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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 September 30, 2002
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 October 31, 2002 there were 39,363,698 shares of Common Stock outstanding,
par value $0.01 per share.
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
PART 1 FINANCIAL INFORMATION (UNAUDITED) Page
----
Item 1 Financial Statements:
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001............................................. 2
Consolidated Statements of Operations for the three and nine
months ended September 30, 2002 and 2001 and for the period
from inception (August 10, 1990) to September 30, 2002............ 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001 and for the period
from inception (August 10, 1990) to September 30, 2002............ 4
Notes to Consolidated Financial Statements ....................... 5 - 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 9 - 15
Item 3 Quantitative and Qualitative Disclosures about Market Risk........ 16
Item 4 Controls and Procedures........................................... 16
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................. 16
Item 2 Changes in Securities............................................. 16
Item 6 Exhibits and Reports on Form 8-K.................................. 16
Signatures........................................................ 17
Sarbanes-Oxley Section 302(a) Certifications...................... 19 - 20
Exhibits
1
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 12,946,074 $ 2,905,767
Short-term investments........................................ 4,323,487 24,808,148
Accounts receivable........................................... 601,371 318,450
Inventory..................................................... 2,082,838 --
Prepaid expenses and other.................................... 1,115,510 1,130,971
Due from insurance company.................................... -- 2,000,000
------------- -------------
Total current assets.................................... 21,069,280 31,163,336
EQUIPMENT, FURNITURE and LEASEHOLD IMPROVEMENTS, net............ 908,948 992,856
RESTRICTED CASH................................................. 467,185 463,499
NOTES RECEIVABLE FROM OFFICERS, net............................. 939,453 944,397
OTHER ASSETS.................................................... 997,030 57,400
------------- -------------
$ 24,381,896 $ 33,621,488
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of note payable............................... $ 253,305 $ 277,473
Current installments of obligation under capital lease........ 55,842 40,493
Accounts payable.............................................. 621,616 847,552
Accrued compensation.......................................... 291,336 764,843
Deferred revenue ............................................. 1,834,672 --
Accrued litigation settlement and expense..................... 149,448 2,642,822
Other accrued liabilities..................................... 3,760,455 3,272,314
------------- -------------
Total current liabilities............................... 6,966,674 7,845,497
------------- -------------
NOTE PAYABLE.................................................... -- 180,330
------------- -------------
OBLIGATION UNDER CAPITAL LEASE.................................. 51,415 62,020
------------- -------------
CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding ................................ -- --
Common Stock, $.01 par value, 150,000,000 shares authorized;
39,363,698 and 31,148,255 shares issued and outstanding .... 393,637 311,482
Additional paid-in capital.................................... 152,460,135 148,631,231
Stock subscription receivable from issuance of Common Stock... - (50,683)
Deferred compensation......................................... (62,417) (73,652)
Deficit accumulated during the development stage.............. (135,427,548) (123,284,737)
------------- -------------
Total stockholders' equity ............................. 17,363,807 25,533,641
------------- -------------
$ 24,381,896 $ 33,621,488
============= =============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
2
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
PERIOD FROM
THREE MONTHS ENDED NINE MONTHS ENDED INCEPTION
SEPTEMBER 30, SEPTEMBER 30, (AUGUST 10, 1990)
----------------------------- ----------------------------- TO
2002 2001 2002 2001 SEPTEMBER 30, 2002
------------ ------------- ------------- ------------- ------------------
Revenues................................... $ 395,953 $ 306,808 $ 699,531 $ 623,781 $ 1,971,456
EXPENSES:
Cost of products sold................. 28,542 -- 28,542 -- 28,542
Research and development ............. 4,659,505 5,210,684 13,087,146 12,408,780 106,493,382
Selling, general and administrative... 1,957,829 1,723,016 6,731,099 5,586,409 36,409,016
Litigation settlement and expense..... (1,462,000) -- (6,749,000) -- 1,743,000
----------- ----------- ------------ ------------ -------------
Operating loss................... (4,787,923) (6,626,892) (12,398,256) (17,371,408) (142,702,484)
Interest income, net....................... 64,696 378,021 255,445 1,478,156 7,274,936
----------- ----------- ------------ ------------ -------------
Net loss................................... $(4,723,227) $(6,248,871) $(12,142,811) $(15,893,252) $(135,427,548)
=========== =========== ============ ============ =============
Basic and diluted net loss per Common Share $ (0.14) $ (0.20) $ (0.37) $ (0.51)
=========== =========== ============ ============
Shares used in computing basic and
diluted net loss per Common Share..... 34,516,015 31,114,247 33,144,529 31,101,766
=========== =========== ============ ============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
3
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
PERIOD FROM
NINE MONTHS ENDED INCEPTION
SEPTEMBER 30, (AUGUST 10, 1990)
----------------------------------- TO
2002 2001 SEPTEMBER 30, 2002
-------------- -------------- ------------------
OPERATING ACTIVITIES:
Net loss................................... $(12,142,811) $(15,893,252) $(135,427,548)
Adjustments to reconcile net loss to net cash
used in operating activities:
Settlement of litigation through agreement
to issue Common Stock ................... (6,749,000) -- 1,088,000
Depreciation and amortization expense...... 423,590 415,611 2,703,442
Loss on disposal of assets ................ -- -- 19,152
Interest income on notes receivable from
officers ................................. (41,056) (32,963) (96,499)
Interest income on promissory note from
director ................................. (284) -- (13,967)
Amortization of deferred compensation ..... 11,235 -- 12,483
Issuance of Common Stock for services
rendered.................................. -- -- 48,578
Issuance of Common Stock options for
services rendered......................... (52,552) 87,796 421,774
Provision for redemption of Redeemable
Preferred Stock........................... -- -- 1,017,387
Write-off of deferred offering costs....... -- -- 469,515
(Increase) decrease in accounts receivable. (282,921) 22,886 (601,371)
Other...................................... -- -- 68,399
(Increase) decrease in prepaid expenses and
other current assets 15,461 166,600 (796,884)
(Increase) decrease in due from insurance 2,000,000 -- (2,000,000)
company...................................
