<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-30929
KERYX BIOPHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 134087132
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
5 Kiryat Mada, Har Hotzvim
Jerusalem 91236 Israel
(Address Including Zip Code of Principal Executive Offices)
+972-2-541-2700
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 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 NO X (the registrant became subject to
the filing requirements of the Securities Exchange Act of 1934 on July 28,
2000.)
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 11, 2000.
<PAGE>
Common Stock, $0.001 par value, 19,423,268 shares outstanding
KERYX BIOPHARMACEUTICALS, INC. AND SUBSIDIARY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets............................................. 1
Consolidated Statements of Operations................................... 2
Consolidated Statements of Cash Flows................................... 3
Notes to Consolidated Financial Statements.............................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................................ 11
PART II. OTHER INFORMATION
11
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders..................... 12
Item 6. Exhibits and Reports on Form 8-K........................................ 12
SIGNATURES....................................................................... 13
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KERYX BIOPHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---------------- ------------
(Audited) (Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 4,126,735 $ 5,033,424
Other receivables 85,685 89,122
Prepaid expenses 166,137 117,965
---------------- ------------
4,378,557 5,240,511
Long-term investments in respect of
fundings for severance benefits 64,047 88,720
Fixed assets 160,141 176,819
Deferred costs in respect of
initial public offering - 723,894
Patents 345,471 605,863
---------------- ------------
$ 4,948,216 $ 6,835,807
================ ============
Liabilities and stockholders' equity
Current liabilities
Accounts payable and accrued expenses $ 252,934 $ 741,278
Due to related party 141,483 -
---------------- ------------
394,417 741,278
Long-term liabilities
Liability in respect of employee
severance benefits 117,736 159,103
---------------- ------------
512,153 900,381
Stockholders' equity
Series A convertible preferred stock, $0.001 par value
each (liquidation preference - $100 per share plus all
declared but unpaid dividends, 170,000 shares
authorized, 79,465 and 118,645 issued and fully paid at December 31,
1999 and June 30, 2000 respectively) 79 118
Common stock, $0.01 par value each (20,000,000 shares
authorized, 1,208,306 and 8,108,306 shares issued and
fully paid at December 31, 1999 and June 30, 2000
respectively) 1,208 8,108
Additional paid-in capital 19,712,951 30,221,175
Unearned compensation (2,854,280) (6,169,433)
Accumulated deficit (12,423,895) (18,124,542)
---------------- ------------
Total stockholders' equity 4,436,063 5,935,426
---------------- ------------
Total liabilities and stockholders'equity $ 4,948,216 $ 6,835,807
================ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
1
<PAGE>
KERYX BIOPHARMACEUTICALS, INC. AND SUBSIDIARY
STATEMENT OF OPERATIONS
(UNAUDITED)
Condensed Consolidated Statements of Operations for the Three Months and Six
----------------------------------------------------------------------------
Months Ended June 30, 1999 and 2000
-----------------------------------
<TABLE>
<CAPTION>
Amounts
Accumulated
During the
Development
Three months ended Six months ended Stage
--------------------------- ---------------------------- ------------
June 30, June 30, June 30, June 30, June 30,
1999 2000 1999 2000 2000
------------ ------------ ----------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Management fees from related company $ - $ - $ - $ - $ 299,997
------------ ------------ ----------- ------------ ------------
Expenses
Research and development expenses $ 369,763 $ 1,128,791 $ 784,184 $ 2,529,670 $ 11,428,319
General and administrative expenses 265,592 2,175,083 528,897 3,268,596 6,617,934
------------ ------------ ----------- ------------ ------------
Operating loss (635,355) (3,303,874) (1,313,081) (5,798,266) (17,746,256)
Financing income (expenses) (90,305) 97,947 (99,904) 152,619 (273,091)
------------ ------------ ----------- ------------ ------------
Net loss before income taxes (725,660) (3,205,927) (1,412,985) (5,645,647) (18,019,347)
Taxes on income - 27,879 - 55,000 105,195
------------ ------------ ----------- ------------ ------------
Net loss (725,660) (3,233,806) (1,412,985) (5,700,647) (18,124,542)
