Notes to Condensed Consolidated Financial Statements
(unaudited)
Unless the context requires otherwise, references in this report to “Keryx,” “Company,” “we,” “us” and “our” refer to Keryx Biopharmaceuticals, Inc. and our subsidiaries.
NOTE 1 – DESCRIPTION OF BUSINESS
We are a commercial stage biopharmaceutical company focused on bringing innovative medicines to people with renal disease. Our long-term vision is to build a leading renal company. Our marketed product, Auryxia
®
(ferric citrate), which is an orally available, absorbable, iron-based medicine is approved in the United States for the control of serum phosphorus levels in patients with chronic kidney disease, or CKD, on dialysis. Ferric citrate is also approved in Japan under the trade name Riona
®
and marketed by our Japanese partner, Japan Tobacco, Inc., or JT, and its subsidiary, Torii Pharmaceutical Co., Ltd., or Torii, and approved in Europe as Fexeric
®
. We are also investigating the use of ferric citrate for the treatment of iron deficiency anemia, or IDA, in adults with non-dialysis dependent CKD, or NDD-CKD, and, pending potential approval for this indication, plan to leverage our U.S. clinical and commercial infrastructure and treat many more people with CKD. Our vision of building a leading renal company includes expansion of our product portfolio with other medicines that can help patients with kidney disease. We use the brand name Auryxia only when we refer to ferric citrate for use in the approved indication in the United States. We refer to the product as ferric citrate when referring to its investigational use.
NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they may not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments that are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of these interim financial statements have been included. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended
December 31, 2016
. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the
three and six
months ended
June 30, 2017
are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.
Principles of Consolidation
The condensed consolidated financial statements include our financial statements and those of our wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of these condensed consolidated financial statements and the reported amounts of revenues and expenses during the applicable reporting period. Actual results could differ from those estimates. Such differences could be material to these condensed consolidated financial statements.
Revenue Recognition
Our primary source of revenue during the reporting periods was product sales. We sell product to a limited number of major wholesalers, our Distributors, as well as certain pharmacies, or collectively, our Customers. Our Distributors resell the product to retail pharmacies for purposes of their reselling the product to fill patient prescriptions. In accordance with GAAP, our revenue recognition policy requires that: (i) there is persuasive evidence that an arrangement exists between us and the Customer, (ii) delivery has occurred, (iii) collectability is reasonably assured, and (iv) the price is fixed or determinable. In the fourth quarter of 2016, we began to recognize revenue under the pull-through (ex-factory) method based on sales to our Customers as a result of our ability to reasonably estimate product returns based on our prior sales and return history.
Prior to the fourth quarter of 2016, we recognized revenue based on the resale of Auryxia for the purposes of filling patient prescriptions, and not based on initial sales from us to our Customers as we did not have sufficient history such that we could reliably estimate returns based on sales to our Customers. As a result, prior to the fourth quarter of 2016, we deferred Auryxia revenue recognition until the earlier of the product being resold for purposes of filling patient prescriptions and the expiration of the right of return (twelve months after the expiration date of the product). The deferred revenue was recorded net of discounts, rebates, and chargebacks. We also deferred the related cost of product sales and recorded such amounts as finished goods inventory held by others, which was included in inventory on our condensed consolidated balance sheet, until revenue related to such product sales was recognized.
