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 SEPTEMBER 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
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
750 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
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(ADDRESS INCLUDING ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
212-531-5965
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(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 November 7, 2003, the registrant had outstanding 21,429,361 shares of
Common Stock, $0.001 par value per share.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002........................................ 3
Interim Consolidated Statements of Operations for the
three and nine months ended September 30, 2003 and 2002...... 4
Interim Consolidated Statements of Cash Flows for the
nine months ended September 30, 2003 and 2002................ 5
Notes to Interim Consolidated Financial Statements
of September 30, 2003........................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................. 32
Item 4. Controls and Procedures........................................ 33
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................... 33
Item 6. Exhibits and Reports on Form 8-K............................... 34
SIGNATURES.............................................................. 34
CERTIFICATIONS.......................................................... 36
2
ITEM 1. FINANCIAL STATEMENTS
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002
- ------------------------------------------------------------------------------
(in thousands, except share and per share amounts)
September 30 December 31
2003 2002
(Unaudited) (Audited)
-------- --------
Assets
Current assets
Cash and cash equivalents $ 12,004 $ 13,350
Investment securities, held-to-maturity 7,660 10,575
Deposits in respect of employee severance
obligations (current portion) 116 299
Accrued interest receivable 79 206
Deferred tax asset -- 170
Other receivables and prepaid expenses 282 267
-------- --------
Total current assets 20,141 24,867
-------- --------
Deposits in respect of employee severance obligations -- 117
Property, plant and equipment, net, held for sale 24 --
Property, plant and equipment, net 80 3,031
Other assets (primarily intangible assets), net 242 1,088
-------- --------
Total assets $ 20,487 $ 29,103
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 743 $ 920
Income taxes payable 130 177
Accrued compensation and related liabilities 432 1,420
-------- --------
Total current liabilities 1,305 2,517
-------- --------
Liability in respect of employee severance obligations -- 188
Deferred tax liability -- 68
-------- --------
Total liabilities 1,305 2,773
-------- --------
Commitments and contingencies
Stockholders' equity
Common stock, $0.001 par value per share (40,000,000 and
40,000,000 shares authorized, 21,335,418 and 19,913,185 shares
issued, 21,279,318 and 19,866,885 shares outstanding
at September 30, 2003 and December 31, 2002, respectively) 21 20
Additional paid-in capital 71,605 72,067
Treasury stock, at cost, 56,100 shares at September 30, 2003
and 46,300 shares at December 31, 2002 (89) (77)
Unearned compensation --* (178)
Deficit accumulated during the development stage (52,355) (45,502)
-------- --------
Total stockholders' equity 19,182 26,330
-------- --------
Total liabilities and stockholders' equity $ 20,487 $ 29,103
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
* Amount less than one thousand dollars.
3
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Consolidated Statements of Operations for the Three Months and Nine
Months Ended September 30, 2003 and 2002
- --------------------------------------------------------------------------------
(in thousands, except share and per share amounts)
Three months ended Nine months ended Amounts
September 30, September 30, Accumulated
---------------------------- ---------------------------- 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 -- (195) (515) (1,539) 6,698
Other research and development 810 2,306 4,735 7,565 28,646
------------ ------------ ------------ ------------ ------------
Total research and development expenses 810 2,111 4,220 6,026 35,344
------------ ------------ ------------ ------------ ------------
General and administrative:
Non-cash compensation 17 2 69 (6) 3,460
Other general and administrative 763 952 2,632 3,344 17,037
------------ ------------ ------------ ------------ ------------
Total general and administrative expenses 780 954 2,701 3,338 20,497
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,590 3,065 6,921 9,364 55,841
------------ ------------ ------------ ------------ ------------
Operating loss (1,590) (3,065) (6,921) (9,364) (55,541)
Interest income, net 34 69 184 403 3,819
------------ ------------ ------------ ------------ ------------
Net loss before income taxes (1,556) (2,996) (6,737) (8,961) (51,722)
Income taxes -- 36 116 25 633
------------ ------------ ------------ ------------ ------------
Net loss (1,556) (3,032) (6,853) (8,986)
============ ============ ============ ============ ============
Basic and diluted loss per common share ($0.07) ($0.15) ($0.33) ($0.45) ($3.83)
Weighted average shares used in computing
basic and diluted net loss per common share 21,107,158 19,907,185 20,623,339 19,898,246 13,674,556
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 Nine Months Ended
September 30, 2003 and 2002
- ------------------------------------------------------------------------------
