<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 quarter ended June 30, 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 July 19, 1996, the Registrant had outstanding 29,219,969 shares
of its $.03 par value Common Stock.
<PAGE>
Pharmos Corporation
(Unaudited)
<TABLE>
<CAPTION>
Consolidated Balance Sheets
- --------------------------------------------------------------------------------------------------
June 30 December 31
1996 1995
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 4,965,682 $ 7,442,791
Prepaid expenses and other current assets 712,284 477,393
------------ ------------
Total current assets 5,677,966 7,920,184
Fixed assets, net 763,337 855,456
Prepaid royalties 573,334
Other assets 259,855 301,704
Intangible assets, net 361,048 384,310
------------ ------------
Total assets $ 7,635,540 $ 9,461,654
============ ============
Liabilities and Shareholders' Equity
Accounts payable $ 847,537 $ 739,356
Accrued wages and other compensation 238,779 205,336
Accrued expenses and other liabilities 410,959 516,034
Current portion of long term debt 60,355 93,684
------------ ------------
Total current liabilities 1,557,630 1,554,410
Long term debt 146,800 181,648
Other liabilities 84,265 235,479
Advances against future sales 4,000,000 1,877,141
------------ ------------
Total liabilities 5,788,695 3,848,678
------------ ------------
Shareholders' Equity
Preferred stock, 1,250,000 shares authorized, none issued
Common stock, $.03 par value; 50,000,000 shares 877,149 874,471
authorized, 29,238,325 and 29,149,039 shares issued, and
29,219,969 and 29,130,683 shares outstanding, respectively
Paid in capital in excess of par 58,812,119 58,763,797
Accumulated deficit (57,841,872) (54,024,741)
------------ ------------
1,847,396 5,613,527
Less: Common stock held in treasury, at par (551) (551)
------------ ------------
Total shareholders' equity 1,846,845 5,612,976
------------ ------------
Commitments and contingencies
Total liabilities and shareholders' equity $ 7,635,540 $ 9,461,654
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
- ------------------------------------------------------------------------------
Three Months Ended
June 30 June 30
1996 1995
Revenues (see note 1)
License fees, royalties, net $ 20,000
------------
Expenses
Research and development, net $ 1,450,961 1,026,682
Patents 69,016 144,241
General and administrative 563,972 642,577
Depreciation and amortization 76,749 99,066
------------ ------------
2,160,698 1,912,566
------------ ------------
Loss from operations (2,160,698) (1,892,566)
------------ ------------
Interest income 124,227 11,217
Interest expense (26,082) (34,991)
------------ ------------
Net loss ($ 2,062,553) ($ 1,916,340)
============ ============
Loss per share ($.07) ($.10)
============ ============
Weighted average shares outstanding 29,219,969 20,033,911
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
- ------------------------------------------------------------------------------
Six Months Ended
June 30 June 30
1996 1995
Revenues (see note 1)
License fees, royalties, net $ 75,000
------------
Expenses
Research and development, net $ 2,589,699 2,751,867
Patents 121,386 355,696
General and administrative 1,101,111 1,391,029
Depreciation and amortization 163,082 197,761
------------ ------------
3,975,278 4,696,353
------------ ------------
Loss from operations (3,975,278) (4,621,353)
------------ ------------
Interest income 202,828 39,011
Interest expense (44,680) (75,558)
------------ ------------
Net loss ($ 3,817,130) ($ 4,657,900)
============ ============
Loss per share (0.13) ($.27)
============ ============
Weighted average shares outstanding 29,215,036 17,338,614
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Pharmos Corporation
(Unaudited)
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------------------
Six Months Ended
June 30, June 30,
1996 1995
(see note 1)
<S> <C> <C>
Net loss ($3,817,130) ($4,657,900)
----------- -----------
Adjustments to reconcile net loss to net cash flows
used in operating activities
Depreciation and amortization 163,082 197,762
Changes in operating assets and liabilities
Prepaid expenses and other current assets (193,042) 372,174
Accounts payable 108,181 (661,347)
Accrued expenses, wages and other liabilities (222,846) 358,545
Prepaid royalties (573,334)
Advances against future sales 2,122,859 1,000,000
----------- -----------
Total adjustments 1,404,900 1,267,134
----------- -----------
Net cash flows used in operating activities (2,412,230) (3,390,766)
----------- -----------
Cash flows from investing activities
(Purchases) disposals of fixed assets, net (47,701) 287
----------- -----------
Net cash flows provided by (used in) investing activities (47,701) 287
----------- -----------
Cash flows from financing activities
Net cash proceeds from acquisition of Oculon 3,072,426
Proceeds from issuance of convertible debentures 1,270,000
Proceeds from exercise of warrants 51,000
Decrease in loans payable, net (68,178) (46,696)
----------- -----------
Net cash flows provided by (used in) financing activities (17,178) 4,295,730
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,477,109) 905,251
----------- -----------
Cash and cash equivalents at beginning of period 7,442,791 1,864,065
----------- -----------
Cash and cash equivalents at end of period $ 4,965,682 $ 2,769,316
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<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 six month
period ended June 30, 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.
The comparative numbers for 1995 have been restated to reflect the
adjustments made in an amendment to Form 10-Q for the quarter ended
September 30, 1995. In the amendment, the Company revised its accounting
treatment for the acquisition of Oculon Corporation to reflect the
transaction as an acquisition of net assets, rather than the purchase of a
business with related goodwill. Other minor classifications have been made
to conform with presentation in the 1995 Form 10-K.
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
6
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
- -------------------------------------------------------------------------------
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.
