<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
--------------------
[x] QUARTERLY REPORT PURSUANT SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarter ended June 30, 1997
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 No. 0-26422
-------
ANSAN PHARMACEUTICALS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 94-3171943
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
400 Oyster Point Blvd. Suite 435
South San Francisco, California 94080
--------------------------------------
(Address of Principal Executive Offices)
(415) 635-0200
--------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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_____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of July 25, 1997: 2,851,954 shares of Common Stock outstanding,
$0.001 par value.
Traditional Small Business Disclosure Format. Yes X No________
---------------
<PAGE>
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Financial Statements:
Condensed Balance Sheets
June 30, 1997 and December 31, 1996.......................... 3
Condensed Statements of Operations
Three months and six months ended June 30, 1997
and 1996 and period from incorporation (November 6, 1992)
to June 30, 1997............................................. 4
Condensed Statements of Cash Flows
Three months and six months ended June 30, 1997
and 1996 and period from incorporation (November 6, 1992)
to June 30, 1997............................................. 5
Notes to Condensed Financial Statements........................ 6
Item 2. Management's Discussion and Analysis
or Plan of Operation........................................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................... 11
SIGNATURES............................................................... 12
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ANSAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ -----------
(Unaudited) (Note A)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 497,790 $ 245,778
Short-term investments 1,200,000 1,500,000
Prepaid expenses and other current assets 32,559 83,760
------------ -----------
Total current assets 1,730,349 1,829,538
Furniture and equipment, net 87,856 93,936
------------ -----------
$ 1,818,205 $ 1,923,474
============ ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 137,338 $ 91,041
Payable to Titan Pharmaceuticals, Inc. 189,300 117,881
Accrued sponsored research - 36,330
Accrued legal fees 5,935 26,327
Other accrued liabilities 11,370 62,457
Debenture payable to Titan Pharmaceuticals, Inc. 1,000,000 -
------------ -----------
Total current liabilities 1,343,943 334,036
Commitments
Stockholders' Equity
Common stock, at amounts paid in 10,699,996 10,850,017
Deferred compensation - (180,561)
Deficit accumulated during the development stage (10,225,734) (9,080,018)
------------ -----------
Total stockholders' equity 474,262 1,589,438
------------ -----------
$ 1,818,205 $ 1,923,474
============ ===========
</TABLE>
Note A: The balance sheet at December 31, 1996 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 accompanying notes.
3
<PAGE>
ANSAN PHARMACEUTICALS,INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, (November 6,
------------------------- ------------------------- 1992) to
June 30,
1997 1996 1997 1996 1997
------------------------- ------------------------- ------------
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Research and development $ 244,487 $ 205,614 $ 627,432 $ 462,976 $ 6,607,974
General and administrative 256,750 242,345 528,529 441,926 3,442,726
---------- ---------- ----------- ----------- ------------
Loss from operations (501,237) (447,959) (1,155,961) (904,902) (10,050,700)
Other income/(expenses)
Interest income 21,053 44,275 39,560 93,283 289,430
Interest expense (26,174) - (29,315) - (464,464)
---------- ---------- ----------- ----------- ------------
Net loss $ (506,358) $ (403,684) $(1,145,716) $ (811,619) $(10,225,734)
========== ========== =========== =========== ============
Net loss per share $ (0.20) $ (0.17) $ (0.46) $ (0.34)
========== ========== =========== ===========
Shares used in calculating
net loss per share 2,485,971 2,407,885 2,484,937 2,406,145
========== ========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
ANSAN PHARMACEUTICALS, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
Incorporation
Six Months Ended (November 6,
June 30, 1992 to
1997 1996 June 30, 1997
----------- --------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(1,145,716) $(811,619) $(10,225,734)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation expense 16,843 9,251 40,826
Amortization of debt discount - - 400,000
Amortization of deferred compensation 26,718 27,779 123,941
Forgiveness of stockholder receivable - - 205
Issuance of common stock in exchange
for consulting services - - 19,984
Grant of common stock to employee - - 155,000
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 51,201 79,589 (32,559)
Accounts payable 46,297 38,166 137,338
Accrued sponsored research (36,330) 730 -
Accrued legal fees (20,392) (32,890) 5,935
Other accrued liabilities (51,087) (70,214) 11,370
----------- --------- ------------
Net cash used in operating activities (1,112,466) (759,208) (9,363,694)
----------- --------- ------------
Cash flows from investing activities
Purchase of furniture and equipment (10,763) (56,785) (128,682)
Purchase of short-term investments (1,400,000) (93,283) (10,150,000)
Sales of short-term investments 1,700,000 900,000 8,950,000
----------- --------- ------------
Net cash provided by (used in) investing activities 289,237 749,932 (1,328,682)
----------- --------- ------------
Cash flows from financing activities
Proceeds from issuance of Series A preferred stock - - 992,592
Proceeds from issuance of common stock 3,822 8,976 5,976,058
Proceeds from related party notes - - 220,000
Proceeds from issuance of debenture to Titan 1,000,000 - 1,000,000
Pharmaceuticals, Inc.
