<PAGE> 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 September 30, 1998 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: 0001066284
CELL PATHWAYS, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-246900
-------- ---------
(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, including 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 ___ No _X_
At September 30, 1998, registrant was privately held. At November 4, 1998,
registrant had concluded a transaction providing for the issuance of
approximately 24,248,000 shares of common stock, par value $0.01 and became a
reporting company.
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CELL PATHWAYS, INC.
(A development stage company)
INDEX TO FORM 10 - Q
For the Quarter Ended September 30, 1998
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION (Unaudited)
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations -
Three Month And Nine Month Periods Ended September 30,
1998 and 1997 and from Inception (August 10, 1990)
to September 30, 1998 4
Condensed Consolidated Statements of Cash Flows -
Nine Month Periods Ended September 31, 1998
and 1997 and from Inception (August 10, 1990)
to September 30, 1998 5
Notes to the Condensed Consolidated Financial Statements 6 - 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 -15
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE> 3
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma
September 30, September 30, December 31,
1998 1998 1997
---- ---- ----
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 41,909 $ 14,382 $ 8,461
Prepaid expenses and other 600 417 179
-------- -------- --------
Total current assets 42,509 14,799 8,640
-------- -------- --------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture and equipment 1,966 1,717 518
Leasehold improvements -- -- 1,258
Building and land -- -- --
-------- -------- --------
1,966 1,717 1,776
Less - Accumulated depreciation and amortization (335) (260) (133)
-------- -------- --------
1,631 1,457 1,643
DEFERRED OFFERING COSTS -- 507 470
RESTRICTED CASH 603 603 199
DEPOSITS 20 20 28
-------- -------- --------
$ 44,763 $ 17,386 $ 10,980
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,048 $ 895 $ 209
Accrued leasehold improvement costs 587 587 1,053
Accrued compensation 61 61 180
Accrued offering costs -- 298 441
Other accrued liabilities 1,998 220 1,321
Notes payable 189 189 53
-------- -------- --------
Total current liabilities 3,883 2,250 3,257
LONG-TERM LIABILITIES:
Note payable, net of current portion 146 146 9
-------- -------- --------
REDEEMABLE PREFERRED STOCK, $.01 par value, 61,250 shares
authorized, 0, 61,250 and 61,250 issued and outstanding,
redeemable for a total of $1,092 -- 1,092 1,092
-------- -------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 5,000,000 shares authorized and none issued
and outstanding pro forma, Convertible Preferred Stock, $.01 par value,
18,400,000 and 13,000,000 shares authorized, 15,614,266 and
10,968,387 shares issued and outstanding, with an aggregate liquidation
preference of $55,160 and $33,217 -- 53,562 32,158
Common Stock $.01 par value, 70,000,000 shares authorized and 24,248,761,
issued and outstanding pro forma. 22,400,000 shares authorized, 2,990,095
and 2,990,095 issued and outstanding 242 30 30
Additional paid-in capital 80,645 459 456
Stock subscription receivable from issuance of Common Stock (37) (37) (37)
Deficit accumulated during the development stage (40,116) (40,116) (25,985)
-------- -------- --------
Total stockholders' equity 40,734 13,898 6,622
======== ======== ========
$ 44,763 $ 17,386 $ 10,980
======== ======== ========
</TABLE>
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
3
<PAGE> 4
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Period From
Inception
Three Months Ended Nine Months Ended (August 10,
September 30, September 30, 1990) to
------------------------------ ----------------------------- September 30,
1998 1997 1997 1998 1998
------------ ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
EXPENSES:
Research and development $ 4,969 $ 2,362 $ 11,866 $ 5,586 $ 32,944
General and administrative 801 243 2,768 584 7,323
Provision for redemption of the