(Increase) decrease in other assets........ (6,297) 54,789 87,070
Increase in inventory...................... (2,082,838) -- (2,082,838)
Increase in deferred revenue .............. 1,834,672 -- 1,834,672
Increase in reserve for notes receivable
from officer.............. 100,000 -- 100,000
Increase (decrease) in accounts payable and
accrued liabilities....................... (211,302) (1,180,282) 2,052,416
Increase (decrease) in accrued litigation
settlement and expense.................... (2,493,374) -- 2,149,448
------------ ------------ -------------
Net cash flows used in operating activities (19,677,477) (16,358,815) (128,946,771)
------------ ------------ -------------
INVESTING ACTIVITIES:
Purchase of equipment, furniture and
leasehold improvements.................... (232,326) (112,716) (5,876,654)
Sale of leasehold improvements............. -- -- 3,000,000
Purchase of marketing and
distribution rights....................... (1,000,000) -- (1,000,000)
Increase in notes receivable from officers. (54,000) (226,000) (942,954)
Cash paid for deposits..................... -- -- (50,767)
(Purchase) sale of short term investments.. 20,484,661 (24,625,867) (4,323,487)
------------ ------------ -------------
Net cash flows provided by (used in)
investing activities..................... 19,198,335 (24,964,583) (9,193,862)
------------ ------------ -------------
FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock,
net of offering costs..................... 10,566,720 -- 47,266,969
Proceeds from the exercise of Series E, F,
G, and Common Stock warrants to purchase
stock..................................... -- -- 19,966,894
Proceeds from the issuance of Common Stock
under the Employee Stock Purchase Plan.... 145,891 181,635 831,201
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 2,846,692
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..... (3,686) 214,539 (467,185)
Cash received from stock subscription...... 50,967 -- 50,967
Principal payments under capital lease
obligations............................... (35,945) (51,769) (394,484)
Proceeds from borrowings................... -- -- 950,000
Repayment of borrowings.................... (204,498) (178,290) (696,695)
------------ ------------ -------------
Net cash flows provided by financing
activities.............................. 10,519,449 189,867 151,086,707
------------ ------------ -------------
Net increase (decrease) in cash and cash
equivalents............................... 10,040,307 (41,133,531) 12,946,074
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 2,905,767 49,528,407 --
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, end of period... $ 12,946,074 $ 8,394,876 $ 12,946,074
============ ============ =============
The accompanying notes to the consolidated financial statements are
an integral part of these statements.
4
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(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, the successor to, a Delaware
corporation of the same name. As the context requires, the "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 and development of products to treat and prevent cancer and the
future commercialization of such products. The Company also markets and sells
Gelclair(TM) Concentrated Oral Gel manufactured by Sinclair Pharmaceuticals Ltd.
of the United Kingdom ("Sinclair"). The Company has not generated any revenues
from the sale of its own 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, profits from the sale of Gelclair(TM) and
corporate alliances. There is no assurance, however, that such additional
funding will be available on terms acceptable to the Company, if at all, or that
profits will be generated from the sale of Gelclair(TM). The Company will
continue to be considered in the development stage until such time as it
generates significant revenues from operations. In October 2002, the Company
implemented a restructuring of its work force eliminating 20% of its staff and
reducing its efforts in research, discovery and preclinical development of
earlier-stage compounds, and subsequently, upon signing an agreement with
Celgene Corporation ("Celgene") to promote Gelclair(TM) in the U.S. oncology
market, eliminated its 16 person sales force and subsequently terminated its
agreement with Aventis Pharmaceuticals, Inc. (Aventis) to promote Nilandron(R)
(nilutamide). Both the restructuring and elimination of the sales force are
expected to decrease expenses in the future. After considering these recent cost
cutting measures, management believes that the Company's existing cash, cash
equivalents and short-term investments will be adequate to fund operations into
the third quarter of 2003, based on projected revenue and expenditure levels. As
of September 30, 2002, the Company had a deficit accumulated during the
development stage of $135,427,548. Should appropriate sources of funding not be
available on terms acceptable to the Company, management would take additional
actions which could include the delay of certain clinical trials and research
activities until such time as appropriate sources of funding were available.
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 to market
Nilandron(R) to urologists in the U. S. and Puerto Rico for use in patients who
suffer from prostate cancer. The Company began to market and promote
Nilandron(R) in September 2000. Under the terms of the Nilandron Agreement, the
Company was responsible for its marketing and promotion expenses and received
from Aventis a percentage of the gross margin on Aventis' sales in excess of a
pre-established gross margin threshold, if any. The Company's agreement with
Aventis terminated in October 2002.
