<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Period Ended June 30, 1998.
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period From __________ to ____________.
Commission file number 0-27436
TITAN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3171940
-------- ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
400 OYSTER POINT BLVD., SUITE 505, SOUTH SAN FRANCISCO, CALIFORNIA 94080
------------------------------------------------------------------------
(Address of Principal Executive Offices including zip code)
(650) 244-4990
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
There were 13,123,508 shares of the Registrant's Common Stock issued and
outstanding on August 7, 1998.
<PAGE>
TITAN PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Consolidated Financial Statements
(unaudited)
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997. . . . . . . . . . . . . . .3
Condensed Consolidated Statements of Operations
Three months and six months ended June 30, 1998
and 1997 and period from commencement of
operations (July 25, 1991) to June 30, 1998. . . . . . . . . . .4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997 and
period from commencement of operations
(July 25, 1991) to June 30, 1998 . . . . . . . . . . . . . . . .5
Notes to Condensed Consolidated Financial
Statements - June 30, 1998 . . . . . . . . . . . . . . . . . . .7
Item 2. Management's Discussion and Analysis
or Plan of Operations. . . . . . . . . . . . . . . . . . . . . .9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2
<PAGE>
Part I. Financial Information
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(unaudited) (Note A)
----------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $16,787,071 $24,386,872
Short-term investments 500,000 500,000
Prepaid expenses and other current assets 160,558 58,937
Other receivables - 371,793
----------- ------------
Total current assets 17,447,629 25,317,602
Furniture and equipment, net 228,633 253,723
Other assets 22,898 22,898
----------- ------------
$17,699,160 $25,594,223
----------- ------------
----------- ------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $642,802 $815,449
Accrued legal fees 60,991 244,486
Accrued sponsored research 135,058 65,500
Accrued payroll and related 163,105 257,751
Accrued professional and accounting fees 40,000 100,000
Other accrued liabilities 105,885 192,487
----------- ------------
Total current liabilities 1,147,841 1,675,673
Commitments
Minority interest - Series B preferred stock of
Ingenex, Inc. 1,241,032 1,241,032
Guaranteed security value (Note 2) 5,500,000
Stockholders' Equity
Preferred stock, at amounts paid in 5,000,000 5,000,000
Common stock, at amounts paid in 52,294,219 49,622,796
Additional paid-in capital 6,521,353 6,521,353
Deferred compensation (372,460) (458,340)
Deficit accumulated during the development
stage (48,132,825) (43,508,291)
----------- ------------
Total stockholders' equity 15,310,287 17,177,518
----------- ------------
$17,699,160 $25,594,223
----------- ------------
----------- ------------
</TABLE>
Note A: The balance sheet at December 31, 1997 has been derived from
the audited financial statements at that date but does not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
COMMENCEMENT
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, OF OPERATIONS
--------------------------- ------------------------- (JULY 25, 1991)
1998 1997 1998 1997 TO JUNE 30, 1998
----------- ----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
License and grant revenue $ - $ 111,483 $ - $ 147,745 $ 17,898,281
Costs and expenses:
Research and development 1,465,540 2,643,240 3,151,780 4,817,975 40,042,096
Acquired in-process research and development - - 9,500,000 10,186,000
General and administrative 973,909 1,626,973 2,003,529 2,963,891 20,345,478
----------- ----------- ----------- ------------ ------------
Total costs and expenses 2,439,449 4,270,213 5,155,309 17,281,866 70,573,574
----------- ----------- ----------- ------------ ------------
Loss from operations (2,439,449) (4,158,730) (5,155,309) (17,134,121) (52,675,293)
Other income (expense):
Equity in loss of Ansan Pharmaceuticals, Inc. - (221,785) - (501,824) (2,046,939)
Gain on sale of technology - 8,513,884 - 8,513,884 8,361,220
Interest income 225,074 147,378 488,893 319,313 2,326,054
Interest expense - (63,670) (87) (138,741) (4,389,774)
Loss on sale of fixed assets (13,431) - (13,431) - (13,431)
Other income (expense) (226) - 55,400 - 260,424
----------- ----------- ----------- ------------ ------------
Other income (expense) - net 211,417 8,375,807 530,775 8,192,632 4,497,554
----------- ----------- ----------- ------------ ------------
Income (loss) before minority interest (2,228,032) 4,217,077 (4,624,534) (8,941,489) (48,177,739)
Minority interest in losses of subsidiaries - - - - 44,914
Net income (loss) $(2,228,032) $ 4,217,077 $(4,624,534) $(8,941,489) $(48,132,825)
Deemed dividend upon conversion of preferred stock - - - - (5,431,871)
----------- ----------- ----------- ------------ ------------
