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 September 30, 2010March 31, 2011

or

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 311302
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 October 26, 2010,April 28, 2011, the Registrant had outstanding 59,585,27359,732,332 shares of its $.03 par value Common Stock.

 
 
 



PART I  FINANCIAL INFORMATION Page 
     
Item 1.
Financial Statements (unaudited)
   
      
 
Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited)March 31, 2011 and December 31, 20092010
  
1
 
      
 
Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30,March 31, 2011 and 2010 and 2009
  
2
 
      
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the ninethree months ended September 30,March 31, 2011 and 2010 and 2009
  
3
 
      
 
Notes to Condensed Consolidated Financial Statements (unaudited)
  
4
 
      
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
511
 
      
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
  
1215
 
      
Item 4
Controls and Procedures
  
  1815
 
  
PART II  OTHER INFORMATION
 
      
Item 1.
Legal Proceedings
  
  1816
 
      
Item 1A.
Risk Factors
  
  1916
 
      
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  
  1916
 
      
Item 3.
Defaults Upon Senior Securities
  
  1916
 
      
Item 4.
Submission of Matters to a Vote of Security Holders
  
  1916
 
      
Item 5.
Other Information
  
  1916
 
      
Item 6.
Exhibits
  
  2017
 
     
SIGNATURES
    2118 



 
 
 


Part I.Financial Information

Item 1Financial Statements

PHARMOS CORPORATION            
Condensed Consolidated Balance Sheets
      
Condensed Consolidated Balance Sheets (Unaudited)
      
 September 30, 2010  December 31, 2009  
March 31,
2011
  
December 31,
2010
 
Assets (Unaudited)  (Unaudited)       
Cash and cash equivalents $3,219,908  $4,629,486  $2,777,520  $3,139,347 
Prepaid expenses and other current assets  56,783   25,678   95,006   46,833 
Total current assets  3,276,691   4,655,164   2,872,526   3,186,180 
                
Fixed assets, net  2,985   1,379   4,987   5,613 
Other assets  23,712   32,479 
                
Total assets $3,303,388  $4,689,022  $2,877,513  $3,191,793 
                
Liabilities and Shareholders’ Equity                
Accounts payable $88,094  $73,717  $303,301  $67,199 
Accrued expenses  85,963   148,414   66,846   103,913 
Accrued wages and other compensation  -   195,000 
Total current liabilities  174,057   417,131   370,147   171,112 
                
Convertible debenture  1,000,000   1,000,000   1,000,000   1,000,000 
Total liabilities  1,174,057   1,417,131   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, 59,585,273 and 59,291,154 issued and outstanding as of        
September 30, 2010 and December 31, 2009, respectively  1,787,558   1,778,735 
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  211,543,949   211,301,675   211,672,786   211,587,386 
Accumulated deficit  (211,201,750)  (209,808,093)  (211,956,964)  (211,353,837)
Treasury stock, at cost, 2,838 shares  (426)  (426)  (426)  (426)
Total shareholders' equity  2,129,331   3,271,891   1,507,366   2,020,681 
                
Total liabilities and shareholders' equity $3,303,388  $4,689,022  $2,877,513  $3,191,793 


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


 
1
 


PHARMOS CORPORATION
(Unaudited)
Condensed Condensed Consolidated Statements of Operations

(Unaudited)

Three months ended
September 30,
Nine months ended
September 30,

  2010  2009  2010  2009 
Expenses            
Research and development $153,806  $1,047,260  $380,164  $4,266,337 
In–process research and development Vela milestone  -   -   -   1,180,000 
General and administrative  295,936   342,320   935,742   1,101,865 
Depreciation and amortization  363   2,030   1,013   6,283 
Total operating expenses  450,105   1,391,610   1,316,919   6,554,485 
                 
Loss from operations  (450,105)  (1,391,610)  (1,316,919)  (6,554,485)
                 
Other (expense) income                
Debt conversion expense  -   -   -   (596,104)
Interest income  578   776   1,207   8,149 
Interest expense  (27,464)  (29,607)  (83,767)  (196,537)
Other income (expense)  6,690   3,134   5,822   (7,282)
Other expense, net  (20,196)  (25,697)  (76,738)  (791,774)
                 
Net loss $(470,301) $(1,417,307) $(1,393,657) $(7,346,259)
                 
Net loss per share                
- basic and diluted $(0.01) $(0.03) $(0.02) $(0.17)
                 
Weighted average shares outstanding                
- basic and diluted  58,699,219   56,064,340   58,438,554   44,100,019 



  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.




