<PAGE> 1
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 September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 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____ 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.
11,185,300 shares as of November 5, 1999
<PAGE> 2
PART I. - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash (interest bearing) $ 1,475,728 $ 1,213,757
U.S. government securities available for sale, at market
(cost- $9,560,916 and $5,502,841, respectively) 9,518,938 5,508,375
Accrued interest receivable 47,569 19,529
Other current assets 143,569 107,993
------------ ------------
11,185,804 6,849,654
FIXED ASSETS, NET 422,180 291,021
DEPOSITS ON EQUIPMENT 122,555
------------ ------------
$ 11,607,984 $ 7,140,675
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 132,878 $ 266,737
Accrued payroll 368,877 410,164
Other accrued charges 240,129 47,628
------------ ------------
741,884 724,529
------------ ------------
SHAREHOLDERS' EQUITY
Capital Stock
Authorized: 100,000,000 shares of which 40,000,000
shares are designated as common stock, no par, and 60,000,000
shares issuable in series or classes
Issued and outstanding: 11,127,449 and 9,365,950
shares of common stock, no par; respectively 44,976,784 36,828,579
Deficit accumulated during the development stage (34,068,706) (30,417,967)
Net unrealized gain (loss) on U.S. government securities
available for sale (41,978) 5,534
------------ ------------
10,866,100 6,416,146
------------ ------------
$ 11,607,984 $ 7,140,675
============ ============
============ ============
</TABLE>
See the accompanying notes to the Consolidated Financial Statements
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DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
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<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
RESEARCH AND DEVELOPMENT COSTS $ 709,307 $ 892,318 $ 2,598,989 $ 3,673,383
------------ ------------ ------------ ------------
OPERATING COSTS
General and administration 593,489 321,038 1,409,317 1,329,037
Depreciation and amortization 18,905 18,180 55,198 50,568
------------ ------------ ------------ ------------
TOTAL OPERATING COSTS 612,394 339,218 1,464,515 1,379,605
TOTAL COSTS 1,321,701 1,231,536 4,063,504 5,052,988
NON-OPERATING REVENUE
Interest income 129,566 112,122 412,765 407,388
Gain on foreign currency exchange -- -- -- --
Gain on sale of U.S. government securities -- -- -- --
Unrealized loss on U.S. government securities
available for sale -- -- -- --
------------ ------------ ------------ ------------
129,566 112,122 412,765 407,388
------------ ------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 1,192,135 1,119,414 3,650,739 4,645,600
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE -- -- -- --
------------ ------------ ------------ ------------
NET LOSS $ 1,192,135 $ 1,119,414 $ 3,650,739 $ 4,645,600
OTHER COMPREHENSIVE (INCOME) LOSS
Net unrealized (gain) loss on U.S. government
securities available for sale (9,913) 8,888 47,512 35,627
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ 1,182,222 $ 1,128,302 $ 3,698,251 $ 4,681,227
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ 0.11 $ 0.12 $ 0.33 $ 0.50
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 10,979,708 9,365,950 10,939,489 9,365,950
============ ============ ============ ============
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
FEBRUARY 21,
1991 (DATE OF
INCORPORATION) TO
SEPTEMBER 30,
1999
(UNAUDITED)
<S> <C>
RESEARCH AND DEVELOPMENT COSTS $ 29,166,980
------------
OPERATING COSTS
General and administration 10,819,480
Depreciation and amortization 258,740
------------
TOTAL OPERATING COSTS 11,078,220
TOTAL COSTS 40,245,200
NON-OPERATING REVENUE
Interest income 5,826,631
Gain on foreign currency exchange 27,204
Gain on sale of U.S. government securities 322,659
Unrealized loss on U.S. government securities
available for sale (62,832)
------------
6,113,662
------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 34,131,538
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (62,832)
NET LOSS $ 34,068,706
OTHER COMPREHENSIVE (INCOME) LOSS
Net unrealized (gain) loss on U.S. government
securities available for sale 41,978
------------
COMPREHENSIVE LOSS $ 34,110,684
============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ 4.98
============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 6,843,211
============
============
</TABLE>
See the accompanying notes to the Consolidated Financial Statements
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DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
FEBRUARY 21,
1991 (DATE OF
NINE MONTHS NINE MONTHS INCORPORATION)
ENDED ENDED TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS USED IN OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (3,650,739) $ (4,645,600) $ (34,068,706)
Amortization of premiums and accretion of
discounts on U.S. government securities
