##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF 1934
 For the quarterly period ended March 31, 2010
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the transition period from  to
 Commission file number: 000-52998
 Transdel Pharmaceuticals, Inc.
  Delaware
    
    45-0567010(State or Other Jurisdiction of Incorporation 
or Organization)
    
    (I.R.S. Employer Identification No.)4225 Executive Square, Suite 485
La Jolla, CA
    
    92037(Address of Principal Executive Offices)
    
    (Zip Code)
 (Registrants Telephone Number, Including Area Code)
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 YES o NO þ




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##### 



TRANSDEL PHARMACEUTICALS, INC.
(A Development Stage Company)
 Table of Contents
 PagePart I FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets  March 31, 2010 (Unaudited) and December 31,
2009
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the three-month
periods ended March 31, 2010 and 2009
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the three-month
periods ended March 31, 2010 and 2009
    
    
    5Notes to the Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 4T. Controls and Procedures
    
    
    17Part II OTHER INFORMATION
    
    
    18Item 1. Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 6. Exhibits
    
    
    26Exhibit 31.1Exhibit 32.1
   2




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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements.
 TRANSDEL PHARMACEUTICALS, INC.
(A Development Stage Company)
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2010
    
    
    2009(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    951,882
    
    
    $
    1,589,773Prepaid expenses and other current assets
    
    
    65,099
    
    
    
    80,917Total current assets
    
    
    1,016,981
    
    
    
    1,670,690Equipment, net
    
    
    1,130
    
    
    
    1,394Total assets
    
    $
    1,018,111
    
    
    $
    1,672,084LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITYCurrent liabilities:Accounts payable
    
    $
    559,797
    
    
    $
    681,014Accrued Phase 3 expenses
    
    
    255,259
    
    
    
    343,633Accrued separation expenses
    
    
    211,046
    
    
    
    Accrued expenses and payroll liabilities
    
    
    27,810
    
    
    
    70,226Total liabilities
    
    
    1,053,912
    
    
    
    1,094,873Stockholders (deficit) equity:Preferred stock, $0.001 par value; 5,000,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 50,000,000 shares authorized, 15,652,061 shares
issued and outstanding as of March 31, 2010 (unaudited) and December 31, 2009
    
    
    15,652
    
    
    
    15,652Additional paid-in capital
    
    
    15,754,728
    
    
    
    15,497,128Deficit accumulated during the development stage
    
    
    (15,806,181
    )
    
    
    (14,935,569
    )Total stockholders (deficit) equity
    
    
    (35,801
    )
    
    
    577,211Total liabilities and stockholders (deficit) equity
    
    $
    1,018,111
    
    
    $
    1,672,084
 See accompanying notes to these unaudited condensed consolidated financial statements.
  3




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TRANSDEL PHARMACEUTICALS, INC.
(A Development Stage Company)
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 For thePeriod FromJuly 24, 1998(Inception)Three Months Ended
    
    
    ThroughMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010Operating expenses:Selling, general and administrative
    
    $
    755,587
    
    
    $
    481,474
    
    
    $
    7,193,268Research and development
    
    
    115,158
    
    
    
    1,146,551
    
    
    
    7,629,274Operating loss
    
    
    870,745
    
    
    
    1,628,025
    
    
    
    14,822,542Other income (expense):Interest expense
    
    
    
    
    
    
    
    
    
    
    (1,575,755
    )Interest income
    
    
    133
    
    
    
    6,789
    
    
    
    127,202Gain on forgiveness of liabilities
    
    
    
    
    
    
    
    
    
    
    89,914Gain on settlement
    
    
    
    
    
    
    
    
    
    
    375,000Total other income (expense), net
    
    
    133
    
    
    
    6,789
    
    
    
    (983,639
    )Net loss
    
    $
    (870,612
    )
    
    $
    (1,621,236
    )
    
    $
    (15,806,181
    )Basic and diluted loss per common share
    
    $
    (0.06
    )
    
    $
    (0.10
    )Weighted average common shares outstanding
    
    
    15,652,061
    
    
    
    15,564,676
 See accompanying notes to these unaudited condensed consolidated financial statements.
  4




