1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2001 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _____________
Commission File Number: 00024889
CELL PATHWAYS, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2969600
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
702 Electronic Drive Horsham, Pennsylvania 19044
(Address of principal executive office) (Zip Code)
(215) 706-3800
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
At May 2, 2001 there were 31,100,904 shares of Common Stock, par value $0.01 per
share, outstanding.
2
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2001
PART I FINANCIAL INFORMATION (UNAUDITED) Page
----
Item 1 Financial Statements:
Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000 ...................................... 3
Consolidated Statements of Operations for the three
months ended March 31, 2001 and 2000 and for the period from
inception (August 10, 1990) to March 31, 2001 .............. 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000 and for the period from
inception (August 10, 1990) to March 31, 2001 .............. 5
Notes to Consolidated Financial Statements ................. 6 - 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 8 - 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk . 12
PART II OTHER INFORMATION
Item 1 Legal Proceedings .......................................... 13
Item 6 Exhibits and Reports on Form 8-K ........................... 13
Signatures ................................................. 14
2
3
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 34,321,948 $ 49,528,407
Short term investments ..................................... 9,828,950 --
Accounts receivable ........................................ 316,973 329,694
Prepaid expenses and other ................................. 2,094,404 1,328,535
------------- -------------
Total current assets ................................. 46,562,275 51,186,636
EQUIPMENT, FURNITURE and LEASEHOLD IMPROVEMENTS, net ......... 1,079,592 1,183,287
RESTRICTED CASH .............................................. 685,469 676,216
NOTES RECEIVABLE FROM OFFICERS ............................... 711,961 642,256
OTHER ASSETS ................................................. 393,198 393,198
------------- -------------
$ 49,432,495 $ 54,081,593
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of note payable ............................ $ 250,350 $ 241,915
Current installments of obligation under capital lease ..... -- 38,218
Accounts payable ........................................... 1,300,094 1,033,202
Accrued compensation ....................................... 358,153 256,565
Other accrued liabilities .................................. 3,174,471 3,424,983
------------- -------------
Total current liabilities ............................ 5,083,068 4,994,883
------------- -------------
NOTE PAYABLE ................................................. 391,960 457,800
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding ................................ -- --
Common Stock, $.01 par value, 150,000,000 shares authorized;
31,100,904 and 31,073,457 shares issued and outstanding .... 311,009 310,734
Additional paid-in capital ................................... 140,330,627 140,235,478
Stock subscription receivable from issuance of Common Stock .. (37,000) (37,000)
Deficit accumulated during the development stage ............. (96,647,169) (91,880,302)
------------- -------------
Total stockholders' equity ........................... 43,957,467 48,628,910
------------- -------------
$ 49,432,495 $ 54,081,593
============= =============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
3
4
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED PERIOD FROM INCEPTION
MARCH 31, (AUGUST 10, 1990)
---------------------------------- TO
2001 2000 MARCH 31, 2001
------------- ------------- ---------------------
REVENUES ............................. $ 316,973 $ -- $ 646,667
EXPENSES:
Research and development .......... 3,782,214 5,379,962 79,423,207
Selling, general and administrative 1,942,632 1,631,211 23,864,421
------------- ------------- -------------
Operating loss .................. (5,407,873) (7,011,173) (102,640,961)
INTEREST INCOME, net ................. 641,006 474,201 5,993,792
------------- ------------- -------------
NET LOSS ............................. $ (4,766,867) $ (6,536,972) $ (96,647,169)
============= ============= =============
Basic and diluted net loss per
Common share ....................... $ (0.15) $ (0.24)
============= =============
Shares used in computing basic and
diluted net loss per Common share . 31,089,838 26,682,240
============= =============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
4
5
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
PERIOD FROM
THREE MONTHS ENDED INCEPTION
MARCH 31, (AUGUST 10, 1990)
---------------------------------- TO
2001 2000 MARCH 31, 2001
------------- ------------- -------------
OPERATING ACTIVITIES:
Net loss ....................................................... $ (4,766,867) $ (6,536,972) $ (96,647,169)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation expense and amortization ....................... 128,612 185,610 1,875,316
Issuance of Common Stock for services rendered .............. -- -- 48,578
