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| OPK > SEC Filings for OPK > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
Selling, general and administrative expense. Selling, general and administrative
expense for the three months ended September 30, 2008 was $3.7 million compared
to $2.7 million of expense for the comparable period of 2007. Selling, general
and administrative expense for the three months ended September 30, 2008
primarily related to personnel costs, including stock-based compensation of
$0.9 million and professional fees. The 2007 period primarily reflects personnel
costs including approximately $0.8 million of expense related to stock-based
compensation and professional fees. As we prepare to sell OTI's OCT/SLO product
in the U.S. following clearance of the pre-market notification 510(k) and
re-inspection of OTI's Toronto facility by the FDA, we anticipate sales and
marketing expenses will increase during the fourth quarter of 2008 and
thereafter.
Research and development expense. Research and development expense during the
three months ended September 30, 2008 was $4.9 million compared to a net
reversal of expense of $4.5 million for the comparable period of 2007. The
expense during the three months ended September 30, 2008 primarily reflects the
cost of our ongoing Phase III clinical trial for bevasiranib, including costs of
clinical trial site and monitoring expenses, clinical supplies, personnel costs
and outside professional fees. Also included in personnel costs for the 2008
three-month period was $0.7 million of stock-based compensation expense. The
reversal of research and development expense for the 2007 three-month period
relates to the reversal of stock based compensation expense of $8.1 million as a
result of the termination of a consulting agreement. Under SFAS 123R, when a
stock based compensation award is forfeited prior to vesting, all compensation
expense recorded in previous periods is reversed in the period of forfeiture.
Partially offsetting this reversal of stock based compensation expense are costs
related to the initiation of our Phase III clinical trial, primarily personnel
costs and start-up fees for our clinical sites.
Other operating expenses. Other operating expenses of $0.4 million for the three
months ended September 30, 2008 reflects amortization of intangible assets
acquired from OTI on November 28, 2007. We did not record any amortization
expense during the quarter ended September 30, 2007.
Other income and expenses. Other expense was $0.4 million reflecting interest on
our outstanding line of credit for the three months ended September 30, 2008,
compared to $0.2 million of other expense for the 2007 period, net of
$0.1 million of other income. Other income primarily consists of interest earned
on our cash and cash equivalents and interest expense reflects the interest
incurred on our borrowings.
Income taxes. The income tax benefit for the three months ended September 30,
2008 reflects our estimated 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. We did not have similar refundable
credits during the three months ended September 30, 2007.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
The nine month period ended September 30, 2008 includes our operations, as well
as the operations of OTI, which we acquired on November 28, 2007. The nine
months ended September 30, 2007 include our results for the full period and the
results of operations from Acuity Pharmaceuticals, Inc., or Acuity, subsequent
to our acquisition on March 27, 2007.
Revenue. Revenue for the nine months ended September 30, 2008 was $7.8 million.
All revenue was generated from sales of OTI's ophthalmic instrumentation
products. We shipped a limited number of products to international markets
during the second quarter of 2008, as we shut down production to correct issues
cited by the FDA in its March 25, 2008 warning letter to OTI. We resumed
production and shipments of our products to international customers during the
third quarter of 2008. Until the acquisition of OTI, we did not generate any
revenue. During 2008, the majority of our revenue has been from international
sales. There were no OCT/SLO product sales in the U.S. during the first nine
months of 2008. Commencement of sales for this product in the U.S. will not
occur until we have received clearance of the premarket notification 510(k) for
the device and the FDA has completed a satisfactory re-inspection of OTS's
Toronto manufacturing facility We anticipate revenue will increase as we move
production of components for the OCT/SLO in-house and begin selling the OCT/SLO
product in the U.S..
Gross margin. Gross margin for the nine months ended September 30, 2008 was
$0.4 million and was entirely related to our ophthalmic instrumentation product
sales. The gross margin was negatively impacted by manufacturing costs
associated with the introduction of our new OCT/SLO model internationally while
we changed suppliers and moved production of our OCT/SLO in-house. During the
nine month period ended September 30, 2008, we incurred approximately
$0.9 million to bring manufacturing of our OCT/SLO product in-house, including
costs associated with production development and excess capacity costs. We
anticipate that our margin will improve as we begin manufacturing more
components in-house and as we begin selling the OCT/SLO product in the U.S.
