resources on other CB2 compounds that have greater potential from multiple aspects. Cannabinor will be available for outlicensing.
The results for the three and six months ended June 30, 2007 and 2006 were a net loss of $4.6 and $4.1 million and a net loss of $9.4 million and $7.1 million, respectively. On a loss per share basis, this equates to $(0.18) and $(0.21) for the quarter and $(0.37) and $(0.37) for the first half, respectively.
Except for 2001, the Company has experienced operating losses every year since inception in funding the research, development and clinical testing of our drug candidates. As of June 30, 2007, the Company’s accumulated deficit was approximately $190.4 million. The Company expects to incur additional losses over the next several years as the Company’s research and development and clinical trial programs continue. The Company’s ability to achieve profitability, if ever, is dependent on its ability to develop and obtain regulatory approvals for its product candidates, to enter into agreements for product development and commercialization with strategic corporate partners and contract to develop or acquire the capacity to manufacture and sell its products.
On August 6, 2007 the board of Pharmos approved a detailed restructuring and cost reduction plan for the Company’s operations in Israel. The plan involves a workforce reduction from 41 employees to 23 employees. Certain key functions that were previously conducted on site will be outsourced and certain equipment will be sold or leased to third parties.
The restructuring plan will enable the Company to continue its scientific research and development programs and better manage existing cash resources.
The Company does not expect a material charge to operations as a result of these actions. Severance arrangements in Israel are largely covered by deposited funds with insurance policies and by an accrual.
Results of Operations
Three Months ended June 30, 2007 and 2006
Total operating expenses for the second quarter of 2007 increased by $281,160 or 6%, from $4,596,064 in 2006 to $4,877,224 in 2007.
Research & development gross expenses increased by $1,285,056 or 54% from $2,381,974 to $3,667,030 in 2007, related to increased clinical study activities over 2006. The Company recorded research and development grant receivables from the Office of the Chief Scientist of Israel’s Ministry of Industry and Trade of $194,308 and $367,626 during the second quarter of 2007 and 2006, respectively, which reduced research and development expenses. Total research and development expenses, net of grants, increased by $1,458,374 or 72%, from $2,014,348 in 2006 to $3,472,722 in 2007. The Company considers major research & development projects to be those projects that have reached at least Phase II level of clinical development.
During the second quarter, the Company commenced a Phase IIb trial of its lead compound, dextofisopam, in female IBS patients, which is expected to enroll approximately 480 patients in about 70 sites over an 18 month period. Costs of $2.2 million were incurred during the quarter in connection with the trial, comprising approximately $1.2 million for CRO-related activities, site selection and evaluation, investigator meetings and CMC packaging, and a $1.0 million research and development milestone payment made by Pharmos upon the study’s commencement. Dextofisopam was one of the compounds the Company obtained through the acquisition of Vela Pharmaceuticals Inc which closed in October 2006. The continued development of this compound through late-stage clinical testing will significantly increase the research and development expenses going forward.
Additional research and development expenses were incurred during the quarter in preparing for a Phase 2a clinical trial with NanoEmulsion-diclofenac for Osteoarthritic pain. On June 27, 2007 the Company announced that patient screening has commenced in this Phase 2a trial.
Also during the quarter, the Company completed a Phase IIa study of an intravenous formulation of cannabinor in a nociceptive pain model. The results of an earlier, separate Phase IIa study of intravenous cannabinor in an experimentally induced pain model were announced in the first quarter 2007. During the second quarter of 2007, the gross cost of development and review of cannabinor was approximately $0.2 million. Total costs since the cannabinor project entered Phase II development in 2006 through June 30, 2007 were $3.5 million.
Gross expenses for other research and development projects in early stages of development for the second quarter of 2007 and 2006 were $772,000 and $747,000, respectively.
General and administrative expenses for the second quarter of 2007 decreased by $1,157,887, or 46%, from $2,495,322 in 2006 to $1,337,435. The decrease primarily reflects 2006 non recurring professional fees and investor relations costs of $661,000 that relate to legal matters associated with the Vela acquisition and a 2006 officer’s severance payment of $379,000.
Depreciation and amortization expenses decreased by $19,327, or 22%, from $86,394 in 2006 to $67,067 in 2007. The decrease is due to fixed assets which have become fully depreciated.
Other income (expense) net, decreased by $257,867 from $497,688 in 2006 to $239,821 in 2007. The majority of the decrease is from decreased interest income from a decline in cash, cash equivalents and short term investments. During the quarter, the Company recorded, in other income, royalties of $1,155 compared with $657 in 2006 per the licensing agreement with Herbamed Ltd, a company controlled by Dr. Haim Aviv, the Company’s Chairman and former CEO.
