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 has the potential to provide an efficacy and/or
safety benefit. ProNeura consists of a small, solid implant made from a mixture of ethylene-vinyl acetate, or EVA, and a drug substance.
The resulting product is a solid matrix that is designed to be administered subdermally in a brief, outpatient procedure and is removed
in a similar manner at the end of the treatment period.
Our
first product based on our ProNeura technology was Probuphine® (buprenorphine implant), which is approved in the United
States, Canada and the European Union, or EU, for the maintenance treatment of opioid use disorder in clinically stable patients taking
8 mg or less a day of oral buprenorphine. While Probuphine continues to be commercialized in Canada and in the EU (as Sixmo™) by
other companies that have either licensed or acquired the rights from Titan, we discontinued commercialization of the product in the
U.S. during the fourth quarter of 2020. Discontinuation of our commercial operations has allowed us to focus our limited resources on
important product development programs and transition back to a product development company.
In
December 2021, we announced our intention to work with our financial advisor to explore strategic alternatives to enhance stockholder
value, potentially including an acquisition, merger, reverse merger, other business combination, sales of assets, licensing or other
transaction. In June 2022, we implemented a plan to reduce expenses and conserve capital that included a company-wide reduction
in salaries and a scale back of certain operating expenses to enable us to maintain sufficient resources as we pursued potential strategic
alternatives. In July 2022, David Lazar and Activist Investing LLC (collectively, “Activist”) acquired an approximately
25% ownership interest in Titan, filed a proxy statement and nominated six additional directors, each of whom was elected to our board
of directors (the “Board”) at a special meeting of stockholders held on August 15, 2022 (the “Special Meeting”).
The exploration and evaluation of possible strategic alternatives by the Board has continued following the Special Meeting. Following
the election of the new directors at the Special Meeting, Dr. Marc Rubin was replaced as our Executive Chairman, and David Lazar assumed
the role of Chief Executive Officer. In connection with the termination of his employment as Executive Chairman, Dr. Rubin will receive
aggregate severance payments of approximately $0.4 million, of which, approximately $247,000 have been paid as of March 31, 2023.
In December 2022, we implemented additional cost reduction measures including a reduction in our workforce.
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 8 of Regulation S-X.
Accordingly, they do not include all 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 months ended March 31, 2023 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2023, or any future interim periods.
The
balance sheet as of December 31, 2022 is derived from the audited financial statements at that date, but does not include all 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 for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (“SEC”).
The accompanying condensed financial
statements have been prepared assuming we will continue as a going concern.
As
of March 31, 2023, we had cash and cash equivalents of approximately $1.1
million, 1,136 which we believe is sufficient to fund our planned operations into the second quarter of 2023. We are exploring
several financing and strategic alternatives; however, there can be no assurance that our efforts will be successful. Accordingly,
there is substantial doubt about our ability to continue as a going concern.
Discontinued
Operations
In
October 2020, we announced our decision to discontinue selling Probuphine in the U.S. and wind down our commercialization activities,
and to pursue a plan that will enable us to focus on our current, early-stage ProNeura-based product development programs.
The
accompanying condensed financial statements have been recast for all periods presented to reflect the assets, liabilities, revenue and
expenses related to our U.S. commercialization activities as discontinued operations (see Note 7). The accompanying condensed financial
statements are generally presented in conformity with our historical format. We believe this format provides comparability with the previously
filed financial statements.
Going
Concern Assessment
We
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, 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 our 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 condensed financial statements in this Quarterly Report on
Form 10-Q for the three months ended March 31, 2023, we do 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 condensed financial statements were issued. Additionally, we have suffered recurring losses from
operations and have an accumulated deficit that raises substantial doubt about our ability to continue as a going concern. We are
exploring several financing and strategic alternatives; however, there can be no assurance that our efforts will be
successful.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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.
