<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 , 1999 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, 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 X No
----- -----
At October 31, 1999 there were 26,105,894 shares of Common Stock, par value
$0.01 per share, outstanding.
<PAGE> 2
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION (UNAUDITED) Page
----
<S> <C> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998............................................. 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended September 30, 1999 and 1998
and for the period from inception (August 10, 1990) to
September 30, 1999................................................ 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998 and for the period
from inception (August 10, 1990) to September 30, 1999............ 5
Notes to Condensed 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 6 Exhibits and Reports on Form 8-K.................................. 13
Signatures........................................................ 14
</TABLE>
2
<PAGE> 3
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 23,355,510 $ 37,232,404
Prepaid expenses and other...................................... 655,422 512,474
------------ ------------
Total current assets...................................... 24,010,932 37,744,878
EQUIPMENT, FURNITURE and LEASEHOLD IMPROVEMENTS, NET 1,469,889 1,533,634
OTHER ASSETS...................................................... 873,278 954,187
------------ ------------
$ 26,354,099 $ 40,232,699
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of obligations under capital lease......... $ 146,260 $ 146,260
Accounts payable................................................ 680,480 601,988
Other accrued liabilities....................................... 2,128,274 3,192,436
------------ ------------
Total current liabilities................................. 2,955,014 3,940,684
------------ ------------
OBLIGATIONS UNDER CAPITAL LEASE, EXCLUDING CURRENT INSTALLMENTS 66,836 159,897
------------ ------------
STOCKHOLDERS' EQUITY :
Preferred Stock, $.01 par value, 5,000,000 shares authorized,
none issued and outstanding..................................... -- --
Common Stock $.01 par value, 70,000,000 shares authorized;
24,550,894 and 24,279,526 shares issued and outstanding......... 245,509 242,796
Additional paid-in capital........................................ 82,541,530 81,256,094
Stock subscription receivable from issuance of Common Stock....... (37,000) (37,000)
Deficit accumulated during the development stage.................. (59,417,790) (45,329,772)
------------ ------------
Total stockholders' equity................................ 23,332,249 36,132,118
------------ ------------
$ 26,354,099 $ 40,232,699
============ ============
</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
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED PERIOD FROM
SEPTEMBER 30, SEPTEMBER 30, INCEPTION
----------------------------- ----------------------------- (AUGUST 10, 1990) TO
1999 1998 1999 1998 SEPTEMBER 30, 1999
------------ ----------- ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C>
EXPENSES:
Research and development............. $ 3,526,994 $ 4,968,945 $ 11,645,229 $ 11,866,490 $ 48,773,559
General and administrative........... 1,245,987 801,433 3,458,283 2,767,805 12,267,328
Provision for redemption of the
Redeemable Preferred Stock......... -- -- -- -- 1,017,000
------------ ----------- ------------ ------------ ------------
Total expenses..................... 4,772,981 5,770,378 15,103,512 14,634,295 62,057,887
INTEREST INCOME......................... 322,265 259,478 1,015,494 502,732 2,640,097
------------ ----------- ------------ ------------ ------------
NET LOSS................................ $ (4,450,716) $(5,510,900) $(14,088,018) $(14,131,563) $(59,417,790)
============ =========== ============ ============ ============
Basic and diluted net loss
per Common Share...................... $(0.18) $(1.84) $(0.58) $(4.73)
============ =========== ============ ============
Shares used in computing basic and
diluted net loss per Common Share... 24,521,598 2,990,095 24,391,178 2,990,095
============ =========== ============ ============
</TABLE>
The accompanying notes to the condensed consolidated financial statements are an
integral part of these statements.
