SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended September 30, 1995 Commission File Number 0-11550
__________________ _______
Pharmos Corporation
______________________________________________________
(Exact name of registrant as specified in its charter)
Nevada 36-3207413
__________________________ __________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2 Innovation Drive, Alachua, Florida 32615
_____________________________________________________
(Address of principal executive offices) (zip code)
(904) 462-1210
_____________________________________________________
(Registrant's telephone number including area code)
101 East 52nd Street, 36th Floor, New York, NY 10022
_____________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
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 short 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 the number of shares outstanding of each of the issuer's
classes of common stock as of the close of the period covered by
this report.
As of November 10, 1995, the issuer had outstanding 29,130,679
shares of its $0.03 par value Common Stock.
<PAGE>
<TABLE>
<CAPTION>
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
________________________________________________________________________________________________________
September 30, December 31,
<S> <C> 1995 <C> 1994
Assets
Cash and cash equivalents $9,305,051 $1,864,065
Accounts receivable, net 191,710 262,650
Prepaid expenses and other current assets 549,318 472,932
Assets held for sale 51,237 --
___________ ___________
Total current assets 10,097,316 2,599,647
Fixed assets, net 1,009,060 1,258,935
Intangible assets, net 395,941 430,834
Excess of purchase price over fair value of assets acquired, net 497,977 --
Other assets 287,251 --
___________ ___________
Total assets $12,287,545 $4,289,416
=========== ===========
Liabilities and Shareholders' Equity
Accounts payable $952,741 $1,920,104
Accrued wages and other compensation 124,154 234,688
Accrued expenses 983,560 383,452
Loans payable 464,949 480,219
___________ ___________
Total current liabilities 2,525,404 3,018,463
Advances against future sales 1,577,141 --
Other liabilities 403,917 91,318
___________ ___________
Total liabilities 4,506,462 3,109,781
___________ ___________
Shareholders' equity
Preferred stock, 1,250,000 shares authorized, none issued -- --
Common stock, $.03 par value; 50,000,000 and 20,000,000
shares authorized, 29,149,035 and 14,631,726 shares issued,
29,130,679 and 14,613,370 shares outstanding, respectively 874,471 438,952
Paid in capital in excess of par 60,278,671 46,669,890
Accumulated deficit (53,371,508) (45,928,656)
___________ ___________
7,781,634 1,180,186
Less: Common stock in treasury, at par (551) (551)
___________ ___________
Total shareholders' equity 7,781,083 1,179,635
___________ ___________
Commitments and contingencies -- --
Total liabilities and shareholders' equity $12,287,545 $4,289,416
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
<PAGE>
<CAPTION>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
____________________________________________________________________________________
Three Months Ended September 30,
1995 1994
<S> <C> <C>
Revenues
License fees, royalties $16,855 --
___________ ___________
16,855 --
___________ ___________
Expenses
Research and development, net 899,471 1,542,996
Patents 49,418 257,981
General and administrative 265,805 938,104
Depreciation and amortization 928,571 109,328
___________ ___________
2,143,265 2,848,409
___________ ___________
Loss from operations (2,126,410) (2,848,409)
Interest income 56,317 5,498
Interest expense (50,638) (17,292)
Other expense 2,514 --
___________ ___________
Net loss ($2,118,217) ($2,860,203)
=========== ===========
Loss per share ($0.09) ($0.29)
=========== ===========
Weighted average shares outstanding 23,591,795 9,807,099
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statement
</FN>
<PAGE>
<CAPTION>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
_________________________________________________________________________________
Nine Months Ended September 30,
1995 1994
<S> <C> <C>
Revenues
Sales of fine chemicals, net $7,841
License fees, royalties $141,997 --
___________ ___________
141,997 7,841
___________ ___________
Expenses
Research and development, net 4,045,717 5,485,108
Patents 420,118 533,439
General and administrative 1,721,239 2,511,763
Depreciation and amortization 1,380,034 323,951
___________ ___________
7,567,108 8,854,261
___________ ___________
Loss from operations (7,425,111) (8,846,420)
Interest income 115,933 95,958
Interest expense (133,674) (39,287)
Other income (expense) 0 150
___________ ___________
Net loss ($7,442,852) ($8,789,599)
=========== ===========
Loss per share ($0.38) ($0.91)
=========== ===========
Weighted average shares outstanding 19,462,141 9,606,367