Redeemable Preferred Stock -- 1,017 -- 1,017 1,017
------------ ------------ ----------- ------------ --------
Total expenses 5,770 3,622 14,634 7,187 41,284
INTEREST INCOME 259 165 503 288 1,168
------------ ------------ ----------- ------------ --------
NET LOSS $ (5,511) $ (3,457) $ (14,131) $ (6,899) $(40,116)
============ ============ =========== ============ ========
Basic and diluted net loss per common share $ (1.84) $ (1.18) $ (4.73) $ (2.47)
============ ============ =========== ============
Shares used in computing basic and diluted
net loss per common share 2,990,095 2,927,554 $ 2,990,095 2,788,415
============ ============ ============ ============
Pro forma basic and diluted net loss per
common share $ (0.23) $ (0.18) $ (0.64) $ (0.39)
============ ============ =========== ============
Share used in computing pro forma basic
and diluted net loss per common share 24,170,114 19,368,918 22,033,802 17,499,298
============ ============ =========== ============
</TABLE>
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
4
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CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Period From
Inception
Nine Months Ended (August 10,
September 30, 1990) to
-------------------------- September 30,
1998 1997 1998
--------- --------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(14,131) $ (6,899) $(40,116)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation expense and other 130 41 260
Issuance of Common Stock for services -- -- 12
Provision for redemption of Redeemable Preferred
Stock -- 1,017 1,017
Write-off of deferred offering costs 470 -- 470
Other -- 5 (9)
Increase in prepaid expenses (238) (6) (417)
Increase (decrease) in accounts payable and
accrued liabilities (764) (64) 800
Increase (decrease) in accrued compensation (119) -- 61
-------- -------- --------
Net cash flows used in operating activities (14,652) (5,906) (37,922)
-------- -------- --------
INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements (2,722) (193) (3,445)
Sale of leasehold improvements 3,000 -- 3,000
Cash received from deposits 9 -- 9
-------- -------- --------
Net cash flows provided by/(used in)
investing activities 287 (193) (436)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of Convertible Preferred
Stock, net of related offering costs 21,404 16,548 47,243
Proceeds from exercise of warrants to purchase
Series E and Series F Convertible Preferred Stock -- 318 473
Decrease in shareholder receivable -- 3 24
Cash received for Common Stock options exercised -- 107 181
Cash paid for deferred offering costs (651) (83) (680)
Proceeds from bridge loan -- -- 791
Partner cash contributions -- -- 5,312
Increase in restricted cash (404) (2) (604)
Proceeds from borrowings -- -- 150
Repayment of borrowings (63) (36) (150)
-------- -------- --------
Net cash flows provided by financing activities 20,286 16,855 52,740
-------- -------- --------
Net increase in cash and cash equivalents 5,921 10,756 14,382
CASH AND CASH EQUIVALENTS, beginning of period 8,461 645 --
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 14,382 $ 11,401 $ 14,382
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Accrual of leasehold improvements payables $ -- $ -- $ 1,359
======== ======== ========
Accrual of deferred offering costs $ 507 $ -- $ 948
======== ======== ========
Conversion of partners' investment to Preferred Stock $ -- $ -- $ 4,927
======== ======== ========
Conversion of bridge loan to Convertible
Preferred Stock $ -- $ -- $ 800
======== ======== ========
Issuance of Convertible Preferred Stock to
investment advisors $ -- $ 115 $ 261
======== ======== ========
Issuance of Common Stock as payment of
management bonus $ -- $ -- $ 59
======== ======== ========
Sale of Common Stock in exchange for stock
subscription receivable $ -- $ 37 $ 37
======== ======== ========
Sale of Convertible Preferred Stock in exchange for
stock subscription receivable $ -- $ 37 $ 239
======== ======== ========
Issuance of Common Stock as payment for
accounts payable $ -- $ 37 $ 37
======== ======== ========
</TABLE>
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
5
<PAGE> 6
CELL PATHWAYS, INC.
