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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
|_| TRANSITION REPORT UNDER 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
750 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
(ADDRESS INCLUDING ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
212-531-5965
(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 |_|
Indicate by an (X) whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| NO |X|
As of August 7, 2003, the registrant had outstanding 21,073,310 shares of Common
Stock, $0.001 par value per share.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of June 30, 2003
and December 31, 2002............................................ 3
Interim Consolidated Statements of Operations for the
three and six months ended June 30, 2003 and 2002................ 4
Interim Consolidated Statements of Cash Flows for the
six months ended June 30, 2003 and 2002.......................... 5
Notes to Interim Consolidated Financial Statements
of June 30, 2003................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...................................................... 32
Item 4. Controls and Procedures............................................ 32
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................... 33
Item 4. Submission of Matters to a Vote of Security Holders................ 33
Item 6. Exhibits and Reports on Form 8-K................................... 33
SIGNATURES.................................................................. 34
2
ITEM 1. FINANCIAL STATEMENTS
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002
- --------------------------------------------------------------------------------
(in thousands, except share amounts)
June 30 December 31
2003 2002
(Unaudited) (Audited)
----------- -----------
Assets
Current assets
Cash and cash equivalents $ 14,806 $ 13,350
Investment securities, held-to-maturity 6,068 10,575
Deposits in respect of employee severance
obligations (current portion) 209 299
Accrued interest receivable 91 206
Deferred tax asset -- 170
Other receivables and prepaid expenses 67 267
-------- --------
Total current assets 21,241 24,867
-------- --------
Deposits in respect of employee severance obligations -- 117
Property, plant and equipment, net, held for sale 384 --
Property, plant and equipment, net 230 3,031
Other assets (primarily intangible assets), net 263 1,088
-------- --------
Total assets $ 22,118 $ 29,103
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 540 $ 920
Income taxes payable 130 177
Accrued compensation and related liabilities 764 1,420
-------- --------
Total current liabilities 1,434 2,517
-------- --------
Liability in respect of employee severance obligations -- 188
Deferred tax liability -- 68
-------- --------
Total liabilities 1,434 2,773
-------- --------
Commitments and contingencies
Stockholders' equity
Common stock, $0.001 par value per share (40,000,000 and
40,000,000 shares authorized, 21,128,810 and 19,913,185
shares issued, 21,072,710 and 19,866,885 shares outstanding
at June 30, 2003 and December 31, 2002, respectively) 21 20
Additional paid-in capital 71,552 72,067
Treasury stock, at cost, 56,100 shares at June 30, 2003
and 46,300 shares at December 31, 2002 (89) (77)
Unearned compensation (1) (178)
Deficit accumulated during the development stage (50,799) (45,502)
-------- --------
Total stockholders' equity 20,684 26,330
-------- --------
Total liabilities and stockholders' equity $ 22,118 $ 29,103
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
3
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Consolidated Statements of Operations for the Three Months and Six
Months Ended June 30, 2003 and 2002
- --------------------------------------------------------------------------------
(in thousands, except share and per share amounts)
Amounts
Accumulated
Three months ended June 30, Six months ended June 30, During the
---------------------------- ---------------------------- Development
2003 2002 2003 2002 Stage
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------ ------------
Management fees from related party $ -- $ -- $ -- $ -- $ 300
------------ ------------ ------------ ------------ ------------
Operating Expenses
Research and development:
Non-cash compensation (249) (764) (515) (1,344) 6,698
Other research and development 554 2,316 3,925 5,259 27,836
------------ ------------ ------------ ------------ ------------
Total research and development expenses 305 1,552 3,410 3,915 34,534
------------ ------------ ------------ ------------ ------------
General and administrative:
Non-cash compensation 50 (2) 52 (8) 3,443
Other general and administrative 1,205 1,082 1,869 2,392 16,274
------------ ------------ ------------ ------------ ------------
Total general and administrative expenses 1,255 1,080 1,921 2,384 19,717
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,560 2,632 5,331 6,299 54,251
------------ ------------ ------------ ------------ ------------
Operating loss (1,560) (2,632) (5,331) (6,299) (53,951)
Interest income, net 65 160 150 334 3,785
------------ ------------ ------------ ------------ ------------
Net loss before income taxes (1,495) (2,472) (5,181) (5,965) (50,166)
Income taxes 14 (61) 116 (11) 633
------------ ------------ ------------ ------------ ------------
Net loss (1,509) (2,411) (5,297) (5,954) (50,799)
============ ============ ============ ============ ============
Basic and diluted loss per common share ($ 0.07) ($ 0.12) ($ 0.26) ($ 0.30) ($ 3.80)
Weighted average shares used in computing
basic and diluted net loss per common share 20,739,770 19,897,032 20,377,416 19,893,701 13,386,279
The accompanying notes are an integral part of the consolidated financial
statements.
4
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
(in thousands)
Amounts
accumulated
Six months ended June 30, during the
-------------------------- development
2003 2002 stage
----------- ---------- -----------
(Unaudited) (Unaudited) (Unaudited)
----------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,297) $ (5,954) $ (50,799)
Adjustments to reconcile cash flows used in
operating activities:
Employee stock compensation expense 79 8 9,039
Consultants' and third-party stock compensation
expense (negative expense) (542) (1,360) 1,102
Issuance of common stock to technology licensor -- 359 359
Interest on convertible notes settled
through issuance of preferred shares -- -- 253
Depreciation and amortization 731 431 2,057
Loss on disposal of property, plant and equipment 6 50 90
Impairment charges 2,482 -- 2,482
Exchange rate differences (9) 22 75
Changes in assets and liabilities:
Decrease (increase) in other receivables
and prepaid expenses 199 226 (63)
Decrease (increase) in accrued interest
receivable 115 (33) (91)
Changes in deferred tax provisions and
valuation allowance 102 17 --
Increase (decrease) in accounts payable
and accrued expenses (333) (323) 537
Increase (decrease) in income taxes payable (47) (116) 130
Increase (decrease) in accrued compensation
and related liabilities (656) (9) 764
Increase (decrease) liability in respect
of employee severance obligations (188) 178 --
--------- --------- ---------
Net cash used in operating activities (3,358) (6,504) (34,065)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment -- (1,080) (4,400)
Proceeds from disposals of property,
plant and equipment 40 33 77
Investment in other assets (64) (66) (1,187)
Proceeds from (additions to) deposits in
respect of employee severance obligations 117 (76) --
Proceeds from (additions to) deposits in
respect of employee severance
obligations (current portion) 90 -- (209)
Proceeds from sale and maturity of
(investment in) short-term securities 4,507 5,443 (6,068)
--------- --------- ---------
Net cash provided by (used in)
investing activities $ 4,690 $ 4,254 $ (11,787)
--------- --------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
5
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 (continued)
- --------------------------------------------------------------------------------
(in thousands)
Amounts
accumulated
Six months ended June 30, during the
----------- ----------- development
2003 2002 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 -- -- 46,298
Proceeds from exercise of options and warrants 127 1 163
Purchase of treasury stock (12) -- (89)
--------- --------- ---------
Net cash provided by financing activities 115 1 60,733
--------- --------- ---------
Effect of exchange rate on cash 9 (22) (75)
--------- --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,456 (2,271) 14,806
Cash and cash equivalents at beginning
of period 13,350 23,345 --
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 14,806 $ 21,074 $ 14,806
========= ========= =========
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
and other assets on credit -- -- --
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ --* $ --* $ 139
Cash paid for income taxes 60 85 431
* Amount less than $1,000
The accompanying notes are an integral part of the consolidated financial
statements.
6
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Notes to the Interim Consolidated Financial Statements of June 30, 2003
- ------------------------------------------------------------------------------
NOTE 1 - GENERAL
BASIS OF PRESENTATION
Keryx Biopharmaceuticals, Inc. ("Keryx" or the "Company") is a biopharmaceutical
company focused on the acquisition, development and commercialization of novel
pharmaceutical products for the treatment of life-threatening diseases,
including diabetes and cancer. The Company was incorporated in Delaware in
October 1998 (under the name Paramount Pharmaceuticals, Inc., which was later
changed to Lakaro Biopharmaceuticals, Inc. in November 1999, and finally to
Keryx Biopharmaceuticals, Inc. in January 2000). The Company commenced
activities in November 1999, and since then has operated in one segment of
operations, namely the development and commercialization of clinical compounds
and core technologies for the life sciences.
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, beginning as of that date, the activities formerly
carried out by Partec were 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 each of Keryx (Israel) Ltd., organized in
Israel, Keryx Biomedical Technologies Ltd., organized in Israel, and Keryx
Securities Corp., a U.S. corporation incorporated in the Commonwealth of
Massachusetts. For convenience purposes, unless otherwise indicated, the
"Company", "Keryx", "we", "us", "it", "our" or "its" refers collectively to
Keryx and its subsidiaries.
