SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended June 30, 1999
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)
99 Wood Avenue South, Suite 301
Iselin, NJ 08830
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 452-9556
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
As of July 31, 1999, the Registrant had outstanding 43,696,478 shares of its
$.03 par value Common Stock.
<PAGE>
Part I. Financial Information
Item 1 Financial Statements
<TABLE>
<CAPTION>
Pharmos Corporation
(Unaudited)
Condensed Consolidated Balance Sheets
- -------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,156,830 $ 3,452,916
Inventory 2,174,567 1,727,096
Receivables 513,786 550,057
Prepaid royalties 277,645 259,488
Prepaid expenses and other current assets 201,629 206,793
------------ ------------
Total current assets 6,324,457 6,196,350
Fixed assets, net 1,209,280 1,181,030
Prepaid royalties, net of current portion 287,824 366,152
Intangible assets, net 221,476 244,738
Other assets 94,710 78,400
------------ ------------
Total assets $ 8,137,747 $ 8,066,670
============ ============
Liabilities and Shareholders' Equity
Accounts payable $ 342,405 $ 936,899
Accrued expenses 631,254 679,737
Accrued wages and other compensation 519,948 456,575
Advances against future sales 1,954,000 1,836,231
Note payable 537,134 --
------------ ------------
Total current liabilities 3,984,741 3,909,442
Advances against future sales, net of current portion 2,025,459 2,591,023
Other liabilities 100,000 100,000
------------ ------------
Total liabilities 6,110,200 6,600,465
------------ ------------
Shareholders' equity
Preferred stock, $.03 par value, 1,250,000 shares
authorized Series C convertible, 200 and 1,500
shares outstanding, respectively (liquidation preference
of $200,000 and $1,500,000 respectively) 6 45
Common stock, $.03 par value; 60,000,000 shares
authorized, 43,249,186 and 39,800,112 shares issued
and outstanding (excluding $551 in 1999 and 1998,
held in Treasury) in 1999 and 1998, respectively 1,298,315 1,193,452
Paid in capital in excess of par 80,847,369 78,051,783
Accumulated deficit (80,118,143) (77,779,075)
------------ ------------
Total shareholders' (deficit) equity 2,027,547 1,466,205
------------ ------------
Commitments and contingencies
Total liabilities and shareholders' equity $ 8,137,747 $ 8,066,670
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
Pharmos Corporation
(Unaudited)
Condensed Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Three Months Ended June 30,
1999 1998
------------ ------------
Revenues
Product sales $ 858,834 $ 893,156
License fee -- 350,000
------------ ------------
858,834 1,243,156
Cost of Goods Sold 209,537 339,852
------------ ------------
Gross Margin 649,297 903,304
------------ ------------
Expenses
Research and development, net 818,658 1,006,915
Selling, general and administrative 694,367 627,602
Patents 55,488 62,702
Depreciation and amortization 86,776 53,376
------------ ------------
Total operating expenses 1,655,289 1,750,595
------------ ------------
Loss from operations (1,005,992) (847,291)
------------ ------------
Other income (expense):
Interest income 29,445 91,583
Other income (expense), net (10,543) (3,595)
Interest expense (6,509) 3,566
------------ ------------
Other income, net 12,393 91,554
------------ ------------
Net loss (993,599) (755,737)
Less: Dividend embedded in convertible preferred stock (52,400)
Preferred stock dividends (5,178) (62,500)
------------ ------------
Net loss applicable to common shareholders ($ 998,777) ($ 870,637)
============ ============
Net loss per share applicable
to common stockholders - basic and diluted ($ .02) ($ .02)
============ ============
Weighted average shares outstanding 42,367,356 36,887,559
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
<PAGE>
<TABLE>
<CAPTION>
Pharmos Corporation
(Unaudited)
Condensed Consolidated Statements of Operations
- -----------------------------------------------------------------------------------------
Six Months Ended June 30,
1999 1998
------------ ------------
<S> <C> <C>
Revenues
Product sales $ 1,191,211 $ 893,156
License fee -- 350,000
------------ ------------
1,191,211 1,243,156
Cost of Goods Sold 298,795 339,852
------------ ------------
Gross Margin 892,416 903,304
------------ ------------
Expenses
Research and development, net 1,752,332 2,062,452
Selling, general and administrative 1,245,303 1,160,475
Patents 91,393 112,332
Depreciation and amortization 168,111 103,715
------------ ------------
Total operating expenses 3,257,139 3,438,974
------------ ------------
Loss from operations (2,364,723) (2,535,670)
------------ ------------
Other income (expense):
Interest income 63,145 197,657
Other income (expense), net (22,686) 10,769
