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, 1999
Commission file number 0-11550
Pharmos Corporation
(Exact name of registrant as specified in its charter)
Nevada 36-3207413
(State or other jurisdiction of (IRS Employer Id. No.)
incorporation or organization)
99 Wood Avenue South, Suite 301
Iselin, NJ 08830
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 452-9556
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
As of May 1, 1999, the Registrant had outstanding 41,762,776 shares of its $.03
par value Common Stock.
Part I. Financial Information
Item 1 Financial Statements
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
------------ ------------
Assets
Cash and cash equivalents $3,133,331 $3,452,916
Inventory 1,681,582 1,727,096
Grants and other receivables 397,719 550,057
Prepaid royalties 270,127 259,488
Prepaid expenses and other current assets 204,834 206,793
------------ ------------
Total current assets 5,687,593 6,196,350
Fixed assets, net 1,222,263 1,181,030
Prepaid royalties, net of current portion 338,409 366,152
Intangible assets, net 233,107 244,738
Other assets 94,742 78,400
------------ ------------
Total assets $7,576,114 $8,066,670
============ ============
Liabilities and Shareholders' Equity
Accounts payable $513,301 $936,899
Accrued expenses 888,319 679,737
Accrued wages and other compensation 494,631 456,575
Advances against future sales 1,908,738 1,836,231
------------ ------------
Total current liabilities 3,804,989 3,909,442
Advances against future sales, net of current portion 2,391,231 2,591,023
Other liabilities 100,000 100,000
------------ ------------
Total liabilities 6,296,220 6,600,465
------------ ------------
Shareholders' equity
Preferred stock, $.03 par value, 1,250,000 shares authorized
Series C convertible, 600 and 1,500 shares outstanding, respectively
(liquidation preference of $600,000 and $1,500,000 respectively) 18 45
Common stock, $.03 par value; 60,000,000 shares authorized,
41,527,212 and 34,391,638 shares issued and outstanding
(excluding $551 in 1999 and 1998, held in Treasury)
in 1999 and 1998, respectively 1,247,201 1,193,452
Paid in capital in excess of par 79,221,601 78,051,783
Accumulated deficit
(79,188,926) (77,779,075)
------------ ------------
Total shareholders' (deficit) equity 1,279,894 1,466,205
------------ ------------
Commitments and contingencies
Total liabilities and shareholders' equity $7,576,114 $8,066,670
============ ============
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,
1999 1998
------------ ------------
Revenues
Product sales $332,377
Cost of Goods Sold 89,258
------------
Gross Margin 243,119
------------
Expenses
Research and development, net 933,674 $1,055,537
Selling, general and administrative 550,936 532,873
Patents 35,905 49,630
Depreciation and amortization 81,335 50,339
------------ ------------
Total operating expenses 1,601,850 1,688,379
------------ ------------
Loss from operations (1,358,731) (1,688,379)
Other income (expense):
Interest income 33,700 106,074
Other income (expense), net (16,177) 7,203
Interest expense (1,369) (2,821)
------------ ------------
Other income, net 16,154 110,456
------------ ------------
Net loss (1,342,577) (1,577,923)
Less: Dividend embedded in convertible preferred stock (590,248)
Preferred stock dividends (16,829) (106,399)
------------ ------------
Net loss applicable to common shareholders ($1,359,406) ($2,274,570)
============ ============
Net loss per share applicable
to common stockholders - basic and diluted ($0.03) ($0.06)
============ ============
Weighted average shares outstanding 40,180,840 35,549,037
============ ============
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,
1999 1998
----------- -----------
Cash flows from operating activities
Net loss ($1,342,577) ($1,577,923)
Adjustments to reconcile net loss to net
cash flow used in operating activities
Depreciation and amortization 81,335 50,339
Changes in operating assets and liabilities
Inventory 45,514 --
Accounts receivable 267,264 --
Grants receivable (114,927) 38,698
Prepaid expenses and other current assets 1,959 (83,940)
Advanced royalties 17,104 --
Other assets (16,341) (865)
Accounts payable (423,597) (2,167,165)
Accrued expenses 208,582 51,567
Advances against future sales, net (127,285) --
Accrued wages 38,055 40,400
----------- -----------
Total adjustments (22,337) (2,070,964)
----------- -----------
Net cash flows used in operating activities (1,364,914) (3,648,888)
Cash flows from investing activities
Purchases of fixed assets, net (110,937) (77,644)
----------- -----------