Issuance of Common Stock options for services rendered ...... (12,208) 620,555 251,719
Provision for redemption of Redeemable Preferred Stock ...... -- -- 1,017,387
Write-off of deferred offering costs ........................ -- -- 469,515
(Increase) decrease in accounts receivable .................. 12,721 -- (316,973)
Other ....................................................... -- -- 68,399
Increase in prepaid and other current assets ............... (765,869) (863,936) (1,775,778)
(Increase) decrease in other assets ......................... -- 42,996 (242,431)
Increase in accounts payable and accrued liabilities ........ 117,968 126,754 2,211,727
------------- ------------- -------------
Net cash flows used in operating activities ............... (5,285,643) (6,424,993) (93,039,710)
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchase of equipment, furniture and leasehold improvements . (24,917) (169,706) (5,433,057)
Sale of leasehold improvements .............................. -- -- 3,000,000
Increase in notes receivable from officers .................. (69,705) -- (711,961)
Cash paid for deposits ...................................... -- (24,673) (50,767)
Purchase of short term investments ........................... (9,785,523) -- (9,785,523)
Increase in short term investments ........................... (43,427) -- (43,427)
------------- ------------- -------------
Net cash flows used in investing activities ................ (9,923,572) (194,379) (13,024,735)
------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock, net of related
offering costs .............................................. -- -- 36,700,249
Proceeds from the issuance of Common Stock under the Employee
Stock Purchase Plan ......................................... 88,505 159,685 606,276
Proceeds from issuance of Convertible Preferred Stock, net of
related offering costs ...................................... -- -- 47,185,046
Proceeds from the transaction with Tseng Labs, Inc. .......... -- -- 27,966,372
Proceeds from the exercise of Series E, F, G and Common
Stock warrants to purchase stock ............................ -- 14,568,101 19,966,894
Proceeds from the exercise of options to purchase Common Stock 19,127 1,753,083 2,759,156
Decrease in stockholder receivable ........................... -- -- 23,626
Redemption of Redeemable Preferred Stock ..................... -- -- (546,051)
Proceeds from bridge loan .................................... -- -- 791,000
Partner cash contributions ................................... -- -- 5,312,355
Increase in restricted cash .................................. (9,253) (8,195) (685,469)
Principal payments under capital lease obligation ............ (38,218) (33,917) (335,371)
Proceeds from borrowings ..................................... -- -- 950,000
Repayment of borrowings ...................................... (57,405) -- (307,690)
------------- ------------- -------------
Net cash flows provided by financing activities .......... 2,756 16,438,757 140,386,393
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ........... (15,206,459) 9,819,385 34,321,948
CASH AND CASH EQUIVALENTS, beginning of period ................. 49,528,407 32,013,118 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period ....................... $ 34,321,948 $ 41,832,503 $ 34,321,948
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Accrual of leasehold improvements payable ...................... $ -- $ -- $ 848,000
============= ============= =============
Accrual of deferred offering costs ............................. $ -- $ -- $ 441,375
============= ============= =============
Conversion of partners' investment to Preferred Stock .......... $ -- $ -- $ 5,312,355
============= ============= =============
Conversion of bridge loan to Convertible Preferred Stock ....... $ -- $ -- $ 791,000
============= ============= =============
Conversion of Convertible Preferred Stock for Common Stock ..... $ -- $ -- $ 53,766,991
============= ============= =============
Issuance of Convertible Preferred Stock to investment advisors . $ -- $ -- $ 540,742
============= ============= =============
Issuance of Common Stock as payment of management bonus ........ $ -- $ -- $ 59,200
============= ============= =============
Redemption of Redeemable Preferred Stock for Common Stock ...... $ -- $ -- $ 545,949
============= ============= =============
Sale of Common Stock in exchange for stock subscription
receivable ................................................... $ -- $ -- $ 37,000
============= ============= =============
Sale of Convertible Preferred Stock in exchange for stock
subscription receivable ...................................... $ -- $ -- $ 23,626
============= ============= =============
Issuance of Common Stock as payment for accounts payable ....... $ -- $ -- $ 48,578
============= ============= =============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
5
6
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Cell Pathways, Inc. was incorporated in Delaware in July 1998 as a
subsidiary of, and as of November 3, 1998 successor to, a Delaware corporation
of the same name. As the context requires, "Company" is used herein to signify
the successor and/or the predecessor corporations.