 
2
 

Pharmos Corporation
(Unaudited)
Condensed Condensed Consolidated Statements of Cash Flows
(Unaudited)

 Nine months ended September 30,  Three months ended March 31, 
 2010 2009  2011  2010 
Cash flows from operating activities           
Net loss $(1,393,657)$(7,346,259)  $(603,127) $(491,377)
               
Adjustments to reconcile net loss to net cash used in operating activities:               
Depreciation and amortization  1,013  6,283   626   465 
Non cash debt conversion expense  -  596,104 
Amortization of deferred financing fees  8,768  28,633   1,469   3,374 
Debenture interest paid in common stock  70,833  130,403 
Milestone stock subscription  -  180,000 
Stock based compensation  151,097  128,021   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  (31,106) 619,544   (49,643)  (82,511)
Accounts payable  14,377  (683,497)  236,102   3,273 
Accrued expenses  (33,284) (194,279)  (12,067)  (54,710)
Accrued wages and other compensation  (195,000) (33,000)  -   (195,000)
Milestone payable  -  1,000,000 
Other liabilities  -  (33,213)
               
Net cash used in operating activities  (1,406,959) (5,601,260)  (361,827)  (744,999)
       
Cash flows from investing activities       
Purchases of fixed assets  (2,619) - 
Proceeds from disposition of fixed assets  -  367,994 
       
Net cash (used in) provided by investing activities  (2,619) 367,994 
       
Cash flows from financing activities       
Proceeds from issuance of common stock and warrants, net-  1,779,777 
     
Net cash provided by financing activities  -  1,779,777 
               
Net decrease in cash and cash equivalents  (1,409,578) (3,453,489)  (361,827)  (744,999)
               
Cash and cash equivalents at beginning of year  4,629,486  4,730,282   3,139,347   4,629,486 
               
Cash and cash equivalents at end of period $3,219,908 $1,276,793  $2,777,520  $3,884,487 
               
Supplemental disclosure of non-cash investing and financing activities:               
Common shares issued for accrued interest  $100,000  $201,667  $50,000  $50,000 
Write off of deferred financing fees with conversion of debentures  -  $78,382 
Conversion of debentures to common stock  -  $3,000,000 

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

 
3
 


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 and nine month period ended September 30, 2010March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.2011. The Decem berDecember 31, 20092010 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 September 30, 2010,March 31, 2011, the Company had $3.2approximately $2.8 million in cash which at the current burn rate should be sufficient until at least December 31, 2011.and cash equivalents. However, the Company’s ultimate ability to continue operating in the long termas a going concern is largely dependent upon achieving a collaboration agreement with a pharmaceutical partner or raising additional capital to advance its lead compounds, (see note 2).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 engaged in the discoverythat discovers and development ofdevelops novel therapeutics to treat a wide range of diseases of the nervous system.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.

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.

4

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 currently pursuing anymeet 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 activities. With limited cash resources,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 and financial resourcesexpertise for further development of Dextofisopam.

Dextofisopam – for irritable bowel syndrome

Dextofisopam is Pharmos’ lead product for diarrhea predominant irritable bowel syndrome (IBS-d). Data from both a Phase 2a Proof-of-Concept study and a Phase 2b Dose-Ranging study strongly support the efficacy of the molecule at the 200 mg BID dosage level.  Importantly, in both of these studies, Dextofisopam was very well-tolerated.

While IBS is not a life threatening disease, it can be debilitating and represents a large unmet medical need. Previously approved treatments for IBS include Lotronex from GSK and Zelnorm from Novartis, both of which were withdrawn after highly successful market launches because of unexpected serious side effects. Lotronex was subsequently relaunched, but with a black box warning label. Dextofisopam is an enantiomer of racemic tofisopam, a drug that has been used safely for over 30 years, and has exhibited an excellent safety profile in clinical trials to date.

Pharmos, together with Vela Pharmaceuticals (Vela) which merged with Pharmos in 2006, has advanced the compound through Phase 2b. The placebo-controlled Phase 2a trial (N=141) studied a 200 mg dose of Dextofisopam and produced statistically significant results that formed the basis for a Phase 2b clinical trial.

The Phase 2b trial (N=324) studied 100 mg, 200 mg and 300 mg doses of Dextofisopam.  While the Phase 2b trial did not meet its primary endpoint (percent of weeks with overall adequate relief) with statistical significance, the trial clearly showed drug activity, especially at the 200 mg dose level, confirming the efficacy observed in the Phase 2a trial. Statistical significance was achieved in multiple variables in month 3, including overall relief. Statistical significance for the primary endpoint was not achieved because of a much higher than expected placebo response rate in the 2b trial, compared with the 2a trial. This higher-than-expected placebo-response may have been largely due to the inclusion of multiple active treatment arms in the study.  The addition of sites and change in CRO during the course of the Phase 2b trial may also have been a factor in the higher placebo response.

 
45
 


Taken together, the results of the Phase 2a and Phase 2b trials make a compelling argument for further development of Dextofisopam for the treatment of IBS-d. The drug shows strong signals for activity, and appears to be very well-tolerated. Pharmos considers that the next development step will be to conduct a Phase 2c clinical trial, but will need a pharmaceutical company as a partner or secure additional financing before a Phase 2c trial can commence.

