<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, 1999.
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 15,378,053 shares of the Registrant's Common Stock issued and
outstanding on May 7, 1999.
<PAGE>
TITAN PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION...........................................PAGE
----
<S> <C>
Item 1. Condensed Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998..........................2
Condensed Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998 and period
from commencement of operations (July 25, 1991)
to March 31, 1999.............................................3
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998 and period
from commencement of operations (July 25, 1991)
to March 31, 1999.............................................4
Notes to Condensed Consolidated Financial
Statements - March 31, 1999...................................6
Item 2. Management's Discussion and Analysis
and Results of Operations.....................................7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.............................................9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.........................10
SIGNATURES....................................................................11
</TABLE>
<PAGE>
TITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited) (Note A)
-------------- --------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 14,791,511 $ 11,654,896
Prepaid expenses and other current assets 185,795 139,958
-------------- --------------
Total current assets 14,977,306 11,794,854
Furniture and equipment, net 454,720 416,956
Other assets 15,783 15,783
-------------- --------------
$ 15,447,809 $ 12,227,593
-------------- --------------
-------------- --------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 864,285 410,235
Accrued legal fees 36,900 108,393
Accrued clinical trials expense 270,758 653,218
Accrued payroll and related 200,986 182,647
Accrued professional and accounting fees 96,268 125,730
Other accrued liabilities 175,000 100,000
-------------- --------------
Total current liabilities 1,644,197 1,580,223
Commitments
Minority interest - Series B preferred stock of Ingenex, Inc. 1,241,032 1,241,032
Stockholders' Equity
Preferred stock, at amounts paid in 5,000,000 5,000,000
Common stock, at amounts paid in 58,224,313 52,291,369
Additional paid-in capital 6,524,247 6,524,204
Deferred compensation (243,640) (286,580)
Deficit accumulated during the development stage (56,942,340) (54,122,655)
-------------- --------------
Total stockholders' equity 12,562,580 9,406,338
-------------- --------------
$ 15,447,809 $ 12,227,593
-------------- --------------
-------------- --------------
</TABLE>
Note A: The balance sheet at December 31, 1998 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
1999 1998 MARCH 31, 1999
-------------- -------------- ---------------
<S> <C> <C> <C>
License and grant revenue $ 46,660 $ - $ 17,944,941
Costs and expenses:
Research and development 2,084,973 1,686,240 46,788,652
Acquired in-process research and development 135,785 - 10,321,785
General and administrative 787,454 1,029,620 22,837,277
-------------- -------------- ---------------
Total costs and expenses 3,008,212 2,715,860 79,947,714
-------------- -------------- ---------------
Loss from operations (2,961,552) (2,715,860) (62,002,773)
Other income (expense):
Equity in loss of Ansan Pharmaceuticals, Inc. - - (2,046,939)
Gain on sale of technology - - 8,361,220
Interest income 151,462 263,819 2,836,204
Interest expense - (87) (4,389,902)
Other income (expense) (9,595) 55,626 254,936
-------------- -------------- ---------------
Other income (expense) - net 141,867 319,358 5,015,519
-------------- -------------- ---------------
Loss before minority interest (2,819,685) (2,396,502) (56,987,254)
Minority interest in losses of subsidiaries - - 44,914
-------------- -------------- ---------------
Net loss $ (2,819,685) $ (2,396,502) $ (56,942,340)
Deemed dividend upon conversion of preferred stock - - (5,431,871)
-------------- -------------- ---------------
Net loss attributable to common stockholders $ (2,819,685) $ (2,396,502) $ (62,374,211)
-------------- -------------- ---------------
-------------- -------------- ---------------
Basic and diluted net loss per common share $ (0.19) $ (0.18)
-------------- --------------
-------------- --------------
Shares used in computing basic and diluted net loss per share 14,686,694 13,078,801
-------------- --------------
-------------- --------------
</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
1999 1998 MARCH 31, 1999
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,819,685) $ (2,396,502) $ (56,942,340)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization expense 88,399 70,580 1,830,703
Issuance of common stock to acquire technology - - 5,500,000
Payment of guaranteed security value - (3,044,409) (3,044,409)
Loss on sale of assets - - (203,683)
Accretion of discount on indebebtedness - - 2,290,910
Equity in loss of Ansan Pharmaceuticals, Inc. - - 2,046,940
Other - - (35,653)
Issuance of common stock to acquire
minority interest of Theracell, Inc. 135,785 - 821,785
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (45,837) (62,963) (185,795)
Receivable from Ansan Pharmaceuticals, Inc.