Payment on related party notes - - (190,000)
Issuance of notes payable - - 1,025,000
Repayment of note payable - - (1,425,000)
Issuance of warrants to purchase common stock - - 400,000
Proceeds from stockholder receivable - - 1,900
Payable to Titan Pharmaceuticals, Inc. 71,419 24,660 3,189,616
----------- --------- ------------
Net cash provided by financing activities 1,075,241 33,636 11,190,166
----------- --------- ------------
Net increase (decrease) in cash and cash equivalents 252,012 24,360 497,790
Cash and cash equivalents, beginning of period 245,778 45,202 -
----------- --------- ------------
Cash and cash equivalents, end of period $ 497,790 $ 69,562 $ 497,790
=========== ========= ============
</TABLE>
See accompanying notes.
5
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Ansan, Inc. (the "Company") was incorporated in the State of Delaware on
November 6, 1992 to engage in the development of analogs of butyric acid for the
treatment of cancer, blood disorders and other serious diseases. The Company is
in the development stage.
Relationship with Titan Pharmaceuticals, Inc.
Titan Pharmaceuticals, Inc. ("Titan"), a biopharmaceutical company engaged,
through the operations of its subsidiaries and affiliates, in the development of
new proprietary therapeutic products for use in the fields of cancer,
immunology, viral diseases, and disorders of the central nervous system, was the
Company's parent until the Company's initial public offering (the "IPO") in
August 1995. Subsequent to the IPO, Titan's ownership interest was reduced to
43%.
In March 1997, Ansan and Titan entered into an agreement for financing
pursuant to which Titan advanced Ansan $1,000,000 in return for a debenture (the
"Debenture") which was convertible at any time prior to June 21, 1997 into
333,333 shares of common stock. Titan did not convert the Debenture prior to
June 21, 1997. The Debenture bears interest at prime plus 2% and is due in
April 1998. In connection with the issuance of the Debenture, Ansan granted
Titan an option to acquire an additional 333,333 shares of Ansan common stock
for an aggregate purchase price of $1,000,000. The option expired unexercised
on June 21, 1997.
The Company contracts with Titan for limited financial and administrative
services. Titan has previously supplied working capital financing to the
Company and may in the future provide such financing. As part of its
affiliation with Titan, the Company and Titan have a number of members in common
of their respective boards of directors.
Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principals for interim
financial information and with the instructions to form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principals for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered for fair presentation have been
included. Operating results for the three- and six-month periods ended June 30,
1997 are not necessarily indicative of the results that may expected for the
year ending December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's 1996 Annual Report on Form 10-KSB.
The Company's activities since incorporation have consisted primarily of
conducting research and development, performing business and financial planning
and raising capital. Accordingly, the Company is considered to be in the
development stage and expects to incur increasing losses and require additional
financial resources to achieve commercialization of its products. The Company
also depends on third parties to conduct certain research on the Company's
behalf through various research arrangements. All of the Company's current
6
<PAGE>
products under development are the subject of license agreements that may
require the payment of future royalties.
