SciClone Pharmaceuticals, Inc.
SCICLONE PHARMACEUTICALS INC (Form: 10-Q, Received: 11/08/2010 16:18:23)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 0-19825

 

 

SCICLONE PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-3116852

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

Identification no.)

950 Tower Lane, Suite 900, Foster City, California   94404
(Address of principal executive offices)   (Zip code)

(650) 358-3456

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     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   ¨     No   ¨

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of November 4, 2010, 47,803,849 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.

 

 

 


Table of Contents

 

SCICLONE PHARMACEUTICALS, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010

INDEX

 

          PAGE NO.  

PART I.

   FINANCIAL INFORMATION   

Item 1.

   Financial Statements (Unaudited)   
  

Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009

     3   
  

Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2010 and 2009

     4   
  

Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2010 and 2009

     5   
  

Notes to Condensed Consolidated Financial Statements

     6   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      15   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      21   

Item 4.

   Controls and Procedures      21   

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      22   

Item 1A.

   Risk Factors      22   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      35   

Item 3.

   Defaults Upon Senior Securities      35   

Item 4.

   Removed and Reserved      35   

Item 5.

   Other Information      35   

Item 6.

   Exhibits      35   

Signature

        36   

 

2


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

     September 30,
2010
    December 31,
2009
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 45,697      $ 29,687   

Short-term investments

     7,278        1,646   

Accounts receivable

     21,588        21,394   

Inventories

     7,376        10,149   

Prepaid expenses and other current assets

     1,773        1,518   

Restricted short-term investments

     —          71   
                

Total current assets

     83,712        64,465   

Property and equipment, net

     633        771   

Restricted investments

     390        415   

Other assets

     857        1,249   
                

Total assets

   $ 85,592      $ 66,900   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 1,503      $ 2,339   

Accrued liabilities

     5,685        6,048   

Deferred revenue

     —          141   
                

Total current liabilities

     7,188        8,528   

Long-term liabilities

     1,000        979   

Stockholders’ equity:

    

Preferred stock; $0.001 par value; 10,000,000 shares authorized; no shares outstanding

     —          —     

Common stock; $0.001 par value; 75,000,000 shares authorized; 47,803,849 and 47,217,944 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively

     48        47   

Additional paid-in capital

     224,918        222,229   

Accumulated other comprehensive income

     42        22   

Accumulated deficit

     (147,604     (164,905
                

Total stockholders’ equity

     77,404        57,393   
                

Total liabilities and stockholders’ equity

   $ 85,592      $ 66,900   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


Table of Contents

 

SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Product sales

   $ 22,840      $ 17,240      $ 61,496      $ 54,280   

Cost of product sales

     3,146        3,098        9,445        9,185   
                                

Gross margin

     19,694        14,142        52,051        45,095   
                                

Operating expenses:

        

Research and development

     2,618        4,101        7,700        12,498   

Sales and marketing

     5,445        4,625        15,996        13,523   

General and administrative

     3,820        3,137        10,403        9,076   
                                

Total operating expenses

     11,883        11,863        34,099        35,097   
                                

Income from operations

     7,811        2,279        17,952        9,998   

Interest and investment income

     31        23        79        128   

Interest and investment expense

     (19     (49     (57     (149

Other income (expense), net

     64        (27     (19     (4
                                

Income before income tax

     7,887        2,226        17,955        9,973   

Provision for income tax

     259        162        654        474   
                                

Net income

   $ 7,628      $ 2,064      $ 17,301      $ 9,499   
                                

Basic net income per share

   $ 0.16      $ 0.04      $ 0.36      $ 0.20   

Diluted net income per share

   $ 0.16      $ 0.04      $ 0.35      $ 0.20   

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


Table of Contents

 

SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Nine Months Ended
September 30,
 
     2010     2009  

Operating activities:

    

Net income

   $ 17,301      $ 9,499   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Non-cash expense related to stock-based compensation

     1,552        1,306   

Depreciation and amortization

     318        398   

Realized gain on trading securities

     (212     (97

Other non-cash expense

     236        96   

Changes in operating assets and liabilities:

    

Accounts receivable

     (194     (5,329

Inventories

     2,803        (2,464

Prepaid expenses and other assets

     (174     108   

Accounts payable (including $0 and $1,800 due to related party as of September 30, 2010 and 2009, respectively)

     (836     1,415   

Accrued liabilities

     (363     (2,364

Deferred revenue

     (141     21   

Long-term liabilities

     21        188   
                

Net cash provided by operating activities

     20,311        2,777   

Investing activities:

    

Purchases of property and equipment

     (105     (170

Purchases of available-for-sale investments

     (7,146     —     

Proceeds from the sale or maturity of available-for-sale investments

     —          44   

Proceeds from the sale or maturity of trading security investments

     1,800        —     
                

Net cash used in investing activities

     (5,451     (126

Financing activities:

    

Proceeds from issuances of common stock

     1,108        2,600   
                

Net cash provided by financing activities

     1,108        2,600   

Effect of exchange rate changes on cash and cash equivalents

     42        (8
                

Net increase in cash and cash equivalents

     16,010        5,243   

Cash and cash equivalents, beginning of period

     29,687        27,673   
                

Cash and cash equivalents, end of period

   $ 45,697      $ 32,916   
                

Supplemental disclosure of cash flow information:

    

Income taxes paid related to foreign operations

   $ 579      $ 446   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


Table of Contents

 

SCICLONE PHARMACEUTICALS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of SciClone Pharmaceuticals, Inc. (“SciClone” or the “Company”) have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) consistent with those applied in, and should be read in conjunction with, the audited financial statements for the year ended December 31, 2009 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The Company prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission for interim reporting. The interim financial information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented and are not necessarily indicative of results for subsequent interim periods or for the full year. The condensed consolidated balance sheet data at December 31, 2009 is derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Material intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.

Revenue Recognition

The Company recognizes revenue from product sales at the time of delivery. There are no significant customer acceptance requirements or post-shipment obligations on the part of the Company, except for sales to a new market where acceptance requirements may have to be met. Sales to importing agents or distributors are recognized at time of shipment when title to the product is transferred to them. Importing agents or distributors do not have contractual rights of return except under limited terms regarding product quality. However, the Company may replace products that have expired or are deemed to be damaged or defective when delivered. The Company estimates expected returns primarily on historical patterns. Historically, the Company has had no product returns of damaged, defective or expired product. As such, no amount was accrued for product returns as of September 30, 2010 and December 31, 2009 in the accompanying condensed consolidated balance sheets. Payments by the importing agents and distributors are not contingent upon sale to the end user by the importing agents or distributors. Amounts invoiced relating to arrangements where collectability is uncertain and revenue cannot be recognized are reflected on the Company’s balance sheet as deferred revenue and recognized as the applicable revenue recognition criteria are satisfied.

Research and Development Expenses

Research and development costs are expensed as incurred. These costs consist primarily of salaries and other personnel-related expenses, including associated stock-based compensation, facility-related expenses, depreciation of facilities and equipment, license-related fees, services performed by clinical research organizations and research institutions and other outside service providers, and certain costs shared for the development of ZADAXIN by the Company’s partner, Sigma-Tau Finanziaria S.p.A (“Sigma-Tau”).

Expenses related to clinical trials generally are accrued based on estimates of work performed or the level of patient enrollment and activities according to the protocols and agreements. The Company monitors planned protocols, work performed, patient enrollment levels and related activities to the extent possible and adjusts estimates accordingly. Nonrefundable advance payments for research and development goods or services are recognized as expense as the related goods are delivered or the related services are provided.

Concentrations of Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, investments and accounts receivable. The Company is exposed to credit risk in the event of default by the institutions holding the cash, cash equivalents and investments and by importers with whom the Company has accounts

 

6


Table of Contents

receivable to the extent of the amounts recorded on the condensed consolidated balance sheet. Substantially all the Company’s cash and cash equivalents are held by financial institutions that the Company believes are of high credit quality. At times, deposits may exceed government insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.

The People’s Republic of China (“China”) uses a tiered method to import and distribute products. The distributors make the sales in the country, but the product is imported for them by licensed importers. For the three months ended September 30, 2010 and 2009, sales to two and three importing agents in China, respectively, accounted for 97% of the Company’s product sales. For the nine months ended September 30, 2010 and 2009, sales to four and three importing agents, respectively, in China accounted for 97%, of the Company’s product sales. As of September 30, 2010, approximately $21.1 million, or 98%, of the Company’s accounts receivable were attributable to two importing agents in China. The Company performs on-going credit evaluations of its importers’ financial condition and generally does not require collateral from its importers.

Net Income Per Share

Basic net income per share has been computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Diluted net income per share is computed by dividing net income by the weighted-average number of common equivalent shares outstanding for the period. Diluted net income per share includes any dilutive impact from outstanding stock options, warrants and the employee stock purchase plan using the treasury stock method.

The following is a reconciliation of the numerator and denominators of the basic and diluted net income per share computations (in thousands, except per share amounts):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  

Numerator:

           

Net income

   $ 7,628       $ 2,064       $ 17,301       $ 9,499   

Denominator:

           

Weighted-average shares outstanding used to compute basic net income per share

     47,795         46,615         47,535         46,360   

Effect of dilutive securities

     1,374         2,954         1,863         737   
                                   

Weighted-average shares outstanding used to compute diluted net income per share

     49,169         49,569         49,398         47,097   
                                   

Basic net income per share

   $ 0.16       $ 0.04       $ 0.36       $ 0.20   

Diluted net income per share

   $ 0.16       $ 0.04       $ 0.35       $ 0.20   

For the three months ended September 30, 2010 and 2009, 3,393,720 and 1,666,117 shares, respectively, related to outstanding stock options and warrants were excluded from the calculation of diluted net income per share because the effect from the assumed exercise of these options and warrants calculated under the treasury stock method would have been anti-dilutive. For the nine months ended September 30, 2010 and 2009, 3,033,068 and 6,826,442 shares, respectively, related to outstanding stock options and warrants were excluded from the calculation of diluted net income per share because the effect from the assumed exercise of these options and warrants calculated under the treasury stock method would have been anti-dilutive.

 

7


Table of Contents

 

Comprehensive Income

The following table summarizes components of total comprehensive income (in thousands) :

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010     2009  

Net income

   $ 7,628       $ 2,064       $ 17,301      $ 9,499   

Other comprehensive income (loss):

          

Net change in unrealized loss and foreign currency translation on foreign-denominated available-for-sale securities

     39         21         (26     35   

Net change in unrealized gains/losses on available for sale securities

     5         19         4        11   

Foreign currency translation

     34         3         42        (8
                                  

Total comprehensive income

   $ 7,706       $ 2,107       $ 17,321      $ 9,537   
                                  

Fair Value of Financial Instruments

The fair value of the Company’s financial instruments reflects the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report reflect the information available to the Company as of September 30, 2010 and December 31, 2009. See Note 3, “Fair Value Measurements.”

Recent Accounting Guidance

In January 2010, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. The ASU requires new disclosures about significant transfers in and out of Levels 1 and 2 fair value measurements and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. The ASU also clarifies existing disclosure requirements regarding inputs and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities for which separate fair value measurements should be disclosed. The Company adopted ASU 2010-06 at the beginning of fiscal 2010. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

Reclassifications

The Company reclassified shipping and handling costs related to product shipments of $0.1 million and $0.4 million, respectively, from sales and marketing expense to cost of product sales for the three and nine months ended September 30, 2009, and reclassified $0.2 million and $0.5 million of legal expense from research and development expense to general and administrative expense for the three and nine months ended September 30, 2009, respectively, to conform to the current period presentation. These reclassifications had no effect on the prior period’s net income or stockholders’ equity.

 

8


Table of Contents

 

2. Cash, Cash Equivalents and Investments

The following is a summary of cash, cash equivalents, and investments (in thousands):

 

     September 30, 2010  
     Amortized
Cost
     Unrealized
Gains
     In Unrealized
Loss Position
For More
Than 12 Months
    Estimated
Fair Value
 

Cash and cash equivalents:

          

Cash

   $ 19,816       $ —         $ —        $ 19,816   

Money market funds

     877         —           —          877   

Foreign U.S. dollar term deposits

     25,004         —           —          25,004   
                                  

Total cash and cash equivalents

   $ 45,697       $ —         $ —        $ 45,697   
                                  

Available-for-sale investments:

          

Certificates of deposit maturing within 1 year

   $ 76       $ —         $ —        $ 76   

Foreign U.S. dollar term deposits maturing within 1 year

     7,146         —           —          7,146   

Restricted long-term Italian state bonds maturing in 2013

     450         —           (60     390   

Corporate equity securities

     51         5         —          56   
                                  

Total available-for-sale investments

   $ 7,723       $ 5       $ (60   $ 7,668   
                                  
     December 31, 2009  
     Amortized
Cost
     Unrealized
Gains
     In Unrealized
Loss Position
For More

Than 12 Months
    Estimated
Fair Value
 

Cash and cash equivalents:

          

Cash

   $ 17,541       $ —         $ —        $ 17,541   

Money market funds

     16         —           —          16   

Foreign U.S. dollar term deposits

     12,130         —           —          12,130   
                                  

Total cash and cash equivalents

   $ 29,687       $ —         $ —        $ 29,687   
                                  

Available-for-sale investments:

          

Certificates of deposit maturing within 1 year

   $ 76       $ —         $ —        $ 76   

Restricted long-term Italian state bonds maturing in 2013

     449         —           (34     415   

Corporate equity securities

     51         2         —          53   
                                  

Total available-for-sale investments

   $ 576       $ 2       $ (34   $ 544   
                                  

Trading security investments:

          

Auction rate securities maturing after 20 years

   $ 1,588       $ —         $ —        $ 1,588   
                                  

Total trading security investments

   $ 1,588       $ —         $ —        $ 1,588   
                                  

As of September 30, 2010 and December 31, 2009, available-for-sale securities included $0.4 million and $0.5 million in restricted investments, respectively. The unrealized losses on the Company’s restricted Italian state bond investments are mainly as a result of currency translation. The Company intends to hold its restricted Italian state bond investments until recovery.

As of December 31, 2009, the Company’s certificate of deposit for $0.1 million secured the Company’s letter of credit required under its European value added tax filing arrangements.

 

9


Table of Contents

 

3. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of input are:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Where quoted prices are available in an active market, the Company determines fair value based upon quoted market prices, and classifies these values in level 1 of the valuation hierarchy. If quoted market prices are not available, fair values are based upon observable inputs such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities and are classified in level 2 of the valuation hierarchy. When quoted prices and observable inputs are unavailable, fair values are based on a market approach using internally developed cash flow models and are classified in level 3 of the valuation hierarchy. The internally developed cash flow models primarily use, as inputs, estimates for interest rates and discount rates including yields of comparable traded instruments adjusted for illiquidity and other risk factors, amount of cash flows and expected holding periods of the assets. These inputs reflect the Company’s assumptions about the assumptions market participants would use in pricing the assets including assumptions about risk developed based on the best information available in the circumstances. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets being measured and their placement within the fair value hierarchy.

Other financial instruments, including accrued liabilities, are carried at cost, which the Company believes approximates fair value because of the short-term maturity of these instruments.

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents, investments, and other current assets) measured at fair value on a recurring basis (in thousands):

 

     Fair Value Measurements at September 30, 2010 Using  

Description

   Quoted Prices in
Active Markets
for

Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Balance as of
September 30, 2010
 

Money market funds

   $ 877       $ —         $ —         $ 877   

Foreign U.S. dollar term deposits

     —           32,150         —           32,150   

Certificates of deposit

     —           76         —           76   

Corporate equity securities

     56         —           —           56   

Restricted long-term Italian state bonds

     390         —           —           390   
                                   

Total

   $ 1,323       $ 32,226       $ —         $ 33,549   
                                   

 

10


Table of Contents

 

     Fair Value Measurements at December 31, 2009 Using  

Description

   Quoted Prices in
Active Markets
for

Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Balance as of
December 31, 2009
 

Money market funds

   $ 16       $ —         $ —         $ 16   

Foreign U.S. dollar term deposits

     —           12,130         —           12,130   

Certificates of deposit

     —           76         —           76   

Corporate equity securities

     53         —           —           53   

Restricted long-term Italian state bonds

     415         —           —           415   

Auction rate securities

     —           —           1,588         1,588   

Put Option

     —           —           202         202   
                                   

Total

   $ 484       $ 12,206       $ 1,790       $ 14,480   
                                   

The following table provides a summary of changes in fair value of the Company’s level 3 financial assets (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Auction Rate Securities:

        

Balance at beginning of period

   $ —        $ 1,583      $ 1,588      $ 1,485   

Proceeds from sales

     (550     —          (1,800     —     

Receivable from broker

     550        —          —          —     

Total realized (loss) gain included in other income (expense)

     —          (1     212        97   
                                

Balance at end of period

   $ —        $ 1,582      $ —        $ 1,582   
                                

Put Option:

        

Balance at beginning of period

   $ —        $ 206      $ 202      $ 285   

Total realized loss included in other expense

     —          (17     (202     (96
                                

Balance at end of period

   $ —        $ 189      $ —        $ 189   
                                

On June 30, 2010, the Company exercised its right (“the Put Option”) under its Auction Rate Securities (“ARS”) Rights Offer from UBS AG to sell its ARS back to the investment firm. As of December 31, 2009, the Company had recorded the $0.2 million fair value of the Put Option in prepaid expenses and other current assets in its condensed consolidated balance sheet. The Company’s fair value election was intended to create accounting symmetry with its fair value accounting of the ARS.