(in thousands)
Amounts
accumulated
Nine months ended September 30, during the
------------------------------- development
2003 2002 stage
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(6,853) $(8,986) $(52,355)
Adjustments to reconcile cash flows used in
operating activities:
Stock compensation expense (negative expense) (446) (1,545) 10,158
Issuance of common stock to technology licensor -- 359 359
Interest on convertible notes settled
through issuance of preferred shares -- -- 253
Depreciation and amortization 905 662 2,231
Loss on disposal of property, plant and equipment 37 51 121
Impairment charges 2,482 -- 2,482
Exchange rate differences 9 34 93
Changes in assets and liabilities:
Decrease (increase) in other receivables
and prepaid expenses (15) 63 (277)
Decrease (increase) in accrued interest
receivable 127 58 (79)
Changes in deferred tax provisions and
valuation allowance 102 31 --
Increase (decrease) in accounts payable
and accrued expenses (130) (536) 740
Increase (decrease) in income taxes payable (47) (120) 130
Increase (decrease) in accrued compensation
and related liabilities (988) 17 432
Increase (decrease) in liability in respect
of employee severance obligations (188) 146 --
-------- -------- --------
Net cash used in operating activities (5,005) (9,766) (35,712)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (3) (1,058) (4,403)
Proceeds from disposals of property,
plant and equipment 369 34 406
Investment in other assets (65) (101) (1,188)
Proceeds from (additions to) deposits in
respect of employee severance obligations 300 (59) (116)
Proceeds from sale and maturity of
(investment in) short-term securities 2,915 3,558 (7,660)
-------- -------- --------
Net cash provided by (used in)
investing activities $3,516 $2,374 $(12,961)
-------- -------- --------
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 Nine Months Ended
September 30, 2003 and 2002 (continued)
- --------------------------------------------------------------------------------
(in thousands)
Amounts
accumulated
Nine months ended September 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 164 1 200
Purchase of treasury stock (12) -- (89)
-------- -------- --------
Net cash provided by financing activities 152 1 60,770
-------- -------- --------
Effect of exchange rate on cash (9) (34) (93)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,346) (7,425) 12,004
Cash and cash equivalents at beginning
of period 13,350 23,345 --
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 12,004 $ 15,920 $ 12,004
======== ======== ========
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 -- 84 --
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ --* $ --* $ 139
Cash paid for income taxes 60 111 431
* Amount less than one thousand dollars.
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 September 30, 2003
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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, K.B.I.
Biopharmaceuticals 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", "our",
"it" 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
and third quarters of 2003, the Company gave notice of termination to an
additional seven people in Israel and to one person in Cambridge, Massachusetts.
In addition, two employees in the Cambridge office left the Company.
Substantially all of the biopharmaceutical development and administrative
activities during 2003 were conducted in the United States of America.
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
7
condition, results of operations, and cash flows in conformity with accounting
principles generally accepted in the United States of America. 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 September 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" ("APB 25"), 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, "Accounting for
Stock-Based Compensation--Transition and Disclosure," ("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 loss and loss per
share would have been increased to the pro forma amounts below:
Amounts
Accumulated
Three months ended September 30, Nine months ended September 30, During the
------------------------------- ------------------------------ Development
2003 2002 2003 2002 Stage
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------- -------- -------- -------- --------
Net loss, as reported $(1,556) $(3,032) $(6,853) $(8,986) $(52,355)
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 1 2 80 10 9,040
Deduct: Stock-based compensation expense
to employees and directors
determined under fair value-based
method net of
related tax effects (207) (332) (1,057) (985) (12,213)
-------- -------- -------- -------- --------
Pro forma net loss $(1,762) $(3,362) $(7,830) $(9,961) $(55,528)
Basic and diluted loss per common share
As reported ($0.07) ($0.15) ($0.33) ($0.45) ($3.83)
Pro forma ($0.08) ($0.17) ($0.38) ($0.50) ($4.06)
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 3,526,168 for
the three and nine months ended September 30, 2003 and 4,801,154 for the three
and nine months ended September 30, 2002.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS 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. Restatement is not permitted. The adoption of
SFAS No. 150 did not have a significant effect on the Company's financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34" ("FIN 45"). This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
financial statements. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 31, 2002.
