SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q\A
AMENDMENT NO. 1 TO FORM 10-Q
Pharmos Corporation
---------------------------------------------
(Exact name of registrant as specified in its charter)
The undersigned registrant hereby amends and restates its entire
Quarterly Report on Form 10-Q, for the fiscal quarter ended September 30, 1995,
as set forth in the pages attached hereto.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: March 15, 1996 PHARMOS CORPORATION
-----------------------
Registrant
By:/s/ S. Colin Neill
---------------------
S. Colin Neill,
Acting Chief Financial
Officer
<PAGE>
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
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Pharmos Corporation
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(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
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(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
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(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 March 15, 1996, the issuer had outstanding 29,130,679 shares of its $0.03
par value Common Stock.
<PAGE>
PHARMOS CORPORATION
(UNAUDITED)
CONSOLIDATED BALANCE SHEETS
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<TABLE><CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
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
Other assets 287,251 --
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Total assets $11,789,568 $4,289,416
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------------- ------------
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
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Total current liabilities 2,525,404 3,018,463
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Advances against future sales 1,577,141 --
Other liabilities 403,917 91,318
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Total liabilities 4,506,462 3,109,781
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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 58,788,240 46,669,890
Accumulated deficit (52,379,054) (45,928,656)
------------- ------------
7,283,657 1,180,186
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Less: Common stock in treasury, at par (551) (551)
Total shareholders' equity 7,283,106 1,179,635
Commitments and contingencies -- --
Total liabilities and shareholders' equity $11,789,568 $4,289,416
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</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
PHARMOS CORPORATION
(UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
Three Months Ended September 30,
1995 1994
Revenues
License fees, royalties $16,855 --
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16,855 --
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Expenses
Research and development, net 1,143,249 1,542,996
Patents 64,422 257,981
General and administrative 430,671 938,104
Depreciation and amortization 189,818 109,328
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1,828,160 2,848,409
Loss from operations (1,811,305) (2,848,409)
Interest income 79,708 5,498
Interest expense (58,116) (17,292)
Other expense (2,785) --
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Net loss ($1,792,498) ($2,860,203)
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------------- ------------
Loss per share ($0.08) ($0.29)
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Weighted average shares outstanding 23,591,795 9,807,099
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The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PHARMOS CORPORATION
(UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
Nine Months Ended September 30,
1995 1994
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 387,580 323,951
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6,574,654 8,854,261
------------- ------------
Loss from operations (6,432,657) (8,846,420)
Interest income 115,933 95,958
Interest expense (133,674) (39,287)
Other income (expense) 0 150
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Net loss ($6,450,398) ($8,789,599)
------------- ------------
------------- ------------
Loss per share ($0.33) ($0.91)
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------------- ------------
Weighted average shares outstanding 19,462,141 9,606,367
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------------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PHARMOS CORPORATION
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE><CAPTION>
Nine Months Ended September 30,
1995 1994
<S> <C> <C>
Cash flows from operating activities
Net loss ($6,450,398) ($8,789,599)
------------- ------------
Adjustments to reconcile net loss to net
cash flows used in operating activities
Depreciation and amortization 387,580 323,453
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
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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)
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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
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<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.
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(TM), 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
1
<PAGE>
PHARMOS CORPORATION
(UNAUDITED)
NOTES TO SEPTEMBER 30, 1995 CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
inflammatory and allergic conditions affecting the anterior segment of the
eye. The Company is currently working on a combination product of
Lotemax(TM) with an antibiotic and on other products of the Lotemax(TM) 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(TM) and Lotemax(TM) 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(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. (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 at a price of
$1.80 per share, commencing one year after the closing of the offering
through the fifth anniversary, 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.
2
<PAGE>
PHARMOS CORPORATION
(UNAUDITED)
NOTES TO SEPTEMBER 30, 1995 CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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.
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.
3
<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.
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.
4
<PAGE>
PHARMOS CORPORATION
(UNAUDITED)
NOTES TO SEPTEMBER 30, 1995 CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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.
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
5
<PAGE>
PHARMOS CORPORATION
(UNAUDITED)
NOTES TO SEPTEMBER 30, 1995 CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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.
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.
6
<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.
As of the acquisition date, and as reflected in the Company's filings on
Form 10-Q for the quarters ended June 30, 1995 and September 30, 1995, the
Company accounted for the transaction as the purchase of a business. As
such, the Company recognized as an asset the excess of purchase price over
the fair market value of net assets acquired. Such asset was to be amortized
over a period of nine months.
