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, 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 November 2, 2000, the Registrant had outstanding 53,879,343 shares of its
$.03 par value Common Stock.
<PAGE>
Part I. Financial Information
Item 1 Financial Statements
Pharmos Corporation
(Unaudited)
Condensed Consolidated Balance Sheets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- --------------
<S> <C> <C>
Assets
Cash and cash equivalents ............................................................. $ 23,737,327 $ 2,918,554
Inventories ........................................................................... 1,114,423 1,837,751
Receivables ........................................................................... 1,254,237 961,769
Prepaid royalties ..................................................................... 104,974 284,193
Prepaid expenses and other current assets ............................................. 310,759 222,391
------------- -------------
Total current assets ............................................................. 26,521,720 6,224,658
Fixed assets, net ..................................................................... 1,435,944 1,183,859
Prepaid royalties, net of current portion ............................................. 143,333 166,477
Restricted cash ....................................................................... 4,006,294 --
Other assets .......................................................................... 922,436 216,300
------------- -------------
Total assets ..................................................................... $ 33,029,727 $ 7,791,294
------------- -------------
Liabilities and Shareholders' Equity
Note payable .......................................................................... $ -- $ 338,128
Accounts payable ...................................................................... 299,499 680,054
Accrued expenses ...................................................................... 871,988 711,189
Accrued wages and other compensation .................................................. 722,896 549,542
Advances against future sales ......................................................... 758,366 2,010,000
------------- -------------
Total current liabilities ........................................................ 2,652,749 4,288,913
Advances against future sales, net of current portion ................................. 1,000,000 1,177,565
Convertible debentures, net ........................................................... 6,533,415 --
Other liabilities ..................................................................... 100,000 100,000
------------- -------------
Total liabilities ................................................................ 10,286,164 5,566,478
------------- -------------
Shareholders' equity
Common stock, $.03 par value; 80,000,000 shares authorized, 53,879,343 and
45,424,401 shares issued and outstanding (excluding $551 in 2000 and
1999, held in Treasury)
in 2000 and 1999, respectively .................................................... 1,616,016 1,362,181
Paid in capital ..................................................................... 107,913,889 83,372,742
Accumulated deficit ................................................................. (86,786,342) (82,510,107)
------------- -------------
Total shareholders' equity ....................................................... 22,743,563 2,224,816
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Commitments and contingencies
Total liabilities and shareholders' equity ....................................... $ 33,029,727 $ 7,791,294
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
Pharmos Corporation
(Unaudited)
Condensed Consolidated Statements of Operations
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenues
Product sales .......................................................... $ 1,661,735 $ 833,118
License fee ............................................................ 100,000 --
------------ ------------
1,761,735 833,118
Cost of Goods Sold ......................................................... 580,202 265,649
------------ ------------
Gross Margin ........................................................... 1,181,533 567,469
------------ ------------
Expenses
Research and development, net .......................................... 1,362,475 839,390
Selling, general and administrative .................................... 999,987 599,174
Patents ................................................................ 46,536 61,781
Depreciation and amortization .......................................... 167,620 85,353
------------ ------------
Total operating expenses ............................................ 2,576,618 1,585,698
------------ ------------
Loss from operations ....................................................... (1,395,085) (1,018,229)
------------ ------------
Other income (expense):
Interest income ........................................................ 314,905 34,378
Other income (expense), net ............................................ (9,192) 20,805
Interest expense ....................................................... (441,787) (9,239)
------------ ------------
Other income(expense), net ............................................. (136,074) 45,944
------------ ------------
Net loss ................................................................... (1,531,159) (972,285)
------------ ------------
Less: Preferred stock dividends ........................................ -- (246)
------------ ------------
Net loss applicable to common shareholders ................................. ($ 1,531,159) ($ 972,531)
============ ============
Net loss per share applicable
to common stockholders - basic and diluted ............................. ($ .03) ($ .02)
============ ============
Weighted average shares outstanding ........................................ 52,986,170 43,664,398
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
Pharmos Corporation
(Unaudited)
Condensed Consolidated Statements of Operations
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenues
Product sales ................................................................ $ 3,740,152 $ 2,024,329
License fee .................................................................. 100,000 --
------------ ------------
3,840,152 2,024,329
Cost of Goods Sold ............................................................... 1,337,893 564,444
------------ ------------
Gross Margin ................................................................. 2,502,259 1,459,885
------------ ------------
Expenses
Research and development, net ................................................ 3,733,144 2,591,722
