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(Exact Name of Registrant as Specified in Its Charter)
Delaware
75-2402409
(State or Other Jurisdiction of
(I.R.S. Employer Identification No.)
Incorporation or Organization)
4400 Biscayne Blvd. Miami, FL33137
(Address of Principal Executive Offices) (Zip Code)
(305) 575-4100
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ YES o NO
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T 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):
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act):
YES o NO þ
OPKO Health, Inc. (the “Company”) is filing this Amendment No. 1 to the Quarterly Report
on Form 10-Q (the “Form 10-Q/A”) to amend its Quarterly Report on Form 10-Q for the quarter ended
June 30, 2010, which was filed with the Securities and Exchange Commission (“SEC”) on August 9, 2010
(the “Original Filing” and together with the Form 10-Q/A, the “Form 10-Q”) to include restated
financial statements as described in Note 12 to the accompanying condensed consolidated financial statements.
The Company has also filed an Amendment No. 1 to the Annual Report on Form 10-K (the “Form
10-K/A”) to amend its Annual Report on Form 10-K for the year ended December 31, 2009, which was
filed with the Securities and Exchange Commission (“SEC”) on March 17, 2010 (the “Original 10-K
Filing” and together with the Form 10-K/A, the “Form 10-K”) to include restated consolidated
financial statements as described in Note 21 to the consolidated financial statements, included therein.
The Company has restated its previously issued consolidated financial statements as of and for
the year ended December 31, 2009, and as of March 31, 2010 to reflect the Company’s determination that it did not
properly account for the September 28, 2009 Series D Convertible Preferred Stock (the “Preferred
Stock”) offering. In connection with the issuance of 1,209,667 shares of Preferred Stock, we issued
warrants to purchase up to an aggregate of 3,024,194 shares of our common stock at an exercise
price of $2.48 per share. The Company is correcting
the classification of the Preferred Stock from a component of equity to the
mezzanine section of the balance sheet.
The restatement does not change the Company’s previously reported revenues, operating
income or cash and cash equivalents shown in its consolidated financial statements for the quarter
ended June 30, 2010.
This Form 10-Q/A amends the following items in the Company’s Original Filing to reflect the
change in accounting treatment:
Part I, Item 1. Financial Statements
Part I, Item 4. Controls and Procedures
Part II, Item 6. Exhibits
Other than as described above, none of the other disclosures in the Original Filing have been
amended or updated. Among other things, forward-looking statements made in the Original Filing have
not been revised to reflect events that occurred or facts that became known to the Company after
the filing of the Original Filing, and such forward-looking statements should be read in their
historical context. Accordingly, this Annual Report on Form 10-Q/A should be read in conjunction
with the Company’s filings with the Securities and Exchange Commission subsequent to the Original
Filing.
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.
LIABILITIES,
SERIES D PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable
$
5,949
$
4,784
Accrued expenses
4,823
3,918
Current portion of lines of credit
6,110
4,321
Total current liabilities
16,882
13,023
Long-term interest payable to related party
—
3,409
Deferred tax liabilities
1,080
1,339
Line of credit with related party, net of unamortized discount of $0 and $68, respectively
—
11,932
Total liabilities
17,962
29,703
Commitments and contingencies
Series D preferred stock — $0.01 par value, 2,000,000 shares authorized;
1,209,677 and 1,209,677 shares issued and outstanding (liquidation value of
$31,813 and $30,613) at June 30, 2010 and December 31, 2009, respectively
26,128
26,128
Shareholders’ equity
Series A Preferred stock — $0.01 par value, 4,000,000 shares authorized;
987,484 and 1,025,934 shares issued and outstanding (liquidation value of
$2,592 and $2,564) at June 30, 2010 and December 31, 2009,
respectively
10
10
Series C Preferred Stock — $0.01 par value, 500,000 shares authorized;
No shares issued or outstanding
—
—
Common Stock — $0.01 par value, 500,000,000 shares authorized;
255,279,878 and 253,762,552 shares issued and outstanding at
June 30, 2010 and December 31, 2009, respectively
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. 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 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 accounting principles
generally accepted in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring adjustments) considered necessary
to present fairly the Company’s results of operations, financial position and cash flows have been
made. The results of operations and cash flows for the three and six months ended June 30, 2010,
are not necessarily indicative of the results of operations and cash flows that may be reported for
the remainder of 2010 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/A for the year ended
December 31, 2009.
