UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2009.
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ________ to _______.
Commission file number
001-33528
OPKO Health, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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75-2402409
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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4400 Biscayne Blvd.
Miami, FL 33137
(Address of Principal Executive Offices) (ZIP Code)
(305) 575-4100
(Registrants 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.
þ
YES
o
NO
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such files). YES
o
NO
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): YES
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NO
þ
As of November 3, 2009, the registrant had 253,744,539 shares of common stock outstanding.
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Page(s)
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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6
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Condensed Consolidated Balance Sheets as of September 30, 2009 and
December 31, 2008 (unaudited)
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6
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Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2009 and September 30, 2008
(unaudited)
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7
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Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2009 and September 30, 2008 (unaudited)
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8
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Notes to Financial Statements
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9
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Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
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19
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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24
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Item 4. Controls and Procedures
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24
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
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24
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Item 1A. Risk Factors
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25
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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25
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Item 3. Defaults Upon Senior Securities
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25
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Item 4. Submission of Matters to a Vote of Security Holders
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25
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Item 5. Other Information
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25
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Item 6. Exhibits
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25
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Signatures
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27
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Exhibit Index
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28
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2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, as that term is defined under the Private
Securities Litigation Reform Act of 1995, or PSLRA, Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements include statements about our expectations, beliefs or intentions regarding our product
development efforts, business, financial condition, results of operations, strategies or prospects.
You can identify forward-looking statements by the fact that these statements do not relate
strictly to historical or current matters. Rather, forward-looking statements relate to
anticipated or expected events, activities, trends or results as of the date they are made.
Because forward-looking statements relate to matters that have not yet occurred, these statements
are inherently subject to risks and uncertainties that could cause our actual results to differ
materially from any future results expressed or implied by the forward-looking statements. Many
factors could cause our actual activities or results to differ materially from the activities and
results anticipated in forward-looking statements. These factors include those described below and
in Item 1A-Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2008,
and described from time to time in our reports filed with the Securities and Exchange Commission.
We do not undertake any obligation to update forward-looking statements. We intend that all
forward-looking statements be subject to the safe-harbor provisions of the PSLRA. These
forward-looking statements are only predictions and reflect our views as of the date they are made
with respect to future events and financial performance.
Risks and uncertainties, the occurrence of which could adversely affect our business, include
the following:
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We have a history of operating losses and we do not expect to become profitable in
the near future.
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Our technologies are in an early stage of development and are unproven.
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Our drug research and development activities may not result in commercially viable
products.
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Following the recommendation of the Independent Data Monitoring Committee, we
terminated the Phase III clinical trial of bevasiranib, our most advanced product
candidate. As a result, we may not continue to develop or be able to successfully
commercialize bevasiranib.
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Our current and planned clinical trials may not satisfy the requirements of the FDA
or other non-United States regulatory authorities.
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We will require substantial additional funding, which may not be available to us on
acceptable terms, or at all.
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We expect to finance future cash needs primarily through public or private offerings,
debt financings or strategic collaborations, which may dilute your stockholdings in the
Company.
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If our competitors develop and market products that are more effective, safer or less
expensive than our future product candidates, our commercial opportunities will be
negatively impacted.
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The regulatory approval process is expensive, time consuming and uncertain and may
prevent us or our collaboration partners from obtaining approvals for the
commercialization of some or all of our product candidates.
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Failure to recruit and enroll patients for clinical trials may cause the development
of our product candidates to be delayed.
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Even if we obtain regulatory approvals for our product candidates, the terms of
approvals and ongoing regulation of our products may limit how we manufacture and market
our product candidates, which could materially impair our ability to generate
anticipated revenues.
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We may not meet regulatory quality standards applicable to our manufacturing and
quality processes.
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Even if we receive regulatory approval to market our product candidates, the market
may not be receptive to our products.
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If we fail to attract and retain key management and scientific personnel, we may be
unable to successfully develop or commercialize our product candidates.
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3
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In the event that we successfully evolve from a company primarily involved in
development to a company also involved in commercialization, we may encounter
difficulties in managing our growth and expanding our operations successfully.
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If we fail to acquire and develop other products or product candidates, at all or on
commercially reasonable terms, we may be unable to diversify or grow our business.
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We have no experience manufacturing our pharmaceutical product candidates and we
therefore intend to rely on third parties to manufacture and supply our pharmaceutical
product candidates, and would need to meet various standards necessary to satisfy FDA
regulations if and when we commence manufacturing.
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We currently have no pharmaceutical marketing, sales or distribution organization.
If we are unable to develop our sales and marketing and distribution capability on our
own or through collaborations with marketing partners, we will not be successful in
commercializing our pharmaceutical product candidates.
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Independent clinical investigators and contract research organizations that we engage
to conduct our clinical trials may not be diligent, careful or timely.
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The success of our business is dependent on the actions of our collaborative
partners.
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If we are unable to obtain and enforce patent protection for our products, our
business could be materially harmed.
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If we are unable to protect the confidentiality of our proprietary information and
know-how, the value of our technology and products could be adversely affected.
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We will rely heavily on licenses from third parties.
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We license patent rights to certain of our technology from third-party owners. If
such owners do not properly maintain or enforce the patents underlying such licenses,
our competitive position and business prospects will be harmed.
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Our commercial success depends significantly on our ability to operate without
infringing the patents and other proprietary rights of third parties.
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Adverse results in material litigation matters or governmental inquiries could have a
material adverse effect upon our business and financial condition.
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Medicare prescription drug coverage legislation and future legislative or regulatory
reform of the health care system may affect our ability to sell our products profitably.
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Failure to obtain regulatory approval outside the United States will prevent us from
marketing our product candidates abroad.
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We may not have the funding available to pursue acquisitions.
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Acquisitions may disrupt our business, distract our management and may not proceed as
planned; and we may encounter difficulties in integrating acquired businesses.
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Non-United States governments often impose strict price controls, which may adversely
affect our future profitability.
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Our business may become subject to economic, political, regulatory and other risks
associated with international operations.
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The market price of our common stock may fluctuate significantly.
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4
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Directors, executive officers, principal stockholders and affiliated entities own a
majority of our capital stock, and they may make decisions that you do not consider to
be in your best interests or in the best interests of our stockholders.
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Compliance with changing regulations concerning corporate governance and public
disclosure may result in additional expenses.
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If we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act
of 2002, as they apply to us, or our internal controls over financial reporting are not
effective, the reliability of our financial statements may be questioned and our common
stock price may suffer.
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We may be unable to maintain our listing on the NYSE Amex Exchange, which could cause
our stock price to fall and decrease the liquidity of our common stock.
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Future issuances of common stock may depress the trading price of our common stock.
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Provisions in our charter documents and Delaware law could discourage an acquisition
of us by a third party, even if the acquisition would be favorable to you.
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We do not intend to pay cash dividends on our common stock in the foreseeable future.
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5
PART I. FINANCIAL INFORMATION
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to
the Company, OPKO, we, our, ours, and us refer to OPKO Health, Inc., a Delaware
corporation, including our wholly-owned subsidiaries.
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Item 1.
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Financial Statements
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OPKO Health, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands except share data)
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September 30,
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December 31,
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2009
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2008
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ASSETS
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Current assets
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Cash and cash equivalents
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$
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58,391
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$
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6,678
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Marketable securities
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5,000
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Accounts receivable, net
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1,395
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1,005
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Inventory
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5,447
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4,063
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Prepaid expenses and other current assets
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1,536
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1,720
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Total current assets
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71,769
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13,466
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Property and equipment, net
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551
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659
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Intangible assets, net
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5,118
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6,336
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Goodwill
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1,097
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1,097
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Investments
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4,697
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Other assets
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371
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206
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Total assets
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$
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83,603
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$
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21,764
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities
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Accounts payable
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$
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1,253
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$
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2,221
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Accrued expenses
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3,064
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5,394
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Current portion of notes payable and capital lease obligations
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27
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97
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Total current liabilities
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4,344
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7,712
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Long-term liabilities and capital lease obligations
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2,996
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1,826
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Line of credit with related party, net unamortized discount of $84 and
$133, respectively
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11,916
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11,867
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Total liabilities
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19,256
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21,405
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Commitments and contingencies
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Shareholders equity
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Series A Preferred stock $0.01 par value, 4,000,000 shares authorized;
932,667 and 953,756 shares issued and outstanding (liquidation value of
$2,507 and $2,384) at September 30, 2009 and December 31, 2008,
respectively
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9
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10
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Series C Preferred Stock $0.01 par value, 500,000 shares authorized;
No shares issued or outstanding
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Series D Preferred Stock $0.01 par value, 2,000,000 shares authorized;
1,209,677 and 0 shares issued and outstanding (liquidation value of
$30,013 and $0) at September 30, 2009 and December 31, 2008
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12
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Common Stock $0.01 par value, 500,000,000 shares authorized;
253,683,005 and 199,020,379 shares issued and outstanding at
September 30, 2009 and December 31, 2008, respectively
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2,536
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1,991
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Treasury stock - 45,154 and 18,000 shares at September 30, 2009 and
December 31, 2008, respectively
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(61
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)
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(24
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Additional paid-in capital
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392,181
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307,498
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Accumulated deficit
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(330,330
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)
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(309,116
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)
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Total shareholders equity
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64,437
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359
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Total liabilities and shareholders equity
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$
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83,603
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$
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21,764
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements
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6
OPKO Health, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share data)
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For the three months ended
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For the nine months ended
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September 30,
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September 30,
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2009
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2008
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2009
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2008
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Revenue
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$
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1,501
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$
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4,050
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$
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6,149
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$
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7,753
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Cost of goods sold
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1,055
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2,969
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4,380
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7,324
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Gross margin
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446
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1,081
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1,769
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429
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Operating expenses
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Selling, general and administrative
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3,089
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3,722
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9,272
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12,284
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Research and development
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2,805
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4,913
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10,962
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14,748
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Write-off of acquired in-process
research and development
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1,398
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Other operating expenses, principally
amortization of intangible assets
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406
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427
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1,218
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1,281
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Total operating expenses
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6,300
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9,062
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21,452
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29,711
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Operating loss
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(5,854
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)
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(7,981
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)
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(19,683
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)
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(29,282
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)
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Other expense, net
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(458
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)
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(350
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)
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(1,402
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)
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(868
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)
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Loss before income taxes and investment
loss
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(6,312
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)
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(8,331
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)
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(21,085
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)
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(30,150
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)
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Income tax benefit
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(23
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)
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|
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(4
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)
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|
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(161
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)
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|
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(64
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)
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Loss before investment losses in investees
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(6,289
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)
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(8,327
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)
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(20,924
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)
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(30,086
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)
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Loss from investments in investee
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(65
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)
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(103
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)
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|
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|
|
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Net loss
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(6,354
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)
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(8,327
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)
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(21,027
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)
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(30,086
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)
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Preferred stock dividend
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|
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(72
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)
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|
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(53
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)
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|
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(188
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)
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|
|
(163
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)
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|
|
|
|
|
|
|
|
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Net loss attributable to common
shareholders
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|
$
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(6,426
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)
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|
$
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(8,380
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)
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|
$
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(21,215
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)
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|
$
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(30,249
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)
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|
|
|
|
|
|
|
|
|
|
|
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Loss per common share, basic and diluted
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$
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(0.03
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)
|
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$
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(0.04
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)
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$
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(0.09
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)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding, basic and diluted
|
|
|
252,986,149
|
|
|
|
187,625,641
|
|
|
|
226,273,290
|
|
|
|
184,361,260
|
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements
.
7
OPKO Health, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,027
|
)
|
|
$
|
(30,086
|
)
|
Adjustments to reconcile net loss to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,401
|
|
|
|
1,366
|
|
Write-off of acquired in-process research and development
|
|
|
|
|
|
|
1,398
|
|
Accretion of debt discount related to notes payable
|
|
|
49
|
|
|
|
156
|
|
Share based compensation
|
|
|
3,536
|
|
|
|
5,770
|
|
Provision for bad debts
|
|
|
58
|
|
|
|
70
|
|
Provision for inventory obsolescence
|
|
|
80
|
|
|
|
130
|
|
Losses from investments in investees
|
|
|
103
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(448
|
)
|
|
|
(460
|
)
|
Inventory
|
|
|
(1,464
|
)
|
|
|
(147
|
)
|
Prepaid expenses and other current assets
|
|
|
184
|
|
|
|
(142
|
)
|
Other assets
|
|
|
(167
|
)
|
|
|
(152
|
)
|
Accounts payable
|
|
|
(968
|
)
|
|
|
(611
|
)
|
Accrued expenses
|
|
|
(1,382
|
)
|
|
|
1,260
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(20,045
|
)
|
|
|
(21,448
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition of business, net of cash
|
|
|
|
|
|
|
48
|
|
Investments
in investees
|
|
|
(4,800
|
)
|
|
|
|
|
Purchase of marketable securities
|
|
|
(9,997
|
)
|
|
|
|
|
Maturities of marketable securities
|
|
|
4,997
|
|
|
|
|
|
Capital expenditures
|
|
|
(75
|
)
|
|
|
(284
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9,875
|
)
|
|
|
(236
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash, to related parties
|
|
|
25,000
|
|
|
|
15,000
|
|
Issuance of common stock for cash
|
|
|
25,990
|
|
|
|
|
|
Issuance of Series D preferred stock and warrants for
cash, including
related parties
|
|
|
30,000
|
|
|
|
|
|
Proceeds from bridge loan with related party
|
|
|
3,000
|
|
|
|
|
|
Repayment of bridge loan with related party
|
|
|
(3,000
|
)
|
|
|
|
|
Insurance financing
|
|
|
217
|
|
|
|
327
|
|
Proceeds from the exercise of stock options and warrants
|
|
|
716
|
|
|
|
351
|
|
Repayments of notes payable and capital lease obligations
|
|
|
(290
|
)
|
|
|
(2,766
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
81,633
|
|
|
|
12,912
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
51,713
|
|
|
|
(8,772
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
6,678
|
|
|
|
23,373
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
58,391
|
|
|
$
|
14,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
51
|
|
|
$
|
100
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Issuance of capital stock to acquire Vidus in 2008
|
|
$
|
|
|
|
$
|
1,319
|
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements
.
8
OPKO Health, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 BUSINESS AND ORGANIZATION
We are a specialty healthcare company involved in the discovery, development, and
commercialization of pharmaceutical products, medical devices, vaccines, diagnostic technologies
and imaging systems. Initially focused on the treatment and management of ophthalmic diseases, we
have since expanded into other areas of major unmet medical need such as oncology, infectious
diseases and neurological disorders. We are a Delaware corporation, headquartered in Miami,
Florida.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation.
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the
United States (GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary to present fairly the Companys results of operations,
financial position and cash flows have been made. The results of operations and cash flows for the
nine months ended September 30, 2009, are not necessarily indicative of the results of operations
and cash flows that may be reported for the remainder of 2009 or for future periods. The interim
condensed consolidated financial statements should be read in conjunction with the Consolidated
Financial Statements and the Notes to Consolidated Financial Statements included in our Annual
Report on Form 10-K for the year ended December 31, 2008.
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Codification (ASC, or the Codification) as the source of authoritative generally accepted
accounting principles (GAAP) recognized by the FASB for
non-governmental entities. The
Codification is effective for financial statements issued for reporting periods that end after
September 15, 2009. The Codification superseded all then-existing non-Securities and Exchange
Commission (SEC) accounting and reporting standards. The Codification did not change rules and
interpretations of the SEC which are also sources of authoritative GAAP for SEC registrants.
Because the Codification did not change GAAP, the Codification had no impact on our consolidated
financial statements or footnotes.
Principles of consolidation
. The accompanying unaudited condensed consolidated financial
statements as of September 30, 2009 and December 31, 2008 and for the three and nine months ended
September 30, 2009 and 2008 include our accounts and our majority-owned subsidiaries. The
condensed consolidated financial statements as of September 30, 2009 and December 31, 2008 include
our accounts and our majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
As discussed in Note 7, we have made an investment in Cocrystal Discovery, Inc.,
(Cocrystal) and determined that Cocrystal is a VIE. In general, a VIE is a corporation,
partnership, limited-liability corporation, trust, or any other legal structure used to conduct
activities or hold assets that either (1) has an insufficient amount of equity to carry out its
principal activities without additional subordinated financial support, (2) has a group of equity
owners that are unable to make significant decisions about its activities, or (3) has a group of
equity owners that do not have the obligation to absorb losses or the right to receive returns
generated by its operations. We have determined that we are not the primary beneficiary of
Cocrystal. Refer to Note 7.
