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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, 1998
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, 1999
held by those persons deemed to be non-affiliates was approximately $50,673,356.
As of March 15, 1999, the Registrant had outstanding 40,538,685 shares of
its $.03 par value Common Stock.
PART I
Item 1. Business
Introduction
Pharmos Corporation (the "Company") is a pharmaceutical company specializing in
the modification of existing molecules through proprietary techniques to reduce
undesirable side effects and/or enhance efficacy. The Company is developing
pharmaceuticals in various fields including: site specific drugs for ophthalmic
indications, neuroprotective agents with a novel mechanism of action for the
treatment of central nervous system ("CNS") disorders, newly designed molecules
to treat cancer, and emulsion-based products for topical and systemic
applications. In March 1998, the Company, together with Bausch & Lomb
Pharmaceuticals, Inc. ("BLP"), announced the receipt of approval from the Food
and Drug Administration ("FDA") to manufacture and market two ophthalmic
products, Lotemax(R) (loteprednol etabonate ophthalmic suspension 0.5%) and
Alrex(TM) (loteprednol etabonate ophthalmic suspension 0.2%). BLP began
marketing Lotemax and Alrex in the second quarter of 1998. Product shipments
also began in the second quarter of 1998, when the Company received its initial
product revenues from the sales of these products.
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. The novel chemical structure of Lotemax allows it to be predictably
transformed by enzymes in the eye to an inactive metabolite, thereby increasing
its safety profile. The safety profile of Lotemax was demonstrated in clinical
trials by a low incidence of elevation in intraocular pressure ("IOP"), a
significant side effect of ophthalmic steroid use. In addition, 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. Seasonal allergic conjunctivitis produces itching, tearing, redness and
swelling in the conjunctiva, the membrane that covers the inside of the eyelid
and the white part of the eye.
The regulatory approvals for Lotemax and Alrex are the first two of three to be
sought in the United States for the Registrant'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.
BLP, a subsidiary of the global eye care company, Bausch & Lomb Incorporated,
co-developed Lotemax and Alrex with the Registrant after the Registrant granted
BLP the rights to process and market the new ophthalmic pharmaceutical line in
June 1995. In December 1996, BLP's rights were extended to select international
markets including Europe and Canada.
Dexanabinol (HU-211), the Company's lead CNS product aimed initially at treating
severe head trauma and stroke, is currently in the third cohort of a Phase II
clinical trial for severe head trauma. On October 7, 1998, the Company announced
the results of the first two of the three cohort Phase II Clinical Study.
Highlights of the study included a significant reduction in intracranial
pressure, a 26% reduction in mortality, and a higher percentage of patients able
to resume a normal life ("Good Neurological Outcome") among the treated group.
Strategy
The Company's business is the design and development of novel drugs with
superior safety and efficacy profiles, initially targeted to ophthalmic and
neurological disorders. The Company seeks to enter into collaborative
relationships with established pharmaceutical companies to complete development
and commercialize its products.
The Company is developing pharmaceuticals that are designed to address unmet
needs in certain markets and to exhibit superior efficacy and/or safety profiles
over competing products in other markets. For example, many current
anti-inflammatory ophthalmic drugs have either significant side effects, such as
the elevation of IOP by
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steroids, or are drugs that are safer, but only moderately effective at reducing
inflammation, such as non-steroidal anti-inflammatory drugs ("NSAIDs"). For many
neurological indications, such as head trauma, there are no effective drug
therapies available.
The Company is applying its experience in drug design and its novel drug
delivery technology in developing products directed at several fields including:
site specific drugs for ophthalmic indications, neuroprotective compounds
targeted at specific CNS biochemical pathways associated with neurological
indications, and systemic drugs for the treatment of cancer.
Products
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 March 1998, Lotemax received product approval from the FDA for the treatment
of steroid responsive inflammatory conditions of the eye, including uveitis and
for post operative eye inflammation. Also in March 1998, Alrex received product
approval from the FDA for the treatment of seasonal allergic conjunctivitis. A
combination of LE with the antibiotic tobramycin ("LE-T") for the treatment of
inflammatory and infectious indications is in development. The final clinical
trial for LE-T reached full enrollment in January 1999 and an NDA filing is
expected this year.
In June 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 December 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.
Dexanabinol (HU-211)
Dexanabinol (HU-211) 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, analgesics and anti-glaucoma
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. More
importantly, it is a stereo selective, non-competitive antagonist of the
glutamate NMDA receptor channel, activation of which is believed to play a key
role in secondary neuronal damage due to head trauma, stroke and cardiac arrest.
The molecule also has free radical scavenging properties, and anti-inflammatory
properties (involving inhibition of TNF-[alpha] production). Both of these
latter mechanisms are 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.
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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 glaucoma, Parkinson's and Alzheimer's
diseases, as well as various other inflammatory conditions. Development of
dexanabinol and other members of this family of compounds for these chronic
indications are being explored 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 early 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, which is targeted for completion in 1999. 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).
On October 7, 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 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 Scale 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 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.
Tamoxifen Analogs
Several diseases are currently treated with drugs that produce mild to
dose-limiting CNS side effects. For instance, tamoxifen, which is used to treat
breast cancer patients and has been approved for use as a prophylactic agent in
healthy women at risk of developing the disease, causes hot flashes and may be
associated with cognitive and affective deficits as well. Additionally,
corticosteroids, used to treat chronic inflammatory and autoimmune diseases,
cause psychotic reactions in some patients and have been shown to cause
selective neuronal death in animals. Neuropathic pain could be treated by
certain systemic anesthetics, but the resulting CNS side effects make such
therapy unsafe. These side effects could be addressed by designing drugs with
limited passage to the brain through the blood brain barrier (BBB).
In light of this concept, several analogs of tamoxifen with poor CNS uptake have
been synthesized and tested in several animal models. Tamoxifen methiodide, a
permanently charged tamoxifen derivative, was tested in animals (nude mice)
inoculated with human breast cancer cells. Treatment resulted in rapid arrest of
growth followed by tumor regression. Growth arrest was also observed in
estrogen-independent tumors. The rate and magnitude of response was higher than
that seen with tamoxifen itself. The compound retains the anti-osteoporotic
effects of tamoxifen in bone but is considerably less active than tamoxifen as a
utero trophic agent, demonstrating an improved therapeutic profile as compared
to the parent compound.
Further preclinical pharmacology is underway to identify additional analogs of
tamoxifen and to gain a fuller understanding of the mechanism of action.
4
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 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.
On June 30, 1995, the Company signed a definitive agreement with BLP to
manufacture and market Lotemax and Alrex, the Company's lead products, in the
United States upon receipt of FDA approval. The agreement includes one other
loteprednol etabonate-based product, LE-T, currently being co-developed by the
Company and BLP. A second agreement signed December 12, 1996, extends BLP's
rights to market these products in Europe, Canada and other selected countries
pending regulatory approval.
Under the agreements, BLP will purchase the active drug substance from the
Company. As of March 1999, 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, 1998, the company had repaid $ .6 million of the cash advances from BLP by
way of credits from sales of Lotemax and Alrex during 1998.
In a separate agreement completed in December 1996, BLP made a $2 million
investment in the common stock of the Company.
5
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 the University of
Florida, 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 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 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
6
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.
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.
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. This group
of patents has 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 1997.
These patents cover Dexanabinol, which is under development for the treatment of
head trauma, stroke and other indications.
Tamoxifen Analogs. The Company has filed patent applications in the U.S.,
Israel, Australia, Canada, Japan and the European Patent Office to protect
pharmaceutical compositions of Tamoxifen analogs and Tamoxifen Methiodide. In
July 1997, a patent was issued by the U.S. Patent and Trademark Office 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. 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 Pilocarpine-SME, which is an improved formulation
to treat glaucoma.
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,
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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.
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
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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 $272,000 (for Fiscal Year 1999).
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
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 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.
9
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.
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 on October 30, 1992 exercised an option to acquire all of the
outstanding shares of Xenon Vision, Inc., a privately held Delaware corporation
("Xenon"). 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 which 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 April 1995, the Company acquired Oculon Corporation
("Oculon") a privately held development stage company with anti-cataract
technologies.
Human Resources
As of March 15, 1999, the Company had 40 full time employees, 6 in the U.S. and
34 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
$2,203,199 under such agreements through December 31, 1998. The Company will be
required to pay royalties to the Chief Scientist from 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 is required to pay royalties to BIRD-F of 2.5%,
through September 1999, then 5% of product sales 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
10
within the framework. To date, the Company has received grants totaling $543,587
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.
Pharmos Ltd. has received certain funding from the Chief Scientist with respect
to its SME Technology and with respect to Dexanabinol. 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.
Item 2. Properties
The Company is headquartered in Iselin, New Jersey where it leases its general
administrative facilities. 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 its Shareholder Meeting held on January 9, 1998 the stockholders of the
Company elected the following persons as directors of the Company to hold office
until the next annual meeting of the stockholders or until their successors are
duly elected and qualified: Haim Aviv (26,386,186 votes for and 1,150,059 votes
against), Stephen C. Knight (26,391,624 votes for and 1,144,621 votes against),
David Schlachet (26,391,149 votes for and 1,145,096 votes against), Marvin P.
Loeb (26,362,624 votes for and 1,173,621 votes against), E. Andrews Grinstead,
III (26,391,624 votes for and 1,144,621 votes against), Fredric D. Price
(26,391,624 votes for and 1,144,621 votes against) and Mony Ben Dor (26,391,149
votes for and 1,145,096 votes against). The stockholders of the Company also
voted to adopt the Company's 1997 Incentive and NonQualified Stock Option Plan
(24,091,679 voted in favor, 2,646,101 voted against and 269,097 abstained or
were withheld). In addition, the stockholders of the Company voted to amend the
Company's Restated Articles of Incorporation to increase the authorized capital
stock of the Company to 60 million shares of common stock (24,533,973 voted in
favor, 2,259,826 voted against and 213,078 abstained or were withheld).
