PHARMOS CORP - FORM 10-Q - April 28, 2011

Attached files

file	filename
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - PHARMOS CORP	ex312.htm
EX-32.2 - SECTION 1350 CERTIFICATION - PHARMOS CORP	ex322.htm
EX-32.1 - SECTION 1350 CERTIFICATION - PHARMOS CORP	ex321.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - PHARMOS CORP	ex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-11550

Pharmos Corporation

(Exact name of registrant as specified in its charter)

	Nevada		36-3207413
	(State or other jurisdiction of incorporation or organization)		(IRS Employer Id. No.)

99 Wood Avenue South, Suite 302

Iselin, NJ 08830

(Address of principal executive offices)

Registrant's telephone number, including area code: (732) 452-9556

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Non-accelerated filer o

Accelerated filer o

Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x .

As of April 28, 2011, the Registrant had outstanding 59,732,332 shares of its $.03 par value Common Stock.

PART I FINANCIAL INFORMATION		Page

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010		1

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010		2

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010		3

	Notes to Condensed Consolidated Financial Statements		4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		15

Item 4	Controls and Procedures		15

PART II OTHER INFORMATION

Item 1.	Legal Proceedings		16

Item 1A.	Risk Factors		16

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		16

Item 3.	Defaults Upon Senior Securities		16

Item 4.	Submission of Matters to a Vote of Security Holders		16

Item 5.	Other Information		16

Item 6.	Exhibits		17

SIGNATURES			18

Part I.

Financial Information

Item 1

Financial Statements

PHARMOS CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)
	March 31, 2011			December 31, 2010
Assets
Cash and cash equivalents	$	2,777,520		$	3,139,347
Prepaid expenses and other current assets		95,006			46,833
Total current assets		2,872,526			3,186,180

Fixed assets, net		4,987			5,613

Total assets	$	2,877,513		$	3,191,793

Liabilities and Shareholders’ Equity
Accounts payable	$	303,301		$	67,199
Accrued expenses		66,846			103,913
Total current liabilities		370,147			171,112

Convertible debenture		1,000,000			1,000,000
Total liabilities		1,370,147			1,171,112


Shareholders’ Equity
Preferred stock, $.03 par value, 1,250,000 shares authorized, none issued and outstanding		-			-
Common stock, $.03 par value; 120,000,000 shares
authorized, 59,732,332 and 59,585,273 issued and outstanding as of
March 31, 2011 and December 31, 2010, respectively		1,791,970			1,787,558
Paid-in capital in excess of par		211,672,786			211,587,386
Accumulated deficit		(211,956,964	)		(211,353,837	)
Treasury stock, at cost, 2,838 shares		(426	)		(426	)
Total shareholders' equity		1,507,366			2,020,681

Total liabilities and shareholders' equity	$	2,877,513		$	3,191,793

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

PHARMOS CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

	Three months ended March 31,
	2011			2010
Expenses
Research and development	$	281,783		$	122,995
General and administrative		294,345			339,314
Depreciation and amortization		626			465
Total operating expenses		576,754			462,774

Loss from operations		(576,754	)		(462,774	)

Other (expense) income
Interest income		96			287
Interest expense		(26,469	)		(28,374	)
Other expense		-			(516	)
Other expense		(26,373	)		(28,603	)

Net loss	$	(603,127	)	$	(491,377	)

Net loss per share
- basic and diluted	$	(0.01	)	$	(0.01	)

Weighted average shares outstanding
- basic and diluted		58,994,984			58,210,866

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

Pharmos Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three months ended March 31,
	2011			2010
Cash flows from operating activities
Net loss	$	(603,127	)	$	(491,377	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		626			465
Amortization of deferred financing fees		1,469			3,374
Stock based compensation		39,813			46,487
Interest paid in common stock		25,000			25,000
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(49,643	)		(82,511	)
Accounts payable		236,102			3,273
Accrued expenses		(12,067	)		(54,710	)
Accrued wages and other compensation		-			(195,000	)

Net cash used in operating activities		(361,827	)		(744,999	)

Net decrease in cash and cash equivalents		(361,827	)		(744,999	)

Cash and cash equivalents at beginning of year		3,139,347			4,629,486

Cash and cash equivalents at end of period	$	2,777,520		$	3,884,487

Supplemental disclosure of non-cash investing and financing activities:
Common shares issued for accrued interest	$	50,000		$	50,000

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

Notes to Condensed Consolidated Financial Statements (unaudited)

Basis of Presentation, Liquidity and Business Risks

The accompanying unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accrual adjustments, considered necessary for a fair statement have been included. Operating results and cash flows for the three month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The December 31, 2010 condensed consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America and included in the Form 10-K filing.