Use of estimates.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Comprehensive loss
. Our comprehensive loss has no components other than net loss for all
periods presented.
Revenue recognition
. Generally, we recognize revenue from product sales when goods are
shipped and title and risk of loss transfer to our customers. Certain of our products are sold
directly to end-users and require that we deliver, install and train the staff at the end-users
facility. As a result, we do not recognize revenue until the product is delivered, installed and
training has occurred. During the three months ended September 30, 2009, revenue derived from
sales to two significant international customers represented approximately 17% and 10% of
9
our revenue, respectively. During the three months ended September 30, 2008, revenue derived
from sales to three significant international customers represented 18%, 17% and 15% of our
revenue, respectively. During the nine months ended September 30, 2009, revenue derived from sales
to three significant international customers represented approximately 18%, 14%, and 12% of our
revenue, respectively. During the nine months ended September 30, 2008, revenue derived from sales
to three significant international customers represented approximately 15%, 14% and 12% of our
revenue, respectively.
Product warranties.
Product warranty expense is recorded concurrently with the recording of
revenue for product sales. The costs of warranties are accounted for as a component of cost of
sales. We estimate warranty costs based on our estimated historical experience and adjust for any
known product reliability issues.
The following table reflects the amounts recorded for the three months ended September 30,
2009 and 2008.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
Beginning balance
|
|
$
|
295
|
|
|
$
|
226
|
|
Accrual for products sold
|
|
|
39
|
|
|
|
153
|
|
Settlements in kind or expired
|
|
|
(116
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
218
|
|
|
$
|
265
|
|
|
|
|
|
|
|
|
The following table reflects the amounts recorded for the nine months
ended September 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
Beginning balance
|
|
$
|
259
|
|
|
$
|
227
|
|
Accrual for products sold
|
|
|
167
|
|
|
|
208
|
|
Settlements in kind or expired
|
|
|
(208
|
)
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
218
|
|
|
$
|
265
|
|
|
|
|
|
|
|
|
Allowance for returns and doubtful accounts.
Allowances for estimated sales returns are
based upon our history of product returns. The amount of allowance for doubtful accounts at
September 30, 2009 and December 31, 2008, was $0.4 million and $0.4 million, respectively. As of
September 30, 2009, accounts receivable from two of our international distributors represented
approximately 32% and 15%, respectively, of our net accounts receivable balance. As of December
31, 2008, accounts receivable from two of our international distributors represented approximately
47% and 19%, respectively, of our net accounts receivable balance.
Segment reporting
. Our chief operating decision-maker (CODM) is comprised of our executive
management with the oversight of our board of directors. Our CODM reviews our operating results
and operating plans and makes resource allocation decisions on a company-wide or aggregate basis.
Accordingly, we have aggregated our instrumentation and pharmaceutical and device research and
development activities into a single segment reporting basis. Our products are being used by and
developed for retina specialists, ophthalmologists, and optometrists, among others.
Equity-Based Compensation.
We account for equity-based compensation as an expense in our
financial statements and such cost is measured at the fair value of the award. Equity-based
compensation arrangements to non-employees are accounted for at their fair value on the measurement
date. We estimate the grant-date fair value of our stock option grants using a valuation model
known as the Black-Scholes-Merton formula or the Black-Scholes Model and allocate the resulting
compensation expense over the corresponding requisite service period associated with each grant.
The Black-Scholes Model requires the use of several variables to estimate the grant-date fair value
of stock options including expected term, expected volatility, expected dividends and risk-free
interest
10
rate. We perform significant analyses to calculate and select the appropriate variable
assumptions used in the Black-Scholes Model. We also perform significant analyses to estimate
forfeitures of equity-based awards. We adjust our forfeiture estimates on at least an annual basis
based on the number of share-based awards that ultimately vest. The selection of assumptions and
estimated forfeiture rates is subject to significant judgment and future changes to our assumptions
and estimates may have a material impact on our consolidated financial statements. During the
three and nine months ended September 30, 2009 we recorded $1.8 million and $3.5 million,
respectively, of equity-based compensation expense. During the three and nine months ended
September 30, 2008, we recorded $1.6 million and $5.8 million, respectively, of equity-based
compensation expense. During the nine months ended September 30, 2009 and 2008, we issued
2,912,593 and 4,741,184 shares of common stock, respectively, in connection with the exercise of
stock options.
Fair value.
We adopted the required provisions of ASC 820-10, Fair Value Measurements and
Disclosures (Fair Value Measurements and Disclosures Standard), as of January 1, 2008, and adopted
certain deferred provisions on January 1, 2009. The Fair Value Measurements and Disclosures
Standard is a technical standard which defines fair value, establishes a consistent framework for
measuring fair value, and expands disclosures for each major asset and liability category measured
at fair value on either a recurring or a nonrecurring basis. The Fair Value Measurements and
Disclosures Standard clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or liability. We
utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair
value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active
markets; Level 2, defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or
no market data exists, therefore requiring an entity to develop its own assumptions.
As of September 30, 2009, we held money market funds and treasury securities, maturing
December 17, 2009, that qualify as cash equivalents as well as marketable securities which were
comprised of treasury securities, maturing October 22, 2009, that are required to be measured at
fair value on a recurring basis. We have $10 million of treasury securities that are recorded at
amortized cost, which reflects their approximate fair value. We intend to hold the treasury
securities through their maturity.
In addition, the Ophthalmic Technologies Inc., or (OTI), put options were valued at fair
value utilizing the Black-Scholes valuation method. Refer to Note 9. During the three and nine
months ended September 30, 2009, we recorded a reversal of expense of $35 thousand and $0.1
million, respectively, reflecting our stock price fluctuations. During the three and nine months
ended September 30, 2008, we recorded $18 thousand and $0.1 million of expense, respectively,
reflecting our stock price fluctuations during that period.
Any future fluctuation in fair value related to these instruments that is judged to be
temporary, including any recoveries of previous write-downs, would be recorded in accumulated other
comprehensive income or loss. If we determine that any future valuation adjustment was
other-than-temporary, we would record a charge to the consolidated statement of operations as
appropriate.
11
Our
financial assets and liabilities measured at fair value on a recurring basis, are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as of September 30, 2009
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
52,625
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
52,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury securities
|
|
|
9,999
|
|
|
|
|
|
|
|
|
|
|
|
9,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
62,624
|
|
|
$
|
|
|
|
|
|
|
|
$
|
62,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTI put option
|
|
$
|
|
|
|
$
|
153
|
|
|
$
|
|
|
|
$
|
153
|
|
|
|
|
Total
|
|
$
|
62,624
|
|
|
$
|
153
|
|
|
$
|
|
|
|
$
|
62,777
|
|
|
|
|
Recent
accounting pronouncements.
On June 30, 2009, we adopted ASC
855-10-55 Subsequent Events Disclosure (Subsequent Events
Standard), which established general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are issued. The Subsequent
Events Standard defines two types of subsequent events. The effects of events or transactions that
provide additional evidence about conditions that existed at the balance sheet date, including the
estimates inherent in the process of preparing financial statements, are recognized in the
financial statements. The effects of events that provide evidence about conditions that did not
exist at the date of the balance sheet but arose after that date are not recognized in the
financial statements. Refer to Note 10.
In June 2009, the FASB issued Statement No. 167 (SFAS 167), Accounting for Variable Interest
Entities. SFAS 167 amends FASB Interpretation No. 46(R) (FIN No. 46(R)), Consolidation of Variable
Interest Entities, to require a comprehensive qualitative analysis to be performed to determine
whether a holder of variable interests in a variable interest entity also has a controlling
financial interest in that entity. In addition, it requires the same such analysis be applied to
entities previously designated as qualified special-purpose entities under SFAS 140. SFAS 167 is
effective as of the start of the first annual reporting period beginning after November 15, 2009,
for interim periods within the first annual reporting period, and for all subsequent annual and
interim reporting periods. We do not expect the adoption of SFAS 167 to have a material impact on
our consolidated financial position, results of operations, or cash flows.
NOTE 3 LOSS PER SHARE
Basic loss per common share is computed by dividing our net loss by the weighted average
number of common shares outstanding during the period. Diluted loss per common share is computed
by dividing our net loss by the weighted average number of shares outstanding and the impact of all
dilutive potential common shares, primarily stock options. The dilutive impact of stock options
and warrants are determined by applying the treasury stock method.
A
total of 20,998,353 and 20,139,831 potential common shares have been excluded from the
calculation of net loss per common share for the three months ended September 30, 2009 and 2008,
respectively, because their inclusion would be anti-dilutive. A total
of 17,154,864 and 24,617,550
potential common shares have been excluded from the calculation of net loss per common share for
the nine months ended September 30, 2009 and 2008, respectively, because their inclusion would be
anti-dilutive. In addition, our Series A preferred stock, if
converted, could be converted into 1,002,617 shares of our common
stock at September 30, 2009 and our Series D preferred stock, if
converted, could be converted into 12,102,146 shares of our common
stock at September 30, 2009.
12
NOTE 4 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
1,786
|
|
|
$
|
1,412
|
|
Less allowance for doubtful accounts
|
|
|
(391
|
)
|
|
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
$
|
1,395
|
|
|
$
|
1,005
|
|
|
|
|
|
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Raw materials (components)
|
|
$
|
2,829
|
|
|
$
|
2,635
|
|
Work-in process
|
|
|
1,512
|
|
|
|
934
|
|
Finished products
|
|
|
1,344
|
|
|
|
749
|
|
Less provision for inventory reserve
|
|
|
(238
|
)
|
|
|
(255
|
)
|
|
|
|
|
|
|
|
|
|
$
|
5,447
|
|
|
$
|
4,063
|
|
|
|
|
|
|
|
|
Intangible assets, net:
|
|
|
|
|
|
|
|
|
Technology
|
|
$
|
4,597
|
|
|
$
|
4,597
|
|
Customer relationships
|
|
|
2,978
|
|
|
|
2,978
|
|
Covenants not to compete
|
|
|
317
|
|
|
|
317
|
|
Tradename
|
|
|
195
|
|
|
|
195
|
|
Other
|
|
|
7
|
|
|
|
7
|
|
Less amortization
|
|
|
(2,976
|
)
|
|
|
(1,758
|
)
|
|
|
|
|
|
|
|
|
|
$
|
5,118
|
|
|
$
|
6,336
|
|
|
|
|
|
|
|
|
NOTE 5 PRIVATE PLACEMENTS OF STOCK
Effective as of September 18, 2009, we entered into a securities purchase agreement (the
Preferred Purchase Agreement) with the private investors named therein (the Preferred
Investors), pursuant to which the Preferred Investors agreed to purchase an aggregate of 1,209,677
shares (the Preferred Shares) of the Companys newly-designated 8.0% Series D Cumulative
Convertible Preferred Stock, par value $0.01 per share (Series D Preferred Stock), at a purchase
price of $24.80 per share, together with warrants (the Warrants) to purchase up to an aggregate
of 3,024,196 shares of the Companys common stock, par value $.01 (the Common Stock) at an
exercise price of $2.48 per share (the Preferred Investment). Initially, the Series D Preferred
Stock is convertible into ten shares of the Companys Common Stock, and the Preferred Shares
purchase price was based on the average closing price of the Companys Common Stock as reported on
the NYSE Amex for the five days preceding the execution of the Preferred Purchase Agreement. In
connection with the Preferred Investment, the Company issued the Preferred Shares and received an
aggregate of $30.0 million on September 28, 2009.
The Company agreed to issue the Preferred Shares and the Warrants in reliance upon the
exemption from registration under Section 4(2) of the Securities Act of 1933, as amended (the
Act). The Preferred Shares issued in the Preferred Investment, including the shares of the
Companys Common Stock into which the Preferred Shares and Warrants may be converted, are
restricted securities as that term is defined by Rule 144 under the Act, subject to a three year
contractual lockup, and no registration rights have been granted.
On September 22, 2009, the Company filed with the Secretary of State of the State of Delaware
a Certificate of Designation of the Powers, Preferences and Relative, Participating, Optional and
Other Special Rights of 8.0% Series D Cumulative Convertible Preferred Stock, and Qualifications,
Limitations and Restrictions Thereof (the Certificate of Designation). A summary of the
Certificate of Designation is set forth below:
Dividends.
Holders of the Series D Preferred Stock are entitled to receive, when, as and if
declared by the Companys Board of Directors, dividends on each share of Series D Preferred Stock
at a rate per annum equal to 8.0% of the sum of (a) $24.80, plus (b) any and all declared and
unpaid and accrued dividends thereon, subject to adjustment for any stock split, combination,
recapitalization or other similar corporate action (the Liquidation Amount). All dividends shall
be cumulative, whether or not earned or declared, accruing on an annual basis from the issue date
of the Series D Preferred Stock.
Voting.
The Holders of Series D Preferred Stock have the right to receive notice of any
meeting of holders of the Companys Common Stock or Series D Preferred Stock and to vote (on an
as-converted into Common Stock basis)
13
upon any matter submitted to a vote of the holders of Common
Stock or Series D Preferred Stock. Except as otherwise expressly set forth in the Companys
Amended and Restated Certificate of Incorporation, as amended from time to time, the holders of
Series D Preferred Stock will vote on each matter submitted to them with the holders of Common
Stock and all other classes and series of the Companys capital stock entitled to vote on such
matter, taken together as a single class.
Rank.
With respect to dividend distributions (other than required dividends to the holders of
the Companys Series A Preferred Stock) and distributions upon liquidation, winding up or
dissolution of the Company, the Series D Preferred Stock ranks senior to all classes of Common
Stock, the Companys Series A Preferred Stock, the Companys Series C Preferred Stock, and to each
other class of the Companys capital stock existing now or hereafter created that are not
specifically designated as ranking senior to or pari passu with the Series D Preferred Stock.
Liquidation Preference.
Upon the occurrence of a Liquidation Event (as defined in the
Certificate of Designation), holders of Series D Preferred Stock are entitled to be paid, subject
to applicable law, out of the assets of the Company available for distribution to its stockholders,
an amount in cash (the Liquidation Payment) for each share of Series D Preferred Stock equal to
the greater of (x) the Liquidation Amount for each such share of Series D Preferred Stock
outstanding plus (i) any declared and unpaid dividends and (ii) accrued dividends or (y) the amount
for each share of Series D Preferred Stock the holders would be entitled to receive pursuant to the
Liquidation Event if all of the shares of Series D Preferred Stock had been converted into Common
Stock as of the date immediately prior to the date fixed for determination of stockholders entitled
to receive a distribution in such Liquidation Event. Such Liquidation Payment will be paid before
any cash distribution will be made or any other assets distributed in respect of any class of
securities junior to the Series D Preferred Stock, including, without limitation, Common Stock and
the Companys Series A Preferred Stock.
Conversion.
The holder of any share of Series D Preferred Stock may at any time and from time
to time convert such share into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing (A) the Liquidation Amount of the share by (B) the Conversion Price,
which is initially $2.48, subject to adjustment as provided in the Certificate of Designation.
Initially, the Series D Preferred Stock is convertible into 10 shares of the Companys Common
Stock.
Mandatory Conversion.
The Company may, at any time, convert the outstanding Series D
Preferred Stock into such number of fully paid and non-assessable shares of Common Stock as is
determined by dividing (A) the Liquidation Amount of the shares by (B) the Conversion Price, but
only if the closing bid price of the Common Stock exceeds $5.00 per share during any thirty (30)
consecutive trading days prior to each conversion. Initially, the Series D Preferred Stock is
convertible into 10 shares of the Companys Common Stock.
Redemption.
To the extent it is lawfully able to do so, the Company may redeem all of the
then outstanding shares of Series D Preferred Stock by paying in cash an amount per share equal to
$24.80 plus all declared or accrued unpaid dividends on such shares, subject to adjustment for any
stock dividends or distributions, splits, subdivisions, combinations, reclassifications, stock
issuances or similar events with respect to the Common Stock.
