** **

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

 

 

**ý           Quarterly Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934 for the Period Ended June 30, 2002.**

** **

**or**

** **

**o           TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the Transition Period From                       to**                 .

 

**Commissionfile number 0-27436**

 

 

**TitanPharmaceuticals, Inc.**

(Exact name ofregistrant 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 checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the preceding 12 months (or forsuch 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.  YesýNoo

 

 

There were27,642,085 shares of the Registrant’s Common Stock issued and outstanding onAugust 6, 2002.

 

 

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**Titan Pharmaceuticals,Inc**.

**Index toForm 10-Q**

 
| **Part I.**    | **Financial Information**                                                                                  |   |
|----------------|------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                       |   |
|           | Item 1.  Condensed Financial Statements (unaudited)                                                   |   |
|           |                                                                                                       |   |
|           | Condensed  Consolidated Balance Sheets June 30, 2002 and December 31, 2001                                 |   |
|           |                                                                                                       |   |
|           | Condensed  Consolidated Statements of Operations Three and six months ended June 30,  2002 and 2001        |   |
|           |                                                                                                       |   |
|           | Condensed  Consolidated Statements of Cash Flows Six months ended June 30, 2002 and 2001                   |   |
|           |                                                                                                       |   |
|           | Notes  to Condensed Consolidated Financial Statements                                                      |   |
|           |                                                                                                       |   |
|           | Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|           |                                                                                                       |   |
|           | Item  3.  Quantitative and Qualitative  Disclosures About Market Risk                                 |   |
|           |                                                                                                       |   |
| **Part II.**   | **Other Information**                                                                                      |   |
|           |                                                                                                       |   |
|           | Item 6.  Exhibits and Reports on Form 8-K                                                             |   |
|           |                                                                                                       |   |
| **SIGNATURES** |                                                                                                       |

 

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**Part I.  Financial Information**

 

**TITAN PHARMACEUTICALS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

** **
|                                                           |   | **June 30,**    |   | **December  31,** |   |
|----------------------------------------------------------------|--------|-----------------|--------|-------------------|--------|
|                                                           |   | **2002**        |   | **2001**          |   |
|                                                           |   | **(unaudited)** |   | **(Note A)**      |   |
| **Assets**                                                     |   |            |   |              |   |
| Current assets                                                 |   |            |   |              |   |
| Cash and cash equivalents                                      |   | $               | 6,298  |              | $      | 5,772 |   |
| Marketable securities                                          |   | 83,318          |   | 99,279            |   |
| Prepaid expenses, receivables, and other current  assets       |   | 1,203           |   | 906               |   |
| Total current assets                                           |   | 90,819          |   | 105,957           |   |
| Furniture and equipment, net                                   |   | 801             |   | 575               |   |
| Investment in other companies                                  |   | 300             |   | 600               |   |
|                                                           |   | $               | 91,920 |              | $      | 107,132 |   |
| **Liabilities and Stockholders’  Equity**                 |   |            |   |              |   |
| Current liabilities                                            |   |            |   |              |   |
| Accounts payable                                               |   | $               | 849    |              | $      | 894 |   |
| Accrued clinical trials expenses                               |   | 1,906           |   | 2,156             |   |
| Other accrued liabilities                                      |   | 1,004           |   | 714               |   |
| Deferred contract revenue                                      |   | —          |   | 2,000             |   |
| Total current liabilities                                      |   | 3,759           |   | 5,764             |   |
| Minority interest - Series B preferred stock of  Ingenex, Inc. |   | 1,241           |   | 1,241             |   |
| Stockholders’ equity                                      |   |            |   |              |   |
| Common stock, at amounts paid in                               |   | 191,686         |   | 191,684           |   |
| Additional paid-in capital                                     |   | 9,118           |   | 9,017             |   |
| Deferred compensation                                          |   | (731            | )      | (795              | )      |
| Accumulated deficit                                            |   | (113,652        | )      | (101,670          | )      |
| Accumulated other comprehensive income                         |   | 499             |   | 1,891             |   |
| Total stockholders’ equity                                |   | 86,920          |   | 100,127           |   |
|                                                           |   | $               | 91,920 |              | $      | 107,132 |   |

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Note A:  The balance sheet hasbeen derived from the audited financial statements at that datebut does not includeall of the information and footnotes required by generally accepted accountingprinciples in the United States for complete financial statements presentation.

