<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996
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)
2 Innovation Drive
Alachua, Florida 32615
(Address of principal executive offices)
Registrant's telephone number, including area code: (904) 462-1210
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
As of April 19, 1996, the Registrant had outstanding
29,219,969 shares of its $.03 par value Common Stock.
<PAGE>
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
March 31, December 31,
1996 1995
Assets
Cash and cash equivalents $ 7,715,332 $ 7,442,791
Prepaid expenses and other current assets 591,152 477,393
------------ ------------
Total current assets 8,306,484 7,920,184
Fixed assets, net 821,148 855,456
Other assets 281,465 301,704
Intangible assets, net 372,679 384,310
------------ ------------
Total assets $ 9,781,776 $ 9,461,654
============ ============
Liabilities and Shareholders' Equity
Accounts payable $ 661,395 $ 739,356
Accrued wages and other compensation 245,203 205,336
Accrued expenses and other liabilities 563,714 516,034
Current portion of long term debt 79,921 93,684
------------ ------------
Total current liabilities 1,550,233 1,554,410
Long term debt 162,686 181,648
Other liabilities 159,458 235,479
Advances against future sales 4,000,000 1,877,141
------------ ------------
Total liabilities 5,872,377 3,848,678
------------ ------------
Shareholders' Equity
Preferred stock, 1,250,000 shares
authorized, none issued
Common stock, $.03 par value; 50,000,000
shares authorized, 29,238,325 and
29,149,039 shares issued, and
29,219,969 and 29,130,683 shares
outstanding, respectively 877,149 874,471
Paid in capital in excess of par 58,812,119 58,763,797
Accumulated deficit (55,779,318) (54,024,741)
------------ ------------
3,909,950 5,613,527
Less: Common stock held in treasury,
at par (551) (551)
------------ ------------
Total shareholders' equity 3,909,399 5,612,976
------------ ------------
Commitments and contingencies
Total liabilities and shareholders'
equity $ 9,781,776 $ 9,461,654
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
- -------------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
1996 1995
Revenues
License fees, royalties, net $ 55,000
------------ ------------
55,000
------------ ------------
Expenses
Research and development, net $ 1,138,738 1,726,599
Patents 52,370 211,455
General and administrative 537,139 747,038
Depreciation and amortization 86,333 98,695
------------ ------------
1,814,580 2,783,787
------------ ------------
Loss from operations (1,814,580) (2,728,787)
------------ ------------
Interest income 78,601 25,338
Interest expense (18,598) (40,567)
Other income 2,456
------------ ------------
Net loss $ (1,754,577) $ (2,741,560)
============ ============
Loss per share $ (.06) $ (.19)
============ ============
Weighted average shares outstanding 29,210,048 14,613,370
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
1996 1995
Net loss $ (1,754,577) $ (2,741,560)
------------ ------------
Adjustments to reconcile net loss to net
cash flow provided by (used in) operating
activities
Depreciation and amortization 86,333 98,695
Changes in operating assets and liabilities
Prepaid expenses and other current assets (93,520) 162,001
Accounts payable (77,961) (349,370)
Accrued expenses, wages and other
liabilities 11,526 222,318
Advances against future sales 2,122,859
------------ ------------
Total adjustments 2,049,237 133,644
------------ ------------
Net cash flows provided by (used in)
operating activities 294,660 (2,607,916)
------------ ------------
Cash flows from investing activities
(Purchases) disposals of fixed assets, net (40,394) 4,250
------------ ------------
Net cash flows provided by (used in)
investing activities (40,394) 4,250
------------ ------------
Cash flows from financing activities
Proceeds from issuance of convertible
debentures 1,270,000
Proceeds from exercise of warrants 51,000
Increase (decrease) in loans payable, net (32,725) 68,349
------------ ------------
Net cash flows provided by financing
activities 18,275 1,338,349
------------ ------------
Net increase (decrease) in cash and cash
equivalents 272,541 (1,265,317)
Cash and cash equivalents at beginning of
period 7,442,791 1,864,065
------------ ------------
Cash and cash equivalents at end of period $ 7,715,332 $ 598,748
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
Pharmos Corporation (the "Company") is a bio-pharmaceutical company
incorporated under the laws of the state of Nevada and is engaged in the
design and development of novel pharmaceutical products in various fields
including: site specific drugs for ophthalmic indications, neuroprotective
agents for treatment of central nervous system ("CNS") disorders, systemic
drugs designed to avoid CNS related side effects, and emulsion based
products for topical and systemic applications. The Company uses a variety
of patented and proprietary technologies to improve the efficacy and/or
safety of drugs. The Company's compounds are in various stages of
development, from preclinical to advanced clinical trials and in March 1995,
the Company completed the submission of its first New Drug Application
("NDA") with the U.S. Food & Drug Administration ('FDA"). The Company
conducts operations in Alachua, Florida and through its wholly-owned
subsidiary, Pharmos, Ltd., in Rehovot Israel.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accrual adjustments,
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1996, are not necessarily
indicative of the results that may be expected for the year ended December
31, 1996.