In March 2003, the Company gave notice of termination to four employees in the
Jerusalem, Israel laboratory facility. In addition, the Company indicated its
intention to cease its early-stage research and development activities and to
further decrease its administrative activities in the Jerusalem facility (a
process sometimes referred to as the "current restructuring"). During the second
quarter of 2003, the Company gave notice of termination to an additional one
person in Israel and to one person in Cambridge, Massachusetts. In addition,
during the course of the current restructuring, Barry Cohen, the Company's Vice
President, Business Development, and Thomas Humphries, the Company's Senior Vice
President, Clinical Development, each resigned his employment with the Company.
In connection with Dr. Humphries leaving the Company, the Company closed its
office in Cambridge, Massachusetts and consolidated its activities in its New
York City headquarters.
Substantially all of the biopharmaceutical development and administrative
activities during 2003 were conducted in the United States, and therefore, the
7
Company has one geographical segment. The majority of the Company's fixed assets
are held by its subsidiaries in Israel, and most of these assets have been
classified as "held for sale" during the three months ended June 30, 2003.
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, 2002. The results of operations for the
period ended June 30, 2003 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 plan. If the Company determines to seek additional funding,
there can be no assurance that the Company will be able to obtain any such
funding on terms that are acceptable to it, if at all.
STOCK - BASED COMPENSATION
The Company applies the intrinsic value-based method of accounting prescribed by
the Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, to account for stock option
plans for employees and directors, as allowed by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based Compensation"
(SFAS No. 123). As such, compensation expense would be recorded on the
measurement date only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123 is applied to stock options and
warrants granted to other than employees and directors. The Company has adopted
the disclosure requirements of SFAS No. 123 and SFAS No. 148 for awards to its
directors and employees.
Had the compensation expenses for stock options granted under the Company's
stock option plans been determined based on fair value at the grant dates
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amount below:
Amounts
Accumulated
Three months ended June 30, Six months ended June 30, During the
--------------------------- --------------------------- Development
2003 2002 2003 2002 Stage
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- ------------ -----------
Net loss, as reported $ (1,509) $ (2,411) $ (5,297) $ (5,954) $ (50,799)
Add: Stock-based compensation expense
to employees and directors
determined under the intrinsic value-
based method, as included in reported net
loss, net of related tax effects 76 4 79 8 9,039
Deduct: Total stock-based compensation expense
to employees and directors
determined under fair value-based
method for all awards, net of
related tax effects (129) (316) (849) (653) (12,212)
--------- --------- --------- --------- ---------
Pro forma net loss $ (1,562) $ (2,723) $ (6,067) $ (6,599) $ (53,972)
Basic and diluted loss per common share
As reported ($ 0.07) ($ 0.12) ($ 0.26) ($ 0.30) ($ 3.80)
Pro forma ($ 0.08) ($ 0.14) ($ 0.30) ($ 0.33) ($ 4.03)
8
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. The common stock equivalent of anti-dilutive securities
not included in the computation of net loss per share amounts was 3,801,016.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS No. 150). This Statement establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of SFAS No. 150 should not have a
significant effect on the Company's financial statements.
NOTE 3 - STOCKHOLDERS' EQUITY
During the six months ended June 30, 2003, the compensation committee of the
Company's board of directors granted options to purchase 980,000 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. The
exercise price of the options issued during the six months ended June 30, 2003
ranged between $1.10 and $1.44 per share. Options for the purchase of 537,092
shares of the Company's common stock were forfeited during the six months ended
June 30, 2003. In addition, options for the purchase of 1,215,625 shares of the
Company's common stock were exercised during the six months ended June 30, 2003.
During the six months ended June 30, 2003, the Company repurchased 9,800 shares
of its common stock at an aggregate cost of approximately $12,000 pursuant to
the stock repurchase program approved by its board of directors in November
2002. Under its stock repurchase program the Company was authorized to
repurchase up to 2,443,900 additional Keryx shares as of June 30, 2003.
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 the "Law for the Encouragement of Capital Investments, 1959". In
June 2002, the subsidiary received formal temporary notification that it had met
the requirements for implementation of the benefits under this program.
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 previously
accumulated tax benefits. Through June 30, 2003, this subsidiary has received
tax benefits of approximately $731,000. As a result of the restructuring
implemented in 2002, the staff and activity of this subsidiary were materially
reduced. In January 2003, the subsidiary notified the Israeli governmental
authority of such
9
reductions and requested that the program instituted prior to the cost
reductions be upheld. In February 2003, the Israeli governmental authority
informed the subsidiary that it may be in non-compliance with the conditions of
its Approved Enterprise program because of the indicated reductions. As part of
the restructuring implemented during the first quarter of 2003, as described in
Note 5, the subsidiary decided to close down the Jerusalem laboratory facility.
The subsidiary is currently engaged in discussions with the Israeli governmental
authority and, at this point, it is uncertain as to whether or not any past
benefits will need to be repaid. Accordingly, the Company has not recorded any
charge with respect to this potential liability.
NOTE 5 - RESTRUCTURING
2003 Restructuring
In March 2003, the Company gave notice of termination to four of its employees
in the Jerusalem laboratory facility, and, in addition, the Company indicated
its intention to cease early-stage research and development activities and to
further decrease the administrative activities in the Jerusalem facility. While
the significant portion of the current restructuring was completed by July 2003,
the Company anticipates that the current restructuring will be fully completed
in the third quarter of 2003. During the second quarter of 2003, the Company
gave notice of termination to an additional one person in Israel and one person
in Cambridge, Massachusetts. In addition, during the course of the current
restructuring, Barry Cohen, the Company's Vice President, Business Development,
and Thomas Humphries, the Company's Senior Vice President, Clinical Development,
each resigned his employment with the Company. In connection with Dr. Humphries
leaving the Company, the Company closed its office in Cambridge, Massachusetts
and consolidated its activities in its New York City headquarters.
In addition, during the second quarter of 2003, as a result of the Company's
decision to sell the majority of its fixed assets, those fixed assets, primarily
office furniture and equipment, laboratory equipment, and computers, software
and related equipment, located in the Jerusalem facility formerly classified as
"held-for-use" were classified as "held-for-sale," in accordance with SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No.
144). At June 30, 2003, $384,000 in fixed assets were classified as
"held-for-sale." The disposition of the majority of these assets was completed
during the early part of the third quarter of 2003.
As part of the above, the Company reevaluated its long-lived assets in
accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" and took a non-cash impairment charge of approximately
$2,481,000 for the six months ended June 30, 2003, of which approximately
$2,357,000 was included in research and development expenses and of which
approximately $124,000 was included in general and administrative expenses. For
the six months ended June 30, 2003, the impairment charge included a write-off
of approximately $1,694,000 in fixed assets and approximately $787,000 in other
investments relating to intangible assets. For the three months ended June 30,
2003, the Company took a non-cash impairment charge of approximately $186,000,
of which approximately $62,000 was included in research and development expenses
and of which approximately $124,000 of which was included in general and
administrative expenses. For the three months ended June 30, 2003, the
impairment charge included a write-off of approximately $185,000 in fixed assets
and approximately $1,000 in other investments relating to intangible assets.
In addition, with the Company's subsidiaries' decision at the end of the second
quarter of 2003, to vacate the Jerusalem facility, the Company reevaluated and
significantly shortened the useful life of the leasehold improvements associated
with their administrative facilities, resulting in
10
accelerated depreciation of approximately $420,000 for the three months ended
June 30, 2003.
The current restructuring included an eight-person reduction in the Company's
work force to 19 full and part-time employees at June 30, 2003. Six of such
persons were research personnel and two were administrative personnel. As of
June 30, 2003, six of these employees had left the Company, with the balance to
cease employment subsequent to June 30, 2003.
Through June 30, 2003, the Company had total accumulated expenses of
approximately $50,000 for severance benefits for employees terminated under the
current restructuring, almost all of which had been previously expensed, in both
research and development expenses and general and administrative expenses, as
part of the Company's ongoing accrual for employee severance benefits in
accordance with Israeli law.
As of June 30, 2003, six employees have left the Company under the current
restructuring and approximately $32,000 of severance benefits have been paid.
As of June 30, 2003, approximately $18,000 in severance obligations related to
the current restructuring is included in accrued compensation and related
liabilities. With respect to this liability, the Company had funded deposits in
respect of employee severance obligations of approximately $16,000.
