The following table provides a reconciliation of cash, cash
equivalents and restricted cash reported within the condensed balance sheets that sum to the total of the same such amounts shown
in the condensed statement of cash flows (in thousands):
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
|
1.
|
Organization and Summary of Significant Accounting Policies
|
The Company
We are a
pharmaceutical company developing proprietary therapeutics utilizing our proprietary long-term drug delivery platform for the
treatment of select chronic diseases for which steady state delivery of a drug provides an efficacy and/or safety benefit. We
are currently transitioning to a commercial stage enterprise having recently re-acquired Probuphine®, a product approved
in the U.S. for management of opiate dependence. We operate in only one business segment, the development of pharmaceutical
products.
Basis of Presentation
The accompanying unaudited
condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”)
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 U.S. GAAP for complete financial statement presentation. 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 three and six-month periods ended June 30, 2018 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2017, or any future interim periods.
The balance sheet
at December 31, 2017 has been derived from the audited financial statements at that date, but does not include all of the
information and footnotes required by U.S. GAAP for complete financial statements. These unaudited condensed financial statements
should be read in conjunction with the audited financial statements and footnotes thereto included in the Titan Pharmaceuticals, Inc.
Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission
(“SEC”).
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The accompanying financial
statements have been prepared assuming we will continue as a going concern.
At
June 30, 2018, we had cash and
cash equivalents of approximately $1.6 million, which we believe, along with the payment from L. Molteni & C. Dei Frattelli
Alitti Società Di Esercizio S.P.A. (“Molteni”) in August, are sufficient to fund our planned operations into
mid-September 2018. If extended, the convertible loan from Molteni should provide funds through the end of the third quarter.
We will
require additional funds to finance our operations, including the commercialization of Probuphine in the U.S., completion of the
Probuphine Phase IV clinical trials mandated by the FDA and advancement of our current ProNeura development programs to later stage
clinical studies. While we are currently considering the various financing alternatives available to us, our efforts to address
our liquidity requirements may not be successful.
Going concern assessment
With the implementation
of FASB's standard on going concern, Accounting Standard Update, or ASU No. 2014-15, beginning with the year ended December 31,
2016 and all annual and interim periods thereafter, we will assess going concern uncertainty in our financial statements to determine
if we have sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at
least one year from the date the financial statements are issued or available to be issued, which is referred to as the “look-forward
period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable
to us, we will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the
timing and nature of projected cash expenditures or programs, and its ability to delay or curtail expenditures or programs, if
necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions around implementing
curtailments or delays in the nature and timing of programs and expenditures to the extent we deem probable those implementations
can be achieved and we have the proper authority to execute them within the look-forward period in accordance with ASU No. 2014-15.
Based upon the above
assessment, we concluded that, at the date the financial statements in this Quarterly Report on Form 10-Q for the months ended
June 30, 2018, we did not have sufficient cash to fund our operations for the next 12 months without additional funds and, therefore,
there was substantial doubt about our ability to continue as a going concern within 12 months after the date the financial statements
were issued.
Revenue Recognition
Beginning January 1, 2018, we have followed
the provisions of ASC Topic 606,
Revenue from Contracts with Customers
. The guidance provides a unified model to determine
how revenue is recognized.
We generate revenue principally from collaborative
research and development arrangements, technology licenses, and government grants. Consideration received for revenue arrangements
with multiple components is allocated among the separate performance obligations based upon their relative estimated standalone
selling price.
In determining the appropriate amount of
revenue to be recognized as we fulfill our obligations under our agreements, we perform the following steps: (i) identification
of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance
obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including
the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated
selling prices; and (v) recognition of revenue when (or as) we satisfy each performance obligation.
Performance Obligations
A performance obligation is a promise in
a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. Our performance
obligations include commercialization license rights, development services and services associated with the regulatory approval
process.
We have optional additional items in contracts,
which are accounted for as separate contracts when the customer elects such options. Arrangements that include a promise for future
commercial product supply and optional research and development services at the customer’s discretion are generally considered
as options. We assess if these options provide a material right to the customer and, if so, such material rights are accounted
for as separate performance obligations. If we are entitled to additional payments when the customer exercises these options, any
additional payments are recorded in revenue when the customer obtains control of the goods or services.