available for sale and investment securities, net (127,042) 238,164 55,504
Depreciation and amortization 55,198 50,568 258,740
Loss on foreign currency exchange -- (2,059) (27,204)
Vesting of non-employee options 84,000 -- 165,586
Issue of additional shares and warrants (Note 9) 152,495 -- 152,495
Gain on sale of U.S. government securities
available for sale -- -- (322,659)
Unrealized loss on U.S. government securities
available for sale -- -- 62,832
Cumulative effect of change in accounting principle -- -- (62,832)
Write-off of intangible assets -- -- 307,519
Compensation expense resulting from extension of
outstanding stock options terms -- -- 557,260
Changes in other assets and liabilities impacting
cash flows from operations:
Accrued interest receivable (28,040) 54,360 (47,569)
Other current assets (35,576) (64,873) (143,569)
Accounts payable (133,859) (379,722) 132,878
Accrued payroll and other charges 151,214 (26,158) 609,006
License agreement obligations -- -- (12,203)
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (3,532,349) (4,775,320) (32,382,922)
------------- ------------- -------------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Purchases of U.S. government securities available for
sale and investment securities (14,131,033) (9,025,941) (129,089,879)
Proceeds from maturing U.S. government securities
available for sale and investment securities 10,200,000 10,250,000 66,020,000
Proceeds from sale of U.S. government securities
available for sale -- -- 53,776,118
Intangible assets -- -- (193,022)
Purchases of fixed assets (21,023) (58,187) (376,110)
Deposits on equipment (165,334) (287,889)
Advances by a former parent -- -- (2,867,900)
Repayment of advances to former parent -- -- 2,867,900
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (4,117,390) 1,165,872 (10,150,782)
------------- ------------- -------------
</TABLE>
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DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
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<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
FEBRUARY 21,
1991 (DATE OF
NINE MONTHS NINE MONTHS INCORPORATION)
ENDED ENDED TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES
<S> <C> <C> <C>
Stock offering costs $ (296,983) $ -- $ (5,345,238)
Issuance of common stock and underwriters options 8,208,693 -- 51,611,509
Payment received on note receivable from director -- -- 68,047
Redemption of option held by former parent -- -- (2,250,000)
Receipt of Section 16(b) common stock profits -- -- 17,125
Payment on license agreement obligations -- -- (119,215)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,911,710 0 43,982,228
------------ ------------ ------------
EFFECT OF EXCHANGE RATES ON CASH -- 2,059 27,204
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH 261,971 (3,607,389) 1,475,728
CASH AT BEGINNING OF PERIOD 1,213,757 4,033,267 --
------------ ------------ ------------
CASH AT END OF PERIOD $ 1,475,728 $ 425,878 $ 1,475,728
============ ============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Issuance of common stock for
promissory note from
former parent $ 150,000
============
License agreement obligations incurred in the
acquisition of an intangible asset $ 131,418
============
Deferred stock offering costs offset against common
stock $ 5,345,238
============
Note receivable from director originating upon
exercise of options for common stock $ 68,047
============
Issuance of common stock and warrants as
compensation to placement agent (note 9) $ 1,805,878
============
Interest paid $ 12,594
============
</TABLE>
There were no income tax payments made during the periods.
See the accompanying notes to the Consolidated Financial Statements
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DUSA PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The Consolidated Balance Sheets as of September 30, 1999, the Consolidated
Statements of Operations for the three-month and nine-month periods ended
September 30, 1999, and 1998 and for the period from February 21, 1991,
(date of incorporation) to September 30, 1999, and the Consolidated
Statements of Cash Flows for the nine-month periods ended September 30,
1999, and 1998 and for the period from February 21, 1991, (date of
incorporation) to September 30, 1999, have been prepared by the Company,
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and changes in cash flows as of
September 30, 1999, and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the Company's December 31,
1998 audited consolidated financial statements and notes thereto.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, DUSA Pharmaceuticals New York,
Inc. All significant intercompany accounts have been eliminated on
consolidation.
2. The Company's United States government securities available for sale
consist of securities of the United States government, and its agencies,
with interest rates and yields ranging from 4.97% to 5.36%, and maturity
dates ranging from October 15, 1999 to September 21, 2000.
