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:
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1.
|
Organization and Summary of Significant Accounting Policies
|
The Company
We are a pharmaceutical company developing
therapeutics utilizing our proprietary long-term drug delivery platform, ProNeura, for the treatment of select chronic diseases
for which steady state delivery of a drug provides an efficacy and/or safety benefit. We have been transitioning to a commercial
stage enterprise following the reacquisition of Probuphine® (buprenorphine) implant, or Probuphine, on May 25, 2018 from our
former licensee. Probuphine is the first product based on our ProNeura technology approved in the U.S., Canada and the European
Union, or EU, for the maintenance treatment of opioid use disorder, or OUD, in select patients. We operate in only one business
segment, the development and commercialization of pharmaceutical products.
In January 2019, pursuant to prior stockholder
authorization, our board of directors (the “Board”) effected a reverse split of the outstanding shares of our common
stock at a ratio of one share for every six shares then outstanding (the “Reverse Split”). Pursuant to their respective
terms, the number of shares underlying our outstanding options and warrants was reduced and their respective exercise prices increased
by the Reverse Split ratio. The number of shares of common stock authorized and the par value of $0.001 per share did not change
as a result of the Reverse Split. All share and per share amounts contained in this Form 10-Q give retroactive effect to the Reverse
Split.
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 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 nine months ended September 30, 2019 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2019, or any future interim periods.
The balance sheet at December 31, 2018
is derived from the audited financial statements at that date, but does not include all of the information and footnotes required
by 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/A for
the year ended December 31, 2018, as filed with the Securities and Exchange Commission (“SEC”).
The preparation of financial statements
in conformity with 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.
In October 2019, we received gross proceeds
of approximately $9.1 million from the sale of 40,276,000 shares of our common stock and warrants to purchase 40,276,000 shares
of our common stock in a public offering (see Note 7). As of September 30, 2019, we had cash and cash equivalents of approximately
$0.9 million, which, we believe, together with the proceeds from the public offering, is sufficient to fund our planned operations
into the third quarter of 2020. We will require additional funds to finance our operations. We are exploring several financing
alternatives; however, there can be no assurance that our efforts to obtain the funding required to continue our operations will
be successful.
TITAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL
STATEMENTS - Continued
(unaudited)
Going concern assessment
We assess going concern uncertainty in
our condensed 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 Accounting Standard Update (“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 of filing the financial statements in this Quarterly Report on Form 10-Q for the nine months ended September 30,
2019, we did not have sufficient cash to fund our operations for the next 12 months without additional funds and, therefore, there
is substantial doubt about our ability to continue as a going concern within 12 months after the date the financial statements
were issued.
Use of Estimates
The preparation of these unaudited condensed
financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including critical accounting policies or estimates
related to warrants issued in equity financing, research and development expenses, income taxes, inventories, revenues, contingencies
and litigation and share-based compensation. We base our estimates on historical experience, information received from third parties
and on various market specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results could differ significantly from those estimates under different assumptions or conditions.
Revenue Recognition
We generate revenue principally
from the sale of Probuphine in the U.S., collaborative research and development arrangements, technology licenses and sales, 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 for our revenue recognition:
(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.
Net Product Revenue
We recognize revenue
from product sales when control of the product transfers, generally upon shipment or delivery, to our customers, which include
distributors. As customary in the pharmaceutical industry, our gross product revenue is subject to a variety of deductions in the
forms of variable consideration, such as rebates, chargebacks, returns and discounts, in arriving at reported net product revenue.
This variable consideration is estimated using the most-likely amount method, which is the single most-likely outcome under a contract
and is typically at stated contractual rates. The actual outcome of this variable consideration may materially differ from our
estimates. From time to time, we will adjust our estimates of this variable consideration when trends or significant events indicate
that a change in estimate is appropriate to reflect the actual experience. Additionally, we will continue to assess the estimates
of our variable consideration as we continue to accumulate additional historical data. Changes in the estimates of our variable
consideration could materially affect our financial statements.
TITAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- Continued
(unaudited)
Returns
– Consistent with the provisions of ASC 606, we estimate returns at the inception of each transaction, based on
multiple considerations, including historical sales, historical experience of actual customer returns, levels of inventory in
our distribution channel, expiration dates of purchased products and significant market changes which may impact future
expected returns to the extent that we would not reverse any receivables, revenues, or contract assets already recognized
under the agreement. During the nine months ended September 30, 2019, we entered into agreements with large national
specialty pharmacies with a distribution channel different from that of our existing customers and, therefore, the related
reserves have unique considerations. We will continue to evaluate the activities with these specialty pharmacies during
upcoming quarters and will update the related reserves accordingly.