At its Shareholder Meeting held on September 17, 1998 the stockholders of the
Company elected the following persons as directors of the Company to hold office
until the next annual meeting of the stockholders or until their successors are
duly elected and qualified: Haim Aviv (27,980,414 votes for and 261,339 votes
against), Stephen C. Knight (27,763,994 votes for and 357,089 votes against),
David Schlachet (27,960,644 votes for and 251,089 votes against), Marvin P. Loeb
(27,960,664 votes for and 251,089 votes against), E. Andrews Grinstead, III
(27,859,994 votes for and 261,089 votes against), Mony Ben Dor (27,869,794 votes
for and 251,289 votes against) and Georges Anthony Marcel (27,882,664 votes for
and 359,089 votes against). The stockholders of the Company also voted to
approve the issuance of certain shares of Common Stock upon conversion of the
Company's Series C Convertible Participating Preferred Stock (6,869,765 voted in
favor, 1,097,044 voted against and 301,089 abstained). In addition, the
stockholders of the Company voted to amend the Company's 1997 Incentive and
Non-Qualified Stock Option
11
Plan to increase the number of shares of Common Stock issuable under the plan
from 600,000 to 1,000,000 (27,045,129 voted for, 1,026,621 voted against and
178,518 abstained).
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 Marketsm. 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, 1998 HIGH LOW
- ---------------------------- ----- -----
1st Quarter .................................... $3.56 $1.63
2nd Quarter .................................... 3.28 2.47
3rd Quarter .................................... 2.75 1.44
4th Quarter .................................... 2.25 1.47
Year ended December 31, 1997 HIGH LOW
- ---------------------------- ----- -----
1st Quarter .................................... $1.94 $1.28
2nd Quarter .................................... 2.19 1.09
3rd Quarter .................................... 3.00 1.44
4th Quarter .................................... 3.00 1.66
The foregoing represent inter-dealer prices, without retail mark-up, mark-down
or commission, and may not necessarily represent actual transactions.
On March 15, 1999, there were 462 record holders of the Common Stock of the
Company and approximately 6,700 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.
12
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Revenues $ 1,539,941 -- -- $ 75,000 $ 7,815
Gross Margin 1,102,228 -- -- -- --
Operating expenses (6,109,809) (8,563,091) (8,354,991) (8,253,666) (13,036,461)
Loss Before Extraordinary Item (4,663,347) (8,233,547) (8,077,210) (8,096,085) (12,955,299)
Extraordinary gain from
forgiveness of debt -- 416,248 -- -- --
Dividend embedded in
convertible preferred stock (642,648) (1,952,767) -- -- --
Preferred Stock dividends (242,295) (240,375) -- -- --
Net loss applicable to
common shareholders ($ 5,548,290) ($10,010,441) ($ 8,077,210) ($ 8,096,085) ($12,955,299)
============ ============ ============ ============ ============
Loss per share applicable
to common shareholders before
extraordinary gain - basic ($ 0.15) ($ 0.32) ($ 0.28) ($ 0.37) ($ 1.19)
Extraordinary gain per share -- (0.01) -- -- --
------------ ------------ ------------ ------------ ------------
Net loss per share applicable
to common shareholders - basic ($ 0.15) ($ 0.31) ($ 0.28) ($ 0.37) ($ 1.19)
============ ============ ============ ============ ============
Total assets $ 8,066,670 $ 8,421,841 $ 7,468,293 $ 9,461,654 $ 4,289,416
============ ============ ============ ============ ============
Long term obligations $ 2,691,023 $ 4,100,000 $ 4,161,767 $ 2,294,268 $ 91,318
============ ============ ============ ============ ============
Cash dividends declared -- -- -- -- --
13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
During 1998, the Company began to generate 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 $77,779,075 through December 31, 1998. 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 trials 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 to develop 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, 1998 and 1997
During the year ended December 31, 1998, the Company reported revenues from sale
of product for the first time. Product sales commenced in April 1998, and
revenues totaled $1,188,278 for the period. Additionally, the Company recorded
license income of $351,663 for the year ended December 31, 1998 ($0 for the year
ended December 31, 1997). 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 for the year ended December 31, 1998 totaled $437,713. Cost
of goods sold includes the cost of the active drug substance and royalty
payments.
Total operating expenses decreased $2,453,210 or 29%, from $8,563,019 in 1997 to
$6,109,809 in 1998. The decrease in operating expenses is primarily due to a
decrease in research and development expenses.
Net research and development expenses decreased by $1,972,125 or 36%, from
$5,463,508 in 1997 to $3,491,383 in 1998. The decrease in R&D expense is
primarily due to the closure of the company's R&D facilities in Florida during
the fourth quarter of 1997, a lower than anticipated level of research and
development expenditures at the Company's Israel facility and reduced regulatory
expenses resulting from the granting of waivers for fees previously paid to the
FDA.
Selling, general and administrative expenses decreased by $495,837 or 19%, from
$2,632,477 in 1997 to $2,136,640 in 1998. The decrease is primarily due to costs
incurred by the Company during 1997 under marketing agreements to supply Bausch
& Lomb Pharmaceuticals, Inc. ("BLP") with certain specified quantities of
loteprednol etabonate ("LE"). These quantities of LE, totaling $598,385, were
purchased during 1997 for use in testing, manufacturing and various marketing
activities, and were charged to results of operations in 1997. No such amounts
were incurred in 1998.
Patent expenses increased by $2,626, or 1 %, from $211,316 in 1997 to $213,942
in 1998. This increase is due to the timing of completion of certain patent
applications.
Depreciation and amortization expenses increased by $12,125, or 5 %, from
$255,718 in 1997 to $267,844 in 1998, reflecting a higher level of purchases of
fixed assets during 1998.
Interest and other income, net of interest and other expenses, increased by
$14,762, or 4.5 %, from $329,472 in
14
1997 to $344,234 in 1998. Interest and other income, net, increased principally
as a result of higher average cash balances during 1998.
Years Ended December 31, 1997 and 1996
Total operating expenses increased by $208,028, or 2.5 %, from $8,354,991 in
1996 to $8,563,019 in 1997. Marketing expenses totaling $598,385, which is
comprised of bulk material purchases of LE, the active drug-substance of Lotemax
and Alrex, were principally offset by reductions in research and development,
net, patents, general and administrative and depreciation and amortization
expenses.
Net research and development expenses decreased by $141,084, or 2.5%, from
$5,604,592 in 1996 to $5,463,508 in 1997. The completion of the clinical trials
associated with the Company's NDA submissions for LE resulted in a decrease in
R&D expense. The company increased participation in approved R&D reimbursement
programs that contributed to a reduction in R&D expense. Increased costs for
toxicology studies for the LE-T program (a combination of LE and Tobramycin) and
Dexanabinol, as well as activities to advance the manufacturing of LE, partially
offset the decrease in R&D expense.
In accordance with its obligations under the Marketing Agreements to supply BLP
with specified quantities of LE (the active drug-substance), the Company
purchased quantities of LE and smaller quantities of a key reagent required for
the manufacture of LE, in the amount of $2,403,012. Certain quantities of LE,
totaling $598,385, that were purchased during 1997, for use in testing, and
marketing activities (principally producing free samples of the product) were
charged to results of operations in 1997. Purchases of LE that totaled
$1,804,627 and were made subsequent to the Company being advised by the FDA that
LE was an approvable drug have been recorded as inventory at December 31, 1997.
In September 1997, the Company signed an agreement terminating the 1992
licensing agreement with the University of Florida, and returned the rights to
technologies that the Company had previously ceased developing. The termination
agreement included a waiver of $416,249 in accounts payable due the University.
General and administrative expense increased by $509,079, or 24 %, from
$2,123,392 in 1996 to $2,632,471 in 1997. The increase is primarily due to costs
incurred to supply BLP with LE, totaling $598,385, partially offset by lower
expenses associated with the completion of the Company's NDAs for Lotemax and
Alrex as well as the closure of its Florida.
Patent expenses decreased by $70,096, or 25%, from $281,412 in 1996 to $211,316
in 1997. This decrease is due to the timing of completion of certain patent
applications.
Depreciation and amortization expenses decreased by $89,877, or 26%, from
$345,595 in 1996 to $255,718 in 1997, reflecting reduced depreciation expense
relating to the Alachua, Florida operation.
Interest and other income, net of interest and other expenses, increased by
$51,692, or 19%, from $277,782 in 1996 to $329,472 in 1997. Interest and other
income, net, increased as a result of higher average cash balances, and net
foreign exchange gains.
Years Ended December 31, 1996 and 1995
Total revenues decreased by $75,000 from 1995 to $-0- in 1996. The 1995 revenues
resulted from the sublicensing of certain technologies that were not being
actively developed by the Company.
Total operating expenses increased by $101,325, or 1%, from $8,253,666 in 1995
to $8,354,991 in 1996 due to increased research and development spending
partially offset by lower general, administrative and other expenses.
15
Research and development expenses increased by $925,513, or 20%, primarily due
to significant spending on clinical trails in 1996. During the past year, the
company initiated and completed Phase III clinical trials of Lotemax for the
treatment of uveitis and post cataract surgery as well as Phase III clinical
trials of Alrex for the treatment of seasonal ocular allergies. In October of
1996, the Company commenced a Phase II study of HU-211 for severe head injury.