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TRANSDEL PHARMACEUTICALS, INC.
(A Development Stage Company)
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 For The PeriodFrom July 24,1998(Inception)ThroughThree Months Ended March 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010Cash flows from operating activities:Net loss
    
    $
    (870,612
    )
    
    $
    (1,621,236
    )
    
    $
    (15,806,181
    )Adjustments to reconcile net loss to net cash used in operating activities:Estimated fair value of contributed services
    
    
    
    
    
    
    
    
    
    
    2,475,000Gain on forgiveness of liabilities
    
    
    
    
    
    
    
    
    
    
    (89,914
    )Amortization of prepaid consulting fees
    
    
    
    
    
    
    28,939
    
    
    
    572,008Depreciation
    
    
    264
    
    
    
    264
    
    
    
    2,024Non-cash interest on notes payable
    
    
    
    
    
    
    
    
    
    
    1,575,755Stock-based compensation
    
    
    257,600
    
    
    
    159,118
    
    
    
    1,514,068Changes in operating assets and liabilities:Prepaid consulting costs
    
    
    
    
    
    
    
    
    
    
    (140,000
    )Prepaid expenses and other current assets
    
    
    15,818
    
    
    
    34,064
    
    
    
    (65,099
    )Accounts payable
    
    
    (121,217
    )
    
    
    224,470
    
    
    
    649,711Accrued Phase 3 expenses
    
    
    (88,374
    )
    
    
    275,456
    
    
    
    255,259Accrued separation expenses
    
    
    211,046
    
    
    
    
    
    
    
    211,046Accrued expenses and payroll liabilities
    
    
    (42,416
    )
    
    
    (18,756
    )
    
    
    27,810Net cash used in operating activities
    
    
    (637,891
    )
    
    
    (917,681
    )
    
    
    (8,818,513
    )Cash flows from investing activities:Purchase of fixed assets
    
    
    
    
    
    
    
    
    
    
    (3,154
    )Net cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    (3,154
    )Cash flows from financing activities:Proceeds from notes payable to stockholders
    
    
    
    
    
    
    
    
    
    
    226,300Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    1,500,000Capital contributions
    
    
    
    
    
    
    
    
    
    
    168,707Net proceeds from purchase of common stock and exercise of warrants and stock options
    
    
    
    
    
    
    
    
    
    
    99,450Net proceeds from Private Placements
    
    
    
    
    
    
    
    
    
    
    7,779,092Net cash provided by financing activities
    
    
    
    
    
    
    
    
    
    
    9,773,549Net change in cash and cash equivalents
    
    
    (637,891
    )
    
    
    (917,681
    )
    
    
    951,882Cash and cash equivalents, beginning of period
    
    
    1,589,773
    
    
    
    5,111,031
    
    
    
    Cash and cash equivalents, end of period
    
    $
    951,882
    
    
    $
    4,193,350
    
    
    $
    951,882Supplemental disclosure of cash flow information:Issuance of and adjustment to common stock and warrants to consulting firms for prepaid consulting fees
    
    $
    
    
    
    $
    
    
    
    $
    432,007Conversion of notes payable and accrued interest into common stock
    
    $
    
    
    
    $
    
    
    
    $
    1,530,177Forgiveness of notes payable and accrued interest to shareholders
    
    $
    
    
    
    $
    
    
    
    $
    241,701Conversion of advances to notes payable to shareholders
    
    $
    
    
    
    $
    
    
    
    $
    196,300
 See accompanying notes to these unaudited condensed consolidated financial statements.
  5




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TRANSDEL PHARMACEUTICALS, INC.
(A Development Stage Company)
 
 NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1. Business Description
 ®
 Note 2. Basis of Presentation
  Note 3. Merger with Public Company and Reorganization
    Note 4. Summary of Significant Accounting Policies
 Going Concern
  6




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TRANSDEL PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 4. Summary of Significant Accounting Policies (continued)
   Development Stage Enterprise.
  ® ®
 Research and Development.
 Cash and Cash Equivalents
 Concentrations of Credit Risk.
 Computer Equipment.
 Fair Value of Financial Instruments.
 Revenue Recognition.
  7




