Back to GetFilings.com
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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 0-19777
DUSA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3103129
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Upton Drive
Wilmington, Massachusetts 01887
(Address of principal executive offices)
(Zip Code)
(978) 657-7500
(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 month (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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
13,955,247 shares as of August 8, 2003
PART I.
ITEM 1. FINANCIAL STATEMENTS
DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,613,837 $ 7,064,596
United States government securities 37,400,520 45,814,947
Accrued interest receivable 614,205 699,664
Accounts receivable 99,131 36,720
Inventory 1,036,987 1,188,659
Prepaids and other current assets 678,245 915,704
------------ ------------
TOTAL CURRENT ASSETS 47,442,925 55,720,290
Property and equipment, net 4,792,083 5,229,683
------------ ------------
TOTAL ASSETS $ 52,235,008 $ 60,949,973
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 322,596 $ 552,891
Accrued payroll 394,032 476,602
Other accrued expenses 1,374,295 2,070,150
Current maturities of long-term debt 270,000 270,000
Deferred revenue 66,150 5,100
------------ ------------
TOTAL CURRENT LIABILITIES 2,427,073 3,374,743
Long-term debt, net of current maturities 1,382,500 1,517,500
------------ ------------
TOTAL LIABILITIES 3,809,573 4,892,243
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
SHAREHOLDERS' EQUITY
Capital Stock
Authorized: 100,000,000 shares; 40,000,000 shares designated as common
stock, no par, and 60,000,000 shares issuable in series or classes; and 95,602,686 95,490,561
40,000 junior Series A preferred shares. Issued and outstanding:
13,943,581 (2002: 13,887,612) shares of common stock, no par.
Additional paid-in capital 2,015,586 2,015,586
Accumulated deficit (51,460,016) (44,082,927)
Accumulated other comprehensive income 2,267,179 2,634,510
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 48,425,435 56,057,730
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 52,235,008 $ 60,949,973
============ ============
See the accompanying Notes to the Condensed Consolidated Financial Statements.
2
DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) (UNAUDITED)
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES
Product sales and rental income $ 147,275 $ 55,658 $ 290,645 $ 106,185
Research grant and milestone revenue - 495,834 - 991,668
Research revenue earned under collaborative agreements - 878,486 - 1,657,623
------------ ------------ ------------ ------------
TOTAL REVENUES 147,275 1,429,978 290,645 2,755,476
------------ ------------ ------------ ------------
OPERATING COSTS
Cost of product sales and royalties 824,027 776,533 1,577,331 1,455,302
Research and development 1,448,600 3,374,905 2,964,991 6,471,596
Marketing and sales 532,978 - 1,063,490 -
General and administrative 1,679,750 1,501,008 3,155,021 2,693,016
------------ ------------ ------------ ------------
TOTAL OPERATING COSTS 4,485,355 5,652,446 8,760,833 10,619,914
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (4,338,080) (4,222,468) (8,470,188) (7,864,438)
OTHER INCOME
Interest income, net 526,964 784,902 1,093,099 1,559,321
------------ ------------ ------------ ------------
NET LOSS $ (3,811,116) $ (3,437,566) $ (7,377,089) $ (6,305,117)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (.27) $ (.25) $ (.53) $ (.45)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 13,932,424 13,869,297 13,912,579 13,867,354
============ ============ ============ ============
See the accompanying Notes to the Condensed Consolidated Financial Statements.
3
DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
2003 2002
(UNAUDITED) (UNAUDITED)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss $ (7,377,089) $ (6,305,117)
Adjustments to reconcile net loss to net cash used in operating
activities
Amortization of premiums and accretion of discounts on United States 47,096 (35,743)
government securities available for sale, net
Depreciation and amortization expense 610,504 888,001
Amortization of deferred revenue - (991,668)
Issuance of common stock to consultants 75,000 50,000
Changes in other assets and liabilities impacting cash flows from operations:
Accrued interest receivable 85,459 78,034
Accounts receivable (62,411) 36,656
Receivable under co-development program - (13,952)
Inventory 151,672 227,090
Prepaids and other current assets 237,459 (312,715)
Deferred charges - (100,000)
Accounts payable (230,295) (106,699)
Accrued payroll and other accrued expenses (741,300) (107,518)
Deferred revenue 61,050 (142,957)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (7,142,855) (6,836,588)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Purchases of United States government securities - (6,131,356)
Proceeds from maturing United States government securities 8,000,000 8,083,593
Purchases of property and equipment (172,904) (2,034,124)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 7,827,096 (81,887)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from long-term debt - 1,900,000
Payments of long-term debt (135,000) -
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (135,000) 1,900,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 549,241 (5,018,475)
------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,064,596 7,568,500
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,613,837 $ 2,550,025
============ ============
See the accompanying Notes to the Condensed Consolidated Financial Statements.
4
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheet as of June 30, 2003, Condensed
Consolidated Statements of Operations for the three and six months ended June
30, 2003 and 2002, and Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2003 and 2002 of DUSA Pharmaceuticals, Inc. (the
"Company" or "DUSA") have been prepared in accordance with accounting principles
generally accepted in the United States of America. These condensed consolidated
financial statements are unaudited but include all normal recurring adjustments,
which management of the Company believes to be necessary for fair presentation
of the periods presented. The results of the Company's operations for any
interim period are not necessarily indicative of the results of the Company's
operations for any other interim period or for a full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. These
condensed consolidated financial statements should be read in conjunction with
the Company's December 31, 2002 audited consolidated financial statements and
notes thereto. Certain amounts for 2002 have been reclassified to conform to the
current year presentation. Such reclassifications had no impact on the net loss
or shareholders' equity for any period presented.