The Company may also incur other costs related to the current restructuring of
the Jerusalem-based activities. See Note 4 with regard to potential liability in
respect of tax benefits received by a subsidiary of the Company as an Approved
Enterprise.
In addition, as part of the current restructuring, the Company may incur other
costs relating to its subsidiary's lease in the Jerusalem facility. Although the
Jerusalem facility was vacated in July 2003, as of the date hereof, the lease
remains in effect. The remaining portion of the lease obligations relating to
the Jerusalem facility amounts to approximately $1,044,000 through the end of
lease term in December 2005. In light of this and in accordance with SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
No. 146"), the Company may record a charge for potential costs associated with
this lease agreement.
Severance benefits for any additional employees who are likely to receive notice
of termination as part of this restructuring are accrued to the balance sheet
date as part of the liability in respect of employee severance benefits in
accordance with Israeli law.
2002 Restructuring
In 2002, the Company implemented a strategic reorganization, sometimes referred
to as the "2002 restructuring". The 2002 restructuring was designed to
substantially reduce early stage research expenditures so that the Company could
focus primarily on the development of its lead product candidate for the
treatment of diabetic nephropathy, KRX-101, and on the acquisition of additional
clinical stage compounds. The 2002 restructuring included a 46 person, or
approximate 70%, reduction in the Company's work force, including senior
management, administrative staff, and research personnel involved in early stage
projects.
Through June 30, 2003, the Company had total accumulated expenses of
approximately $1,121,000 for severance benefits for employees terminated under
the 2002 restructuring, almost all of which had been expensed in prior periods.
11
As of June 30, 2003, all 46 employees have left the Company under 2002
restructuring and approximately $716,000 of severance benefits have been paid.
As of June 30, 2003, approximately $404,000 in severance obligations related to
the 2002 restructuring is included in accrued compensation and related
liabilities. With respect to this liability, the Company had funded deposits in
respect to employee severance obligations of approximately $48,000.
NOTE 6 - SUBSEQUENT EVENTS
In July 2003, the Company's subsidiaries vacated the Jerusalem facility and
relocated to smaller facilities. The landlord of the Jerusalem facility has
alleged that the Company is immediately liable to pay the landlord a sum in
excess of $1.1 million as a result of the alleged breach of the lease agreement
for the Jerusalem facility. The amount being demanded by the landlord includes
rent for the entire remaining term of the lease (through 2005), as well as
property taxes and other costs. In August 2003, the landlord realized the bank
guarantee, in the amount of $222,000, which had been previously provided as
security in connection with the lease agreement. No litigation has yet been
commenced in this matter and the likelihood of this claim cannot be estimated at
this time. See Note 5 - Restructuring.
In August 2003, the Company announced that the Collaborative Study Group (CSG),
the largest standing renal clinical trial group comprised of academic and
tertiary nephrology care centers, will conduct the US-based Phase II/III
clinical program for KRX-101 for the treatment of diabetic nephropathy. It is
anticipated that this clinical program will commence by the late third quarter
or early fourth quarter of 2003. The financial terms of the arrangement have not
been finalized.
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.
OVERVIEW
We are a biopharmaceutical company focused on the acquisition, development and
commercialization of novel pharmaceutical products for the treatment of
life-threatening diseases, including diabetes and cancer.
In August of 2002 and March of 2003, we initiated corporate restructurings that
have resulted in the reduction of staff and a re-focusing of our efforts on the
development of our lead compound, KRX-101, which has completed a Phase II trial
conducted in Europe, and on the acquisition of additional late stage clinical
compounds. For a further discussion of these restructurings, see "Restructuring"
below.
Our lead compound under development is sulodexide, or KRX-101, to which we have
an exclusive license in North America, Japan and other markets. In 2001, KRX-101
was granted Fast-Track designation for the treatment of diabetic nephropathy
and, in 2002, we announced that the FDA had agreed, in principle, to permit us
to avail ourselves of the accelerated approval process under subpart H of the
FDA's regulations governing applications for the approval to market a new drug.
In August 2003, we announced that the Collaborative Study Group (CSG), the
largest standing renal clinical trial group comprised of academic and tertiary
nephrology care centers, will conduct the US-based Phase II/III clinical program
12
for KRX-101 for the treatment of diabetic nephropathy. It is anticipated that
this clinical program will commence by the late third quarter or early fourth
quarter of 2003.
To date, we have not received approval for the sale of any of our drug
candidates in any market.
We were incorporated in Delaware in October 1998. We commenced operations in
November 1999, following our acquisition of substantially all of the assets and
certain of the liabilities of Partec Ltd., our predecessor company that began
its operations in January 1997. Since commencing operations, our activities have
been primarily devoted to developing our technologies and drug candidates,
raising capital, purchasing assets for our corporate offices and laboratory
facilities 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 from our
initial public offering. We have two wholly owned operating subsidiaries, Keryx
Biomedical Technologies Ltd. and Keryx (Israel) Ltd., which have historically
engaged in research and development activities and administrative activities,
respectively, in Israel. For a further discussion of our current research,
development and administrative activities in Israel, see "2003 Restructuring"
and "2002 Restructuring" below. We also have a U.S. subsidiary, Keryx Securities
Corp., organized under the laws of the Commonwealth of Massachusetts for the
purpose of investing the Company's liquid funds.
Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers for
laboratory development, facilities-related and other expenses relating to the
design, development, testing, and enhancement of our product candidates, as well
as expenses related to in-licensing or acquisition of new 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, stock options and warrants. 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," as allowed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), and comply with the disclosure provisions of SFAS
No. 123 and SFAS No. 148. Compensation expense for options and warrants granted
to employees and directors represents the intrinsic value (the difference
between the stock price of the common stock and the exercise price of the
options or warrants) of the options and warrants at the date of grant, as well
as the difference between the stock price at reporting date and the exercise
price, in the case where a measurement date has not been reached. Compensation
for options and warrants granted to consultants and other third-parties 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." The compensation
cost is recorded over the respective vesting periods of the individual stock
options and warrants. The expense is included in the respective categories of
expense in the statement of operations. We expect to incur significant non-cash
compensation expense in the future. However, because some of the options and
warrants issued to employees, consultants and other third-parties either do not
13
vest immediately or vest upon the achievement of certain milestones, the total
expense is uncertain.
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 and our clinical trials.
STOCK REPURCHASE PROGRAM
In November 2002, our board of directors authorized a stock repurchase program
of up to 2.5 million shares of our common stock. Purchases under the stock
repurchase program may be made in the open market or in private transactions
from time to time. The stock repurchase program is being funded using our
current assets. During the six months ended June 30, 2003, we repurchased 9,800
shares of our common stock at an aggregate cost of $12,000 pursuant to the stock
repurchase program. Under the stock repurchase program, up to 2,443,900 shares
of our common stock remain available for repurchase as of June 30, 2003.
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.
We define critical accounting policies 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. 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 because the majority of
the transactions of each subsidiary, including billings, payroll, taxes and
14
other major obligations, are conducted using the US dollar. Therefore all gains
and losses from translations are recorded in our statement of operations. Had we
used the Israeli currency as the functional currency of our subsidiaries,
exchange gains and losses would have been treated as a component of
stockholders' equity, as other comprehensive income, included in a statement of
comprehensive income. We believe that the amount of such comprehensive income
for the six months ended June 30, 2003 would not have been material.
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 and 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
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 for the comparative period relates to our wholly owned Israeli
subsidiaries. These subsidiaries have generated taxable income in respect of
services provided within the group, and therefore we believed in the past that
the deferred tax asset relating to the Israeli subsidiaries would be realized.
It should be noted that as the income has been derived from companies within the
consolidated group, it had been eliminated upon consolidation. During the
quarter, we decided to cease our research and development activities in Israel
and further decrease our administrative activities in our Jerusalem facility. In
addition, since the Israeli subsidiaries are no longer expected to generate
income, we do not believe that the deferred tax asset will be realized. We
therefore have decided to record a valuation allowance against the deferred tax
asset, resulting in an expense in the statement of operations for the six months
ended June 30, 2003.
In September 2001, one of our Israeli subsidiaries received the status of an
"Approved Enterprise" which grants certain tax benefits in Israel in accordance
with the "Law for the Encouragement of Capital Investments, 1959." Through June
30, 2003, this Israeli subsidiary will have received tax benefits of
approximately $731,000 as a result of the subsidiary's status as an "Approved
Enterprise." In June 2002, the subsidiary received formal temporary notification
that it had met the requirements for implementation of the benefits under this
program. In January 2003, the subsidiary notified the Israeli governmental
authority of reductions in its staff and operations that had formed the basis of
its Approved Enterprise program, and requested that the program instituted prior
to the cost reductions be approved. In February 2003, the Israeli governmental
authority informed this subsidiary that it may be in non-compliance with the
conditions of its Approved Enterprise program because of the indicated
reductions. As part of the restructuring implemented during the first quarter of
2003, as described below, our Israeli subsidiaries decided to close down the
Jerusalem laboratory facility. We are currently engaged in discussions with the
Israeli governmental authority and, at this point, are uncertain as to whether
or not any past benefits will need to be repaid. Accordingly, we have not
recorded any charge with respect to this potential liability.