Cannabinoid –CB2 selective receptor agonist program for neuropathic pain

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.

In November 2009Effective October 31, 2008 the Company entered into a Material Transfer Agreement whereby a European company will perform certain experiments with samplesceased operations in Rehovot, Israel, and managed those activities out of our synthetic selective cannabinoid receptor CB2 agonist.

Tianeptine – for irritable bowel syndrome

Tianeptine, a potential follow-on product to Dextofisopam, has completed late-preclinical development for the treatment of irritable bowel syndrome (IBS). Tianeptine, a racemic molecule, has been marketed outside the United States since 1988 for the treatment of depression. Preclinical studies support the potential utility of Tianeptine for the treatment of functional gastrointestinal disorders and, in particular, IBS. Pharmos has established patent rights for the use of Tianeptine and its enantiomers for the treatment of IBS and functional dyspepsia.  The Company has decided not to pursue Tianeptine.

Tofisopam – other therapeutic indicators

The Company owns the rights to both R and S Tofisopam. Dextofisopam is the R enantiomer of racemic tofisopam and is being developed for IBS as described above. The Company is also exploring the potential of S-Tofisopam, an enantiomer of racemic tofisopam, in several indications in which it has shown signals of activity in prior clinical trials or preclinical models.

The most promising indication is in the area of gout. In earlier Phase 1 studies with S-Tofisopam in healthy volunteers, a significant lowering of uric acid was noted. As lowering uric acid levels is potentially a treatment for gout patients, the Company is exploring and investigating the initiation of a proof of concept clinical trial in gout patients using S-Tofisopam.

The Company has corporate officesCompany’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.

2.    LiquiditySubstantial 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 Business Risks
Exceptthese assets are available for 2001,sale or licensing. During the quarter the Company has experienced operating losses every year since inceptionengaged in fundingdiscussions on the research, developmentpossible licensing and clinical testing of our drug candidates. The Company had an accumulated deficit of $211.2 million as of September 30, 2010 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 Officeor sale 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. At September 30, 2010, the Company had $3.2 million in cash which at the current burn rate should be sufficient until at least December 31, 2011. However, the Company’s ultimate ability to continue operating in the long term is largely dependent upon achieving collaboration with a pharmaceutical partner or raising additional capital to advance its compounds. 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.

5


Also, the Company does not currently have the finances and resources to complete full clinical trials for its lead compound, Dextofisopam. Nevertheless the Company is exploring the feasibility of smaller trials in other therapeutic indications or commencing pre-clinical development on its other intellectual property assets which could further reduce the Company’s current resources.CB2 program.

3.2.      Significant Accounting Policies

Basis of consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Pharmos LtdLtd. and Vela Acquisition Corp.Pharmaceuticals.  All significant intercompany balances and transactions are eliminated in consolidation. Pharmos LtdVela Acquisition Corp. is dormant and was used as the vehicle to acquire Vela Pharmaceuticals Inc. in October 2006.  The Israel was voluntarily liquidated onoperations, including research and development activities, ceased effective October 31, 2008 and the Company completed its voluntary liquidation in May 30, 2010.

Cash and Cash Equivalents

Cash and Cash Equivalents as of September 30, 2010March 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.

6


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 with whomthat the Company files. There were no uncertain tax positions at September 30, 2010 or December 31, 2009,files with. Given the Company’s substantial net operating loss carryforwards (“NOLs”), which are subject to a full valuation allowance as well as the Company’s tax positions for the open years meet the recognition thresholdshistorical operating losses, there was no effect on our financial position, results of more likely than notoperations or cash flows related to be sustained upon examination.this Interpretation.

Foreign exchange

With the closure and liquidation of Pharmos Ltd in Israel on May 30, 2010, the Company has no foreign operations. The Company'sCompany’s foreign operations wereare 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).  To date, suchSuch gains and losses have been insignificant.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, investments, other receivables, other assets, accounts payable and accrued liabilities approximate fair value due to their short term maturities.


6

The Company has estimated the fair value of the $1,000,000 outstanding convertible debenture due November 1, 2012 to be approximately $400,000$540,000 at September 30, 2010.March 31, 2011. In determining the fair value the Company used a level 3 inputinputs (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 ninethree months ended September 30,March 31, 2011 and 2010, and 2009, the Company recognized equity based compensation expense of $151,097$39,813 and $128,021,$46,487, respectively, for restricted stock and stock options. As of September 30, 2010,March 31, 2011, the total compensation costs related to non-vested stock options not yet recognized is $157,041$186,305 and the Executive Chairman of the Board Robert Johnston’s non-vested restricted stock not yet recognized is $170,500$137,500 which will be recognized over the remaining requisite service period.

During the ninethree months ended September 30,March 31, 2011 and 2010, and 2009, 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
 
          
September 30, 2010  490,000  $0.11  $0.09 
September 30, 2009  1,050,000  $0.22  $0.17 
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 

Reclassification

Certain amounts in prior periods have been reclassified to conform to the 2010 financial statement presentation.