On May 26, 2009, May 29, 2009, and June 1, 2009, we entered into stock purchase agreements
with a total of seven accredited investors (Investors) pursuant to which the Investors agreed to
make a $31.0 million investment in the Company in exchange for 31,000,000 shares of our Common
Stock at $1.00 per share, representing a range of discounts of approximately 16-21% to the average
closing price of our Common Stock on the NYSE Amex for the five trading days immediately preceding
the closing date of the agreements.
On February 23, 2009, we entered into a Stock Purchase Agreement with Frost Gamma Investments
Trust (the Gamma Trust), of which Phillip Frost, M.D., our Chairman and CEO, is the sole trustee,
pursuant to which the Gamma Trust agreed to make a $20.0 million cash investment in the Company in
exchange for 20,000,000 shares (the Shares) of our Common Stock, at $1.00 per share, representing
an approximately 20% discount to the average closing price of our Common Stock on the NYSE Amex for
the five trading days immediately preceding the effective date of Audit Committee and stockholder
approval of the transaction. We issued the Shares and received the proceeds on April 27, 2009.
NOTE 6 PROMISSORY NOTE
On March 4, 2009, the Gamma Trust advanced $3.0 million to us pursuant to a Promissory Note we
issued to the Gamma Trust (the Note). The entire amount of this advance and all accrued interest
thereon was due and payable
14
on the earlier of May 4, 2009, or such earlier date following the
closing of the stock purchase transaction with the Gamma Trust discussed in Note 5. The Note bears
interest at a rate equal to 11% per annum and may be prepaid in whole or in part without penalty or
premium. We repaid the Note and $48 thousand of interest on April 27, 2009.
NOTE 7 INVESTMENTS IN BIOTECHNOLOGY COMPANIES
On June 10, 2009, we entered into a stock purchase agreement with Sorrento Therapeutics, Inc.
(Sorrento), a privately held company with a technology for generating fully human monoclonal
antibodies, pursuant to which we invested $2.3 million in Sorrento. In exchange for the
investment, we acquired approximately one-third of the outstanding common shares of Sorrento and
received a fully-paid, exclusive license to the Sorrento antibody library for the discovery and
development of therapeutic antibodies in the field of ophthalmology. On September 21, 2009,
QuikByte Software, Inc., a Colorado corporation (Quikbyte), acquired Sorrento pursuant to a
Merger Agreement dated July 14, 2009 (the Merger Agreement) by and among QuikByte, Sorrento, and
certain other parties named therein. At the effective time of the Merger (the Merger), all of
the issued and outstanding shares of Sorrento common stock (the Sorrento Shares) were converted
into the right to receive shares of QuikByte common stock, par value $0.0001 per share (the
QuikByte Common Stock).
On September 18, 2009, QuikByte entered into a Stock Purchase Agreement (the QuikByte Stock
Purchase Agreement) with investors (the QuikByte Investors) pursuant to which QuikByte received
an aggregate investment of $2.0 million in exchange for shares of QuikByte Common Stock (the
QuikByte Financing). The QuikByte Investors included Dr. Phillip Frost, our Chairman and Chief
Executive Officer, and other members of OPKO management. Upon completion of the Merger, after
giving effect to the QuikByte Financing, OPKO owned approximately 53,113,732 shares of QuikByte
Common Stock, or approximately 24% of QuikBytes total outstanding common stock at September 30,
2009. The closing stock price for QuickByte, a thinly traded stock, as quoted on the
over-the-counter markets was $0.50 per share.
Effective September 21, 2009, the Company entered into an agreement pursuant to which the
Company invested $2.5 million in Cocrystal Discovery, Inc., a privately held biopharmaceutical
company (Cocrystal) in exchange for 1,701,723 shares of Cocrystals Convertible Series A
Preferred Stock. A group of investors led by The Frost Group, LLC (the Frost Group), whose
members include the Gamma Trust, Jane Hsiao, the Companys Vice Chairman and Chief Technical
Officer, Steven D. Rubin, the Companys Executive Vice President Administration and a director,
and Rao Uppaluri, the Companys Chief Financial Officer (the Frost Investors), previously
invested $5 million in Cocrystal, and agreed to invest an additional $5 million payable in two
equal installments in September 2009 and March 2010. As a result of an amendment to the Frost
Investor agreements dated June 9, 2009, OPKO, rather than the Frost Investors, made the first
installment investment ($2.5 million) on September 21, 2009. Following the first investment, the
members of the Frost Group owned a total of 2,948,645 shares of Cocrystal, representing 33.65% of
Cocrystals voting stock on an as converted basis and the Gamma Trust owned a majority of those
shares, owning 2,768,257 shares. Following the final installment investment of $2.5 million in
Cocrystal by the Frost Investors in or around March 2010, the Company will own approximately 16% of
Cocrystal and members of the Frost Group will own approximately 4,422,967 shares, representing 42%
of Cocrystals voting stock on an as converted basis, including 4,152,386 held by the Gamma Trust.
Dr. Frost, Mr. Rubin, and Dr. Hsiao currently serve on the Board of Directors of Cocrystal and
represent 50% of its board.
We have determined that Cocrystal has insufficient resources to carry out its principal
activities without additional subordinated financial support. As such, Cocrystal meets the
definition of a VIE. In order to determine the primary beneficiary of the VIE, we evaluated the
related party group to identify who had the most significant power to control Cocrystal. The Gamma
Trust holds in excess of 32% of the voting stock of Cocrystal on a fully diluted basis as of the
date of our investment and after the March 2010 investment by the Frost Investors, will hold in
excess of 42% of the voting stock. In addition, the Gamma Trust influenced the redesign of
Cocrystal and can significantly influence the success of Cocrystal through its board representation
and voting power. As such, we have determined that the Gamma Trust is the primary beneficiary
within the related party group. As a result of our determination that we are not the primary
beneficiary, we have accounted for our investment in Cocrystal under the equity method.
NOTE 8 RELATED PARTY TRANSACTIONS
On September 18, 2009, we entered into a securities purchase agreement with various investors.
Refer to Note 5. Included among the investors is the Gamma Trust, Hsu Gamma Investment, L.P, a
limited partnership controlled by
Jane H. Hsiao, the Companys Vice Chairman and Chief Technical Officer, and Oracle Partners
LP, a limited partnership in which Dr. Frost is a limited partner.
15
On June 16, 2009, we entered into an agreement to lease approximately 10,000 square feet of
space in Hialeah, Florida to house manufacturing and service operations for our ophthalmic
instrumentation business (the Hialeah Facility) from an entity controlled by Dr. Frost and Dr.
Jane Hsiao. Pursuant to the terms of a lease agreement, which is effective as of February 1, 2009,
we anticipate paying gross rent of $0.1 million per year for a one-year lease which may be
extended, at our option, for one additional year. From April 2008 through January 2009, we leased
20,000 square feet at the Hialeah Facility from a third party landlord pursuant to a lease
agreement which contained an option to purchase the facility. We initially elected to exercise the
option to purchase the Hialeah Facility in September 2008. Prior to closing, however, we assigned
the right to purchase the Hialeah Facility to an entity controlled by Drs. Frost and Hsiao and
leased back a smaller portion of the facility as a result of several factors, including our
inability to obtain outside financing for the purchase, current business needs, the reduced
operating costs for the smaller space, and the minimization of risk and expense of unutilized
space.
On June 10, 2009, we entered into a stock purchase agreement with Sorrento, pursuant to which
we invested $2.3 million in Sorrento. In exchange for the investment, we acquired approximately
one-third of the outstanding common shares of Sorrento and received a fully-paid, exclusive license
to the Sorrento antibody library for the discovery and development of therapeutic antibodies in the
field of ophthalmology. Refer to Note 7. Dr. Richard Lerner, a member of our Board of Directors,
serves as a consultant and scientific advisory board member to Sorrento and owns less than one
percent of its shares.
Effective September 21, 2009, the Company entered into an agreement pursuant to which the
Company invested $2.5 million in Cocrystal in exchange for 1,701,723 shares of Cocrystals Series A
Preferred Stock. The Frost Investors, led by the Frost Group, previously invested $5 million in
Cocrystal, and agreed to invest an additional $5 million payable in two equal installments in
September 2009 and March 2010. As a result of an amendment to the Frost Investor agreements dated
June 9, 2009, OPKO, rather than the Frost Investors, made the first installment investment ($2.5
million) on September 21, 2009. Refer to Note 7.
On July 20, 2009, the Company entered into a worldwide exclusive license agreement with
Academia Sinica in Taipei, Taiwan, for a new technology to develop protein vaccines against
influenza and other viral infections. Dr. Alice Yu, a member of our board of directors, is a
Distinguished Research Fellow and Associate Director at the Genomics Research Center, Academia
Sinica.
On May 26, 2009, May 29, 2009, and June 1, 2009, we entered into stock purchase agreements
with a total of seven accredited investors pursuant to which we agreed to sell an aggregate of 31
million shares of the Companys Common Stock in exchange for $31 million. Under the terms of each
investment, OPKO issued shares to the investors at a price of $1.00 per Share. Refer to Note 5.
Oracle Partners, LP and Vector Group Ltd. were among the investors in the transaction and purchased
4 million and 5 million shares of our Common Stock, respectively. Dr. Frost is a limited partner
in Oracle Partners LP. Dr. Frost may also be deemed to beneficially own 11.5% of Vector Group
Ltd.s outstanding stock.
On March 4, 2009, the Gamma Trust advanced $3.0 million to us under a Promissory Note we
issued to the Gamma Trust, which was repaid in full on April 27, 2009. Refer to Note 6.
In March 2009, we paid the $45 thousand filing fee to the Federal Trade Commission in
connection with filings made by us and Dr. Frost, under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (HSR). The filings permitted Dr. Frost and his affiliates to acquire
additional shares of our Common Stock upon expiration of the HSR waiting period on March 23, 2009.
On February 23, 2009, we entered into a Stock Purchase Agreement with the Gamma Trust, of
which Dr Frost is the sole trustee. Refer to Note 5.
In November 2007, we entered into an office lease with Frost Real Estate Holdings, LLC, an
entity affiliated with Dr. Frost. The lease is for approximately 8,300 square feet of space in an
office building in Miami, Florida, where the Companys principal executive offices are located.
The lease provides for payments of approximately $0.3 million during 2009. The rent is inclusive
of operating expenses, property taxes and parking.
We reimburse Dr. Frost for Company-related use by Dr. Frost and our other executives of an
airplane owned by a company that is beneficially owned by Dr. Frost. We reimburse Dr. Frost in an
amount equal to the cost of a first class airline ticket between the travel cities for each executive, including Dr. Frost,
traveling on the airplane for Company-related business. We do not reimburse Dr. Frost for personal
use of the airplane by Dr. Frost or any other executive; nor do we pay for any other fixed or
variable operating costs of the airplane. During the three and nine
16
months ended September 30, 2009, we recorded general and administrative expenses of approximately $9 thousand and $55
thousand, respectively, for Company-related travel by Dr. Frost and other OPKO executives. For the
comparable periods of 2008, we recorded approximately $5 thousand and $91 thousand of general and
administrative expense.
We have a fully utilized $12.0 million line of credit with the Frost Group. The Frost Group
members include a trust controlled by Dr. Frost, Dr. Jane H. Hsiao, our Vice Chairman of the board
of directors and Chief Technical Officer, Steven D. Rubin, is Executive Vice President
Administration and a director of the Company, and Rao Uppaluri, the Chief Financial Officer of the
Company. We are obligated to pay interest upon maturity, compounded quarterly, on outstanding
borrowings under the line of credit at an 11% annual rate, which is due January 11, 2011. The line
of credit is collateralized by all of our personal property except our intellectual property.
On September 19, 2007, we entered into an exclusive technology license agreement with Winston
Laboratories, Inc. (Winston). Subsequent to our entering into the license agreement with
Winston, on November 13, 2007, a group of investors led by the Frost Group, made an investment in
Winston. Currently, the group of investors, led by Dr. Frost, Dr. Hsiao, Mr. Rubin and Dr.
Uppaluri, beneficially own approximately 30% of Winston Pharmaceuticals, Inc., and Mr. Uppaluri has
served as a member of Winstons board of directors since September 2008.
NOTE 9 COMMITMENTS AND CONTINGENCIES
On May 7, 2007, Ophthalmic Imaging Systems, or OIS, sued Steven Verdooner, its former
president and our then Executive Vice President, Instrumentation, in California Superior Court for
the County of Sacramento. OIS later amended its complaint to add claims against the Company and
The Frost Group, LLC alleging breach of fiduciary duty, intentional interference with contract and
intentional interference with prospective economic advantage. Trial in the matter was scheduled to
commence on April 28, 2009. In order to avoid the expense and uncertainty of litigation, and
without making any admission of wrongdoing or liability, we entered into a settlement agreement to
fully and finally resolve the lawsuit on May 4, 2009. The impact of the settlement was not
material to the Company.
We are a party to other litigation in the ordinary course of business. We do not believe that
any such litigation will have a material adverse effect on our business, financial condition, or
results of operations.
In the event of a termination of an existing employee of OTI, we would become obligated at
such employees sole option to acquire up to 10% of the shares issued to the employee in connection
with the acquisition of OTI at a price of $3.55 per share. In connection with the potential
obligation, we have recorded approximately $0.2 million in accrued expenses as of September 30,
2009, based on the estimated fair value of the unexercised put option.
On May 6, 2008, we completed the acquisition of Vidus Ocular, Inc., or Vidus. Pursuant to a
Securities Purchase Agreement with Vidus, each of its stockholders, and the holders of convertible
promissory notes issued by Vidus, we acquired all of the outstanding stock and convertible debt of
Vidus in exchange for (i) the issuance and delivery at closing of 658,080 shares of our Common
Stock (the Closing Shares); (ii) the issuance of 488,420 shares of our Common Stock to be held in
escrow pending the occurrence of certain development milestones (the Milestone Shares); and (iii)
the issuance of options to acquire 200,000 shares of our Common Stock. Additionally, in the event
that the stock price for our Common Stock at the time of receipt of approval or clearance by the
U.S. Food & Drug Administration of a pre-market notification 510(k) relating to the Aquashunt
TM
is
not at or above a specified price, we will be obligated to issue an additional 413,850 shares of
our Common Stock.
We expect to incur losses from operations for the foreseeable future. We expect to incur
substantial research and development expenses, including expenses related to the hiring of
personnel and additional clinical trials. We expect that selling, general and administrative
expenses will also increase as we expand our sales, marketing and administrative staff and add
infrastructure. We intend to finance additional research and development projects, clinical trials
and our future operations with a combination of private placements, payments from potential
strategic research and development, licensing and/or marketing arrangements, public offerings, debt
financing and revenues from future product sales, if any. There can be no assurance, however, that
additional capital will be available to us on acceptable terms, or at all.
NOTE 10 SUBSEQUENT EVENTS
On October 12, 2009, we entered into an asset purchase agreement (the Schering Agreement)
with Schering-Plough Corporation (Schering) to acquire assets relating to Scherings neurokinin-1
(NK-1) receptor antagonist
17
program. Under the terms of the Schering Agreement, we will pay
Schering $2 million in cash upon closing and up to an additional $27 million upon certain
development milestones. Rolapitant, the lead product in the NK-1 program, recently completed Phase
II clinical testing for prevention of nausea and vomiting related to cancer chemotherapy and
surgery, and other indications. Phase I clinical testing has also been initiated for a second
compound in the same class.
In connection with its merger with Merck & Co., Inc., which closed on November 3, 2009 (the
Merger), Schering determined to divest its oral and intravenous formulations of rolapitant and
other assets in its NK-1 program. Closing of the transaction between OPKO and Schering is expected
to occur during the fourth quarter of this year.
On October 1, 2009, we entered into a definitive agreement to acquire Pharma Genexx S.A.
(Pharma Genexx), a privately-owned Chilean company engaged in the representation, importation,
commercialization and distribution of pharmaceutical products, over-the-counter products and
medical devices for government, private and institutional markets. Pursuant to a stock purchase
agreement with Pharma Genexx and its shareholders, Farmacias Ahumada S.A., FASA Chile S.A., and
Laboratorios Volta S.A., we acquired all of the outstanding stock of Pharma Genexx in exchange for
US$16 million in cash. A portion of the proceeds will remain in escrow for a period of time to
satisfy indemnification claims. Closing of the transaction occurred on October 7, 2009.