 

4. Inventories

Inventories consisted of the following (in thousands) :

 

     September 30,
2010
     December 31,
2009
 

Raw materials

   $ 1,530       $ 2,446   

Work in progress

     355         1,048   

Finished goods

     5,491         6,655   
                 
   $ 7,376       $ 10,149   
                 

 

11


Table of Contents

 

5. Other Assets

The following is a summary of other assets (in thousands) :

 

     September 30,
2010
     December 31,
2009
 

Value added tax receivable

   $ 450       $ 732   

Lease deposits

     247         247   

Intangible assets

     140         192   

Other

     20         78   
                 
   $ 857       $ 1,249   
                 

 

6. Accrued Liabilities

The following is a summary of accrued liabilities (in thousands):

 

     September 30,
2010
     December 31,
2009
 

Accrued compensation

   $ 1,846       $ 1,913   

Accrued sales and marketing expenses

     1,644         1,394   

Accrued professional fees

     797         394   

Accrued taxes

     405         309   

Accrued manufacturing costs

     309         808   

Accrued clinical trial expense

     163         452   

Other

     521         778   
                 
   $ 5,685       $ 6,048   
                 

 

7. Silicon Valley Bank Line-of-Credit

Under its loan and security agreement and an unconditional guaranty and security agreement with Silicon Valley Bank (the “Credit Facility”), the Company and its subsidiaries, SciClone Pharmaceuticals International Ltd. and SciClone Pharmaceuticals International China Holding Ltd. as borrowers, may borrow up to $6 million for a term of 36 months, subject to certain sublimits, including $2.5 million for letters of credit. The Credit Facility is secured by a first priority secured interest in all of the Company’s assets, other than intellectual property. The Credit facility expires in November 2011, and upon termination all amounts borrowed must be repaid in full. As of September 30, 2010, there were no outstanding borrowings under the Credit Facility. The Credit Facility bears interest on borrowed funds at the bank’s prime rate plus 1.75% on outstanding balances. The Company is required to meet certain financial covenants, including minimum consolidated revenue, and minimum consolidated earnings before interest and income tax, as defined, and since November 14, 2009, has been subject to certain minimum fees and interest payments. The Company is also required to meet certain operating covenants that limit its ability to incur liabilities, create liens, make capital expenditures, pay dividends or distributions, make investments, and dispose of assets and to carry credit insurance. The Company has received a limited waiver to the Credit Facility to waive certain minimum fees and interest payments, and to waive the requirement to maintain a credit insurance policy. The Company is currently in compliance with the Credit Facility after giving effect to the limited waiver. Refer also to note 11 “Subsequent Events.”

 

8. Stock-Based Compensation

Stock Options

The Company has several stock-based compensation plans (the “Plans”) that are described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The Company, under the various equity plans, is permitted to grant incentive stock options, nonstatutory stock options, restricted stock units, performance shares and other forms of equity compensation. In accordance with the Plans, the options expire ten years from the date of grant. Options are generally granted at fair market value on the date of grant and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period, generally four years, or upon achievement of certain service conditions. Certain options granted under the Plans vest over shorter periods. During the nine months ended September 30, 2010, the Company granted options to purchase a total of 1,473,000 shares of common stock and options to purchase 578,000 shares of common stock were exercised. During the twelve months ended December 31, 2009, the Company granted options to purchase a total of 2,269,000 shares of common stock and 999,000 shares of common stock were exercised.

 

12


Table of Contents

 

The Company has granted certain performance-based options to purchase shares of the Company’s common stock at an exercise price equal to the closing price of a share of the Company’s common stock as of the grant date. The options will fully vest upon meeting a performance goal within an established time frame. If the performance goal is met for the option within the established time frame, the option generally has a ten-year term measured from the date of grant. If the performance goal is not met within the established time frame, the option expires in its entirety. The grant date fair value per share of the awards has been calculated using the Black-Scholes option pricing model. The Company recognizes expense related to the performance-based options over the period of time the Company determines that it is probable that the performance goal will be achieved. For the nine months ended September 30, 2010, the Company granted a performance-based option to purchase a total of 40,000 shares of common stock. For the twelve months ended December 31, 2009, the Company granted performance-based options to purchase a total of 340,000 shares of common stock. For the three and nine months ended September 30, 2010, the Company recorded $30,000 and $0.2 million, respectively, of expense related to performance-based options. For the three and nine months ended September 30, 2009, the Company recorded $7,000 of expense of expense related to performance-based options.

In May 2010, the Company amended target-stock-price-based options to purchase 750,000 of the Company’s common stock granted to its chief executive officer. The amendment modified the vesting provisions of the options such that 1/36 th of the unvested stock options vest monthly over a three-year period, with initial vesting occurring on June 1, 2010. The fair value of the modified award was estimated using the Black-Scholes option valuation model with the assumptions of a risk-free rate of 2.28%, a volatility factor of 71.83%, a dividend yield of 0%, and an expected life of 5.07 years. The incremental compensation cost resulting from the modification and the remaining unrecognized compensation expense from the original award are being recognized ratably over the three-year vesting period. The Company recorded expense of $0.1 million and $0.2 million for the three and nine months ended September 30, 2010, respectively, related to these options. The Company recorded expense of $37,000 and $0.2 million for the three and nine months ended September 30, 2009, respectively, related to these options.

Employee Stock Purchase Plan

As of September 30, 2010, 1,300,000 shares of our common stock are reserved for issuance under the Company’s Employee Stock Purchase Plan (“ESPP”). Each offering under the ESPP is for a three-month period. Commencing with the offering period beginning June 1, 2010, the purchase price of the stock issued under the ESPP will be equal to 85% of the lower of the fair market value of a share of common stock on the first day of the offering or on the final day of the offering period. For the three and nine months ended September 30, 2010, the Company recorded $4,000 and $8,000, respectively, of expense related to the ESPP. There was no expense recorded during the three or nine months ended September 30, 2009 related to the ESPP.

 

9. Income Taxes

Provision for income tax of $0.3 million and $0.2 million for the three months ended September 30, 2010 and 2009, respectively, and $0.7 million and $0.5 million for the nine months ended September 30, 2010 and 2009, respectively, related to the Company’s foreign operations in China. The Company’s statutory tax rate in China was 20% in 2009 and is 22% for 2010. The Company did not provide for U.S. income taxes on undistributed earnings of its foreign operations that are intended to be permanently reinvested in the foreign operations.

 

10. Other Corporate Matters

On August 5, 2010, SciClone was contacted by the United States Securities and Exchange Commission (“SEC”) and advised that the SEC has initiated a formal, non-public investigation of SciClone, and the SEC issued a subpoena to SciClone requesting a variety of documents and other information. The subpoena requests documents relating to a range of matters including, but not limited to, potential payments or transfers of anything of value to regulators and government-owned entities in China, bids or contracts with state or government-owned entities in China, any joint venture partner, intermediary or local agent of the Company in China, the Company’s ethics and anti-corruption policies, training, and audits, and certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the United States Department of Justice (“DOJ”) indicating that the DOJ was investigating Foreign Corrupt Practices Act (“FCPA”) issues in the pharmaceutical industry generally, and that the DOJ had information about the Company’s practices suggesting possible violations. The Company intends to cooperate fully with the SEC and DOJ in the conduct of their investigations.

In response to these matters, the Company’s board of directors has appointed a special committee of independent directors. Based on an initial review, the special committee has decided to undertake an independent investigation as to matters reflected in and arising from the SEC and DOJ investigations including, but not limited to, certain sales and marketing matters in China, in order to evaluate whether any violation of the FCPA or other laws occurred as to such matters.

 

13


Table of Contents

The investigation is in process and no conclusions have been reached, however if the investigation results in a determination that a violation occurred or may have occurred, the additional information resulting from such investigation or the determinations made in such investigation may indicate that the Company’s internal controls were not effective. In addition, the Company may determine based upon the results of such investigation that changes in internal controls are appropriate even if a violation did not occur. Independent of the outcome of the investigation, the Company has determined to undertake a further review of its internal controls to consider whether it will implement additional internal controls or modifications of its internal controls.

Following the Company’s announcement of these investigations, purported class actions naming SciClone and certain of its officers as defendants were filed and derivate lawsuits purportedly on behalf of the Company were filed naming certain of its officers and directors as defendants. See Item 1, “Legal Proceedings.”

Based on the information obtained to date, the Company has determined that any potential liability that may result is not probable or cannot be reasonably estimated and therefore no accrual was made related to these matters in its unaudited condensed consolidated financial statements as of September 30, 2010.

 

11. Subsequent Events

On October 1, 2010, the Company’s subsidiaries, SciClone Pharmaceuticals International Ltd. and SciClone Pharmaceuticals International China Holding Ltd. as borrowers, terminated the existing $6 million Credit Facility with Silicon Valley Bank (“SVB”) and entered into a $15 million loan and security agreement with SVB (“the Debt Financing Facility”). SciClone Pharmaceuticals, Inc. is the guarantor of the Debt Financing Facility. The Debt Financing Facility bears interest on borrowed funds at SVB’s prime rate plus 1.25% on outstanding balances and is secured by a first priority secured interest in all of the Company’s assets, including intellectual property in an event of default. The Company is required to meet certain financial covenants, including minimum liquidity, as defined, and is subject to certain minimum fees and interest payments. The Company is also required to meet certain operating covenants that limit its ability to incur liabilities, create liens, make capital expenditures, pay dividends or distributions, make investments, and dispose of assets. The Debt Financing Facility expires October 1, 2012, and upon termination all amounts borrowed must be repaid in full. There have been no draws made on the Debt Financing Facility.

In November 2010, the Company was awarded a total of $978,000 in non-taxable grants as part of the U.S. Department of Treasury’s Therapeutic Discovery Project Program related to its research and development activities in SCV-07 and ZADAXIN.

 

14


Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on our current expectations, estimates and projections about our business, industry, management’s beliefs and certain assumptions made by us. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe” or similar expressions are intended to identify forward-looking statements including those statements we make regarding our future financial results; anticipated product sales; the sufficiency of our resources to complete clinical trials and other new product development initiatives; government regulatory actions that may affect product reimbursement, product pricing or otherwise affect the scope of our sales and marketing; the timing and outcome of clinical trials; the timing of completion of therapy and observation for our clinical trials; ZADAXIN ® ’s ability to complement existing therapies; prospects for ZADAXIN and our plans for its enhancement and commercialization; future size of the worldwide hepatitis B virus (“HBV”) and hepatitis C virus (“HCV”) and other markets; research and development and other expense levels; the ability of our suppliers to continue financially viable production of our products; cash and other asset levels; the allocation of financial resources to certain trials and programs, and expenses related to litigation and regulatory investigations. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors including, but not limited to, those described under the caption “Risk Factors” in this Quarterly Report on Form 10-Q. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Overview

SciClone Pharmaceuticals (NASDAQ: SCLN) is a revenue-generating, global specialty pharmaceutical company with a substantial international business, based primarily in the People’s Republic of China (“China”), and with a product portfolio of novel therapies for cancer and infectious diseases. Our strategy is focused on continuing international sales growth, a cost-containing clinical development strategy, and overall expense management. ZADAXIN, our brand of thymalfasin or thymosin alpha 1, has regulatory approval in over 30 countries for the treatment of HBV and HCV, certain cancers and as a vaccine adjuvant. All of our revenues are derived from sales of ZADAXIN, substantially all of which is sold in China. As our approval in China is an import license, all sales are made to licensed importers, and they are also our primary distributors in China. Substantially all our sales are made to two such importers/distributors. We have a sales force of over 200 representatives in China and our increases in sales are due in part to sales force expansion and further market penetration in China. To date, we have been able to maintain our gross margin in part due to relatively stable or even decreasing costs of sales, and in part due to maintaining a relatively stable sales price. We anticipate that gross margins will remain in the historical range, however prices in China are subject to regulation, and are currently under review by regulatory authorities, and if a substantial reduction in the sale price to hospitals occurred our gross margins would be substantially reduced. We believe our current cash and investment position and the gross profit from our product sales provide the financial resources to execute on our strategy for continued growth in our international business and for development of our pipeline of late-stage product candidates.

We plan to expand our commercial operations with the goal of becoming a significant pharmaceutical company in China’s rapidly growing pharmaceutical market. A key part of our strategy is to leverage our decade of experience in China and to grow our international business by adding commercial stage or near term commercial stage products to our portfolio. We believe we are well-positioned to in-license additional therapeutics for our international business, in part because of our opportunity to commercialize these products utilizing our well established sales and marketing organization in China. Furthermore, our international growth strategy may include additional partnerships and merger and acquisition transactions for synergistic, commercially attractive products.

We have successfully in-licensed two products that are part of this international commercial growth strategy, DC Bead ® and ondansetron RapidFilm ® .

Our DC Bead product candidate is a novel treatment for advanced liver cancer which is currently approved in approximately 40 countries worldwide, including Europe and the U.S. We have commercialization rights for this product in China. We commenced a small local registration trial in the first quarter of 2010, which is expected to enroll approximately 40 advanced liver cancer patients at several liver cancer treatment centers. The primary endpoint is safety and the secondary endpoint is efficacy, as measured by tumor response. If the trial results are positive, we believe we may receive regulatory approval for DC Bead in 2011.

Our second in-licensed product candidate as part of this international commercial growth strategy is ondansetron RapidFilm. This product is an oral thin film formulation of ondansetron, a serotonin 5-HT3 receptor antagonist commonly used to treat and prevent nausea and vomiting caused by chemotherapy, radiotherapy and surgery. In March 2010, we announced that BioAlliance Pharma had received European Union (“EU”) approval of ondansetron RapidFilm. BioAlliance

 

15


Table of Contents

Pharma holds all European rights to ondansetron RapidFilm and was granted regulatory approval under the EU decentralized procedure in 16 major EU countries. We have commercialization rights for this product candidate in China including Hong Kong and Macau, and Vietnam, and we plan to file a clinical trial application as part of the product registration process around the end of the year.

Outside of China, SciClone’s clinical development strategy is to focus on driving cost-efficient phase 1 and 2 development of promising compounds while seeking development partners for more costly phase 3 trials, allowing us to achieve the potential upside of our portfolio of drug candidates. Our portfolio of product candidates for cancer and infectious diseases includes SCV-07 and thymalfasin. SCV-07, a small molecule synthetic peptide with immunomodulating properties, is being developed for attenuating oral mucositis in subjects with head and neck cancer receiving concurrent chemotherapy and radiotherapy, and for the treatment of HCV.

Oral mucositis (“OM”) is a common, painful, debilitating complication of cancer treatment, and we estimate that total medical costs for the treatment of oral mucositis may reach around $4.2 billion in the U.S. and $10 billion worldwide in 2010. In May 2010, we announced further top-line results from our phase 2a proof of concept clinical trial of SCV-07 to modify the course of oral mucositis in patients with head and neck cancer receiving chemoradiotherapy regimens.

This phase 2a study showed a signal towards delay to onset of severe oral mucositis, the study’s primary endpoint, in the higher dose group. The incidence of severe OM after 5 weeks of chemoradiation was 30% lower in the patients in the high dose treatment arm (0.1 mg/kg; 17 patients) compared to the 20 patients who received placebo (29% vs. 42%). A post hoc data analysis of ulcerative mucositis (WHO grades 2-4), a major cause of morbidity associated with OM, was also conducted. The high dose of SCV-07 delayed the onset of any ulcerative mucositis in 24% of patients at doses of radiation up to 50Gy (after approximately 5 weeks of treatment) while 100% of patients in the placebo group suffered from ulcerative mucositis at 35Gy (after approximately 3.5 weeks of treatment). Supportive of these findings, the high dose SCV-07 group also showed improvement over placebo for exploratory endpoints, including the use of gastric tube feedings, unplanned office or emergency room visits, and breaks in planned course of radiation therapy of one week or longer.