Interest expense (11,912) (6,416)
------------ ------------
Other income, net 28,547 202,010
------------ ------------
Net loss (2,336,176) (2,333,660)
Less: Dividend embedded in convertible preferred stock (642,648)
Preferred stock dividends (22,007) (168,899)
------------ ------------
Net loss applicable to common shareholders ($ 2,358,183) ($ 3,145,207)
============ ============
Net loss per share applicable
to common stockholders - basic and diluted ($ .06) ($ .09)
============ ============
Weighted average shares outstanding 41,281,450 36,222,174
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
Pharmos Corporation
(Unaudited)
Condensed Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
Six Months Ended June 30,
1999 1998
----------- -----------
Cash flows from operating activities
Net loss ($2,336,176) ($2,333,660)
----------- -----------
Adjustments to reconcile net loss to net
cash flow used in operating activities
Depreciation and amortization 168,111 103,715
Changes in operating assets and liabilities
Inventory (447,471) 18,628
Receivables 36,271 (572,848)
Prepaid expenses and other current assets 5,164 9,290
Advanced royalties 60,171 70,708
Other assets (16,309) (865)
Accounts payable (594,494) (1,965,979)
Accrued expenses (48,483) (15,435)
Advances against future sales, net (447,795) (415,764)
Accrued wages 63,373 155,441
----------- -----------
Total adjustments (1,221,462) (2,613,109)
----------- -----------
Net cash flows used in operating activities (3,557,638) (4,946,769)
----------- -----------
Cash flows from investing activities
Purchases of fixed assets, net (173,099) (177,000)
----------- -----------
Net cash flows used in investing activities (173,099) (177,000)
----------- -----------
Cash flows from financing activities
Proceeds from issuances of common stock
and exercise of warrants, net 1,620,438
Proceeds from issuances of preferred stock, net 4,635,289
Proceeds from exercise of equity credit line 2,897,517
Increase (decrease) in loans payable 537,134 (30,733)
----------- -----------
Net cash flows provided by financing activities 3,434,651 6,224,994
----------- -----------
Net increase (decrease) in cash and cash equivalents (296,086) 1,101,225
Cash and cash equivalents at beginning of year 3,452,916 4,423,389
----------- -----------
Cash and cash equivalents at end of period $ 3,156,830 $ 5,524,614
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information pursuant to the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accrual adjustments,
considered necessary for a fair presentation have been included. Operating
results for the three-month and six-month periods ended June 30, 1999, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
1. The Company
Pharmos Corporation (the "Company") is a pharmaceutical company
specializing in the modification of existing molecules through proprietary
techniques to reduce undesirable side effects and/or enhance efficacy. The
Company is developing pharmaceuticals in various fields including: site
specific drugs for ophthalmic indications, neuroprotective agents with a
novel mechanism of action for the treatment of central nervous system
("CNS") disorders, newly designed molecules to treat cancer, and
emulsion-based products for topical and systemic applications. The Company
has administrative offices in Iselin, New Jersey and conducts operations
through its wholly owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.
In March 1998, the Company received approval for three separate New Drug
Applications ("NDA") from the U.S. Food and Drug Administration ("FDA").
Two of these approvals were for Lotemax(R) and one was for Alrex(TM).
Lotemax has been approved for the treatment of several ocular inflammatory
indications, including uveitis, and for post-operative inflammation. Alrex
has been approved for the treatment of seasonal allergic conjunctivitis.
2. Liquidity and Business Risks
While the Company has generated revenue through the sale of its approved
products in the market, it has incurred operating losses since its
inception. At June 30, 1999, the Company has an accumulated deficit of $
80,118,143. Such losses have resulted principally from costs incurred in
research and development and from general and administrative expenses. The
Company has funded its operations through the use of cash obtained
principally from third party financing. Management believes that cash and
cash equivalents of $ 3.2 million as of June 30, 1999, combined with
anticipated cash inflows from revenues derived from sales of Lotemax and
Alrex and the equity line of credit obtained on December 10, 1998 will be
sufficient to support operations through 2000. As of June 30, 1999, $ 6.4
million remained available under the equity line of credit.