Accumulated deficit at beginning of period (4,108,458) (14,890,736) (3,421,133) (12,423,895) -
------------ ------------ ----------- ------------ ------------
Accumulated deficit at end of period $(4,834,118) $(18,124,542) $(4,834,118) $(18,124,542) $(18,124,542)
============ ============ =========== ============ ============
Earnings (losses) per share
Basic and diluted losses per common share $ (0.09) $ (0.40) $ (0.17) $ (0.70) $ (2.24)
Weighted average shares used in computing basic
and diluted net loss per common share 8,108,306 8,108,306 8,108,306 8,108,306 8,108,306
Pro forma net loss per common share $ (0.05) $ (0.23) $ (0.10) $ (0.40) $ (1.27)
Weighted average shares used in
computing pro forma net loss per
common share 14,223,268 14,223,268 14,223,268 14,223,268 14,223,268
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
<PAGE>
KERYX BIOPHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Amounts
Accumulated
During the
Development
Six months ended Stage
------------------------------- -------------
June 30, June 30, June 30,
1999 2000 2000
------------ ------------ -------------
(Unaudited) (Unaudited) (Unaudited)
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(1,412,985) $(5,700,647) $(18,124,542)
Adjustments to reconcile net loss to
net cash used in operating activities:
Employee stock compensation expense - 2,695,555 7,660,352
Consultants' stock compensation expense - 736,810 1,785,721
Interest on convertible notes 95,864 - 252,966
Provision for employee severance benefits (18,623) 41,367 181,103
Depreciation 20,843 16,124 92,292
Changes in assets and liabilities:
Decrease (increase) in other receivables 21,259 (3,437) (62,768)
Decrease (increase) in prepaid expenses (6,882) 48,172 (139,841)
Decrease in related party - (141,483) -
Increase (decrease) in accounts
payable and accrued expenses (70,160) 488,344 730,370
----------- ----------- ------------
Net cash used for operating activities (1,370,684) (1,819,195) (7,624,347)
----------- ----------- ------------
Cash flows from investing activities
Investment in fixed assets (602) (32,802) (268,371)
Purchases in other assets (93,477) (260,392) (606,832)
Fundings in respect of employee severance benefits - (24,673) (110,720)
----------- ----------- ------------
Net cash used for investing activities (94,079) (317,867) (985,923)
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
Keryx Biopharmaceuticals, Inc. (Development Stage Company)
Condensed Consolidated Statements of Cash Flows for the Three and Six Months
Ended June 30, 1999 and 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amounts
Accumulated
During the
Development
Six Months Ended Stage
---------------------------- -----------
June 30, June 30, June 30,
1999 2000 2000
------------ ------------- -----------
(Unaudited) (Unaudited) (Unaudited)
------------ ------------- -----------
<S> <C> <C> <C>
Cash flows from financing activities
Proceeds from short-term loans - - 500,000
Proceeds from long-term loans 124,861 - 3,250,902
Issuance of convertible notes, net 2,150,000 2,150,000
Issuance of shares, net and contributed capital 52 3,767,647 8,459,980
Issuance costs relating to initial public offering - (723,894) (723,894)
---------- --------- ----------
Net cash provided by financing activities 2,274,913 3,043,753 13,636,988
---------- --------- ----------
Effect of exchange rate on cash 378 (232) 6,476
Net increase (decrease) in cash and cash equivalents 809,772 906,459 5,026,949
Cash and cash equivalents at beginning of period 127,872 4,126,735 -
---------- ---------- -----------
Cash and cash equivalents at end of period $ 938,022 $5,033,425 $ 5,033,425
========== ========== ===========
Non-cash transactions
Conversion of short-term loans into contributed capital $ - $ - $ 500,000
Conversion of long-term loans into contributed capital - - 2,680,541
Conversion of long-term loans into convertible notes of Partec 570,361 - 570,361
Conversion of convertible notes of Partec and accrued interest
into stock in Keryx - - 2,973,376
Declaration of stock dividend - - 402
Supplementary disclosures of cash flow information
Cash paid during the period for interest - - 134,055
Cash paid during the period for income taxes - - -
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
KERYX BIOPHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - General:
Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with the instructions for Form 10Q and, therefore, do not
include all disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with
generally accepted accounting principles. All adjustments which are, in the
opinion of management, of a normal recurring nature and are necessary for a
fair presentation of the interim financial statements, have been included.