Principles of consolidation. The accompanying unaudited condensed consolidated financial
statements include the accounts of OPKO Health, Inc. and our wholly-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in consolidation.
Use of estimates. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 for the three and six months ended June 30, 2010
includes net loss for the three and six months and the cumulative
translation adjustment, net, of $1.1 million and
$1.4 million, respectively, for
the translation results of our subsidiaries in Chile and Mexico. Comprehensive loss for the three
and six months ended June 30, 2009 is comprised entirely of our net loss.
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 instrumentation
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.
Derivative financial instruments. We record derivative financial instruments on our balance
sheet at their fair value and the changes in the fair value are recognized in income when they
occur, the only exception being derivatives that qualify as hedges. To qualify the derivative
instrument as a hedge, we are required to meet strict hedge effectiveness and contemporaneous
documentation requirements at the initiation of the hedge and assess the hedge effectiveness on an
ongoing basis over the life of the hedge. At June 30, 2010 and December 31, 2009, our forward
contracts for inventory purchases did not meet the documentation requirements to be designated as
hedges. Accordingly, we recognize all changes in fair values in income. Refer to Note 7.
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.
Allowance for doubtful accounts. We analyze accounts receivable and historical bad debt
levels, customer credit worthiness and current economic trends when evaluating the adequacy of the
allowance for doubtful accounts using the specific identification method. Our reported net loss is
directly affected by our estimate of the collectability of accounts receivable. Estimated
allowances for sales returns are based upon our history of product returns. The
amount of
allowance for doubtful accounts at June 30, 2010 and December 31, 2009, was $0.6 million and
$0.4 million, respectively.
Segment reporting. Our chief operating decision-maker (“CODM”) is comprised of our executive
management with the oversight of our board of directors. Our CODM review our operating results and
operating plans and make resource allocation decisions on a company-wide or aggregate basis. We
currently manage our operations in two reportable segments, pharmaceutical and instrumentation
segments. The pharmaceutical segment consists of two operating segments, our (i) pharmaceutical
research and development segment which is focused on the research and development of pharmaceutical
products, diagnostic tests and vaccines, and (ii) the pharmaceutical operations we acquired in
Chile and Mexico through the acquisition of Pharma Genexx S.A. (“Pharma Genexx”) and Pharmacos
Exakta S.A. de C.V. (“Pharmacos Exakta”). The instrumentation segment consists of ophthalmic
instrumentation products and the activities related to the research, development, manufacture and
commercialization of those products. There are no inter-segment sales. We evaluate the
performance of each segment based on operating profit or loss. There is no inter-segment
allocation of interest expense and income taxes.
Equity-based compensation. We measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award. That cost is
recognized in the statement of operations over the period during which an employee is required to
provide service in exchange for the award. We record excess tax benefits, realized from the
exercise of stock options as a financing cash inflow rather than as a reduction of taxes paid in
cash flow from operations. Equity-based compensation arrangements to non-employees are recorded at
their fair value on the measurement date. The measurement of equity-based compensation is subject
to periodic adjustment as the underlying equity instruments vest. During the three months ended
June 30, 2010 and 2009, we recorded $1.5 million and $1.1 million, respectively, of equity-based
compensation expense. For the six month period ending June 30, 2010 and 2009, we recorded $2.7
million, and $1.8 million, respectively, of equity-based compensation expense.
Recent accounting pronouncements. In March 2010, the Financial Accounting Standards Board, or
FASB, issued updated guidance to amend and clarify how entities should evaluate credit derivatives
embedded in beneficial interests in securitized financial assets. The updated guidance eliminates
the scope exception for bifurcation of embedded credit derivatives in interests in securitized
financial assets, unless they are created solely by subordination of one financial instrument to
another. The update allows entities to elect the fair value option for any beneficial interest in
securitized financial assets upon adoption. This guidance is effective by the first day of the
first fiscal quarter beginning after June 15, 2010. Early adoption is permitted. We have not
adopted this guidance early and are currently evaluating the potential effect of the adoption of
this amendment on our results of operation and financial condition.
