Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File No. 0-11550
December 31, 2000
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) (zip code)
Registrant's telephone number, including area code: (732) 452-9556
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.03 par value
(Title of Class)
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[_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the registrant's Common Stock at March 15,
2001 held by those persons deemed to be non-affiliates was approximately
$94,932,007.
As of March 15, 2001, the Registrant had outstanding 54,246,861 shares of
its $.03 par value Common Stock.
PART I
Item 1. Business
Introduction
Pharmos Corporation (the "Company") is a bio-pharmaceutical company that
discovers and develops novel therapeutics to treat a range of inflammatory and
neurological disorders such as traumatic brain injury and stroke. The Company
has an extensive portfolio of drug candidates under development, as well as
discovery, preclinical and clinical capabilities.
Dexanabinol, the Company's lead Central Nervous System (CNS) product aimed
initially at treating severe head trauma and stroke, is currently undergoing a
pivotal Phase III clinical trial for sever traumatic brain injury (TBI) in
Europe. During 2000, the Company completed the Phase II testing of dexanabinol.
These studies concluded that the goals of establishing the safety of dexanabinol
in TBI and the dosing parameters for the Phase III study were met, and enabled
the Company to select the optimal dose to be used in the Phase III clinical
tests. The Phase II studies revealed a trend of efficacy in the drug treated
groups versus the placebo group and, within the most severely injured patients,
a more than two-fold increase in the percentage of those achieving good recovery
(28.0% in the dexanabinol group vs. 11.7% in the placebo group) was
demonstrated. In addition, neurological recovery appeared to be accelerated in
the dexanabinol treated group, such that the percentage of dexanabinol patients
achieving good recovery at 1 month was significantly higher than in the placebo
group.
The Company has identified several promising new compounds based upon its
program to develop cannabinoid compounds. Preclinical investigations are
underway for compounds in stroke, multiple sclerosis, neuropathic pain,
Parkinson's disease and Amyotrophic Lateral Sclerosis. The Company has also
synthesized and tested a series of selective estrogen receptor modulators
(SERM). The initial focus of the SERMs development program is the use of charged
tamoxifen derivatives in treating breast cancer.
The Company, together with Bausch & Lomb Pharmaceuticals, Inc. ("BLP"),
manufactures and markets two ophthalmic products, Lotemax(R) (loteprednol
etabonate ophthalmic suspension 0.5%) and Alrex(R) (loteprednol etabonate
ophthalmic suspension 0.2%). BLP began marketing Lotemax and Alrex in 1998.
Lotemax is a topical, site-specific steroid that is used to treat steroid
responsive inflammatory eye conditions. The prescription eye drop is also used
for post-operative eye inflammations such as experienced following cataract
surgery. Lotemax has the broadest range of approved indications of any
ophthalmic steroid on the market. Alrex is a specially developed formula of
loteprednol etabonate that is used in the treatment of ophthalmic allergies.
Alrex is indicated for the treatment of seasonal allergic conjunctivitis, an
inflammation of the eye usually caused by pollens.
The regulatory approvals for Lotemax and Alrex are the first two of three to be
sought in the United States for the Company's and BLP's line of ophthalmic
products containing loteprednol etabonate. The third product, which combines the
active ingredient loteprednol etabonate with an anti-infective agent, is in
final development.
During 2000, BLP began selling Lotemax and Alrex in Argentina. The Company
received its initial international product revenues from the sales of these
products.
BLP, a subsidiary of the global eye care company, Bausch & Lomb Incorporated,
co-developed Lotemax and Alrex with the Company after the Company granted BLP
the rights to process and market the new ophthalmic pharmaceutical line for
North America and select international markets including Europe and Canada.
Strategy
The Company's business is the discovery and development of novel therapeutics to
treat a range of inflammatory and neurological disorders such as traumatic brain
injury and stroke. The Company seeks to enter into
2
collaborative relationships with established pharmaceutical companies to
complete development and to commercialize its products.
The Company is applying its experience in drug design, novel drug delivery
technology and high through-put screening in developing products directed at
several fields including: neuroprotective compounds forTBI and stroke,
non-psychotropic cannabinoids for neurological, vascular and other conditions
involving inflammatory processes, and site specific drugs for ophthalmic
indications.
Products
Dexanabinol
Dexanabinol is the Company's lead synthetic cannabinoid compound in a family of
non psychotic cannabinoid molecules originally designed to avoid the
psychotropic and sedative spectrum of cannabinometic agents, while retaining
their beneficial properties as anti-emetics, anti-inflammatories and analgesic
agents.
It is now well established that the psychotropic effects of cannabinoids are
mediated via stereo selective (-) preferring receptors. Dexanabinol is a (+)
optical isomer and does not interact with cannabinoid receptors. It is a stereo
selective, non-competitive antagonist of the NMDA receptor channel, has free
radical scavenging properties, and anti-inflammatory properties (involving
inhibition of TNF- [alpha] production). All of these mechanisms may be important
for neuroprotection. Therefore, dexanabinol appears to have a unique modality to
neuroprotection, combining three relevant mechanisms of action in a single
molecule which act at different time points of the neurotoxic process in head
trauma, stroke and potentially other indications.
While head trauma and stroke are the highest priority indications for
dexanabinol, its spectrum of activities has potential as an anti-inflammatory
and protectant in other diseases such as neuropathic pain, multiple sclerosis,
glaucoma, Parkinson's, Alzheimer's disease and glaccoma, as well as various
other inflammatory conditions. Development of dexanabinol and other members of
this family of compounds for these chronic indications are proceeding at the
preclinical level.
In several animal models (including closed head injury, focal and global
forebrain ischemia and optic nerve crush), the drug has demonstrated significant
neuroprotective activity. In these studies, a single injection of dexanabinol
given after the injury resulted in a significant long-term functional
improvement and an increase in neuronal survival.
In 1996, a Phase I study of rising dose tolerance in healthy volunteers (50
subjects) showed dexanabinol to be safe and well tolerated at doses up to and
including the expected therapeutic doses. Specifically, there were no
hallucinations, sedation or blood pressure changes of the type reported with
other glutamate antagonists. In late 1996, the Company commenced a Phase II
study of head injured patients. This study, conducted at six medical centers in
Israel on patients with severe head injury, was reviewed and approved by the
American Brain Injury Consortium (ABIC) and the European Brain Injury Consortium
(EBIC).
In 1998, the Company announced the results of the first two cohorts of the three
cohort Phase II Clinical Study involving 67 patients. Clinical endpoints
established an excellent safety profile of the drug in the treated patients.
There were no unexpected adverse experiences reported for either the drug
treated or placebo group. Intracranial pressure above a threshold of 25 mmHg, an
important risk factor and a predictor of poor neurological outcome, was
significantly reduced in the drug-treated patients through the third day of
treatment, without a concomitant reduction in systolic blood pressure. The
mortality rate of 10% (3/30) in the dexanabinol group compared favorably with a
13.5% rate in the placebo group (5/37). The investigators concluded that
dexanabinol was shown to be safe and well tolerated in severe head trauma
patients. Neurological outcomes in the study, assessed periodically up to 6
months after injury, established a strong trend of efficacy. The percentage of
patients achieving Good Neurological Outcome, the highest score on the five
level Glasgow Outcome Score used to assess the recovery of head trauma patients,
was higher in the drug-treated group at each measurement. Among the most
severely injured patients in the study, a better outcome was consistently
observed among the drug treated group
3
than among the placebo treated group. Patients received an intravenous injection
of either dexanabinol or placebo within 6 hours of the injury. Demographically,
all 67 patients were fairly representative of the characteristics describing
severe head trauma.
During 2000 the Company announced the results of the third cohort of the Phase
II Clinical Study. The study concluded that the Phase II goals of establishing
the safety of dexanabinol in TBI and the dosing parameters for a pivotal study
were met. An aggregate of 101 patients was enrolled in the multi-center,
double-blind, randomized Phase II study, which was carried out in six trauma
centers in Israel affiliated with the American Brain Injury Consortium.
Fifty-two of the patients were treated with dexanabinol at three separate doses
and forty-nine received a placebo. In the third cohort, thirty-three patients
received an intravenous injection of either 200 mg. of dexanabinol (N=21) or
placebo (N=12) within six hours of injury. Demographically, these patients were
fairly representative of the TBI population, comprising mostly young men injured
in motor vehicle accidents. However, the dexanabinol and placebo groups differed
with respect to several important baseline entry parameters affecting the
patients' prognosis; for example, injury severity as determined by the Glasgow
Coma Scale was significantly worse in the treated group than in the placebo
group. In addition, the patients' CT classifications indicating the extent of
the brain injury were worse in the drug-treated group compared to placebo.
Predictably, the strong trend for better neurological outcome in comparison with
placebo that was observed in the first two cohorts was not repeated in this
cohort. Nevertheless, ICP above a threshold of 25mmHg, a major risk factor
affecting the prognosis of TBI, was lower 40-70% of the time during the first
days after injury in the treated group vs. the placebo group. This result was
similar to those of the previous two cohorts (48mg. and 150mg. doses) reported
in 1998. An analysis of patient performance on the Galveston Orientation and
Amnesia Test (GOAT) demonstrated significantly better results in the dexanabinol
treated patients at 1, 3 and 6 months follow-up compared to placebo. GOAT is a
neurological test that measures awareness of surroundings and ability to
remember.
The 6 month outcome as measured by the Glasgow Outcome Score (GOS) was similar
in the treated and placebo groups as a whole, a comparison of outcome within the
subgroup of very severe (Glasgow Coma Scale "GCS" 4-6) patients revealed a more
than two-fold increase in the percentage of those achieving good recovery (28.0%
in the dexanabinol group vs. 11.7% in the placebo group). In addition,
neurological recovery appeared to be accelerated in the dexanabinol treated
group, such that the percentage of dexanabinol patients achieving good recovery
(measured by GOS) at 1 month was significantly higher than in the placebo group
(17% vs. 2%, p<0.02).
During January 2001, the Company announced that its international pivotal trial
of dexanabinol for severe TBI commenced in Europe. The purpose of the Phase III
study is to determine the safety and efficacy of dexanabinol in severe TBI
patients. Approximately 40 centers in Europe and 30 in the U.S. are expected to
participate in the study. European countries participating in the study include
Finland, France, Germany, the Netherlands, Italy, Spain, Belgium and the U.K.,
along with Israel. The Company plans to begin the U.S. arm of the Phase III
trial later this year, and expects total study enrollment of about 860 patients.
The Company is collaborating with the EBIC and the ABIC in a number of areas,
including recruitment efforts with trauma centers.
Combinatorial chemistry strongly supported by bioinformatics and computer
modeling has been employed to generate a "Combidex" library of molecules with
enhanced therapeutic benefits and limited side effects. The Company's hybrid
combinatorial chemistry approach utilizes rational structural scaffolds designed
by employing quantitative structure-activity relationships, computer-assisted
molecular modeling based on steric and allosteric ligand-receptor interactions,
and virtual computer libraries. Compound libraries are then prepared via
combinatorial chemistry directed at the pharmacophores on the structural
scaffolds. In contrast to conventional random stochastic chemistry, the rational
approach leads to a larger percentage of synthesized compounds that demonstrate
activity in screening assays and increases the potential of developing potent
and selective drug candidates.
As a result of its rational drug research, the Company has identified several
lead candidates within its family of cannabinoid compounds that may be effective
for stroke, neuropathic pain, multiple sclerosis, and neurodegenerative diseases
such as Parkinson's and Amyotrophic Lateral Sclerosis.
The Company has identified several lead drug candidates, based upon its
dexanabinol family of compounds for
4
the development of novel and powerful drugs for stroke, TBI, multiple sclerosis,
neuropathic pain and neurodegenerative diseases such as Parkinson's Amyotrophic
Lateral Sclerosis. Development of these compounds are proceeding at the
preclinical level.
5
Loteprednol Etabonate
Lotemax and Alrex are the trade names of drug products in the form of eye drop
suspensions in which the active compound is loteprednol etabonate ("LE"). LE is
a unique steroid, designed to act in the eye and alleviate inflammatory and
allergic conditions, and is quickly hydrolyzed into a predictable inactive
metabolite before it reaches the inner eye or systemic circulation. This
pharmacological profile results in improved safety by avoiding the side effects
related to exposure to most ocular steroids. In the eye, the most unwanted side
effect of steroids is the elevation of IOP, which can be sight threatening.
While steroids, for lack of an alternative, are regularly used for severe
inflammatory conditions of the eye, milder conditions, such as allergies, are
preferentially treated with less effective non-steroidal agents.
In 1998, Lotemax received marketing approval from the FDA for the treatment of
steroid responsive inflammatory conditions of the eye, including uveitis, and
for postoperative eye inflammation. Also in 1998, Alrex received marketing
approval from the FDA for the treatment of seasonal allergic conjunctivitis.
LE-T, a third loteprednol etabonate-based eye drug combined with the antibiotic
tobramycin, is undergoing a further clinical trial before submitting the NDA for
FDA approval in order to add considerable support to the Company's intent to
receive a broad labeling for the product upon approval, a feature that will
assist its commercialization. Upon successful completion of the clinical trial,
an NDA is expected to be filed with the FDA.
In 1995, the Company entered into an agreement with BLP to market Lotemax, Alrex
and LE-T in the U.S. A second agreement, covering Europe, Canada and other
selected countries, was signed in 1996. Both agreements give BLP the right to
purchase the active component LE from the Company, to manufacture the "drug
product" and to assist the Company in developing the products. In 1995, the
Company also signed an agreement with PPG-Sipsy, a unit of PPG Industries, Inc.,
for exclusive manufacturing of LE for sale to the Company. Following FDA
approval of Lotemax and Alrex, BLP commenced product shipments in April 1998,
providing the Company with its initial product revenues.
During 2000, Lotemax and Alrex were approved for marketing in Argentina and
Brazil. Late in 2000, the Company received its initial international revenues
from the sale of its products in Argentina. A filing to market LE 0.5%
ophthalmic suspension for ophthalmic inflammatory indications in the United
Kingdom was submitted to the Medicines Control Agency, the drug regulatory
agency in the U.K. Upon approval, the product will be submitted by BLP and the
Company for approval in other European countries through a Mutual Recognition
procedure. Sold in the U.S. under the trademark Lotemax, the product will be
marketed under the Loterox trade name in the U.K.
SERM Platform
The company has developed a library of selective estrogen receptor modulators
(SERM) that have been synthesized and screened by estrogen receptor binding. So
far, one derivative has been found to be potent in moderating the growth of the
virulent Panc-1 tumor in nude mice and is now under investigation for its action
on breast and intractable tumors such as glioblastoma multiforma. Further
synthesis and screening of SERM analogs are ongoing to identify drug candidates
for the treatment of osteoporosis, cardiovascular diseases, mood and other
cognitive disorders.
Competition
The pharmaceutical industry is highly competitive. The Company competes with a
number of pharmaceutical companies that have financial, technical and marketing
resources significantly greater than those of the Company. Some companies with
established positions in the pharmaceutical industry may be better equipped than
the Company to develop and market products in the markets the Company is seeking
to enter. A significant amount of pharmaceutical research is also being carried
out at universities and other not-for-profit research organizations. These
institutions are becoming increasingly aware of the commercial value of their
findings and are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for the use of technology
6
they have developed. These institutions may also market competitive commercial
products on their own or through joint ventures and will compete with the
Company in recruiting highly qualified scientific personnel.
The Company is pursuing areas of product development in which there is a
potential for extensive technological innovation. The Company's competitors may
succeed in developing products that are more effective than those of the
Company. Rapid technological change or developments by others may result in the
Company's potential products becoming obsolete or non-competitive.
Collaborative Relationships
The Company's commercial strategy is to develop products independently and,
where appropriate, in collaboration with established pharmaceutical companies
and institutions. Collaborative partners may provide financial resources,
research and manufacturing capabilities and marketing infrastructure to aid in
the commercialization of the Company's products in development and potential
future products. Depending on the availability of financial, marketing and
scientific resources, among other factors, the Company may license its
technology or products to others and retain profit sharing, royalty,
manufacturing, co-marketing, co-promotion or similar rights. Any such
arrangements could limit the Company's flexibility in pursuing alternatives for
the commercialization of its products. There can be no assurance that the
Company will establish any additional collaborative arrangements or that, if
established, any such relationships will be successful.