The incidence of severe OM after 5 weeks of chemoradiation was 50% higher in the patients in the low-dose treatment arm (0.02 mg/kg; 20 patients) compared to the 20 patients who received placebo (63% vs. 42%). However, the post hoc data analysis of ulcerative mucositis showed that the low dose of SCV-07 delayed the onset of any ulcerative mucositis in 5% of patients at doses of radiation up to 50Gy compared to 100% of patients in the placebo group who suffered from ulcerative mucositis at 35Gy. Regarding exploratory endpoints, the low dose group showed similar results to the placebo group. Importantly, both doses of SCV-07 were shown to be safe and well tolerated with no drug-related serious adverse events reported in either arm.

In September 2010, we announced that researchers have identified two unique gene clusters that were associated with subjects who responded to treatment in our phase 2a study. We believe that the discovery of these gene clusters may assist in providing the framework for effectively identifying those patients most likely to respond to SCV-07 in future clinical trials based on their individual genomic profile or gene signature.

Based on the findings from the phase 2a study and completed discussions with the U.S. Food and Drug Administration, we are planning to initiate a phase 2b study in late 2010 or early 2011. As compared to the phase 2a trial, the phase 2b study design is expected to include higher doses of SCV-07 and be adequately powered to demonstrate statistical significance. Additionally, we intend to continue to investigate the role of specific genetic profiles on patient response to SCV-07, as well as the potential link between cytokine activity and SCV-07’s sub-cellular mechanism of action.

The second component of the SCV-07 clinical development program is for the treatment of HCV. This multicenter, multidose, open-label phase 2b study is designed to evaluate the safety and immunomodulatory effects of SCV-07 as a monotherapy or in combination with ribavirin in non–cirrhotic patients with genotype 1 chronic HCV who have relapsed after at least 44 weeks of treatment with pegylated interferon and ribavirin. The study, which monitors biomarkers of immune activation and HCV viral load dynamics, includes two treatment cohorts of 20 patients each who receive SCV-07 at a dose of either 0.1 mg/kg or 1.0 mg/kg. The treatment period is approximately eight weeks long, including four weeks of SCV-07 monotherapy followed by four weeks of SCV-07 in combination with ribavirin. We expect to report top-line results in the fourth quarter of 2010. During our previous phase 2a clinical trial of SCV-07 designed to evaluate the effect of SCV-07 on HCV viral load, as well as on other measures of immune response, SCV-07 demonstrated activity in some treated patients in the higher dosage groups, and the decrease in viral load in these patients was accompanied by an increase in a biomarker which is usually correlated with an immunological response against HCV. Additionally, SCV-07 was shown to be generally safe and well-tolerated with no dose-limiting toxicities or serious adverse events reported.

We continue to seek development opportunities with ZADAXIN (“thymalfasin”) focused on vaccine enhancement. In June 2010, we and our partner, Sigma-Tau Finanziaria S.p.A., announced final results from a clinical study evaluating the potential of ZADAXIN (thymalfasin) to enhance the immune response. ZADAXIN administration given with the MF59 adjuvanted H1N1 influenza monovalent vaccine, Focetria ® from Novartis, led to a statistically significant increase in the

 

16


Table of Contents

percentage of subjects who seroconverted, when evaluated at 21 days after vaccination, compared with those who received the H1N1 vaccine alone; and at 42 days after vaccination the improvement in titers seen in ZADAXIN-treated patients was maintained. When evaluated at 84 and 168 days after vaccination, the seroconversion rates were similar for patients receiving ZADAXIN and those receiving vaccine alone. The study was conducted in an immunocompromised population of patients with end-stage renal disease on chronic hemodialysis. These data indicate that the enhancement effect of ZADAXIN, while significantly higher in the critical first six weeks following vaccination, was reduced at later time points and no longer significantly different compared to the vaccine alone. Based on the positive study results and potential applications to enhance vaccines targeting other types of infections and diseases, including cancer, we plan to continue discussions with bio-defense agencies and related groups to determine which vaccines might benefit most from enhancement with ZADAXIN.

The United States Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) are each conducting formal investigations of us regarding a range of matters including the possibility of violations of the Foreign Corrupt Practices Act (“FCPA”). In response to these matters, our board of directors has appointed a special committee of independent directors. Based on an initial review, the special committee has decided to undertake an independent investigation as to matters reflected in and arising from the SEC and DOJ investigations including, but not limited to, certain sales and marketing matters in China, in order to evaluate whether any violation of the FCPA or other laws occurred as to such matters. The investigation is in process and no conclusions have been reached, however if the investigation results in a determination that a violation occurred or may have occurred, the additional information resulting from such investigation or the determinations made in such investigation may indicate that our internal controls were not effective. In addition, we may determine based upon the results of such investigation that changes in our internal controls are appropriate even if a violation did not occur. Independent of the outcome of the investigation, we have determined to undertake a further review of our internal controls to consider whether we will implement additional internal controls or modifications of our internal controls. Following our announcement of the SEC and DOJ investigations, purported class actions naming SciClone and certain of its officers as defendants were filed and derivate lawsuits purportedly on behalf of the Company were filed naming certain of its officers and directors as defendants. In addition, the board of directors has received a demand from a purported stockholder demanding that the board of directors take actions to remedy breaches of fiduciary duties by the directors and certain officers relating to alleged violations of the FCPA and securities laws. We cannot predict the outcome of these matters, but we anticipate that we will incur substantial expenses in the course of the investigations, and in connection with current or future litigation. If it is determined that sales or marketing activities have occurred that violate, or may have violated, the FCPA or other laws, our future operating results could be adversely affected. In addition, we could incur additional expenses related to fines, or to remediative measures including if we determine that our internal controls or disclosure controls are not effective.

We believe our cash and investments as of September 30, 2010 and ongoing revenue generating business operations will be sufficient to support our current operating plan for at least the next 12 months. Our results may fluctuate from quarter to quarter and we may report quarterly losses in the future.

Recent Accounting Guidance

In January 2010, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. The ASU requires new disclosures about significant transfers in and out of Levels 1 and 2 fair value measurements and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. The ASU also clarifies existing disclosure requirements regarding inputs and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities for which separate fair value measurements should be disclosed. We adopted ASU 2010-06 at the beginning of fiscal 2010. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements.

Critical Accounting Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. We believe there have been no significant changes in our critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2009.

Results of Operations

Product Sales and Gross Margin:

The following tables summarize the period over period changes in our product sales (in thousands), in our cost of product sales (in thousands) and our product gross margin:

 

     Three Months Ended
September 30,
    Change     Nine Months Ended
September 30,
    Change  
        
     2010     2009       2010     2009    

Product Sales

   $ 22,840      $ 17,240        32   $ 61,496      $ 54,280        13

Cost of Product Sales

     3,146        3,098        2     9,445        9,185        3

Product Gross Margin

     86.2     82.0       84.6     83.1  

Product sales were $22.8 million and $61.5 million for the three- and nine-months ended September 30, 2010, respectively, compared to $17.2 million and $54.3 million for the corresponding periods in 2009. Product sales to China were $22.1 million and $59.4 million, or 97% of sales, for the three- and nine-month periods ended September 30, 2010, compared to $16.7 million and $52.5 million, or 97% of sales, for the corresponding periods in 2009. Our overall revenue growth for the three- and nine-month periods ended September 30, 2010, compared to the corresponding period in 2009, was attributable to an increase in the quantity of ZADAXIN sold primarily due to further market penetration in China. All product sales in each

 

17


Table of Contents

period were derived from sales of ZADAXIN. For the three-month period ended September 30, 2010, sales to two importing agents in China accounted for approximately 64% and 33% of our product sales. For the three-month period ended September 30, 2009, sales to two importing agents in China accounted for approximately 61% and 29% of our product sales. For the nine-month period ended September 30, 2010, sales to two importing agents in China accounted for approximately 66% and 20% of our product sales. For the nine-month period ended September 30, 2009, sales to two importing agents in China accounted for approximately 64% and 31% of our product sales. The two largest customers were the same importing agents in each of these periods. Our experience with those importers has been good and we anticipate that we will continue to sell a majority of our product to them.

Our product gross margin for the three- and nine- months ended September 30, 2010 was 86.2% and 84.6%, respectively, compared to 82.0% and 83.1% for the same periods in 2009. The higher product gross margin for the three- and nine- months ended September 30, 2010 compared to the same periods in 2009 was due primarily to lower per vial production costs mainly as a result of increased production. We expect cost of product sales and gross margins to fluctuate from period to period depending upon the level of sales and price of ZADAXIN, the absorption of product-related fixed costs, currency exchange fluctuations, and any charges associated with excess or expiring finished product inventory. There are discussions in China that government reimbursement levels in China for listed drugs could be reviewed in the next three to six months, and that ZADAXIN’s list price could be included in such a review. In similar situations where drugs have been included on government reimbursement lists in China in the past, the price reductions from list price were usually between 5 and 15 percent, although we can’t predict what reduction, if any, will be imposed.

Research and Development (“R&D”):

The following tables summarize the period over period changes in our R&D expenses (in thousands):

 

     Three Months  Ended
September 30,
     Change     Nine Months Ended
September 30,
     Change  
          
     2010      2009        2010      2009     

Research and Development

   $ 2,618       $ 4,101         -36   $ 7,700       $ 12,498         -38

R&D expenses for the three months ended September 30, 2010 decreased by $1.5 million, or 36%, compared to the same period in 2009. R&D expenses for the nine months ended September 30, 2010 decreased by $4.8 million, or 38%, compared to the same period in 2009. The decreases in the three- and nine-month periods were primarily related to the timing of clinical trial-related expenses, including the completion of enrollment of patients in our phase 2a clinical trial of SCV-07 for the delay to onset of severe oral mucositis in the first quarter of 2010 and the discontinuation of the RP101 clinical trial for the treatment of pancreatic cancer last year. These decreases were partially offset by increased expenses related to our SCV-07 phase 2b clinical trial for the treatment of HCV.

The major components of R&D expenses include salaries and other personnel-related expenses, including associated stock-based compensation, facility-related expenses, depreciation of facilities and equipment, license-related fees, services performed by clinical research organizations and research institutions and other outside service providers, and the sharing of certain costs for the development of ZADAXIN by our partner, Sigma-Tau.

The initiation, continuation, and completion of our current clinical development programs has had and is expected to continue to have a significant effect on our research and development expenses. Actual costs incurred in future periods will vary depending in particular upon timeline and design of further clinical trials and final decisions regarding the timing and expense-sharing arrangements for these trials, though we expect our research and development expenses to increase significantly for the remainder of the year in preparation for our SCV-07 phase 2b trial in oral mucositis which we plan to initiate in late 2010 or early 2011. We are evaluating opportunities to acquire or in-license the marketing rights to proprietary products primarily in China, which may result in increased research and development expenses due to license fee payments or other expenses related to in-licensing and development of new products in the future.

Sales and Marketing:

The following tables summarize the period over period changes in our sales and marketing expenses (in thousands):

 

     Three Months  Ended
September 30,
     Change     Nine Months Ended
September 30,
     Change  
          
     2010      2009        2010      2009     

Sales and Marketing

   $ 5,445       $ 4,625         18   $ 15,996       $ 13,523         18

 

18


Table of Contents

 

Sales and marketing expenses for the three months ended September 30, 2010 increased by $0.8 million, or 18%, compared to the same period in 2009, primarily related to increased conferences and local training seminars associated with our sales efforts for ZADAXIN in the 2010 period. Sales and marketing expenses for the nine months ended September 30, 2010 increased by $2.5 million, or 18%, compared to the same period in 2009, primarily related to increased conferences and local training seminars and an increase in employee-related costs associated with growth in our sales force and our sales efforts for ZADAXIN in the 2010 period. We expect sales and marketing expenses to increase for the remainder of 2010 compared to 2009, related to our expanding sales efforts associated with the growth of our international business, primarily in China.

General and Administrative:

The following tables summarize the period over period changes in our general and administrative expenses (in thousands):

 

     Three Months  Ended
September 30,
     Change     Nine Months Ended
September 30,
     Change  
          
     2010      2009        2010      2009     

General and Administrative

   $ 3,820       $ 3,137         22   $ 10,403       $ 9,076         15

General and administrative expenses for the three months ended September 30, 2010 increased by $0.7 million, or 22%, compared to the same period in 2009, and general and administrative expenses for the nine months ended September 30, 2010 increased by $1.3 million, or 15%, compared to the same period in 2009. Increases for both of the 2010 periods, compared to the same periods in 2009, primarily resulted from higher corporate and legal expenses related to business development efforts for China and in connection with the SEC and DOJ investigations announced in August 2010. We expect our general and administrative expenses will increase for the remainder of 2010 compared to 2009, related to our expanding operations in China, responding to the SEC and DOJ investigations and shareholder litigations that have been, or may be, filed following our announcement of those investigations, and the conduct of an independent investigation by a special committee of our board of directors.

Other Income:

In November 2010, we were awarded a total of $978,000 in non-taxable grants as part of the U.S. Department of Treasury’s Therapeutic Discovery Project Program related to our research and development activities in SCV-07 and ZADAXIN. We expect other income will increase for the fourth quarter of 2010, compared to 2009, related to this grant award.

Provision for Income Tax:

Provision for income tax was $0.3 million and $0.7 million for the three- and nine-month periods ended September 30, 2010, respectively, compared to $0.2 million and $0.5 million for the three- and nine-month periods ended September 30, 2009, and related to our foreign operations in China. The increases in the 2010 periods compared to 2009 were due to increased operating activities in China and an increased statutory tax rate in China from 20% in 2009 to 22% in 2010. We expect these increases to continue for the remainder of 2010.

Liquidity and Capital Resources

Days’ sales outstanding in accounts receivable, using the average receivables method, were 94 and 93 days as of September 30, 2010 and 2009, respectively. The majority of our sales are to importers in China where our accounts receivable collections have standard credit terms ranging from 90 to 180 days.

The following tables summarize our cash and investments and our cash flow activities as of the end of, and for each of, the periods presented (in thousands):

 

     As of
September 30, 2010
     As of
December 31, 2009
 

Cash and investments

   $ 53,365       $ 31,819   

 

19


Table of Contents

 

     Nine Months Ended
September 30,
 
     2010     2009  

Cash provided by (used in):

    

Operating activities

   $ 20,311      $ 2,777   

Investing activities

   $ (5,451   $ (126

Financing activities

   $ 1,108      $ 2,600   

At September 30, 2010 and December 31, 2009, we had $53.4 million and $31.8 million, respectively, in cash and investments. Net cash provided by operating activities was $20.3 million for the nine months ended September 30, 2010 and primarily reflected the net income for the period, adjusted for non-cash items such as stock-based compensation expense, depreciation and amortization expense and changes in operating assets and liabilities. Such changes included a decrease in inventory levels by $2.8 million to fulfill sales demands and a $0.8 million decrease in accounts payable.

Net cash provided by operating activities was $2.8 million for the nine months ended September 30, 2009 and primarily reflected the net income for the period adjusted for non-cash items such as stock-based compensation expense, depreciation and amortization expense and changes in operating assets and liabilities. Such changes included an increase in accounts receivable of $5.3 million due to an increase in sales and normal fluctuations in the timing of payments received from customers, an increase in inventory levels by $2.5 million to address potential increased demands, and a $0.9 million net decrease in accrued expenses and accounts payable.

Net cash used in investing activities was $5.5 million and $0.1 million for the nine months ended September 30, 2010 and 2009, respectively. Cash used in investing activities was primarily related to the purchase of available-for-sale investments, net of proceeds from the sale or maturity of investments.

Net cash provided by financing activities of $1.1 million and $2.6 million for the nine months ended September 30, 2010 and 2009, respectively, consisted of proceeds from the exercise of stock options made under our stock award plans and the issuance of stock under our employee stock purchase plan.

On October 1, 2010, our subsidiaries, SciClone Pharmaceuticals International Ltd. and SciClone Pharmaceuticals International China Holding Ltd. as borrowers, terminated the existing $6 million line-of-credit facility with Silicon Valley Bank (“SVB”) and entered into a new loan and security agreement with SVB (“the Debt Financing Facility”) for a debt financing facility up to $15 million for a term of 24 months. SciClone Pharmaceuticals, Inc. is the guarantor of the facility. The Debt Financing Facility bears interest on borrowed funds at the bank’s prime rate plus 1.25% on outstanding balances and is secured by a first priority secured interest in all of our assets, including intellectual property in an event of default. We are required to meet certain financial covenants, including minimum liquidity, as defined, and are subject to certain minimum fees and interest payments. We are also required to meet certain operating covenants that limit our ability to incur liabilities, create liens, make capital expenditures, pay dividends or distributions, make investments, and dispose of assets. The Debt Financing Facility expires October 1, 2012, and upon termination all amounts borrowed must be repaid in full.