Net cash flows used in investing activities (110,937) (77,644)
Cash flows from financing activities
Proceeds from issuances of common stock
and exercise of warrants, net -- 237,088
Proceeds from issuances of preferred stock, net -- 4,658,494
Proceeds from exercise of equity credit line 1,156,266 --
Increase (decrease) in loans payable -- (13,176)
----------- -----------
Net cash flows provided by financing activities 1,156,266 4,882,405
Net increase (decrease) in cash and cash equivalents (319,585) 1,155,873
Cash and cash equivalents at beginning of year 3,452,916 4,423,389
----------- -----------
Cash and cash equivalents at end of period $3,133,331 $5,579,262
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information pursuant to the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accrual adjustments,
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 1999, are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
1. The Company
Pharmos Corporation (the "Company") is a pharmaceutical company
specializing in the modification of existing molecules through proprietary
techniques to reduce undesirable side effects and/or enhance efficacy. The
Company is developing pharmaceuticals in various fields including: site
specific drugs for ophthalmic indications, neuroprotective agents with a
novel mechanism of action for the treatment of central nervous system
("CNS") disorders, newly designed molecules to treat cancer, and
emulsion-based products for topical and systemic applications. The Company
has administrative offices in Iselin, New Jersey and conducts operations
through its wholly owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.
In March 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 AlrexTM. Lotemax has been approved
for the treatment of several ocular inflammatory indications, including
uveitis, and for post-operative inflammation. Alrex has been approved for
the treatment of seasonal allergic conjunctivitis.
2. Liquidity and Business Risks
While the Company has generated revenue through the sale of its approved
products in the market, it has incurred operating losses since its
inception. At March 31, 1999, the Company has an accumulated deficit of
$79,188,926. Such losses have resulted principally from costs incurred in
research and development and from general and administrative expenses. The
Company has funded its operations through the use of cash obtained
principally from third party financing. Management believes that cash and
cash equivalents of $3.1 million as of March 31, 1999, combined with
anticipated cash inflows from revenues derived from sales of Lotemax and
Alrex and the obtaining of a $10 million equity line of credit on December
10, 1998 will be sufficient to support operations through 2000. As of March
31, 1999, $8.2 million remained available under the equity line of credit.
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.
5
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
3. Significant Accounting Policies
Revenue recognition
Sales revenue is recognized upon shipment of products to customers, less
allowances for estimated returns and discounts. License fees and royalties
are recognized when earned in accordance with the underlying agreements.
Revenue for contracted research and development services is recognized as
performed. Revenue from these contracts is recognized as costs are incurred
(as defined in the contract), generally direct labor and supplies plus
agreed overhead rates. Any advance payments on contracts are deferred until
the related services are performed.
All of the Company's revenues are derived from one Customer.
Inventories
Inventories consist of loteprednol etabonate, the compound used in the
Company's products, Lotemax and Alrex, and is stated at the lower of cost
or market with cost determined on a weighted average basis.
Reclassifications
Certain amounts for 1998 have been reclassified to conform to the fiscal
1999 presentation. Such reclassifications did not have an impact on the
Company's financial position or results of operations.
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 and Alrex, on an exclusive basis in the United
States following receipt of FDA approval. The Marketing Agreement also
covers the Company's other loteprednol etabonate based product, LE-T. Under
the Marketing Agreement, Bausch & Lomb will purchase the active drug
substance (loteprednol etabonate) from the Company. A second agreement,
covering Europe, Canada and other selected countries, was signed in
December 1996 ("the New Territories Agreement").