Bausch & Lomb Pharmaceuticals, Inc.
The Company has a contract with BLP to manufacture and market Lotemax and Alrex,
the Company's lead products, in the United States. The agreement includes one
other loteprednol etabonate-based product, LE-T, currently being co-developed by
the Company and BLP. A second agreement extends BLP's rights to market these
products in Europe, Canada and other selected countries pending regulatory
approval.
Under the agreements, BLP purchases the active drug substance from the Company.
BLP has provided the Company with a total of $5 million in cash advances and is
entitled to recoup the advances by way of credits from sales of Lotemax, Alrex
and line extension products. Another $1 million is due subject to receiving
regulatory approval for LE-T in the United States. An additional $1.6 million in
advances against future sales by BLP will be payable to the Company following
receipt of regulatory clearance in certain markets outside of the United States.
BLP collaborates in the development of these products by making available
amounts up to 50% of their Phase III clinical trial costs. The Company retains
certain conditional co-marketing rights in the U.S. to all of the products
covered by the marketing agreement. As of December 31, 2000, the Company had
repaid $3.4 million of the cash advances from BLP by way of credits from sales
of Lotemax and Alrex since 1998. In 1996, BLP made a $2 million investment in
the common stock of the Company.
Patents, Proprietary Rights and Licenses
Patents and Proprietary Rights
Proprietary protection generally has been important in the pharmaceutical
industry, and the commercial success of products incorporating the Company's
technologies may depend, in part, upon the ability to obtain strong patent
protection.
Some of the technologies underlying the Company's potential products were
invented or are owned by various third parties, including Dr. Nicholas Bodor and
the Hebrew University of Jerusalem ("Hebrew University"). The Company is the
licensee of these technologies under patents held by the applicable owner
through licenses that generally remain in effect for the life of the applicable
patent. The Company generally maintains, at its expense, U.S. and foreign patent
rights with respect to both the licensed and its own technology and files and/or
prosecutes the relevant patent applications in the U.S. and foreign countries.
The Company also relies upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop its competitive position. The
Company's policy is to protect its technology by, among other things, filing, or
requiring the applicable
7
licensor to file, patent applications for technology that it considers important
to the development of its business. The Company intends to file additional
patent applications, when appropriate, relating to its technology, improvements
to its technology and to specific products it develops. There can be no
assurance that any additional patents will be issued, or if issued, that they
will be of commercial benefit to the Company. In addition, it is impossible to
anticipate the breadth or degree of protection that any such patents will
afford.
The patent positions of pharmaceutical firms, including the Company, are
uncertain and involve complex factual questions. In addition, the coverage
claimed in a patent application can be significantly reduced before or after the
patent is issued. Consequently, the Company does not know whether any of the
pending patent applications underlying the licensed technology will result in
the issuance of patents or, if any patents are issued, whether they will provide
significant proprietary protection or will be circumvented or invalidated. Since
patent applications in the U.S. are maintained in secrecy until patents issue
and since publication of discoveries in the scientific or patent literature
often lag behind actual discoveries, the Company cannot be certain that it or
its licensors, as the case may be, were the first creators of inventions covered
by pending and issued patents or that it or its licensors, as the case may be,
were the first to file patent applications for such inventions. Moreover, the
Company may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office to determine priority of invention, which could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. There can be no assurance that a court of competent
jurisdiction, if issued, will uphold the patents relating to the licensed
technology, or that a competitor's product will be found to infringe such
patents.
Other pharmaceutical and drug delivery companies and research and academic
institutions may have filed patent applications or received patents in the
Company's fields. If patents are issued to other companies that contain
competitive or conflicting claims and such claims are ultimately determined to
be valid, there can be no assurance that the Company would be able to obtain
licenses to these patents at a reasonable cost or be able to develop or obtain
alternative technology.
The Company also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets.
It is the Company's policy to require its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting or
advisory relationships with the Company. These agreements generally provide that
all confidential information developed or made known to the individual during
the course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific
circumstances. In the case of employees and certain consultants, the agreements
provide that all inventions conceived by the individual in the course of their
employment or consulting relationship shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the Company's trade secrets in
the event of unauthorized use or disclosure of such information. The Company's
patents and licenses underlying its potential products described herein are
summarized below.
Neuroprotective Agents. The Company has licensed from the Hebrew University,
which is the academic affiliation of the inventor, Dr. Raphael Mechoulam,
patents covering novel compounds that have demonstrated certain beneficial
neuropharmacological activity while appearing to be devoid of most of the
deleterious effects usually associated with this class of compounds. Several
patents have been designed to protect this family of compounds and their uses
devised by the Company and the inventors. The earliest patent applications
resulted in patents issued in 1989, and the most recent patents date from 2000.
These patents cover dexanabinol, which is under development for the treatment of
head trauma, stroke and other indications, and novel analogs.
Site-Specific Drugs. In the general category of site-specific drugs that are
active mainly in the eye and have limited systemic side effects, the Company has
licensed several patents from Dr. Nicholas Bodor. The earliest patents date from
1984 and the most recent from 1996. Some of these patents cover loteprednol
etabonate-based products and its formulations.
8
Selective Estrogen Receptor Modulators (SERM). The Company has filed patent
applications in the U.S., Israel, Australia, Canada, Japan, Brazil, Korea and
the European Patent Office to protect pharmaceutical compositions of tamoxifen
analogs and tamoxifen methiodide. In July 1997, the U.S. Patent and Trademark
Office issued a patent with claims covering the use of permanently ionic
derivatives of steroid hormones and their antagonists known as tamoxifen
analogs. The patent also claims novel analogs of tamoxifen and other steroid
hormones and their antagonists. A second patent was issued in July 2000 claiming
anti-angiogenic uses of these same compounds. The Company believes that these
charged derivatives are superior to the parent compounds in that they are devoid
of CNS side effects and show an overall improved pharmacological profile.
Emulsion-based Drug Delivery Systems. In the general category of SubMicron
Emulsion (SME) technology, the Company licensed two patents from Hebrew
University and has separately filed ten patent applications that are at
different stages of prosecution. These patents and patent applications have been
devised to protect a group of formulation technologies devised by the Company
and the inventors as they relate to pharmaceutical and medicinal products. The
earliest patent filings for SME technology date from 1986 and the most recent
from 1996. These patents cover a broad range of improved formulations for
increased bioavailability of hydrophobic drugs, to treat various diseases and
disorders.
Licenses
The Company's license agreements generally require the Company, as licensee, to
pay royalties on sale of products developed from the licensed technologies, and
fees on revenues the Company receives for sublicenses, where applicable. The
royalty rates defined in the licenses are customary and usual in the
pharmaceutical industry. The royalties will be payable for periods up to fifteen
years from the date of certain specified events, including the date of the first
sale of such products, or the date from which the first registered patent from
the developed technologies is in force, or the year following the date in which
FDA approval has been received for a developed product. Certain of the license
agreements also require annual payments.
Government Regulation
The Company's activities and products are significantly regulated by a number of
governmental entities, especially the FDA, in the U.S. and by comparable
authorities in other countries. These entities regulate, among other things,
research and development activities and the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising,
promotion, distribution and sale of the Company's potential products. Product
development and approval within this regulatory framework take a number of years
and involve the expenditure of substantial resources. Many products that appear
promising initially ultimately do not reach the market because they are found to
be unsafe (perhaps too toxic) or to lack effectiveness, as demonstrated by
testing required by government regulation during the development process. In
addition, there can be no assurance that this regulatory framework will not
change or that additional regulation will not arise at any stage of the
Company's product development that may preclude or otherwise adversely affect
approval, delay an application or require additional expenditures by the
Company. Moreover, even if approval is obtained, failure to comply with present
or future regulatory requirements, or new information adversely reflecting on
the safety or effectiveness of the approved drug, can lead to FDA withdrawal of
approval to market the product.
The regulatory process required to be completed by the FDA before a new drug
delivery system may be marketed in the U.S. depends significantly on whether the
drug (which will be delivered by the drug delivery system in question) has
existing approval for use and in what dosage form. If the drug is a new chemical
entity that has not been approved, the process includes (i) preclinical
laboratory and animal tests, (ii) an IND application which has become effective,
(iii) adequate and well-controlled human clinical trials to establish the safety
and effectiveness of the drug for its intended indication and (iv) FDA approval
of a pertinent NDA. If the drug has been previously approved, the approval
process is similar, except that certain toxicity tests normally required for the
IND application may not be necessary. Even with previously approved drugs,
additional toxicity testing may be required when the delivery form is
substantially changed, or when a company does not have access to the raw data
from the prior preclinical studies.
9
The activities required before a pharmaceutical product may be marketed in the
U.S. begin with preclinical testing. Preclinical tests include laboratory
evaluation of product chemistry and other end points and animal studies to
assess the potential safety and efficacy of the product as formulated. The FDA,
under a series of regulations called the Good Laboratory Practice regulations,
regulates the conduct of preclinical studies. Violations of these regulations
can, in some cases, lead to invalidation of the data from these studies,
requiring such studies to be replicated.
The entire body of preclinical development work necessary to administer
investigational drugs to volunteers or patients is summarized in an
Investigative New Drug ("IND") application to the FDA. FDA regulations provide
that human clinical trials may begin thirty days following the submission and
receipt of an IND application, unless the FDA advises otherwise or requests
additional information, clarification or additional time to review the IND
application; it is generally considered good practice to obtain affirmative FDA
response before commencing trials. There is no assurance that the submission of
an IND application will eventually allow a company to commence clinical trials.
Once trials have commenced, the FDA may stop the trials, or particular types or
parts of trials, by placing a "clinical hold" on such trials because of concerns
about, for example, safety of the product being tested or the adequacy of the
trial design. Such holds can cause substantial delay and in some cases may
require abandonment of a product.
Clinical testing involves the administration of the drug to healthy volunteers
or to patients under the supervision of a qualified principal investigator,
usually a physician pursuant to an FDA-reviewed protocol. Each clinical study is
conducted under the auspices of independent Institutional Review Boards ("IRBs")
at the institutions at which the study will be conducted. An IRB will consider,
among other things, ethical factors, the safety of human subjects and the
possible liability of the institution.
Phase I clinical studies are commonly performed in 20 to 40 healthy human
subjects or, more rarely, in selected patients with the targeted disease or
disorder. Their goal is to establish initial data about tolerance and safety of
the drug in humans. Also, the first data regarding the absorption, distribution,
metabolism, and excretion of the drug in humans are established.
In Phase II human clinical studies, preliminary evidence is sought regarding the
pharmacological effects of the drug and the desired therapeutic efficacy in
limited studies with small numbers of selected patients (50 to 200). Efforts are
made to evaluate the effects of various dosages and to establish an optimal
dosage level schedule and validate clinical efficacy endpoints to be used in
Phase III trials. Additional safety data are also gathered from these studies.
Phase III clinical studies consist of expanded, large scale studies of patients
(200 to several thousand) with the target disease or disorder, to obtain
definitive statistical evidence of the effectiveness and safety of the proposed
product and dosing regimen. These studies may also include separate
investigations of the effects in subpopulations of patients, such as the
elderly.
At the same time that the human clinical program is being performed, additional
non-clinical (i.e., animal) studies are also being conducted. Expensive, long
duration (12-18 months) toxicity and carcinogenicity studies are done to
demonstrate the safety of drug administration for the extended period of time
required for effective therapy. Also, a variety of laboratory, animal, and
initial human studies may be performed to establish manufacturing methods for
the drug, as well as stable, effective dosage forms.
The results of product development, preclinical studies and clinical studies and
other information are submitted to the FDA in an NDA to seek approval for the
marketing and interstate commercial shipment of the drug. With the NDA, a
company must pay the FDA a user fee of $301,000 (for Fiscal Year 2001).
Companies with less than 500 employees and no revenues from products may be
eligible for an exception. This exception was granted to the Company in
connection with the NDA for Lotemax and Alrex and reduced the fee by 50%, which
is payable 12 months after the NDA is filed by the FDA. The FDA may refuse to
file or deny an NDA if applicable regulatory requirements, such as compliance
with Current Good Clinical Practice ("cGCP") requirements, are not satisfied or
may require additional clinical testing. Even if such data are submitted, the
10
FDA may ultimately decide that the NDA does not satisfy the requirements for
approval. If the FDA does ultimately approve the product, it may require, among
other things, post-marketing testing, including potentially expensive Phase IV
studies, and surveillance to monitor the safety and effectiveness of the drug.
In addition, the FDA may in some circumstances impose restrictions on the use of
the drug that may be difficult and expensive to administer, and almost always
seeks to require prior approval of promotional materials. Product approvals may
be withdrawn if compliance with regulatory requirements is not maintained or if
problems occur after the product reaches the market. After a product is filed
for a given indication in an NDA, subsequent new indications or dosages for the
same product are reviewed by the FDA via the filing and upon receipt of a
Supplemental NDA ("sNDA") submission as well as payment of a separate user fee.
The sNDA is more focused than the NDA and deals primarily with safety and
effectiveness data related to the new indication or dosage, and labeling
information for the sNDA indication or dosage. Finally, the FDA requires
reporting of certain information, e.g., adverse experience reports, that becomes
known to a manufacturer of an approved drug.
Each domestic drug product manufacturing establishment must be registered with,
and approved by, the FDA and must pay the FDA a registration fee and annual
maintenance fee. In addition, each such establishment must inform the FDA of
every drug product it has in commercial distribution and keep such list updated.
Establishments handling controlled substances must be licensed and are inspected
by the U.S. Drug Enforcement Agency ("DEA"). Domestic establishments are also
subject to inspection by the FDA for compliance with Current Good Manufacturing
Practice ("cGMP") regulations after an NDA has been filed and thereafter, at
least biennially. The labeling, advertising and promotion of drug products also
must be in compliance with pertinent FDA regulatory requirements. Failure to
comply with applicable requirements relating to production, distribution or
promotion of a drug product can lead to FDA demands that production and shipment
cease, and, in some cases, that product be recalled, or to enforcement actions
that can include seizures, injunctions and criminal prosecution.
To develop and market its potential products abroad, the Company is also subject
to numerous and varying foreign regulatory requirements, implemented by foreign
health authorities, governing, among other things, the design and conduct of
human clinical trials, pricing and marketing. The approval procedure varies
among countries and can involve additional testing, and the time required to
obtain approval may differ from that required to obtain FDA approval. At
present, foreign marketing authorizations are applied for at a national level,
although within the European Union ("EU") certain registration procedures are
available to companies wishing to market a product in more than one EU member
country. If a regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, marketing authorization is
almost always granted. The foreign regulatory approval process includes all of
the risks associated with obtaining FDA approval set forth above. Approval by
the FDA does not ensure approval by other countries.
Various aspects of the Company's business and operations are also regulated by a
number of other governmental agencies including the DEA, U.S. Department of
Agriculture, Environmental Protection Agency and Occupational Safety and Health
Administration as well as by other federal, state and local authorities. In
addition, numerous foreign authorities would regulate any future international
sales.
There continue to be a number of legislative and regulatory proposals aimed at
changing the health care system. It is uncertain what, if any, legislative
proposals will be adopted or what actions federal or state agencies, or third
party payers may take in response to any health care reform proposals or
legislation. Although the Company cannot predict whether any such legislative or
regulatory proposals will be adopted or the effect such proposals may have on
its business, the uncertainty surrounding such proposals could have a material
adverse effect on the Company. Furthermore, the Company's ability to
commercialize its potential product portfolio may be adversely affected to the
extent that such proposals have a material adverse effect on the business,
financial condition and profitability of other companies that are prospective
collaborators for certain of the Company's potential products.
The Company's ability to commercialize its products successfully may depend in
part on the extent to which reimbursement for the cost of such products and
related treatments will be available from government health administration
authorities, private health insurers and other organizations. There can be no
assurance that adequate third-party coverage will be available to enable the
Company or any of its future licensees to maintain price levels sufficient to
realize an appropriate return on its investment in product development.