2) UNITED STATES GOVERNMENT SECURITIES AVAILABLE FOR SALE
The Company's United States government securities available for sale
consist of securities of the United States government and its agencies, with
current yields, as of June 30, 2003, ranging from 3.96% to 7.13% and maturity
dates ranging from August 15, 2003 to February 15, 2007.
Accumulated other comprehensive income consists of net unrealized gains
or losses on United States government securities available for sale, which is
reported as part of shareholders' equity in the Condensed Consolidated Balance
Sheets.
3) INVENTORY
Inventory consisted of the following:
JUNE 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------ ------------
Finished goods $ 860,968 $ 1,047,941
Raw materials 176,019 140,718
------------ ------------
$ 1,036,987 $ 1,188,659
============ ============
5
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4) OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following:
JUNE 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------ ------------
Research and development costs $ 252,382 $ 473,543
Marketing and sales costs 146,351 -
Product related costs 70,951 463,340
License milestone - 500,000
Legal and other professional fees 583,259 297,966
Employee benefits 193,674 207,833
Other accrued expenses 127,678 127,468
------------ ------------
$ 1,374,295 $ 2,070,150
============ ============
5) SHAREHOLDERS' EQUITY
On June 15, 2003, the Company granted compensation of $50,000 to
Therapeutics, Inc., a clinical research organization, pursuant to an agreement
for services. This compensation was issued in July 2003 and was comprised of
11,666 shares of common stock valued at $35,000 and $15,000 of cash. The Company
recorded the total value of the compensation in the current quarter as part of
research and development costs in the Condensed Consolidated Statements of
Operations.
On May 2, 2003, the Company granted a total of 32,750 shares of
unregistered common stock, without par value, to two outside consultants as
compensation for services. These shares were valued at approximately $75,000 and
were recorded as part of research and development costs in the Condensed
Consolidated Statements of Operations.
On March 13, 2003, the Company issued 23,219 shares of restricted
common stock at a closing price of $1.599 per share to its Chief Executive
Officer, reflecting payment of the after-tax portion of his 2002 bonus
compensation.
6) MARKETING AND SALES
As a result of the termination of the Company's marketing and
development collaboration with its former marketing partner in September 2002,
the Company commenced certain marketing and sales initiatives in 2003 associated
with having full rights and responsibilities of its product. In addition, the
Company has reassigned resources that were previously functioning in research
and development roles to its marketing and sales function. Prior to the
Company's termination of its marketing and development collaboration, all rights
and activities associated with marketing and sales of its products were solely
the responsibility of its former partner. Activities included in
6
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
marketing and sales expense for 2003 consist of trade show expenses,
advertising, personnel and other resources assigned to marketing and sales
activities, and other marketing and promotional activities. All such costs are
expensed as incurred.
7) ACCOUNTING FOR STOCK BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," addresses the financial accounting
and reporting standards for stock or other equity-based compensation
arrangements. The Company has elected to continue to use the intrinsic
value-based method to account for employee stock option awards under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and to provide disclosures based on the fair value method
in the Notes to the Consolidated Financial Statements as permitted by SFAS No.
123. Stock or other equity-based compensation for non-employees must be
accounted for under the fair value-based method as required by SFAS No. 123 and
Emerging Issues Task Force ("EITF") No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" and other related interpretations.
Under this method, the equity-based instrument is valued at either the fair
value of the consideration received or the equity instrument issued on the date
of grant. The resulting compensation cost is recognized and charged to
operations over the service period, which is generally the vesting period.
7
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Had the Company used the fair value method to measure compensation, the
Company's pro forma net loss and pro forma net loss per common share for the
three and six months ending June 30, 2003 and 2002 would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) (UNAUDITED)
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NET LOSS
As reported $ (3,811,116) $ (3,437,566) $ (7,377,089) $ (6,305,117)
Stock-based compensation recorded 75,000 50,000 75,000 50,000
Effect on net loss if fair value method had (618,712) (1,402,906) (1,205,921) (1,990,115)
been used
------------- ------------- ------------- -------------
Proforma $ (4,354,828) $ (4,790,472) $ (8,508,010) $ (8,245,232)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE
As reported $ (.27) $ (.25) $ (.53) $ (.45)
Stock-based compensation recorded .01 - .01 -
Effect on net loss per common share if fair (.05) (.10) (.09) (.14)
value method had been used
------------- ------------- ------------- -------------
Proforma $ (.31) $ (.35) $ (.61) $ (.59)
============= ============= ============= =============
8) BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share are based on the weighted
average number of shares outstanding during each period. Stock options and
warrants are not included in the computation of the weighted average number of
shares outstanding for dilutive net loss per common share during each of the
periods presented in the Condensed Consolidated Statements of Operations, as the
effect would be antidilutive. For the periods ended June 30, 2003 and 2002, such
potentially dilutive securities totaling approximately 2,705,000 and 2,751,000
shares, respectively, have been excluded from the computation of diluted net
loss per common share.