Our U.S. Auryxia product sales for the
three and six
months ended
June 30, 2017
and
2016
were offset by provisions for allowances and accruals as set forth in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three months ended
June 30, 2017
|
|
Percent of gross
Auryxia
product sales
|
|
Three months ended
June 30, 2016
|
|
Percent of gross
Auryxia
product sales
|
Gross Auryxia product sales
|
$
|
26,029
|
|
|
|
|
$
|
12,561
|
|
|
|
Less provision for product sales allowances and accruals:
|
|
|
|
|
|
|
|
Trade allowances
|
2,463
|
|
|
9
|
%
|
|
1,555
|
|
|
12
|
%
|
Rebates, chargebacks and discounts
|
8,784
|
|
|
34
|
%
|
|
2,543
|
|
|
20
|
%
|
Product returns
|
346
|
|
|
2
|
%
|
|
—
|
|
|
—
|
|
Other incentives
(1)
|
320
|
|
|
1
|
%
|
|
184
|
|
|
2
|
%
|
Total
|
11,913
|
|
|
46
|
%
|
|
4,282
|
|
|
34
|
%
|
Net U.S. Auryxia product sales
|
$
|
14,116
|
|
|
|
|
$
|
8,279
|
|
|
|
|
|
(1)
|
Includes co-pay assistance and voucher rebates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Six months ended June 30, 2017
|
|
Percent of gross
Auryxia
product sales
|
|
Six months ended June 30, 2016
|
|
Percent of gross
Auryxia
product sales
|
Gross Auryxia product sales
|
$
|
43,983
|
|
|
|
|
$
|
21,185
|
|
|
|
Less provision for product sales allowances and accruals
|
|
|
|
|
|
|
|
Trade allowances
|
4,228
|
|
|
9
|
%
|
|
2,701
|
|
|
13
|
%
|
Rebates, chargebacks and discounts
|
14,114
|
|
|
32
|
%
|
|
4,221
|
|
|
20
|
%
|
Product returns
|
278
|
|
|
1
|
%
|
|
—
|
|
|
—
|
|
Other incentives
(1)
|
742
|
|
|
2
|
%
|
|
368
|
|
|
1
|
%
|
Total
|
19,362
|
|
|
44
|
%
|
|
7,290
|
|
|
34
|
%
|
Net U.S. Auryxia product sales
|
$
|
24,621
|
|
|
|
|
$
|
13,895
|
|
|
|
|
|
(1)
|
Includes co-pay assistance and voucher rebates.
|
Reclassifications
Certain amounts in the table above for the six months ended
June 30, 2017
, which also appears in
Management's Discussion and Analysis of Financial Condition and Results of Operations,
have been reclassified for consistency. Specifically, fees paid to a Customer for the three months ended March 31, 2017 totaling
$0.5 million
that were included in the caption "Rebates, chargebacks and discounts" were reclassified to the caption "Trade allowances" for the six months ended
June 30, 2017
. Total product sales allowances for the six months ended
June 30, 2017
were not affected.
Basic and Diluted Net Loss Per Common Share
Basic net loss per share is computed by dividing the losses allocable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per share does not reflect the effect of shares of common stock to be issued upon the exercise of stock options, as their inclusion would be anti-dilutive. The options outstanding as of
June 30, 2017
and
2016
, which are not included in the computation of net loss per share amounts, were
12,468,869
and
8,869,094
, respectively.
The following table presents amounts that were excluded from the calculation of diluted net loss per share, due to their anti-dilutive effect:
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2017
|
|
June 30, 2016
|
Options to purchase common stock
|
12,469
|
|
|
8,869
|
|
Shares issuable upon conversion of convertible senior notes
|
33,422
|
|
|
33,422
|
|
|
45,891
|
|
|
42,291
|
|
Concentrations of Credit Risk
We do not have significant off-balance-sheet risk or credit risk concentrations. We primarily maintain our cash and cash equivalents in deposit accounts and institutional money market funds. As of
June 30, 2017
, approximately
$34.4 million
of our total
$140.5 million
cash and cash equivalents balance was invested in institutional money market funds. See Note 3 – Fair Value Measurements.
Our accounts receivable, net at
June 30, 2017
and
December 31, 2016
represent amounts due to us from customers. We perform ongoing credit evaluations of our customers and generally do not require collateral. The following table sets forth customers who represented
10%
or more of our total accounts receivable, net as of
June 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Fresenius Medical Care Rx
|
23
|
%
|
|
22
|
%
|
AmerisourceBergen Drug Corporation
|
22
|
%
|
|
23
|
%
|
Cardinal Health, Inc.
|
20
|
%
|
|
11
|
%
|
DaVita Rx
|
16
|
%
|
|
10
|
%
|
McKesson Corporation
|
14
|
%
|
|
31
|
%
|
We currently have
two
suppliers with
three
approved sites for the supply of Auryxia drug product. We are currently utilizing
one
of these suppliers at its
two
approved sites to manufacture Auryxia drug product and are conducting additional development work at the other supplier. If any of our suppliers were to limit or terminate production, or otherwise fail to meet the quality or delivery requirements needed to supply Auryxia at adequate levels, we could experience losses of revenue, which could materially and adversely impact our results of operations.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or the FASB, or other standard setting bodies that we adopt as of the specified effective date.