4
<PAGE> 5
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED PERIOD FROM
SEPTEMBER 30, INCEPTION
---------------------------------- (AUGUST 10, 1990) TO
1999 1998 SEPTEMBER 30, 1999
------------ ------------ -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss .................................................... $(14,088,018) $(14,131,563) $(59,417,790)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense and amortization .................... 406,434 126,952 794,451
Issuance of Common Stock for services rendered ........... -- -- 48,578
Issuance of Common Stock options for services rendered ... -- -- 13,313
Provision for redemption of Redeemable Preferred Stock ... -- -- 1,017,387
Write-off of deferred offering costs ..................... -- 469,515 469,515
Other .................................................... -- 3,052 68,399
(Increase) decrease in prepaid and other current assets .. (142,948) (238,448) (336,796)
(Increase) decrease in other assets ...................... 96,909 -- (111,339)
Increase (decrease) in accounts payable and
accrued liabilities ...................................... (985,670) (991,109) 187,763
------------ ------------ ------------
Net cash flows used in operating activities ............ (14,713,293) (14,761,601) (57,266,519)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements ......... (342,689) (3,263,108) (4,742,489)
Sale of leasehold improvements ........................... -- 3,000,000 3,000,000
Cash paid for deposits ................................... (16,000) 8,671 (50,767)
------------ ------------ ------------
Net cash flows provided by (used in) investing activities . (358,689) (254,437) (1,793,256)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of Convertible Preferred Stock,
net of related offering costs ............................ -- 21,404,004 47,185,046
Proceeds from the transaction with Tseng Labs, Inc. ...... -- -- 27,966,372
Proceeds from exercise of Series E, F, and G warrants
to purchase stock ........................................ 840,288 -- 1,521,842
Decrease in shareholder receivable ........................ -- -- 23,626
Cash received for Common Stock options exercised .......... 276,741 -- 723,422
Proceeds from Employee Stock Purchase Plan ................ 171,120 -- 171,120
Redemption of Redeemable Preferred Stock .................. -- -- (546,051)
Proceeds from bridge loan ................................. -- -- 791,000
Partner cash contributions ................................ -- -- 5,312,355
Increase in restricted cash ............................... -- (404,783) (611,172)
Principal payments under capital lease obligations ........ (93,061) -- (122,275)
Proceeds from borrowings .................................. -- -- 150,000
Repayment of borrowings ................................... -- (62,502) (150,000)
------------ ------------ ------------
Net cash flows provided by (used in) financing
activities .......................................... 1,195,088 20,936,719 82,415,285
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ........ (13,876,894) 5,920,681 23,355,510
CASH AND CASH EQUIVALENTS, beginning of Period .............. 37,232,404 8,460,839 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period .................... $ 23,355,510 $ 14,381,520 $ 23,355,510
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Accrual of leasehold improvements payable ................... $ -- $ -- $ 848,000
============ ============ ============
Accrual of deferred offering costs .......................... $ -- $ 97,000 $ 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 .................................... $ -- $ 425,742 $ 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
============ ============ ============
</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, 1999
(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 pharmaceutical company focused on the research,
development and future commercialization of products to prevent and treat
cancer. The Company is in the development stage and has not generated any
product revenues to date, nor is there any assurance of any future product
revenues. 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, corporate alliances or
through combinations thereof. 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 September 30, 1999, the Company had a deficit accumulated during the
developmental stage of $59,417,790.
On November 3, 1998, the Company completed a financing through the
acquisition of Tseng Labs, Inc. ("Tseng") (a publicly held shell 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) through September 30, 1999.
Basis of Presentation
The unaudited condensed consolidated financial statements as of
September 30, 1999 and for the three months and nine months ended September 30,
1999 and 1998, 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, 1998 included in the Company's annual
report on Form 10-K filed with the Securities and Exchange Commission.