We have reviewed all subsequent events and transactions that occurred after our September 30,
2009 unaudited condensed consolidated balance sheet date as of November 6, 2009, through the time
of filing this Quarterly Report on Form 10-Q on November 6, 2009.
18
|
|
|
Item 2.
|
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations
|
OVERVIEW
You should read this discussion together with the condensed consolidated financial statements,
related Notes, and other financial information included elsewhere in this report and in our Annual
Report on
Form 10-K
for the year ended
December 31, 2008 (the Form
10-K).
The following
discussion contains assumptions, estimates and other forward-looking statements that involve a
number of risks and uncertainties, including those discussed under Risk Factors, in Part II, Item
1A of our
Form 10-K
for the year ended December 31, 2008. These risks could cause our actual
results to differ materially from those anticipated in these forward-looking statements.
We are a specialty healthcare company involved in the discovery, development, and
commercialization of pharmaceutical products, medical devices, vaccines, diagnostic technologies
and imaging systems. Initially focused on the treatment and management of ophthalmic diseases, we
have since expanded into other areas of major unmet medical need such as oncology, infectious
diseases and neurological disorders. We actively explore opportunities to acquire complementary
pharmaceuticals, compounds, and technologies, which could, individually or in the aggregate,
materially increase the scale of our business. We also intend to continue exploring strategic
opportunities in medical markets that would allow us to benefit from our business and global
distribution expertise.
We expect to incur substantial losses as we continue the development of our product candidates
and establish a sales and marketing infrastructure in anticipation of the commercialization of our
product candidates. We currently have limited commercialization capabilities, and it is possible
that we may never successfully commercialize any of our pharmaceutical product candidates. To
date, we have devoted a significant portion of our efforts towards research and development. As of
September 30, 2009, we had an accumulated deficit of $330.3 million. Since we do not generate
revenue from any of our pharmaceutical product candidates and have only generated limited revenue
from our instrumentation business, we expect to continue to generate losses in connection with the
research and development activities relating to our product candidates and other technologies.
Such research and development activities are budgeted to expand over time and will require further
resources if we are to be successful. As a result, we believe that our operating losses are likely
to be substantial over the next several years. We will need to obtain additional funds to further
develop our research and development programs, and there can be no assurance that additional
capital will be available to us on acceptable terms, or at all.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
Revenue.
Revenue for the three months ended September 30, 2009, was $1.5 million, compared to
$4.1 million for the comparable 2008 period. Revenue for the three months ended September 30, 2009 was negatively
impacted by decreased sales prices of our OPKO Spectral OCT SLO (OCT/SLO)
product and decreased unit volume. In addition, results for the 2008 period
reflect unit shipments in the ordinary course, as well as the fulfillment of orders received, but not shipped during the
second quarter of 2008. During the second quarter of 2008, we chose to
halt shipment of product while we addressed a warning letter we received
from the U.S. Food and Drug Administration.
Gross margin.
Gross margin for the three months ended September 30, 2009, was $0.4 million
compared to a gross margin of $1.1 million for the comparable period of 2008. Gross margin
declined for the three months ended September 30, 2009, as compared to the same period in 2008 as a
result of the decrease in sales volume during the 2009 period. Gross margin as a percent of sales
improved slightly in the 2009 period.
Selling, general and administrative expense.
Selling, general and administrative expense for
the three months ended September 30, 2009, was $3.1 million compared to $3.7 million of expense for
the comparable period of 2008. Selling, general and administrative expenses during the three
months ended September 30, 2009 and 2008, primarily include personnel expenses, including
equity-based compensation expense of $0.8 million and $0.9 million, respectively, and professional
fees. The decrease in selling, general and administrative expenses primarily reflects decreased
personnel costs and sales commissions to our international distributors.
Research and development expense.
Research and development expense during the three months
ended September 30, 2009, was $2.8 million compared to $4.9 million for the comparable period of
2008. The decrease for the three months ended September 30, 2009, primarily reflects the decision
in March 2009 to terminate the Phase
19
III clinical trial for bevasiranib. All site close-out activities were completed during the
second quarter of 2009 and all activities for the Phase III trial were completed during the third
quarter of 2009. The decrease in research and development expense in the 2009 period as a result
of the clinical trial shut down was partially offset by increased costs relating to the
Aquashunt
TM
clinical trial which began in the first quarter of 2009 and ongoing
development costs for our ophthalmic instrumentation business, which are primarily
personnel-related expenses. The 2008 period primarily reflects the cost of our Phase III clinical
trial for bevasiranib, including costs of clinical trial site and monitoring expenses, personnel
costs and outside professional fees. The amount for the three months ended September 30, 2009,
includes equity-based compensation expense of $1.0 million, compared to the 2008 period which
includes $0.7 million of equity-based compensation expense.
Other operating expenses.
Other operating expenses primarily include amortization of our
intangible assets acquired from OTI.
Other income and expenses.
Other expense was $0.5 million for the first three months of 2009
compared to $0.4 million for the 2008 period. Other income primarily consists of interest earned
on our cash and cash equivalents and interest expense reflects the interest incurred on our line of
credit. As a result of reduced interest rates during the three months ended September 30, 2009,
interest earned decreased significantly.
Income taxes.
Income tax benefit for the three months ended September 30, 2009 and 2008,
reflects a Canadian provincial tax credit that is refundable once we file our tax return. This
credit relates to research and development expenses incurred at our OTI locations.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
Revenue.
Revenue for the nine months ended September 30, 2009, was $6.1 million, compared to
$7.8 million for the comparable 2008 period. The decrease in revenue for the nine months ended
September 30, 2009, as compared to the first nine months of 2008 is the result of a decrease in the
average sales price of our OCT/SLO product and a slight decrease in the number of units shipped.
We believe revenue for the nine months ended September 30, 2009, was also impacted by our limited
participation at tradeshows during 2008 while we focused on enhancing the product and our
manufacturing processes. We began marketing and selling our OCT/SLO product in the U.S. at the
beginning of 2009.
Gross margin.
Gross margin for the nine months ended September 30, 2009, was $1.8 million
compared to gross margin of $0.4 million for the comparable period of 2008. Gross margin for the
nine months ended September 30, 2009, improved as a result of the cost reduction initiatives we
began implementing in 2008 to reduce our costs associated with the OCT/SLO product. During the
first half of 2008, we changed a number of suppliers and processes related to our OCT/SLO product
which resulted in lower manufacturing costs, resulting in higher gross margins on that product
during the second half of 2008 and the first nine months of 2009. During the nine months ended
September 30, 2008, we incurred approximately $0.9 million in expense related to production
development including bringing a portion of the manufacturing process for our OCT/SLO product
in-house.
Selling, general and administrative expense.
Selling, general and administrative expense for
the nine months ended September 30, 2009, was $9.3 million compared to $12.3 million of expense for
the comparable period of 2008. Selling, general and administrative expenses during the first nine
months of 2009 and 2008, primarily include personnel expenses, including equity-based compensation
expense of $2.3 million and $3.8 million, respectively, and professional fees. The decrease in
selling, general and administrative expenses primarily reflects decreased personnel costs,
including severance and approximately $1.4 million related to the acceleration of vesting for stock
options in connection with the termination of certain employees in 2008. In addition, there were
decreased sales commissions to our international distributors in the nine months of 2009.
Partially offsetting these decreases was an increase in professional fees during the nine months
ended September 30, 2009, as compared to the 2008 period. We anticipate selling, general and
administrative expenses will increase during the remainder of 2009 while we increase our sales and
marketing activities to promote and support our OCT/SLO product, including the launch costs in the
U.S. and participation in additional tradeshows in the U.S. and internationally.
Research and development expense.
Research and development expense during the nine months
ended September 30, 2009, was $11.0 million compared to $14.7 million for the comparable period of
2008. The decrease for the nine months ended September 30, 2009, primarily reflects the decrease
in activity of the Phase III clinical trial for bevasiranib which was terminated in March 2009.
The 2008 period primarily reflects the cost of our Phase III clinical trial for bevasiranib,
including costs of clinical trial site and monitoring expenses, personnel costs and outside
professional fees. The decrease in research and development expense also reflects the decrease in
personnel
20
costs, including equity-based compensation partially offset by increased costs relating to the
Aquashunt
TM
clinical trial which began in the first quarter of 2009 and ongoing
development costs for our ophthalmic instrumentation business, which are primarily
personnel-related expenses. The amount for the nine months ended September 30, 2009, includes
equity-based compensation expense of $1.2 million, compared to the 2008 period which includes $1.9
million of equity-based compensation expense. The amount for the 2009 period includes the shutdown
costs of the trial, including transitioning patients from the trial onto the standard of care
therapy and the costs of analyzing the data collected and performing statistical analysis.
Write-off of Acquired In-Process Research and Development.
On May 6, 2008, we acquired Vidus,
a privately held company that is developing Aquashunt, for the treatment of glaucoma, in a stock
for stock transaction. We recorded the assets and liabilities at fair value, and as a result, we
recorded acquired in-process research and development expense and recorded a charge of $1.4
million. We did not have any such activity during the nine months ended September 30, 2009.
Other operating expenses.
Other operating expenses primarily include amortization of our
intangible assets acquired from OTI.
Other income and expenses.
Other expense was $1.4 million for the first nine months of 2009
compared to $0.9 million, net of $0.3 million of interest income for the comparable 2008 period.
Other income primarily consists of interest earned on our cash and cash equivalents and interest
expense reflects the interest incurred on our line of credit. As a result of reduced interest
rates, interest earned during the nine months ended September 30, 2009, decreased significantly.
Income taxes.
Income tax benefit for the nine months ended September 30, 2009 and 2008,
reflects a Canadian provincial tax credit that is refundable once we file our tax return. This credit relates to research and development expenses incurred at our OTI locations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2009, we had cash, cash equivalents and marketable securities of
approximately $63.4 million compared to $6.7 million on December 31, 2008. Cash used in operations
during 2009 primarily reflects payment of liabilities related to the Phase III clinical trial for
bevasiranib and related shut down expenses of that trial, as well as selling, general and
administrative activities related to our corporate and instrumentation operations. Since our
inception, we have not generated significant gross margins to offset our operating and other
expenses and our primary source of cash has been from the private placement of stock and through
credit facilities available to us.
On
October 7, 2009, we closed on the acquisition of Pharma Genexx S.A.,
a privately-owned Chilean company engaged in the representation,
importation,
commercialization and distribution of pharmaceutical products,
over-the-counter products and medical devices for government, private and institutional
markets for US$16 million in cash.
Effective September 21, 2009, the Company entered into an agreement pursuant
to which the Company invested $2.5 million in Cocrystal Discovery, Inc.,
a privately held biopharmaceutical company (Cocrystal) in exchange for
1,701,723 shares of Cocrystals Series A Preferred Stock.
On September 18, 2009, we entered into a securities purchase agreement (the Preferred
Purchase Agreement) with the private investors named therein (the Preferred Investors), pursuant
to which the Preferred Investors agreed to purchase an aggregate of
1,209,677 shares (the
Preferred Shares)
of the Companys newly-designated 8.0% Series D Cumulative Convertible Preferred
Stock, par value $0.01 per share (Series D Preferred Stock), at a purchase price of $24.80 per
share, together with warrants (the Warrants) to purchase up to an aggregate of 3,024,196 shares
of the Companys common stock, par value $.01 (the Common Stock) at an exercise price of $2.48
per share (the Preferred Investment). Initially, the Series D Preferred Stock is convertible
into ten shares of the Companys Common Stock, and the Preferred Shares purchase price was based on
the average closing price of the Companys Common Stock as reported on the NYSE Amex for the five
days preceding the execution of the Preferred Purchase Agreement. In connection with the Preferred
Investment, the Company issued the Preferred Shares on September 28, 2009.
On May 26, 2009, May 29, 2009, and June 1, 2009, we entered into stock purchase agreements
with a total of seven accredited investors (Investors) pursuant to which the Investors agreed to
make a $31.0 million investment in the Company in exchange for 31,000,000 shares of our Common
Stock, par value $.01 (the Shares), at $1.00 per share.
On March 4, 2009, Frost Gamma Investments Trust (the Gamma Trust), of which Phillip Frost,
M.D., our Chairman and CEO, is the sole trustee, advanced $3.0 million to us under a Promissory
Note we issued to the Gamma Trust (the Note). The entire amount of this Note and all accrued
interest thereon was due and payable on May 4, 2009 or such earlier date following the closing of
the transaction contemplated by the Stock Purchase Agreement with the Gamma Trust, dated February
23, 2009. The Note bears interest at a rate equal to 11% per annum and may be prepaid in whole or
in part without penalty or premium. We repaid the Note in full, plus accrued interest of $48
thousand on April 27, 2009.
21
On February 23, 2009, we entered into a stock purchase agreement with the Gamma Trust pursuant
to which the Gamma Trust agreed to make a $20.0 million investment in exchange for 20,000,000
shares of our common stock, par value $.01 (the Shares), at $1.00 per share, representing an
approximately 20% discount to the average closing price of our common stock on the NYSE Amex
exchange for the five trading days immediately preceding the effective date of Audit Committee and
stockholder approval of the transaction. We issued the Shares and received the proceeds of $20.0
million on April 27, 2009.
We have a fully-drawn $12.0 million line of credit with the Frost Group, a related party. We
are obligated to pay interest upon maturity, compounded quarterly, on outstanding borrowings under
the line of credit at an 11% annual rate, which is due January 11, 2011. The line of credit is
collateralized by all of our personal property except our intellectual property.
We expect to incur losses from operations for the foreseeable future. We expect to incur
substantial research and development expenses, including expenses related to the hiring of
personnel and additional clinical trials. We expect that selling, general and administrative
expenses will also increase as we expand our sales, marketing and administrative staff and add
infrastructure.
We believe the cash and cash equivalents on hand at September 30, 2009, are sufficient to meet
our anticipated cash requirements for operations and debt service for the next 12 months. We based
this estimate on assumptions that may prove to be wrong or are subject to change, and we may be
required to use our available cash resources sooner than we currently expect. If we acquire
additional assets or companies, accelerate our product development programs or initiate additional
clinical trials, we will need additional funds. Our future cash requirements will depend on a
number of factors, including possible acquisitions, the continued progress of our research and
development of product candidates, the timing and outcome of clinical trials and regulatory
approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending, and
enforcing patent claims, and other intellectual property rights, the status of competitive
products, the availability of financing, and our success in developing markets for our product
candidates. If we are not able to secure additional funding when needed, we may have to delay,
reduce the scope of, or eliminate one or more of our clinical trials or research and development
programs.
We intend to finance additional research and development projects, clinical trials, and our
future operations with a combination of private placements, payments from potential strategic
research and development, licensing and/or marketing arrangements, public offerings, debt
financing, and revenues from future product sales, if any. There can be no assurance, however,
that additional capital will be available to us on acceptable terms, or at all.
22
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting Estimates
. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of sales and expenses during the
reporting period. Actual results could differ from those estimates.
Equity-based compensation.
We recognize equity based compensation as an expense in our
financial statements and that such cost is measured at the fair value of the award. Equity-based
compensation arrangements to non-employees are recorded at their fair value on the measurement
date. We estimate the grant-date fair value of our stock option grants using a valuation model
known as the Black-Scholes-Merton formula or the Black-Scholes Model and allocate the resulting
compensation expense over the corresponding requisite service period associated with each grant.
The Black-Scholes Model requires the use of several variables to estimate the grant-date fair value
of stock options including expected term, expected volatility, expected dividends and risk-free
interest rate. We perform significant analyses to calculate and select the appropriate variable
assumptions used in the Black-Scholes Model. We also perform significant analyses to estimate
forfeitures of equity-based awards. We are required to adjust our forfeiture estimates on at least
an annual basis based on the number of share-based awards that ultimately vest. The selection of
assumptions and estimated forfeiture rates is subject to significant judgment and future changes to
our assumptions and estimates may have a material impact on our Consolidated Financial Statements.