Adoption of FIN 45 did not have an impact on the Company's results of operations
or financial position.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. Public companies must complete their
evaluations of variable interest entities and consolidate those where they are
the primary beneficiary in financial statements issued for the first interim or
annual period ending after December 15, 2003. The new implementation date for
calendar-year public companies is as of December 31, 2003. FIN 46 requires
certain disclosures in financial statements issued after December 31, 2003 if it
is reasonably possible that the Company will consolidate or disclose information
about variable interest entities when the Interpretation becomes effective. The
Company does not believe that the impact of FIN 46 will have a significant
effect on the Company's financial statements.
In April 2003, the FASB determined that stock-based compensation should be
recognized as a cost in the financial statements and that such cost be measured
according to the fair value of the stock options. The FASB has not as yet
determined the methodology for calculating fair value and plans to issue an
exposure draft and final statement in 2004. The Company will continue to monitor
communications on this subject from the FASB in order to determine the impact on
the Company's consolidated financial statements.
NOTE 3 - STOCKHOLDERS' EQUITY
During the nine months ended September 30, 2003, the compensation committee of
the Company's board of directors granted options to purchase 905,000 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 Company recorded non-cash compensation expense of $15,654 in the nine
9
months ended September 30, 2003 resulting from these grants. The exercise price
of the options issued during the nine months ended September 30, 2003 ranged
between $1.10 and $2.14 per share. Options for the purchase of 667,178 shares of
the Company's common stock were forfeited during the nine months ended September
30, 2003. In addition, options for the purchase of 1,422,233 shares of the
Company's common stock were exercised during the nine months ended September 30,
2003.
During the nine months ended September 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 September 30, 2003.
NOTE 4 - INCOME TAXES
As part of the process of preparing the Company's consolidated financial
statements, the Company is required to estimate its income taxes in each of the
jurisdictions in which it operates. This process involves management estimating
the Company's 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 the Company's consolidated balance sheet. The Company must then
assess the likelihood that its deferred tax assets will be recovered from future
taxable income and, to the extent it believes that recovery is not likely, the
Company must establish a valuation allowance. To the extent the Company
establishes a valuation allowance or increases this allowance in a period, the
Company must include an expense within the tax provision in the statement of
operations. Significant management judgment is required in determining the
Company's provision for income taxes, its deferred tax assets and liabilities
and any valuation allowance recorded against the Company's net deferred tax
assets. The Company has fully offset its US deferred tax asset with a valuation
allowance. The Company's lack of earnings history and the uncertainty
surrounding its 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 the Company's
financial statements for the comparative period relates to its wholly owned
Israeli subsidiaries. These subsidiaries have generated taxable income in
respect of services provided within the group, and therefore the Company
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 2003, the Company decided to cease its research and
development and its administrative activities in its Jerusalem facility. In
addition, since the Israeli subsidiaries are no longer expected to generate
income, the Company does not believe that the deferred tax asset will be
realized. The Company therefore has decided to record a valuation allowance
against the deferred tax asset, resulting in an expense in the statement of
operations for the nine months ended September 30, 2003.
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 September 30, 2003, our subsidiary has
received tax benefits in the form of exemptions of approximately $731,000. As a
result of the restructuring implemented in 2002, the staff and activity of this
subsidiary were materially reduced. As part of the restructuring implemented
during the first quarter of 2003, as described in Note 5, the Company decided to
close down its Jerusalem laboratory facility. In October 2003, the subsidiary
received a letter from the Israeli Ministry of Industry and Trade that its
Approved Enterprise status was cancelled as of July 2003 and that past benefits
would not need to be repaid. The Israeli tax authorities have yet to confirm
this position. However, the Company believes that, based on the letter received
from the Ministry of Industry and Trade, it is unlikely the past benefits will
need to be repaid, and therefore, the Company has not recorded any charge with
respect to this potential liability.
10
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. During
the second and third quarters of 2003, the Company gave notice of termination to
an additional seven people in Israel and to one person in Cambridge,
Massachusetts. In addition, two employees in the Cambridge office left the
Company. While the significant portion of the current restructuring was
completed through the end of the third quarter of 2003, the Company anticipates
that the current restructuring will be fully completed by the end of the current
year.