In January 2002, the Company entered into a ten-year exclusive
distribution agreement (the "Gelclair Agreement") with Sinclair to promote and
distribute Gelclair(TM) in North America (U.S., Canada and Mexico).
Gelclair(TM) is an oral gel formulation for the management and relief of pain
associated with inflammation and ulceration of the mouth caused by chemotherapy
or radiotherapy treatments and other causes. In June 2002, the Company began to
promote Gelclair(TM) in the oncology market. The Company purchases Gelclair(TM)
from Sinclair and resells to wholesale customers in the U.S.
5
In August 2002, the Company entered into a four-year marketing
agreement with John O. Butler Company ("Butler"). Butler markets Gelclair(TM)
to the dental market within the U.S. and will market in Canada if and when
Gelclair(TM) is approved for marketing in Canada. In October 2002, the Company
entered into a three-year agreement with Celgene for the promotion of
Gelclair(TM) in the U.S. oncology market.
Basis of Presentation
The unaudited consolidated financial statements as of September 30,
2002 and for the three and nine months ended September 30, 2002 and 2001 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 accounting
principles generally accepted in the United States. 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, 2001 included in the
Company's annual report on Form 10-K filed with the Securities and Exchange
Commission.
Concentration of Credit Risk
As of September 30, 2002, two wholesale customers represented 95.4% of
the $282,921 accounts receivable due from shipments of Gelclair(TM). The
remaining accounts receivable of $318,450 is due from Aventis from the
promotion of Nilandron(R). The Company's agreement with Aventis terminated in
October 2002. Credit risk is controlled through use of credit limits, credit
approvals and periodic credit evaluations of wholesale customers.
2. GELCLAIR(TM) AGREEMENTS
In January 2002, the Company entered into a ten-year exclusive
distribution agreement with Sinclair to promote and distribute Gelclair(TM) in
North America. In June 2002, the Company began to promote Gelclair(TM) in the
U.S. oncology market (See Note 6). Under the Gelclair Agreement, the Company
has paid Sinclair $1 million for the exclusive right to market and distribute
Gelclair(TM) in North America, which amount has been capitalized and is being
amortized over the ten-year term of the Gelclair Agreement. The Company made a
$2 million payment in the first quarter of 2002 for inventory purchases,
committed to additional inventory purchases of $2 million, $3 million and $5
million in 2002, 2003 and 2004, respectively, and could be responsible for
milestone payments totaling $3 million related to the achievement of certain
sales, patent and clinical trial milestones. The Company purchases Gelclair(TM)
from Sinclair and resells to wholesale customers in the U.S.
In August 2002, the Company entered into a four-year marketing
agreement with Butler. Butler markets Gelclair(TM) to the dental market within
the U.S. and will market in Canada if and when Gelclair(TM) is approved for
marketing in Canada. Butler will receive a marketing fee based on the amount of
product sold into the dental market.
In October 2002, the Company entered into a three-year agreement with
Celgene for the promotion of Gelclair(TM) in the U.S. oncology market. Celgene
will receive a fixed percent of net sales of Gelclair(TM).
3. SHORT TERM INVESTMENTS
The Company invests in U.S. Government securities. Securities with
maturties 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 maturities.
4. INVENTORY
Inventory is comprised solely of Gelclair(TM) and is stated at the
lower of cost or market as determined using the first-in, first-out method.
Inventory consisted of the following as of September 30, 2002:
Finished goods on hand $ 1,467,116
Inventory subject to return 615,722
-----------
$ 2,082,838
===========
Inventory subject to return represents the amount of Gelclair(TM)
shipped to wholesale customers which has not
6
been recognized as revenue (See Note 6).
5. NOTES RECEIVABLE FROM OFFICERS
During 2000, 2001 and 2002, the Company has made loans to two of its
officers that were outstanding as of September 30, 2002, totaling $942,955 plus
accrued interest of $96,499 and which are repayable five years from the date of
issuance. The loans, including accrued interest, are secured by subordinate
mortgages on real property and are reviewed periodically to assess their
realizable value. In the third quarter ended September 30, 2002, the Company
recorded an allowance of $100,000 against one of the officer's loans. The
officer loans and accrued interest are presented net of the allowance
on the accompanying consolidated balance sheet.
6. REVENUE RECOGNITION
The Company recognizes revenue under the Nilandron Agreement in the
period in which marketing services are performed if Aventis' sales of
Nilandron(R) for that period exceed specified thresholds. As of November 1,
2002, the Nilandron Agreement has been terminated.
Product revenues are recognized upon shipment of product and are
recorded net of reserves for returns and allowances. A reserve for returns is
determined by using reports from external, independent sources. These reports
provide data on prescriptions filled through retail outlets as well as shipments
made from our wholesaler customers to retail pharmacies and hospitals. The
reserve is established and adjusted based on the movement of product through the
supply chain, thereby identifying slow moving product that is more likely to be
returned. The reserve is reviewed at each reporting period and adjusted to
reflect current data.