Selling, general and administrative .......................................... 2,838,476 1,844,477
Patents ...................................................................... 128,433 153,174
Depreciation and amortization ................................................ 376,838 253,464
------------ ------------
Total operating expenses .................................................. 7,076,891 4,842,837
------------ ------------
Loss from operations ............................................................. (4,574,632) (3,382,952)
------------ ------------
Other income (expense):
Interest income .............................................................. 739,345 97,523
Other income (expense), net .................................................. (2,370) (1,881)
Interest expense ............................................................. (438,578) (21,151)
------------ ------------
Other income, net ............................................................ 298,397 74,491
------------ ------------
Net loss ......................................................................... (4,276,235) (3,308,461)
Less: Dividend embedded in convertible preferred stock
Preferred stock dividends .................................................... -- (22,253)
------------ ------------
Net loss applicable to common shareholders ....................................... ($ 4,276,235) ($ 3,330,714)
============ ============
Net loss per share applicable
to common stockholders - basic and diluted ................................... ($ .08) ($ .08)
============ ============
Weighted average shares outstanding .............................................. 51,506,739 42,104,485
============ ============
</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
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net loss ..................................................................... ($ 4,276,235) ($ 3,308,461)
------------ ------------
Adjustments to reconcile net loss to net
cash flow used in operating activities
Depreciation and amortization ........................................... 376,838 253,464
Changes in operating assets and liabilities
Inventory ............................................................... 723,328 (352,539)
Receivables ............................................................. (292,468) 114,597
Prepaid expenses and other current assets ............................... (88,368) (157,295)
Advanced royalties ...................................................... 202,363 115,499
Other assets ............................................................ -- 2,203
Accounts payable ........................................................ (380,555) (237,626)
Accrued expenses ........................................................ 160,799 (253,312)
Accrued wages ........................................................... 173,354 51,910
------------ ------------
Total adjustments ....................................................... 875,291 (463,099)
------------ ------------
Net cash flows used in operating activities .................................. (3,400,944) (3,771,560)
------------ ------------
Cash flows from investing activities
Purchases of fixed assets, net ............................................ (550,440) (189,351)
------------ ------------
Net cash flows used in investing activities .................................. (550,440) (189,351)
------------ ------------
Cash flows from financing activities
Advances against future sales, net ........................................ (1,429,199) (741,915)
Proceeds from issuances of common stock,
exercise of warrants and value ascribed to the
beneficial conversion feature, net .................................... 22,219,549 --
Proceeds from exercise of equity credit line .............................. 2,145,905 3,903,014
Increase in debt payable,net .............................................. (338,128) 438,781
Increase convertible debentures, net ...................................... 6,178,324 --
Increase in restricted cash ............................................... (4,006,294) --
------------ ------------
Net cash flows provided by financing activities .............................. 24,770,157 3,599,880
------------ ------------
Net increase (decrease) in cash and cash equivalents ........................... 20,818,773 (361,031)
Cash and cash equivalents at beginning of year ................................. 2,918,554 3,452,916
------------ ------------
Cash and cash equivalents at end of period ..................................... $ 23,737,327 $ 3,091,885
============ ============
</TABLE>
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 nine-month periods ended September 30,
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 September 30, 2000, the Company has an accumulated deficit of
$86,786,342. 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 debt and equity financing. Management believes
that cash and cash equivalents of $23.7 million as of September 30, 2000,
combined with restricted cash and anticipated cash inflows from revenues
derived from sales of Lotemax and Alrex, can 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 strategic
corporate alliances, equity offerings, 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.
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 principally 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 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 September 30, 2000, Bausch and Lomb has provided the Company with
$5 million in cash advances against future sales, of which approximately
$1.8 million was outstanding at September 30, 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 September 30, 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. Private Placement
In September 2000, the Company completed a private placement of Convertible
Debentures, common stock and warrants to purchase shares of common stock
with institutional investors, generating gross proceeds of $11 million.
The Convertible Debentures, which generated gross proceeds of $8 million,
are due in February 2002 and carry a 6% interest payable in cash or common
stock. The Convertible Debentures are convertible into common shares of the
Company at the conversion price of $3.83 per share and are convertible
beginning October 31, 2000. Under
7
<PAGE>
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
certain anti-dilutive conditions, the conversion price may change. Until
converted into common stock, the terms of the Convertible Debentures
require the Company to deposit $4 million in an escrow account. The
escrowed capital is shown as Restricted Cash on the Company's Balance Sheet
and will be released to the Company in proportion to the amount of
Convertible Debentures converted into common shares or upon the repayment
of the debt.