In May 2009, we filed a shelf registration statement on Form S-3 with the SEC under which we may offer and sell up to $50.0 million of our securities, assuming we continue to meet the SEC’s eligibility requirements for primary offerings on Form S-3.

We believe that our existing cash and investments and ongoing revenue generating business operations will be sufficient to support our current operating plan for at least the next 12 months. We have no current commitments to offer and sell any securities that may be offered or sold pursuant to our registration statement. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may subject us to restrictive covenants and significant interest costs. To the extent that we raise additional funds through collaboration and licensing arrangements, we would be required to relinquish some rights to our technologies, product candidates or marketing territories. Additional financing or collaboration and licensing arrangements may not be available when needed either at all or, on favorable terms.

We intend to continue to explore alternatives for financing to provide additional flexibility in managing our operations, in-licensing or acquiring new products, particularly in China, and funding our clinical trials. The unavailability or the inopportune timing of any financing could prevent or delay our long-term product development and commercialization programs, either of which could hurt our business. We cannot assure you that funds from financings, if any, will be sufficient to conduct and complete further clinical trials or to acquire or in-license additional products. The need, timing and amount of any such financing would depend upon numerous factors, including the status of the pending regulatory investigations and pending litigations, the level and price of ZADAXIN sales, the timing and amount of manufacturing costs related to ZADAXIN, the availability of complementary products, technologies and businesses, the initiation and continuation of

 

20


Table of Contents

preclinical and clinical trials and testing, the timing of regulatory approvals, developments in relationships with existing or future collaborative parties, the status of competitive products, and various alternatives for financing. We have not determined the timing or structure of any transaction.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 in money market funds, certificates of deposit, term deposits, U.S. Treasury, or government agency notes. All of our investments mature within one year from date of purchase except for our Italian state bonds which mature in 2013. Our investment securities may be subject to interest rate risk and could decrease in value if market interest rates rise. To minimize this risk, we primarily hold securities that are short-term in duration and maintain an average maturity of less than one year. We believe that our exposure to interest rate risk is not significant and a 1% movement in market interest rates would not have a significant impact to the total value of our investment portfolio at September 30, 2010.

We do not hold any derivative financial instruments for speculation or trading purposes. Substantially all our sales have been in U.S. dollars. Our purchases with contract manufacturers are denominated in U.S. dollars and euros and costs of our marketing efforts in China are paid in local currency. In addition, we have certain cash balances and other assets denominated in euros. As a result, we are exposed to foreign currency rate fluctuations, and we do not hedge against the risk associated with such fluctuations. Consequently, changes in exchange rates could result in material exchange losses and could unpredictably, materially and adversely affect our operating results and stock price. Such losses have not been significant to date.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Controls

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Act of 1934, as amended) that was identified in connection with the evaluation thereof that occurred during the third quarter of 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Subsequent to the end of the quarter, and based on an initial review, a special committee of our board of directors determined to undertake an independent investigation as to matters reflected in and arising from the SEC and DOJ investigations, including but not limited to, certain sales and marketing matters in China in order to evaluate whether any violation of the FCPA or other laws occurred as to such matters. The investigation is in process and no conclusions have been reached, however if the investigation results in a determination that a violation occurred or may have occurred, the additional information resulting from such investigation or the determinations made in such investigation may indicate that our internal controls were not effective. In addition, we may determine based upon the results of such investigation that changes in our internal controls are appropriate even if a violation did not occur. Independent of the outcome of the investigation, we have determined to undertake a further review of our internal controls to consider whether we will implement additional internal controls or modifications of our internal controls.

Limitations of the Effectiveness of Internal Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of inherent limitations in any control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. We are continuously seeking to improve the efficiency and effectiveness of our operations and of our internal controls. This results in refinements to processes throughout our organization.

 

21


Table of Contents

 

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In August 2010, a purported securities class action lawsuit was filed in the United States District Court for the Northern District of California, naming us and certain of our officers as defendants. In September 2010, a second purported securities class action lawsuit was filed in the same court. The lawsuits allege violations of the Securities Exchange Act of 1934, as amended, in connection with allegedly false, misleading and incomplete statements issued by the defendants related to potential violations of the Foreign Corrupt Practices Act, our reported revenues, income and sales growth, and marketing and sales activities. Plaintiffs seek damages, an award of their costs and attorney’s fees, and injunctive and/or equitable relief on behalf of a purported class of stockholders who purchased our common stock during the period between May 11, 2009 and August 10, 2010. On October 27, 2010, the securities class action lawsuits were consolidated under the caption In re SciClone Pharmaceuticals, Inc. Securities Litigation , Case No. CV 10-03584-JW, and the court appointed lead plaintiffs. Plaintiffs must file an amended consolidated complaint on or before November 29, 2010. Our motion to dismiss the amended consolidated complaint, if made, must be filed by January 10, 2011. A hearing on our motion to dismiss has been scheduled for March 21, 2011.

In September 2010, three derivative lawsuits were filed purportedly on behalf of the Company in California Superior Court for the County of San Mateo naming certain of our officers and directors as defendants. The lawsuits assert claims for breach of fiduciary duty, abuse of control, unjust enrichment and corporate waste based on alleged violations of the Foreign Corrupt Practices Act. Plaintiffs seek damages, restitution and injunctive and/or equitable relief purportedly on behalf of the Company, and an award of their costs and attorney’s fees. We expect the derivative lawsuits may be consolidated and we anticipate that we will not respond to the complaints until after one of the complaints has been designated as the operative complaint, or until an amended consolidated complaint is filed.

While Company management believes that we have meritorious defenses and intend to defend these lawsuits vigorously, these lawsuits and any other related lawsuits are subject to inherent uncertainties, and the actual cost will depend upon many unknown factors. The outcome of the litigation is necessarily uncertain, we could be forced to expend significant resources in the defense of this lawsuit and we may not prevail.

On November 3, 2010 the board of directors received a letter from a purported stockholder demanding that the board of directors take actions to remedy alleged breaches of fiduciary duties by the directors and certain officers relating to alleged violations of the FCPA and other securities laws. The board has not yet responded to the letter.

Item 1A. Risk Factors

Our risk factors are set forth below in their entirety. The list is not exhaustive and you should carefully consider these risks and uncertainties before investing in our common stock. We have marked with an asterisk (*) those risk factors below that reflect substantive changes from the risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2010 .

Our stock price may be volatile, and an investment in our stock could suffer a decline in value. *

We have a history of operating losses and an accumulated deficit. Although we reported net income of $11.9 million for the year ended December 31, 2009 and $17.3 million for the nine months ended September 30, 2010, we have experienced significant operating losses in the past, and as of September 30, 2010, we had an accumulated deficit of approximately $147.6 million. If our operating expenses were to increase or if we were not able to increase or sustain revenue, we may not achieve profitability over the next 12 months.

The market price of our common stock has experienced, and may continue to experience, substantial volatility due to many factors, some of which we have no control over, including:

 

   

developments related to the pending United States Securities and Exchange Commission (“SEC”) and United States Department of Justice (“DOJ”) investigations, our efforts to cooperate with the investigations and events related to pending litigations;

 

   

government regulatory action affecting our Company or our drug products or our competitors’ company or their drug products in China, the United States and other foreign countries, including the effect of any change in the governmentally permitted maximum listed price for ZADAXIN;

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

   

progress and results of clinical trials;

 

   

progress of thymalfasin and SCV-07 through the regulatory process, especially regulatory actions and the adequacy of clinical data and documentation for regulatory purposes;

 

   

finding a partner for late-stage trials of our clinical development candidates;

 

   

progress of DC Bead ® and ondansetron RapidFilm ® through required clinical studies and the regulatory process, especially regulatory actions and the adequacy of clinical data and documentation for regulatory purposes in China and Vietnam;

 

22


Table of Contents

 

   

timing and achievement of milestones;

 

   

changes in our agreements or relationships with collaborative partners;

 

   

announcements of technological innovations or new products by us or our competitors;

 

   

announcement and completion of corporate acquisition, merger, licensing or marketing arrangements, or sales of assets;

 

   

developments or disputes concerning patent or proprietary rights;

 

   

changes in the composition of our management team or board of directors;

 

   

changes in company assessments or financial estimates by securities analysts;

 

   

changes in assessments of our internal controls over financial reporting;

 

   

general stock market conditions and fluctuations for the emerging growth and pharmaceutical market sectors;

 

   

economic and political conditions in the United States or abroad; and

 

   

broad financial market fluctuations in the United States, Europe or Asia.

Our revenue is dependent on our sale of ZADAXIN in China, and if we experience difficulties in our foreign sales efforts, our operating results and financial condition will be harmed. *

Our product revenue is highly dependent on the sale of ZADAXIN in China. If we experience difficulties in our foreign sales efforts in China, our business will suffer and our operating results and financial condition will be harmed. For both the nine months ended September 30, 2010 and 2009, approximately 97% of our ZADAXIN sales were to customers in China. Sales of ZADAXIN in China may be limited due to the low average personal income, lack of patient cost reimbursement, poorly developed infrastructure and competition from other products, including generics. ZADAXIN sales growth in recent years has benefited from the rapidly growing Chinese economy and growing personal disposable income. Sales of ZADAXIN in China could be adversely affected by a slowing or downturn of the Chinese economy.

In China, ZADAXIN is approved only for the treatment of hepatitis B virus (“HBV”) and as a vaccine adjuvant. We face competition from pharmaceutical companies who are aggressively marketing competing products for the treatment of HBV and other indications where we believe ZADAXIN may be used on an off-label basis. In addition, several local companies are selling lower-priced, locally manufactured generic thymosin, which is a competitive product and is selling in substantial and increasing quantities. While generic products outsell ZADAXIN in unit volumes, we have been able to maintain an advantage through the reputation of our imported, branded product. We expect such competition to continue and there could be a negative impact on the price and the volume of ZADAXIN sold in China, which would harm our business. Our efforts to in-license or acquire other pharmaceutical products for marketing in China and other markets may be unsuccessful or even if successful may not have a meaningful effect on our dependence on ZADAXIN sales in those markets.

In November 2009, thymosin alpha 1, the generic chemical name for our pharmaceutical product ZADAXIN, was included as a Category B product in the National Reimbursed Drug List and pricing for ZADAXIN on the National Reimbursed Drug List is still being reviewed by the authorities. China regulates pharmaceutical prices and pharmaceutical importation. These regulations may reduce prices for ZADAXIN to levels significantly below those that would prevail in an unregulated market, limit the volume of product which may be imported and sold or place high import duties on the product, any of which may limit the growth of our revenues or cause them to decline. We believe that the Chinese government is increasing its efforts to reduce overall health care costs, including through pricing controls. Individual provinces in China and, in some cases, individual hospitals can and have established pricing requirements for a product to be included on formulary lists. In some cases, these prices have been lower than our distributors have been selling ZADAXIN, in which case we have been removed from formulary lists, which consequently has reduced sales to certain hospitals and could adversely affect our future sales. The Chinese national and provincial governments may regulate our product pricing and the maximum prices for ZADAXIN at the provincial level over the next several years, and potentially at the national level. The process and timing for this is unpredictable. In addition, we are aware that ZADAXIN may be used on an off-label basis, and the Chinese government’s pricing, reimbursement or other actions might reduce such uses. We are working on these regulatory processes as well as on potential changes in our business model depending on potential outcomes. We believe we will be able to successfully manage our business in China through this process, however maximum prices could be set at some time in the future which could adversely affect our results or require substantial changes in our business model which may be difficult to implement.

 

23


Table of Contents

 

We have received regulatory approvals to import and market ZADAXIN in China and to manufacture ZADAXIN and export the product from Italy. In order to continue our sales to China, we need to maintain these approvals. Our license to import ZADAXIN into China needs to be renewed every five years and the next renewal is required in 2013. Although we were successful in obtaining a renewal in 2008, there is no assurance that we will receive renewals in the future when applied for or that the renewals will not be conditioned or limited in ways that limit our ability to sell ZADAXIN in China. Further, our licenses to manufacture and export ZADAXIN from Italy are dependent upon our continuing compliance with regulations in Italy. Our business would be adversely affected if we are not able to maintain these approvals. In order to sell ZADAXIN to the licensed importers in China, our manufacturers must 1) be approved by the Italian Ministry of Health (“AIFA”) and 2) be accepted by the State Food and Drug Administration of China (“SFDA”), the Chinese equivalent to the United States Food and Drug Administration (“FDA”), and we must obtain an Imported Drug License from the SFDA permitting the importation of ZADAXIN into China. The license must be renewed every five years, and if we change manufacturers, these changes must 1) be approved by the AIFA in Italy and 2) be accepted by the SFDA. When we change manufacturers we must obtain a new approval. We are currently in the process of changing manufacturer and if we are not successful in obtaining the necessary approval in a timely manner, our business would be adversely affected. The SFDA, the FDA, AIFA and other regulatory agencies may, and have, changed their internal administrative rules in ways that may delay or complicate the regulatory process. Those changes are not always disclosed or known to us and we may experience unexpected delays or additional costs as a result of such changes.

Our ZADAXIN sales and operations in other parts of China and the world are subject to a number of risks and increasing regulations, including difficulties and delays in obtaining registrations, renewals of registrations, permits, pricing approvals and reimbursement, increasing regulation of product promotion and selling practices, unexpected changes in regulatory requirements and political instability. In addition, during the second quarter of 2009 we experienced a strong upsurge in ZADAXIN sales which we believe was attributable both to the increasing penetration of ZADAXIN within the Chinese market, as well as concerns in China from the H1N1 flu virus. Although we believe that ZADAXIN sales have returned to levels more consistent with our established business, if distributors and hospitals that purchase ZADAXIN stockpile more ZADAXIN than needed for current use, our sales of ZADAXIN may suffer as distributors and hospitals use ZADAXIN already in their inventory before purchasing additional product from us. This could lead to uneven future revenue results for ZADAXIN and in turn materially impact our cash flow and business condition.

We experience other issues with managing foreign sales operations including long payment cycles, potential difficulties in accounts receivable collection and, especially from significant customers, fluctuations in the timing and amount of orders and the adverse effect of any of these issues on our business could be increased due to the concentration of our business with a small number of distributors. Problems with collections from, or sales to, any one of those distributors could materially adversely affect our results. Operations in foreign countries including China also expose us to risks relating to difficulties in enforcing our proprietary rights, currency fluctuations and adverse or deteriorating economic conditions. If we experience problems with obtaining registrations, complying with reimbursement rules or compliance with foreign country or applicable U.S. laws, adverse or mixed outcome of clinical studies anywhere in the world, or if we experience difficulties in payments or intellectual property matters in foreign jurisdictions, or if significant political, economic or regulatory changes occur, our results could be adversely affected. Moreover, our operations throughout the world including China are potentially subject to the laws and regulations of the United States including the Foreign Corrupt Practices Act, in addition to the laws and regulations of the local countries. Regulation in China of the activities in the pharmaceutical industry has increased and may continue to undergo significant and unanticipated changes. A number of companies have faced significant expenses or fines as a result of the increasing regulation of, and enforcement activity regarding, the pharmaceutical industry. We recently received notices of investigations by U.S. government agencies that relate to our operations in China. If we fail to comply with regulations or to carry out controls on our Chinese or other foreign operations in a manner that satisfies all applicable laws, our business would be harmed.

The Chinese government has been engaged in an extensive stimulus program in China over the past year. We believe that the Chinese government is reducing these stimulus programs. We believe these programs have had broad effects across the Chinese economy, and the reduction or withdrawal of these programs could adversely affect spending in numerous ways, including reduction of spending on pharmaceutical products including ZADAXIN.