11
Corporate History
Pharmos Corporation (the "Company"), a Nevada corporation, formerly known as
Pharmatec, Inc., was incorporated under the laws of the State of Nevada on
December 20, 1982. On October 29, 1992, the Company completed a merger (the
"Merger") with Pharmos Corporation, a privately held New York corporation ("Old
Pharmos"), and in 1992 acquired all of the outstanding shares of Xenon Vision,
Inc., a privately held Delaware corporation. Prior to the Merger, Old Pharmos
was a biopharmaceutical company with proprietary drug delivery and formulation
technologies, one of which involved an initial application of ophthalmic drugs,
and another of which involved research pharmaceuticals with neuroprotective
properties being developed for applications such as stroke and head trauma.
Prior to the Merger, the Company was a publicly-held company primarily engaged
in the development and testing of a chemical delivery system that has been shown
in animal studies to permit the passage of drugs across the blood-brain barrier.
Prior to its acquisition, Xenon was a research-based pharmaceutical company
developing several patented products for the ophthalmic field. In 1995, the
Company acquired Oculon Corporation, a privately-held development stage company
with anti-cataract technologies.
Human Resources
As of March 1, 2001, the Company had 66 employees, 11 in the U.S. and 55 in
Israel, of whom approximately 14 hold doctorate or medical degrees. The
Company's employees are not covered by a collective bargaining agreement. The
Company has never experienced employment-related work stoppages and considers
its employee relations to be excellent.
Public Funding and Grants
The Company's subsidiary, Pharmos Ltd., has received certain funding from the
Chief Scientist of the Israel Ministry of Industry and Trade (the "Chief
Scientist") for research and development of dexanabinol, SME technology for
injection and nutrition as well as for research relating to pilocarpine,
dexamethasone and ophthalmic formulations for dry eyes. The Company has received
$2,452,059 under such agreements through December 31, 2000. The Company will be
required to pay royalties to the Chief Scientist from ranging 2% to 5% of
product sales, if any, as a result of the research activities conducted with
such funds. Aggregate royalty payments are limited to the amount of funding
received. Additionally, funding by the Chief Scientist places certain legal
restrictions on the transfer of know-how and the manufacture of resulting
products outside of Israel. See "Conditions in Israel."
The Company has received certain funding of $925,780 from the Israel-U.S.
Binational Industrial Research and Development Foundation ("BIRD-F") to develop
Lotemax and LE-T. The Company was required to pay royalties to BIRD-F on product
sales, if any, of 2.5%, through September 1999, then 5% thereafter, as a result
of the research activities conducted with such funds. Aggregate royalty payments
are limited to 150% of the amount of such funding received, linked to the
exchange rate of the U.S. dollar and the New Israeli Shekel.
In April 1997, the Company signed an agreement with the Magnet consortium,
operated by the Office of the Chief Scientist, for developing generic
technologies and for the design and development of drug and diagnostic kits.
Under such agreement, the Company is entitled to a non-refundable grant
amounting to approximately 60% of the actual research and development and
equipment expenditures on approved projects. No royalty obligations are required
within the framework. To date, the Company has received grants totaling
$1,505,468 pursuant to this agreement.
Conditions in Israel
The Company conducts significant operations in Israel through its subsidiary,
Pharmos Ltd., and therefore is affected by the political, economic and military
conditions to which that country is subject.
12
Pharmos Ltd. has received certain funding from the Chief Scientist with respect
to dexanabinol and with respect to its SME Technology. The proclaimed purpose of
the legislation under which such funding was provided is to develop local
industry, improve the state balance of trade and to create new jobs in Israel.
Such funding prohibits the transfer or license of know-how and the manufacture
of resulting products outside of Israel without the permission of the Chief
Scientist. Although it is the Company's belief that the Chief Scientist does not
unreasonably withhold this permission if the request is based upon commercially
justified circumstances and any royalty obligations to the Chief Scientist are
sufficiently assured, there can be no assurance that such consent, if requested,
would be granted upon terms satisfactory to the Company or granted at all.
13
Item 2. Properties
The Company is headquartered in Iselin, New Jersey where it leases its executive
offices and maintains clinical, regulatory and business development staff. The
Company also leases facilities used in the operation of its research,
development, pilot manufacturing and administrative activities in Rehovot,
Israel. These facilities have been improved to meet the special requirements
necessary for the operation of the Company's research and development
activities. In the opinion of the management these facilities are sufficient to
meet the current and anticipated future requirements of the Company. In
addition, management believes that it has sufficient ability to renew its
present leases related to these facilities or obtain suitable replacement
facilities.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on July 20, 2000, the
stockholders of the Company elected the following persons as directors of the
Company to serve until the next annual meeting of stockholders and until their
successors are duly elected and qualified: Haim Aviv, Elkan R. Gamzu, E. Andrews
Grinstead III (deceased in February 2001), Samuel D. Waksal, David Schlachet,
Mony Ben Dor and Georges Anthony Marcel. The results of the voting were as
follows:
VOTES FOR VOTES WITHHELD
Haim Aviv 41,159,667 366,908
Elkan R. Gamzu 41,159,667 366,908
E. Andrews Grinstead 41,159,667 366,908
Samuel D. Waksal 41,159,192 367,383
David Schlachet 41,183,667 342,908
Mony Ben Dor 41,158,417 368,158
Georges Anthony Marcel 41,253,667 272,908
Also at the Annual Meeting, the stockholders approved the adoption of the
Company's 2000 Stock Option Plan, with 40,192,603 votes cast for approval,
1,269,711 votes cast against and 64,261 abstentions.
14
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded on the Nasdaq SmallCap Market(t)m. The
following table sets forth the range of high and low bid prices for the Common
Stock as reported on the NASDAQ National Market System and the Nasdaq SmallCap
Market during the periods indicated.
Year ended December 31, 2000 HIGH LOW
- ---------------------------- ------ ------
1st Quarter......................... $15.38 $1.75
2nd Quarter......................... 6.75 2.38
3rd Quarter......................... 4.56 2.94
4th Quarter......................... 3.59 1.47
Year ended December 31, 1999 HIGH LOW
- ---------------------------- ------ ------
1st Quarter......................... $1.78 $1.13
2nd Quarter......................... 2.13 1.19
3rd Quarter......................... 2.00 1.22
4th Quarter......................... 2.44 1.06
The high and low bid prices for the Common Stock during the first quarter of
2001 (through March 15, 2001) were $3.00 and $1.50, respectively. The closing
price on March 15, 2001 was $1.75.
The foregoing represents inter-dealer prices, without retail mark-up, mark-down
or commission, and may not necessarily represent actual transactions.
On March 15, 2001, there were approximately 499 record holders of the Common
Stock of the Company and approximately 20,416 beneficial owners of the Common
Stock of the Company, based upon the number of shares of Common Stock held in
"street name".
The Company has paid no dividends on its Common Stock and does not expect to pay
cash dividends in the foreseeable future. The Company is not under any
contractual restriction as to its present or future ability to pay dividends.
The Company currently intends to retain any future earnings to finance the
growth and development of its business.
15
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenues $ 5,098,504 $ 3,279,397 $ 1,539,941 -- --
Gross Margin 3,222,549 2,284,780 1,102,228 -- --
Operating expenses (9,969,879) (6,999,136) (6,109,809) $(8,563.091) (8,354,991)
Loss Before Extraordinary Item (7,984,202) (4,618,190) (4,663,347) (8,233,547) (8,077,210)
Extraordinary gain from
forgiveness of debt -- -- -- 416,248 --
Dividend embedded in
convertible preferred stock -- -- (642,648) (1,952,767) --
Preferred Stock dividends -- (22,253) (242,295) (240,375) --
----------- ------------ ----------- ------------ ------------
Net loss applicable to
common shareholders ($ 7,984,202) ($4,640,443) ($5,548,290) ($10,010,441) ($8,077,210)
============= ============ ============ ============ ============
Loss per share applicable
to common shareholders before
extraordinary gain - basic ($ 0.15) ($ 0.11) ($ 0.15) ($ 0.32) ($ 0.28)
Extraordinary gain per share -- -- -- 0.01 --
----------- ------------ ----------- ------------ -----------
Net loss per share applicable
to common shareholders - basic ($ 0.15) ($ 0.11) ($ 0.15) ($ 0.31) ($ 0.28)
============= ============ ============ ============ ============
Total assets $ 30,783,109 $ 7,791,294 $ 8,066,670 $ 8,421,841 $ 7,468,293
============ =========== =========== ============ ===========
Long term obligations $ 7,680,872 $ 1,277,565 $ 2,691,023 $ 4,100,000 $ 4,161,767
============ =========== =========== ============ ===========
Cash dividends declared -- -- -- -- --
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
During 2000 and 1999, the Company generated revenues from product sales, but
continues to be dependent upon external financing, interest income, and research
and development contracts to pursue its intended business activities. The
Company has not been profitable since inception and has incurred a cumulative
net loss of $90,494,309 through December 31, 2000. Losses have resulted
principally from costs incurred in research activities aimed at identifying and
developing the Company's product candidates, clinical research studies, merger
and acquisition costs, the write-off of purchased research and development, and
general and administrative expenses. The Company expects to incur additional
operating expenses over the next several years as the Company's research and
development and clinical trial programs continue. The Company's ability to
achieve profitability is dependent on the level of revenues from the sale of
drug substance to support Lotemax and Alrex, coupled with its ability to develop
and obtain regulatory approvals for its product candidates, to enter into
agreements for product development and commercialization with strategic
corporate partners and contract to develop or acquire the capacity to
manufacture and sell its products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Results of Operations
Years Ended December 31, 2000 and 1999
Revenues from sales increased $1,819,107 or 55%, from $3,279,397 in 1999 to
$5,098,504 in 2000. The increase primarily resulted from increased market shares
for the Company's products. Additionally, License Fee revenues were $225,000
compared to zero in 1999. The license income was primarily generated from the
licensing of a technology of the Company for use in Japan.
Cost of goods sold increased $881,338 or 89%, from $994,617 in 1999 to
$1,875,955 in 2000. The increase reflects the high product revenue for 2000
compared to 1999. Cost of goods sold includes the cost of the active drug
substance and royalty payments to the licensor. Cost of goods in 2000 grew
faster than product revenues as a result of higher expenses for product samples,
higher LE product license expenses and higher royalties.
Total operating expenses increased $2,970,743 or 42%, from $6,999,136 in 1999 to
$9,969,879 in 2000. The increase in operating expenses is primarily due to
increases in selling, general & administrative expenses, research and
development expenses and depreciation.
Net research and development expenses increased by $1,456,396 or 38%, from
$3,827,001 in 1999 to $5,283,397 in 2000. The increase in R&D expense is
primarily due to increased to expenditures, including increased employee
headcounts, related to the development of dexanabinol for the treatment of
traumatic brain injury and to increased activity in the Company's cannabinoid
program to treat various central nervous system and inflammation-based
conditions.
Selling, general and administrative expenses increased by $1,432,697 or 55%,
from $2,612,170 in 1999 to $4,044,867 in 2000. The increase is primarily due to
higher staffing levels and increased investor relations activities.
Depreciation and amortization expenses increased by $135,680, or 39%, from
$346,044 in 1999 to $481,724 in 2000, reflecting increased depreciation expense
related to laboratory equipment purchases.
Other income (expense), net of interest and other expenses, decreased by
$1,333,038 from income of $96,166 in 1999 to expense of $1,236,872 in 2000. A
higher level of interest expense was primarily due to non-cash charges related
to the Company's convertible debt financing, completed in the third quarter of
2000, of approximately $2.4 million. The increased expense was partially offset
by increased interest income of approximately $1.1 million a result of higher
average cash balances in 2000.
17
Years Ended December 31, 1999 and 1998
Revenues from sale of product increased $2,091,119 or 176%, from $1,188,278 in
1998 to $3,279,397 in 1999. The increase resulted from increased market shares
for the Company's products as well as a full year of revenue for 1999 versus
three quarters in 1998 as product sales commenced in April 1998. Additionally,
the Company recorded license income of $351,663 for the year ended December 31,
1998. The license income was primarily generated from a non-recurring payment
received by the Company in exchange for the transfer of certain drug technology.
Cost of goods sold increased $556,904 or 127%, from $437,713 in 1998 to $994,617
in 1999. The increase reflects the high product revenue in 1999 versus 1998.
Cost of goods sold includes the cost of the active drug substance and royalty
payments.
Total operating expenses increased $889,327 or 15%, from $6,109,809 in 1998 to
$6,999,136 in 1999. The increase in operating expenses is due to increases in
selling, general & administrative expenses, research and development expenses
and depreciation.
Net research and development expenses increased by $335,618 or 10%, from
$3,491,383 in 1998 to $3,827,001 in 1999. The increase in R&D expense is
primarily due to higher outside consulting costs associated with the Phase II
testing of the Company's dexanabinol product and on compounds in various stages
of clinical and preclinical testing.
Selling, general and administrative expenses increased by $475,530 or 22%, from
$2,136,640 in 1998 to $2,612,170 in 1999. The increase is primarily due to
higher wage and benefits costs and increased investor relations activities
partially offset by reduced professional fees and reduced travel costs.
Depreciation and amortization expenses increased by $78,200, or 35%, from
$267,844 in 1998 to $346,044 in 1999, reflecting increased depreciation expense
related to laboratory equipment purchases in 1998.
Interest and other income, net of interest and other expenses, decreased by
$248,068, or 72%, from $344,234 in 1998 to $ 96,166 in 1999. The decline is
principally due to lower interest income as a result of lower average cash
balances.
Liquidity and Capital Resources
While the Company has received revenues since 1998 through the sale of its
approved products, it has incurred operating losses since its inception. At
December 31, 2000, the Company had an accumulated deficit of $90,494,309. 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 $21.7 million, including cash and cash
equivalents of $22.5 million, as of December 31, 2000.
During 2000, the Company received additional equity of $4.8 million and issued
2,615,003 shares of its common stock from the exercise of warrants to purchase
the Company's common stock. During the first quarter of 2000, the Company sold
4,500,000 registered shares of common stock to several investors pursuant to a
shelf registration that generated $12.7 million in gross proceeds.
During 2000, under terms of the Equity Line of Credit Agreement, obtained in
1998, the Company issued 518,424 shares of its Common Stock and 51,162 warrants
to purchase shares of its Common Stock to such investor for consideration of
$2.1million, net of fees.
18
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 semiannually 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 (or 2,088,775 common
shares) and are convertible beginning October 31, 2000. Under certain conditions
giving rise to anti-dilution adjustments, 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.
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 $1.8
million, all of which has been amortized and included as interest expense in the
year ending December 31, 2000. Additionally, the discount on the Convertible
Debenture of approximately $ 800,000 will be amortized to interest expense over
the life of the debt. For the year ending December 31, 2000, $177,976 has been
amortized.
The Company issued 1,024,425 common shares in the private placement that
generated gross proceeds of $3 million. Under the terms of the transaction,
821,515 shares were issued at closing and 202,910 shares were issued in the
fourth quarter of 2000 as a one-time adjustment that did not result in
additional proceeds to the Company. One investor has 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.
During January 2001, the Company paid $572,539 and issued 182,964 shares of the
common stock of the Company to the investors in the convertible debenture. The
payment of cash and stock were the option chosen by the Company and represent
adjustments to the pricing based upon the Company's stock price during the
adjustment period. Under the terms of the agreements, no further adjustments are
due.
The issuance costs related to the Private Placement of approximately $1.4
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
related to the Convertible Debenture will be amortized over the life of the
debt. For the year ending December 31, 2000, $224,691 has been amortized and
included as interest expense. The issuance costs relating to the common shares
have been netted against the proceeds.
Cumulative advances from Bausch & Lomb as of December 31, 2000 totaled $5
million. BLP is entitled to recoup the advances by withholding certain amounts
from the proceeds payable to the Company for purchases of the active drug
substance used in the production of Lotemax, Alrex and line extension products.
As of December 31, 2000, the outstanding advances from BLP amounted to $1.6
million. The Company may be obligated to repay such advances if it is unable to
supply BLP with certain specified quantities of the active drug substance.
Management believes that existing cash and cash equivalents, combined with
anticipated cash inflows from investment income, the equity line of credit, 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 operations. 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.