Transaction Price
We have both fixed and variable consideration.
Non-refundable upfront payments are considered fixed, while milestone payments are identified as variable consideration when determining
the transaction price. Funding of research and development activities is considered variable until such costs are reimbursed at
which point they are considered fixed. We allocate the total transaction price to each performance obligation based on the relative
estimated standalone selling prices of the promised goods or services for each performance obligation.
At the inception of each arrangement that
includes milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount
to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal
would not occur, the value of the associated milestone is included in the transaction price. Milestone payments that are not within
our control, such as approvals from regulators, are not considered probable of being achieved until those approvals are received.
For arrangements that include sales-based
royalties or earn-out payments, including milestone payments based on the level of sales, and the license or purchase agreement
is deemed to be the predominant item to which the royalties or earn-out payments relate, we recognizes revenue at the later of
(a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty or earn-out payment
has been allocated has been satisfied (or partially satisfied).
Allocation of Consideration
As part of the accounting for these arrangements,
we must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified
in the contract. Estimated selling prices for license rights are calculated using the residual approach. For all other performance
obligations, we use a cost-plus margin approach.
Timing of Recognition
Significant management judgment is required
to determine the level of effort required under an arrangement and the period over which we expect to complete our performance
obligations under an arrangement. We estimate the performance period or measure of progress at the inception of the arrangement
and re-evaluate it each reporting period. This re-evaluation may shorten or lengthen the period over which revenue is recognized.
Changes to these estimates are recorded on a cumulative catch up basis. If we cannot reasonably estimate when our performance obligations
either are completed or become inconsequential, then revenue recognition is deferred until we can reasonably make such estimates.
Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method. Revenue is
recognized for licenses or sales of functional intellectual property at the point in time the customer can use and benefit from
the license. For performance obligations that are services, revenue is recognized over time proportionate to the costs that we
have incurred to perform the services using the cost-to-cost input method.
Research and Development Costs and
Related Accrual
Research and development
expenses include internal and external costs. Internal costs include salaries and employment related expenses, facility costs,
administrative expenses and allocations of corporate costs. External expenses consist of costs associated with outsourced contract
research organization, or CRO, activities, sponsored research studies, product registration, patent application and prosecution,
and investigator sponsored trials. We also record accruals for estimated ongoing clinical trial costs. Clinical trial costs represent
costs incurred by CROs and clinical sites. These costs are recorded as a component of research and development expenses. Under
our agreements, progress payments are typically made to investigators, clinical sites and CROs. We analyze the progress of the
clinical trials, including levels of patient enrollment, invoices received and contracted costs when evaluating the adequacy of
accrued liabilities. Significant judgments and estimates must be made and used in determining the accrued balance in any accounting
period. Actual results could differ from those estimates under different assumptions. Revisions are charged to expense in the period
in which the facts that give rise to the revision become known.
Recent Accounting Pronouncements
In November 2016,
the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. ASU No. 2016-18 is intended to reduce
diversity in practice in the classification and presentation of changes in restricted cash on the Condensed Statement of Cash Flows.
The ASU requires that the Condensed Statement of Cash Flows explain the change in total cash, cash equivalents and amounts generally
described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts.
The ASU also requires a reconciliation between the total of cash, cash equivalents and restricted cash presented on the Condensed
Statement of Cash Flows and the cash and cash equivalents balance presented on the Condensed Balance Sheet. We adopted ASU No.
2016-18, and the guidance has been retrospectively applied to all periods presented. The adoption of the guidance did not have
an impact on our Condensed Balance Sheet or Statement of Operations and Comprehensive Loss.
In July 2017, the
Financial Accounting Standards Board, or FASB, issued a two-part Accounting Standards Update, or ASU, No. 2017-11,
I. Accounting
for Certain Financial Instruments With Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Exception
amending guidance in FASB ASC 260, Earnings Per Share, FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815,
Derivatives and Hedging. The amendments in Part I of ASU 2017-11 change the classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. The amendments in Part II of ASU 2017-11 re-characterize the indefinite
deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception.