In February 1997, the Company submitted an NDA for Alrex and in March 1997, the
Company amended and supplemented the previously filed NDA for Lotemax with the
results of the 1996 clinical trials. The increased clinical trial expenses were
partially offset by cost saving measures taken by the Company in early 1995 that
focused research and development activities on products which were closest to
commercialization. BLP net reimbursements for clinical trials totaled $1.2
million during 1996, thereby reducing research and development expenses by this
amount.
General and administrative costs decreased by $434,326, or 17%, in 1996. This
reduction resulted primarily from the 1995 relocation of corporate headquarters
from New York to the Company's existing facility in Alachua, Florida.
Patent expense decreased by $199,447, or 41%, in 1996. The company was able to
reduce patent maintenance costs by returning to an original patent holder
several patents covering technologies that were no longer being pursued.
Further, the Company's in-house patent counsel now executes work previously
undertaken by external patent attorneys.
Depreciation and amortization expenses decreased by $190,415, or 35%, in 1996
due to the absence in 1996 of depreciation of New York facilities following the
1995 closing, a write-off of certain leasehold improvements, as well as reduced
depreciation relating to the Florida operation.
Net interest income increased by $195,200 in 1996, reflecting the higher level
of investable funds in 1996. In addition, the Company had higher interest
expense in 1995 relating to interest on the convertible debentures issued by the
Company in February 1995 , and converted into Common Stock by July 1995, and a
note that was paid in full.
Liquidity and Capital Resources
The Company had no sources of recurring revenues until the commencement of
product sales in April 1998, and has incurred operating losses since its
inception. At December 31, 1998, the Company has an accumulated deficit of
$77,779,095. The Company has financed its operations with public and private
offerings of securities, advances and other funding pursuant to a marketing
agreement with BLP, research contracts, license fees, royalties and sales, and
interest income.
The Company had working capital of $2.3 million, including cash and cash
equivalents of $3.5 million, as of December 31, 1998. On February 4, 1998, the
Company completed a private placement of convertible preferred stock and
warrants that generated $5 million in gross proceeds. On December 10, 1998, the
Company obtained a $10 million equity line of credit with a single institutional
investor. During 1998, the Company received additional equity of $1.7 million
from the exercise of warrants to purchase the Company's common stock.
Management believes that the equity line of credit, existing cash and cash
equivalents combined with anticipated cash inflows from investment income, R&D
grants and proceeds from sales of the drug substance for Lotemax and Alrex to
BLP will be sufficient to support operations through the first half of 2000. The
Company is continuing to actively pursue various funding options, including
additional equity offerings, strategic corporate alliances, business
combinations and the establishment of product related research and development
limited partnerships, to obtain the additional financing that would be required
to continue the development of its products and bring them to commercial
markets. The Company's success depends upon many factors that are beyond the
Company's immediate control, including market acceptance of Lotemax and Alrex,
competition, and the ability to obtain additional financing. There can be no
assurance that the Company will be successful in obtaining additional financing
or commercializing its product candidates, or that Lotemax or Alrex will achieve
market acceptance.
16
During 1997, the Company raised equity of $5.8 million through the issuance of
common stock, convertible preferred stock and warrants. All net proceeds were
available to fund the Company's operations. Pursuant to the U.S. Marketing
agreement with BLP and following the NDA submission for Alrex, the Company
received in March 1997, an additional $ 1 million in advances against future
sales of the active drug substance (needed to manufacture the drug), $143,333 of
which was advanced to the license holder. Cumulative advances from BLP as of
December 31, 1998 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, 1998, the outstanding advances
from BLP amounted to $4.4 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.
The Year 2000
The Company has completed its assessment of the potential impact of the year
2000 on the ability of the Company's computerized information systems to
accurately process information that may be date sensitive. Any of the Company's
programs that recognize a date using "00" as the year 1900 rather than the year
2000 could result in errors or systems failures. The Company currently believes
that the costs of addressing this issue will not have a material adverse impact
on the Company's financial position. The Company has not been able to complete
an assessment of any year 2000 issues that may effect third parties, including
the Company's current and prospective suppliers. The Company plans to devote all
resources required to resolve any significant third-party year 2000 compliance
problems in a timely manner. Any year 2000 compliance problems of the Company,
its customers or vendors could have a material adverse effect on the Company's
business, results of operations and financial condition.
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.
17
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. 59 Chairman, Chief Executive Officer,
Chief Scientist and Director
Gad Riesenfeld, Ph.D. 55 President, Chief Operating Officer
Robert W. Cook 43 Vice President Finance and
Chief Financial Officer
Anat Biegon, Ph.D. 45 Vice President/Research and Development
Marvin P. Loeb 72 Director
E. Andrews Grinstead III 53 Director
Stephen C. Knight, M.D. 39 Director
David Schlachet 53 Director
Mony Ben Dor 53 Director
George Anthony Marcelt,
M.D., Ph.D. 57 Director
Stephan Guttmann, Ph.D. 71 Director
Haim Aviv, Ph.D., is Chairman, Chief Executive Officer, Chief Scientist and a
Director of the Company and co-founded in 1990, 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 free-lance consulting 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 private company involved in extracorporeal blood therapy.
Robert W. Cook was elected Vice President Finance and Chief Financial Officer of
Pharmos in January 1998. 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.
Anat Biegon, Ph.D., has served as Vice President of Research and Development
since December 1994. Dr. Biegon became head of Research and Development for the
Company in 1994. From 1992 to 1994, Dr. Biegon was director of Pharmos Ltd.'s
Department of Pharmacology. From 1991 to 1992, she was a Staff Physiologist at
the University of California at Berkeley's Lawrence Berkeley Laboratory,
Division of Research Medicine and Radiation Biophysics. From 1990 to 1991, Dr.
Biegon was a Research Associate Professor in the Department of Psychiatry at New
York
18
University Medical Center. From 1988 to 1990, she was an Associate Professor in
the Department of Neurobiology at the Weizmann Institute of Science. Dr. Biegon
resigned from her position effective April 1999 in order to pursue other
interests. She will, however, continue to support the dexanabinol development
program and will be working with the Company through 1999.
Marvin P. Loeb, a Director, was Chairman of the Board of the Company (then known
as Pharmatec, Inc.) from December 1982 through October 1992, and has remained a
Director of the Company since 1992. He has been Chairman of Trimedyne, Inc. (and
its subsidiaries), a publicly-held company engaged in the manufacture of lasers,
optical fibers and laser delivery systems, since April 1981; a Director of Gynex
Pharmaceuticals, Inc., from April 1986 until its merger with and into
Biotechnology General Corporation in 1993, a publicly-held company engaged in
the development and commercialization of pharmaceutical products. A Director and
Chairman of Automedix Sciences, Inc. from September 1980 until August 1997.
Automedix Sciences, Inc. changed its name to COMC, Inc. in August 1997 and is a
publicly held voice and data transmission company. Chairman of Cardiomedics,
Inc., a privately held company engaged in the development of heart assist
devices, since May 1986. President and Director of Marvin P. Loeb & Co. since
1965, and Master Health Services, Inc. since 1972, both of which are family-held
companies engaged in licensing of inventions and financial consulting.
E. Andrews Grinstead, III, a Director of the Company since 1991, is Chairman of
the Board and Chief Executive Officer of Hybridon, Inc., a privately-held
biotechnology company. Mr. Grinstead joined Hybridon in 1991. From 1987 to
October 1990, he was Managing Director and Group Head of the life sciences group
at PaineWebber, Inc. From 1986 to 1987, Mr. Grinstead was Managing Director and
Group Head of the life sciences group at Drexel Burnham Lambert, Inc. From 1984
to 1986, he was a Vice President at Kidder, Peabody & Co., Inc., where he
developed the life sciences corporate finance specialty group. Prior to his
seven years on Wall Street, Mr. Grinstead served in a variety of operational and
executive positions with Eli Lilly & Company, most recently as general manager
of Venezuelan Pharmaceutical, Animal Health and Agricultural Chemical
Operations. Since 1991, Mr. Grinstead has served as a Director of EcoScience
Corporation, a development-stage company engaged in the development of
biopesticides. He also serves as a director of Meridian Medical Technologies,
Inc., a pharmaceutical and medical device company. Mr. Grinstead has served as a
member of the Board of Trustees for the Albert B. Sabine Vaccine Foundation, a
501(c)(3) charitable foundation dedicated to disease prevention since 1994, and
on the Board of the Massachusetts Biotech Counsel since 1997. Mr. Grinstead was
appointed to the President's Council of the National Academy of Sciences and the
Institute of Medicine in 1992. Mr. Grinstead received an A.B. from Harvard
College in 1967, a J.D. from the University of Virginia School of Law in 1974
and an M.B.A. from the Harvard Graduate School of Business Administration in
1976.
Stephen C. Knight, M.D., a Director of the Company since November 1994, is Chief
Financial Officer, Senior Vice President Finance &Corporate Development, of Epix
Medical, Inc. Prior to joining Epix Medical in July 1996, Dr. Knight was a
Senior Consultant at Arthur D. Little, Inc., where he specialized in R&D
valuations, and mergers and acquisitions in the pharmaceutical, biotechnology,
health care information, medical equipment and diagnostic industries. Prior to
joining Arthur D. Little, Dr. Knight worked as a consultant at APM, Inc. Dr.
Knight has performed medical research at the National Institutes of Health, AT&T
Bell Laboratories, and Yale and Columbia Universities. Dr. Knight holds an M.D.
from the Yale University School of Medicine and an MBA from the Yale School of
Organization and Management.