At March 31, 2011, the Company had approximately $2.8 million in cash and cash equivalents. However, the Company’s ability to continue as a going concern is largely dependent upon achieving a collaboration with a pharmaceutical partner or raising additional capital to advance its lead compounds, Dextofisopam, for the treatment of IBS, and Levotofisopam, for the treatment of gout. The Company continues to pursue various funding and financing options; however management believes that future funding or financing options may be challenging because of the current environment.

The Company does not currently have the finances and resources to perform large clinical trials for its most advanced compound, Dextofisopam. During the quarter, the Company conducted work to initiate a proof-of-concept trial in gout patients using S-Tofisopam. The Company currently has sufficient financial resources to fund this clinical trial, but not to advance Dextofisopam.

As such these factors raise substantial doubt as to the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from this uncertainty.

1. The Company

Pharmos Corporation (the Company or Pharmos) is a biopharmaceutical company that discovers and develops novel therapeutics to treat a range of diseases of the nervous system, including disorders of the brain-gut axis (e.g., Irritable Bowel Syndrome), with a focus on pain/inflammation, and autoimmune disorders.

Pharmos owns the rights to both R and S Tofisopam through two US issued composition of matter patents. These are the two enantiomers of racemic tofisopam that has been used safely outside the United States for over 30 years. Dextofisopam is the R enantiomer and is being developed for the treatment of irritable bowel syndrome (IBS) and as described below has completed clinical testing through Phase 2b. It is a large unmet medical need but Pharmos does not have the financial resources to fund large IBS trials and therefore seeks a pharmaceutical company as a partner. Levotofisopam is the S enantiomer and is being developed as a treatment for gout.

The Company’s operations in Israel were closed effective October 2008 and the Company has been actively seeking to sell and license the CB2 selective agonist program that had been developed in Israel.

Levotofisopam (S-Tofisopam) for treatment of Gout.

During the quarter, the Company conducted work to initiate a proof-of-concept trial in gout patients using Levotofisopam. Two ex-US Phase 1 clinical studies were completed by Vela Pharmaceuticals (merged with Pharmos in October 2006). In these studies, conducted in healthy volunteers in the United Kingdom and The Netherlands, Levotofisopam treatment was generally well tolerated and was associated with a large and rapid reduction in mean uric acid values.

The lowering of uric acid is believed to be a key treatment in gout patients. The precise mechanism by which Levotofisopam lowers uric acid is unknown. However, unlike allopurinol, a drug commonly used to treat gout patients, Levotofisopam does not inhibit xanthine oxidase. Available data indicate that the predominant mechanism of the serum-urate lowering effect of levotofisopam in humans is through uricosuric activity rather than inhibition of urate synthesis. A precondition leading in some cases to gout is hyperuricemia, which leads to increased pools of insoluable urate. Chronic hyperuricemia can lead to destructive gouty arthritis, formation of kidney stones, urate nephropathy, and /or tophi (crystal aggregates), which can produce grotesque malformations of the hands, feets, or other portions of the body. Hyperuricemia is caused either by an overproduction of or, more usually (80-90% of cases), underexcretion of uric acid, the metabolic product of purine metabolism.

During the quarter, the Company incurred costs associated with conducting work to initiate a proof-of-concept trial in gout patients using Levotofisopam, including the manufacturing of clinical trial material.

Summary of Dextofisopam development through Phase 2b

The Company's most advanced product is Dextofisopam for the treatment of irritable bowel syndrome (IBS). IBS is a chronic and sometimes debilitating condition that affects roughly 10%-15% of U.S. adults and is two to three times more prevalent in women than in men. With an absence of safe and effective therapies, Dextofisopam’s novel non-serotonergic activity holds the potential for a unique and innovative treatment approach to IBS with diarrhea predominant and alternating patients.