The results of operations for the period ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the entire
fiscal year or any other interim period.
The accompanying consolidated financial statements for the period ended June
30, 2000 have been prepared in order to present the financial position,
results of operations and cash flows relating to the Company's activities
for all periods covered by the statements. Until November 1999, most of the
Company's activities were carried out by Partec Limited, an Israeli
corporation, and its subsidiaries (hereinafter collectively referred to as
"Partec"). The subsidiaries of Partec during the period prior to November
1999 were SignalSite Inc. (85% owned) and its wholly owned subsidiary
SignalSite Israel Ltd., and Vectagen Inc. (87.25% owned) and its wholly
owned subsidiary, Vectagen Israel Ltd. In November 1999, the Company and its
subsidiary acquired substantially all of the assets and liabilities of
Partec and as of that date, the activities formerly carried out by Partec
are now performed by the Company and its subsidiary. 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. This has
been effected by means of an "as if" pooling and Partec is being presented
as a "predecessor" company.
Earnings per Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the effect of common shares
issued upon exercise of stock options and warrants. The dilutive effect of
stock options is considered in earnings per share calculations if dilutive,
using the treasury stock method.
Unaudited Pro Forma Net Loss Per Share
The Company completed its initial public offering as described in Note 4
below. The unaudited pro forma net loss per share included in these
financial statements reflects the conversion of all shares of Series A
convertible preferred stock, which were automatically converted upon
consummation of the initial public offering, to 6,114,962 shares of common
stock at a 51.54:1 ratio. The weighted average number of shares used to
calculate the unaudited pro forma net loss per share reflects the conversion
of the preferred stock as though it occurred on January 1, 1999.
Note 2 - Recent Accounting Pronouncements:
The Financial Accounting Standards Board ("FASB") Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement
No. 133" ("Statement 137") was issued in June 1999. Statement 137 defers the
effective date of FASB 133, "Accounting for Derivative Instruments and
Hedging Activities" ("Statement 133") for one year. Statement 133 generally
requires that changes in fair value of a derivative be recognized currently
in earnings unless specific hedge accounting criteria are met. The Company
does not expect the adoption of Statement 133 to have a significant impact
on its financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" (FIN No. 44). This
interpretation clarifies the definition of employee for purposes of applying
APB 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting
for an exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, but certain conclusions in this
interpretation cover specific events that occur after either December 15,
1998 or January 15, 2000. The Company does not expect FIN No. 44 to have a
material effect on its financial statements.
5
<PAGE>
Note 3 - Stockholders' Equity:
A. In January 2000, 39,180 shares of Series A convertible preferred stock were
issued as part of the continuation of the private placement commenced in
1999 in consideration for $3.9 million.
B. In March 2000, the board of directors amended the vesting terms of 19,999
options granted in November 1999 as part of the Company's stock option plan.
These options were to vest on the effective date of the Company's initial
public offering on Nasdaq instead of upon start of a specific clinical
trial. The options were subsequently cancelled upon termination of the
optionee's employment before the options had vested.
C. In June 2000, the stockholders approved an increase in authorized capital
stock by 20,000,000 to 40,000,000 of common stock, par value $0.001, which
increase took effect on the completion of an initial public offering.
D. In June 2000, the board of directors declared a 3:2 common stock dividend to
be effective in conjunction with the Company's initial public offering,
whereby the stockholders receive one share of common stock for each two
shares of common stock held at July 15, 2000. These financial statements
have been prepared to retroactively reflect the stock dividend.
