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, 1997
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 October 29, 1997, the Registrant had outstanding 34,118,368 shares of its
$.03 par value Common Stock.
<PAGE>
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
Assets
Cash and cash equivalents $ 6,517,002 $ 5,132,906
R & D reimbursements receivable 200,501 359,019
Prepaid expenses and other current assets 253,178 247,363
------------ ------------
Total current assets 6,970,681 5,739,288
Fixed assets, net 543,986 629,413
Prepaid royalties 716,667 573,334
Intangible assets, net 302,893 337,786
Other assets 70,084 188,472
------------ ------------
Total assets $ 8,604,311 $ 7,468,293
============ ============
Liabilities and Shareholders' Equity
Accounts payable $ 373,927 $ 847,415
Accrued expenses and other liabilities 1,534,776 451,136
Accrued wages and other compensation 241,460 357,981
Current portion of long term debt 57,299 115,244
------------ ------------
Total current liabilities 2,207,462 1,771,776
Advances against future sales 5,000,000 4,000,000
Long term debt 14,516 157,133
Other liabilities 46,485 51,119
------------ ------------
Total liabilities 7,268,463 5,980,028
------------ ------------
Shareholders' Equity
Preferred stock, $.03 par value, 1,250,000 shares authorized
Series A convertible, with a $1,000 liquidation preference, 0 and
1,900 shares outstanding, respectively -- 57
Series B convertible, with a $1,000 liquidation preference, 3,500
and 0 shares outstanding, respectively 105 --
Common stock, $.03 par value; 50,000,000 shares authorized,
33,981,969 and 30,727,525 shares issued, and 33,963,613 and
30,709,169 shares outstanding, respectively 1,019,459 921,825
Paid in capital in excess of par 70,494,710 62,668,886
Accumulated deficit (70,177,875) (62,101,952)
------------ ------------
1,336,399 1,488,816
Less: Common stock held in treasury, at par (551) (551)
------------ ------------
Total shareholders' equity 1,335,848 1,488,265
------------ ------------
Total liabilities and shareholders' equity $ 8,604,311 $ 7,468,293
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30, September 30,
1997 1996
<S> <C> <C>
Expenses
Research and development, net $ 1,092,389 $ 1,386,219
Drug substance purchase (see note 2) 28,800 --
Patents 56,027 66,118
General and administrative 644,399 545,289
Depreciation and amortization 72,898 77,357
------------ ------------
1,894,513 2,074,983
------------ ------------
Loss from operations (1,894,513) (2,074,983)
------------ ------------
Interest income, net of interest and other expense of $13,879 and
$13,773, respectively 92,016 48,460
------------ ------------
Net loss before extraordinary gain (1,802,497) (2,026,523)
Extraordinary gain from forgiveness of debt (see note 2), net of
$0 in income taxes 416,249 --
------------ ------------
Net loss ($ 1,386,248) ($ 2,026,523)
------------ ------------
Dividend embedded in convertible preferred stock (see note 5) ($ 651,895) --
------------ ------------
Net loss applicable to common stockholders ($ 2,038,143) ($ 2,026,523)
============ ============
Net loss per share applicable to common stockholders before
extraordinary gain ($ .07) ($ .07)
Extraordinary gain per share applicable to common stockholders .01 --
------------ ------------
Net Loss per share applicable to common stockholders ($ .06) ($ .07)
============ ============
Weighted average common shares outstanding 32,853,545 29,219,969
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1997 1996
------------ ------------
<S> <C> <C>
Expenses
Research and development, net $ 3,757,042 $ 3,975,918
Drug substance purchase (see note 2) 598,385 --
Patents 188,029 187,504
General and administrative 1,894,208 1,646,400
Depreciation and amortization 215,318 240,439
------------ ------------
6,652,982 6,050,261
------------ ------------
Loss from operations (6,652,982) (6,050,261)
------------ ------------
Interest income, net of interest and other expense of $80,637 and
$58,453, respectively 276,814 206,608
------------ ------------
Net loss before extraordinary gain (6,376,168) (5,843,653)
------------ ------------
Extraordinary gain from forgiveness of debt (see note 2), net of
$0 in income taxes 416,249 --
------------ ------------
Net loss ($ 5,959,919) ($ 5,843,653)
------------ ------------
Dividend embedded in convertible preferred stock (see note 5) ($ 1,927,169) --
------------ ------------
Net loss applicable to common stockholders ($ 7,887,088) ($ 5,843,653)