David Schlachet, a Director of the Company since December 1994, has served as
the Chairman of Elite Industries Ltd. from July 1997. 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. The Strauss Group is Israel's largest
privately owned food manufacturer. Mr. Schlachet was Vice President of Finance
and Administration at the Weizmann Institute of Science in Rehovot, Israel from
1990 to December, 1995. Mr. Schlachet 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. Mr.
Schlachet is a Director of Taya Investment Company Ltd., an Israeli
publicly-held investment company.
19
Mony Ben Dor, a Director of the Company since September 1997, has been Vice
President of The Israel Corporations, Ltd. since May 1997, and chairman of two
publicly traded subsidiaries: H.L. Finance and Leasing and Albany Bonded
International Trade. He is also a director of a number of subsidiary companies
of Israel Chemicals Ltd. From 1992 to 1997, Mr. Ben Dor was Vice President of
Business Development for Clal Industries Ltd. (a subsidiary of Clal Israel),
which is one of the leading investment groups in Israel. He was actively
involved in the acquisition of companies including Jaffora Ltd. and a portfolio
of pharmaceutical companies including Pharmaceutical Resources Inc. and Finetech
Ltd. 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 Ltd., 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.
Stephan Guttmann, Ph.D., a Director of the Company since December 1998, retired
as Senior Vice President of Research and Development at Sandoz Pharma Ltd.,
which merged with Ciba-Geigy in 1997 to form Novartis. Earlier in his career,
Dr. Guttmann lead Sandoz' Worldwide Pharma Research and Development. Prior to
that, at the Sandoz Pharmaceutical Chemical Research Department, Dr. Guttmann
held a variety of positions including head of the Pharmaceutical Development and
Preclinical Research departments. Dr. Guttmann has served on the board of
Systemix and the Scientific Advisory Board of Sequana Pharmaceuticals and is
currently on the boards of Modex Pharmaceuticals.
Section 16 Filings
No person who, during the fiscal year ended December 31, 1998, 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 1998 and the two previous years, as well as all other
executive officers of the Company who received compensation in excess of
$100,000 for 1998.
20
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 1998 $236,347 $ 4,197(1) 100,000
Executive Officer, and 1997 $227,471 $ 40,000 $ 16,119(1)
Chief Scientist 1996 $236,453 $ 27,435(1)
Gad Riesenfeld, Ph.D
President and 1998 $175,000 $ 25,000 $ 50,728(2) 80,000
Chief Operating Officer 1997 $175,000 $ 44,948(2)
1996 $150,000 $ 43,798(2)
Robert W. Cook
Vice President Finance 1998 $165,000 $ 20,000 $ 4,800(1) 150,000
and Chief Financial Officer
Anat Biegon, Ph.D
Vice President of 1998 $ 88,830 $ 14,396 $ 23,490(1) 60,000
Research and 1997 $ 81,873 $ 20,456 $ 27,860(1)
Development 1996 $ 85,516 $ 26,565(1)
(1) Consists of contributions to insurance premiums, car allowance and car
expenses.
(2) Consists of housing allowance, contributions to insurance premiums, and car
allowance.
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 YearEnded December 31, 1998
Common Stock
Underlying % of Total Options
Options Granted to Exercise Price
Granted Employees per Share Expiration Date
------------ ------------------ -------------- ---------------
Haim Aviv, Ph.D 100,000 15.2% $ 2.78 5/18/08
Gad Riesenfeld, Ph.D 80,000 12.2% $ 2.78 5/18/08
Robert W. Cook 100,000 15.2% $ 2.00 1/1/08
50,000 7.6% $ 2.78 5/18/08
Anat Biegon, Ph.D 60,000 9.1% $ 2.78 5/18/08
21
Aggregated Option Exercises
for the Year Ended December 31, 1998
and Option Values as of December 31, 1998:
Value of Unexercised
In-the-Money Options at
Number of Number of Unexercised December 31, 1998
Shares Options at December 31, 1998 -----------------------
Acquired on Value ------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ------------ ------------- ----------- -------------
Haim Aviv, Ph.D 0 0 312,376 112,000 $ -- $ --
Gad Riesenfeld, Ph.D 0 $60,022(1) 71,333 88,000 $ -- $ --
Robert W. Cook 0 0 25,000 125,000 $ -- $ --
Anat Biegon, Ph.D 0 0 44,533 66,000 $ -- $ --
(1) Represents 43,750 shares
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 improve loyalty to the Company and help make each
employee aware of the importance of the business success of the Company.
As of December 31, 1998, the Company has 1,551,101 options to purchase shares of
the Company's Common Stock outstanding under various option plans, 536,765 of
which are non-qualified options. A summary of the various established stock
option plans is as follows:
1991 Plan. Old Pharmos established a stock option plan in 1991. There are
currently 11,476 options outstanding under this plan and it is anticipated that
future grants of stock options will not be made from this plan.
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, 1998, there were options to purchase 701,166 shares of the
Company's Common Stock outstanding under this plan. Each option granted
outstanding under the 1992 plan as of December 31, 1998 expire by January 2008.
It is anticipated that future grants of stock options will not be made from this
plan.
1997 Plan. The 1997 Plan will be administered by a committee appointed by the
Board of Directors (the "Compensation Committee"). Members of the Compensation
Committee will not be eligible to receive options while they are members except
to the extent otherwise permitted under the requirements of Rule 16b-3 under the
Securities Exchange Act of 1934. 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, is 1,000,000 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 1997 Plan that expire or terminate
will again be available for options to be issued under the 1997 Plan.
22
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 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, 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.
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 1997 Plan 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
therefor 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.
Under current federal income tax law, the grant of incentive stock options under
the 1997 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, 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
23
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, 1998,
there were 845,750 1997 Employees Warrants at $1.59, 10,000 1997 Employees
Warrants at $1.66 and 95,000 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, 1999. 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
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 $50,000 per year, subject to yearly increases and review. 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 $185,000.
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 $175,000.
Directors' Compensation. In 1998, Directors did not receive any compensation for
service on the Board or for attending Board meetings.
24
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, 1999, 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) 1,349,305 3.3%
c/o Pharmos Ltd.
Kiryat Weitzman
Rehovot, Israel
Marvin P. Loeb(3) 305,646 *
Trimedyne, Inc.
2810 Barranca Road
Irvine, CA 92714
E. Andrews Grinstead III(4) 115,738 *
Hybridon, Inc.
One Innovation Drive
Worcester, MA 01605
Stephen C. Knight, M.D.(4) 8,333 *
Epix Medical, Inc.
71 Rogers Street
Cambridge, MA 02142
David Schlachet(4) 20,000 *
Strauss Ltd.
16 Bazel Street
Petach-Tikva, Israel 49510
Mony Ben Dor(4) 1,875 *
The Israel Corporation
4 Weizman St
Tel-Aviv 61336, Israel
Georges Anthony Marcel, M.D., Ph.D 0 *
c/o TMC Development
9, rue de Magdebourg
75116 Paris France
Stephan Guttmann, Ph.D. 0 *
Hegenheimermattweg
CH-4123 Allschwil
Switzerland
All Directors and 2,083,013 5.0%
Executive Officers as a group
(11 persons)(5)
25
- ----------
* Indicates ownership of less than 1%.
(1) Based on 40,538,685 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 to purchase 437,376
shares of Common Stock.
(3) Held jointly with his wife. Also includes currently exercisable options and
warrants to purchase 60,000 shares of Common Stock. Does not include shares
held by his adult children, his grandchildren or a trust for the benefit of
his grandchildren.
(4) Consists of currently exercisable options and warrants to purchase Common
Stock.
(5) Based on the number of shares of Common Stock outstanding, plus 915,438
currently exercisable warrants and options held by the Directors and
executive officers.
Item 13. Certain Relationships and Related Transactions
None.
26
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, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
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; EXECUTIVE COMPENSATION PLANS
Exhibits
2 Plan of acquisition, reorganization, arrangement, liquidation or succession
2(a) Agreement and Plan of Merger dated as of March 28, 1995 between
Pharmos Corporation, PMC Merger Corporation and Oculon
Corporation (Incorporated by reference to the Company's Current
Report on Form 8-K, dated April 11, 1995, as amended).
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
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1994).
3(c) Amended and Restated By-Laws (Incorporated by reference to Form
S-1 Registration Statement of the Company dated June 30, 1994
(No. 33-80916)).
3(d) 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).
4 Instruments defining the rights of security holders, including indentures
4(a) 1983 Incentive Stock Option Plan (The Company's 1984 and 1986
Plans are identical in all respects except as to the number of
shares subject to option) (Incorporated by reference to Form S-18
Registration Statement of the Company dated June 7, 1983
(2-84298-C)).
27
4(b) Amendment of 1983, 1984 and 1986 Incentive Stock Option Plans
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1988).
4(c) 1988 Incentive Stock Option Plan (Incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1988).
4(d) Pharmos Corporation 1991 Incentive Stock Option Plan
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1992).
4(e) 1992 Incentive and Non-Qualified Stock Option Plan (Annexed as
Appendix F to the Joint Proxy Statement/Prospectus).
4(f) Form of Class A Warrant to purchase (x) shares of Common Stock
and (y) Class B Warrants (Incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1991).
4(g) Form of Class B Warrant to purchase shares of Common Stock
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1991).
4(h) Unit Purchase Option Agreement dated February 18, 1992 between
the Company and David Blech (Incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1991).