Recent Accounting Pronouncements
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements ("ASU 2009-13"). ASU 2009-13, amends existing revenue recognition accounting pronouncements that are currently within the scope of Codification Subtopic 605-25 (previously included within EITF 00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). The consensus to ASU 2009-13 provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance modifies the parameters in establishing the fair value of undelivered products and services enabling separate revenue recognition based upon manageme nt's estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. EITF 00-21 previously required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. Under EITF 00-21, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and allows for retroactive application. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations.

 
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In April 2010, the FASB issued ASU No. 2010-17, Milestone Method of Revenue Recognition ("ASU 2010-17"). ASU 2010-17, updates guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate with the scope of Codification Subtopic 605 (previously included within EITF 00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21")). The consensus to ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a drug study or achieving a specific result from the research or development efforts. An entity often recognizes these milestone payments as revenue in their entirety upon achieving the related milestone, commonly referred to as the milestone period. This new approach is effective prospectively for milestones achieved in fiscal years beginning on or after June 15, 2010 and allows for retroactive application. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations.

4.3.      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 2010.2011.

In the first quarter of 2010, the Company elected to pay the interest on its 10% Convertible Debentures due November 2012 incurred through the fourth interest payment date, January 15, 2010, in common stock to the remaining debenture holder. The dollar amount of interest incurred from July 15, 2009 to January 15, 2010 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.


8

In the third quarter of 2010, the Company elected to pay the interest on its 10% Convertible Debentures due November 2012 incurred through the fifth interest payment date, July 15, 2010, in common stock to the remaining debenture holder. The dollar amount of interest incurred from January 15, 2010 to July 15, 2010 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.
4.Acquisition of Vela Pharmaceuticals, Inc.

5.   Milestone Commitments

In March 2006, the Company acquiredannounced 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 advancecomplete clinical development of this product candidate. The Vela acquisition also includesincluded 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.
 
TheUnder 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 requiring issuance of these contingent shares or funding these payments were met at December 31, 20092010 and September 30, 2010March 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


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(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) payme ntpayment 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 endpoints.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.

6.5.      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 September 30,March 31, 2011 and 2010, and 2009, other potential common stock has been excluded from the calculation of diluted net loss per common share, as their inclusion would be anti-dilutive.


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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.

 September 30, March 31, 
 2010 2009 2011 2010 
         
Stock options  3,460,499 3,647,155  4,577,812  3,579,155 
Convertible debenture  1,428,571 1,428,571  1,428,571  1,428,571 
Vela milestone  - 2,000,000
Restricted stock  825,000 1,200,000  675,000  1,200,000 
Warrants  18,000,000 18,000,000  18,000,000  18,000,000 
            
Total potential dilutive securities not included in loss per share  23,714,070 26,275,726  24,681,383  24,207,726 

7.6.      Common Stock Transactions

In the first quarter of 2010, the Company elected to pay the interest on its 10% Convertible Debentures due November 2012 incurred through the fourth interest payment date, January 15, 2010, in common stock to the remaining debenture holder. The dollar amount of interest incurred from July 15, 2009 to January 15, 2010 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.

In the third quarter of 2010, the Company elected to pay the interest on its 10% Convertible Debentures due November 2012 incurred through the fifth interest payment date, July 15, 2010, in common stock to the remaining debenture holder. The dollar amount of interest incurred from January 15, 2010 to July 15, 2010 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.

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 ninethree months of 2010,2011, the Company expensed $49,500$16,500 for Mr. Johnston’s restricted stock.
 
On September 3, 2010, Steven Leventer PhD,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.


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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 September 30, 2010,March 31, 2011, the Company had reserved 3,460,4994,577,812 common stock shares for outstanding stock options.  There were 18,000,000The Company has outstanding warrants asexercisable for 18,000,000 shares of September 30, 2010.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.


 
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8.   Segment and Geographic Information

The Company is active in one business segment: designing, developing, selling and marketing pharmaceutical products.  On August 29, 2008 the Company announced that effective October 31, 2008 it would cease operations in Rehovot, Israel, and manage those activities out of the Company’s US headquarters in Iselin, New Jersey. The Company’s subsidiary in Israel, Pharmos Ltd. was voluntarily liquidated on May 30, 2010.