The Company is a development stage pharmaceutical company focused on
the research, development and commercialization of products to prevent and treat
cancer. The Company has not generated any revenues from the sale of its products
to date, nor is there any assurance of any future product revenues from the
development of its products. The Company's intended products are subject to long
development cycles and there is no assurance the Company will be able to
successfully develop, manufacture, obtain regulatory approval for or market its
products. During the period required to develop its products, the Company plans
to continue to finance operations through debt and equity financings and
corporate alliances. There is no assurance, however, that such additional
funding will be available on terms acceptable to the Company, if at all. The
Company will continue to be considered in the development stage until such time
as it generates significant revenues from its principal operations. As of March
31, 2001, the Company had a deficit accumulated during the developmental stage
of $96,647,169.
On November 3, 1998, the Company completed a financing through the
acquisition of Tseng Labs, Inc. ("Tseng") (a publicly held company) in which the
Company issued to Tseng stockholders approximately 5.5 million shares of the
Company's Common Stock and received net proceeds of approximately $26.4 million.
The accompanying consolidated financial statements include the accounts of the
Company from inception (August 10, 1990) and the accounts of Tseng after
November 3, 1998.
In July 2000, the Company entered into an exclusive Marketing and
Promotion Agreement (the "Nilandron Agreement") with Aventis Pharmaceuticals,
Inc. to market Nilandron(R) (nilutamide) to urologists in the United States
and Puerto Rico for use in patients who suffer from prostate cancer. The Company
began to market and promote Nilandron(R) in September 2000 through the use of
a dedicated third-party sales force. Under the terms of the Nilandron Agreement,
the Company is responsible for all marketing and promotion expenses and will
receive a percentage of the gross margin on sales in excess of a pre-established
gross margin threshold. For the three months ended March 31, 2001 and the year
ended December 31, 2000, the Company recognized revenue under the Nilandron
Agreement of $316,973 and $329,694, respectively.
Basis of Presentation
The unaudited consolidated financial statements as of March 31, 2001
and for the three months ended March 31, 2001 and 2000, are unaudited but
include all adjustments (consisting only of normal recurring adjustments) which,
in the opinion of management, are necessary to state fairly the financial
information set forth therein in accordance with generally accepted accounting
principles. The interim results may not be indicative of the results that may be
expected for the year. These financial statements should be read in conjunction
with the audited consolidated financial statements for the year ended December
31, 2000 included in the Company's annual report on Form 10-K filed with the
Securities and Exchange Commission.
2. SHORT-TERM INVESTMENTS
The Company invests in U.S. Government securities. Securities with
maturity greater than three months, but less than one year, at the time of
purchase are considered to be short-term investments. The investments are
classified as held-to-maturity and are stated at amortized cost. The carrying
amount of the investments approximates fair value due to their short maturity.
6
7
3. BASIC AND DILUTED NET LOSS PER COMMON SHARE
The Company provides basic and diluted net loss per Common share
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." SFAS No. 128 requires dual presentation of basic and
diluted net loss per Common share. "Basic" net loss per Common share equals net
loss divided by the weighted average Common shares outstanding during the
period. "Diluted" net loss per Common share equals net loss divided by the sum
of the weighted average Common shares outstanding during the period plus Common
Stock equivalents. The Company's basic and diluted net loss per share amounts
are the same since the assumed exercise of stock options and warrants are
anti-dilutive. The amount of Common Stock equivalents excluded from the
calculation of diluted net loss per share was 7,878,879 and 2,609,270 as of
March 31, 2001 and 2000, respectively.
4. LITIGATION
In February and March of 1999, five different groups of stockholders
filed class actions in the United States District Court in Philadelphia against
the Company and certain of its officers and directors alleging violations of
Section 11 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The complaints alleged that the Company made
false and misleading statements about the efficacy and near-term
commercialization of the Company's lead drug candidate, exisulind. The cases
were consolidated in March 1999, and a consolidated amended complaint which
asserts claims under Section 10(b) and 20(a) of the Securities Exchange Act of
1934 and SEC Rule 10-b5 was filed on June 28, 1999 seeking an unspecified amount
of damages on behalf of a class of persons who traded in the Company's
securities between October 7, 1998 and February 2, 1999. The defendants moved to
dismiss the complaint on September 21, 1999. The motion to dismiss was denied on
January 27, 2000. On February 10, 2000, defendants filed a motion for
reconsideration, or, in the alternative, certification for immediate appeal,
both of which were denied by the district court by order dated March 16, 2000.
