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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 June 30, 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 July 31, 2001 there were 31,120,098 shares of Common Stock, par value $0.01
per share, outstanding.
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CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001
PART 1 FINANCIAL INFORMATION (UNAUDITED) Page
----
Item 1 Financial Statements:
Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000 ........................................ 3
Consolidated Statements of Operations for the three
and six months ended June 30, 2001 and 2000 and for the period
from inception (August 10, 1990) to June 30, 2001 ............ 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 2001 and 2000 and for the period
from inception (August 10, 1990) to June 30, 2001 ............ 5 - 6
Notes to Consolidated Financial Statements ................... 7 - 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 9 - 13
Item 3 Quantitative and Qualitative Disclosures about Market Risk ... 13
PART II OTHER INFORMATION
Item 1 Legal Proceedings ............................................ 13
Item 2 Change in Securities and Use of Proceeds ..................... 13
Item 4 Submission of Matters to a Vote of Security Holders .......... 14
Item 6 Exhibits and Reports on Form 8-K ............................. 14
Signatures ................................................... 15
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CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 10,036,743 $ 49,528,407
Short term investments ....................................... 28,510,409 --
Accounts receivable........................................... -- 329,694
Prepaid expenses and other ................................... 1,511,310 1,328,535
------------- -------------
Total current assets ................................... 40,058,462 51,186,636
EQUIPMENT, FURNITURE and LEASEHOLD IMPROVEMENTS ................ 1,116,206 1,183,287
RESTRICTED CASH................................................. 458,644 676,216
NOTES RECEIVABLE FROM OFFICERS.................................. 768,853 642,256
OTHER ASSETS ................................................... 360,505 393,198
------------- -------------
$ 42,762,670 $ 54,081,593
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of note payable .............................. $ 259,083 $ 241,915
Current installments of obligation under capital lease ....... 36,300 38,218
Accounts payable ............................................. 647,113 1,033,202
Accrued compensation ......................................... 557,072 256,565
Other accrued liabilities .................................... 1,584,078 3,424,983
------------- -------------
Total current liabilities .............................. 3,083,646 4,994,883
------------- -------------
LONG TERM LIABILITIES:
Note payable.................................................... 323,821 457,800
Obligation under capital lease, excluding current portion ...... 89,382 --
------------- -------------
Total liabilities......................................... 3,496,849 5,452,683
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 and 5,000,000 shares
authorized, none issued and outstanding ...................... -- --
Common Stock, $.01 par value, 150,000,000 and 70,000,000 shares
authorized; 31,102,154 and 31,073,457 shares issued and
outstanding .................................................. 311,021 310,734
Additional paid-in capital ..................................... 140,516,483 140,235,478
Stock subscription receivable from issuance of Common Stock .... (37,000) (37,000)
Deficit accumulated during the development stage ............... (101,524,683) (91,880,302)
------------- -------------
Total stockholders' equity ............................... 39,265,821 48,628,910
------------- -------------
$ 42,762,670 $ 54,081,593
============= =============
The accompanying notes to the condensed consolidated financial statements are an
integral part of these statements.
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CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
PERIOD FROM
INCEPTION
THREE MONTHS ENDED SIX MONTHS ENDED (AUGUST 10, 1990)
JUNE 30, JUNE 30, TO
------------------------------- --------------------------------
2001 2000 2001 2000 JUNE 30, 2001
------------ -------------- ------------- ------------- -------------
REVENUES ............................ $ -- $ -- $ 316,973 $ -- $ 646,667
EXPENSES:
Research and development ......... 3,415,882 5,237,800 7,198,096 10,617,762 82,839,089
Selling, general and ............. 1,920,761 2,455,667 3,863,393 4,086,878 25,785,182
------------- ------------- ------------- ------------- -------------
administrative
Operating Loss ................. (5,336,643) (7,693,467) (10,744,516) (14,704,640) (107,977,604)
INTEREST INCOME, Net ................ 459,129 539,756 1,100,135 1,013,957 6,452,921
------------- ------------- ------------- ------------- -------------
NET LOSS ............................ $ (4,877,514) $ (7,153,711) $ (9,644,381) $ (13,690,683) $(101,524,683)
============= ============= ============= ============= =============
Basic and diluted net loss per ...... $ (0.16) $ (0.26) $ (0.31) $ (0.50)
============= ============= ============= =============
Common Share
Shares used in computing basic and
diluted net loss per Common Share 31,100,945 27,569,399 31,095,422 27,125,820
============= ============= ============= =============
The accompanying notes to the condensed consolidated financial statements are an
integral part of these statements.