Goodwill and intangible assets
. The allocation of the purchase price for acquisitions
requires extensive use of accounting estimates and judgments to allocate the purchase price to the
identifiable tangible and intangible assets acquired, including in-process research and
development, and liabilities assumed based on their respective fair values. Additionally, we must
determine whether an acquired entity is considered to be a business or a set of net assets, because
a portion of the purchase price can only be allocated to goodwill in a business combination.
Appraisals inherently require significant estimates and assumptions, including but not limited
to, determining the timing and estimated costs to complete the in-process R&D projects, projecting
regulatory approvals, estimating future cash flows, and developing appropriate discount rates. We
believe the estimated fair values assigned to the Vidus assets acquired and liabilities assumed are
based on reasonable assumptions. However, the fair value estimates for the purchase price
allocation may change during the allowable allocation period, which is up to one year from the
acquisition date, if additional information becomes available that would require changes to our
estimates.
Allowance for doubtful accounts and revenue recognition
. Generally, we recognize revenue from
product sales when goods are shipped and title and risk of loss transfer to our customers. Certain
of our products are sold directly to end-users and require that we deliver, install and train the
staff at the end-users facility. As a result, we do not recognize revenue until the product is
delivered, installed and training has occurred. Return policies in certain international markets
for our medical device products provide for stringent guidelines in accordance with the terms of
contractual agreements with customers. Our estimates for sales returns are based upon the
historical patterns of products returned matched against the sales from which they originated, and
managements evaluation of specific factors that may increase the risk of product returns. The
allowance for doubtful accounts recognized in our consolidated balance sheets at September 30, 2009
and December 31, 2008 was $0.4 million and $0.4 million, respectively.
Recent accounting pronouncements:
On June 30, 2009, we adopted ASC 855-10-50 Subsequent
Events Disclosure (Subsequent Events Standard), which established general standards of
accounting for and disclosure of events that occur after the balance sheet date but before the
financial statements are issued. The Subsequent Events Standard defines two types of subsequent
events. The effects of events or transactions that provide additional evidence about conditions
that existed at the balance sheet date, including the estimates inherent in the process of
preparing financial statements, are recognized in the financial statements. The effects of events
that provide evidence about conditions that did not exist at the date of the balance sheet but
arose after that date are not recognized in the financial statements.
In June 2009, the FASB issued Statement No. 167 (SFAS 167), Accounting for Variable Interest
Entities. SFAS 167 amends FASB Interpretation No. 46(R) (FIN No. 46(R)), Consolidation of Variable
Interest Entities, to require a comprehensive qualitative analysis to be performed to determine
whether a holder of variable interests in a variable interest entity also has a controlling
financial interest in that entity. In addition, it requires the same such analysis be applied to
entities previously designated as qualified special-purpose entities under SFAS 140. SFAS
167 is effective as of the start of the first annual reporting period beginning after November
15, 2009, for interim
23
periods within the first annual reporting period, and for all subsequent
annual and interim reporting periods. We do not expect the adoption of SFAS 167 to have a material
impact on our consolidated financial position, results of operations, or cash flows.
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
|
In the normal course of doing business, we are exposed to the risks associated with foreign
currency exchange rates and changes in interest rates. We do not engage in trading market risk
sensitive instruments or purchasing hedging instruments or other than trading instruments that
are likely to expose us to significant market risk, whether interest rate, foreign currency
exchange, commodity price, or equity price risk.
Our exposure to market risk relates to our cash and investments and to our borrowings. We
maintain an investment portfolio of money market funds and treasury securities. The securities in
our investment portfolio are not leveraged, and are, due to their very short-term nature, subject
to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the
short-term maturities of our investments, we do not believe that a change in market interest rates
would have a significant negative impact on the value of our investment portfolio except for
reduced income in a low interest rate environment. At September 30, 2009, we had cash, cash
equivalents and marketable securities of $63.4 million. The weighted average interest rate related
to our cash and cash equivalents for the nine months ended September 30, 2009 was 0.1%. As of
September 30, 2009, the principal value of our credit line was $12.0 million, which bears a
weighted average interest rate of 11.0% as of September 30, 2009.
The primary objective of our investment activities is to preserve principal while at the same
time maximizing yields without significantly increasing risk. To achieve this objective, we invest
our excess cash in debt instruments of the U.S. Government and its agencies, bank obligations,
repurchase agreements and high-quality corporate issuers, and money market funds that invest in
such debt instruments, and, by policy, restrict our exposure to any single corporate issuer by
imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates,
we maintain investments at an average maturity of generally less than one month.
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Item 4.
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Controls and Procedures
|
The Companys management, under the supervision and with the participation of the Companys
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the
effectiveness of the Companys disclosure controls and procedures as defined in Securities and
Exchange Commission (SEC) Rule 13a-15(e) as of September 30, 2009. Based on that evaluation, the
Companys CEO and CFO have concluded that the Companys disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the SECs rules and forms and is accumulated and communicated
to the Companys management, including the CEO and CFO, as appropriate, to allow timely decisions
regarding required disclosure.
There have been no changes to the Companys internal control over financial reporting that
occurred during the Companys third quarter of 2009 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
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Item 1.
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Legal Proceedings
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None.
24
There have been no material changes from the risk factors as previously disclosed in the Item
1A of the Company Annual Report on Form 10-K.
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
|
Refer to the Companys Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 24, 2009.
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Item 3.
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Defaults Upon Senior Securities
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None.
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Item 4.
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Submission of Matters to a Vote of Security Holders
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None.
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Item 5.
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Other Information
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None.
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Exhibit 2.1
(1)
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Merger Agreement and Plan of Reorganization, dated as of March
27, 2007, by and among Acuity Pharmaceuticals, Inc., Froptix
Corporation, eXegenics, Inc., e-Acquisition Company I-A, LLC, and
e-Acquisition Company II-B, LLC.
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Exhibit 2.2
(4)+
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Securities Purchase Agreement dated May 2, 2008, among Vidus
Ocular, Inc., OPKO Instrumentation, LLC, OPKO Health, Inc., and the
individual sellers and noteholders named therein.
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Exhibit 3.1
(2)
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Amended and Restated Certificate of Incorporation.
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Exhibit 3.2
(3)
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Amended and Restated By-Laws.
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Exhibit 3.3
(5)
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Certificate of Designation of Series D Preferred Stock
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Exhibit 4.1
(1)
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Form of Common Stock Warrant.
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Exhibit 4.2
(5)
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Form of Warrant to Purchase Shares of Common Stock.
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Exhibit 10.1
(5)
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Form of Securities Purchase Agreement Series D Preferred Stock.
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Exhibit 10.2
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Form of Restricted Share Award Agreement (Director).
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Exhibit 10.3
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Cocrystal Discovery, Inc. Agreements.
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Exhibit 31.1
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Certification by Phillip Frost, Chief Executive Officer, pursuant
to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act
of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 for the quarterly period ended September 30, 2009.
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Exhibit 31.2
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Certification by Rao Uppaluri, Chief Financial Officer, pursuant to
Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of
1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 for the quarterly period ended September 30, 2009.
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Exhibit 32.1
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Certification by Phillip Frost, Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for the quarterly period ended September
30, 2009.
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25
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Exhibit 32.2
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Certification by Rao Uppaluri, Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for the quarterly period ended September
30, 2009.
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+
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Certain confidential material contained in the document
has been omitted and filed separately with the
Securities and Exchange Commission.
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(1)
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Filed with the Companys Current Report on Form 8-K
filed with the Securities and Exchange Commission on
April 2, 2007, and incorporated herein by reference.
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(2)
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Filed with the Companys Current Report on Form 8-A
filed with the Securities and Exchange Commission on
June 11, 2007, and incorporated herein by reference.
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(3)
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Filed with the Companys Annual Report on Form 10-K
filed with the Securities and Exchange Commission on
March 31, 2008 and incorporated herein by reference.
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(4)
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Filed with the Companys Quarterly Report on Form 10-Q
filed with the Securities and Exchange Commission on
August 8, 2008 for the Companys three-month period
ended June 30, 2008, and incorporated herein by
reference.
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(5)
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Filed with the Companys Current Report on Form 8-K
files with the Securities and Exchange Commission on
September 24, 2009.
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26
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.
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Date: November 6, 2009
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OPKO Health, Inc.
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/s/ Adam Logal
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Adam Logal
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Executive Director of Finance,
Chief Accounting Officer and
Treasurer
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27
Exhibit Index
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Exhibit Number
|
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Description
|
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Exhibit 10.2
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Form of Restricted Share Award Agreement (Director).
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Exhibit 10.3
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Cocrystal Discovery, Inc Agreements.
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Exhibit 31.1
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Certification by Phillip Frost, Chief Executive Officer,
pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities
and Exchange Act of 1934 as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 for the quarterly period
ended September 30, 2009.
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Exhibit 31.2
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Certification by Rao Uppaluri, Chief Financial Officer,
pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities
and Exchange Act of 1934 as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 for the quarterly period
ended September 30, 2009.
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Exhibit 32.1
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Certification by Phillip Frost, Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for the
quarterly period ended September 30, 2009.
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Exhibit 32.2
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Certification by Rao Uppaluri, Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for the
quarterly period ended September 30, 2009.
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28
Exhibit 10.3
This Joinder (this
Agreement
) is entered into this 21st day of September, 2009, by
OPKO Health, Inc. (OPKO).
R E C I T A L S
1. Effective September 19, 2008 Cocrystal Discovery, Inc., a Delaware corporation
(Cocrystal), and certain investors (the Investors) entered into (a) that certain Series A
Preferred Stock Purchase Agreement attached hereto as
Attachment A
(the Purchase
Agreement), (b) that certain Investors Rights Agreement attached hereto as
Attachment B
(the Investor Rights Agreement), (c) that certain Right of First Refusal and Co-Sale Agreement
attached hereto as
Attachment C
(the Co-Sale Agreement), and (d) that certain Voting
Agreement attached hereto as
Attachment D
(the Voting Agreement, and together with the
Purchase Agreement, the Investor Rights Agreement, the Co-Sale Agreement and the Voting Agreement,
the Agreements). Each of the capitalized terms used herein but not otherwise defined shall have
the meaning ascribed such terms in the Purchase Agreement.
2. Effective June 9, 2009, the Investors and Cocrystal entered into that certain First
Amendment to the Series A Preferred Stock Financing Agreements attached hereto as
Attachment
E
, pursuant to which the Purchase Agreement was amended to permit OPKO to purchase
approximately $2.5 million of shares of Cocrystals Series A Preferred Stock (the Shares) at the
Second Closing (the Amendment).
3. The Amendment further provided that each of the Agreements was amended to add OPKO a party
thereto with such amendments to be effective upon OPKOs purchase of the Shares and OPKOs
execution of counterpart signature pages to the Agreements at the Second Closing.
4. Effective September 21, 2009, OPKO delivered $2.5 million, the purchase price for the
Shares, to Cocrystal, and OPKO hereby acknowledges, agrees and confirms that, by its execution of
this Agreement, OPKO will be deemed to be a party to each of the Purchase Agreement (as modified by
the Amendment), the Investor Rights Agreement, the Co-Sale Agreement, and the Voting Agreement.
Concurrent with the execution of this Agreement, OPKO will deliver to Cocrystal a counterpart
signature page to each of the Agreements.
IN WITNESS WHEREOF, the undersigned have hereby executed this Agreement as of the day and year
first set forth above.
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OPKO Health, Inc.
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By:
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Kate Inman
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Title:
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Deputy General Counsel, Secretary
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***
Attachments B through D of this Joinder Agreement have been omitted from this filing
.
The
Company agrees to furnish supplementally copies of the omitted attachments to the Commission upon
request
1
Attachment A
Series A Preferred Stock Purchase Agreement
COCRYSTAL DISCOVERY, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
This Series A Preferred Stock Purchase Agreement (the
Agreement
) is entered into as of September
19, 2008 by and among Cocrystal Discovery, Inc., a Delaware corporation (the
Company
), and the
investors listed on
Exhibit A
attached to this Agreement (each an
Investor
and together the
Investors
). The parties hereby agree as follows herein:
1. Purchase and Sale of Preferred Stock
.
1.1 Sale and Issuance of Series A Preferred Stock
.
(a) The Company shall adopt and file with the Secretary of State of the State of Delaware on
or before the Initial Closing (as defined below) the Amended and Restated Certificate of
Incorporation in the form of
Exhibit B
attached to this Agreement (the
Restated Certificate
).
(b) On or prior to the Initial Closing, the Company shall have authorized (i) the sale and
issuance to the Investors pursuant to this Agreement of up to 7,080,000 shares (the
Shares
) of
its Series A Preferred Stock, $0.0001 par value per share (the
Series A Preferred Stock
), and
(ii) the issuance of the shares of the Companys Common Stock, $0.0001 par value per share (the
Common Stock
), to be issued upon conversion of the Shares (the
Conversion Shares
). As of the
Initial Closing, the Series A Preferred Stock and the Common Stock shall have the rights,
privileges, and restrictions set forth in the Restated Certificate.
(c) Subject to the terms and conditions of this Agreement, each Investor agrees, severally and
not jointly, to purchase at the applicable Closing, and the Company agrees to sell and issue to
each Investor at such Closing, that number of Shares of Series A Preferred Stock set forth opposite
each such Investors name on
Exhibit A
attached hereto under the column entitled Cash Paid at
Closing with respect to such Closing at a purchase price of $1.44134 per Share.
1.2 Closing; Delivery
.
(a) The initial purchase and sale of the Shares under this Agreement shall take place at the
offices of Perkins Coie LLP, 1201 Third Avenue, Suite 4800, Seattle, Washington, 98101, at 11:00
a.m. Pacific time on the date hereof, or at such other time and place as the Company and the
Investors mutually agree upon orally or in writing (which date, time and place are designated as
the
Initial Closing
).
(b) The second purchase and sale of the Shares under this Agreement shall take place at the
offices of Perkins Coie LLP, 1201 Third Avenue, Suite 4800, Seattle, Washington, 98101, at 11:00
a.m. Pacific time on September 18, 2009, or at such later date and time as may be designated by the
Companys Board of Directors (the
Board of Directors
), other than the Series A Directors (as such
term is defined in the Restated Certificate), provided such later date and time is reasonably
acceptable to the Investors (which date, time and place are designated as the
Second Closing
).
(c) The third purchase and sale of the Shares under this Agreement shall take place at the
offices of Perkins Coie LLP, 1201 Third Avenue, Suite 4800, Seattle, Washington, 98101, at 11:00
a.m. Pacific time on March 19, 2010, or at such later date and time as may be designated by the
Board of Directors, other than the Series A Directors, provided such later date and time is
reasonably acceptable to
the Investors (which date, time and place are designated as the
Third Closing
, and together
with the Initial Closing and the Second Closing, each being a
Closing
).
(d) At each Closing, the Company shall deliver to each Investor a certificate representing the
Shares being purchased by such Investor at such Closing, against payment of the purchase price
therefor by check payable to the Company, by wire transfer to a bank account designated by the
Company, by cancellation or conversion of notes or other indebtedness of the Company held by such
Investor, or by any combination of such methods.
(e) At the Initial Closing, the Investor holding a convertible promissory note of the Company
(as identified on
Exhibit A
) (the
Note
) shall deliver the Note to the Company for cancellation
and conversion into the number of shares of Series A Preferred Stock set forth opposite such
Investors name on
Exhibit A
under Initial Closing (the
Note Shares
) pursuant to the terms of
this Agreement (and notwithstanding any terms to the contrary contained in the Note). The parties
hereto agree and acknowledge that the Note shall convert into the Note Shares at the Initial
Closing (notwithstanding any terms to the contrary contained in the Note), and that upon the
issuance of the Note Shares at the Initial Closing, any and all amounts due under the Note shall be
deemed paid in full and all obligations of the Company under the Note shall be fully and finally
satisfied and discharged.
1.3 Defined Terms Used in this Agreement
. In addition to the terms defined above, the
following terms used in this Agreement shall be construed to have the meanings set forth or
referenced below.
Investors Rights Agreement
means the agreement among the Company and the Investors dated as of
the date of the Initial Closing, in substantially the form of
Exhibit C
attached to this Agreement.