The defendants answered the complaint on March 13, 2000. On May 24, 2000,
defendants filed a petition for writ of mandamus in the Court of Appeals for the
Third Circuit, requesting that the Court of Appeals review the district court's
denial of the motion to dismiss. The Court of Appeals denied the petition for
writ of mandamus on September 29, 2000. This case is in discovery which we
expect to be completed by the second quarter 2001. Dispositive motions and
pretrial proceedings are to be filed shortly after discovery ends. The Company
denies any allegations of wrongdoing and intends to vigorously defend the
litigation.
On March 13, 2001, two stockholders filed a class action in the United
States District Court in Philadelphia against the Company and certain of its
officers and directors alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The complaint was filed on behalf of persons
who purchased our securities from October 27, 1999 through September 22, 2000.
Nine identical complaints on behalf of other stockholders have subsequently been
filed. The complaints allege that the Company made false and misleading
statements about the Company's drug candidate, exisulind. The Company denies any
allegations of wrongdoing and intends to vigorously defend the litigation.
7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cell Pathways, Inc. was incorporated in Delaware in July 1998 as a
subsidiary of, and, as of November 3, 1998, the successor to, a Delaware
corporation of the same name. As the context requires, the "Company" or "CPI" is
used herein to signify the successor and/or the predecessor corporations.
Certain statements in this report, and oral statements made in respect
of this report, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements are those
which express plan, anticipation, intent, contingency or future development
and/or otherwise are not statements of historical fact. These statements are
subject to risks and uncertainties, known and unknown, which could cause actual
results and developments to differ materially from those expressed or implied in
such statements. Such risks and uncertainties relate to, among other factors,
the absence of approved products; history of operating losses and the need for
further financing; early stage of development; the costs, delays and
uncertainties inherent in science, basic pharmaceutical research, drug
development, clinical trials and the regulatory approval process, with respect
to both our current product candidates and our future product candidates, if
any; dependence on the development and market acceptance of Aptosyn(TM)
(exisulind) for one or more significant disease indications; limitations on, or
absence of, the predictive value of data obtained in laboratory tests, animal
models and human clinical trials when planning additional steps in product
development; uncertainty of obtaining regulatory approval of any compound for
any disease indication; uncertainty and adversity arising from the action of the
U.S. Food and Drug Administration, or FDA, in issuing a "not approvable" letter
with respect to the New Drug Application, or NDA, submitted for Aptosyn(TM)
(exisulind) for the orphan drug condition of familial adenomatous polyposis, or
FAP, a rare disease that puts those afflicted at high risk of developing colon
cancer; the timing and scope of any approval which might be received, or any
failure to receive approval, for any compound for any indication in the future;
the volatility of the market price of our Common Stock; acceptance of any
product candidates by physicians and providers of healthcare reimbursement; the
actions of competitors; the pace of technological changes in the
biopharmaceutical industry; dependence upon third parties; the validity, scope
and enforceability of patents; the risk of our pending class action securities
litigations; potential product liability claims; and availability of insurance.
These and other risks are detailed in our reports filed from time to
time under the Securities Act and/or the Securities Exchange Act, including the
sections entitled "Business," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Other Events" in
our annual reports on Form 10-K, quarterly reports on Form 10-Q and periodic
reports on Form 8-K and in such registration statements on Form S-3 as we may
file from time to time. You are encouraged to read these filings as they are
made. They are available over the Internet from the SEC in its EDGAR database at
http://www.sec.gov and from the Company.
Given the uncertainties affecting pharmaceutical companies in the
development stage, you are cautioned not to place undue reliance on any such
forward-looking statements, any of which may turn out to be wrong due to
inaccurate assumptions, unknown risks, uncertainties or other factors. No
forward-looking statement can be guaranteed; actual future results may vary
materially.
Both forward-looking statements and statements of historic fact must be
understood in the context of the risks referred to above which characterize our
development stage business. We undertake no obligation to update or revise the
statements made herein or the risk factors that may relate thereto.
