TITAN PHARMACEUTICALS INC - Quarter Report: 1999 September (Form 10-Q)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission file number 0-27436

Titan Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)

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 15,620,471 of the Registrant's Common Stock issued and outstanding on October 29, 1999.

Titan Pharmaceuticals, Inc.
Index to Form 10-Q

Part I. Financial Information

TITAN PHARMACEUTICALS, INC.
(a development stage company)

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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TITAN PHARMACEUTICALS, INC.
(a development stage company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

See Notes to Condensed Consolidated Financial Statements

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TITAN PHARMACEUTICALS, INC.
(a development stage company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

See Notes to Condensed Consolidated Financial Statements

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TITAN PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Summary of Significant Accounting Policies

The Company and its 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"). The Company and its subsidiaries operate in one industry segment.

Ingenex, Inc.

    Ingenex is engaged in the development of gene-based therapeutics for the treatment of cancer. At September 30, 1999, the Company owned 81% of Ingenex, assuming the conversion of all preferred stock to common stock.

ProNeura, Inc.

    ProNeura is engaged in the development of cost effective, long term treatment solutions to neurologic and psychiatric disorders through an implantable drug delivery system. At September 30, 1999, the Company owned 79% of ProNeura.

Theracell Merger

    On March 10, 1999, a majority owned Company subsidiary, 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 adjustments) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 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. Net Loss Per Share

    The Company calculates basic and diluted net loss per common share using the weighted average shares outstanding for the period. Had the Company been in a net income position, diluted earnings per share as of September 30, 1999 and 1998 would have included an additional 12,285,488 and 11,694,667

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shares, respectively, related to the Company's outstanding options, warrants and convertible preferred stock (prior to the application of treasury stock method.)

3. Stockholders' Equity

    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. The Company's comprehensive loss was the same as the Company's net loss for the reporting periods.

4. Subsequent Event

    In October 1999, the Company called for redemption on November 19, 1999 (the "Redemption Date") of its outstanding Class A Warrants for cash at the redemption price of $0.05 per warrant. Rather than surrendering the warrants for redemption, warrant holders may exercise their rights to purchase the Company's Common Stock at a price of $6.02 per share at any time prior to 5:00PM EST on the Redemption Date. In connection with the redemption, the Company entered into an advisory agreement with Deutsche Bank Securities Inc. pursuant to which the Company agreed to pay an advisory fee of $2 million payable on the Redemption Date if at least $30 million is received from warrant exercises, or in installments if more than $15 million but less than $30 million is raised. If less than $15 million is raised, $1 million of Deutsche Bank's fee will be in the form of warrants. Also in connection with the redemption, the Company amended the warrant agreement to terminate D.H. Blair Investment Banking Corp.'s solicitation rights in consideration for the payment to Blair of 2.7% of the warrant exercise proceeds.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

    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 product and technology development, clinical research, raising capital, and securing patent protection. At September 30, 1999, the Company had an accumulated deficit of approximately $62,494,000, resulting from expenditures for product development and general and administrative activities.

    Revenues from a U.S. government grant for the three and nine months ended September 30, 1999 were approximately $52,000 and $99,000, respectively. There were no revenues for the three and nine months ended September 30, 1998.

    Research and development expenses for the third quarter of 1999 were approximately $1,749,000 compared to $2,138,000 for the same quarter in 1998, a decrease of 18%. Planned expenditures for the third quarter of 1999 were based on prioritizing company resources for the development of CeaVac™, Pivanex™ and Spheramine™, and support its other programs through NIH and various other grants. For the nine months ended September 30, 1999, research and development expenses were $6,694,000, including $136,000 of acquired in-process research and development related to the acquisition of minority interest of Theracell, compared to $5,290,000 for the same period in 1998, an increase of 27%. Research and development spending for the nine months in 1999 were within budget, and the planned increase compared to 1998 was primarily due to patient enrollment in the Phase II clinical trial with CeaVac™ in colorectal cancer and the final phases of the pre-clinical program for Spheramine with anticipated clinical trial commencement by the end of the year.

    General and administrative expenses for the third quarter of 1999 were approximately $838,000 compared to $805,000 for the same quarter in 1998, an increase of 4%. For the nine months ended September 30 1999, general and administrative expenses were $2,154,000 compared to $2,809,000 for the same period in 1998, a decrease of 23%. The decrease for the nine months was due to the Company's planned consolidation of operations and ongoing efforts to contain non-research operating costs.

    Other income, net of other expenses for the three and nine month periods ended September 30, 1999 were approximately $89,000 and $378,000, respectively, compared to $189,000 and $720,000, respectively, for the same periods in 1998. The decreases were primarily a result of reduced interest income during 1999 compared to the same periods in 1998.

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.

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System Assessment

    Most of Titan's 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 ("CROs"). These functions include, but are not limited to, clinical study monitoring, biostatistics, data management and drug manufacturing. To the extent that the systems of CROs 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 CROs 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 CROs 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 CROs will be Year 2000 ready. The inability of its suppliers or CROs 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 Capital Resources

    The Company has funded its operations from inception primarily through private and public sales of its securities, corporate partnerships and government grants. During 1997, the Company received approximately $25,861,000 from license fees and the sale of a research technology.

    In October 1999, the Company called for redemption on November 19, 1999 (the "Redemption Date") of its outstanding Class A Warrants for cash at the redemption price of $0.05 per warrant. Rather than surrendering the warrants for redemption, warrant holders may exercise their rights to purchase the Company's Common Stock at a price of $6.02 per share at any time prior to 5:00PM EST on the Redemption Date. In the event that all of the warrants are exercised, the Company will receive gross proceeds of up to $42,700,000 before deducting fees and expenses. In connection with the redemption, the Company entered into an advisory agreement with Deutsche Bank Securities Inc. pursuant to which the Company agreed to pay an advisory fee of $2 million payable on the Redemption Date if at least $30 million is received from warrant exercises, or in installments if more than $15 million but less than $30 million is raised. If less than $15 million is raised, $1 million of Deutsche Bank's fee will be in the form of warrants. Also in connection with the redemption, the Company amended the warrant agreement to terminate D.H. Blair Investment Banking Corp.'s solicitation rights in consideration for the payment to Blair of 2.7% of the warrant exercise proceeds.

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    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 $2,316,000. 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.

    In May 1998, the Company negotiated a $5,000,000 bank line of credit that expires in March 2000. To date the Company has not borrowed against this facility.

    The Company expects to continue to incur substantial additional operating losses from costs related to continuation and expansion of product development, clinical trials, and administrative 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 additional financing, depending on numerous factors including, but not limited to, the amount of proceeds received by the Company upon the exercise of its Class A Warrants, the progress of the Company's product 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 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 may 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.

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PART II

Item 4. Submission of Matters to a Vote of Security Holders

    On August 30, 1999, the Company held its Annual Meeting of Shareholders. Matters voted upon at the meeting and the number of affirmative votes, negative votes, withheld votes and abstentions cast with respect to each such matter were as follows:

Item 6. Exhibits and Reports on Form 8-K

    (a) Exhibits

    (b) Reports on Form 8-K

    A current report on Form 8-K was filed with the Securities and Exchange Commission on October 19, 1999 to announce the redemption of the registrant's outstanding Class A warrants.

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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.

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Titan Pharmaceuticals, Inc. Index to Form 10-Q

PART II
SIGNATURES