UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-30929
KERYX BIOPHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-4087132
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
101 Main Street, 17th Floor
Cambridge, MA 02142
(ADDRESS INCLUDING ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
617-494-5515
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by an (X) whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| NO |_|
As of July 30, 2002, the registrant had outstanding 19,907,185 shares of Common
Stock, $0.001 par value per share.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Interim Consolidated Balance Sheets............................ 1
Interim Consolidated Statements of Operations.................. 2
Interim Consolidated Statements of Cash Flows.................. 3
Notes to Interim Consolidated Financial Statements............. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................. 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................... 16
Item 4. Submission of Matters to a Vote of Security Holders............ 16
Item 5. Other Information...............................................17
Item 6. Exhibits and Reports on Form 8-K............................... 17
SIGNATURES.............................................................. 18
ITEM 1. FINANCIAL STATEMENTS
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001
- -------------------------------------------------------------------------------
(in thousands, except per share amounts)
June 30 December 31
2002 2001
(Unaudited) (Audited)
------------- -------------
Assets
Current assets
Cash and cash equivalents $ 21,074 $ 23,345
Investment securities, held-to-maturity 8,865 14,308
Accrued interest receivable 236 203
Other receivables and prepaid expenses 239 465
------------- -------------
Total current assets 30,414 38,321
Investment in respect of employee
severance obligations 367 291
Property, plant and equipment, net 3,428 3,338
Deferred tax asset, net 98 115
Other assets (primarily intangible assets), net 1,067 1,002
------------- -------------
Total assets $ 35,374 $ 43,067
============= =============
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 1,460 $ 2,376
Accrued compensation and related liabilities 701 710
------------- -------------
Total current liabilities 2,161 3,086
Liability in respect of employee severance obligations 944 766
------------- -------------
Total liabilities 3,105 3,852
------------- -------------
Stockholders' equity
Common stock, $0.001 par value per share (40,000,000 and
40,000,000 shares authorized, 19,907,185 and 19,846,694
shares issued and fully paid at June 30, 2002 and
December 31, 2001, respectively) 20 19
Additional paid-in capital 72,262 74,025
Unearned compensation (340) (1,110)
Deficit accumulated during the development stage (39,673) (33,719)
------------- -------------
Total stockholders' equity 32,269 39,215
------------- -------------
Total liabilities and stockholders' equity $ 35,374 $ 43,067
============= =============
The accompanying notes are an integral part of the consolidated
financial statements.
-1-
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Consolidated Statements of Operations for the Three Months and Six
Months Ended June 30, 2002 and 2001
- -------------------------------------------------------------------------------
(in thousands, except share and per share amounts)
Amounts
Accumulated
During the
Development
Three months ended Six months ended Stage
---------------------------- ---------------------------- ------------
June 30 June 30 June 30 June 30 June 30
------------ ------------ ------------ ------------ ------------
2002 2001 2002 2001 2002
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------ ------------
Management fees from related party $ -- $ -- $ -- $ -- $300
------------ ------------ ------------ ------------ ------------
Expenses
Research and development:
Non-cash compensation (764) 646 (1,344) 999 7,251
Other research and development 2,316 2,066 5,259 3,744 19,647
------------ ------------ ------------ ------------ ------------
Total research and development expenses 1,552 2,712 3,915 4,743 26,898
------------ ------------ ------------ ------------ ------------
General and administrative expenses
Non-cash compensation (2) 35 (8) 83 3,387
Other general and administrative 1,082 1,240 2,392 2,309 12,689
------------ ------------ ------------ ------------ ------------
Total general and administrative expenses 1,080 1,275 2,384 2,392 16,076
------------ ------------ ------------ ------------ ------------
Total operating expenses 2,632 3,987 6,299 7,135 42,974
------------ ------------ ------------ ------------ ------------
Operating loss (2,632) (3,987) (6,299) (7,135) (42,674)
Interest income, net 160 549 334 1,419 3,456
------------ ------------ ------------ ------------ ------------
Net loss before income taxes (2,472) (3,438) (5,965) (5,716) (39,218)
Income taxes (61) 11 (11) 121 455
------------ ------------ ------------ ------------ ------------
Net loss (2,411) (3,449) (5,954) (5,837) (39,673)
============ ============ ============ ============ ============
Basic and diluted loss per common share ($0.12) ($0.17) ($0.30) ($0.30) ($3.26)
Weighted average shares used in computing
basic and diluted net loss per common share 19,897,032 19,721,973 19,893,701 19,659,159 12,158,401
The accompanying notes are an integral part of the consolidated
financial statements.