Right of First Refusal Agreement
means the agreement among the Company, the Purchasers, and
certain other stockholders of the Company, dated as of the date of the Initial Closing, in
substantially the form of
Exhibit D
attached to this Agreement.
Transaction Agreements
means this Agreement, the Investors Rights Agreement, the Right of First
Refusal Agreement, and the Voting Agreement.
Voting Agreement
means the agreement among the Company, the Purchasers and certain other
stockholders of the Company, dated as of the date of the Initial Closing, in substantially the form
of
Exhibit E
attached to this Agreement.
2. Representations and Warranties of the Company
.
The Company hereby represents and warrants to each Investor as of the date of the Initial
Closing, except as set forth on the Schedule of Exceptions delivered to the Investors (the
Schedule of Exceptions
), which exceptions shall be deemed to be representations and warranties as
if made hereunder:
2.1 Organization, Valid Existence, Corporate Power and Qualification
. The Company is a
corporation duly organized, validly existing, and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own its properties and carry on
its business as currently conducted. The Company is duly qualified to transact business and is in
good standing in the state of Washington and each other jurisdiction in which the failure to so
qualify would have a material adverse effect on its business, financial condition or operating
results.
2.2 Capitalization
. The equity capitalization of the Company consists, immediately prior to
the Initial Closing, of the following:
(a) 7,150,000 shares of Preferred Stock, all of which have been designated Series A Preferred
Stock, none of which are issued and outstanding immediately prior to the Initial Closing. The
rights, privileges and preferences of the Preferred Stock are as stated in the Restated
Certificate.
(b) 17,150,000 shares of Common Stock, 3,054,444 shares of which are issued and outstanding
immediately prior to the Initial Closing. All of the outstanding shares of Common Stock have been
duly authorized and validly issued, are fully paid and nonassessable, and were issued in compliance
with all applicable federal and state securities laws.
(c) The Company has reserved 500,000 shares of Common Stock for issuance to officers,
directors, employees and consultants of the Company pursuant to its 2007 Equity Incentive Plan,
which (including all amendments thereto) has been duly adopted by the Companys Board of Directors
and shareholders (the
Stock Plan
). Of such reserved shares of Common Stock, no options to
purchase shares have been granted or are currently outstanding (the
Outstanding Options
), 85,444
shares have been issued pursuant to restricted stock awards, and 414,556 of such shares of Common
Stock remain available for issuance to officers, directors, employees and consultants pursuant to
the Stock Plan. The Company has furnished to the Purchasers complete and accurate copies of the
Stock Plan and forms of agreements used thereunder.
(d) Other than (i) the Outstanding Options, and (ii) as set forth in the Transaction
Agreements, there are no outstanding options, warrants, rights (including conversion or preemptive
rights and rights of first refusal or similar rights), or agreements, orally or in writing, for the
purchase or acquisition from the Company of any shares of its capital stock or securities
exercisable for or convertible into shares of capital stock. None of the Companys stock purchase
or stock restriction agreements or stock option documents contains a provision for acceleration (or
lapse of a repurchase right) upon the occurrence of any event. The Company has never adjusted or
amended the exercise price of any stock options previously awarded, whether through amendment,
cancellation, replacement grant, repricing, or any other means. The Company has no obligation
(contingent or otherwise) to purchase or redeem any of its capital stock.
(e) All outstanding securities of the Company, including, without limitation, all outstanding
shares of capital stock of the Company, all shares of the capital stock of the Company issuable
upon conversion or exercise of all convertible or exercisable securities, and all other securities
that the Company is obligated to issue, are subject to a one hundred eighty (180) day market
stand-off restriction upon an initial public offering of the Companys securities pursuant to a
registration statement filed with the Securities and Exchange Commission pursuant to the Securities
Act of 1933, as amended (the
Securities Act
), in a form substantially identical to Section 2.11
of the Investors Rights Agreement.
2.3 Subsidiaries
. The Company does not currently own or control, directly or indirectly, any
interest in any other corporation, partnership, trust, joint venture, limited liability company,
association, or other business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
2.4 Authorization
. All corporate action on the part of the Company, its officers, directors,
and stockholders necessary for the authorization, execution and delivery of the Transaction
Agreements, the performance of all obligations of the Company hereunder and thereunder, and the
authorization, issuance, and delivery of the Shares and the Conversion Shares (together, the
Securities
) has been taken or will be taken prior to the Initial Closing. The Transaction
Agreements, when executed and delivered by the Company, shall constitute valid and legally binding
obligations of the Company, enforceable against the Company in accordance with their respective
terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and other laws of general application affecting enforcement of creditors
rights generally, (b) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable remedies, or
(c) to the extent the indemnification provisions contained in the Investors Rights Agreement may be
limited by applicable federal or state securities laws.
2.5 Valid Issuance of Shares
. The Shares, when issued, sold and delivered in accordance with
the terms and for the consideration set forth in this Agreement, will be validly issued, fully
paid, and nonassessable and free of restrictions on transfer other than restrictions on transfer
under the Transaction Agreements, applicable state and federal securities laws, and liens or
encumbrances created by or imposed by an Investor. Based in part upon the representations of the
Investors in Section 3 of this Agreement, and subject to Section 2.6 below, the Shares will be
issued in compliance with all applicable federal and state securities laws. The Conversion Shares
have been duly reserved for issuance and, upon issuance in accordance with the terms of the
Restated Certificate, will be validly issued, fully paid, and nonassessable and free of
restrictions on transfer other than restrictions on transfer under the Transaction Agreements,
applicable federal and state securities laws, and liens or encumbrances created by or imposed by an
Investor. Based in part upon the representations of the Investors in Section 3 of this Agreement,
and subject to Section 2.6 below, the Conversion Shares, when issued upon conversion of the Shares
in accordance with the Restated Certificate, will be issued in compliance with all applicable
federal and state securities laws.
2.6 Governmental Consents and Filings
. No consent, approval, order, or authorization of, or
registration, qualification, designation, declaration, or filing with, any federal, state, or local
governmental authority on the part of the Company is required in connection with the consummation
of the transactions contemplated by this Agreement, except for (a) the filing of the Restated
Certificate with the Secretary of State of the state of Delaware, and (b) filings pursuant to
applicable state securities laws and Regulation D of the Securities Act.
2.7 Litigation
. There is no claim, action, suit, proceeding, arbitration, complaint, charge,
or investigation pending or, to the Companys knowledge, currently threatened against the Company
that questions the validity of the Transaction Agreements or the right of the Company to enter into
them, or to consummate the transactions contemplated hereby or thereby, or that might result,
either individually or in the aggregate, in any material adverse effect on the Companys business,
financial condition, prospects or operating results, or any change in the current equity ownership
of the Company, nor is the Company aware that there is any reasonable basis for the foregoing. The
Company is not a party or subject to the provisions of any order, writ, injunction, judgment, or
decree of any court or government agency or instrumentality, and to the Companys knowledge no
officer of the Company is a party or subject to any of the foregoing with respect to such officers
role with the Company. There is no action, suit, proceeding, or investigation by the Company
currently pending or which the Company intends to initiate. The foregoing includes, without
limitation, actions, suits, proceedings, or investigations pending or threatened in writing (or any
reasonable basis therefor known to the Company) involving the prior employment of any of the
Companys employees, their services provided in connection with the Companys business, or any
information or techniques allegedly proprietary to any of their former employers, or their
obligations under any agreements with prior employers.
2.8 Intellectual Property
.
(a) The Company owns, or is validly licensed or otherwise possesses or reasonably believes
that it can readily obtain on commercially reasonable terms legally enforceable rights to use, all
intellectual property (including but not limited to patents, patent applications, copyrights,
trademarks (including trade names and service marks), trademark applications, trade secrets,
licenses, domain names, works of authorship, inventions, confidential information, and proprietary
rights and processes) (collectively,
Intellectual Property
) necessary for or used in its business
as now conducted and as currently proposed to be conducted, without (to the Companys knowledge
with respect to patents and patent applications only) any conflict with or infringement of the
rights of third parties. The Company
has not received any written communications alleging or otherwise indicating that the Company
has violated or, by conducting its business as now conducted, would violate any of the Intellectual
Property rights of any other person or entity.
(b) The Company has not been and will not be required, for the conduct of its business as
currently conducted and as currently proposed to be conducted, to utilize any inventions or other
intellectual or other property of any employees, agents or independent contractors of the Company
(or persons the Company currently intends to hire) made prior to their employment or other
engagement by the Company or other than as part of such employment or engagement for and on behalf
of the Company. To the Companys best knowledge, at no time during the conception, reduction to
practice or development of any of the Intellectual Property owned by the Company (whether prior to
or during the employment or engagement of any such person by the Company) was any developer,
inventor or other contributor to such Intellectual Property (1) operating under any grants from any
governmental entity or agency, hospital, academic institution or private or other source (any of
the above or sub-division or sub-entity thereof, an
Institution
), performing research sponsored
by any Institution or subject to any employment, consulting, staff or faculty member or other
engagement agreement or arrangement (whether full-time or part-time) or invention assignment or
nondisclosure agreement or other obligation with any third party that would adversely affect the
Companys rights in such Intellectual Property, (2) using any facilities of any Institution in
connection with any such conception or development of any such Intellectual Property, or utilizing
in connection therewith any time which his relationship or engagement with any Institution
warranted to be devoted to such Institution or to his activities therein or for which he was
receiving compensation from such Institution, (3) researching, developing, teaching, using or
otherwise being involved, in connection with his relationship or engagement with any Institution,
in any matter that relates to any such Intellectual Property, or (4) otherwise engaged in any
activity in connection with his relationship or engagement with any Institution that might serve as
a basis for any claim by any Institution with respect to any rights in any such Intellectual
Property. Without derogating in any manner from any other representation or warranty made herein,
no Institution has any rights of any kind in any of the Companys Intellectual Property.
(c) The Company has taken reasonable measures to protect the secrecy and confidentiality of
all of its trade secrets and all know-how, inventions, designs, processes, technical data, and
other information from which the Company derives value, or may potentially derive value, from the
item not being generally known. The Company does not know of any infringement, misappropriation,
or violation by any third party of any Intellectual Property rights owned by the Company.
(d) Section 2.8(d) of the Schedule of Exceptions contains a complete list of all registered
patents, registered trademarks, registered service marks, registered trade names, registered domain
names, registered copyrights, and all other rights to Intellectual Property that are registered
with a public legal authority that are owned by the Company, and all pending applications for
registration of any Intellectual Property rights.
(e) The software owned by the Company was not developed with, does not contain, and is not
compiled or integrated with Open Source Materials that would impose any of the obligations or
restrictions described in the definition of Open Source Materials below on the Companys ability to
distribute or use such Company-owned software or portion thereof.
Open Source Materials
means software or any portion thereof provided to the Company under a license that purports to
require the Company to do any of the following: (1) disclose or distribute or provide access to any
of the software or portion thereof owned by the Company; (2) authorize a licensee of a Company
product to make derivative works of any software or portion thereof owned by the Company; or (3)
distribute any software or portion thereof owned by the Company at no cost to the recipient or
otherwise restrict the Companys ability to charge for distribution of or use of such for
commercial purposes.
(f) None of the Companys employees are obligated under any contract (including licenses,
covenants, or commitments of any nature) or other agreement, or subject to any judgment, decree, or
order of any court or administrative agency, that would interfere with the use of such employees
full time efforts to promote the interests of the Company or that would interfere with or restrict
the Companys business as proposed to be conducted. Neither the execution nor delivery of this
Agreement, nor the carrying on of the Companys business as presently conducted, will conflict with
or result in a breach of the terms, conditions, or provisions of, or constitute a default under,
any contract, covenant, or instrument under which any of such employees is now obligated. It is
not and will not be necessary for the Company to use any inventions of any of its employees (or
persons it currently intends to hire) made prior to or outside the scope of their employment by the
Company.
2.9 Compliance with Other Instruments
. The Company is not in violation or default (a) of any
provisions of its Restated Certificate or Bylaws, (b) of any judgment, order, writ, or decree
applicable to it or to which it is a party, (c) under any instrument, note, indenture, or mortgage
to which it is a party, (d) under any lease, agreement, contract, or purchase order to which it is
a party that is required to be listed on the Schedule of Exceptions, or (e) of any provision of any
federal or state statute, rule, or regulation applicable to the Company. The execution, delivery,
and performance of the Transaction Agreements, and the consummation of the transactions
contemplated by the Transaction Agreements, will not result in any such violation or default or
constitute, with or without the passage of time and giving of notice, either (i) a violation of or
default under any of the foregoing, or (ii) an event which results in the creation of any lien,
charge, or encumbrance upon any assets of the Company or the suspension, revocation, forfeiture, or
nonrenewal of any permit or license applicable to the Company. Neither the Company nor any of its
subsidiaries is engaged, nor has any officer, director, employee, or agent of the Company or any of
its subsidiaries engaged, in any act or practice which would constitute a violation of the Foreign
Corrupt Practices Act of 1977, or any rules or regulations promulgated thereunder. There is not
now, and there never has been, any employment by the Company or any of its subsidiaries, or
beneficial ownership in the Company or any of its subsidiaries by, any governmental or political
official in any country in the world. To the Companys knowledge, the Company and each of its
respective officers, directors, employees and agents are in compliance with and have not violated
the U.S. money laundering laws or regulations, the U.S. Bank Secrecy Act, as amended by the USA
Patriot Act of 2001 (including any recordkeeping or reporting requirements thereunder), or the
anti-money laundering laws or regulations of any jurisdiction.
2.10 Agreements; Actions
.
(a) Except for the Transaction Agreements, there are no agreements, understandings,
instruments, contracts, or proposed transactions, or judgments, orders, writs, or decrees, to which
the Company is a party or by which it is bound that involve (i) obligations of, or payments to, the
Company in excess of $25,000 in any fiscal year, (ii) the license of any patent, copyright,
trademark, trade secret, or other Intellectual Property right to or from the Company (other than
standard end-user licenses for off the shelf software products used by the Company in its business
and not incorporated into any product or service offered or proposed to be offered by the Company),
or (iii) the grant of rights to develop, license, distribute, or sell its products or services to
any other person outside of the ordinary course of business.
(b) Since January 1, 2008, the Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series of its capital
stock, (ii) incurred any indebtedness for borrowed money or incurred any other liabilities
individually in excess of $25,000 or in excess of $100,000 in the aggregate, (iii) made any loans
or advances to any person or entity, other than ordinary advances for travel expenses, or
(iv) sold, exchanged, or otherwise disposed of any of its material assets or material rights, other
than the sale of its inventory in the ordinary course of business.
(c) For the purposes of subsections (a) and (b) above, all indebtedness, liabilities,
agreements, understandings, instruments, contracts, and proposed transactions involving the same
person or entity (including persons or entities the Company has reason to believe are affiliated
with that person or entity) shall be aggregated for the purposes of meeting the individual minimum
dollar amounts of each such subsection.
2.11 Related Party Transactions
.
(a) Except for the agreements explicitly contemplated by the Transaction Agreements and other
than agreements or understandings pertaining to (i) standard employee benefits generally made
available to all employees, (ii) standard director and officer indemnification agreements approved
by the Board of Directors, (iii) the purchase of shares of the Companys capital stock and the
issuance of options to purchase shares of the Companys common stock under the Stock Plan, and (iv)
proprietary information and invention agreements, in each instance, there are no agreements,
understandings, or proposed transactions between the Company and any of its employees, officers, or
directors, or their affiliates.
(b) The Company is not indebted, directly, or indirectly, to any of its employees, officers,
or directors, or to their respective affiliates, spouses, or children, other than in connection
with customary and reasonable expenses or advances of such expenses of employees incurred in the
ordinary course of business. None of the Companys employees, officers, or directors, or any
members of their immediate families, or any affiliate thereof, are, directly or indirectly,
indebted to the Company or, to the Companys knowledge, have any direct or indirect ownership
interest in (i) any firm or corporation with which the Company is affiliated or with which the
Company has a business relationship or (ii) any firm or corporation which competes with the
Company, other than ownership positions in publicly traded companies not exceeding two percent of
the outstanding capital stock thereof. None of the Companys employees, officers, or directors or,
to the Companys knowledge, any members of their immediate families are, directly or indirectly,
interested in any material contract with the Company. The Company is not a guarantor or indemnitor
of any indebtedness of any other person, firm, or corporation.
