<PAGE>
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 March 31, 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 (I.R.S. 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 13,100,883 shares of the Registrant's Common Stock issued and
outstanding on May 11, 1998.
<PAGE>
TITAN PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997. . . . . . . . . . . . . . . .2
Condensed Consolidated Statements of Operations
Three months ended March 31, 1998
and 1997 and period from commencement of
operations (July 25, 1991) to March 31, 1998. . . . . . . . . . . .3
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997 and
period from commencement of operations
(July 25, 1991) to March 31, 1998 . . . . . . . . . . . . . . . . .4
Notes to Condensed Consolidated Financial
Statements - March 31, 1998 . . . . . . . . . . . . . . . . . . . .6
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
<PAGE>
PART I. FINANCIAL INFORMATION
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(unaudited) (Note A)
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 19,130,440 $ 24,386,872
Short-term investments 500,000 500,000
Prepaid expenses and other current assets 121,900 58,937
Other receivables - 371,793
------------ ------------
Total current assets 19,752,340 25,317,602
Furniture and equipment, net 269,980 253,723
Other assets 23,898 22,898
------------ ------------
$ 20,046,218 $ 25,594,223
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 859,497 $ 815,449
Accrued legal fees 50,906 244,486
Accrued sponsored research 124,312 65,500
Accrued payroll and related 161,902 257,751
Accrued professional and accounting fees 64,500 100,000
Other accrued liabilities 120,000 192,487
------------ ------------
Total current liabilities 1,381,117 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 52,222,909 49,622,796
Additional paid-in capital 6,521,353 6,521,353
Deferred compensation (415,400) (458,340)
Deficit accumulated during the development stage (45,904,793) (43,508,291)
------------ ------------
Total stockholders' equity 17,424,069 17,177,518
------------ ------------
$ 20,046,218 $ 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
2
<PAGE>
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
COMMENCEMENT
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, (JULY 25, 1991)
--------------------------- TO
1998 1997 MARCH 31, 1998
------------ ------------ --------------
<S> <C> <C> <C>
License and grant revenue $ - $ 36,262 $ 17,898,281
Costs and expenses:
Research and development 1,686,240 2,174,735 38,576,556
Acquired in-process research and development - 9,500,000 10,186,000
General and administrative 1,029,620 1,336,918 19,371,569
----------- ------------ ------------
Total costs and expenses 2,715,860 13,011,653 68,134,125
----------- ------------ ------------
Loss from operations (2,715,860) (12,975,391) (50,235,844)
Other income (expense):
Equity in loss of Ansan Pharmaceuticals, Inc. - (280,039) (2,046,939)
Gain on sale of technology - - 8,361,220
Interest income 263,819 171,935 2,100,980
Interest expense (87) (75,071) (4,389,774)
Other income (expense) 55,626 - 260,650
----------- ------------ ------------
Other income (expense) - net 319,358 (183,175) 4,286,137
----------- ------------ ------------
Loss before minority interest (2,396,502) (13,158,566) (45,949,707)
Minority interest in losses of subsidiaries - - 44,914
Net loss $(2,396,502) $(13,158,566) $(45,904,793)
Deemed dividend upon conversion of preferred stock - - (5,431,871)
----------- ------------ ------------
Net loss attributable to common stockholders $(2,396,502) $(13,158,566) $(51,336,664)
----------- ------------ ------------
----------- ------------ ------------
Basic and diluted net loss per common share $ (0.18) $ (1.02)
----------- ------------
----------- ------------
Shares used in computing basic and diluted net loss per share 13,078,801 12,897,703
----------- ------------
----------- ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
COMMENCEMENT
THREE MONTHS ENDED MARCH 31, OF OPERATIONS
-------------------------------- (JULY 25, 1991) TO
1998 1997 MARCH 31, 1998
----------- ------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,396,502) $(13,158,566) $(45,904,793)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization expense 70,580 143,210 1,519,274
Issuance of common stock to acquire technology - 5,500,000 5,500,000
Payment of guaranteed security value (3,044,409) - (3,044,409)
Accretion of discount on indebtedness - - 2,290,910
Equity in loss of Ansan Pharmaceuticals, Inc. - 280,039 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 (62,963) (20,431) (121,900)
Receivable from Ansan Pharmaceuticals, Inc. - (19,034) -
Other receivables 371,793 - -
Other assets (1,000) (80,262) (28,863)
Accounts payable 44,048 13,764 1,183,687
Accrued license fee - 2,000,000
Other accrued liabilities (338,604) 57,025 922,036
----------- ------------ ------------
Net cash used in operating activities (5,357,057) (5,284,255) (34,986,771)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (43,897) (32,111) (1,195,120)
Purchase of short-term investments - (100,000) (59,782,493)
Proceeds from sale of short-term investments - 8,600,000 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 (43,897) 7,467,889 (1,831,054)
----------- ------------ ------------
</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
THREE MONTHS ENDED MARCH 31, OF OPERATIONS
-------------------------------- (JULY 25, 1991) TO
1998 1997 MARCH 31, 1998
----------- ------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock $ 144,522 $ 2,998 $ 30,173,296
Deferred financing costs - - (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 - (62,494) (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 - (135,061) (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 on disposal of assets - - (216,699)
----------- ------------ ------------
Net cash provided by/(used in) financing activities 144,522 (194,557) 55,948,265
----------- ------------ ------------
Net (decrease)/increase in cash and cash equivalents (5,256,432) 1,989,077 19,130,440
Cash and cash equivalents, beginning of period 24,386,872 1,376,532 -
----------- ------------ ------------
Cash and cash equivalents, end of period $19,130,440 $ 3,365,609 $ 19,130,440
----------- ------------ ------------
----------- ------------ ------------
Supplemental cash flow disclosure
Interest paid $ 87 $ 75,071 $ 1,393,396
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<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 is engaged in the development of gene-based therapeutics and the
discovery of medically important genes for the treatment of cancer and viral
diseases. In September 1994, Ingenex issued shares of its Series B
convertible preferred stock to a third party for $1,241,032, net of issuance
costs. In June 1996, Ingenex issued 981,818 shares of common stock to the
Company, converting $5,400,000 of debt payable. Also in June 1996, and in
consideration of a payment to Ingenex of $100,000, Ingenex issued to the
Company an option to purchase an additional 315,789 shares of common stock
which will have an exercise price per share equal to the initial public
offering price of Ingenex common stock and an additional option and a right
of first refusal with respect to future issuances of common stock in order
for the Company to maintain ownership of a majority of the outstanding common
stock. The option expires one year from the date of the consummation of the
initial public offering of Ingenex common stock. 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 March 31, 1998, the Company owned 81% of Ingenex,
assuming the conversion of all preferred stock to common.