8
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9) COMPREHENSIVE LOSS
For the three and six months ended June 30, 2003 and 2002,
comprehensive loss consisted of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) (UNAUDITED)
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
NET LOSS $ (3,811,116) $ (3,437,566) $ (7,377,089) $ (6,305,117)
Net change in unrealized gains (losses)
on United States securities available (120,333) 838,459 (367,331) 42,698
for sale
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ (3,931,449) $ (2,599,107) $ (7,744,420) $ (6,262,419)
============ ============ ============ ============
10) COMMITMENTS AND CONTINGENCIES
Legal Matters - On April 12, 2002, the Company received notice that one
of the patents licensed to the Company by PARTEQ Research & Development
Innovations, the technology transfer arm of Queen's University at Kingston,
Ontario was challenged by PhotoCure ASA. PhotoCure ASA has filed a lawsuit in
Australia alleging that Australian Patent No. 624985, which is one of the
patents relating to the Company's 5-aminolevulinic acid technology, is invalid.
As a consequence of this action, Queen's University has assigned the Australian
patent to the Company so that DUSA may participate directly in this litigation.
The Company has filed an answer setting forth its defenses and a related
countersuit alleging that certain activities of PhotoCure and its marketing
partner, Galderma S.A., infringe the patent. The case is in its earliest stages
so the Company is unable to predict the outcome at this time.
In March 2003, the Company received notice that its Dutch patent was
being formally challenged by an anonymous agent, and DUSA filed a formal
response to the opposition. In May 2003, a hearing was held in the Dutch Patent
Office with both the anonymous agent and the Company presenting technical
arguments pertaining to the validity of the Dutch patent. A final ruling by the
Dutch patent board is expected later in 2003. The potential impact of a
challenge in The Netherlands is minimal; however, the Company does plan to
defend its patent at this time.
9
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
11) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2002, the EITF reached conclusion on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." This consensus
provides guidance in determining when a revenue arrangement with multiple
deliverables should be divided into separate units of accounting, and, if
separation is appropriate, how the arrangement consideration should be allocated
to the identified accounting units. The provisions of EITF No. 00-21 are
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company will evaluate any new arrangements into which
it enters in accordance with this EITF.
12) SUBSEQUENT EVENT
In March 2003, the Company completed the facility qualification,
process validation, and drug product stability testing, and submitted an NDA
supplement to the FDA, with respect to its manufacturing facility in Wilmington,
Massachusetts. In May 2003, the FDA completed its inspection of the facility
and, on July 14, 2003, the Company received approval from the FDA to manufacture
the Levulan(R) Kerastick(R) at its Wilmington facility.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
DUSA is a pharmaceutical company engaged primarily in the research,
development, and marketing of a drug named 5-aminolevulinic acid, or ALA, used
in combination with appropriate light devices in order to detect or treat a
variety of medical conditions. The trademark for our brand of ALA is Levulan(R).
When Levulan(R) is used and followed with exposure to light to produce a
therapeutic effect, the technology is called photodynamic therapy, or PDT. When
Levulan(R) is used and followed with exposure to light to detect medical
conditions, the technology is called photodetection, or PD. Our first products,
which were launched in September 2000 in the United States, are Levulan(R) 20%
topical solution using our Kerastick(R) brand applicator, and our BLU-U(R) brand
light unit. Our products are used together to provide PDT for the treatment of
non-hyperkeratotic actinic keratoses, or AKs, of the face or scalp.
We have primarily devoted our resources to funding research and
development in order to advance the Levulan(R) PDT/PD technology platform and,
as a result, we have experienced significant operating losses. As of June 30,
2003, we had an accumulated deficit of approximately $51,460,000. Achieving our
goal of becoming a profitable operating company is dependent upon the market
penetration of our products, acceptance of our therapy by the medical and
consumer constituencies, and our ability to develop new products. We believe
that as doctors become more familiar with the benefits of Levulan(R) PDT for
actinic keratoses, and improved reimbursement for physicians is attained, more
widespread adoption of our therapy should occur over time. In addition, we are
aware that some physicians have been using Levulan(R) with light devices
manufactured by other companies and for uses other than our FDA-approved use.
While we are not permitted to market our products for so-called "off-label"
uses, these activities could also positively affect adoption of our products and
increase sales.
We expect to continue to incur operating losses until our first
products successfully penetrate the market. As a result of the termination of
our former dermatology collaboration arrangement in 2002, we reevaluated our
expenses and are minimizing research and development and related general and
administrative expenditures that are not directly related to our core objectives
for 2003. At this time, we are focusing primarily on increasing the sales of our
approved products, on implementing our development program, and on seeking a
partner to help develop and market Levulan(R) PDT for the treatment of dysplasia
in patients with Barrett's esophagus. As of June 30, 2003, our staff included 42
full-time employees as compared to 43 at the end of 2002, who support all of our
activities, including marketing, production, maintenance, customer support, and
financial operations for our products, as well as the research and development
programs for dermatology and internal indications. We expect to increase our
staff during the second half of 2003 as we focus on marketing activities and
customer support associated with our AK products. While our financial position
is strong, we cannot predict when product sales along with interest income may
offset the cost of these efforts.