The Company's success depends upon many factors that are beyond the
Company's immediate control, including market acceptance of Lotemax and
Alrex, competition, and the ability to obtain additional financing. 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. There can be no assurance
that Lotemax or Alrex will achieve market acceptance or that the Company
will be successful in obtaining additional financing or commercializing its
product candidates.
6
<PAGE>
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
3. Significant Accounting Policies
Revenue recognition
Sales revenue is recognized upon shipment of products to customers, less
allowances for estimated returns and discounts. License fees and royalties
are recognized when earned in accordance with the underlying agreements.
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.
All of the Company's revenues from product sales are derived from one
Customer.
Inventories
Inventories consist of loteprednol etabonate, the compound used in the
Company's products, Lotemax and Alrex, and is stated at the lower of cost
or market with cost determined on a weighted average basis.
Reclassifications
Certain amounts for 1998 have been reclassified to conform to the fiscal
1999 presentation. Such reclassifications did not have an impact on the
Company's financial position or results of operations.
4. Collaborative Agreements
In June 1995, the Company entered into a marketing agreement (the
"Marketing Agreement") with Bausch & Lomb Pharmaceuticals, Inc. ("Bausch &
Lomb") to market Lotemax and Alrex, on an exclusive basis in the United
States following receipt of FDA approval. The Marketing Agreement also
covers the Company's other loteprednol etabonate based product, LE-T. Under
the Marketing Agreement, Bausch & Lomb will purchase the active drug
substance (loteprednol etabonate) from the Company. A second agreement,
covering Europe, Canada and other selected countries, was signed in
December 1996 ("the New Territories Agreement").
Through June 30, 1999, Bausch and Lomb has provided the Company with $5
million in cash advances against future sales, of which approximately $4.0
million was outstanding at June 30, 1999. An additional $1 million is due
from Bausch & Lomb upon the receipt of regulatory approval for LE-T in the
United States. Bausch & Lomb is entitled to recoup the advances by
withholding certain amounts against payments for future purchases of the
active drug substance, based on the advances made, until all 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. The portion of advances expected to be recouped by
Bausch and Lomb during the following twelve months, based on management's
estimate of product sales to Bausch & Lomb, has been presented as a current
liability in the accompanying balance sheet at June 30, 1999 and December
31, 1998.
Bausch & Lomb also collaborates in the development of LE-T 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 and the New Territories
Agreement.
7
<PAGE>
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
5. Common and Preferred Stock Transactions
On February 4, 1998, the Company completed a private placement with
institutional investors of Series C Redeemable Convertible Preferred Stock
("Series C convertible preferred stock") and warrants to purchase 650,000
shares of common stock, generating gross proceeds of $5 million. The Series
C convertible preferred stock carries a 5% premium payable in common stock,
and is convertible, at the option of the holder, into common shares of the
Company 60 days subsequent to the date of issuance. The conversion price is
the lower of 90% of the average of the low trade prices of the Common Stock
for the five consecutive trading days ending on the day immediately prior
to the conversion date (the "Variable Conversion Price") or $2.89 per
share. Until converted into common stock, the Series C convertible
preferred stock has no voting rights. The warrants issued to the investor
and the finders are exercisable at prices ranging from $2.28 to $2.67 per
share, commencing one year after the closing for four and five year
periods. Under certain circumstances, the holders of the Series C
convertible preferred stock were initially able to require the Company to
redeem the outstanding shares of the Series C convertible preferred stock.
In December 1998, the Company received a waiver of the redemption features
from the holder of the Series C convertible preferred stock.
During 1998, the Company issued 2,299,957 shares of common stock upon
conversion of 3,500 shares of its Series C convertible preferred stock.
During the first quarter of 1999, the Company issued 858,585 shares of
common stock upon conversion of its Series C convertible preferred stock.
During the second quarter of 1999, the Company issued 334,339 shares of
common stock upon conversion of its Series C convertible preferred stock.
During July 1999, the Company issued 153,201 shares of common stock upon
conversion of its Series C convertible preferred stock. These July 1999
transactions completed the conversion of the Series C convertible preferred
stock, leaving no preferred stock outstanding at the end of July 1999.
As of June 30, 1999 and December 31, 1998, cumulative dividends on the
Company's outstanding Series C convertible preferred stock were $195,678
and $173,671, respectively. The dividends are payable in common stock of
the Company at the fair market value on the date of conversion.
