SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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 311
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 |_|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|.
As of July 29, 2004 the Registrant had outstanding 88,246,781 shares of its $.03
par value Common Stock.
Part I. Financial Information
Item 1 Financial Statements
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
June 30, December 31,
2004 2003
------------- -------------
Assets
Cash and cash equivalents $ 41,086,668 $ 49,369,250
Restricted cash 13,521,538 11,192,312
Research and development grants receivable 1,397,932 681,245
Debt issuance costs 331,527 967,402
Prepaid expenses and other current assets 488,152 585,020
------------- -------------
Total current assets 56,825,817 62,795,229
Fixed assets, net 1,108,715 1,255,096
Restricted cash -- 4,907,686
Other assets 18,946 20,589
Debt issuance costs -- 29,471
------------- -------------
Total assets $ 57,953,478 $ 69,008,071
============= =============
Liabilities and Shareholders' Equity
Accounts payable $ 2,547,557 $ 3,005,461
Accrued expenses 1,121,923 1,751,200
Warrant liability 1,024,736 823,029
Accrued wages and other compensation 1,157,730 1,486,529
Convertible debentures, net 12,656,502 13,702,412
------------- -------------
Total current liabilities 18,508,448 20,768,631
Other liability 10,000 10,000
Convertible debentures, net -- 4,773,339
------------- -------------
Total liabilities 18,518,448 25,551,970
------------- -------------
Commitments and contingencies
Shareholders' equity
Preferred stock, $.03 par value, 1,250,000 shares authorized,
none issued and outstanding -- --
Common stock, $.03 par value; 150,000,000 shares authorized,
88,235,531 and 85,554,016 issued 2,647,492 2,567,047
Deferred compensation (104,676) (66,660)
Paid in capital 169,122,661 161,960,059
Accumulated deficit (132,230,021) (121,003,919)
Treasury stock, $.03 par value; 14,189 shares (426) (426)
------------- -------------
Total shareholders' equity 39,435,030 43,456,101
------------- -------------
Total liabilities and shareholders' equity $ 57,953,478 $ 69,008,071
============= =============
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,
2004 2003
------------ ------------
Expenses
Research and development, net of grants $ 2,497,008 $ 2,317,564
Selling, general and administrative 1,712,634 752,032
Depreciation and amortization 150,276 168,577
------------ ------------
Total operating expenses 4,359,918 3,238,173
------------ ------------
Loss from operations (4,359,918) (3,238,173)
Other expense
Interest income 138,902 48,905
Other income (expense) 13,975 (6,205)
Derivative loss (34,624) (1,115,911)
Interest expense (1,043,636) (2,735)
------------ ------------
Other expense, net (925,383) (1,075,946)
------------ ------------
Net loss ($ 5,285,301) ($ 4,314,119)
============ ============
Net loss per share
- basic and diluted ($ .06) ($ .07)
============ ============
Weighted average shares outstanding - basic and diluted 88,017,455 64,842,460
============ ============
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,
2004 2003
------------ ------------
Expenses
Research and development, net of grants $ 5,797,938 $ 6,356,629
Selling, general and administrative 2,750,345 1,604,931
Depreciation and amortization 300,070 340,193
------------ ------------
Total operating expenses 8,848,353 8,301,753
------------ ------------
Loss from operations (8,848,353) (8,301,753)
Other expense
Interest income 302,849 895,416
Other income (expense), net 8,684 (24,721)
Derivative loss (201,707) (1,072,546)
Interest expense (2,487,575) (309,720)
------------ ------------
Other expense, net (2,377,749) (511,571)
------------ ------------
Net loss ($11,226,102) ($ 8,813,324)
============ ============
Net loss per share
- basic and diluted ($ .13) ($ .14)
============ ============
Weighted average shares outstanding - basic and diluted 87,770,205 61,590,867
============ ============
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,
2004 2003
------------ ------------
Cash flows from operating activities
Net loss ($11,226,102) ($ 8,813,324)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 300,070 340,193
Interest expense on convertible debentures converted into
common stock 10,555 --
Reversal of beneficial conversion feature -- (786,000)
Change in the value of warrants 201,707 1,072,546
Amortization of debt discount and issuance costs 2,116,649 53,342
Amortization of fair value of change in convertible debt -- 68,808
Stock options issuances below fair market value 35,984 26,664
Option expense - consultant compensation 411,371 16,040
Changes in operating assets and liabilities
Research and development grants receivable (716,687) (26,459)
Prepaid expenses and other current assets 96,868 (16,519)
Other assets 1,643 (10,250)
Accounts payable (457,904) (137,385)
Accrued expenses (629,277) (728,551)
Accrued wages and other compensation (328,799) 512
------------ ------------
Net cash used in operating activities (10,183,922) (8,940,383)
------------ ------------
Cash flows from investing activities
Purchases of fixed assets (153,689) (32,011)
Decrease in restricted cash 2,578,460 2,199,999
------------ ------------
Net cash provided by investing activities 2,424,771 2,167,988
------------ ------------
Cash flows from financing activities
Proceeds from issuance of common stock
and exercise of options and warrants, net 5,015,033 11,630,215
Repayment of convertible debentures (5,538,464) (3,500,000)
------------ ------------
Net cash (used in) provided by financing activities (523,431) 8,130,215
------------ ------------
Net (decrease) increase in cash and cash equivalents (8,282,582) 1,357,820
Cash and cash equivalents at beginning of year 49,369,250 19,579,287
------------ ------------
Cash and cash equivalents at end of period $ 41,086,668 $ 20,937,107
============ ============
Supplemental information:
Interest paid $ 356,221 $ 525,448
Supplemental disclosure of non-cash financing activities:
Conversion of convertible debt $ 2,000,000 $ --
Issuance of warrants in connection with the private placement $ -- $ 393,707
The accompanying notes are an integral part of these consolidated financial
statements.
5
Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements
Basis of Presentation
The accompanying unaudited 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 and six month periods
ended June 30, 2004, are not necessarily indicative of the results that
may be expected for the year ended December 31, 2004.
1. The Company
Pharmos Corporation (the Company or Pharmos) is a bio-pharmaceutical
company that discovers and develops new drugs to treat a range of
neuro-inflammatory disorders. The Company has a portfolio of drug
candidates in clinical trials and under development, as well as discovery,
preclinical and clinical capabilities. The Company has executive offices
in Iselin, New Jersey and conducts research and development through its
wholly owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.