Those amendments do not have an accounting effect. ASU 2017-11 is effective for public business entities for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We adopted ASU 2017-
11 for the year ended December 31, 2017, and retrospectively applied ASU 2017-11 as required. There was no retrospective impact
as a result of the adoption of ASU 2017-11 on the financial statements. See Note 10, “Debt Agreements”.
In August 2016, the
FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
addressing eight specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for
fiscal years beginning after December 31, 2017, and for interim periods within those years. The adoption of ASU No. 2016-15 did
not have a material impact on our statements of cash flows.
In March 2016, the
FASB issued ASU No. 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 addresses several aspects of the accounting for share-based payment award transactions,
including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; (c) classification on the
statement of cash flows; and (d) accounting for forfeitures. We adopted the provisions of ASU 2016-09 in the first quarter of 2017.
We have elected to continue to estimate forfeitures based on the estimated number of awards expected to vest. In addition, the
adoption of ASU 2016-09 resulted in the recognition of $12.0 million of previously unrecognized excess tax benefits in deferred
tax assets, fully offset by a valuation allowance. All tax-related cash flows resulting from stock-based compensation, including
the excess tax benefits related to the settlement of stock-based payment awards, are now classified as cash flows from operating
activities on our statements of cash flows.
The adoption of ASU
2016-09 did not have a material impact on our results of operations or financial condition.
In February 2016,
the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. This ASU requires most lessees to recognize right of use assets and
lease liabilities, but recognize expenses in a manner similar with current accounting standards. The new standard is effective
for fiscal years and interim periods beginning after December 15, 2018. Entities are required to use a modified retrospective approach,
with early adoption permitted. We are currently evaluating the impact of this new standard on the financial statements.
In May 2014, the FASB
issued ASU No. 2014-09,
Revenue from Contracts with Customers
and has subsequently issued several supplemental or clarifying
ASUs (collectively, “ASC 606”), ASC 606 supersedes nearly all existing revenue recognition guidance under U.S. GAAP.
The core principle of ASC 606 is to recognize revenues when promised goods or services are transferred to customers in an amount
that reflects the consideration to which an entity expects to be entitled for those goods or services. ASC 606 defines a five step
process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition
process than are required under existing U.S. GAAP.
The standard is effective
for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods:
(i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to
elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASC 606 recognized
at the date of adoption.
We adopted the new
standard effective January 1, 2018 under the modified retrospective transition method, applying the new guidance to the most current
period presented. Upon adoption, there was no change to the units of accounting previously identified under legacy GAAP, which
are now considered performance obligations under the new guidance, and there was no change to the revenue recognition pattern for
each performance obligation. Therefore, the adoption of the new standard resulted in no cumulative effect to the opening accumulated
deficit balance.
We assessed the impact
that the adoption of ASC 606 will have on our financial statements by analyzing our current portfolio of customer contracts, including
a review of historical accounting policies and practices to identify potential differences in the application of ASC 606. Additionally,
we performed a comprehensive review of our current processes and systems to determine and implement changes required to support
the adoption of ASC 606 on January 1, 2018.
Subsequent Events
We have evaluated
events that have occurred after June 30, 2018 and through the date that the financial statements are issued. See Note 10. “Subsequent Events”.
Fair Value Measurements
We measure the fair
value of financial assets and liabilities based on authoritative guidance which defines fair value, establishes a framework consisting
of three levels for measuring fair value, and expands disclosures about fair value measurements. Fair value is defined as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three
levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active
markets for identical assets or liabilities;
Level 2 – quoted prices for similar
assets and liabilities in active markets or inputs that are observable;
Level 3 – inputs that are unobservable
(for example cash flow modeling inputs based on assumptions).
Financial instruments,
including receivables, accounts payable and accrued liabilities are carried at cost, which we believe approximates fair value due
to the short-term nature of these instruments. Our warrant liabilities are classified within level 3 of the fair value hierarchy
because the value is calculated using significant judgment based on our own assumptions in the valuation of these liabilities.
