BUILDING
VALUE
THROUGH
PROGRESS
(L O R U S LOGO)
L O R U S THERAPEUTICS INC.
THIRD QUARTER
December 1, 2002 to February 28, 2003
LETTER TO SHAREHOLDERS
Dear Shareholders:
We are very pleased to review with you the operating highlights for the third
quarter of 2003.
Lorus reached a milestone in the quarter by recording our first ever
revenue in February from the sale of Virulizin(R) to our Mexico distributor
Mayne Pharma.
Lorus continued to advance the clinical programs in the third quarter. We
expanded the ongoing phase II clinical trial of our lead antisense drug,
GTI-2040, in renal cell carcinoma to six major oncology centers in the United
States (U.S.).
The U.S. National Cancer Institute (NCI) has approved protocols for six
additional cancer indications in the multiple phase II clinical trial program
with GTI-2040. The indications include breast cancer, colon cancer, non-small
cell lung cancer, acute myeloid leukemia, prostate cancer, and a range of solid
tumors.
The U.S. Food and Drug Administration (FDA) awarded orphan drug status to
GTI-2040 for the treatment of advanced renal cell carcinoma. This status allows
the FDA to help facilitate the drug's development process by providing financial
incentives and granting seven years of market exclusivity in the U.S.
independent of patent protection upon approval of the drug in the U.S.
Lorus made significant advances with its lead immunotheraphy drug,
Virulizin(R). Subsequent to the quarter end, a patent was allowed by the United
States Patent and Trademark Office (USPTO) titled "Immunomodulating Compositions
for the Treatment of Immune System Disorders". This is the third U.S. Patent
allowance for Virulizin(R), and it significantly broadens protection to include
methods for treatment of a variety of different cancers.
The Mexican Patent Office allowed Lorus a patent to protect the
immunomodulator composition, process for preparation and use of Virulizin(R) for
the treatment of cancer. The allowance is critically important to our strategic
plan for maximizing the value of Virulizin(R) in our first commercial
marketplace.
Dr. Robert Capizzi was appointed to the board of directors in January. Dr.
Capizzi has served on and chaired various boards of the U.S. National Institutes
of Health, the American Cancer Society, national and international professional
societies, and scientific advisory boards of multinational pharmaceutical
companies. He has also lectured extensively and is the author and/or co-author
of several hundred publications and presentations of original research and
review articles in journals, periodicals and textbooks.
Lorus made an important addition to the senior management team with the
appointment of Mr. Bruce Rowlands to the position of Senior Advisor. Mr.
Rowlands brings considerable industry experience in the areas of corporate
finance, institutional equity sales and investor communications. Most recently,
he served as vice president and director at Dominick & Dominick Securities
Canada, an affiliate of Dominick & Dominick LLC in New York City.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following information should be read in conjunction with the unaudited
consolidated financial statements and notes prepared in accordance with Canadian
generally accepted accounting principles (GAAP) in this quarterly report, and
should also be read in conjunction with the audited consolidated financial
statements and notes, and management's discussion and analysis contained in the
Company's
annual report for the year ended May 31, 2002. All amounts are expressed in
Canadian dollars unless otherwise noted.
RESULTS OF OPERATIONS
REVENUES
Lorus has recorded its first revenue from the sale of Virulizin(R) in Mexico in
the quarter. The Company has incurred annual operating losses since inception
related to the research, manufacturing, and clinical development of its
proprietary compounds. Revenue from the sale of Virulizin(R) will partially
offset future research and development costs, but losses will continue as Lorus
further invests in its drug development programs.
RESEARCH AND DEVELOPMENT
Research and development expenses for the third quarter of fiscal 2003 increased
to $2,876,000 compared to $1,872,000 for the same quarter last year. For the
nine months ended February 28, 2003, research and development expenses increased
to $9,246,000 compared to $6,107,000 for the same period last year. Cost
increases in fiscal 2003 can be attributed primarily to higher clinical trial
costs for the ongoing pivotal Phase III trial of Virulizin(R) for the treatment
of advanced pancreatic cancer and an expanded GTI-2040 phase II trial in
patients with renal cell carcinoma.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the third quarter of fiscal 2003
decreased to $960,000 compared to $1,209,000 for the same quarter last year. For
the nine months ended February 28, 2003, general and administrative expenses
decreased to $3,060,000 compared to $3,854,000 for the same period last year.