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. The Company's ownership in Theracell was 85% through November 1995,
at which time the Company entered into an agreement with the minority
stockholders of Theracell pursuant to which 140,000 shares of the Company's
stock were issued in exchange for all the outstanding shares of Theracell
common stock held by them. In connection with the issuance of the 140,000
shares, the Company recorded a charge for acquired in-process research and
development of $686,000. In November 1995, the former minority stockholders
of Theracell were granted an option to acquire 5% of the issued and
outstanding capital stock of Theracell. These options can be exercised at a
price of $1.59 per share within a period of three years from January 18,
1996. Commencing thirty days after the date Theracell's shares are first
publicly traded, the Theracell options may be subject to redemption under
certain conditions by Theracell on thirty days' written notice at a
redemption price of $0.05 per share if the closing price of Theracell's
common stock for any thirty consecutive trading days ending within fifteen
days of the notice of redemption averages in excess of $3.18 per share. At
March 31, 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 March
31, 1998, the Company owned 79% of ProNeura.
6
<PAGE>
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 intercompany 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 three-month period ended March 31, 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 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 loss or stockholders' equity. During the three
months ended March 31, 1998 and 1997, the Company's comprehensive loss was
the same as the Company's net loss for such periods.
7
<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 acquiring technologies, research, clinical development, securing patent
protection and raising capital. At March 31, 1998, the Company had an
accumulated deficit of approximately $45,905,000, resulting from expenditures
for research and development and general and administrative activities
including professional fees.
There were no revenues for the three months ended March 31, 1998 ("1998
quarter") and approximately $36,000 for the three months ended March 31, 1997
("1997 quarter") from government grants.
Research and development expenses for the 1998 quarter were
approximately $1,686,000 compared with $2,175,000 for the 1997 quarter, a
decrease of 22%. The 1997 quarter includes development of the GSX technology,
which was subsequently sold by the Company in June 1997. The results for the
1997 quarter 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 $1,030,000 compared with $1,337,000 for the 1997 quarter, a
decrease of 23%. The 1997 quarter includes expenditures related to Trilex
Pharmaceuticals, which was merged with and into the Company in August 1997,
reducing general and administrative expenses.
Other income for the 1998 quarter was approximately $319,000 compared to
an expense of approximately $183,000 for the 1997 quarter, a net change of
approximately $503,000. Other income for the 1998 quarter includes interest
income of approximately $264,000 compared to $172,000 during the 1997
quarter. Interest expense for the 1997 quarter was approximately $75,000,
which was attributable to a capital equipment lease and a technology
financing agreement, both of which were retired with proceeds of the GSX
sale. Other income for the 1997 quarter also includes losses of
approximately $280,000 representing the Company's share of Ansan
Pharmaceutical's losses.
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 sublicense of Iloperidone to Novartis Pharma AG and the GSX
sale.
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.
8
<PAGE>
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 $1,319,000. 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.
The Company is currently negotiating 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.
9
<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 three months ended
March 31, 1998.
10
<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.
May 14, 1998 By: /s/ Louis R. Bucalo
------------------------------------------
Louis R. Bucalo, M.D., President and
Chief Executive Officer
May 14, 1998 By: /s/ Robert E. Farrell
------------------------------------------
Robert E. Farrell, Chief Financial Officer
11
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 19,130,440
<SECURITIES> 500,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,752,340
<PP&E> 474,182
<DEPRECIATION> 204,202
<TOTAL-ASSETS> 20,046,218
<CURRENT-LIABILITIES> 1,381,117
<BONDS> 0
0
5,000,000
<COMMON> 52,222,909
<OTHER-SE> (38,557,808)
<TOTAL-LIABILITY-AND-EQUITY> 20,046,218
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,715,860
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87
<INCOME-PRETAX> (2,396,502)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,396,502)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