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION:
The Registrant
The Registrant 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. The business was established in 1990 and its principal focus has
been the development and commercialization of products to prevent and treat
cancer. As of September 30, 1998 such Company had an accumulated deficit
during the development stage of $40.1 million. The condensed consolidated
financial statements as of September 30, 1998 are those of the Registrant's
parent and the Registrant. On November 3, 1998, the Registrant acquired
both its parent company and Tseng Labs, Inc., ("Tseng"), pursuant to a
registration statement on Form S-4 (the "Registration Statement") which
became effective in September 1998. The Registrant became a publicly traded
company as of November 4, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Quarterly Financial Information and Results of Operations
The consolidated financial statements as of September 30, 1998 and for the
three month and nine month periods ended September 30, 1998 and 1997 are
unaudited and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of results for these interim periods. The consolidated results
of operations for the three month and nine month periods ended September
30, 1998 and 1997 are not necessarily indicative of the results to be
expected for the entire year. The September 30, 1998 and 1997 condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's
Registration Statement on Form S-4.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
6
<PAGE> 7
3. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET:
On November 3, 1998, Registrant completed a financial acquisition of Tseng
(a publicly held shell company with net assets of approximately $28,500,000
whose principal asset was cash), in which CPI issued to Tseng stockholders
approximately 5,510,781 shares of the Registrant's Common Stock. In
connection with the transaction the Company incurred transaction costs and
severance of approximately $2,800,000. Immediately prior to consummation of
the transaction, warrants to purchase 65,076 shares of Series E Preferred
Stock were exercised, and all outstanding shares of Redeemable Preferred
Stock converted into $546,000 in cash consideration and 33,052 shares of
the Registrant's Common Stock. Upon consummation of the transaction all of
the outstanding shares of Convertible Preferred Stock converted into
15,679,341 shares of the Registrant's Common Stock. During October 1998,
Tseng completed the sale of real estate comprised of building and land for
net cash proceeds of $2.6 million. The unaudited pro forma condensed
consolidated balance sheet reflects the above activity as if it had
occurred on September 30, 1998.
The transaction was accounted for as a reorganization with the sale of
approximately 23% of the outstanding shares of the Registrant's Common
Stock in exchange for Tseng's cash and other net assets. The most
significant non-cash asset was Tseng's former operating facility
(approximately $2.4 million net book value at September 30, 1998) which was
sold for approximately book value in October 1998.
4. BASIC AND DILUTED NET LOSS PER COMMON SHARE AND PRO FORMA BASIC AND DILUTED
NET LOSS PER COMMON SHARE:
The Company has provided basic and diluted net loss per common share
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share" and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98.
Basic and diluted net loss per common share was computed by dividing net
loss applicable to common stockholders by the weighted average number of
shares of Common Stock outstanding during the period. Common Stock issuable
upon exercise or conversion of options, warrants, Convertible Preferred
Stock and warrants to purchase Convertible Preferred Stock and upon the
redemption of the redeemable Preferred Stock have not been included in the
calculation of diluted net loss per common share since the result would be
anti-dilutive.
Options and warrants to purchase 1,233,755 and 511,210 shares of Common
Stock at weighted average exercise prices of $4.44 and $2.10 per share;
warrants to purchase 422,188 and 243,457 shares of Preferred Stock
convertible into Common Stock at weighted average exercise prices of $4.20
and $3.43 per share, and Preferred Stock convertible into 15,614,266 and
10,968,387 shares of Common Stock at weighted average exercise prices of
$4.18 and $3.29 per share, were outstanding as of September 30, 1998 and
1997, respectively, and were are not included in the diluted net loss per
common share calculations as they would be anti-dilutive. In addition,
33,052 shares of Common Stock issued upon the redemption of the Redeemable
Preferred Stock are not included in the diluted net loss per common share
calculations as they would be anti-dilutive.
7
<PAGE> 8
Pro forma basic and diluted net loss per common share for the three month
and the nine month periods ending September 30, 1998 and 1997 assumes that
the Common Stock issued upon conversion of the outstanding Convertible
Preferred Stock and the redemption of the Redeemable Preferred Stock for
$546,000 of cash consideration and 33,052 shares of Common Stock at the
time of the transaction have been outstanding using the if-converted
method, and 65,076 shares of Common Stock issued upon the exercise of
warrants to purchase Series E Convertible Preferred Stock and the issuance
of 5,510,781 shares of Common Stock to Tseng shareholders, at the time of
the Transactions have been outstanding using the treasury stock method.
Options to purchase 517,197 shares of Common Stock upon exercise of
outstanding options of Tseng have been excluded as they would be
anti-dilutive.