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CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
PERIOD FROM
INCEPTION
SIX MONTHS ENDED (AUGUST 10, 1990)
JUNE 30, TO
--------------------------------
2001 2000 JUNE 30, 2001
------------- ------------- -------------
OPERATING ACTIVITIES:
Net loss .................................... $ (9,644,381) $ (13,690,683) $(101,524,683)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense ....... 264,153 387,738 2,010,857
Issuance of Common Stock for services ....... -- -- 48,578
rendered
Issuance of Common Stock options for ........ 169,035 483,654 432,962
services rendered
Provision for redemption of Redeemable
Preferred Stock ............................ -- -- 1,017,387
Write-off of deferred offering costs ........ -- -- 469,515
Increase in short term investments .......... (274,091) -- (274,091)
Decrease in accounts receivable ............. 329,694 -- --
Other ....................................... -- -- 68,399
Increase in prepaid expenses and other ...... (182,775) (638,528) (1,192,684)
current assets
Increase in other assets .................... 32,693 (65,764) (209,738)
Increase (decrease) in accounts payable and
accrued liabilities ........................ (1,926,487) 218,536 167,272
------------- ------------- -------------
Net cash flows used in operating activities (11,232,159) (13,305,047) (98,986,226)
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchase of equipment, furniture and
leasehold improvements ..................... (71,390) (380,697) (5,479,530)
Sale of leasehold improvements .............. -- -- 3,000,000
Increase in notes receivable from officers .. (126,597) -- (768,853)
Cash paid for deposits ...................... -- (24,673) (50,767)
Purchase of short term investments .......... (28,236,318) -- (28,236,318)
------------- ------------- -------------
Net cash flows used in investing activities (28,434,305) (405,370) (31,535,468)
------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock,
net of related offering costs .............. -- -- 36,700,249
Proceeds from the exercise of Series E, F,
G, and Common Stock warrants to purchase
stock ...................................... -- 15,166,544 19,966,894
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 options to
purchase Common Stock ...................... 23,752 1,924,813 2,763,781
Decrease in shareholder receivable .......... -- -- 23,626
Redemption of Redeemable Preferred Stock .... -- -- (546,051)
Proceeds from bridge loan ................... -- -- 791,000
Partner cash contributions .................. -- -- 5,312,355
(Increase) decrease in restricted cash ...... 217,572 (17,236) (458,644)
Principal payments under capital lease
obligations ................................ (38,218) (68,862) (335,371)
Proceeds from borrowings .................... -- -- 950,000
Repayment of borrowings ..................... (116,811) -- (367,096)
------------- ------------- -------------
Net cash flows provided by financing
activities ............................... 174,800 17,164,944 140,558,437
------------- ------------- -------------
Net increase (decrease) in cash and cash .... (39,491,664) 3,454,527 10,036,743
equivalents
CASH AND CASH EQUIVALENTS, beginning of
period ..................................... 49,528,407 32,013,118 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period .... $ 10,036,743 $ 35,467,645 $ 10,036,743
============= ============= =============
The accompanying notes to the condensed consolidated financial statements are an
integral part of these statements.
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CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
PERIOD FROM
INCEPTION
SIX MONTHS ENDED (AUGUST 10, 1990)
JUNE 30, TO
----------------
2001 2000 JUNE 30, 2001
----- ------ ---------------
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 ...... $ -- $ -- $ 5,312,355
===== ====== ===========
Preferred Stock
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 condensed consolidated financial statements are an
integral part of these statements.
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CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 future 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 June 30, 2001, the Company had a deficit accumulated during the developmental
stage of $101,524,683.