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial stateme
</FN>
<PAGE>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Cash Flows
______________________________________________________________________________________________
Nine Months Ended September 30,
1995 1994
<S> <C> <C>
Cash flows from operating activities
Net loss ($7,442,852) ($8,789,599)
____________ ___________
Adjustments to reconcile net loss to net
cash flows used in operating activities
Depreciation and amortization 1,380,034 323,453
Warrant grant to Consultant 48,333
Changes in operating assets and liabilities, net of effects
of Oculon acquisition
Accounts receivable, net 155,111 207,251
Prepaid expenses and other current assets 52,167 70,557
Other assets (66,460) --
Accounts payable (968,051) 180,582
Accrued expenses, wages and other compensation 134,181 379,639
Advances against future sales 1,577,141 --
Other liabilities (77,030)
____________ ___________
Total adjustments 2,312,456 1,084,452
____________ ___________
Net cash flows used in operating activities (5,130,396) (7,705,147)
____________ ___________
Cash flows from investing activities
Disposal (purchases) of fixed assets, net (36,573) (126,066)
____________ ___________
Net cash flows (used in) investing activities (36,573) (126,066)
____________ ___________
Cash flows from financing activities
Proceeds from acquisition of Oculon Corporation, net 3,305,543 --
Proceeds from issuance of convertible debentures 1,270,000 --
Proceeds from issuance of common stock, net 8,100,000 1,500,100
Proceeds from exercise of warrants 39,000 148,175
Increase (decrease) in loans payable (106,588) 541,715
____________ ___________
Net cash flows provided by financing activities 12,607,955 2,189,990
____________ ___________
Net increase (decrease) in cash and cash equivalents 7,440,986 (5,641,223)
Cash and cash equivalents at beginning of period 1,864,065 7,455,931
____________ ___________
Cash and cash equivalents at end of period $9,305,051 $1,814,708
============ ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.</FN>
</TABLE>
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to September 30, 1995 Consolidated Financial Statements
__________________________________________________________________
1.The Company
Pharmos Corporation (the "Company") (formerly Pharmatec, Inc.)
is a pharmaceutical company incorporated under the laws of the
State of Nevada. The Company is headquartered in Alachua,
Florida and operates research, development and pilot
manufacturing facilities in Alachua, Florida and Rehovot,
Israel.
The Company is engaged in the development of novel
pharmaceutical products based on innovative drug delivery
technologies to treat disorders of the eye and central nervous
system. The Company uses a variety of patented and proprietary
technologies to improve the efficacy and/or safety of drugs.
The Company s compounds are in various stages of development,
from preclinical to advanced clinical trials. In March 1995,
the Company completed the submission of its first New Drug
Application ( NDA ) to the U.S. Food & Drug Administration
( FDA ). In connection with its development efforts, the
Company has also undertaken research and development contracts
in the past and has sold fine chemicals to the pharmaceutical
research community.
2.Operations
Management believes that existing cash and cash equivalents of
$9,305,051 as of September 30, 1995, combined with the
investment income those funds will generate, and the expected
cash to be received from grants and definitive marketing
agreements, should be sufficient to support operations through
March 1997. The Company will seek additional funding through
collaborative arrangements or through future public or private
equity or debt financing. There can be no assurance that
additional financing will be available on acceptable terms, or
at all. If additional funds are raised by issuing equity
securities, further dilution to stockholders may result. If
adequate funds are not available, the Company may be required
to delay, reduce the scope of or eliminate one or more of its
research or development programs or to obtain funds through
arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its
technologies, product candidates or products that the Company
would otherwise seek to develop or commercialize itself.
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to September 30, 1995 Consolidated Financial Statements
__________________________________________________________________
On February 7, 1995, the Company sold $1,270,000 principal
amount convertible debentures in a private placement
transaction. During the quarters ended June 30, and September
30, 1995 all of the convertible debentures were exchanged for
2,442,308 shares of the Company's common stock. The Company's
registration of the shares with the Securities and Exchange
Commission ( S.E.C. ) was declared effective May 18, 1995.