In March 2010, the FASB reached a consensus to issue an amendment to the accounting for
revenue arrangements under which a vendor satisfies its performance obligations to a customer over
a period of time, when the deliverable or unit of accounting is not within the scope of other
authoritative literature and when the arrangement consideration is contingent upon the achievement
of a milestone. The amendment defines a milestone and clarifies whether an entity may recognize
consideration earned from the achievement of a milestone in the period in which the milestone is
achieved. This amendment is effective for fiscal years beginning on or after June 15, 2010, with
early adoption permitted. The amendment may be applied retrospectively to all arrangements or
prospectively for milestones achieved after the effective date. We have not adopted this guidance
early and adoption of this amendment is not expected to have a material impact on our results of
operation or financial condition.
In January 2010, the FASB issued an amendment to the accounting for fair value measurements
and disclosures. This amendment details additional disclosures on fair value measurements,
requires a gross presentation of activities within a Level 3 rollforward and adds a new requirement
to the disclosure of transfers in and out of Level 1 and Level 2 measurements. The new disclosures
are required of all entities that are required to provide disclosures about recurring and
nonrecurring fair value measurements. This amendment was effective as of January 1, 2010, with an
exception for the gross presentation of Level 3 rollforward information, which is required for
annual reporting periods beginning after December 15, 2010, and for interim reporting periods
within those years. The adoption of the remaining provisions of this amendment is not expected to
have a material impact on our financial statement disclosures.
In October 2009, the FASB issued an amendment to the accounting for multiple-deliverable
revenue arrangements. This amendment provides guidance on determining whether multiple
deliverables exist, how the arrangements should be separated and how the consideration paid should
be allocated. As a result of this
amendment, entities may be able to separate multiple-deliverable
arrangements in more circumstances than under existing accounting guidance. This guidance amends
the requirement to establish the fair value of undelivered products and services based on objective
evidence and instead provides for separate revenue recognition based upon management’s best
estimate of the selling price for an undelivered item when there is no other means to determine the
fair value of that undelivered item. The existing guidance previously required that the fair value
of the undelivered item reflect the price of the item either sold in a separate transaction between
unrelated third parties or the price charged for each item when the item is sold separately by the
vendor. If the fair value of all of the elements in the arrangement was not determinable, then
revenue was deferred until all of the items were delivered or fair value was determined. This
amendment will be effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption and retrospective
application is also permitted. We have not adopted this guidance early and are currently
evaluating the potential effect of the adoption of this amendment on our results of operations and
financial condition.
NOTE 3 LOSS PER SHARE
Basic loss per share is computed by dividing our net loss by the weighted average number of
shares outstanding during the period. Diluted earnings per 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 20,164,446 and 15,692,101 potential common shares have been excluded from the
calculation of net loss per share for the three months ended June 30, 2010 and 2009, respectively,
because their inclusion would be anti-dilutive. A total of 19,617,796 and 15,238,119 potential
common shares have been excluded from the calculation of net loss per share for the six months
ended June 30, 2010 and 2009, respectively, because their inclusion would be anti-dilutive. As of
June 30, 2010, the holders of our Series A Preferred Stock and Series D Preferred Stock could
convert their Preferred Shares into approximately 1,036,858 and 12,827,952 shares of our Common
Stock, respectively.
NOTE 4 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
June 30,
December 31,
(in thousands)
2010
2009
Accounts receivable, net:
Accounts receivable
$
12,557
$
9,118
Less allowance for doubtful accounts
(641
)
(351
)
$
11,916
$
8,767
Inventories, net:
Raw materials (components)
$
3,897
$
3,764
Work-in process
1,003
1,365
Finished products
7,129
5,632
Less provision for inventory reserve
(210
)
(241
)
$
11,819
$
10,520
Intangible assets, net:
Customer relationships
$
6,993
$
7,259
Technology
4,597
4,597
Product registrations
3,612
3,829
Tradename
617
578
Covenants not to compete
363
317
Other
7
7
Less amortization
(5,558
)
(3,865
)
$
10,631
$
12,722
The change in value of the intangible assets reflects the foreign currency fluctuation between the
Chilean peso and the US dollar at June 30, 2010 and December 31, 2009.