Rebates –
Our provision for rebates is estimated based on our customers’ contracted rebate programs and our historical experience of
rebates paid.
Discounts –The
provision is estimated based upon invoice billings, utilizing historical customer payment experience.
The following table provides a summary
of activity with respect to our product returns, and discounts and rebates, which are included on our condensed consolidated balance
sheets within accrued sales allowances (in thousands):
|
|
Product
Returns
Allowance
|
|
|
Discounts and
Rebates
Allowance
|
|
|
Total
|
|
Balance at December 31, 2018
|
|
$
|
33
|
|
|
$
|
48
|
|
|
$
|
81
|
|
Provision
|
|
|
681
|
|
|
|
189
|
|
|
|
870
|
|
Payments/credits
|
|
|
(50
|
)
|
|
|
(151
|
)
|
|
|
(201
|
)
|
Balance at September 30, 2019
|
|
$
|
664
|
|
|
$
|
86
|
|
|
$
|
750
|
|
Performance Obligations
A performance
obligation is a promise in a contract to transfer a distinct good or service to the customer. 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).
TITAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- Continued
(unaudited)
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
(“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.
Leases
In February 2016, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standard Update, or ASU, No. 2016-02, Leases (Topic 842),
to enhance the transparency and comparability of financial reporting related to leasing arrangements. We adopted the standard effective
January 1, 2019.
We determine whether the arrangement is
or contains a lease at inception. Operating lease right-of-use assets and lease liabilities are recognized at the present value
of the future lease payments at commencement date. The interest rate implicit in lease contracts is typically not readily determinable,
and therefore, we utilize our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a
similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset
may be required for items such as initial direct costs paid or incentives received.
Lease expense is recognized over the expected
term on a straight-line basis. Operating leases are recognized on our condensed balance sheet as right-of-use assets, operating
lease liabilities current and operating lease liabilities non-current. We no longer recognize deferred rent on our condensed balance
sheet.
TITAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- Continued
(unaudited)
Recent Accounting Pronouncements
Accounting Standards Adopted
In February 2016, the FASB issued
ASU No. 2016-02, Leases (Topic 842). Topic 842 requires most lessees to recognize right of use assets and lease
liabilities, but recognize expenses in a manner similar with current accounting standards. Effective January 1, 2019, we
adopted the provisions under Topic 842 using a modified retrospective transition approach without adjusting comparative
periods. Additionally, as permitted by Topic 842, we elected to apply the following practical expedients: (i) not to reassess
whether any expired or existing contracts are or contain leases or the classification of any expired or existing leases and
(ii) not to apply the recognition requirements to short-term leases. As a result of this adoption, we recorded operating
lease right-of-use asset and operating lease liability associated with our office lease in our condensed balance sheet as of
March 31, 2019. We used a discount rate of 12%, which reflects our borrowing rate as of the adoption date, to measure the
present value of future lease payments to determine the fair value of our operating lease right-of-use asset and liability.
Our office lease expires in June 2021 and we did not include an estimated renewal in the calculation of our operating lease
right-of-use asset and liability as we believe that it is less than probable we will renew our office lease. Our adoption of
Topic 842 did not result in any cumulative adjustment to the balance of our accumulated deficit as of January 1, 2019. Lease expense
for operating lease payments is recognized on a straight-line basis over the lease term, which is consistent with Topic 840.
The following table presents maturities
of our operating lease (in thousands):
2019 (3 months)
|
|
$
|
76
|
|
2020
|
|
|
308
|
|
2021
|
|
|
155
|
|
Total minimum lease payments (base rent)
|
|
|
539
|
|
Less: imputed interest
|
|
|
(55
|
)
|
Total operating lease liabilities
|
|
$
|
484
|
|
In June 2018, the FASB issued ASU 2018-07,
Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting
for share-based payment awards issued to nonemployees with the guidance applicable to grants to employees. Under the new standard,
equity-classified share-based payment awards issued to nonemployees are measured on the grant date, instead of the current requirement
to remeasure the awards through the performance completion date. We adopted ASU 2018-07 during the three months ended March 31,
2019 using the prospective approach. The adoption of ASU 2018-07 did not have any material impact to our condensed financial statements.