In March 1995, the Company completed the submission of the New
Drug Application (NDA) for Lotemax , its novel site-specific
ocular anti-inflammatory agent. The Company has requested from
the U.S. Food and Drug Administration approval of labeling to
treat inflammatory and allergic conditions affecting the
anterior segment of the eye. The Company is currently working
on a combination product of Lotemax with an antibiotic and on
other products of the Lotemax line extension.
In April 1995, the Company completed the acquisition of Oculon
Corporation, a privately held ophthalmic drug development
company with anti-cataract technologies and approximately $4.3
million in net cash and cash equivalents. The Company issued
6,000,000 shares of its common stock to the holders of Oculon's
Series III Senior Preferred Stock. The shares of all other
holders of Oculon capital stock were canceled. In addition,
the Company issued ten year warrants to purchase 500,000 shares
of the Company's common stock at an exercise price of $2.75 per
share to certain holders of Oculon stock options. The
registration of the 6,000,000 shares with the S.E.C. was
declared effective on July 7, 1995.
In June 1995, the Company announced the successful completion
of a Phase I clinical trial on Dexanabinol (HU-211).
Dexanabinol is under development for the treatment of stroke,
head injury and cardiac arrest patients.
On June 30, 1995, the Company signed a definitive marketing
agreement (the "Marketing Agreement") with Bausch and Lomb
Pharmaceuticals, Inc. (Bausch & Lomb) to market Lotemax and
Lotemax extension products, currently under development, in
the United States. Under this agreement, Bausch & Lomb will
purchase the active drug substance from the Company and provide
the Company with $4 million in cash advances through March
1996. An additional $2 million is to be advanced subject to
development milestone achievements related to the Lotemax line
extension products. Bausch & Lomb will also collaborate in the
development of such additional products by making available
amounts up to 50% of the Phase III clinical trial costs. The
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to September 30, 1995 Consolidated Financial Statements
__________________________________________________________________
Company has retained certain conditional co-marketing rights to
all of the products covered by the Marketing Agreement. (See
Note 10).
On September 14, 1995, the Company completed a private offering
of 6,000,000 units at an offering price of $1.50 per unit.
Each unit consisted of one share of the Company s common stock
and one warrant to purchase 0.075 of one share of common stock.
Net proceeds to the Company were approximately $8,100,000. The
warrants are exercisable at a price of $1.80 per share,
commencing one year after the closing of the offering, through
the fifth anniversary. In addition, the Company issued
warrants to purchase an aggregate of 450,000 shares of the
Company s common stock to the two finders who assisted in the
transaction.
The Company has agreed to file, within 60 days of the closing,
a registration statement on Form S-3 covering the resale of the
shares of common stock included in the units and the shares of
common stock issuable upon exercise of the warrants.
3. Significant Accounting Policies
Basis of Presentation
_____________________
The unaudited interim financial statements of the Company for
the nine month period ended September 30, 1995 have been
prepared by management and include all adjustments, consisting
only of normal recurring adjustments, necessary to present
fairly the unaudited interim periods, together with the
appropriate entries to record the purchase of Oculon using the
purchase method of accounting (see Note 8). The results of
operations for the nine and three month periods ended
September 30, 1995 are not necessarily indicative of the
results to be expected for the full year. These interim
financial statements should be read in conjunction with the
financial statements and related notes contained in the
Company's annual report on Form 10-K for the year ended
December 31, 1994. Certain reclassifications have been made to
prior period amounts in order to conform to classifications
used in the current period.
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to September 30, 1995 Consolidated Financial Statements
__________________________________________________________________
Basis of consolidation
______________________
The accompanying financial statements include all wholly owned
subsidiaries. Inter-company transactions are eliminated in
consolidation.
Cash and cash equivalents
_________________________
The Company invests its excess cash in U.S. Treasury securities
and debt instruments of financial institutions and corporations
with strong credit ratings. The Company has established
guidelines relative to diversification and maturity that
maintain safety and liquidity. These investments have original
maturities of seven months or less and are classified as cash
equivalents.
Revenue recognition
___________________
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. License fees and royalties are
recognized when earned in accordance with the underlying
agreements. Sales revenue is recognized upon shipment of
goods.