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 claimed the bank
guarantee, in the amount of approximately $222,000, which was previously
provided as security in connection with the lease agreement making the net
amount potentially due to the landlord approximately $791,000. At this time, no
litigation has been initiated and the likelihood of this claim cannot be
estimated at this time.
In addition, during the second and third quarters of 2003, the Company completed
the disposition of the majority of its fixed assets associated with its
early-stage research and development activities in Israel. At September 30,
2003, $24,000 in fixed assets, primarily laboratory equipment, formerly
classified as "held-for-use" were classified as "held-for-sale," and recorded at
the lower of carrying value or fair market value in accordance with SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144").
As part of the current restructuring, the Company reevaluated its long-lived
assets in accordance with SFAS No. 144 and recorded a non-cash impairment charge
of approximately $2,482,000 for the nine months ended September 30, 2003, of
which approximately $2,358,000 was included in research and development expenses
and approximately $124,000 was included in general and administrative expenses
for the nine months ended September 30, 2003. The impairment charge included a
write-off of approximately $1,694,000 in fixed assets, primarily laboratory
equipment, and approximately $787,000 in other investments relating to
intangible assets, primarily patents. For the three months ended September 30,
2003, the Company did not incur any non-cash impairment charges.
In addition, with the Company's decision 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
accelerated depreciation of approximately $141,000 and $561,000 for the three
months and nine months ended September 30, 2003. Following the accelerated
depreciation, the leasehold improvements were completely written off in July
2003.
The current restructuring included a 14 person reduction in the Company's work
force to nine full and part-time employees. Through September 30, 2003, nine
full and part-time employees had left the Company, of which six were research
personnel and three were administrative personnel. On October 1, 2003, an
additional five full and part-time employees, of which three are research
personnel and two are administrative personnel, had left the Company. No option
accelerations took place through September 30, 2003 as a result of the current
restructuring.
Through September 30, 2003, with respect to the current restructuring, the
Company had total accumulated expenses of approximately $185,000 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 throughout the employment term in
accordance with Israeli law.
As of September 30, 2003, 9 employees have left the Company under the current
restructuring and approximately $50,000 of severance benefits have been paid.
11
As of September 30, 2003, approximately $135,000 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 $103,000.
In addition, as part of the current restructuring, the Company may incur other
costs relating to its subsidiary's lease for the Jerusalem facility. The
remaining portion of the Company's subsidiary's lease obligations for the
Jerusalem facility, through the term of the lease ending in 2005, amounts to
approximately $791,000, net of the bank guarantee in the amount of approximately
$222,000, which was previously provided as security in connection with the lease
agreement that the landlord has claimed in August 2003. 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 in the future 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 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. 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 September 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 2002.
As of September 30, 2003, all 46 employees have left the Company under the 2002
restructuring and approximately $916,000 of severance benefits have been paid,
with approximately $158,000 paid in 2002 and the balance paid in 2003.
As of September 30, 2003, approximately $205,000 in severance obligations
related to the 2002 restructuring is included in accrued compensation and
related liabilities. Most of this amount will be paid in the fourth quarter of
2003.
NOTE 6 - SUBSEQUENT EVENTS
In October 2003, the Company announced that it had initiated a multi-center,
Phase II/III clinical program for its diabetic nephropathy drug candidate,
KRX-101. The Phase II portion of the Phase II/III clinical program will be a
randomized, double-blind, placebo-controlled, study comparing two doses (200mg
and 400mg daily) of KRX-101, versus placebo. The entire Phase II/III program is
expected to enroll between 750 and 1,000 patients, with the first component
enrolling up to approximately 135 patients. The program is designed to assess
the safety and efficacy of KRX-101 in patients with Type 2 Diabetes who continue
to have persistent microalbuminuria following treatment with maximum approved
doses of ACE inhibitors or A2 receptor blockers (ARBs). The study will evaluate
sulodexide's, or KRX-101's, ability to regress proteinuria in the study
population. The treatment period for the patients in this trial will be six
months. Patients will also be evaluated two months following the discontinuation
of therapy.
12
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 in the U.S. 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.