Geographic information for the three and nine months ending September 30, 2010 and 2009 are as follows:

  Three months ended September 30,  Nine months ended September 30, 
  2010  2009  2010  2009 
Net (loss) income            
  United States $(470,301) $(1,382,937) $(1,392,788) $(7,253,924)
  Israel  -   (34,370)  (869)  (92,335)
  $(470,301) $(1,417,307) $(1,393,657) $(7,346,259)
                 
Capital Expenditures                
  United States $1,153  $-  $2,619  $- 
  Israel  -   -   -   - 
  $1,153  $-  $2,619  $- 

Geographic information as of September 30, 2010 and December 31, 2009 are as follows:

Total Assets September 30, 2010  December 31, 2009 
  United States $3,303,388  $4,669,681 
  Israel  -   19,341 
  $3,303,388  $4,689,022 
         
Long Lived Assets, net        
  United States $2,985  $1,379 
  Israel  -  - 
  $2,985  $1,379 


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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 forwa rd-lookingforward-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, 20092010 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  20102011 Strategy and Operating Plan

The
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 currently pursuing any clinical development activities. With limited cashhave the financial resources to fund the strategy is to seeknext trial and therefore seeks a pharmaceutical partnercompany 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 appropriate GIquarter, the Company conducted work to initiate a proof-of-concept trial in gout patients using Levotofisopam. Two ex-US Phase 1 clinical scientificstudies were completed by Vela Pharmaceuticals (merged with Pharmos in October 2006). In these studies, conducted in healthy volunteers in the United Kingdom and financial resources for further development of Dextofisopam.The Netherlands, Levotofisopam treatment was generally well tolerated and was associated with a large and rapid reduction in mean uric acid values.

During the quarter, the Company continued its effortsincurred costs associated with conducting work to attractinitiate a pharmaceutical partner forproof-of-concept trial in gout patients using Levotofisopam, including the further developmentmanufacturing of Dextofisopam for irritable bowel syndrome and / or raise additional venture capital funds. Additionally, the Company explored advancing some of its other compounds in other therapeutic areas. S-Tofisopam for the treatment of gout looks like a promising candidate and the Company has conducted exploratory discussions, includingclinical trial protocol design.material.

The Company continued to presentPharmos’ most advanced compound is Dextofisopam, as an IBS opportunity to potential pharmaceutical company partners with the assistance of our investment bank. We believe that the next development step is to conduct a Phase 2c clinical trial. As this may cost as much as $ 8 million we need a partner. Concurrently with seeking a pharmaceutical partner, we continue to seek venture capital firms.

Dextofisopam is Pharmos’ lead product for diarrhea predominant irritable bowel syndrome (IBS-d). Data from bothwhich  has completed a Phase 2a Proof-of-Conceptdouble-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 Dose-Ranging study strongly supporttrial in February 2007 and in June 2007 the efficacy of the molecule at the 200 mg BID dosage level.  Importantly, in both of these studies, dextofisopam was very well-tolerated.

While IBS is not a life threatening disease, it can be debilitating and represents a large unmet medical need. Previously approved treatments for IBS include Lotronex from GSK and Zelnorm from Novartis, both of which were withdrawn after highly successful market launches because of unexpected serious side effects. Lotronex was subsequently relaunched, but with a black box warning label.Company announced patient screening had commenced. Dextofisopam is an enantiomerthe R-enantiomer of racemic tofisopam, a drug that has beenmolecule marketed and used safely outside the United States for over 30 years,three decades for multiple indications including IBS. Unlike the two 5-HT3 or 5-HT4 IBS therapies recently introduced into the market, and has exhibited an excellentsubsequently withdrawn because of safety profile in clinical trials to date. Unlike Lotronex and Zelnorm, which are serotonergic (5-HT) drugs, Dextofisopam structurally is a homophthalazine; Dextofisopam binds with high specificity toconcerns, Dextofisopam’s novel non-serotonergic activity offers a unique class of receptors in the brain, namely 2,3-benzodiazepine receptors. These receptors are found principally in t he hypothalamus, an area of the brain controlling autonomic function.  Importantly, when Dextofisopam bindsand innovative approach to these receptors, it decreases stimulated autonomic activity without affected basal autonomic activity.  In this manner, Dextofisopam “normalizes” aberrant GI function typical of IBS-d, without causing constipation. While Dextofisopam does have a benzodiazepine-like structure, its ring-structure is unique and atypical, making Dextofisopam non-sedating and non-addicting.IBS treatment.


 
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Pharmos, together with Vela Pharmaceuticals which merged with Pharmos in 2006, has advanced the compound through Phase 2b. The placebo-controlled Phase 2a trial (N=141) studied a 200mg doseresults of Dextofisopam and produced statistically significant results that formed the basis for a Phase 2b clinical trial.

The Phase 2b trial (N=324) studied 100 mg, 200 mg and 300 mg doses of Dextofisopam.  While the Phase 2b trial did not meet its primary endpoint (percent of weeks with overall adequate relief) with statistical significance, the trial clearly showed drug activity, especially at the 200 mg dose level, confirming the efficacy seenstudy were announced in the Phase 2a trial. Statistical significance was achieved in multiple variables in month 3, including overall relief.September 2009. The Phase 2b trial had a higher placebo response rate than the Phase 2a trial which may be one of the reasons the Phase 2b trial did not achieve statistical significance for the primary endpoint of overall adequate relief. This higher-than-expected placebo-response may have been largelyrelief was not met due to a high placebo response, but drug activity was observed in all drug cohorts, especially the inclusion of multiple active treatment arms in the study.  The addi tion of sites and change in CRO during the course of the Phase 2b trial may also have been a factor in the higher placebo response.200 mg dose.

