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 September 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 November 1, 1996, the Registrant had outstanding
29,219,969 shares of its $.03 par value Common Stock.
<PAGE>
<TABLE>
<CAPTION>
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
_______________________________________________________________________________________
September 30 December 31
1996 1995
<S> <C> <C>
Assets
Cash and cash equivalents $ 4,868,623 $ 7,442,791
Prepaid expenses and other current assets 637,818 477,393
____________ ____________
Total current assets 5,506,441 7,920,184
Fixed assets, net 713,232 855,456
Prepaid royalties 573,334
Other assets 244,607 301,704
Intangible assets, net 349,417 384,310
____________ ____________
Total assets $ 7,387,031 $ 9,461,654
============ ============
Liabilities and Shareholders' Equity
Accounts payable $ 741,492 $ 739,356
Accrued wages and other compensation 259,801 205,336
Accrued expenses and other liabilities 408,789 516,034
Current portion of long term debt 70,115 93,684
____________ ____________
Total current liabilities 1,480,197 1,554,410
Long term debt 121,348 181,648
Other liabilities 83,164 235,479
Advances against future sales 4,000,000 1,877,141
____________ ____________
Total liabilities 5,684,709 3,848,678
____________ ____________
2
<PAGE>
Shareholders Equity
Preferred stock, 1,250,000 shares authorized 57
Series A Convertible Preferred stock, $.03 par
value, $1,000 Liquidation Preference, 1,900 and
0 shares outstanding, respectively
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 60,694,062 58,763,797
Accumulated deficit (59,868,395) (54,024,741)
____________ ____________
1,702,873 5,613,527
Less: Common stock held in treasury, at par (551) (551)
____________ ____________
Total shareholders' equity 1,702,322 5,612,976
____________ ____________
Commitments and contingencies
Total liabilities and shareholders' equity $ 7,387,031 $ 9,461,654
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
3
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<TABLE>
<CAPTION>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
__________________________________________________________________________________
Three Months Ended
____________________________________
September 30 September 30
1996 1995
(see note 1)
<S> <C> <C>
Expenses
Research and development, net $ 1,386,219 $ 1,125,691
Patents 66,118 64,422
General and administrative 545,289 497,612
Depreciation and amortization 77,357 123,580
_____________ _____________
2,074,983 1,811,305
_____________ _____________
Loss from operations (2,074,983) (1,811,305)
_____________ _____________
Interest income 62,233 79,708
Interest expense (13,773) (60,901)
_____________ _____________
Net loss ($ 2,026,523) ($ 1,792,498)
_____________ _____________
Loss per share ($.07) ($.08)
============= =============
Weighted average shares outstanding 29,219,969 23,591,795
============= =============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
____________________________________________________________________________________
Nine Months Ended
____________________________________
September 30 September 30
1996 1995
(see note 1)
<S> <C> <C>
Revenues
License fees, royalties, net $ 75,000
_____________
Expenses
Research and development, net $ 3,975,918 3,877,558
Patents 187,504 420,118
General and administrative 1,646,400 1,888,639
Depreciation and amortization 240,439 321,342
_____________ _____________
6,050,261 6,507,657
_____________ _____________
Loss from operations (6,050,261) (6,432,657)
_____________ _____________
Interest income 265,061 115,933
Interest expense (58,453) (133,674)
_____________ _____________
Net loss ($ 5,843,653) ($ 6,450,398)
============= =============
Loss per share ($0.20) ($.33)
============= =============
Weighted average shares outstanding 29,216,698 19,462,141
============= =============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Cash Flows
_______________________________________________________________________________________________
Nine Months Ended
___________________________________
September 30 September 30
1996 1995
(see note 1)
<S> <C> <C>
Net loss ($5,843,653) ($6,450,398)
____________ ____________
Adjustments to reconcile net loss to net cash flows
used in operating activities
Depreciation and amortization 240,439 321,342
Warrant grant to consultants 48,333
Changes in operating assets and liabilities
Prepaid expenses and other current assets (103,328) 207,056
Accounts payable 2,136 (968,051)
Accrued expenses, wages and other liabilities (205,095) 134,181
Prepaid royalties (573,334)
Advances against future sales 2,122,859 1,577,141
____________ ____________
Total adjustments 1,483,677 1,320,002
____________ ____________
Net cash flows used in operating activities (4,359,976) (5,130,396)
____________ ____________
Cash flows from investing activities
(Purchases) disposals of fixed assets, net (63,322) (36,573)
____________ ____________
Net cash flows provided by (used in) investing activities (63,322) (36,573)
____________ ____________
6
<PAGE>
Cash flows from financing activities
Net cash proceeds from acquisition of Oculon 3,305,543
Proceeds from issuance of convertible debentures 1,270,000
Proceeds from issuance of Common Stock, net 8,100,000
Proceeds from issuance of Preferred Stock, net 1,882,000
Proceeds from exercise of warrants 51,000 39,000
Decrease in loans payable, net (83,870) (106,588)
____________ ____________
Net cash flows provided by (used in) financing 1,849,130 12,607,955
____________ ____________
Net increase (decrease) in cash and cash equivalents (2,574,168) 7,440,986
____________ ____________
Cash and cash equivalents at beginning of period 7,442,791 1,864,065
____________ ____________
Cash and cash equivalents at end of period $ 4,868,623 $ 9,305,051
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
7
<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 submitted 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 nine
month period ended September 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 reclassifications have been made to conform with
presentation in the 1995 Form 10-K.