2. BASIC AND DILUTED NET LOSS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per
Share", became effective at the end of 1997 and requires presentation of two
calculations of earnings per Common Share. "Basic" earnings per Common Share
equals net income divided by the weighted average Common Shares outstanding
during the period. "Diluted" earnings per Common Share equals net income divided
by the sum of the weighted average Common Shares outstanding during the period
plus Common Stock equivalents. The Company's basic and diluted per share amounts
are the same since the assumed exercise of stock options and warrants,
conversion of Convertible Preferred Stock, and the redemption of Redeemable
Preferred Stock are all anti-dilutive. The amount of Common Stock equivalents
excluded from the calculation are options and warrants to purchase 2,037,491 and
1,233,755 shares of Common Stock, Convertible Preferred Stock convertible into 0
and 15,614,266 shares of Common Stock, warrants to purchase 0 and 422,188 shares
of Convertible Preferred Stock convertible into the same number of shares of
Common Stock and 0 and 33,052 shares of Common Stock to be issued upon
redemption of the Redeemable Preferred Stock that were outstanding as of
September 30, 1999 and 1998, respectively.
6
<PAGE> 7
3. 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 seeking
unspecified damages on behalf of various classes of persons, including all
persons who purchased Company Common Stock during certain periods in 1998 and
1999. The complaints alleged that the Company had made false and misleading
statements about the efficacy and near-term commercialization of exisulind, the
Company's lead drug candidate. These actions were consolidated into one action
by court order of April 28, 1999. On June 28, 1999 a consolidated amended
complaint was filed on behalf of a class of all purchasers of Company Common
Stock between October 7, 1998 and February 2, 1999, inclusive. The Company
believes that the allegations are without merit and intends to vigorously defend
the litigation.
4. PRIVATE PLACEMENT OF COMMON STOCK
Subsequent to September 30, 1999, in October, the Company completed a
private placement of Common Stock in which 1,555,000 shares of Common Stock were
sold at $9.00 per share representing net proceeds to the Company of
approximately $13.5 million. For each share of Common Stock purchased the
Company issued one Common Stock warrant, which expires on December 31, 2000.
Such Common Stock warrant allows the purchase of one share of the Company's
Common Stock at $14.00 per share.
7
<PAGE> 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 made herein, and oral statements made in respect
hereof, 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; early stage of
development; the costs, delays and uncertainties inherent in basic
pharmaceutical research, drug development, clinical trials and the regulatory
approval process with respect to both the Company's current product candidates
and its future product candidates, if any; dependence on development of
Aptosyn(TM) (exisulind), the Company's first product candidate; the 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 uncertainty of obtaining regulatory approval, including
uncertainty of approval of the New Drug Application ("NDA") submitted for
Aptosyn(TM) (exisulind) for adenomatous polyposis coli ("APC") whether in
connection with the adequacy of the data generated in the clinical trials of
Aptosyn(TM) (exisulind) or otherwise, and the timing and scope of any approval
received; acceptance by providers of healthcare reimbursement; the validity,
scope and enforceability of patents; the actions of competitors; dependence upon
third parties; product liability and the need for further financing. These and
other risks are detailed in the Company's reports filed from time to time under
the Securities Act of 1933 and/or the Securities Exchange Act of 1934, including
the sections entitled "Business" and "Risk Factors" in the Company's report on
Form 10-K for the year ended December 31, 1998. Given these uncertainties,
current and prospective investors are cautioned not to place undue reliance on
any such forward-looking statements. The Company undertakes no obligation to
update or revise the statements made herein or the factors which may relate
thereto.
OVERVIEW
CPI 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 Aptosyn(TM) (exisulind).
The Company filed an IND for its second product candidate, CP 461, in December
1998. In August 1999, the Company submitted to the FDA an NDA for Aptosyn(TM)
(exisulind) for APC, an FDA designated orphan drug indication. The Company is
continuing to conduct clinical trials of Aptosyn(TM) (exisulind) and CP 461 for
the prevention and treatment of various precancer and 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. As noted
in footnote 4, in October 1999 the Company issued 1.555 million shares of Common
Stock for net proceeds of approximately $13.5 million and which increased the
Common Stock outstanding to 26.1 million shares.
