Business context and reporting period
This is Transdel Pharmaceuticals, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2011—not a filing identified as Harrow, Inc. The company was a development-stage specialty pharmaceutical business developing topical products using its Transdel delivery technology, with Ketotransdel for acute pain as its lead drug candidate. It had generated no revenue since inception.
Financial results and position
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Revenue | $0 | $0 |
| SG&A expense | $121,429 | $448,033 |
| Research and development expense | $24,338 | $111,554 |
| Operating loss | $145,767 | $559,587 |
| Net loss | $164,465 | $596,778 |
| Basic and diluted loss per share | $0.01 | $0.04 |
| Net cash used in operating activities | Not separately presented | $285,909 |
At June 30, 2011, cash was $5,553, total assets were $76,334, and total liabilities were $1,598,970, including $1,092,670 of current convertible-note principal and accrued interest. Stockholders’ deficit was $1,522,636. With no revenue, a gross margin is not applicable.
Material changes versus prior comparable period
For the six months, net loss narrowed to $596,778 from $1,358,613, and operating cash use fell to $285,909 from $1,547,159. SG&A declined by $717,364 and R&D by $90,558. Management attributed lower expenses mainly to payroll and operating activity suspensions around March 1, 2011, staff resignations, reduced clinical activity, and the prior-year inclusion of approximately $416,000 in one-time former-CEO separation costs. Cash fell from $291,462 at year-end 2010 to $5,553 at June 30, 2011; the lower reported losses therefore do not indicate improving commercial performance.
Outlook, risks, and unusual items
- Going concern and funding: The filing reports recurring losses, no revenue, and substantial doubt about the company’s ability to continue as a going concern. Management said additional financing was needed to fund operations and the further clinical work required for Ketotransdel; it warned that failure to obtain funding could force cessation of operations. The company expected losses to continue through 2012.
- Clinical and commercial risk: The first Phase 3 Ketotransdel trial failed its primary endpoint in the original analysis. A post-hoc modified analysis excluding 35 patients reported statistical significance. The FDA required at least two adequate and well-controlled Phase 3 studies; management said further trials and safety studies depended on financing and might begin in 2012 or 2013. FDA approval and timing were uncertain.
- Bankruptcy and asset sale: The company filed for Chapter 11 on June 26, 2011 and agreed to a proposed asset sale to Cardium. The bankruptcy court denied the sale motion in July 2011; the agreement was terminated, and the Chapter 11 case was dismissed in December 2011. These are subsequent events disclosed in the report.
- Subsequent financing and control changes: After quarter-end, DermaStar provided for a secured line of credit of up to $750,000, secured by a blanket lien including intellectual property; the company reported $300,000 advanced by December 31, 2011 at 10% interest. DermaStar also acquired convertible preferred stock for $100,000, creating a change in control. A January 2012 settlement provided for conversion of the 2010 note and certain payables into shares once sufficient authorized shares were available.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30, 2011 because of a material weakness. The filing describes planned remediation during 2012.
- Other unusual items: The $100,000 in non-refundable royalty advances was deferred, not recognized as revenue. Management reported that cosmetic license partners had abandoned or were expected to abandon commercialization efforts and that related agreements were terminated in January 2012.
Important facts to verify
- Confirm the intended issuer: this filing names Transdel Pharmaceuticals, Inc., not Harrow, Inc.
- Review the subsequent-event details and current status of the Chapter 11 dismissal, DermaStar secured advances and lien, preferred-stock control, and note conversions.
- Verify actual financing available, cash runway, and the company’s ability to fund the required Ketotransdel trials and safety studies.
- Assess the clinical evidence in light of the original Phase 3 primary-endpoint failure and the post-hoc modified analysis.
- Review the disclosed material weakness and whether planned financial-control remediation was completed.