11
As we continue to evaluate our corporate governance policies in light
of the Sarbanes-Oxley Act of 2002, DUSA's Board of Directors determined that the
Chairman of the Board and Chief Executive Officer positions should be held by
two persons, rather than one. Therefore, in June, 2003, the Board of Directors
appointed one of its independent directors, Mr. Jay Haft, as the Company's
Chairman. Simultaneously, our Controller, Peter Chakoutis, was appointed as the
Company's Principal Accounting Officer.
MANUFACTURING FACILITY APPROVAL - In March 2003, DUSA completed the
facility qualification, process validation, and drug product stability testing,
and submitted an NDA supplement to the FDA with respect to our manufacturing
facility in Wilmington, Massachusetts. The FDA completed its inspection of the
facility in May 2003 and, on July 14, 2003, DUSA received approval from the FDA
to manufacture the Levulan(R) Kerastick(R) at our Wilmington facility.
510(k) FDA FILING - On June 10, 2003, DUSA submitted a Section 510(k)
premarket notification application to the FDA for treatment of mild to moderate
acne with our BLU-U(R) light, without Levulan(R), based on an equivalency
comparison to other manufacturers approved commercial light units. DUSA
anticipates a response from the FDA later in 2003.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are disclosed in Note 2 to the Notes to the
Consolidated Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 2002. Since not all of these accounting policies require
management to make difficult, subjective or complex judgments or estimates, they
are not all considered critical accounting policies. We have discussed these
policies and the underlying estimates used in applying these accounting policies
with our Audit Committee. We consider the following policies and estimates to be
critical to our financial statements.
REVENUE RECOGNITION - Revenues on product sales of the Kerastick(R) are
recognized when persuasive evidence of an arrangement exists, the price is fixed
and final, delivery has occurred, and there is reasonableness of collection.
Research revenue previously earned under collaborative agreements consisted of
non-refundable research and development funding from our former dermatology
collaboration partner. Research revenue generally compensated us for a portion
of our agreed-upon research and development expenses and was recognized as
revenue at the time the research and development activities were performed under
the terms of the related agreements and when no future performance obligations
existed. Milestone or other up-front payments are typically recorded as deferred
revenue upon receipt and recognized as earned, generally on a straight-line
basis over the term of an agreement. Although we make every effort to assure the
reasonableness of our estimates, significant unanticipated changes in our
estimates due to business, economic, or industry events could have a material
impact on our results of operations.
INVENTORY - Inventories are stated at the lower of cost or market
value. Cost is determined using the first-in, first-out method. Inventories are
continually reviewed for slow moving, obsolete and excess items. Inventory items
identified as slow-moving are evaluated to determine if an
12
adjustment is required. Additionally, our industry is characterized by regular
technological developments that could result in obsolete inventory. Although we
make every effort to assure the reasonableness of our estimates, any significant
unanticipated changes in demand, technological development, or significant
changes to our business model could have a significant impact on the value of
our inventory and our results of operations. We use sales projections to
estimate the appropriate level of inventory that should remain on the
Consolidated Balance Sheet. Management believes that the recorded inventory
value is reasonable in light of our current sales forecasts. Should we be unable
to achieve the forecasted sales, additional adjustments may be recorded to cost
of goods sold.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS - We review long-lived
assets, comprised of property, plant and equipment for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
assets may not be fully recoverable or that the useful lives of these assets are
no longer appropriate. Factors considered important which could trigger an
impairment review include significant changes relative to: (i) projected future
operating results; (ii) the use of the assets or the strategy for the overall
business; (iii) business collaborations; and (iv) industry, business, or
economic trends and developments. Each impairment test is based on a comparison
of the undiscounted cash flow to the recorded value of the asset. When it is
determined that the carrying value of long-lived or intangible assets may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, the asset is written down to its estimated fair value on a
discounted cash flow basis. In 2002 and again as of June 30, 2003, we concluded
that the termination of our former dermatology collaboration arrangement in
September 2002 and current business events have not caused any impairment to our
manufacturing facility. At June 30, 2003, our total property, plant and
equipment had a carrying value of $4,792,000, including $2,663,000 associated
with our manufacturing facility, and we had no intangible assets recorded as of
that date.
STOCK-BASED COMPENSATION - We have elected to continue to use the
intrinsic value-based method to account for employee stock option awards under
the provisions of Accounting Principles Board Opinion No. 25, and to provide
disclosures based on the fair value method in the Notes to the Consolidated
Financial Statements as permitted by Statement of Financial Accounting Standards
("SFAS") No. 123. Stock or other equity-based compensation for non-employees is
accounted for under the fair value-based method as required by SFAS No. 123 and
Emerging Issues Task Force ("EITF") No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" and other related interpretations.
Under this method, the equity-based instrument is valued at either the fair
value of the consideration received or the equity instrument issued on the date
of grant. The resulting compensation cost is recognized and charged to
operations over the service period, which, in the case of stock options, is
generally the vesting period. As we utilize stock and stock options as one means
of compensating employees, consultants, and others, a change in accounting for
stock-based compensation would, under certain circumstances, result in a
material effect on our results of operations, but would not affect cash flow.