As described below, the Phase 2b Dextofisopam trial did not meet its primary endpoint. The Company’s focus was on further understanding the Dextofisopam Phase 2b results and discussing these with potential pharmaceutical partners and investment funds to participate in conducting an additional clinical trial as the next development stage for Dextofisopam. The Company estimates that the cost of such a trial would be in the $8 million to $10 million range. As the Company does not have sufficient funds to proceed with development, the Company needs to secure a partner and /or funding source.

In September 2009, the Company announced the results of its Phase 2b Dextofisopam clinical trial to evaluate safety and efficacy of the compound in irritable bowel syndrome.

Although the primary efficacy variable (% of weeks responding for adequate overall relief of IBS symptoms) did not reach statistical significance, the percentage responding for the Dextofisopam 200 mg group was higher than that observed for the Phase 2a trial. However, the placebo response rate was also higher than expected compared to the Phase 2a placebo response.

This result was similarly demonstrated across all other secondary efficacy variables associated with the adequate overall relief question. In all cases except in the first month, the response rates for the Dextofisopam 200 mg group were essentially the same as or in most cases better than the response rates observed for the Phase 2a trial.

Also, secondary response variables of adequate relief of abdominal pain and discomfort and overall IBS symptoms ratings showed statistical significance and trends favoring the Dextofisopam 200 mg group compared to placebo.

The Company’s strategy is to seek a pharmaceutical partner with the appropriate GI clinical and scientific expertise for further development of Dextofisopam.

The CB2 selective receptor agonist program

Pharmos’ cannabinoid research was geared toward development of selective and specific CB2 receptor agonists. By activating CB2 receptors, CB2 agonists inhibit autoimmune and inflammatory processes, and are likely to be useful for treating pain, autoimmune, inflammatory and degenerative disorders. Although progress has been made, the early stage of this work and resource limitations have resulted in termination of these programs. Pharmos’ strategy is to sell or out license the technology developed around the cannabinoid research. Pharmos had developed these compounds in preclinical testing for neuropathic pain.

Effective October 31, 2008 the Company ceased operations in Rehovot, Israel, and managed those activities out of the Company’s US headquarters in Iselin, New Jersey. The voluntary liquidation of the Company’s subsidiary in Israel, Pharmos Ltd. was completed in May of 2010.

Substantial development work was conducted on the CB2 selective agonist program in Israel from 2002 through 2008. The Company expended approximately $15 million on this development program and these assets are available for sale or licensing. During the quarter the Company engaged in discussions on the possible licensing and or sale of the CB2 program.

2. Significant Accounting Policies

Basis of consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Pharmos Ltd. and Vela Pharmaceuticals. All significant intercompany balances and transactions are eliminated in consolidation. Vela Acquisition Corp. is dormant and was used as the vehicle to acquire Vela Pharmaceuticals Inc. in October 2006. The Israel operations, including research and development activities, ceased effective October 31, 2008 and the Company completed its voluntary liquidation in May 2010.

Cash and Cash Equivalents

Cash and Cash Equivalents as of March 31, 2011 consist primarily of a money market fund invested in short term government obligations.

Concentration of Credit Risk

Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents. The Company maintains its cash and cash equivalent balances with a high quality financial institution who invests the Company’s funds in Government short-term instruments. Consequently the Company believes that such funds are subject to minimal credit risk.

Grants

The costs and expenses of research and development activities are partially funded by grants the Company received. The grants are deducted from research and development expenses at the time such grants are received.

Income Taxes

The Company accounts for income taxes in accordance with the provisions of FASB ASC Topic 740. “Accounting for Income Taxes” (“ASC – Topic 740”). Under the asset and liability method of Topic 740, 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 Topic 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.

The Company follows the guidance of Financial Accounting Standards Board interpretation in ASC Topic 740 which covers, Accounting for Uncertainty in Income Taxes. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. Measurement of the tax uncertainty occurs if the recognition threshold has been met. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Pharmos conducts business in the US and as a result, files US and New Jersey income tax returns. The Company announced that effective October 31, 2008 it would cease operations in Rehovot, Israel. In the normal course of business, the Company is subject to examination by taxing authorities. At present, there are no ongoing audits or unresolved disputes with the various tax authorities that the Company files with. Given the Company’s substantial net operating loss carryforwards (“NOLs”), which are subject to a full valuation allowance as well as the historical operating losses, there was no effect on our financial position, results of operations or cash flows related to this Interpretation.