 

See Notes to Condensed Consolidated FinancialStatements

 

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**TITAN PHARMACEUTICALS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

**(in thousands, except per shareamount)**

** **
|                                                                            |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|---------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                            |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                                                            |   |                             |   |                           |   |   |   |   |   |
| Contract and grant revenue                                                      |   | $                                | 151    |                           | $      | 373 |   | $ | 2,498 |   | $ | 953 |   |
| License revenue                                                                 |   | —                           |   | 2,500                          |   | — |   | 2,500 |   |
| Total revenue                                                                   |   | 151                              |   | 2,873                          |   | 2,498 |   | 3,453 |   |
|                                                                            |   |                             |   |                           |   |   |   |   |   |
| Operating expenses:                                                             |   |                             |   |                           |   |   |   |   |   |
| Research and development                                                        |   | 6,919                            |   | 5,341                          |   | 14,405 |   | 10,340 |   |
| General and administrative                                                      |   | 1,391                            |   | 1,211                          |   | 2,601 |   | 2,795 |   |
| Total operating expenses                                                        |   | 8,310                            |   | 6,552                          |   | 17,006 |   | 13,135 |   |
| Loss from operations                                                            |   | (8,159                           | )      | (3,679                         | )      | (14,508 | ) | (9,682 | ) |
|                                                                            |   |                             |   |                           |   |   |   |   |   |
| Other income (expense):                                                         |   |                             |   |                           |   |   |   |   |   |
| Interest income, net                                                            |   | 1,447                            |   | 1,867                          |   | 2,854 |   | 3,402 |   |
| Other expense                                                                   |   | (320                             | )      | (22                            | )      | (328 | ) | (73 | ) |
| Other income, net                                                               |   | 1,127                            |   | 1,845                          |   | 2,526 |   | 3,329 |   |
| Net loss                                                                        |   | $                                | (7,032 | )                              | $      | (1,834 | ) | $ | (11,982 | ) | $ | (6,353 | ) |
|                                                                            |   |                             |   |                           |   |   |   |   |   |
| Basic and diluted net loss per share                                            |   | $                                | (0.25  | )                              | $      | (0.07 | ) | $ | (0.43 | ) | $ | (0.23 | ) |
|                                                                            |   |                             |   |                           |   |   |   |   |   |
| Weighted average shares used in computing basic and  diluted net loss per share |   | 27,642                           |   | 27,619                         |   | 27,642 |   | 27,544 |   |

 

See Notes to Condensed Consolidated FinancialStatements

 

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**TITANPHARMACEUTICALS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

**(in thousands)**

** **
|                                                                                      |   | **Six Months  Ended June 30,** |    |
|-------------------------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                                      |   | **2002**                       |    | **2001** |   |
| **Cash flows from operating activities:**                                                 |   |                           |    |   |   |
| Net loss                                                                                  |   | $                              | (11,982 | ) | $ | (6,353 | ) |
| Adjustments to reconcile net loss to net cash  provided by(used in) operating activities: |   |                           |    |   |   |
| Depreciation and amortization                                                             |   | 567                            |    | 258 |   |
| Non-cash compensation related to stock options                                            |   | 165                            |    | 161 |   |
| Changes in operating assets and liabilities:                                              |   |                           |    |   |   |
| Prepaid expenses, receivables and other assets                                            |   | (396                           | )       | (565 | ) |
| Accounts payable and other accrued liabilities                                            |   | (5                             | )       | 451 |   |
| Deferred contract revenue                                                                 |   | (2,000                         | )       | — |   |
| Net cash used in operating activities                                                     |   | (13,651                        | )       | (6,048 | ) |
|                                                                                      |   |                           |    |   |   |
| **Cash flows from investing  activities:**                                                |   |                           |    |   |   |
| Purchases of furniture and equipment, net                                                 |   | (394                           | )       | (125 | ) |
| Purchases of marketable securities                                                        |   | (8,095                         | )       | (41,890 | ) |
| Proceeds from maturities of marketable securities                                         |   | 14,133                         |    | 31,200 |   |
| Proceeds from sales of marketable securities                                              |   | 8,531                          |    | 7,030 |   |
| Net cash provided by (used in) investing activities                                       |   | 14,175                         |    | (3,785 | ) |
|                                                                                      |   |                           |    |   |   |
| **Cash flows from financing  activities:**                                                |   |                           |    |   |   |
| Issuance of common stock, net                                                             |   | 2                              |    | 849 |   |
| Net cash provided by financing activities                                                 |   | 2                              |    | 849 |   |
|                                                                                      |   |                           |    |   |   |
| **Net increase (decrease) in cash and  cash equivalents**                                 |   | 526                            |    | (8,984 | ) |
| Cash and cash equivalents at beginning of period                                          |   | 5,772                          |    | 20,300 |   |
| Cash and cash equivalents at end of period                                                |   | 6,298                          |    | 11,316 |   |
| Marketable securities at end of period                                                    |   | 83,318                         |    | 101,806 |   |
| **Cash, cash equivalents and  marketable securities********at end of period**             |   | $                              | 89,616  |   | $ | 113,122 |   |