Selling, general and administrative expense. Selling, general and administrative
expense for the nine months ended September 30, 2008 was $12.3 million compared
to $8.2 million of expense for the comparable period of 2007. Selling, general
and administrative expense for the nine months ended September 30, 2008
primarily related to personnel costs, including stock-based compensation of $3.8
million and professional fees. In addition, as a result of our acquisition of
OTI on November 28, 2007, our selling expenses reflect a full nine months of
post acquisition activity for OTI. As we prepare to sell OTI's OCT/SLO product
in the U.S. following clearance of the pre-market notification 510(k) and
re-inspection of OTI's Toronto facility by the FDA, we anticipate these expenses
will increase in the later part of 2008 and thereafter. We acquired Acuity on
March 27, 2007 and we had limited operations prior to that, resulting in limited
operating expenses during a portion of the 2007 period. The 2007 period includes
approximately $3.4 million of expense related to stock-based compensation and
professional fees.
Research and development expense. Research and development expense during the
nine months ended September 30, 2008 was $14.7 million compared to $7.0 million
for the comparable period of 2007. The 2008 period expense primarily reflects
the cost of our ongoing Phase III clinical trial for bevasiranib, including
costs of clinical trial sites and monitoring expenses, clinical supplies,
personnel costs and outside professional fees. Also included in personnel costs
for the nine month period of 2008 was $1.9 million in stock based compensation
expense. Research and development expense for the nine month period of 2007
primarily relates to personnel costs, including stock based compensation expense
of $2.3 million and costs related to the initiation of our Phase III clinical
trial. The three months ended September 30, 2007 included a reversal of stock
based compensation expense of $8.1 million as a result of the termination of a
consulting agreement which had been expensed in prior quarters. Under SFAS 123R,
when a stock based compensation award is forfeited prior to vesting, all
compensation expense recorded in previous periods is reversed in the period of
forfeiture.
Write-off of acquired in-process research and development. On May 6, 2008, we
acquired Vidus 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. On
March 27, 2007, we acquired Acuity 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
$243.8 million.
Other operating expenses. Other operating expenses of $1.3 million reflect
amortization of our intangible assets acquired from OTI on November 28, 2007. We
did not record any amortization expense during the first nine months of 2007.
Other income and expenses. Other expense was $0.9 million, net of $0.3 million
of interest income for the first nine months of 2008 compared to $0.4 million of
interest expense, net of $0.2 million for the 2007 period. Other income
primarily consists of interest earned on our cash and cash equivalents and
interest expense reflects the interest incurred on our borrowings.
Income taxes. The income tax benefit for the first nine months of 2008 reflects
our estimated 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. We acquired OTI on November 28, 2007 and as a result, did not
have similar refundable credits during the first nine months of 2007.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2008, we had cash and cash equivalents of approximately
$14.6 million as compared to $23.4 million at December 31, 2007. We used
approximately $21.4 million of cash in operations during the nine months ended
September 30, 2008. Cash was primarily used in our on-going Phase III clinical
trial for bevasiranib and personnel costs supporting that trial and selling,
general and administrative activities. Since our inception, we have not
generated positive cash flow from operations and our primary source of cash has
been from the private placement of stock and through credit facilities available
to us.
On January 11, 2008, we repaid in full all outstanding amounts and terminated
all of our commitments under the term loan with Horizon Financial Funding
Company, LLC, or Horizon. The loan had an interest rate of 12.23%, and the
principal was payable in 12 equal monthly installments which commenced
August 2007. The total amount repaid in satisfaction of our obligations under
the term loan was $2.4 million.
We currently have a fully utilized $12.0 million line of credit with The Frost
Group, LLC, or the Frost Group, a related party. The Frost Group members include
a trust controlled by Dr. Phillip Frost, who is the Company's 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 the Chief Financial Officer of the Company. We
are obligated to pay interest upon maturity, capitalized quarterly, on
outstanding borrowings under the line of credit at a 10% annual rate, which is
due July 11, 2009. The line of credit is collateralized by all of our personal
property except our intellectual property. Effective November 6, 2008, the
maturity date on the line of credit was extended for a period of eighteen months
from July 11, 2009 until January 11, 2011, and the annual interest rate was
increased to 11% from the amendment date forward. Refer to Note 12 of our
Condensed Consolidated Financial Statements
On September 10, 2008, in exchange for a $15 million cash investment in the
Company, we issued 13,513,514 shares of our common stock, par value $.01, to a
group of investors which included members of the Frost Group. The shares were
issued at a price of $1.11 per share, representing an approximately 40% discount
to the average trading price of our stock on the American Stock Exchange. The
shares issued in the private placement are restricted securities, subject to a
two year lockup, and no registration rights have been granted. Refer to Note 10
of our Condensed Consolidated Financial Statements.