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 other income (expense). Such gains and losses were insignificant in 2010 while in 2011 there were none.

Fair value of financial instruments

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, other assets, accounts payable and accrued liabilities approximate fair value due to their short term maturities.

The Company has estimated the fair value of the $1,000,000 outstanding convertible debenture due November 1, 2012 to be approximately $540,000 at March 31, 2011. In determining the fair value the Company used level 3 inputs (unobservable) discount rate of 35%. Management used a discount rate they believe was most relevant given the business risks described in Note 2 of the financial statements and because they have been unable to raise third party financing during the past several years.

Equity based compensation

During the three months ended March 31, 2011 and 2010, the Company recognized equity based compensation expense of $39,813 and $46,487, respectively, for restricted stock and stock options. As of March 31, 2011, the total compensation costs related to non-vested stock options not yet recognized is $186,305 and the Executive Chairman of the Board Robert Johnston’s non-vested restricted stock not yet recognized is $137,500 which will be recognized over the remaining requisite service period.

During the three months ended March 31, 2011 and 2010, executive and outside directors of the Company were granted stock options under the Pharmos 2000 and 2009 Stock Option Plan per the table below:

Period Ended	Grants Issued		Weighted Average Exercise Price		Weighted Average Fair Value

March 31, 2011		1,120,000	$	0.09	$	0.07
March 31, 2010		70,000	$	0.08	$	0.07

3. Convertible Debentures

On January 3, 2008, Pharmos Corporation completed a private placement of its 10% Convertible Debentures due November 2012. At the closing the Company issued $4,000,000 principal amount of the Debentures, at par, and received gross proceeds in the same amount. The purchasers consisted of certain existing investors in the Company, namely Venrock Associates (which is affiliated with Anthony B. Evnin), New Enterprise Associates (which is affiliated with Charles W. Newhall, III), Lloyd I. Miller, III and Robert F. Johnston.

The Debentures mature the earlier of November 1, 2012 or the sale of the Company. The Debentures, together with all accrued and unpaid interest thereon, may be repaid, without premium or penalty, commencing on November 1, 2011. Starting on November 1, 2009 (or earlier sale of the Company), any outstanding Debenture may be converted into common shares at the option of the holder. The conversion price is fixed equal to $0.70 per share. The Debentures bear interest at the rate of 10% per annum, payable semi-annually either in cash or common stock of the Company at the option of the Company, provided that an effective registration statement is in effect.

On April 21, 2009, Venrock Associates (which is affiliated with Anthony B. Evnin, a Director of the Company), New Enterprise Associates (which is affiliated with Charles W. Newhall, III, a Director of the Company) and Robert F. Johnston, the Company’s Executive Chairman of the Board of Directors, agreed to convert as of such date the Company’s 10% Convertible Debentures due November 1, 2012 held by them, comprising an aggregate of $3,000,000 in principal amount, at a conversion price of $0.275 per share. Accrued but unpaid interest on their debentures, aggregating $80,403, was also converted on such date, at a conversion price of $0.34 per share. An aggregate of 11,145,570 shares was issued upon conversion of the principal and accrued but unpaid interest on the debentures.

A registration statement covering the resale of the shares underlying the debenture held by Lloyd I. Miller, III, was declared effective in February 2011.

4.	Acquisition of Vela Pharmaceuticals, Inc.

In March 2006, the Company announced an agreement to acquire Vela Pharmaceuticals, Inc. (“Vela”), which had a Phase II product candidate, Dextofisopam, in development to treat IBS. The Company has dedicated substantial resources to complete clinical development of this product candidate. The Vela acquisition also included additional compounds in preclinical and/or clinical development for neuropathic pain, inflammation and sexual dysfunction. The final merger agreement, as amended, was approved by the Company’s shareholders on October 25, 2006.

Under the amended Merger Agreement, the Company issued 6.5 million shares of common stock and paid $6 million to Vela shareholders at closing. Pharmos also agreed to reimburse Vela for $679,000 of operating expenses from July 1, 2006 through closing. The amended Merger Agreement also includes additional performance-based milestone payments to the Vela stockholders related to the development of Dextofisopam, aggregating up to an additional $5 million in cash and the issuance of up to an additional 9,250,000 shares of Pharmos common stock. None of the milestone conditions were met at December 31, 2010 and March 31, 2011 except for a $1.0 million milestone payment made by Pharmos due upon the study’s commencement which was paid in 2008.