------------ ============
Net loss per share applicable to common stockholders before
extraordinary gain ($ .26) ($ .20)
Extraordinary gain per share applicable to common stockholders .01 --
------------ ------------
Net loss per share applicable to common stockholders ($ .25) ($ .20)
============ ============
Weighted average common shares outstanding 31,852,139 29,216,698
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss ($5,959,919) ($5,843,653)
----------- -----------
Adjustments to reconcile net loss to net cash flow
provided by operating activities
Depreciation and amortization 215,318 240,439
Changes in operating assets and liabilities
R&D reimbursements receivable, prepaid expenses and other 271,091 (103,328)
assets
Accounts payable (473,486) 2,136
Accrued expenses, accrued wages and other liabilities 962,485 (205,095)
Prepaid royalties (143,333) (573,334)
Advances against future sales 1,000,000 2,122,859
----------- -----------
Total adjustments 1,832,075 1,483,677
----------- -----------
Net cash flows used in operating activities (4,127,844) (4,359,976)
----------- -----------
Cash flows from investing activities
Purchases of fixed assets, net (94,998) (63,322)
----------- -----------
Net cash flows used in investing activities (94,998) (63,322)
----------- -----------
Cash flows from financing activities
Proceeds from issuance of Preferred Stock, net 1,882,000
Proceeds from exercise of warrants 67,500 51,000
Decrease in loans payable, net (200,562) (83,870)
----------- -----------
Net cash flows provided by financing 5,606,938 1,849,130
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,384,096 (2,574,168)
Cash and cash equivalents at beginning of period 5,132,906 7,442,791
----------- -----------
Cash and cash equivalents at end of period $ 6,517,002 $ 4,868,623
=========== ===========
</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. The Company
Pharmos Corporation (the "Company") is an emerging pharmaceutical company
incorporated under the laws of the state of Nevada and is engaged in the
development and commercialization of proprietary products based on rational
design of drugs to meet significant therapeutic needs in major markets.
The Company is developing pharmaceuticals in various fields including: site
specific drugs for ophthalmic indications, neuroprotective agents for
treatment of central nervous system ("CNS") disorders, newly designed
molecules to treat cancer, 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.
The Company has submitted two separate New Drug Applications ("NDA") to the
U.S. Food & Drug Administration ("FDA"): Lotemax(TM) for the treatment of
several ocular inflammatory diseases and LE-A, a product for the treatment
of seasonal allergic conjunctivitis. On September 3, 1997, the FDA issued
an "approvable letter" in response to the Company's Lotemax(TM) NDA. The
letter states that Lotemax(TM) is approvable subject to the Company
satisfactorily addressing several remaining issues.
The Company conducts operations in Alachua, Florida (see note 6) and
through its wholly-owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.
2. Basis of Presentation
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, 1997, are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1997.
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, 1996.
In the first nine months of 1997, the Company, in anticipation of approval
by the FDA of either or both of the NDAs submitted (see note 1) and in
accordance with its obligations under the Marketing Agreements (see note 4)
to supply Bausch & Lomb with
6
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
certain specified quantities of the active drug substance ("loteprednol
etabonate"), purchased bulk quantities of loteprednol etabonate and a key
reagent in the amount of $598,385. However, until the FDA approves either
of the Company's NDAs that use loteprednol etabonate (see note 3), the
Company has taken a valuation allowance of $598,385 against these purchases
to the lower of cost or market value as there are currently no alternative
uses for such quantities of this drug substance.
In the third quarter, the Company reached an agreement with the University
of Florida (the "University") to terminate a 1992 licensing agreement.
Under the terms of the agreement, the Company has returned the rights to
technologies the Company previously ceased developing, and the University
has forgiven $416,249 in debts owed by the Company.