We face risks related to the potential outcomes of the SEC investigation regarding Foreign Corrupt Practices Act (“FCPA”) compliance and other matters and DOJ investigation regarding FCPA and our own investigation into such matters, including potential penalties, substantial expenses and the use of significant management time and attention, any of which could adversely affect our business. *

        We are subject to a formal, non public investigation by the SEC. In connection with the investigation the SEC issued a subpoena to us requesting documents regarding a range of matters including but not limited to documents relating to potential payments or transfer of anything of value to regulators and government-owned entities in China; documents relating to bids or contracts with state or government-owned entities in China; documents relating to intermediary or local agent of the Company in China; documents regarding the Company’s ethics and anti-corruption policies, training, and audits; and documents relating to certain Company financial and other disclosures made by the Company. The DOJ is currently conducting an investigation of us in connection with compliance with the FCPA, as to which they have advised us that the DOJ has information about the Company’s practices suggesting possible violations. We have been cooperating with, and will continue to cooperate with, the investigations by and inquiries from the SEC and DOJ. In response to these matters, our board of directors has appointed a special committee of independent directors. Based on an initial review, the special committee has decided to undertake an independent

 

24


Table of Contents

investigation as to matters reflected in and arising from the SEC and DOJ investigations including, but not limited to, certain sales and marketing matters in China, in order to evaluate whether any violation of the FCPA or other laws occurred as to such matters. We are unable to predict what consequences, if any, that any investigation by any regulatory agency or by our special committee may have on us. These and any other regulatory investigations and our cooperation with them will result in substantial legal and accounting expenses, and could divert management’s attention from other business concerns and harm our business. Any civil or criminal action commenced against us by a regulatory agency could result in administrative orders against us, the imposition of significant penalties and/or fines against us, and/or the imposition of civil or criminal sanctions against certain of our officers, directors and/or employees. The investigations, results of the investigations, or remedial actions we may take, if any, as a result of such investigations, may adversely affect our business in China. If we are subject to an adverse finding resulting from the SEC and DOJ investigations, or from our own independent investigation, we could be required to pay damages or penalties or have other remedies imposed upon us. If it is determined that sales or marketing activities have occurred that violate, or may have violated, the FCPA or other laws, our future operating results could be adversely affected. In addition, we could incur additional expenses related to fines, or to remediative measures including if we determine that our internal controls or disclosure controls are not effective. The period of time necessary to resolve our independent investigation, and the investigation by the DOJ the SEC is uncertain, and these matters could require significant management and financial resources which could otherwise be devoted to the operation of our business.

We have been named as a party to purported stockholder class actions and purported derivative lawsuits, and we may be named in additional litigation, all of which will require significant management time and attention and result in significant legal expenses and may result in an unfavorable outcome which could have a material adverse effect on our business, financial condition, results of operations and cash flows. *

Certain of our officers and directors have been named as nominal defendants in several purported stockholder derivative lawsuits. The lawsuits assert claims for breach of fiduciary duty, abuse of control, unjust enrichment and corporate waste based on alleged violations of the Foreign Corrupt Practices Act. We and certain of our officers have also been named as defendants in two purported class actions lawsuits which allege violations of the Securities Exchange Act of 1934, as amended, in connection with allegedly false, misleading and incomplete statements issued by the defendants related to potential violations of the Foreign Corrupt Practices Act, our reported revenues, income and sales growth, and marketing and sales activities. In addition, our board of directors has received a demand from a purported stockholder demanding that the board of directors take actions to remedy breaches of fiduciary duties by the directors and certain officers relating to alleged violations of the FCPA and securities laws. We cannot predict whether these or other litigations are likely to result in any material recovery by, or expense to, SciClone. We expect to continue to incur legal fees in responding to these lawsuits. The expense of defending such litigation may be significant. The amount of time to resolve this and any additional lawsuits is unpredictable and these actions may divert management’s attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows.

We are at risk of additional securities class action and derivative lawsuits. *

Securities class action litigation has often been brought against a company following a decline in the market price of its securities. We were sued recently after our announcement regarding SEC and DOJ investigations and we and certain of our officers and directors have been named as parties in purported stockholder class actions and derivative lawsuits. We may be named in additional litigation, all of which will require significant management time and attention and result in significant legal expenses and may result in an unfavorable outcome which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We may experience stock price volatility in the future, either related to announcements regarding the SEC and DOJ investigation, our own investigations related thereto or other matters. This risk is especially relevant for us because biotechnology companies have experienced greater than average stock price volatility in recent years. Such litigation could result in additional substantial costs and a diversion of management’s attention and resources, which could harm our business.

Our sales of ZADAXIN may fluctuate due to seasonality of product orders and sales in any quarter may not be indicative of future sales.

Our sales for the quarter ended June 30, 2009 were greatly affected by the demand in China for ZADAXIN which we believe was in connection with Influenza A (H1N1). Similarly, our sales for the quarter ended September 30, 2003 were greatly affected by the demand in China for ZADAXIN in connection with the treatment of Severe Acute Respiratory Syndrome (“SARS”). To date, SARS has not re-emerged, like influenza, as a seasonal public health problem. However, it is not possible to predict what effect, if any, H1N1, SARS, or similar epidemics would have on future sales of ZADAXIN, if they were to emerge. Although we do not market ZADAXIN for use in treating epidemic diseases such as Influenza A (H1N1) or SARS, if ZADAXIN is purchased in connection with outbreaks of seasonal viral contagions, product sales could become more concentrated in certain quarters of the calendar year, quarterly sales levels could fluctuate and sales in any quarter may not be indicative of sales in future periods.

 

25


Table of Contents

 

We may lose market share or otherwise fail to compete effectively in the intensely competitive pharmaceutical industry.

Competition in the pharmaceutical industry in China is intense, and we expect that competition will increase. Our success depends on our ability to compete in this industry, but we cannot assure you that we will be able to successfully compete with our competitors. Increased competitive pressure could lead to intensified price-based competition resulting in lower prices and margins, which would hurt our operating results. We cannot assure you that we will compete successfully against our competitors or that our competitors, or potential competitors, will not develop drugs or other treatments for our targeted indications that will be superior to ours.

We depend on sales in China, and global conditions could negatively affect our operating results or limit our ability to expand our operations outside of China. Changes in China’s political, social and economic environment may affect our financial performance.

A large majority of our sales are in China. Heightened tensions resulting from the current geopolitical conditions in the Middle East, North Korea and elsewhere could worsen, causing disruptions in foreign trade, which would harm our sales. In particular, our commercial product is manufactured in Europe and distributed by us from our operations in Hong Kong. Any disruption of our supply and distribution activities due to geopolitical conditions could decrease our sales and harm our operating results.

With respect to China, our financial performance may be affected by changes in China’s political, social and economic environment. The role of the Chinese central and local governments in the Chinese economy is significant. Chinese policies toward economic liberalization, and laws and policies affecting foreign companies, currency exchange rates and other matters could change, resulting in greater restrictions on our ability to do business in China. Any imposition of surcharges or any increase in Chinese tax rates could hurt our operating results. The Chinese government could revoke, terminate or suspend our license for national security and similar reasons without compensation to us. If the government of China were to take any of these actions, we would be prevented from conducting all or part of our business. Any failure on our part to comply with governmental regulations could result in the loss of our ability to market our products in China.

Because of China’s tiered method of importing and distributing finished pharmaceutical products, our quarterly results may vary substantially from one period to the next. *

China uses a tiered method to import and distribute finished pharmaceutical products. At each port of entry, and prior to moving the product forward to the distributors, government-licensed importing agents must process and evaluate each shipment to determine whether such shipment satisfies China’s quality assurance requirements. In order to efficiently manage this process, the importing agents typically place large, and therefore relatively few, orders within an annual period. Therefore, our sales to an importing agent can vary substantially from quarter to quarter depending on the size and timing of the orders, which has in the past and may in the future cause our quarterly results to fluctuate. We rely on a limited number of importers, in any given quarter, to supply substantially all of our product in China. Because we use a small number of importing agents in China, our receivables from any one importing agent are material, and if we were unable to collect receivables from any importer, our business and cash-flow would be adversely affected. These importers are not obligated to place purchase orders for our product, and if they determined for any reason not to place purchase orders, we would need to seek alternative licensed importers, which could cause short term fluctuations in our business.

The existence of counterfeit pharmaceutical products in China’s pharmaceutical retail market may damage our brand and reputation and have a material adverse effect on our business, financial condition, results of operations and prospects. *

Certain medicine products distributed or sold in China’s pharmaceutical retail market, including those appearing to be our products, may be counterfeit. Counterfeit products are products sold under the same or very similar brand names and/or having a similar appearance to genuine products. Counterfeit products, including counterfeit pharmaceutical products, are a significant problem in China. Such products divert sales from genuine products, often are of lower cost, often are of lower quality (having different ingredients or formulations, for example), and have the potential to damage the reputation for quality and effectiveness of the genuine product. The counterfeit pharmaceutical product regulation control and enforcement system in China is not able to completely eliminate production and sale of counterfeit pharmaceutical products. Any sale of counterfeit products resulting in adverse side effects to consumers may subject us to negative publicity and expenses. It could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may be subject to currency exchange rate fluctuations, which could adversely affect our financial performance. *

Substantially all of our product sales are denominated in U.S. dollars. Fluctuation in the U.S. dollar exchange rate with local currency directly affects the customer’s cost for our product. In particular, a stronger U.S. dollar vis-à-vis the local currency would tend to have an adverse effect on sales and potentially on collection of accounts receivable. China currently

 

26


Table of Contents

maintains the value of the renminbi in a narrow currency trading band that may or may not fluctuate based upon government policy. Depending on market conditions and the state of the Chinese economy, China has intervened in the foreign exchange market in the past to prevent significant short-term fluctuations in the renminbi exchange rate, and it could make future adjustments, including moving to a managed float system, with opportunistic interventions. This reserve diversification may negatively impact the United States dollar and U.S. interest rates. A trend to a stronger U.S. dollar would erode margins earned by our Chinese importers and prompt them to ask us to lower our prices. We are subject to currency exchange rate fluctuations as a result of expenses incurred by our foreign operations. In particular, one of our supply arrangements under which we purchase finished products is denominated in euros and costs of our operations in China are paid in local currency. Consequently, changes in exchange rates could unpredictably and adversely affect our operating results and could result in exchange losses. To date, we have not hedged against the risks associated with fluctuations in exchange rates and, therefore, exchange rate fluctuations could have a material adverse impact on our future operating results and stock price.

Our business strategy is dependent on our ability to in-license or otherwise acquire the rights to develop and commercialize products, particularly in China. If we fail to acquire such rights or are unsuccessful in our efforts to develop such products and obtain regulatory approval to market and successfully commercialize them, our business will suffer.

All of our products, including ZADAXIN, the only one for which we have sales revenue, have been in-licensed by us. We do not conduct product discovery and typically have in-licensed our products from third parties who have discovered the products and conducted at least some pre-clinical research on them. We are particularly focused on in-licensing products for the China market and the competition for attractive products to in-license is intense, and we cannot assure you that we will be able to in-license products in the future on acceptable terms, if at all. In addition, we face the risks of developing the in-licensed products and the risks and uncertainties of conducting clinical trials and seeking regulatory approval to market the in-licensed products, all of which require years of effort and the commitment of significant financial resources. Our ability to grow our business requires the development and commercialization of additional products. If we are unable to in-license or acquire products on acceptable terms and successfully develop and commercialize them, our business could be harmed.

We may engage in acquisitions and must successfully integrate any acquired products or companies in order to avoid a material disruption to our business and material adverse effects to our financial results. *

We may engage in one or more acquisitions of products or companies. Acquisitions involve numerous risks, including the following:

 

   

difficulties and costs in integrating the operations, technologies, products and personnel of the acquired businesses;

 

   

inadequate internal control procedures and disclosure controls to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or poor integration of a target company’s or businesses’ procedures and controls;

 

   

potential difficulties in complying with the Foreign Corrupt Practices Act;

 

   

diversion of management’s attention from normal daily operations of the business;

 

   

potential difficulties in completing projects associated with in-process research and development;

 

   

difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;

 

   

insufficient net revenue to offset increased expenses associated with acquisitions;

 

   

potential failure to achieve commercial expectations;

 

   

potential loss of key employees of the acquired companies; and

 

   

difficulty in forecasting revenues and margins.

Acquisitions may also cause us to:

 

   

issue common stock that would dilute our current shareholders’ percentage ownership;

 

   

assume liabilities, some of which may be unknown at the time of such acquisitions;

 

   

record goodwill and intangible assets that will be subject to impairment testing and potential periodic impairment charges;

 

   

incur amortization expenses related to certain intangible assets;

 

   

incur large and immediate write-offs of in-process research and development costs; or

 

27


Table of Contents

 

   

become subject to litigation.

Mergers and acquisitions of pharmaceutical companies inherently entail risk, and no assurance can be given that any future acquisitions will be successful or will not adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could harm our business and operating results in a material way. Even when an acquired company has already developed and marketed products, there can be no assurance of the continued prospects or success of such products or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products.

We may not be able to successfully develop or commercialize our products. *

While we have sales of ZADAXIN (“thymalfasin or thymalfasin alpha 1”) in certain markets, regulatory approval does not exist at this time for ZADAXIN in other key markets. In 2006, we acquired the rights to distribute DC Bead in China, but we must receive regulatory approval before we can commercialize this product. We previously believed that regulatory approval for DC Bead in China would be forthcoming in 2009. However, the SFDA required us to conduct a local trial in China to supplement data already obtained from a previous DC Bead study. This study is underway and if the trial results are positive, we expect to receive regulatory approval for DC Bead in 2011, although timing may be delayed if there are additional requirements requested by the SFDA. Our other potential products presently are SCV-07 and ondansetron RapidFilm and each of them is in an earlier stage of development than ZADAXIN. Clinical trials outcomes are uncertain. For example, in October 2009, we halted our phase 2 trial of RP101 and we have no plans to proceed with further development of RP101 at this time. We may consider and undertake various strategies to expand our portfolio of potential products, including acquiring product candidate rights through licenses or other relationships, or through other strategic relationships including acquisitions of other companies that may have proprietary rights to other development candidates or the capability to discover new drug candidates. Such transactions could require a substantial amount of our financial resources, or, if equity is involved, may result in substantial dilution to current stockholders. Strategic transactions also require substantial management time and effort and are subject to various risks that could adversely affect us or our financial results.

To fully develop our products, substantial resources are required for extensive research, development, pre-clinical testing, clinical trials, and manufacturing scale-up and regulatory approval prior to the potential products being ready for sale. We cannot assure that our efforts will produce commercially viable products. We face significant technological risks inherent in developing these products. We may also abandon some or all of our proposed products before they become commercially viable. For ondansetron RapidFilm, we are obligated to make a milestone payment upon regulatory approval. If any of our products, even if developed and approved, cannot be successfully commercialized in a timely manner, our business will be harmed and the price of our stock may decline.

We have not yet sold any product other than ZADAXIN and our sales have been primarily to a single country, China. Our future revenue growth depends to a great extent on increased sales of ZADAXIN to China. If we fail to successfully market ZADAXIN, our revenue and operating results will be limited. If unexpected and serious adverse events are reported, or if expected efficacy results are not achieved, it would have a material adverse effect on our business. Our future revenue will also depend in part on our ability to develop other commercially viable and accepted products, such as DC Bead, ondansetron RapidFilm, and SCV-07. Market acceptance of our products will depend on many factors, including our ability to convince prospective customers to use our products as an alternative to other treatments and therapies and to convince prospective strategic partners to market our products effectively and to manufacture our products in sufficient quantities with acceptable quality and at an acceptable cost. In addition, doctors must opt to use treatments involving our products. If doctors elect to use a different course of treatment, demand for our drug products would be reduced. Failure to do any of the above will lead to an unfavorable outcome on the results of our operations.

We cannot predict the safety profile of the use of thymalfasin, DC Bead, ondansetron RapidFilm or SCV-07 when used in combination with other drugs.

Many of our trials involve the use of thymalfasin in combination with other drugs. SCV-07 may be developed to be used in combination with other drugs. Some of these drugs, particularly pegylated interferon alpha, ribavirin, non-pegylated interferon alpha, dacarbazine and gemcitabine are known to cause adverse patient reactions. We cannot predict how thymalfasin, DC Bead, ondansetron RapidFilm or SCV-07 will work with other drugs, including causing possible adverse side effects not directly attributable to the other drugs that could compromise the safety profile of thymalfasin, DC Bead, ondansetron RapidFilm or SCV-07 when used in certain combination therapies.

Final results from our proposed or ongoing clinical trials for thymalfasin, SCV-07, ondansetron RapidFilm, and DC Bead may differ materially from interim or pre-clinical trial results. These clinical trials could be affected by the future actions of our partners, unexpected delays, unanticipated patient dropout rates or adverse side effects, future actions by the SFDA or the FDA or equivalent regulatory authorities in Europe or other countries or additional expenses.

 

28


Table of Contents

 

Our ability to achieve and sustain operating profitability depends in large part on our ability to commence, execute and complete clinical programs and obtain additional regulatory approvals for ZADAXIN and other drug candidates.