E. In June 2000, the Company adopted a stock option plan (the "New Plan")
pursuant to which the compensation committee of the Company's board of
directors may grant stock options to directors, consultants, and employees.
The new plan authorizes option grants to purchase up to 4,455,000 shares of
authorized but unissued common stock. As of June 2000, the compensation
committee issued incentive stock options to purchase 10,000 shares of
common stock to employees and non-qualified options to purchase 84,500
shares of common stock to employees and consultants at an exercise price
equal to the share price of the Company's initial public offering. 4,360,500
shares of common stock remain available for grant.
Note 4 - Subsequent Events
Initial public offering
The Company completed its initial public offering of 4.6 million shares of
its common stock at $10 per share pursuant to a Registration Statement on
Form S-1 (Registration no. 333-37402) on July 28, 2000. Additionally, the
underwriters exercised a portion of their over-allotment option and
purchased an additional 600,000 shares of the Company's common stock, at $10
per share, on August 30, 2000. Total proceeds of this offering, including
the exercise of the over-allotment option, were approximately $46.9 million,
net of underwriting fees and estimated offering expenses of approximately
$5.1 million.
As a result of the offering, all outstanding shares of Series A Convertible
Preferred Stock automatically converted into 6,114,962 shares of common
stock.
Stock Options
In August 2000, the Company's compensation committee granted non-qualified
options to consultants to purchase 4,500 shares of common stock, under the
New Plan.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We were incorporated as a Delaware corporation in October 1998. Since
commencing operations, our activities have been primarily devoted to developing
our technologies as well as business development, raising capital, purchasing
assets and recruiting personnel. We are a development stage company and have no
product sales to date. Our major sources of working capital have been proceeds
from various private financings. We have a 100% wholly owned subsidiary, Keryx
(Israel) Limited, which engages in research and development activities and
administrative functions in Israel.
Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers for
laboratory development, legal expenses resulting from intellectual property
prosecution and organizational affairs and other expenses relating to the
design, development, testing, and enhancement of our product candidates. We
expense our research and development costs as they are incurred.
General and administrative expenses consist primarily of salaries and related
expenses for executive, finance and other administrative personnel, recruitment
expenses, professional fees and other corporate expenses, including business
development and general legal activities.
Our results include non-cash compensation expense as a result of the issuance
of stock and stock option grants. Compensation expense for options granted to
employees represents the difference between the fair value of our common stock
and the exercise price of the options at the date of grant. We account for
stock-based employee compensation arrangements in accordance with the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and comply with the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Compensation for options granted to consultants has been determined in
accordance with SFAS No. 123 as the fair value of the equity instruments issued.
APB Opinion No. 25 has been applied in accounting for fixed and milestone-based
stock options to employees and directors as allowed by SFAS No. 123. This amount
is being recorded over the respective vesting periods of the individual stock
options. The expense is included in the respective categories of expense in the
statement of operations. We expect to record additional non-cash compensation
expense in the future, which may be significant. However, because some of the
options are milestone-based, the total expense is uncertain.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
Revenues. We are a development stage company and have not had revenues from
our planned principal operations.
7
<PAGE>
Research and Development Expenses. Research and development expenses increased
by $759,000 to $1,129,000 for the quarter ended June 30, 2000 as compared to
$370,000 for the quarter ended June 30, 1999. This increase was primarily
attributable to the non-cash compensation expense of $846,000 during the
period related to stock options. We expect our research and development costs to
increase significantly over the next several years as we expand our research and
product development efforts and implement our business strategy.
General and Administrative Expenses. General and administrative expenses
increased by $1,909,000 to $2,175,000 for the quarter ended June 30, 2000 as
compared to $266,000 for the quarter ended June 30, 1999. This increase was
primarily attributable to non-cash compensation expense of $1,243,323 during the
period related to stock options. We expect general and administrative expenses
to continue to increase over the next several years as we implement our business
strategy and commercialize our products.