15
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. We have assumed for the purposes of
the Black-Scholes calculation that an option will be exercised one year after it
fully vests. We base our estimates of our stock price volatility on the
volatility during the period prior to the grant of the option or warrant.
However, this estimate is neither predictive nor indicative of the future
performance of our stock. 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.
Impairment Of Long-Lived Assets And Long-Lived Assets To Be Disposed Of. We have
adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS No. 144) from January 1, 2002. This Statement requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future cash flows expected to
be generated by the asset or used in its disposal. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Fair value of fixed assets "held for
sale" was determined based on discussions held with prospective buyers as well
as resellers of second-hand assets. We have conducted such review in light of
our restructuring in 2003. Our review included estimating each drug candidate's
chance of continued development, partnering and FDA approval, its estimated
market size and share, and potential royalty rate. We believe, based upon this
review of our future net cash flow estimates for each of our drug candidates and
the decision to cease activity in the Jerusalem facility, that an impairment
charge should be recorded for the six months ended June 30, 2003. Any changes in
any of these estimates could affect the need to record an impairment charge or
the amount of the charge thereof. See "Restructuring" below.
RESTRUCTURING
2003 Restructuring
In March 2003, we gave notice of termination to four of our employees based in
our Jerusalem laboratory facility, and, in addition, we indicated our intention
to cease our early-stage research and development activities and to further
decrease our administrative activities in our Jerusalem facility. While the
significant portion of the current restructuring was completed by July 2003, we
16
anticipate that the current restructuring will be fully completed in the third
quarter of 2003. During the second quarter of 2003, we gave notice of
termination to an additional one person in Israel and to one person in
Cambridge, Massachusetts.
As of June 30, 2003, our subsidiaries decided to vacate the Jerusalem facility
and to consolidate our remaining limited Israeli activities at an alternative
location. During the course of the current restructuring, Barry Cohen, the
Company's Vice President, Business Development, and Thomas Humphries, the
Company's Senior Vice President, Clinical Development, each resigned his
employment with us. In connection with Dr. Humphries leaving the Company, we
closed our office in Cambridge, Massachusetts and consolidated its activities in
our New York City headquarters.
In addition, as a result of our decision during the second quarter of 2003 to
sell the majority of our fixed assets, those fixed assets, primarily office
furniture and equipment, laboratory equipment, and computers, software and
related equipment, located in the Jerusalem facility that were previously
classified as "held-for-use" were classified as "held-for-sale," in accordance
with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS No. 144). At June 30, 2003, $384,000 in fixed assets were
classified as "held-for-sale." We completed the disposition of the majority of
these assets during the early third quarter of 2003.
As part of the above, we reevaluated our long-lived assets in accordance with
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"
and took a non-cash impairment charge of $2,481,000 for the six months ended
June 30, 2003, $2,357,000 of which was included in research and development
expenses and $124,000 of which was included in general and administrative
expenses. For the six months ended June 30, 2003, the impairment charge included
a write-off of $1,694,000 in fixed assets and $787,000 in other investments
relating to intangible assets. For the three months ended June 30, 2003, we took
a non-cash impairment charge of $186,000, $62,000 of which was included in
research and development expenses and $124,000 of which was included in general
and administrative expenses. For the three months ended June 30, 2003, the
impairment charge included a write-off of $185,000 in fixed assets and $1,000 in
other investments relating to intangible assets.
In addition, with the decision of our subsidiaries to vacate the Jerusalem
facility, we reevaluated and significantly shortened the useful life of
leasehold improvements associated with their administrative activities,
resulting in accelerated depreciation of $420,000 for the three months ended
June 30, 2003.
The current restructuring included an eight person reduction in our work force
to 19 full and part-time employees at June 30, 2003. Six of such persons were
research personnel and two were administrative personnel. As of June 30, 2003,
six of these employees had left us, with the balance to cease employment
subsequent to June 30, 2003.
Through June 30, 2003, we had total accumulated expenses of $50,000 for
severance benefits for employees terminated under the current restructuring,
almost all of which had been previously expensed, in both research and
development expenses and general and administrative expenses, as part of our
ongoing accrual for employee severance benefits in accordance with Israeli law.
As of June 30, 2003, six employees have left us under the current restructuring
and $32,000 of severance benefits have been paid.
As of June 30, 2003, $18,000 in severance obligations related to the current
restructuring is included in accrued compensation and related liabilities. With
17
respect to this liability, we had funded deposits in respect of employee
severance obligations of $16,000.
We may also incur other costs related to the current restructuring of our
subsidiaries' Jerusalem-based activities, with regard to potential liability in
respect of tax benefits received by our subsidiary as an Approved Enterprise.
In addition, as part of the current restructuring, we may incur other costs
relating to the lease in the Jerusalem facility. The facility was vacated in
July 2003, however as of the date hereof the lease remains in effect. The
remaining portion of the lease obligations relating to the Jerusalem facility
amounts to $1,044,000 through the term of the lease ending in December 2005. In
light of this and in accordance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"), we may record a
charge for potential costs associated with this lease agreement.
Severance benefits for any additional employees who are likely to receive notice
of termination as part of this restructuring are accrued to the balance sheet
date as part of the liability in respect of employee severance benefits in
accordance with Israeli law.
2002 Restructuring
In the second half of 2002, we implemented a strategic reorganization, sometimes
referred to as the "2002 restructuring". The 2002 restructuring was designed to
substantially reduce early stage research expenditures so that we could focus
primarily on the development of our lead product candidate for the treatment of
diabetic nephropathy, KRX-101, and on the acquisition of additional clinical
stage compounds. The 2002 restructuring included a 46 person, or approximate
70%, reduction in the Company's work force, including senior management,
administrative staff, and research personnel involved in early stage projects.
Through June 30, 2003, we had total accumulated expenses of $1,121,000 for
severance benefits for employees terminated under our 2002 restructuring, almost
all of which had been expensed in prior periods.
As of June 30, 2003, 46 employees have left us under the 2002 restructuring and
$716,000 of severance benefits have been paid.
As of June 30, 2003, $404,000 in severance obligations related to the 2002
restructuring is included in accrued compensation and related liabilities. With
respect to this liability, we had funded deposits in respect to employee
severance obligations of $48,000.
18
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2002
Revenue. We did not have any revenue for the three months ended June 30, 2003
and June 30, 2002.
Research and Development Expenses. Research and development expenses, including
non-cash compensation expense related to stock option grants and warrant
issuances, decreased by $1,247,000 to $305,000 for the three months ended June
30, 2003, as compared to expenses of $1,552,000 for the three months ended June
30, 2002. The decrease in research and development was due to the decline in
early stage research and development expenditures as a result of the current and
2002 restructurings. These decreases were partially offset by the non-cash
impairment charge associated with our subsidiaries' decision to sell certain
fixed assets located in the Jerusalem facility and their consequent
classification as "held-for-sale" instead of "held-for-use."
We expect our research and development costs to increase sequentially during the
second half of the year as a result of the expected commencement of our
U.S.-based clinical program for KRX-101. However, we do expect research and
development costs for the second half of 2003 to decrease compared to the second
half of 2002.
Non-cash compensation expense related to stock option grants and warrant
issuances was negative $249,000 for the three months ended June 30, 2003 as
compared to negative $764,000 for the three months ended June 30, 2002. This
negative non-cash compensation expense was primarily due to the reversal of
previously recorded compensation of milestone-based options pursuant to the
provisions of SFAS No. 123 and EITF 96-18.
General and Administrative Expenses. General and administrative expenses,
including non-cash compensation expense related to stock option grants and
warrant issuances, increased by $175,000 to $1,255,000 for the three months
ended June 30, 2003, as compared to expenses of $1,080,000 for the three months
ended June 30, 2002. The increase in general and administrative expenses was due
primarily to the accelerated depreciation of leasehold improvements in the
Jerusalem facility and due to a non-cash impairment charge associated with our
subsidiaries' decision to sell certain fixed assets located in the Jerusalem
facility and their consequent classification as "held-for-sale" instead of
"held-for-use." These increases were partially offset by reduced personnel and
related costs associated with the 2002 restructuring.