We recorded no fair
value adjustment of the warrant liabilities for the three and six-month periods ended June 30, 2018. We recorded non-cash gains
on decreases in the fair value of approximately $190,000 and $612,000 for the three and six-month periods ended June 30, 2017,
respectively, in our Condensed Statements of Operations and Comprehensive Loss. The underlying warrants expired by their terms
on April 18, 2018. See Note 7 “Warrant Liability” for further discussion on the calculation of the fair value of the
warrant liability.
The following table
summarizes the stock-based compensation expense recorded for awards under the stock option plans for the three and six-month periods
ended June 30, 2018 and 2017:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(in thousands, except per share amounts)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Research and development
|
|
$
|
156
|
|
|
$
|
128
|
|
|
$
|
318
|
|
|
$
|
245
|
|
General and administrative
|
|
|
246
|
|
|
|
254
|
|
|
|
516
|
|
|
|
558
|
|
Total stock-based compensation expenses
|
|
$
|
402
|
|
|
$
|
382
|
|
|
$
|
834
|
|
|
$
|
803
|
|
No tax benefit was
recognized related to stock-based compensation expense since we have accumulated operating losses and we have established a full
valuation allowance to offset all the potential tax benefits associated with our deferred tax assets.
We use the Black-Scholes-Merton
option-pricing model with the following assumptions to estimate the stock-based compensation expense for the three and six-month
periods ended June 30, 2018 and 2017:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted-average risk-free interest rate
|
|
|
2.9
|
%
|
|
|
2.0
|
%
|
|
|
2.7
|
%
|
|
|
2.1
|
%
|
Expected dividend payments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected holding period (years)
1
|
|
|
6.4
|
|
|
|
6.5
|
|
|
|
6.4
|
|
|
|
6.5
|
|
Weighted-average volatility factor
2
|
|
|
0.91
|
|
|
|
0.88
|
|
|
|
0.89
|
|
|
|
0.88
|
|
Estimated forfeiture rates
3
|
|
|
25
|
%
|
|
|
27
|
%
|
|
|
26
|
%
|
|
|
28
|
%
|
|
(1)
|
Expected holding period is
based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting
schedules and the expectations of future employee behavior.
|
|
(2)
|
Weighted average volatility is based on the historical volatility of our common stock.
|
|
(3)
|
Estimated forfeiture rates are based on historical data.
|
Options to purchase
approximately 5,000 and 60,000 shares of common stock were granted during the three-month periods ended June 30, 2018 and 2017,
respectively. Options to purchase approximately 950,000 and 496,000 shares of common stock were granted during the six-month periods
ended June 30, 2018 and 2017, respectively.
The following table
summarizes option activity for the six-month period ended June 30, 2018:
(in thousands, except per share amounts)
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Option
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2018
|
|
|
2,728
|
|
|
$
|
4.32
|
|
|
|
5.75
|
|
|
$
|
30
|
|
Granted
|
|
|
950
|
|
|
|
0.97
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(18
|
)
|
|
|
8.36
|
|
|
|
|
|
|
|
|
|
Cancelled or forfeited
|
|
|
(12
|
)
|
|
|
5.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
3,648
|
|
|
$
|
3.42
|
|
|
|
6.44
|
|
|
$
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2018
|
|
|
2,796
|
|
|
$
|
4.00
|
|
|
|
5.88
|
|
|
$
|
57
|
|
No shares of restricted
stock were awarded to employees, directors and consultants during the three and six-month periods ended June 30, 2018 and 2017.
As of June 30, 2018,
there was approximately $0.6 million of total unrecognized compensation expense related to non-vested stock options. This expense
is expected to be recognized over a weighted-average period of 0.7 years.
Basic net loss per share excludes the effect of dilution and is computed by dividing net loss by the weighted-average
number of shares outstanding for the period. Diluted net loss per share reflects the potential dilution that could occur if securities
or other contracts to issue shares were exercised into shares. In calculating diluted net loss per share, the numerator is adjusted
for the change in the fair value of the warrant liability (only if dilutive) and the denominator is increased to include the number
of potentially dilutive common shares assumed to be outstanding during the period using the treasury stock method.