2.12 Rights of Registration and Voting Rights
. Except as provided in the Investors Rights
Agreement, the Company is not under any obligation to register under the Securities Act any of its
currently outstanding securities or any securities issuable upon exercise or conversion of its
currently outstanding securities. To the Companys knowledge, except as contemplated in the Voting
Agreement, no stockholder of the Company has entered into any agreements with respect to the voting
of shares of capital stock of the Company.
2.13 Title to Assets
. The property and assets that the Company owns are free and clear of all
mortgages, deeds of trust, liens, loans, and encumbrances, except for statutory liens for the
payment of current taxes that are not yet delinquent and encumbrances and liens that arise in the
ordinary course of business and do not materially impair the Companys ownership or use of such
property or assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to its knowledge, holds a valid leasehold interest free of any
liens, claims, or encumbrances other than those of the lessors of such property or assets.
2.14 Material Liabilities
. The Company has no material liability or obligation, absolute or
contingent (individually or in the aggregate), except (i) obligations and liabilities incurred
after the date of incorporation in the ordinary course of business that are not material,
individually or in the aggregate, and (ii) obligations under contracts made in the ordinary course
of business that would not be required to be reflected in financial statements prepared in
accordance with generally accepted accounting principles.
2.15 Changes
. Since June 30, 2008, there has not been:
(a) any change in the business, financial condition, prospects or operating results of the
Company, except changes in the ordinary course of business that have not been, individually, or in
the aggregate, materially adverse;
(b) any damage, destruction, or loss, whether or not covered by insurance, materially and
adversely affecting the business, properties or financial condition of the Company;
(c) any waiver or compromise by the Company of a valuable right or of a material debt owed to
it;
(d) any satisfaction or discharge of any lien, claim, or encumbrance or payment of any
obligation by the Company, except in the ordinary course of business and that is not materially
adverse to the Company;
(e) any change to a material contract or agreement to which the Company is a party or subject;
(f) any change in any compensation arrangement or agreement with any officer or director;
(g) any resignation or termination of employment of any officer or key employee of the
Company;
(h) any mortgage, pledge, transfer of a security interest in or lien created by the Company
with respect to any of its properties or assets, except liens for taxes not yet due or payable;
(i) any loans or guarantees made by the Company to or for the benefit of its employees,
officers, or directors, or any members of their immediate families, other than travel advances and
other advances made in the ordinary course of business;
(j) any declaration, setting aside, or payment or other distribution in respect to any of the
Companys capital stock, or any direct or indirect redemption, purchase, or other acquisition of
any of such stock by the Company;
(k) any sale, assignment, or transfer of any patents, trademarks, copyrights, trade secrets,
or other Intellectual Property rights; or
(l) any arrangement or commitment by the Company to do any of the things described in this
Section 2.15.
2.16 Tax Matters
.
(a) There are no federal, state, county, local or foreign taxes dues and payable by the
Company which have not been timely paid. There are no accrued and unpaid federal, state, country,
local or foreign taxes of the Company which are due, whether or not assessed or disputed. There
have been no examinations or audits of any tax returns or reports by any applicable federal, state,
local or foreign governmental agency. The Company has duly and timely filed all federal, state,
county, local and foreign tax returns required to have been filed by it and there are in effect no
waivers of applicable statutes of limitations with respect to taxes for any year.
(b) To the Companys knowledge, all individuals who have purchased unvested shares of the
Companys Common Stock have timely filed elections under Section 83(b) of the Code and any
analogous provisions of applicable state tax laws.
(c) The Company is not a United States real property holding corporation within the meaning
of the Code and any regulations promulgated thereunder.
2.17 Insurance
. The Company has in full force and effect fire, general liability, and
casualty insurance policies with extended coverage, in such amounts (subject to reasonable
deductions) as customarily carried by similar companies at equivalent stages of development.
2.18 Employee Matters
.
(a) The Company is not bound by or subject to (and none of its assets or properties is bound
by or subject to) any written or oral, express or implied, contract, commitment, or arrangement
with any labor union, and no labor union has requested or, to the knowledge of the Company, has
sought to represent any of the employees, representatives, or agents of the Company. There is no
strike or other labor dispute involving the Company pending, or to the knowledge of the Company
threatened, which could have a material adverse effect on the Companys business, financial
condition or operating results, nor is the Company aware of any labor organization activity
involving its employees.
(b) Each officer and key employee of the Company is currently devoting substantially all of
his or her business time to the conduct of the business of the Company. The Company is not aware
that any officer or key employee is planning to work less than full time at the Company. The
Company is not aware that any officer or key employee, or that any group of key employees, intends
to terminate his, her, or their employment with the Company, nor does the Company have a present
intention to terminate the employment of any of the foregoing individuals. No officer or key
employee is currently working or, to the Companys knowledge, plans to work for a competitive
enterprise, whether or not such officer or key employee is or will be compensated by such
enterprise.
(c) The employment of each officer and employee of the Company is terminable at the will of
the Company, and upon termination of the employment of each such officer and employee, no severance
or other payments will become due.
(d) The Company is not delinquent in payments to any of its employees, consultants, or
independent contractors for any wages, salaries, commissions, bonuses, or other direct compensation
for any service performed for it to the date hereof or amounts required to be reimbursed to such
employees, consultants, or independent contractors. The Company has complied in all material
respects with all applicable state and federal equal employment opportunity laws and with other
laws related to employment, including those related to wages, hours, worker classification, and
collective bargaining. The Company has withheld and paid to the appropriate governmental entity or
is holding for payment not yet due to such governmental entity all amounts required to be withheld
from employees of the Company and is not liable for any arrears of wages, taxes, penalties, or
other sums for failure to comply with any of the foregoing.
2.19 Benefit Plans
. Section 2.19 of the Schedule of Exceptions sets forth each employee
benefit plan maintained, established, or sponsored by the Company, or which the Company
participates in or contributes to, which is subject to the Employee Retirement Income Security Act
of 1974, as amended (
ERISA
). The Company has made all required contributions and has no
liability to any such employee benefit plan, other than liability for health plan continuation
coverage described in Part 6 of Title I(B) of ERISA, and has complied in all material respects with
all applicable laws for any such employee benefit plan.
2.20 Proprietary Information and Invention Agreements
. Each employee and officer of the
Company has executed an agreement with the Company regarding confidentiality, proprietary
information and invention assignment substantially in the form delivered or made available to the
Investors. Each consultant and independent contractor of the Company has executed an agreement
with the Company regarding confidentiality, proprietary information, and invention assignment
substantially in the form delivered or made available to the Investors. Each such agreement is in
full force and effect, and the Company is not aware that any of its employees, consultants,
independent contractors, or officers is in violation of any such agreement. No such employee,
consultant, independent contractor, or officer has excluded works or inventions made prior to his,
her, or its employment with or service to the Company from his, her, or its assignment of
inventions pursuant to any such agreement.
2.21 Permits
. The Company has all franchises, permits, licenses, and any similar authority
necessary for the conduct of its business, the lack of which could reasonably be expected to
materially and adversely affect the business, properties, prospects or financial condition of the
Company. The Company is not in default under any of such franchises, permits, licenses or other
similar authority.
2.22 Corporate Documents
. The Restated Certificate and Bylaws of the Company are in the form
provided or made available to the Investors. The copy of the minute books of the Company provided
or made available to the Investors contains minutes of all meetings of directors and stockholders
and all actions by written consent without a meeting by the directors and stockholders since the
date of incorporation and accurately reflects all actions by the directors (and any committee of
directors) and stockholders with respect to all transactions referred to in such minutes in all
material respects.
2.23 Brokers
. The Company has not incurred in connection with the sale of the Shares to the
Investors any brokerage or finders fees, or agents commissions or any similar liabilities.
2.24 Environmental and Safety Laws
. To the Companys knowledge the Company is not in
violation of any applicable statute, law, or regulation relating to the environment or occupational
health and safety, and to the Companys knowledge no material expenditures are or will be required
in order to comply with any such existing statute, law, or regulation.
2.25 Disclosure
. The representations and warranties of the Company contained in this
Agreement, as qualified by the Schedule of Exceptions, and in the exhibits attached hereto or any
certificate furnished or to be furnished to Investors at the Initial Closing (when read together in
the aggregate) do not contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements contained herein or therein not misleading in light
of the circumstances in which they were made.
3. Representations and Warranties of the Investors
.
Each Investor hereby represents and warrants to the Company, severally and not jointly, that:
3.1 Authorization
. The Investor has full power and authority to enter into the Transaction
Agreements. The Transaction Agreements to which the Investor is a party, when executed and
delivered by the Investor, will constitute valid and legally binding obligations of the Investor,
enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general
application affecting enforcement of creditors rights generally, and as limited by laws relating
to the availability of specific performance, injunctive relief, or other equitable remedies, or
(b) to the extent the indemnification provisions contained in the Investors Rights Agreement may be
limited by applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account
. The Shares to be acquired by the Investor will be
acquired for investment for the Investors own account, not as a nominee or agent, and not with a
view to the resale or distribution of any part thereof, and the Investor has no present intention
of selling, granting
any participation in, or otherwise distributing the same. By executing this Agreement, the
Investor further represents that the Investor does not presently have any contract, undertaking,
agreement, or arrangement with any person or entity to sell, transfer or grant participations to
such person or entity or to any third person or entity, with respect to any of the Shares. The
Investor has not been formed for the specific purpose of acquiring the Shares.
3.3 Disclosure of Information
. The Investor has had an opportunity to discuss the Companys
business, management, financial affairs, and the terms and conditions of the offering of the Shares
with the Companys management and has had an opportunity to review the Companys facilities. The
foregoing, however, does not limit or modify the representations and warranties of the Company in
Section 2 of this Agreement or the right of the Investor to rely thereon.
3.4 Restricted Securities
. The Investor understands that the Shares have not been, and will
not be, registered under the Securities Act, by reason of a specific exemption from the
registration provisions of the Securities Act which depends upon, among other things, the bona fide
nature of the investment intent and the accuracy of the Investors representations as expressed
herein. The Investor understands that the Shares are restricted securities under applicable U.S.
federal and state securities laws and that, pursuant to these laws, the Investor must hold the
Shares indefinitely unless they are registered with the Securities and Exchange Commission and
qualified by state authorities, or an exemption from such registration and qualification
requirements is available. The Investor acknowledges that the Company has no obligation to
register or qualify the Shares, or the Common Stock into which the Shares may be converted, for
resale except as set forth in the Investors Rights Agreement.
3.5 No Public Market
. The Investor understands that no public market now exists for the
Shares, and that the Company has made no assurances that a public market will ever exist for the
Shares.
3.6 Legends
. The Investor understands that the Shares and any securities issued in respect of
or exchange for the Shares, may bear one or all of the following legends:
(a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH,
THE SALE OR DISTRIBUTION THEREOF. NO SUCH TRANSFER MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
COMPANY OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.
(b) Any legend set forth in, or required by, the other Transaction Agreements.
(c) Any legend required by the securities laws of any state to the extent such laws are
applicable to the Shares represented by the certificate so legended.
Notwithstanding the foregoing, the legend referred to in Section 3.6(a) above shall be removed and
the Company shall issue a certificate without such legend to the holder of the Securities if such
Securities are registered under the Securities Act, or if such holder provides the Company with an
opinion of counsel (which may be counsel for the Company) reasonably acceptable to the Company to
the effect that, or the Company otherwise satisfies itself that, a public sale or transfer of such
Securities may be made without registration under the Securities Act, or such holder provides the
Company with reasonable assurances, which may, at the option of the Company, include an opinion of
counsel reasonably acceptable to the Company, that such Securities can be sold pursuant to Rule 144
under the Securities Act.
3.7 Accredited Investor
. The Investor is an accredited investor as defined in Rule 501(a)
of Regulation D promulgated under the Securities Act.
3.8 Foreign Investors
. If the Investor is not a United States person (as defined by
Section 7701(a)(30) of the Code), the Investor hereby represents that it has satisfied itself as to
the full observance of the laws of its jurisdiction in connection with any invitation to subscribe
for the Shares or any use of this Agreement, including (a) the legal requirements within its
jurisdiction for the purchase of the Shares, (b) any foreign exchange restrictions applicable to
such purchase, (c) any governmental or other consents that may need to be obtained, and (d) the
income tax and other tax consequences, if any, that may be relevant to the purchase, holding,
redemption, sale, or transfer of the Shares. The Investors subscription and payment for and
continued beneficial ownership of the Shares will not violate any applicable securities or other
laws of the Investors jurisdiction.
3.9 Exculpation among Investors
. The Investor acknowledges that it is not relying upon any
person or entity, other than the Company and its officers and directors, in making its investment
or decision to invest in the Company.
3.10 Residence
. If the Investor is an individual, then the Investor resides in the state or
province identified in the address of the Investor set forth on
Exhibit A
; if the Investor is a
partnership, corporation, limited liability company, or other entity, then the office or offices of
the Investor in which its principal place of business is identified in the address or addresses of
the Investor set forth on
Exhibit A
.
3.11 General Solicitation
. Neither the Investor, nor any of its officers, directors,
employees, agents, stockholders or partners has either directly or indirectly, including through a
broker or finder (a) engaged in any general solicitation, or (b) published any advertisement in
connection with the offer and sale of the Shares.
4. Conditions to the Investors Obligations at Initial Closing
.
The obligations of each Investor to purchase Shares at the Initial Closing are subject to the
fulfillment, on or before the Initial Closing, of each of the following conditions, unless
otherwise waived by such Investor in writing:
4.1 Representations and Warranties
. The representations and warranties of the Company
contained in Section 2 shall be true and correct in all respects as of the Initial Closing with the
same effect as though such representations and warranties had been made on and as of the date of
the Initial Closing.
4.2 Performance
. The Company shall have performed and complied with all covenants,
agreements, obligations, and conditions contained in this Agreement that are required to be
performed or complied with by the Company on or before the Initial Closing.
4.3 Compliance Certificate
. The President of the Company shall deliver to the Investors at
the Initial Closing a certificate certifying that the conditions specified in Sections 4.1 and 4.2
have been fulfilled.
4.4 Qualifications
. All authorizations, approvals or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are required in connection
with the lawful issuance and sale of the Shares pursuant to this Agreement shall have been obtained
and shall be effective as of the Initial Closing.
4.5 Board of Directors
. As of the Initial Closing, the authorized size of the Board of
Directors shall be set at six directors, and the Board shall be comprised of Sam Lee, Gary Wilcox,
Roger Kornberg, Phillip Frost, M.D., Jane Hsiao, Ph.D. and Steven D. Rubin.
4.6 Investors Rights Agreement
. The Company and each Investor (other than the Investor
relying upon this condition to excuse such Investors performance hereunder) shall have executed
and delivered the Investors Rights Agreement.
4.7 Right of First Refusal Agreement
. The Company, each Investor (other than the Investor
relying upon this condition to excuse such Investors performance hereunder), and the other
stockholders of the Company named as parties thereto shall have executed and delivered the Right of
First Refusal Agreement.
4.8 Voting Agreement
. The Company, each Investor (other than the Investor relying upon this
condition to excuse such Investors performance hereunder), and the other stockholders of the
Company named as parties thereto shall have executed and delivered the Voting Agreement.
4.9 Restated Certificate
. The Company shall have filed the Restated Certificate with the
Secretary of State of Delaware on or prior to the Initial Closing, which shall continue to be in
full force and effect as of the Initial Closing.
4.10 Secretarys Certificate
. The Secretary of the Company shall have delivered to the
Investors at the Initial Closing a certificate dated as of the Initial Closing certifying (a) the
Restated Certificate as then in effect, (b) the Bylaws of the Company as then in effect, (c) the
resolutions of the Board of Directors of the Company approving (among other things) the Transaction
Agreements and the transactions contemplated thereunder (including the issuance of the Securities),
and (d) the resolutions of the stockholders of the Company approving (among other things) the
Restated Certificate.
4.11 Indemnification Agreements
. The Company and each director designated by an Investor
(other than the Investor relying upon this condition to excuse such Investors performance
hereunder) shall have executed and delivered the Companys standard form of Indemnification
Agreement for its directors.