Other receivables - 371,793 -
Other assets - (1,000) (20,748)
Accounts payable 454,050 44,048 1,188,475
Other accrued liabilities (390,076) (338,604) 1,180,328
-------------- -------------- -------------
Net cash used in operating activities (2,577,364) (5,357,057) (45,573,487)
-------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (83,223) (43,897) (1,557,336)
Proceeds from sale of furniture and equipment - - 24,791
Purchase of short-term investments - - (59,782,493)
Proceeds from sale of short-term investments - - 59,782,493
Effect of deconsolidation of
Ansan Pharmaceuticals, Inc. - - (135,934)
-------------- -------------- -------------
Net cash (used in)/provided by investing activities (83,223) (43,897) (1,668,479)
-------------- -------------- -------------
-------------- -------------- -------------
</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
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, (JULY 25, 1991) TO
1999 1998 MARCH 31, 1999
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 5,797,159 144,522 36,038,915
Deferred financing costs - - (713,899)
Issuance of preferred stock - - 22,601,443
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)
Proceeds from capital lease bridge financing - - 658,206
Payments of principle under capital lease obligation - - (633,766)
Proceeds from Ingenex, Inc. technology financing - - 2,000,000
Principal payments on Ingenex, Inc. technology financing - - (2,000,000)
Increase (decrease) in minority interest - - 1,241,032
Issuance of common stock by subsidiaries 43 - 176,546
-------------- -------------- --------------
Net cash provided by/(used in) financing activities 5,797,202 144,522 62,033,477
-------------- -------------- --------------
Net (decrease)/increase in cash and cash equivalents 3,136,615 (5,256,432) 14,791,511
Cash and cash equivalents, beginning of period 11,654,896 24,386,872 -
-------------- -------------- --------------
Cash and cash equivalents, end of period $ 14,791,511 $ 19,130,440 $ 14,791,511
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental cash flow disclosure
Interest paid $ - $ 87 $ 1,393,524
-------------- -------------- --------------
-------------- -------------- --------------
Conversion of notes payable to related parties and
accrued interest into Series A preferred stock $ - $ - $ (1,306,329)
-------------- -------------- --------------
-------------- -------------- --------------
Acquisition of furniture and equipment pursuant to
capital lease $ - $ - $ 595,236
-------------- -------------- --------------
-------------- -------------- --------------
Cashless exercise of warrants $ - $ - $ 871,892
-------------- -------------- --------------
-------------- -------------- --------------
</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 two
subsidiaries: Ingenex, Inc. ("Ingenex") and ProNeura, Inc. ("ProNeura"),
collectively, (the "Operating Companies"). In March 1999, a third Company
subsidiary, Theracell, Inc. ("Theracell"), was merged with and into Titan.
INGENEX, INC.
Ingenex is engaged in the development of gene-based therapeutics for the
treatment of cancer. 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 1997, Ingenex sold a research technology and certain fixed
assets 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, 1999, the
Company owned 81% of Ingenex, assuming the conversion of all preferred stock
to common.
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, 1999, the Company owned 79% of ProNeura.
THERACELL MERGER
On March 10, 1999, Theracell was merged with and into Titan. Pursuant to
the merger, the Company recorded an in-process research and development
expense of approximately $136,000, related to the acquisition of the shares
held by the minority shareholders.
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, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. 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, 1998.
2. SEGMENT INFORMATION
The Company and its Operating Companies operate in one industry
segment, principally the development of proprietary therapeutics for the
treatment of central nervous system disorders, cancer and other serious and
life-threatening diseases.
3. COMPREHENSIVE INCOME
During the three months ended March 31, 1999 and 1998, the Company's
comprehensive loss was the same as the Company's net loss for such periods.
4. NET LOSS PER SHARE
Had the Company been in a net income position, diluted earnings per
share for the three months ended March 31, 1999 and 1998 would have included
the shares used in the computation of basic net loss per share and the
dilutive effect of 11,772,473 and 11,490,631 shares, respectively, related to
outstanding options and warrants (prior to the application of the treasury
stock method.)
5. NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which is
required to be adopted in years beginning after June 15, 1999. Because the
Company does not use derivatives, the adoption of SFAS 133 will not effect
the Company's consolidated results of operations and financial position.
6
<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, raising capital, research, clinical development,
and securing patent protection. At March 31, 1999, the Company had an
accumulated deficit of approximately $56,942,000, resulting from expenditures
for research and development and general and administrative activities.
There was approximately $47,000 in revenues from a U.S. government grant
for the three months ended March 31, 1999 compared to no revenues for the
three months ended March 31, 1998.
Research and development expenses for the 1999 quarter were
approximately $2,085,000 compared with $1,686,000 for the 1998 quarter, an
increase of 24%. The increase is due to the initiation and furtherance of the
Company's cancer clinical trials. During the 1999 quarter Theracell, Inc.,
a subsidiary of the Company, was merged with and into Titan. As a result, the
Company recorded an in-process research and development expense of
approximately $136,000.
General and administrative expenses for the 1999 quarter were
approximately $787,000 compared with $1,030,000 for the 1998 quarter, a
decrease of 24%. The decrease can be attributed to planned reductions in
personnel expenses and other administrative costs.
