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 March 31, 2000
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 May 1, 2000, the Registrant had outstanding 52,485,197 shares of its $.03
par value Common Stock.
<PAGE>
Part I. Financial Information
Item 1 Financial Statements
Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 19,087,900 $ 2,918,554
Inventories 1,698,383 1,837,751
Receivables 503,315 961,769
Prepaid royalties 279,177 284,193
Prepaid expenses and other current assets 279,197 222,391
------------- -------------
Total current assets 21,847,972 6,224,658
Fixed assets, net 1,226,823 1,183,859
Prepaid royalties, net of current portion 121,078 166,477
Intangible assets, net 186,583 198,214
Other assets 18,086 18,086
------------- -------------
Total assets $ 23,400,542 $ 7,791,294
------------- -------------
Liabilities and Shareholders' Equity
Note payable $ -- $ 338,128
Accounts payable 574,905 680,054
Accrued expenses 458,305 711,189
Accrued wages and other compensation 693,734 549,542
Advances against future sales 2,062,000 2,010,000
------------- -------------
Total current liabilities 3,788,944 4,288,913
Advances against future sales, net of current portion 893,838 1,177,565
Other liabilities 100,000 100,000
------------- -------------
Total liabilities 4,782,782 5,566,478
------------- -------------
Shareholders' equity
Common stock, $.03 par value; 80,000,000 shares
authorized, 52,459,197 and 45,424,401 shares
issued and outstanding (excluding $551 in 2000
and 1999, held in Treasury) in 2000 and 1999,
respectively 1,573,962 1,362,181
Paid in capital 101,449,049 83,372,742
Accumulated deficit (84,405,251) (82,510,107)
============= =============
Total shareholders' equity 18,617,760 2,224,816
============= =============
Commitments and contingencies
Total liabilities and shareholders' equity $ 23,400,542 $ 7,791,294
============= =============
</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 March 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues
Product sales $ 663,580 $ 332,377
Cost of Goods Sold 280,529 89,258
------------ ------------
Gross Margin 383,051 243,119
------------ ------------
Expenses
Research and development, net 1,436,975 933,674
Selling, general and administrative 859,069 550,936
Patents 31,960 35,905
Depreciation and amortization 97,060 81,335
------------ ------------
Total operating expenses 2,425,064 1,601,850
------------ ------------
Loss from operations (2,042,013) (1,358,731)
Other income
Interest income 146,931 33,700
Other income (expense), net (6,102) (16,177)
Interest expense 6,040 (1,369)
------------ ------------
Other income, net 146,869 16,154
------------ ------------
Net loss (1,895,144) (1,342,577)
Less : Preferred stock dividends -- (16,829)
------------ ------------
Net loss applicable to common shareholders ($ 1,895,144) ($ 1,359,406)
============ ============
Net loss per share applicable
to common stockholders - basic and diluted ($ 0.04) ($ 0.03)
============ ============
Weighted average shares outstanding - basic and diluted 48,982,681 40,180,840
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
Pharmos Corporation
(Unaudited)
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net loss ($ 1,895,144) ($ 1,342,577)
Adjustments to reconcile net loss to net
cash flow used in operating activities
Depreciation and amortization 97,060 81,335
Changes in operating assets and liabilities
Inventory 139,368 45,514
Receivables 458,454 152,337
Prepaid expenses and other current assets (56,806) 1,959
Advanced royalties 50,415 17,104
Other assets -- (16,341)
Accounts payable (105,149) (423,597)
Accrued expenses (252,884) 208,582
Accrued wages 144,192 38,055
------------ ------------
Total adjustments 474,650 104,948
------------ ------------
Net cash flows used in operating activities (1,420,494) (1,237,629)
Cash flows from investing activities
Purchases of fixed assets, net (128,393) (110,937)
------------ ------------
Net cash flows used in investing activities (128,393) (110,937)
Cash flows from financing activities
Advances against future sales (231,727) (127,285)
Proceeds from issuances of common stock
and exercise of warrants, net 16,695,838 --
Proceeds from exercise of equity credit line 1,592,250 1,156,266
Decrease in notes payable (338,128) --
------------ ------------
Net cash provided by financing activities 17,718,233 1,028,981
Net increase (decrease) in cash and cash equivalents 16,169,346 (319,585)
Cash and cash equivalents at beginning of year 2,918,554 3,452,916
------------ ------------
Cash and cash equivalents at end of period $ 19,087,900 $ 3,133,331
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<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 period ended March 31, 2000, are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2000.
1. The Company
Pharmos Corporation (the "Company") is a bio-pharmaceutical company that
develops and commercializes products for the ophthalmic, central nervous
system, neurological and other key healthcare markets. The Company has a
diverse product pipeline that includes marketed products with superior
therapeutic indices, and drug candidates with enhanced molecular structures
that display improved safety and/or efficacy properties compared to the
parent molecules or to competing products. The Company has executive
offices in Iselin, New Jersey and also 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").
These approvals were for Lotemax(R) and Alrex(R). 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 March 31, 2000, the Company has an accumulated deficit of
$84,405,251. 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 $19.1 million as of March 31, 2000, combined with
anticipated cash inflows from revenues derived from sales of Lotemax and
Alrex, will be sufficient to support the Company's continuing operations.
In order to finance the development of its drug pipeline, 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. There can be no
assurance that the Company will be successful in commercializing its new
product candidates.
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.
The Company's revenues are principally derived from one customer.
5
<PAGE>
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
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 1999 have been reclassified to conform to the fiscal
2000 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 third loteprednol etabonate based product, LE-T. Under
the Marketing Agreement, Bausch & Lomb purchases 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 March 31, 2000, Bausch and Lomb has provided the Company with $5
million in cash advances against future sales, of which approximately $3
million was outstanding at March 31, 2000. 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 March 31, 2000 and December
31, 1999.