We expect our general and administrative costs to increase sequentially during
the second half of the year as a result of the expected commencement of our
U.S.-based clinical program for KRX-101. However, we do expect general and
administrative costs for the second half of 2003 to decrease compared to the
second half of 2002.
Non-cash compensation expense related to stock option grants was $50,000 for the
three months ended June 30, 2003 as compared to negative $2,000 for the three
months ended June 30, 2002.
Interest Income (Expense), Net. Interest income, net, decreased by $95,000 to
$65,000 for the three months ended June 30, 2003, as compared to income of
$160,000 for the three months ended June 30, 2002. The decrease resulted from a
lower level of invested funds and the general decline in market interest rates
when compared to the comparable period last year.
19
Income Taxes. Income tax expense increased by $75,000 to $14,000 for the three
months ended June 30, 2003, as compared to income of $61,000 for three months
ended June 30, 2002. The increase in income tax expense was primarily due to our
subsidiary's reversal of a previously recorded income tax liability, which
resulted in income in the comparative period last year, pursuant to receiving
formal temporary notification that it met the requirements for implementation of
benefits under the Approved Enterprise; and due to an adjustment of a
prior-period's tax liability which was done upon the presentation of a tax
assessment. Income tax expense for the comparative period 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.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2002
Revenue. We did not have any revenue for the six months ended June 30, 2003 and
June 30, 2002.
Research and Development Expenses. Research and development expenses, including
non-cash compensation expense related to stock option grants and warrant
issuances, decreased by $505,000 to $3,410,000 for the six months ended June 30,
2003, as compared to expenses of $3,915,000 for the six months ended June 30,
2002. The decrease in research and development expenses was due to a decline in
early stage research and development expenditures as a result of the current and
2002 restructurings. These decreases were partially offset by the non-cash
impairment charge associated with the decision to cease the Jerusalem laboratory
activities, as described above.
We expect our research and development costs to increase sequentially during the
second half of the year as a result of the expected commencement of our
U.S.-based clinical program for KRX-101. However, we do expect research and
development costs for the second half of 2003 to decrease compared to the second
half of 2002.
Non-cash compensation expense related to stock option grants and warrant
issuances was negative $515,000 for the six months ended June 30, 2003 as
compared to negative $1,344,000 for the six months ended June 30, 2002. This
negative non-cash compensation expense was primarily due to the reversal of
previously recorded compensation of milestone-based options pursuant to the
provisions of SFAS No. 123 and EITF 96-18.
General and Administrative Expenses. General and administrative expenses,
including non-cash compensation expense related to stock option grants and
warrant issuances, decreased by $463,000 to $1,921,000 for the six months ended
June 30, 2003, as compared to expenses of $2,384,000 for the six months ended
June 30, 2002. The decrease in general and administrative expenses was due
primarily to reduced personnel and related costs associated with the 2002
restructuring. The decrease in general and administrative expenses was partially
offset by the accelerated depreciation of leasehold improvements in the
Jerusalem facility and due to a non-cash impairment charge associated with the
decision to sell certain fixed assets located in the Jerusalem facility and
their consequent classification as "held-for-sale" instead of "held-for-use."
We expect our general and administrative costs to increase sequentially during
the second half of the year as a result of the expected commencement of our
U.S.-based clinical program for KRX-101. However, we do expect general and
administrative costs for the second half of 2003 to decrease compared to the
second half of 2002.
20
Non-cash compensation expense related to stock option grants was $52,000 for the
six months ended June 30, 2003 as compared to negative $8,000 for the six months
ended June 30, 2002.
Interest Income (Expense), Net. Interest income, net, decreased by $184,000 to
$150,000 for the six months ended June 30, 2003, as compared to income of
$334,000 for the six months ended June 30, 2002. The decrease resulted from a
lower level of invested funds and the general decline in market interest rates
when compared to the comparable period last year.
Income Taxes. Income tax expense increased by $127,000 to $116,000 for the six
months ended June 30, 2003, as compared to income of $11,000 for the six months
ended June 30, 2002. The increase in income tax expense was primarily due to the
creation of a valuation allowance against the deferred tax asset and the
deferred tax liability of our Israeli subsidiaries, associated with the
cessation of research and development activities and further decrease in
administrative activities in the Jerusalem facility; due to our subsidiary's
reversal of a previously recorded income tax liability, which resulted in income
in the comparative period last year, pursuant to receiving formal temporary
notification that it met the requirements for implementation of benefits under
the Approved Enterprise; and due to an adjustment of a prior-period's tax
liability which was done upon the presentation of a tax assessment. Income tax
expense for the comparative period 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, 2003, 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, 2003, we had $21.0 million in cash, cash equivalents, interest
receivable and short-term securities, a decrease of $3.1 million from December
31, 2002. Cash used in operating activities for the six months ended June 30,
2003 was $3.4 million as compared to $6.5 million for the six months ended June
30, 2002. This decrease in cash used in operating activities was due primarily
to reduced early stage research activities and associated personnel and general
and administrative expenses. For the six months ended June 30, 2003, net cash
provided by investing activities of $4.7 million was primarily the result of the
maturity of short-term securities.
As of June 30, 2003, we have known contractual obligations, commitments and
contingencies of $1,156,000. Of this amount, $33,000 relates to other agreements
due within the next year. The additional $1,123,000 relates to operating lease
obligations of which $497,000 is due within the next year, with the remaining
$626,000 due within one to three years. Of the amount relating to operating
lease obligations, $1,044,000 reflects the remaining portion of our subsidiary's
lease obligations for the Jerusalem facility through the term of the lease
ending in 2005. Subsequent to June 30, 2003, our Israeli subsidiaries vacated
this facility, however, as of the date hereof, the lease for the facility
remains in effect. Following the departure, the landlord of the Jerusalem
facility claimed that we have breached the lease agreement and are consequently
liable to immediately pay all the monies owed in connection with that agreement.
In
21
addition, the landlord claimed and obtained the bank guarantee, in the amount of
$222,000, which was previously provided as security in connection with the lease
agreement. At this time, no litigation has been initiated and the likelihood of
the claim cannot be estimated at this time.
- -----------------------------------------------------------------------------------------------
Payments Due By Period
- -----------------------------------------------------------------------------------------------
Less than After 5
Contractual Obligations Total 1 Year 1-3 Years 4-5 Years Years
- -----------------------------------------------------------------------------------------------
Operating Leases $1,123,000 $497,000 $626,000 -- --
- -----------------------------------------------------------------------------------------------
Other Agreements 33,000 33,000 -- -- --
- -----------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $1,156,000 $530,000 $626,000 -- --
- -----------------------------------------------------------------------------------------------
Additionally, we have undertaken to make contingent milestone payments to
certain of our licensors of up to approximately $5.0 million over the life of
the licenses, which expire from 2017 to 2023. 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 $21.0 million in cash, cash equivalents, interest receivable
and short-term securities as of June 30, 2003 will be sufficient to enable us to
meet our planned operating needs and capital expenditures for at least the next
24 months. Our cash and cash equivalents as of June 30, 2003 are invested in
highly liquid investments such as cash, money market accounts and short-term US
corporate and government debt securities. As of June 30, 2003, 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 2003 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 timing of expenses associated with product development of our
proprietary product candidates, especially KRX-101, and including
those expected to be in-licensed, partnered or acquired;
o the timing of the in-licensing, partnering and acquisition of new
product opportunities;
o the progress of the development efforts of parties with whom we have
or intend to, entered into research and development agreements;
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
22
o the amount of any funds expended to repurchase our common stock.
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.
RISK FACTORS THAT MAY AFFECT RESULTS
This Quarterly Report on Form 10-Q contains forward-looking statements,
including statements about our future operating results, our drug development
programs and potential strategic alliances. For this purpose, any statement that
is not a statement of historical fact should be considered a forward-looking
statement. We often use the words "believe," "anticipate," "plan," "expect,"
"intend" and similar expressions to help identify forward-looking statements.
There are a number of important factors that could cause our actual results to
differ materially from those indicated or implied by forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere in this Form 10-Q. We
disclaim any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY AND HAVE INCURRED SUBSTANTIAL OPERATING
LOSSES SINCE OUR INCEPTION. WE EXPECT TO CONTINUE TO INCUR LOSSES IN THE FUTURE
AND MAY NEVER BECOME PROFITABLE.
We have a limited operating history. You should consider our prospects in light
of the risks and difficulties frequently encountered by early stage companies.
In addition, we have incurred operating losses since our inception, expect to
continue to incur operating losses for the foreseeable future and may never
become profitable. As of June 30, 2003, we had an accumulated deficit of
approximately $50.8 million. As we expand our research and development efforts,
we will incur increasing losses. We may continue to incur substantial operating
losses even if we begin to generate revenues from our drug candidates or
technologies.