The following table sets forth the reconciliation of the numerator and denominator used in the computation of
basic and diluted net loss per common share for the three and six-months ended June 30, 2018 and 2017:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in thousands, except per share amounts)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss used for basic earnings per share
|
|
$
|
(869
|
)
|
|
$
|
(3,451
|
)
|
|
$
|
(3,474
|
)
|
|
$
|
(6,456
|
)
|
Less change in fair value of warrant liability
|
|
|
—
|
|
|
|
(190
|
)
|
|
|
—
|
|
|
|
(612
|
)
|
Net loss used for diluted earnings per share
|
|
$
|
(869
|
)
|
|
$
|
(3,641
|
)
|
|
$
|
(3,474
|
)
|
|
$
|
(7,068
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average outstanding common shares
|
|
|
21,204
|
|
|
|
21,204
|
|
|
|
21,204
|
|
|
|
21,199
|
|
Effect of dilutive potential common shares resulting from options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Effect of dilutive potential common shares resulting from warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted-average shares outstanding—diluted
|
|
|
21,204
|
|
|
|
21,204
|
|
|
|
21,204
|
|
|
|
21,201
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.30
|
)
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.33
|
)
|
The table below
presents common shares underlying stock options and warrants that are excluded from the calculation of the weighted average
number of common shares outstanding used for the calculation of diluted net loss per common share. These are excluded from
the calculation due to their anti-dilutive effect for the three and six-months ended June 30, 2018 and 2017:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted-average anti-dilutive common shares resulting from options
|
|
|
3,658
|
|
|
|
2,437
|
|
|
|
3,327
|
|
|
|
2,324
|
|
Weighted-average anti-dilutive common shares resulting from warrants
|
|
|
1,482
|
|
|
|
1,117
|
|
|
|
1,730
|
|
|
|
517
|
|
|
|
|
5,140
|
|
|
|
3,554
|
|
|
|
5,057
|
|
|
|
2,841
|
|
Comprehensive loss for the periods presented is comprised solely of our net loss. We had no items of other comprehensive
loss during the three and six-month periods ended June 30, 2018 and 2017. Comprehensive loss for the three and six-month periods
ended June 30, 2018 was $0.9 million and $3.5 million, respectively. Comprehensive loss for the three and six-month periods ended
June 30, 2017 was $3.5 million and $6.5 million, respectively.
Until its termination
in May 2018, we were party to
a license agreement (as
amended, the “License Agreement”) pursuant to which we had granted Braeburn Pharmaceuticals, Inc. (“Braeburn”)
the exclusive commercialization rights to Probuphine in the United States and its territories and Canada. Under the License Agreement,
we received certain milestone payments, as well as royalties on net sales of Probuphine. Upon receipt of approval, our obligation
was fulfilled and we recognized as revenue the full amount of the milestone payment. In addition, we were entitled to receive
a low single digit royalty on sales by Braeburn of other competing continuous delivery treatments for opioid dependence as defined
in the License Agreement. The License Agreement provided for us to be reimbursed by Braeburn for any development services and
activities undertaken at Braeburn’s request. Under ASC 606, there was no change in the amount or timing of revenue recognized
under this agreement. In February 2016, Braeburn sublicensed rights to develop and commercialize Probuphine in Canada to Knight
Therapeutics, Inc. (“Knight”).
On May 25, 2018, we entered into a Termination
and Transition Services Agreement (the “Transition Agreement”) with Braeburn pursuant to which we regained all rights
to the commercialization and clinical development of Probuphine in the United States and Canada. Braeburn paid us $1.0 million,
transferred inventory to us with a value of approximately $1.1 million and agreed to provide support services through December
28, 2018. In addition, the Transition Agreement provides for the immediate transfer to us of all regulatory documentation and
development data related to Probuphine. The estimated fair value of the inventory received was determined using available inputs
such as existing supply agreements, prior selling prices and remaining life to expiration. We recognized approximately $2.1 million
of license related revenue related to this transaction in the three month period ended June 30, 2018. The sublicense to Knight
was assigned to Titan as part of the Transition Agreement.