On November 3, 1998, the Company completed a financing through the
acquisition of Tseng Labs, Inc. ("Tseng") (a publicly held company with no
continuing operations) 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. The Company does not anticipate that the revenues, if
any, to the Company under the Nilandron Agreement will be material.
Basis of Presentation
The unaudited condensed consolidated financial statements as of June
30, 2001 and for the three and six months ended June 30, 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.
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2. SHORT TERM INVESTMENTS
The Company invests in U.S. Government securities. Securities with a
maturity greater than three months at the time of purchase are considered to be
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.
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 are options and warrants to purchase 7,947,062 and 2,561,299 shares
of Common Stock as of June 30, 2001 and 2000, respectively.
4. LITIGATION
In February and March of 1999, five stockholder class actions were
filed against the Company and certain of its officers and directors in the
United States District Court for the Eastern District of Pennsylvania. 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 which had the effect of artificially inflating the price of the
Company's Common Stock. These actions were consolidated into one action, and a
consolidated amended complaint was filed in late June 1999 asserting a class
period extending from October 7, 1998 to February 2, 1999. On June 7, 2001, the
Company reached an agreement in principle settling all claims arising from this
lawsuit. The settlement amount, $3.75 million, will be funded by the Company's
insurance carrier. This settlement is still subject to the execution of a final
agreement and court approval, after which notice and an opportunity to object
must be furnished to the class. There is no assurance that the settlement will
be approved or completed in a timely fashion or at all.
In March, April and May of 2001, eleven additional stockholder class
actions were filed in the United States District Court for the Eastern District
of Pennsylvania against the Company and certain of its officers and directors
seeking unspecified damages. The lawsuits allege that the Company and its
officers made false and misleading statements about the Company's lead drug
candidate which caused artificial inflation of the Company's stock price. The
class includes investors who purchased the Company's stock between October 27,
1999 and September 22, 2000, when the Company announced that the FDA had
informed the Company that it would be receiving a "not approvable" letter for
its new drug application for its leading drug candidate. The litigation is in
very preliminary stages. In May 2001, the individual class actions were
consolidated. By court order dated July 27, 2001, lead plaintiffs and their
counsels have been appointed in the consolidated action. The Company denies any
allegations of wrongdoing and intends to vigorously defend the litigation. There
is no assurance that the Company will be successful in its defense or that
insurance will be adequate or available to permit a settlement or fund any
judgment in this action.
On August 2, 2001, the Commmonwealth Court of Pennsylvania issued an
Order to stay proceedings and actions for 180 days in certain cases involving
parties insured by Reliance Insurance Company in connection with that Court's
responsibility for supervisory authority over the rehabilitation of Reliance
Insurance Company. In the Order, the Commonwealth Court has requested that
federal courts extend the stay to cases in the federal courts. Included in the
list of stayed actions, are two cases which the Company believes are intended to
be the class action securities litigations against the Company which are
described in the immediately preceding two paragraphs.
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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 scientific research, 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, approval and market
acceptance of one or more of our product candidates 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; the risks that clinical
studies are not positive or even if positive do not result in safety and
efficacy necessary to obtain regulatory approvals; the risks of conducting
clinical trials of our drugs in combination with other drug therapies;
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 in issuing a "not approvable" letter with respect to the
New Drug Application submitted for Aptosyn(TM) (exisulind) for familial
adenomatous polyposis; 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 whether due to the adequacy of the development
programs, changing regulatory requirements or otherwise: 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 and adequacy 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 Food and Drug
Administration ("FDA") in December 1993 for human clinical trials of the
Company's first product candidate, Aptosyn(TM). 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
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received orphan drug designation. In September 2000, the FDA issued a "not
approvable" letter for the FAP indication. While the Company continues to
evaluate the FAP program, including the regulatory and competitive environment,
the Company currently is focusing its development resources on Aptosyn(TM) and
CP461 in various cancer indications rather than precancerous indications. The
future of the FAP program is uncertain. There can be no assurance that the FDA
will ever approve an NDA for FAP.
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, in a private placement of stock, 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 in a private
placement of stock and approximately $20.8 million primarily from the exercise
of previously issued Common Stock warrants and options. The Company's Common
Stock outstanding at June 30, 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 does not anticipate that the
revenues, if any, to the Company under the Nilandron Agreement will be material.