In October 2003, we announced that we had initiated a multi-center, Phase II/III
clinical program for our diabetic nephropathy drug candidate, KRX-101. The Phase
II portion of the Phase II/III clinical program will be a randomized,
double-blind, placebo-controlled, study, comparing two doses (200mg and 400mg
daily) of KRX-101, versus placebo. The entire Phase II/III program is expected
to enroll between 750 and 1,000 patients, with the first component enrolling up
to approximately 135 patients. The program is designed to assess the safety and
efficacy of KRX-101 in patients with Type 2 Diabetes who continue to have
persistent microalbuminuria following treatment with maximum approved doses of
ACE inhibitors or A2 receptor blockers (ARBs). The study will evaluate
sulodexide's ability to regress proteinuria in the study population. The
treatment period for the patients in this trial will be six months. Patients
will also be evaluated two months following the discontinuation of therapy.
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. For a further discussion of our current research,
development and administrative activities in Israel, see "2003 Restructuring"
and "2002 Restructuring" below.
13
Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers for
clinical and 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 APB 25, "Accounting for Stock Issued to Employees," and FASB
issued Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation," as allowed by 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"
("EITF 96-18"). 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 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, our clinical trials and potential in-licensing
opportunities.
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 nine months ended September 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 September 30,
2003.
14
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
of America. 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
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 nine months ended September 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
15
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 2003, we
decided to cease our research and development and 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 nine months ended September 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
September 30, 2003, this Israeli subsidiary has received tax benefits in the
form of exemptions 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. As part of the restructuring implemented during
the first quarter of 2003, as described in Note 5, we decided to close down our
Jerusalem laboratory facility. In October 2003, the subsidiary received a letter
from the Israeli Ministry of Industry and Trade that its Approved Enterprise
status was cancelled as of July 2003 and that past benefits would not need to be
repaid. The Israeli tax authorities have yet to confirm this position. However,
we believe that, based on the letter received from the Ministry of Industry and
Trade, it is unlikely the past benefits will need to be repaid, and therefore,
we have not recorded any charge with respect to this potential liability.
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, 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.
16
Impairment Of Long-Lived Assets And Long-Lived Assets To Be Disposed Of. We have
adopted 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 drug candidates and the
decision to cease activity in the Jerusalem facility, that an impairment charge
should be recorded for the nine months ended September 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 in the
Jerusalem laboratory facility, and, in addition, we indicated our intention to
cease early-stage research and development activities and to further decrease
the administrative activities in the Jerusalem facility. During the second and
third quarters of 2003, we gave notice of termination to an additional seven
people in Israel and to one person in Cambridge, Massachusetts. In addition, two
employees in the Cambridge office left us. While the significant portion of the
current restructuring was completed through the end of the third quarter of
2003, we anticipate that the current restructuring will be fully completed by
the end of the current year.
In July 2003, our subsidiaries vacated the Jerusalem facility and relocated to
smaller facilities. The landlord of the Jerusalem facility has alleged that we
are 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 claimed the bank guarantee, in the amount of $222,000,
which was previously provided as security in connection with the lease agreement
making the net amount potentially due to the landlord $791,000. At this time, no
litigation has been initiated and the likelihood of this claim cannot be
estimated at this time.
In addition, during the second and third quarters of 2003, we completed the
disposition of the majority of the fixed assets associated with our early-stage
research and development activities in Israel. At September 30, 2003, $24,000 in
fixed assets, primarily laboratory equipment, formerly classified as
"held-for-use" were classified as "held-for-sale," and recorded at the lower of
carrying value or fair market value in accordance with SFAS No. 144.
As part of the current restructuring, we reevaluated our long-lived assets in
accordance with SFAS No. 144 and recorded a non-cash impairment charge of
$2,481,000 for the nine months ended September 30, 2003, of which $2,357,000 was
included in research and development expenses and $124,000 was included in
general and administrative expenses for the nine months ended September 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 September 30, 2003, we did not incur any non-cash impairment
charges.
17
In addition, with our decision to vacate the Jerusalem facility, we reevaluated
and significantly shortened the useful life of the leasehold improvements
associated with their administrative facilities, resulting in accelerated
depreciation of $141,000 and $561,000 for the three months and nine months ended
September 30, 2003. Following the accelerated depreciation, the leasehold
improvements were completely written off in July 2003.
The current restructuring included a 14 person reduction in our work force to
nine full and part-time employees. Through September 30, 2003, nine full and
part-time employees had left us, of which six were research personnel and three
were administrative personnel. On October 1, 2003, an additional five full and
part-time employees, of which three are research personnel and two are
administrative personnel, had left us. No option accelerations took place
through September 30, 2003 as a result of the current restructuring.