The remaining milestones are as follows:

· $1 million cash: Final patient enrolled in Phase 2b trial (1)

· $2 million + 2 million shares: NDA submission

· $2 million cash +2.25 million shares: FDA approval

· 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

(1) The milestone was reached when the final patient was enrolled in the Dextofisopam Phase 2b trial and was recognized in the first quarter of 2009 as all probability criteria were met. The milestone had two components, a cash portion of $1,000,000 and a share portion of 2,000,000 shares valued at $180,000. The total charge in the first quarter was $1,180,000. The shares were issued in November 2009 under the terms of the Amendment #3 to the agreement and plan of merger. Under that amendment the payment of the cash portion was deferred until such time as 1) the Company successfully entered into a strategic collaboration or licensing agreement with a third party for the development of Dextofisopam resulting in an upfront cash fee of at least $10 million, and 2) payment of the cash milestone would still leave the Company with one year’s operating cash.

The Company recorded the milestone in the first quarter as it met the accounting requirements of under ACS 450. The results of the Phase 2b trial were announced in September 2009 and reported that while there was clearly drug activity, the trial did not achieve its primary endpoint. Under the terms of the Vela acquisition agreement as amended, the 2 million shares were issued on November 2, 2009. The cash portion that was expensed in Q1 2009 was reversed in Q4 2009 since it is not deemed probable that the amended terms would be achieved. Since the trial results were not successful, no other milestones have been achieved.

5. Net Loss Per Common Share

Basic and diluted net loss per common share was computed by dividing the net loss for the period by the weighted average number of shares of common stock issued and outstanding. For the periods ending March 31, 2011 and 2010, other potential common stock has been excluded from the calculation of diluted net loss per common share, as their inclusion would be anti-dilutive.

The following table sets forth the number of potential shares of common stock that have been excluded from diluted loss per share since inclusion would have been anti-dilutive.

	March 31,
	2011		2010

Stock options		4,577,812		3,579,155
Convertible debenture		1,428,571		1,428,571
Restricted stock		675,000		1,200,000
Warrants		18,000,000		18,000,000

Total potential dilutive securities not included in loss per share		24,681,383		24,207,726

6. Common Stock Transactions

On May 11, 2009, Robert Johnston, the Executive Chairman, was awarded 1,200,000 shares of restricted stock. 300,000 of such shares became vested and free from a risk of forfeiture on the first anniversary of the date hereof, and the remaining 900,000 shares become vested and free from a risk of forfeiture in quarterly increments over a three-year period commencing on the first anniversary of the grant date. Over the four year period, a total of $264,000 will be recorded as compensation expense. In the first three months of 2011, the Company expensed $16,500 for Mr. Johnston’s restricted stock.

On September 3, 2010, Steven Leventer Ph.D., a new board member, was awarded 350,000 shares of non-qualified stock options. One-third of the options shall be exercisable as of the date hereof, one-third of the options shall be exercisable as of the first anniversary of the date hereof and one-third of the options shall be exercisable as of the second anniversary of the date hereof. In the first three months of 2011, the Company expensed $2,922 for Dr. Leventer’s stock options.

In the first quarter of 2011, the Company elected to pay the interest on its 10% Convertible Debentures due November 2012 incurred through the sixth interest payment date, January 15, 2011, in common stock to the remaining debenture holder. The dollar amount of interest incurred from July 15, 2010 to January 15, 2011 to be paid in stock amounted to $50,000 which, converted at $0.34 per share, resulted in an aggregate of 147,059 shares issued to the debenture holder.

As of March 31, 2011, the Company had reserved 4,577,812 common stock shares for outstanding stock options. The Company has outstanding warrants exercisable for 18,000,000 shares of common stock. The exercise price of the warrants, which have a five-year term and expires on April 21, 2014, is $0.12 per share.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This report on Form 10-Q contains information that may constitute "forward-looking statements." The use of words such as "believe," "expect," "intend," "estimate," "anticipate," "project," "will" and similar expressions identify forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. As and when made, we believe that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part I, "Item 1A. Risk Factors" of our Form 10-K for the year ended December 31, 2010 and elsewhere in this report and those described from time to time in our future reports filed with the Securities and Exchange Commission.