Income Taxes. Most of our operating losses are attributable to our predecessor
company and stock-based compensation, and accordingly, as of June 30, 2000, we
had a minimal net operating loss carryforward for US federal income tax
purposes. This loss carryforward is available to offset against future federal
taxable income, if any, and begins expiring in 2019. Our net operating loss
carryforward for tax purposes could significantly increase as a result of the
exercise of options granted to employees, consultants and directors. However,
utilization of net operating losses and credits in the US may be substantially
limited due to the change in ownership provisions of the Internal Revenue Code
of 1986 and similar state provisions. In addition, an annual limitation may
result in the expiration of net operating losses and credits before utilization.
Management believes that there is sufficient uncertainty regarding the
realization of deferred tax assets such that a full valuation allowance is
appropriate, and accordingly, no asset was recorded. Income tax expense
attributable to income from the continuing operations of our subsidiary in
Israel was $28,000 for the quarter ended June 30, 2000.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Revenue. As a development stage company, we did not have any revenues for
either of the six-month periods ending June 30, 2000 or June 30, 1999.
Research and Development Expenses. Research and development expenses increased
by $1,746,000 to $2,530,000 for the six months ended June 30, 2000 as compared
to $784,000 for the six months ended June 30, 1999. This increase was primarily
attributable to non-cash compensation expense of $1,375,000 related to stock
options for the six months ended June 30, 2000, as well as to the expansion of
our existing research and development activities during the period. We expect
our research and development costs to increase significantly over the next
several years as we expand our research and product development efforts and
implement our business strategy.
General and Administrative Expenses. General and administrative expenses
increased by $2,740,000 to $3,269,000 for the six months ended June 30, 2000 as
compared to $529,000 for the six months ended June 30, 1999. This increase was
primarily attributable to non-cash compensation expense of $2,057,000 related to
stock options for the six months ended June 30, 2000. We expect general and
administrative expenses to continue to increase over the next several years as
we implement our business strategy and commercialize our products.
8
<PAGE>
Income Taxes. Most of our operating losses are attributable to our predecessor
company and stock-based compensation, and accordingly, as of June 30, 2000, we
had a minimal net operating loss carryforward for US federal income tax
purposes. This loss carryforward is available to offset against future federal
taxable income, if any, and begins expiring in 2019. Our net operating loss
carryforward for tax purposes could significantly increase as a result of the
exercise of options granted to employees, consultants and directors. However,
utilization of net operating losses and credits in the US may be substantially
limited due to the change in ownership provisions of the Internal Revenue Code
of 1986 and similar state provisions. In addition, an annual limitation may
result in the expiration of net operating losses and credits before utilization.
Management believes that there is sufficient uncertainty regarding the
realization of deferred tax assets such that a full valuation allowance is
appropriate, and accordingly, no asset was recorded. Income tax expense
attributable to income from the continuing operations of our subsidiary in
Israel was $55,000 for the six months ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception primarily through various
private financings. As of June 30, 2000, we had received gross proceeds of $11.6
million from issuances of common and preferred stock and $3.2 million through
the contribution of notes by holders in our predecessor company.
As of June 30, 2000, we had $5.0 million in cash and cash equivalents. Cash
used in operating activities for the six-month period ended June 30, 2000 was
$1.8 million as compared to $1.37 million for the six-month period ended June
30, 1999. This increase was due primarily to increased losses associated with
the expansion of our business. Net cash used in investing activities was $0.32
million for the six-month period ended June 30, 2000, consisting primarily of
prosecution of patent applications and related capital expenditures.
In connection with research services provided to us, we are obligated to make
annual payments totaling $466,000 to Yissum until December 15, 2001. In
addition, in connection with our license agreement for KRX-101, we are obligated
to make milestone payments to Alfa Wassermann of up to $2,950,000 and annual
payments in the aggregate of up to $900,000.