In August 2018, the SEC published
Release No. 33-10532, Disclosure Update and Simplification, or DUSTR, which adopted amendments to certain disclosure
requirements that have become redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure
requirements, GAAP, or changes in the information environment. While most of the DUSTR amendments eliminate updated or
duplicative disclosure requirements, the final rule amends the interim financial statement requirements to include a
reconciliation of changes in stockholders’ equity (deficit) in the notes or as a separate statement for each period for
which a statement of comprehensive income (loss) is required to be filed. The new interim reconciliation of changes in
stockholders’ equity (deficit) for the three and nine months ended September 30, 2019 and 2018 is included herein.
Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses, which requires an organization to measure
all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions,
and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information
to better inform their credit loss estimates. The amendments in this ASU are effective for us in our interim period ending March
31, 2020. We are currently assessing the impact of the adoption of Topic 326 on our financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement,
which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB's disclosure
framework project. The ASU is effective for us in our interim period ending March 31, 2020, with early adoption permitted. We do
not expect the adoption of this ASU to have any significant impact on our quarterly or annual disclosures.
TITAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- Continued
(unaudited)
In August 2018, the FASB issued ASU No.
2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that Is a Service Contract.
The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements
that include an internal-use software license). Adoption of the ASU is either retrospective or prospective. The ASU is effective
for us in our interim period ending March 31, 2020, with early adoption permitted. We are currently evaluating the impact of the
adoption of ASU No. 2018-15 on our condensed financial statements.
Subsequent Events
We have evaluated events that have occurred
after September 30, 2019 and through the date that our condensed financial statements are issued. See Note 7, “Subsequent
Events.”
Fair Value Measurements
Financial instruments,
including receivables, accounts payable and accrued liabilities are carried at cost, approximate their fair values due to the short-term
nature of these instruments. Our investments in money market funds are classified within Level 1 of the fair value hierarchy. Our
warrant and derivative liabilities are classified within level 3 of the fair value hierarchy because the fair value is calculated
using significant judgment based on our own assumptions in the valuation of these liabilities.
At September 30, 2019
and December 31, 2018, the fair value of our investments in money market funds were approximately $0.8 million and approximately
$8.9 million, respectively, which are included within our cash and cash equivalents in our condensed balance sheets.
In January 2019, 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 583,334 to 1,666,667.
In January 2019, our stockholders approved
a repricing of 122,115 fully-vested stock options with exercise prices in excess of $21.00 held by employees and consultants other
than the named executive officers or members of the Board. The effected options were repriced at $1.55. As a result of the repricing
of these stock options, we incurred a total of approximately $136,000 of additional stock-based compensation expense during the
nine months ended September 30, 2019, of which approximately $77,000 was recorded within research and development and approximately
$59,000 within selling, general and administrative in our condensed statement of operations and comprehensive loss.
The following table summarizes the stock-based
compensation expense recorded for awards under our stock option plans (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Research and development
|
|
$
|
—
|
|
|
$
|
136
|
|
|
$
|
91
|
|
|
$
|
455
|
|
Selling, general and administrative
|
|
|
128
|
|
|
|
252
|
|
|
|
523
|
|
|
|
767
|
|
Total stock-based compensation
|
|
$
|
128
|
|
|
$
|
388
|
|
|
$
|
614
|
|
|
$
|
1,222
|
|
We use the Black-Scholes-Merton option-pricing
model with the following assumptions to estimate the fair value of our stock options:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Weighted-average risk-free interest rate
|
|
|
—
|
%
|
|
|
2.9
|
%
|
|
|
2.2
|
%
|
|
|
2.7
|
%
|
Expected dividend payments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected holding period (years) 1
|
|
|
—
|
|
|
|
6.4
|
|
|
|
5.4
|
|
|
|
6.4
|
|
Weighted-average volatility factor 2
|
|
|
—
|
|
|
|
0.91
|
|
|
|
0.94
|
|
|
|
0.89
|
|
Estimated forfeiture rates for options granted 3
|
|
|
—
|
%
|
|
|
25
|
%
|
|
|
21
|
%
|
|
|
26
|
%
|
|
(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.