Current accounting standards, including Emerging Issues Task Force Issue
No. 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, require the company
to compute the Beneficial Conversion Feature ("BCF") of the convertible
debt. The BCF must be capitalized and amortized from the closing date until
the earliest date that the investors have the right to convert the debt
into common shares. The BCF was computed at approximately $1.1 million,
$355,091 of which has been amortized and included as interest expense for
the three and nine month periods ending September 30, 2000. Additionally,
the discount on the Convertible Debenture will be amortized to interest
expense over the life of the debt. This amount was computed at
approximately $ .8 million, $44,494 of which has been amortized and
included as interest expense for the three and nine month periods ending
September 30, 2000.
The Company issued 821,515 common shares in the private placement that
generated gross proceeds of $3 million. Under the terms of the transaction,
the number of shares is subject to a possible one-time adjustment which, if
effected, would not change the proceeds to the Company. The investors have
an option, in the form of a warrant, to purchase an additional $2 million
of common shares for a period of one year provided that the future purchase
price is greater than the initial closing price of $3.65 per share. The
maximum number of shares that can be issued from this warrant is 547,945
and is part of the maximum number of warrants issued for the total private
placement of 1,115,730, including placement agent warrants.
Issuance costs related to the Convertible Debentures of approximately $.8
million, including the value of 187,929 warrants to purchase common shares
at prices ranging from $4.34 to $4.56, have been capitalized. The issuance
costs are included in the Company's Other Assets and will be amortized over
the life of the debt. For the three and nine month periods ending September
30, 2000, $43,590 has been expensed.
6. Common and Preferred Stock Transactions
During the third quarter of 2000, the Company issued warrants to purchase
up to 1,115,730 shares of common stock at prices ranging from $3.65 to
$6.08 per share and expiring in 2001 and 2005 in connection with the $11
million private placement described in Note 5.
During the third quarter of 2000, the Company issued 374,525 shares of its
common stock upon the exercise of stock options and warrants, and received
consideration of $687,391.
During the second quarter of 2000, the Company issued 55,750 shares of its
common stock upon the exercise of stock options and warrants, and received
consideration of $334,061.
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%
8
<PAGE>
Pharmos Corporation
Notes to Condensed Consolidated Financial Statements
of the closing bid price of the Common Stock on the Principal Market on a
specified date. As of September 30, 2000, $1.7 million remained available
under the equity line of credit.
During the second quarter of 2000, under terms of the Credit Agreement, the
Company issued 150,000 shares of its Common Stock and warrants to purchase
12,574 shares of its Common Stock to the Investor for consideration of
$553,655, net of fees. The warrants have an exercise price of $5.00 per
share and expire in the second quarter of 2003.
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 third 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 August 2005.
During the second quarter of 2000, the Company issued warrants to purchase
16,000 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 June 2005.
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.
7. 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 nine months ending September 30,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues
United States ........................ $ 1,761,735 $ 833,118 $ 3,840,152 $ 2,024,329
Israel ............................... -- -- -- --
----------- ----------- ----------- -----------
$ 1,761,735 $ 833,118 $ 3,840,152 $ 2,024,329
=========== =========== =========== ===========
Net loss
United States ........................ ($1,432,454) ($ 960,662) ($4,000,498) ($3,255,628)
Israel ............................... (98,705) (11,623) (275,737) (52,833)
----------- ----------- ----------- -----------
($1,531,159) ($ 972,285) ($4,276,235) ($3,308,461)
=========== =========== =========== ===========
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarters ended September 30, 2000 and 1999
Product sales revenue totaled $1,661,735 for the quarter ended September 30,
2000 compared to $833,118 for the quarter ended September 30, 1999. Increased
sales volumes resulted from market share growth and price increases for the
Company's ophthalmic products, Lotemax and Alrex. Additionally, the Company
recorded License revenue of $100,000 for the quarter ended September 30, 2000.
Cost of goods sold for the quarter ended September 30, 2000 totaled $580,202
compared to $265,649 for the quarter ended September 30, 1999. The increase
reflects the higher sales volumes. Cost of goods sold includes the cost of the
active drug substance and licensing costs.
Total operating expenses increased $990,920 or 62%, from $1,585,698 in 1999 to
$2,576,618 in 2000. The increase is primarily due to higher research and
development expenses, increased general and administrative expenses and higher
amortization and depreciation expenses.
Net research and development expenses increased by $523,085 or 62%, from
$839,390 in 1999 to $1,362,475 in 2000. The increase in R&D expense is primarily
due a higher level of activity in the Company's dexanabinol analog program and
increased expenses relating to its development of dexanabinol for traumatic
brain injury. Dexanabinol is a neuroprotective agent for the treatment of
central nervous system ("CNS") disorders. Additionally, spending on the
Company's discovery and early stage programs increased.