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's income has been limited to interest income from investments and
revenues from the Nilandron Agreement beginning in the fourth quarter of 2000
and in the first six months of 2001, 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 and net loss for the six months ended June 30, 2001
was $9,644,381. As of June 30, 2001, CPI's accumulated deficit was $101,524,683
and its unrestricted cash, cash equivalents and short term investments were
$38,547,152. 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 June 30, 2001 Compared with Three Months Ended June
30, 2000. The Company did not receive revenues related to the Nilandron
Agreement in the three months ended June 30, 2001 and 2000. The Company began
promoting Nilandron(R) in accordance with this agreement in September 2000.
The Company does not anticipate that the revenues, if any, to the Company under
the Nilandron Agreement will be material.
Total expenses for the three months ended June 30, 2001 were
$5,336,643, a decrease of $2,356,824 or 30.6% from the same period in 2000.
Research and development expenses for the three months ended June 30, 2001 were
$3,415,882, a decrease of $1,821,918 or 34.8% from the three months ended June
30, 2000. This decrease was primarily due to a reduction in the second quarter
of 2001 of purchases of raw material of Apotsyn(TM) and a reduction in
clinical development expenses from the same period in 2000. Selling, general and
administrative expenses were $1,920,761 for the three months ended June 30,
2001, a decrease of $534,906 or 21.8%, from the same period in 2000. This
decrease was primarily due to a reduction in marketing related expenses in the
second quarter of 2001 versus the same period in 2000, offset partially by
expenses related to the promotion of Nilandron(R) in the second quarter of
2001.
Interest income, net of interest expense, was $459,129 for the three
months ended June 30, 2001, a decrease of $80,627 or 14.9% from the same period
of 2000, primarily due to lower interest rates.
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Six Months Ended June 30, 2001 Compared with Six Months Ended June 30,
2000. Revenues from the Nilandron Agreement were $316,973 for the six months
ended June 30, 2001. There were no revenues from this agreement in the six
months ended June 30, 2000 since the agreement was initiated in July 2000 and
promotion began in September 2000. The Company does not anticipate that the
revenues, if any, to the Company under the Nilandron Agreement will be material.
Total expenses for the six months ended June 30, 2001 were $11,061,489,
a decrease of $3,643,151 or 24.8% from the same period in 2000. Research and
development expenses for the six months ended June 30, 2001 were $7,198,096, a
decrease of $3,419,666 or 32.2%, from the six months ended June 30, 2000. This
decrease was primarily due to a reduction in the first six months of 2001 of
purchases of raw material of Apotsyn(TM) and a reduction in clinical
development expenses from the same period in 2000. Selling, general and
administrative expenses were $3,863,393 for the six months ended June 30, 2001,
a decrease of $223,485 or 5.5%, from the same period in 2000. This decrease was
primarily due to a reduction in marketing related expenses in the first six
months of 2001 versus the same period in 2000, offset partially by expenses
related to the promotion of Nilandron(R) in the first six months of 2001.
Interest income, net of interest expense, was $1,100,135 for the six
months ended June 30, 2001, an increase of $86,178 or 8.5% from the same period
of 2000, primarily due to higher average cash balances, offset partially by
lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
CPI has financed its operations since inception primarily with the net
proceeds received from private placements of equity securities and the
transaction with Tseng. Financing activities have generated net proceeds of
$140.6 million from inception through June 30, 2001.
At June 30, 2001, the Company had cash, cash equivalents, and short
term investments of $38,547,152, a decrease of $10,981,255 from the comparable
balances at December 31, 2000. This decrease was primarily the result of cash
used to finance the net loss of $9.6 million in the first six months of 2001 and
the payment of outstanding liabilities. During the six months ended June 30,
2001 the Company used cash to acquire $71,390 in equipment, furniture and
leasehold improvements and for loans to officers which increased by $126,598.
Cash was provided from financing activities was $174,800 during this period due
primarily to a reduction in restricted cash balances and from proceeds from the
issuance of Common Stock as part of the employee stock purchase plan.