|
6.
|
Molteni Purchase Agreement
|
On March 21, 2018,
we entered into an Asset Purchase, Supply and Support Agreement (the “Purchase Agreement”) with Molteni pursuant to
which Molteni acquired the European intellectual property related to Probuphine, including the Marketing Authorization Application
(“MAA”) under review by the European Medicines Agency (“EMA”), and will have the exclusive right to commercialize
the Probuphine product supplied by us in Europe, as well as certain countries of the Commonwealth of Independent States, the Middle
East and North Africa (the “Molteni Territory”).
We received an initial
payment of €2.0 million (approximately $2.4 million) for the purchased assets and will receive additional potential payments
totaling upon the achievement of certain regulatory and product label milestones. Additionally, we are entitled to receive earn-out
payments for up to 15 years on net sales of Probuphine in the Molteni Territory ranging in percentage from the low-teens to the
mid-twenties. In August 2018, we entered into an amendment to the Purchase Agreement described below in Note 10. “Subsequent
Events.”
We concluded that the performance
obligations identified in the Purchase Agreement included the transfer of the intellectual property and our efforts towards the
approval by the EMA and other regulatory bodies. The initial closing payment was allocated between the transfer of the intellectual
property and our efforts related to the EMA approval as set forth below.
We used the expected
cost-plus approach to estimate the standalone selling price of approximately $1.4 million related to our efforts towards the approval
by the EMA and other regulatory bodies. This includes employee related expenses as well as other manufacturing, regulatory and
clinical costs which will be incurred as part of our efforts. We believe that the services will be at a consistent rate and will
be substantially complete as of December 31, 2018. As such we will recognize the revenue ratably over the balance of year ending
December 31, 2018. If the facts and circumstances change, we will reassess these assumptions. The costs associated with these services
will be expensed over the same period.
We used the residual
approach to value the transfer of the intellectual property at approximately $1.0 million as we had not established and had no
reliable way to establish a standalone selling price for the intellectual property.
As a result of the
outcome of the milestone and earn-out payments being unpredictable due to the involvement of third parties, we believe that using
the most likely amount method is appropriate. Any subsequent revenue related to milestone and earn-out payments will be recognized
at the time the milestones are achieved or when the related net sales have occurred.
The Agreement provides
that we will supply Molteni with semi-finished product (i.e., the implant, the applicator and related technology) on an exclusive
basis at a fixed price through December 31, 2019, with subsequent price increases not to exceed annual cost increases to us for
the active pharmaceutical ingredient and under our current manufacturing agreement. Revenue will be recognized when the semi-finished
product has been transferred to Molteni.
Molteni will be prohibited
from marketing a Competitor Product (as defined in the Agreement) in the Territory for the five year period following approval
of the MAA. Thereafter, Molteni will be required to pay us a low single digit royalty on net sales of any Competitor Product.
The following table
presents changes in contract assets and liabilities during the six months ended June 30, 2018:
(in thousands)
|
|
Beginning Balance
|
|
|
Additions
|
|
|
Deductions
|
|
|
Ending
Balance
|
|
Six months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
—
|
|
|
$
|
291
|
|
|
$
|
—
|
|
|
$
|
291
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
—
|
|
|
$
|
2,448
|
|
|
$
|
(1,509
|
)
|
|
$
|
939
|
|
Until they expired by their terms on April 18, 2018
,
we had warrants outstanding to purchase an aggregate of 983,395 shares of common stock at an exercise price of $4.85 per share.
The warrants contained a provision where the warrant holder had the option to receive cash equal to the Black Scholes fair value
of the remaining unexercised portion of the warrant as cash settlement in the event that there was a fundamental transaction (contractually
defined to include various merger, acquisition or stock transfer activities). Due to this provision, ASC 480,
Distinguishing
Liabilities from Equity
required that these warrants be classified as liabilities. The fair value of these warrants was determined
using the Lattice valuation model, and the changes in the fair value were recorded in the Condensed Statements of Operations and
Comprehensive Loss.