19
Item 8. Financial Statements and Supplementary Data
The information called for by this Item 8 is included following the "Index to
Financial Statements" contained in this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors, officers and key employees of the Company are as follows:
Name Age Position
- ----- ---- -------
Haim Aviv, Ph.D. 61 Chairman, Chief Executive Officer,
Chief Scientist and Director
Gad Riesenfeld, Ph.D. 57 President, Chief Operating Officer
Robert W. Cook 45 Executive Vice President and
Chief Financial Officer
David Schlachet 55 Director
Mony Ben Dor 55 Director
Georges Anthony Marcel, M.D., Ph.D. 59 Director
Elkan R. Gamzu, Ph.D. 58 Director
Samuel D. Waksal, Ph.D. 52 Director
Haim Aviv, Ph.D., is Chairman, Chief Executive Officer, Chief Scientist and a
Director of the Company. In 1990, he co-founded Pharmos Corporation, a New York
corporation ("Old Pharmos"), which merged into the Company in October 1992 (the
"Merger"). Dr. Aviv also served as Chairman, Chief Executive Officer, Chief
Scientist and a Director of Old Pharmos prior to the Merger. Dr. Aviv was the
co-founder in 1980 of Bio-Technology General Corp. ("BTG"), a publicly-traded
company engaged in the development of products using recombinant DNA, its
General Manager and Chief Scientist from 1980 to 1985, and a Director and Senior
Scientific Consultant until August 1993. Prior to that time, Dr. Aviv was a
professor of molecular biology at the Weizmann Institute of Science. Dr. Aviv is
the principal stockholder of Avitek Ltd., a stockholder of the Company. Dr. Aviv
is also an officer and/or significant stockholder of several privately held
Israeli biopharmaceutical and venture capital companies.
Gad Riesenfeld, Ph.D., was named President and Secretary in February 1997, and
has served as Chief Operating Officer since March 1995. He served as Executive
Vice President from December 1994 to February 1997, Vice President of Corporate
Development and General Manager of Florida Operations from October 1992 to
December 1994, and was employed by Pharmos from March 1992 until the Merger.
Prior thereto, he was engaged in a variety of Pharmaceutical and Biotechnology
business activities relating to the commercialization of intellectual property,
primarily in the pharmaceutical and medical fields. From March 1990 through May
1991 Dr. Riesenfeld was a Managing Director of Kamapharm Ltd., a private company
specializing in human blood products. Prior thereto, from May 1986, he was
Managing Director of Galisar Ltd., a pharmaceutical company involved in
extracorporeal blood therapy. Dr. Riesenfeld holds a Ph.D. degree from the
Hebrew University of Jerusalem and held a scientist position, as a post
doctorate, at the Cedars Sinai Medical Center in Los Angeles, California.
Robert W. Cook was elected Vice President Finance and Chief Financial Officer of
Pharmos in January 1998 and became Executive Vice President in February 2001.
20
From May 1995 until his appointment as the Company's Chief Financial Officer, he
was a vice president in GE Capital's commercial finance subsidiary, based in New
York. From 1977 until 1995, Mr. Cook held a variety of corporate finance and
capital markets positions at The Chase Manhattan Bank, both in the U.S. and in
several overseas locations. He was named a managing director of Chase in January
1986. Mr. Cook holds a degree in international finance from The American
University, Washington, D.C.
David Schlachet, a Director of the Company from December 1994, served as the
Chairman of Elite Industries Ltd. from July 1997 until June 30th 2000. From
January 1996 to June 1997, Mr. Schlachet served as the Vice President of the
Strauss Group and Chief Executive Officer of Strauss Holdings Ltd, one of
Israel's largest privately owned food manufacturers. He was Vice President of
Finance and Administration at the Weizmann Institute of Science in Rehovot,
Israel from 1990 to December 1995, and was responsible for the Institute's
administration and financial activities, including personnel, budget and
finance, funding, investments, acquisitions and collaboration with the
industrial and business communities. From 1989 to 1990, Mr. Schlachet was
President and Chief Executive Officer of YEDA Research and Development Co. Ltd.,
a marketing and licensing company at the Weizmann Institute of Science. Today
Mr. Schlachet serves as Chairman of Harel Capital Markets (Israeli broker,
underwriter and asset management firm) and as a Director of Israel Discount Bank
Ltd., Hapoalim Capital Markets Ltd, Teldor Ltd. (software and computer company),
Proseed Ltd., a Venture Capital investment company, and Taya Investment Company
Ltd., an Israeli publicly-held investment company, and also serves as Managing
Partner in Biocom, a V.C. Fund in the field of Life Science.
Mony Ben Dor, a director of the Company since September 1997, has been managing
partner of Biocom, a V.C Fund in the field of Life Science since April, 2000.
Prior to that he was Vice President of the Israel Corporation Ltd. from May
1997, and Chairman of two publicly traded subsidiaries: H.L. Finance and Leasing
and Albany Bonded International Trade. He was also a Director of a number of
subsidiary companies such as Israel Chemicals Ltd., Zim Shipping Lines, and
Tower Semi Conductors. From 1992-1997 Mr. Ben Dor was Vice President of Business
Development for Clal Industries Limited, which is one of the leading investment
groups in Israel. He was actively involved in the acquisition of companies
including a portfolio of pharmaceutical companies Pharmaceutical Resources Inc.,
Finetech Ltd., BioDar Ltd., to name a few. He served as a director representing
Clal Industries in all of the acquired companies as well as other companies of
Clal Industries. Prior to his position at Clal Industries, Mr. Ben Dor served as
Business Executive at the Eisenberg Group of companies.
Georges Anthony Marcel, M.D., Ph.D., a Director of the Company since September
1998, is President and Chief Executive Officer of TMC Development S.A., a
biopharmaceutical consulting firm based in Paris, France. Prior to founding TMC
Development in 1992, Dr. Marcel held a number of senior executive positions in
the pharmaceutical industry, including Chief Executive Officer of Amgen's French
subsidiary, Vice President of Marketing for Rhone-Poulenc Sante and Director of
Development for Roussel-Uclaf. Dr. Marcel teaches biotechnology industrial
issues and European regulatory affairs at the Faculties of Pharmacy of Paris and
Lille. Dr. Marcel is also a member of the Gene Therapy Advisory Committee at the
French Medicines Agency.
Elkan R. Gamzu, Ph.D., a Director of the Company since February 2000, is a
consultant to the biotechnology and pharmaceutical industries. Prior to becoming
a consultant, Dr. Gamzu held a number of senior executive positions in the
biotechnology and pharmaceutical industries, including President and Chief
Executive Officer of Cambridge Neuroscience, Inc. from 1994 until 1998. Dr.
Gamzu also served as President and Chief Operating Officer and Vice President of
Development for Cambridge Neuroscience, Inc. from 1989 to 1994. Previously, Dr.
Gamzu held a variety of senior positions with Warner-Lambert and Hoffmann-La
Roche, Inc. Dr. Gamzu is a member of the Board of Directors of three other
biotechnology companies: the publicly traded XTL Biopharmaceuticals Ltd. and the
privately held biotechnology companies Neurotech S.A. of Evry, France and
Hypnion, Inc. of Worcester, MA. He is also on the Board of Directors of
Rho-ADDS, sas, a Paris-based provider of biostatistics and data management for
the biopharmaceutical industry.
Samuel D. Waksal, Ph.D., a Director of the Company since March 2000, is a
founder of ImClone Systems Incorporated and has been its Chief Executive Officer
and a Director since August 1985 and President since March 1987. From 1982 to
1985, Dr. Waksal was a member of the faculty of Mt. Sinai School of Medicine as
Associate Professor of Pathology and Director of the Division of Immunotherapy
21
within the Department of Pathology. He has served as visiting Investigator of
the National Cancer Institute, Immunology Branch, Research Associate of the
Department of Genetics, Stanford University Medical School, Assistant Professor
of pathology at Tufts University School of Medicine and Senior Scientist for the
Tufts Cancer Research Center. Dr. Waksal was a scholar of the Leukemia Society
of America from 1979 to 1984. Dr. Waksal currently serves on the Executive
Committee of the New York Biotechnology Association, the Board of Directors of
Cadus Pharmaceutical Corporation and is Chairman of the New York Council for the
Humanities.
Section 16 Filings
No person who, during the fiscal year ended December 31, 2000, was a director,
officer or beneficial owner of more than ten percent of the Company's Common
Stock which is the only class of securities of the Company registered under
Section 12 of the Securities Exchange Act of 1934 (the "Act"), a "Reporting
Person" failed to file on a timely basis, reports required by Section 16 of the
Act during the most recent fiscal year. The foregoing is based solely upon a
review by the Company of Forms 3 and 4 during the most recent fiscal year as
furnished to the Company under Rule 16a-3(d) under the Act, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, and any representation received by the Company from any reporting
person that no Form 5 is required.
Item 11. Executive Compensation
The following table summarizes the total compensation of the Chief Executive
Officer of the Company for 2000 and the two previous years, as well as all other
executive officers of the Company who received compensation in excess of
$100,000 for 2000.
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------- ----------------------
Stock
Name/ Restricted Underlying
Principal Position Year Salary Bonus Other Stock Options
- ----------------- ---- ------ ----- ------- -------- ----------
Haim Aviv, Ph.D
Chairman, Chief 2000 $244,662 $74,044 $ 2,925(1) 100,000
Executive Officer, and 1999 $236,418 $29,906 $ 2,829(1) 65,000
Chief Scientist 1998 $236,347 $ 4,197(1) 100,000
Gad Riesenfeld, Ph.D
President and 2000 $194,250 $20,000 $ 71,125(2) 60,000
Chief Operating Officer 1999 $185,000 $20,000 $ 53,860(2) 50,000
1998 $175,000 $25,000 $ 50,728(2) 80,000
Robert W. Cook
Vice President Finance 2000 $183,750 $40,000 $ 4,800(1) 45,000
and Chief Financial Officer 1999 $175,000 $20,000 $ 4,800(1) 40,000
1998 $165,000 $20,000 $ 4,800(1) 150,000
(1) Consists of contributions to insurance premiums, car allowance and car
expenses.
(2) Consists of housing allowance, contributions to insurance premiums, and car
allowance.
22
The following tables set forth information with respect to the named executive
officers concerning the grant, repricing and exercise of options during the last
fiscal year and unexercised options held as of the end of the fiscal year.
Option Grants for the Year Ended December 31, 2000
Common Stock
Underlying % of Total Options
options Granted to Exercise Price
Granted Employees per Share Expiration Date
------------ ------------------ --------------- ---------------
Haim Aviv, Ph.D 100,000 15.6 % $ 4.03 6/6/10
Gad Riesenfeld, Ph.D. 60,000 9.4 % $ 4.03 6/6/10
Robert W. Cook 45,000 7.0 % $ 4.03 6/6/10
Aggregated Option Exercises
for the Year Ended December 31, 2000
and Option Values as of December 31, 2000:
Value of Unexercised
Number of Number of Unexercised In-the-Money Options at
Shares Options at December 31, 2000 December 31, 2000
Acquired on Value -------------------------- ----------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
Haim Aviv, Ph.D 125,000 $781,250 265,626 198,750 $ 5,590 $16,770
Gad Riesenfeld, Ph.D 87,250 $480,864 131,833 137,500 $ 4,300 $12,900
Robert W. Cook 50,000 $214,536 60,000 125,000 $ 3,440 $10,320
Stock Option Plans
It is currently the Company's policy that all full time key employees are
considered annually for the possible grant of stock options, depending upon
employee performance. The criteria for the awards are experience, uniqueness of
contribution to the Company and level of performance shown during the year.
Stock options are intended to generate greater loyalty to the Company and help
make each employee aware of the importance of the business success of the
Company.
As of December 31, 2000, there were options to purchase 1,344,002 shares of the
Company's Common Stock outstanding under the 1997 Plan, expiring on dates from
January 1, 2008 through June 6, 2010. As of December 31, 2000, there were
options to purchase 92,000 shares of the Company's Common Stock outstanding
under the 2000 Plan, expiring in June and July 2010.
As of December 31, 1999, the Company has 1,929,101 options to purchase shares of
the Company's Common Stock outstanding under various option plans, 616,765 of
which are non-qualified options. During 1999, the Company granted 392,000
options to purchase shares of its Common Stock to employees, 80,000 of which are
non-qualified options. A summary of the various established stock option plans
is as follows:
1992 Plan. The maximum number of shares of the Company's Common Stock available
for issuance under the 1992 Plan is 750,000 shares, subject to adjustment in the
event of stock splits, stock dividends, mergers, consolidations and the like.
Common Stock subject to options granted under the 1992 Plan that expire or
terminate will again be available for options to be issued under the 1992 Plan.
As of December 31, 2000, there were options to purchase 427,542 shares of the
Company's Common Stock outstanding under this plan. Each option granted
outstanding under the 1992 plan as of December 31, 2000 expires on October 31,
2005.
24
1997 Plan and 2000 Plan. The 1997 Plan and the 2000 Plan are each administered
by a committee appointed by the Board of Directors (the "Compensation
Committee"). The Compensation Committee will designate the persons to receive
options, the number of shares subject to the options and the terms of the
options, including the option price and the duration of each option, subject to
certain limitations.
The maximum number of shares of Common Stock available for issuance under the
1997 Plan, as amended, and under the 2000 Plan is 1,500,000 shares each, subject
to adjustment in the event of stock splits, stock dividends, mergers,
consolidations and the like. Common Stock subject to options granted under the
1997 Plan and the 2000 Plan that expire or terminate will again be available for
options to be issued under each Plan.
The price at which shares of Common Stock may be purchased upon exercise of an
incentive stock option must be at least 100% of the fair market value of Common
Stock on the date the option is granted (or at least 110% of fair market value
in the case of a person holding more than 10% of the outstanding shares of
Common Stock (a "10% Stockholder")).
The aggregate fair market value (determined at the time the option is granted)
of Common Stock with respect to which incentive stock options are exercisable
for the first time in any calendar year by an optionee under the 1997 Plan, the
2000 Plan or any other plan of the Company or a subsidiary, shall not exceed
$100,000. The Compensation Committee will fix the time or times when, and the
extent to which, an option is exercisable, provided that no option will be
exercisable earlier than one year or later than ten years after the date of
grant (or five years in the case of a 10% Stockholder). The option price is
payable in cash or by check. However, the Board of Directors may grant a loan to
an employee, pursuant to the loan provision of the 1997 Plan or the 2000 Plan,
for the purpose of exercising an option or may permit the option price to be
paid in shares of Common Stock at the then current fair market value, as defined
in the 1997 Plan or the 2000 Plan.
Under the 1997 Plan, upon termination of an optionee's employment or
consultancy, all options held by such optionee will terminate, except that any
option that was exercisable on the date employment or consultancy terminated
may, to the extent then exercisable, be exercised within three months thereafter
(or one year thereafter if the termination is the result of permanent and total
disability of the holder), and except such three month period may be extended by
the Compensation Committee in its discretion. If an optionee dies while he is an
employee or a consultant or during such three-month period, the option may be
exercised within one year after death by the decedent's estate or his legatees
or distributees, but only to the extent exercisable at the time of death. The
2000 Plan provides that the Compensation Committee may in its discretion
determine when any particular stock option shall expire. A stock option
agreement may provide for expiration prior to the end of its term in the event
of the termination of the optionee's service to the Company or death or any
other circumstances.
The 1997 Plan and the 2000 Plan each provides that outstanding options shall
vest and become immediately exercisable in the event of a "sale" of the Company,
including (i) the sale of more than 75% of the voting power of the Company in a
single transaction or a series of transactions, (ii) the sale of substantially
all assets of the Company, (iii) approval by the stockholders of a
reorganization, merger or consolidation, as a result of which the stockholders
of the Company will own less than 50% of the voting power of the reorganized,
merged or consolidated company.
The Board of Directors may amend, suspend or discontinue the 1997 Plan, but it
must obtain stockholder approval to (i) increase the number of shares subject to
the 1997 Plan, (ii) change the designation of the class of persons eligible to
receive options, (iii) decrease the price at which options may be granted,
except that the Board may, without stockholder approval accept the surrender of
outstanding options and authorize the granting of new options in substitution
therefore specifying a lower exercise price that is not less than the fair
market value of Common Stock on the date the new option is granted, (iv) remove
the administration of the 1997 Plan from the Compensation Committee, (v) render
any member of the Compensation Committee eligible to receive an option under the
1997 Plan while serving thereon, or (vi) amend the 1997 Plan in such a manner
that options issued under it intend to be incentive stock options, fail to meet
the requirements of Incentive Stock Options as defined in Section 422 of the
Code.