General and administrative expenses increased by $400,813 or 67%, from $599,174
in 1999 to $999,987 in 2000. The increase is primarily due to higher staffing
costs and increased investor relations activity.
Depreciation and amortization expenses increased by $82,267, or 96%, from
$85,353 in 1999 to $167,620 in 2000. The increase reflects increased
depreciation expense relating to laboratory equipment purchases.
Other income, net, decreased by $182,018, from net income of $45,944 in 1999 to
a net charge of $136,074 in 2000. While interest income increased significantly
as a result of higher average cash balances, the increases were more than offset
by the non-cash charges of $399,585 for the amortization of the Beneficial
Conversion Feature and the debt discount from the private placement of
convertible debentures in September 2000.
Nine months ended September 30, 2000 and 1999
Product sales revenue totaled $3,740,152 for the nine months ended September 30,
2000 compared to $2,024,329 for the nine months ended September 30, 1999.
Increased sales volumes resulted from market share growth and higher prices for
the Company's ophthalmic products, Lotemax and Alrex. Additionally, the Company
recorded license income of $100,000 for the nine months ended September 30,
2000.
Cost of goods sold for the nine months ended September 30, 2000 totaled
$1,337,893 compared to $564,444 for the nine months ended September 30, 1999.
The increase reflects the volume difference between the two periods. Cost of
goods sold includes the cost of the active drug substance and licensing costs.
Total operating expenses increased $2,234,054 or 46%, from $4,842,837 in 1999 to
$7,076,891 in 2000. The increase is primarily due to higher research and
development expenses and increased general and administrative expenses.
10
<PAGE>
Net research and development expenses increased by $1,141,422, or 44%, from
$2,591,722 in 1999 to $3,733,144 in 2000. The increase in R&D expense is
primarily due to a higher level of activity in the Company's dexanabinol analog
program and increased expenses relating to its development of dexanabinol for
traumatic brain injury, as well as additional spending on the Company's
discovery and early stage programs.
General and administrative expenses increased by $993,999 or 54%, from
$1,844,477 in 1999 to $2,838,476 in 2000. The increase is primarily due to
higher staffing costs and increased investor relations activity.
Depreciation and amortization expenses increased by $123,374, or 49%, from
$253,464 in 1999 to $376,838 in 2000, reflecting increased depreciation expense
relating to laboratory equipment purchases. The increase reflects increased
depreciation expense relating to laboratory equipment purchases.
Other income, net, increased by $223,906, from $74,491 in 1999 to $298,397 in
2000. Interest income increased by $641,823 as a result of higher average cash
balances. However, the increased interest income was partially offset by the
non-cash charges of $399,585 for the amortization of the Beneficial Conversion
Feature and the debt discount from the private placement of convertible
debentures in September 2000.
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 September 30, 2000, the Company has an accumulated deficit of
$86,786,342. 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 $23.9 million, including cash and cash
equivalents of $23.7 million, as of September 30, 2000. The Company also had $4
million of restricted cash held in escrow until the Company's convertible
debentures are converted into common shares of the Company by the investor or
are repaid by the Company. On December 10, 1998, the Company obtained a $10
million equity line of credit with a single institutional investor. As of
September 30, 2000, $1.7 million remained available under the equity line of
credit.
On September 1, 2000, the Company completed a private placement of convertible
debentures, common stock and warrants to purchase shares of common stock with
institutional investors, generating total gross proceeds of $11 million. The
convertible debentures, which generated gross proceeds of $8 million, are due in
February 2002 and carry a 6% interest payable in cash or common stock. The
convertible debentures are convertible into common shares of the Company at the
conversion price of $3.83 per share and are convertible beginning October 31,
2000. Under certain anti-dilutive conditions, the conversion price may change.
The issuance of common shares in the private placement generated gross proceeds
of $3 million. The investors have an option, in the form of a warrant, to
purchase an additional $2 million of common shares for a period of one year
provided that the future purchase price is greater than the initial closing
price of $3.65 per share.
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 the Company's regular operations. The Company
expects to commence the final phase of clinical development on the Company's
dexanabinol (HU-211) drug candidate in the near future. The total cost of this
phase of development is expected to range between $15 million and $25 million
over the next 3 years. The Company continues to actively pursue various funding
options, including strategic corporate alliances, additional equity offerings,
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.
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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.
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
(a) Exhibits:
None.
(b) Reports on Form 8-K:
1. Form 8-K dated September 8, 2000 (earliest event reported
September 1, 2000); Item 5 was reported.
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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, 2000 by: /s/ Robert W. Cook
------------------
Robert W. Cook
Vice President Finance and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
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