On February 17, 2010, we acquired Pharmacos Exakta, a privately-owned Mexican company, engaged
in the manufacture, marketing and distribution of ophthalmic and other pharmaceutical products for
government and private markets since 1957. Pursuant to a purchase agreement we acquired all of the
outstanding stock of Pharmacos Exakta and real property owned by an affiliate of Pharmacos Exakta
for a total aggregate purchase price of $3.6 million, of which an aggregate of $1.6 million was
paid in cash and $2.0 million was paid in shares of our Common Stock, par value $.01. The number
of shares to be issued was determined by the average closing price of the Company’s Common Stock as
reported on the NYSE Amex for the ten trading days ending on February 12, 2010. A total of
1,372,428 shares of OPKO Common Stock were issued in the transaction which were valued at $2.0
million due to trading restrictions. A portion of the proceeds will remain in escrow for a period
of time for working capital adjustments and to satisfy indemnification claims.
On October 1, 2009, we entered into a definitive agreement to acquire 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 in Chile. 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 $16 million
in cash. The transaction closed on October 7, 2009.
Effective September 21, 2009, we entered into an agreement pursuant to which we invested $2.5
million in cash in Cocrystal Discovery, Inc., a privately held biopharmaceutical company
(“Cocrystal”) in exchange for 1,701,723 shares of Cocrystal’s Convertible Series A Preferred Stock.
As of June 30, 2010, we own approximately 16% of Cocrystal’s outstanding stock.
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 variable interest entity (“VIE”). In order to determine the primary beneficiary of
the variable interest entity (“VIE”), we evaluated the related party group to identify who had the
most significant power to control Cocrystal. Members of The Frost Group, LLC (the “Frost Group”)
own approximately 4,422,967 shares, representing 42% of Cocrystal’s voting stock on an as converted
basis, including 4,152,386 held by the Frost Gamma Investments Trust (the “Gamma Trust”). The
Frost Group members include a trust controlled by Dr. Frost, who is our Chief Executive Officer and
Chairman of the Board of Directors, Dr. Jane H. Hsiao, who is the Vice Chairman of the Board of
Directors and Chief Technical Officer, Steven D. Rubin who is Executive Vice President -
Administration and a director of the Company and Rao Uppaluri who is our Chief Financial Officer.
Dr. Frost, Mr. Rubin, and Dr. Hsiao currently serve on the Board of Directors of Cocrystal and
represent 50% of its board. 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.
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. We own approximately
53,113,732 shares of Sorrento common stock, or approximately 24% of Sorrento’s total outstanding
common stock at June 30, 2010. The closing stock price for Sorrento’s common stock, a thinly
traded stock, as quoted on the over-the-counter markets was $1.75 per share on June 30, 2010.
NOTE 6 FAIR VALUE MEASUREMENTS
We record fair value at 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 June 30, 2010, we held money market funds that qualify as cash equivalents and forward
contracts for inventory purchases that are required to be measured at fair value on a recurring
basis. Refer to Note 7. As of June 30, 2010, we held money market funds that qualify as cash
equivalents as well as marketable securities which were comprised of treasury securities, maturing
August 12, 2010, that are required to be measured at fair value on a recurring basis. The $10
million of treasury securities are recorded at amortized cost, which reflects their approximate
fair value. Our other assets and liabilities carrying value approximate their fair value due to
their short-term nature.
Upon the termination of an employee of Ophthalmics Technologies, Inc., or OTI, we became
obligated at the former employee’s 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 February
2009, this employee exercised his put option and we repurchased 27,154 shares of our Common Stock
at $3.55 per share for a total of $0.1 million. In addition, an existing employee of OTI has the
same provision within his employment arrangement with a potential obligation of approximately
$0.3 million. We have recorded approximately $0.1 million and $0.2 million in accrued expenses as
of June 30, 2010 and December 31, 2009, respectively, based on the estimated fair value of the
unexercised put option.
The OTI put options were valued at fair value utilizing the Black-Scholes-Merton valuation
method. During the three months ended June 30, 2010 and 2009, we recorded a reversal of expense of
$24 thousand and $0.1 million, respectively, reflecting our stock price fluctuations. During the
six months ended June 30, 2010 and 2009, we recorded a reversal of expense of $40 thousand and $0.1
million, respectively, reflecting our stock price fluctuations.