No tax provision is required at this time since the Company expects to be in a tax loss position at year-end December 31, 2007 and has net operating losses from previous years. The Company has established a 100% valuation allowance against the deferred tax asset.
Six Months ended June 30, 2007 and 2006
Total operating expenses for the first half 2007 ended June 30, 2007 increased by $1,923,338 or 24% from $8,054,248 in 2006 to $9,977,586 in 2007.
Research & development gross expenses increased by $2,324,681 or 55% from $4,249,088 in 2006 to $6,573,769 in 2007, related to an increase in clinical activities. The Company recorded research and development grant receivables from the Office of the Chief Scientist of Israel’s Ministry of Industry and Trade of $530,949 and $668,261 during the first half of 2007 and 2006,
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respectively, which reduced research and development expenses. Total research and development expenses, net of grants, increased by $2,461,993 or 69% from $3,580,827 in 2006 to $6,042,820 in 2007. The Company considers major research & development projects to be those projects that have reached at least Phase II level of clinical development.
During the first half of 2007, the Company commenced a Phase IIb trial of its lead compound, dextofisopam, in female IBS patients, which is expected to enroll approximately 480 patients in about 70 sites over an 18 month period. Costs of $3.1 million were incurred during the first half in connection with the trial, comprising approximately $2.1 million for CRO-related activities, site selection and evaluation, investigator meetings and CMC packaging, and a $1.0 million milestone payment made by Pharmos upon the study’s commencement. Dextofisopam was one of the compounds the Company obtained through the acquisition of Vela Pharmaceuticals Inc which closed in October 2006. The continued development of this compound through late-stage clinical testing will significantly increase the research and development expenses going forward.
Additional research and development expenses were incurred during the quarter in preparing for a Phase 2a clinical trial with NanoEmulsion-diclofenac for Osteoarthritic pain. On June 27, 2007 the Company announced that patient screening has commenced in this Phase 2a trial.
Also during the first half of 2007 the Company completed a Phase IIa study of an intravenous formulation of cannabinor in a nociceptive pain model and a separate Phase IIa study of intravenous cannabinor in an experimentally induced pain model. During the first half of 2007, the gross cost of development and review of cannabinor was approximately $2.3 million. Total costs since the cannabinor project entered Phase II development in 2006 through June 30, 2007 were $3.5 million.
Gross expenses for other research and development projects in early stages of development for the first half of 2007 and 2006 were $1,458,000 and $1,531,000, respectively.
General and administrative expenses for the first half 2007 decreased by $510,412, or 12% from $4,308,543 in 2006 to $3,798,131. The decrease primarily reflects 2006 non recurring professional fees and investor relations costs of $568,000 that relate to legal matters associated with the Vela acquisition and a reduction in insurance costs of $194,000 in the first half 2007 reflecting favorable renewal rates and reduced policy coverage limits. These reductions are offset in part by a $250,000 consulting fee paid in 2007 to a former officer in accordance with their employment agreement.
Depreciation and amortization expenses decreased by $28,243, or 17%, from $164,878 in 2006 to $136,635 in 2007. The decrease is due to fixed assets which have become fully depreciated.
Other income (expense), net, decreased by $366,098 from income of $953,186 in 2006 to income of $587,088 in 2007. The majority of the decreases is from decreased interest income from a decline in cash, cash equivalents and short term investments. During the first half 2007, the Company recorded in other income royalties of $2,052 compared with $1,648 in the first half of 2006 per the licensing agreement with Herbamed Ltd, a company controlled by Dr. Haim Aviv, the Company’s Chairman and former CEO.
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Liquidity and Capital Resources
The Company incurred cumulative operating losses since 2002 and had an accumulated deficit of $190.4 million at June 30, 2007. The Company has financed its operations with public and private offerings of securities, advances and other funding pursuant to a marketing and asset agreement with Bausch & Lomb, grants from the Office of the Chief Scientist of Israel, research contracts, the sale of a portion of its New Jersey State Net Operating Loss carryforwards, and interest income. Should the Company be unable to raise adequate financing or generate revenue in the future, operations will need to be scaled back or discontinued.