-2-
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001
- -------------------------------------------------------------------------------
(in thousands)
Amounts
accumulated
Six months ended June 30 during the
------------ ------------ development
2002 2001 stage
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,954) $(5,837) $(39,673)
Adjustments to reconcile cash flows used in
operating activities: Revenues and
expenses not involving cash flows:
Employee stock compensation expense 8 819 8,864
Consultants' stock compensation expense (1,360) 264 1,774
Issuance of common stock to technology licensor 359 -- 359
Interest on convertible notes settled
through issuance of preferred shares -- -- 253
Provision for employee severance obligations 178 218 944
Depreciation and amortization 431 37 804
Disposal of property, plant and equipment 50 -- 78
Exchange rate differences 22 21 80
Changes in assets and liabilities:
Decrease (increase) in other receivables
and prepaid expenses 226 (400) (234)
(Increase) decrease in accrued interest
receivable (33) 42 (236)
Decrease (increase) in deferred tax asset, net 17 -- (98)
(Decrease) increase in accounts payable
and accrued expenses (439) 1,225 1,458
(Decrease) increase in accrued
compensation and related liabilities (9) 262 701
------------ ------------ ------------
Net cash used in operating activities (6,504) (3,349) (24,926)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets, net of disposals (1,047) (851) (4,292)
Investment in other assets, net (66) 11 (1,090)
Purchase of investment securities-employee
severance obligations (76) (66) (367)
Proceeds from sale and maturity of
(investment in) short-term securities 5,443 7,246 (8,865)
Investment in long-term securities -- (3,974) --
------------ ------------ ------------
Net cash provided by (used in)
investing activities $4,254 $2,366 $(14,614)
------------ ------------ ------------
The accompanying notes are an integral part of the consolidated
financial statements.
-3-
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001 (continued)
- --------------------------------------------------------------------------
Amounts
accumulated
Six months ended June 30 during the
---------------------------- development
2002 2001 stage
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term loans $ -- $ -- $ 500
Proceeds from long-term loans -- -- 3,251
Issuance of convertible note, net -- -- 2,150
Issuance of preferred shares, net and
contributed capital -- -- 8,453
Receipts on account of shares previously
issued -- -- 7
Proceeds from initial public offering, net
of issuance costs -- -- 46,298
Proceeds from exercise of warrants and options 1 13 35
------------ ------------ ------------
Net cash provided by financing activities 1 13 60,694
------------ ------------ ------------
Effect of exchange rate on cash (22) (21) (80)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,271) (991) 21,074
Cash and cash equivalents at beginning
of period 23,345 22,708 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $21,074 $21,717 $21,074
============ ============ ============
NON-CASH TRANSACTIONS
Conversion of short-term loans into
contributed capital $ -- $ -- $ 500
Conversion of long-term loans into
contributed capital -- -- 2,681
Conversion of long-term loans into
convertible notes of Partec -- -- 570
Conversion of convertible notes of Partec
and accrued interest into stock in Keryx -- -- 2,973
Issuance of warrants to related party
as finder's fee in private placement -- -- 114
Declaration of stock dividend -- -- 3
Conversion of Series A preferred stock to
common stock -- -- --*
Purchase of property, plant and equipment
on credit (475) -- --
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ --* $ --* $ 139
Cash paid for income taxes 85 120 323
* Amount less than $1 (thousand)
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Notes to the Interim Consolidated Financial Statements of June 30, 2002
- -------------------------------------------------------------------------------
NOTE 1 - GENERAL
BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements were
prepared in accordance with the instructions for Form 10-Q and, therefore, do
not include all disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with generally
accepted accounting principles. All adjustments which are, in the opinion of
management, of a normal recurring nature and are necessary for a fair
presentation of the interim financial statements have been included.
Nevertheless, these financial statements should be read in conjunction with the
Company's audited financial statements contained in its Annual Report on Form
10-K for the year ended December 31, 2001. The results of operations for the
period ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the entire fiscal year or any other interim period.
The Company has not had revenues from its planned principal operations and
is dependent upon significant financing to fund the working capital necessary to
execute its business development plan. There can be no assurance that the
Company will be able to obtain additional funding.
Until November 1999, most of the Company's activities were carried out by
Partec Limited, an Israeli corporation formed in December 1996, and its
subsidiaries SignalSite Inc. (85% owned) and its subsidiary, SignalSite Israel
Ltd. (wholly owned), and Vectagen Inc. (87.25% owned) and its subsidiary,
Vectagen Israel Ltd. (wholly owned) (hereinafter collectively referred to as
"Partec"). In November 1999, the Company acquired substantially all of the
assets and liabilities of Partec and, as of that date, the activities formerly
carried out by Partec are now performed by the Company. At the date of the
acquisition, Keryx and Partec were entities under common control (the
controlling interest owned approximately 79.7% of Keryx and approximately 76% of
Partec) and accordingly, the assets and liabilities were recorded at their
historical cost basis by means of an "as if" pooling and Partec is being
presented as a predecessor company. Consequently, these financial statements
include the activities performed in previous periods by Partec by aggregating
the relevant historical financial information with the financial statements of
the Company as if they had formed a discrete operation under common management
for the entire development stage.