25
The Board of Directors may amend, suspend or discontinue the 2000 Plan, but it
must obtain stockholder approval to (i) increase the number of shares subject to
the 2000 Plan or (ii) change the designation of the class of persons eligible to
receive options.
Under current federal income tax law, the grant of incentive stock options under
the 1997 Plan or the 2000 Plan will not result in any taxable income to the
optionee or any deduction for the Company at the time the options are granted.
The optionee recognizes no gain upon the exercise of an option. However the
amount by which the fair market value of Common Stock at the time the option is
exercised exceeds the option price is an "item of tax preference" of the
optionee, which may cause the optionee to be subject to the alternative minimum
tax. If the optionee holds the shares of Common Stock received on exercise of
the option at least one year from the date of exercise and two years from the
date of grant, he will be taxed at the time of sale at long-term capital gains
rates, if any, on the amount by which the proceeds of the sale exceed the option
price. If the optionee disposes of the Common Stock before the required holding
period is satisfied, ordinary income will generally be recognized in an amount
equal to the excess of the fair market value of the shares of Common Stock at
the date of exercise over the option price, or, if the disposition is a taxable
sale or exchange, the amount of gain realized on such sale or exchange if that
is less. If, as permitted by the 1997 Plan or the 2000 Plan, the Board of
Directors permits an optionee to exercise an option by delivering already owned
shares of Common Stock valued at fair market value) the optionee will not
recognize gain as a result of the payment of the option price with such already
owned shares. However, if such shares were acquired pursuant to the previous
exercise of an option, and were held less than one year after acquisition or
less than two years from the date of grant, the exchange will constitute a
disqualifying disposition resulting in immediate taxation of the gain on the
already owned shares as ordinary income. It is not clear how the gain will be
computed on the disposition of shares acquired by payment with already owned
shares.
1997 Employees and Directors Warrants Plan
The 1997 Employees and Directors Warrants Plan was approved by the Stock Option
Committee as of February 12, 1997 and March 19, 1997. 1,030,000 Warrants to
purchase 1,030,000 shares of Common Stock were granted to certain employees of
the Company. Of such warrants, 955,000 were granted at an exercise price of
$1.59 per share and 75,000 were granted and an exercise price of $1.66 per share
(together, the "1997 Employees Warrants"). The 1997 Employees Warrants become
exercisable in increments of 25% each on their first, second, third and fourth
anniversaries, respectively, and shall expire in the year 2007. 100,000 Warrants
to purchase 100,000 shares of Common Stock were granted to directors of the
Company at an exercise price of $1.59 per share (the "1997 Directors Warrants")
on February 12, 1997. The 1997 Directors Warrants become exercisable in
increments of 25% each on the first, second, third and fourth anniversaries of
February 12, 1997 and shall expire on February 12, 2003. At December 31, 2000,
there were 496,500 1997 Employees Warrants at $1.59, no 1997 Employees Warrants
at $1.66 and 30,000 1997 Directors Warrants at $1.59 outstanding.
Upon termination of a Warrant Holder's employment, consultancy or affiliation
with the Company, all Warrants held by such Warrant Holder will terminate,
except that any Warrant that was exercisable on the date which the employment,
consultancy or affiliation terminated may, to the extent then exercisable, be
exercised within three months thereafter (or one year thereafter if the
termination is the result of permanent and total disability of the holder). If a
Warrant Holder dies while he or she is an employee, consultant or affiliate of
the Company, or during such three month period, the Warrant may be exercised
within one year after death by the decedent's estate or his legatees or
distributees, but only to the extent exercisable at the time of death.
Employment/Consulting Contracts/Directors' Compensation
Haim Aviv, Ph.D. In addition to serving as Chairman of the Board and Chief
Executive Officer of the Company, Dr. Aviv has provided consulting services
under a consulting agreement with an initial three-year term ended May 3, 1993.
The term automatically renews for additional one-year periods unless either the
Company or Dr. Aviv terminates the agreement at least 90 days prior to a
scheduled expiration date. The agreement has been renewed on an annual basis and
presently expires on May 3, 2001. Dr. Aviv is entitled to severance pay equal to
25% of his salary in the event of termination or non-renewal without cause.
Under the agreement, Dr. Aviv is required to render certain consulting services
26
to the Company and in consideration therefore, Dr. Aviv is entitled to receive
$170,000 per year, subject to yearly increases and review.
The Company's subsidiary, Pharmos Ltd., employs Dr. Aviv as its Chief Executive
Officer under an employment agreement with Dr. Aviv pursuant to which Dr. Aviv
receives a salary, subject to yearly increases and review. Dr. Aviv's annual
gross salary is $248,000 Dr. Aviv is required to devote at least 50% of his
business time and attention to the business of Pharmos, Ltd. and to serve on its
Board of Directors.
Gad Riesenfeld, Ph.D. In October 1992, Old Pharmos entered into a one-year
employment agreement with Dr. Riesenfeld, which is automatically renewable for
successive one-year terms unless either party gives three months prior notice of
non-renewal. Under the Agreement, Dr. Riesenfeld devotes his full time to
serving as President and Chief Operating Officer of the Company. Dr.
Riesenfeld's annual gross salary is $194,250.
Robert W. Cook. In January 1998, the Company entered into a one-year employment
agreement with Mr. Cook, which is automatically renewable for successive
one-year terms unless either party gives three months prior notice of
non-renewal. Under the Agreement, Mr. Cook devotes his full time to serving as
Vice President Finance and Chief Financial Officer of the Company. Mr. Cook's
annual gross salary is $183,750.
Directors' Compensation. In 2000, Directors did not receive any compensation for
service on the Board or for attending Board meetings.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 15, 2001, by (i)
each person who was known by the Company to own beneficially more than 5% of any
class of the Company's Common Stock, (ii) each of the Company's Directors, and
(iii) all current Directors and executive officers of the Company as a group.
Except as otherwise noted, each person listed below has sole voting and
dispositive power with respect to the shares listed next to such person's name.
Amount of
Name and Address of Beneficial Percentage of
Beneficial Ownership Ownership Total (1)
- --------------- --------- -------------
Haim Aviv, Ph.D. (2) 1,227,560 2.2%
c/o Pharmos Ltd.
Kiryat Weitzman
Rehovot, Israel
David Schlachet (3) 15,000 *
BioCom (Management) Limited
40 Einstein St., Ramat Aviv Tower
Tel-Aviv 69102, Israel
Mony Ben Dor (3) 10,000 *
BioCom (Management) Limited
40 Einstein St., Ramat Aviv Tower
Tel-Aviv 69102, Israel
Georges Anthony Marcel M.D., Ph.D.(3) 9,375 *
TMC Development
9, rue de Magdebourg
77116 Paris France
27
Elkan R. Gamzu, Ph.D. (3) 7,500 *
enERGetics
199 Wells Avenue, Suite 302
Newton, MA 02459
Samuel D. Waksal, Ph.D. 2,000 *
ImClone Systems Incorporated
180 Varick Street
New York, NY 10014
All Directors and 1,523,628 2.8%
Executive Officers as a group
(8 persons)(4)
- ----------
* Indicates ownership of less than 1%.
(1) Based on 54,246,861 shares of Common Stock outstanding, plus each
individual's currently exercisable warrants or options. Assumes that no
other individual will exercise any warrants and/or options.
(2) Includes 276,153 shares of Common Stock held in the name of Avitek Ltd., of
which Dr. Aviv is the Chairman of the Board of Directors and the principal
stockholder, and, as such, shares the right to vote and dispose of such
shares. Also includes currently exercisable options and warrants to
purchase 515,628 shares of Common Stock.
(3) Consists of currently exercisable options and warrants to purchase Common
Stock.
(4) Based on the number of shares of Common Stock outstanding, plus 793,336
currently exercisable warrants and options held by the Directors and
executive officers.
Item 13. Certain Relationships and Related Transactions
In April 2000, the Company entered into agreements with each of Dr. Stephen
Knight and Mr. Marvin Loeb, former directors of the Company, providing for the
immediate vesting of their outstanding non-qualified stock options in
consideration for their agreement to consult on strategic and financial matters
with the Company on an unpaid basis following their termination of service as
directors of the Company through the periods ending December 31, 2000 and March
31, 2001, respectively.
28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Exhibits
(1) FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December
31, 2000, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December
31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or note thereto.
(3) EXHIBITS
Exhibits
3 Articles of Incorporation and By-Laws
3(a) Restated Articles of Incorporation (Incorporated by reference to
Appendix E to the Joint Proxy Statement/Prospectus included in the
Form S-4 Registration Statement of the Company dated September 28,
1992 (No. 33-52398) (the "Joint Proxy Statement/Prospectus").
3(b) Certificate of Amendment of Restated Articles of Incorporation dated
January 30, 1995 (Incorporated by reference to Annual Report on Form
10-K for the year ended December 31, 1994).
3(c) Certificate of Amendment of Restated Articles of Incorporation dated
January 16, 1998 (Incorporated by reference to the Company's Current
Report on Form 8-K, dated February 6, 1998).
3(d) Certificate of Amendment of Restated Articles of Incorporation dated
October 21, 1999 (Incorporated by reference to Form S-3 Registration
Statement of the Company dated September 28, 2000 (No. 333-46818).
3(e) Amended and Restated By-Laws (Incorporated by reference to Form S-3
Registration Statement of the Company dated September 28, 2000 (No.
333-46818).
4 Instruments defining the rights of security holders, including
indentures
29
4(a) Form of Warrant to purchase Common Stock at an exercise price of $1.31
per share (pre-reverse split) (Incorporated by reference to Form S-3
Registration Statement of the Company dated September 14, 1993
(33-68762)).
4(b) Form of Placement Agent's Warrant Agreement, dated August 13, 1993, to
purchase shares of Common Stock (Incorporated by reference to Form S-3
Registration Statement of the Company dated September 14, 1993
(33-68762)).
4(c) Registration Agreement dated as of January 18, 1994 by and among the
Company, David Blech and Lake Charitable Remainder Trust (Incorporated
by reference to Form S-3 Registration Statement of the Company dated
January 28, 1993 (33-74638)).
4(d) Form of Warrant Agreement dated September 2, 1994 to purchase 42,000
shares of Common Stock (Incorporated by reference to Form S-1
Registration Statement of the Company dated June 30, 1994 [No.
33-80916], Amendment No. 2).
4(e) Warrant Agreement dated October 4, 1994 between the Company and Judson
Cooper (Incorporated by reference to Form S-3 Registration Statement
of the Company dated November 25, 1994 [No. 33-86720]).
4(f) Warrant Agreement dated February 7, 1995 between the Company and
Judson Cooper (Incorporated by reference to Annual Report on Form 10-K
for the year ended December 31, 1994).
4(g) Form of Employee Warrant Agreement, dated April 11, 1995, between the
Company and Oculon Corporation (Incorporated by reference to the
Company's Current Report on Form 8-K, dated April 11, 1995, as
amended).
4(h) Form of Warrant Agreement dated as of September 14, 1995 between the
Company and the Investors (Incorporated by reference to the Company's
Current Report on Form 8-K, dated September 14, 1995).
4(i) Form of Warrant Agreement dated as of April 30, 1995 between the
Company and Charles Stolper (Incorporated by reference to Form S-3
Registration Statement of the Company dated November 14, 1995, as
amended [No. 33-64289]).
4(j) Form of Warrant Agreement dated as of April 30, 1995 between the
Company and Janssen/Meyers Associates, L.P. (Incorporated by reference
to Form S-3 Registration Statement of the Company dated November 14,
1995, as amended [No. 33-64289]).
4(k) Form of Warrant Agreement dated as of October 31, 1995 between the
Company and S. Colin Neill (Incorporated by reference to Form S-3
Registration Statement of the Company dated November 14, 1995, as
amended [No. 33-64289]).
4(l) Certificate of Designation, Rights, Preferences and Privileges of
Series A Preferred Stock of the Company (Incorporated by reference to
Form S-3 Registration Statement of the Company dated December 20,
1996, as amended [No. 333-15165]).
4(m) Form of Stock Purchase Warrant dated as of September 30, 1996 between
the Company and the Investors (Incorporated by reference to Form S-3
Registration Statement of the Company dated December 20, 1996, as
amended [No. 333-15165]).
4(n) Form of Stock Purchase Warrant dated as of September 30, 1996 between
the Company and Alan M. Mark (Incorporated by reference to Form S-3
Registration Statement of the Company dated December 20, 1996, as
amended [No. 333-15165]).
30
4(o) Form of Warrant Agreement dated as of March 15, 1996 between the
Company and Michael E. Lewis, Ph.D. (Incorporated by reference to Form
S-3 Registration Statement of the Company dated December 20, 1996, as
amended [No. 333-15165]).
4(p) Stock Purchase Agreement, dated December 12, 1996, between the Company
and Bausch & Lomb Pharmaceuticals, Inc. (Incorporated by reference to
Annual Report on Form 10-K dated March 29, 1997).
4(q) Certificate of Designation, Rights Preferences and Privileges of
Series B Preferred Stock of the Company (Incorporated by reference to
Form S-3 Registration of the Company dated April 30, 1997 [No.
333-26155]).
4(r) Form of Stock Purchase Warrant dated as of March 31, 1997 between the
Company and the Investors (Incorporated by reference to Form S-3
Registration Statement of the Company dated April 30, 1997 [No.
333-26155]).
4(s) Certificate of Designation, Rights Preferences and Privileges of
Series C Preferred Stock of the Company (Incorporated by reference to
the Company's Current Report on Form 8-K filed on February 4, 1998).
4(t) Form of Stock Purchase Warrant dated as of February 4, 1998 between
the Company and the Investor and the Company and the Placement Agent
(Incorporated by reference to the Company's Current Report on Form 8-K
filed on February 4, 1998).
4(u) Form of Stock Purchase Warrant dated as of March 31, 1997 between the
Company and the Investor (Incorporated by reference to Form S-3
Registration Statement of the Company dated March 5, 1998 [No.
333-47359]).
4(v) Private Equity Line of Credit Agreement dated as of December 10, 1998
between the Company and the Investor (Incorporated by reference to the
Company's Current Report 8-K filed on December 23, 1998).
4(w) Amendment Agreement dated as of December 18, 1998 between the Company
and Dominion Capital Fund, Ltd. (Incorporated by reference to the
Company's Current Report 8-K filed on December 23, 1998).
4(x) Purchase Agreement between the Company, Millennium Partners LP, Strong
River Investments Inc. and St. Albans Partners Ltd., dated as of
September 1, 2000 (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed on September 11, 2000).
4(y) Form of 6% convertible debenture due February 28, 2002 (Incorporated
by reference to Exhibit 4.2 to the Company's Current Report on Form
8-K filed on September 11, 2000).
4(z) Registration Rights Agreement between the Company, Millennium Partners
LP, Strong River Investments Inc. and St. Albans Partners Ltd., dated
as of September 1, 2000 (Incorporated by reference to Exhibit 4.3 to
the Company's Current Report on Form 8-K filed on September 11, 2000).
4(a)(a) Form of Common Stock Purchase Warrant exercisable until September 1,
2005 (Incorporated by reference to Exhibit 4.4 to the Company's
Current Report on Form 8-K filed on September 11, 2000).
31
4(a)(b) Escrow Agreement between the company, Millennium Partners LP, Strong
River Investments Inc., St. Albans Partners Ltd. and Kleinberg Kaplan
Wolff & Cohen PC, dated as of September 1, 2000 (Incorporated by
reference to Exhibit 4.5 to the Company's Current Report on Form 8-K
filed on September 11, 2000).
4(a)(c) Common Stock Investment Agreement between the Company, Millennium
Partners LP, Strong River Investments Inc. and Laterman & Co. LP,
dated as of September 1, 2000 (Incorporated by reference to Exhibit
4.6 to the Company's Current Report on Form 8-K filed on September 11,
2000).