The following is a reconciliation of the numerator and denominator of basic
and diluted net loss per common share (in thousands, except share and per
share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Loss (numerator) $ (5,511) $ (3,457) $ (14,131) $ (6,899)
Weighted average Common Stock outstanding
(denominator) 2,990,095 2,927,554 2,990,095 2,788,415
------------ ------------ ------------ ------------
Basic and diluted net loss per
common share $ (1.84) $ (1.18) $ (4.73) $ (2.47)
============ ============ ============ ============
Pro forma denominator:
Weighted average Common Stock outstanding 2,990,095 2,927,554 2,990,095 2,788,415
Conversion of Convertible Preferred Stock,
redemption of Redeemable Preferred Stock,
issuance of Common Stock upon the exercise
and conversion of warrants to purchase
Series E Convertible Preferred Stock, and
issuance of Common Stock to Tseng
shareholders 21,180,019 16,441,364 19,043,707 14,710,883
------------ ------------ ------------ ------------
24,170,114 19,368,918 22,033,802 17,499,298
============ ============ ============ ============
Pro forma basic and diluted net loss per
common share $ (0.23) $ (0.18) $ (0.64) $ (0.39)
============ ============ ============ ============
</TABLE>
8
<PAGE> 9
5. SERIES G CONVERTIBLE PREFERRED STOCK:
In April and May 1998, the Company effected a private offering of Series G
Convertible Preferred Stock and related warrants at $4.75 per share. As of
June 30, 1998, the Company had issued 4,556,249 shares of Series G
Convertible Preferred Stock and warrants to purchase 227,793 additional
shares of Convertible Preferred Stock, resulting in proceeds to the Company
of $21,404,000. The warrants are exercisable until the earlier of May 1,
2000, or the sale of substantially all of the assets of the Company. In
addition, the Company issued 89,630 shares of Series G Convertible
Preferred Stock as compensation for services rendered in connection with
the offering of the Series G Convertible Preferred Stock. All Series G
Convertible Preferred Stock was converted to Common Stock of the Registrant
after September 30 ,1998 in the transaction described in Note 3.
6. DEBT:
In March 1996, the Company borrowed $150,000 from a bank. The note bore
interest at a rate of 7.79% and was payable in equal monthly installments
through March 1999. During the nine months ended September 30, 1998, the
note was repaid.
In September 1998, the Company entered into a capital lease agreement. The
lease bears interest at a rate of 12% and is payable in equal monthly
installments through March 2001.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with Cell Pathways, Inc. ("CPI") financial statements and notes thereto included
in the Company's Registration Statement on Form S-4 (the "Registration
Statement") filed with the Securities and Exchange Commission and effective
September 1998. When used in this discussion, the words "expects" and "plans"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include, but are not limited to, the risks discussed below, the risks discussed
in the section of the Registration Statement entitled "Risk Factors" and the
risks discussed elsewhere in the Registration Statement.
OVERVIEW
CPI is a pharmaceutical company focused on the development and
commercialization of products to prevent and treat cancer. From the inception of
CPI's business in partnership form in 1990, CPI's operating activities have
related primarily to conducting research and development, raising capital and
recruiting personnel. The business converted from partnership to corporate form
in September 1993. Historically, CPI conducted its business with few direct
employees and many consultants. In the four years leading to the filing of an
Investigational New Drug application with the Food and Drug Administration
("FDA") in December 1993, to permit the commencement of human clinical trials of
CPI's first product candidate, PREVATAC(TM) exisulind, CPI spent a total of $4.6
million. Annual expenses were $3.2 million, $4.8 million and $10.7 million in
1995, 1996 and 1997, respectively. Expenses for the first nine months of 1998
were $14.6 million.
In adenomatous polyposis coli ("APC"), Phase I clinical trials for
PREVATAC(TM) exisulind began in February 1994; Phase I/II clinical trials began
in August 1995; and Phase III clinical trials were initiated in the second
quarter of 1997 and are expected to conclude in January 1999. In December 1997,
CPI initiated Phase II/III trials of PREVATAC(TM) exisulind for the treatment of
sporadic adenomatous colonic polyps (patient enrollment continuing) and for the
prevention of prostate cancer recurrence (patient enrollment completed in the
third quarter of 1998) as well as a pilot study of PREVATAC(TM) exisulind for
the treatment of lung cancer. In addition, a Phase II/III trial of PREVATAC(TM)
exisulind for prevention of breast cancer recurrence (patient enrollment
continuing) was initiated in February 1998. CPI plans to initiate Phase II
trials for the treatment of Barrett's Esophagus and bronchial dysplasia in the
fourth quarter of 1998.