The Company owns a 100% interest in Keryx (Israel) Ltd., incorporated in
Israel, Keryx Biomedical Technologies Ltd., incorporated in Israel, and Keryx
Securities Corp., a US corporation organized in Massachusetts. At present,
substantially all of the biopharmaceutical research and development activities
are conducted in Israel, and therefore, the Company has one geographical
segment.
LOSS PER SHARE
Basic net loss per share is computed by dividing the losses allocable to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted net loss per share does not reflect the effect of common
shares to be issued upon exercise of stock options and warrants, as their
inclusion would be anti-dilutive.
-5-
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). According to SFAS 146,
commitment to a plan to exit an activity or dispose of long-lived assets will no
longer be enough to record a one-time charge for most anticipated costs.
Instead, companies will record exit or disposal costs when they are "incurred"
and can be measured at fair value, and they will subsequently adjust the
recorded liability for changes in estimated cash flows. SFAS 146 revises
accounting for specified employee and contract terminations that are part of
restructuring activities. SFAS 146 is effective for exit or disposal activities
initiated after December 31, 2002, however earlier adoption is encouraged. The
Company is presently evaluating the effect that adoption of SFAS 146 will have
on its financial statements.
NOTE 3 - STOCKHOLDERS' EQUITY
The compensation committee of the Company's board of directors has
granted, during the six months ended June 30, 2002, options to purchase 96,900
shares of the Company's common stock to the Company's employees, directors and
consultants, pursuant to the Company's 2000 Stock Option Plan, adopted in June
2000. In addition, options for the purchase of 41,037 shares of the Company's
common stock were forfeited during the six months ended June 30, 2002. The
exercise price of the options issued during the six months ended June 30, 2002
ranged between $2.62 and $7.30 per share.
Additionally, in January 2002, the Company issued unregistered shares of
its common stock, and granted warrants exercisable for 500,000 shares of its
common stock, to Yissum Research and Development Company of the Hebrew
University of Jerusalem in partial consideration for the grant by Yissum of an
exclusive license to technology relevant to the Company's core business. The
warrants vest, in up to four tranches, only upon the achievement of specified
research and development milestones.
NOTE 4 - INCOME TAXES
In September 2001, one of the Company's Israeli subsidiaries received the
status of an "Approved Enterprise" which grants certain tax benefits in Israel
in accordance with Paragraph 51 of the "Law for the Encouragement of Capital
Investments, 1959".
Because of this "Approved Enterprise" status, income arising from the
subsidiary's approved activities is subject to zero tax under the "Alternative
Benefit Method" for a period of ten years. In June 2002, the subsidiary received
formal temporary notification that it had met the requirements for
implementation of the benefits under this program.
In the event of distribution by the subsidiary of a cash dividend out of
retained earnings which were tax exempt due to the Approved Enterprise status,
the subsidiary would have to pay a 10% corporate tax on the amount distributed,
and the recipient would have to pay a 15% tax (to be withheld at source) on the
amounts of such distribution received. Should the subsidiary derive income from
sources other than the Approved Enterprise during the relevant period of
benefits, such income will be taxable at the regular tax rate of 36% in 2001 and
thereafter.
-6-
Under its Approved Enterprise status, the subsidiary must maintain certain
conditions and submit periodic reports. Failure to comply with the conditions of
the Approved Enterprise status could cause the subsidiary to lose all previously
accumulated tax benefits. As the date of these financial statements the
subsidiary's management believes it complies with these conditions.
NOTE 5 - SUBSEQUENT EVENTS
In August 2002, the Company announced a major strategic reorganization
designed to cut costs and extend corporate capital. As part of this program, the
Company will focus its efforts on two leading products, KRX-101 and KRX-123, as
well as a select group of its most promising opportunities.
Key components of the reorganization include an approximate 45% reduction
in Keryx's work force of 63 employees including senior management,
administrative staff, and research personnel who are primarily involved in early
stage projects. A 5-10% pay cut will be instituted for all remaining employees,
including senior management. The work force reduction affects operations in
Israel and the United States.