Through March 31, 1999, Bausch and Lomb has provided the Company with $5
million in cash advances against future sales, of which approximately $4.3
million was outstanding at March 31, 1999. An additional $1 million is due
from Bausch & Lomb upon the receipt of regulatory approval for LE-T in the
United States. Bausch & Lomb is entitled to recoup the advances by
withholding certain amounts against payments for future purchases of the
active drug substance, based on the advances made, until all the advances
have been repaid. The Company may be obligated to repay such advances if it
is unable to supply Bausch & Lomb with certain specified quantities of the
active drug substance. The portion of advances expected to be recouped by
Bausch and Lomb during the following twelve months, based on management's
estimate of product sales to Bausch & Lomb, has been presented as a current
liability in the accompanying balance sheet at March 31, 1999 and December
31, 1998.
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.
6
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
5. Common and Preferred Stock Transactions
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 Series
C convertible 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. 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"). Until converted into
common stock, the Series C convertible 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 were initially able
to require the Company to redeem the outstanding shares of the Series C
convertible preferred stock. In December 1998, the Company received a
waiver of the redemption features from the holder of the Series C
convertible preferred stock.
During 1998, the Company issued 2,299,957 shares of common stock upon
conversion of 3,500 shares of its Series C convertible preferred stock.
During the first quarter of 1999, the Company issued 859,585 shares of
common stock upon conversion of its Series C convertible preferred stock.
As of March 31, 1999 and December 31, 1998, cumulative dividends on the
Company's outstanding Series C convertible preferred stock were $190,500
and $173,671, respectively. The dividends are payable in common stock of
the Company at the fair market value on the date of conversion.
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. The Company
recorded a preferred stock dividend of $0 and $590,248 for the three
months ended March 31, 1999 and 1998, respectively, on the outstanding
shares of convertible preferred stock in connection with the conversion
discount.
The Company entered into a Private Equity Line of Credit Agreement (the
"Credit Agreement") as of December 10, 1998, and as amended on December 18,
1998, with Dominion Capital Fund, Ltd., which subsequently assigned its
rights to Centennial Parkway LLC. (the "Investor"). Pursuant to the terms
of the Credit Agreement, the Company may, from time to time during a
specified term, cause the Investor to purchase up to an aggregate of
$10,000,000 of the Company's common stock, par value $.03 per share (the
"Common Stock"). The price per share of Common Stock to be paid by the
Investor is to be determined at the time of each purchase according to a
specified formula which is based upon the average closing bid price of the
Common Stock on the principal trading exchange or market for the Common
Stock (the "Principal Market") over a prescribed, five-day period. With
each purchase of Common Stock, the Investor is also to receive warrants
exercisable for a number of shares of Common Stock equal to ten percent of
the number of shares of Common Stock purchased at an exercise price per
share equal to 125% of the closing bid price of the Common Stock on the
Principal Market on a specified date.
During the first quarter of 1999, under terms of the Credit Agreement, the
Company issued 933,233 shares of its Common Stock and warrants to purchase
86,162 shares of its Common Stock to the Investor for consideration of
$1,158,000, net of fees. The warrants have exercise prices ranging from
$1.41 to $1.99 per share and expire in the first quarter of 2002.
7
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
6. Segment and Geographic Information
The Company is active in one business segment: designing, developing,
selling and marketing pharmaceutical products. The Company maintains
development operations in the United States and Israel. The Company's
selling operations are maintained in the United States.
Geographic information for the three months ending March 31, 1999 and 1998
are as follows:
1999 1998
----------- -----------
Net revenues
United States $332,377 --
Israel -- --
----------- -----------
$332,377 --
----------- -----------
Net loss
United States ($1,308,455) ($1,577,866)
Israel (34,122) (57)
----------- -----------
($1,342,577) ($1,577,923)
=========== ===========
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Quarters ended March 31, 1999 and 1998
Product sales revenue totaled $332,377 for the quarter ended March 31, 1999.