The following table describes the Company’s liquidity and financial position on June 30, 2007, and on December 31, 2006:
| | | | | | | | | | | |
| | June 30, 2007 | | December 31, 2006 | |
| |
| |
| |
|
Working capital | | | $ | 15,655,783 | | | | $ | 24,168,153 | | |
| | | | | | | | | | | |
Cash and cash equivalents | | | $ | 12,131,642 | | | | $ | 12,757,013 | | |
| | | | | | | | | | | |
Short term investments | | | $ | 5,114,366 | | | | $ | 13,172,673 | | |
| | | | | | | | | | | |
Total cash, cash equivalents and short term investments | | | $ | 17,246,008 | | | | $ | 25,929,686 | | |
Current working capital position
As of June 30, 2007, the Company had working capital of $15.7 million consisting of current assets of $17.9 million and current liabilities of $2.2 million. This represents a decrease of $8.5 million from its working capital of $24.2 million on current assets of $26.7 million and current liabilities of $2.5 million as of December 31, 2006. This decrease in working capital of $8.5 million was principally associated with the funding of research and development and general and administrative activities.
Current and future liquidity position
Management believes that the current cash, cash equivalents and short term investments, totaling $17.2 million as of June 30, 2007, will be sufficient to support the Company’s continuing operations through June 30, 2008. The Company routinely pursues various funding options, including additional equity offerings, equity-like financing, strategic corporate alliances, business combinations and the establishment of product related research and development limited partnerships, to obtain additional financing to continue the development of its products and bring them to commercial markets. Should the Company be unable to raise adequate financing or generate revenue in the future, long-term operations will need to be scaled back or discontinued.
Cash
At June 30, 2007, cash and cash equivalents totaled $12.1 million. At December 31, 2006 cash and cash equivalents totaled $12.8 million. This net decrease in cash of $0.7 million was due to the net conversion of $8.1 million of short term investments into cash and $8.8 million for normal operating requirements. The cash, cash equivalents and short term investments will be used to fund Research & Development activities and general and administrative costs.
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Operating activities
Net cash used in operating activities for the first six months of 2007 was $8.8 million compared to net cash used of $5.6 million for the first six months of 2006. The increase in cash used of $3.2 million is primarily due to higher R&D spending related to the initiation of the Dextofisopam Phase IIb trial in 2007 including a milestone payment of $1.0 million.
Investing activities
During the first six months of 2007, the Company had net investment proceeds in short term investments of $8.1 million, fixed asset purchases of $0.1 million, proceeds from the disposition of assets of $0.1 million and a severance pay funding benefit of $0.1 million.
Capital expenditures for property, plant and equipment for the six months ended June 30, 2007 and 2006 totaled approximately $132,000 and $130,000, respectively for normal replacements and improvements.
The proceeds from the disposition of fixed assets include $65,000 for the discounted sale of a vehicle to a former officer in accordance with the terms of his employment agreement.
Financing activities
There were no financing activities in the first six months of 2007 or 2006.
Commitment and Contingencies
As of June 30, 2007, the Company had the following contractual commitments and long-term obligations:
| | | | | | | | | | | | | | | | | | | |
| | Total | | Less than
1 Year | | 1 - 3
Years | | 3 - 5
Years | | More than
5 Years | | Undetermined |
| |
| |
| |
| |
| |
| |
|
|
Operating Leases | | $ | 753,698 | | $ | 409,489 | | $ | 344,209 | | $ 0 | | | $ — | | | $ | — | |
Other long-term liabilities reflected on our balance sheet* | | | 1,203,275 | | | — | | | — | | — | | | — | | | | 1,203,275 | |
| |
|
| |
|
| |
|
| |
| | |
| | |
|
| |
Total | | $ | 1,956,973 | | $ | 409,489 | | $ | 344,209 | | $ 0 | | | $ — | | | $ | 1,203,275 | |
| |
|
| |
|
| |
|
| |
| | |
| | |
|
| |
| |
* | Consists of severance benefits payable under Israeli law. Because these benefits are paid only upon termination of employment, it is not possible to allocate the liability across future years. The Company has funded $837,779. |
In connection with the acquisition of Vela Pharmaceuticals which closed on October 25, 2006 the Company is obligated to pay certain performance based milestones connected to the development of dextofisopam.
The $1.0 million cash milestone payable when the first patient enrolled in the Phase 2b trial was paid on June 26, 2007 as that milestone was achieved in the second quarter of 2007. Such amount was included in research and development expense (net).
The remaining milestones are as follows:
| |
• | $1 million cash + 2 million shares of Pharmos common stock: Final patient enrolled in Phase 2b trial |
| |
• | $2 million cash + 2.25 million shares: Successful completion of Phase 2b |
| |
• | $2 million + 2 million shares: NDA submission |
| |
• | $2 million cash +2.25 million shares: FDA approval |
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• | 1 million shares: Approval to market in Europe or Japan |
| |
• | 4 million shares: $100 million sales of dextofisopam, when and if approved, in any 12-month period |
New accounting pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-
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value measurements. SFAS 157 applies only to fair value measurements that are already required or permitted by other accounting standards (except for measurements of share-based payments) and is expected to increase the consistency of those measurements. Accordingly, SFAS 157 does not require any new fair value measurements. However, for some entities, the application of SFAS 157 will change current practice. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of SFAS 157 to have a material impact on our consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115” (SFAS No. 159), which is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. SFAS No. 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings. The Company is currently evaluating the impact that SFAS No. 159 will have on its consolidated financial statements.