5. Conditions to the Companys Obligations at Closing
.
The obligations of the Company to sell the Shares to the Investors at each Closing are subject to
the fulfillment, on or before such Closing, of each of the following conditions, unless otherwise
waived by the Company in writing:
5.1 Representations and Warranties
. The representations and warranties of each Investor
contained in Section 3 shall be true and correct in all respects as of such Closing with the same
effect as though such representations and warranties had been made on and as of the date of the
Closing.
5.2 Performance
. The Investors shall have performed and complied with all covenants,
agreements, obligations and conditions contained in this Agreement that are required to be
performed or complied with by them on or before such Closing.
5.3 Qualifications
. All authorizations, approvals or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are required in connection
with the lawful issuance and sale of the Shares pursuant to this Agreement shall have been obtained
and shall be effective as of such Closing.
5.4 Investors Rights Agreement
. Each Investor shall have executed and delivered the Investors
Rights Agreement.
5.5 Right of First Refusal Agreement
. Each Investor and the other stockholders of the Company
named as parties thereto shall have executed and delivered the Right of First Refusal Agreement.
5.6 Voting Agreement
. Each Investor and the other stockholders of the Company named as
parties thereto shall have executed and delivered the Voting Agreement.
5.7 Purchase Price
. Each Investor in such Closing shall have delivered to the Company the
purchase price for the Shares being purchased by such Investor in such Closing, in the amount set
forth opposite such Investors name on
Exhibit A
.
6. Miscellaneous
.
6.1 Survival of Warranties
. Unless otherwise set forth in this Agreement, the representations
and warranties of the Company and the Investors contained in or made pursuant to this Agreement
shall survive the execution and delivery of this Agreement until the earliest of (a) the second
anniversary of the Initial Closing, (b) the closing of a Deemed Liquidation (as defined in the
Restated Certificate), or (c) the closing of a Qualified IPO (as defined in the Restated
Certificate).
6.2 Successors and Assigns
. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities
under or by reason of this Agreement, except as expressly provided in this Agreement.
6.3 Governing Law
. This Agreement and the rights and obligations of the parties hereunder
shall be governed by, and construed in accordance with, the laws of the State of Delaware, without
giving effect to principles of conflicts of law.
6.4 Counterparts; Facsimile
. This Agreement may be executed and delivered by facsimile
signature and in two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
6.5 Titles and Subtitles
. The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this Agreement.
6.6 Notices
. All notices and other communications given or made pursuant to this Agreement
shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or:
(a) personal delivery to the party to be notified, (b) when sent, if sent by facsimile during
normal business hours of the recipient, and if not sent during normal business hours, then on the
recipients next business day, (c) five (5) days after having been sent by registered or certified
mail, return receipt requested, postage prepaid, or (d) one (1) business day after deposit with a
nationally recognized overnight courier, freight prepaid, specifying next business day delivery,
with written verification of receipt. All communications shall be sent to the respective parties
at their address as set forth on the signature page or
Exhibit A
, or to such facsimile number or
address as subsequently modified by written notice given in accordance with this Section 6.6. If
notice is given to the Company, a copy shall also be sent to Perkins Coie LLP, Attention James R.
Lisbakken and Mark A. Metcalf, 1201 Third Avenue, Suite 4800, Seattle, WA 98101.
6.7 No Finders Fees
. Each party represents that it neither is nor will be obligated for any
finders fee or commission in connection with this transaction. Each Investor agrees to indemnify
and to hold harmless the Company from any liability for any commission or compensation in the
nature of a finders or brokers fee arising out of this transaction (and the costs and expenses of
defending against such liability or asserted liability) for which each Investor or any of its
officers, employees, or representatives is responsible. The Company agrees to indemnify and hold
harmless each Investor from any liability for any commission or compensation in the nature of a
finders or brokers fee arising out of
this transaction (and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees, or representatives
is responsible.
6.8 Fees and Expenses; Attorneys Fees
. The Company and each Investor shall each bear its own
expenses with respect to the transaction; provided that the Company shall reimburse The Frost
Group, LLC for the documented fees and expenses of its outside legal counsel, up to a maximum
amount of $20,000. If any action at law or in equity (including arbitration) is necessary to
enforce or interpret the terms of any of the Transaction Agreements, the prevailing party shall be
entitled to reasonable attorneys fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
6.9 Amendments and Waivers
. Any term of this Agreement may be amended or waived only with the
written consent of the Company and the holders of a majority of the Common Stock issued or issuable
upon conversion of the Shares. Any amendment or waiver effected in accordance with this
Section 6.9 shall be binding upon the Investors and each transferee of the Shares (or the Common
Stock issuable upon conversion thereof), each future holder of all such securities, and the
Company. Each Investor acknowledges that by the operation of this paragraph, the holders of a
majority of the Common Stock issued or issuable upon conversion of the Shares has the right and
power to diminish or eliminate all rights of such Investor under this Agreement.
6.10 Severability
. If one or more provisions of this Agreement are held to be unenforceable
under applicable law, the parties agree to renegotiate such provision in good faith. In the event
that the parties cannot reach a mutually agreeable and enforceable replacement for such provision,
then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement
shall be interpreted as if such provision were so excluded, and (c) the balance of the Agreement
shall be enforceable in accordance with its terms.
6.11 Delays or Omissions
. No delay or omission to exercise any right, power, or remedy
accruing to any party under this Agreement, upon any breach or default of any other party under
this Agreement, shall impair any such right, power, or remedy of such non-breaching or
non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any
waiver of any single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. Any waiver, permit, consent, or approval of any kind or
character on the part of any party of any breach or default under this Agreement, or any waiver on
the part of any party of any provisions or conditions of this Agreement, must be in writing and
shall be effective only to the extent specifically set forth in such writing. All remedies, either
under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not
alternative.
6.12 Entire Agreement
. This Agreement (including the Exhibits hereto), the Restated
Certificate, and the other Transaction Agreements constitute the full and entire understanding and
agreement between the parties with respect to the subject matter hereof, and any other written or
oral agreement relating to the subject matter hereof existing between the parties are expressly
canceled.
6.13 Legal Representation
. It is acknowledged by each of the other Investors that the Company
has retained Perkins Coie LLP to act as its counsel in connection with the transactions
contemplated by the Transaction Agreements and that Perkins Coie LLP has not acted as counsel for
any of the Investors in connection with the transactions contemplated by the Transaction Documents,
and that none of the Investors has the status of a client of Perkins Coie LLP for conflict of
interest or any other purpose as a result thereof.
6.14 California Corporate Securities Law.
THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS
UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102 OR
25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT
* * * * *
IN WITNESS WHEREOF, the parties have executed this Series A Preferred Stock Purchase Agreement as
of the date first written above.
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COMPANY:
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COCRYSTAL DISCOVERY, INC.
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By:
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Sam Lee
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President
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Address:
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17108 17th Avenue W.
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Lynnwood, WA 98037
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INVESTORS:
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**The Exhibits to the Series A Preferred Stock Purchase Agreement been omitted from this filing.
The Company agrees to furnish supplementally copies of the omitted attachments to the Commission
upon request.
Attachment E
First Amendment to the Series A Preferred Stock Financing Agreements
COCRYSTAL DISCOVERY, INC.
FIRST AMENDMENT TO
SERIES A PREFERRED STOCK
FINANCING AGREEMENTS
This First Amendment to Series A Preferred Stock Financing Agreements (the
Amendment
) is
made as of June 9, 2009 by and among Cocrystal Discovery, Inc., a Delaware corporation (the
Company
), and the undersigned stockholders of the Company (the
Stockholders
). This Amendment
amends: (a) that certain Series A Preferred Stock Purchase Agreement, dated September 19, 2008,
between the Company and the holders of the Companys Series A Preferred Stock (the
Purchase
Agreement
); (b) that certain Investors Rights Agreement, dated September 19, 2008, between the
Company and certain founders and investors of the Company named therein (the
Investors Rights
Agreement
); (c) that certain Right of First Refusal and Co-Sale Agreement, dated September 19,
2008, between the Company and certain founders and investors of the Company named therein (the
Co-Sale Agreement
); and (d) that certain Voting Agreement, dated September 19, 2008, between the
Company and certain common holders and investors of the Company named therein (the
Voting
Agreement
). Capitalized terms used but not defined herein shall be ascribed the meanings given to
such terms in the Purchase Agreement.
RECITALS
A. The Company and the Stockholders desire to amend the Purchase Agreement to permit OPKO
Health, Inc., a Delaware corporation (
OPKO
), to purchase approximately $2,500,000 of the Series A
Preferred Stock of the Company (the
Series A Preferred
) at the Second Closing.
B. The investment by OPKO under the Purchase Agreement will be made in lieu of investment by
the following investors, who currently have the right to invest in the Second Closing under the
Purchase Agreement: ***.
C. Pursuant to Section 6.9 of the Purchase Agreement, any term of the Purchase Agreement may
be amended with the written consent of the Company and the holders of a majority of the Common
Stock of the Company issued or issuable upon conversion of the outstanding Shares. The
Stockholders collectively hold a majority of the Common Stock of the Company issued or issuable
upon conversion of the Shares that are outstanding on the date of this Amendment.
D. In connection with the purchase of shares of Series A Preferred by OPKO pursuant to the
Purchase Agreement, the Company and the Stockholders desire to amend the Investors Rights
Agreement, the Co-Sale Agreement and the Voting Agreement to permit OPKO to become a party to each
of those agreements.
E. Pursuant to Section 6.6 of the Investors Rights Agreement, any term of the Investors Rights
Agreement may be amended with the written consent of the Company, the holders of a majority of the
Registrable Securities (as defined in the Investors Rights Agreement) excluding Founder Registrable
Securities (as defined in the Investors Rights Agreement), and the holders of a majority of the
Founder Registrable Securities. The Stockholders collectively hold (i) a majority of the
Registrable Securities excluding the Founder Registrable Securities, and (ii) a majority of the
Founder Registrable Securities.
1
F. Pursuant to Section 8.3 of the Co-Sale Agreement, the Co-Sale Agreement may be amended to
add a new holder of Preferred Stock of the Company as an Investor under the Co-Sale Agreement
with the written consent of the Company and the holders of a majority of the Holders Shares (as
such term is defined in the Co-Sale Agreement) held by all Holders (as such term is defined in the
Co-Sale Agreement). The Stockholders that are Holders under the Co-Sale Agreement collectively
hold a majority of the Holder Shares.
G. Pursuant to Section 7(c) of the Voting Agreement, any term of the Voting Agreement may be
amended with the written consent of the Company, an Investor Majority (as such term is defined in
the Voting Agreement), and a Common Majority (as such term is defined in the Voting Agreement).
The Stockholders collectively constitute both an Investor Majority and a Common Majority under the
Voting Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable
consideration, the receipt and sufficiency of which are hereby confirmed, the parties hereto hereby
agree as follows:
7. Amendment of the Purchase Agreement
.
7.1 Section 1.1(c)
. Section 1.1(c) of the Purchase Agreement is hereby amended and restated
in its entirety to read as follows:
(c) Subject to the terms and conditions of this Agreement, each Investor agrees,
severally and not jointly, to purchase at the applicable Closing, and the Company agrees to
sell and issue to each Investor at such Closing, that number of Shares of Series A Preferred
Stock set forth opposite each such Investors name on
Exhibit A
attached hereto under the
column entitled Cash Paid at Closing with respect to such Closing at a purchase price of
(a) with respect to the First Closing and the Third Closing, $1.44134 per Share, or (b) with
respect to the Second Closing, the applicable purchase price set forth opposite each such
Investors name under the column entitled Per Share Purchase Price on the schedule for the
Second Closing on
Exhibit A
attached hereto, which price as indicated on
Exhibit A
shall be
either $1.44134 per Share or $1.4691 per Share.
7.2 Schedule of Investors
. The Schedule of Investors for the Second Closing under the
Purchase Agreement (set forth on Exhibit A to the Purchase Agreement) is hereby amended in its
entirety to read as follows:
2
Second Closing September 18, 2009
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Number of Shares
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of Series A
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Per Share Purchase
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Cash Paid
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Name and Address
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Preferred Stock
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Price
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at Closing
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OPKO Health, Inc.
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1,701,723
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$
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1.46910
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$
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2,500,001.26
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4400 Biscayne Blvd.
Suite 1180
Miami, FL 33137
****
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17,345
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$
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1.44134
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$
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25,000.05
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TOTAL
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1,719,068
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$
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2,525,001.31
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8. Amendment of Investors Rights Agreement
.
8.1
The Investors Rights Agreement is hereby amended to add OPKO as a party thereto as an
Investor, with such amendment to be effective upon OPKOs purchase of shares of the Companys
Series A Preferred Stock at the Second Closing (as such term is defined in the Purchase Agreement)
under the Purchase Agreement and OPKOs execution of a counterpart signature page to the Investors
Rights Agreement. The Company is hereby authorized to update Exhibit A to the Investors Rights
Agreement to reflect such amendment.
8.2
The defined term Purchase Agreement when used in the Investors Rights Agreement is
hereby amended to mean that certain Series A Preferred Stock Purchase Agreement, dated September
19, 2008, between the Company and the holders of the Companys Series A Preferred Stock, as such
agreement may be amended from time to time.
9. Amendment of Co-Sale Agreement
.
9.1
The Co-Sale Agreement is hereby amended to add OPKO as a party thereto as an Investor,
with such amendment to be effective upon OPKOs purchase of shares of the Companys Series A
Preferred Stock at the Second Closing (as such term is defined in the Purchase Agreement) under the
Purchase Agreement and OPKOs execution of a counterpart signature page to the Co-Sale Agreement.
The Company is hereby authorized to update Schedule B to the Co-Sale Agreement to reflect such
amendment.
9.2
The defined term Purchase Agreement when used in the Co-Sale Agreement is hereby amended
to mean that certain Series A Preferred Stock Purchase Agreement, dated September 19, 2008,
between the Company and the holders of the Companys Series A Preferred Stock, as such agreement
may be amended from time to time.
10. Amendment of Voting Agreement
.
10.1
The Voting Agreement is hereby amended to add OPKO as a party thereto as an Investor,
with such amendment to be effective upon OPKOs purchase of shares of the Companys Series A
Preferred Stock at the Second Closing (as such term is defined in the Purchase Agreement) under the
Purchase Agreement and OPKOs execution of a counterpart signature page to the Voting Agreement.
The Company is hereby authorized to update Schedule A to the Voting Agreement to reflect such
amendment.
3
10.2
The defined term Purchase Agreement when used in the Voting Agreement is hereby amended
to mean that certain Series A Preferred Stock Purchase Agreement, dated September 19, 2008,
between the Company and the holders of the Companys Series A Preferred Stock, as such agreement
may be amended from time to time.
11. Miscellaneous
.
11.1 Governing Law
. This Amendment and the rights and obligations of the parties hereunder
shall be governed by, and construed in accordance with, the laws of the State of Delaware, without
giving effect to principles of conflicts of law.
11.2 Counterparts
. This Amendment may be executed in any number of counterparts, each of
which shall be enforceable against the parties actually executing such counterparts, and all of
which together shall constitute one instrument.
11.3 Titles and Subtitles
. The titles and subtitles used in this Amendment are used for
convenience only and are not to be considered in construing or interpreting this Amendment.
11.4 Entire Agreement
. Except as expressly amended hereby, the Purchase Agreement, the
Investors Rights Agreement, the Co-Sale Agreement and the Voting Agreement and all rights and
obligations of the Company and the other parties thereto under such agreements shall remain in full
force and effect. If any term, provision, covenant or restriction of this Amendment is held by a
court of competent jurisdiction or other authority to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this Amendment, and of the
Purchase Agreement, the Investors Rights Agreement, the Co-Sale Agreement and the Voting Agreement
shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
[Signature page follows]
4
IN WITNESS WHEREOF, this Amendment has been executed and delivered by the undersigned as of
the date first written above.
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COMPANY:
COCRYSTAL DISCOVERY, INC.
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By:
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Gary L. Wilcox, Ph.D.
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Chief Executive Officer
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STOCKHOLDERS:
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By:
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Name:
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Title:
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5