Inventories
Inventories
are recorded at the lower of cost or net realizable value. Cost is based on the first in, first out method. We regularly review inventory
quantities on hand and write down to its net realizable value any inventory that we believe to be impaired. The determination of net
realizable value requires judgment including consideration of many factors, such as estimates of future product demand, product net selling
prices, current and future market conditions and potential product obsolescence, among others. The components of inventories are as follows:
Schedule of components of inventories | |
| | | |
| | |
| |
As of | |
(in thousands) | |
March 31,
2023 | | |
December 31,
2022 | |
Raw materials and supplies | |
$ | 60 | | |
$ | 60 | |
Finished goods | |
| 46 | | |
| 46 | |
Total inventories | |
$ | 106 | | |
$ | 106 | |
The
approximately $46,000 of finished goods inventory at March 31, 2023 and December 31, 2022 included materials held for potential
sale.
Revenue
Recognition
We
generate revenue principally from collaborative research and development arrangements, sales or licenses of technology, government grants,
sales of Probuphine materials to holders of the ex-U.S. product rights, and prior to the discontinued operations, the sale of Probuphine
in the U.S. 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) identify contracts with customers; (ii) identify performance obligations; (iii) determine the transaction price; (iv)
allocate the transaction price to the performance obligations; and (v) recognize of revenue when (or as) we satisfy each performance obligation.
Grant
Revenue
We
have contracts with National Institute on Drug Abuse or NIDA, within the U.S. Department of Health and Human Services, or HHS, the Bill&
Melinda Gates Foundation, and other government-sponsored organizations for research and development related activities that provide for
payments for reimbursed costs, which may include overhead and general and administrative costs. We recognize revenue from these contracts
as we perform services under these arrangements when the funding is committed. Associated expenses are recognized when incurred as research
and development expenses. Revenues and related expenses are presented gross in the condensed statements of operations.
Net
Product Revenue
Prior
to the discontinuation of our commercialization activities relating to Probuphine in the U.S., we recognized 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 was 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 was estimated
using the most-likely amount method, which is the single most-likely outcome under a contract and was typically at stated contractual
rates. The actual outcome of this variable consideration could materially differ from our estimates. From time to time, we would adjust
our estimates of this variable consideration when trends or significant events indicated that a change in estimate is appropriate to
reflect the actual experience. Additionally, we continued to assess the estimates of our variable consideration as we continued to accumulate
additional historical data.
Returns
– Consistent with the provisions of ASC 606, we estimated 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 could 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 year ended December 31,
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 had unique considerations. We continued to evaluate the activities with these specialty
pharmacies and updated the related reserves accordingly.
Rebates
– Our provision for rebates was estimated based on our customers’ contracted rebate programs and our historical experience
of rebates paid.
Discounts
– The provision was estimated based upon invoice billings, utilizing historical customer payment experience.
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 considerations. 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 recognize 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.
Contract
Assets and Liabilities
The
following table presents the activity related to our accounts receivable for the three months ended March 31, 2023.
Schedule of activity related to our accounts receivable | |
| | |
(In thousands) | |
| | |
Balance at January 1, 2023 | |
$ | 36 | |
Additions | |
| 98 | |
Deductions | |
| (126 | ) |
Balance at March 31, 2023 | |
$ | 8 | |
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, and investigator sponsored trials.
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
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 sheets
as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current.
The
following table presents the minimum lease payments of our operating lease:
Schedule of minimum operating lease payments | |
| | |
2023 | |
| 98 | |
2024 | |
| 66 | |
Total minimum lease payments (base rent) | |
| 164 | |
Less: imputed interest | |
| (6 | ) |
Total operating lease liabilities | |
$ | 158 | |
Recent
Accounting Pronouncements
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 beginning on January 1, 2023.
The adoption of Topic 326 did not have a material impact on our condensed financial statements and disclosures.