As part of its focus on the core indications of Keryx's lead products, the
company announced that it is terminating the AIDS-related kidney disease (HIVAN)
clinical trial of KRX-101. This trial was recently initiated in South Africa and
was experiencing some enrollment difficulties. With respect to the clinical
development of KRX-101, the Company will now be concentrating on the much larger
potential market for this product, diabetic kidney disease (diabetic
nephropathy).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited,
consolidated financial statements and the related footnotes thereto, appearing
elsewhere in this report. This discussion contains certain forward-looking
statements regarding future events with respect to the Company. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "intends,"
"should, "would," "will," "could," or "may," and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated in such forward-looking statements, including those factors set
forth under the caption "Risk Factors" in the Company's Annual Report on Form
10-K for the year ended December 31, 2001, of which the captioned discussion is
expressly incorporated herein by reference. The forward-looking information
provided herein represents the Company's estimates as of the date of this
Quarterly Report on Form 10-Q. The Company expects that subsequent events and
developments may cause these estimates to change. The Company cautions you that
while it may elect to update this forward-looking information at some point in
the future, it specifically disclaims any obligation to do so.
-7-
OVERVIEW
We were incorporated as a Delaware corporation in October 1998. We
commenced operations in November 1999, following our acquisition of
substantially all of the assets and certain liabilities of Partec Ltd. Partec
Ltd. is our predecessor company and began its operations in January 1997. Since
commencing operations, our activities have been primarily devoted to developing
our technologies, raising capital, purchasing assets and recruiting personnel.
We are a development stage company and have no product sales to date. Our
major sources of working capital have been proceeds from various private
placements of equity securities and our initial public offering. We have two
wholly owned operating subsidiaries, Keryx Biomedical Technologies Ltd. and
Keryx (Israel) Ltd., which engage in research and development activities and
administrative activities in Israel.
Research and development expenses consist primarily of salaries and
related personnel costs, fees paid to consultants and outside service providers
for laboratory development and other expenses relating to the design,
development, testing, and enhancement of our product candidates. We expense our
research and development costs as they are incurred.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and other administrative personnel,
recruitment expenses, professional fees and other corporate expenses, including
business development, general legal activities and facilities related expenses.
Our results of operations include non-cash compensation expense as a
result of the grants of stock and stock options. Compensation expense for
options granted to our employees and directors represents the intrinsic value
(the difference between the stock price of the common stock and the exercise
price of the options) of the options at the date of grant. We account for
stock-based employee and director compensation arrangements in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and FASB issued Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation," and comply with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." Compensation for options granted to
consultants has been determined in accordance with SFAS No. 123, as the fair
value of the equity instruments issued, and according to the guidelines set
forth in EITF 96-18, "Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services," and EITF 00-18 "Accounting by a Grantee for an Equity Instrument to
be Received in Conjunction with Providing Goods and Services." APB Opinion No.
25 has been applied in accounting for fixed options to our employees and
directors as allowed by SFAS No. 123. The compensation cost is recorded over the
respective vesting periods of the individual stock options. The expense is
included in the respective categories of expense in the statement of operations.
We expect to record additional non-cash compensation expense in the future,
which may be significant. However, because some of the options issued to
consultants either do not vest immediately or vest upon the achievement of
certain milestones, the total expense is uncertain.
-8-
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities and related disclosure of contingent assets and liabilities at the
date of our financial statements and the reported amounts of revenues and
expenses during the applicable period. Actual results may differ from these
estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and may potentially result in
materially different results under different assumptions and conditions. In
applying these critical accounting policies, our management uses its judgment to
determine the appropriate assumptions to be used in making certain estimates.
These estimates are subject to an inherent degree of uncertainty. For a detailed
discussion of the application of these and other accounting policies, please see
Note 1 in the Notes to our Consolidated Financial statements. Our critical
accounting policies include the following:
Foreign Currency Translation. In preparing our consolidated financial
statements, we translate non-US dollar amounts in the financial statements of
our Israeli subsidiaries into US dollars. Under the relevant accounting guidance
the treatment of any gains or losses resulting from this translation is
dependent upon management's determination of the functional currency. The
functional currency is determined based on management's judgment and involves
consideration of all relevant economic facts and circumstances affecting the
subsidiaries. Generally, the currency in which a subsidiary transacts a majority
of its transactions, including billings, financing, payroll and other
expenditures would be considered the functional currency. However, any
dependency upon the parent and the nature of the subsidiary's operations must
also be considered. If any subsidiary's functional currency is deemed to be the
local currency, then any gain or loss associated with the translation of that
subsidiary's financial statements would be included as a separate part of our
stockholders' equity under the caption "cumulative translation adjustment."
However, if the functional currency of the subsidiary is deemed to be the
US dollar then any gain or loss associated with the translation of these
financial statements would be included within our statement of operations. Based
on our assessment of the factors discussed above, we consider the US dollar to
be the functional currency for each of our Israeli subsidiaries. Therefore all
gains and losses from translations are recorded in our statement of operations.