|
TITAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- Continued
(unaudited)
The following table summarizes option activity:
|
|
Options (in
thousands)
|
|
|
Weighted
Average
Exercise
Price per
share
|
|
|
Weighted
Average
Remaining
Option
Term (in
years)
|
|
|
Aggregate
Intrinsic
Value (in
thousands)
|
|
Outstanding at January 1, 2019
|
|
|
665
|
|
|
$
|
17.94
|
|
|
|
6.44
|
|
|
$
|
4.0
|
|
Granted
|
|
|
854
|
|
|
|
1.64
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(274
|
)
|
|
|
21.32
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
1,245
|
|
|
|
6.02
|
|
|
|
8.16
|
|
|
|
—
|
|
Exercisable at September 30, 2019
|
|
|
705
|
|
|
|
9.41
|
|
|
|
7.12
|
|
|
|
|
|
As of September 30, 2019, there was approximately
$0.3 million of total unrecognized compensation expense related to non-vested stock options. This expense was expected to be recognized
over a weighted-average period of approximately 1.7 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:
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
(in thousands, except per share amounts)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders for basic earnings per share
|
|
$
|
(2,803
|
)
|
|
$
|
(2,330
|
)
|
|
$
|
(12,517
|
)
|
|
$
|
(5,804
|
)
|
Less change in fair value of derivatives
|
|
|
—
|
|
|
|
(141
|
)
|
|
|
—
|
|
|
|
(141
|
)
|
Net loss used for diluted earnings per share
|
|
$
|
(2,803
|
)
|
|
$
|
(2,471
|
)
|
|
$
|
(12,517
|
)
|
|
$
|
(5,945
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
15,517
|
|
|
|
3,650
|
|
|
|
14,112
|
|
|
|
3,573
|
|
Diluted weighted-average common shares outstanding
|
|
|
15,517
|
|
|
|
3,650
|
|
|
|
14,112
|
|
|
|
3,573
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.18
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.89
|
)
|
|
$
|
(1.62
|
)
|
Diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.68
|
)
|
|
$
|
(0.89
|
)
|
|
$
|
(1.66
|
)
|
The table below presents common shares
underlying stock options, warrants and convertible loans (see Note 5) 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 (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Weighted-average anti-dilutive common shares resulting from options
|
|
|
1,282
|
|
|
|
3,531
|
|
|
|
1,027
|
|
|
|
3,396
|
|
Weighted-average anti-dilutive common shares resulting from warrants
|
|
|
5,961
|
|
|
|
1,461
|
|
|
|
1,222
|
|
|
|
1,618
|
|
Anti-dilutive common shares resulting from convertible loans
|
|
|
330
|
|
|
|
—
|
|
|
|
332
|
|
|
|
—
|
|
|
|
|
7,573
|
|
|
|
4,992
|
|
|
|
2,581
|
|
|
|
5,014
|
|
4.
|
Molteni Purchase Agreement
|
On March 21, 2018, we entered into a purchase
agreement (“Molteni Purchase Agreement”) with L. Molteni & C. Dei Frattelli Alitti Società Di Esercizio
S.P.A. (“Molteni”) pursuant to which Molteni acquired the European intellectual property related to Probuphine, including
the marketing authorization application under review by the European Medicines Agency (“EMA”), and gained the exclusive
right to commercialize the Probuphine product supplied by us in the EU, 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 upon 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 in percentages ranging from the low-teens to the mid-twenties.
We concluded that the performance obligations
identified in the Molteni Purchase Agreement included the transfer of the intellectual property and our efforts towards an approval
by the EMA and other regulatory bodies. The initial payment was allocated between the property transfer and our EMA efforts as
set forth below.
TITAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- Continued
(unaudited)
We used the expected cost-plus approach
to estimate the standalone selling price of approximately $1.4 million related to our efforts towards an approval by the EMA and
other regulatory bodies (“Titan Services”). This includes employee related expenses as well as other manufacturing,
regulatory and clinical costs, which are incurred as part of our efforts. As of March 31, 2019, we fully recognized the revenue
associated with the Titan Services under the Molteni Purchase Agreement as we completed the Titan Services.