Clinical trials are inherently risky and may reveal that our product candidates are ineffective or have unanticipated side effects and/or drug interactions that may significantly decrease the likelihood of regulatory approval. In October 2009, we announced the discontinuation of our phase 2 clinical trial evaluating RP101, a nucleoside analog known as BVdU, for the treatment of late-stage pancreatic cancer. This decision followed the recommendation of the trial’s Data Safety Monitoring Committee (“DSMC”) based upon the data reviewed and we have no plans to proceed with further development of RP101 at this time. In addition, on November 5, 2008, we announced the top-line results from a large, randomized, phase 3 clinical trial evaluating thymalfasin in combination with pegylated interferon alpha-2a (“peg-IFN-2a”) and ribavirin (“RBV”) as a treatment for patients with hepatitis C virus (“HCV”) who have not responded to prior therapy consisting of peg-IFN and RBV alone (current standard of care). The thymalfasin treated group did not achieve statistical significance for the primary end point of sustained virological response (“SVR”) as assessed in the primary analysis population, i.e. the intent-to-treat population. In the prospectively defined secondary population of patients who completed the full course of 48 weeks of treatment with thymalfasin in addition to peg-IFN-2a and RBV (“Completer Population”), the primary endpoint was achieved with statistical significance. These results did not meet our expectations based upon prior clinical trials. Similarly, the results of our thymalfasin phase 2 melanoma clinical trial do not necessarily predict future clinical or commercial success. Finally, the results of studies in DC Bead, ondansetron RapidFilm, SCV-07, including a phase 2a for HCV, pre-clinical and phase 1 trial results also do not predict clinical or commercial success.

We may face numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent commercialization of our product candidates including: our product candidate clinical trials may not prove statistical significance; negative or inconclusive clinical trial results may require us to conduct further testing or we may choose to abandon projects that we had been expecting to complete; clinical trials may be halted due to safety reasons; patient dropout rates in our clinical trial may be higher than anticipated; the FDA, its European equivalent EMEA or the SFDA may not approve our products for commercialization or may require additional clinical trial data prior to approving our products; and/or our future expenses and ability to proceed with a trial may be dependent in part on finding a partner. Moreover, if the outcome of any of these trials is unsuccessful, or even if successful, does not achieve commercially meaningful results, our business could be harmed.

If third-party reimbursement is not available or patients cannot otherwise pay for ZADAXIN, DC Bead, ondansetron RapidFilm, or SCV-07, we may not be able to successfully market them. *

Significant uncertainty exists as to the reimbursement status of new therapeutic products, such as ZADAXIN, and once commercialized, DC Bead, ondansetron RapidFilm and SCV-07. We cannot assure you that third-party insurance coverage and reimbursement will be available for therapeutic products we might develop. Although ZADAXIN receives some limited reimbursement in certain provinces in China, we cannot assure you that we will be able to maintain existing reimbursements or increase third-party payments for ZADAXIN or obtain third-party payments for DC Bead in China or ondansetron RapidFilm in China including Hong Kong and Macau, or Vietnam. The failure to obtain or maintain third-party reimbursement for our products would harm our business. Further, we cannot assure you that additional limitations will not be imposed in the future in the United States or elsewhere on drug coverage and reimbursement due to proposed health care reforms. In many emerging markets where we have marketing rights to ZADAXIN, but where government resources and per capita income may be so low that our products will be prohibitively expensive, we may not be able to market our products on economically favorable terms, if at all.

Efforts by governmental and third-party payers to contain or reduce health care costs or the announcement of legislative proposals or reforms to implement government controls could cause us to reduce the prices at which we market our drugs, which would reduce our gross margins and may harm our business.

If we do not obtain regulatory approval for thymalfasin, SCV-07, ondansetron RapidFilm or DC Bead for the intended indications that we are evaluating, our revenues will be limited and our operating results may be materially affected. *

Our ability to execute on our business strategy is largely dependent on our ability to obtain regulatory approval for the use of thymalfasin in major markets, for the use of SCV-07 in major markets, excluding Russia, for the use of ondansetron RapidFilm in China including Hong Kong and Macau, and Vietnam, and for the use of DC Bead in China. The regulatory approval processes in the United States, Europe and China are demanding and typically require 12 months or more in the United States and China and 18 months or more in Europe from the date of submission of an NDA. We have committed significant resources, including capital and time, to develop these products, and intend to continue to do so, including the initiation and execution of additional clinical trials, with the goal of obtaining such approvals. If we do not obtain these approvals, we will be unable to achieve any revenue from these products in these major markets and our thymalfasin sales in other jurisdictions could decline.

 

29


Table of Contents

 

We believed that regulatory approval for DC Bead would be forthcoming in 2009. However, the SFDA required us to conduct a local trial in China to supplement data already obtained from a previous DC Bead study. The study is underway and if the trial results are positive, we expect to receive regulatory approval for DC Bead in 2011. However, we cannot give assurance that such submission will be approved by the regulatory authorities. If additional clinical trials in China are required as part of the regulatory process, the regulatory submission for marketing approval could be delayed for a considerable period of time, and there can be no assurance that the results of clinical trials would support a regulatory submission or that the regulatory authorities would approve the product to be commercialized and sold in China. To the extent that additional information or clinical trials are required by the regulatory authorities, or we do not receive regulatory approval in China, our future sales potential in China could be harmed.

All new drugs, including our products, which have been developed or are under development, are subject to extensive and rigorous regulation by the FDA, SFDA and similar regulatory agencies. These regulations govern, among other things, the development, testing, manufacturing, labeling, storage, pre-market approval, importation, advertising, promotion, sale and distribution of our products. These regulations may change from time to time and new regulations may be adopted.

Satisfaction of government regulations may take several years and the time needed to satisfy them varies substantially based on the type, complexity and novelty of the pharmaceutical product. As a result, government regulation may cause us to delay the introduction of, or prevent us from marketing, our existing or potential products for a considerable period of time and impose costly procedures upon our activities. Even if we obtain regulatory approval for our products, such approval may impose limitations on the indicated uses for which our products may be marketed. Further unsatisfactory data resulting from clinical trials may also adversely affect our ability to market and sell thymalfasin in markets where it is approved for sale.

We rely on third parties who are our sole source suppliers for our clinical trial and commercial products and their inability to deliver products that meet our quality-control standards could delay or harm one or more important areas of our business including our sales, clinical trials or the regulatory approval process.*

We rely on third parties, who are subject to regulatory oversight, to supply our clinical and commercial products. For example, Biocompatibles is the sole supplier of DC Bead, Applied Pharma Research S.A. (“APR”) is the sole supplier of ondansetron RapidFilm, and Solvay Peptides S.A. is our sole supplier of SCV-07. Any unanticipated deficiencies in these suppliers, or the suppliers or our raw materials, and/or recall of the manufacturing lots or similar action regarding the pegylated interferon alpha, ribavirin or gemcitabine used in our clinical trials could delay the trials or detract from the integrity of the trial data and its potential use in future regulatory filings. In addition, manufacturing interruptions or failure to comply with regulatory requirements by any of these suppliers could significantly delay clinical development of potential products and reduce third-party or clinical researcher interest and support of proposed trials. These interruptions or failures could also impede commercialization of our products and impair our competitive position.

Further, any deficiencies or shortages in supply of our commercial products would adversely affect our ability to realize our sales plans. For example, the manufacturing of the raw material and the processing to finished product of ZADAXIN is done in few batches in any given three-month period and any manufacturing errors have the potential to require a product recall. During 2006, we experienced failures and lower yields on production runs from our sole supplier of bulk active pharmaceutical ingredient (“API”) product for the manufacture of ZADAXIN for our current markets, including China. During 2009, we experienced quality-control problems with a component of our ZADAXIN kit. We have experienced further problems recently. Although we are taking steps to ensure that such problems do not continue, there is no assurance that we will either be successful in doing so with our current supplier or be able to timely and cost-effectively qualify a new supplier for this component. Manufacturing interruptions or failure or delay of product to meet quality assurance specifications could adversely affect shipments and recognition of sales of ZADAXIN in any period and impair our relationships with customers and our competitive position and may increase the cost of material produced.

We are in the process of registering new suppliers for ZADAXIN with regulatory agencies in markets where thymalfasin is approved for sale, including China. This process, quality assurance and other steps could cause delays or interruptions of supply in certain other markets. In some countries, a manufacturing change may require additional regulatory approvals that may delay thymalfasin marketing approvals in new markets. In addition, if sales of ZADAXIN were to increase dramatically, our third-party suppliers may not be able to supply ZADAXIN either quickly enough or at a commercially reasonable cost, which could limit our ability to satisfy increased demand or could adversely affect the ability of these suppliers to provide products for our clinical trials. If any of our suppliers are unable to match our need for supply, either because of product defects, inability to increase supply in the face of increased demand, or maintain financially viable businesses, our ability to affect our sales and protect our brand reputation would be materially impaired, thereby materially and adversely affecting our sales and results of operations.

We rely on third parties for development of our products and the inability of any of these parties to reliably, timely or cost-effectively provide us with their obligated services could materially harm the timing of bringing our products to market and accordingly adversely affect our business.

 

30


Table of Contents

 

We rely on third parties, such as contract research organizations, medical institutions, clinical investigators, contract laboratories, and collaborative partners in the conduct of clinical trials for our product candidates. If these parties, whom we do not control, do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines or choose not to continue their relationship with us, if the third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical or clinical activities may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize our product candidates.

Commercialization of some of our products depends on collaborations with others. If our collaborators are not successful, or if we are unable to find future collaborators, we may not be able to properly develop and commercialize our products.

We depend in part on our distributors and business partners to develop or promote our drugs, and if they are not successful in their efforts or fail to do so, our business will suffer. For example, Sigma-Tau is responsible for the development and marketing of ZADAXIN in most of Europe. Biocompatibles is providing SciClone with the necessary supporting documents to obtain regulatory approval in China for DC Bead, APR is providing SciClone with the necessary supporting documents to obtain regulatory approval in China including Hong Kong and Macau, and Vietnam for ondansetron RapidFilm. We generally do not have control over the amount and timing of resources that our business partners devote to our collaborative efforts, and some have not always performed as or when expected. If they do not perform their obligations as we expect, particularly obligations regarding clinical trials, our development expenses would increase and the development or sale of our products could be limited or delayed, which could hurt our business and cause our stock price to decline. In addition, our relationships with these companies may not be successful. Disputes may arise with our collaborators, including disputes over ownership rights to intellectual property, know-how or technologies developed with our collaborators. We may not be able to negotiate similar additional arrangements in the future to develop and commercialize ZADAXIN or other products.

If we are unable to manage our key personnel, or are unable to attract and retain additional, highly skilled and experienced personnel, our business will suffer. *

We are highly dependent upon our ability to attract and retain qualified personnel because of the specialized, scientific and worldwide nature of our business. Further, we are also dependent on our ability to appropriately staff these personnel in appropriate positions as our business fluctuates. There is intense competition for qualified management, scientific, clinical, regulatory, and sales and marketing personnel in the pharmaceutical industry. There is significant turnover in the industry in China in particular, and we have also experienced turnover in our sales personnel. We may not be able to attract and retain the qualified personnel we need to grow and develop our business globally. Conversely, in the event that we need to reduce the size of a particular aspect of our business, we are also dependent on our ability to make such adjustments while retaining suitably skilled personnel. Further, our efforts to in-license or acquire, develop and commercialize product candidates for China require the addition of clinical and regulatory personnel and the capabilities to expand our sales and marketing operation. In addition, we assign numerous key responsibilities to a limited number of individuals, and we would experience difficulty in finding immediate replacements for any of them were any one of them to choose to leave employment with us. If we were unable to attract and retain qualified personnel as needed or promptly replace those employees who are critical to our product development and commercialization, the development and commercialization of our products would be adversely affected. At this time, we do not maintain “key person” life insurance for any of our personnel.

We may need to obtain additional funding to support our long-term product development and commercialization programs.

We believe our existing cash and investments and ongoing revenue generating business operations will be sufficient to support our current operating plan for at least the next 12 months. However, our ability to achieve and sustain operating profitability is dependent on numerous factors including our ability to achieve our goal of increasing sales of ZADAXIN, securing regulatory approval for DC Bead in China, and for ondansetron RapidFilm in China including Hong Kong and Macau, and Vietnam, the execution and successful completion of thymalfasin, SCV-07, and DC Bead clinical trials and securing partnerships for those programs that lead to regulatory approvals in major pharmaceutical markets. We cannot assure you that such funds from operating activities will be sufficient, or that we will attain profitable operations in future periods. In addition, we intend to develop other products and we may need additional funds in the future to support such development and to support future growth and achieve profitability. If we need to raise additional funds in the future and such funds are not available on reasonable terms, if at all, our commercialization efforts may be impeded, our revenues may be limited and our operating results may suffer.

If we fail to protect our products, technologies and trade secrets, we may not be able to successfully use, manufacture, market or sell our products, or we may fail to advance or maintain our competitive position, and we have limited intellectual property protection in China.

 

31


Table of Contents

 

Our success depends significantly on our ability to obtain and maintain meaningful patent protection for our products and technologies and to preserve our trade secrets. Our pending patent applications may not result in the issuance of patents in the future. Our patents or patent applications may not have priority over others’ applications. Our existing patents and additional patents that may be issued, if any, may not provide a competitive advantage to us or may be invalidated or circumvented by our competitors. Others may independently develop similar products or design around patents issued or licensed to us. Patents issued to, or patent applications filed by, other companies could harm our ability to use, manufacture, market or sell our products or maintain our competitive position with respect to our products. Although many of our patents relating to thymalfasin have expired, including composition of matter patents, we have rights to other patents and patent applications relating to thymalfasin and thymalfasin analogues, including method of use patents with respect to the use of thymalfasin for certain indications. Additionally, thymosin alpha 1 (“thymalfasin”), the chemical composition of thymalfasin, has received Orphan Drug designation in the United States for the treatment of stage IIb through stage IV melanoma. If other parties develop generic forms of thymalfasin for other indications, including conducting clinical trials for such indications, our patents and other rights might not be sufficient to prohibit them from marketing and selling such generic forms of thymalfasin. If other parties develop analogues or derivatives of thymalfasin, our patents and other rights might not be sufficient to prohibit them from marketing these analogues or derivatives.

Pharmaceutical products are either not patentable or have only recently become patentable in some of the countries in which we market or may market thymalfasin. We do not have composition patent claims directed to the same form of thymalfasin currently marketed in China, our largest market, although we do have other type of patent claims, pending or issued, directed to other aspects of thymalfasin therapy. Other companies market generic thymosin alpha 1 in China, sometimes in violation of our patent, trademark or other rights which, to date, we have defended by informing physicians and hospitals of the practice. Past enforcement of intellectual property rights in many of these countries, including China in particular, has been limited or non-existent. Future enforcement of patents and proprietary rights in many other countries will likely be problematic or unpredictable. Moreover, the issuance of a patent in one country does not assure the issuance of a similar patent in another country. Claim interpretation and infringement laws vary by nation, so the extent of any patent protection is uncertain and may vary in different jurisdictions.

If we are involved in intellectual property claims and litigation, the proceedings may divert our resources and subject us to significant liability for damages, substantial litigation expense and the loss of our proprietary rights.

Our commercial success depends in part on our not infringing valid, enforceable patents or proprietary rights of third parties, and not breaching any licenses that may relate to our technologies and products. In addition, we may not be aware of all patents or patent applications that may impact our ability to make, use or sell any of our potential products. For example, U.S. patent applications may be kept confidential for 12 or more months while pending in the Patent and Trademark Office, and patent applications filed in foreign countries are often first published nine months or more after filing. It is possible that we may unintentionally infringe these patents or other patents or proprietary rights of third parties. We may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third-party patents. Any legal action against us or our collaborative partners claiming damages and seeking to enjoin commercial activities relating to our products and processes affected by third-party rights may require us or our collaborative partners to obtain licenses in order to continue to manufacture or market the affected products and processes. Our efforts to defend against any of these claims, regardless of merit, would require us to devote resources and attention that could have been directed to our operations and growth plans. In addition, these actions may subject us to potential liability for damages. We or our collaborative partners may not prevail in a patent action and any license required under a patent may not be made available on commercially acceptable terms, or at all. Any conflicts resulting from the patent rights of others could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection.

If other companies obtain patents with conflicting claims, we may be required to obtain licenses to those patents or develop or obtain alternative technology to manufacture or market the affected products and processes. We may not be able to obtain any such licenses on acceptable terms or at all. Any failure to obtain such licenses could delay or prevent us from pursuing the development or commercialization of our potential products. Our efforts to defend against any of these claims would require us to devote resources and attention that could have been directed to our operations and growth plans.

We may need to initiate litigation, which could be time-consuming and expensive, to enforce our proprietary rights or to determine the scope and validity of others’ rights. If litigation results, a court may find our patents or those of our licensors invalid or may find that we have infringed on a competitor’s rights. If any of our competitors have filed patent applications in the United States which claim technology we also have invented, the Patent and Trademark Office may require us to participate in expensive interference proceedings to determine who has the right to a patent for the technology. These actions may subject us to potential liability for damages. We or our collaborative partners may not prevail in a patent action and any license required under a patent may not be made available on commercially acceptable terms, or at all.