We have not yet commercialized any products or technologies and cannot be sure
we will ever be able to do so. Even if we commercialize one or more of our drug
candidates or technologies we may not become profitable. Our ability to achieve
profitability depends on a number of factors, including our ability to complete
our development efforts, obtain regulatory approval for our drug candidates and
successfully commercialize our drug candidates and technologies.
23
IF WE ARE UNABLE TO SUCCESSFULLY BEGIN OR COMPLETE OUR CLINICAL TRIALS OF
KRX-101, OUR ABILITY TO ACHIEVE OUR CURRENT BUSINESS STRATEGY WILL BE ADVERSELY
AFFECTED.
Whether or not and how quickly we complete clinical trials is dependent in part
upon the rate at which we are able to engage clinical trial sites and,
thereafter, the rate of enrollment of patients. Patient enrollment is a function
of many factors, including the size of the patient population, the proximity of
patients to clinical sites, the eligibility criteria for the study and the
existence of competitive clinical trials. If we experience delays in identifying
and contracting with sites and/or in patient enrollment in our clinical trial
program, we may incur additional costs and delay our development program for
KRX-101.
Additionally, we have submitted a subpart H clinical development plan to the FDA
for the clinical development of KRX-101 for diabetic nephropathy. A final
agreement on the specifics of our clinical program for that development plan has
not been agreed to with the FDA and we cannot give any assurance that an
acceptable final agreement on the specifics of such clinical program will ever
be reached with the FDA. In fact, based on the FDA's comments to date, we
believe that additional discussions with the FDA will be required prior to final
agreement on the specifics of our subpart H accelerated approval clinical
program. We cannot assure you that those discussions will take place or, if they
do take place, the timing of such discussions, or that the results of such
discussions will be satisfactory to us. Additionally, the FDA has stated that
based on the novelty of the approach that we have discussed with them, they
would want to refer our proposed approach to the Cardio-Renal Advisory
Committee.
Moreover, even if we are able to reach final agreement with the FDA regarding
the specifics of an accelerated approval approach, no assurance can be given
that we will be able to meet the requirements set forth in such agreement. The
subpart H process is complex and requires flawless execution. Many companies who
have been granted the right to utilize an accelerated approval approach have
failed to obtain approval. The clinical timeline, scope and consequent cost for
the development of KRX-101 will depend, in part, on the final outcome of our
discussions with the FDA. Moreover, negative or inconclusive results from the
clinical trials we hope to conduct or adverse medical events could cause us to
have to repeat or terminate the clinical trials. Accordingly, we may not be able
to complete the clinical trials within an acceptable time frame, if at all.
OUR DRUG CANDIDATES ARE IN EARLY STAGES OF DEVELOPMENT AND MAY NEVER RECEIVE THE
NECESSARY REGULATORY APPROVALS.
Our drug candidates are in early stages of development. We have not received,
and may never receive, regulatory approval for clinical trials for any of our
drug candidates. We will need to conduct significant additional research and
human testing before we can apply for product approval with the FDA or with
regulatory authorities of other countries. Preclinical testing and clinical
development are long, expensive and uncertain processes. Satisfaction of
regulatory requirements typically depends on the nature, complexity and novelty
of the product and requires the expenditure of substantial resources. Data
obtained from preclinical and clinical tests can be interpreted in different
ways, which could delay, limit or prevent regulatory approval. It may take us
many years to complete the testing of our drug candidates and failure can occur
at any stage of this process. Negative or inconclusive results or medical events
during a clinical trial could cause us to delay or terminate our development
efforts.
Clinical trials also have a high risk of failure. A number of companies in the
pharmaceutical industry, including biotechnology companies, have suffered
significant setbacks in advanced clinical trials, even after achieving promising
results in earlier trials. If we experience delays in the testing or approval
process or if we need to perform more or larger clinical trials than originally
24
planned, our financial results and the commercial prospects for our drug
candidates may be materially impaired. In addition, we have limited experience
in conducting and managing the clinical trials necessary to obtain regulatory
approval in the United States and abroad and, accordingly, may encounter
unforeseen problems and delays in the approval process.
BECAUSE WE LICENSE OUR PROPRIETARY TECHNOLOGIES, TERMINATION OF THESE AGREEMENTS
WOULD PREVENT US FROM DEVELOPING OUR DRUG CANDIDATES.
We do not own KRX-101 or any of our early-stage technologies. We have licensed
these technologies from others. These license agreements require us to meet
development or financing milestones and impose development and commercialization
due diligence on us. In addition, under these agreements we must pay royalties
on sales of products resulting from licensed technologies and pay the patent
filing, prosecution and maintenance costs related to the licenses. If we do not
meet our obligations in a timely manner or if we otherwise breach the terms of
our agreements, our licensors could terminate the agreements and we would lose
the rights to KRX-101 or our early-stage technologies.
BECAUSE OUR REVISED BUSINESS MODEL IS BASED, IN PART, ON THE ACQUISITION OR
IN-LICENSING OF ADDITIONAL CLINICAL PRODUCT CANDIDATES, IF WE FAIL TO ACQUIRE OR
IN-LICENSE SUCH CLINICAL PRODUCT CANDIDATES, OUR LONG TERM BUSINESS PROSPECTS
WILL BE SUBSTANTIALLY IMPAIRED.
As a major part of our business strategy, we plan to acquire or in-license
clinical stage product candidates. If we fail to acquire or in-license such
product candidates, we may not achieve expectations of our future performance.
Because we do not intend to engage in significant discovery research, we must
rely on third parties to sell or license new product opportunities to us. Other
companies, including some with substantially greater financial, development,
marketing and sales resources, are competing with us to acquire or in-license
such products or product candidates. We may not be able to acquire or in-license
rights to additional products or product candidates on acceptable terms, if at
all.
IF WE DO NOT ESTABLISH OR MAINTAIN DRUG DEVELOPMENT AND MARKETING ARRANGEMENTS
WITH THIRD PARTIES, WE MAY BE UNABLE TO COMMERCIALIZE OUR TECHNOLOGIES INTO
PRODUCTS.
We are an emerging company and do not possess all of the capabilities to fully
commercialize our product candidates on our own. From time to time, we may need
to contract with third parties to:
o assist us in developing, testing and obtaining regulatory approval
for and commercializing some of our compounds and technologies; and
o market and distribute our drug candidates.
For example, we are currently seeking third party partners to conduct further
preclinical development of the KinAce platform and other early stage programs.
There can be no assurance that we will be able to successfully enter into
agreements with such partners on terms that are acceptable to us. If we are
unable to successfully contract with third parties for these services when
needed, or if existing arrangements for these services are terminated, whether
or not through our actions, or if such third parties do not fully perform under
these arrangements, we may have to delay, scale back or end one or more of our
drug development programs or seek to develop or commercialize our technologies
independently, which could result in delays. Further, such failure could result
in the termination of license rights to one or more of our technologies.
25
Moreover, if these development or marketing agreements take the form of a
partnership or strategic alliance, such arrangements may provide our
collaborators with significant discretion in determining the efforts and
resources that they will apply to the development and commercialization of
products based on our technologies. Accordingly, to the extent that we rely on
third parties to research, develop or commercialize products based on our
technologies, we are unable to control whether such products will be
scientifically or commercially successful.
WE RELY ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS. IF THESE THIRD PARTIES DO
NOT SUCCESSFULLY MANUFACTURE OUR PRODUCTS OUR BUSINESS WILL BE HARMED.
We have no experience in manufacturing products for clinical or commercial
purposes and do not have any manufacturing facilities. We intend to use third
parties to manufacture our products for use in clinical trials and for future
sales. We may not be able to enter into third party contract manufacturing
agreements on acceptable terms, if at all.
Contract manufacturers often encounter difficulties in scaling up production,
including problems involving production yields, quality control and assurance,
shortage of qualified personnel, compliance with FDA and foreign regulations,
production costs and development of advanced manufacturing techniques and
process controls. Our third party manufacturers may not perform as agreed or may
not remain in the contract manufacturing business for the time required by us to
successfully produce and market our drug candidates. In addition, our contract
manufacturers will be subject to ongoing periodic, unannounced inspections by
the FDA and corresponding foreign governmental agencies to ensure strict
compliance with, among other things, current good manufacturing practices, in
addition to other governmental regulations and corresponding foreign standards.
We will not have control over, other than by contract, third party
manufacturers' compliance with these regulations and standards. Switching or
engaging multiple manufacturers may be difficult because the number of potential
manufacturers is limited and, particularly in the case of KRX-101, the process
by which multiple manufacturers make the drug substance must be identical at
each manufacturing facility. It may be difficult for us to find and engage
replacement or multiple manufacturers quickly and on terms acceptable to us if
at all. Moreover, if we need to change manufacturers, the FDA and corresponding
foreign regulatory agencies must approve these manufacturers in advance, which
will involve testing and additional inspections to ensure compliance with these
regulations and standards.