We do not undertake to discuss matters relating to our ongoing clinical trials or our regulatory strategies beyond those which have already been made public or discussed herein.

Executive Summary of 2011 Strategy and Operating Plan

Pharmos owns the rights to both R and S Tofisopam through two US issued composition of matter patents. These are the two enantiomers of racemic tofisopam that has been used safely outside the United States for over 30 years. Dextofisopam is the R enantiomer and is being developed for the treatment of irritable bowel syndrome (IBS) and as described below has completed clinical testing through Phase 2b. It is a large unmet medical need but Pharmos does not have the financial resources to fund the next trial and therefore seeks a pharmaceutical company as a partner.

Levotofisopam is the S-enantiomer of the racemic mixture RS-tofisopam, a well tolerated, effective, nonsedating agent used outside the United States for the treatment of a variety of disorders associated with stress or autonomic instability. During the quarter, the Company conducted work to initiate a proof-of-concept trial in gout patients using Levotofisopam. Two ex-US Phase 1 clinical studies were completed by Vela Pharmaceuticals (merged with Pharmos in October 2006). In these studies, conducted in healthy volunteers in the United Kingdom and The Netherlands, Levotofisopam treatment was generally well tolerated and was associated with a large and rapid reduction in mean uric acid values.

Pharmos’ most advanced compound is Dextofisopam, which has completed a Phase 2a double-blind, placebo-controlled trial with patients having diarrhea-predominant or alternating IBS with positive effect on primary efficacy endpoint (n=141, p=0.033). In this study, Dextofisopam was well-tolerated and demonstrated significant improvement over placebo, suggesting that Dextofisopam has the potential to become a novel first line treatment for IBS. Pharmos initiated a Phase 2b trial in February 2007 and in June 2007 the Company announced patient screening had commenced. Dextofisopam is the R-enantiomer of racemic tofisopam, a molecule marketed and used safely outside the United States for over three decades for multiple indications including IBS. Unlike the two 5-HT3 or 5-HT4 IBS therapies recently introduced into the market, and subsequently withdrawn because of safety concerns, Dextofisopam’s novel non-serotonergic activity offers a unique and innovative approach to IBS treatment.

The results of a Phase 2b study were announced in September 2009. The primary endpoint of overall adequate relief was not met due to a high placebo response, but drug activity was observed in all drug cohorts, especially the 200 mg dose.

The Company now is seeking a pharmaceutical partner with clinical, scientific and financial capabilities to further develop Dextofisopam.

In research efforts over the past decade, the Company has developed a significant expertise in cannabinoid biology and chemistry, and has generated significant know-how and an intellectual property estate pertaining to multiple areas of cannabinoid biology. The Company closed its operations in Israel effective October 31, 2008. No further development work has been performed on the cannabinoid assets and the focus is to partner or sell these assets. The Company continues to seek, sell or license other CB2 assets, including Cannabinor which was the only CB2 asset to enter human clinical trials.

The Company has explored the concept of a merger or reverse merger with another life science company in order to build greater pipeline critical mass. Several possible candidates were recently examined but were not pursed after preliminary scientific diligence.

The results for the three ended March 31, 2011 and 2010 were a net loss of $0.6 million and $0.5 million. On a loss per share basis, this equates to $(0.01) and $(0.01) for the quarters ended March 31, 2011 and 2010, 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. The Company had an accumulated deficit of $212.0 million as of March 31, 2011 and expects to continue to incur losses going forward. Such losses have resulted principally from costs incurred in research and development and from general and administrative expenses. Previously the Company had financed its operations with public and private offerings of securities, advances and other funding pursuant to an earlier marketing 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 net operating loss carryforwards (NOL’s), and interest income. During 2010 the Company was awarded a cash grant of $244,000 under the Federal Qualifying Therapeutic Discovery Project for the further development of Dextofisopam. The Company had approximately $2.8 million of cash and cash equivalents at March 31, 2011. However, the Company’s ability to continue as a going concern is largely dependent upon achieving a collaboration with a pharmaceutical partner or raising additional capital to advance its lead compounds, Dextofisopam, for the treatment of IBS, and Levotofisopam, for the treatment of gout. The Company has in the past pursued various funding and financing options; however management believes that future funding or financing options may be challenging because of the current environment.