In July 2017, we entered
into a venture loan and security agreement (“Original Loan Agreement”) with Horizon Technology Finance Corporation
(“Horizon”), pursuant to which we received a loan in the amount of $7.0 million
The Original Loan
Agreement provided for repayment of the loan on an interest-only basis through December 31, 2018, followed by monthly payments
of principal and accrued interest for the balance of the 46-month term. The loan bears interest at a floating coupon rate of one-month
LIBOR (floor of 1.10%) plus 8.40%. A final payment equal to 5.0% of the loan will be due on the scheduled maturity date for such
loan. The Original Loan Agreement also contained a prepayment penalty based on a percentage of the then outstanding principal balance,
equal to 4% if the prepayment occurs during the interest-only payment period, 3% if the prepayment occurs during the 12 months
following such period, and 2% thereafter.
Our obligations under
the Original Loan Agreement were secured by a first priority security interest in all of our assets, with the exception of our
intellectual property. We agreed not to pledge or otherwise encumber our intellectual property assets, subject to certain exceptions.
The Original Loan
Agreement included customary affirmative and restrictive covenants, excluding any covenants to attain or maintain certain financial
metrics, and also included customary events of default, including for payment failures, breaches of covenants, change of control
and material adverse changes. Upon the occurrence of an event of default and following any applicable cure periods, a default interest
rate of an additional 5% could be applied to the outstanding loan balance, and Horizon could declare all outstanding obligations
immediately due and payable and take such other actions as set forth in such agreement.
In connection with
the Original Loan Agreement, we issued Horizon seven-year warrants to purchase an aggregate of 280,612 shares of our common stock
(“Horizon Warrants”). The per share exercise price of the Horizon Warrants is the lower of (i) $1.96 or (ii) the price
per share of any securities that may be issued by the Company in an equity financing during the 18 months following the agreement
date. We agreed to file a registration statement covering the resale of the shares underlying the Horizon Warrants. In accordance
with ASC 480,
Distinguishing Liabilities from Equity
, as amended by ASU, No. 2017-11, which we early adopted during 2017,
the Horizon Warrants have been classified as equity and their fair value at the time of issuance was determined using a Lattice
valuation model and was recorded in the Condensed Balance Sheet as a discount to the debt obligation.
The key assumptions
used to value the Horizon Warrants were as follows:
Assumption
|
Date of issuance
|
|
|
July 27, 2017
|
|
Expected price volatility
|
|
|
47
|
%
|
Expected term (in years)
|
|
|
7.00
|
|
Risk-free interest rate
|
|
|
2.12
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Weighted-average fair value of warrants
|
|
$
|
1.02
|
|
The anti-dilution
provisions contained in the outstanding Series A warrants were triggered by the Horizon Warrant issuance, resulting in a reduction
of the exercise price of such warrants from $4.89 to $4.85 per share.
On February 2, 2018,
we entered into an amendment to the Original Loan Agreement (the “Amended Loan Agreement”) pursuant to which we prepaid
$3.0 million of the outstanding $7.0 million principal amount and provided Horizon with a lien on our intellectual property. The
other terms of the Original Loan Agreement remained unchanged.
On March 21, 2018,
we entered into an Amended and Restated Venture Loan and Security Agreement (the “Restated Loan Agreement”) with Horizon
and Molteni pursuant to which Horizon assigned approximately $2.4 million of the $4.0 million outstanding principal balance of
the loan to Molteni and Molteni was appointed collateral agent and assumed majority and administrative control of the debt. Under
the Restated Loan Agreement, the interest only payment and forbearance periods were extended to December 31, 2019. In addition,
Molteni has the right to convert its portion of the debt into shares of our common stock at a conversion price of $1.20 per share
and is required to effect this conversion of debt to equity if we complete an equity financing resulting in gross proceeds of
at least $10.0 million at a price per share of common stock in excess of $1.20 and repay the $1.6 million balance of Horizon’s
loan amount. The lien on our intellectual property remains in place at this time. As the present value of the cash flows under
the terms of the Restated Loan Agreement is less than 10% different from the remaining cash flows under the terms of the Amended
Loan Agreement prior to being amended and restated, the Restated Loan Agreement was accounted for as a debt modification. Accordingly,
expenses incurred as a result of the modification were expensed as incurred and the previously deferred fees and costs related
to the debt will continue to be amortized over the remaining term along with the related warrants issued as part of the agreement
described in Note 9 “Rights Agreement.”