2. Liquidity and Business Risks
The Company incurred operating losses since its inception through the year
ended December 31, 2000 and was not profitable in 2002, 2003 and the first
two quarters of 2004. During 2001, the Company recorded net income due to
the nonrecurring sale of its ophthalmic product line. At June 30, 2004,
the Company has an accumulated deficit of $132.2 million. Such losses have
resulted principally from costs incurred in research and development and
from general and administrative expenses. The Company has financed its
operations with public and private offerings of securities, advances and
other funding pursuant to a marketing agreement with Bausch & Lomb, grants
from the Chief Scientist of Israel, research contracts, license fees,
royalties and sales, and interest income. Management believes that the
current cash and cash equivalents of $41.1 million as of June 30, 2004,
will be sufficient to support the Company's continuing operations beyond
June 30, 2005.
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 additional financing to
continue the development of its products and bring them to commercial
markets. Should the Company be unable to raise adequate financing or
generate revenue in the future, long-term operations will need to be
scaled back or discontinued.
3. Significant Accounting Policies
Reclassifications
Certain amounts in the consolidated financial statements of the prior
period have been reclassified to conform to the current period
presentation for comparative purposes.
Research and development grants receivable
As of June 30, 2004 and December 31, 2003, research and development grant
receivables consist of grants for research and development relating to
certain projects. Participations and grants in respect of research and
development expenses are recognized as a reduction of research and
development expenses as the related costs are incurred.
Restricted cash
In connection with the September 2003 Convertible Debenture offering, the
terms of the agreement required the Company to establish an escrow
account. The escrow account is shown as Restricted Cash on the Company's
6
Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements
balance sheet and will be released to the Company generally in proportion
to the amount of Convertible Debentures converted into common shares or in
connection with the repayment of the debt that began in March 2004. The
terms of the debentures further stipulates that the restricted cash can
only be used to fund acquisitions upon the approval of the investors. The
short-term balance represents debt repayment due within 12 months. During
the first quarter of 2004, one of the investors converted a total of $2
million plus interest into shares of common stock. As part of the escrow
agreement, $2 million of restricted cash was released to the Company
during April 2004. In addition, the Company repaid the debenture holders
approximately $5.5 million from its cash and cash equivalents account
during the six months ended June 30, 2004. The escrow agreement stipulates
that the Company repay the debenture holders the first $5.0 million from
its cash and cash equivalents. Therefore, the remaining $500,000 is not
subject to the escrow agreement and has been classified as unrestricted
cash.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable or that the useful lives of these
assets are no longer appropriate. Each impairment test is based on a
comparison of the undiscounted cash flow to the recorded value of the
asset. Subsequent impairment assessments could result in future impairment
charges. Any impairment charge would result in the reduction in the
carrying value of long-lived assets to its fair market value and would
reduce our operating results in the period in which the charge arose.
Equity based compensation
The Company accounts for its employee stock option plans in accordance
with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense related to employee stock options is
recorded if, on the date of grant, the fair value of the underlying stock
exceeds the exercise price. The Company adopted the disclosure-only
requirements of SFAS No. 123, " Accounting for Stock-Based Compensation",
which allows entities to continue to apply the provisions of APB Opinion
No. 25 for transactions with employees and provide pro forma operating
results and pro forma per share disclosures for employee stock grants as
if the fair-value-based method of accounting in SFAS No. 123 as amended by
SFAS 148 has been applied to these transactions. Options issued to
non-employees are valued using the fair value methodology under SFAS 123.
The following table illustrates the effect on net loss and net loss per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation. The estimated fair
value of each option is calculated using the Black-Scholes option-pricing
model.
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ------------ -----------
Net (loss) as reported ($5,285,301) ($4,314,119) ($11,226,102) ($8,813,324)
Add: Stock-based employee
compensation expense included in
reported net loss 17,952 13,332 35,984 26,664
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards (353,102) (260,027) (706,204) (498,402)
----------- ----------- ------------ -----------
Pro forma net (loss) ($5,620,451) ($4,560,814) ($11,896,322) ($9,285,062)
=========== =========== ============ ===========
Earnings per share:
Basic and diluted - as reported ($ .06) ($ .07) ($ .13) ($ .14)
Basic and diluted - pro forma ($ .06) ($ .07) ($ .13) ($ .15)
7
Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements
For disclosure purposes under SFAS No. 123, the fair value of each option
grant was estimated on the date of grant using the Black-Scholes option
valuation model with the following weighted-average assumption:
Three months ended, June 30 Six months ended, June 30
2004 2003 2004 2003
---- ---- ---- ----
Risk-free interest rate 3.07 - 3.36% 3.15 % 3.07 - 3.36% 2.88 - 3.15%
Expected lives (in years) 5 5 5 5
Dividend yield 0% 0% 0% 0%
Expected volatility 88% 75% 88% 75%
New Accounting Pronouncement
In March 2004, the Emerging Issues Task Force issued EITF 03-6,
"Participating Securities and the Two-Class Method under FASB Statement
No. 128". This statement provides additional guidance on the calculation
and disclosure requirements for earnings per share. The FASB concluded in
EITF 03-6 that companies with multiple classes of common stock or
participating securities, as defined by SFAS No. 128, calculate and
disclose earnings per share based on the two-class method. The adoption of
this statement does not have an impact to the Company's financial
statement presentation as the Company is in a loss position.
4. Net Loss Per Common Share
Basic and diluted net loss per common share was computed by dividing the
net loss for the period by the weighted average number of shares of common
stock issued and outstanding. In accordance with the requirements of
Statement of Financial Accounting Standards No. 128, common stock
equivalents have been excluded from the calculation of diluted net loss
per common share, as their inclusion would be antidilutive.
The following table summarized the equivalent number of common shares
assuming the related securities that were outstanding as of June 30, 2004
and 2003 had been converted.
2004 2003
---------- ---------
Stock options 4,697,207 3,976,830
Warrants 7,288,308 6,004,530
Shares issuable upon exercise of convertible debt 3,332,064 --
---------- ---------
Total potential dilutive securities not included
in loss per share 15,317,579 9,981,360
========== =========
5. 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(R) and Alrex(R), on an exclusive basis in the
United States following receipt of FDA approval. The Marketing Agreement
also covered the Company's other loteprednol etabonate based product,
LE-T. Under the Marketing Agreement, Bausch & Lomb purchased 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). In October 2001,
the Company sold its ophthalmic product line, including the Company's
rights under the above agreements to Bausch & Lomb.