Through September 30, 2003, with respect to the current restructuring, we had
total accumulated expenses of $185,000 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 throughout the employment term in accordance with Israeli law.
As of September 30, 2003, 9 employees have left us under the current
restructuring and $50,000 of severance benefits have been paid.
As of September 30, 2003, $135,000 in severance obligations related to the
current restructuring is included in accrued compensation and related
liabilities. With respect to this liability, we had funded deposits in respect
of employee severance obligations of $103,000.
In addition, as part of the current restructuring, we may incur other costs
relating to our subsidiary's lease for the Jerusalem facility. The remaining
portion of our subsidiary's lease obligations for the Jerusalem facility,
through the term of the lease ending in 2005, amounts to $791,000, net of the
bank guarantee in the amount of $222,000, which was previously provided as
security in connection with the lease agreement that the landlord has claimed in
August 2003. 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
in the future 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 as
part of the liability in respect of employee severance benefits in accordance
with Israeli law.
2002 Restructuring
18
In 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. The 2002 restructuring included a 46
person, or 70%, reduction in our work force, including senior management,
administrative staff, and research personnel involved in early stage projects.
Through September 30, 2003, we had total accumulated expenses of $1,121,000 for
severance benefits for employees terminated under the 2002 restructuring, almost
all of which had been expensed in 2002.
As of September 30, 2003, all 46 employees have left us under the 2002
restructuring and $916,000 of severance benefits have been paid, with $158,000
paid in 2002 and the balance paid in 2003.
As of September 30, 2003, $205,000 in severance obligations related to the 2002
restructuring is included in accrued compensation and related liabilities. Most
of this amount will be paid in the fourth quarter of 2003.
19
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Revenue. We did not have any revenue for the three months ended September 30,
2003 and September 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 $1,301,000 to $810,000 for the three months ended
September 30, 2003, as compared to expenses of $2,111,000 for the three months
ended September 30, 2002. The decrease in research and development was due
primarily to a $546,000 reduction in payroll and related costs and a $1,169,000
reduction in lab-related expenses, sponsored research, technology license
payments, pre-clinical and consulting fees associated primarily with early stage
research and development projects, as a result of the current and 2002
restructurings. These decreases were partially offset by the absence of negative
non-cash compensation expenses related to stock option grants and warrant
issuances, as well as an increase in expenses related to the preparation for our
U.S.-based clinical program for KRX-101.
We expect our research and development costs to increase in the fourth quarter
of 2003 as compared to the third quarter of 2003 as a result of the commencement
of our U.S.-based clinical program for KRX-101. However, we do expect research
and development costs for the fourth quarter of 2003 to decrease compared to the
fourth quarter of 2002.
We did not record any non-cash compensation expense related to stock option
grants and warrant issuances for the three months ended September 30, 2003, as
compared to a negative expense of $195,000 for the three months ended September
30, 2002. This was due to the absence of any research-linked milestone-based
options during the current quarter.
General and Administrative Expenses. General and administrative expenses,
including non-cash compensation expense related to stock option grants and
warrant issuances, decreased by $174,000 to $780,000 for the three months ended
September 30, 2003, as compared to expenses of $954,000 for the three months
ended September 30, 2002. The decrease in general and administrative expenses
was due primarily to a $320,000 reduction in payroll and related costs as a
result of reduced personnel associated with the current and 2002 restructurings.
These decreases were partially offset by the accelerated depreciation of
leasehold improvements in the Jerusalem facility, which was completed during the
third quarter of 2003.
We expect our general and administrative costs to increase in the fourth quarter
of 2003 as compared to the third quarter of 2003 as a result of the commencement
of our U.S.-based clinical program for KRX-101. However, we do expect general
and administrative costs for the fourth quarter of 2003 to be comparable to the
fourth quarter of 2002.
Non-cash compensation expense related to stock option grants was $17,000 for the
three months ended September 30, 2003 as compared to $2,000 for the three months
ended September 30, 2002.
Interest Income (Expense), Net. Interest income, net, decreased by $35,000 to
$34,000 for the three months ended September 30, 2003, as compared to income of
$69,000 for the three months ended September 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.
20
Income Taxes. We did not record any income tax expense for the three months
ended September 30, 2003, as compared to expenses of $36,000 for the three
months ended September 30, 2002. Income tax expense for the comparative period
is attributable to taxable income from the continuing operations of our
subsidiaries in Israel.