As described in Note 1, in March 1995, the Company submitted its first
NDA. It is 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(TM), the Company's lead product candidate, on an exclusive
basis in the United States. The Marketing Agreement also includes
Lotemax(TM) 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 June 1996. An
additional $2 million in advances may be made subject to reaching certain
development milestones in the Lotemax(TM) 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 June 30, 1996, the Company has received a total of $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 June 30, 1996 are reflected as a long
term liability in the accompanying balance sheet.
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.
7
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
- -------------------------------------------------------------------------------
5. Commitments and Contingencies
Legal matters
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(TM)"). The Company
and Dr. Bodor agreed to discontinue with prejudice all pending actions in
New York and Florida. In connection with the settlement of the dispute
with Dr. Bodor, on May 1, 1996, the Company paid Dr. Bodor $573,334 of
advances received from Bausch & Lomb under the Marketing Agreement. Such
payment represents advances to Dr. Bodor against future royalties on sales
of Lotemax.
On June 6, 1996 the United States District Court, Southern District of New
York granted Pharmos' motion to be dismissed from the Blech Securities
class action suit. The Company had been named in March 1995, as an
additional co-defendent in an amended complaint filed in a class action
suit against David Blech, D. Blech & Co and a number of other defendents,
including, eleven publicly traded biotechnology companies.
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 predictedwith 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.
8
<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 $57,841,872 through June 30, 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
Quarter Ended June 30, 1996 and 1995
Total revenues decreased by $20,000 from 1995. Revenues in 1995 related to
fees the Company received as a result of sublicensing certain technologies
which were not being actively developed by the Company.
Total operating expenses increased by $248,132, or 13%, from $1,912,566 in
1995 to $2,160,698 in 1996 due to increases in research and development
expenses partially offset by decreases in other expenses.
Research and development expenses increased by $424,279, or 41%. The
increase results from an additional Uveitis study for Lotemax(TM) and clinical
phase III trials for the first Lotemax(TM) line extension project.
Patent expenses decreased by $75,225 or 52%, compared to 1995. This
decrease reflects a return to more normalized levels of patent expenses as mid
1995 was impacted by costs of defending patent challenges related to
technologies licensed by the Company. Further, the Company has returned to the
University of Florida, several patents whose technologies are not being
pursued, resulting in reduced patent maintenance costs.
General and administrative expenses decreased by $78,605 or 12%, in 1996
primarily reflecting the impact of the cost savings from 1995 relocation of the
corporate headquarters from New York to Alachua, Florida.
9
<PAGE>
Net interest income in 1996 of $98,145 represented a change of $121,919
compared to net interest expense of $23,774 in 1995. This change reflects the
Company's higher level of investible funds in 1996 along with higher interest
expense in 1995 relating to primarily interest on the convertible debentures
issued by the Company in February 1995 and converted into Common Stock by July
1995.
The net loss for 1996 of $2,062,553 reflects an increase of $146,213, or
8%, from the net loss of $1,916,340 for the 1995 period. The increased research
and development activities account for the increase in the net loss, offset by
cost reductions in other areas.
Six Months Ended June 30, 1996 and 1995
Total revenues decreased by $75,000 from 1995. Revenues in 1995 related to
fees the Company received as a result of sublicensing certain technologies
which were not being actively developed by the Company.
Total operating expenses decreased by $721,075, or 15%, from $4,696,353 in
1995 to $3,975,278 in 1996 due to decreases in research and development
expenses, patent expenses and general and administrative expenses.
Research and development expenses decreased by $162,168, or 6%, primarily
due to Bausch & Lomb reimbursing the Company for 50% of the costs of the
ongoing clinical trial costs related to Lotemax(TM) 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 $234,310 or 66%, compared to 1995. This
decrease reflects a return to more normalized levels of patent expenses as mid
1995 was impacted by costs of defending patent challenges related to
technologies licensed by the Company. Further, the Company has returned to the
University of Florida, several patents whose technologies are not being
pursued, resulting in reduced patent maintenance costs.
General and administrative expenses decreased by $289,918 or 21%, 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 $158,148 represented a change of $194,695
compared to net interest expense of $36,547 in 1995. This change reflects the
Company's higher level of investible funds in 1996 along with higher interest
expense in 1995 relating to primarily interest on the convertible debentures
issued by the Company in February 1995 and converted into Common Stock by July
1995.
The net loss for 1996 of $3,817,130 reflected a decrease of $840,770, or
18%, from the net loss of $4,657,900 for the 1995 period. All expense
catagories contributed to the decrease for the reasons discribed above.
10
<PAGE>
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 $4.1 million, and cash and cash
equivalents of $4.9 million as of June 30, 1996. Management believes that
existing cash and cash equivalents combined with anticipated 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(TM) 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 $573,334 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.
11
<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(TM)"). The Company and Dr. Bodor agreed to discontinue with
prejudice all pending actions in New York and Florida.
On June 6, 1996 the United States District Court, Southern District of
New York granted Pharmos' motion to be dismissed from the Blech
Securities class action suit. The Company had been named in March
1995, as an additional co-defendent in an amended complaint filed in a
class action suit against David Blech, D. Blech & Co and a number of
other defendents, including, eleven publicly traded biotechnology
companies.
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 April 18, 1996,
filed pursuant to Section 13 of the Exchange Act.
Exhibits NONE
12
<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
Dated: August 12, 1996 by: /s/ S. Colin Neill
---------------------------------
S. Colin Neill
Acting Vice President Finance and
Chief Accounting Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,965,682
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,677,966
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,635,540
<CURRENT-LIABILITIES> 1,557,630
<BONDS> 0
<COMMON> 877,149
0
0
<OTHER-SE> 969,696
<TOTAL-LIABILITY-AND-EQUITY> 7,635,540
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,082
<INCOME-PRETAX> (2,062,553)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,062,553)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,062,553)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