Prepaid expenses and other current assets
_________________________________________
Prepaid expenses and other current assets at September 30, 1995
includes cash deposits of $300,000 which are being used as
security for both short term loans and a letter of guarantee
related to the lease of the research facilities in Israel.
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to September 30, 1995 Consolidated Financial Statements
__________________________________________________________________
Fixed assets
____________
Fixed assets are recorded at cost. Maintenance and repairs are
expensed as incurred. Property, furniture and equipment are
depreciated on a straight-line basis over their estimated
useful lives which range from three to fourteen years.
Leasehold improvements are amortized on a straight-line basis
over the shorter of the lease term or the estimated lives of
the related assets.
Intangible assets
_________________
Intangible assets represent the Company's rights to develop and
commercialize certain products derived from certain licensed
technologies. The assets are being amortized over eighteen
months to fifteen years. As of September 30, 1995 and December
31,1994, accumulated amortization was $643,839 and $608,946,
respectively.
Research and development costs
______________________________
All research and development costs are expensed as incurred.
The Company has accounted for reimbursements of research and
development expenses received with respect to the royalty
participation agreements described in Note 5 as a reduction of
research and development expense in accordance with the terms
of Statement of Financial Accounting Standards No. 68,
"Research and Development Agreements."
Income taxes
____________
Effective January 1, 1993, the Company adopted, on a
prospective basis, Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109"), which
requires recognition of deferred income taxes under the
liability method. The implementation of SFAS 109 did not have
a significant impact on the Company's financial position or
results of operations and, accordingly, there was no effect on
the recorded amounts of assets and liabilities as of January 1,
1993.
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to September 30, 1995 Consolidated Financial Statements
__________________________________________________________________
Postemployment benefits
_______________________
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits" ("SFAS 112"). The implementation
of SFAS 112 did not have a significant impact on the Company's
financial position or results of operations.
Foreign exchange
________________
The Company's foreign operations are principally conducted in
U.S. dollars. Any transactions or balances in currencies other
than U.S. dollars are remeasured and any resultant gains and
losses are included in the determination of current period
income and loss.
Treasury stock
______________
Shares of common stock held in treasury are accounted for at
par value with any difference between cost and par included in
paid-in capital in excess of par value.
Loss per share
______________
Loss per share is calculated based on the weighted average
number of common shares outstanding during the period. Options
and warrants outstanding are excluded from the calculations
because their impact would be antidilutive.
4. Government Grants for Research and Development
The Company has entered into agreements with U.S. federal
agencies and the State of Israel which provide for grants for
research and development relating to certain projects. Amounts
received under these agreements have been reflected as a
reduction of research and development expense and amounted to
$24,177 during the nine months ended September 30, 1995 and
$900,298 during 1994.
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to September 30, 1995 Consolidated Financial Statements
__________________________________________________________________
The grant agreements generally provide for reimbursement of a
percentage of allowable research and development costs, to a
specified maximum, undertaken in the Company's research
facilities. The grants are to be repaid on the basis of
royalties from the sale of products developed as a result of
the research activities carried out with the grant funds.
Agreements with certain agencies of the State of Israel place
certain legal restrictions on the transfer of technology and
manufacture of resulting products outside Israel.
5. Licensing Arrangements
The Company is both a licensor and licensee of certain research
technologies.
As a licensor, the Company has entered into various agreements
under which the rights to certain of its technologies are
licensed to others. The Company is to be compensated by
receipt of its share of defined future product sales or
royalties paid by the licensee. These agreements have provided
for funding of research, either in whole or in part by the
licensee.
As a licensee, the Company has various license agreements with
certain U.S. federal agencies and the State of Israel, certain
universities, and a former director who had been a vice
president of the Company, wherein the Company has acquired
exclusive or coexclusive rights to develop and commercialize
certain research technologies. The agreements generally
require the Company to pay royalties on sale of products
developed from the licensed technologies and fees on revenues
from sublicenses, where applicable. The royalty rates defined
in the licenses are customary and usual in the pharmaceutical
industry. The royalties will be payable for periods up to
fifteen years from the date of certain specified events,
including the date of the first sale of such products, or the
date from which the first registered patent from the developed
technologies is in force, or the year following the date in
which U.S. Food and Drug Administration approval has been
received for a developed product. No amounts have been
recorded as a liability with respect to these contingent
royalties as of September 30, 1995 or December 31, 1994 as in
the opinion of management none of the specified events have yet
occurred. In addition, certain of the license agreements
require annual payments for periods extending through 1998.