Impact of Inflation. The effects of inflation and changing prices on our
operations were not significant during the periods presented.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Revenue. We did not have any revenue for the nine months ended September 30,
2003 and September 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 $1,806,000 to $4,220,000 for the nine months ended
September 30, 2003, as compared to expenses of $6,026,000 for the nine months
ended September 30, 2002. The decrease in research and development expenses was
due primarily to a $1,640,000 reduction in payroll and related costs and a
$3,375,000 reduction in lab-related expenses, technology license payments,
sponsored research, pre-clinical and consulting fees associated primarily with
early stage research and development projects, as a result of the current and
2002 restructurings, as well as the absence of clinical trial expenses
associated with the KRX-101 HIVAN trial in South Africa. These decreases were
partially offset by the non-cash impairment charge of $2,357,000 associated with
our decision to cease our Jerusalem laboratory activities, as described above,
and by reduced non-cash compensation expenses associated with the cancellation
of certain research-linked milestone-based options.
We expect our research and development costs to increase in the fourth quarter
of 2003 as a result of the commencement of our U.S.-based clinical program for
KRX-101. However, we do expect research and development costs for the fourth
quarter of 2003 to decrease compared to the fourth quarter of 2002.
Non-cash compensation expense related to stock option grants and warrant
issuances was negative $515,000 for the nine months ended September 30, 2003 as
compared to negative $1,539,000 for the nine months ended September 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 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 $637,000 to $2,701,000 for the nine months ended
September 30, 2003, as compared to expenses of $3,338,000 for the nine months
ended September 30, 2002. The decrease in general and administrative expenses
was due primarily to a $1,047,000 reduction in payroll and related costs as a
result of reduced personnel associated with the current and 2002 restructuring.
The decrease in general and administrative expenses was partially offset by the
accelerated depreciation of leasehold improvements in the Jerusalem facility and
a $124,000 non-cash impairment charge associated with our decision to sell
certain fixed assets located in the Jerusalem facility.
We expect our general and administrative costs to increase in the fourth quarter
of 2003 as a result of the commencement of our U.S.-based clinical program for
KRX-101. However, we do expect general and administrative costs for the fourth
quarter of 2003 to be comparable to the fourth quarter of 2002.
21
Non-cash compensation expense related to stock option grants was $69,000 for the
nine months ended September 30, 2003 as compared to negative $6,000 for the nine
months ended September 30, 2002.
Interest Income (Expense), Net. Interest income, net, decreased by $219,000 to
$184,000 for the nine months ended September 30, 2003, as compared to income of
$403,000 for the nine months ended September 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 $91,000 to $116,000 for the nine
months ended September 30, 2003, as compared to expenses of $25,000 for the nine
months ended September 30, 2002. The increase in income tax expense was
primarily due to the recording of a $102,000 valuation allowance against the net
deferred tax assets of our Israeli subsidiaries, associated with the cessation
of our research and development activities and further decrease in
administrative activities in our Jerusalem facility. Income tax expense for the
comparative period is attributable to taxable income from the continuing
operations of our subsidiaries in Israel.
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 September 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 September 30, 2003, we had $19.7 million in cash, cash equivalents,
interest receivable, and short-term securities, a decrease of $4.4 million from
December 31, 2002. Cash used in operating activities for the nine months ended
September 30, 2003 was $5.0 million as compared to $9.8 million for the nine
months ended September 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 nine
months ended September 30, 2003, net cash provided by investing activities of
$3.5 million was primarily the result of the maturity of short-term securities.
As of September 30, 2003, we have known contractual obligations, commitments and
contingencies of $1,715,000. Of this amount, $867,000 relates to research and
development agreements (primarily with our U.S.-based manufacturer of KRX-101)
due within the next year. The additional $848,000 relates to operating lease
obligations of which $342,000 is due within the next year, with the remaining
$506,000 due within one to three years. Of the amount relating to operating
lease obligations, $791,000 reflects the remaining portion of our subsidiary's
lease obligations for the Jerusalem facility through the term of the lease
ending in 2005, net of the bank guarantee in the amount of $222,000, which was
previously provided as security in connection with the lease agreement that the
landlord has claimed in August 2003. In July 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. At this time, no litigation has been initiated and the
likelihood of the claim cannot be estimated at this time.