Results of Operations

Three Months ended March 31, 2011 and 2010

Total operating expenses for the first quarter of 2011 increased by $113,980 or 25%, from $462,774 in 2010 to $576,754 in 2011.

Research & development expenses for the first quarter increased by $158,788 or 129% from $122,995 in 2010 to $281,783 in 2011. The primary areas include a $70,000 increase in clinical studies and an $115,000 increase in consultant and professional fees which were offset by a $26,000 reduction in various other areas. Consulting and professional fees increased substantially as the Company conducted work in preparation for initiating a proof-of-concept trial in gout patients using S-Tofisopam. Clinical fees increased due to costs related to manufacturing capsules needed for this trial. These increases were slightly offset by a reduction of various facility related expenses as the Company continued to reduce overall facility costs.

General and administrative expenses for the first quarter of 2011 decreased by $44,969, or 13%, from $339,314 in 2010 to $294,345 in 2011. The primary reductions were a $15,000 reduction in consultant and professional fees, a $19,000 reduction in salaries and benefits and an $11,000 reduction in various facility related expenses. Accounting fees have decreased as there was higher accounting fees related to the filing of a Regulation statement on Form S-1 in 2010. The decrease in payroll costs in 2011 reflects lower stock compensation costs and the elimination of an administrative position in 2010. The decrease in the facility related expenses were a combination of all expense items and overall was not a significant reduction.

No tax provision is required at this time since the Company expects to be in a tax loss position at year-end December 31, 2011 and has net operating losses from previous years. The Company has established a 100% valuation allowance against the deferred tax asset.

Liquidity and Capital Resources

The following table describes the Company's working capital, cash and cash equivalents and convertible debentures on March 31, 2011, and on December 31, 2010:

	March 31, 2011		December 31, 2010

Working capital	$	2,502,379	$	3,015,068

Cash and cash equivalents	$	2,777,520	$	3,139,347

Convertible Debenture – due November 2012	$	1,000,000	$	1,000,000

Current working capital position

As of March 31, 2011, the Company had working capital of $2.5 million consisting of current assets of $2.9 million and current liabilities of $0.4 million. This represents a decrease of $0.5 million from its working capital of $3.0 million on current assets of $3.2 million and current liabilities of $0.2 million as of December 31, 2010. This decrease in working capital of $0.5 million was principally associated with the funding of general and administrative activities and research and development expenses related to advance work to start a proof of concept clinical trial in gout patients using S-Tofisopam.

Current and future liquidity position

As discussed in the executive summary, the Company does not currently have the finances and resources to complete full clinical trials for its lead compound, Dextofisopam. During the quarter the Company conducted internal work in preparation for starting a proof-of-concept trial in gout patients using S-Tofisopam. The Company currently has sufficient financial resources to fund this clinical trial, but not to advance Dextofisopam.

Cash

At March 31, 2010, cash and cash equivalents totaled $2.8 million. At December 31, 2010 cash and cash equivalents totaled $3.1 million. This net decrease in cash of $0.3 million was due primarily to spending for normal operating requirements. The cash and cash equivalents will be used to fund Research & Development activities and general and administrative costs.

Operating activities

Net cash used in operating activities for the first three months of 2011 was $0.4 million compared to net cash used of $0.7 million for the first three months of 2010. The primary reason for the decrease in the cash used was a result of the timing of payments of 2009 accrued wages in 2010. In addition the decrease was a result of the timing of payments related to advance work in preparation for a clinical trial in gout using S-Tofisopam.