These financial statements and notes should be read in conjunction with the
Company's audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
2. Liquidity and Business Risks
The Company currently has no sources of recurring revenues and has incurred
operating losses since its inception. Such losses have resulted principally
from costs incurred in research and development and from general and
administrative expenses associated with the Company's operations. The
Company expects that operating losses will continue for at least the next
few years as product development, clinical testing and other operations
continue. The Company currently funds its operations principally through the
use of cash obtained from third party financing. Management believes that
existing cash and cash equivalents combined with anticipated cash inflows
from investment income, grants and advances pursuant to the Marketing
Agreement (See Note 3), will be sufficient to support operations into the
first quarter of 1997. The Company is continuing to actively pursue various
funding options, including equity offerings, commercial and other
borrowings, strategic corporate alliances and business combination
transactions, the establishment of product related research and development
limited partnerships, or a combination of these methods for obtaining the
additional financing that would be required to continue the research and
development necessary to complete the development of its products and bring
them to commercial markets.
<PAGE>
As described in Note 1, in March 1995, the Company submitted its first NDA.
It is reasonably possible that FDA approval for this product candidate
will not be granted on a timely basis or at all. Any delay in obtaining or
failure to obtain such approval would materially and adversely affect the
marketing of the Company's drug candidate and the Company's business,
financial position and results of operations.
3. Marketing Agreement
On June 30, 1995, the Company signed a marketing agreement (the "Marketing
Agreement") with Bausch & Lomb Pharmaceuticals, Inc. ("Bausch & Lomb") to
market Lotemax(Trademark), the Company's lead product candidate, on an
exclusive basis in the United States. As described in Notes 1 and 2, this
product candidate is pending FDA approval. The Marketing Agreement also
includes Lotemax(Trademark) line extension products currently being
developed by the Company. Under the Marketing Agreement, Bausch & Lomb
will purchase the active drug substance (Loteprednol Etabonate) from the
Company and provide the Company with $4 million in cash advances through
March 1996. An additional $2 million in advances may be made subject to
reaching certain development milestones in the Lotemax(Trademark) 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.
As of March 31, 1996, the Company has received $4,000,000 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. The Company may be obligated
to repay such advances if it is unable to supply Bausch & Lomb with certain
specified quantities of the active drug substance. Advances received through
March 31, 1996 are reflected as a long term liability in the accompanying
balance sheet as, in the opinion of management, no recoupment of such
advances is expected to occur in the next twelve months.
4. Shareholders' Equity, Warrants, Stock Options and
Certain Related Party and Other Financing Transactions
In January 1996 the Company issued 89,286 shares of its Common Stock as a
result of the exercise of warrants to purchase shares of the Company's
Common stock. Of this amount 75,000 shares were issued at an exercise price
of $.52 per share and 14,286 shares were issued at an exercise price of $.84
per share.
<PAGE>
5. Commitments and Contingencies
Legal proceedings
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. The
Company's motion to dismiss (along with motions to dismiss by numerous other
Defendants) was argued and submitted before United States District Court on
November 9, 1995 and a decision has not yet been rendered by the Court.
Management believes that the ultimate outcome will not have a significant
impact on the Company's financial position or results of operations.
Management has reviewed with counsel all other actions and proceedings
pending against or involving the Company. Although the ultimate outcome of
such actions and proceedings cannot be predicted with certainty at this
time, management believes that losses, if any, in excess of amounts accrued
resulting from those actions will not have a significant impact on the
Company's financial position or results of operations.
6. Subsequent Events
On April 26, 1996 the Company's Board of Directors approved the terms of a
settlement of the litigation initiated by the Company in October 1995
against Dr. Nicholas Boder regarding its licensing of its ophthalmic
anti-inflammatory drug, Loteprednol Etabonate ("Lotemax(Trademark)").
The Company and Dr. Bodor agreed to discontinue with prejudice all
pending actions in New York and Florida.
The settlement involves the Company making a lump sum payment on May 1, 1996
as an advance to Dr. Bodor, such amount being based on 14.33% of advances
received by the Company from Bausch & Lomb (See Note 3). Dr Bodor will also
receive advances at the rate of 14.33% on future advances and other
non-royalty payments from Bausch & Lomb or other parties with whom the
Company enters into marketing or similar arrangements for the licensed
technologies.
All advances made to Dr. Bodor will be offset against agreed-upon royalty
payments to be made to Dr. Bodor based on the net selling price of Bausch &
Lomb or other marketing partners.
The Company retains the exclusive right to make and use Lotemax(Trademark)
and line extension products in the territory covered by the License,
which includes the United States, Canada and substantially all of
Western Europe.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto.