13
RESULTS OF OPERATIONS
REVENUES - Total revenues for the three and six months ended June 30,
2003 were $147,000 and $291,000, as compared to $1,430,000 and $2,755,000 during
the comparable 2002 periods. Revenues for 2003 were comprised entirely of
product sales reflecting direct Kerastick(R) sales to physicians as compared to
$56,000 and $106,000 of product sales in the three and six months ended June 30,
2002. The increase in 2003 product sales revenue results from DUSA's receipt of
100% of revenues on Kerastick(R) units sold to end-users primarily through our
distributor, Moore Medical Corporation, as compared to approximately 30% of the
net sales that we received as a royalty under our former collaboration agreement
during 2002. Product sales for the comparable three and six-month 2002 periods
also included rental income on the BLU-U(R) in the amount of $2,000 and $21,000,
respectively, which we did not receive in 2003 due to a change in the marketing
strategy of the BLU-U(R). Total revenues for the three and six month periods in
2002 also included research grant and milestone revenues of $496,000 and
$992,000, and research and development reimbursement of $878,000 and $1,658,000
that we earned under our collaboration agreement with our former marketing and
development partner.
As of June 30, 2003, 323 BLU-U(R) units were in place in physicians
offices, down slightly from 324 units at March 31, 2003 and 329 units at
December 31, 2002. Kerastick(R) sales to end-users were 1,914 and 3,756 for the
three and six months ended June 30, 2003, as compared to 2,202 and 4,002 for the
comparable 2002 periods. Management believes this decrease in 2003 and continued
low level of end-user sales is partly attributable to the transition of
marketing responsibilities from our former partner, including our focus on
developing an infrastructure to support marketing activities and implementation
of our own marketing strategy. See "Marketing and Sales."
14
COST OF PRODUCT SALES AND ROYALTIES - Cost of product sales and
royalties for the three and six months ended June 30, 2003 were $824,000 and
$1,577,000, respectively, as compared to $777,000 and $1,455,000 in 2002. A
summary of the components of cost of product sales and royalties is provided
below:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(UNAUDITED) (UNAUDITED)
- ------------------------------------------ ------------------------------------------
INCREASE INCREASE
2003 2002 (DECREASE) 2003 2002 (DECREASE)
- ------------ ------------ ------------ ------------ ------------ ------------
Product costs including internal
costs (e.g. customer service,
quality assurance, purchasing,
and other product support
operations) assigned to support
$ 620,000 $ 331,000 $ 289,000 products (1) $ 1,183,000 $ 635,000 $ 548,000
Costs incurred to ship, install
and service the BLU-U(R)in
71,000 186,000 (115,000) physicians offices 117,000 292,000 (175,000)
Depreciation on BLU-U(R)light
114,000 96,000 18,000 units 241,000 200,000 41,000
19,000 16,000 3,000 Royalty and supply fees (2) 36,000 32,000 4,000
- 91,000 (91,000) Net underutilization costs (3) - 183,000 (183,000)
- 57,000 (57,000) Deferred charges amortization (4) - 113,000 (113,000)
- ------------ ------------ ------------ ------------ ------------ ------------
Total cost of product sales and
$ 824,000 $ 777,000 $ 47,000 royalties $ 1,577,000 $ 1,455,000 $ 122,000
============ ============ ============ ============ ============ ============
1) Includes costs to support DUSA's manufacturing facility,
including the submission of the FDA supplement.
2) Royalty and supply fees are paid to our licensor, PARTEQ
Research and Development Innovations, the licensing arm of
Queen's University, Kingston, Ontario.
3) Underutilization costs commenced in 2001 and were fully
amortized as of December 31, 2002 based on agreements with our
third-party manufacturers due to orders falling below certain
previously anticipated levels.
4) Deferred charges amortization reflects consideration paid by
us in 2000 to amend our Supply Agreement with Sochinaz SA, the
manufacturer of the bulk drug ingredient used in Levulan(R).
Such deferred charges were fully amortized in 2002.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs for the
three and six month periods ended June 30, 2003 were $1,449,000 and $2,965,000,
as compared to $3,375,000 and $6,472,000 in the comparable 2002 periods. This
lower level of research and development costs in 2003 is attributable to the
absence of costs for co-sponsored projects that were developed in collaboration
in 2002 and previously reimbursed to us by our former marketing partner.
Co-
15
sponsored projects included Phase I/II studies using Levulan(R) PDT in the
treatment of persistent plantar warts and onychomycosis (nail fungus). These
projects have been delayed as we concentrate on increasing sales, and
implementing a new dermatology development program focused on indications that
use our approved Kerastick(R). Based on market research that was completed
during the quarter, we have decided to move forward with Phase II studies for
use of Levulan(R) PDT in acne and photo-damaged skin rather than pursuing a
broad area actinic keratoses (BAAK) treatment at this time, as we do not believe
this indication would have a major impact on sales. We have also submitted a
Section 510(k) premarket notification application to the FDA for use of the
BLU-U(R), without Levulan(R) PDT, to treat mild to moderate acne. The
development program also includes completing an FDA-mandated Phase IV long-term
AK tracking study, which should be completed in 2003, and funding of various
investigator studies involving the Kerastick(R). This strategy should keep us in
a strong financial position as we continue to implement activities to increase
revenues from the current approved products for AKs.