Sale of Ophthalmic Product line
In October 2001, Bausch & Lomb purchased all rights to the Company's
loteprednol etabonate (LE) ophthalmic product line for cash and assumption
of certain ongoing obligations. The Company received gross proceeds of
approximately $25 million in cash for its rights to Lotemax(R) and
Alrex(R), prescription products that were
8
Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements
manufactured and marketed by Bausch & Lomb under a 1995 Marketing
Agreement with the Company. Bausch & Lomb also acquired future extensions
of LE formulations including LE-T, a product candidate that was submitted
to the FDA for marketing approval in September 2003. Bausch & Lomb will
pay the Company additional fees depending on the approval date with the
FDA as follows: If the earlier of (a) commercial launch or (b) 6 months
after FDA approval of LE-T (the Triggering Event) occurs before January 1,
2002 the Company was initially to receive $15.4 million. That amount has
been decreasing by $90,000 for each month of 2002 and 2003 to a minimum
amount of $13.3 million (if the Triggering Event occurs on December 31,
2003). Since the Triggering Event had not occurred as of June 30, 2004,
the Company and Bausch & Lomb will negotiate in good faith to agree upon
the amount of additional consideration that Bausch & Lomb will pay the
Company but not to exceed $13.3 million. The Company can not be assured
that FDA approval of LE-T will be obtained. The patent owner of LE-T is
entitled to 11% of the additional fees that the Company receives as a
result of the contingent payment, which will be netted against any
additional gain recorded.
Under the terms of the October 2001 agreement, which is subject to
renegotiation, upon FDA approval the Company may receive a milestone
payment of up to $10 million if the following occurs: (a) net sales of
LE-T in the first 12 months after commercial launch are at least $7.5
million and (b) net sales of LE-T in the second twelve consecutive months
after commercial launch (i) exceed $15.0 million and (ii) are greater than
net sales in (a) above. Future payments will be included in the Company's
income when all contingencies are resolved. The patent owner is also
entitled to 14.3% of the additional fees that the Company receives as a
result of these contingent payment. Pharmos agreed to pay up to $3.75
million of the costs of developing LE-T, of which $600,000 was deducted
from the purchase price paid by Bausch & Lomb in October 2001. Another
$1.59 million was paid to Bausch & Lomb in October 2003, leaving an
additional $1.56 million as Pharmos' share of these research and
development related LE-T expenses. This amount is included in accounts
payable at June 30, 2004 and December 31, 2003 and represents the maximum
amount Pharmos owes Bausch & Lomb for their project development under the
terms of the 2001 agreement.
6. Common Stock Transactions
In the first six months of 2004, the Company issued 9,493 shares of common
stock with gross proceeds of $28,998 pursuant to the Pharmos Corporation
2001 Employee Stock Purchase Plan. In the first six months of 2004, the
Company issued 252,302 of common stock with gross proceeds of $383,753
from the exercise of options by employees and former employees. The
Company incurred a non-cash charge of approximately $403,000 for extending
the stock option exercise period to its former chief financial officer in
return for consulting services.
In December 2003, the Company completed a public offering. Pharmos sold
10,500,000 common shares at a purchase price of $2.75 per share for gross
proceeds of $28,875,000. The stock was offered in a firm commitment
underwriting pursuant to an existing shelf registration statement. The net
proceeds of this offering to Pharmos were approximately $26.9 million.
During January 2004, the underwriters exercised their over-allotment
option in full to purchase an aggregate of 1,575,000 shares of Pharmos'
common stock at a purchase price of $2.75 per share, less the underwriting
discount. Total net proceeds from the offering, including $4.07 million
from the exercise of the over-allotment option, were approximately $31.0
million.
On May 30, 2003, the Company completed a private placement to sell common
shares and warrants to ten investors, generating total gross proceeds of
$8.0 million. The Company filed a registration statement with the
Securities and Exchange Commission to permit resales of the common stock
by the investors. The private placement offering was completed by issuing
9,411,765 shares of common stock at a price of $0.85 per share
(representing an approximate 20% discount to a ten-day trailing average of
the closing price of the stock ending May 28, 2003) and 3,264,706 warrants
at an exercise price of $1.40 per share, which includes 441,177 placement
agent warrants. Issuance costs of approximately $525,000 in cash and
$240,000 for the value of the placement agent warrants were recorded as a
debit to additional paid in capital. The Company calculated the value of
the warrants, including the placement agent warrants, being approximately
$1,773,000 under the Black-Scholes option pricing method (assumption:
volatility 75%, risk free rate 3.15% and zero dividend yield). In the
first six months of 2004, two investors exercised 247,058 warrants to
purchase the Company's common stock, resulting in approximately $345,882
gross proceeds to the Company. As of June 30, 2004, seven of the twelve
warrant holders (ten investors and two placement agents) have exercised
1,947,058 warrants totaling approximately $2,726,000.
9
Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements
On March 4, 2003, the Company completed a private placement to sell common
shares and warrants to eight investors, generating total gross proceeds of
$4.3 million under a shelf registration. The private placement offering
was completed by issuing 5,058,827 shares of common stock at a price of
$0.85 per share (the fair market value on March 4, 2003) and 1,141,182
warrants at an exercise price of $1.25 per share, which includes 129,412
placement agent warrants. Issuance costs totaled approximately $127,000 in
cash and $45,000 for the value of the placement agent warrants. As of June
30, 2004, five of the nine warrant holders (eight investors and one
placement agent) have exercised 823,533 warrants totaling approximately
$1,029,416. There were no exercises during 2004. According to EITF 00-19,
the issued warrants meet the requirements of and will be accounted for as
a liability since registered shares must be delivered upon settlement.
Initially, the Company calculated the value of the warrants, including the
placement agent warrants, to be approximately $394,000 under the
Black-Scholes option-pricing method (assumption: volatility 75%, risk free
rate 2.88% and zero dividend yield). The value of the warrants will be
marked to market each reporting period until exercised or expiration and
amounted to $1,024,736 at June 30, 2004. Upon exercise of each of the
warrants, the related liability is reclassified to additional
paid-in-capital. A total of $936,154 was recorded as a credit to
additional paid-in-capital since inception as a result of exercises and
the recording of the initial value of the warrants.
