Filing identity and reporting period
Important mismatch: The supplied filing is Transdel Pharmaceuticals, Inc.’s Form 10-Q for the quarter and nine months ended September 30, 2011—not a Harrow, Inc. filing or a 2011 first-quarter report. The company later disclosed a planned name change to Imprimis Pharmaceuticals, Inc. The financial statements are unaudited.
Business context and results
Transdel was a development-stage specialty pharmaceutical company developing topical products using its Transdel delivery technology. Its lead candidate, Ketotransdel, was being developed for acute pain. The company reported no revenue through September 30, 2011; $100,000 in royalty advances remained deferred.
| Metric | Three months ended September 30, 2011 | Nine months ended September 30, 2011 | Comparable 2010 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| SG&A expense | $66,496 | $514,529 | $584,983; $1,750,380 |
| Research and development expense | $0 | $111,554 | $142,788; $344,900 |
| Net loss | $85,400 | $682,178 | $746,460; $2,105,073 |
| Net loss per share, basic and diluted | $0.01 | $0.04 | $0.05; $0.13 |
SG&A and R&D decreased substantially year over year, principally because payroll and most business operations were suspended around March 1, 2011, staff resigned, and clinical activity declined. The 2010 SG&A comparison also included approximately $416,000 of former-CEO separation and stock-option modification costs. With no revenue, the filing provides no meaningful gross margin or operating margin.
Cash flow, liquidity, and debt
- At September 30, 2011, cash was $2,154, compared with $291,462 at December 31, 2010. Current assets were $76,522 and current liabilities were $1,647,760; total liabilities were $1,647,760. Stockholders’ deficit was $1,571,238.
- For the first nine months of 2011, operating cash outflow was $316,845, financing inflow was $27,537, and cash declined by $289,308. The filing attributes lower operating cash use versus 2010 partly to spending cuts, suspended payroll, and slower payment of accounts payable.
- The company had a $1 million senior convertible note bearing 7.5% interest, with $111,574 of accrued interest at September 30. The full principal and accrued interest were shown as current liabilities. Related-party advances of $27,537 were also outstanding.
- Management and the filing identify substantial doubt about the company’s ability to continue as a going concern. The company depended on additional financing to fund operations and required clinical studies.
Material developments, outlook, and risks
- The company filed for Chapter 11 protection on June 26, 2011. The bankruptcy court denied the proposed sale of substantially all assets to Cardium on July 26; the agreement was terminated October 7. The court dismissed the Chapter 11 case on December 9, 2011. The filing states there were no current legal proceedings.
- After quarter-end, DermaStar provided a secured line of credit of up to $750,000 at 10% annual interest, subject to conditions; $300,000 had been advanced by December 31, 2011. The company pledged its assets, including intellectual property, as collateral. DermaStar also acquired control through Series A preferred stock issued for $100,000, with substantial potential common-stock conversion rights.
- In January 2012, the noteholders agreed to waive acceleration rights and to convert their holdings, and specified accounts payable, into common stock once enough shares were authorized. The filing reported an approximately $1,139,932 note balance as of February 14, 2012; conversion could result in approximately 73.3 million additional shares. The former holder of 20% also agreed to pay $50,000 upon conversion.
- Shareholders approved an increase in authorized common shares to 395 million and a company name change, expected to take effect after SEC information requirements. They also approved a reverse split; the company said the Board would implement a one-for-eight split. These post-period events carry significant dilution and governance implications.
- The first Phase 3 Ketotransdel trial failed its primary endpoint in the original analysis. Management cited favorable post-hoc analyses, including a modified analysis excluding 35 patients who did not meet entry criteria. The FDA required at least two adequate, well-controlled Phase 3 studies; management said timing depended on financing and anticipated initiation in 2012 or 2013 if funds were obtained. There is no assurance of financing, trial success, or regulatory approval.
- Management said cosmetic licensees had abandoned commercialization efforts; the JH Direct and Jan Marini agreements were terminated effective January 30, 2012. The filing gives no quantified future revenue outlook.
- Disclosure controls and internal control over financial reporting were reported ineffective due to a material weakness. Management described remediation plans, including strengthening independent audit oversight and finance processes. The company also reported that it had not filed all required reports during the preceding 12 months.
Most important facts to verify
- Confirm the issuer and period: this is Transdel Pharmaceuticals’ September 30, 2011 Form 10-Q, not a Harrow filing or 2011 Q1 report.
- Verify the post-quarter financing actually available, outstanding secured advances, collateral terms, and any subsequent changes to the DermaStar arrangements.
- Check the authorized-share amendment, one-for-eight reverse split, preferred-stock conversion, and note/AP conversion status and resulting dilution.
- Review the going-concern disclosures, cash needs, unpaid liabilities, and ability to fund operations and required Ketotransdel trials.
- Assess the original Phase 3 failure alongside the post-hoc analyses, and verify any later FDA feedback, trial activity, or commercial progress.
- Confirm the status of the reported material weakness, remediation, and any delinquent SEC filings.