In connection with
the Restated Loan Agreement, we issued Horizon seven-year warrants to purchase 40,000 shares of our common stock at an exercise
price of $1.20 per share. The Horizon Warrants have been classified as equity and their fair value at the time of issuance was
determined using a Black Scholes valuation model and was recorded in the Condensed Balance Sheet as a discount to the debt obligation.
The key assumptions
used to value the new Horizon warrants were as follows:
Assumption
|
Date of issuance
|
|
|
March 21, 2018
|
|
Expected price volatility
|
|
|
86
|
%
|
Expected term (in years)
|
|
|
7.00
|
|
Risk-free interest rate
|
|
|
2.82
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Weighted-average fair value of warrants
|
|
$
|
0.81
|
|
In consideration
of Molteni’s entry into the Restated Loan Agreement and the Purchase Agreement, on March 21, 2018, we entered into an agreement
(as amended in May 2018, the “Rights Agreement”) with Molteni pursuant to which we agreed to (i) issue Molteni seven-year
warrants to purchase 540,000 shares of our common stock at an exercise price of $1.20 per share (the “Molteni Warrants”),
(ii) provide Molteni customary demand and piggy-back registration rights with respect to the shares of common stock issuable upon
conversion of its loan and exercise of the Molteni Warrants, (iii) appoint one member of our board of directors under certain
circumstances and (iv) provide board observer rights to Molteni if it has not designated a board nominee as well as certain information
rights. The board designation, observer and information rights will terminate at such time as Molteni ceases to beneficially own
at least one percent of our outstanding capital stock (inclusive of the shares issuable upon conversion of debt under the Restated
Loan Agreement and exercise of the Molteni Warrants). The Molteni Warrants have been classified as equity and their fair value
at the time of issuance was determined using a Black Scholes valuation model. The amount was allocated equally between the Restated
Loan Agreement and the Purchase Agreement and was recorded in the Condensed Balance Sheet as a discount to the debt obligation
and a contract asset, respectively.
The key assumptions
used to value the Molteni Warrants were as follows:
Assumption
|
Date of issuance
|
|
|
March 21, 2018
|
|
Expected price volatility
|
|
|
86
|
%
|
Expected term (in years)
|
|
|
7.00
|
|
Risk-free interest rate
|
|
|
2.82
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Weighted-average fair value of warrants
|
|
$
|
0.81
|
|
On August 3, 2018,
we entered into an amendment (the “Amendment”) to the Purchase Agreement with Molteni. Under the Amendment, Molteni
made an immediate payment to us of €950,000 (approximately $1,109,000) and has committed to make a convertible loan to us
of €550,000 (approximately $642,000) provided we have submitted our response to the 120-day letter from the EMA on or prior
to September 14, 2018 in accordance with the Amendment, both in exchange for the elimination of an aggregate of €2.0 million
(approximately $2,335,000) of regulatory milestones provided for in the Purchase Agreement that are potentially payable in 2019,
at the earliest. The loan (the “Convertible Loan”), if made, will convert automatically into shares of our common
stock upon the issuance by the EMA of marketing approval for Probuphine at a conversion price per share equal to the lower of
(i) the closing price on the loan funding date and (ii) the closing price on the conversion date. In the event the EMA has not
granted marketing approval by December 31, 2019, the Convertible Loan will become due and payable, together with accrued interest
at the rate of one-month LIBOR (to the extent in excess of 1.10%) plus 9.50% per annum. The Convertible Loan will contain other
covenants and events of default substantially consistent with the Restated Loan Agreement.
On August 7, 2018, our stockholders approved
an amendment to the Titan Pharmaceuticals, Inc. 2015 Omnibus Equity Incentive Plan to increase the number of shares authorized
for awards thereunder from 2,500,000 to 3,500,000.