Accounting
Standards Not Yet Adopted
In
August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,
which simplifies the accounting for convertible instruments. ASU 2020-06 eliminates certain models that require separate accounting for
embedded conversion features, in certain cases. Additionally, among other changes, the guidance eliminates certain of the conditions
for equity classification for contracts in an entity’s own equity. The guidance also requires entities to use the if converted
method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments
that may be settled in cash or shares, except for certain liability-classified share-based payment awards. This guidance is effective
beginning after December 15, 2023 and must be applied using either a modified or full retrospective approach. Early adoption is
permitted. We are currently evaluating the impact this guidance will have on our condensed financial statements and related disclosures.
Subsequent
Events
We
have evaluated events that have occurred after March 31, 2023 and through the date that our condensed financial statements are issued.
Fair
Value Measurements
Financial
instruments, including receivables, accounts payable and accrued liabilities are carried at cost, and their fair values are approximated
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.
At
March 31, 2023 and December 31, 2022, the fair value of our investments in money market funds were approximately $0.8 million
and $2.6 million, respectively, which are included within our cash and cash equivalents in our condensed balance sheets.
The
following table summarizes option activity:
Schedule of our 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 December 31, 2022 | |
| 927 | | |
$ | 7.97 | | |
| 8.34 | | |
$ | - | |
Forfeited or expired | |
| (16 | ) | |
| 119.39 | | |
| - | | |
| - | |
Outstanding at March 31, 2023 | |
| 911 | | |
| 6.06 | | |
| 8.12 | | |
| | |
Exercisable at March 31, 2023 | |
| 911 | | |
| 6.06 | | |
| 8.12 | | |
| - | |
During
August and September 2022, our Board granted 125,000 options to purchase common stock at $1.52 per share and 900,000 options to
purchase common stock at $1.31 per share which are subject to shareholder approval of an amendment to increase the number of shares reserved
for issuance under our 2015 Plan. The options vest monthly over a 12-month period from the grant dates. As the shares underlying these
options have not been approved by our stockholders, they have been excluded from the table above as of March 31, 2023.
The
following table summarizes the stock-based compensation expense recorded for awards under our stock option plans (in thousands):
Schedule of the stock-based compensation expense | |
| | | |
| | |
| |
Three Months Ended | |
| |
March 31, | |
(in thousands) | |
2023 | | |
2022 | |
Research and development | |
$ | 28 | | |
$ | 123 | |
Selling, general and administrative | |
| 262 | | |
| 103 | |
Total stock-based compensation | |
$ | 290 | | |
$ | 226 | |
We
use the Black-Scholes-Merton option-pricing model with the following assumptions to estimate the fair value of our stock options:
Schedule of assumptions to estimate the fair value of options | |
| | | |
| | |
| |
Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Weighted-average risk-free interest rate | |
| - | % | |
| 1.47 | % |
Expected dividend payments | |
| - | | |
| - | |
Expected holding period (years) 1 | |
| - | | |
| 5.4 | |
Weighted-average volatility factor 2 | |
| - | | |
| 113.2 | |
Estimated forfeiture rates for options granted 3 | |
| - | % | |
| 5.14 | % |
(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. |
As
of March 31, 2023, there was approximately $0.6 million of total unrecognized compensation expense related to non-vested stock options
subject to shareholder approval. This expense is expected to be recognized over a weighted-average period of approximately 0.5 year.
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:
Schedule of antidilutive securities excluded from computation of net loss per common share | |
| | | |
| | |
| |
Three Months Ended | |
| |
March 31, | |
(in thousands) | |
2023 | | |
2022 | |
Weighted-average anti-dilutive common shares resulting from options | |
| 919 | | |
| 977 | |
Weighted-average anti-dilutive common shares resulting from warrants | |
| 6,307 | | |
| 5,442 | |
| |
| 7,226 | | |
| 6,419 | |
4. |
JT Pharmaceuticals Asset
Purchase Agreement |
In
October 2020, we entered into an Asset Purchase Agreement, or JT Agreement, with JT Pharmaceuticals, Inc., or JT Pharma, to acquire
JT Pharma’s kappa opioid agonist peptide, TP-2021 (formerly JT-09) for use in combination with our ProNeura long-term, continuous
drug delivery technology, for the treatment of chronic pruritus and other medical conditions. Under the terms of the JT Agreement, JT
Pharma received a $15,000 closing payment and is entitled to receive future milestone payments, payable in cash or in stock, based on
the achievement of certain developmental and regulatory milestones, and single-digit percentage earn-out payments on net sales of the
product if successfully developed and approved for commercialization. In January 2022, we entered into an agreement with JT Pharma
to clarify certain provisions of the JT Agreement pursuant to which we agreed that the proof-of-concept milestone provided for in the
JT Agreement was achieved and made a payment of $100,000 and issued 51,021 shares of our common stock to JT Pharma. The related expense
was included in research and development expenses in our condensed statements of operations.