In May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, a comprehensive new standard which amends revenue recognition principles and provides a single set of criteria for revenue recognition among all industries. The new standard provides a five-step framework whereby revenue is recognized when promised goods or services are transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosures pertaining to revenue recognition in both interim and annual periods. The standard is effective for interim and annual periods beginning after December 15, 2017 and allows for adoption using a full retrospective method, or a modified retrospective method. The FASB has subsequently issued amendments to ASU No. 2014-09 that have the same effective date and transition date of January 1, 2018. We expect to adopt these standards using the modified retrospective method. We have identified the customer contracts that are in the scope of these standards and we are in the process of reviewing the contracts. Prior to January 1, 2018, we plan to complete our review of the identified customer contracts as well as our license agreements to determine the impact that these standards will have on our financial position, results of operations and disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The new standard requires that all lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements. The new standard will be effective for us on January 1, 2019. The adoption of this standard may have a material impact on our financial position as it may impact the amount of our assets and liabilities. We are currently evaluating the potential impact that this standard may have on our results of operations.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. The new standard addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard will be effective for us on January 1, 2018. This standard is not expected to have a material impact on our statement of cash flows upon adoption.
NOTE 3 – FAIR VALUE MEASUREMENTS
The following table provides the fair value measurements of applicable financial assets as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets at fair value
as of June 30, 2017
|
|
Financial assets at fair value
as of December 31, 2016
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
(1)
|
$
|
34,373
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
107,084
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
$
|
34,373
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
107,084
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
Cash equivalents as of June 30, 2017 and December 31, 2016 consisted of institutional money market funds. The carrying value of our money market funds approximates fair value due to their short-term maturities.
|
Debt
In October 2015, we issued
$125 million
in Convertible Senior Notes, due 2020, or the Notes, in a private financing to funds managed by Baupost Group Securities, L.L.C., or Baupost. As of
June 30, 2017
and
December 31, 2016
, the fair value of the Notes was
$242 million
and
$196 million
, respectively, which differs from their carrying value. The fair value of the Notes is influenced by our stock price and stock price volatility. See Note 9 – Debt for additional information on our debt obligations.
NOTE 4 – INVENTORY
Inventory consists of the following at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2017
|
|
December 31, 2016
|
Raw materials
|
$
|
596
|
|
|
$
|
418
|
|
Work in process
|
15,499
|
|
|
11,430
|
|
Finished goods
|
1,990
|
|
|
833
|
|
Total inventory
|
$
|
18,085
|
|
|
$
|
12,681
|
|
NOTE 5 – STOCKHOLDERS’ EQUITY (DEFICIT)
2017 Annual Meeting of Stockholders
At our 2017 Annual Meeting of Stockholders held on June 8, 2017, our stockholders approved an amendment to our certificate of incorporation to increase the number of authorized shares of our common stock to
230,000,000
shares. We filed the amendment with the Secretary of State of the State of Delaware on June 13, 2017.
Change in Stockholders’ Equity (Deficit)
Total stockholders’ equity (deficit) increased by
$33.9 million
during the
six
months ended
June 30, 2017
. This increase was primarily attributable to the proceeds from the issuance of common stock of
$73.1 million
, the reclassification of the derivative liability related to the Notes to equity of
$62.7 million
and
$7.3 million
related to stock-based compensation, partially offset by our net loss of approximately
$110 million
.
NOTE 6 – STOCK-BASED COMPENSATION EXPENSE
Equity Incentive Plans
As of
June 30, 2017
, a total of
2,144,634
shares were available for the issuance of stock options or other stock-based awards under our stock option and incentive plans.
Stock Options
The following table summarizes stock option activity for the
six
months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
Number of shares
|
|
Weighted average exercise price
|
Outstanding at December 31, 2016
|
8,677,998
|
|
|
$
|
7.28
|
|
Granted
|
4,409,150
|
|
|
5.39
|
|
Exercised
|
(62,802
|
)
|
|
4.09
|
|
Forfeited or Expired
|
(555,477
|
)
|
|
7.07
|
|
Outstanding at June 30, 2017
|
12,468,869
|
|
|
$
|
6.64
|
|
Vested and expected to vest at June 30, 2017
|
7,531,012
|
|
|
$
|
7.50
|
|
Exercisable at June 30, 2017
|
4,079,875
|
|
|
$
|
8.98
|
|
Upon the exercise of stock options, we issue new shares of our common stock. As of
June 30, 2017
,
4,361,250
options issued to employees are unvested, performance-based options.