7. Private Placement
On September 26, 2003, the Company completed a private placement of
convertible debentures and warrants to six institutional investors,
generating total gross proceeds of $21.0 million. Five million dollars of
the proceeds will be used for working capital purposes, and $16.0 million
will be available to fund acquisitions upon the approval of the investors.
The convertible debentures are convertible into common stock of the
Company at a fixed price of $4.04, 205% above the closing bid price of the
stock for the five days preceding the closing date. The debentures, which
bear an interest rate of 4%, will be redeemed in 13 substantially equal
monthly increments beginning March 31, 2004. In general, amounts converted
into shares of Pharmos common stock will reduce the monthly redemption
amount proportionately. The $16.0 million earmarked for acquisition
activity will be held in escrow until used or repaid. In connection with
the financing, the Company also issued 5,514,705 three-year warrants
(including 514,705 placement agent warrants) to purchase 5,514,705 shares
of common stock at an exercise price of $2.04 per share. Total issuance
costs related to the financing were approximately $1,229,000 in cash and
$434,000 for the value of the placement agent warrants. The issuance costs
allocated to the warrants were recorded as a reduction to additional paid
in capital. The placement agent warrants were capitalized and are being
amortized over the life of the debt. The Company calculated the value of
the warrants at the date of the transaction, including the placement agent
warrants, being approximately $4,652,877 under the Black-Scholes
option-pricing method (assumption: volatility 75%, risk free rate 1.59%
and zero dividend yield). The Company allocated the $19.34 million in net
proceeds between the convertible debentures and the warrants based on
their fair values. The Company is reporting the debt discount of
approximately $3.5 million as a direct reduction to the face amount of the
debt in accordance with APB 21. The discount will accrete over the life of
the outstanding debentures. Total accretion of the debt discount in 2004
was approximately $1,543,570. The issuance costs allocated to the
convertible debentures of approximately $1.4 million are being deferred
and amortized to interest expense over the life of the debt. During the
first quarter of 2004, one of the investors converted a total of $2
million plus interest into 497,662 shares of common stock. In conjunction
with this conversion, the relating unamortized debt discount and issuance
costs totaling $267,912 was reclassified to additional paid in capital. As
of June 30, 2004, approximately $7.5 million has been either repaid or
converted into common stock of the Company. As of June 30, 2004, one of
the six warrant holders exercised 100,000 warrants totaling approximately
$204,000.
As of June 30, 2004, the Convertible Debenture repayment schedule was as
follows:
2004 2005 Total
---- ---- -----
Principal $ 8,615,384 $ 4,846,154 $ 13,461,538
Applicable Discount: (736,612) (68,424) (805,036)
----------- ----------- ------------
Total, net $ 7,878,772 $ 4,777,730 $ 12,656,502
=========== =========== ============
10
Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements
Emerging Issues Task Force Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, required the Company to compute the Beneficial
Conversion Feature (BCF) of the convertible debt from the private
placement of September 2000. The BCF must be capitalized and amortized
from the closing date until the earliest date that the investors have the
right to convert the debt into common shares. The BCF in 2000 was computed
at approximately $1.8 million, all of which has been amortized and
included as interest expense in the year ending December 31, 2000. Two of
the eight investors of the March 2003 private placement were also holders
of the remaining $3.5 million September 2000 Convertible Debenture
offering, which was ultimately redeemed for approximately $4.0 million,
which includes unpaid and accrued interest. The Convertible Debenture
holders chose not to convert the existing debt to common equity. Instead,
the Convertible Debenture holders opted to be repaid early and participate
in a new round of financing. For the two investors, the sale of the common
stock and warrants reduced the conversion price of the outstanding debt,
which resulted in an additional BCF charge of approximately $2.7 million
during the first quarter ending March 31, 2003. The total related BCF
charge since inception of the debt of $3.5 million was redeemed in the
first quarter of 2003 as a result of the debt being repaid. The impact of
the reversal of the total BCF charge since inception of the debt resulted
in a net credit of $786,000 recorded as interest income during the first
quarter ending March 31, 2003. This accounting treatment is in accordance
with EITF 00-27.
8. 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 and six months ending June 30, 2004
and 2003 are as follows:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss
United States ($5,189,102) ($ 4,179,834) ($11,013,302) ($8,530,608)
Israel (96,199) (134,285) (212,800) (282,716)
----------- ------------ ------------ -----------
($5,285,301) ($ 4,314,119) ($11,226,102) ($8,813,324)
=========== ============ ============ ===========
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion and analysis of our financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. The Company has based these forward-looking statements on our
current expectations and projections of future events. Such statements reflect
our current views with respect to future events and are subject to unknown
risks, uncertainty and other factors that may cause results to differ materially
from those contemplated in such forward looking statements. In addition, the
following discussion should be read in conjunction with the consolidated
financial statements and the related notes thereto included elsewhere in this
report.
Through the end of the third quarter of 2001, the Company generated revenues
from product sales but continues to be dependent upon external financing,
interest income, and research and development contracts to pursue its intended
business activities. The Company had not been profitable from inception through
2000, was not profitable in 2002, 2003, and the first two quarters of 2004, and
has incurred a cumulative net loss of $132.2 million through June 30, 2004. In
2001, the Company recorded a profit due to the sale of its ophthalmic product
line to Bausch & Lomb. Losses have resulted principally from costs incurred in
research activities aimed at identifying and developing the Company's product
candidates, clinical research studies, the write-off of purchased research and
development, and general and administrative expenses. The Company expects to
incur additional losses over the next several years as the Company's research
and development and clinical trial programs continue. The Company's ability to
achieve profitability, if ever, is dependent on its ability to develop and
obtain regulatory approvals for its product candidates, to enter into agreements
for product development and commercialization with strategic corporate partners
and contract to develop or acquire the capacity to manufacture and sell its
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
In mid-March 2004, the Company completed enrollment of U.S. and international
TBI patients in its pivotal, Phase III clinical trial of dexanabinol.
Approximately six months after the completion of enrollment, Pharmos anticipates
completing the clinical trial, as the trial protocol requires periodic
examinations and testing of patients enrolled in the trials during the six
months following their initial treatment. Several months after the completion of
the last patient last follow-up visit, Pharmos plans to unblind the study and
announce the main study results around year-end.