Taken together, the results of the Phase 2aThe Company now is seeking a pharmaceutical partner with clinical, scientific and Phase 2b trials make a compelling argument forfinancial capabilities to further development of Dextofisopam for the treatment of IBS-d. The drug shows strong signals for activity, and appears to be very well-tolerated. Pharmos considers that the next development step will be to conduct a Phase 2c clinical trial.develop Dextofisopam.

In addition to seeking to achieve a partnership with a pharmaceutical firm and /or raise additional capital,research efforts over the past decade, the Company is exploring the feasibility of smaller trialshas developed a significant expertise in other therapeutic indications or commencing pre-clinical development on its othercannabinoid 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 which could further reduceand the Company’s current resources.

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 also maintains a commitment to out-license proprietary technologies and products not consistent with our primary corporate focus. Assets involved are Tianeptine to treat IBS or functional dyspepsia and S-Tofisopam. The Company has decided not to pursue Tianeptine and will allow its patents to lapse.

The Company ownsexplored the rights to both R and S Tofisopam. Dextofisopam is the R enantiomer of racemic tofisopam and is being developed for IBS as described above. The Company is also exploring the potential of S-Tofisopam, an enantiomer of racemic tofisopam, in several indications in which it has shown signals of activity in prior clinical trials or preclinical models.

The most promising indication is in the area of gout. In earlier Phase 1 studies with S-Tofisopam in healthy volunteers, a significant lowering of uric acid was noted. As lowering uric acid levels is potentially a treatment for gout patients, the Company is exploring and investigating the initiationconcept of a proof of concept clinical trialmerger or reverse merger with another life science company in gout patients using S-Tofisopam.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 nine months ended September 30, 2010 and 2009 were a net loss of $0.5$0.6 million and $1.4 million and a net loss of $1.4 million and $7.3 million, respectively.$0.5 million. On a loss per share basis, this equates to $(0.01) and $(0.03)$(0.01) for the quarters ended March 31, 2011 and $(0.02) and $(0.17) for the first nine months,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 $211.2$212.0 million as of September 30, 2010March 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.


13

Results of Operations
Three Months ended September 30,March 31, 2011 and 2010 and 2009

Total operating expenses for the thirdfirst quarter of 2010 decreased2011 increased by $941,505$113,980 or 68%25%, from $1,391,610$462,774 in 20092010 to $450,105$576,754 in 2010.2011.

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.


12

General and administrative expenses for the first quarter of 2011 decreased by $893,454$44,969, or 85%13%, from $1,047,260 in 2009 to $153,806$339,314 in 2010 related to the Company’s completion of the Dextofisopam Phase 2b trial and the downsizing and curtailment of general research and development programs.  The decline reflects decreases$294,345 in virtually every research and development expense category.2011. The primary reductions includewere a $789,000 reduction in clinical studies, a $35,000$15,000 reduction in consultant and professional fees, a $19,000 reduction in various other areassalaries and a $51,000 reduction in payroll. The decrease in these costs, reflect the fact that the Dextofisopam Phase 2b trial is complete.

In 2009, the Company completed a Phase 2b trial of its lead compound, Dextofisopambenefits and the results of the clinical trial were announced on September 14, 2009. The trial did not meet the primary endpoints for any of the three drug dose arms and therefore the trial did not meet the definition of a successful trial. In the third quarter of 2010 costs of $26,497 were incurred during the quarter in connection with the Dextofisopam trial, consisting of certain consulting and professional fees.

General and administrative expenses for the third quarter of 2010 decreased by $46,384 or 14%, from $342,320 in 2009 to $295,936 in 2010. The primary reductions are a $65,000 reduction in consultant and professional fees, a $57,000an $11,000 reduction in various facility related expenses and a $24,000 reduction in salaries and benefits. These reductions were offset by an increase in marketing expense due to a reversal of a prior accrued marketing expense of $100,000 in 2009. Professional and accountingexpenses. Accounting fees have decreased as there was higher accounting fees related to the filing of a resultRegulation statement on Form S-1 in 2010. The decrease in payroll costs in 2011 reflects lower stock compensation costs and the elimination of reduced accounting fees.an administrative position in 2010. The decrease in the facility related expenses were a combination of all expense items and the majority of the reductionoverall was related to the higher rent expenses incurred in 2009. The decrease in payroll costs in 2010 was primarily attributable to the completion of payouts in 2009 for our R ehovot location.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, 20102011 and has net operating losses from previous years. The Company has established a 100% valuation allowance against the deferred tax asset.

Results of Operations
Nine Months ended September 30, 2010 and 2009

Total operating expenses for the first nine months of 2010 decreased by $5,237,566 or 80%, from $6,554,485 in 2009 to $1,316,919 in 2010.