4(i) 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(j) 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(k) 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(l) Form of Stock Purchase Agreement dated as of September 2, 1994
between the Company and the Purchaser (Incorporated by reference
to Form S-1 Registration Statement of the Company dated June 30,
1994 [No. 33-80916], Amendment No. 2).
4(m) 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(n) Form of Common Stock Purchase Agreement dated as of October 4,
1994 between the Company and the Purchasers (Incorporated by
reference to Form S-3 Registration Statement of the Company dated
November 25, 1994 [No. 33-86720]).
4(o) 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(p) Form of Convertible Debenture Purchase Agreement dated as of
February 7, 1995 between the Company and the Investors
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1994).
28
4(q) 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(r) 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(s) Form of Penalty 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(t) Form of Unit Purchase 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(u) 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(v) 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(w) 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(x) 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(y) 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(z) Form of 5% Preferred Stock Securities Purchase Agreement 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(a)(a) 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(a)(b) 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]).
4(a)(c) 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(a)(d) 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
29
March 29, 1997.
4(a)(e) 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(a)(f) Form of 5% Preferred Stock Securities Purchase Agreement dated as
of March 31, 1997 between the Company and the Investors
(Incorporated by reference to Form S-3 Registration of the
Company dated April 30, 1997 [No. 333-26155]).
4(a)(g) 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(a)(h) 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(a)(i) Form of Securities Purchase Agreement dated as of February 4,
1998 between the Company and the Investor (Incorporate by
reference to the Company's Current Report on Form 8-K filed on
February 4, 1998).
4(a)(j) 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(a)(k) 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(a)(l) 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(a)(m) 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).
10 Material Contracts
10(a) License Agreement dated as of March 14, 1989 between National
Technical Information Service (NTIS), U.S. Department of Commerce
and the Company (Incorporated by reference to Annual Report on
Form 10-K for year ended December 31, 1989).
10(b) Common Stock and Warrant Purchase Agreement, dated November 5,
1991, between the Company and David Blech (Incorporated by
reference to Annual Report on Form 10-K for year ended December
31, 1991).
30
10(c) Private Placement Agreement, dated November 5, 1991, between the
Company and David Blech and D. Blech & Company, Incorporated
(Incorporated by reference to Annual Report on Form 10-K for year
ended December 31, 1991).
10(d) Stock Option Agreement, dated March 20, 1992, between the
Company, Pharmos Corporation, Xenon Vision, Inc. and the security
holders of Xenon Vision, Inc. (Incorporated by reference to
Annual Report on Form 10-K for year ended December 31, 1991).
10(e) Agreement and Plan of Merger, dated May 13, 1992, as amended, by
and among the Company, Pharmatec Merger Corporation and Pharmos
Corporation (composite copy as amended to date) (Incorporated by
reference to the Joint Proxy Statement/Registration Statement).
10(f) Registration Rights Agreement dated October 30, 1992 between the
Company and the security holders of Xenon Vision, Inc.
(Incorporated by reference to the Joint Proxy Statement/
Registration Statement).
10(g) 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 Form 10-K/A, for year
ended December 31, 1992).(1)
10(g)(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(g)(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(h) 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(h)(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(h)(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(i) 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)(i)(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(j) 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(k) Letter from Old Pharmos to D. Blech & Co. Incorporated ("D. Blech
& Co.") dated June 27, 1991 re: consulting services (Incorporated
by reference to Annual Report on Form 10-K, as amended by Form
10-K/A, for year ended December 31, 1992).
10(l) Old Pharmos Employment Agreement with Stephen Streber dated as of
July 1, 1992
31
(Incorporated by reference to Annual Report on Form 10-K, as
amended by Form 10-K/A, for year ended December 31, 1992).
10(m) Letter dated July 27, 1992 from Old Pharmos to Henry Dachowitz re
employment (Incorporated by reference to Annual Report on Form
10-K, as amended by Form 10-K/A, for year ended December 31,
1992).
10(n) 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(o) Lease Agreement dated as of November 1, 1992 between Talquin
Development Company and the Company (Incorporated by reference to
Annual Report on Form 10-K, as amended by Form 10-K/A, for year
ended December 31, 1992).
10(p) Form of Purchase Agreement dated as of August 13, 1993 by and
among the Registrant and the Investors listed on Exhibit A
thereto (Incorporated by reference to Form S-3 Registration
Statement of the Company dated September 29, 1993 [33-68762]).
10(q) Amended and Restated License Agreement with Research Component
dated July 1, 1993 between University of Florida Research
Foundation, Inc. and the Company (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(r) 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(s) Consulting Agreement dated as of January 1, 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(t) Product Development and Clinical Manufacturing Services Agreement
dated as of October 21, 1994 between the Company and Bausch &
Lomb Pharmaceuticals, Inc. (Incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1994).
10(u) Agreement and Release dated as of November 11, 1994 between the
Company and Stephen R. Streber (Incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1994).
10(v) Employment Agreement dated as of November 11, 1994 between the
Company and Henry M. Dachowitz (Incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1994).
10(w) 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(x) 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(y) Marketing Agreement, dated as of December 12, 1996, between the
Company and Bausch & Lomb Pharmaceuticals, Inc. (1)
10(z) Consulting Agreement, dated November 11, 1996, between the
Company and Alan Mark. (Incorporated by reference to Form S-3
Registration Statement of the Company dated April 30, 1997 [No.
333-26155]).
32
10(a)(a) Employment Agreement, dated December 15, 1997, between the
Company and Robert W. Cook ( Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997).
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 Consent of Experts
23(a) Consent of PricewaterhouseCoopers LLP**
27 Financial Data Schedule**
- ----------
** Filed herewith.
(1) Confidential information is omitted and identified by a * and filed
separately with the SEC.
(b) Reports on Form 8-K
Since October 1, 1998, the Company has one report on Form 8-K, dated
December 23, 1998.
33
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 30, 1999
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 30, 1999
- ----------------------------- Financial and Accounting Officer),
Robert W. Cook and Secretary
/s/ Gad Riesenfeld President, Chief Operating Officer March 30, 1999
- -----------------------------
Gad Riesenfeld
/s/ Marvin P. Loeb Director March 30, 1999
- -----------------------------
Marvin P. Loeb
/s/ E. Andrews Grinstead III Director March 30, 1999
- -----------------------------
E. Andrews Grinstead III
/s/ Stephen C. Knight Director March 30, 1999
- -----------------------------
Stephen C. Knight
/s/ David Schlachet Director March 30, 1999
- -----------------------------
David Schlachet
/s/ Mony Ben Dor Director March 30, 1999
- -----------------------------
Mony Ben Dor
/s/ Georges Anthony Marcel Director March 30, 1999
- -----------------------------
Georges Anthony Marcel
/s/ Stephan Guttmann Director March 30, 1999
- -----------------------------
Stephan Guttmann
34
Pharmos Corporation
Index to Consolidated Financial Statements
Report of Independent Accountants F-2
Consolidated balance sheets as of December 31, 1998 and 1997 F-3
Consolidated statement of operations for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated statement of changes in shareholders' (deficit) equity
for the years ended December 31, 1998, 1997 and 1996 F-5
Consolidated statement of cash flows for the years ended
December 31, 1998, 1997 and 1996 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' (deficit)
equity and of cash flows present fairly, in all material respects, the financial
position of Pharmos Corporation and its subsidiary at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. 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 audit. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations and at December 31, 1998 has an accumulated deficit of
$77,779,075 that raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 1, 1999
F-2
Pharmos Corporation
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31,
----------------------------------
1998 1997
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 3,452,916 $ 4,423,389
Inventories 1,727,096 1,804,627
Grants and other receivables 550,057 237,655
Prepaid royalties 259,488 143,333
Prepaid expenses and other current assets 206,793 171,299
------------ ------------
Total current assets 6,196,350 6,780,303
Fixed assets, net 1,181,030 703,428
Prepaid royalties, net of current portion 366,152 573,334
Intangible assets, net 244,738 291,262
Other assets 78,400 73,514
------------ ------------
Total assets $ 8,066,670 $ 8,421,841
============ ============
Liabilities and Shareholders' (Deficit) Equity
Current liabilities:
Long term debt, current portion $ -- $ 55,253
Accounts payable 936,899 2,576,968
Accrued expenses 679,737 809,869
Accrued wages and other compensation 456,575 401,285
Advances against future sales 1,836,231 1,000,000
------------ ------------
Total current liabilities 3,909,442 4,843,375
Advances against future sales, net of current portion 2,591,023 4,000,000
Other liabilities 100,000 100,000
------------ ------------
Total liabilities 6,600,465 8,943,375
Shareholders' (deficit) equity:
Preferred stock, $.03 par value, 1,250,000 shares authorized:
Series B convertible, 0 and 2,755 shares outstanding, respectively
(liquidation preference of $0 and $2,755,000, respectively) -- 83
Series C convertible, 1,500 and 0 shares outstanding, respectively
(liquidation preference of $1,500,000 and $0, respectively) 45 --
Common stock, $.03 par value; 60,000,000 shares authorized,
39,800,112 and 34,391,638 shares issued and
outstanding (excluding $551 in 1998 and 1997,
held in Treasury) in 1998 and 1997, respectively 1,193,452 1,031,197
Paid in capital 78,051,783 70,516,913
Accumulated deficit (77,779,075) (72,069,727)
------------ ------------
Total shareholders' (deficit) equity 1,466,205 (521,534)
------------ ------------
Commitments and contingencies
Total liabilities and shareholders' (deficit) equity $ 8,066,670 $ 8,421,841
============ ============
The accompanying notes are an integral part of these financial
statements.