OVERVIEW
Cell Pathways, Inc. is a development stage pharmaceutical company
focused on the research, development and commercialization of products to
prevent and treat cancer. From the inception of the Company's business in 1990,
operating activities have related primarily to conducting research and
development, raising capital and recruiting personnel. The Company's initial
investigational new drug application ("IND") was filed with the U.S. Food and
Drug Administration ("FDA") in December 1993 for human clinical trials of the
Company's first product candidate, Aptosyn(TM) (exisulind). The Company filed
an IND for its second product candidate, CP461, in December 1998. In August
1999, the Company submitted to the FDA a new drug application ("NDA") for
Aptosyn(TM) for familial adenomatous polyposis ("FAP"), an indication for
which the Company had received orphan drug designation. On September 25, 2000,
the FDA issued a "not approvable" letter noting
8
9
deficiencies in the Company's NDA for Aptosyn(TM) for FAP and finding the
information provided as to the safety and efficacy of Aptosyn(TM) to be
inadequate for the FAP indication. The Company intends to meet with the FDA to
discuss the NDA and determine its course of action with respect to the NDA and
the FAP program thereafter. The Company is evaluating the FAP program, including
the regulatory and competitive environment. The future of the FAP program is
uncertain. There can be no assurance that the Company will be able to address
the FDA concerns or that the FDA will ever approve the NDA for FAP. The Company
is currently focusing its development of Aptosyn(TM) and CP461 in various cancer
indications.
On November 3, 1998, CPI completed a financing through the acquisition
of Tseng Labs, Inc. ("Tseng") (a publicly held company with no continuing
operations which, subsequent to the transaction, became a subsidiary of CPI), in
which CPI issued to Tseng stockholders approximately 5.5 million shares of CPI
Common Stock and received net proceeds of approximately $26.4 million. In
October 1999, the Company issued 1.555 million shares of Common Stock for net
proceeds of approximately $13.5 million. During the year ended December 31,
2000, the Company received approximately $23.1 million from the issuance of 3.2
million shares of Common Stock and approximately $20.8 million primarily from
the exercise of previously issued Common Stock warrants and options. The Common
Stock outstanding as of March 31, 2001 was 31.1 million shares.
In July 2000, the Company entered into an exclusive Marketing and
Promotion Agreement (the "Nilandron Agreement") with Aventis Pharmaceuticals,
Inc. to market Nilandron(R) (nilutamide) to urologists in the United States
and Puerto Rico for use in patients who suffer from prostate cancer. The Company
began to promote Nilandron(R) in September of 2000 through the use of a
dedicated third-party contract sales force. Under the terms of the Nilandron
Agreement, Cell Pathways is responsible for all marketing and promotion expenses
and receives a percentage of the gross margin on sales in excess of a
pre-established gross margin threshold.
The Company has not received any revenue from the sale of its products,
and none of its product candidates has been approved for marketing. The Company
does not anticipate that the revenues to the Company under the Nilandron
Agreement will be material. The Company's income has been limited to interest
income from investments and revenues from the Nilandron Agreement beginning in
the fourth quarter of 2000, and its primary source of capital has been the sale
of its equity securities, including the transaction with Tseng. Net losses for
the years ended December 31, 2000 and 1999 were $26,916,808 and $19,633,722,
respectively. As of March 31, 2001, CPI's accumulated deficit was $96,647,169
and its unrestricted cash, cash equivalents and short-term investments were
$44,150,898. The Company anticipates that it will continue to incur additional
operating losses for the next several years and that it will need to raise
additional capital to sustain its operations. There can be no assurance that any
of its product candidates will be approved for marketing, that profitability
will be attained or, if profitability is achieved, that the Company will remain
profitable on a quarterly or annual basis in the future. The Company's operating
results will fluctuate from quarter to quarter. Some of these fluctuations may
be significant and, as a result, quarter to quarter comparisons may not be
meaningful.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 Compared with Three Months Ended
March 31, 2000. Revenues related to the Nilandron Agreement were $316,973 for
the three months ended March 31, 2001. The Company began promoting Nilandron(R)
to urologists in September 2000.
Total expenses for the three months ended March 31, 2001 were
$5,724,846, a decrease of $1,286,327 or 18.3% from the same period in 2000.