3. Basic net loss per common share is based on the weighted average number of
shares outstanding during each period. Certain common stock issuances
(2,200,000) were made at prices less than the initial public offering
price. Accordingly, the associated shares are included in the calculation
of basic net loss per share as if they were outstanding for the entire
period. None of the stock options and warrants are included in the
computation of the weighted average number of shares outstanding for
diluted net loss per common share during the period as the effect would be
antidilutive.
4. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. As required, the Company adopted SFAS No.
133 in the quarter ended March 31, 1999. The adoption did not have a
material effect on the consolidated financial statements.
5. The Company has entered into a series of agreements for research projects
and clinical studies. As of September 30, 1999, future payments to be made
pursuant to these agreements, under certain terms and conditions, total
approximately $423,360 for the remainder of 1999.
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<PAGE> 7
6. On February 25, 1999, the Company entered into a partial termination
agreement with Lumenetics, Inc. ("Lumenetics") whereby in light of the
employment of the principals of Lumenetics by DUSA, the Company agreed to
terminate certain provisions of the Consulting and Development Agreement
dated October 14, 1997. Under the new agreement, all stock options
previously granted to Lumenetics will remain in force and vest according to
the terms of the original agreement.
7. On January 15, 1999, the Company issued 1,500,000 shares of its common
stock in a private placement pursuant to Regulation D of the Securities Act
of 1933 at $5.00 per share. The Company received net proceeds of
$7,223,740. An additional 130,435 shares of common stock were issued as
commission and non-accountable expense allowance to the placement agent.
Additional compensation was paid to the placement agent in 163,043
five-year warrants each of which are exercisable into one share of common
stock at $5.00 per share. These shares and warrants have been valued at
$1,805,878 and have been recorded as stock offering costs.
Since the Form S-3 Registration Statement which was filed to register
the shares in the private placement was not yet effective as of June 1,
1999, the Company was obligated to issue and did issue 15,000 shares of
common stock to the investors and 1,630.43 additional warrants to the
placement agent, i.e. 1% of the shares issued to the investors and 1% of
the warrants issued to placement agent. These warrants have the same terms
and conditions as the original placement agent warrants. These shares and
warrants have been valued at $152,495 and both have been recorded as part
of general and administration costs in the consolidated statements of
operations.
8. Under the terms of the 1996 Omnibus Plan as amended, each person who is a
continuing director following the Annual Meeting of Shareholders
automatically receives 10,000 non-qualified stock options. Consequently on
June 11, 1999 the Company granted a total of 50,000 non-qualified stock
options to the directors to purchase the common stock of the Company at
$9.69 per share. The exercise price of such options is the closing stock
market price on the date of the grant.
9. The Company entered into an Extension of Research Agreement effective April
1, 1999 with PARTEQ Innovations ("PARTEQ"). As partial consideration, the
Company granted options to purchase 10,000 shares of common stock of the
Company at an exercise price of $9.25 per share. These options have a term
of 10 years and vest at a rate of 25% each year over four years on the
anniversary dates of the granting of the options. These options have been
valued at $84,000 and have been included in the Consolidated Statements of
Operations as part of research and development costs. In addition to the
options, the Company agreed to provide to PARTEQ cash funding support in
the amount of CDN$79,000, CDN$50,000 of which was paid on June 25, 1999 and
the balance of which is due on April 1, 2000.
10. During the three months ended September 30, 1999, 111,064 warrants and
options were exercised at prices ranging from US$5.00 to US$7.70 per share.
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<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Notes to the Consolidated
Financial Statements for the year ended December 31, 1998 and for the three and
nine-month periods ended September 30, 1999, and September 30, 1998,
respectively. DUSA Pharmaceuticals, Inc. is a development stage pharmaceutical
company engaged primarily in the research and development of a light sensitive
drug named 5-aminolevulinic acid, or ALA, used in combination with appropriate
light devices in order to detect or treat a variety of human disorders. The
trademark for DUSA's brand of ALA is Levulan(R). When Levulan(R) is used and
followed by exposure to light to produce a therapeutic effect the technology is
called photodynamic therapy or PDT. When Levulan(R) is used and followed by
exposure to light to detect medical conditions the technology is called
photodetection or PD. Recently, the Company received letters of "approvability"
from the United States Food and Drug Administration for its first Levulan(R) New
Drug Application ("NDA") and Pre-Market Approval ("PMA") application for the
clinical version of its first light device product, the BLU-U(TM), which will be
used to treat actinic keratoses (pre-cancerous skin lesions) ("AKs") of the face
and scalp. However, because the commercial light unit DUSA intends to market is
a modified version of the unit used in the clinical studies, DUSA intends to
file an amendment to the PMA covering these modifications during the fourth
quarter of this year. DUSA expects that the amendment will be approved in the
normal course of the FDA's review process. Final approval of the NDA and the PMA
will be required in order to market the drug and light products together.