We have incurred negative cash flow from operations since we started our
business. We have spent, and expect to continue to spend, substantial amounts in
connection with implementing our business strategy, including our planned
product development efforts, our clinical trials, and our research and discovery
efforts. Based on our current plans, we believe that the net proceeds of
approximately $46.9 million from our July 2000 initial public offering of
5,200,000 shares of common stock, which includes the exercise of a portion of
the underwriters' overallotment option, together with our existing cash and cash
equivalents immediately prior to our initial public offering will be sufficient
to enable us to meet our planned operating needs for at least the next 22
months. Over the next 22 months we expect to spend approximately $14 million on
clinical trials, $15 million on discovery research (including $1.2 million in
connection with sponsored research arrangements), $12.5 million on general
corporate expenditures, $4 million on capital expenditures, $900,000 on patents
and $500,000 on facilities rent, including a four-year operating lease
obligation amounting to approximately $200,000. We expect to fund the $4 million
estimated capital expenditures through financial leasing arrangements.
Our forecast of the period of time through which our financial resources 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.
9
<PAGE>
These factors include the following:
. the progress of our research activities;
. the number and scope of our research programs;
. the progress of our pre-clinical and clinical development activities;
. the progress of the development efforts of parties with whom we have
entered into research and development agreements;
. our ability to maintain current research and development programs and to
establish new research and development and licensing arrangements;
. our ability to achieve our milestones under licensing arrangements;
. the costs involved in prosecuting and enforcing patent claims and other
intellectual property rights; and
. the costs and timing of regulatory approvals.
We have based our estimate on assumptions that may prove to be wrong. We may
need to obtain additional funds sooner or in greater amounts than we currently
anticipate. Potential sources of financing include strategic relationships,
public or private sales of our shares 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.
FORWARD LOOKING STATEMENTS
Statements contained or referenced in this filing that are not historical
facts may be forward-looking statements, as the term is defined in the Private
Litigation Reform Act of 1995. In some cases, you can identify forward-looking
statements by terminology such as "anticipate", "estimate", "expect", "project",
"intend", "plan", "believe" and other words and terms of similar meaning in
connection with any discussion of future operating or financial performance. Our
actual results and the timing of certain events may differ significantly from
the results discussed in forward-looking statements. Factors that might cause
or contribute to such a discrepancy include, but are not limited to, the risks
outlined in our Registration Statement on Form S-1 filed with the Securities and
Exchange Commission. The forward-looking statements contained in this filing or
in our Registration Statement on Form S-1 include, among other things,
statements relating to our drug development and regulatory strategy, growth
strategy, use of proceeds, projected capital expenditures, research and
development expenditures, other costs and expenses, revenue, profitability, and
liquidity and capital resources.
10
<PAGE>
Any and all of our forward-looking statements can be affected by inaccurate
assumptions we might make or by known or unknown risks and uncertainties. Our
actual future results may vary materially.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities
that we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. We currently maintain
an investment portfolio of primarily money market investments and certificates
of deposits with maturities of less than 90 days. We expect to maintain our
portfolio in cash equivalents and short-term, interest bearing securities,
including commercial paper, money market funds and government debt securities.
The average duration of all of our investments in 1999 was less than one year.
Due to the short-term nature of these investments, we believe we have no
material exposure to interest rate risk arising from our investments. Therefore,
no quantitative tabular disclosure is required.
Foreign Currency Rate Fluctuations. While our Israeli subsidiary primarily
operates in New Israel Shekels or NIS, most operating expenses and commitments
are linked to the US dollar. As a result, there is currently minimal exposure to
foreign currency rate fluctuations. Any foreign currency revenues and expenses
are translated using the daily average exchange rates prevailing during the year
and any transaction gains and losses are included in net income. In the future,
our subsidiary may enter into NIS-based commitments that may expose us to
foreign currency rate fluctuations. We may use hedging instruments, including
forward contracts, to minimize any foreign currency rate fluctuation exposure.