 

See Notes to Condensed Consolidated FinancialStatements

 

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**TITAN PHARMACEUTICALS, INC.**

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.****             ****Organization and Summary of Significant Accounting Policies**

 

***The Company***

                We are abiopharmaceutical company developing proprietary therapeutics for the treatmentof central nervous system disorders, cancer, and other serious and lifethreatening diseases.  We operate in onebusiness segment, the development of biopharmaceutical products.

 

***Basis of Presentation***

 

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of Titan and its subsidiaries after elimination of all significantintercompany accounts and transactions. Certain prior year balances have beenreclassified to conform to the current year presentation.  These financial statements have beenprepared in accordance with generally accepted accounting principles in theUnited States for interim financial information and with the instructions toForm 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for a complete financialstatements presentation. In the opinion of management, all adjustments(consisting of normal recurring adjustments) considered necessary for a fairpresentation have been included. Operating results for the six-month period ended June 30, 2002 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2002.

 

Theseunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and footnotesthereto included in the Titan Pharmaceuticals, Inc. annual report on Form 10-Kfor the year ended December 31, 2001.

 

***Revenue Recognition***

Contract revenue for research and development isrecorded as earned based on the performance requirements of the contract.  Revenue associated with performancemilestones, considered “at-risk” until the milestones are completed, isrecognized based on the achievement of the milestones as defined in therespective agreements.  Governmentgrants, which support our research effort in specific projects, generallyprovide for reimbursement of approved costs as defined in the grant documents,and revenue is recognized when associated project costs are incurred.

*** ***

***Operating Subsidiaries***

We conduct a small portion of our operations throughtwo subsidiaries: Ingenex, Inc. and ProNeura, Inc.  At June 30, 2002, we owned 81% of Ingenex(assuming the conversion of all preferred stock to common stock) and 79% ofProNeura.

 

**2.****             ****Net Loss Per Share**

Wecalculate net loss per share using the weighted average common sharesoutstanding for the period.  For periodsended June 30, 2002 and 2001, the effect of an additional 5,415,516 and 3,860,610shares, 

 

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respectively,related to our authorized and issued convertible preferred stock and options,were not included in the computation of diluted earnings per share because theyare anti-dilutive.

 

 

**3.****             ****Comprehensive Income**

 

Comprehensive income iscomprised of net loss and other comprehensive income.  The only component of other comprehensive income is unrealizedgains and losses from our marketable securities.  Comprehensive loss for the three and six months ended June 30,2002 were $7.2 million and $13.4 million, respectively, and for the three andsix months ended June 30, 2001 were $2.1 million and $5.4 million,respectively.

 

**4.****             ****Related Parties Transactions**

                In 2001, we provided certain relocation loans toemployees in connection with employment. In February 2001, we made a loan to a vice president officer in theprincipal amount of $373,000 bearing interest at the prime rate.  The loan was due and payable on August 7,2002.  As of August 14, 2002, $200,000has been repaid leaving a principal balance of $173,000.

 

**5.****             ****Spheramine milestone payment from Schering AG.**

                In February 2002, we announcedthat we received a $2.0 million milestone payment from Schering, Titan’scorporate partner for worldwide development, manufacture and commercializationof SpheramineÒ,Titan’s novel cell therapy for the treatment of Parkinson’s disease.  The milestone payment followed Schering’sdecision in the first quarter 2002 to initiate larger, randomized clinicaltesting of Spheramine for the treatment of patients with late-stage Parkinson’sdisease following the successful completion of Titan’s Phase I/II clinicalstudy of Spheramine.  As a result, Titanrecognized $2.0 million in contract revenue in the first quarter.

 

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**Item 2.        Management’s Discussion and Analysisof 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 SecuritiesReform Act of 1995, the attainment of which involves various risks anduncertainties. Forward-looking statements may be identified by the use offorward-looking terminology such as “may,” “will,” “expect,” “believe,”“estimate,” “plan,” “anticipate,” “continue,” or similar terms, variations ofthose terms or the negative of those terms. Our actual results may differmaterially from those described in these forward-looking statements due to,among other factors, the results of ongoing research and development activitiesand pre-clinical testing, the results of clinical trials and the availabilityof additional financing through corporate partnering arrangements orotherwise.  Additional factors includeour ability to protect our patents and proprietary rights, ability to complywith extensive government regulations, and other factors and risks detailedunder the caption “Risk Factors” in the Company’s 2001 Annual Report on Form10-K and other filings with the U.S. Securities and Exchange Commission.  Stockholders and prospective investors inthe Company should carefully consider these risk factors. The Company disclaimsany obligation to update these statements for subsequent events.*