Aggregate minimum annual payments through 1998 range from
$26,000 to $229,500.
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to September 30, 1995 Consolidated Financial Statements
__________________________________________________________________
6. Loans Payable
The Company's Israeli subsidiary, Pharmos Limited, obtained
short term financing in 1994 in the form of loans and a line of
credit facility from one of its banks. As of September 30,
1995, Pharmos Limited had an outstanding loan of $406,250,
which is due in November 1995. Interest is payable monthly at
an annualized rate of LIBOR plus 1.5%. In addition, Pharmos
Limited has a line of credit of $100,000 denominated in New
Israeli Shekels. As of September 30, 1995, Pharmos Limited has
not drawn against this line of credit. The Company has
guaranteed these two obligations of Pharmos Limited.
The Company has a note payable outstanding of $58,699 relating
to the refurbishment of the Florida facility. Interest is
payable monthly at an annual rate of 8%. The entire balance of
the note payable is recorded as a current liability in the
accompanying balance sheet as of September 30, 1995
7.Convertible Debentures
On February 7, 1995, the Company sold $1,270,000 principal
amount convertible debentures in a private placement
transaction to several accredited investors, including a large
institutional shareholder and a member of the Company's Board
of Directors. The Company's registration of the shares with
the S.E.C. was declared effective May 18, 1995.
During the quarter ended June 30, 1995, $200,000 of convertible
debentures were exchanged for 384,616 shares of the Company's
common stock. During July 1995, all the remaining debentures
were exchanged into 2,057,692 shares of the Company's common
stock at the rate of $0.52 per share. Interest at 10% per
annum accrued daily from the issuance date and was paid
quarterly in arrears commencing May 7, 1995. In connection
with this offering, the Company issued 150,000 warrants to
purchase the Company's common stock at $0.52 per share. As of
September 30, 1995, the holder of such warrant exercised the
right to purchase 75,000 shares of the Company s common stock.
In accordance with the terms of the warrant the remaining
unexercised warrants expire on April 10, 2005.
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to September 30, 1995 Consolidated Financial Statements
__________________________________________________________________
8.Acquisition of Oculon Corporation
On April 11, 1995, the Company acquired Oculon Corporation
("Oculon"). Oculon was a privately-held development stage
company undertaking research and development of ophthalmic
drugs using anti-cataract technologies. The Company is
utilizing the assets of Oculon for its own operations and for
its own purpose and is not continuing to operate Oculon as a
business.
Under the terms of a merger agreement (the "Merger Agreement"),
the Company issued 6,000,000 shares of its common stock to the
holders of Oculon's Series III Senior Preferred Stock. The
shares of all other holders of Oculon capital stock were
canceled. In addition, the Company issued ten year warrants to
purchase 500,000 shares of the Company's common stock at an
exercise price of $2.75 per share to certain holders of Oculon
stock options. The Company's registration of the shares with
the S.E.C. became effective on July 7, 1995.
The purchase price consisted of 6,000,000 shares of the
Company's common stock, valued at $4,312,800, 500,000 warrants,
as described above, with an estimated value of $250,000, plus
acquisition costs of $483,386. The acquisition has been
accounted for under the purchase method of accounting.
Accordingly, the assets and liabilities of Oculon as of the
date of acquisition have been recorded at their estimated fair
market values. The excess of the purchase price over the fair
value of the net assets of Oculon of $1,490,431 is being
amortized over a 9 month period of expected benefit. During the
nine months ended September 30, 1995 the related amortization
expense amounted to $992,454.
9.Income Taxes
Net operating loss carry forwards for U.S. tax purposes of
approximately $46,500,000 as of December 31, 1994 expire from
2000 through 2009. The Company's gross deferred tax assets at
December 31, 1994 represent primarily the tax effect of net
operating loss carry-forwards and differences in the valuation
of depreciation, payables and accruals. As a result of
previous business combinations and changes in stock ownership,
as well as potential future changes in stock ownership,
substantially all of these net operating loss carry forwards
will be subject to substantial restriction with regard to
annual utilization. A full valuation allowance has been
established with regard to the gross deferred tax assets.