Any hedging transactions that we enter into may not adequately protect us
against currency rate fluctuations and may result in losses to us.
Impact of Inflation. The effects of inflation and changing prices on our
operations were not significant during the periods presented.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Changes in Securities. During the quarter ended June 30, 2000, we issued
options to an officer and two consultants of the company to purchase 93,000
shares of our common stock under our 2000 Stock Option Plan. These options are
exercisable at an exercise price of $10.00 per share. The shares underlying
these options have not been registered under the Securities Act of 1933, as
amended.
We believe that the issuance of these options was exempt from registration
under the Securities Act of 1933, as amended, because they were issued pursuant
to a compensatory benefit plan pursuant to Rule 701 under that Act. We believe
all option grantees had adequate access, through their relationships with us, to
information about us.
(d) Use of Proceeds
11
<PAGE>
Our registration statement on Form S-1 (Registration No. 333-37402) relating
to our initial public offering of common stock was declared effective by the
SEC on July 28, 2000. We registered a total of 5,290,000 shares of common stock
at a maximum aggregate offering price of $52,900,000. In our initial public
offering, we sold 4,600,000 shares of common stock at a price of $10.00 per
share. Our initial public offering was managed on behalf of the underwriters by
Roth Capital Partners (in the United States) and WestLB Panmure Limited (in the
United Kingdom). The offering commenced on July 28, 2000 and closed on August
3, 2000. On August 30, 2000, the underwriters purchased an additional 600,000
shares of our common stock in connection with the exercise of their over-
allotment option. Proceeds to us from our initial public offering (including
those derived from the exercise of the underwriters' over-allotment option),
after deduction of the underwriting discounts and commissions of approximately
$3.64 million and offering expenses of approximately $1.5 million, totaled
approximately $46.9 million. We paid the amount of approximately $60,000 to
Pennie & Edmonds, LLP for legal services rendered in connection with the initial
public offering. S. Leslie Misrock, one of our directors, is a senior partner of
Pennie & Edmonds. Apart from that payment to Pennie & Edmonds, none of the
expenses incurred in our initial public offering were direct or indirect
payments to our directors, officers or their associates, to persons owning 10%
or more of any class of our equity securities or to our affiliates. We did not
use any of the proceeds from our initial public offering in the quarter to which
this report relates because the offering closed subsequent to the quarter end.
We have not used any offering proceeds to date. We have invested the proceeds in
short term money market accounts. The balance of the offering proceeds remains
available to us to use for the purposes specified in our registration statement
on Form S-1 including (1) to fund clinical trials for KRX-101 for diabetic
nephropathy; (2) to fund clinical trials for KRX-123 for hormone-resistant
prostate cancer; (3) to fund expansion of our KinAce platform and to further
develop the compounds we have generated with it; and (4) for working capital and
general corporate purposes.
The occurrence of unforeseen events or changed business conditions could cause
us to use the proceeds of our initial public offering in a manner other than as
described above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to our By Laws and Section 228(a) of the Delaware General Corporation
Law, stockholders owning a majority of our common and Series A preferred stock,
acting by written consent dated June 26, 2000, voted to approve the 2000 Stock
Option Plan and to increase our authorized share capital by 20,000,000 shares of
common stock so that, after such increase, our authorized share capital would be
40,000,000 shares of common stock and 5,000,000 shares of preferred stock. A
total of 7,001,118 votes were cast in favor of the approval of the 2000 Stock
Option Plan and the increase of our authorized share capital.
Proper notice was give to all stockholders of the foregoing actions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
1.1 Underwriting Agreement (without exhibits)
3.1 Amendment to Certificate of Incorporation
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
12
<PAGE>
None.
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 BIOPHARMACUTICALS, INC.
Date: September 11, 2000 By: /s/ Morris Laster
-----------------
Morris Laster
Chief Executive Officer and Chairman
Date: September 11, 2000 By: /s/ Robert Gallahue, Jr.
------------------------
Robert Gallahue, Jr.
Chief Financial Officer and Treasurer
13