On November 3, 1998, CPI completed a financial acquisition of Tseng
Labs, Inc. ("Tseng"), (a publicly held shell company with net assets of $28.5
million, principally comprised of $27.8 million of cash at September 30, 1998,
and, subsequent to the transaction, a subsidiary of CPI), in which CPI issued to
Tseng stockholders 5.5 million shares of CPI Common Stock. Such transaction was
approved by the respective stockholders of both companies. As it is anticipated
that Tseng will have no operations after such transaction, the transaction will
be accounted for as an exchange of approximately 23% of CPI Common Stock for
Tseng's assets. CPI's historical financial statements will be the financial
statements of the combined company.
10
<PAGE> 11
CPI has not received any revenue from the sale of products, and no
product candidate of CPI has been approved for marketing. Accordingly, CPI's
income has been limited to interest income from investments, and CPI's primary
source of capital has been the sale of its equity securities and the
aforementioned transaction with Tseng completed on November 3, 1998. As of
September 30, 1998, CPI's accumulated deficit was $40.1 million and its
unrestricted cash and investments were $14.4 million ($41.9 million on a pro
forma basis including the transaction with Tseng net of expenses associated with
the Tseng transaction and severance payments triggered by the transaction and
including the sale of Tseng real estate, in October 1998, resulting in net
proceeds of $2.6 million). CPI anticipates that it will continue to incur
additional operating losses for the next several years. There can be no
assurance that CPI's products will be approved for marketing, that CPI will
attain profitability or, if profitability is achieved, that CPI will remain
profitable on a quarterly or annual basis in the future.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared with Three Months Ended
September 30, 1997. Total expenses for the three months ended September 30, 1998
were $5,770,000, an increase of $2,148,000 from the same period in 1997.
Research and development expenses for the third quarter ended September 30, 1998
were $4,969,000, an increase of $2,607,000 from the same period in 1997. Such
increase was primarily due to the procurement of clinical trial supplies of
PREVATAC(TM) exisulind in the third quarter of 1998, expenses associated with
the Company's clinical trials in APC, sporadic colonic polyps, prostate and
breast cancer recurrence and lung cancer, and additional personnel in 1998 to
support the in-house activities of research, and additional personnel required
to manage the Company's expanded clinical and new product development
activities. General and administrative expenses were $801,000 for the three
months ended September 30, 1998, an increase of $558,000 from the same period in
1997. Such increase was primarily the result of an increase in personnel related
activities, principally salary, travel and recruitment expenses, consulting
expenses for management information systems, marketing research and public and
investor relations, and facility expenses associated with CPI's new facility.
Such increases in research and development and general and administrative
expenses in the third quarter of 1998 were partially offset by a provision of
$1,017,000, recorded in the third quarter of 1997, for the redemption of CPI
Redeemable Preferred Stock as CPI's preparations for a registration of its stock
made it probable that such redemption would occur.
Interest income was $259,000 in the third quarter of 1998, an increase
of $94,000 from the third quarter of 1997, due to the higher cash balances
resulting from the Series G Convertible Preferred Stock financing in the first
half of 1998 which resulted in net proceeds of $21.4 million.
Nine Months Ended September 30, 1998 Compared With Nine Months Ended
September 30, 1997. Total expenses for the nine months ended September 30, 1998
were $14,634,000, an increase of $7,447,000 from the same period in 1997.
Research and development expenses for the first three quarters of 1998 were
$11,866,000, an increase of $6,280,000 from 1997. Such increase was primarily
due to the procurement of clinical trial supplies of PREVATAC(TM) exisulind
principally in the third quarter of 1998, expenses associated with the Company's
clinical trials in APC, sporadic colonic polyps, prostate and breast cancer
recurrence and lung cancer and additional personnel in 1998 to support the
in-house activities of research, and additional personnel required to manage the
Company's expanded
11
<PAGE> 12
clinical and new product development activities. General and administrative
expenses were $2,768,000 for the nine months ended September 30, 1998, an
increase of $2,184,000 from the same period in 1997. Such increase was primarily
due to a charge of approximately $715,000 for expenses related to CPI's initial
public offering which was not undertaken, an increase in personnel related
activities, principally salary, travel and recruitment expenses, consulting
expenses for management information systems, marketing research and public and
investor relations, and facility expenses associated with the Company's new
facility. Such increases in research and development and general and
administrative expenses, for the first nine months of 1998, were partially
offset by a provision of $1,017,000, recorded in the third quarter of 1997, for
the redemption of CPI Redeemable Preferred Stock as CPI's preparations for a
registration of its stock made it probable that such redemption would occur.