3. Liquidity and Business Risks
The Company currently has no sources of recurring revenues and has incurred
operating losses since its inception. At September 30, 1997, the Company
has an accumulated deficit of $70,177,875 (unaudited). Such losses have
resulted principally from costs incurred in research and development and
from general and administrative expenses. The Company expects those
operating losses will continue as product development, clinical testing and
other normal operations continue. The Company currently funds its
operations through the use of cash obtained principally from third party
financing. Management believes that cash and cash equivalents of $6.5
million as of September 30, 1997, combined with anticipated cash inflows
from investment income and research & development grants, will be
sufficient to support operations well into the first quarter of 1998. The
Company is continuing to actively pursue various funding options, including
equity offerings, strategic corporate alliances, business combinations, and
the establishment of research and development partnerships to obtain the
additional financing necessary to complete the development of its product
candidates and bring them to commercial markets.
As described in Note 1, the Company has submitted two NDAs to the FDA. It
is possible that FDA approval for these product candidates will not be
granted on a timely basis or at all. Any delay in obtaining approval or
failure to obtain such approvals would materially and adversely affect the
Company's business, financial position and results of operations.
7
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. Collaborative Agreements
The Company has entered into marketing agreements (the "Marketing
Agreements") granting Bausch & Lomb Pharmaceuticals, Inc. ("Bausch & Lomb")
rights to market Lotemax(TM), the Company's lead product candidate, on an
exclusive basis in the United States and in certain territories outside the
U.S. The Marketing Agreements also cover the Company's two other
Loteprednol etabonate based products, which are referred to as LE-A and
LE-T. Under the Marketing Agreements, Bausch & Lomb will purchase the
active drug substance (Loteprednol etabonate) from the Company and, through
September 30, 1997, has provided the Company with $5 million in cash
advances against future sales.
Bausch & Lomb will be entitled to credits against future purchases of the
active drug substance based on the advances and future advances until the
advances have been repaid. 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, 1997 are reflected as a long term liability in the
accompanying balance sheet.
Bausch & Lomb collaborates in the development of products by making
available amounts up to 50% of the Company's Phase III clinical trial
costs. The Company has also agreed to reimburse Bausch & Lomb for certain
R&D expenses related to the development of the Company's products. As of
September 30, 1997, the Company has accrued $600,000 in such
reimbursements. The Company is also contingently liable to reimburse Bausch
& Lomb for an additional $400,000 of R&D expenses that are to be deducted
from future purchases of the active drug substance.
For the three month period and nine month period ended September 30, 1997
and 1996, R&D expense reimbursements from Bausch & Lomb, net of the
Company's R&D expense obligations to B&L, were ($188,394) and $401,368, and
($419,826) and $1,081,112, respectively. The net reimbursements are
included in research and development expense in the accompanying
consolidated statement of operations.
5. Common & Preferred Stock Transactions
On February 12, 1997, the Company issued warrants to purchase an aggregate
of 1,030,000 shares of common stock at an exercise price of $1.59 per share
to 15 employees of the Company. Such warrants become exercisable in
increments of 25% each on February 12, 1998, February 12, 1999, February
12, 2000 and February 12, 2001. All of such warrants expire on February 12,
2007. Also, on February 12, 1997, the Company issued warrants to purchase
an aggregate of 100,000 shares of common stock at an exercise price of
$1.59 per share to the Company's five outside directors. These warrants
become exercisable on the same basis as the warrants issued to
8
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
employees, but expire on February 12, 2003. Upon termination of employment
or termination as a director, all warrants held by such employee or
director will expire, except that any warrant that was exercisable on the
date of termination may, to the extent then exercisable, be exercised
within three months thereafter (or one year thereafter if the termination
is the result of death or permanent disability of such employee or
director).
In March 1997, the Company issued warrants to purchase an aggregate of
75,000 shares of common stock at an exercise price of $1.66 per share to an
employee of the Company. Such warrants become exercisable in increments of
25% each on March 1, 1998, March 1, 1999, March 1, 2000 and March 1, 2001.
All of such warrants expire on March 1, 2007. Upon termination of
employment, all warrants held by such employee will expire, except that any
warrant that was exercisable on the date of termination may, to the extent
then exercisable, be exercised within three months thereafter (or one year
thereafter if the termination is the result of death or permanent
disability of such employee).