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.
Our financial assets and liabilities measured at fair value on a recurring basis are as
follows:
We enter into foreign currency forward exchange contracts to cover the risk of exposure to
exchange rate differences arising from inventory purchases on letters of credit. Under these
forward contracts, for any rate above or below the fixed rate, we receive or pay the difference
between the spot rate and the fixed rate for the given amount at the settlement date.
We record derivative financial instruments on our balance sheet at their fair value as an
accrued expense and the changes in the fair value are recognized in income in other expense net
when they occur, the only exception being derivatives that qualify as hedges. To qualify the
derivative instrument as a hedge, we are required to meet strict hedge effectiveness and
contemporaneous documentation requirements at the initiation of the hedge and assess the hedge
effectiveness on an ongoing basis over the life of the hedge. At June 30, 2010, the forward
contracts did not meet the documentation requirements to be designated as hedges. Accordingly, we
recognize all changes in fair values in income.
On July 20, 2010, we entered into a use agreement for approximately 1,100 square feet of space
in Jupiter, Florida to house our molecular diagnostics operations from The Scripps Research
Institute (“Scripps”). Dr. Frost is a member of the Board of Trustees of Scripps and Dr. Richard
Lerner, a member of our Board of Directors, is also the President of Scripps. Pursuant to the
terms of the use agreement, which is effective as of November 1, 2009, gross rent is approximately
$40 thousand per year for a two-year term which may be extended, upon mutual agreement, for one
additional year.
On June 1, 2010, the Company entered into a cooperative research and development agreement
with Academia Sinica in Taipei, Taiwan, for pre-clinical work for a compound against various forms
of cancer. 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. In connection with the
agreement, we are required to pay Academia Sinica approximately $0.2 million over the term of the
agreement.
Effective March 5, 2010, the Frost Group assigned two license agreements with Academia Sinica
to the Company’s subsidiary, OPKO Taiwan, Inc. The license agreements pertain to alpha-galactosyl
ceramide analogs and their use as immunotherapies and peptide ligands in the diagnosis and
treatment of cancer. In connection with the assignment of the two licenses, the Company agreed to
reimburse the Frost Group for the licensing fees previously paid by the Frost Group to Academia
Sinica in the amounts of $50 thousand and $75 thousand, respectively, as well as reimbursement of
certain expenses.
Effective September 21, 2009, we entered into an agreement pursuant to which the we invested
$2.5 million in Cocrystal in exchange for 1,701,723 shares of Cocrystal’s Convertible Series A
Preferred Stock. A group of Investors, led by the Frost Group (the “Cocrystal 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
Cocrystal Investors agreements dated June 9, 2009, OPKO, rather than the Cocrystal Investors, made
the first installment investment ($2.5 million) on September 21, 2009. Refer to Note 5.
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 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,
gross rent is $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 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.
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.
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 Company’s principal executive offices are located. We
had previously been leasing this space from Frost Real Estate Holdings on a month-to-month basis
while the parties were negotiating the lease. The lease provides for payments of approximately $18
thousand per month in the first year increasing annually to $24 thousand per month in the fifth
year, plus applicable sales tax. The rent is inclusive of operating expenses, property taxes and
parking. The rent for the first year was reduced to reflect a $30 thousand credit for the costs of
tenant improvements. From January 1, 2008 through October 1, 2008, we leased an additional 1,100
square feet of general office and laboratory space on a ground floor annex of our corporate office
building pursuant to an addendum to the Lease, which required us to pay annual rent of $19 thousand
per year for the annex space.
On September 19, 2007, we entered into an exclusive technology license agreement with Winston
Laboratories, Inc. (“Winston”) pursuant to which we acquired an exclusive license to the
proprietary rights of certain products in exchange for the payment of an initial licensing fee,
royalties, and payments on the occurrence of certain milestones.
On February 23, 2010, we provided Winston notice of termination of the license agreement, and
the agreement terminated on May 24, 2010. Previously, members of the Frost Group, LLC, or the
Frost Group, beneficially owned approximately 30% of Winston Pharmaceuticals, Inc., and Dr.