Other income and expenses, net for the 1999 quarter was approximately
$142,000 compared to approximately $319,000 for the 1998 quarter, a net
change of approximately $177,000. Other income for the 1999 quarter includes
interest income of approximately $151,000 compared to $264,000 during the
1998 quarter.
IMPACT OF YEAR 2000
GENERAL
The "Year 2000 Issue" is the result of computer programs being
written using two digits rather than four to define the applicable year.
Computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, or engage in similar normal business
activities.
SYSTEM ASSESSMENT
Titan is a relatively young company, incorporated in 1992, and most
of its Information Technology ("IT") and Non-IT systems were Year 2000
compliant when purchased. The Company believes, therefore, it will not be
required to implement significant modifications or replace significant
portions of its software and hardware in order to be Year 2000 compliant. The
Company is, however, taking steps to ensure that the Year 2000 Issue does not
have a material impact on the operation of the Company.
Significant functions related to the Company's clinical trials are
carried out by contract research organizations ("CRO's"). These functions
include, but are not limited to, clinical study monitoring,
7
<PAGE>
biostatistics, data management and drug manufacturing. To the extent that the
systems of CRO's produce incorrect information or cause incorrect
interpretation of the information that they produce, the Company is at risk
for making invalid conclusions about the nature, efficacy, or safety of its
products or technologies which could lead to abandoning potentially lucrative
products or technologies or invalidly continuing development and pursuing FDA
approval of others. The Company is in the process of contacting its
significant suppliers and CRO's and requesting that they provide certificates
of compliance with relation to this issue. At this time the Company is not
aware of any suppliers or CRO's with a Year 2000 Issue that would materially
impact the Company's results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that its suppliers or CRO's
will be Year 2000 ready. The inability of its suppliers or CRO's to complete
their Year 2000 resolution process in a timely fashion could materially
impact the Company. The effect of non-compliance by other external agents is
not determinable.
COSTS AND CONTINGENCIES
To date, the Company has expended only internal costs to assess the
Year 2000 Issue. Letters of Year 2000 compliance from internal software
providers tend to indicate that the Company will not be exposed to any
material expenditures for replacements of such systems, however there can be
no assurance of this. Also, it is not yet possible to ascertain if any
expenditure will be required to replace systems, subcontractors or the work
performed by such subcontractors. While vendor assurances and internal
testing are useful in assessing Year 2000 issues, neither can provide
absolute assurance that no Year 2000 problems will or can occur. During 1999,
the Company will continue to refine its plans in an attempt to assure the
Year 2000 Issue will not materially adversely affect their business
operations or financial condition.
LIQUIDITY AND SOURCES OF CAPITAL
The Company has funded its operation from inception primarily
through private and public sales of its securities and corporate
partnerships. During 1997, the Company received approximately $25,861,000
from license fees and the sale of a research technology.
In January 1999, the Company completed a private placement of
2,254,545 shares of its Common Stock for net proceeds of approximately
$5,798,000, after deducting fees and commissions and other expenses of the
offering.
In November 1998, the Company agreed to guarantee certain potential
obligations of the Company's Chief Executive Officer, related to the
Company. The Company's Chief Executive Officer has pledged approximately
300,000 shares of the Company's common stock, owned by the Chief Executive
Officer, to secure the guarantee by the Company. Under said guarantee, the
Company may be obligated to make a payment of up to $400,000.
Titan has entered into various agreements with contract research
organizations, academic institutions, and other entities for the performance
of research and development activities and for the maintenance 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 $2,412,000. 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. To preserve operating capital,
the Company has chosen to strategically focus on development of its later stage
products in clinical development, and at least temporarily reduce or eliminate
spending on certain preclinical programs. While the Company has sufficient
working capital to sustain planned operations for a period greater than 12
months, the Company may seek
8
<PAGE>
additional financing, 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. To date the Company has not borrowed against this facility.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has reviewed the requirements of Item 3 and has determined
that these disclosures are not applicable.
9
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
27.1 Financial Data Schedule
<S> <C>
(b) Reports on Form 8-K
A current report on Form 8-K was filed with the Securities and
Exchange Commission on January 28, 1999.
</TABLE>
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 17, 1999 By: /s/Louis R. Bucalo
------------------
Louis R. Bucalo, M.D., President and
Chief Executive Officer
May 17, 1999 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-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,791,511
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,977,306
<PP&E> 773,458
<DEPRECIATION> 318,738
<TOTAL-ASSETS> 15,447,809
<CURRENT-LIABILITIES> 1,644,197
<BONDS> 0
0
5,000,000
<COMMON> 58,224,313
<OTHER-SE> (50,418,093)
<TOTAL-LIABILITY-AND-EQUITY> 15,447,809
<SALES> 0
<TOTAL-REVENUES> 46,660
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,220,758
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,819,685)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,819,685)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