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to September 30, 1995 Consolidated Financial Statements
__________________________________________________________________
10. Marketing Agreement with Bausch & Lomb
On June 30, 1995, the Company signed a definitive marketing
agreement with Bausch & Lomb Pharmaceuticals, Inc. to market
Lotemax , the Company's lead product, in the United States.
The Marketing Agreement also includes Lotemax line extension
products currently being developed by the Company . Under the
Marketing Agreement, Bausch & Lomb will purchase the active
drug substance from the Company and provide the Company with $4
million in cash advances through March 1996. An additional $2
million is subject to reaching certain development milestones
in the Lotemax line extension products. Bausch & Lomb will
also collaborate in the development of such additional 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.
In accordance with the terms of the Marketing Agreement, the
Company has received $1,577,141 in advances against future
sales to Bausch & Lomb of the active drug substance (needed to
manufacture the drug). Bausch & Lomb will be entitled to
credits against such future purchases of the drug substance
based on the advances and future advances until the advances
have been recouped.
11. Legal Proceedings and Disputes
The Company currently is involved in separate disputes with two
of its licensors regarding the applicability of the Company's
license to a new technology being developed by the licensor and
the priority of a licensed patent. While the Company believes
that its position is correct in both of these disputes and that
it will prevail, an adverse determination or resolution of both
or either of them could have a material adverse effect on the
Company and its operations.
In March 1995, the Company was named as an additional co-
defendant in an amended complaint filed in a pending purported
class action suit against David Blech, D. Blech & Co. and a
number of other defendants, including eleven publicly traded
biotechnology companies. The complaint seeks damages for
alleged unlawful manipulation of the stock market prices of the
named biotechnology companies. The Company believes that the
claims against it have no factual or legal basis and are
without merit and has filed a motion to dismiss the claims
asserted against it.
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to September 30, 1995 Consolidated Financial Statements
__________________________________________________________________
On October 27, 1995, the Company commenced an action Dr.
Nicholas Bodor, a former director of the Company, seeking to
enjoin Dr. Bodor from taking any steps to terminate or
interfere with the Company s rights under its license agreement
with Dr. Bodor relating to its ophthalmic anti-inflammatory
drug, Loteprednol Etabonate ( Lotemax ). Dr. Bodor claims
that the advances against future revenues of Lotemax , recently
received by the Company under its Marketing Agreement with
Bausch & Lomb Pharmaceuticals, Inc., are an up-front licensing
fee of which Dr. Bodor is entitled to receive a portion and
that the failure to pay would constitute grounds for his
terminating the license agreement. Dr. Bodor also claims that
the Marketing Agreement is actually a sublicense entitling Dr.
Bodor to additional royalties under his license agreement. In
such event Dr. Bodor would be entitled to receive a portion of
the Company s advances from Bausch & Lomb as well as a higher
royalty percentage from the Company on future sales of
Lotemax .
Dr. Bodor has commenced a separate action seeking judicial
clarification of these issues. The Company strongly disagrees
with Dr. Bodor's characterization of the Marketing Agreement
with Bausch & Lomb and believes his interpretation is incorrect
and has no merit. To prevent Dr. Bodor from wrongfully
terminating the license agreement, the Company commenced this
action to protect its rights under both the license agreement
and the Marketing Agreement.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
___________________________________________________________
Pharmos Corporation is a bio-pharmaceutical company in the
business of developing novel drug delivery technologies
targeted to the eye and brain. No products have yet been
commercialized, but occasional revenues have been derived from
product sales and royalties. The Company is dependent upon
external financings, interest income, and research and
development contracts to pursue its intended business
activities. The Company has not been profitable since
inception and has incurred cumulative losses of $53,371,508
through September 30, 1995. Losses have resulted principally
from costs incurred in research activities aimed at
identifying and developing the Company's product candidates,
clinical research studies, merger and acquisition costs, the
write-off of purchased research and development, and general
and administrative expenses. The Company expects to incur
additional operating losses over the next several years as the
Company's research and development and clinical trials
programs continue. The Company's ability to achieve
profitability is dependent on its ability to develop and
obtain regulatory approvals for its products, to enter into
agreements for product development and commercialization with
strategic corporate partners, and to develop the capacity to
manufacture and sell its products.