The decrease in both periods was due mainly to lower use of external advisory
services, and ongoing cost containment.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the third quarter of fiscal 2003 decreased to
$224,000 from $458,000 for the same quarter last year. For the nine months ended
February 28, 2003, depreciation and amortization expenses decreased to $483,000
from $1,480,000 during the same period last year. In both periods, the decrease
was due mainly to the adoption of the new CICA accounting pronouncement for
goodwill and other intangible assets whereby the Company ceased amortizing
goodwill on June 1, 2002.
INTEREST INCOME
Interest income for the third quarter of fiscal 2003 decreased to $258,000 from
$511,000 for the same quarter last year. For the nine months ended February 28,
2003, interest income decreased to $942,000 from $1,674,000 for the same period
last year. These decreases can be attributed primarily to lower cash and
short-term investments balances in fiscal 2003.
NET LOSS
Net loss for the third quarter ended February 28, 2003 totaled $3,802,000
($0.026 per share) compared to a loss of $3,028,000 ($0.021 per share) for the
same quarter last year. The loss was $11,847,000 ($0.082 per share) for the
first nine months of fiscal 2003 compared to $9,767,000 ($0.068 per share) for
the comparable period last year. The increase in net loss relates primarily to
higher level of activities with the Virulizin(R) Phase III clinical trial, the
expanded GTI-2040 phase II clinical trial and lower interest income, partially
offset by lower administrative costs from cost conservation efforts and the
ceasing of amortization of goodwill in accordance with the adoption of a new
accounting pronouncement effective June 1, 2002. On a comparable basis, the loss
for the three months and nine months ended February 28, 2002 would have been
$2,664,000 ($0.02 per share) and $8,676,000 ($0.06 per share) respectively after
adjustment to remove the amortization of goodwill.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Lorus has financed its operations and technology acquisitions
primarily from equity financing, the exercise of warrants and stock options, and
interest income on funds held for future investment. The Company believes that
its available cash, cash equivalents and short-term investments, and the
interest earned thereon, should be sufficient to finance its operations and
capital needs for at least twelve months.
OPERATING CASH REQUIREMENTS
Lorus' cash burn (cash used in operating activities) for the third quarter of
fiscal 2003 increased to $3,747,000 compared to $1,885,000 for the same quarter
last year. For the nine months ended February 28, 2003 the cash burn increased
slightly to $8,934,000 from $8,910,000 for the comparable period last year. The
increase in the quarter is due mainly to higher product development and clinical
trial costs in the quarter, partially offset by lower current liabilities at
February 28, 2003.
CASH POSITION
At February 28, 2003 Lorus had cash and cash equivalents and short-term
investments totaling $27.7 million compared to $37.8 million at May 31, 2002.
Working capital was $24.3 million at February 28, 2003 compared to $35.6 million
at May 31, 2002.
/s/ Jim A. Wright
DR. JIM A. WRIGHT
Chief Executive Officer
FORWARD LOOKING STATEMENTS
Except for historical information, this quarterly report contains
forward-looking statements, which reflect the Company's current expectation
regarding future events. These forward-looking statements involve risks and
uncertainties, which may cause actual results to differ materially from those
statements. Those risks and uncertainties include, but are not limited to,
changing market conditions, the successful and timely completion of clinical
studies, the establishment of corporate alliances, the impact of competitive
products and pricing, new product development, uncertainties related to the
regulatory approval process, and other risks detailed from time-to-time in the
Company's ongoing quarterly filings, annual information form, annual reports and
20-F filings. We undertake no obligation to publicly update or revise any
forward looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward looking events in this quarterly report might not occur.
For more information:
GRACE TSE
Lorus Therapeutics Inc.