Substantial sales of our stock or equity in our subsidiaries or the exercise or conversion of options or convertible securities may impact the market price of our common stock.

 

32


Table of Contents

 

Our collaborative partner Sigma-Tau and affiliates hold a substantial amount of our stock. The stock is freely tradable and Sigma-Tau is not under any obligation to SciClone which would prevent it from selling some or all of the stock it holds except for applicable U.S. insider trading regulations with respect to possession of material non-public information by Sigma-Tau or its officers and directors.

In May 2009, we filed a Form S-3 Shelf registration with the Securities and Exchange Commission (“SEC”) which was later declared effective by the SEC and will allow us to sell securities in one or more offerings. Future issuances of substantial amounts of our common stock could adversely affect the market price of our common stock. Similarly, if we raise additional funds through the issuance of common stock or securities convertible into or exercisable for common stock or sell equity in a subsidiary, the percentage ownership of our present stockholders of the respective entities will be reduced and the price of our common stock may fall.

Our cash and investments are subject to certain risks which could materially adversely affect our overall financial position. *

We invest our cash in accordance with an established internal policy and customarily in instruments which historically have been highly liquid and carried relatively low risk. However, with turmoil in the credit markets, similar types of investments have experienced losses in value or liquidity issues which differ from their historical pattern. For example, we routinely have invested in money market funds with large financial institutions. One or more of these funds could experience losses or liquidity problems and, although to date some of the largest financial institutions who sponsor such funds have offset similar losses, there is no assurance that our financial institutions would either not incur losses or would offset any losses were they to occur.

Should any of our cash investments permanently lose value or have their liquidity impaired, it would have a material and adverse effect on our overall financial position by imperiling our ability to fund our operations and forcing us to seek additional financing sooner than we would otherwise and such financing may not be available on commercially attractive terms.

In addition, financial instruments may subject us to a concentration of credit risk. Substantially all of our cash, and cash equivalents are held by a limited number of financial institutions including all of our term deposits held by financial institutions in Hong Kong and offshore. Such term deposits do not exceed federally insured limits and to date, we have not experienced any losses on our deposits of cash and cash equivalents. However, if any of these instruments permanently lost value or had their liquidity impaired, it would also have a material and adverse effect on our overall financial position by imperiling our ability to fund our operations and forcing us to seek additional financing sooner than we would otherwise and such financing may not be available on commercially attractive terms.

New accounting pronouncements may impact our financial position or results of operations.

Future changes in financial accounting standards may cause adverse, unexpected fluctuations in the timing of the recognition of revenues or expenses and may affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with frequency and may occur in the future and this may lead to changes in our accounting policies in the future.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

Effective internal controls are necessary for us to provide reliable financial reports and to protect from fraudulent, illegal or unauthorized transactions. If we cannot provide effective controls and reliable financial reports, our business and operating results could be harmed. Moreover, as a United States-based corporation doing business in China, these controls often need to satisfy the requirements of Chinese law as well as the requirements of United States law which frequently differ in certain aspects. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. For example, our management determined that as of December 31, 2008 we had a material weakness in our internal controls related to our failure to expense approximately $540,000 in research and development costs related to changes in the scope of activities performed by our clinical research organization during 2008. Although we have since taken steps to rectify this material weakness, there can be no assurance that we will be successful in this regard. Any failure to implement and maintain controls over our financial reporting, or difficulties encountered in the implementation of improvements in our controls, could cause us to fail to meet our reporting obligations. Any failure to improve our internal controls or to address identified weaknesses in the future, including with respect to our clinical research expenses, if they were to occur, could also cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock.

Subsequent to the end of the quarter, a special committee of our board of directors determined to undertake an independent investigation as to matters reflected in and arising from the SEC and DOJ investigations, including but not limited to, certain sales and marketing matters in China in order to evaluate whether any violation of the FCPA or other laws occurred as to such matters. The investigation is in process and no conclusions have been reached, however if the investigation results in a determination that a violation occurred or may have occurred, the additional information resulting from such investigation or the determinations made in such investigation may indicate that our internal controls were not effective. In addition, we may determine based upon the results of such investigation that changes in our internal controls are appropriate even if a violation did not occur. Independent of the outcome of the investigation, we have determined to undertake a further review of our internal controls to consider whether we will implement additional internal controls or modifications of our internal controls.

 

33


Table of Contents

 

New legislation may impact our financial position or results of operations.

Compliance with changing regulations concerning corporate governance and public disclosure has resulted in and may continue to result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and The NASDAQ Stock Market rules, are creating uncertainty for companies such as ours and costs are increasing as a result of this uncertainty and other factors. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment has and may continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

Currently a majority of our revenue is generated from customers located outside the United States, and a substantial portion of our assets, including employees, are located outside the United States. United States income taxes and foreign withholding taxes have not been provided on undistributed earnings of non-United States subsidiaries, because such earnings are intended to be indefinitely reinvested in the operations of those subsidiaries. President Obama’s administration has recently announced initiatives that would substantially reduce our ability to defer U.S. taxes including: repealing deferral of U.S. taxation of foreign earnings, eliminating utilization or substantially reducing our ability to claim foreign tax credits, and eliminating various tax deductions until foreign earnings are repatriated to the United States. If any of these proposals are constituted into legislation, they could increase our U.S. income tax liability and as a result have a negative impact on our financial position and results of operations.

Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us, which may be beneficial to our stockholders, more difficult.

Certain anti-takeover provisions of Delaware law and our charter documents as currently in effect may make a change in control of our company more difficult, even if a change in control would be beneficial to our stockholders. Our charter documents contain certain anti-takeover provisions, including provisions in our certificate of incorporation providing that stockholders may not cumulate votes, stockholders’ meetings may be called by stockholders only if they hold 25% or more of our common stock and provisions in our bylaws providing that the stockholders may not take action by written consent. Additionally, our board of directors has the authority to issue 10 million shares of preferred stock and to determine the terms of those shares of stock without any further action by the stockholders. The rights of holders of our common stock are subject to the rights of the holders of any preferred stock that may be issued. The issuance of preferred stock could make it more difficult for a third-party to acquire a majority of our outstanding voting stock. Delaware law also prohibits corporations from engaging in a business combination with any holders of 15% or more of their capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction. Our board of directors may use these provisions to prevent changes in the management and control of our company. Also, on December 18, 2006, our board of directors declared a dividend distribution of one Preferred Stock Purchase Right (collectively, the “Rights”) for each outstanding share of our Common Stock, each Right which entitles the registered holder to purchase from the Company one one-thousandth of a share of the Company’s Series D Preferred Stock, $0.001 par value, at a price of $25.00 pursuant to a Rights Agreement dated as of December 19, 2006, between the Company and Mellon Investor Services LLC. The Rights have certain anti-takeover effects. Under certain circumstances the Rights could cause substantial dilution to a person or group who attempts to acquire the Company on terms not approved by our board of directors. Although the Rights should not interfere with an acquisition of the Company approved by the board, the Rights may have the effect of delaying and perhaps improving the terms of an acquisition for our stockholders, or deterring an acquisition of the Company. Also, under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future.

We may be subject to product liability lawsuits, and our insurance may be inadequate to cover damages.

Clinical trials of any of our current and potential products or the actual commercial sales of our product may expose us to liability claims from the use of these products. We currently carry product liability insurance. However, we cannot be certain that we will be able to maintain insurance on acceptable terms, if at all, for clinical and commercial activities or that the insurance would be sufficient to cover any potential product liability claim or recall. If we fail to have sufficient coverage, our business, results of operations and cash flows could be adversely affected.

If we are unable to comply with environmental and other laws and regulations, our business may be harmed.

We are subject to various federal, state and local laws, regulations and recommendations relating to the use, manufacture, storage, handling and disposal of hazardous materials and waste products (including radioactive compounds and infectious disease agents), as well as safe working conditions, laboratory and manufacturing practices and the experimental use of animals. The extent of government regulation that might result from future legislation or administrative action in these areas cannot be accurately predicted.

We do not currently maintain hazardous materials at our facilities. While we outsource our research and development programs involving the controlled use of biohazardous materials, if in the future we conduct these programs ourselves, we might be required to incur significant cost to comply with environmental laws and regulations. Further, in the event of an accident, we would be liable for any damages that result, and the liability could exceed our resources.

 

34


Table of Contents

 

Our business and operations are subject to the risks of being based in particular locations known for earthquakes, other natural catastrophic disasters and service interruptions. *

Our corporate headquarters are located in the Silicon Valley area of Northern California, a region known for seismic activity. Although we maintain a disaster recovery policy that includes storage of important corporate data in a different geographic region of the United States, all of our significant corporate data is stored in our headquarters facility and accordingly, a significant natural disaster, such as an earthquake, could have a material adverse impact on our business, operating results, and financial condition. Most of our sales are into China for which we maintain a sole warehouse for finished goods in Hong Kong, which can experience severe typhoon storms, earthquakes or other natural catastrophic disasters. Although our distributors in China may maintain several months supply of our product, were our warehouse capability to be interrupted, either through a natural disaster such as flooding or through a service interruption, such as a lack of electricity to power required air conditioning, our ability to timely deliver finished product to China could be adversely affected which in turn would materially adversely affect our sales and ensuing operating results.

We May Be Affected by Climate Change and Market or Regulatory Responses to Climate Change

Climate change, including the impact of global warming, could have a material adverse effect on our results of operations, financial condition, and liquidity if it were to disrupt the demand, supply or delivery of product, management of our business, or result in cost increases as a result of government regulation.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Removed and Reserved

 

Item 5. Other Information

None

 

Item 6. Exhibits

 

Exhibit
Number

 

Description

10.1 (1)   Loan and Security Agreement by and among SciClone Pharmaceuticals International Ltd., Sciclone Pharmaceuticals International China Holding Ltd., and Silicon Valley Bank, dated as of October 1, 2010.
10.2 (1)   License Agreement between Edward T. Wei, SciClone Pharmaceuticals, Inc. and SciClone Pharmaceuticals International Ltd. dated July 28, 1997.
31.1 (1)   Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 (1)   Rule 13a-14(a) Certification of Chief Financial Officer.
32.1 (1)   Section 1350 Certification of Chief Executive Officer.
32.2 (1)   Section 1350 Certification of Chief Financial Officer.

 

(1) Filed Herewith.

 

35


Table of Contents

 

SIGNATURE

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.

 

  SCICLONE PHARMACEUTICALS, INC.
  (Registrant)
Date: November 8, 2010    

/ S /    G ARY S. T ITUS        

    Gary S. Titus
    Senior Vice President, Finance and Chief Financial Officer

 

36


Table of Contents

 

INDEX TO EXHIBITS

 

Exhibit

Number

 

Exhibit

10.1 (1)   Loan and Security Agreement by and among SciClone Pharmaceuticals International Ltd., Sciclone Pharmaceuticals International China Holding Ltd., and Silicon Valley Bank, dated as of October 1, 2010.
10.2 (1)   License Agreement between Edward T. Wei, SciClone Pharmaceuticals, Inc. and SciClone Pharmaceuticals International Ltd. dated July 28, 1997.
31.1 (1)   Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 (1)   Rule 13a-14(a) Certification of Chief Financial Officer.
32.1 (1)   Section 1350 Certification of Chief Executive Officer.
32.2 (1)   Section 1350 Certification of Chief Financial Officer.

 

(1) Filed Herewith.

 

37

 

Exhibit 10.1

LOAN AND SECURITY AGREEMENT

This LOAN AND SECURITY AGREEMENT (this “ Agreement ”) dated as of October 1, 2010 (the “ Effective Date ”) by and among S ILICON V ALLEY B ANK , a California corporation (“ Bank ”), S CI C LONE P HARMACEUTICALS I NTERNATIONAL L TD . , a Cayman Islands exempted company (“ SPIL ”) and S CI C LONE P HARMACEUTICALS I NTERNATIONAL C HINA H OLDING L TD . , a Cayman Islands exempted company (“ SPIL China ,” and together with SPIL, collectively, “ Borrowers ” and each a “ Borrower ”) provides the terms on which Bank shall lend to Borrowers and Borrowers shall repay Bank. The parties agree as follows:

1 ACCOUNTING AND OTHER TERMS

Accounting terms not defined in this Agreement shall be construed following GAAP. Calculations and determinations must be made following GAAP. As used in this Agreement, the word “shall” is mandatory, the word “may” is permissive, the word “or” is not exclusive, the words “includes” and “including” are not limiting, the singular includes the plural and capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in Section 13. All other terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined therein.

2 LOAN AND TERMS OF PAYMENT

2.1 Promise to Pay; Parent as Guarantor Only . Borrowers hereby jointly, severally and unconditionally promise to pay Bank the outstanding principal amount of all Credit Extensions and accrued and unpaid interest thereon as and when due in accordance with this Agreement. Bank and Borrowers intend and agree that the obligations of the Parent shall be, and are, solely those of a guarantor and that any such obligations of the Parent shall arise to the extent any such obligations are undertaken by the Parent pursuant to the Guaranty.

2.1.1 Revolving Advances .

(a) Availability . Subject to the terms and conditions of this Agreement and to deduction of Reserves, Bank shall make Advances not exceeding the Availability Amount. Amounts borrowed hereunder may be repaid and, prior to the Revolving Line Maturity Date, reborrowed, subject to the applicable terms and conditions precedent herein.

(b) Termination; Repayment . The Revolving Line terminates on the Revolving Line Maturity Date, when the principal amount of all Advances, the unpaid interest thereon, and all other Obligations relating to the Revolving Line shall be immediately due and payable.

2.1.2 [Reserved.]

2.1.3 [Reserved.]

2.1.4 Cash Management Services Sublimit . Borrowers may use up to $2,500,000 of the Revolving Line for Bank’s cash management services which may include merchant services, direct deposit of payroll, business credit card, and check cashing services identified in Bank’s various cash management services agreements (collectively, the “ Cash Management Services ”). Any amounts Bank pays on behalf of Borrowers for any Cash Management Services will be treated as Advances under the Revolving Line and will accrue interest at the interest rate applicable to Advances.

2.2 Overadvances . If, at any time, the sum of the outstanding principal amount of any Advances (including any amounts used for Cash Management Services) exceeds the lesser of either the Revolving Line or the Borrowing Base (such excess amount being an “ Overadvance ”), Borrowers shall immediately pay to Bank in cash such Overadvance. Without limiting Borrowers’ obligation to repay Bank any amount of the Overadvance, Borrowers agree to pay Bank interest on the outstanding amount of any Overadvance, on demand, at the Default Rate.


 

2.3 Payment of Interest on the Credit Extensions.

(a) Interest Rate ; Advances . Subject to Section 2.3(b), the principal amount outstanding under the Revolving Line shall accrue interest at a per annum rate equal to the Prime Rate plus the Prime Rate Margin, which interest shall be payable monthly.

(b) Default Rate . Immediately upon the occurrence and during the continuance of an Event of Default, Obligations shall bear interest at a rate per annum which is 5% above the rate that is otherwise applicable thereto (the “ Default Rate ”). Payment or acceptance of the increased interest rate provided in this Section 2.3(b) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Bank.

(c) Adjustment to Interest Rate . Changes to the interest rate of any Credit Extension based on changes to the Prime Rate shall be effective on the effective date of any change to the Prime Rate and to the extent of any such change.

(d) 360-Day Year . Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed.

(e) Debit of Accounts . Bank may debit any of Borrowers’ deposit accounts, including the Designated Deposit Accounts, for principal and interest payments or any other amounts Borrowers owe Bank when due. These debits shall not constitute a set-off.

(f) Minimum Monthly Interest . Borrowers shall pay Bank interest of not less than the Minimum Monthly Interest per month. Such amount shall be fully earned for the following 12 months on the Effective Date and on each anniversary thereof and, except as provided in Section 12.1, shall be payable as follows: in the event the aggregate amount of interest earned by Bank in any month (exclusive of any collateral monitoring fees, unused line fees, or any other fees and charges hereunder) is less than the Minimum Monthly Interest, Borrowers shall pay Bank an amount, payable on the last day of such month, in an amount equal to the (i) Minimum Monthly Interest minus (ii) the aggregate amount of all interest earned by Bank (exclusive of any collateral monitoring fees, unused line fees, or any other fees and charges hereunder) in such month.

(g) Payment; Interest Computation; Float Charge . Interest is payable monthly on the last calendar day of each month. In computing interest on the Obligations, all Payments received after 12:00 p.m. Pacific time on any day shall be deemed received on the next Business Day. Bank shall not, however, be required to credit Borrowers’ account for the amount of any item of payment which is unsatisfactory to Bank in its good faith business judgment, and Bank may charge Borrowers’ Designated Deposit Accounts for the amount of any item of payment which is returned to Bank unpaid.