In connection with the issuances of the Series A, B and C convertible
preferred stock, the Company was required to recognize, in its earnings per
share ("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 earliest date that conversion can occur. The Company
recorded a preferred stock dividend of $ 0 and $52,400 for the three months
ended June 30, 1999 and 1998, respectively, and $ 0 and $642,648 for the
six months ended June 30, 1999 and 1998, respectively, on the outstanding
shares of convertible preferred stock in connection with the conversion
discount.
The Company entered into a Private Equity Line of Credit Agreement (the
"Credit Agreement") as of December 10, 1998, and as amended on December 18,
1998, with Dominion Capital Fund, Ltd., which subsequently assigned its
rights to Centennial Parkway LLC. (the "Investor"). Pursuant to the terms
of the Credit Agreement, the Company may, from time to time during a
specified term, cause the Investor to purchase up to an aggregate of
$10,000,000 of the Company's common stock, par value $.03 per share (the
"Common Stock"). The price per share of Common Stock to be paid by the
Investor is to be determined at the time of each purchase according to a
specified formula which is based upon the average closing bid price of the
Common Stock on the principal trading exchange or market for the Common
Stock (the "Principal Market") over a prescribed, five-day period. With
each purchase of Common Stock, the Investor is also to receive warrants
exercisable for a number of shares of Common Stock equal to ten percent of
the number of shares of Common Stock purchased at an exercise price per
share equal to 125% of the closing bid price of the Common Stock on the
Principal Market on a specified date.
8
<PAGE>
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
During the first quarter of 1999, under terms of the Credit Agreement, the
Company issued 933,233 shares of its Common Stock and warrants to purchase
86,162 shares of its Common Stock to the Investor for consideration of
$1,158,000, net of fees. The warrants have exercise prices ranging from $
1.41 to $ 1.99 per share and expire in the first quarter of 2002.
During the second quarter of 1999, under terms of the Credit Agreement, the
Company issued 1,369,279 shares of its Common Stock and warrants to
purchase 114,311 shares of its Common Stock to the Investor for
consideration of $1,737,000 net of fees. The warrants have exercise prices
ranging from $ 1.56 to $ 2.38 per share and expire in the second quarter of
2002.
6. Segment and Geographic Information
The Company is active in one business segment: designing, developing,
selling and marketing pharmaceutical products. The Company maintains
development operations in the United States and Israel. The Company's
selling operations are maintained in the United States.
Geographic information for the three and six months ending June 30, 1999
and 1998 are as follows:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net revenues
United States $ 858,834 $ 893,156 $ 1,191,211 $ 893,156
Israel
-- -- -- --
----------- ----------- ----------- -----------
$ 858,834 $ 893,156 $ 1,191,211 $ 893,156
=========== =========== =========== ===========
Net loss
United States ($ 986,511) ($ 753,257) ($2,294,996) ($2,331,123)
Israel (7,088) (2,480) (41,210) (2,537)
----------- ----------- ----------- -----------
($ 993,599) ($ 755,737) ($2,336,176) ($2,333,660)
=========== =========== =========== ===========
7. Note Payable
On April 1, 1999, the Company issued a one-year note to finance the
purchase of certain drug substance inventory. The note is payable in
installments and bears interest at 8% per annum.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarters ended June 30, 1999 and 1998
Product sales revenue totaled $ 858,834 for the quarter ended June 30, 1999
compared to $ 893,156 for the quarter ended June 30, 1998. Product sales
commenced in the second quarter of 1998, following the March 1998 FDA approval
of the Company's Lotemax and Alrex ophthalmic products. A substantial portion of
the product sales for the quarter ended June 30, 1998 represented a stocking of
our customer's distribution channels and was not representative of the actual
product prescription demand for the period. Additionally, the Company recorded
license revenue of $ 350,000 for the quarter ended June 30, 1998. This license
revenue represented a non-recurring payment in exchange for the transfer of
certain drug technology.
Cost of goods sold for the quarter ended June 30, 1999 totaled $ 209,537
compared to $ 339,852 for the quarter ended June 30, 1998. The decline reflects
volume and product mix differences, as well as the timing of certain licensing
expenses. Cost of goods sold includes the cost of the active drug substance and
licensing costs.
Total operating expenses decreased $95,305 or 5%, from $1,750,594 in 1998 to
$1,655,289 in 1999. The decrease is primarily due lower research and development
expenses, offset by increased general and administrative expenses and
depreciation expense.