Restricted Stock
Certain employees and directors have been awarded restricted stock under our equity incentive plans. The time-vesting restricted stock awards vest primarily over a period of
three
years. The following table summarizes restricted share activity for the
six
months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
Number of shares
|
|
Weighted average grant date fair value
|
Outstanding at December 31, 2016
|
1,524,884
|
|
|
$
|
7.07
|
|
Granted
|
1,116,275
|
|
|
5.66
|
|
Vested
|
(394,323
|
)
|
|
6.00
|
|
Forfeited
|
(90,193
|
)
|
|
5.47
|
|
Outstanding at June 30, 2017
|
2,156,643
|
|
|
$
|
6.61
|
|
As of
June 30, 2017
,
435,000
shares of restricted stock issued to employees are unvested, performance-based shares.
Stock-Based Compensation Expense
We incurred
$3.7 million
and
$3.6 million
of stock-based compensation expense related to equity incentive grants during the three months ended
June 30, 2017
and
2016
, respectively and
$7.3 million
and
$6.8 million
during the
six
months ended
June 30, 2017
and
2016
, respectively. The following table reflects stock-based compensation expense for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
(in thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of goods sold
|
$
|
28
|
|
|
$
|
8
|
|
|
$
|
88
|
|
|
$
|
14
|
|
Research and development
|
483
|
|
|
880
|
|
|
1,061
|
|
|
1,585
|
|
Selling, general and administrative
|
3,161
|
|
|
2,665
|
|
|
6,187
|
|
|
5,247
|
|
Total stock-based compensation expense
|
$
|
3,672
|
|
|
$
|
3,553
|
|
|
$
|
7,336
|
|
|
$
|
6,846
|
|
Stock-based compensation costs capitalized as part of inventory were immaterial for the
three and six
months ended
June 30, 2017
and
2016
.
The fair value of stock options granted is estimated at the date of grant using the Black-Scholes pricing model. The expected term of options granted is derived from historical data, the expected vesting period and the full contractual term. Expected volatility is based on the historical volatility of our common stock. The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. We have assumed no expected dividend yield, as dividends have never been paid to stock or option holders and will not be paid for the foreseeable future.
The weighted average grant date fair value of stock options granted during the three months ended
June 30, 2017
and
2016
was
$4.65
and
$5.01
, respectively, and during the six months ended
June 30, 2017
and
2016
was
$3.86
and
$3.42
, respectively. We used historical information to estimate forfeitures of stock options. As of
June 30, 2017
, there was
$12.3 million
and
$7.1 million
of total unrecognized compensation cost related to non-vested stock options and restricted stock, respectively, each of which is expected to be recognized over weighted-average periods of
2.2 years
. These amounts do not include
4,361,250
unvested options and
435,000
shares of unvested restricted stock as of
June 30, 2017
which are performance-based and vest upon achievement of certain corporate milestones. Stock-based compensation for these awards will be measured and recorded if and when it is probable that the milestone will be achieved.
NOTE 7—LICENSE AGREEMENTS
In November 2005, we entered into a license agreement with Panion & BF Biotech, Inc., or Panion. Under the license agreement, we acquired the exclusive worldwide rights, excluding certain Asian-Pacific countries, for the development and marketing of ferric citrate. To date, we have paid an aggregate of
$11.6 million
of milestone payments to Panion. In addition, Panion is eligible to receive royalty payments based on a mid-single digit percentage of net sales of ferric citrate in the licensed territory, as well as a manufacturing fee for product manufactured for use in the licensed territory.
In September 2007, we entered into a Sublicense Agreement with JT and Torii, under which JT and Torii obtained the exclusive sublicense rights for the development and commercialization of ferric citrate in Japan. JT and Torii are responsible for the future development and commercialization costs in Japan. Effective June 8, 2009, we entered into an Amended and Restated Sublicense Agreement, or Revised Agreement, with JT and Torii, which, among other things, provided for the elimination of all significant on-going obligations under the Sublicense Agreement.