In March 2003, the Company initiated a double-blinded placebo controlled Phase
II trial of dexanabinol as a preventive agent against the cognitive impairment
(CI) that can follow coronary surgery involving cardiopulmonary bypass (CS-CPB)
operations. In mid-July 2004, the Company completed enrollment of 202 CS-CPB
patients in its Phase II clinical trial of dexanabinol. The clinical protocol
calls for a final follow-up examination of each patient three months after
enrollment. Allowing time for completion of patient records and preparation of
the database, Pharmos expects to unblind the data and announce the study results
during the fourth quarter of 2004.
Our development of dexanabinol for TBI involves only one pivotal Phase III
clinical trial. Assuming a successful clinical trial, Pharmos plans to submit a
New Drug Application (NDA) to the FDA. The FDA may grant an unconditional
approval or may grant approval conditioned upon further post-marketing testing.
The FDA could also conclude that further clinical testing to confirm the data
Pharmos obtained from its pivotal Phase III trial would be required for approval
of the NDA. A requirement by the FDA for further significant clinical testing
after the completion of the current pivotal Phase III clinical trial or a
rejection of our NDA would have a material adverse effect on Pharmos and its
operations.
Pharmos is advancing the lead candidate from its proprietary platform of
CB2-selective compounds through advanced stages of preclinical development.
Pending successful completion of ongoing preclinical studies, the Company plans
to initiate human testing of PRS-211,375 during the first half of 2005 by
studying its potential to treat pain and other indications.
12
Results of Operations
Quarters ended June 30, 2004 and 2003
Total operating expenses increased by $1,121,745 or 35%, to $4,359,918 in 2004
from $3,238,173 in 2003. In mid-March 2004, the Company completed enrollment of
U.S. and international traumatic brain injury patients in its pivotal, Phase III
clinical trial of dexanabinol. During February 2003, the FDA accepted the
Company's Investigational New Drug application, which allowed the Company to
begin U.S. patient enrollment in the trial. Last year at this time, the Company
incurred a significant amount of resources to commence the clinical trial in the
U.S. and to further support international sites. The decrease in the clinical
trial expenses offset increased activities with consultants and professional
fees along with higher salaries and benefits from additional headcount. The
Company incurred higher expenditures relating to the scale up of dexanabinol
synthesis. Also, the Company incurred higher consulting and professional fees in
connection with an increase in accounting fees, including Sarbanes-Oxley
compliance, and legal services in 2004. The Company incurred a non-cash charge
for extending the stock option exercise period to its former chief financial
officer in return for consulting services.
The Company considers major research & development projects to be those projects
that have reached at least Phase II level of clinical development. The Company's
major project is the development of dexanabinol for the treatment of severe
traumatic brain injury (TBI), which has completed patient enrollment in Phase
III testing in the U.S., Europe, Australia and Israel. During the second quarter
of 2004, the gross cost of the TBI project was $2.1 million. Total costs since
the TBI project entered Phase II development in 1996 through June 30, 2004 were
$40.3 million. The principal costs of completing the project include collection
and evaluation of the data, production of the drug substance and drug product,
commercial scale-up, and management of the project. The primary uncertainties in
the completion of the project are the results of the study upon its conclusion,
and the Company's ability to produce or secure production of finished drug
product under current Good Manufacturing Practice conditions for sale in
countries in which marketing approval has been obtained, as well as the
resources required to generate sales in such countries. Should the uncertainties
delay completion of the project on the current timetable, the Company may
experience additional costs that cannot be accurately estimated. If the Phase
III trial of dexanabinol for the treatment of severe traumatic brain injury is
successfully completed, the Company can expect to begin to earn revenues upon
marketing approval as early as 2006; however, should our product candidate
require additional clinical trials creating additional financial and time
burdens or should the product fail to achieve FDA or other regulatory approvals,
or fail to generate commercial sales, it would have a material adverse affect on
our business.
In addition, during 2003, the Company initiated a Phase II trial of dexanabinol
as a preventive agent against the cognitive impairment (CI) that can follow
coronary surgery involving cardiopulmonary bypass (CS-CPB) that was approved by
Israel's Ministry of Health. Patient enrollment was completed in mid-July 2004.
During the second quarter of 2004, the gross cost of patients undergoing CS-CPB
was $344,503. Total costs since the CS-CPB project entered Phase II development
in 2003 through June 30, 2004 were $1.5 million.
Gross expenses for other research and development projects in early stages of
development for the second quarters of 2004 and 2003 were $481,292 and $382,522,
respectively. Total research and development expenses, net of grants, for the
second quarters of 2004 and 2003 were $2,497,008 and $2,317,564, respectively.
The Company recorded research and development grant receivables from the Office
of the Chief Scientist of Israel's Ministry of Industry and Trade of $890,889
and $1,076,214 during the second quarters of 2004 and 2003, respectively, which
reduced the research and development expenses.
Selling, general and administrative expenses increased by $960,602, or 128%, to
$1,712,634 in 2004 from $752,032 in 2003. The majority of the increase in
selling, general and administrative expenses is due to higher professional fees,
salaries, and insurance fees by $703,759, $138,579, and $50,119, respectively,
in the quarter compared to the second quarter 2003. The higher professional fees
in 2004 are attributed to increased accounting fees, preparation of
Sarbanes-Oxley compliance, earlier timing of the Company's annual
13
shareholder meeting and a non-cash charge of approximately $403,000 for
extending the stock option exercise period to the Company's former chief
financial officer. Insurance renewals were higher reflecting insurance industry
trends.
Depreciation and amortization expenses decreased by $18,301, or 11%, from
$168,577 in 2003 to $150,276 in 2004. The decrease is due to some fixed assets
becoming fully depreciated.
Other expense, net, decreased by $150,563 from $1,075,946 in 2003 to $925,383 in
2004. Interest expense increased by $1,040,901 to $1,043,636 in 2004 from $2,735
in 2003. The increase is due to outstanding convertible debentures of
approximately $12 million that were not present at June 30, 2003. During the
quarter, the Company recorded in other income royalties of $1,285 per the
licensing agreement with Herbamed, Ltd, a company controlled by Dr. Haim Aviv,
the Company's CEO. Interest income increased by $89,997, or 184%, to $138,902 in
2004 from $48,905 in 2003 as a result of a higher average cash balance.
