 1997
Product sales commenced in May, 1998, and revenue totaled $90,743 for the
quarter ($0 for the quarter ended September 30, 1997). Third quarter sales
revenue reflects reorders from product wholesalers and distributors subsequent
to the filling of initial orders during the second quarter, and represented
about half of actual Lotemax and Alrex sales during the quarter. Inventory draw
down at wholesalers and distributors is expected to continue during the fourth
quarter of 1998, after which the Company believes its sales revenue will more
closely track the level of product sales.
Cost of goods sold for the quarter ended September 30, 1998 totaled $32,447 ($0
for the quarter ended September 30, 1997). Cost of goods sold includes a higher
than anticipated level of production costs incurred in the initial stages of
commercial production.
As part of the Company's efforts to achieve market recognition and acceptance
for its FDA approved products, the Company's marketing partner, Bausch & Lomb,
distributed large numbers of product samples to its customers. These samples
were in addition to the drug product sold by Bausch & Lomb to its customers.
Management believes that the distribution of samples is critically important to
the long term acceptance and use of the drug products but may have an adverse
short-term impact on the level of future sales of these products.
Total operating expenses decreased $546,563 or 29%, from $1,894,513 in 1997 to
$1,347,950 in 1998. The net decrease in operating expenses is primarily due to a
decrease in research and development expenses.
Net research and development expenses decreased by $560,797 or 45%, from
$1,236,604 in 1997 to $675,807 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, lower research and development expenditures on the opthalmic
drug products following receipt of FDA approval in the first quarter of 1998,
and lower clinical trial expenses in the third quarter of 1998 at the Company's
Israel facility.
Depreciation and amortization expenses decreased by $8,896, or 12%, from $72,898
in 1997 to $64,002 in 1998, reflecting reduced depreciation expense relating to
the Alachua, Florida operation.
Other income, net, decreased by $6,169, or 7%, from $92,016 in 1997 to $85,847
in 1998. Interest income decreased as a result of lower average cash balances.
Nine months ended September 30, 1998 and September 30, 1997
During the nine months ended September 30, 1998, the Company reported revenues
from sale of product for the first time. Product sales commenced in May,1998,
and revenue totaled $983,899 for the period ($0 for the period ended September
30, 1997). Additionally, the Company recorded license income of $350,000 for the
nine month ended September 30, 1998 ($0 for the nine months ended September 30,
1997). The license income was generated from a non-recurring payment received by
the Company in exchange for the transfer of certain drug technology.
Cost of goods sold for the nine months ended September 30, 1998 totaled $372,299
($0 for the nine months ended September 30, 1997). Cost of goods sold includes a
higher than anticipated level of direct production costs incurred in the initial
stages of commercial production.
As part of the Company's efforts to achieve market recognition and acceptance
for its FDA approved products, the Company's marketing partner, Bausch & Lomb,
distributed large numbers of product samples to its customers. These samples
were in addition to the drug product sold by Bausch & Lomb to its customers.
Management believes that the distribution of samples is critically important to
the long term acceptance and use of the drug products but may have an adverse
short-term impact on the level of future sales of these products.
Total operating expenses decreased $1,866,058 or 28%, from $6,652,982 in 1997 to
$4,786,924 in 1998. The net
10
decrease in operating expenses is primarily due to a decrease in research and
development expenses.
Net research and development expenses decreased by $1,451,428 or 35%, from
$4,189,687 in 1997 to $2,738,259 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, and a lower than anticipated level of research and
development expenditure in the Company's Israel facility.
Selling, general and administrative expenses decreased by $347,007 or 17 %, from
$2,059,948 in 1997 to $1,712,941 in 1998. The decrease is primarily due to costs
incurred by the Company during the first nine months of 1997 under marketing
agreements to supply Bausch & Lomb with certain specified quantities of
loteprednol etabonate ("LE"). Certain quantities of LE, totaling $598,385, were
purchased during the first nine months of 1997 for use in testing, manufacturing
and various marketing activities, and were charged to results of operations in
1997. 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.
Patent expenses decreased by $20,022 or 11%, from $188,029 in 1997 to $168,007
in 1998. This decrease is due in part to management's decision not to renew its
patent protection on certain patents owned by a third party.
Depreciation and amortization expenses decreased by $47,601 or 22%, from
$215,318 in 1997 to $167,717 in 1998, reflecting reduced depreciation expense
relating to the Alachua, Florida operation.
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 inception. The
Company 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 $3.6 million, including cash and cash
equivalents of $4.3 million, as of September 30, 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 proceeds generated from sales of Lotemax and Alrex by Bausch &
Lomb together with additional cash inflows from investment income and R&D grants
will be sufficient to support operations into the second 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 of $5 million from Bausch & Lomb as of September
30, 1998. Bausch & Lomb is 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.
11
Year 2000 Risk
The Company has completed its assessment of the potential impact of the year
2000 on the ability of the Company's computerized information systems to
accurately process information that may be date sensitive. Any of the Company's
programs that recognize a date using "00" as the year 1900 rather than the year
2000 could result in errors or systems failures. The Company currently believes
that the costs of addressing this issue will not have a material adverse impact
on the Company's financial position. The Company has not been able to complete
an assessment of any year 2000 issues that may effect third parties, including
the Company's current and prospective suppliers. The Company plans to devote all
resources required to resolve any significant third-party year 2000 compliance
problems in a timely manner. Any year 2000 compliance problems of the Company,
its customers or vendors could have a material adverse effect on the Company's
business, results of operations and financial condition.
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
At its Annual Meeting held on September 16, 1998, the stockholders of
the Company elected the following persons as directors of the Company
(each receiving the votes listed below), to hold office until the next
annual meeting of stockholders and until their successors are duly
elected and qualified: Haim Aviv (27,482,689 votes for and 254,039
votes withheld); E. Andrews Grinstead III (27,362,269 votes for and
253,789 votes withheld); Marvin Loeb (27,492,939 votes for and 243,789
votes withheld); Stephen Knight (27,266,269 votes for and 349,789
votes withheld); David Schlachet (27,492,939 votes for and 243,789
votes withheld); Mony Ben Dor (27,372,069 votes and 243,789 votes
withheld); and Georges Anthony Marcel (27,384,939 votes for and
351,789 votes withheld). The stockholders of the Company also voted in
favor (6,366,540 votes for, 1,095,244 votes against and 301,089
abstentions) of a resolution approving the issuance of certain shares
of the Company's Common Stock upon conversion of the Company's Series
C Convertible Participating Preferred Stock. Finally, the stockholders
of the Company voted in favor (26,541,904 votes for, 1,024,821 votes
against and 178,518 abstentions) of a resolution to adopt an amendment
to the Company's 1997 Incentive and Non-Qualified Stock Option Plan
increasing the number of shares authorized for issuance under the Plan
from 600,000 to 1,000,000.
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: November 4, 1998 by: /s/ Robert W. Cook
---------------------------
Robert W. Cook
Vice President - Finance
and Chief Financial Officer
14