We have also been conducting Phase I/II studies in the treatment of
high-grade and low-grade dysplasia associated with Barrett's esophagus. Results
of the high-grade dysplasia (HGD) study as of January 2003, with 12 months of
follow-up data in 4 patients, and 6 months in 1 patient, showed a continued
complete ablation of high-grade dysplasia. The treatment has been well
tolerated, with no occurrence of strictures (circumferential scarring), and no
signs of mucosal overgrowth. In addition, in preparation for a pre-pivotal Phase
II clinical trial, we are preparing to carry out a small single-center pilot
Phase II clinical trial using DUSA's new proprietary light delivery device for
the treatment of high grade dysplasia. However, we do not plan to fund the
pre-pivotal Phase II or III clinical trials for this indication on our own, and
are soliciting potential partners for this indication, with the goal of
completing a partnership during 2003. Despite these efforts, there can be no
assurance that we will be able to consummate any collaboration, or whether we
will be able to obtain terms acceptable to us.
MARKETING AND SALES COSTS - Marketing and sales costs for the three and
six month periods ended June 30, 2003 were $533,000 and $1,063,000,
respectively. In the prior year, there were no marketing and sales expenses
incurred directly by us as all rights and activities associated with marketing
and sales of our products were the sole responsibility of our former partner. In
late 2002, following the termination of our collaboration with our former
marketing partner, we commenced marketing initiatives associated with having
full rights and responsibilities for our products. In addition, as of January 1,
2003, we reassigned resources that were functioning in research and development
roles to our marketing and sales function. In August 2003, DUSA hired a sales
executive and is planning to hire a small, dedicated Levulan(R) PDT sales team
to commence regional test marketing in late 2003. With success, DUSA plans to
expand the sales force significantly in 2004.
GENERAL AND ADMINISTRATIVE COSTS - General and administrative costs for
the three and six month periods ended June 30, 2003 were $1,680,000 and
$3,155,000, respectively, as compared to $1,501,000 and $2,693,000 in comparable
2002 periods. These increases are attributable to higher legal expenses
amounting to $903,000 and $1,586,000 during the current three and six month
periods, as compared to $396,000 and $734,000 in the comparable 2002 periods,
due primarily to
16
patent defense costs. Such patent defense issues are discussed below. It is
expected that legal expenses will remain at elevated levels as long as the
patent dispute continues. This higher legal expense level was offset, in part,
by lower staffing costs in 2003, due primarily to employee separations during
2002.
In April 2002, we received a copy of a notice issued by PhotoCure ASA
to Queen's University at Kingston, Ontario, alleging that Australian Patent No.
624985, which is one of the patents licensed by PARTEQ to us, relating to
5-aminolevulinic acid technology, is invalid. As a consequence of this action,
Queen's University has assigned the Australian patent to us so that we may
participate directly in this litigation. We have filed an answer setting forth
our defenses and a related countersuit alleging that certain activities of
PhotoCure and its marketing partner, Galderma S.A, infringe the patent. The case
is in its earliest stages so we are unable to predict the outcome at this time.
In March 2003, we received notice that our Dutch patent is being
formally challenged by an anonymous agent, and we filed a formal response to the
opposition. In May 2003, a hearing was held in the Dutch Patent Office with both
the anonymous agent and DUSA presenting technical arguments pertaining to the
validity of the Dutch patent. A final ruling by the Dutch patent board is
expected later in 2003. Although we believe that the potential impact of a
challenge in The Netherlands would be minimal, we plan to defend our patent at
this time.
INTEREST INCOME, NET - Interest income, net for the three and six month
periods ended June 30, 2003 was $527,000 and $1,093,000, as compared to $785,000
and $1,559,000 in the comparable 2002 periods. These decreases were attributable
to lower investable cash balances as we used cash to support our operating
activities, and lower yields. Interest income will continue to decline as our
investable cash balances are used to support our operating activities. During
the three and six month periods ended June 30, 2003, we incurred interest
expense of $17,000 and $34,000 on borrowings associated with the construction of
our new Kerastick(R) manufacturing facility, which has been capitalized in
property and equipment in the Condensed Consolidated Balance Sheet as of June
30, 2003. There was no interest incurred in the comparable 2002 periods.
NET LOSSES - For the three and six months ended June 30, 2003, the
Company incurred net losses of $3,811,000, or $0.27 per share, and $7,377,000,
or $0.53 per share, respectively, as compared to net losses of $3,438,000, or
$0.25 per share, and $6,305,000, or $0.45 per share, for the comparable periods
in 2002. These increased losses are due in part to the absence of research
revenue from our former collaborative partner offset, in part, by savings
realized through cost reductions. Such losses were within management's
expectations, and are expected to continue unless sales of our first products
increase significantly.
LIQUIDITY AND CAPITAL RESOURCES
We are in a strong cash position to continue to increase Levulan(R) PDT
marketing expenses, and fund our current research and development activities for
our Levulan(R) PDT/PD platform. Our
17
total assets were $52,235,000 as of June 30, 2003 compared to $60,950,000 as of
December 31, 2002. This decrease is primarily attributable to the funding of
2003 operating activities.
As of June 30, 2003 we had inventory of $1,037,000 as compared to
$1,189,000 as of December 31, 2002, representing finished goods and raw
materials. Also, as of June 30, 2003, we had net property, plant and equipment
of $4,792,000, as compared to $5,230,000 as of December 31, 2002, representing
costs associated with constructing our manufacturing facility, commercial light
units in the field, and other property, plant and equipment. The decrease in net
property, plant and equipment mainly reflects normal depreciation.