Net income (loss) attributable to common stockholders $(2,228,032) $ 4,217,077 $(4,624,534) $(8,941,489) $(53,564,696)
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
Basic and diluted earnings (net loss) per common share $ (0.17) $ 0.32 $ (0.35) $ (0.69)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Shares used in computing basic earnings (net loss)
per share 13,108,230 13,046,102 13,093,516 12,971,902
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Shares used in computing diluted earnings per share 13,242,099
-----------
-----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
COMMENCEMENT
SIX MONTHS ENDED JUNE 30, OF OPERATIONS
--------------------------- (JULY 25, 1991)
1998 1997 TO MARCH 31,1998
------------ ------------ ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,624,534) $(8,941,489) $(48,132,825)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization expense 145,054 245,576 1,593,748
Issuance of common stock to acquire technology - 5,500,000 5,500,000
Payment of guaranteed security value (3,044,409) - (3,044,409)
Loss (gain) on sale of assets 14,105 (218,654) 14,105
Accretion of discount on indebtedness - - 2,290,910
Equity in loss of Ansan Pharmaceuticals, Inc. - 501,825 2,046,940
Other - - (35,653)
Issuance of common stock to acquire
minority interest of Theracell, Inc. - - 686,000
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (101,621) (22,765) (160,558)
Receivable from Ansan Pharmaceuticals, Inc. - (71,419) -
Other receivables 371,793 - -
Other assets - 152,564 (27,863)
Accounts payable (172,647) 420,491 966,992
Accrued license fee - 2,000,000 -
Other accrued liabilities (355,185) 390,366 905,455
----------- ----------- ------------
Net cash used in operating activities (7,767,444) (43,505) (37,397,158)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (71,189) (51,718) (1,222,412)
Proceeds from sale of furniture and equipment 23,000 - 23,000
Purchase of short-term investments - (100,000) (59,782,493)
Proceeds from sale of short-term investments - 12,600,000 59,282,493
Issuance of debenture to Ansan
Pharmaceuticals, Inc. - (1,000,000)
Effect of deconsolidation of
Ansan Pharmaceuticals, Inc. - - (135,934)
----------- ----------- ------------
Net cash (used in)/provided by investing activities (48,189) 11,448,282 (1,835,346)
----------- ----------- ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
COMMENCEMENT
SIX MONTHS ENDED JUNE 30, OF OPERATIONS
--------------------------- (JULY 25, 1991)
1998 1997 TO MARCH 31,1998
------------ ------------ ----------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 215,832 2,998 30,244,606
Deferred financing costs - 46,349 (713,899)
Issuance of preferred stock - - 17,601,443
Issuance of preferred stock - Novartis - - 5,000,000
Proceeds from notes and advances payable - - 2,681,500
Repayment of notes payable - - (1,441,500)
Proceeds from Ansan bridge financing - - 1,425,000
Proceeds from Titan Pharmaceuticals, Inc. and
Ingenex, Inc. bridge financing - - 5,250,000
Repayment of Titan Pharmaceuticals, Inc. and
Ingenex, Inc. bridge financing - - (5,250,000)
Payments of principle under capital lease obligation - (127,462) (633,766)
Proceeds from capital lease bridge financing - - 658,206
Proceeds from Ingenex, Inc. technology financing - - 2,000,000
Principal payments on Ingenex, Inc. technology financing - (1,289,313) (2,000,000)
Increase in minority interest from issuances of
preferred stock by Ingenex, Inc. - - 1,241,032
Issuance of common stock by subsidiaries - - 173,652
Loss (gain) on disposal of assets - - (216,699)
----------- ----------- ------------
Net cash provided by/(used in) financing activities 215,832 (1,367,428) 56,019,575
----------- ----------- ------------
Net (decrease)/increase in cash and cash equivalents (7,599,801) 10,037,349 16,787,071
Cash and cash equivalents, beginning of period 24,386,872 1,376,532 -
----------- ----------- ------------
Cash and cash equivalents, end of period $16,787,071 $11,413,881 $ 16,787,071
----------- ----------- ------------
----------- ----------- ------------
Supplemental cash flow disclosure
Interest paid $ 87 $138,741 $ 1,393,396
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND ITS SEVERAL DEVELOPMENT STAGE SUBSIDIARIES
Titan Pharmaceuticals, Inc. (the "Company" or "Titan"), was incorporated
in February 1992 in the State of Delaware. Titan is a biopharmaceutical
company developing proprietary therapeutics for the treatment of central
nervous system disorders, cancer and other serious and life-threatening
diseases. Titan conducts a portion of its operations through three
development stage biotechnology companies: Ingenex, Inc. ("Ingenex"),
Theracell, Inc. ("Theracell") and ProNeura, Inc. ("ProNeura"), collectively,
(the "Operating Companies"). Trilex Pharmaceuticals, Inc. ("Trilex") was
incorporated in May 1996, as a wholly owned subsidiary of the Company, to
engage in the development of cancer therapeutic vaccines utilizing
anti-idiotypic antibody technology. In August 1997, Trilex was merged (the
"Trilex Merger") with and into Titan.