Net research and development expenses decreased by $ 188,257 or 19%, from $
1,006,915 in 1998 to $ 818,658 in 1999. The decrease in R&D expense is primarily
due to the absence of regulatory costs associated with Lotemax and Alrex, which
were approved by the FDA in March 1998.
General and administrative expenses increased by $ 66,765 or 11%, from $627,602
in 1998 to $694,367 in 1999. The increase is primarily due to higher spending on
investor relations activities offset by reduced facilities costs for the
Company's New Jersey offices.
Patent expenses decreased by $ 7,214, or 12%, from $ 62,702 in 1998 to $ 55,488
in 1999. This decrease is due principally to the timing of various patent costs.
Depreciation and amortization expenses increased by $33,400, or 63%, from
$53,376 in 1998 to $86,776 in 1999, reflecting increased depreciation expense
relating to laboratory equipment purchases in 1998.
Other income, net, decreased by $ 79,161, or 86%, from $ 91,554 in 1998 to $
12,393 in 1999. Interest income decreased as a result of lower average cash
balances.
Six months ended June 30, 1999 and 1998
Product sales revenue totaled $ 1,191,211 for the six months ended June 30, 1999
compared to $ 893,156 for the six months ended June 30, 1998. The 1999 period
includes product sales for all six months while the 1998 period includes sales
only for the second quarter of 1998, following the March 1998 FDA approval of
the Company's Lotemax and Alrex ophthalmic products. Additionally, the Company
recorded license revenue of $ 350,000 for the quarter ended June 30, 1998. This
license revenue represented a non-recurring payment in exchange for the transfer
of certain drug technology.
Cost of goods sold for the six months ended June 30, 1999 totaled $ 298,795
compared to $ 339,852 for the six months ended June 30, 1998. The decline
reflects volume and product mix differences, as well as the timing of certain
licensing expenses. Cost of goods sold includes the cost of the active drug
substance and licensing costs.
10
<PAGE>
Total operating expenses decreased $ 181,835 or 5%, from $3,438,974 in 1998 to
$3,257,139 in 1999. The decrease is primarily due lower research and development
expenses, offset by increased general and administrative expenses and
depreciation expense.
Net research and development expenses decreased by $310,120, or 15%, from
$2,062,452 in 1998 to $1,752,332 in 1999. The decrease in R&D expense is
primarily due the absence of development and regulatory costs associated with
Lotemax and Alrex, which were approved by the FDA in March 1998.
General and administrative expenses increased by $ 84,828 or 7%, from $1,160,475
in 1998 to $1,245,303 in 1999. The increase is primarily due to higher spending
on investor relations activities offset by reduced facilities costs for the
Company's New Jersey offices.
Patent expenses decreased by $ 20,939, or 19%, from $ 112,332 in 1998 to $
91,393 in 1999. This decrease is due principally to the timing of various patent
costs.
Depreciation and amortization expenses increased by $64,396, or 62%, from
$103,715 in 1998 to $ 168,111 in 1999, reflecting increased depreciation expense
relating to laboratory equipment purchases in 1998.
Other income, net, decreased by $ 173,463, or 86%, from $ 202,010 in 1998 to $
28,547 in 1999. The decline is principally due to lower interest income as a
result of lower average cash balances and less favorable foreign exchange
transactions.
Liquidity and Capital Resources
The Company had no sources of recurring revenues until the commencement of
product sales in April 1998, and has incurred operating losses since its
inception. At June 30, 1999, the Company has an accumulated deficit of $
80,118,143. The Company has financed its operations with public and private
offerings of securities, advances and other funding pursuant to a marketing
agreement with BLP, research contracts, license fees, royalties and sales, and
interest income.
The Company had working capital of $ 2.3 million, including cash and cash
equivalents of $ 3.2 million, as of June 30, 1999. On February 4, 1998, the
Company completed a private placement of convertible preferred stock and
warrants that generated $5 million in gross proceeds. On December 10, 1998, the
Company obtained a $10 million equity line of credit with a single institutional
investor. As of June 30, 1999, $ 6.4 million remained available under the equity
line of credit.