As of June 30, 2003, we had accounts receivable of $99,000 as compared
to $37,000 as of December 31, 2002, representing net sales associated with
Kerastick(R) sales.
As of June 30, 2003, we had current liabilities of $2,427,000, as
compared to $3,375,000 as of December 31, 2002. In May 2002, we entered into a
secured term loan promissory note ("Note") with Citizens Bank of Massachusetts
to fund the construction of our manufacturing facility and borrowed $1,900,000.
As of June 30, 2003, the total outstanding loan balance was $1,652,500, of which
$270,000 is current. Approximately $3,000,000 of the Company's United States
government securities are pledged as collateral to secure the loan. Prior to
expiration of the 360-day LIBOR-based rate for each year of the loan, we can
either continue to choose a LIBOR-based rate at that time, execute a one-time
conversion to a fixed rate loan, or repay the loan balance. As of June 30, 2003,
the interest rate on the Note was reduced to 2.755%. As this interest rate was
lower than the yield being generated by each of our United States government
securities, we decided to maintain the loan at this time.
We invest our excess cash in United States government securities, all
of which are classified as available for sale. These securities had an aggregate
cost of $35,134,000, and a current aggregate market value of $37,401,000 as of
June 30, 2003, resulting in a net unrealized gain on securities available for
sale of $2,267,000, which has been included in shareholders' equity. As of
December 31, 2002, government securities had an aggregate cost of $43,180,000
and an aggregate market value of $45,815,000, resulting in a net unrealized gain
of $2,635,000. Due to fluctuations in interest rates and depending upon the
timing of our need to convert government securities into cash to meet our
working capital requirements, some gains or losses could be realized. As of June
30, 2003, these securities had interest yields ranging from 3.96% to 7.13% and
maturity dates ranging from August 15, 2003 to February 15, 2007. As of December
31, 2002, these securities had interest yields ranging from 3.95% to 7.21% and
maturity dates ranging from January 21, 2003 to February 15, 2007.
We believe that we have sufficient capital resources to proceed with
our current programs for Levulan(R) PDT, and to fund operations and capital
expenditures for the foreseeable future, particularly with the current reduction
in research and development spending. We have invested our funds in liquid
investments, so that we will have ready access to these cash reserves, as
needed, for the funding of development plans on a short-term and long-term
basis.
18
As a result of the termination of our former dermatology collaboration
arrangement, we have reevaluated our operations and are minimizing research and
development and related general and administrative expenditures that are not
directly related to our core objectives for 2003. We are also implementing a
development program focused on dermatology indications that use our approved
Kerastick(R). See "Research and Development Costs."
We anticipate that the level of marketing and sales expense will
increase with the hiring of a sales executive in August 2003, and a small
targeted sales force over the balance of 2003. We may seek to expand or enhance
our business by using resources to acquire by license, purchase or other
arrangements, businesses, new technologies, or products, especially in
PDT-related areas. For the balance of the year, we are focusing primarily on
increasing the sales of the Levulan(R) Kerastick(R) and the BLU-U(R), and on
seeking a partner to help develop and market Levulan(R) PDT for the treatment of
dysplasia in patients with Barrett's esophagus.
We cannot accurately predict the level of revenues from sales of our
products. In order to maintain and expand continuing research and development
programs, we may need to raise additional funds through future corporate
alliances, financings, or other sources, depending upon the amount of sales we
receive.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
There have been no material changes to our contractual obligations and
other commercial commitments from those presented in our Annual Report on Form
10-K for the year ended December 31, 2002.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2002, the EITF reached conclusion on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." This consensus
provides guidance in determining when a revenue arrangement with multiple
deliverables should be divided into separate units of accounting, and, if
separation is appropriate, how the arrangement consideration should be allocated
to the identified accounting units. The provisions of EITF No. 00-21 are
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company will evaluate any new arrangements into which
it enters in accordance with this EITF.
INFLATION
Although inflation rates have been comparatively low in recent years,
inflation is expected to apply upward pressure on our operating costs. We have
included an inflation factor in our cost estimates. However, the overall net
effect of inflation on our operations is expected to be minimal.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We hold fixed income Unites States government securities that are
subject to interest rate market risks. We do not believe that the risk is
material at this time as we have apportioned our investments in short-term and
long-term instruments with maturities, up to five years, and we strive to match
the maturity dates of these instruments to our cash flow needs. A ten percent
decline in the average yield of these instruments would not have a material
effect on our results of operations or cash flows. As noted above, if
significant, sudden fluctuations in interest rates occur, losses could be
realized. We do not hold derivative securities. Accordingly, we do not believe
that there is a material market risk exposure with respect to derivative or
other financial instruments that would require disclosure under this item.
We currently have exposure to interest rate risk under a secured term
loan promissory note which we issued to fund the construction of our
manufacturing facility. This loan currently bears interest at a LIBOR-based
rate, and calls for an annual renewal on June 30th of each year through June 30,
2009 to either the applicable LIBOR-based rate or a one-time conversion to a
fixed rate loan. On June 30, 2003, the loan rate was reduced to the then current
360-day LIBOR-based rate of 2.755%. Our exposure to interest rate risk due to
changes in LIBOR is not expected to be material.