INGENEX, INC.
Ingenex was incorporated in July 1991 and reincorporated in June 1992.
It is engaged in the development of gene-based therapeutics. In June 1997,
Ingenex sold its GSX System (the "GSX Sale"), a research technology, and
certain fixed assets to Pharmaceutical Product Development, Inc. ("PPD") for
$8,722,500 in cash and the assumption of certain capital lease liabilities
and recognized a gain of $8,361,220. At June 30, 1998, the Company owned 81%
of Ingenex.
THERACELL, INC.
Theracell was incorporated in November 1992 to engage in the development
of novel treatments for various neurologic disorders through the
transplantation of neural cells and neuron-like cells directly into the
brain. At June 30, 1998, the Company owned 98% of Theracell.
PRONEURA, INC.
ProNeura was incorporated in October 1995 to engage in the development
of cost effective, long term treatment solutions to neurologic and
psychiatric disorders through an implantable drug delivery system. At June
30, 1998, the Company owned 79% of ProNeura.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Titan and its majority owned subsidiaries after
elimination of all significant inter-company accounts and transactions.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. These financials should be read in conjunction with the
audited consolidated financial statements and footnotes thereto included in
the Titan Pharmaceuticals, Inc. annual report on Form 10-K for the year ended
December 31, 1997.
2. GUARANTEED SECURITY VALUE
In January 1997, the Company entered into an exclusive license
agreement with Hoechst Marion Roussel, Inc. ("HMRI"). The license agreement
gave the Company a worldwide license to HMRI's patent rights and know-how
related to the antipsychotic agent Iloperidone-TM-. Pursuant to the license,
the Company paid, during 1997, an up-front license fee of $9,500,000,
consisting of: (i) $4,000,000 in cash and (ii) $5,500,000 through the
issuance 594,595 shares of common stock (the "HMRI Shares".) The Company was
obligated to pay to HMRI the difference between $5,500,000 and the net
proceeds received by HMRI upon sale of the above mentioned
7
<PAGE>
common stock. Accordingly, the Company had classified the entire $5,500,000
as a non-current liability under the heading Guaranteed Security Value in the
accompanying December 31, 1997 balance sheet. In February 1998, HMRI sold the
HMRI Shares for net proceeds of approximately $2,456,000. Accordingly, in
March 1998, the Company paid to HMRI approximately $3,044,000, which was
deducted from Guaranteed Security Value balance. The remaining balance of
$2,456,000 was transferred to stockholders' equity.
3. CHANGES IN ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
statement has no impact on the Company's net income/loss or stockholders'
equity. During the three months ended June 30, 1998 and 1997 and the six
months ended June 30, 1998 and 1997, the Company's comprehensive income/loss
was the same as the Company's net income/loss for such periods.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains certain forward-looking statements,
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the attainment of which involves various risks
and uncertainties. Forward-looking statements may be identified by the use
of forward-looking terminology such as "may", "will", "expect", "believe",
"estimate", "anticipate", "continue" or similar terms, variations of those
terms or the negative of those terms. The Company's actual results may
differ materially from those described in these forward-looking statements
due to, among other factors, the results of ongoing research and development
activities and preclinical testing, the results of clinical trials and the
availability of additional financing through corporate partnering
arrangements or otherwise.
RESULTS OF OPERATIONS
Since its inception, the Company's efforts have been principally devoted
to research and development, including human clinical trials, as well as to
acquiring licenses and technologies, raising capital and securing patent
protection. At June 30, 1998, the Company had an accumulated deficit of
approximately $48,133,000, resulting from expenditures for research and
development and general and administrative activities including professional
fees.
There were no revenues for the three months ended June 30, 1998 (the
"1998 quarter") and for the six months ended June 30, 1998 (the "1998 six
months"). Total revenues for the three months ended June 30, 1997 (the "1997
quarter") were approximately $111,000, and total revenues for the six months
ended June 30, 1997 (the "1997 six months") were approximately $148,000.
Revenue earned during both the 1997 six months and quarter was earned
pursuant to US government grants.