Bausch & Lomb also collaborates in the development of 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 and the New Territories
Agreement.
5. Common and Preferred Stock Transactions
During the first quarter of 2000, the Company issued 4,500,000 shares of
its common stock in various private equity sales, and received
consideration, net of offering costs and expenses, of $12,648,383.
During the first quarter of 2000, the Company issued 2,184,728 shares of
its common stock upon the exercise of stock options and warrants, and
received consideration of $4,035,855.
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.
6
<PAGE>
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
During the first quarter of 2000, under terms of the Credit Agreement, the
Company issued 368,424 shares of its Common Stock and warrants to purchase
38,588 shares of its Common Stock to the Investor for consideration of
$1,592,250, net of fees. The warrants have exercise prices ranging from
$2.19 to $16.80 per share and expire in the first quarter of 2003.
During the first quarter of 2000, the Company issued warrants to purchase
8,000 shares of its common stock as compensation to a consultant. The
warrants were immediately exercisable, have an exercise price of $1.19 per
share and expire by February 2005.
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 months ending March 31, 2000 and 1999
are as follows:
2000 1999
---- ----
Net revenues
United States $ 663,580 $ 332.377
Israel -- --
----------- -----------
$ 663,580 $ 332,377
=========== ===========
Net loss
United States ($1,868,894) ($1,308,455)
Israel (26,250) (34,122)
----------- -----------
($1,895,144) ($1,342,577)
=========== ===========
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarters ended March 31, 2000 and 1999
Product sales revenue totaled $663,580 for the quarter ended March 31, 2000, a
100% increase from $332,377 for the quarter ended March 31, 1999. Product sales
increases reflect market share gains for the Company's Lotemax and Alrex
ophthalmic products and additional stocking of Alrex in advance of a price
increase effective April 2000. Product revenues for the quarter ended March 31,
2000 were below product revenues for the quarter ended December 31, 1999. This
decline is due to seasonal factors in the demand for the Company's products and
a price increase effective January 2000 for Lotemax which led to additional
stocking in the quarter ended December 31, 1999.
Cost of goods sold for the quarter ended March 31, 2000 totaled $280,529,
increasing 214% from $89,258 for the quarter ended March 31, 1999. The higher
cost of goods sold is due to higher sales volumes, product sample expenses and
higher royalty and licensing costs.
Total operating expenses increased $823,214 or 51%, from $1,601,850 in 1999 to
$2,425,064 in 2000. The increase is primarily due to higher research and
development expenses, as well as increased general and administrative expenses.
Net research and development expenses increased by $503,301 or 54%, from
$933,674 in 1999 to $1,436,975 in 2000. Cost increases partially resulted from
higher regulatory costs for the Company's ophthalmic products, including filing
fees for product approvals in Europe. Also, the Company experienced higher costs
as a result of a higher level of activity in early discovery programs and higher
professional consulting spending on clinical studies of the Company's
dexanabinol (HU-211) drug candidate.
General and administrative expenses increased by $308,133 or 56%, from $550,936
in 1999 to $859,069 in 2000. The increase is primarily due to higher employee
costs.
Depreciation and amortization expenses increased by $15,725, or 19%, from to
$81,335 in 1999 to $97,060 in 2000, reflecting increased depreciation expense
relating to laboratory equipment purchases in 1999.
Other income, net, increased by $130,715, from $16,154 in 1999 to $146,869 in
2000. Interest income increased as a result of higher average cash balances.
Liquidity and Capital Resources
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
March 31, 2000, the Company has an accumulated deficit of $84,405,251. 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 $18.1 million, including cash and cash
equivalents of $19.1 million, as of March 31, 2000. During the quarter ended
March 31, 2000, the Company raised $12.6 million from various equity
transactions and $4.0 million from the exercise of previously outstanding
warrants and options to purchase the Company's common stock.
On December 10, 1998, the Company obtained a $10 million equity line of credit
with a single institutional investor. During the quarter ended March 31, 2000,
the Company raised $1.6 million from the equity line of credit. As of March 31,
2000, $2.3 million remained available under the equity line of credit.
8
<PAGE>
Management believes that existing cash and cash equivalents combined with
anticipated cash inflows from proceeds from sales of the drug substance for
Lotemax and Alrex to BLP, investment income, R&D grants and the availability of
the equity line of credit, will be sufficient to support the Company's
continuing operations. The Company continues 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 is
required to continue the development of its products and bring them to
commercial markets.
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 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.
9
<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
10
<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: May 12, 2000
by: /s/ Robert W. Cook
--------------------------
Robert W. Cook
Vice President Finance and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-END> Mar-31-2000
<CASH> 19,087,900
<SECURITIES> 0
<RECEIVABLES> 503,315
<ALLOWANCES> 0
<INVENTORY> 1,698,383
<CURRENT-ASSETS> 21,847,972
<PP&E> 2,934,368
<DEPRECIATION> 1,707,545
<TOTAL-ASSETS> 23,400,542
<CURRENT-LIABILITIES> 3,788,944
<BONDS> 0
1,573,962
0
<COMMON> 0
<OTHER-SE> 17,043,798
<TOTAL-LIABILITY-AND-EQUITY> 23,400,542
<SALES> 663,580
<TOTAL-REVENUES> 663,580
<CGS> 383,051
<TOTAL-COSTS> 2,425,064
<OTHER-EXPENSES> 140,829
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,040
<INCOME-PRETAX> (1,895,144)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,895,144)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,895,144)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