Six Months ended June 30, 2004 and 2003
Total operating expenses increased by $546,600 or 7%, to $8,848,353 in 2004 from
$8,301,753 in 2003. In mid-March 2004, the Company completed enrollment of U.S.
and international traumatic brain injury patients in its pivotal, Phase III
clinical trial of dexanabinol. During February 2003, the FDA accepted the
Company's Investigational New Drug application, which allowed the Company to
begin U.S. patient enrollment in the trial. Last year at this time, the Company
incurred a significant amount of resources to commence the clinical trial in the
U.S. and to further support international sites. The decrease in the clinical
trial expenses offset increased activities with consultants and professional
fees along with higher salaries and benefits from additional headcount. The
Company incurred higher expenditures relating to the scale up of dexanabinol
synthesis. Also, the Company incurred higher consulting and professional fees in
connection with an increase in accounting fees, including Sarbanes-Oxley
compliance, and legal services in 2004. The Company incurred a non-cash charge
for extending the stock option exercise period to its former chief financial
officer in return for consulting services.
The Company considers major research & development projects to be those projects
that have reached at least Phase II level of clinical development. The Company's
major project is the development of dexanabinol for the treatment of severe TBI,
which has completed patient enrollment in Phase III testing in the U.S., Europe,
Australia and Israel. During the first six months of 2004, the gross cost of the
TBI project was $4.9 million. Total costs since the TBI project entered Phase II
development in 1996 through June 30, 2004 were $40.3 million. The principal
costs of completing the project include collection and evaluation of the data,
production of the drug substance and drug product, commercial scale-up, and
management of the project. The primary uncertainties in the completion of the
project are the results of the study upon its conclusion, and the Company's
ability to produce or secure production of finished drug product under current
Good Manufacturing Practice conditions for sale in countries in which marketing
approval has been obtained, as well as the resources required to generate sales
in such countries. Should the uncertainties delay completion of the project on
the current timetable, the Company may experience additional costs that cannot
be accurately estimated. If the Phase III trial of dexanabinol for the treatment
of severe traumatic brain injury is successfully completed, the Company can
expect to begin to earn revenues upon marketing approval as early as 2006;
however, should our product candidate require additional clinical trials
creating additional financial and time burdens or should a product fail to
achieve FDA or other regulatory approvals, or fail to generate commercial sales,
it would have a material adverse affect on our business.
In addition, during 2003, the Company initiated a Phase II trial of dexanabinol
as a preventive agent against the cognitive impairment (CI) that can follow
coronary surgery involving cardiopulmonary bypass (CS-CPB) that was approved by
Israel's Ministry of Health. Enrollment of patients undergoing CS-CPB in the
trial was completed in July 2004. During the six months of 2004, the gross cost
of patients undergoing CS-CPB was
14
$685,255. Total costs since the CS-CPB project entered Phase II development in
2003 through June 30, 2004 were $1.5 million.
Gross expenses for other research and development projects in earlier stages of
development for the first six months of 2004 and 2003 were $925,064 and
$865,803, respectively. Total research and development expenses, net of grants,
for the first six months of 2004 and 2003 were $5,797,938 and $6,356,629,
respectively. The Company recorded research and development grant receivables
from the Office of the Chief Scientist of Israel's Ministry of Industry and
Trade of $1,707,145 and $1,076,215 during the first six months of 2004 and 2003,
respectively, which reduced the research and development expenses.
Selling, general and administrative expenses increased by $1,145,414, or 71%, to
$2,750,345 in 2004 from $1,604,931 in 2003. The majority of the increase in
selling, general and administrative expenses is due to higher professional fees,
salaries, and insurance fees by $668,288, $254,466, and $100,517, respectively,
in the first six months compared to the same period in 2003. The higher
professional fees in 2004 are attributed to increased accounting fees,
preparation of Sarbanes-Oxley compliance, earlier timing of the Company's annual
shareholder meeting and a non-cash charge of approximately $403,000 for
extending the stock option exercise period to the Company's former chief
financial officer. Insurance renewals were higher reflecting insurance industry
trends.
Depreciation and amortization expenses decreased by $40,123, or 12%, from
$340,193 in 2003 to $300,070 in 2004. The decrease is due to some fixed assets
becoming fully depreciated.
Other expense, net, increased by $1,866,178 from $511,571 in 2003 to $2,377,749
in 2004. Interest expense increased by $2,177,855 to $2,487,575 in 2004 from
$309,720 in 2003. The 2004 interest expense is based on six months of interest
associated with the remaining balance of the $21.0 million September 2003
Convertible Debenture financing as compared to three months of interest expense
on the remaining $3.5 million September 2000 Convertible Debentures, which were
ultimately retired during the first quarter of 2003. In accordance with Emerging
Issues Task Force Issue No. 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios
(BCF), the Company recorded a charge of $1.8 million which was fully amortized
at December 31, 2000 in connection with the issuance of convertible debt with a
favorable conversion feature. In accordance with EITF 00-27, a net credit of
$786,000 was recorded as interest income during the first quarter of 2003 to
reverse the BCF previously recorded which was associated with the remaining
balance of the September 2000 Convertible Debenture offering with a face amount
of $3.5 million which was not converted. During the first six months of 2004,
the Company recorded as other income royalties of $4,754 per the licensing
agreement with Herbamed, Ltd, a company controlled by Dr. Haim Aviv, the
Company's CEO. Interest income decreased by $592,567 or 66% from $895,416 in
2003 to $302,849 in 2004. Included in interest income is the impact of the BCF
of $786,000 in 2003.
Liquidity and Capital Resources
While the Company recorded revenues from 1998 until the third quarter of 2001
from the sale of its approved products, it has incurred cumulative operating
losses since its inception and had an accumulated deficit of $132.2 million at
June 30, 2004. The Company has financed its operations with public and private
offerings of securities, advances and other funding pursuant to a marketing
agreement with Bausch & Lomb, research contracts, license fees, royalties and
sales, the sale of a portion of our New Jersey State Net Operating Loss
carryforwards, and interest income. Should the Company be unable to raise
adequate financing or generate revenue in the future, operations will need to be
scaled back or discontinued.