In the accompanying unaudited financial statements the Company has revised
its accounting treatment of this transaction to reflect the Oculon
acquisition as an acquisition of net assets. Accordingly, the shares of
stock and warrants issued have been recorded at the fair value of the
adjusted net assets received of $3,555,755, less transaction costs of
$483,386 and the originaly recorded asset excess of purchase price over
assets acquired and related amortization expense amounting to $992,454
through the period ending September 30, 1995 have been eliminated.
Subsequent to the acquisition the Company identified additional costs of
approximately $722,000 principally related to severance obligations to
Oculon's former employees, a provision for losses on Oculon's lease
obligations and costs associated with terminating Oculon's technology
license agreements, such obligations existed as of the acquisition date and
accordingly have been reflected as adjustments to the net assets acquired.
The following adjustments to the previously filed reports on Form 10-Q for
the quarters ended June 30, 1995 and September 30, 1995 reflect the impact
of eliminating amortization related to the intangible asset purchase price
in excess net assets acquired and adjusting operating expenses by the amount
of additional costs described above which in the accompanying financial
statements have been reflected as reductions in net assets acquired.
7
<PAGE>
PHARMOS CORPORATION
(UNAUDITED)
NOTES TO SEPTEMBER 30, 1995 CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, 1995 June 30, 1995
As Reported As Adjusted As Reported As Adjusted
Net Loss ($ 2,583,075) ($ 1,916,340) ($ 5,324,635) ($ 4,657,900)
Net Loss per Share ($ 0.13) ($ 0.08) ($ 0.31) ($ 0.20)
Three Months Ended Nine Months Ended
September 30, 1995 September 30, 1995
As Reported As Adjusted As reported As Adjusted
Net Loss ($ 2,118,217) ($ 1,792,498) ($ 7,442,852) ($ 6,450,398)
Net Loss per Share ($ 0.09) ($ 0.08) ($ 0.38) ($ 0.33)
June 30, 1995 September 30, 1995
As Reported As Adjusted As Reported As Adjusted
Total Assets $ 5,857,072 $ 5,342,322 $ 12,287,545 $ 11,789,568
Total Equity (deficit) $ 617,800 ($ 144,694) $ 7,781,083 $ 7,283,106
8
<PAGE>
PHARMOS CORPORATION
(UNAUDITED)
NOTES TO SEPTEMBER 30, 1995 CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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.
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(TM), the Company's
lead product, 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 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(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.
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. 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 loteprednol etabonate.
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.
9
<PAGE>
PHARMOS CORPORATION
(UNAUDITED)
NOTES TO SEPTEMBER 30, 1995 CONSOLIDATED FINANCIAL STATEMENTS
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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.
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(TM)"). Dr. Bodor claims that the advances
against future revenues of Lotemax(TM), 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(TM). 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.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
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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
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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 $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
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periods. These decreases are primarily attributable to a reduced levels of
clinical trials related to the Company's lead compound Lotemax(TM), 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 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
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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
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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.
On June 30, 1995, the Company signed a definitive marketing agreement with
Bausch & Lomb Pharmaceuticals, Inc. to market Lotemax(TM), the Company's lead
product, 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 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(TM) 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.
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PART II
OTHER INFORMATION
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Item 1 Legal Proceedings
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The Company recently received a favorable ruling from the New York Supreme
Court granting the Company's motion for a preliminary injunction enjoining Dr.
Nicholas 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 ("LotemaxTM"). In
addition, the Court denied Dr. Bodor's motion to dismiss the action for lack of
personal jurisdiction. The Court's ruling was in an action commenced by the
Company in Supreme court, New York County, on October 27, 1995.
In its Memorandum Decision, the Court found that "Pharmos has demonstrated
a likelihood of success on the merits," and held that Dr. Bodor "has not
demonstrated that the License Agreement prohibits the co-marketing of a product
that contains a licensed product, as opposed to the marketing of the licensed
product itself." The Court also instructed the parties to submit a proposed
order implementing the terms of the Court's Memorandum Decision and affidavits
regarding an appropriate undertaking (bond) by the Company pending a final
determination of the action.
Item 2 Changes in Securities NONE
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Item 3 Defaults upon Senior Securities NONE
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Item 4 Submission of Matters to Vote of Security Holders NONE
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Item 5 Other Information NONE
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Item 6 Exhibits and Reports on Form 8-K
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Reports on Form 8-K
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(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 October 27, 1995,
as amended, filed pursuant to Section 13 of the Exchange Act.
(c) The Company's Current Report on Form 8-K, dated September 14,
1995, as amended, filed pursuant to Section 13 of the Exchange Act.
(d) 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
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SIGNATURE PAGE
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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: March 15, 1996 /s/ S. Colin Neill
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S. Colin Neill
Acting Chief Financial
Officer