Results of Operations
Three Month and Nine Month Periods Ended September 30, 1995
and 1994
___________________________________________________________
In 1995 the Company entered into sub-licensing agreements
which have provided license fees revenues of $70,142 for the
quarter ended September 30, and $125,142 for the six month
period ended September 30, 1995. Revenues of $7,841 for the
nine month period ended September 30, 1994 resulted from fine
chemical sales. During 1994 the Company phased out the selling
of speciality chemicals and no such revenues have been
recognized in 1995.
Total operating expenses for the quarter decreased by $705,144
(25%) to $2,143,265. This decrease resulted from decreases in
net research & development expenses, patent expenses and
general and administrative expenses amounting to $1,524,387
(56%) and an increase in depreciation and amortization
expenses of $819,243. For the comparable nine month periods
ended September 30, 1995 and 1994, total operating expenses
decreased by $1,287,153 (15%) from $8,854,261 in 1994 to
<PAGE>
$7,567,108 in 1995. Decreases in net research & development
expenses, patent expenses and general and administrative
expenses amounting to $2,343,236 (27%) were partially offset
by an increase of $1,056,083 in depreciation and amortization
expense.
The decrease in operating expenses in both the three and nine
month periods ending September 30, 1995 compared to 1994
generally resulted from a strategy of downsizing and focusing
on bringing leading products to commercialization. The
increase in depreciation and amortization expense relates to
amortization of the excess of purchase price over fair value
of assets acquired resulting from the acquisition of Oculon
Corporation in April 1995.
Net research & development expenses decreased by $643,525
(42%) between the three month periods ended September 30, 1995
and 1994 and $1,439,391 (26%) between the nine month periods.
These decreases are primarily attributable to a reduced levels
of clinical trials related to the Company s lead compound
Lotemax , reduced staffing levels and decreases in licencing
fees resulting from the Company returning certain licensing
rights which would not be utilized as a result of the strategy
outlined above.
Patent expenses for the quarter and nine month periods of 1995
decreased by $208,563 (81%) and $113,321 (21%) respectively
compared to the 1994 periods. Such decreases resulted
primarily from the Company returning certain patents which
were not being utilized to the University of Florida.
General and administrative expenses decreased by $672,299
(72%) for the quarter ending September 30, 1995 compared to
1994, primarily as a result of decreases in staffing, as well
as reductions in legal and professional fees. For the nine
month period general and administrative expenses decreased by
$790,524 (31%). For the nine month period reductions in
staffing levels and other expenses implemented in late 1994
and in the first and second quarters of 1995 and which became
apparent in the third quarter of 1995 were offset by costs
incurred in association with the downsizing activities as well
as increased professional fees related to the financing
activities of the Company.
Interest income increased by $50,819 in the third quarter and
$19,975 for the nine month period, due primarily to higher
levels of investible funds related to cash received as a
result of the Oculon acquisition. Interest expense increased
by $33,346 in the third quarter and $94,387 for the nine
month period. These increases are primarily due to interest
on the convertible debentures issued in February 1995 and as a
result of borrowings on the loan and a line of credit obtained
by the Company's Israeli subsidiary, Pharmos Limited. The
<PAGE>
debentures were converted into common stock in the late second
quarter and early third quarter of 1995, and some of proceeds
from the private placement may be used to reduce borrowings on
the loan and a line of credit.
The net loss for the third quarter ended September 30, 1995 of
$2,118,217 reflected a decrease of $741,986 (26%), from the
net loss for the third quarter of 1994. The net losses for
the nine month periods ended September 30 decreased by
$1,346,747 (15%), from a loss of $8,789,599 in 1994 to a loss
of $7,442,852 in 1995.
Liquidity and Capital Resources
_______________________________
The Company has not been profitable since its inception and
has financed its operations with public and private offerings
of securities; a marketing agreement with Bauch & Lomb,
research contracts, license fees, royalties and sales and
interest income.