15
The following table describes the Company's liquidity and financial position on
June 30, 2004, and on December 31, 2003:
June 30, 2004 December 31, 2003
Working capital $ 38,317,369 $ 42,026,598
Cash and cash equivalents $ 41,086,668 $ 49,369,250
Short-term convertible debentures, net $ 12,656,502 $ 13,702,412
Long-term convertible debentures, net $ 0 $ 4,773,339
Current working capital position
As of June 30, 2004, the Company had working capital of $38.3 million consisting
of current assets of $56.8 million and current liabilities of $18.5 million.
This represents a decrease of $3.7 million from its working capital of $42.0
million on current assets of $62.8 million and current liabilities of $20.8
million as of December 31, 2003. This decrease in working capital of $3.7
million was principally due to cash used in support of the Company's operations.
Current and future liquidity position
Management believes that cash and cash equivalents of $41.1 million as of June
30, 2004, will be sufficient to support the Company's continuing operations
beyond June 2005. 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 additional financing to continue the
development of its products and bring them to commercial markets.
Cash and restricted cash
At June 30, 2004, cash and cash equivalents, including restricted cash of $13.5
million totaled $54.6 million. At December 31, 2003 cash and cash equivalent,
including restricted cash of $16.1 million totaled $65.5 million. This decrease
in cash of $10.9 million was principally due to cash used in the Company's
operations. The cash, cash equivalents and restricted cash will be used to
finance future growth, capital expenditures and repayment of debt.
As part of the September 2003 financing, the Company received a total of $16.0
million of restricted cash held in escrow, which will remain in escrow until
either the Company's convertible debentures are converted into common shares of
the Company by the investor or by the Company, or such funds are repaid by the
Company or are used to fund acquisition(s) approved by the investors. To date,
approximately $7.5 million of the original $21.0 million in convertible
debentures has either been converted into common shares of the Company's stock
or repaid.
Operating activities
Net cash used in operating activities for the first two quarters of 2004 was
$10.2 million compared to $8.9 million for the first two quarters of 2003. The
increase is due principally to the higher expenses related to the completed
enrollment of U.S. and international TBI patients in its pivotal Phase III
clinical trial of dexanabinol.
Capital expenditures
Our capital expenditures for property, plant and equipment for the first six
months of 2004 and 2003 totaled approximately $154,000 and $32,000, respectively
for normal replacements and improvements.
16
Financing activities
During the first quarter of 2004, one of the investors from the September 2003
Convertible Debentures private placement converted a total of $2 million plus
interest into 497,662 shares of common stock of the Company. As part of the
escrow agreement, $2 million of restricted cash was released to the Company
during April 2004. As of June 30, 2004, the Company repaid or converted
approximately $7.5 million of the September 2003 Convertible Debentures. The
remaining Convertible Debenture balance of $13.5 million will be repaid in equal
monthly installments by March 2005.
Executive stock trading program
During April 2004, Pharmos Corporation's President and Chief Operating Officer,
Dr. Gad Riesenfeld, and one of its directors, Dr. Elkan Gamzu, separately
adopted pre-arranged stock trading plans in accordance with guidelines specified
by Rule 10b5-1 under the Securities Exchange Act of 1934.
Rule 10b5-1 permits officers and directors of public companies to adopt
pre-determined plans for selling specified amounts of stock. The plans may be
entered into only when the director or officer is not in possession of material,
non-public information and may be used to gradually diversify investment
portfolios over a period of time.
Dr. Riesenfeld and Dr. Gamzu have each made their first sale of stock pursuant
to their 10b5-1 plans. Dr. Riesenfeld exercised stock options and sold 12,882
shares on April 19, 2004, and Dr. Gamzu exercised stock options and sold 2,500
shares on April 15, 2004. Under the terms of Dr. Riesenfeld's plan, he may,
prior to April 19, 2005, exercise stock options and/or warrants and sell, on a
monthly basis, up to an aggregate of 154,583 shares (including the 12,882 shares
already sold), which represents approximately 23% of the total number of shares,
warrants and options he currently holds. Under the terms of Dr. Gamzu's plan, he
may, prior to April 15, 2005, exercise stock options and sell, on a monthly
basis, up to an aggregate of 75,000 shares (including the 2,500 shares already
sold), which represents approximately 65% of the total number of shares,
warrants and options he currently holds.
In October 2001, Bausch & Lomb Pharmaceuticals, Inc. (Bausch & Lomb) purchased
all rights to the Company's loteprednol etabonate (LE) ophthalmic product line
for cash and assumption of certain ongoing obligations. The Company received
gross proceeds of approximately $25 million in cash for its rights to Lotemax(R)
and Alrex(R), prescription products that are made and marketed by Bausch & Lomb
under a 1995 Marketing Agreement with the Company; in addition, Bausch & Lomb
also acquired future extensions of LE formulations including LE-T, a product
that was submitted to the FDA for marketing approval in September 2003. The
Company had no product sales beginning in the fourth quarter of 2001. Bausch &
Lomb will pay the Company additional fees depending on the approval date with
the FDA as follows: If the earlier of (a) commercial launch or (b) 6 months
after FDA approval of LE-T (the Triggering Event) occurs before January 1, 2002
the Company was initially to receive $15.4 million. That amount has been
decreasing by $90,000 for each month of 2002 and 2003 to a minimum amount of
$13.3 million (if the Triggering Event occurs on December 31, 2003). Since the
Triggering Event had not occurred as of June 30, 2004, the Company and Bausch &
Lomb will negotiate in good faith to agree upon the amount of additional
consideration that Bausch & Lomb will pay the Company but not to exceed $13.3
million. The Company can not be assured that FDA approval of LE-T will be
obtained. An additional milestone payment of up to $10 million could be paid to
the Company to the extent sales of the new product exceed an agreed-upon
forecast in the first two years. The Company has a passive role as a member of a
joint committee overseeing the development of LE-T. Pharmos agreed to pay up to
$3.75 million of the costs of developing LE-T, of which $600,000 was deducted
from the purchase price paid by Bausch & Lomb in October 2001. In July 2003, the
Company paid Bausch & Lomb $1.59 million of its liability for the LE-T
development. As of June 30, 2004, Pharmos owes an additional $1.56 million as
its share of these research and development related LE-T expenses. This amount
is included as part of accounts payable at June 30, 2004, and represents the
maximum amount Pharmos owes Bausch & Lomb.