Net Loss Per Share
Net loss per share for the three- and six-month periods ended June 30, 1996
and June 30, 1997 is computed using the weighted average number of common shares
outstanding, reduced by the number of shares held in escrow (see Release of
Escrowed Shares and Options below). Common equivalent shares are excluded from
the calculation as their effect is antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 "Earnings Per Share", which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact is not expected to result in a
change in reported earnings per share for the three and six month periods ended
June 30, 1997 and June 30, 1996, as the Company incurred net losses in those
periods, and accordingly, the calculation of earnings per share for those
periods excluded stock options as their effect was antidilutive.
Release of Escrowed Shares and Options
In connection with the IPO, certain stockholders of the Company placed an
aggregate of 365,983 shares of Common Stock (the "Escrow Shares"), and the
current holders of certain options which are exercisable at less than the
initial public offering price of $5.00 placed options to purchase 34,017 shares
(the "Escrow Options"), into escrow pending the Company's attainment of certain
revenue or share price goals. The Securities and Exchange Commission has taken
the position with respect to the release of securities from escrow that in the
event any of the Escrow Shares or Escrow Options are released from escrow to
directors, officers, employees or consultants of the Company, the release will
be treated, for financial reporting purposes, as a compensation expense to the
Company. Accordingly, the Company will, in the event of the release of the
Escrow Shares and Escrow Options, recognize during the period in which the
earnings or market price targets are met what could be a substantial one-time
charge which would substantially increase the Company's loss or reduce or
eliminate earnings, if any, at such time. The amount of compensation expense
recognized by the Company will not affect the Company's total stockholders'
equity.
2. SUBSEQUENT EVENTS
Proposed Merger With Discovery Laboratories, Inc.
In July of 1997 the Company entered into an Agreement and Plan of
Reorganization and Merger with Discovery Laboratories, Inc. ("Discovery"), a
privately-held development stage biotechnology company, pursuant to which
Discovery will be merged with and into Ansan. The parties also entered into a
Stock Purchase Agreement pursuant to which Discovery has purchased shares of a
new class of convertible preferred stock of Ansan for aggregate cash
consideration of $1,300,000, representing a common stock equivalent price of
approximately $1.40 per share.
7
<PAGE>
In connection with these transactions, Ansan has entered into a sublicense
agreement with Titan. Pursuant to the agreement, and contingent upon completion
of the merger, Titan will receive an exclusive worldwide sublicense to certain
butyrate compounds licensed by Ansan for certain indications in exchange for
Titan's payment of a 2% royalty on net sales and Titan's transfer to Ansan of
all its equity holdings in Ansan.
The closing of the merger is subject to customary closing conditions,
including approval by the stockholders of Ansan and Discovery. If the merger is
completed, it is anticipated that the shareholders of Discovery will be issued
securities representing approximately 90% of the outstanding stock of the
combined entity. In the event the merger is not completed, the preferred stock
held by Discovery may, under certain circumstances, be convertible into shares
of common stock representing 51% of Ansan's then outstanding shares. In such
circumstances, Ansan would have the right to redeem the preferred stock for
$1,300,000 plus a redemption premium of $13,000 per month that the stock is
outstanding.
The following selected unaudited pro forma balance sheet data gives effect
as of June 30, 1997, to the $1,300,000 investment, made by Discovery, pursuant
to the Stock Purchase Agreement.