Interest income was $503,000 in the first nine months of 1998, an
increase of $215,000 from the same period in 1997, due to the higher cash
balances resulting from the sale of the Series G Convertible Preferred Stock
financing in the first half of 1998 and which resulted in net proceeds of $21.4
million.
LIQUIDITY AND CAPITAL RESOURCES
CPI has financed its operations since inception primarily with the net
proceeds received from private placements of equity securities. These placements
generated net proceeds of approximately $53.6 million from inception through
September 30, 1998. Net cash generated by financing activities was $20,286,000
and $16,855,000 for the nine months ended September 30, 1998 and 1997,
respectively, primarily reflecting the sale of equity securities. The Series F
Convertible Preferred Stock private placement, which commenced in December 1996
and concluded in June 1997, raised $17.6 million. The CPI Series G Convertible
Preferred Stock private placement in April and May of 1998 raised $21.4 million.
On November 3, 1998, CPI completed a transaction in which CPI issued to Tseng
stockholders 5.5 million shares of CPI common stock to acquire Tseng, whose
assets consisted predominantly of cash which at September 30, 1998 was
approximately $27.8 million.
At September 30, 1998, CPI had cash and cash equivalents of $14.4
million (excluding restricted cash of $603,000). CPI's cash position increased
by $5.9 million for the nine month period ended September 30, 1998, primarily
reflecting the net proceeds of the private placement of Series G Preferred Stock
less operating expense and capital expenditures. CPI invests its excess cash
primarily in low risk, highly liquid money market funds and U.S. government
treasuries. As of September 30, 1998 the pro forma cash and cash equivalent
position of CPI, including the cash and cash equivalents of Tseng, was $41.9
million, net of expenses associated with the Tseng transaction and severance
payments triggered by the transaction and including the sale of Tseng real
estate, in October 1998, resulting in net proceeds of $2.6 million. CPI had
$603,000 in a restricted account pledged as security for a letter of credit for
the 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.
During the first nine months of 1998, the Company acquired
approximately $1.2 million in laboratory equipment for its new research
laboratories in its Horsham Facility. The Company plans to seek financing for
such acquisitions in 1998; however, there can be no assurance that such
financing will be available on terms acceptable to CPI, if at all.
12
<PAGE> 13
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. In June 1998, CPI completed a
financing transaction with a public Real Estate Investment Trust ("REIT")
whereby CPI now leases the facility from the REIT. In connection therewith, in
June 1998 CPI received a one-time payment of $3 million toward improvements
previously made and to be made to such facility for laboratories and office
space. CPI vacated its 7,900 square feet facility in Aurora, Colorado at the end
of July 1998; the lease expires in June 1999. CPI has consolidated all
operations from the Aurora facility into the Horsham facility.
In August 1998, Tseng entered into a definitive agreement to sell the
real estate which was leased to a third party. The sale of the real estate for
approximately $2.6 million of net proceeds was completed in October 1998 and is
included in the pro forma balance sheet as of September 30, 1998.
CPI anticipates that annual expenditures for preclinical studies,
clinical trials, product development, research, selling and marketing, and
general and administrative expense will increase significantly in future years.
In anticipation of the possible FDA approval for the marketing of PREVATAC(TM)
exisulind, CPI has begun in the second half of 1998 to prepare for the
commercialization of CPI's first product and plans to accelerate such
preparation in 1999, adding substantial additional expense. However, there can
be no assurance that CPI will be able to successfully complete the clinical
development of PREVATAC(TM) exisulind for APC or any other indication, that the
FDA will grant approval within the time frame expected, if at all, that the
other developments or expansions in CPI's programs of research, development and
commercialization will not require additional funding or encounter delays or
that, in light of these or other circumstances, CPI will be able to achieve the
planned levels of revenue, expense and cash flow.