8
<PAGE>
Pharmos Corporation
(unaudited)
Notes to Condensed Consolidated Financial Statements
_____________________________________________________________________
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 and from advances pursuant to the Marketing Agreement
(See Note 3). Management believes that existing cash and cash
equivalents combined with anticipated cash inflows from investment
income, grants and advances pursuant to the Marketing Agreement,
will be sufficient to support operations into the second 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.
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 line extension
products currently being developed by the Company. Pursuant to
the Marketing Agreement, Bausch & Lomb will purchase the active
drug substance (Loteprednol Etabonate) from the Company and has
provided the Company with $4 million in cash advances through
September 1996. An additional $2 million in advances may be made
9
<PAGE>
Pharmos Corporation
(unaudited)
Notes to Condensed Consolidated Financial Statements
_____________________________________________________________________
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.
As of September 30, 1996, the Company has received a total of $4
million 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 September 30, 1996 are reflected as a
long term liability in the accompanying balance sheet.
For the nine month period ended September 30, 1996, reimbursement
of clinical trial costs from Bausch & Lomb were $1,174,428,
including $263,183 which was included in prepaid expenses and
other current assets as of September 30.
4. Financing
On September 30, 1996, the Company completed a private placement
of Series A Convertible Preferred Stock and warrants to purchase
Common Stock, with institutional investors generating gross
proceeds of $1.9 million. The Preferred Stock is convertible into
common shares of the Company based on the share price at the time
of conversion. The 50,000 warrants issued to the investors are
exercisable at a price of $1.75 per share, commencing one year
after the closing for a three year period. The investors were
granted limited rights to approve certain financing by the Company
for 180 days from closing.
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.
10
<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"). 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
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.
11
<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 $59,868,395
through September 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 SEPTEMBER 30, 1996 AND 1995
Total operating expenses increased by $263,678, or 15%,
from $1,811,305 in 1995 to $2,074,983 in 1996 primarily due to
increases in research and development expenses.
Research and development expenses increased by $260,528,
or 23% primarily due to costs relating to three phase III trials
of Lotemax (one trial for Uveitis and two for Post Cataract
Surgery). Bausch & Lomb reimbursements for clinical trials totaled
$401,367 during the 1996 period thereby, reducing research and
development expenses by this amount.
General and administrative expenses increased by $47,677
or 10%, in 1996 due to expenses relating to the September 1996
private placement and certain other administrative cost,
partially offset by consolidation of all the USA operations to
Alachua, Florida.
12
<PAGE>
Depreciation and amortization expenses decreased by
$46,223 due to the absence of any such expenses in the 1996 period
for the New York facilities following its closing in late 1995, as
well as reduced depreciation expenses relating to the Alachua,
Florida operation.
Net interest income in 1996 of $48,460 represented an
increase of $29,653 compared to net interest income of $18,807 in
1995. This change reflects lower interest expense in 1996
relating to interest on a note that was paid in full.
NINE MONTHS ENDED SEPTEMBER 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 $457,396, or 7%,
from $6,507,657 in 1995 to $6,050,261 in 1996 due to decreases in
patent expenses, general and administrative expenses, and
depreciation and amortization.
Research and development expenses increased by $98,360,
or 3%, primarily due to the costs of phase III clinical trials
of Lotemax and LE-Allergy, partially offset by cost savings
actions taken by the Company in March 1995 that included staff
reductions and focusing on ongoing research and development
activities on the products of the Company which were closest to
commercialization. Bausch & Lomb reimbursements for clinical
trials totaled $1,174,428 during the 1996 period thereby reducing
research and development expenses by this amount.
Patent expenses decreased by $232,614 or 55%, 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 an original patent holder,
several patents whose technologies are not being pursued,
resulting in reduced patent maintenance costs.
General and administrative expenses decreased by
$242,239 or 13%, 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.
13
<PAGE>
Depreciation and amortization expenses decreased by
$80,903 due to the absence of any such expenses in the 1996 period
for the New York facilities following its closing in 1995, as well
as reduced depreciation expenses relating to the Florida
operation.
Net interest income in 1996 of $206,608 represented an
increase of $224,349 compared to net interest expense of $17,741
in 1995. This change reflects the Company's higher level of
investible funds in 1996 along with higher interest expense in
1995 relating to interest on the convertible debentures issued by
the Company in February 1995 and converted into Common Stock by
July 1995 and a note that was paid in full.
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 million, and cash
and cash equivalents of approximately $4.8 million as of
September 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, will be sufficient to support operations into the
second 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.
14
<PAGE>
Part II
Other Information
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . NONE
Item 2 Changes in Securities . . . . . . . . . . . . . . . NONE
Item 3 Defaults upon Senior Securities . . . . . . . . . . NONE
Item 4 Submission of Matters to Vote of Security Holders . NONE
Item 5 Other Information . . . . . . . . . . . . . . . . . NONE
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . NONE
15
<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:November 14, 1996 by: /s/ Alan M. Mark
________________________
Alan M. Mark,
Acting Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,868,623
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,506,441
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,387,031
<CURRENT-LIABILITIES> 1,480,197
<BONDS> 0
0
57
<COMMON> 877,149
<OTHER-SE> 825,116
<TOTAL-LIABILITY-AND-EQUITY> 7,387,031
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,773
<INCOME-PRETAX> (2,026,523)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,026,523)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,026,523)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