Product sales of Gelclair(TM) to the Company's wholesale customers
were initiated in the U.S. in May 2002. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right
of Return Exists", the Company defers the recognition of revenue on product
shipments of Gelclair(TM) to wholesale customers until such time that the right
of product return expires. At each reporting period, the Company monitors
shipments from wholesale customers to pharmacies and hospitals, wholesale
customer reorder history and prescriptions filled by pharmacies based on
prescription data from external, independent sources. When this data indicates
a flow of product through the supply chain, which indicates that returns are
less likely to occur, product revenue is recognized. For the three and nine
months ended September 30, 2002 shipments to wholesale customers were $195,000,
and $1,925,000 respectively, of which $88,267 has been recognized as product
revenues with the balance recorded as deferred revenue in the accompanying
balance sheet. In addition, the related cost of the product shipped to
wholesale customers that has not been recognized as revenue has been reflected
as inventory subject to returns (See Note 4).
7. BASIC AND DILUTED NET LOSS PER COMMON SHARE
The Company presents basic and diluted net loss per Common share
pursuant to 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 is anti-dilutive due to the Company's losses. The amount of Common
Stock equivalents excluded from the calculation are options and warrants to
purchase 4,670,189 and 7,826,534 shares of Common Stock as of September 30, 2002
and 2001, respectively.
8. LITIGATION
In March, April and May of 2001, eleven 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 alleged that the Company and its
officers made false and misleading statements about the Company's drug
candidate, Aptosyn(R), which caused artificial inflation of the Company's stock
price during the class period of October 27, 1999 to 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 Aptosyn(R).
In February 2002, a stipulation of settlement was agreed to. Pursuant to this
stipulation of settlement, and following a preliminary order by the court, the
Company's insurance carrier paid $2.0 million into escrow and the Company issued
1.7 million shares into escrow. On September 23, 2002, following a hearing, the
Court entered a final order approving the settlement and dismissing the action
at which time the $2.0 million and 1.7 million shares were released from escrow.
The time to appeal therefrom has expired. As of December 31, 2001, the Company
recorded the fair value of the 1.7 million shares of Common Stock
7
of $7,837,000, as an increase to additional paid-in capital and recorded a
charge to litigation settlement expense for the then fair value of the Common
Stock. As of September 30, 2002, the fair value of the 1.7 million shares was
adjusted to $1,088,000 based on the final fair value of the shares as of
September 23, 2002, which resulted in a $6,749,000 reduction to the litigation
settlement expense and a decrease to additional paid-in capital during the nine
months ended September 30, 2002.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cell Pathways, Inc. was incorporated in Delaware in July 1998 as a
subsidiary of and, as of November 3, 1998, the successor to, a Delaware
corporation of the same name. As the context requires, the "Company" or "CPI"
is used herein to signify the successor and/or the predecessor corporations.
Certain statements in this report, and oral statements made in respect
of this report, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements are those
which express plan, anticipation, intent, contingency or future development
and/or otherwise are not statements of historical fact. These statements are
subject to risks and uncertainties, known and unknown, which could cause actual
results and developments to differ materially from those expressed or implied
in such statements. Statements of historic fact must also be understood in the
context of, and subject to, these risks. Such risks and uncertainties relate
to, among other factors: early stage of development; the need for further
financing; absence of approved products; history of operating losses;
dependence on the development, regulatory approval and market acceptance of one
or more of our product candidates for one or more significant disease
indications; the costs, delays and uncertainties inherent in scientific
research, basic pharmaceutical research, drug development, clinical trials and
the regulatory approval process; the risks that CP461 will not exhibit safety
and efficacy in its current and future clinical trials in cancer indications,
in Crohn's disease or in any other disease indication; the risks that accrual
of our Phase III trial of Aptosyn(R) and Taxotere(R) is not completed within a
reasonable time and that safety and efficacy are not demonstrated by this
combination therapy in this trial; limitations on, or absence of, the
predictive value of data obtained in laboratory tests, animal models and human
clinical trials when planning additional steps in product development;
uncertainty that additional studies, if any, of Aptosyn(R), CP461 or any other
compound may not be positive; uncertainty of obtaining regulatory approval of
any compound for any disease indication whether due to adequacy of the
development program, changing regulatory requirements or otherwise; the risk
that the Company does not conduct the clinical studies it may have planned to
conduct or does not pursue development plans it may have planned to pursue; the
risk that the U.S. Food and Drug Administration may stop or delay any clinical
study for reasons of safety or otherwise; the risk that a registration strategy
for CP461 in cancer is not fully developed within a reasonable time, whether
due to the nature or timing of further clinical results or otherwise; the risk
that clinical studies do not result in the safety and efficacy necessary to
obtain regulatory approvals; the risks of conducting clinical trials, including
the risk of conducting clinical trials of our drugs in combination with other
drug therapies; the commercial risk and risk of liability in marketing and
selling Gelclair(TM) Concentrated Oral Gel, including the risk that the
prescribers do not prescribe the product and sales do not materialize, the risk
that the market opportunity available to Gelclair(TM) is smaller than
estimated, due to inaccurate assumptions, competition or other factors, the
risks associated with the product launch, manufacturing and marketing risks,
the risk that the Company's sales of Gelclair(TM) are less than the Company's
minimum purchase obligations and the risk that the efforts of the companies to
which the Company has contracted the promotion of Gelclair(TM) to the oncology
and dental markets are not successful in generating significant sales revenues;
the commercial risk and risk of liability in providing marketing services
promoting Nilandron(R) (nilutamide) manufactured by Aventis Pharmaceuticals,
Inc. through November of 2002, including the risk that Aventis' sales of
Nilandron(R) do not exceed the threshold entitling the Company to a percentage
of gross margin; the risk that the Company may enter into, or may fail to enter
into, licensing, partnership or collaborative arrangements or strategic
alliances which accord to other companies rights with respect to one or more
Company compounds, technologies or programs in exchange for financing and
operational assistance, or in which the Company acquires rights and obligations
or otherwise experience substantial change; the volatility of the market price
of our Common Stock; the risk that we may not be able to sell securities
registered under the shelf registration statement or otherwise or to otherwise
raise sufficient capital to sustain the operations of the Company; the risk of
dilution through the effects of further financings or strategic alliances;
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 future class action securities
litigation; 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 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. Be sure to read the "Risk Factors" in
Item 1 of Form 10-K (and also the discussion of the related subject matters
appearing in Item 1 of Form 10-K).