Uppaluri, our Chief Financial Officer, served as a member of Winston’s board. Effective May 19,2010, the members of the Frost Group sold 100% of Winston’s capital stock beneficially owned by
them (consisting of an aggregate of 18,399,271 outstanding shares of common stock and warrants to
purchase an aggregate of 8,958,975 shares of common stock) to an entity whose members include Dr.
Joel E. Bernstein, the President and Chief Executive Officer of Winston. As consideration for the
sale, the Frost Group members received an aggregate of $789,500 in cash and non-recourse promissory
notes in the aggregate principal amount of $10,263,500 (the “Promissory Notes”). Dr. Uppaluri
resigned from the Winston board effective May 19, 2010.
We have a $12.0 million line of credit with the Frost Group, a related party. On June 2, 2010
we repaid all amounts outstanding on the line of credit including $12 million in principal and $4.1
million in interest. We have the ability to redraw funds under the line of credit until its
expiration in January 2011. We are obligated to pay interest upon maturity, capitalized 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 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. For the three and six months
ended June 30, 2010, we reimbursed Dr. Frost approximately $7 thousand and $25 thousand,
respectively, for Company-related travel by Dr. Frost and other OPKO executives. For the three and
six months ended June 30, 2009, we reimbursed Dr. Frost approximately $13 thousand and $46
thousand, respectively, for Company-related travel by Dr. Frost and other OPKO executives.
NOTE 9 COMMITMENTS AND CONTINGENCIES
On January 7, 2010, we received a letter from counsel to Nidek Co., Ltd. (“Nidek”) alleging
that Ophthalmic Technologies, Inc. (“OTI”) or OPKO breached its service obligations to Nidek under
the Service Agreement between OTI, Nidek and Newport Corporation, dated December 29, 2006, and the
Service Agreement by and between Nidek and OTI, dated the same date. We have had discussions with
Nidek regarding the matter, but it is too early to assess the likelihood of litigation in this
matter or the probability of a favorable or unfavorable outcome. We do not believe this matter
will have a material impact on our results of operations or financial condition. We are also
assessing possible claims of indemnification against a supplier in connection with the matter.
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™
is not at or above a specified price, we will be obligated to issue an additional 413,850 shares of
our common stock.
We have a potential obligation of approximately $0.3 million related to a put option held by
an employee. Refer to Note 6.
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.
We are a party to other litigation in the ordinary course of business. We do not believe that
any such other litigation will have a material adverse effect on our business, financial condition
or results of operations.
NOTE 10 SEGMENTS
We currently manage our operations in two reportable segments, pharmaceutical and
instrumentation segments. The pharmaceutical segment consists of two operating segments, our (i)
pharmaceutical research and development segment which is focused on the research and development of
pharmaceutical products, diagnostic tests and vaccines, and (ii) the pharmaceutical operations we
acquired in Chile and Mexico through the acquisition of Pharma Genexx and Pharmacos Exakta. The
instrumentation segment consists of ophthalmic instrumentation products and the activities related
to the research, development, manufacture and commercialization of those products. There are no
inter-segment sales. We evaluate the performance of each segment based on operating profit or
loss. There is no inter-segment allocation of interest expense and income taxes.
Information regarding our operations and assets for the two segments and the unallocated
corporate operations as well as geographic information are as follows:
For the three months ended
For the six months ended
June 30,
June 30,
(in thousands)
2010
2009
2010
2009
Revenue
Pharmaceutical
$
5,273
$
—
$
10,585
$
—
Instrumentation
2,182
2,347
4,792
4,648
$
7,455
$
2,347
$
15,377
$
4,648
Operating loss
Pharmaceutical
$
(1,415
)
$
(1,578
)
$
(2,059
)
$
(6,648
)
Instrumentation
(998
)
(1,310
)
(1,934
)
(1,989
)
Corporate
(3,114
)
(2,359
)
(5,600
)
(5,192
)
$
(5,527
)
$
(5,247
)
$
(9,593
)
$
(13,829
)
Depreciation and amortization
Pharmaceutical
$
529
$
8
$
1,043
$
13
Instrumentation
444
445
888
891
Corporate
20
16
33
31
$
993
$
469
$
1,964
$
935
Revenue
United States
$
172
$
22
$
369
$
241
Chile
4,257
—
9,194
—
Mexico
1,138
—
1,391
—
All others
1,888
2,325
4,423
4,407
$
7,455
$
2,347
$
15,377
$
4,648
As of
June 30,
December
2010
31, 2009
Assets
Pharmaceutical
$
33,581
$
28,813
Instrumentation
11,113
12,262
Corporate
23,321
46,355
$
68,015
$
87,430
During the three months ended June 30, 2010, our two largest customers represented
approximately 15% and 13% of our total revenue, respectively. During the three months ended June30, 2009, our four largest customers represented approximately 19%, 16%, 15%, and 13%,
respectively, of our revenue. During the six months ended June 30, 2010, our two largest customers
represented approximately 15% and 13% of our total revenue, respectively. During the six months
ended June 30, 2009, our three largest customers represented approximately 19%, 16%, and 15%,
respectively, of our revenue. As of June 30, 2010, two customers represented approximately 28% and
16% of our accounts receivable balance, respectively. As of December 31, 2009, two customers
represented 32% and 19%, respectively, of our accounts receivable balance.