On March 31, 1997, the Company completed a private placement of Series B
Convertible Preferred Stock and warrants to purchase common stock, with
institutional investors generating gross proceeds of $6 million. The
preferred stock carries a 5% dividend rate payable in cash or common stock,
at the option of the Company, and is convertible into common shares of the
Company based on the share price at the time of conversion less discounts
ranging from 17% to 20%. Until converted into common stock, the preferred
stock has no voting rights. The 159,000 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. The Company issued warrants to purchase an aggregate of 239,473
shares of common stock at an exercise price of $1.38 per share to certain
parties who assisted in the completion of the private placement . The
warrants vest March 31, 1998 and will expire in 2008.
During the first quarter of 1997, the Company issued 330,884 shares of its
common stock upon conversion of 440 shares of the Company's Series A
convertible preferred stock. The shares were issued at conversion prices
ranging from $1.27 per share to $1.46 per share. The Company also issued
25,457 shares of common stock in payment of dividends on the Series A
convertible preferred stock. As of the date of such issuances, these
dividends are valued at $33,282.
During the second quarter of 1997, the Company issued 929,404 shares of its
common stock upon conversion of 985 shares of the Company's Series A
convertible preferred stock. The shares were issued at conversion prices
ranging from $0.93 per share to $1.37 per share. The Company also issued
17,857 shares of common stock in payment of dividends on the Series A
convertible preferred stock. As of the date of such issuances, these
dividends are valued at $19,414.
9
<PAGE>
Pharmos Corporation
(Unaudited)
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
During the third quarter of 1997, the Company issued 1,828,185 shares of
its common stock upon conversion of 2,975 shares of the Company's Series A
and Series B convertible preferred stock. The shares were issued at
conversion prices ranging from $1.23 per share to $2.04 per share. The
Company also issued 85,157 shares of common stock in payment of dividends
on the Series A and Series B convertible preferred stock. As of the date of
such issuances, these dividends are valued at $136,140.
During the first quarter of 1997, the Company issued 37,500 shares of its
common stock upon exercise of warrants to purchase shares of the Company's
common stock at $1.80 per share.
As of September 30, 1997, cumulative dividends in arrears on the Company's
outstanding Series A and Series B convertible preferred stock are $0 and
$12,153, respectively. The dividends are payable in either cash or common
stock at the option of the Company.
In connection with the issuances of the Series A and B convertible
preferred stock, the Company was required to recognize in the EPS
calculation, the value of the conversion discount as a dividend to the
preferred stockholders. The dividend has been recognized in the EPS
calculation on a pro rata basis over the period beginning with issuance to
the date that conversion can occur. During the quarter ended September 30,
1997, the Company recorded a preferred stock dividend of $651,895 on the
outstanding shares of Series A and B convertible preferred stock in
connection with the conversion discount.
6. Subsequent Events
The Company announced on October 6, 1997 the relocation of its corporate
headquarters to Iselin, New Jersey and the closure of its Alachua, Florida
facility by year-end. The remaining R&D and regulatory activities required
to support Lotemax(TM), LE-Allergy and LE-T will be maintained by
transferring responsibilities to Bausch & Lomb Pharmaceuticals, to the
Pharmos R&D site in Israel and by continuing employment of key Florida
personnel on a consulting basis. The Company has taken a $100,000 charge
against earnings in the third quarter in estimate of the costs of the
relocation and closure.
7. Legal Proceedings
Management has reviewed with counsel all 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.
10
<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.
Results of Operations
Quarter ended September 30, 1997 and 1996
Total operating expenses decreased $180,470, or 9%, from $2,074,983 in 1996 to
$1,894,513 in 1997 primarily due to a decrease in research and development
costs, and patent costs partially offset by bulk material purchases for the
manufacture of loteprednol etabonate ("LE"), the active drug-substance of
Lotemax(TM), and an increase in general and administrative expenses. Excluding
the drug substance purchase, operating expenses decreased by $209,270, or 10%
from $2,074,983 in 1996 to $1,865,713 in 1997.
Net research and development expenses decreased by $293,830, or 21%, from
$1,386,219 in 1996 to $1,092,389 in 1997. The completion of the clinical trials
associated with the Company's NDA submissions for LE resulted in a decrease in
R&D expense. The company significantly increased participation in approved R&D
reimbursement programs which contributed to a reduction in R & D expense.
Increased costs for toxicology studies for the LET program (a combination of LE
and Tobramycin) and Dexanabinol, as well as activities to advance the
manufacturing of LE, partially offset the decrease in R & D expense.