Accounting For Income Taxes. As part of the process of preparing our
consolidated financial statements we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves
management estimating our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be recovered from
future taxable income and, to the extent we believe that recovery is not likely,
we must establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
-9-
within the tax provision in the statement of operations. Significant management
judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. We have fully offset our US deferred tax asset with a
valuation allowance. Our lack of earnings history and the uncertainty
surrounding our ability to generate taxable income prior to the expiration of
such deferred tax assets were the primary factors considered by management in
establishing the valuation allowance. The deferred tax asset in our financial
statements relates to our wholly owned Israeli subsidiaries.
Stock Compensation. During historical periods we have granted options to
employees, directors and consultants, as well as warrants to other third
parties. In applying SFAS No. 123, we use the Black-Scholes pricing model to
calculate the fair market value of our options and warrants. The Black-Scholes
model takes into account volatility in the price of our stock, the risk-free
interest rate, the estimated life of the option or warrant, the closing market
price of our stock and the exercise price. For purposes of the calculation, it
was assumed that no dividends will be paid during the life of the options and
warrants.
In accordance with EITF 96-18, "Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services," total compensation expense for options issued to consultants
is determined at the "measurement date." The expense is recognized over the
vesting period for the options. Until the measurement date is reached, the total
amount of compensation expense remains uncertain. We record option compensation
based on the fair value of the options at the reporting date. These options are
then revalued, or the total compensation is recalculated based on the then
current fair value, at each subsequent reporting date. This results in a change
to the amount previously recorded in respect of the option grant and additional
expense or a negative expense may be recorded in subsequent periods based on
changes in the assumptions used to calculate fair value, such as changes in
market price, until the measurement date is reached and the compensation expense
is determined.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2001
Revenue. We did not have any revenues for the three months ended June 30,
2002 and June 20, 2001.
Research and Development Expenses. Research and development expenses
decreased by $1,160,000 to $1,552,000 for the three months ended June 30, 2002,
as compared to expenses of $2,712,000 for the three months ended June 30, 2001.
Net of non-cash compensation, research and development expenses increased by
$250,000 to $2,316,000 for the three months ended June 30, 2002, as compared to
expenses of $2,066,000 for the three months ended June 30, 2001. The increase in
research and development expenses was due primarily to increased personnel and
related costs, increased facilities related costs and increased
non-manufacturing clinical development costs associated with KRX-101.
-10-
These increases were partially offset by a decline in pre-clinical materials and
testing costs and a decline in manufacturing expenses associated with KRX-101
clinical trial materials. We expect our research and development costs to
decrease over the next year as the result of the implementation of cost control
measures. However, if we are unable to establish and maintain adequate research
and development arrangements with third parties with respect to our future
clinical development activities, we may be required to fund all or a substantial
portion of our future clinical trial programs, in which case our research and
development costs would increase despite the implementation of such cost control
measures. Non-cash compensation expense related to stock option grants and
warrant issuances was negative $764,000 for the three months ended June 30, 2002
as compared to $646,000 for the three months ended June 30, 2001. This negative
non-cash compensation expense was primarily due to the revaluation of previously
issued options and warrants to consultants and other third-parties.
General and Administrative Expenses. General and administrative expenses
decreased by $195,000 to $1,080,000 for the three months ended June 30, 2002, as
compared to expenses of $1,275,000 for the three months ended June 30, 2001. Net
of non-cash compensation, general and administrative expenses decreased by
$158,000 to $1,082,000 for the three months ended June 30, 2002, as compared to
expenses of $1,240,000 for the three months ended June 30, 2001. The decrease in
general and administrative expenses was due primarily to a reduction in outside
consulting service costs partially offset by increased personnel and management
expenses. We expect our general and administrative expenses to continue to
decrease over the next year as the result of the implementation of cost control
measures. Non-cash compensation expense related to stock option grants was
negative $2,000 for the three months ended June 30, 2002 as compared to $35,000
for the three months ended June 30, 2001.
Interest Income, Net. Interest income, net, decreased by $389,000 to
$160,000 for the three months ended June 30, 2002, as compared to income of
$549,000 for the three months ended June 30, 2001. The decrease in this period
resulted from a lower level of invested funds and the general decline in market
interest rates when compared to the same period last year.
Income Taxes. Income tax expense decreased by $72,000 to negative $61,000
for the three months ended June 30, 2002, as compared to an expense of $11,000
for the three months ended June 30, 2001. The decrease in income tax expense is
attributable to the lower income tax rate used for one of our subsidiaries that
attained Israeli Approved Enterprise status (see Note 4 to our unaudited interim
consolidated Financial Statements above). In addition, pursuant to receiving
formal temporary notification that it met the requirements for implementation of
benefits under the Approved Enterprise, the subsidiary reversed a previously
recorded income tax liability, resulting in negative income tax expense. As of
June 30, 2002, we have recorded a net deferred tax asset against income taxes
for the period then ended. Income tax expense is attributable to taxable income
from the continuing operations of our subsidiaries in Israel. This income is
eliminated upon consolidation of our financial statements.
