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. 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 Part I. Financial Information TITAN PHARMACEUTICALS, INC. (a development stage company) CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1998 1997 (unaudited) (Note A) ----------- ------------ 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 ----------- ------------ ----------- ------------
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
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 ----------- ----------- ----------- ------------ ---------------- 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 ----------- -----------
See Notes to Condensed Consolidated Financial Statements 4 TITAN PHARMACEUTICALS, INC. (a development stage company) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
PERIOD FROM COMMENCEMENT SIX MONTHS ENDED JUNE 30, OF OPERATIONS --------------------------- (JULY 25, 1991) 1998 1997 TO MARCH 31,1998 ------------ ------------ ---------------- 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) ----------- ----------- ------------
See Notes to Condensed Consolidated Financial Statements 5 TITAN PHARMACEUTICALS, INC. (a development stage company) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
PERIOD FROM COMMENCEMENT SIX MONTHS ENDED JUNE 30, OF OPERATIONS --------------------------- (JULY 25, 1991) 1998 1997 TO MARCH 31,1998 ------------ ------------ ---------------- 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 ----------- ----------- ------------ ----------- ----------- ------------
See Notes to Condensed Consolidated Financial Statements 6 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 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 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 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 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 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