T 416 798 1200 ext.380
F 416 798 2200
E ir@lorusthera.com
www.lorusthera.com
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
(unaudited)
Period
from
THREE Three NINE Nine inception
MONTHS months MONTHS months Sept. 5,
ENDED ended ENDED ended 1986 to
FEB. 28, Feb. 28, FEB. 28, Feb. 28, Feb. 28,
(Amounts in 000's except for per common share data)(Canadian 2003 2002 2003 2002 2003
Dollars) ----------------------------------------------------
Revenues
Product sales (note 2) 27 - 27 - 27
Operating expenses
Cost of sales 27 - 27 - 27
Research and development 2,876 1,872 9,246 6,107 55,755
General and administrative 960 1,209 3,060 3,854 31,648
Depreciation and amortization 224 458 483 1,480 7,884
----------------------------------------------------
OPERATING LOSS 4,060 3,539 12,789 11,441 95,287
INTEREST INCOME (258) (511) (942) (1,674) (8,571)
----------------------------------------------------
LOSS FOR THE PERIOD 3,802 3,028 11,847 9,767 86,716
Deficit, beginning of period 82,914 68,121 74,869 61,382 -
----------------------------------------------------
DEFICIT, END OF PERIOD $ 86,716 $ 71,149 $ 86,716 $ 71,149 $ 86,716
====================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ 0.02 $ 0.02 $ 0.08 $ 0.07
=========================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING USED
IN THE CALCULATION OF BASIC AND DILUTED LOSS PER SHARE 144,433 143,898 144,424 143,170
=========================================
See accompanying notes to unaudited consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Period
from
THREE Three NINE Nine inception
MONTHS months MONTHS months Sept. 5,
ENDED ended ENDED ended 1986 to
FEB. 28, Feb. 28, FEB. 28, Feb. 28, Feb. 28,
(Amounts in 000's)(Canadian Dollars) 2003 2002 2003 2002 2003
----------------------------------------------------
Operating Activities
Loss for the period $ (3,802) $ (3,028) $(11,847) $ (9,767) $ (86,716)
Add items not requiring a current outlay of cash:
Depreciation and amortization 661 894 1,793 2,790 14,383
Other - - - - 500
Net change in non-cash working capital balances related to
operations (606) 249 1,120 (1,933) 2,450
----------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (3,747) (1,885) (8,934) (8,910) (69,383)
====================================================
Investing Activities
Sale (purchase) of short-term investments, net 3,717 4,071 12,154 9,540 (24,503)
Business acquisition, net of cash received - - - - (539)
Acquired research and development - - - - (715)
Additions to fixed assets (325) (194) (1,228) (284) (4,960)
Cash proceeds on sale of fixed assets - - - - 348
----------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,392 3,877 10,926 9,256 (30,369)
====================================================
Financing Activities
Issuance of warrants - - - - 31,877
Issuance of common shares 21 739 25 1,389 71,057
----------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 21 739 25 1,389 102,934
====================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE
PERIOD (334) 2,731 2,017 1,735 3,182
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,516 1,787 1,165 2,783 -
----------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,182 $ 4,518 $ 3,182 $ 4,518 $ 3,182
====================================================
See accompanying notes to unaudited consolidated financial statements
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, May 31,
2003 2002
(Amounts in 000's)(Canadian Dollars) (unaudited) (audited)
-----------------------
Assets
CURRENT ASSETS
Cash and cash equivalents $ 3,182 $ 1,165
Short-term investments 24,503 36,657
Prepaid expenses and amounts receivable 828 1,195
-----------------------
TOTAL CURRENT ASSETS 28,513 39,017
FIXED ASSETS 1,566 533
GOODWILL (note 4) 606 606
ACQUIRED RESEARCH AND DEVELOPMENT 6,106 7,416
-----------------------
$ 36,791 $ 47,572
=======================
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable $ 758 $ 442
Accrued liabilities 3,427 2,990
-----------------------
TOTAL CURRENT LIABILITIES 4,185 3,432
SHAREHOLDERS' EQUITY
Share capital
Common shares
Authorized: unlimited number of
shares; Issued and outstanding
(000's):
February 28, 2003 - 144,455
May 31, 2002 - 144,412 119,420 119,168
Deferred stock-based compensation (98) (159)
Deficit accumulated during
development stage (86,716) (74,869)
-----------------------
TOTAL SHAREHOLDERS' EQUITY 32,606 44,140
-----------------------
$ 36,791 $ 47,572
=======================
See accompanying notes to unaudited consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
These unaudited consolidated interim financial statements of Lorus Therapeutics
Inc. ("the Company") have been prepared by the Company in accordance with
accounting principles generally accepted in Canada and comply in all material
respects with accounting principles generally accepted in the United States and
follow the same accounting policies and methods of application as the audited
annual financial statements for the year ended May 31, 2002 except for the
accounting policies newly adopted as described in notes 2 and 3. These
statements should be read in conjunction with the audited consolidated financial
statements for the year ended May 31, 2002.
2. Newly adopted accounting policies
REVENUE RECOGNITION
The Company recognizes revenue from product sales when title has passed and
collection is reasonably assured which typically is upon delivery to the
distributor.
The Company earns royalties from its distributor. Total royalties from the
distribution and licensing agreement are recognized when the amounts are
reasonably determinable and collection is reasonably assured.