9
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, and subject to, 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 and development of products to treat and prevent
cancer and the future commercialization of such products. The Company also
markets and sells Gelclair (TM) Concentrated Oral Gel manufactured by Sinclair
Pharmaceuticals Ltd. of the United Kingdom ("Sinclair"). 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
and, commencing in September 2000, the marketing of products produced by
others. The Company's initial investigational new drug application ("IND") was
filed with the U.S. Food and Drug Administration ("FDA") in December 1993 for
human clinical trials of the Company's first product candidate, Aptosyn(R)
(exisulind). The Company filed an IND for its second product candidate, CP461,
in December 1998. In August 1999, the Company submitted to the FDA a new drug
application ("NDA") for use of Aptosyn(R) in treating familial adenomatous
polyposis, an orphan drug indication. In September 2000, the Company received a
"not approvable" letter from the FDA for this NDA. The Company currently is
focusing its development resources on Aptosyn(R) and CP461 in various cancer
indications. In March 2001, the Company initiated a Phase III randomized,
placebo controlled, double-blind multi-center study of approximately 600
patients with advanced non-small cell lung cancer ("NSCLC"), refractory to
standard platinum-containing combination chemotherapy, designed to evaluate
Aptosyn(R) in combination with Taxotere(R) versus Taxotere(R) and placebo. In
October 2001, the FDA put this study on clinical hold to new patient accrual
pending completion of a planned interim safety analysis. Patients already
enrolled on the protocol were allowed to continue treatment. Subsequent reviews
by both the independent data and safety monitoring board ("DSMB") and the FDA
resulted in the lifting of the clinical hold in December 2001 at which time the
Company resumed enrollment of new patients. In the third quarter of 2001, the
Company initiated pilot Phase IIa studies of CP461 in various cancer
indications. In the third quarter of 2002, the Company initiated a Phase II
study of CP461 in Crohn's disease, a chronic inflammatory condition of the
bowel.
On November 3, 1998, CPI completed a financing through the acquisition
of Tseng Labs, Inc. ("Tseng") (a publicly held company with no continuing
operations) in which CPI issued to Tseng stockholders approximately 5.5 million
shares of CPI Common Stock and received net proceeds of approximately $26.4
million. In October 1999, the Company issued 1.555 million shares of Common
Stock for net proceeds of approximately $13.5 million. During the year ended
December 31, 2000, the Company received approximately $23.1 million from the
issuance of 3.2 million shares of Common Stock and approximately $20.8 million
primarily from the exercise of previously issued Common Stock warrants and
options. In March 2002, the Company received approximately $8.0 million from
the issuance of 2.4 million shares of Common Stock. In September 2002, the
Company received approximately $2.5 million from the issuance of 4.0 million
shares of Common Stock. Common Stock outstanding at September 30, 2002 and
December 31, 2001 was 39.4 million and 31.1 million shares (including 1.7
million shares issued in escrow for the class action litigation settlement, see
Note 8), respectively.
In July 2000, the Company entered into an exclusive marketing and
promotion agreement (the "Nilandron Agreement") with Aventis Pharmaceuticals
Inc. ("Aventis"), to market Nilandron(R) (nilutamide) to urologists in the U.S.
and Puerto Rico for use in patients who suffer from prostate cancer. The
Company began to market Nilandron(R) in September of 2000. Under the terms of
the Nilandron Agreement, the Company is responsible for its marketing and
promotion expenses and receives from Aventis a percentage of the gross margin
on Aventis' sales in excess of a pre-established gross margin threshold, if
any. The Company recognized revenue of $307,686 and $611,264 for the third
quarter and nine months ended September 30, 2002, respectively, and $306,808
and $623,781 for the third quarter and nine months ended September 30, 2001,
respectively, under the Nilandron Agreement. In October 2002, the
Nilandron Agreement was terminated.
In January 2002, the Company entered into a ten-year exclusive
distribution agreement (the "Gelclair Agreement") with Sinclair to promote and
distribute Gelclair(TM) in North America (U.S., Canada and Mexico).
Gelclair(TM) is an oral gel formulation for the management and relief of pain
associated with inflammation and ulceration of the mouth caused by chemotherapy
or radiotherapy treatments and other causes.
10
Product sales of Gelclair(TM) to the Company's wholesale customers were
initiated in the U.S. in May 2002. The Company purchases Gelclair(TM) from
Sinclair and resells to wholesale customers in the U.S.
In August 2002, the Company entered into a four-year marketing
agreement with John O. Butler Company ("Butler"). Butler markets Gelclair(TM) to
the dental market within the U.S. and will market in Canada if and when
Gelclair(TM) is approved for marketing in Canada. In October 2002, the Company
entered into a three-year agreement with Celgene Corporation ("Celgene") for
the promotion of Gelclair(TM) in the U.S. oncology market.