Overview
The Company has generated limited revenues from product sales and is
dependent upon external financing, interest income, and research and development
contracts to pursue its intended business activities. The Company has not been
profitable since inception and has incurred a cumulative net loss of $55,779,318
through March 31, 1996. 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, and to secure additional financing.
Results of Operations
Quarters Ended March 31, 1996 and 1995
Total revenues decreased by $55,000 from 1995. Revenues in 1995 related to
a fee the Company received as a result of sublicensing certain technologies
which were not being actively developed by the Company.
Total operating expenses decreased by $969,207, or 35%, from $2,783,787 in
1995 to $1,814,580 in 1996 primarily due to decreases in research and
development expenses, patent expenses and general and administrative expenses.
Research and development expenses decreased by $587,861, or 34%, primarily
due to Bausch & Lomb reimbursing the Company for 50% of the costs of the ongoing
clinical trial costs related to Lotemax(Trademark) and line extension products
as well as cost savings actions taken by the Company in March 1995 that included
staff reductions and focusing ongoing research and development activities on the
products of the Company which were closest to commercialization.
Patent expenses decreased by $159,085, or 75%, compared to 1995. This
decrease reflects a return to more normalized levels of patent expenses as early
1995 was impacted by costs of defending patent challenges related to
technologies licensed by the Company.
General and administrative expenses decreased by $209,899, or 28%, in 1996
primarily reflecting the impact of the cost savings which resulted from the
Company's decisions in late 1994 and early 1995 to eliminate staff and relocate
its corporate headquarters from New York to Alachua, Florida.
Net interest income in 1996 of $60,003 represented a change of $75,232
compared to net interest expense of $15,229 in 1995. This change reflects the
Company's higher level of investible funds in 1996 along with interest expense
in 1995 including interest on the convertible debentures
<PAGE>
issued by the Company in February 1995 and converted into Common Stock by July
1995.
The net loss for 1996 of $1,754,577 reflected a decrease of $986,983, or
36%, from the net loss of $2,741,560 for the 1995 period. The decrease in
operating expenses described above accounted for substantially all of this
decrease.
Liquidity and Capital Resources
The Company currently has no sources of recurring revenues and has incurred
operating losses since its inception and has financed its operations with public
and private offerings of securities, a marketing agreement with Bausch & Lomb,
research contracts, license fees, royalties and sales, and interest income.
The Company had working capital of $6.8 million, including cash and cash
equivalents of $7.7 million as of March 31, 1996. Management believes that
existing cash and cash equivalents combined with additional cash inflows from
investment income, grants and advances pursuant to the Marketing Agreement
described below, will be sufficient to support operations into the first
quarter of 1997. Management believes that additional funding will be required
to fund operations until, if ever, profitable operations can be achieved.
Therefore, the Company is continuing to actively pursue various funding options,
including additional equity offerings, commercial and other borrowings,
strategic corporate alliances and business combination transactions, the
establishment of product related research and development limited partnerships,
or a combination of these methods for obtaining the additional financing that
would be required to continue the research and development necessary to complete
the development of its products and bring them to commercial markets.
During the first quarter of 1996 the Company received $2.1 million in cash
advances as provided for under the Marketing Agreement with Bausch & Lomb,
bringing the total of such advances to $4 million. An additional $2 million in
advances may be made subject to reaching certain development milestones in the
Lotemax(Trademark) 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. Under the Marketing
Agreement, Bausch & Lomb will purchase the active drug substance and 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. The
Company may be obligated to repay such advances if it is unable to supply Bausch
& Lomb with certain specified quantities of the active drug substance.
In connection with the settlement of the dispute with Dr. Bodor, on May 1,
1996, the Company paid Dr. Bodor 14.33% of advances received from Bausch & Lomb
under the Marketing Agreement. Such payment represents advances to Dr. Bodor
against future royalties on sales of Lotemax. Management believes that this
payment will not significantly effect the Company's ability to fund operations
into the first quarter of 1997.
<PAGE>
Part II
Other Information
Item 1 Legal Proceedings
On April 26, 1996 the Company's Board of Directors approved the terms
of a settlement of the litigation initiated by the Company in October
1995 against Dr. Nicholas Bodor regarding its licensing of its
ophthalmic anti-inflammatory drug, Loteprednol Etabonate
("Lotemax(Trademark)"). The Company and Dr. Bodor agreed to
discontinue with prejudice all pending actions in New York
and Florida.
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 February 15, 1996,
filed pursuant to Section 13 of the Exchange Act.
(B) The Company's Current Report on Form 8-K, dated April 18, 1996,
filed pursuant to Section 13 of the Exchange Act.
Exhibits NONE
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMOS CORPORATION
Dated: May 1, 1996 by: /s/ S. Colin Neill
------------------------------
S. Colin Neill
Acting Chief Financial Officer
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<PERIOD-START> JAN-01-1996
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