F-3
Pharmos Corporation
Consolidated Statement of Operations
- --------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Revenues:
Product sales $ 1,188,278 $ -- $ --
License fee 351,663 --
------------ ------------ ------------
Total Revenues 1,539,941 -- --
Cost of Goods Sold 437,713 -- --
------------ ------------ ------------
Gross Margin 1,102,228 -- --
------------ ------------ ------------
Expenses:
Research and development, net 3,491,383 5,463,508 5,604,592
Selling, general and administrative 2,136,640 2,632,477 2,123,392
Patents 213,942 211,316 281,412
Depreciation and amortization 267,844 255,718 345,595
------------ ------------ ------------
Total operating expenses 6,109,809 8,563,019 8,354,991
------------ ------------ ------------
Loss from operations (5,007,581) (8,563,019) (8,354,991)
Other income (expenses):
Interest income 315,336 330,453 323,097
Other income (expenses), net 38,844 16,365 (9,393)
Interest expense (9,946) (17,346) (35,923)
------------ ------------ ------------
Other income (expenses), net 344,234 329,472 277,781
------------ ------------ ------------
Loss before extraordinary item (4,663,347) (8,233,547) (8,077,210)
Extraordinary gain from forgiveness of debt,
net of $0 of income taxes (Note 4) -- 416,248 --
------------ ------------ ------------
Net loss (4,663,347) (7,817,299) (8,077,210)
Less: Dividend embedded in convertible preferred
stock (Note 8) (642,648) (1,952,767) --
Preferred stock dividends (242,295) (240,375) --
------------ ------------ ------------
Net loss applicable to common shareholders $ (5,548,290) $(10,010,441) $ (8,077,210)
============ ============ ============
Loss per share applicable to common shareholders
before extraordinary gain - basic and diluted $ (.15) $ (.32) $ (.28)
Extraordinary gain per share -- .01 --
------------ ------------ ------------
Net loss per share applicable to common
shareholders - basic and diluted $ (.15) $ (.31) $ (.28)
============ ============ ============
Weighted average shares outstanding - basic and diluted 37,277,186 32,442,981 29,291,401
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
Pharmos Corporation
Consolidated Statements of Changes in Shareholders' Equity (Note 8)
================================================================================
Series A Convertible
Common Stock Preferred Stock
Shares Amount Shares Amount
------------ ------------ ------------ ------------
December 31, 1995 29,149,039 $874,471
Warrant exercise 99,286 2,978
Issuance of preferred stock, net of offering costs 1,900 $57
of $18,000
Private placement of common stock 1,479,200 44,376
Warrant grant to consultants
Net loss
------------ ------------ ------------ ------------
December 31, 1996 30,727,525 921,825 1,900 57
Issuance of preferred stock, net of offering costs
of $260,000
Warrant exercises 37,500 1,125
Conversion of Series A preferred stock 1,492,943 44,788 (1,900) (57)
Common Stock Dividend upon conversion of P/S 47,265 1,418
Conversion of Series B preferred stock 2,000,215 60,006
Common Stock Dividend upon conversion of P/S 86,190 2,586
Dividend embedded in convertible preferred stock
Net loss
------------ ------------ ------------ ------------
December 31, 1997 34,391,638 1,031,748 0 0
Issuance of C preferred stock, net of offering costs
of $411,135
Warrant and option exercises 970,728 29,122
Conversion of Series B preferred stock 1,704,978 51,149
Common Stock Dividend upon conversion of P/S, 34,904 1,047
Conversion of Series C preferred stock 2,230,010 66,900
Common Stock Dividend upon conversion of P/S, 69,947 2,098
Issuance of Common Stock - equity credit line, net 397,907 11,938
Dividend embedded in convertible preferred stock
Preferred Stock Dividends
Net loss
------------ ------------ ------------ ------------
December 31, 1998 39,800,112 $1,194,003 0 $0
============ ============ ============ ============
Series B Convertible Series C Convertible
Preferred Stock Preferred Stock
Shares Amount Shares Amount
------------ ------------ ------------ ------------
December 31, 1995
Warrant exercise
Issuance of preferred stock, net of offering costs
of $18,000
Private placement of common stock
Warrant grant to consultants
Net loss
------------ ------------ ------------ ------------
December 31, 1996 0 $0 0 $0
Issuance of preferred stock, net of offering costs
of $260,000 6,000 180
Warrant exercises
Conversion of Series A preferred stock
Common Stock Dividend upon conversion of P/S
Conversion of Series B preferred stock (3,245) (97)
Common Stock Dividend upon conversion of P/S
Dividend embedded in convertible preferred stock
Net loss
------------ ------------ ------------ ------------
December 31, 1997 2,755 83 0 0
Issuance of C preferred stock, net of offering costs 5,000 150
of $411,135
Warrant and option exercises
Conversion of Series B preferred stock (2,755) (83)
Common Stock Dividend upon conversion of P/S,
Conversion of Series C preferred stock (3,500) (105)
Common Stock Dividend upon conversion of P/S,
Issuance of Common Stock - equity credit line, net
Dividend embedded in convertible preferred stock
Preferred Stock Dividends
Net loss
------------ ------------ ------------ ------------
December 31, 1998 0 $0 1,500 $45
============ ============ ============ ============
Paid-in
Capital in Accumulated Treasury Stock
Excess of Par Deficit Shares Amount
------------- ------------ ------------ ------------
December 31, 1995 $58,763,797 $(54,024,742) 18,356 $(551)
Warrant exercise 55,522
Issuance of preferred stock, net of offering costs 1,881,943
of $18,000
Private placement of common stock 1,955,624
Warrant grant to consultants 12,000
Net loss (8,077,210)
------------ ------------ ------------ ------------
December 31, 1996 62,668,886 (62,101,952) 18,356 (551)
Issuance of preferred stock, net of offering costs
of $260,000 5,739,820
Warrant exercises 66,375
Conversion of Series A preferred stock (44,731)
Common Stock Dividend upon conversion of P/S 59,345 (60,763)
Conversion of Series B preferred stock (59,909)
Common Stock Dividend upon conversion of P/S 134,360 (136,946)
Dividend embedded in convertible preferred stock 1,952,767 (1,952,767)
Net loss (7,817,299)
------------ ------------ ------------ ------------
December 31, 1997 70,516,913 (72,069,727) 18,356 (551)
Issuance of C preferred stock, net of offering costs 4,588,715
of $411,135
Warrant and option exercises 1,649,212
Conversion of Series B preferred stock (51,067)
Common Stock Dividend upon conversion of P/S, 53,724 (54,771)
Conversion of Series C preferred stock (66,795)
Common Stock Dividend upon conversion of P/S, 104,189 (106,287)
Issuance of Common Stock - equity credit line, net 371,949
Dividend embedded in convertible preferred stock 642,648 (642,648)
Preferred Stock Dividends 242,295 (242,295)
Net loss (4,663,347)
------------ ------------ ------------ ------------
December 31, 1998 $78,051,783 $(77,779,075) 18,356 $(551)
============ ============ ============ ============
Total
Shareholders'
Equity
------------
December 31, 1995 $5,612,975
Warrant exercise 58,500
Issuance of preferred stock, net of offering costs 1,882,000
of $18,000
Private placement of common stock 2,000,000
Warrant grant to consultants 12,000
Net loss (8,077,210)
------------
December 31, 1996 1,488,265
Issuance of preferred stock, net of offering costs
of $260,000 5,740,000
Warrant exercises 67,500
Conversion of Series A preferred stock 0
Common Stock Dividend upon conversion of P/S 0
Conversion of Series B preferred stock (0)
Common Stock Dividend upon conversion of P/S 0
Dividend embedded in convertible preferred stock 0
Net loss (7,817,299)
------------
December 31, 1997 (521,534)
Issuance of C preferred stock, net of offering costs 4,588,865
of $411,135
Warrant and option exercises 1,678,334
Conversion of Series B preferred stock 0
Common Stock Dividend upon conversion of P/S, 0
Conversion of Series C preferred stock 0
Common Stock Dividend upon conversion of P/S, 0
Issuance of Common Stock - equity credit line, net 383,887
Dividend embedded in convertible preferred stock 0
Preferred Stock Dividends 0
Net loss (4,663,347)
------------
December 31, 1998 $1,466,205
============
Pharmos Corporation
Consolidated Statement of Cash Flows
- ------------------------------------------------------------------------------
Year Ended December 31,
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(4,663,347) $(7,817,299) $(8,077,210)
Adjustments to reconcile net loss to net
cash flow used in operating activities:
Depreciation and amortization 267,844 255,718 345,595
Loss on disposal of fixed assets -- 41,560 --
Warrant grant to consultants -- -- 12,000
Extraordinary gain from forgiveness of debt -- (416,248)
Changes in operating assets and liabilities
Inventory 77,531 (1,804,627) --
Grants and other receivables (312,402) 121,364 (254,758)
Prepaid expenses and other current assets (35,494) 76,064 239,000
Advanced royalties 91,027 (143,333) (573,334)
Other assets (4,887) 114,958 --
Accounts payable (1,640,069) 2,145,801 108,059
Accrued expenses (130,132) 312,248 (18,413)
Accrued wages and other compensation 55,290 43,304 152,645
Other liabilities -- 48,881 (184,360)
----------- ----------- -----------
Net cash used in operating activities (6,294,639) (7,021,609) (8,250,776)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets, net (698,921) (324,769) (73,028)
----------- ----------- -----------
Net cash used in investing activities (698,921) (324,769) (73,028)
----------- ----------- -----------
Cash flows from financing activities:
Advances against future sales (572,746) 1,000,000 2,122,859
Proceeds from issuance of common stock
and exercise of warrants and options, net 1,678,334 67,500 2,058,500
Proceeds from issuance of preferred stock, net 4,588,865 5,740,000 1,882,000
Proceeds from exercise of equity credit line 383,887 -- --
Payments of loans payable (55,253) (170,639) (49,440)
----------- ----------- -----------
Net cash provided by financing activities 6,023,087 6,636,861 6,013,919
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (970,473) (709,517) (2,309,885)
Cash and cash equivalents at beginning of year 4,423,389 5,132,906 7,442,791
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,452,916 $ 4,423,389 $ 5,132,906
=========== =========== ===========
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 pharmaceutical company
specializing in the modification of existing molecules through proprietary
techniques to reduce undesirable side effects and/or enhance efficacy. The
Company is developing pharmaceuticals in various fields including: site
specific drugs for ophthalmic indications, neuroprotective agents with a
novel mechanism of action for the treatment of central nervous system
("CNS") disorders, newly designed molecules to treat cancer, and
emulsion-based products for topical and systemic applications. The Company
has administrative offices in Iselin, New Jersey and conducts operations
through its wholly owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.