Research & development expenses decreased by $3,886,173 or 91% from $4,266,337 in 2009 to $380,164 in 2010, related to the Company’s completion of the Dextofisopam Phase 2b trial and the downsizing and curtailment of general research and development programs.  The decline reflects decreases in virtually every research and development expense category. The primary reductions include a $3,453,000 reduction in clinical studies, a $179,000 reduction in consultant and professional fees, a $113,000 reduction in various other areas and a $141,000 reduction in payroll. The decrease in these costs, reflect the fact that the Dextofisopam trial is complete.

In 2009, the Company completed a Phase 2b trial of its lead compound, Dextofisopam and the results of the clinical trial were announced on September 14, 2009. The trial did not meet the primary endpoints for any of the three drug dose arms and therefore the trial did not meet the definition of a successful trial. In the first nine months of 2010 costs of $110,482 were incurred in connection with the Dextofisopam trial, consisting of certain consulting and professional fees.


14

In the first nine months of 2010, In process research and development costs which were related to the Vela milestone decreased by $1,180,000 from $1,180,000 in 2009 to $0 in 2010. On April 9, 2009 the last patients were enrolled in the Phase 2b trial thus triggering the following milestone: $1 million cash + 2 million shares of Pharmos common stock: Final patient enrolled in Phase 2b trial. The expense of the milestone of $1,180,000 was reflected in the 1Q 2009 results. The payment of the cash portion of the milestone was deferred under an amendment to the acquisition agreement. Under the terms of the Vela acquisition agreement as amended, the 2 million shares were issued on November 2, 2009. As noted in Commitments and Contingencies below, the $1 million cash portion of the milestone expense was reversed in 4Q 2009 since it is not dee med probable that the amended terms would be achieved.

General and administrative expenses for the first nine months of 2010 decreased by $166,123, or 15%, from $1,101,865 in 2009 to $935,742 in 2010. The primary reductions are a $159,000 reduction in consultant and professional fees and a $134,000 reduction in various facility related expenses. This is offset by an increase of $29,000 in salaries and benefits, the majority of which results from higher stock compensation in 2010 and a non cash bonus reversal in 2009 and a reduction of miscellaneous expenses in 2009 of $100,000. Professional and accounting fees have decreased as a result of reduced accounting fees. The decrease in the facility related expenses were a combination of all expense items and the majority of the reduction was related to the annual reports expenses incurred in 2009 and higher rent expenses in 2009. The increase in payroll costs in 2010 reflects higher stock compensation costs and a reversal of the 2008 bonus accrual in the first quarter of 2009, as it was not paid. The increase in miscellaneous expenses was for a reduction in 2009 for an accrued marketing expense that was not paid.

Other expense net, decreased by $715,036 from $791,774 in other expense in 2009 to $76,738 in other expense in 2010. The majority of this decrease is related to the conversion of debentures into equity resulting in an expense of $596,104 in 2009. The decrease is also related to an $112,770 reduction in interest expense attributable to reduced debt outstanding in 2010 and a $13,104 decrease in translation losses that were recorded at our Rehovot location in 2009 and Herbamed royalty fees were collected. This was offset by the decreased interest income of $6,942 from a decline in cash and cash equivalents.

Liquidity and Capital Resources

The Company incurred cumulative operating losses since 2002 and had an accumulated deficit of $211.2 million at September 30, 2010. The Company has financed its operations with public and private offerings of securities, advances and other funding pursuant to an earlier 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 working capital, cash and cash equivalents and convertible debentures on September 30, 2010,March 31, 2011, and on December 31, 2009:2010:

 September 30, 2010  December 31, 2009  March 31, 2011  December 31, 2010 
            
Working capital $3,102,634  $4,238,033  $2,502,379  $3,015,068 
                
Cash and cash equivalents $3,219,908  $4,629,486  $2,777,520  $3,139,347 
                
Convertible Debenture – due 2012 $1,000,000  $1,000,000 
Convertible Debenture – due November 2012 $1,000,000  $1,000,000 
                


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Current working capital position

As of September 30, 2010,March 31, 2011, the Company had working capital of $3.1$2.5 million consisting of current assets of $3.3$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. This represents a decrease of $1.1 million from its working capital of $4.2 million on current assets of $4.6 million and current liabilities of $0.4 million as of December 31, 2009.2010. This decrease in working capital of $1.1$0.5 million was principally associated with the funding of general and administrative activities.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

At September 30, 2010As discussed in the executive summary, the Company had approximately $3.2 million of cashdoes not currently have the finances and cash equivalents, which at current operating levels should beresources 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 continue operations at least through December 31, 2011. However,fund this clinical trial, but not to advance Dextofisopam.
As such these factors raise substantial doubt as to the Company’s ability to operate in the long term is largely dependent upon achievingcontinue as a pharmaceutical partnership for the advancement of its lead compound, Dextofisopam for the treatment of IBS. Further, the Company may embark on smaller clinical trials, the expense of which would reduce cash resources available.going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from this uncertainty.