If third-party manufacturers fail to deliver the required quantities of our drug
candidates on a timely basis and at commercially reasonable prices, and if we
fail to find replacement or multiple manufacturers on acceptable terms, our
ability to develop and deliver products on a timely and competitive basis may be
adversely impacted and our business, financial condition or results of
operations will be materially harmed.
In the event that we are unable to obtain or retain third party manufacturers,
we will not be able to commercialize our products as planned. The manufacture of
our products for clinical trials and commercial purposes is subject to FDA and
foreign regulations. No assurance can be given that our third party
manufacturers will comply with these regulations or other regulatory
requirements now or in the future.
While we currently have a contract manufacturing relationship for KRX-101, we do
not believe that this relationship will be sufficient to meet our needs for
clinical and commercial supplies. Accordingly, we are currently seeking to
establish an alternative contract manufacturing relationship which we believe
will be adequate to satisfy our current clinical and commercial supply needs.
26
As we seek to transition our manufacturing of KRX-101 to a new contract
manufacturer, we will need to create a reproducible manufacturing process that
will ensure consistent manufacture of KRX-101 across multiple batches and
sources. As with all heparin-like compounds, the end product is highly sensitive
to the manufacturing process utilized. Accordingly, the creation of a
reproducible process will be required for the successful commercialization of
KRX-101. There can be no assurance that we will be successful in this endeavor.
IF WE ARE NOT ABLE TO OBTAIN THE RAW MATERIAL REQUIRED FOR THE MANUFACTURE OF
OUR LEAD PRODUCT CANDIDATE, KRX-101, OUR ABILITY TO DEVELOP AND MARKET THIS
PRODUCT CANDIDATE WILL BE SUBSTANTIALLY HARMED.
Source materials for KRX-101, our lead product candidate, are derived from
porcine intestines. Long-term supplies for KRX-101 could be affected by
limitations in the supply of porcine intestines, over which we will have no
control. Additionally, diseases affecting the world supply of pigs could have an
actual or perceived negative impact on our ability, or the ability of our
contract manufacturers, to source, make and/or sell KRX-101. Such negative
impact could materially adversely affect the commercial success of KRX-101.
IF OUR COMPETITORS DEVELOP AND MARKET PRODUCTS THAT ARE MORE EFFECTIVE THAN
OURS, OUR COMMERCIAL OPPORTUNITY MAY BE REDUCED OR ELIMINATED.
Our commercial opportunity will be reduced or eliminated if our competitors
develop and market products that are more effective, have fewer side effects or
are less expensive than our drug candidates. Other companies have products or
drug candidates in various stages of preclinical or clinical development to
treat diseases for which we are seeking to discover and develop drug candidates.
Some of these potential competing drugs are further advanced in development than
our drug candidates and may be commercialized earlier. Even if we are successful
in developing effective drugs, our products may not compete successfully with
products produced by our competitors.
Our competitors include pharmaceutical companies and biotechnology companies, as
well as universities and public and private research institutions. In addition,
companies active in different but related fields represent substantial
competition for us. Many of our competitors have significantly greater capital
resources, larger research and development staffs and facilities and greater
experience in drug development, regulation, manufacturing and marketing than we
do. These organizations also compete with us to recruit qualified personnel,
attract partners for joint ventures or other collaborations, and license
technologies that are competitive with ours. As a result, our competitors may be
able to more easily develop technologies and products that would render our
technologies or our drug candidates obsolete or noncompetitive.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, OUR OPERATIONS COULD BE DISRUPTED AND OUR BUSINESS COULD BE HARMED.
Subsequent to the current and 2002 restructurings, we currently have 15 full and
part-time employees and several other persons working under research agreements
or consulting agreements. To successfully develop our drug candidates, we must
be able to attract and retain highly skilled personnel. In addition, if we lose
the services of our current personnel, in particular, Michael S. Weiss, our
Chairman and Chief Executive Officer, our ability to continue to develop our
lead drug candidates could be materially impaired. In addition, while we have an
employment agreement with Mr. Weiss, this agreement would not prevent him from
terminating his employment with us.
27
ANY ACQUISITIONS WE MAKE MAY NOT BE SCIENTIFICALLY OR COMMERCIALLY SUCCESSFUL.
As part of our business strategy, we may effect acquisitions to obtain
additional businesses, products, technologies, capabilities and personnel. If we
make one or more significant acquisitions in which the consideration includes
stock or other securities, your equity in us may be significantly diluted. If we
make one or more significant acquisitions in which the consideration includes
cash, we may be required to use a substantial portion of our available cash.
Acquisitions involve a number of operational risks, including:
o difficulty and expense of assimilating the operations, technology
and personnel of the acquired business;
o inability to retain the management, key personnel and other
employees of the acquired business;
o inability to maintain the acquired company's relationship with key
third parties, such as alliance partners;
o exposure to legal claims for activities of the acquired business
prior to acquisition;
o diversion of management attention; and
o potential impairment of substantial goodwill and write-off of
in-process research and development costs, adversely affecting our
reported results of operations.
RISKS RELATED TO OUR FINANCIAL CONDITION
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS ON TERMS FAVORABLE TO US, OR AT ALL,
OUR BUSINESS WOULD BE HARMED.
We expect to use rather than generate funds from operations for the foreseeable
future. Based on our current plans, we believe our existing cash and cash
equivalents will be sufficient to fund our operating expenses and capital
requirements for at least the next two years. However, the actual amount of
funds that we will need prior to or after that date will be determined by many
factors, some of which are beyond our control. As a result, we may need funds
sooner or in different amounts than we currently anticipate. These factors
include:
o the progress of our development activities;
o the progress of our research activities;
o the number and scope of our development programs;
o our ability to establish and maintain current and new licensing or
acquisition arrangements;
o our ability to achieve our milestones under our licensing
arrangements;
o the costs involved in enforcing patent claims and other intellectual
property rights; and
o the costs and timing of regulatory approvals.
28
If our capital resources are insufficient to meet future capital requirements,
we will have to raise additional funds. If we are unable to obtain additional
funds on terms favorable to us or at all, we may be required to cease or reduce
our operating activities or sell or license to third parties some or all of our
technology. If we raise additional funds by selling additional shares of our
capital stock, the ownership interests of our stockholders will be diluted. If
we raise additional funds through the sale or license of our technology, we may
be unable to do so on terms favorable to us.
OUR RESTRUCTURINGS MAY NOT ACHIEVE THE RESULTS WE INTEND AND MAY HARM OUR
BUSINESS.
Since mid-2002, we have been restructuring the company, including the current
and 2002 restructurings. Our workforce reduction consisted principally of
research personnel primarily involved in early-stage projects, along with
certain managerial and administrative staff. The implementation of our
restructurings has placed, and may continue to place, a significant strain on
our managerial, operational, financial and other resources. If we are unable to
implement our restructurings effectively, we may not successfully achieve our
business strategy or reduce our costs. Moreover, we may be required to further
reduce our headcount and/or program-specific expenditures, which could require
us to further scale back or abandon any of our development activities, or
license to others products or technologies we would otherwise have sought to
commercialize ourselves.
As of June 30, 2003, we decided, due its significantly reduced activity, to
vacate the Jerusalem facility by the middle of July 2003, and to consolidate the
remaining limited activities at an alternative location. Although the facility
was vacated in July 2003, as of the date hereof the lease remains in effect. The
remaining portion of the lease obligations relating to the Jerusalem facility
amounts to $1,044,000 through the term of the lease ending December 2005. The
Company could be held responsible for the remaining obligations of our
subsidiaries under the lease and in certain instances damages and other charges.
In September 2001, one of our Israeli subsidiaries received the status of an
"Approved Enterprise," a status which grants certain tax benefits in Israel in
accordance with the "Law for the Encouragement of Capital Investments, 1959".
Through June 30, 2003, our Israeli subsidiary will have received tax benefits of
approximately $731,000 as a result of our subsidiary's status as an "Approved
Enterprise." As a result of recent cost reductions, the staff and activity of
this subsidiary have been materially reduced. In January 2003, the subsidiary
notified the Israeli governmental authority of reductions in its staff and
operations that had formed the basis of its Approved Enterprise program, and
requested that the program instituted prior to the cost reductions be approved.