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TRANSDEL PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 4. Summary of Significant Accounting Policies (continued)
  Stock-Based Compensation.
  Basic and Diluted Loss per Common Share
  Use of Estimates.
 Note 5. Stockholders Equity
   8




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TRANSDEL PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 5. Stockholders Equity (continued)
   Note 6. Stock Option Plan
   WeightedWeighted
    
    
    Ave.Ave.
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Exercise
    
    
    Contractual
    
    
    Intrinsicof Shares
    
    
    Price
    
    
    Life
    
    
    ValueOutstanding  January 1, 2010
    
    
    1,605,000
    
    
    $
    1.64Granted
    
    
    300,000
    
    
    
    0.90Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Outstanding  March 31, 2010
    
    
    1,905,000
    
    
    $
    1.53
    
    
    
    7.0
    
    
    $
    109,500Exercisable  March 31, 2010
    
    
    1,045,417
    
    
    $
    1.78
    
    
    
    5.2
    
    
    $
    25,500Vested and expected to vest  March 31, 2010
    
    
    1,826,792
    
    
    $
    1.54
    
    
    
    6.9
    
    
    $
    101,100
    9




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TRANSDEL PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 6. Stock Option Plan (continued)
   ®
     10




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TRANSDEL PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 7. Stock Warrants
   Number ofShares
    
    
    Weighted-Subject to
    
    
    AverageWarrants
    
    
    ExerciseOutstanding
    
    
    PriceWarrants outstanding  January 1, 2010
    
    
    802,730
    
    
    $
    4.10Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Warrants outstanding and exercisable  March 31, 2010
    
    
    802,730
    
    
    $
    4.10Weighted average remaining contractual life of the outstanding warrants  March 31, 2010
    
    2.56 years
 Note 8. Commitments and Contingencies
 Indemnities and Guarantees
  Cato Research Ltd. Agreement
 ®
  11




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TRANSDEL PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 8. Commitments and Contingencies (Continued)
 Cosmetic Products Consulting Agreement
  Cosmeceutical License Agreement
  Separation Agreement
  Note 9. Subsequent Event
 Issuance of Senior Convertible Promissory Note
   12




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
 ®
   Plan of Operations
 ®
 Clinical Program for Ketotransdel®
 ®
 ® ® ® ® ®
 ®
 ®
 ®
 ®
  13




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® ®
 Cosmeceutical/Cosmetic Product Development Program
 TM
  Other Product Development Programs
 ®
  Results of Operations
 Selling, General and Administrative Expenses
   Three months endedMarch 31,
    
    
    $2010
    
    
    2009
    
    
    VarianceSelling, general and administrative
    
    $
    755,587
    
    
    $
    481,474
    
    
    $
    274,113
  14




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
    
    As a result of the separation agreement entered into by us and our former chief
executive officer, we recognized aggregate one-time expenses of approximately $416,000.
This amount was comprised of approximately $242,000 related to the accrual of continued
salary and medical benefits to be provided for a period of one year after the separation
date of February 17, 2010 and approximately $174,000 of stock based compensation expense
related to the modification of terms for the former chief executive officers stock
options.
    
    The primary reason for the decrease, approximately $73,000, of investor relations
expense was due to significant amount of stock based compensation incurred during the same
period last year, but not in the current period, for investor relations services provided
to us.
    
    In the first quarter of 2009, we incurred monthly fees and stock-based compensation
charges related to consulting services primarily for business development services.
However, during the first quarter of 2010, we only incurred a minor amount of consulting
fees, therefore, this accounted for a net decrease in consulting expenses of approximately
$57,000.
 Research and Development Expenses
   Three months endedMarch 31,
    
    
    $2010
    
    
    2009
    
    
    VarianceResearch and development
    
    $
    115,158
    
    
    $
    1,146,551
    
    
    $
    (1,031,393
    )
  
    
    During the same period in the prior year, the Phase 3 study for Ketotransdel was
on-going and therefore, we recognized approximately $1.1 million of expenses related to the
study during that period. The expenses were primarily for the investigator payments owed
to the clinical sites for the patients they enrolled in the study and the fees incurred by
our contract research organization for their services provided in conducting the study. In
the current period, we only recognized a minimal amount of expense, which was incurred by
our contract research organization for final administrative activities related to the
study.
    