In March 1998, the Company received approval for three separate New Drug
Applications ("NDA") from the U.S. Food and Drug Administration ("FDA").
These approvals were for Lotemax(R) and Alrex(TM). Lotemax has been
approved for the treatment of several ocular inflammatory indications,
including uveitis, and for post-operative inflammation. Alrex has been
approved for the treatment of seasonal allergic conjunctivitis.
2. Liquidity and Business Risks
While the Company has generated revenue through the sale of its approved
products in the market, it has incurred operating losses since its
inception. At December 31, 1998, the Company has an accumulated deficit of
$77,779,075. Such losses have resulted principally from costs incurred in
research and development and from general and administrative expenses. The
Company has funded its operations through the use of cash obtained
principally from third party financing. Management believes that cash and
cash equivalents of $3.5 million as of December 31, 1998, combined with
anticipated cash inflows from revenues derived from sales of Lotemax and
Alrex and the obtaining of a $10 million equity line of credit on December
10, 1998 (see note 8) will be sufficient to support operations into 2000.
The Company's success depends upon many factors that are beyond the
Company's immediate control, including market acceptance of Lotemax and
Alrex, competition, and the ability to obtain additional financing. The
Company is continuing to actively pursue various funding options, including
equity offerings, strategic corporate alliances, business combinations, and
the establishment of research and development partnerships to obtain the
additional financing necessary to complete the development of its product
candidates and bring them to commercial markets. There can be no assurance
that Lotemax or Alrex will achieve market acceptance or that the Company
will be successful in obtaining additional financing or commercializing its
product candidates.
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.
F-7
Pharmos Corporation
Notes to Consolidated Financial Statements
Net loss per common share
The Company adopted Statement of Financial Accounting Standards No.128,
"Earnings per Share" ("SFAS 128") effective December 1997.
Basic net loss per common share is computed by dividing net loss applicable
to common shareholders 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 were converted. Diluted common shares are based on the most
advantageous convertible rate or exercise price available to the security
holder.
At December 31, 1998, 1,500 outstanding shares of Series C Convertible
Preferred Stock, convertible into 1,114,818 shares of common stock and
outstanding options and warrants to purchase 5,634,842 shares of common
stock, with exercise prices ranging from $ .75 to $ 5.20 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 1998 and 1997.
Revenue recognition
Sales revenue is recognized upon shipment of products to customers, less
allowances for estimated returns and discounts. License fees and royalties
are recognized when earned in accordance with the underlying agreements.
Revenue for contracted research and development services is recognized as
performed. Revenue from these contracts is recognized as costs are incurred
(as defined in the contract), generally direct labor and supplies plus
agreed overhead rates. Any advance payments on contracts are deferred until
the related services are performed.
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.
Certain purchases of loteprednol etabonate, totaling $598,385, have been
expensed in 1997. This amount represents inventory to be used in testing,
manufacturing and various marketing programs.
Fixed assets
Fixed assets are recorded at cost. Property, furniture and equipment are
depreciated on a straight-line basis over their estimated useful lives,
which range from three to fourteen 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.
F-8
Pharmos Corporation
Notes to Consolidated Financial Statements
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, 1998 and 1997, accumulated amortization was
$795,042 and $748,518, respectively. Amortization expense amounted to
$46,524 in each of the years ended December 31, 1998, 1997 and 1996.
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, 1998, 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.
F-9
Pharmos Corporation
Notes to Consolidated Financial Statements
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 net income and pro forma
earnings 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.
Reclassifications
Certain amounts for 1997 and 1996 have been reclassified to conform to the
fiscal 1998 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 Comprehensive 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") 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, 1998, Bausch and Lomb has provided the Company with $5
million in cash advances against future sales, of which approximately $4.4
million was outstanding at December 31, 1998. An additional $1 million is
due from Bausch & Lomb upon the receipt of regulatory approval for LE-T in
the United States. Bausch & Lomb is entitled to recoup the advances by
withholding certain amounts against payments for future purchases of the
active drug substance, based on the advances made, until all the advances
have been repaid. The Company may be obligated to repay such advances if it
is unable to supply Bausch & Lomb with certain specified quantities of the
active drug substance. The portion of advances expected to be recouped by
Bausch and Lomb in 1999, based on management's estimate of product sales to
Bausch & Lomb in 1999, has been presented as a current liability in the
accompanying balance sheet at December 31, 1998.
Bausch & Lomb also collaborates in the development of products by making
available amounts up to 50%
F-10
Pharmos Corporation
Notes to Consolidated Financial Statements
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.
In September 1997, the Company entered into an agreement with the
University of Florida Research Foundation (the "University"). Under terms
of the agreement, the Company returned rights to technologies the Company
previously ceased developing, and in exchange the University forgave
$416,248 of debts owed by the Company during 1997. During 1998, the Company
received a non-recurring license fee of $350,000 in exchange for the
transfer of certain drug technology to the University under the agreement.
5. Fixed Assets
Fixed assets consist of the following:
December 31,
1998 1997
----------- -----------
Laboratory, pilot plant and other equipment $ 1,916,804 $ 1,339,688
Leasehold improvements 255,451 240,462
Office furniture and fixtures 143,714 107,251
Computer equipment 145,449 78,795
Vehicles 53,307 53,307
----------- -----------
2,514,725 1,819,503
Less - Accumulated depreciation and amortization (1,333,695) (1,116,075)
----------- -----------
$ 1,181,030 $ 703,428
=========== ===========
Depreciation and amortization of fixed assets was $221,320, $209,194 and
$299,071 in 1998, 1997 and 1996, 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 $513,931, $418,245 and $245,302 during 1998,
1997 and 1996, 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 2% 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, 1998, the total amounts received under such grants
amounted to $3,672,566, of which $3,128,979 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
$3,591,869 based on grants received through December 31, 1998.
F-11
Pharmos Corporation
Notes to Consolidated Financial Statements
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 $343,587 in 1998
pursuant to this agreement.
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 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, 1998.
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
1998, 1997 and 1996.
In March 1997, the Company paid a licensor, who is a former director,
$143,333. This payment represented prepaid royalties to the former director
against future royalties on sales of Lotemax and Alrex. Outstanding prepaid
royalties totaled $ 625,640 and $ 716,667 and are reflected as an asset on
the balance sheets at December 31, 1998 and 1997, 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. Common and Preferred Stock Transactions
1998 Transactions
In January 1998, the shareholders of the Company approved the increase in
the number of authorized shares of common stock from 50,000,000 to
60,000,000 and adopted the 1997 Incentive and Non-Qualified Stock Option
Plan, which has reserved for issuance up to 600,000 shares of common stock
upon the exercise of stock options to be granted to employees, directors,
consultants and other key personnel.
In May 1998, the Company, under provisions of the 1997 Incentive and
Non-Qualified Stock Option Plan, 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.
In September 1998, the shareholders of the Company 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 600,000 to 1,000,000.
F-12
Pharmos Corporation
Notes to Consolidated Financial Statements
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 $68,624.
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 2,299,957 shares of common stock upon
conversion of 3,500 shares of its 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 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 $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 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 39,791 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.
F-13
Pharmos Corporation
Notes to Consolidated Financial Statements
1997 Transactions
On February 12, 1997, the Company issued warrants to purchase an aggregate
of 955,000 shares of common stock at an exercise price of $1.59 per share,
the fair market value of the common stock on the date of grant, to 14
employees of the Company. Prior to December 31, 1997, 65,000 of these
warrants were canceled in connection with the termination of 2 employees.
Such warrants become exercisable in increments of 25% each on February 12,
1998, February 12, 1999, February 12, 2000 and February 12, 2001. All of
such warrants expire on February 12, 2007. Also, on February 12, 1997, the
Company issued warrants to purchase an aggregate of 115,000 shares of
common stock at an exercise price of $1.59 per share to the Company's five
outside directors and one outside consultant. These warrants become
exercisable on the same basis as the warrants issued to employees, but
expire on February 12, 2003. Upon termination of employment or termination
as a director, all warrants held by such employee or director will expire,
except that any warrant that was exercisable on the date of termination
may, to the extent then exercisable, be exercised within three months
thereafter (or one year thereafter if the termination is the result of
death or permanent disability of such employee or director).
In March 1997, the Company issued warrants to purchase an aggregate of
75,000 shares of common stock at an exercise price of $1.66 per share, the
fair market value of the common stock on the date of grant, to an employee
of the Company. Such warrants become exercisable in increments of 25% each
on March 1, 1998, March 1, 1999, March 1, 2000 and March 1, 2001. All of
such warrants expire on March 1, 2007. Upon termination of employment, all
warrants held by such employee will expire, except that any warrant that
was exercisable on the date of termination may, to the extent then
exercisable, be exercised within three months thereafter (or one year
thereafter if the termination is the result of death or permanent
disability of such employee).