<TABLE>
<CAPTION>
June 30, 1997 Adjustment June 30, 1997
(unaudited) (pro forma)
<S> <C> <C> <C>
Current Assets $1,730,349 $1,300,000 $3,030,349
Furniture and Equipment 87,856 87,856
---------- -------------
Total Assets 1,818,205 3,118,205
========== =============
Total Liabilities 1,343,943 1,343,943
Total Stockholders' Equity 474,262 $1,300,000 1,774,262
---------- -------------
Total Liabilities and
Stockholders' Equity $1,818,205 $3,118,205
========== =============
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This Form 10-QSB contains forward-looking statements. These forward-
looking statements are subject to risks and uncertainties which may cause
actual results to differ materially from stated expectations. These risks and
uncertainties include but are not limited to: timeliness of completion, if
ever, of the merger with Discovery Laboratories, Inc.; timeliness of
completion, if at all, of IND filings; FDA approval of IND's if filed;
timeliness of commencement, if ever, of clinical trials; timeliness of
completion, if ever, of clinical trials; changing requirements for regulatory
approval; technological uncertainties; the impact of competitive products and
pricing; future availability of capital; uncertainties arising from patents;
and a number of other risks, including those described above, those set forth
in the Company's 1996 annual report of form 10-KSB and other reports filed
with the Securities and Exchange Commission; and those which may not be
identifiable as yet.
Results of Operations
The Company is in the development stage. Since its inception in
November 1992, the Company's efforts have been principally devoted to research
and development, securing patent protection and raising capital. From inception
through June 30, 1997, the Company has sustained cumulative losses of
approximately $10,226,000. These losses have resulted from expenditures in
connection with research and development and general and administrative
activities, including legal and professional activities.
Through June 30, 1997, research and development expenses since
inception have been approximately $6,608,000 and general and administrative
expenses since inception have been approximately $3,443,000. Total research and
development expenses were approximately $244,000 and $627,000 during the three-
and six-month periods ended June 30, 1997, respectively, compared with
approximately $206,000 and $463,000 for the three- and six-month periods ended
June 30, 1996, respectively, an increase of approximately 18% and 35% for the
three- and six-month periods, respectively. The increases are due to
expenditures associated with the development initiatives for AN10 topical and
Apafant. Such expenditures include, but are not limited to, formulation
development, chemistry, manufacturing and controls, pharmacology and toxicology.
Total general and administrative expenses were approximately $257,000
and $529,000 during the three- and six-month periods ended June 30, 1997,
respectively, compared with approximately $242,000 and $442,000 for the three-
and six-month periods ended June 30, 1996, respectively, an increase of
approximately 6% and 20% for the three- and six-month periods, respectively. The
increase is due to additional overhead needed to support the Company's
additional development programs.
Interest income was approximately $21,000 and $40,000 for the three-
and six-month periods ended June 30, 1997, respectively, compared with
approximately $44,000 and $93,000 for the three- and six-month periods ended
June 30, 1996. This decrease is the result of declining cash balances. The
Company has also incurred interest expense of approximately $29,000 for the six
months ended June 30, 1997, related to the $1,000,000 note payable to Titan (see
9
<PAGE>
Liquidity and Capital Resources). The Company had no interest bearing debt for
the comparable period in 1996.
The Company expects to continue to incur substantial research and
development costs in the future due to ongoing and new research and development
programs, manufacturing of products for use in clinical trials, patent and
regulatory activities, and preclinical and clinical testing of the Company's
products. In May of 1996, the Company signed a licensing agreement with
Boehringer Ingelheim GmbH to acquire the rights in the United States and the
European Union to develop a new intravenous formulation of the drug Apafant for
all clinical indications. The Company expects to incur substantial research and
development costs related to this acquisition. The Company also expects that
general and administrative costs necessary to support clinical trials, research
and development, manufacturing and the creation of a marketing and sales
organization, if warranted, will increase in the future. Accordingly, the
Company expects to incur increasing operating losses for the foreseeable future.
There can be no assurance that the Company will ever achieve profitable
operations.
Liquidity and Capital Resources
In August and September 1995, the Company completed an IPO which
resulted in net proceeds to the Company, after deduction of underwriting
discounts and commissions and other expenses of the IPO, of approximately
$5,950,000. As of June 30, 1997, the Company had working capital of
approximately $386,000.
In March 1997, Ansan and Titan entered into an agreement for financing
pursuant to which Titan advanced Ansan $1,000,000 in return for a debenture (the
"Debenture") which was convertible at any time prior to June 21, 1997 into
333,333 shares of common stock. Titan did not convert the Debenture prior to
June 21, 1997. The Debenture bears interest at prime plus 2% and is due in
April 1998. In connection with the issuance of the Debenture, Ansan granted
Titan an option to acquire an additional 333,333 shares of Ansan common stock
for an aggregate purchase price of $1,000,000. The option expired unexercised
on June 21, 1997.