Impact of Inflation. The effects of inflation and changing prices on our
operations were not significant during the periods presented.
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SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2001
Revenue. We did not have any revenues for the six months ended June 30,
2002 and June 20, 2001.
Research and Development Expenses. Research and development expenses
decreased by $828,000 to $3,915,000 for the six months ended June 30, 2002, as
compared to expenses of $4,743,000 for the six months ended June 30, 2001. Net
of non-cash compensation, research and development expenses increased by
$1,515,000 to $5,259,000 for the six months ended June 30, 2002, as compared to
expenses of $3,744,000 for the six months ended June 30, 2001. The increase in
research and development expenses was due primarily to increased personnel and
related costs, increased facilities related costs and increased
non-manufacturing clinical development costs associated with KRX-101. These
increases were partially offset by a decline in pre-clinical materials and
testing costs and a decline in manufacturing expenses associated with KRX-101
clinical trial materials. We expect our research and development costs to
decrease over the next year as the result of the implementation of cost control
measures. However, if we are unable to establish and maintain adequate research
and development arrangements with third parties with respect to our future
clinical development activities, we may be required to fund all or a substantial
portion of our future clinical trial programs, in which case our research and
development costs would increase despite the implementation of such cost control
measures. Non-cash compensation expense related to stock option grants and
warrant issuances was negative $1,344,000 for the six months ended June 30, 2002
as compared to $999,000 for the six months ended June 30, 2001. This negative
non-cash compensation expense was primarily due to the revaluation of previously
issued options and warrants to consultants and other third-parties.
General and Administrative Expenses. General and administrative expenses
decreased by $8,000 to $2,384,000 for the six months ended June 30, 2002, as
compared to expenses of $2,392,000 for the six months ended June 30, 2001. Net
of non-cash compensation, general and administrative expenses increased by
$83,000 to $2,392,000 for the six months ended June 30, 2002, as compared to
expenses of $2,309,000 for the six months ended June 30, 2001. The increase in
general and administrative expenses was due primarily to increased personnel and
management expenses, and increased facilities related costs, partially offset by
a reduction in outside consulting service costs. We expect our general and
administrative expenses to decrease over the next year as the result of the
implementation of cost control measures. Non-cash compensation expense related
to stock option grants was negative $8,000 for the six months ended June 30,
2002 as compared to $83,000 for the six months ended June 30, 2001.
Interest Income, Net. Interest income, net, decreased by $1,085,000 to
$334,000 for the six months ended June 30, 2002, as compared to income of
$1,419,000 for the six months ended June 30, 2001. The decrease in this period
resulted from a lower level of invested funds and the general decline in market
interest rates when compared to the same period last year.
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Income Taxes. Income tax expense decreased by $132,000 to negative $11,000
for the six months ended June 30, 2002, as compared to an expense of $121,000
for the six months ended June 30, 2001. The decrease in income tax expense is
attributable to the lower income tax rate used for one of our subsidiaries that
attained Israeli Approved Enterprise status (see Note 4 to our unaudited interim
consolidated Financial Statements above). In addition, pursuant to receiving
formal temporary notification that it met the requirements for implementation of
benefits under the Approved Enterprise, the subsidiary reversed a previously
recorded income tax liability, resulting in negative income tax expense. As of
June 30, 2002, we have recorded a net deferred tax asset against income taxes
for the period then ended. Income tax expense is attributable to taxable income
from the continuing operations of our subsidiaries in Israel. This income is
eliminated upon consolidation of our financial statements.
Impact of Inflation. The effects of inflation and changing prices on our
operations were not significant during the periods presented.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception primarily through various
private and public financings. As of June 30, 2002, we had received net proceeds
of $46.3 million from our initial public offering, and $11.6 million from
private placement issuances of common and preferred stock, including $2.9
million raised through the contribution by holders of their notes issued by our
predecessor company.
As of June 30, 2002, we had $30.2 million in cash, cash equivalents,
interest receivable and short-term securities, a decrease of $7.7 million from
December 31, 2001. Cash used in operating activities for the period ended June
30, 2002 was $6.5 million as compared to $3.3 million for the comparable period
ended June 30, 2001. This increase in cash used in operating activities was due
primarily to increased expenses associated with the expansion of our business.
Net cash provided by investing activities was $4.3 million for the period ended
June 30, 2002. Cash provided by investing activities was primarily the result of
the maturity of short-term securities, partially offset by capital expenditures.
We have incurred negative cash flow from operations since our inception.
We anticipate incurring negative cash flow from operations for the foreseeable
future. We have spent, and expect to continue to spend, substantial amounts in
connection with implementing our business strategy, including our planned
product development efforts, our clinical trials, and our research and discovery
efforts.