    The increase in personnel expenses of approximately $76,000 was primarily related to
stock-based compensation and wages of our chief medical officer who was hired in October
2009. This position was not filled in the same period of the prior year.
    
    The increase in consulting expenses of approximately $13,000 during the current period,
in comparison to the same period in the prior year, is due to fees incurred by consultants
in order to provide additional analysis on the Phase 3 study data.
 Interest Income
  Liquidity and Capital Resources
    15




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®
   Critical Accounting Policies
    Stock-Based Compensation.
   16




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Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  
 Item 4T.
    
    Controls and Procedures.
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
   17




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PART II
OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
 You should consider carefully the following information about the risks described below,
together with the other information contained in this quarterly report on Form 10-Q and in our
other filings with the Securities and Exchange Commission, before you decide to buy or maintain an
investment in our common stock. We believe the risks described below are the risks that are
material to us as of the date of this quarterly report. If any of the following risks actually
occur, our business financial condition, results of operations and future growth prospects would
likely be materially and adversely affected. In these circumstances, the market price of our common
stock could decline, and you may lose all or part of the money you paid to buy our common stock.
The risk factors set forth below with an asterisk (*) next to the title are new risk factors or
risk factors containing changes, including any material changes from the risk factors set forth in
our annual report on Form 10-K for the fiscal year ended December 31, 2009, as filed with the
Securities and Exchange Commission on March 31, 2010.
 Risks Relating to Our Business
 *We have incurred losses in the research and development of Ketotransdel® and our Transdel
technology since inception. No assurance can be given that we will ever generate revenue or become
profitable.
  ® ® ®
 *The report of our independent registered public accounting firm on our 2009 consolidated
financial statements contains a going concern modification, and we will need additional financing
to execute our business plan, fund our operations and to continue as a going concern, which
additional financing may not be available on a timely basis, or at all.
 ® ®
  18




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®
 We may not be able to correctly estimate our future operating expenses, which could lead to
cash shortfalls.
  
    
    the time and resources required to develop, conduct clinical trials and obtain
regulatory approvals for our drug candidates;
    
    the costs to attract and retain personnel with the skills required for effective
operations; and
    
    the costs of preparing, filing, prosecuting, defending and enforcing patent
claims and other patent related costs, including litigation costs and the results of
such litigation.
 Timing and results of clinical trials to demonstrate the safety and efficacy of products as
well as FDA approval of products are uncertain.
  ® ® ® ®
  19




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If we fail to comply with continuing federal, state and foreign regulations, we could lose our
approvals to market drugs and our business would be seriously harmed.
  
    
    issue warning letters;
    
    impose civil or criminal penalties;
    
    suspend or withdraw our regulatory approval;
    
    suspend or terminate any of our ongoing clinical trials;
    
    refuse to approve pending applications or supplements to approved applications filed by us;
    
    impose restrictions on our operations;
    
    close the facilities of our contract manufacturers; or
    
    seize or detain products or require a product recall.
   Delays in the conduct or completion of our clinical and non-clinical trials or the analysis of
the data from our clinical or non-clinical trials may result in delays in our planned filings for
regulatory approvals, and may adversely affect our business.
  
    
    failure of the FDA to approve the scope or design of our clinical
or non-clinical trials or manufacturing plans;
    
    delays in enrolling volunteers in clinical trials;
    
    insufficient supply or deficient quality of materials necessary
for the performance of clinical or non-clinical trials;
    
    negative results of clinical or non-clinical studies; and
    
    adverse side effects experienced by study participants in clinical
trials relating to a specific product.
   20




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None of our pharmaceutical product candidates, other than Ketotransdel®, have commenced
clinical trials.
 ®
 Once approved, there is no guarantee that the market will accept our products, and regulatory
requirements could limit the commercial usage of our products.
  We may be subject to product liability claims.
   If our patents are determined to be unenforceable, or if we are unable to obtain new patents
based on current patent applications or for future inventions, we may not be able to prevent others
from using our intellectual property.
  