The FDA approvable letter states that final approval of the NDA is
dependent upon DUSA's submission of revised labeling for the product that must
be approved by the FDA. In addition, all of DUSA's third-party manufacturers
must meet FDA's "good manufacturing practices" (GMP) regulations prior to
receipt of marketing approval from the FDA. During the quarter, DUSA learned
that the agency reinspected the third-party manufacturer of bulk drug and on
November 4, 1999, was informed that the agency has now determined that the
facilities are acceptable. The Company has submitted revised labeling to the FDA
and is awaiting a response to the
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<PAGE> 9
Company's revisions. On November 5, 1999, the Company presented its NDA and PMA
data to an FDA panel of experts of the Dermatologic and Ophthalmic Drugs
Advisory Committee. As the FDA had already designated DUSA's NDA as approvable,
the agency did not ask the panel to vote on this issue. Rather, the panel made a
number of suggestions with respect to labeling and post-marketing studies which
the agency will likely consider.
Financial Condition
DUSA's total assets were $11,607,984 as of September 30, 1999 compared to
$7,140,675 as of December 31, 1998. Of these amounts, DUSA held cash and United
States government securities at a fair market value of $10,994,666 as of
September 30, 1999, as compared to $6,722,132 as of December 31, 1998. The
increases are the direct result of the completion of a private placement of the
Company's shares completed in January, 1999 which raised net proceeds of
$7,223,740 (see Note 7 to the Notes to Consolidated Financial Statement).
Management expects that assets will decline until the Company successfully makes
the transition to profitability after approval and launch of its first product,
or concludes and receives funds as part of a corporate alliance and/or from
other financing activities. As of September 30, 1999, the Company had
outstanding current liabilities of $741,884 as compared to $724,529 as of
December 31, 1998. As of September 30, 1999, the Company had an accumulated
deficit of $34,068,706. Since its inception the Company has had no long-term
debt.
The profitability of the Company is dependent upon receipt of final
marketing approval of Levulan(R) PDT for AKs by the FDA and the ability of the
Company to develop a market for its products. As stated above, DUSA is working
towards NDA approval of its first product. However, the Company cannot be sure
that a successful market will develop for its new technology. The Company is
conducting serious negotiations concerning potential collaborative licensing
arrangements with pharmaceutical companies with marketing, sales and
distribution capability to promote its products.
As planned, the Company has made capital expenditures in preparation for
the manufacture and commercialization of its KERASTICK(TM) and BLU-U(TM) which
total $287,889 as of september 30, 1999. The Company expects to make additional
capital expenditures, including leasehold improvements, of approximately
$200,000 for the balance of year ending december 31, 1999.
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<PAGE> 10
At this time, DUSA's research and development program includes Levulan(R)
photodynamiC therapy and photodetection for several medical uses, including:
- actinic keratoses - hair removal
- bladder cancer - endometrial ablation
- acne - cancer or dysplasia of the cervix
A variety of other conditions, such as restinosis, as recently reported, may
also be candidates for future development.
DUSA'S Levulan(R) PDT research and development program continued at
modest levels of support during the quarter while the Company focuses its
resources on manufacturing scale-up marketing, and issues relating to obtaining
final FDA approval of its initial product. In early October, 1999, the Company
initiated a Phase II trial for the treatment of facial acne with Levulan(R) PDT
using blue light. Also, the Company's management is considering new protocols
for Phase II clinical trials for the bladder cancer detection indication.
Investigator studies relating to endometrial ablation and dysplasia of the
cervix are also continuing. However, substantial research and testing will be
required in order to develop these indications into commercial products.
Funding of additional bladder cancer detection, acne treatment and hair
removal studies and other potential indications beyond the Company's current
commitments will be carefully controlled until a dermatology license agreement
or other financing is completed in order for the Company to maintain its
operations and prepare for commercialization of its initial products, namely the
Levulan(R) Kerastick(TM) brand applicator and the BLU-U(TM) brand light device.