In February 2003, the Israeli governmental authority informed this subsidiary
that it may be in non-compliance with the conditions of its Approved Enterprise
program because of the indicated reductions. As part of the restructuring
implemented during the first quarter of 2003, we decided to close down our
Jerusalem laboratory facility. We are currently engaged in discussions with the
Israeli governmental authority and at this point are uncertain as to whether or
not any past benefits will need to be repaid. Accordingly, we have not recorded
any charge with respect to this potential liability. It is possible that as a
result of these cost reductions and the close down of the Jerusalem laboratory
facility, we may be liable to repay some or all of the tax benefits received to
date, which could adversely affect our cash flow and results of operations.
29
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY THIRD PARTIES
MAY BE ABLE TO USE OUR TECHNOLOGY, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
COMPETE IN THE MARKET.
Our commercial success will depend in part on our ability and the ability of our
licensors to obtain and maintain patent protection on our drug products and
technologies and successfully defend these patents and technologies against
third-party challenges. The patent positions of pharmaceutical and biotechnology
companies can be highly uncertain and involve complex legal and factual
questions. No consistent policy regarding the breadth of claims allowed in
biotechnology patents has emerged to date. Accordingly, the patents we use may
not be sufficiently broad to prevent others from practicing our technologies or
from developing competing products. Furthermore, others may independently
develop similar or alternative technologies or design around our patented
technologies. The patents we use may be challenged, invalidated or fail to
provide us with any competitive advantage.
Moreover, we rely on trade secrets to protect technology where we believe patent
protection is not appropriate or obtainable. However, trade secrets are
difficult to protect. While we require our employees, collaborators and
consultants to enter into confidentiality agreements, this may not be sufficient
to adequately protect our trade secrets or other proprietary information. In
addition, we share ownership and publication rights to data relating to some of
our drug candidates with our research collaborators and scientific advisors. If
we cannot maintain the confidentiality of this information, our ability to
receive patent protection or protect our proprietary information will be at
risk.
LITIGATION OR THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD
REQUIRE US TO SPEND SUBSTANTIAL TIME AND MONEY DEFENDING SUCH CLAIMS AND
ADVERSELY AFFECT OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS.
Third parties may assert that we are using their proprietary technology without
authorization. In addition, third parties may have or obtain patents in the
future and claim that our technologies infringe their patents. If we are
required to defend against patent suits brought by third parties, or if we sue
third parties to protect our patent rights, we may be required to pay
substantial litigation costs, and our management's attention may be diverted
from operating our business. In addition, any legal action against our licensors
or us that seeks damages or an injunction of our commercial activities relating
to the affected technologies could subject us to monetary liability and require
our licensors or us to obtain a license to continue to use the affected
technologies. We cannot predict whether our licensors or we would prevail in any
of these types of actions or that any required license would be made available
on commercially acceptable terms, if at all.
RISKS RELATED TO OUR COMMON STOCK
CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK AMONG OUR EXISTING EXECUTIVE
OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM
INFLUENCING SIGNIFICANT CORPORATE DECISIONS.
As of June 30, 2003, our executive officers, directors and principal
stockholders (including their affiliates) beneficially own, in the aggregate,
approximately 34.41% of our outstanding common stock, including, for this
purpose, currently exercisable options and warrants held by our executive
officers, directors and principal stockholders. As a result, these persons,
acting together, may have the ability to effectively determine the outcome of
all matters submitted to our stockholders for approval, including the election
and removal of directors and any merger, consolidation or sale of all or
substantially all of our assets. In addition, such persons, acting together, may
30
have the ability to effectively control our management and affairs. Accordingly,
this concentration of ownership may harm the market price of our common stock by
discouraging a potential acquirer from attempting to acquire us.
OUR STOCK PRICE COULD BE VOLATILE AND YOUR INVESTMENT COULD DECLINE IN VALUE.
The trading price of our common stock is likely to be highly volatile and
subject to wide fluctuations in price in response to various factors, many of
which are beyond our control. These factors include:
o developments concerning our drug candidates;
o announcements of technological innovations by us or our competitors;
o new products introduced or announced by us or our competitors;
o changes in financial estimates by securities analysts;
o actual or anticipated variations in quarterly operating results;
o expiration or termination of licenses, research contracts or other
collaboration agreements;
o conditions or trends in the regulatory climate and the
biotechnology, pharmaceutical and genomics industries;
o changes in the market valuations of similar companies; and
o additions or departures of key personnel.
In addition, equity markets in general, and the market for biotechnology and
life sciences companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies traded in those markets. These broad market and
industry factors may materially affect the market price of our common stock,
regardless of our development and operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against that company. Such
litigation, if instituted against us, could cause us to incur substantial costs
to defend such claims and divert management's attention and resources, which
could seriously harm our business.
THE GENERAL BUSINESS CLIMATE IS UNCERTAIN AND WE DO NOT KNOW HOW THIS WILL
IMPACT OUR BUSINESS OR OUR STOCK PRICE.
Over the past several years, there have been dramatic changes in economic
conditions, and the general business climate has been negatively impacted.
Indices of the U.S. stock markets have fallen significantly and consumer
confidence has waned. Compounding the general unease about the current business
climate are the still unknown economic and political impacts of the September
11, 2001 terrorist attacks and hostilities abroad. We are unable to predict how
any of these factors may affect our business or stock price.
31
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD MAKE A
THIRD-PARTY ACQUISITION OF US DIFFICULT. THIS COULD LIMIT THE PRICE INVESTORS
MIGHT BE WILLING TO PAY IN THE FUTURE FOR OUR COMMON STOCK.
Provisions in our certificate of incorporation and bylaws could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, or control us. These provisions could
limit the price that certain investors might be willing to pay in the future for
shares of our common stock. Our certificate of incorporation allows us to issue
preferred stock with rights senior to those of the common stock without any
further vote or action by the stockholders and our bylaws eliminate the right of
stockholders to call a special meeting of stockholders, which could make it more
difficult for stockholders to effect certain corporate actions. These provisions
could also have the effect of delaying or preventing a change in control. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to the holders of our common stock or could adversely
affect the rights and powers, including voting rights, of such holders. In
certain circumstances, such issuance could have the effect of decreasing the
market price of our common stock.
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 in
which we invest 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-term interest bearing securities,
including corporate debt, money market funds and government debt securities. The
average duration of all of our investments held in the first half of 2003 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.
Foreign Currency Rate Fluctuations. While our Israeli subsidiaries 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluations
as of the end of the period covered in this report, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures (as defined in Exchange Act Rules 13a, 14(c) and 15(d))
are effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC.
32
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, 2003,
we have used the net proceeds of this offering as follows:
o approximately $5.8 million to fund the development of KRX-101
for diabetic nephropathy;
o approximately $3.9 million to fund the development of KRX-123
for hormone-resistant prostate cancer;
o approximately $10.3 million to fund expansion of our KinAce
platform and to further develop the compounds we have
generated with it; and
o approximately $15.1 million to use as working capital,
in-licensing development activities and for general corporate
purposes.
We intend to use our current capital resources primarily to advance KRX-101 and
to in-license, acquire and develop novel clinical stage compounds. 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 June 23, 2003. At the meeting,
Lawrence J. Kessel and Peter Salomon were elected and Malcolm Hoenlein, Peter M.
Kash, Lindsay A. Rosenwald, and Michael S. Weiss were reelected to our board of
directors. The vote with respect to each nominee is as set forth below:
Nominee Total Vote For Total Vote Withheld
- ------- -------------- -------------------
Malcolm Hoenlein 12,447,179 4,400
Peter M. Kash 12,447,179 4,400
Lawrence J. Kessel 12,447,179 4,400
Lindsay A. Rosenwald 12,447,179 4,400
Peter Salomon 12,447,179 4,400
Michael S. Weiss 12,447,179 4,400
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index are included with this
report.
10.1 - Employment Agreement between Keryx Biopharmaceuticals, Inc.
and Ron Bentsur, dated as of June 23, 2003.
31.1 Certification of Principal Executive Officer
33
31.2 Certification of Principal Financial Officer
32.1 - Certifications pursuant to 18 U.S.C. Section 1350
32.2 - Certifications pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K -
On August 13, 2003, the Company furnished a Current Report on Form
8-K under Item 9, containing a copy of its earnings release for the
period ended June 30, 2003 (including financial statements) pursuant
to Item 12 (Results of Operations and Financial Condition).
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, 2003 /s/ Ron Bentsur
---------------------------------------------
Ron Bentsur
Vice President Finance and Investor Relations
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
10.1 - Employment Agreement between Keryx Biopharmaceuticals, Inc. and Ron
Bentsur, dated as of June 23, 2003.
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32.1 - Certification pursuant to 18 U.S.C. Section 1350
32.2 - Certification pursuant to 18 U.S.C. Section 1350
35