    
    obtain and maintain patent protection with respect to our products;
    
    prevent third parties from infringing upon our proprietary rights;
    
    maintain trade secrets;
    
    operate without infringing upon the patents and proprietary rights of others; and
    
    obtain appropriate licenses to patents or proprietary rights held by
third parties if infringement would otherwise occur, both in the U.S.
and in foreign countries.
    21




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The use of our technologies could potentially conflict with the rights of others.
  We will be dependent on outside manufacturers in the event that we successfully develop our
product candidates into commercial products; therefore, we will have limited control of the
manufacturing process, access to raw materials, timing for delivery of finished products and costs.
One manufacturer may constitute the sole source of one or more of our products.
    We are dependent on third parties to conduct clinical trials and non-clinical studies of our
drug candidates and to provide services for certain core aspects of our business. Any interruption
or failure by these third parties to meet their obligations pursuant to various agreements with us
could have a material adverse effect on our business, results of operations and financial
condition.
   22




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Our cosmetic/cosmeceutical product development program may not be successful.
 TM
 We currently have no internal sales and marketing resources and may have to rely on third
parties in the event that we successfully commercialize our product.
  If we are unable to retain our key personnel or attract additional professional staff, we may
be unable to maintain or expand our business.
   23




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Risks Relating to Our Industry
 If we are unable to compete with other companies that develop rival products to our products,
then we may never gain market share or achieve profitability.
  We may not be able to keep up with the rapid technological change in the biotechnology and
pharmaceutical industries, which could make our products obsolete and reduce our potential
revenues.
  Our ability to generate revenues will be diminished if we fail to obtain acceptable prices or
an adequate level of reimbursement from third-party payors.
   Changes in the healthcare industry that are beyond our control may be detrimental to our
business.
  Risks Relating to the Common Stock
 We are subject to financial reporting and other requirements for which our accounting and
other management systems and resources may not be adequately prepared.
   24




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If we fail to maintain an effective system of internal control, we may not be able to report
our financial results accurately
or to prevent fraud. Any inability to report and file our financial results accurately and
timely could harm our business and adversely impact the trading price of our common stock.
  Public company compliance may make it more difficult to attract and retain officers and
directors.
  Our stock price may be volatile.
  
    
    changes in the pharmaceutical industry and markets;
    
    competitive pricing pressures;
    
    our ability to obtain working capital financing;
    
    new competitors in our market;
    
    additions or departures of key personnel;
    
    limited public float in the hands of a small number of persons
whose sales or lack of sales could result in positive or negative
pricing pressure on the market price for our common stock;
    
    sales of our common stock;
    
    our ability to execute our business plan;
    
    operating results that fall below expectations;
    
    loss of any strategic relationship with our contract manufacturers
and clinical and non-clinical research organizations;
    
    industry or regulatory developments;
    
    economic and other external factors; and
    
    period-to-period fluctuations in our financial results.
  We have not paid dividends in the past and do not expect to pay dividends in the future. Any
return on investment may be limited to the value of our common stock.
   25




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Our common stock is classified as a penny stock, which makes it more difficult for our
investors to sell their shares.
   Offers or availability for sale of a substantial number of shares of our common stock may
cause the price of our common stock to decline.
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 6.
    
    Exhibits
 ExhibitNumber

    
    Description31.1
*
    
    Section 302 Certification of Principal Executive Officer and Principal Financial Officer32.1
*
    
    Section 906 Certification of Principal Executive Officer and Principal Financial Officer
  *
    
    Filed herewith.  26




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SIGNATURES
  Transdel Pharmaceuticals, Inc.Dated: May 13, 2010
    By:
    /s/ John LomoroJohn LomoroActing Chief Executive Officer
and Chief Financial Officer
(Principal Executive Officer and
Principal Financial Officer)  27




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EXHIBIT INDEX
 ExhibitNumber

    
    Description31.1
*
    
    Section 302 Certification of Principal Executive Officer and Principal Financial Officer32.1
*
    
    Section 906 Certification of Principal Executive Officer and Principal Financial Officer
  *
    
    Filed herewith.  28