4(a)(d) Registration Rights Agreement between the Company, Millennium Partners
LP, Strong River Investments Inc. and Laterman & Co. LP, dated as of
September 1, 2000 (Incorporated by reference to Exhibit 4.7 to the
Company's Current Report on Form 8-K filed on September 11, 2000).
4(a)(e) Form of Common Stock Adjustment Warrant exercisable until November 1,
2001 (Incorporated by reference to Exhibit 4.8 to the Company's
Current Report on Form 8-K filed on September 11, 2000).
4(a)(f) Form of Call Warrant exercisable until September 1, 2001 (Incorporated
by reference to Exhibit 4.9 to the Company's Current Report on Form
8-K filed on September 11, 2000).
4(a)(g) Form of Optional Adjustment Warrant exercisable until February 28,
2002 (Incorporated by reference to Exhibit 4.10 to the Company's
Current Report on Form 8-K filed on September 11, 2000).
4(a)(h) Form of placement agent warrant with Ladenburg Thalmann & Co. Inc.
(Incorporated by reference to Form S-3 Registration Statement of the
Company dated September 28, 2000 (No. 333-46818).
4(a)(i) Form of placement agent warrant with SmallCaps OnLine LLC
(Incorporated by reference to Form S-3 Registration Statement of the
Company dated September 28, 2000 (No. 333-46818).
4(a)(j) Form of consulting warrant with SmallCaps OnLine LLC (Incorporated by
reference to Form S-3 Registration Statement of the Company dated
September 28, 2000 (No. 333-46818).
10 Material Contracts
10(a) Agreement between Avitek Ltd. ("Avitek") and Yissum Research
Development Company of the Hebrew University of Jerusalem ("Yissum")
dated November 20, 1986 (Incorporated by reference to Annual Report on
Form 10-K, as amended by Form10-K/A, for year ended December 31,
1992). (1)
10(a)(1) Supplement to Agreement (Incorporated by reference to Annual Report on
Form 10-K, as amended by Form 10-K/A, for year ended December 31,
1992). (1)
10(a)(2) Hebrew language original executed version of Agreement (Incorporated
by reference to Annual Report on Form 10-K, as amended by Form 10-K/A,
for year ended December 31, 1992). (1)
32
10(b) Agreement between Avitek and Yissum dated January 25, 1987
(Incorporated by reference to Annual Report on Form 10-K, as amended
by Form 10-K/A, for year ended December 31, 1992). (1)
10(b)(1) Schedules and Appendixes to Agreement (Incorporated by reference to
Annual Report on Form 10-K, as amended by Form 10-K/A, for year ended
December 31, 1992). (1)
10(b)(2) Hebrew language original executed version of Agreement (Incorporated
by reference to Annual Report on Form 10-K, as amended by Form 10-K/A,
for year ended December 31, 1992). (1)
10(c) Research, Development and License Agreement between Pharmos Ltd.,
Pharmos Corporation ("Old Pharmos") and Yissum dated February 5, 1991
(Incorporated by reference to Annual Report on Form 10-K, as amended
by Form 10-K/A, for year ended December 31, 1992). (1)
10(c)(1) Schedules and Appendixes to Agreement (Incorporated by reference to
Annual Report on Form 10-K, as amended by Form 10-K/A, for year ended
December 31, 1992). (1)
10(d) Pharmos Ltd. Employment Agreement with Haim Aviv ("Aviv") dated as of
May 2, 1990 and Old Pharmos Consulting Agreement with Aviv dated as of
May 2, 1990, as amended by letter from Old Pharmos to Aviv dated June
27, 1990 and Unanimous Written Consent of the Board of Directors of
Old Pharmos dated March 17, 1992 (Incorporated by reference to Annual
Report on Form 10-K, as amended by Form 10-K/A, for year ended
December 31, 1992). **
10(e) Personal Employment Agreement dated October 1, 1992 between Old
Pharmos and Gad Riesenfeld (Incorporated by reference to Annual Report
on Form 10-K, as amended by Form 10-K/A, for year ended December 31,
1992).**
10(f) License Agreement dated as of April 2, 1993 between the Company and
Dr. Nicholas Bodor (Incorporated by reference to Annual Report on Form
10-K, as amended by Form 10-K/A, for year ended December 31, 1993).
(1)
10(g) Marketing Agreement, dated as of June 30, 1995, between the Company
and Bausch & Lomb Pharmaceuticals, Inc. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter ending
June 30, 1995). (1)
10(h) Processing Agreement, dated as of June 30, 1995, between the Company
and Bausch & Lomb Pharmaceuticals, Inc. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter ending
June 30, 1995). (1)
10(i) Marketing Agreement, dated as of December 12, 1996, between the
Company and Bausch & Lomb Pharmaceuticals, Inc. (1)
10(j) Employment Agreement, dated December 15, 1997, between the Company and
Robert W. Cook (Incorporated by reference to Exhibit 10(a)(a) to
Annual Report on Form 10-K for the year ended December 31, 1997).**
10(k) 1992 Incentive and Non-Qualified Stock Option Plan (Annexed as
Appendix F to the Joint Proxy Statement/Prospectus). **
10(l) 1997 Incentive and Non-Qualified Stock Option Plan (Annexed as
Appendix B to the Proxy Statement on Form 14A filed November 5, 1997).
**
10(m) 2000 Incentive and Non-Qualified Stock Option Plan (Annexed as
Appendix A to the Proxy Statement on Form 14A filed June 19, 2000).**
33
10(n) *** Agreement dated as of January 21, 2000 between the Company and Dr.
Elkan R. Gamzu.**
10(o) *** Agreement dated as of April 7, 2000 between the Company and Dr.
Stephen C. Knight.**
10(p) *** Agreement dated as of April 14, 2000 between the Company and Mr.
Marvin P. Loeb.**
21 Subsidiaries of the Registrant
21(a) Subsidiaries of the Registrant (Incorporated by reference to Annual
Report on Form 10-K, as amended by Form 10-K/A, for year ended
December 31, 1992).
23(a) *** Consent of PricewaterhouseCoopers, LLP
- --------------------------
(1) Confidential information is omitted and identified by a * and filed
separately with the SEC.
(**) This document is a management contract or compensatory plan or
arrangement.
(***) Filed herewith.
(b) Reports on Form 8-K
None.
(c) Exhibits
None.
(d) Financial Statement Schedules
See Item 14(a)(2) above
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Haim Aviv
-----------------------------------------------
Dr. Haim Aviv, Chairman of the Board and Chief
Executive Officer (Principal Executive Officer)
Date: March 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
- -------- ---- ----
/s/ Robert W. Cook Chief Financial Officer (Principal March 28, 2001
- ------------------------------------ Financial and Accounting Officer),
Robert W. Cook and Secretary
/s/ David Schlachet Director March 28, 2001
- ------------------------------------
David Schlachet
/s/ Mony Ben Dor Director March 28, 2001
- ------------------------------------
Mony Ben Dor
/s/ Georges Anthony Marcel Director March 28, 2001
- ------------------------------------
Georges Anthony Marcel, M.D.,Ph.D.
/s/ Elkan R. Gamzu . Director March 28, 2001
- ------------------------------------
Elkan R. Gamzu, Ph.D.
/s/ Samuel D. Waksal Director March 28, 2001
- ------------------------------------
Samuel D. Waksal, Ph.D.
35
Pharmos Corporation
Index to Consolidated Financial Statements
Report of Independent Accountants F-2
Consolidated balance sheets as of December 31, 2000 and 1999 F-3
Consolidated statement of operations for the years ended
December 31, 2000, 1999 and 1998 F-4
Consolidated statement of changes in shareholders' equity
for the years ended December 31, 2000, 1999 and 1998 F-5
Consolidated statement of cash flows for the years ended
December 31, 2000, 1999 and 1998 F-6
Notes to consolidated financial statements F-7
F-1
Report of Independent Accountants
To the Board of Directors and
Shareholders of Pharmos Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Pharmos Corporation and its subsidiary at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 12, 2001
F-2
Pharmos Corporation
Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------------------
December 31,
--------------------------------
2000 1999
--------------- ------------
Assets
Current assets
Cash and cash equivalents $ 22,480,777 $ 2,918,554
Inventories 796,550 1,837,751
Receivables 1,188,502 961,769
Prepaid royalties 6,591 284,193
Prepaid expenses and other current assets 281,109 222,391
------------- ------------
Total current assets 24,753,529 6,224,658
Fixed assets, net 1,681,390 1,183,859
Prepaid royalties, net of current portion 143,000 166,477
Intangible assets, net 151,690 198,214
Restricted cash 4,035,414 --
Other assets 18,086 18,086
------------- ------------
Total assets $ 30,783,109 $ 7,791,294
============= ============
Liabilities and Shareholders' Equity
Current liabilities
Note payable $ -- $ 338,128
Accounts payable 458,504 680,054
Accrued expenses 1,162,098 711,189
Accrued wages and other compensation 768,975 549,542
Advances against future sales 619,702 2,010,000
------------- ------------
Total current liabilities 3,009,279 4,288,913
Advances against future sales, net of current portion 1,000,000 1,177,565
Convertible debentures, net 6,580,872 --
Other liabilities 100,000 100,000
------------- ------------
Total liabilities 10,690,151 5,566,478
------------- ------------
Commitments and Contingencies (Note 14)
Shareholders' equity
Preferred stock, $.03 par value, 1,250,000
shares authorized, none issued and outstanding
Common stock, $.03 par value; 80,000,000 shares
authorized, 54,063,897 and 45,424,401 shares
issued and outstanding (excluding $551 in 2000
and 1999, held in Treasury) in 2000 and 1999,
respectively 1,621,916 1,362,181
Paid in capital 108,965,351 83,372,742
Accumulated deficit (90,494,309) (82,510,107)
------------- ------------
Total shareholders' equity 20,092,958 2,224,816
------------- ------------
Total liabilities and shareholders' equity $ 30,783,109 $ 7,791,294
============= ============
The accompanying notes are an integral part of these financial statements.
F-3
Pharmos Corporation
Consolidated Statement of Operations
- ------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------
2000 1999 1998
---- ---- ----
Revenues
Product sales $ 4,873,504 $ 3,279,397 $ 1,188,278
License fee 225,000 -- 351,663
------------ ------------ ------------
Total Revenues 5,098,504 3,279,397 1,539,941
Cost of Goods Sold 1,875,955 994,617 437,713
------------ ------------ ------------
Gross Margin 3,222,549 2,284,780 1,102,228
------------ ------------ ------------
Expenses
Research and development, net 5,283,397 3,827,001 3,491,383
Selling, general and administrative 4,044,867 2,612,170 2,136,640
Patents 159,891 213,921 213,942
Depreciation and amortization 481,724 346,044 267,844
------------ ------------ ------------
Total operating expenses 9,969,879 6,999,136 6,109,809
------------ ------------ ------------
Loss from operations (6,747,330) (4,714,356) (5,007,581)
------------ ------------ ------------
Other income (expense)
Interest income 1,133,439 129,481 315,336
Other income (expense), net (10,226) (2,790) 38,844
Interest expense (2,360,085) (30,525) (9,946)
------------ ------------ ------------
Other income (expense), net (1,236,872) 96,166 344,234
------------ ------------ ------------
Net loss (7,984,202) (4,618,190) (4,663,347)
Less: Dividend embedded in convertible preferred
stock -- -- (642,648)
Preferred stock dividends -- (22,253) (242,295)
------------ ------------ ------------
Net loss applicable to common shareholders $ (7,984,202) $ (4,640,443) $ (5,548,290)
============ ============ ============
Net loss per share applicable to common
shareholders - basic and diluted $ (.15) $ (.11) $ (.15)
============ ============ ============
Weighted average shares outstanding - basic and diluted 52,109,589 42,725,157 37,277,186
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
Pharmos Corporation
Consolidated Statement of Changes in Shareholders' Equity (Note 9)
For the Years ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------------------------------
Series A & B Series C
Convertible Convertible Paid-in
Common Stock Preferred Stock Preferred Stock Capital in
Shares Amount Shares Amount Shares Amount Excess of
------ ------ ------ ------ ------ ------ ----------
December 31, 1997 34,391,638 $1,031,748 2,755 $83 $70,516,913
Issuance of Series C preferred stock, net
of offering costs of $411,135 5,000 $ 150 4,588,715
Warrant exercises 970,728 29,122 1,649,212
Conversion of Series B preferred stock 1,704,978 51,150 (2,755) (83) (51,067)
Common Stock Dividend upon conversion
of P/S, Series B 34,904 1,047 53,724
Conversion of Series C preferred stock 2,230,010 66,900 (3,500) (105) (66,795)
Common Stock Dividend upon conversion
of P/S, Series C 69,947 2,098 104,189
Issuance of Common Stock - equity
credit line, net of fees of $216,114 397,907 11,938 371,949
Dividend embedded in convertible
preferred stock 642,648
Preferred Stock Dividends 242,295
Net loss
---------- ---------- ------- ------- --------- --------- --------------
December 31, 1998 39,800,112 1,194,003 0 0 1,500 45 78,051,783
Warrant and option exercises 150,000 4,500 121,500
Conversion of Series C preferred stock 1,270,058 38,102 (1,500) (45) (38,057)
Common Stock Dividend upon conversion
of P/S, Series C 76,066 2,282 88,307
Issuance of Common Stock - equity credit
line, net of fees of $199,197 4,128,165 123,845 5,126,956
Preferred Stock Dividends 22,253
Net loss
---------- ---------- ------- ------- --------- --------- --------------
December 31, 1999 45,424,401 1,362,732 0 0 0 0 83,372,742
Warrant exercises 2,615,003 78,450 4,754,443
Warrant issuances - consultant compensation 243,449
Issuance of Common Stock - equity credit
line, net of $77,831 518,424 15,552 2,130,352
Issuance of Common Stock - private equity
sales, net of fees of $382,000 5,524,425 165,733 18,464,365
Net loss
---------- ---------- ------- ------- --------- --------- --------------
December 31, 2000 54,082,253 $1,622,467 0 $ 0 0 $ 0 $108,965,351
========== ========== ======= ======= ========= ========= ============
Total
Accumulated Treasury Stock Shareholders'
Deficit Shares Amount Equity
------- ------ ------ ------
December 31, 1997 ($72,069,727) 18,356 ($ 551) ($521,534)
Issuance of Series C preferred stock, net
of offering costs of $411,135 4,588,865
Warrant exercises 1,678,334
Conversion of Series B preferred stock 0
Common Stock Dividend upon conversion
of P/S, Series B (54,771) 0
Conversion of Series C preferred stock 0
Common Stock Dividend upon conversion
of P/S, Series C (106,287) 0
Issuance of Common Stock - equity
credit line, net of fees of $216,114 383,887
Dividend embedded in convertible
preferred stock (642,648) 0
Preferred Stock Dividends (242,295) 0
Net loss (4,663,347) (4,663,347)
----------- -------- ---------- -------------
December 31, 1998 (77,779,075) 18,356 (551) 1,466,205
Warrant and option exercises 126,000
Conversion of Series C preferred stock 0
Common Stock Dividend upon conversion
of P/S, Series C (90,589) 0
Issuance of Common Stock - equity credit
line, net of fees of $199,197 5,250,801
Preferred Stock Dividends (22,253) 0
Net loss (4,618,190) (4,618,190)
----------- -------- ---------- -------------
December 31, 1999 (82,510,107) 18,356 (551) 2,224,816
Warrant exercises 4,832,893
Warrant issuances - consultant compensation 243,449
Issuance of Common Stock - equity credit
line, net of $77,831 2,145,904
Issuance of Common Stock - private equity
sales, net of fees of $382,000 18,630,098
Net loss (7,984,202) (7,984,202)
----------- -------- ---------- -------------
December 31, 2000 $90,494,309) 18,356 ($ 551) $20,092,958
============ ======= ========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
Pharmos Corporation
Consolidated Statement of Cash Flows
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
2000 1999 1998
----- ----- -----
Cash flows from operating activities
Net loss $ (7,984,202) $(4,618,190) $(4,663,347)
Adjustments to reconcile net loss to net
cash flow used in operating activities
Depreciation and amortization 481,724 346,044 267,844
Amortization of Beneficial Conversion Feature 1,796,344 -- --
Amortization of Debt Discount and Issuance costs 449,053 -- --
Warrant issuances - consultant compensation 243,449 -- --
Changes in operating assets and liabilities
Inventories 1,041,201 (110,655) 77,531
Receivables (226,733) (411,712) (312,402)
Prepaid expenses and other current assets (58,718) (15,598) (35,494)
Advanced royalties 301,079 174,970 91,027
Other assets -- 60,314 (4,887)
Accounts payable (221,550) (256,846) (1,640,069)
Accrued expenses 450,909 31,452 (130,132)
Accrued wages 219,433 92,967 55,290
------------ ----------- -----------
Net cash used in operating activities (3,508,011) (4,707,254) (6,294,639)
------------ ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (932,731) (302,350) (698,921)
------------ ----------- -----------
Net cash used in investing activities (932,731) (302,350) (698,921)
------------ ----------- -----------
Cash flows from financing activities:
Advances against future sales, net (1,567,863) (1,239,689) (572,746)
Proceeds from issuance of common stock
and exercise of warrants, net 23,462,991 126,000 1,678,334
Proceeds from issuance of convertible debentures, net 4,335,475 -- --
Proceeds from issuance of preferred stock, net -- -- 4,588,865
Proceeds from exercise of equity credit line 2,145,904 5,250,803 383,887
(Increase) in restricted cash (4,035,414) -- --
(Decrease) increase in notes payable, net (338,128) 338,128 (55,253)
------------ ----------- -----------
Net cash provided by financing activities 24,002,965 4,475,242 6,023,087
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 19,562,223 (534,362) (970,473)
Cash and cash equivalents at beginning of year 2,918,554 3,452,916 4,423,389
------------ ----------- -----------
Cash and cash equivalents at end of year $ 22,480,777 $ 2,918,554 $ 3,452,916
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
Pharmos Corporation
Notes to Consolidated Financial Statements
1. The Company
Pharmos Corporation (the "Company") is a bio-pharmaceutical company that
discovers and develops novel therapeutics to treat a range of inflammatory
and neurological disorders such as traumatic brain injury and stroke. The
Company has an expansive portfolio of drug candidates under development, as
well as discovery, preclinical and clinical capabilities. The Company has
executive 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").