8
<PAGE> 9
The Company has not received any revenue from the sale of products, and
no product candidate of CPI has been approved for marketing. 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 transaction with
Tseng. As of September 30, 1999 and December 31, 1998, CPI's accumulated deficit
was $59,417,790 and $45,329,772, respectively, and the unrestricted cash and
cash equivalents at the end of the same periods were $23,355,510 and
$37,232,404, respectively (not including the net proceeds from the October 1999
issuance of Common Stock). The Company anticipates that it will continue to
incur additional operating losses for the next several years. There can be no
assurance that any of the Company's product candidates will be approved for
marketing, that the Company will attain profitability or, if profitability is
achieved, that the Company will remain profitable on a quarterly or annual basis
in the future. CPI's operating results will fluctuate from quarter to quarter.
Some of these fluctuations may be significant and, therefore, quarter to quarter
comparisons may not be meaningful.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared with Three Months Ended
September 30, 1998. Total expenses for the three months ended September 30, 1999
were $4,772,981 a decrease of $997,397 or 17.3% from the same period in 1998.
Research and development expenses ("R&D") for the three months ended September
30, 1999 were $3,526,994, a decrease of $1,441,951 or 29.0%, from the same
period in 1998 due primarily to a decrease in raw material expenses associated
with Aptosyn(TM) (exisulind) offset partially by an increase in personnel to
support research and product development activities. General and administrative
("G&A") expenses were $1,245,987 for the three months ended September 30, 1999,
an increase of $444,554 or 55.5%, from the same period in 1998 due primarily to
an increase in marketing and consulting expenses related to commercialization
preparations for Aptosyn(TM) (exisulind) and an increase in personnel.
Interest income was $322,265 for the three months ended September 30,
1999, an increase of $62,787 from the same period of 1998 due to higher average
cash balances.
Nine Months Ended September 30, 1999 Compared with Nine Months Ended
September 30, 1998. Total expenses for the nine months ended September 30, 1999
were $15,103,512 an increase of $469,217 or 3.2% from the same period in 1998.
R&D expenses for the nine months ended September 30, 1999 were $11,645,229, a
decrease of $221,261 or 1.9%, from the same period in 1998 due primarily to a
decrease in raw material expenses for Aptosyn(TM) (exisulind), partially offset
by an increase in personnel to support research and product development
activities. G&A expenses were $3,458,283 for the nine months ended September 30,
1999, an increase of $690,478 or 24.9%, from the same period in 1998. In the
nine months ended September 30, 1998, the Company recorded a one-time charge of
approximately $715,000 related to expenses for an initial public offering that
was not completed. The increase in G&A expenses is primarily due to increases in
facility expenses, marketing and consulting expenses related to
commercialization preparations for Aptosyn(TM) (exisulind) and personnel
expenses, which were partially offset by the one-time charge in the same period
in 1998 related to the expenses for the initial public offering that was not
undertaken.
Interest income was $1,015,494 for the nine months ended September 30,
1999, an increase of $512,762 from the same period of 1998 due primarily to
higher average cash balances.
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
$82,415,285 from inception (August 10, 1990) through September 30, 1999.
At September 30, 1999, the Company had cash and cash equivalents of
$23,355,510. The Company's cash position decreased by $13,876,894 for the nine
months ended September 30, 1999 primarily due to the net operating loss in the
nine months ended September 30, 1999 of $14,088,018, a reduction in current
liabilities of $985,670 and the addition of $342,689 in laboratory and computer
equipment. The Company received $840,288, 276,741 and $171,120 in cash from the
exercise of warrants, stock options and the purchase of Common Stock under the
Employee Stock Purchase Plan, respectively. CPI invests its excess cash
primarily in low risk, highly liquid money market funds and U.S. government
treasuries. CPI has $611,172 in a restricted account pledged as security for
certain leases.
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<PAGE> 10
Subsequent to September 30, 1999, the Company completed a private
placement of 1.555 million shares of Common Stock resulting in net proceeds of
approximately $13.5 million. For each share of Common Stock purchased, the
purchaser received a warrant to purchase one share of Common Stock at $14 per
share expiring on December 31, 2000.
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's lease expired
in June 1999 on its 7,900 square feet facility in Aurora, Colorado which was
vacated at the end of July 1998. 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. The Company
believes that the allegations are without merit (see footnote 3).