Full development and testing of all potential indications which are currently
under development would require additional funding. The timing of future
expenditures will be dependent on various factors, including receipt of final
approval for marketing of Levulan(R) PDT for AK, progress on the Company's other
research and development programs, the results of preclinical and clinical
trials, the timing of regulatory marketing approvals, competitive developments,
payments under any collaborative arrangements, if any, entered into by the
Company and the availability of alternate financing. While the FDA letter of
approvability for Levulan(R) PDT in the treatment of AKs moves the Company
closer to product launch, there can be no guarantee that DUSA's current
resources will be sufficient to enable the Company to obtain final regulatory
marketing approval. Nor can the Company assure that it has sufficient funds to
market any product for any indications currently
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<PAGE> 11
under development. Therefore, it is difficult to predict the timing or magnitude
of the revenues from the marketing of the Company's product or whether any such
revenues will be realized.
If sufficient funds are available, the Company may also use its
resources to acquire by license, purchase or other arrangements, businesses,
technologies, or products that enhance or expand the Company's business. The
Company is actively seeking relationships with pharmaceutical or other suitable
organizations to market the Company's products and technologies, and/or to
provide funding for research projects.
Results of Operations
The Company has had no sales to date. Interest income, earned primarily
on United States government securities, increased slightly to $129,566 for the
three-month period ended September 30, 1999, as compared to $112,122 for the
three-month period ended September 30, 1998. Interest income will decrease as
funds are utilized to support DUSA's research and development efforts and
scale-up for commercialization including a build-up of inventory of
Kerastick(TM) and BLU-U(TM) to prepare for launch subsequent to approval. This
trend is expected to continue throughout the Company's development stage, unless
the Company raises funds by concluding a strategic alliance or other financing
activities. Interest income for the cumulative period from February 21, 1991
(date of incorporation) to September 30, 1999 was $5,826,631.
Research and development costs for the three-month period ended
September 30, 1999 decreased to $709,307 from $892,318 for the comparable
three-month period ended September 30, 1998 as the Company continues to conserve
its funds while it awaits FDA approval. Should the Company conclude a corporate
alliance or other financing activity, it intends to accelerate research and
development funding.
Operating expenses increased significantly during the quarter to
$612,394 for the three-month period ended September 30, 1999, from $339,218 for
the three-month period ended September 30, 1998. The increase is due to the
addition of expenses related to DUSA's Massachusetts office and costs related to
strategic alliance negotiations. Operating expenses are expected to continue to
increase as the Company scales up the manufacturing for the commercial
production of Levulan(R), hires additional personnel, including executive and
director level
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<PAGE> 12
personnel, and begins to build inventory in anticipation of FDA approval.
As a result of the Company's on-going efforts to control research and
development spending during the FDA approval process, the Company incurred a net
loss of $1,192,135, or $0.11 per share, for the three-month period ended
September 30, 1999, as compared to a net loss of $1,119,414, or $0.12 per share,
for the three-month period ended September 30, 1998. Net losses for the
cumulative period from February 21, 1991 (date of incorporation) to September
30, 1999 were $34,068,706, or $4.98 per share.
Liquidity and Capital Resources
The Company's United States government securities available for sale
have an aggregate cost of $9,560,916 and a current aggregate market value of
$9,518,938 as of September 30, 1999, resulting in a net unrealized loss on
securities available for sale of $41,978 which has been included in the
shareholders' equity. Some losses could be realized, depending upon the timing
of the Company's need to convert government securities into cash to meet its
working capital requirements. As of September 30, 1999, the Company's securities
had interest rates and yields ranging from 4.97% to 5.36%, and maturity dates
ranging from October 15, 1999 to September 21, 2000.
During the quarter DUSA received $602,000 upon the exercise of warrants
and/or options which have been registered on a Form S-3 which became effective
June 18, 1999. (See Note 7 to the Notes to the Consolidated Financial
Statements). The funds will be used for working capital. The Company may receive
proceeds of up to an additional $3,208,367.15 from the conversion of the
remaining options and warrants. The amount that the Company receives will depend
upon the exercise price of the warrants and the options and the extent to which
they are exercised.