Research and development expenses for the 1998 quarter were
approximately $1,466,000 compared to $2,643,000 for the 1997 quarter, a
decrease of 45%. For the 1998 six months, research and development expenses
were $3,152,000 compared to $4,818,000 for the 1997 six months, a decrease of
35%. The 1997 six months and the 1997 quarter include expenditures related
to a research technology, which was subsequently sold by the Company in June
1997. The 1997 six months and the 1997 quarter also include expenditures
related to the development of Iloperidone, which is now being funded by
Novartis Pharma AG pursuant to the partnering agreement (the "Novartis
Sublicense") establish by Titan and Novartis in November 1997.
The results for the 1997 six months also include a non-recurring,
acquired in-process research and development charge of $9,500,000 related to
the acquisition of Iloperidone.
General and administrative expenses for the 1998 quarter were
approximately $974,000 compared to $1,627,000 for the 1997 quarter, a
decrease of 40%. For the 1998 six months, general and administrative
expenses were $2,004,000 compared to $2,964,000 for the 1997 six months, a
decrease of 32%. The 1997 six months includes expenditures related to a
former subsidiary, which was merged with and into the Company in August 1997.
Other income for the 1997 quarter and the 1997 six months includes a
gain of approximately $8,514,000 from the sale of GSX, a research technology
developed by Ingenex, and certain fixed assets. Interest income was
approximately $225,000 during the 1998 quarter compared to $147,000 during
the 1997 quarter. For the 1998 six months, interest income was $489,000
compared to $319,000 for the 1997 six months. Interest expense decreased to
approximately $100 during the 1998 six months from $139,000 during the 1997
six months. There was no interest expense for the 1998 quarter compared to
$64,000 for the 1997 quarter. Other income for the 1997 six months also
includes losses of approximately $502,000 representing the Company's share of
Ansan Pharmaceutical's losses. The Company's share of Ansan's losses for the
1997 quarter was $222,000.
9
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
The Company has funded its operation from inception primarily through
private placements of its securities, as well as the IPO. During 1997, the
Company also received approximately $25,861,000 from up-front license fees
relating to the Novartis Sublicense and the sale of a research technology.
In March 1998, the Company paid to HMRI approximately $3,044,000 (the
difference between the net proceeds received by HMRI, upon the sale of the
HMRI Shares in February 1998, and the $5,500,000 guaranteed value of the HMRI
Shares when issued.) As the Company classified the $5,500,000 as guaranteed
security value, the HMRI Shares had not been included in stockholders'
equity. Upon the payment to HMRI, approximately $2,456,000 was credited to
stockholders' equity.
Titan has entered into various agreements with research institutions,
universities, and other entities for the performance of research and
development activities and for the acquisition of licenses related to those
activities. The aggregate commitments the Company has under these
agreements, including minimum license payments, for the next 12 months is
approximately $2,000,000. Certain of the licenses provide for the payment of
royalties by the Company on future product sales, if any. In addition, in
order to maintain license and other rights while products are under
development, the Company must comply with customary licensee obligations,
including the payment of patent related costs and meeting project-funding
milestones.
The Company expects to continue to incur substantial additional
operating losses from costs related to continuation and expansion of research
and development, clinical trials, and increased administrative and fund
raising activities over at least the next several years. While the Company
has sufficient working capital to sustain planned operations for a period
greater than 12 months, the Company may seek additional financing sooner,
depending on numerous factors including, but not limited to, the progress of
the Company's research and development programs, the results of clinical
studies, technological advances, determinations as to the commercial
potential of the Company's products, and the status of competitive products.
In May 1998, the Company negotiated a $5,000,000 bank line of credit. In
addition, certain expenditures will be dependent on the establishment of
collaborative relationships with other companies, the availability of
financing, and other factors. In any event, the Company anticipates that it
will require substantial additional financing in the future. There can be no
assurance as to the availability or terms of any required additional
financing, when and if needed.
10
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the six months ended
June 30, 1998.
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
TITAN PHARMACEUTICALS, INC.
August 14, 1998 By: /s/Louis R. Bucalo
--------------------------------------
Louis R. Bucalo, M.D., President and
Chief Executive Officer
August 14, 1998 By: /s/Robert E. Farrell
--------------------------------------
Robert E. Farrell, Chief Financial
Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 16,787,071
<SECURITIES> 500,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,447,629
<PP&E> 439,851
<DEPRECIATION> (211,218)
<TOTAL-ASSETS> 17,699,160
<CURRENT-LIABILITIES> 1,147,841
<BONDS> 0
0
5,000,000
<COMMON> 52,294,219
<OTHER-SE> (40,742,900)
<TOTAL-LIABILITY-AND-EQUITY> 17,699,160
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,155,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,624,534)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,624,534)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