We have not generated positive cash flow from operations, and 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 do not have the cash and cash equivalents on hand at September 30, 2008
sufficient to meet our anticipated cash requirements for operations and debt
service for the next 12 months and we will require additional funding during the
first half of 2009. If we accelerate our product development programs or
initiate additional clinical trials, we will need additional funds earlier. Our
future cash requirements will depend on a number of factors, including 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, 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, and take other actions designed to
reduce our cost of operations, all of which may not significantly extend the
period of time that we will be able to continue operations without raising
additional funding.
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, the issuance of debt or equity securities, debt
financing and revenues from future product sales, if any. To the extent we raise
additional capital by issuing equity securities or obtaining borrowings
convertible into equity, ownership dilution to existing stockholders will result
and future investors may be granted rights superior to those of existing
stockholders. Our ability to obtain additional capital may depend on prevailing
economic conditions and financial, business and other factors beyond our
control. The current disruptions in the U.S. and global financial markets may
adversely impact the availability and cost of credit, as well as our ability to
raise money in the capital markets. Current economic conditions have been, and
continue to be volatile and, in recent months, the volatility has reached
unprecedented levels. Continued instability in these market conditions may limit
our ability to replace, in a timely manner, maturing liabilities and access the
capital necessary to fund and grow our business. There can be no assurance that
additional capital will be available to us on acceptable terms, or at all.
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.
Stock-Based Compensation. As of June 23, 2006 (the date of inception), we
adopted Statement of Financial Accounting Standards, or SFAS No. 123(R).
Share-Based Payments SFAS No. 123(R) replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB No. 25. SFAS No. 123(R) requires
that all stock-based compensation be recognized as an expense in the financial
statements and that such cost be measured at the fair value of the award.
Equity-based compensation arrangements to non-employees are accounted for in
accordance with SFAS No. 123(R) and Emerging Issues Task Force Issue No. 96-18
(EITF 96-18), "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services,"
which requires that these equity instruments are recorded at their fair value on
the measurement date. As prescribed under SFAS 123(R), 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 as
required by SFAS 123(R). 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 under the provisions of SFAS No. 141,
Business Combinations (SFAS No. 141). 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 and OTI 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
under SFAS No. 141, 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 management's 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, 2008 and December 31, 2007 was
$0.3 million and $0.5 million, respectively.
Recent accounting pronouncements. In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities,
or SFAS 159, which gives companies the option to measure eligible financial
assets, financial liabilities, and firm commitments at fair value (i.e., the
fair value option), on an instrument-by-instrument basis, that are otherwise not
permitted to be accounted for at fair value under other accounting standards.
The election to use the fair value option is available when an entity first
recognizes a financial asset or financial liability or upon entering into a firm
commitment. Subsequent changes in fair value must be recorded in earnings. SFAS
159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. We adopted SFAS 159 in the first quarter of 2008 and
the adoption did not have any impact on our financial position or results of
operations as we elected not to apply fair value on an instrument-by-instrument
basis.
In June 2007, the Emerging Issues Task Force (Task Force) of the FASB reached a
consensus on Issue No. 07-3 ("EITF 07-3"), Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities. Under EITF 07-3, nonrefundable advance payments for goods or
services that will be used or rendered for research and development activities
should be deferred and capitalized. Such payments should be recognized as an
expense as the goods are delivered or the related services are performed, not
when the advance payment is made. If a company does not expect the goods to be
delivered or services to be rendered, the capitalized advance payment should be
charged to expense. EITF 07-3 is effective for new contracts entered into in
fiscal years beginning after December 15, 2007, and interim periods within those
fiscal years. Earlier application is not permitted. We have adopted EITF 07-3 as
of January 1, 2008. The adoption of EITF 07-3 did not have a material effect on
our consolidated results of operations or financial condition.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS
141R will require, among other things, the expensing of direct transaction
costs, including deal costs and restructuring costs as incurred, acquired
in-process research and development assets to be capitalized, certain contingent
assets and liabilities to be recognized at fair value and earn-our arrangements,
including contingent consideration, may be required to be measured at fair value
until settled, with changes in fair value recognized each period into earnings.
In addition, material adjustments made to the initial acquisition purchase
accounting will be required to be recorded back to the acquisition date. This
will cause companies to revise previously reported results when reporting
comparative financial information in subsequent filings. SFAS No. 141R is
effective for the Company on a prospective basis for transactions occurring
beginning on January 1, 2009 and earlier adoption is not permitted. SFAS
No. 141R may have a material impact on the Company's consolidated financial
position, results of operations and cash flows if we enter into material
business combinations after January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51" ("SFAS No. 160").
SFAS No. 160 requires minority interests to be recharacterized as noncontrolling
. . .
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