Product sales commenced in the second quarter of 1998, following FDA approval of
the Company's Lotemax and Alrex ophthalmic products.
Cost of goods sold for the quarter ended March 31, 1999 totaled $89,258. Cost of
goods sold includes the cost of the active drug substance and licensing costs.
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 $86,529 or 5%, from $1,688,379 in 1998 to
$1,601,850 in 1999. The decrease is primarily due lower research and development
expenses, offset by increased general and administrative expenses and
depreciation expense.
Net research and development expenses decreased by $ 121,863 or 12%, from $
1,055,537 in 1998 to $ 933,674 in 1999. The decrease in R&D expense is primarily
due to an increased level of research grants in 1999 and the absence of research
costs associated with Lotemax and Alrex, which were approved by the FDA in March
1998, partially offset by increased spending on Phase II human clinical studies
of the Company's dexanabinol (HU-211) product.
General and administrative expenses increased by $ 18,063 or 3 %, from $532,873
in 1998 to $550,936 in 1999. The increase is primarily due to higher spending on
investor relations activities offset by reduced insurance and travel costs.
Patent expenses decreased by $ 13,725, or 28%, from $ 49,630 in 1998 to $ 35,905
in 1999. This decrease is due principally to the timing of various patent costs.
Depreciation and amortization expenses increased by $30,996, or 62%, from
$50,339 in 1998 to $81,335 in 1999, reflecting increased depreciation expense
relating to laboratory equipment purchases in 1998.
Other income, net, decreased by $ 94,302, or 85%, from $ 110,456 in 1998 to $
16,154 in 1999. Interest income decreased as a result of lower average cash
balances.
9
Liquidity and Capital Resources
The Company had no sources of recurring revenues until the commencement of
product sales in April 1998, and has incurred operating losses since its
inception. At March 31, 1999, the Company has an accumulated deficit of
$79,188,926. The Company has financed its operations with public and private
offerings of securities, advances and other funding pursuant to a marketing
agreement with BLP, research contracts, license fees, royalties and sales, and
interest income.
The Company had working capital of $1.9 million, including cash and cash
equivalents of $3.1 million, as of March 31, 1999. On February 4, 1998, the
Company completed a private placement of convertible preferred stock and
warrants that generated $5 million in gross proceeds. On December 10, 1998, the
Company obtained a $10 million equity line of credit with a single institutional
investor. As of March 31, 1999, $8.2 million remained available under the equity
line of credit.
Management believes that the equity line of credit, existing cash and cash
equivalents combined with anticipated cash inflows from investment income, R&D
grants and proceeds from sales of the drug substance for Lotemax and Alrex to
BLP will be sufficient to support operations through 2000. The Company is
continuing to actively pursue various funding options, including additional
equity offerings, strategic corporate alliances, business combinations and the
establishment of product related research and development limited partnerships,
to obtain the additional financing that would be 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 additional financing. There can be no assurance that the
Company will be successful in obtaining additional financing or commercializing
its product candidates, or that Lotemax or Alrex will achieve market acceptance.
Statements made in this document related to the development, commercialization
and market expectations of its drug products, to the establishment of corporate
collaborations, and to the Company's operational projections are forward-looking
and are made pursuant to the safe harbor provisions of the Securities Litigation
Reform Act of 1995. Such statements involve risks and uncertainties which may
cause results to differ materially from those set forth in these statements.
Among the factors that could result in a materially different outcome are the
inherent uncertainties accompanying new product development, action of
regulatory authorities and the results of further trials. Additional economic,
competitive, governmental, technological, marketing and other factors identified
in Pharmos' filings with the Securities and Exchange Commission could affect
such results.
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 13, 1999 by: /s/ Robert W. Cook
--------------------------------
Robert W. Cook
Vice President Finance and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
12