Research and development ("R&D") expenses were $3,782,214, a decrease of
$1,597,748 or 29.7%, from the same period in 2000. This decrease was primarily
the result of a non-cash charge of $620,555 recorded in the three months ended
March 31, 2000, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 123, related to the estimated value of stock options granted to
scientific advisory board members, based on the Company's stock price at March
31, 2000, which had increased substantially during the first three months of
2000. Also, in the three months ended March 31, 2000, purchases of raw materials
were made to produce Aptosyn(TM), the Company's lead drug candidate, for
clinical and commercial purposes. Also contributing to the decrease in R&D
expenses was a reduction in clinical expenses in the three months ended March
31, 2001 from the same period in 2000. Selling, general and administrative
expenses were $1,942,632 for the three months ended March 31, 2001, an increase
of $311,421 or 19.1%, from the same period in 2000. This increase was primarily
due to sales and marketing expenses related to the promotion of Nilandron(R) in
the first quarter of 2001.
Interest income was $641,006, net of interest expense of $26,245, for
the three months ended March 31, 2001, an increase of $166,805 or 35.2% from the
same period in 2000 primarily due to higher average cash balances.
9
10
LIQUIDITY AND CAPITAL RESOURCES
CPI has financed its operations since inception primarily with the net
proceeds received from the sale of equity securities, including the transaction
with Tseng. Financing activities have generated net proceeds of approximately
$140.4 million from inception through March 31, 2001.
At March 31, 2001, the Company had cash, cash equivalents and
short-term investments of approximately $44.2 million. The Company's cash, cash
equivalents, and short term investments decreased by $5.4 million from December
31, 2000. This decrease was primarily the result of the net loss of $4.8 million
for the three months ended March 31, 2001 and cash used for up front payments
due under a contractual agreement related to the initiation of a clinical trial
in non-small cell lung cancer. During the first quarter of 2001, a portion of
the Company's excess cash was invested in U.S. government securities with an
original maturity in excess of three months, thereby requiring such investments
to be classified as short-term investments.
CPI invests its excess cash primarily in low risk, highly liquid money
market funds and U.S. government securities. The Company has $685,469 in a
restricted account pledged for a security deposit under the lease of its
Horsham, Pennsylvania facility, and as security to a letter of credit for a
portion of a software lease commitment.
CPI leases approximately 40,000 square feet of laboratory and office
space in Horsham, Pennsylvania under a ten - year lease which expires in 2008
and which contains two five - year renewal options. The Company believes its
facilities will be adequate for the foreseeable future.
In February and March of 1999, five different groups of stockholders
filed class actions in the United States District Court in Philadelphia against
the Company and certain of its officers and directors alleging violations of
Section 11 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. (See Note 4 of Notes to Condensed Consolidated
Financial Statements included elsewhere in this report.) The Company denies any
allegations of wrongdoing and intends to vigorously defend the litigation.
On March 13, 2001, two stockholders filed a class action in the United
States District Court in Philadelphia against the Company and certain of its
officers and directors alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The complaint was filed on behalf of persons
who purchased our securities from October 27, 1999 through September 22, 2000.
Nine identical complaints on behalf of other stockholders have subsequently been
filed. The complaints allege that the Company made false and misleading
statements about the Company's drug candidate, exisulind. The Company denies any
allegations of wrongdoing and intends to vigorously defend the litigation.
CPI anticipates that annual expenditures for preclinical studies,
clinical trials, product development, research, selling and marketing, and
general and administrative expenses will increase significantly in future years.
CPI anticipates that it will need to raise additional capital. There can be no
assurance that the Company will be able to successfully complete the clinical
development of Aptosyn(TM) for any indication, that the FDA will grant
approval with respect to any indication within the time frame expected, if at
all, or that the other developments or expansions in the Company's research,
development and commercialization programs will ultimately lead to revenues for
the Company.