On March 31, 1997, the Company completed a private placement with
institutional investors of Series B Convertible Preferred Stock and
warrants to purchase common stock, generating gross proceeds of $6 million.
The Series B preferred stock carries a 5% dividend rate payable in cash or
common stock, at the option of the Company, and is convertible into common
shares over a period ranging from 90 to 270 days subsequent to March 31,
1997. The conversion price will be based on the share price at the time of
conversion less discounts ranging from 17% to 20%. Until converted into
common stock, the preferred stock has no voting rights. The 159,000
warrants issued to the investors are exercisable at a price of $1.75 per
share, commencing March 31, 1998, for a three year period. The Company also
issued warrants to purchase an aggregate of 239,473 shares of common stock
at an exercise price of $1.38 per share to certain parties who assisted in
the completion of the private placement. The warrants are exercisable from
March 31, 1998 and will expire in 2007.
On April 30, 1997, the Company issued warrants to purchase an aggregate of
15,000 shares of common stock at an exercise price of $1.22 per share to an
outside consultant of the Company. Such warrants became exercisable on
April 30, 1998 and expire on April 30, 2003.
During 1997, the Company issued 3,493,158 shares of its common stock upon
conversion of 5,145 shares of the Company's Series A and Series B
Convertible Preferred Stock. The shares were issued with conversion prices
ranging from $.93 per share to $2.04 per share. The Company also issued
133,455 shares of common stock in payment of dividends on the Series A and
Series B Convertible Preferred Stock. As of the date of such issuances,
these dividends were valued at $197,709. The Company issued 37,500 shares
of its common stock upon exercise of warrants to purchase shares of the
Company's common stock at $1.80 per share.
1996 Transactions
In January 1996, the Company issued 89,286 shares of its common stock as a
result of the exercise of certain warrants. Of this amount, 75,000 shares
were issued at an exercise price of $.52 per share and 14,286 shares were
issued at an exercise price of $.84 per share.
F-14
Pharmos Corporation
Notes to Consolidated Financial Statements
On September 30, 1996, the Company completed a private placement of Series
A convertible preferred stock and warrants to purchase common stock, with
institutional investors generating gross proceeds of $1.9 million. The
Series A preferred stock carried a 5% dividend rate payable in cash or
common stock, at the option of the Company, and was convertible into common
shares over a period ranging from 80 days to 360 days subsequent to
September 30, 1996. The conversion price was based on the share price at
the time of conversion less discounts ranging from 17% to 20%. Until
converted into common stock, the preferred stock had no voting rights. The
50,000 warrants issued to the investors are exercisable at a price of $1.75
per share, commencing one year after the closing for a three year period.
The investors were granted limited rights to approve certain financing by
the Company for 180 days from closing.
In December 1996, the Company issued 10,000 shares of its common stock as a
result of the exercise of warrants to purchase shares of the Company's
common stock. The 10,000 shares were issued at an exercise price of $.75
per share.
In December 1996, Bausch & Lomb purchased 1,479,200 shares of common stock
from the Company for $2 million in a private placement. The purchase price
of $1.35 per share was equal to the average closing price for the prior 15
days.
During 1996, the Company issued warrants to consultants who assisted the
Company on various business and financial matters as follows: warrants to
purchase 15,000 shares at an exercise price of $2.31 per share, which
expire in March 2002; warrants to purchase 65,000 shares of the Company's
common stock at an exercise price of $1.34 per share, which expire in
September 2007; warrants to purchase 10,000 shares at an exercise price of
$1.39 per share, which expire in November 2006. The Company recognized
compensation expense of $12,000 related to warrants in 1996.
F-15
Pharmos Corporation
Notes to Consolidated Financial Statements
9. Warrants
Many of the warrants issued in connection with various equity financing and
related transactions during 1991 through 1998 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, 1998 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
------------- --------------- ------------- --------
February 1992 February 1999 87,979 $ 2.44
August 1993 August 1999 466,832 $ 2.60
October 1993 September 1999 65,044 $ 2.26
June 1994 October 1999 150,000 $ .84
April 1995 April 2005 500,000 $ 2.75
April 2005 10,000 $ .78
May 1995 April 2000 7,119 $ .75
April 2000 17,119 $ 1.00
April 2000 17,119 $ 1.50
September 1995 September 2000 821,489 $ 1.80
October 1995 October 2001 10,000 $ 1.88
March 1996 March 2002 15,000 $ 2.31
September 1996 September 2007 50,000 $ 1.75
September 2007 65,000 $ 1.34
November 1996 November 2002 10,000 $ 1.39
February 1997 September 1999 20,000 $ 1.59
February 2003 90,000 $ 1.59
February 2007 845,750 $ 1.59
March 1997 March 2001 159,000 $ 1.75
March 2007 10,000 $ 1.66
March 2008 239,473 $ 1.38
April 1997 April 2003 15,000 $ 1.22
January 1998 October 2005 22,000 $ 2.22
February 1998 January 2003 502,314 $ 2.66
January 2003 150,566 $ 2.28
December 1998 December 2001 18,824 $ 1.95
December 2001 18,113 $ 2.11
--------- ------
Total shares and average
exercise price 4,383,741 $ 2.01
========= ======
F-16
Pharmos Corporation
Notes to Consolidated Financial Statements
10. 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 12/31/96 513,253 $2.13
Expired (86,834) $1.74
--------- -----
Options outstanding at 12/31/97 426,419 $2.21
Granted 627,917 $2.63
Exercised (6,000) $1.94
Expired (34,000) $2.27
--------- -----
Options Outstanding at 12/31/98 1,014,336 $2.47
========= =====
Options exercisable at 12/31/98 382,086 $2.24
========= =====
The exercise prices of outstanding incentive stock options at December 31,
1998 range from $ 1.94 to $ 2.78 per share and have an weighted average
remaining contractual life of 8.3 years.
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 12/31/96 432,182 $ 3.12
Expired (25,000) $10.50
-------- ------
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
======== ======
Options exercisable at 12/31/98 441,440 $ 2.62
======== ======
The exercise prices of outstanding nonqualified stock options at December
31, 1998 range from $ 1.75 to $ 5.20 per share and have an weighted average
remaining contractual life of 6.0 years.
The Company has 500,000 options available for grant at December 31, 1998.
F-17
Pharmos Corporation
Notes to Consolidated Financial Statements
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 and warrant grants 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 $478,000, or
$ .01 per share in 1998 and $305,000, or $.01 per share in 1997 and
$203,000 or $.01 per share in 1996 before deducting the value of stock
options that were canceled in 1995. The fair value of options and warrants
granted to employees, officers, and directors from 1996 through 1998 are
estimated at $.51 to $1.44 on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: dividend yield 0%,
volatility of 50%, risk-free interest rate of 6.5%, assumed forfeiture rate
of 3%, and an expected life of 3 to 5 years.
11. Long Term Debt
As of December 31, 1998, Pharmos Limited has an unused line of credit of
$50,000 denominated in New Israeli Shekels.
12. Income Taxes
No provision for income taxes was recorded for the three years ended
December 31, 1998 due to net operating losses incurred. Net operating loss
carryforwards for U.S. tax purposes of approximately $60,956,000 expire
from 2000 through 2013.
The Company's gross deferred tax assets of $26,900,000 and $25,087,000 at
December 31, 1998 and 1997, 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 2000.
The Company also has a long term lease on office facilities in New York,
which previously served as the Company's executive headquarters, which
expires in March 2000. The Company has entered into a non-cancelable
sublease agreement for this facility which expires in March 2000.
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.
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At December 31, 1998, the future minimum lease commitments and sublease
rental receivables with respect to non-cancelable operating leases with
initial terms in excess of one year are as follows:
Lease Sublease
Commitments Rentals
-------- ----------
1999 $447,395 $146,950
2000 213,854 36,738
2001 89,119 --
-------- --------
$750,368 $183,688
-------- --------
Rent expense during 1998, 1997 and 1996 amounted to $292,035, $410,856 and
$371,526 respectively. Rent expense in 1998, 1997 and 1996 is net of
$146,950, $308,608 and $499,106 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, 1998, 1997 or 1996. 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 $5,504, $10,090 and $11,363 in 1998,
1997 and 1996, respectively.
15. Estimated Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, grants and other
receivables, accounts payable and accrued expenses are reasonable estimates
of their fair values. Due to the uncertainty of the timing of future
product sales it is not practical to estimate the fair value of advances
against future sales which have a carrying value of $4,427,254 at December
31, 1998. The estimated fair values of all other financial instruments
approximate, or are not materially different, than their carrying values.
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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, 1998, 1997 and
1996 are as follows:
1998 1997 1996
----------- ----------- -----------
Net revenues
United States $ 1,539,941 -- --
Israel -- -- --
----------- ----------- -----------
$ 1,539,941 -- --
----------- ----------- -----------
Net loss
United States ($4,480,022) ($7,660,521) ($7,865,918)
Israel (183,325) (156,778) (211,292)
----------- ----------- -----------
($4,663,347) ($7,817,299) ($8,077,210)
----------- ----------- -----------
Total assets
United States $ 6,478,552 $ 7,058,724 $ 6,684,973
Israel 1,588,118 1,363,119 783,320
----------- ----------- -----------
$ 8,066,670 $ 8,421,843 $ 7,468,293
=========== =========== ===========
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