NOTE 11 SUBSEQUENT EVENTS
We have reviewed all subsequent events and transactions that occurred after the date of our
June 30, 2010 consolidated balance sheet date, through the time of filing this Quarterly Report on
Form 10-Q on August 9, 2010.
NOTE 12 RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated its previously issued consolidated financial statements as of and for
the year ended December 31, 2009, and as of March 31, 2010 to reflect the Company’s determination that it did not
properly account for the September 28, 2009 Series D Convertible Preferred Stock (the “Preferred
Stock”) offering. In connection with the issuance of 1,209,667 shares of Preferred Stock, we issued
warrants to purchase up to an aggregate of 3,024,194 shares of our common stock at an exercise
price of $2.48 per share. The Company is correcting
the classification of the Preferred Stock from a component of equity to the
mezzanine section of the balance sheet.
The Company’s management, under the supervision and with the participation of the Company’s
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the
effectiveness of the Company’s disclosure controls and procedures as defined in Securities and
Exchange Commission (“SEC”) Rule 13a-15(e) as of June 30, 2010. Based on that evaluation,
management has concluded that the Company’s disclosure controls and procedures are ineffective to
ensure that information the Company is required to disclose in reports that it files or submits
under the Securities Exchange Act is accumulated and communicated to management, including the CEO
and CFO, as appropriate, to allow timely decisions regarding required disclosure and is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes to the Company’s Internal Control Over Financial Reporting
During the preparation of our financial statements for the quarter ended September 30, 2010,
we determined that a deficiency in controls relating to the accounting for a beneficial conversion
feature on, and the classification of, convertible preferred stock existed as of the previous
assessment date and have further concluded that such a deficiency represented a material weakness as
of June 30, 2010. As a result, we concluded that the Company’s internal controls over financial
reporting were not effective as of June 30, 2010. The Company has implemented additional controls and procedures over financial reporting including adding additional review procedures on its complex accounting issues.
In addition, in connection with our acquisitions
of Pharmacos Exakta and Pharma Genexx, we began implementing a new accounting system, as well as
standards and procedures, upgrading and establishing controls over accounting systems and adding
employees who are trained and experienced in the preparation of financial statements in accordance
with U.S. GAAP to ensure that we have in place appropriate internal control over financial
reporting at Pharma Genexx and Pharmacos Exakta.
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.
Exhibit 2.2(4)+
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.
Exhibit 2.3(5)
Purchase Agreement, dated February 17, 2010,
among Ignacio Levy García and José de Jesús Levy
García, Inmobiliaria Chapalita, S.A. de C.V.,
Pharmacos Exakta, S.A. de C.V., OPKO Health, Inc.,
OPKO Health Mexicana S. de R.L. de C.V., and OPKO
Manufacturing Facilities S. de R.L. de C.V.
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 June 30, 2010.
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 June 30, 2010.
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 June 30, 2010.
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 June 30, 2010.
Filed with the Company’s Quarterly Report on Form 10-Q
filed with the Securities and Exchange Commission on
August 8, 2008 for the Company’s three-month period
ended June 30, 2008, and incorporated herein by
reference.
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.
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 June 30, 2010.
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 June 30, 2010.
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 June 30, 2010.
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 June 30, 2010.
21
Dates Referenced Herein and Documents Incorporated by Reference