5. |
Commitments and Contingencies |
Lease
Commitments
We
lease our office facility under an operating lease that expires in June 2024. Rent expense associated with this lease was approximately
$32,000 for the three months ended March 31, 2023 and 2022.
Legal
Proceedings
A
legal proceeding has been initiated by a former employee alleging wrongful termination, retaliation, infliction of emotional distress,
negligent supervision, hiring and retention and slander. An independent investigation into this individual’s allegations of whistleblower
retaliation, while still an employee, was conducted utilizing an outside investigator and concluded that such allegations were not substantiated.
We intend to vigorously defend the lawsuit (which we have compelled into arbitration); however, in light of our cash position, as described
elsewhere in this report, there can be no assurance that the defense and/or settlement of this matter will not have a material adverse
impact on our business.
Our
common stock outstanding as of March 31, 2023 and December 31, 2022 was 15,016,295 shares.
February 2022
Offerings
In
February 2022, we completed a registered direct offering with an accredited investor pursuant to which we issued an aggregate of
1,100,000 shares of our common stock and 2,274,242 pre-funded warrants to purchase shares of our common stock, with an exercise price
of $0.001 per share. In a concurrent private placement, we sold unregistered pre-funded warrants to purchase an aggregate of 1,289,796
shares of common stock with an exercise price of $0.001 per share and issued unregistered five year and six month warrants to purchase
an aggregate of 4,664,038 shares of common stock with an exercise price of $1.14. The net cash proceeds from these offerings were approximately
$5.0 million after deduction of underwriting fees and other offering expenses.
Warrant
Exercises
In
March 2022, we received approximately $1,000 from the exercise of 974,242 pre-funded warrants issued in the February 2022 registered
direct offering.
JT
Pharma Milestone
In
January 2022, we entered into an agreement with JT Pharma to clarify certain provisions of the JT Agreement pursuant to which we
agreed that the proof-of-concept milestone provided for in the JT Agreement was achieved and made a payment of $100,000 and issued 51,021
shares of our common stock to JT Pharma.
Restricted
Shares
In
August 2021, we agreed to issue 50,000 shares of our common stock pursuant to a restricted stock agreement with Maxim Partners,
LLC in connection with the entry into an amendment to our existing advisory agreement. The shares vested monthly over 12 months. We recorded
approximately $27,000 of stock-based compensation expense during the three months ended March 31, 2022.
7. |
Discontinued Operations |
The
following table presents information related to assets and liabilities reported as discontinued operations in our condensed balance sheets:
Schedule of assets and liabilities reported as discontinued operations in our condensed balance sheets | |
| | | |
| | |
| |
March 31, | | |
December 31, | |
(In thousands) | |
2023 | | |
2022 | |
Receivables | |
| 10 | | |
| - | |
Prepaid expenses and other current assets | |
| 21 | | |
| 14 | |
Discontinued operations – current assets | |
$ | 31 | | |
$ | 14 | |
| |
| | | |
| | |
Accounts payable | |
$ | 187 | | |
$ | 129 | |
Discontinued operations – current liabilities | |
$ | 187 | | |
$ | 129 | |
|
8. |
Related Party Transactions |
During
the three months ended March 31, 2023, we made payments related to legal fees of approximately $50,000 to a law firm operated by
one of our Board members.