The Company has not generated any revenue from the sale of its own
products, and none of its product candidates has been approved for marketing.
The Company's income has been limited to interest income from investments,
revenues from sales of Gelclair(TM) and the Nilandron Agreement which was
terminated in October 2002. The Company's primary source of capital has been
the sale of equity securities, including the transaction with Tseng. Net losses
were $31,404,435 and $26,916,808 for the years ended December 31, 2001 and
2000, respectively, and the net loss for the nine months ended September 30,
2002 was $12,142,811. As of September 30, 2002, the accumulated deficit was
$135,427,548 and the cash, cash equivalents and short-term investments were
$17,269,561. 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 through financings or corporate alliances to sustain its
operations. Should appropriate sources of funding not be available on terms
acceptable to the Company, management would take action which could include the
delay of certain clinical trials and research activities until such time as
appropriate sources of funding were available. There can be no assurance that
appropriate sources of funding will be available to permit the Company to
continue its operations, that any of the Company's 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 September 30, 2002 Compared with Three Months Ended
September 30, 2001.
Revenues recognized from the sale of Gelclair(TM) and the promotion of
Nilandron(R) were $88,267 and $307,686, respectively, for the three months ended
September 30, 2002, which represented a total increase of $89,145 from the same
period in 2001 primarily due to the recognition of revenue from the sale of
Gelclair(TM) launched in May 2002. The Company recognizes revenue from
Gelclair(TM) upon shipment of product to its wholesale customers, net of
reserves for returns and allowances. The reserves for returns and allowances are
based on reports from external, independent sources. These reports provide data
on prescriptions filled through retail outlets as well as shipments made from
the Company's wholesaler customers to the retail pharmacies and hospitals. The
reserves are established and adjusted based on the movement of product through
the supply chain, thereby identifying slow moving product that is more likely to
be returned. The reserves are reviewed at each reporting period and adjusted to
reflect current data.
Total expenses, including cost of products sold, for the three months
ended September 30, 2002 were $5,184,000. In the third quarter of 2002, the
Company recorded a final non-cash reduction of litigation settlement expense of
$1,462,000 related to the Company's settlement of its securities class action
litigation, which was approved by the court in September 2002. This final
adjustment to the amount previously recorded by the Company in 2001 and during
the first six months of 2002 represents the change in the fair value of 1.7
million shares of the Company's Common Stock issued as part of the settlement.
Excluding this non-cash reduction of litigation settlement expense of
$1,462,000, total expenses for the three months ended September 30, 2002 would
have been $6,645,876, a decrease of $287,824 or 4.1% from the same period in
2001.
Cost of products sold for the three months ended September 30, 2002
was $28,542 or 32.3% of product revenues, related to sales of Gelclair(TM).
Research and development ("R&D") expenses for the three months ended September
30, 2002 were $4,659,505 a decrease of $551,179 or 10.6% from the same period
in 2001. This decrease was primarily due to lower clinical study expenses
associated with the Company's Phase III clinical trial of Aptosyn(R) in
combination with Taxotere(R) in patients with non-small cell lung cancer.
Selling, general and administrative ("SG&A") expenses were $1,957,829 for the
three months ended September 30, 2002, an increase of $234,813, or 13.6% from
the same period in 2001. This increase was primarily due to promotion and
distribution expenses for Gelclair(TM).
Interest income, net of interest expense, was $64,696 for the three
months ended September 30, 2002, a decrease of $313,325 from the same period of
2001, due to lower average cash balances and lower average interest rates on
investments.
11
Nine Months Ended September 30, 2002 Compared with Nine Months Ended
September 30, 2001.
Revenues from the sale of Gelclair(TM) and the promotion of
Nilandron(R) were $88,267 and $611,264, respectively, for the nine months ended
September 30, 2002, a total increase of $75,750 from the same period of 2001
primarily due to the recognition of revenue from the sale of Gelclair(TM)
launched in May 2002, offset partially by lower revenues from the Nilandron
Agreement.
Total expenses, including cost of products sold, for the nine months
ended September 30, 2002 were $13,097,787. For the nine months ended September
30, 2002, the Company recorded a non-cash reduction of litigation settlement
expense of $6,749,000 related to the Company's settlement of its class action
litigation which was approved by the court in September 2002. This final
adjustment to the amount previously recorded by the Company in 2001 represents
the change in the fair value of 1.7 million shares of the Company's Common
Stock issued as part of the settlement. Excluding the non-cash reduction of
litigation settlement expense of $6,749,000, total expenses for the nine months
ended September 30, 2002 would have been $19,846,787, an increase of $1,851,598
or 10.3% from the same period in 2001.
Cost of products sold for the nine months ended September 30, 2002 was
$28,542 or 32.3% of net sales, related to sales of Gelclair(TM). R&D expenses
for the nine months ended September 30, 2002 were $13,087,146, an increase of
$678,366 or 5.5%, from the same period in 2001. This increase was primarily due
to clinical study expenses associated with the Company's Phase III clinical
trial of Aptosyn(R) in combination with Taxotere(R) in patients with non-small
cell lung cancer, and three ongoing pilot Phase IIa clinical trials of CP461 in
patients with chronic lymphocytic leukemia, hormone-refractory prostate cancer
and renal ("kidney") cell carcinoma. SG&A expenses were $6,6731,099 for the nine
months ended September 30, 2002, an increase of $1,144,690 or 20.5%, from the
same period in 2001. This increase was primarily due to promotion and
distribution expenses for Gelclair(TM).