The following table
presents changes in contract assets and liabilities during the nine months ended September 30, 2019 (in thousands):
|
|
Beginning
Balance
|
|
|
Deductions
|
|
|
Ending
Balance
|
|
Contract assets
|
|
$
|
99
|
|
|
$
|
(99
|
)
|
|
$
|
—
|
|
Contract liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
313
|
|
|
$
|
(313
|
)
|
|
$
|
—
|
|
In August 2018, we entered into an amendment
to the Molteni Purchase Agreement, pursuant to which Molteni made an immediate payment of €950,000 (approximately $1.1 million)
and a convertible loan of €550,000 (approximately $0.6 million) (“Molteni Convertible Loan”) (see Note 5) to
us, both in exchange for the elimination of an aggregate of €2.0 million (approximately $2.3 million) of regulatory milestones
provided for in the Molteni Purchase Agreement. We concluded that the approximately $1.1 million immediate payment by Molteni reflected
a milestone payment with no additional obligations to us and, therefore, was recognized as revenue during the year ended December
31, 2018.
In September 2019, we entered into an additional
amendment to the Molteni Purchase Agreement, pursuant to which the percentage earn-out payments on net sales from the original
range of low-teens to mid-twenties to low-teens to mid-teens. We also agreed to delay payments of any earn-outs until the later
of (i) January 1, 2021 or (ii) the one year anniversary of completion of compliance by our manufacturer with EU requirements (currently
anticipated to occur by the end of this year). The milestone payments under the Purchase Agreement remain unchanged.
Horizon and Molteni Loan
In July 2017, we entered into a venture
loan and security agreement that was subsequently amended in February 2018, (“Horizon Loan Agreement”) with Horizon
Technology Finance Corporation (“Horizon”). In connection with the Horizon Loan Agreement, we issued Horizon warrants
that are currently exercisable to purchase an aggregate of 366,668 shares of our common stock at an exercise price per share of
$1.50.
In March 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 as the collateral agent and assumed majority and administrative control of the loan. Under the Restated Loan
Agreement, Molteni had the right to convert its portion of the debt into shares of our common stock at a conversion price of $7.20
per share and was 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 $7.20 and repay the $1.6 million balance of Horizon’s
loan amount. In connection with the Restated Loan Agreement, we issued warrants to purchase an aggregate of 6,667 shares of our
common stock with an exercise price per share of $7.20 to Horizon.
In consideration of Molteni’s
entry into the Restated Loan Agreement and the Purchase Agreement, on March 21, 2018, we entered into a rights agreement (the
“Rights Agreement”) with Molteni pursuant to which we agreed to (i) issue Molteni seven-year warrants to purchase
90,000 shares of our common stock at an exercise price of $7.20 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) designate one member of our
board of directors following conversion of the loan in full and (iv) provide board observer rights to Molteni if it has not
designated a board nominee as well as certain information rights.
TITAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- Continued
(unaudited)
In September 2019, we entered into an amendment
to the Restated Loan Agreement pursuant to which the interest-only payment and forbearance periods were extended by one year to
December 31, 2020 and the maturity date was extended by one year to June 1, 2022. In connection with the amendment to the Restated
Loan Agreement, the final payments to the lenders were increased by an aggregate of approximately $0.3 million (exclusive of a
restructuring fee payable to Horizon) and the conversion provisions related to Molteni’s portion of the loan amount were
revised to eliminate the mandatory conversion feature, to reduce the conversion price to $0.225 and to cap the number of shares
issuable upon conversion to 3,422,777.
As of September 30, 2019, the loan from
Molteni under the amendment to the Restated Loan Agreement was convertible into 3,422,777 shares of our common stock.
In accordance with ASC 470, “Debt,”
the amendment to the loan from Molteni is accounted for under debt extinguishment accounting, which required us to extinguish the
carrying amount of the loan prior to the amendment and reacquire the loan after the amendment. As a result, during the three months
ended September 30, 2019, we recorded approximately $0.3 million gain on debt extinguishment related to the write-off of the balance
of the accreted final payment of the loan. The modification to the loan from Horizon did not constitute debt extinguishment and,
therefore, did not have any impact to our condensed financial statements.
Molteni Convertible Loan
In connection with the Amendment to the
Molteni Purchase Agreement (see Note 4), in June 2019, the Molteni Convertible Loan, together with unpaid accrued interest, was
converted in full into 448,287 shares of our common stock at $1.50 per share upon the receipt of EMA approval of Sixmo. As a result,
we recorded approximately $0.1 million loss on debt extinguishment.