The Company has in the past pursued various funding options, including additional equity offerings, strategic corporate alliances, and business combinations, as well as grants and the sale of some of its New Jersey net operating loss carry forwards. Future equity financings will be challenging because of the low market capitalization of the Company and the move from the NASDAQ market to trading on the over the counter Pink Sheets in March 2009.
13

Cash

At September 30,March 31, 2010, cash and cash equivalents totaled $3.2$2.8 million. At December 31, 20092010 cash and cash equivalents totaled $4.6$3.1 million. This net decrease in cash of $1.4$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 ninethree months of 20102011 was $1.4$0.4 million compared to net cash used of $5.6$0.7 million for the first ninethree months of 2009.2010. The primary reason for the decrease reflectsin the declinecash used was a result of the timing of payments of 2009 accrued wages in operating expenses.2010. In addition the decrease was a greater portionresult of the cash was utilized for G&A spending rather than on R&D spendingtiming of payments related to advance work in 2010 as compared to 2009 which reflects the focus of expenditures on the G&A as we lookpreparation for a partnership or licensing deal for a future Dextofisopam clinical trial.

Investing activities

Net cash usedtrial in investing activities were $2,619 for a fixed asset purchase in 2010 while in 2009 the Company had net cash provided by the proceeds from the disposition of fixed assets in its Israel operations of $367,994.gout using S-Tofisopam.

Financing activities

Net cash provided by financing activities were zero in 2010 while in 2009 the Company completed a private placement of common stock and warrants that raised proceeds of $1,779,777, net of issuance costs.


 
16

Commitment and Contingencies

As of September 30, 2010,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  
 
Total
  
Less than
1 Year
  
1 - 3
Years
  
3 - 5
Years
  Undetermined 
Operating leases $64,800  $64,800  $-  $-  $-  $19,161  $19,161  $-  $-  $- 
Convertible debenture  1,000,000   -   1,000,000   -   -   1,000,000   -   1,000,000   -  ��- 
Convertible debenture interest  208,333   100,000   108,333   -   -   158,333   100,000   58,333   -   - 
Total $1,273,133  $164,800  $1,108,333  $-  $-  $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.

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 endpoints.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 also expensed in Q1 2009 but 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.

New accounting pronouncements

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements ("ASU 2009-13"). ASU 2009-13, amends existing revenue recognition accounting pronouncements that are currently within the scope of Codification Subtopic 605-25 (previously included within EITF 00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). The consensus to ASU 2009-13 provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition bas ed upon management's estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. EITF 00-21 previously required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. Under EITF 00-21, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and allows for retroactive application. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations.

 
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In April 2010, the FASB issued ASU No. 2010-17, Milestone Method of Revenue Recognition ("ASU 2010-17"). ASU 2010-17, updates guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate with the scope of Codification Subtopic 605 (previously included within EITF 00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). The consensus to ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a drug study or achieving a specific result from the research or development efforts. An entity often recognizes these milestone payments as revenue in their entirety upon achieving the related milestone, commonly referred to as the milestone period. This new approach is effective prospectively for milestones achieved in fiscal years beginning on or after June 15, 2010 and allows for retroactive application. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations as there are not currently any milestones that will be achieved.

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 September 30, 2010.March 31, 2011. Based on this evaluation, Pharmos' principal executive officer and principal financial officer concluded that as of September 30, 2010,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 finan cialfinancial 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.

 
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Part II   Other Information
 
Item 1
Legal ProceedingsNONE
   
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 $3.2$2.8 million as of September 30, 2010,March 31, 2011, will be sufficient to support our currently planned continuing operations through at least December 31, 2011. However, the Company’s ultimate ability to continue operating in the long termas a going concern is largely dependent upon achieving a collaboration with a pharmaceutical partner or  raising additional capital to advance its compounds.lead compounds, Dextofisopam, for the treatment of IBS, and Levotofisopam, for the treatment of gout.   The Company is actively seeking to sell or license non-core assets.  Should we be unable to raise adequate financing or generate revenuehas in the past pursued various funding and financing options; however management believes that future our operations will need tofunding or financing options may be scaled back or discontinued.challenging because of the current environment.

Item 2
Unregistered Sales of Equity Securities and Use of ProceedsNONE
   
Item 3
Defaults upon Senior SecuritiesNONE
   
Item 4
Submission of Matters to Vote of Security HoldersNONE
   
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.

 
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Item 6                      Exhibits

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.
   


 
2017
 

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: October 27, 2010April 28, 2011    
  by:/s/ S. Colin Neill 
     
  S. Colin Neill 
  President, Chief Financial Officer, Secretary & Treasurer 
  (Principal Accounting and Financial Officer) 

18