CPI cannot predict the date of its first product approval, if any, the
rate of revenue generated from initial product sales, if achieved, or the level
of expense which may be associated with such initial product sales. The Company
anticipates that it will require additional financing in the future to continue
its research and development programs. Until such time as the Company is able to
generate sufficient revenue from product sales, if ever, CPI plans to finance
its anticipated growth and development largely through equity or debt financing
and/or strategic or corporate alliances. CPI believes, based on its current
operating plans, that its existing cash, cash equivalents and short term
investments balance of approximately $44.2 million as of March 31, 2001,
together with interest earned on these balances, will provide sufficient working
capital to sustain operations into the second half of 2002. However, there can
be no assurance that the Company will not require additional funding prior to
that time, as the Company must adapt to changing circumstances arising from
within the Company's programs as well as from outside the Company. There can be
no assurance that additional equity or debt financing or corporate
collaborations will be available on terms acceptable to CPI, if at all. Any
additional equity financing would be dilutive to stockholders. Debt financing,
if available, may include restrictive covenants. Corporate alliances would
generally require the Company to give up certain marketing rights or other
rights to its potential products and technology. If additional funds should be
needed but are not
10
11
available, the Company may be required to modify its operations significantly or
to obtain funds by entering into collaborative arrangements or other
arrangements on unfavorable terms. The failure by CPI to raise capital on
acceptable terms if and when needed would have a material adverse effect on
CPI's business, financial condition and results of operations.
INFLATION
The Company does not believe that inflation has had any significant
impact on its business to date.
INCOME TAXES
As of March 31, 2001, CPI has net operating loss carryforwards ("NOLs")
for income tax purposes available to offset future federal income tax, subject
to limitations for alternative minimum tax. In addition, the Company has other
significant deferred tax assets that will also offset future income tax. As the
Company has not yet achieved profitable operations, management believes the tax
assets do not satisfy the realization criteria of SFAS No. 109, "Accounting for
Income Taxes" and therefore the Company has recorded a valuation allowance for
the entire amount of its net tax asset as of March 31, 2001.
The Tax Reform Act of 1986 contains provisions that may limit the NOLs
available to be used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. A change in ownership of a
company of greater than 50% within a three-year period results in an annual
limitation on CPI's ability to utilize its NOLs from tax periods prior to the
ownership change. The Company believes that the transaction with Tseng triggered
such limitation. However, the Company does not expect such limitation to have a
significant impact on its operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
an amendment of FASB Statement No. 133," which must be adopted by the Company in
the year ending December 31, 2001, provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. As the Company does not currently hold derivative instruments or
engage in hedging activities, the adoption of this pronouncement will have no
impact on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 draws on existing accounting rules and provides specific guidance
on revenue recognition of up-front non-refundable license fees. As the Company
has not had any license fee revenue, the adoption of SAB 101 did not have any
impact on the Company's financial position or results of operations.
11
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
primarily relates to the Company's investment portfolio. The Company is averse
to principal loss and seeks to limit default risk, market risk and reinvestment
risk. In particular, the Company does not use derivative financial instruments
in its investment portfolio, places its investments with high quality issuers
and, except for investments with the U.S. Government, limits the amount of
credit exposure to any one issuer. The Company mitigates default risk by
investing in only the safest and highest credit quality securities,
predominantly those of the U.S. Government, and by positioning its portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer, guarantor or depository. The portfolio includes only
marketable securities with active secondary or resale markets to ensure
portfolio liquidity and has historically been invested in securities which have
original maturities of less than nine months to ensure principal preservation.
As of March 31, 2001 and 2000, the Company was primarily invested in U.S.
Government securities and money market funds, which were classified as cash,
cash equivalents and short term investments in the Company's financial
statements. The investments had principal (or notional) amounts of $44,150,898
and $41,909,432, respectively, which were equal to their fair value, average
interest rates of 4.7% and 5.1%, respectively, and maturities of less than one
year.
12
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 4 to the notes to the Company's
condensed consolidated financial statements included herein is hereby
incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits filed as part of the Form 10-Q.
None.
(b) There were no reports on Form 8-K filed during the quarter ending March
31, 2001.
13
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CELL PATHWAYS, INC.
Dated: May 2, 2001 By: /s/ Robert J. Towarnicki
------------------------------------
Robert J. Towarnicki
Chairman; President; Chief Executive
Officer and Director (Principal
Executive Officer)
Dated: May 2, 2001 By: /s/ Brian J. Hayden
Brian J. Hayden
------------------------------------
Chief Financial Officer; Vice
President - Finance and Treasurer
(Principal Financial and Accounting
Officer)
14