 

*                Spheramine®,CeaVac®, TriAb®, TriGemTM, Pivanex®, CCMTM, ProbuphineTM, and PromafenTM  are trademarks of Titan Pharmaceuticals,Inc.*

 

***Overview***

We are a biopharmaceutical company developing proprietary therapeuticsfor the treatment of central nervous system disorders, cancer, and other seriousand life threatening diseases.  Ourproduct development programs focus on large pharmaceutical markets withsignificant unmet medical needs.

 

We currently have ten products in development, seven of which are inclinical development, with two products in expanded human trials for safety andefficacy, known as Phase III clinical trials. We have five products in earlier stage trials for dosing, andpreliminary safety and efficacy, known as Phase I and Phase II clinicaltrials.  In addition to these programs,we have three products in pre-clinical development.

 

We are independently developing our product candidates and alsoutilizing strategic partnerships, including collaborations with Novartis PharmaAG (Novartis) and Schering AG (Schering), as well as collaborations withseveral government-sponsored clinical cooperative groups.  These collaborations help fund productdevelopment and enable us to retain significant economic interest in ourproducts.

 

The results of astudy evaluating the potential effect of iloperidone, an antipsychoticmedication in development, on the EKG profile of patients receiving the drugwere announced in July 2002.  The studyindicated that results for iloperidone were roughly comparable to that forziprasidone, one of the approved agents in the study.  The potential of these data to support any possible regulatorysubmission for iloperidone is not currently known.  In addition, this may potentially limit the opportunity ofiloperidone as first line therapy for schizophrenia.  Novartis and Titan are currently preparing to evaluate next stepsfor the iloperidone program.

 

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The followingtable provides a summary status of our products in development:

 
| **Product**         |   | **Potential  Indication(s)**                                   |   | **Phase of  Development**       |   | **Marketing  Rights** |
|---------------------|--------|----------------------------------------------------------------|--------|---------------------------------|--------|-----------------------|
| Iloperidone         |   | Schizophrenia,  psychosis                                      |   | Phase III                       |   | Novartis Pharma  AG   |
| Spheramine          |   | Parkinson’s  disease                                      |   | Phase II  (planned for 2H 2002) |   | Schering AG           |
| CeaVac              |   | Colorectal,  gastrointestinal and pancreatic cancer            |   | Phase III  (colorectal cancer)  |   | Titan                 |
| TriAb               |   | Breast and  ovarian cancer                                     |   | Phase II (breast  cancer)       |   | Titan                 |
| TriGem &  TriAb |   | Small cell lung  cancer                                        |   | Phase II  (planned for 2H 2002) |   | Titan                 |
| CeaVac &  TriAb |   | Metastatic  breast, non-small cell lung, and colorectal cancer |   | Phase II                        |   | Titan                 |
| Pivanex             |   | Non-small cell  lung cancer                                    |   | Phase II                        |   | Titan                 |
| Gallium  Maltolate  |   | Myeloma,  prostate and bladder cancer, lymphoma                |   | Phase I/II                      |   | Titan                 |
| Probuphine          |   | Opiate addiction                                               |   | Pre-clinical                    |   | Titan                 |
| Promafen            |   | Alcohol  addiction                                             |   | Pre-clinical                    |   | Titan                 |
| RB94                |   | Head, neck, and  pancreatic cancer                             |   | Pre-clinical                    |   | Titan                 |

 

Our products areat various stages of development and may not be successfully developed orcommercialized. We do not currently have any products being commerciallysold.  Our proposed products willrequire significant further capital expenditures, development, testing, andregulatory clearances prior to commercialization.  We may experience unanticipated problems relating to productdevelopment and cannot predict whether we will successfully develop andcommercialize any products.  Anestimation of product completion dates and completion costs can varysignificantly for each product and are difficult to predict.  Various statutes and regulations alsoinfluence our product development progress and the success of obtainingapproval is highly uncertain.  For afull discussion of risks and uncertainties in our product development, see“Risk Factors­­ — Our products are atvarious stages of development and may not be successfully developed or commercialized”in our 2001 annual report on Form 10-K.