Interest income, net of interest expense, was $255,445 for the nine
months ended September 30, 2002, a decrease of $1,222,711 from the same period
of 2001, primarily due to lower average cash balances and lower average
interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily with
the net proceeds received from the sale of equity securities, including the
transaction with Tseng. Financing activities have generated net proceeds of
$151.1 million from inception through September 30, 2002.
As of September 30, 2002, the Company had cash, cash equivalents, and
short-term investments of $17,269,561, a decrease of $10,444,354 from the
comparable balances at December 31, 2001. This decrease was primarily the
result of cash used to fund operations for the nine months ended September 30,
2002, $2.1 million in inventory purchases and a $1.0 million payment to
Sinclair for the licensing rights to market Gelclair(TM). Partially offsetting
the cash used in the first nine months of 2002 was a total of $10.5 million of
cash received from a private placement of 2.4 million shares of Common Stock
and a registered direct offering of 4.0 million shares of Common Stock. The
Company invests its excess cash primarily in low risk, highly liquid money
market funds and U.S. government securities. As of September 30, 2002, the
Company had a portion of its excess cash invested in U.S. government securities
with original maturities in excess of three months, thereby requiring such
investments to be classified as short-term investments. As of September 30,
2002, the Company had $467,185 in a restricted cash account pledged for a
security deposit under the lease of its Horsham, Pennsylvania facility.
In October 2002, in an effort to preserve capital, the Company reduced
its work force and planned expenditures in its early stage research and
discovery programs. Subsequently in October 2002, the Company entered into an
agreement with Celgene to promote Gelclair(TM) on behalf of the Company. In
conjunction with the signing of this agreement, the Company eliminated its 16
person sales force. Employment at the end of October was approximately
forty-four persons.
In September 2002, the Company sold 4,036,001 shares of Common Stock
in a registered direct offering at the price of $0.70 per share, resulting in
the net proceeds of approximately $2.5 million. In addition to a cash fee, the
placement agent received 80,720 warrants to purchase Common Stock at a price of
$0.84. The warrants are exercisable until September 2007.
12
In March 2002, the Company sold 2,390,107 shares of Common Stock in a
private placement, mainly to institutional investors, at a price of $3.70 per
share, resulting in net proceeds of approximately $8.0 million. With each four
shares of Common Stock purchased, the Company issued a warrant to purchase one
share of the Company's Common Stock at $4.74 per share. The warrants are
exercisable until March 26, 2006.
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 March, April and May of 2001, eleven 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 alleged that the Company and its
officers made false and misleading statements about the Company's drug
candidate, Aptosyn(R), which caused artificial inflation of the Company's stock
price during the class period of October 27, 1999 to 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
Aptosyn(R). In February 2002, a stipulation of settlement was agreed to.
Pursuant to this stipulation of settlement, and following a preliminary order
by the court, the Company's insurance carrier paid $2.0 million into escrow and
the Company issued 1.7 million shares into escrow. On September 23, 2002,
following a hearing, the Court entered a final order approving the settlement
and dismissing the action at which time the $2.0 million and 1.7 million shares
were released from escrow. The time to appeal therefrom has expired. As of
December 31, 2001, the Company recorded the fair value of the 1.7 million
shares of Common Stock of $7,837,000, as an increase to additional paid-in
capital and recorded a charge to litigation settlement expense for the then
fair value of the Common Stock. As of September 23, 2002, the fair value of the
1.7 million shares was adjusted to $1,088,000 based on the final fair value of
the shares as of September 23, 2002, which resulted in a $6,749,000 reduction
to the litigation settlement expense and a decrease to additional paid-in
capital during the nine months ended September 30, 2002.
Under the Gelclair Agreement, in the first quarter ended March 31,
2002, the Company paid Sinclair $1 million for the exclusive right to market
and distribute Gelclair(TM) in North America and $2 million for inventory
purchases. The Company committed to additional inventory purchases of $2
million, $3 million and $5 million in 2002, 2003 and 2004, respectively, and
could be responsible for milestone payments totaling $3 million related to the
achievement of certain sales, patent and clinical trial milestones.
The Company anticipates the annual expenditures for preclinical
studies, clinical trials, product development, research, selling and marketing,
and general and administrative expenses will increase significantly in future
years. CPI will need to raise additional capital. Even with additional capital,
there can be no assurance that the Company will be able to successfully
complete the clinical development of Aptosyn(R), CP461 or any other drug
candidate for any indication, that the FDA will grant approval of any drug
candidate for any indication, or that the other developments or expansions in
CPI's research, development and commercialization and sales and marketing
programs will ultimately lead to revenues or profitability 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, the level of
expense which may be associated with such initial product sales, or the level
of revenue and expense associated with the marketing and/or selling of
Gelclair(TM). The Company anticipates that it will require additional financing
in the future to continue its research and development programs. Until such
time as CPI is able to generate sufficient revenue, 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 $17.3 million as of September
30, 2002, together with interest earned on these balances, will be adequate to
fund operations into the third quarter 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 and 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. Should appropriate sources of
funding not be available on terms acceptable to the Company, management would
take action which could include the delay of certain clinical trials and
research activities until such time as appropriate sources of funding was
available. Any additional equity financing would be dilutive to stockholders.