In the current quarter, the Company, in anticipation of approval by the FDA of
either or both of the NDAs submitted and in accordance with its obligations
under the Marketing Agreements to supply Bausch & Lomb with certain specified
quantities of LE ( the active drug-substance), purchased bulk quantities of a
key reagent essential to the manufacture of LE in the amount of $28,800.
However, until the FDA approves either of the Company's NDAs that use LE, the
Company has taken a valuation allowance of $28,800 against these purchases to
lower of cost or market value as there are currently no alternative uses for
such quantities of this reagent.
Patent expenses decreased by $10,091, or 15%, from $66,118 in 1996 to $56,027 in
1997. This decrease is due to the timing of completion of certain patent
applications.
General and administrative expense increased by $99,110, or 18%, from $545,289
in 1996 to $644,399 in 1997. On October 6, 1997 the Company announced the
relocation of its corporate headquarters to New Jersey and the closure of its
Florida facility by year-end and as a result, the Company accrued a one-time
charge of $100,000.
Depreciation and amortization expenses decreased by $4,459, or 6%, from $77,357
in 1996 to $72,898 in 1997, reflecting reduced depreciation expense relating to
the Alachua, Florida operation.
11
<PAGE>
Pharmos Corporation
(Unaudited)
Interest and other income, net of interest and other expenses, increased by
$46,708, or 96%, from $48,460 in 1996 to $95,168 in 1997. Interest and other
income, net, increased as a result of higher average cash balances and
translation gains as a result of the fluctuation of the Israeli Shekel against
the US Dollar.
On September 8, 1997, the Company signed an agreement terminating the 1992
licensing agreement with the University of Florida and returned the rights to
technologies the Company previously ceased developing. The termination agreement
included a waiver of $416,249 in outstanding debts due the University.
Nine Months ended September 30, 1997 and 1996
Total operating expenses increased $602,721, or 10%, from $6,050,261 in 1996 to
$6,652,982 in 1997 primarily due to the purchase of drug substance for the
manufacture of ("LE"), the active drug-substance of Lotemax(TM), as well as
increases in general and administrative expenses, off-set by a decrease in R & D
expense. Excluding the drug substance purchase, operating expenses increased by
$4,336, or less than 1% from $6,050,261 in 1996 to $6,054,597 in 1997.
Net research and development expenses decreased by $218,876, or 6%, from
$3,975,918 in 1996 to $3,757,042 in 1997. The completion of the clinical trials
associated with the Company's NDA submissions for LE resulted in a decrease in
R&D expense, as did increased participation in approved R&D programs. Increased
costs for toxicology studies for the LET program (a combination of LE and
Tobramycin) and Dexanabinol, as well as for regulatory filings , combined with
significant activities together with Bausch & Lomb Pharmaceuticals ("BLP") to
advance the manufacturing of LE, partially offset the decrease in R & D expense.
In the first nine months of 1997, in anticipation of approval by the FDA of
either or both of the NDAs submitted and in accordance with its obligations
under the Marketing Agreements to supply BLP with certain specified quantities
of the active drug-substance, the Company purchased bulk quantities of LE, as
well as a key reagent critical to the manufacturing process of LE, in the amount
of $598,385. However, until the FDA approves either of the Company's NDAs that
use LE, the Company has taken a valuation allowance of $598,385 against these
purchases to lower of cost or market value as there are currently no alternative
uses for such quantities of the drug substance or the reagent.
Patent expenses increased by $525, or less than 1%, from $187,504 in 1996 to
$188,029 in 1997.
General and administrative expenses increased by $247,808, or 15%, from
$1,646,400 in 1996 to $1,894,208 in 1997. On October 6, 1997 the Company
announced the relocation of its corporate headquarters to New Jersey and the
closure of its Florida facility by year-end and as a result, the Company accrued
a one-time charge of $ 100,000.
12
<PAGE>
Pharmos Corporation
(Unaudited)
Depreciation and amortization expenses decreased by $25,121, or 10%, from
$240,439 in 1996 to $215,318 in 1997, reflecting reduced depreciation expense
relating to the Alachua, Florida operation.
Interest and other income, net of interest and other expense, increased by
$73,358, or 36%, from $206,608 in 1996 to $279,966 in 1997. Interest and other
income, net, increased as a result of higher average cash balances and
translation gains as a result of the fluctuation of the Israeli Shekel against
the US Dollar.