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 December 31, 2000, the Company has an accumulated deficit of
$90,494,309. 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 $22.5 million as of December 31, 2000, combined with
the 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
Basis of consolidation
The accompanying consolidated financial statements include the Company's
wholly owned subsidiary, Pharmos Ltd. All significant intercompany
transactions are eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues, costs and
expenses during the reporting period. Actual results could differ from
those estimates.
Net loss per common share
Basic net loss per common share is computed by dividing net loss for the
period, reduced by any preferred stock dividends (embedded, declared or in
arrears), by the sum of the weighted average number of shares of common
stock issued and outstanding. Diluted earnings per share is computed by
dividing net loss for the period by the sum of the weighted average number
of shares of common stock issued and outstanding, increased to include the
number of common shares that would have been issued if all outstanding
preferred stock, stock options, and stock warrants that are dilutive are
converted. Diluted common shares are based on the most advantageous
convertible rate or exercise price available to the security holder.
F-7
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 2000,1999 and 1998 outstanding options and warrants to
purchase 5,005,240, 5,890,273 and 5,634,842 shares of common stock,
respectively, with exercise prices ranging from $ .75 to $ 6.08 per share
could potentially dilute basic earnings per share in the future but have
not been included in the computation of diluted net loss per share because
to do so would be antidilutive for the periods presented.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents primarily consist of commercial paper and money market accounts
in 2000, 1999 and 1998.
Revenue recognition
Sales revenue is recognized upon the transfer of the title and rights 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.
In December 1999,the staff of the Securities and Exchange Commission of the
United States issued Staff Accounting Bulletin ("SAB") No. 101, " Revenue
Recognition in Financial Statements". SAB 101 summarizes certain views of
the staff in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company has finalized its
assessment as to the impact of SAB 101, and determined that there is no
material effect on its current revenue recognition policies.
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.
Fixed assets
Fixed assets are recorded at cost. Property, furniture and equipment are
depreciated on a straight-line basis over their estimated useful lives. The
Company uses the following estimated useful lives:
Laboratory, pilot plant and other equipment 7 years to 14 years
Leasehold improvements 5 years to 14 years
Office furniture and fixtures 3 years to 14 years
Computer equipment 3 years
Vehicles 7 years
Leasehold improvements are amortized on a straight-line basis over the
shorter of the lease term or the estimated lives of the related assets.
Maintenance and repairs are expensed as incurred.
Intangible assets
Intangible assets represent the Company's rights to develop and
commercialize certain products derived from certain licensed technologies.
The assets are being amortized over their estimated useful life of fifteen
years. As of December 31, 2000 and 1999, accumulated amortization was
$888,090 and $841,566, respectively. Amortization expense amounted to
$46,524 in each of the years ended December 31, 2000, 1999 and 1998.
F-8
Pharmos Corporation
Notes to Consolidated Financial Statements
As a result of the current period operating loss combined with a history of
operating losses, management assessed whether or not the Company's
intangible assets were recoverable. As of December 31, 2000, management
estimates that the net future cash inflows expected to result from the
commercial marketing of the licensed technologies will exceed the carrying
amount of the Company's intangible assets and accordingly, no impairment
loss was recognized. On a periodic basis, the Company will assess whether
there are conditions present that indicate an impairment of long lived
assets and long lived assets to be disposed of. In the event such an
impairment is present, management will consider the undiscounted cash flows
from such assets to quantify the amount of such impairment and the loss to
be recorded.
Research and development costs
All research and development costs are expensed when incurred. The Company
has accounted for reimbursements of research and development costs as a
reduction of research and development expense.
Income taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities, if any, are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Foreign exchange
The Company's foreign operations are principally conducted in U.S. dollars.
Any transactions or balances in currencies other than U.S. dollars are
remeasured and any resultant gains and losses are included in the
determination of current period income and loss. To date, such gains and
losses have been insignificant.
Concentration of credit risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents. The Company maintains some of its cash balances in accounts
which exceed federally insured limits. It has not experienced any losses to
date resulting from this practice.
Equity based compensation
The Company accounts for its employee stock option plans in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense related to employee stock options is recorded only if,
on the date of grant, the fair value of the underlying stock exceeds the
exercise price. The Company adopted the disclosure-only requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation", which allows
entities to continue to apply the provisions of APB Opinion No. 25 for
transactions with employees and provide pro forma operating results and pro
forma per share disclosures for employee stock grants made in 1996 and
future years as if the fair-value-based method of accounting in SFAS No.
123 had been applied to these transactions. Warrants issued to
non-employees are valued using the fair value methodology under SFAS No.
123.
F-9
Pharmos Corporation
Notes to Consolidated Financial Statements
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Based Compensation" ("FIN 44") which provides guidance for applying APB
Opinion No.25. FIN 44 applies prospectively to new awards, exchanges of
awards in a business combination, modifications to outstanding awards and
changes in grantee status on or after July 1,2000. However, certain
conclusions in FIN 44 cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have
a material effect on the Company.
Reclassifications
Certain amounts for 1999 and 1998 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.
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Compehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive
income, defined as all changes in equity from non-owner sources. Adoption
of SFAS 130 did not have a material effect on the Company's financial
position or results of operations.
Segment and geographic information
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS 131"). SFAS 131 establishes
standards for the way public enterprises report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to stockholders. See Note 16 for additional disclosures
related to segment and geographic information.
4. Collaborative Agreements
In June 1995, the Company entered into a marketing agreement (the
"Marketing Agreement") with Bausch & Lomb Pharmaceuticals, Inc. ("Bausch &
Lomb"), a shareholder of the Company, 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 December 31, 2000, Bausch and Lomb has provided the Company with $5
million in cash advances against future sales, of which approximately $1.6
million is outstanding at December 31, 2000. An additional $1 million is
due from Bausch and 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 in 2001, based on management's estimate of product sales to
Bausch & Lomb in 2001, has been presented as a current liability in the
accompanying balance sheet at December 31, 2000.
F-10
Pharmos Corporation
Notes to Consolidated Financial Statements
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.
Total receivables from Bausch & Lomb as of December 31, 2000 and December
31, 1999 were $870,043 and $621,935, respectively.
5. Fixed Assets
Fixed assets consist of the following:
December 31,
------------
2000 1999
---- ----
Laboratory, pilot plant and other equipment $2,400,221 $ 2,087,289
Leasehold improvements 467,444 272,196
Office furniture and fixtures 249,480 165,655
Computer equipment 582,396 242,093
Vehicles 38,742 38,742
----------- -----------
3,738,283 2,805,975
Less - Accumulated depreciation and amortization (2,056,893) (1,622,116)
----------- -----------
$ 1,681,390 $ 1,183,859
=========== ===========
Depreciation and amortization of fixed assets was $435,200, $299,520 and
$221,320 in 2000, 1999 and 1998, respectively.
6. Grants for Research and Development
The Company has entered into agreements with U.S. federal agencies and the
State of Israel which provide for grants for research and development
relating to certain projects. Amounts received pursuant to these agreements
have been reflected as a reduction of research and development expense.
Such reductions amounted to $326,438, $138,102 and $376,007 during 2000,
1999 and 1998, respectively. The agreements with agencies of the State of
Israel place certain legal restrictions on the transfer of technology and
manufacture of resulting products outside Israel. The Company will be
required to pay royalties, at rates ranging from 3% to 5%, to such agencies
from the sale of products, if any, developed as a result of the research
activities carried out with the grant funds.
As of December 31, 2000, the total amounts received under such grants
amounted to $3,957,527, of which $3,377,839 relates to grants that contain
royalty provisions. Aggregate future royalty payments related to sales of
products developed, if any, as a result of these grants are limited to
$2,246,421 based on grants received through December 31, 2000.
In April 1997, the Company also signed an agreement with Consortium Magnet
for developing generic technologies for design and development of drugs and
diagnostic kits, operated by the Office of the Chief Scientist. Under such
agreements the Company is entitled to a non-refundable grant amounting to
approximately 60% of actual research and development and equipment
expenditures on approved projects. No royalty obligations are required
within the framework. The Company received grants totaling $543,807,
$418,074 and $0 in 2000, 1999 and 1998, respectively, pursuant to this
agreement.
F-11
Pharmos Corporation
Notes to Consolidated Financial Statements
7. Licensing Arrangements
The Company is a licensee of certain research technologies and has various
license agreements wherein the Company has acquired exclusive or
co-exclusive rights to develop and commercialize certain research
technologies. These agreements, which include agreements related to Lotemax
and Alrex, generally require the Company to pay royalties on the sale of
products developed and contingent royalties based upon milestones from the
licensed technologies and fees on revenues from sublicenses, where
applicable. The royalty rates, as defined in the respective license
agreements, are customary and usual in the pharmaceutical industry. The
royalties will be payable for periods up to fifteen years from the date of
specified events, including the date of the first sale of such products, or
the date from which the first registered patent from the developed
technologies is in force, or the year following the date on which approval
from the FDA received for a developed product. No amounts have been
recorded as a liability with respect to any contingent royalties as of
December 31, 2000.
Certain of the license agreements require annual payments for periods
extending through 2012. Minimum annual payments under licensing agreements
are $103,500. License fee expense amounted to approximately $103,500 during
2000, 1999, and 1998.
The Company has paid a licensor, who is a former director, prepaid
royalties against future royalties on sales of Lotemax and Alrex.
Outstanding prepaid royalties totaled $149,591 and $ 450,670 and are
reflected as an asset on the balance sheets at December 31, 2000 and 1999,
respectively. The Company has agreed to prepay additional royalties based
on future advances and other non-royalty payments from Bausch & Lomb or
other parties with whom the Company enters into marketing or similar
arrangements.
8. 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 semiannually 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 (or
2,088,775 common shares) and are convertible beginning October 31, 2000.
Under 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.
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 $1.8 million, all of which has been amortized and included
as interest expense in the year ending December 31, 2000. Additionally, the
discount on the Convertible Debenture of approximately $ 800,000 will be
amortized to interest expense over the life of the debt. For the year
ending December 31, 2000, $177,976 has been amortized.
The Company issued 1,024,425 common shares in the private placement that
generated gross proceeds of $3 million. Under the terms of the transaction,
821,515 shares were issued at closing and 202,910 shares were issued in the
fourth quarter of 2000 as a one-time adjustment that did not change the
proceeds to the
F-12
Pharmos Corporation
Notes to Consolidated Financial Statements
Company. One investor has 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 at prices ranging from $3.65 to $6.08 per share.
The issuance costs related to the Private Placement of approximately $1.4
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 related to the Convertible Debenture will be amortized over the life
of the debt. For the year ending December 31, 2000, $224,691 has been
amortized and included as interest expense. The issuance costs related to
the common stock were netted against the proceeds.
9. Common and Preferred Stock Transactions
2000 Transactions
During 2000, the Company issued 1,024,425 shares of common stock in a
private placement transaction that generated gross proceeds of $3 million.
Additionally, 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 private placement
described in Note 8.
The Company issued 2,615,003 shares of its common stock upon the exercise
of stock options and warrants, and received consideration of $4,832,893.
During the first quarter of 2000, the Company issued 4,500,000 registered
shares of its common stock under a "shelf" registration to several
investors, and received consideration, net of offering costs and expenses,
of $12,648,383.
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. As of December 31, 2000, $1.7 million remained
available under the equity line of credit.
The Company issued options for the purchase of 523,000 shares of common
stock to employees, directors and other key personnel, under provisions of
the 1997 Incentive and Non-Qualified Stock Option Plan and options for the
purchase of 12,000 shares of common stock to employees under provisions of
the 2000 Incentive and Non-Qualified Stock Option Plan. The options are
exercisable over a ten-year period and will expire on June 6, 2010. The
options will vest in four annual installments of 25% each on June 6, 2001,
2002, 2003 and 2004, respectively. The options are exercisable at a strike
price of $4.03 per share, which represents the closing market value of the
common stock on the date the options were awarded. In addition, the
Company, under provisions of the 1997 Incentive and Non-Qualified Stock
Option Plan, issued options for the purchase of 15,000 shares of common
stock which are exercisable over a ten-year period and vest in four
F-13
Pharmos Corporation
Notes to Consolidated Financial Statements
annual installments of 25% each, at an exercise price of $ 2.41 and issued
options for the purchase of 10,000 shares of common stock which are
exercisable over a ten-year period, vested on the date of the grant, at an
exercise price of $ 2.41. Further, the Company, under provisions of the
2000 Incentive and Non-Qualified Stock Option Plan, issued options for the
purchase of 75,000 shares of common stock which are exercisable over a
ten-year period and vest in four annual installments of 25% each, at an
exercise price of $ 4.00.
During 2000, under terms of the Credit Agreement, the Company issued
518,424 shares of its Common Stock and warrants to purchase 51,162 shares
of its Common Stock to the Investor for consideration of $2,145,904, net of
fees. The warrants have exercise prices ranging from $2.19 to $16.80 per
share and expire in 2003.
During 2000, the Company issued warrants to purchase 32,000 shares of its
common stock (4000 warrants each month through August 2000) as compensation
to a consultant. The warrants were immediately exercisable, have an
exercise price of $1.19 per share and expire by 2005.
1999 Transactions
In October 1999, the shareholders of the Company approved the increase in
the number of authorized shares of common stock from 60,000,000 to
80,000,000 and approved an increase in the number of shares of common stock
reserved for issuance under the 1997 Incentive and Non-Qualified Stock
Option Plan from 1,000,000 to 1,500,000.
In April 1999, the Company, under provisions of the 1997 Incentive and
Non-Qualified Stock Option Plan, issued options to employees, directors and
other key personnel for the purchase of 292,000 shares of common stock. The
options are exercisable over a ten-year period and will expire on April 16,
2009. The options will vest in four annual installments of 25% each on
April 16, 2000, 2001, 2002 and 2003, respectively. The options are
exercisable at a strike price of $1.25 per share, which represents the
closing market value of the common stock on the date the options were
awarded. In addition, the Company, under provisions of the 1997 Incentive
and Non-Qualified Stock Option Plan, issued options for the purchase of
20,000 shares of common stock which are exercisable over a ten-year period
and vest in four annual installments of 25% each, at exercise prices
ranging from $ 1.25 to $ 2.09.
