HROW

Business Context and Reporting Period

Company: Transdel Pharmaceuticals, Inc. (Note: Metadata listed "Harrow, Inc." but filing text confirms Transdel Pharmaceuticals, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: A specialty pharmaceutical company developing non-invasive, topically delivered products using its proprietary Transdel™ cream formulation technology. The lead product candidate is Ketotransdel® (topical ketoprofen) for acute pain management. The company is in the development stage with no product revenues to date.

Key Financial Metrics

Operating Expenses:

• Selling, General & Administrative (SG&A): $1,598,369 (2009) vs. $1,755,731 (2008).
• Research & Development (R&D): $2,965,707 (2009) vs. $1,990,665 (2008).

Liquidity: The company reported a working capital deficiency. Cash burn was significant, with net cash used in operating activities totaling $3,570,758 for 2009.

Material Changes vs. Prior Period

• Increased R&D Spend: R&D expenses increased by approximately $975,000 (49%) year-over-year, primarily driven by costs associated with the Phase 3 clinical trial for Ketotransdel® (investigator payments and CRO fees).
• Decreased SG&A: SG&A expenses decreased by approximately $157,000 (9%), largely due to reduced amortization of stock-based compensation for investor relations and lower legal fees, partially offset by increased personnel and insurance costs.
• Cash Position: Cash and cash equivalents declined by approximately $3.5 million, from $5.1 million in 2008 to $1.6 million in 2009.
• Going Concern: The independent auditor issued a "going concern" modification, citing recurring losses and negative cash flows raising substantial doubt about the company's ability to continue operations without additional financing.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Guidance:

• Runway: Management forecasts that current cash resources will fund operations into the second quarter of 2010.
• Financing Needs: The company explicitly states it requires additional financing to conduct a second Phase 3 clinical trial and supportive safety studies required by the FDA for Ketotransdel® approval. Without this funding, the company may be forced to cease operations.
• Commercialization: The company is seeking commercial partners for Ketotransdel® and has licensed its anti-cellulite cosmeceutical product to JH Direct, LLC, with a planned launch in late 2010.

Risks and Contingencies:

• Regulatory Uncertainty: FDA approval requires two adequate and well-controlled Phase 3 trials. While the first trial showed statistical significance in a modified Intent-To-Treat (ITT) analysis, there is no assurance the FDA will accept this data or that a second trial will be successful.
• Capital Markets: The economic downturn and the company's lack of profitability may make raising capital difficult or dilutive.
• Management Changes: Dr. Juliet Singh resigned as CEO and Director in February 2010. John T. Lomoro (CFO) was appointed Acting CEO. A separation agreement included accelerated vesting of 300,000 stock options for Dr. Singh.

Unusual Items:

• Gain on Settlement (2008): A one-time gain of $375,000 was recognized in 2008 from a settlement with a former law firm. No such gain occurred in 2009.

Investor Verification Checklist

• Capital Sufficiency: Verify the status of fundraising efforts required to fund the second Phase 3 trial and operations beyond Q2 2010.
• FDA Acceptance: Confirm whether the FDA has accepted the modified ITT analysis from the first Phase 3 trial as one of the two required studies.
• Management Stability: Monitor the search for a permanent CEO following Dr. Singh's resignation and the impact of the separation agreement on cash flow.
• Stock Dilution: Review the terms of any new equity financing, as future raises are likely to be dilutive to existing shareholders.
• Cosmeceutical Revenue: Track the launch timeline and royalty potential of the anti-cellulite product licensed to JH Direct.