CPI anticipates that quarterly and annual expenditures for preclinical
studies, clinical trials, product development, research, selling, marketing and
administrative expenses will increase significantly in future periods. In
anticipation of possible FDA approval for the marketing of Aptosyn(TM)
(exisulind), in 1998 the Company began to make preparations and incurred
expenses for the commercialization of CPI's first product. There can be no
assurance that CPI will be able to successfully complete the clinical
development of Aptosyn(TM) (exisulind) for any indication, that the FDA will
grant approval with respect to any indication within the time frame expected, if
at all, that the other developments or expansions in CPI's research, development
and commercialization programs will not require additional funding or encounter
delays or that, in light of these or other circumstances, CPI will be able to
achieve anticipated levels of revenue, expense and cash flow.
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. Accordingly,
while the Company has no present plans for financing, the Company anticipates
that it may require additional financing in the future to continue its research
and development programs. Absent sufficient revenue from product sales, CPI
plans to finance its anticipated growth and development largely through equity
or debt financings and/or strategic alliances with corporate partners. CPI
believes, based on its current operating plans, and without benefit of any
revenue from product sales if product approval is achieved, that its existing
cash and cash equivalents balance of approximately $23.4 million as of September
30, 1999, together with interest earned on the Company's excess cash balances
and the net proceeds of $13.5 million from the sale of Common Stock in October
1999, will provide sufficient working capital to sustain operations into the
first quarter of 2001. However, there can be no assurance 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 or 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
the Company, if at all. Debt financing, if available, may include restrictive
covenants. Corporate alliances could 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 the Company to raise capital on acceptable terms if and when needed
would have a material adverse effect on the Company'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 September 30, 1999, 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 September 30, 1999. (Also see the Company's annual report on Form
10-K, note 11 of notes to consolidated financial statements.)
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<PAGE> 11
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.
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.
The Company does not believe that it has material exposure to the Year
2000 issue with respect to its own information systems. The Company has reviewed
its existing systems and believes that they correctly define the Year 2000.
Non-information technology systems that utilize embedded technology, such as
microcontrollers, HVAC, and security 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 has significantly completed it review
of these systems. This review will be completed in 1999.
In addition, the Company has been conducting an analysis to determine
the extent to which its major suppliers', third-party researchers' and clinical
trial sites' systems (insofar as they relate to CPI's business) are subject to
the Year 2000 issue. This review is significantly completed and will be
completed in 1999. CPI is currently unable to predict the extent to which it
would be vulnerable to its third parties failure to remediate any Year 2000
issues on a timely basis. The failure of a major third party 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 therefore 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 the extent necessary, CPI plans to formulate contingency plans to
address the Year 2000 risks. Historical costs directly related to Year 2000
issue remediation have been immaterial as CPI's past 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 the future to address the Year 2000 issue, nor does the Company believe
that it will be required to make material capital expenditures to fix Year 2000
issues other than system upgrades on a normal replacement schedule with only
immaterial opportunity costs of CPI personnel to ensure new systems and third
parties are Year 2000 compliant.
11
<PAGE> 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 three months to ensure principal preservation.
As of September 30, 1999, the Company was invested in U.S. Government securities
and money market funds, which were classified as cash equivalents in the
Company's financial statements. The investments had principal (or notional)
amounts of $23,232,756 which were equal to their fair value, an average interest
rate of 4.6% and mature in less than three months.
12
<PAGE> 13
PART II. OTHER INFORMATION
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 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only, and not
filed.
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K dated August 25, 1999,
reporting under Item 5 - Other Events.
13
<PAGE> 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: November 12, 1999 By: /s/ Robert J. Towarnicki
--------------------------------------------
Robert J. Towarnicki
President, Chief Executive Officer and Director
(Principal Executive Officer)
Dated: November 12, 1999 By: /s/ Brian J. Hayden
--------------------------------------------
Brian J. Hayden
Chief Financial Officer;
Vice President - Finance; Treasurer
(Principal Financial and Accounting Officer)
14
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