22
- -------------------------------------- ---------------------------------------------------------------------------------------
Payments Due By Period
- -------------------------------------- ---------------- ----------------- ----------------- ---------------- -----------------
Contractual Obligations Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years
- -------------------------------------- ---------------- ----------------- ----------------- ---------------- -----------------
Research & Development Agreements $867,000 $867,000 -- -- --
- -------------------------------------- ---------------- ----------------- ----------------- ---------------- -----------------
Operating Leases 848,000 342,000 506,000 -- --
- -------------------------------------- ---------------- ----------------- ----------------- ---------------- -----------------
Total Contractual Cash Obligations $1,715,000 $1,209,000 $506,000 -- --
- -------------------------------------- ---------------- ----------------- ----------------- ---------------- -----------------
As a result of the initiation of our Phase II/III clinical program in October
2003, it is anticipated that we will be incurring additional commitments of
approximately $950,000 over the next twelve months. This commitment is not
included in the table above.
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. This commitment is not included in the table
above.
We believe that our $19.7 million in cash, cash equivalents, interest receivable
and short-term securities as of September 30, 2003 will be sufficient to enable
us to meet our planned operating needs and capital expenditures for at least the
next 18 to 24 months. Our cash and cash equivalents as of September 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 September 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
o the amount of any funds expended to repurchase our common
stock.
23
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 September 30, 2003, we had an accumulated deficit of
approximately $52.4 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.
24
IF WE ARE UNABLE TO SUCCESSFULLY 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 our most recent
submission, 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 MAY NEVER RECEIVE THE NECESSARY REGULATORY APPROVALS.
We have not received, and may never receive, regulatory approval for commercial
sale 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
25
process or if we need to perform more or larger clinical trials than originally
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
26
in delays. Further, such failure could result in the termination of license
rights to one or more of our technologies. 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 continue 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 future 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.
27
We recently entered into a contract manufacturing relationship with a U.S.-based
contract manufacturer for KRX-101 which we believe will be adequate to satisfy
our current clinical and commercial supply needs. However, as we seek to
transition our manufacturing of KRX-101 to our 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 nine 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.
ANY ACQUISITIONS WE MAKE MAY NOT BE SCIENTIFICALLY OR COMMERCIALLY SUCCESSFUL.
28
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 18 to 24 months. 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.
29
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 RESULT IN ADDITIONAL ISRAELI TAX LIABILITIES.
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 September 30, 2003, our Israeli subsidiary has received tax benefits in
the form of exemptions of approximately $731,000 as a result of our subsidiary's
status as an "Approved Enterprise." As part of the restructuring implemented
during the first quarter of 2003, as described in Note 5, we decided to close
down our Jerusalem laboratory facility. In October 2003, the subsidiary received
a letter from the Israeli Ministry of Industry and Trade that its Approved
Enterprise status was cancelled as of July 2003 and that past benefits would not
need to be repaid. The Israeli tax authorities have yet to confirm this
position. However, we believe that, based on the letter received from the
Ministry of Industry and Trade, it is unlikely that past benefits will need to
be repaid, and therefore, we have not recorded any charge with respect to this
potential liability. There can be no assurances that the Israeli tax authorities
will confirm this position, as a result, 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.
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.
30
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 September 30, 2003, our executive officers, directors and principal
stockholders (including their affiliates) beneficially own, in the aggregate,
approximately 32.50% 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
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 and pharmaceutical industries;
31
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.
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 as of September 30, 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.
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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.
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.
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 September 30,
2003, we have used the net proceeds of this offering as follows:
o approximately $6.3 million to fund the development of KRX-101,
our lead drug candidate for diabetic nephropathy, of which
$0.5 million and $0.9 million were spent in the three and nine
months ended September 30, 2003, respectively;
o approximately $3.9 million to fund the development of KRX-123
for hormone-resistant prostate cancer;
o approximately $10.4 million to fund expansion of our KinAce
platform and to further develop the compounds we have
generated with it; and
o approximately $15.8 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.
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Until we use the net proceeds, we intend to invest the funds in short and
long-term, investment-grade, interest-bearing instruments.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index are included with this report.
UPDATE
31.1 Certification of Principal Executive Officer
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 12, containing a copy of its earnings release for the period
ended June 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KERYX BIOPHARMACEUTICALS, INC.
Date: November 12, 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:
UPDATE
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