ITEM 4. CONTROLS AND PROCEDURES
Our management is responsible for the preparation, integrity and
objectivity of the financial statements and other information presented in this
report. Such financial statements have been prepared in accordance with
generally accepted accounting principals and reflect certain estimates and
adjustments by management. Our management maintains a system of internal
accounting and disclosure controls, and procedures which management believes
provide reasonable assurance that the transactions are properly recorded and our
assets are protected from loss or unauthorized use.
The integrity of the accounting and disclosure systems are based on
written policies and procedures, the careful selection and training of qualified
financial personnel, a program of internal controls and direct management
review. Our disclosure control systems and procedures are designed to ensure
timely collection and evaluation of information subject to disclosure, to ensure
the selection of appropriate accounting policies and to ensure compliance with
our accounting policies and procedures. The Audit Committee is composed solely
of independent directors and meets periodically with the independent auditors
and management to discuss accounting, financial reporting, auditing and internal
auditing matters. The independent auditors have direct and private access to the
Audit Committee.
As of June 30, 2003, an evaluation was performed under the supervision
and with the participation of our management, including the Chief Executive
Officer/Chief Financial Officer, regarding the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
our management, including the Chief Executive Officer/Chief Financial
20
Officer, believes that our disclosure controls and procedures are adequately
designed to ensure that the information that we are required to disclose in this
report has been accumulated and communicated to our management, including our
Chief Executive Officer/Chief Financial Officer, as appropriate, to allow timely
decisions regarding such required disclosure. There have been no significant
changes in our internal controls or in other factors that could significantly
affect internal controls subsequent to June 30, 2003.
FORWARD-LOOKING STATEMENTS
This report, including the Management's Discussion and Analysis,
contains various "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933 which represent our expectations or beliefs
concerning future events, including, but not limited to statements regarding
management's goal of becoming profitable, beliefs regarding adoption of our
therapy, expectations for continuing operating losses, expectations of
increasing staff, timing of a response from FDA regarding the 510(k)
application, effects of unanticipated changes in estimates, technology and
forecasts, belief concerning reasonableness of inventory values, factors which
could trigger impairment review, effect of an accounting change for stock-based
compensation, beliefs concerning the decrease in revenues and decision not to
pursue the BAAK indication, expectations for increased marketing and sales costs
and elevated levels of legal fees, beliefs regarding The Netherlands patent
litigation, expectations regarding levels of interest income and net losses,
requirements of cash resources, and potential impact on conversion of government
securities, need for additional funds for development, evaluation of
transactions under new accounting pronouncements, inflation, market risks and
controls and procedures. These forward-looking statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward-looking statements. These factors include, without
limitation, changing market and regulatory conditions, actual clinical results
of our trials, the impact of competitive products and pricing, the FDA approval
and market acceptance of our products, the maintenance of our patent portfolio
and ability to obtain competitive levels of reimbursement by additional
third-party payors, and other risks noted in our SEC filings from time to time,
including our Form 10-K for the period ending December 31, 2002, none of which
can be assured.
21
PART II- OTHER INFORMATION
Items 1, 3, and 5.
None.
Item 2. Changes in Securities and Use of Proceeds.
i) On May 2, 2003, DUSA issued 32,750 shares of unregistered common
stock, without par value, to two outside consultants for
compensation of services in reliance on Section 4(2) of the
Securities Act of 1933, as amended.
ii) On June 15, 2003, DUSA granted 11,666 shares of unregistered
common stock, without par value, to an outside consultant for
compensation of services in reliance on Section 4(2) of the
Securities Act of 1933, as amended. Such shares were issued in
July 2003.
Item 4. Submission of Matters to a Vote of Security Holders
Matters submitted to a vote of security holders of the Corporation at the Annual
Meeting of Shareholders held June 19, 2003 included the election of five (5)
directors and ratification of the selection of Deloitte and Touche LLP as the
independent auditors for the Corporation for 2003.
a) The following persons were elected to serve as directors of the
Corporation:
Votes Cast Votes Cast Broker
For Against Abstained Non-votes
---------- --------- --------- ---------
D. Geoffrey Shulman 12,080,079 175,438 -0- -0-
John H. Abeles 12,080,079 175,438 -0- -0-
David Bartash 12,080,079 175,438 -0- -0-
Richard C. Lufkin 12,080,079 175,438 -0- -0-
Jay Haft 12,080,079 175,438 -0- -0-
b) Shareholders ratified the selection of Deloitte & Touche LLP as the
independent auditors for the Corporation for 2003 as follows:
Votes Cast Votes Cast Broker
For Against Abstained Non-votes
---------- --------- --------- ---------
Deloitte & Touche LLP 12,210,775 40,298 4,443 -0-
22
Item 6. Exhibits and Reports on Form 8-K.
i) Exhibits
a) Exhibit 31.1 - Sarbanes-Oxley Section 302(a)
Certification.
b) Exhibit 32.1 - Certification Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
c) Exhibit 99.1 - Press Release dated August 12, 2003
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.
DUSA Pharmaceuticals, Inc.
By: /s/ D. Geoffrey Shulman
-----------------------
D. Geoffrey Shulman
President, Chief Executive Officer
(Principal Executive Officer), and
Chief Financial Officer (Principal
Financial Officer)
Date: August 12, 2003 By: /s/ Peter M. Chakoutis
----------------------
Peter M. Chakoutis
Controller (Principal Accounting
Officer)
23