In January 2014, JT and Torii received manufacturing and marketing approval of ferric citrate from the Japanese Ministry of Health, Labour and Welfare. Ferric citrate launched in May 2014 and is marketed in Japan by Torii under the brand name Riona, is indicated as an oral treatment for the improvement of hyperphosphatemia in patients with CKD. Under the terms of the Revised Agreement, we receive royalty payments based on a tiered double-digit percentage of net sales of Riona in Japan escalating up to the mid-teens and may also receive up to an additional
$55.0 million
upon the achievement of certain annual net sales milestones. In accordance with our revenue recognition policy, royalty revenues are recognized in the quarter that JT and Torii provide their written report and related information to us regarding sales of Riona, which generally will be one quarter following the quarter in which the underlying sales by JT and Torii occurred. For each of the three months ended
June 30, 2017
and
2016
, we recorded
$1.0 million
in license revenue related to royalties earned on net sales of Riona in Japan. For the
six
months ended
June 30, 2017
and
2016
, we recorded
$2.3 million
and
$2.2 million
, respectively, in license revenue related to royalties earned on net sales of Riona in Japan. We record the associated mid-single digit percentage of net sales royalty expense due Panion, the licensor of ferric citrate, in the same period as the royalty revenue from JT and Torii is recorded. For each of the three months ended
June 30, 2017
and
2016
, we recorded
$0.6 million
in license expenses related to royalties due to the licensor of ferric citrate relating to sales of Riona in Japan. For the
six
months ended
June 30, 2017
and
2016
, we recorded
$1.4 million
and
$1.3 million
, respectively, in license expenses related to royalties due to the licensor of ferric citrate relating to sales of Riona in Japan.
NOTE 8 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2017
|
|
December 31, 2016
|
Accounts payable
|
$
|
7,696
|
|
|
$
|
2,225
|
|
Accrued compensation and related liabilities
|
5,709
|
|
|
8,190
|
|
Professional, license, and other fees and expenses
|
6,374
|
|
|
6,159
|
|
Commercial rebates, fees and returns
|
10,367
|
|
|
4,616
|
|
Total accounts payable and accrued expenses
|
$
|
30,146
|
|
|
$
|
21,190
|
|
NOTE 9 – DEBT
In October 2015, we completed the sale of
$125 million
of Notes due 2020, in a private placement, or the Private Placement, to funds managed by Baupost pursuant to a Notes Purchase Agreement dated October 14, 2015. The Notes were issued under an Indenture, or the Indenture, dated as of October 15, 2015, with The Bank of New York Mellon Trust Company, N.A. as trustee, or the Trustee. The Indenture subjects us to certain financial and business covenants and contains restrictions on the payments of cash dividends.
The Indenture contains customary terms and events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving us) occurs and is continuing, the Trustee by notice to us, or the holders of at least
25%
in aggregate principal amount of the outstanding Notes by written notice to us and the Trustee, may declare
100%
of the principal on all of the Notes to be due and payable. Upon such a declaration of acceleration, such principal will be due and payable immediately. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving us,
100%
of the principal on all of the Notes will become due and payable automatically.
Further, in connection with the Private Placement, we entered into a Registration Rights Agreement with the purchasers of the Notes, or the Registration Rights Agreement, pursuant to which we agreed to (i) file a registration statement, or the Resale Registration Statement with the Securities and Exchange Commission, or SEC, covering the resale of the Notes and the underlying common stock which the Notes are convertible into upon the written request of Baupost, and (ii) use commercially reasonable efforts, subject to receipt of necessary information from all the purchasers of the Notes, to cause the SEC to declare the Resale Registration Statement effective. Further, the Registration Rights Agreement permits Baupost to demand from time to time that we file a shelf Registration Statement pursuant to Rule 415 of the Securities Act from which any number of shelf takedowns may be conducted upon written request from Baupost. Finally, the Registration Rights Agreement affords Baupost certain piggyback registration rights.
The Notes are convertible at the option of Baupost at an initial conversion rate of 267.3797 shares of our common stock per $1,000 principal amount, equal to a conversion price of
$3.74
per share, which represents the last reported sale price of our stock on October 14, 2015. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events. Further, upon the occurrence of certain fundamental changes involving us, Baupost may require us to repurchase for cash all or part of their Notes at a repurchase price equal to
100%
of the principal amount of the Notes to be repurchased.