Debt financing, if available, may include restrictive covenants and also may be
dilutive. Corporate alliances would generally require the Company to give up
certain marketing rights or other rights to its potential products and
technology and may also be dilutive. 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
13
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 September 30, 2002, CPI had 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, 2002. (Also see Note 11 of notes to
consolidated financial statements in the Company's December 31, 2001 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
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of long-lived assets
and the associated asset retirement costs. SFAS No. 143 requires that the fair
value of a liability associated with an asset retirement be recognized in the
period in which it is incurred, with the associated retirement costs
capitalized as part of the carrying amount of the long-lived asset and
subsequently depreciated over its useful life. The adoption of SFAS No. 143 did
not have any impact on the Company's financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which establishes a single
accounting model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," and resolves significant implementation issues related to
SFAS No. 121 and Accounting Principles Board ("APB") Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of a Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company is required to adopt SFAS No. 144 for its year
ending December 31, 2002, however early application is permitted. The Company
adopted SFAS No. 144 on January 1, 2002. The adoption had no impact on the
Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs associated with exit and disposal activities, including restructuring
activities. SFAS No. 146 also addresses recognition of certain costs related
to terminating a contract that is not a capital lease, costs to consolidate
facilities or relocate employees, and termination benefits provided to
employees that are involuntarily terminated under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. Given that SFAS No. 146
was issued in June 2002 and is not yet effective, the impact on the Company's
financial position or results of operations from adopting SFAS No. 146 has not
been determined.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation
of financial statements. Note 2 of the notes to consolidated financial
statements, in the Company's December 31, 2001 annual report on Form 10-K,
includes a summary of our significant accounting policies and methods used in
the preparation of our consolidated financial statements. While the preparation
of our consolidated financial statements requires us to make
14
estimates and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of expenses during the reporting period,
we do not believe the Company's financial statements are significantly affected
by complex accounting policies and methods, given our stage of development.
REVENUE RECOGNITION
We recognize revenue under the Nilandron Agreement in the period in
which marketing services are performed if Aventis' gross margin of sales of
Nilandron(R)for that period exceed specified thresholds. The Nilandron
Agreement was terminated in October 2002.
Product revenues are recognized upon shipment of product and are
recorded net of reserves for returns and allowances. A reserve for returns is
determined by using reports from external, independent sources. These reports
provide data on prescriptions filled through retail outlets as well as
shipments made from our wholesaler customers to the retail pharmacies. The
reserve is established and adjusted based on the movement of product through
the supply chain thereby identifying slow moving product that is more likely to
be returned. The reserve is reviewed at each reporting period and adjusted to
reflect current data.
Product sales of Gelclair(TM) to the Company's wholesale customers were
initiated in the U.S. in May 2002. In accordance with SFAS No. 48, "Revenue
Recognition When Right of Return Exists", the Company defers the recognition of
revenue on product shipments of Gelclair(TM) to wholesale customers until such
time that the right of product return expires. At each reporting period, the
Company monitors shipments from wholesale customers to pharmacies and
hospitals, wholesale customer reorder history and prescriptions filled by
pharmacies based on prescription data from external, independent sources. When
this data indicates a flow of product through the supply chain, which indicates
that returns are less likely to occur, product revenue is recognized.
15
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 six months to ensure principal preservation.
As of September 30, 2002, 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 $4,335,000 which were
equal to their fair value, an average interest rate of 1.8% and maturities of
less than one year.
ITEM 4. CONTROLS AND PROCEDURES
a. Within the 90 days prior to the date of filing of this report,
the Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the
Company's Chief Executive Officer along with Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Company's Chief Executive Officer along
with the Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company and required to
be included in the Company's periodic SEC filings.
b. There have been no significant changes in our internal controls
or in other factors that could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Footnote 8 to the Notes to the Company's
consolidated financial statements included herein is hereby incorporated by
reference.
ITEM 2. CHANGES IN SECURITIES
In September 2002, in conjunction with a registered direct placement
of Common Stock, the Company issued to the placement agent, J.P.Carey
Securities, Inc., warrants to purchase 80,720 shares of Common Stock at a price
of $0.84 exercisable until September 2007. Also in September 2002, the Company
issued to consultants warrants to purchase 100,000 shares of Common Stock at a
price of $1.00, exercisable until October 2007.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification Pursuant to 18U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Exhibit 99.2 Certification Pursuant to 18U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) There were no reports on Form 8-K filed during the quarter ending
September 30, 2002.
16
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 14, 2002 By: /s/ Robert J. Towarnicki
--------------------------------------------
Robert J. Towarnicki
Chairman, President, Chief Executive
Officer and Director
(Principal Executive Officer)
Dated: November 14, 2002 By: /s/ Brian J. Hayden
--------------------------------------------
Brian J. Hayden
Chief Financial Officer; Vice
President - Finance; Treasurer
(Principal Financial and Accounting Officer)
17
Sarbanes-Oxley Section 302(a) Certification
I, Robert J. Towarnicki, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cell Pathways,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Robert J. Towarnicki
-------------------------
Robert J. Towarnicki
Chief Executive Officer
18
Sarbanes-Oxley Section 302(a) Certification
I, Brian J. Hayden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cell Pathways,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
nencessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Brian J. Hayden
--------------------
Brian J. Hayden
Chief Financial Officer
19