Commitment and Contingencies

As of March 31, 2011, the Company had the following contractual commitments and long-term obligations:

	Total		Less than 1 Year		1 - 3 Years		3 - 5 Years		Undetermined
Operating leases	$	19,161	$	19,161	$	-	$	-	$	-
Convertible debenture		1,000,000		-		1,000,000		-		-
Convertible debenture interest		158,333		100,000		58,333		-		-
Total	$	1,177,494	$	119,161	$	1,058,333	$	-	$	-

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 remaining milestones are as follows:

· $1 million cash: Final patient enrolled in Phase 2b trial (1)

· $2 million + 2 million shares: NDA submission

· $2 million cash +2.25 million shares: FDA approval

· 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

(1) The milestone was reached when the final patient was enrolled in the Dextofisopam Phase 2b trial and was recognized in the first quarter of 2009 as all probability criteria were met. The milestone had two components, a cash portion of $1,000,000 and a share portion of 2,000,000 shares valued at $180,000. The total charge in the first quarter 2009 was $1,180,000. The shares were issued in November 2009 under the terms of the Amendment #3 to the agreement and plan of merger. Under that amendment the payment of the cash portion was deferred until such time as 1) the Company successfully entered into a strategic collaboration or licensing agreement with a third party for the development of Dextofisopam resulting in an upfront cash fee of at least $10 million, and 2) payment of the cash milestone would still leave the Company with one year’s operating cash.

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 and cash equivalents. 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.

Item 4. 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' principal executive officer and principal financial officer at March 31, 2011. Based on this evaluation, Pharmos' principal executive officer and principal financial officer concluded that as of March 31, 2011, 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 principal executive officer and principal 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 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II Other Information

Item 1	Legal Proceedings	NONE

Item 1A	Risk Factors

NASDAQ Listing

On March 13, 2009 the company was officially delisted from the Nasdaq Capital Market, and is currently trading on the OTCBB pink sheets. The company was not in compliance with the minimum $2,500,000 stockholders’ requirement for continued listing and was unable to comply during the grace period extended by NASDAQ. As a result of trading on the OTCBB pink sheets, liquidity for our common stock may be significantly decreased which could reduce trading price and increase the transaction costs of trading shares of the company’s common stock.

Need For Additional Capital

Our ability to operate as a going concern is dependent upon raising adequate financing. Management believes that the current cash and cash equivalents, totaling $2.8 million as of March 31, 2011, will be sufficient to support our currently planned continuing operations through at least December 31, 2011. However, the Company’s ability to continue as a going concern is largely dependent upon achieving a collaboration with a pharmaceutical partner or raising additional capital to advance its lead compounds, Dextofisopam, for the treatment of IBS, and Levotofisopam, for the treatment of gout. The Company has in the past pursued various funding and financing options; however management believes that future funding or financing options may be challenging because of the current environment.

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	NONE

Item 3	Defaults upon Senior Securities	NONE

Item 4	Submission of Matters to Vote of Security Holders	NONE

Item 5	Other Information

Effective October 30, 2010, current director Steven Leventer, PhD, has been appointed to the audit committee.

Effective March 29, 2011, Srinivas Akkaraju, MD, PhD retired from the Board of Directors of Pharmos Corporation.

Item 6

Exhibits

Number		Exhibit

3.1		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)

3.2		Certificate of Amendment of Restated Articles of Incorporation dated January 30, 1995 (Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1994).

3.3		Certificate of Amendment of Restated Articles of Incorporation dated January 16, 1998 (Incorporated by reference to the Company’s Current Report on Form 8-K, dated February 6, 1998).

3.4		Certificate of Amendment of Restated Articles of Incorporation dated October 21, 1999 (Incorporated by reference to exhibit 4(e) to the Form S-3 Registration Statement of the Company filed September 28, 2000 (No. 333-46818)).

3.5		Certificate of Amendment of Restated Articles of Incorporation dated July 19, 2002 (Incorporated by reference to Exhibit 3 to the Company’s Report on Form 10-Q for the quarter ended June 30, 2002).

3.6		Certificate of Amendment of Restated Articles of Incorporation dated July 7, 2004 (Incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 10-Q for the quarter ended June 30, 2004).

3.7		Certificate of Amendment to Articles of Incorporation dated September 23, 2005 (Incorporated by reference to exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).

3.8		Certificate of Amendment to Articles of Incorporation dated August 5, 2009 (Incorporated by reference to exhibit 3.8 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009).

3.9		Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).

31.1		Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15(d)-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15(d)-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.

	PHARMOS CORPORATION


Date: April 28, 2011
	by:	/s/ S. Colin Neill

	S. Colin Neill
	President, Chief Financial Officer, Secretary & Treasurer
	(Principal Accounting and Financial Officer)

PHARMOS CORP - FORM 10-Q - April 28, 2011

Attached files

PHARMOS CORP Reports