Included in prepaid expenses as of June 30, 2001 is a balance of
$725,585 related to advance payments made in 2000 for anticipated manufacturing
expenses for Aptosyn(TM). Due to reductions in the manufacturing plan for
Aptosyn(TM), this amount, plus interest, was refunded to the Company in July
2001.
CPI invests its excess cash primarily in low risk, highly liquid money
market funds and U.S. government securities. The Company has $458,644 in a
restricted account pledged as security for a security deposit under the lease of
its Horsham, Pennsylvania facility. In the first six months of 2001, a portion
of the Company's excess cash was invested in U.S. government securities with
original maturities excess of three months, thereby requiring such investments
to be classified as short term investments.
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 stockholder class actions were
filed against the Company and certain of its officers and directors in the
United States District Court for the Eastern District of Pennsylvania. 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. These actions were consolidated into one action. On June 7, 2001, the
Company reached an agreement in principle settling all claims arising from this
lawsuit. The settlement amount, $3.75 million, will be funded by the Company's
insurance carrier. This settlement is still subject to the execution of a final
agreement and court approval, after which notice and an opportunity to object
must be furnished to the class. There is no assurance that the settlement will
be approved or completed in a timely fashion or at all.
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In March, April and May of 2001, eleven additional stockholder class
actions were filed in the United States District Court for the Eastern District
of Pennsylvania against the Company and certain of its officers and directors
seeking unspecified damages. The lawsuits allege that the Company and its
officers made false and misleading statements. The class includes investors who
purchased the Company's stock between October 27, 1999 and September 22, 2000,
when the Company announced that the FDA had informed the company that it would
be receiving a "not approvable" letter for its new drug application for its
leading drug candidate. The litigation is in very preliminary stages. In May
2001, the individual class actions were consolidated. The Company denies any
allegations of wrongdoing and intends to vigorously defend the litigation. There
is no assurance that the Company will be successful in its defense or that
insurance will be adequate or available to permit a settlement or fund any
judgment in this action.
CPI anticipates that quarterly and annual expenditures for preclinical
studies, clinical trials, product development, research, selling, 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) or CP461 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 $38.5 million as of June 30, 2001, together
with interest earned on these balances, will provide sufficient working capital
to sustain operations into the first half of 2003. 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
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 June 30, 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 Statement of Financial
Accounting Standards 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 June 30, 2001. (Also see Note 12 of notes to consolidated financial
statements in the Company's annual report on Form 10-K.)
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 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
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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.
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 eleven months to ensure principal preservation.
As of June 30, 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 $38,547,152
and $36,731,934, respectively, which were equal to their fair value, average
interest rates of 3.9% and 5.4%, respectively, and maturities of less than one
year.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Footnote 4 to the notes to the Company's
consolidated financial statements included herein is hereby incorporated by
reference.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 30, 2001, the
following matters were submitted to a vote of security holders:
a) Three directors were elected for terms of three years each, as
follows:
Votes Votes Votes % of Outstanding
Director FOR AGAINST WITHHELD Voting FOR
-------- --- ------- -------- -------------
Judith A. Hemberger Ph.D. 26,419,341 -- 812,066 97.02%
Robert J. Towarnicki 26,337,820 -- 893,587 96.72%
Rifat Pamukcu, M. D. 26,788,199 -- 443,208 98.38%
b) Ratification of the selection of Arthur Andersen LLP as independent
auditors of the Company for 2001.
The stockholders ratified the selection of Arthur Andersen LLP as
independent auditors of the Company by a vote of 26,997,786 in favor, 183,003
against and 50,618 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None.
(b) There were no reports on Form 8-K filed during the quarter ending June
30, 2001.
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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: August 9, 2001 By: /s/ Robert J. Towarnicki
------------------------------------
Robert J. Towarnicki
Chairman, President, Chief Executive
Officer and Director (Principal
Executive Officer)
Dated: August 9, 2001 By: /s/ Brian J. Hayden
------------------------------------
Brian J. Hayden
Chief Financial Officer; Vice
President - Finance; Treasurer
(Principal Financial and Accounting
Officer)
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