Management believes that the equity line of credit, existing cash and cash
equivalents combined with anticipated cash inflows from investment income, R&D
grants and proceeds from sales of the drug substance for Lotemax and Alrex to
BLP will be sufficient to support operations through 2000. The Company is
continuing 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 that would be required to continue the
development of its products and bring them to commercial markets. The Company's
success depends upon many factors that are beyond the Company's immediate
control, including market acceptance of Lotemax and Alrex, competition, and the
ability to obtain additional financing. There can be no assurance that the
Company will be successful in obtaining additional financing or commercializing
its product candidates, or that Lotemax or Alrex will achieve market acceptance.
Statements made in this document related to the development, commercialization
and market expectations of its drug products, to the establishment of corporate
collaborations, and to the Company's operational projections are forward-looking
and are made pursuant to the safe harbor provisions of the Securities Litigation
Reform Act of 1995. Such statements involve risks and uncertainties which may
cause results to differ materially from those set forth in these statements.
Among the factors that could result in a materially
11
<PAGE>
different outcome are the inherent uncertainties accompanying new product
development, action of regulatory authorities and the results of further trials.
Additional economic, competitive, governmental, technological, marketing and
other factors identified in Pharmos' filings with the Securities and Exchange
Commission could affect such results.
The Year 2000
The Year 2000 computer system issue involves hardware and software programs that
recognize a date using "00" as the year 1900 rather than the year 2000 and could
result in errors or systems failures for many businesses, including the Company.
Recognizing the importance of minimizing the impact of potential disruptions to
the Company's business resulting from the year 2000 issue, the Company has
adopted a plan to review and correct any potential issues which could impact the
Company's operations. The plan addresses the state of readiness of internal
computer systems as well as significant external third party systems to handle
the risks associated with the year 2000 issue.
Internal Preparation. The two major areas of concern for computer systems
internal to the Company are the financial systems and the data collection
systems for the Company's research efforts.
The Company's financial records are maintained on readily available generic
programs purchased from various vendors. These programs are run on personal
computers and a network server for personal computers. All of the Company's
currently utilized critical systems have been installed or updated since the
beginning of 1998. A required product specification for these new systems was
that the purchased systems were certified by the vendors as able to handle year
2000 issues properly ("Y2K compliant"). The critical financial systems addressed
include accounts payable, accounts receivable, inventory, cash management,
general ledgers and financial consolidation.
Information and data critical to the Company's research efforts are generally
maintained on printed records, however; many data summary, review and
communication activities utilize programs run on personal computers and a
network server for personal computers. The Company's critical systems for
research have been installed or updated in recent years and are Y2K compliant.
Additionally, the Company has a policy requiring maintenance of updated copies
of programs and files ("back up") in the case of possible system failures,
including year 2000 issue related failures. The back up material is maintained
at the Company's research facility and an additional copy is maintained at an
off site location.
The Company currently believes that its systems are either fully Y2K compliant,
that appropriate back up procedures exist or that the costs of addressing any
possible year 2000 issues will not have a material adverse impact on the
Company's operations or financial position.
Third Party Preparation. The Company's has identified its critical third party
relationships in order to assess potential year 2000 issues with the third
party's computer systems that might impact the Company's operations. These
critical relationships include one customer, one principal vendor, financial
institutions and various service vendors. The Company has surveyed these
critical third parties and seeking assurances that the third parties have
addressed year 2000 issues involving systems important in the conduct of
business with the Company, or that plans are in place to assure that the systems
are Y2K compliant before the end of 1999. The Company completed the survey of
critical third party relationships by the end of the second quarter of 1999. The
Company plans to address or correct all issues by the end of the third quarter
of 1999.
12
<PAGE>
Compliance Costs. The Company's expenditures on its year 2000 issues to date
have been nominal, and the Company does not anticipate any significant future
costs associated with year 2000 issues.
Risks of the Company's year 2000 issues. The greatest risks to the Company are
potential failures of the computer systems of the Company's third party
relationships. The Company currently believes that the most likely worst case
scenario concerning the year 2000 issue involves potential business disruptions
among the financial institutions with which the Company conducts business. If a
signification number of these financial institutions experience business
disruptions due to a year 2000 issue, the Company's cash flow could be
materially disrupted.
The Company believes that any year 2000 compliance problems of the Company, its
customers or vendors will not have any material adverse effect on the Company's
business, results of operations and financial condition.
13
<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
14
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMOS CORPORATION
Dated: August 9, 1999 by: /s/ Robert W. Cook
----------------------
Robert W. Cook
Vice President Finance
and Chief Financial Officer
(Principal Accounting and
Financial Officer)
15
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
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0
0
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