INVENTORY
The company purchases drugs for resale and for research and clinical
development. Drugs purchased for use in research and clinical development are
expensed as purchased. Drugs purchased for resale are recorded as inventory and
valued at lower of cost and net realizable value.
3. Changes in accounting policies
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective June 1, 2002, the Company prospectively adopted the recommendations of
the Canadian Accounting Standards Board ("AcSB") Handbook Section 3062,
"Goodwill
and Other Intangible Assets." Section 3062 requires that goodwill no longer be
amortized to earnings, but instead be periodically reviewed for impairment.
Section 3062 also requires that intangible assets be assessed to determine if
they have a finite life. Intangible assets with a finite life will continue to
be amortized systematically over their estimated useful life. Intangible assets
with an indefinite life are not to be amortized but are instead tested for
impairment annually.
The Company evaluated its goodwill as of June 1, 2002 in accordance with
Section 3062 and determined that its goodwill was not impaired as of that date.
The Company will perform an annual impairment test on goodwill as of a date on
or before May 31, 2003.
The Company assessed the useful lives of its intangible assets and
determined that they are of finite life and continued amortizing them over their
estimated useful lives.
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
Effective June 1, 2002, the Company adopted the Handbook Section 3870
"Stock-based Compensation and Other Stock-based Payments". Section 3870
establishes standards for the recognition, measurement, and disclosure of
stock-based compensation and other stock-based payments made in exchange for
goods and services provided by employees and non-employees. It applies to
transactions in which common shares, stock options, or other equity instruments
are granted or liabilities incurred based on the price of common stock or other
equity instruments.
Adoption of Section 3870 does not have a material impact on the Company's
financial condition or results of operations as the Company's existing
accounting policies, as disclosed in the audited annual financial statements for
the year ended May 31, 2002, comply with the new standard.
4. Goodwill
Effective June 1, 2002, the Company ceased amortizing its goodwill due to the
change in accounting policy as described in note 3. This change has not been
applied retroactively and the amounts presented for prior periods have not been
restated for the change. The impact of this change is as follows:
(Amounts in 000's) THREE Three NINE Nine
MONTHS months MONTHS months
ENDED ended ENDED ended
FEB. 28, Feb. 28, FEB. 28, Feb. 28,
2003 2002 2003 2002
-------------------------------------------
Loss for the period $ 3,802 $ 3,028 $ 11,847 $ 9,767
Less: Amortization of goodwill - (364) - (1,091)
-------------------------------------------
Loss before amortization of goodwill $ 3,802 $ 2,664 $ 11,847 $ 8,676
-------------------------------------------
Loss per share $ 0.03 $ 0.02 $ 0.08 $ 0.07
Loss per share before
amortization of goodwill $ 0.03 $ 0.02 $ 0.08 $ 0.06
-------------------------------------------
5. Share capital
As of February 28, 2003, there were 6,177,916 options outstanding to acquire
common shares of the Company. During the nine month period ended February 28,
2003, 42,307 options were exercised to purchase common shares of the Company.
6. Pro forma disclosure for Employee Stock Based Compensation
The Company accounts for its stock options granted to employees using the
intrinsic value method. Section 3870 requires companies not using the fair value
method to disclose pro forma net earnings and earnings per share information as
if the Company had accounted for employee stock options under the fair value
method. The Company has elected to disclose pro forma net loss and pro forma net
loss per share as if the Company had accounted for its options since 1995 under
the fair value method.
A summary of the pro forma impact on the statement of loss is presented in
the table below.
(Amounts in 000's) THREE MONTHS NINE MONTHS
ENDED ENDED
FEB. 28, FEB. 28,
2003 2003
----------------------------
Loss for the period $ 3,802 $ 11,847
Compensation expense related to the
fair value of stock options 270 997
----------------------------
Pro forma loss for the period $ 4,072 $ 12,844
----------------------------
Pro forma loss per common share $ 0.03 $ 0.09
----------------------------
The fair value of each option granted has been estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for options granted in the three and nine months periods ended February 28,
2003: (i) dividend yield of 0%; (ii) expected volatility of 80%; (iii) risk free
interest rate of 3.5% and (iv) expected life of 5 years. The Company has assumed
no forfeiture rate as adjustments for actual forfeitures are made in the year
they occur. The weighted-average grant date fair values of options issued in the
three and nine months period ended February 28, 2003 were $0.40 and $0.49,
respectively.