At issuance, a portion of the Notes was contingently convertible into cash if our stockholders did not approve an increase in the number of authorized shares of our common stock by July 1, 2016. In accordance with accounting guidance for debt with a conversion option, we separated the conversion option from the debt instrument and accounted for it separately as a derivative liability, due to the Notes initially being partially convertible to cash at the option of Baupost. We allocated the proceeds between the debt component and the embedded conversion option (the derivative) by performing a valuation of the derivative as of the transaction date, which was determined based on the difference between the fair value of the Notes with the conversion option and the fair value of the Notes without the conversion option. The fair value of the derivative liability was recognized as a debt discount and the carrying amount of the convertible senior notes represents the difference between the proceeds from the issuance of the Notes and the fair value of the derivative liability on the date of issuance. The excess of the principal amount of the debt component over its carrying amount, or debt discount, was amortized to interest expense using the effective interest method over the expected life of the debt.
Our outstanding convertible senior notes balance was
$125 million
as of
June 30, 2017
and
December 31, 2016
.
We determined the expected life of the debt was equal to the period through July 1, 2016, as this represented the earliest point at which a portion of the Notes was initially contingently convertible into cash. Accordingly, for the
three and six
months ended
June 30, 2016
approximately
$18.5 million
and
$34.2 million
of interest expense was recognized related to the Notes, all of which was attributable to the amortization of the debt discount.
Following our 2016 Annual Meeting of Stockholders held on May 25, 2016, we filed a certificate of amendment to our certificate of incorporation with the Secretary of State of the State of Delaware to increase the number of authorized shares of our common stock to allow for the full conversion of the Notes into our common stock. On April 10, 2017, we entered into the First Supplemental Indenture, or the First Supplement, to the Indenture. Under the terms of the First Supplement, the Notes issued under the Indenture were not convertible by the holders thereof until on or after June 8, 2017, except in connection with a “fundamental change” as defined in the Indenture. After June 8, 2017, the Notes are convertible entirely into shares of our common stock or cash depending upon the number of shares of our common stock authorized at the time of such conversion. At our 2017 Annual Meeting of Stockholders held on June 8, 2017, our stockholders ratified the filing and effectiveness of the certificate of amendment filed in May 2016. In addition, at the meeting our stockholders also approved a separate amendment to our certificate of incorporation to increase the number of authorized shares of our common stock to
230,000,000
shares. As a result, the full amount of the Notes is convertible into shares of our common stock. The holders of the Notes may, at their option, convert the Notes until the maturity date thereof.
In accordance with accounting guidance for debt modifications and exchanges, we assessed the terms of the First Supplement and determined that it resulted in a modification. During the three months ended June 30, 2017, we separated the conversion option from the debt instrument and accounted for it separately as a derivative liability, due to the Notes being contingently convertible to cash at the option of Baupost per the terms of the First Supplement. We allocated the proceeds between the debt component and the embedded conversion option (the derivative) by performing a valuation of the derivative as of the date of the First Supplement, which was determined based on the difference between the fair value of the Notes with the conversion option and the fair value of the Notes without the conversion option. The fair value of the derivative liability was recognized as a debt discount and the carrying amount of the convertible senior notes represented the difference between the principal amount of the Notes and the fair value of the derivative liability on the date of the First Supplement. The excess of the principal amount of the debt component over its carrying amount, or debt discount, was amortized to interest expense using the effective interest method over the expected life of the debt. We determined the expected life of the debt was equal to the period through June 8, 2017, as this represented the point at which the Notes was contingently convertible into cash.
In the
three and six
months ended
June 30, 2017
,
$63.0 million
of interest expense was recognized related to the Notes. As of
June 30, 2017
and
December 31, 2016
, the carrying value of the Notes was
$125 million
, and the fair value of the Notes was
$242 million
and
$196 million
, respectively.
NOTE 10 – OTHER INCOME (EXPENSE), NET
The components of other income (expense), net are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
(in thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest income
|
$
|
118
|
|
|
$
|
185
|
|
|
$
|
235
|
|
|
$
|
387
|
|
Other income (expense)
|
(5
|
)
|
|
7
|
|
|
(8
|
)
|
|
12
|
|
Fair value adjustment to derivative liability
|
225
|
|
|
(2,711
|
)
|
|
225
|
|
|
(4,718
|
)
|
|
$
|
338
|
|
|
$
|
(2,519
|
)
|
|
$
|
452
|
|
|
$
|
(4,319
|
)
|
The fair value adjustment to the derivative liability was recorded in connection with the Notes and related First Supplement. See Note 9 - Debt for additional information.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Commitments
As of
June 30, 2017
, our contractual obligations and commitments primarily consist of our obligations under non-cancelable leases, the Notes, and various agreements with third parties, including selling, general and administrative, research and development and manufacturing agreements.