As of June 30, 2002, we have known contractual obligations, commitments
and contingencies of $2,828,000. Of this amount, $1,452,000 relates to research
agreements, of which $827,000 is due within the next year, a total of $500,000
is due between one and three years, with the remaining $125,000 due between four
and five years. The additional $1,376,000 relates to operating lease
obligations, of which $461,000 is due within the next year, a total of $731,000
is due between one and three years, with the remaining $184,000 due between four
and five years.
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- ------------------------------------------------------------------------------------------------------------------------------
Payments Due by Period
- ------------------------------------------------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years
- ------------------------------------------------------------------------------------------------------------------------------
Research Agreements $1,452,000 $827,000 $500,000 $125,000 --
- ------------------------------------------------------------------------------------------------------------------------------
Operating Leases $1,376,000 $461,000 $731,000 $184,000 --
- ------------------------------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $2,828,000 $1,288,000 $1,231,000 $309,000 --
- ------------------------------------------------------------------------------------------------------------------------------
Additionally, we have undertaken to make contingent milestone payments to
certain of our licensors of up to approximately $4.0 million. In certain cases,
such payments will reduce any royalties due on sales of related products. In the
event that the milestones are not achieved, we remain obligated to pay one
licensor $50,000 annually until the license expires.
We believe that our $30.2 million in cash, cash equivalents, and
short-term securities as of June 30, 2002 will be sufficient to enable us to
meet our planned operating needs and capital expenditures until at least early
2004. Our cash and cash equivalents as of June 30, 2002 are invested in highly
liquid investments such as cash, money market accounts, short-term US corporate
debt securities, and short-term obligations of domestic governmental agencies.
As of June 30, 2002, we are unaware of any known trends or any known demands,
commitments, events, or uncertainties that will, or that are reasonably likely
to, result in a material increase or decrease in our required liquidity. We
expect that our liquidity needs throughout 2002 will continue to be funded from
existing cash, cash equivalents, and short-term securities.
Our forecast of the period of time through which our cash, cash
equivalents and short-term securities will be adequate to support our operations
is a forward-looking statement that involves risks and uncertainties. The actual
amount of funds we will need to operate is subject to many factors, some of
which are beyond our control.
These factors include the following:
o the progress of our research activities;
o the number and scope of our research programs;
o the progress of our pre-clinical and clinical development
activities;
o the progress of the development efforts of parties with whom we have
entered into research and development agreements;
o our ability to maintain current research and development programs
and to establish new research and development and licensing
arrangements;
-14-
o our ability to achieve our milestones under licensing arrangements;
o the costs involved in prosecuting and enforcing patent claims and
other intellectual property rights; and
o the costs and timing of regulatory approvals.
We have based our estimate on assumptions that may prove to be wrong. We
may need to obtain additional funds sooner or in greater amounts than we
currently anticipate. Potential sources of financing include strategic
relationships, public or private sales of our stock or debt and other sources.
We may seek to access the public or private equity markets when conditions are
favorable due to our long-term capital requirements. We do not have any
committed sources of financing at this time, and it is uncertain whether
additional funding will be available when we need it on terms that will be
acceptable to us, or at all. If we raise funds by selling additional shares of
common stock or other securities convertible into common stock, the ownership
interest of our existing stockholders will be diluted. If we are not able to
obtain financing when needed, we may be unable to carry out our business plan.
As a result, we may have to significantly limit our operations and our business,
financial condition and results of operations would be materially harmed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The primary objective of our investment activities is
to preserve principal while at the same time maximizing the income we receive
from our investments without significantly increasing risk. Some of the
securities that we invest in may have market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later
rises, the principal amount of our investment will probably decline. We maintain
our portfolio in cash equivalents and short- and long-term interest bearing
securities, including corporate debt, money market funds and government debt
securities. The average duration of all of our investments in 2001 was less than
one year. Due to the short-term nature of these investments, we believe we have
no material exposure to interest rate risk arising from our investments.
Therefore, no quantitative tabular disclosure is required.
Foreign Currency Rate Fluctuations. While our Israeli subsidiaries
primarily transact business in New Israel Shekels or NIS, most operating
expenses and commitments are linked to the US dollar. As a result, there is
currently minimal exposure to foreign currency rate fluctuations. Any foreign
currency revenues and expenses are translated using the daily average exchange
rates prevailing during the year and any transaction gains and losses are
included in net income. In the future, our subsidiaries may enter into NIS-based
commitments that may expose us to foreign currency rate fluctuations. We may use
hedging instruments, including forward contracts, to minimize any foreign
currency rate fluctuation exposure. Any hedging transactions that we enter into
may not adequately protect us against currency rate fluctuations and may result
in losses to us.