On September 8, 1997, the Company signed an agreement terminating the 1992
licensing agreement with the University of Florida and returned the rights to
technologies the Company previously ceased developing. The termination agreement
included a waiver of $416,249 in outstanding debts due the University.
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, advances and other funding pursuant to
marketing and co-development agreements with Bausch and Lomb, research
contracts, license fees, royalties and sales, and interest income.
The Company has working capital of $4.8 million, including cash and cash
equivalents of $6.5 million, as of September 30, 1997. On March 31, 1997, the
Company completed a private placement of convertible preferred stock and
warrants that generated $ 6 million in gross proceeds. Management believes that
existing cash and cash equivalents combined with anticipated cash inflows from
investment income and R&D grants will be sufficient to support operations well
into the first quarter of 1998. Management believes that additional funding will
be required to fund operations until, if ever, profitable operations can be
achieved. Therefore, the Company will continue to actively pursue various
funding options, including additional equity offerings, strategic corporate
alliances, business combinations and the establishment of product related
research and development limited partnerships, to obtain the additional
financing required to continue the development of its product candidates and
bring them to commercial markets.
In connection with the issuances of the Series A and B convertible preferred
stock, the Company recognized in the EPS calculation, in compliance with the
SECs position on accounting for conversion discounts embedded in preferred
stock, the value of the conversion discount as a dividend to the preferred
stockholders. The dividend has been recognized in the EPS calculation on a pro
rata basis over the period beginning with issuance to the date that conversion
can occur. During the quarter ended September 30, 1997, the Company recorded a
preferred stock dividend of $651,895 on the outstanding shares of Series A and B
convertible preferred stock in connection with the conversion discount.
13
<PAGE>
Pharmos Corporation
(Unaudited)
Pursuant to the U.S. Marketing agreement with Bausch & Lomb and following the
NDA submission for LE-A, the Company received in March 1997, an additional $ 1
million in advances against future sales of the active drug substance (needed to
manufacture the drug), $ 143,333 of which was advanced to the license holder.
Cumulative advances from Bausch & Lomb as of September 30, 1997 total $5
million. Bausch & Lomb will be entitled to recoup the advances by way of credits
from future sales of Lotemax(TM) and line extension products. 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.
14
<PAGE>
Pharmos Corporation
(Unaudited)
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
On September 3, 1997, the FDA issued an "approvable letter" in
response to the Company's NDA for LotemaxTM (loteprednol etabonate
ophthalmic suspension 0.5%). The approvable letter is the FDA's formal
response to the Lotemax NDA, which was submitted by the Company. The
letter states that LotemaxTM is approvable subject to the Company
satisfactorily addressing several remaining issues.
The Company on September 8, 1997 terminated a 1992 licensing agreement
with the University of Florida, returning the rights to technologies
the Company previously ceased developing. The termination agreement
includes the waiver of $416,249 in debts of the Company to the
University.
The Company announced on October 6, 1997 the relocation of its
corporate headquarters to Iselin, New Jersey and the closure of its
Alachua, Florida facility by year-end. The remaining R&D and
regulatory activities required to support Lotemax(TM), LE-Allergy and
LE-T will be maintained by transferring responsibilities to Bausch &
Lomb Pharmaceuticals, to the Pharmos R&D site in Israel and by
continuing employment of key Florida personnel on a consulting basis.
Item 6 Exhibits and Reports on Form 8-K
Reports on Form 8-K
The Company's Current Report on Form 8-K, dated September 16, 1997,
filed pursuant to Section 13 of the Exchange Act.
Exhibits 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, 1997 By:
----------------------------------
Shaun Marcus
Vice President - Finance
(Principal Accounting Officer)
16
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,517,002
<SECURITIES> 0
<RECEIVABLES> 200,501
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,970,681
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,604,311
<CURRENT-LIABILITIES> 2,207,462
<BONDS> 0
0
105
<COMMON> 1,019,459
<OTHER-SE> 316,284
<TOTAL-LIABILITY-AND-EQUITY> 8,604,311
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,894,513
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,879
<INCOME-PRETAX> (1,802,497)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,802,497)
<DISCONTINUED> 0
<EXTRAORDINARY> 416,249
<CHANGES> 0
<NET-INCOME> (1,386,248)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
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