CPI plans to finance its anticipated growth and development largely
through equity financings, as needed. CPI anticipates that, if there are delays
in its current programs or if its current programs of research and development
yield expansion opportunities, CPI would seek additional financing, whether
through public or private equity or debt financings, corporate alliances or
through combinations thereof. There can be no assurance that additional equity
or debt financing 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. If additional funds should be
needed but are not available, CPI may be required to curtail 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
CPI does not believe that inflation has had any significant impact on
CPI's business to date.
INCOME TAXES
As of December 31, 1997, CPI had approximately $20.9 million of net
operating loss carryforwards ("NOLs") for income tax purposes available to
offset future federal income tax, subject to
13
<PAGE> 14
limitations for alternative minimum tax. The NOLs are subject to examination by
the federal and state tax authorities and expire between 2008 and 2012.
Prior to its conversion into corporate form, the business had
accumulated losses totaling approximately $3.9 million. For tax purposes, these
losses were distributed to the partners in accordance with the provisions of the
partnership agreement of CPI's predecessor partnership. Thus, these losses,
while included in the financial statements of CPI, are not available to offset
future taxable income, if any, of CPI.
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. CPI believes that the closing of the Tseng transaction on
November 3, 1998 triggered such a limitation. However, CPI does not expect such
limitation to have a significant impact on its operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements and requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
has been adopted in CPI's fiscal 1998 financial statements and had no impact on
CPI's financial position or results of operations. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is required to be adopted for CPI's 1998 year-end
financial statements. The adoption of this pronouncement is expected to have no
impact on CPI's financial statements as CPI currently operates in one segment.
RISKS ASSOCIATED WITH THE YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions and information, send invoices, or engage in
similar normal business activities.
CPI does not believe that it has material exposure to the Year 2000
issue with respect to its own information systems since CPI has reviewed its
existing systems and they correctly define the Year 2000. Non-information
technology systems that utilize embedded technology, such as microcontrollers,
14
<PAGE> 15
may also face Year 2000 issues. However, the Company believes that it does not
have significant Year 2000 issues related to non-information technology systems
and is currently reviewing these systems. This review is expected to be
completed during 1998.
In addition, CPI is conducting an analysis to determine the extent to
which its major vendors' systems (insofar as they relate to CPI's business) are
subject to the Year 2000 issue. This review is expected to be completed during
1998. CPI is currently unable to predict the extent to which it would be
vulnerable to its vendors' failure to remediate any Year 2000 issues on a timely
basis. The failure of a major vendor subject to the Year 2000 issue to convert
its systems on a timely basis or a conversion that is incompatible with CPI's
systems could have a material adverse effect on CPI. However, CPI's activities
to date have related primarily to conducting research and development activities
and as a result are not significantly dependent on external third-party systems.
All new contractual arrangements with third parties require assurance that the
third party is Year 2000 compliant.
To date CPI has not made any contingency plans to address third-party
Year 2000 risks. CPI plans to formulate contingency plans to the extent
necessary in 1999. Historical and estimated costs directly related to Year 2000
issue remediation have been and are expected to be immaterial as CPI's past and
future infrastructure has been built with Year 2000 issues in mind and to
minimize these issues. Based on information now known to CPI, the Company does
not expect to incur material costs in addressing the Year 2000 issue, nor does
the Company believe that it will be required to make material capital
expenditures to a normal replacement schedule with only immaterial opportunity
costs of CPI personnel to ensure new systems and third parties are Year 2000
compliant.
15
<PAGE> 16
Part II. Other Information
Item 1. None
Item 2. None
Item 3. None
Item 4. None
Item 5. None
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.
27.1.1 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only, and not
filed.
(b) There were no reports on Form 8-K filed during the quarter ended
September 30, 1998.
16
<PAGE> 17
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: November 10, 1998 By: /s/ Robert J. Towarnicki
-----------------------------
Robert J. Towarnicki
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: November 10, 1998 By: /s/ Brian J. Hayden
-----------------------------
Brian J. Hayden
Chief Financial Officer; Vice President -
Finance; Treasurer (Principal Financial
and Accounting Officer)
17
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