HROW

Business Context and Reporting Period

Company: Transdel Pharmaceuticals, Inc. (Note: Metadata listed "Harrow, Inc." but filing content identifies Transdel Pharmaceuticals, Inc.)
Reporting Period: Quarter ended March 31, 2009
Status: Development Stage Company
Business Overview: Transdel is a specialty pharmaceutical company developing non-invasive, topically-delivered medications using its patented Transdel™ cream formulation technology. The lead drug candidate is Ketotransdel® (ketoprofen) for acute musculoskeletal pain. The company is also exploring cosmetic/cosmeceutical products and other therapeutic areas.

Key Financial Metrics

Key Expense Drivers: Research and Development (R&D) expenses were $1,146,551, driven by the ongoing Phase 3 clinical trial for Ketotransdel®. Selling, General, and Administrative (SG&A) expenses were $481,474.

Material Changes vs. Prior Period

• Net Loss Increase: Net loss increased significantly from $272,721 in Q1 2008 to $1,621,236 in Q1 2009. This is primarily due to the acceleration of R&D costs associated with the Phase 3 clinical trial which commenced in late 2008.
• R&D Expenses: Increased from $219,100 in Q1 2008 to $1,146,551 in Q1 2009. The prior period included costs for preparing the FDA filing, while the current period reflects active trial execution.
• SG&A Expenses: Increased slightly from $447,855 to $481,474. Increases in personnel (stock options), consulting, and insurance costs were partially offset by a decrease in investor relations expenses.
• Other Income: Q1 2008 included a one-time $375,000 gain on settlement with a law firm. No such gain occurred in Q1 2009.
• Liquidity: Cash and cash equivalents decreased from $5,111,031 at year-end 2008 to $4,193,350 at March 31, 2009, reflecting a net cash burn of approximately $917,681 from operating activities.

Guidance, Outlook, and Risks

Outlook and Capital Needs: Management believes current cash resources ($4.2 million) are sufficient to fund operations for the next 12 months, including the completion of the current Phase 3 trial. However, the company explicitly states it will need to secure additional financing to execute a second Phase 3 clinical trial required by the FDA for final regulatory approval of Ketotransdel®. Failure to raise these funds could force the company to cease operations or delay the business plan.

Clinical Progress: As of May 1, 2009, approximately 80% of patients (target ~350) have been enrolled in the first Phase 3 study. Top-line results are anticipated in the second half of 2009.

Risks and Contingencies:

• Going Concern: The company has incurred cumulative losses of $12.0 million since inception and expects to continue incurring losses. Future profitability depends on FDA approval and commercialization.
• Financing Risk: The economic downturn and capital market disruption may make it difficult or dilutive to raise necessary capital.
• Regulatory Risk: FDA approval is uncertain. Failure to demonstrate safety/efficacy or delays in trials would materially harm the business.
• Third-Party Dependence: The company relies on Cato Research Ltd. for clinical trials and third-party manufacturers for production.

Investor Verification Checklist

• Cash Runway: Verify if the $4.2 million cash balance is sufficient to complete the current Phase 3 trial without additional financing, as management projects.
• Second Phase 3 Funding: Assess the likelihood and terms of securing the additional capital required for the second FDA-mandated Phase 3 trial.
• Clinical Enrollment: Confirm the status of patient enrollment (reported as ~80% as of May 1, 2009) and the timeline for top-line results.
• Accrued Liabilities: Review the increase in "Accrued Phase 3 expenses" from $141,952 (Dec 2008) to $417,408 (Mar 2009) to understand payment obligations to Cato Research Ltd.
• Stock-Based Compensation: Note the $159,118 in stock-based compensation expense for the quarter and the potential for future dilution from outstanding options and warrants.