During 1999, the Company issued 1,346,124 shares of common stock upon
conversion of its Series C convertible preferred stock. These transactions
completed the conversion of the Series C convertible preferred stock,
leaving no preferred stock outstanding at December 31, 1999.
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 $642,648 for the years ended
December 31,1999 and 1998, respectively, on the outstanding shares of
convertible preferred stock in connection with the conversion discount.
During 1999, under terms of the Credit Agreement, the Company issued
4,128,165 shares of its Common Stock and warrants to purchase 348,495
shares of its Common Stock to the Investor for consideration of $5,250,803,
net of fees. The warrants have exercise prices ranging from $ 1.41 to $
2.38 per share and expire by December 2002.
1998 Transactions
In May 1998, the Company, under provisions of the 1997 Incentive and
Non-Qualified Stock Option Plan,
F-14
Pharmos Corporation
Notes to Consolidated Financial Statements
issued options to employees, directors, consultants and other key personnel
for the purchase of 500,000 shares of common stock. The options are
exercisable over a ten-year period and will expire on May 18, 2008. The
options will vest in four annual installments of 25% each on May 18, 1999,
2000, 2001 and 2002, respectively. The options are exercisable at a strike
price of $2.781 per share, which represents the closing market value of the
common stock on the date the options were awarded.
During the first quarter of 1998, the Company issued 1,704,978 shares of
its common stock upon conversion of 2,755 shares of the Company's Series B
convertible preferred stock. The shares were issued with conversion prices
ranging from $1.41 per share to $1.78 per share. The Company also issued
34,904 shares of common stock in payment of dividends of the Series B
convertible preferred stock. As of the date of such issuances, these
dividends were valued at $54,771.
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 into common shares of the Company 60 days subsequent to
the date of issuance. For the period ending 180 days after 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 2,230,010 shares of common stock upon
conversion of 3,500 shares of its Series C convertible preferred stock and
69,947 shares of common stock in payment of dividends on the Series C
convertible preferred stock.
As of December 31, 1998 and 1997, cumulative dividends in arrears on the
Company's outstanding Series B and C convertible preferred stock were
$173,671 and $42,666, respectively. The dividends are payable in common
stock of the Company.
During 1998, the Company issued 970,728 shares of its common stock upon the
exercise of warrants, and received consideration of $1,678,334.
In connection with the issuances of the Series A, B and C convertible
preferred stock, the Company was required to recognize, in it's per share
amounts ("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 $642,648 and $1,952,767 for the
years ended December 31,1998 and 1997, respectively, on the outstanding
shares of convertible preferred stock in connection with the conversion
discount.
The Company has 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. (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
F-15
Pharmos Corporation
Notes to Consolidated Financial Statements
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.
During 1998, under terms of the Credit Agreement, the Company issued
397,907 shares of its Common Stock and warrants to purchase 39,937 shares
of its Common Stock to the Investor for consideration of $383,887, net of
fees. The warrants have exercise prices ranging from $ 1.95 to $ 2.11 per
share and expire in December 2001.
10. Warrants
Some of the warrants issued in connection with various equity financing and
related transactions during 1991 through 2000 contain anti-dilution
provisions requiring adjustment, if at a later date securities are issued
at prices below the respective warrant's exercise price. The following
table summarizes the shares issuable upon exercise of warrants outstanding
at December 31, 2000 as adjusted for the events which have triggered
anti-dilution provisions contained in the respective warrant agreements:
Shares Issuable Exercise
Issuance Date Expiration Date Upon Exercise Price
------------- --------------- ------------- -----
April 1995 April 2005 341,600 $ 2.75
April 2005 10,000 $ .78
February 1997 February 2007 45,000 $ 1.59
February 2007 434,000 $ 1.59
March 1997 March 2001 106,000 $ 1.75
March 2008 171,052 $ 1.38
March 1997 March 2007 10,000 $ 1.66
January 1998 October 2005 7,000 $ 2.22
February 1998 January 2003 531,081 $ 2.51
January 2003 157,185 $ 2.18
November 1999 November 2004 4,000 $ 1.19
December 1999 December 2004 4,000 $ 1.19
January 2000 January 2005 4,000 $ 1.19
February 2000 February 2005 4,000 $ 1.19
March 2000 March 2005 4,000 $ 1.19
April 2000 April 2005 4,000 $ 1.19
May 2000 May 2005 4,000 $ 1.19
June 2000 June 2005 4,000 $ 1.19
June 2003 12,574 $ 5.00
July 2000 July 2005 4,000 $ 1.19
August 2000 August 2005 4,000 $ 1.19
September 2000 September 2001 547,945 $ 3.65
September 2005 95,843 $ 4.56
September 2005 92,086 $ 4.34
September 2005 379,856 $ 6.08
--------- ------
Total shares and average
exercise price 2,981,222 $ 3.05
========= ======
F-16
Pharmos Corporation
Notes to Consolidated Financial Statements
11. Stock Option Plans
The Company's shareholders have approved incentive stock option plans for
officers and employees. Options granted are generally exercisable over a
specified period, not less than one year from the date of grant, and
generally expire ten years from the date of grant. The following table
summarizes activity in approved incentive stock options approved by the
Company's Board of Directors:
Under Weighted Average
Option Exercise Price
------ --------------
Options outstanding at 12/31/97 426,419 $ 2.21
Granted 627,917 $ 2.63
Exercised (6,000) $ 1.94
Cancelled (34,000) $ 2.27
---------- ------
Options Outstanding at 12/31/98 1,014,336 $ 2.47
Granted 312,000 $ 1.25
Cancelled (14,000) $ 2.05
-------- ------
Options Outstanding at 12/31/99 1,312,336 $ 2.19
--------- ------
Granted 449,252 $ 4.03
Exercised (214,167) $ 2.31
Cancelled (27,583) $ 2.65
---------- ------
Options Outstanding at 12/31/00 1,519,838 $ 2.71
========== ======
Options exercisable at 12/31/00 602,836 $ 2.29
========== ======
Options exercisable at 12/31/99 581,836 $ 2.32
========== ======
Options exercisable at 12/31/98 382,086 $ 2.24
========== ======
Additional information with respect to the outstanding incentive stock options
as of December 31, 2000 is as follows:
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------------------
Weighted
Average Weighted
Range of Exercise Options Remaining Average Weighted Average
Prices Outstanding Contractual Life Exercise Price Options Exercisable Exercise Price
- ----------------------------------------------------------------- -------------------------------------
$ 1.25 - $ 2.78 1,070,586 6.8 years $ 2.29 602,836 $ 2.29
$4.03 449,252 9.4 years $ 4.03 -- --
------------------------------------------- -------------------------------------
1,519,838 7.9 years $ 2.71 602,836 $ 2.29
All incentive stock option grants during 2000 were made from the Pharmos
Corporation 1997 Incentive and Non-Qualified Stock Option Plan. As of
December 31, 2000, no shares remained available for issuance under this
plan.
F-17
Pharmos Corporation
Notes to Consolidated Financial Statements
The Company's Board of Directors approved nonqualified stock options for
key employees, directors and certain non-employee consultants. The
following table summarizes activity in Board-approved nonqualified stock
options: Under Weighted Average Option Exercise Price
Options outstanding at 12/31/97 407,182 $ 2.67
Exercised (6,667) $ 1.94
Granted 136,250 $ 1.74
------- ------
Options Outstanding at 12/31/98 536,765 $ 2.47
Granted 80,000 $ 1.25
------ ------
Options Outstanding at 12/31/99 616,765 $ 2.31
------- ------
Granted 190,748 $ 3.81
Exercised (283,333) $ 2.23
Cancelled (20,000) $ 1.25
-------- ======
Options Outstanding at 12/31/00 504,180 $ 2.97
======= ======
Options exercisable at 12/31/00 287,807 $ 2.77
======= ======
Options exercisable at 12/31/99 616,765 $ 2.31
======= ======
Options exercisable at 12/31/98 445,932 $ 2.62
======= ======
Additional information with respect to the outstanding nonqualified stock
options as of December 31, 2000 is as follows:
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------------------
Weighted
Average Weighted
Range of Exercise Options Remaining Average Weighted Average
Prices Outstanding Contractual Life Exercise Price Options Exercisable Exercise Price
- ----------------------------------------------------------------- -------------------------------------
$ 1.25 - $ 2.50 300,182 4.4 years $ 2.10 230,807 $ 2.26
$ 4.00 - $ 4.03 165,748 9.5 years $ 4.02 18,750 $ 4.00
$ 5.20 38,250 1.3 years $ 5.20 38,250 $ 5.20
-------------------------------------------- -------------------------------------
504,180 6.2 years $ 2.97 287,807 $ 2.77
All stock option grants during 2000 were made from the Pharmos Corporation
1997 Incentive and Non-Qualified Stock Option Plan. As of December 31,
2000, no shares remained available for issuance under this plan.
During 2000, the Company adopted the Pharmos Corporation 2000 Incentive and
Non-Qualified Stock Option Plan, which authorizes the grant of up to
1,500,000 shares of the Company's common stock at the discretion of the
Company's Board of Directors.
During 2000, the Company modified the terms of certain nonqualified stock
options granted to two of the Company's former Directors who entered into
consulting relationships with the Company. The modifications included the
immediate vesting of the nonqualified options and, accordingly, the Company
expensed the value
F-18
Pharmos Corporation
Notes to Consolidated Financial Statements
of these options as consultant compensation for the year ended December 31,
2000.
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for its plans. As all options and warrants granted to employees were
granted with exercise prices equal to the fair value of the common stock on
the respective grant dates, no compensation expense has been recognized for
its stock-based compensation plans. Had compensation cost for the Company's
stock option plans been determined based upon the fair value at the grant
date for awards under these plans consistent with the methodology
prescribed under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Company's net loss and loss
per share would have been increased by approximately $798,000, or $.02 per
share in 2000 and $560,000, or $.01 per share in 1999 and $478,000 or $.01
per share in 1998 before deducting the value of stock options that were
canceled in 1995. The weighted average fair value of options and warrants
granted to employees, officers, and directors from 1998 through 2000 are
estimated at $ 0.783 to $2.697 on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: dividend yield 0%,
volatility of 78% in 2000 and 50% in 1999 and 1998, risk-free interest rate
of 5.89% in 2000 and 6.5% in 1999 and 1998, assumed forfeiture rate of 3%,
and an expected life of 1 to 5 years.
12. Income Taxes
No provision for income taxes was recorded for the three years ended
December 31, 2000 due to net operating losses incurred. Net operating loss
carryforwards for U.S. tax purposes of approximately $66,000,000 expire
from 2001 through 2020.
The Company's gross deferred tax assets of $28,300,000 and $23,800,000 at
December 31, 2000 and 1999, respectively, represented primarily the tax
effect of both the net operating loss carryforwards, deferred research and
development costs and research and development tax credit carryforwards. As
a result of previous business combinations and changes in stock ownership,
substantially all of these net operating losses and tax credit
carryforwards are subject to significant restriction with regard to annual
utilization. A full valuation allowance has been established with regard to
the gross deferred tax assets.
13. Commitments and Contingencies
Leases
The Company leases research and office facilities in Israel and New Jersey.
The facilities in Israel are used in the operation of the Company's
research and administration activities. The New Jersey facility which
serves as the corporate headquarters is leased under an agreement which
expires in February 2004. The research and development facility in Israel
is leased under an agreement which expires in May 2002.
All of the leases and subleases described above call for base rentals,
payment of certain building maintenance costs (where applicable) and future
increases based on the consumer price indices.
At December 31, 2000, the future minimum lease commitments with respect to
non-cancelable operating leases with initial terms in excess of one year
are as follows:
Lease
Commitments
-----------
2001 $ 419,787
2002 272,060
2003 164,053
2004 35,044
---------
$ 890,944
=========
F-19
Pharmos Corporation
Notes to Consolidated Financial Statements
Rent expense during 2000, 1999 and 1998 amounted to $329,246, $323,469 and
$292,035 respectively. Rent expense in 2000, 1999 and 1998 is net of $0,
$86,454 and $146,950 of sublease income, respectively.
Consulting contracts and employment agreements
In the normal course of business, the Company enters into annual employment
and consulting contracts with various employees and consultants.
Dividend restrictions
Dividends may be paid by the Company's subsidiary, Pharmos Limited, only
out of retained earnings as determined for Israeli statutory purposes.
There are no retained earnings in Israel available for distribution as
dividends as of December 31, 2000, 1999 or 1998. The Company does not
intend to pay a cash dividend in the foreseeable future.
14. Employee Benefit Plan
The Company has a 401-K defined contribution profit-sharing plan covering
certain employees. Contributions to the plan are based on salary reductions
by the participants, matching employer contributions as determined by the
Company, and allowable discretionary contributions, as determined by the
Company's Board of Directors, subject to certain limitations. Contributions
by the Company to the plan amounted to $26,570, $11,333 and $5,504 in 2000,
1999 and 1998, respectively.
15. Estimated Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, grants and other
receivables, accounts payable, accrued expenses and convertible debt are
reasonable estimates of their fair values. The estimated fair values of all
other financial instruments approximate, or are not materially different,
than their carrying values.
F-20
Pharmos Corporation
Notes to Consolidated Financial Statements
16. Segment and Geographic Information
In 1998, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 establishes standards for
reporting information regarding operating segments and related disclosures
about products and services, geographic areas and major customers.
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 years ending December 31, 2000, 1999 and
1998 are as follows:
2000 1999 1998
---- ---- ----
Net revenues
United States $ 5,098,504 $ 3,279,397 $ 1,539,941
Israel -- -- --
------------ ----------- -----------
$ 5,098,504 $ 3,279,397 $ 1,539,941
============ =========== ===========
Net loss
United States ($ 7,597,846) ($ 4,343,289) ($ 4,480,022)
Israel (386,356) (274,901) (183,325)
------------ ----------- -----------
($ 7,984,202) ($ 4,618,190) ($ 4,663,347)
============ =========== ===========
Total assets
United States $ 28,073,517 $ 5,728,624 $ 6,478,552
Israel 2,709,592 2,062,670 1,588,118
------------ ----------- -----------
$ 30,783,109 $ 7,791,294 $ 8,066,670
============ =========== ===========
17. Quarterly Information (Unaudited)
Year ended
December 31, 2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ----------- ----------- ----------- -----------
Revenues $ 663,580 $ 1,414,837 $ 1,761,735 $ 1,258,352
Gross Margin 383,051 937,675 1,181,533 720,290
Operating Expenses 2,425,064 2,075,209 2,576,618 2,892,988
Loss from Operations (2,042,013) (1,137,534) (1,395,085) (2,172,698)
Other Income (Expense),
net 146,869 287,602 (136,074)* (1,535,269)*
Net loss applicable to
common shareholders $(1,895,144) $ (849,932) $(1,531,159)* $(3,707,967)*
Net loss per share $ (.04) $ (.02) $ (.03) $ (.07)
*- Other Income (Expense), net and the Net Loss for the third and fourth quarter
of 2000 include the amortization of the Beneficial Conversion Feature from the
Private Placement as discussed in Note 8.
F-21
Pharmos Corporation
Notes to Consolidated Financial Statements
Year ended
December 31, 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ----------- ----------- ----------- -----------
Revenues $ 332,377 $ 858,834 $ 833,118 $ 1,255,068
Gross Margin 243,119 649,297 567,469 824,895
Operating Expenses 1,601,850 1,655,289 1,585,698 2,156,299
Loss from Operations (1,358,731) (1,005,992) (1,018,229) (1,331,404)
Other Income, net 16,154 12,393 45,944 21,675
Net loss (1,342,577) (993,599) (972,285) (1,309,729)
Preferred stock
dividends (16,829) (5,178) (246) --
Net loss applicable to
common shareholders $(1,359,406) $ (998,777) $ (972,531) $(1,309,729)
Net loss per share $ (.03) $ (.02) $ (.02) $ (.03)
18. Subsequent event
During January 2001, the Company paid $572,539 and issued 182,964 shares of
the common stock of the Company to the investors in the convertible
debenture described in Note 8. The payment of cash and stock were the
option chosen by the Company and represent adjustments to the pricing based
upon the Company's stock price during the adjustment period. Under the
terms of the agreements, no further adjustments are due.
F-22