During September 1995 the Company completed a private offering
of 6,000,000 units at $1.50 per unit. Each unit consisted of
one share of common stock and a warrant to purchase 0.075 of
one share of common stock. The net proceeds to the Company
were approximately $8,100,000 and will be used to fund ongoing
research and development and general operating expenses of the
Company. Additionally, some of the proceeds may be used to
repay short term borrowings.
The Company had cash and cash equivalents of $9,305,051 and an
additional deposit of $300,000 which is a security for both
short term loans and a letter of guarantee related to the
lease of the research facilities in Israel. The Company s
working capital was $7,571,912 as of September 30, 1995.
Management believes that existing cash and cash equivalents
combined with the investment income those funds will generate
and the expected cash to be received from grants and
definitive marketing agreements, should be sufficient to
support operations through March 1997. The Company will seek
additional funding through collaborative arrangements or
through future public or private equity or debt financing.
There can be no assurance that additional financing will be
available on acceptable terms, or at all. If additional funds
are raised by issuing equity securities, further dilution to
stockholders may result. If adequate funds are not available,
the Company may be required to delay, reduce the scope of or
eliminate one or more of its research or development programs
or to obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates or
products that the Company would otherwise seek to develop or
commercialize itself.
<PAGE>
On June 30, 1995, the Company signed a definitive marketing
agreement with Bausch & Lomb Pharmaceuticals, Inc. to market
Lotemax , the Company's lead product, in the United States.
The Marketing Agreement also includes Lotemax line extension
products currently being developed by the Company . Under the
Marketing Agreement, Bausch & Lomb will purchase the active
drug substance from the Company and provide the Company with
$4 million in cash advances through March 1996. An additional
$2 million is subject to reaching certain development
milestones in the Lotemax line extension products. Bausch &
Lomb will also collaborate in the development of such
additional products by making available amounts up to 50% of
their Phase III clinical trial costs. The Company has
retained certain conditional co-marketing rights to all of the
products covered by the Marketing Agreement.
As of September 30, 1995 the Company has received $1,577,141
in cash advances under the terms of this agreement. In
accordance with the terms of the Marketing Agreement Bausch &
Lomb will recoup such advances by receiving credits from the
Company against future purchases of the active drug substance
until the advances have been recouped.
<PAGE>
PART II
OTHER INFORMATION
_________________
Item 1 Legal Proceedings
The Company recently commenced an action against Dr.
Nicholas Bodor, a former director of the Company, seeking to
enjoin Dr. Bodor from taking any steps to terminate or interfere
with the Company's rights under its License Agreement with Dr.
Bodor relating to LotemaxTM. Dr. Bodor claims that the advances
against future revenues of LotemaxTM recently received by the
Company under its Marketing Agreement with Bausch & Lomb
Pharmaceuticals, Inc. are an up front licensing fee of which Dr.
Bodor is entitled to receive a portion and that the failure to
pay would constitute grounds for his terminating the License
Agreement. Dr. Bodor also claims that the Marketing Agreement is
actually a sublicense entitling Dr. Bodor to additional royalties
under his License Agreement and in response has commenced a separate
action seeking judicial clarification of these issues. The Company
strongly disagrees with Dr. Bodor's characterization of the
Bausch & Lomb Marketing Agreement and believes his interpretation
is incorrect and has no merit. To prevent Dr. Bodor from wrongfully
terminating the License Agreement, the Company commenced the action
to protect its rights under both the License Agreement and the
Marketing Agreement.
Item 2 Changes in Securities NONE
Item 3 Defaults upon Senior Securities NONE
Item 4 Submission of Matters to Vote of Security Holders NONE
Item 5 Other Information NONE
Item 6 Exhibits and Reports on Form 8-K
Reports on Form 8-K
___________________
(a) The Company's Current Report on Form 8-K, dated October
27, 1995, filed pursuant to Section 13 of the Exchange Act.
(b) The Company's Current Report on Form 8-K, dated
September 14, 1995, as amended, filed pursuant to Section 13 of
the Exchange Act.
(c) The Company's Current Report on Form 8-K, dated July 5,
1995, as amended, filed pursuant to Section 13 of the Exchange
Act.
Exhibits NONE
________
<PAGE>
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
Date: November 13, 1995 /s/ S. Colin Neill
______________________ _____________________
S. Colin Neill,
Acting Chief Financial
Officer
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