The Company believes it has sufficient capital resources to proceed
with its current development program for Levulan(R) PDT/ PD through 2000 if the
Company does not reallocate resources to marketing activities related to the AK
launch. Management has controlled research and development spending in 1999 to
enhance the Company's ability to complete the regulatory process. Full
development and testing of any potential indications which are currently under
development would require additional funding. See "Financial Condition". The
Company has invested its funds in liquid investments, so that it will have ready
access to its cash reserves, as needed, for the funding of its development plans
on a short-term and long-term basis.
-12-
<PAGE> 13
SFAS No. 133
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. As
required, the Company adopted SFAS No. 133 in the quarter ended March 31, 1999.
The adoption did not have a material effect on the consolidated financial
statements.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs having been
written using two digits, rather than four, to define the applicable year. Any
of our computers, computer programs, and administrative equipment that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. While DUSA's relatively new systems have been tested and
found to be Year 2000 compliant, DUSA cannot predict whether any of the systems
of third-parties with whom we do business do not contain undetected errors or
defects associated with the Year 2000 date functions that may have a material
adverse effect on its business, results of operation or financial condition. If
any of DUSA's systems that have date-sensitive software use only two digits,
system failures or miscalculations may result causing disruptions to our
operations, including among other things, a temporary inability to process
transactions, sending and receiving electronic data with our third-party
suppliers, and engaging in similar normal business activities. DUSA believes
that it has replaced its own personal computers and servers which were not Year
2000 compliant.
We have not completed the process of obtaining certifications from
unrelated third-parties but expect to be complete before the end of 1999. In the
event such certifications are not available, we are developing plans to evaluate
the potential impact on our operations if such third-parties are unable to
perform their obligations. To the extent that such third-parties are materially
adversely affected by the year 2000 issue, we could experience disruptions and
delays in our operations and in receipt of supplies of our drug or light
devices. These events could negatively impact our research and development
activities and our revenues of any products which may have been commercialized
by that date.
-13-
<PAGE> 14
The Company believes that it is devoting the necessary resources to
identify and resolve significant Year 2000 issues. The costs incurred in
addressing Year 2000 compliance are not considered at this time to be material
and will be expensed as incurred.
Inflation
Although inflation rates have been comparatively low in recent years,
inflation is expected to apply upward pressure on the operating costs of the
Company. The Company has included an inflation factor in its cost estimates,
however, the overall net effect of inflation on the operations of the Company
should be minimal.
Forward-Looking Statements
The foregoing Management Discussion and Analysis contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1993 which represent the Company's expectations or beliefs concerning
future events. These statements refer to management's expectations of regulatory
approval of its drug and commercial light device after a PMA amendment is filed
and final labeling is approved, the commencement of marketing and transition to
profitability, conclusion of and funding from a corporate alliance or financing
activity, the level of support for its research and development program,
expectations for additional capital expenditures, the sufficiency of the
Company's cash flow and assets for the Company's future liquidity and capital
resource needs, expectations of potential future indications, conversion of
options and warrants, and the use of any proceeds derived from such conversion,
the decline of assets and interest income and increase in operating expenses,
and the potential adverse effect from Year 2000 computer problems. 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 stock market
conditions, availability of suitable light sources and drug supplies, results of
its clinical trials, the impact of competitive products and pricing, and the
timely development, FDA approval and market acceptance of the Company's
products, and uncertainties of concluding negotiations with corporate alliance
partners, none of which can be assured. Results actually achieved may differ
materially from expected results included in these statements as a result of
these or other factors identified in DUSA's filings with the SEC from time to
time.
-14-
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company holds fixed income U.S. government securities as described
above in Item 2 which are subject to interest rate market risks. See "Liquidity
and Capital Resources." DUSA does not believe that the risk is material as it
makes an effort to match the relatively short-term maturities of these
securities with its cash flow needs.
PART II- OTHER INFORMATION
Item 1-5.
None.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits 27 - Financial Data Schedule, which is submitted
electronically to the Securities and Exchange Commission for
information only and not filed.
b) There were no Reports on Form 8-K filed during the quarter.
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
GEOFFREY SHULMAN, MD, FRCPC
PRESIDENT, CHIEF EXECUTIVE OFFICER,
AND CHIEF FINANCIAL OFFICER
Dated: November 8, 1999
-15-
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF
OPERATIONS AND CONSOLIDATED STATEMENTS OF CASH FLOWS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE FISCAL QUARTER ENDING
SEPTEMBER 30, 1999.
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