In July of 1997 the Company entered into an Agreement and Plan of
Reorganization and Merger with Discovery Laboratories, Inc. ("Discovery"), a
privately-held development stage biotechnology company, pursuant to which
Discovery will be merged with and into Ansan. The parties also entered into a
Stock Purchase Agreement pursuant to which Discovery has purchased shares of a
new class of convertible preferred stock of Ansan for aggregate cash
consideration of $1,300,000, representing a common stock equivalent price of
approximately $1.40 per share.
In connection with these transactions, Ansan has entered into a
sublicense agreement with Titan. Pursuant to the agreement, and contingent upon
the completion of the merger, Titan will receive an exclusive worldwide
sublicense to certain butyrate compounds licensed by Ansan for certain
indications in exchange for Titan's payment of a 2% royalty on net sales and
Titan's transfer to Ansan of all its equity holdings in Ansan.
10
<PAGE>
The closing of the merger is subject to customary closing conditions,
including approval by the stockholders of Ansan and Discovery. If the merger is
completed, it is anticipated that the shareholders of Discovery will be issued
securities representing approximately 90% of the outstanding stock of the
combined entity. In the event the merger is not completed, the preferred stock
held by Discovery may, under certain circumstances, be convertible into shares
of common stock representing 51% of Ansan's then outstanding shares. In such
circumstances, Ansan would have the right to redeem the preferred stock for
$1,300,000 plus a redemption premium of $13,000 per month that the stock is
outstanding.
The Company believes that it has necessary capital to sustain planned
operations through March 1998. In the event that the Company's internal
estimates relating to its planned expenditures prove materially inaccurate, the
Company may be required to reallocate funds among its planned activities or to
curtail certain planned expenditures. In any event, the Company anticipates
that it will require substantial additional financing after such time in order
to continue its research and development capabilities, fund operating expenses,
pursue regulatory approval, and build production, sales, and marketing
activities, as necessary. There can be no assurance as to the availability or
terms of any additional financing, when and if needed. In the event that the
Company fails to raise any funds it requires, it may be necessary for the
Company to curtail its activities significantly or to cease operations
altogether.
11
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement of Computation of Net Loss Per Share
27 Financial Data Schedule
(b) Reports of Form 8-K
No reports on Form 8-K were filed during the six months ended
June 30, 1997.
12
<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.
ANSAN PHARMACEUTICALS, INC.
July 28, 1997 By: /s/Vaughan H.J. Shalson
-----------------------
Vaughan H.J. Shalson
President and Chief Executive Officer
(Principal Executive Officer and
Financial Officer)
13
<PAGE>
EXHIBIT 11
ANSAN PHARMACEUTICALS,INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Loss $ (506,358) $ (403,684) $(1,145,716) $ (811,619)
=========== =========== =========== ===========
Weighted average shares of
Common Stock outstanding 2,851,954 2,771,645 2,850,920 2,769,905
Escrow Shares (365,983) (363,760) (365,983) (363,760)
----------- ----------- ----------- -----------
Shares used in calculating net loss per share 2,485,971 2,407,885 2,484,937 2,406,145
=========== =========== =========== ===========
Net loss per share $ ($0.20) $ ($0.17) $ ($0.46) $ ($0.34)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 497,790
<SECURITIES> 1,200,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,730,349
<PP&E> 87,856
<DEPRECIATION> 16,843
<TOTAL-ASSETS> 1,818,205
<CURRENT-LIABILITIES> 1,343,943
<BONDS> 0
0
0
<COMMON> 10,699,996
<OTHER-SE> (10,225,734)
<TOTAL-LIABILITY-AND-EQUITY> 1,818,205
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 501,237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,174
<INCOME-PRETAX> (506,358)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (506,358)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0)
</TABLE>