On June 27, 2007, the FASB reached a final consensus on Emerging Issues Task Force Issue 07-3, “Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (“EITF 07-03”). Currently, under FASB Statement No. 2, “Accounting for Research and Development Costs”, nonrefundable advance payments for future research and development activities for materials, equipment, facilities, and purchased intangible assets that have no alternative future use are expensed as incurred. EITF 07-03 addresses whether such non-refundable advance payments for goods or services that have no alternative future use and that will be used or rendered for research and development activities should be expensed when the advance payments are made or when the research and development activities have been performed. The consensus reached by the FASB requires companies involved in research and development activities to capitalize such non-refundable advance payments for goods and services pursuant to an executory contractual arrangement because the right to receive those services in the future represents a probable future economic benefit. Those advance payments will be capitalized until the goods have been delivered or the related services have been performed. Entities will be required to evaluate whether they expect the goods or services to be rendered. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment will be charged to expense. The consensus on EITF 07-03 is effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Earlier application is not permitted. Entities are required to recognize the effects of applying the guidance in EITF 07-03 prospectively for new contracts entered into after the effective date. The Company is in the process of evaluating the expected impact of EITF 07-03 on its financial position and results of operations following adoption.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We assessed our vulnerability to certain market risks, including interest rate risk associated with financial instruments included in cash, cash equivalents, short term investments and the currency impact in Israel. Due to the relatively short-term nature of these investments the Company has determined that the risks associated with interest rate fluctuations related to these financial instruments do not pose a material risk to us. The value of the warrant liability is generally based upon the Company’s stock price.
Item 4T. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of Pharmos’ disclosure controls and procedures (as defined in Section13a-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of Pharmos’ Chief Executive Officer and Chief Financial Officer and several other members of Pharmos’ senior management at June 30, 2007. Based on this evaluation, Pharmos’ Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2007, Pharmos’ disclosure controls and procedures were effective, at a reasonable level of assurance, in ensuring that the information required to be disclosed by Pharmos in the reports it files or submits under the Act is (i) accumulated and communicated to Pharmos’ management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Changes in Internal Control over Financial Reporting: There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II Other Information
Item 1 Legal Proceedings
Class Action Suits
The Company and certain current officers have been named as defendants in several purported shareholder class action lawsuits alleging violations of federal securities laws. These lawsuits were filed beginning in January 2005 and are pending in the U.S. District Court for the District of New Jersey. These lawsuits assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaints allege generally that the defendants knowingly or recklessly made false or misleading statements regarding the effectiveness of dexanabinol in treating TBI (Traumatic Brain Injury) which had the effect of artificially inflating the price of the Company’s common stock. The complaints seek unspecified damages. These class actions have been consolidated by order of the court and lead plaintiffs and lead plaintiffs’ counsel have been appointed. An amended complaint was filed in September 2005.
On May 31, 2007, the Company entered into an agreement with plaintiffs to settle the class action lawsuits that commenced starting in January 2005 and are currently pending in the U.S. District Court for the District of New Jersey. The lawsuits relate to statements purportedly made by Pharmos and its officers regarding the effectiveness of dexanabinol in treating traumatic brain injury.
The settlement, which is covered in its entirety by Pharmos’ insurance, has been reached with no admission of liability by any party and has been entered into to avoid costly and time consuming litigation by all parties. The parties agreed to seek the required court approvals of the settlement and filed the settlement documents with the Court on June 4, 2007. On July 18, 2007, the Court granted preliminary approval of the settlement. The settlement is subject to final court approval. There is no assurance that the settlement will be approved by the Court.
Both of the previously disclosed derivative lawsuits (which alleged, generally, breaches of fiduciary duty and other state law violations arising from the same set of underlying facts as the class actions) have been settled, court approval has been obtained, the settlements are final and the cases have been dismissed with prejudice.
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There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.
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Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | NONE |
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Item 3 | Defaults upon Senior Securities | NONE |
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Item 4 | Submission of Matters to Vote of Security Holders | NONE |
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Item 5 | Other Information | NONE |
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Item 6 | Exhibits | |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| PHARMOS CORPORATION |
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Dated: August 8, 2007 | |
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| by: | /s/ S. Colin Neill |
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|
| |
| S. Colin Neill |
| Senior Vice President and Chief Financial Officer |
| (Principal Accounting and Financial Officer) |
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