Contingencies
We accrue a liability for legal contingencies when we believe that it is both probable that a liability has been incurred and that we can reasonably estimate the amount of the loss. We review these accruals and adjust them to reflect the best information available at the time. To the extent new information is obtained and our views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in our accrued liabilities would be recorded in the period in which such determination is made. For the matters referenced below, a liability is not probable or the amount cannot be reasonably estimated and, therefore, an accrual has not been made. In addition, in accordance with the relevant authoritative guidance, for any matters in which the likelihood of material loss is at least reasonably possible, we will provide disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, we will provide disclosure to that effect. We expense legal costs as they are incurred.
Four
purported class action lawsuits have been filed against us and certain of our current and former officers (Gregory P. Madison, Scott A. Holmes, Ron Bentsur, and James Oliviero).
Three
of these actions were filed in the U.S. District Court for the Southern District of New York, captioned respectively Terrell Jackson v. Keryx Biopharmaceuticals, Inc., et al., No. 1:16-cv-06131, filed on August 2, 2016, Richard J. Erickson v. Keryx Biopharmaceuticals, Inc., et al. No. 1:16-cv-06218, filed on August 4, 2016, and Richard King v. Keryx Biopharmaceuticals, Inc., et al., No. 1:16-cv-06233, filed on August 5, 2016. The Jackson complaint purports to be brought on behalf of stockholders who purchased our common stock between February 25, 2016 and August 1, 2016, the Erickson complaint purports to be brought on behalf of stockholders who purchased our common stock between March 2, 2016 and July 29, 2016, and the King complaint purports to be brought on behalf of stockholders who purchased our common stock between February 25, 2016 and July 29, 2016. On August 26, 2016, the fourth complaint, captioned Tim Karth v. Keryx Biopharmaceuticals, Inc., et al., No. 1:16-cv-11745, was filed in the U.S. District Court for the District of Massachusetts, which complaint was subsequently amended. The Karth complaint purports to be brought on behalf of stockholders who purchased our common stock between May 8, 2013 and August 1, 2016. The Jackson, Erickson and King matters were transferred to the U.S. District Court for the District of Massachusetts on April 5, 2017. The Karth plaintiffs have filed a motion to consolidate the actions and the defendants have joined in that motion. The Jackson, Erickson and King plaintiffs are currently challenging the appointment of the Karth plaintiffs as lead plaintiff. Each complaint generally alleges that we and certain of our current and former officers violated Sections 10(b) and/or 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder by making allegedly false and/or misleading statements concerning us and our business operations and future prospects in light of the August 1, 2016 announcement of an interruption in our supply of Auryxia.
Two
stockholder derivative complaints were also filed on December 16, 2016 against us and certain of our current and former officers (Gregory P. Madison, Scott A. Holmes, Ron Bentsur and James Oliviero), certain of our current directors (Kevin J. Cameron, Daniel P. Regan, Steven C. Gilman, Michael Rogers and John P. Butler) and our former directors (Michael P. Tarnok, Joseph Feczko, Jack Kaye and Wyche Fowler, Jr.), in the Superior Court of Massachusetts, one captioned Venkat Vara Prasad Malledi v. Keryx Biopharmaceuticals, Inc., et al., No. 16-3865 and one captioned James Anderson v. Keryx Biopharmaceuticals, Inc., et al., No. 16-3866. Each of these two complaints generally allege that the individual defendants breached their fiduciary duties owed to us, unjustly enriched themselves by their actions, abused their control positions with us, mismanaged us and wasted corporate assets since July 31, 2013 in light of our August 1, 2016 announcement by us of an interruption in the supply of the our product Auryxia. On June 27, 2017, the Superior Court granted the parties' motion to consolidate and stay the derivative litigations. All of the complaints seek unspecified damages, interest, attorneys’ fees, and other costs. We deny any allegations of wrongdoing and intend to vigorously defend against these lawsuits. There is no assurance, however, that we or the other defendants will be successful in our defense of either of these lawsuits or that insurance will be available or adequate to fund any settlement or judgment or the litigation costs of these actions. Moreover, we are unable to predict the outcome or reasonably estimate a range of possible losses at this time. A resolution of these lawsuits adverse to us or the other defendants, however, could have a material effect on our financial position and results of operations in the period in which the particular lawsuit is resolved.