-15-
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds From Registered Securities
We received net proceeds (after deducting underwriting discounts and
commissions and offering expenses) of $46.3 million from the sale of 5,200,000
shares of common stock in our initial public offering in July 2000. As of June
30, 2002, we have used the net proceeds of this offering as follows:
o approximately $4.2 million to fund clinical development for
KRX-101 for diabetic nephropathy and other indications;
o approximately $2.1 million to fund clinical development for
KRX-123 for hormone-resistant prostate cancer;
o approximately $9.2 million to fund expansion of our KinAce
platform and to further develop the compounds we have
generated with it; and
o approximately $11.3 million to use as working capital and for
general corporate purposes.
We intend to continue using the net proceeds of this offering to fund
these ongoing activities, as appropriate. The timing and amounts of our actual
expenditures will depend on several factors, including the timing of our entry
into collaboration agreements, the progress of our clinical trials, the progress
of our research and development programs, the results of other pre-clinical and
clinical studies and the timing and costs of regulatory approvals.
Until we use the net proceeds, we intend to invest the funds in short and
long-term, investment-grade, interest-bearing instruments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of stockholders on May 23, 2002. At the
meeting, Benjamin Corn, M.D., Malcolm Hoenlein, Peter Kash, Morris Laster, M.D.,
Mark Rachesky, M.D., Lindsay Rosenwald, M.D., Wayne Rothbaum and J. Wilson
Totten, M.D. were reelected to our board of directors. The vote with respect to
each nominee is as set forth below:
Nominee Total Vote Total Vote Withheld Total Vote Against
- ------- ---------- ------------------- ------------------
For
---
Benjamin Corn, M.D. 12,996,986 3,700 --
Malcolm Hoenlein 12,996,986 3,700 --
Peter Kash 12,996,986 3,700 --
Morris Laster, M.D. 12,996,986 3,700 --
Mark Rachesky, M.D. 12,996,986 3,700 --
Lindsay Rosenwald, M.D. 12,996,986 3,700 --
Wayne Rothbaum, M.D. 12,996,986 3,700 --
J. Wilson Totten, M.D. 12,996,986 3,700 --
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ITEM 5. OTHER INFORMATION
In August 2002, the Company announced a major strategic reorganization
designed to cut costs and extend corporate capital. As part of this program, the
Company will focus its efforts on two leading products, KRX-101 and KRX-123, as
well as a select group of its most promising opportunities.
Key components of the reorganization include an approximate 45% reduction
in Keryx's work force of 63 employees including senior management,
administrative staff, and research personnel who are primarily involved in early
stage projects. A 5-10% pay cut will be instituted for all remaining employees,
including senior management. The work force reduction affects operations in
Israel and the United States.
As part of the reorganization, the Company terminated the employment of
Robert Gallahue, the Company's Chief Financial Officer and Treasurer. Ira
Weinstein, the Company's current Chief Operating Officer and previous Chief
Financial Officer, has been appointed by the Company's Board of Directors to
replace Mr. Gallahue as the Company's interim Chief Financial Officer &
Treasurer.
As part of its focus on the core indications of Keryx's lead products, the
company announced that it is terminating the AIDS-related kidney disease (HIVAN)
clinical trial of KRX-101. This trial was recently initiated in South Africa and
was experiencing some enrollment difficulties. With respect to the clinical
development of KRX-101, the Company will now be concentrating on the much larger
potential market for this product, diabetic kidney disease (diabetic
nephropathy).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index are included with
this report.
(b) Reports on Form 8-K
None.
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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.
KERYX BIOPHARMACEUTICALS, INC.
Date: August 14, 2002 By: /s/ Ira Weinstein
Ira Weinstein
Interim Chief Financial Officer & Treasurer
STATEMENT PURSUANT TO 18 U.S.C. ss.1350
Pursuant to 18 U.S.C. ss.1350, each of the undersigned certifies that this
Quarterly Report on Form 10-Q for the period ended June 30, 2002 fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and that the information contained in this report fairly presents, in
all material respects, the financial condition and results of operations of
Keryx Biopharmaceuticals, Inc.
/s/ Benjamin Corn
-------------------------------------------
Dated: August 14, 2002 Benjamin Corn, M.D.
Chief Executive Officer
/s/ Ira Weinstein
-------------------------------------------
Dated: August 14, 2002 Ira Weinstein
Interim Chief Financial Officer & Treasurer
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on Form
10-Q:
10.1 Employment Agreement between Morris Laster, M.D., and Keryx
Biopharmaceuticals, Inc., dated as of November 26, 2001.
10.2 Amended Employment Agreement between Morris Laster, M.D., and Keryx
(Israel) Ltd., dated as of November 26, 2001.
99.1 Risk Factors - Those statements set forth in pages 19 through 25 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2001 under
the caption "Risk Factors" are incorporated herein by reference.
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