17
As a result of this transaction, the Company recorded a net gain of $16.3
million during the fourth quarter of 2001. The Company incurred transaction and
royalty costs of approximately $2 million. The Company also compensated the LE
patent owner approximately $2.7 million ($1.5 million paid upon closing and $1.2
million paid in October 2002) from the proceeds of the sale of Lotemax and Alrex
in return for his consent to the Company's assignment of its rights under the
license agreement to Bausch & Lomb. Additionally, the patent owner will receive
11% of the proceeds payable to the Company following FDA approval of LE-T, as
well as 14.3% of its milestone payment, if any.
In March 2004, the Emerging Issues Task Force issued EITF 03-6, "Participating
Securities and the Two-Class Method under FASB Statement No. 128". This
statement provides additional guidance on the calculation and disclosure
requirements for earnings per share. The FASB concluded in EITF 03-6 that
companies with multiple classes of common stock or participating securities, as
defined by SFAS No. 128, calculate and disclose earnings per share based on the
two-class method. The adoption of this statement does not have an impact to the
Company's financial statement presentation as the Company is in a loss position.
As of June 30, 2004, the Company had the following contractual commitments and
long-term obligations:
Payments Due by Period
Less than 1 1 - 3 4 - 5 After
Total Year Years Years 5 Years
Operating Leases $ 1,289,709 $ 277,079 $470,649 $217,281 $324,700
Convertible Debentures* 13,698,179 13,698,179 -- -- --
R&D Commitments 229,691 229,691 -- -- --
----------- ----------- -------- -------- --------
Total $15,217,579 $14,204,949 $470,649 $217,281 $324,700
=========== =========== ======== ======== ========
* Includes interest expense to be paid in cash and excludes the debt discount
On September 26, 2003, the Company completed a private placement of convertible
debentures and warrants with six institutional investors, generating total gross
proceeds of $21.0 million. The convertible debentures are convertible into
common stock of the Company at a fixed price of $4.04, 205% above the closing
bid price of the stock for the five days preceding the closing date. The
debentures, which bear an interest rate of 4%, will be redeemed in 13 equal
monthly increments beginning March 31, 2004. As of June 30, 2004, debentures
totaling approximately $7.5 million were either repaid or converted into common
stock of the Company.
The R&D commitments represent scheduled professional fee payments for clinical
services relating to the Phase III clinical study of dexanabinol for severe TBI.
One of the clinical service based agreements, if fully utilized, currently
totals $11.1 million and is not committed beyond 2004. Through June 30, 2004,
the Company has recorded $10.2 million as an expense.
The Company has assessed its vulnerability to certain market risks, including
interest rate risk associated with financial instruments included in cash and
cash equivalents and our convertible debentures. Due to the relatively
short-term nature of these investments the Company has determined that the risks
associated with interest rate fluctuations related to these financial
instruments do not pose a material risk to us.
Statements made in this document related to the development, commercialization
and market expectations of the Company's drug candidates, 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,
18
technological, marketing and other factors identified in Pharmos' filings with
the Securities and Exchange Commission could affect such results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Please refer to the second to last paragraph in the foregoing section,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of
Pharmos' disclosure controls and procedures (as defined in
section13(a) - 14(c) of the Securities Exchange Act of 1934 (the
"Act")) was carried out under the supervision and with the
participation of Pharmos' Chief Executive Officer and Chief
Financial Officer and several other members of Pharmos' senior
management at June 30, 2004. Pharmos' Chief Executive Officer and
Chief Financial Officer concluded that Pharmos' disclosure controls
and procedures as currently in effect are effective in ensuring that
the information required to be disclosed by Pharmos in the reports
it files or submits under the Act is (i) accumulated and
communicated to Pharmos' management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
(b) Changes in Internal Controls: There were no changes in Pharmos'
internal controls or in other factors that could significantly
affect those controls subsequent to the date of their most recent
evaluation.
19
Part II
Other Information
Item 1 Legal Proceedings NONE
Item 2 Changes in Securities, use of Proceeds, and Issuer
Purchases of Equity Securities NONE
Item 3 Defaults upon Senior Securities NONE
Item 4 Submissions of Matters to Vote of Security Holders
At the Corporation's Annual Meeting of Stockholders held on June 30, 2004,
the stockholders of the Corporation elected the following persons as Class
I Directors of the Corporation to serve until the 2007 annual meeting of
stockholders and until their successors are duly elected and qualified:
David Schlachet and Georges Anthony Marcel. The results of the voting were
as follows:
VOTES FOR VOTES WITHHELD
--------- --------------
David Schlachet 63,437,319 2,363,018
Georges Anthony Marcel 61,994,233 3,806,104
Also at the Annual Meeting, the stockholders approved the increase in the
number of authorized shares of the Company's Common Stock to 150,000,000
from 110,000,000 with 57,463,219 votes for approval, 7,956,575 votes
against approval, and 532,022 abstentions.
Also at the Annual Meeting, the stockholders approved amending of the
Company's 2000 Stock Option Plan, with 10,156,464 votes cast for approval,
8,799,748 votes cast against and 790,362 abstentions.
Further, the stockholders ratified the Board's selection of
PricewaterhouseCoopers LLP as the Corporation's independent auditors for
the fiscal year ending December 31, 2004, with 64,065,753 votes for
ratification, 1,421,560 votes against ratification, and 464,504
abstentions.
Item 5 Other Information NONE
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
------ -------
3.1 Certificate of Amendment of Restated Articles of
Incorporation dated June 30, 2004
20
31.1 Certification of Chief Executive Officer pursuant to
Exchange Act Rules 13a-14(a) and 15(d)-14(a), adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Chief Financial Officer pursuant to
Exchange Act Rules 13a-14(a) and 15(d)-14(a), adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current Report filed on April 22, 2004; Item 5 was reported, Adoption of
certain pre-arranged stock trading plans in accordance with guidelines
specified by Rule10b5-1 under the Securities Exchange Act of 1934
Current Report filed on July 20, 2004; Item 5 was reported, Appointment of
the Chief Financial Officer
Current Report filed on July 28, 2004; Item 12 was reported, Results of
Operations and Financial Condition for the second quarter ended June 30,
2004
21
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: July 30, 2004
by: /s/ James A. Meer
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James A. Meer
Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
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