 

***Results of Operations***

Revenues for thesecond quarter of 2002 were approximately$150,000, compared to $2.9 million for the same quarter in 2001.  For the first six months of 2002, revenueswere $2.5 million, compared to $3.5 million for the same six-month period in2001.  The decrease in revenue for thesix-month period was due to additional revenue in 2001 from a one-time $2.5million license fee payment from Novartis, partially offset by a $2.0 millionmilestone payment received from Schering in 2002 following the successfulcompletion of our Phase I/II study and Schering’s decision to initiate expandedclinical testing of Spheramine for the treatment of patients with late-stageParkinson’s disease.

 

Research and development expenses forthe second quarter 2002 were $6.9 million, compared to $5.3 million for thesame quarter in 2001.  For the first sixmonths of 2002, research and development expenses were $14.4 million, comparedto $10.3 million for the same six-month period in 2001.  The increase resulted primarily from ourexpanded clinical and pre-clinical operations, including planned increases inexpenditures associated with our ongoing randomized, placebo-controlled PhaseIII clinical study of CeaVac in Dukes D colorectal cancer, as well as ourclinical studies of CeaVac and TriAb and progress in our pre-clinicaldevelopment of drug candidates for the treatment of opiate and alcoholaddiction.

 

General and administrative expensesfor the second quarter 2002 were $1.4 million compared to $1.2 million for thesame quarter in 2001.  For the first sixmonths of 2002, general and administrative expenses were $2.6 million, comparedto $2.8 million for the same six-month period in 2001.  The decrease for the six-month periodresulted primarily from the absence of certain non-recurring corporatedevelopment costs, while 

 

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thesecond quarter reflected a slight increase in general and administrativesupport for our increased clinical and pre-clinical operations.

 

Other income for the second quarter2002, net of a $300,000 write-down of certain long-term investments, was $1.1million compared to $1.8 million for the same quarter in 2001.  For the first six months of 2002, otherincome, net, was $2.5 million compared to $3.3 million for the same six-monthperiod in 2001.  The decrease, primarilyin interest income, was a result of lower interest rates and decreased cash andmarketable securities.

 

 As a result of the foregoing, we had a net loss for the secondquarter 2002 of $7.0 million, or $0.25 per share, compared to $1.8 million, or$0.07 per share, for the same quarter in 2001. For the first six months of 2002, our net loss was $12.0 million, or$0.43 per share, compared to $6.4 million, or $0.23 per share, for the samesix-month period in 2001.

 

***Liquidity andCapital Resources***

                Wehave funded our operations since inception through our initial public offeringand private placements of our securities, as well as proceeds from warrant andoption exercises, corporate licensing and collaborative agreements, andgovernment sponsored research grants. At June 30, 2002, we had $89.6 million of cash, cash equivalents, andmarketable securities.

 

                Ouroperating activities used $13.7 million and $6.0 million of cash in the firstsix months in 2002 and 2001, respectively. Uses of cash in operating activities were primarily to fund productdevelopment programs and administrative expenses.  We have entered into various agreements with researchinstitutions, universities, and other entities for the performance of researchand development activities and for the acquisition of licenses related to thoseactivities.  The aggregate commitmentswe have under these agreements, including minimum license payments, for thenext 12 months is approximately $0.9 million.  Certain of our licenses require us to payroyalties on future product sales, if any. In addition, in order to maintain license and other rights whileproducts are under development, we must comply with customary licenseeobligations, including the payment of patent related costs and diligent effortsin product development.

 

                Weexpect to continue to incur substantial additional operating losses from costsrelated to continuation and expansion of product and technology development,clinical trials, and administrative activities.  We believe that we currently have sufficient working capital tosustain our planned operations through 2005.

**Item 3.        Quantitativeand Qualitative Disclosures About Market Risk**

 

                Our market risk disclosures set forth in our Form 10-Kfor the period ended December 31, 2001, have not changed significantly.

 

**PART II**

**Item 6.**        **Exhibits and Reports on Form 8-K**

(a)                                  Exhibits

99.0         Section 906 Certification

(b)                                 Reportson Form 8-K

Therewere no current reports on Form 8-K filed for the quarter ended June 30, 2002.

 

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**SIGNATURES**

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 
|            | **TITAN PHARMACEUTICALS, INC.** |
|-----------------|---------------------------------|
|            |                            |   |   |
|            |                            |   |   |
| August 14, 2002 | By:                             |      /s/ Louis R. Bucalo |   |
|            |                            | Louis  R. Bucalo, M.D. |   |
|            |                            | Chairman,  President and Chief Executive Officer |
|            |                            |   |   |
| August 14, 2002 | By:                             |      /s/ Robert E. Farrell |   |
|            |                            | Robert E. Farrell |   |
|            |                            | Executive Vice President and Chief Financial Officer |

 

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