At-the-Market Offering (the “ATM”)
In April 2019, we implemented the ATM for
the sale of up to $8.6 million of our common stock. During the three months ended June 30, 2019, we issued a total of 329,656 shares
of our common stock at a weighted-average price of $1.60 per share for total net proceeds of approximately $0.5 million under the
ATM. In August 2019, we reduced the dollar amount that can be sold under ATM to $4.0 million.
August 2019 Offering
In August 2019, we completed an offering
(the “August 2019 Offering”) with a single accredited institutional investor (the “Purchaser”) pursuant
to which we issued 1,480,000 shares of our common stock and pre-funded warrants to purchase 1,372,314 shares of our common stock
with an exercise price of $0.01 per share (the “Pre-funded Warrants”) in a registered direct offering and warrants
to purchase 2,852,314 shares of our common stock with an exercise price of $1.07 per share (the “Placement Warrants”)
in a concurrent private placement. The Pre-Funded Warrants, which were exercised for common stock in September 2019, were issued
in lieu of common stock in order to ensure the Purchaser did not exceed certain beneficial ownership limitations. The Placement
Warrants will become exercisable in February 2020 and will expire in February 2025. The Placement Warrants agreement contains a
provision where the warrant holder has 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 is a fundamental transaction (contractually defined to include
various merger, acquisition or stock transfer activities). As a result of this provision, in accordance with ASC 480, “Distinguishing
Liabilities from Equity,” the Placement Warrants are required to be classified as liabilities. The fair value of the Placement
Warrants is determined using the Black-Scholes Option Pricing model to calculate the call option and Binomial Option Pricing model
to calculate the put option with changes in the fair value recorded in the condensed statements of operations and comprehensive
loss.
During the three months ended
September 30, 2019, approximately $1.4 million and approximately $0.6 million, respectively, were allocated to warrant
liability and additional paid-in capital.
TITAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- Continued
(unaudited)
The warrant liability associated with
the Placement Warrants is classified within level 3 of the fair value hierarchy. The below table represents the weighted-average
key assumptions used to calculate the fair value of the Placement Warrants:
|
|
As of
|
|
|
|
August 7,
2019
|
|
|
September 30,
2019
|
|
Volatility
|
|
|
87
|
%
|
|
|
97
|
%
|
Risk-free Interest Rate
|
|
|
1.5
|
%
|
|
|
1.6
|
%
|
Dividend Rate
|
|
|
—
|
|
|
|
—
|
|
Expected Term (in years)
|
|
|
4.9
|
|
|
|
4.8
|
|
Weighted-Average Fair Value per share warrant
|
|
$
|
0.50
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
The below table presents the roll-forward of the warrant liability associated with the Placement Warrants (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Beginning balance as of January 1, 2019
|
|
|
|
|
|
$
|
—
|
|
Warrant liability
|
|
|
|
|
|
|
1,429
|
|
Non-cash gain on changes in fair value 1
|
|
|
|
|
|
|
(1,041
|
)
|
Ending balance as of September 30, 2019
|
|
|
|
|
|
$
|
388
|
|
|
(1)
|
Recorded within other income in the condensed statements of operations and comprehensive loss for the three and nine months
ended September 30, 2019.
|
In October 2019, we completed an
underwritten public offering (the “Public Offering”) pursuant to which we issued 40,276,000 units at an offering
price of $0.225 per unit, consisting of 35,886,000 shares of our common stock and pre-funded warrants to purchase 4,390,000
shares of our common stock with an exercise price of $0.01 per share (the “Pre-funded Warrants”), and Class B
Warrants to purchase 40,276,000 shares of our common stock at $0.225 per share (the “Class B Warrants”). The
Pre-Funded Warrants, which were exercised for common stock in October 2019, were issued in lieu of common stock in order to
ensure the Purchaser did not exceed certain beneficial ownership limitations. The Class B Warrants are immediately
exercisable and will expire in October 2024. The Class B Warrant agency agreement contains a provision where the warrant
holder has the option to receive cash equal to the Black Scholes fair value of the remaining unexercised portion of the
warrant in the event that there is a fundamental transaction (contractually defined to include various merger, acquisition or
stock transfer activities). Through the date of filing this Quarterly Report on Form 10-Q, we received net cash proceeds of
approximately $8.1 million, after deduction of underwriting fees and other offering expenses.