2.4 Fees . Borrowers shall pay to Bank:

(a) [Reserved.]

(b) [Reserved.]

(c) Termination Fee . Subject to the terms of Section 12.1, a termination fee;

(d) Unused Revolving Line Facility Fee . A fee (the “ Unused Revolving Line Facility Fee ”), payable monthly, in arrears, on a calendar year basis, in an amount equal to 0.35% per annum of the average unused portion of the Revolving Line, as determined by Bank. The unused portion of the Revolving Line for any period of calculation, for purposes of this calculation, shall equal the difference between (x) the sum of (i) the Revolving Line amount during such period minus (ii) $2,500,000, and (y) the average of the daily closing balance of the Revolving Line outstanding during such period. Borrowers shall not be entitled to any credit, rebate or repayment of any Unused Revolving Line Facility Fee previously earned by Bank pursuant to this Section notwithstanding any termination of the Agreement, or suspension or termination of Bank’s obligation to make loans and advances hereunder; and


 

(e) Bank Expenses . All Bank Expenses (including reasonable attorneys’ fees and expenses, plus expenses, for documentation and negotiation of this Agreement) incurred through and after the Effective Date, when due. Bank acknowledges receipt of a good faith deposit in the amount of $35,000 (the “ Good Faith Deposit ”), which amount is to be applied to Bank Expenses. Any portion of such Good Faith Deposit not utilized to pay Bank Expenses through the time of the first Advance under this Agreement will be credited to the account of Borrowers.

2.5 Payments; Application of Payments .

(a) All payments (including prepayments) to be made by any Borrower under any Loan Document shall be made in immediately available funds in U.S. Dollars, without setoff or counterclaim, before 12:00 p.m. Pacific time on the date when due. Payments of principal and/or interest received after 12:00 p.m. Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment shall be due the next Business Day, and additional fees or interest, as applicable, shall continue to accrue until paid.

(b) All payments with respect to the Obligations may be applied in such order and manner as Bank shall determine in its sole discretion. No Borrower shall have any right to specify the order or the accounts to which Bank shall allocate or apply any payments required to be made by any Borrower to Bank or otherwise received by Bank under this Agreement when any such allocation or application is not specified elsewhere in this Agreement.

3 CONDITIONS OF LOANS

3.1 Conditions Precedent to Initial Credit Extension . Bank’s obligation to make the initial Credit Extension is subject to the condition precedent that Borrowers shall consent to or have delivered, in form and substance satisfactory to Bank, such documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate, including, without limitation:

(a) duly executed original signatures to the Loan Documents to which it is a party;

(b) duly executed original signatures to the IP Security Agreements from Borrowers and Guarantor;

(c) duly executed original signatures to the Control Agreements;

(d) for each Borrower and Guarantor their Operating Documents and certified good standing certificates from each jurisdiction in which a Borrower or Guarantor transacts business as of a date no earlier than thirty (30) days prior to the Effective Date;

(e) duly executed original signatures to the completed Borrowing Resolutions for each Borrower and Guarantor;

(f) certified copies, dated as of a recent date, of financing statement searches, as Bank shall request, accompanied by written evidence (including any UCC termination statements) that the Liens indicated in any such financing statements either constitute Permitted Liens or have been or, in connection with the initial Credit Extension, will be, terminated or released;

(g) the Perfection Certificates executed by each Borrower and Guarantor;

(h) duly executed bailee agreements in favor of Bank;

(i) a legal opinion of Borrowers’ Cayman Island counsel dated on or before the date of the initial Credit Extension together with the duly executed original signatures thereto;

(j) the duly executed original signatures to the Guaranty;


 

(k) evidence satisfactory to Bank that the insurance policies required by Section 6.7 hereof are in full force and effect, together with appropriate evidence showing lender loss payable and/or additional insured clauses or endorsements in favor of Bank;

(l) the completion of the Initial Audit with results satisfactory to Bank in its sole and absolute discretion;

(m) [Reserved];

(n) certified copies of each Borrowers’ register of mortgages and charges;

(o) a share charge agreement in form and substance satisfactory to Bank, executed by SPIL and charging to Bank a security interest in 100% of the issued shares in the capital of SPIL China;

(p) a share charge agreement in form and substance satisfactory to Bank, executed by Parent and charging to Bank a security interest in 100% of the issued shares in the capital of SPIL;

(q) executed Officer’s Certificates from each Borrower and Guarantor in the form attached hereto as Exhibit D; and

(r) payment of the fees and Bank Expenses then due as specified in Section 2.4 hereof.

3.2 Conditions Precedent to all Credit Extensions . Bank’s obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following:

(a) except as otherwise provided in Section 3.4, timely receipt of an executed Transaction Report;

(b) the representations and warranties in Section 5 shall be true in all material respects on the date of the Transaction Report and on the Funding Date of each Credit Extension; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, and no Event of Default shall have occurred and be continuing or result from the Credit Extension. Each Credit Extension is Borrowers’ joint and several representation and warranty on that date that the representations and warranties in Section 5 remain true in all material respects; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; and

(c) there has not been (i) a Material Adverse Change or (ii) any material adverse deviation by Borrowers from the most recent budgets or projections of Borrowers delivered to Bank as required by Section 6.2(viii).

3.3 Covenant to Deliver .

Borrowers, jointly and severally, agree to deliver to Bank each item required to be delivered to Bank under this Agreement as a condition to any Credit Extension. Borrowers expressly agree that a Credit Extension made prior to the receipt by Bank of any such item shall not constitute a waiver by Bank of Borrowers’ obligation to deliver such item, and any such Credit Extension in the absence of a required item shall be made in Bank’s sole discretion.

3.4 Procedures for Borrowing . Subject to the prior satisfaction of all other applicable conditions to the making of an Advance set forth in this Agreement, to obtain an Advance (other than Advances under Sections 2.1.2 or 2.1.4), Borrowers shall notify Bank (which notice shall be irrevocable) by electronic mail or facsimile by 12:00 p.m. Pacific time on the Funding Date of the Advance. Together with such notification, Borrowers must promptly deliver to Bank by electronic mail or facsimile a completed Transaction Report executed by a Responsible


Officer or his or her designee. Bank shall credit Advances to the Designated Deposit Account requested. Bank may make Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Advances are necessary to meet Obligations which have become due. Bank may rely on any electronic mail or facsimile notice given by a person whom Bank believes is a Responsible Officer or designee.

4 CREATION OF SECURITY INTEREST

4.1 Grant of Security Interest . Each Borrower, as legal and beneficial owner, hereby grants and charges to Bank, to secure the payment and performance in full of all of the Obligations (other than obligations under the Warrant), a continuing security interest in, and pledges to, and, by way of fixed charge, charges in favor of, Bank, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof. Borrowers jointly and severally represent, warrant, and covenant that the security interest granted herein is and shall at all times continue to be a first priority perfected security interest in the Collateral (subject only to Permitted Liens that may have superior priority to Bank’s Lien under this Agreement). If a Borrower shall acquire a commercial tort claim, Borrowers shall promptly notify Bank in a writing signed by Borrowers of the general details thereof and grant to Bank in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Bank.

If this Agreement is terminated, Bank’s Lien in the Collateral shall continue until the Obligations (other than inchoate indemnity obligations or obligations under the Warrant) outstanding at the time of such termination are repaid in full in cash. Upon payment in full in cash of the Obligations (other than inchoate indemnity obligations or obligations under the Warrant) outstanding at the time of such termination and at such time as Bank’s obligation to make Credit Extensions has terminated, Bank shall, at Borrowers’ written request and sole cost and expense, release its Liens in the Collateral and all rights therein shall revert to Borrowers.

4.2 Authorization to File Financing Statements . Borrowers hereby authorize Bank to file financing statements, without notice to Borrowers, with all appropriate jurisdictions to perfect or protect Bank’s interest or rights hereunder, including a notice that any disposition of the Collateral, by either Borrower or any other Person, shall be deemed to violate the rights of Bank under the Code. Such financing statements may indicate the Collateral as “all assets of the Debtor” or words of similar effect, or as being of an equal or lesser scope, or with greater detail, all in Bank’s discretion.

4.3 IP Security Agreement Escrow . Borrowers’ duly executed original signatures to the IP Security Agreement provided to Bank in accordance with Section 3.1(b) shall be held in escrow by Bank until the occurrence of the IP Trigger. Upon the occurrence of the IP Trigger, without any further action by any party, the signatures are automatically released from escrow and delivered by Borrowers to Bank. The intent of the parties is that immediately upon the occurrence of the IP Trigger, the IP Security Agreement become immediately duly executed and delivered to Bank and be then in full force and effect. Borrowers agree to execute any instruments and take further action as Bank reasonably requests to effect such due execution and delivery to Bank, to cause the IP Security Agreement to be in full force and effect, and to perfect or protect Bank’s first priority security interest in the Collateral.

5 REPRESENTATIONS AND WARRANTIES

Borrowers jointly and severally represent and warrant as follows:

5.1 Due Organization, Authorization; Power and Authority . Each Borrower is duly existing and in good standing in its jurisdiction of formation and is qualified and licensed to do business and is in good standing in any jurisdiction in which the conduct of its business or its ownership of property requires that it be qualified except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. In connection with this Agreement, Borrowers have delivered to Bank completed certificates signed by each Borrower and Guarantor, each entitled “Perfection Certificate.” Borrowers represent and warrant to Bank that, except as Borrowers may hereafter disclose to Bank pursuant to Section 7.2, (a) each Borrower’s exact legal name is indicated on the applicable Perfection Certificate and on the signature page hereof; (b) each Borrower is an organization of the type and is organized in the jurisdiction set forth in the applicable Perfection Certificate; (c) each Perfection Certificate accurately sets forth the applicable Borrower’s organizational identification number or accurately states that such Borrower has none; (d) each Perfection Certificate accurately sets forth the applicable Borrower’s place of business, or, if more than one, its chief executive office as well as such Borrower’s mailing address (if different than


its chief executive office); (e) no Borrower (nor any predecessors of any Borrower) has, in the past 5 years, changed its jurisdiction of formation, organizational structure or type, or any organizational number assigned by its jurisdiction; and (f) all other information set forth on the Perfection Certificates pertaining to any Borrower and their Subsidiaries is accurate and complete (it being understood and agreed that Borrowers may from time to time update certain information in the Perfection Certificates after the Effective Date to the extent permitted by one or more specific provisions in this Agreement). If a Borrower is not now a Registered Organization but later becomes one, Borrowers shall promptly notify Bank of such occurrence and provide Bank with such Borrower’s organizational identification number.

The execution, delivery and performance by each Borrower of the Loan Documents to which it is a party have been duly authorized, and do not (i) conflict with any of such Borrower’s organizational documents, (ii) contravene, conflict with, constitute a default under or violate any material Requirement of Law, (iii) contravene, conflict or violate any applicable order, writ, judgment, injunction, decree, determination or award of any Governmental Authority by which any Borrower or any of Borrowers’ Subsidiaries or any of their property or assets may be bound or affected, (iv) require any action by, filing, registration, or qualification with, or Governmental Approval from, any Governmental Authority (except such Governmental Approvals which have already been obtained and are in full force and effect) or (v) constitute an event of default under any material agreement by which any Borrower is bound. Neither Borrower is in default under any agreement to which it is a party or by which it is bound in which the default could reasonably be expected to cause a Material Adverse Change.

5.2 Collateral . Borrowers have good title to, have rights in, and the power to transfer each item of the Collateral upon which they purport to grant a Lien hereunder, free and clear of any and all Liens except Permitted Liens. Borrowers have no deposit accounts other than the deposit accounts with Bank and the deposit accounts described in the Perfection Certificate delivered to Bank in connection herewith. The Collateral is not in the possession of any third party bailee (such as a warehouse), except as otherwise provided in the Perfection Certificate and fully insured goods in transit in the ordinary course of business. Except as hereafter disclosed to Bank in writing by Borrowers, none of the components of the Collateral shall be maintained at locations other than (a) as provided in the Perfection Certificate, (b) fully insured components of the Collateral that may be located in transit between Borrower’s locations in Belgium, Italy and Hong Kong or (c) the following locations at which no more than $100,000 in the aggregate of Collateral may be located at any time: (i) mobile equipment, including computers with employees and consultants at various locations, (ii) Collateral at locations Bank has been notified of pursuant to Section 7.2, (iii) Collateral at temporary locations for sales, testing or demonstration purposes and (iv) other locations. In the event that Borrowers, after the date hereof, intend to store or otherwise deliver any portion of the Collateral to a bailee, then Borrowers will first receive the written consent of Bank and such bailee must acknowledge in writing that the bailee is holding such Collateral for the benefit of Bank. The foregoing requirement for a written acknowledgement shall not apply with respect to any bailee that (i) does not have an established course of business with any Borrower and (ii) holds Collateral solely as part of a “start-up” testing regimen to establish such bailee as a regular part of the Borrower’s supply chain, provided that the exception to the written acknowledgement requirement contained in this sentence shall only apply until such bailee has entered into a formal agreement with one or more of the Borrowers. The Accounts are bona fide, existing obligations of the Account Debtors. Except for Inventory with an aggregate value, at any time, of not more than $200,000, all Inventory is in all material respects of good and marketable quality, free from material defects. Borrowers are the sole legal and beneficial owners of their Intellectual Property, except for (a) non-exclusive licenses of Intellectual Property granted to third parties in the ordinary course of business, (b) exclusive licenses of Intellectual Property that could not result in a legal transfer of title of the licensed property that are exclusive only in respects other than territory or exclusive as to territory only as to discreet geographical areas outside of the United States or (c) other non-exclusive licenses of Intellectual Property that could not result in a legal transfer of title of the licensed property. Each patent that is material to Borrowers’ business is valid and enforceable and no part of the Intellectual Property that is material to Borrowers’ business has been judged invalid or unenforceable, in whole or in part, and to the best of Borrowers knowledge, no claim has been made that any part of the Intellectual Property violates the rights of any third party.

5.3 Accounts Receivable .

(a) For each Account with respect to which Advances are requested, on the date each Advance is requested and made, such Account shall be an Account which has arisen in the ordinary course of Borrowers’ business and which is listed on the books of the Borrowers in accordance with GAAP.


 

(b) All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Accounts are and shall be true and correct and all such invoices, instruments and other documents, and all of each Borrower’s Books are genuine and in all respects what they purport to be. Whether or not an Event of Default has occurred and is continuing, Bank may notify any Account Debtor owing any Borrower money of Bank’s security interest in such funds and verify the amount of such Account, provided that if no Event of Default has occurred, Bank shall coordinate its efforts to notify Account Debtors with one of the Borrowers. All sales and other transactions underlying or giving rise to each Account shall comply in all material respects with all applicable laws and governmental rules and regulations. Borrowers have no knowledge of any actual or imminent Insolvency Proceeding of any Account Debtor. To the best of Borrowers’ knowledge, all signatures and endorsements on all documents, instruments, and agreements relating to all Accounts are genuine, and all such documents, instruments and agreements are legally enforceable in accordance with their terms.

5.4 Litigation . There are no actions or proceedings pending or, to the knowledge of the Responsible Officers, threatened in writing by or against Parent, any Borrower or any of Borrowers’ Subsidiaries involving more than $100,000.

5.5 No Material Deviation in Financial Statements . All consolidated financial statements for Parent and Borrowers and any of their Subsidiaries delivered to Bank fairly present in all material respects the Parent’s and Borrowers’ consolidated financial condition and the Parent’s and Borrowers’ consolidated results of operations as of the dates of such financial statements. There has not been any material deterioration in the Parent’s or any Borrower’s consolidated financial condition since the date of the most recent financial statements submitted to Bank.

5.6 Solvency . The fair salable value of each Borrower’s assets (including goodwill minus disposition costs) exceeds the fair value of such Borrower’s liabilities; neither Borrower is left with unreasonably small capital after the transactions in this Agreement; and each Borrower is able to pay its debts (including trade debts) as they mature.

5.7 Regulatory Compliance . No Borrower is an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act of 1940, as amended. No Borrower is engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal Reserve Board of Governors). Each Borrower has complied in all material respects with the Federal Fair Labor Standards Act. Neither Borrowers, nor any of their Subsidiaries, are a “holding company” or an “affiliate” of a “holding company” or a “subsidiary company” of a “holding company” as each term is defined and used in the Public Utility Holding Company Act of 2005. No Borrower has violated any laws, ordinances or rules, the violation of which could reasonably be expected to cause a Material Adverse Change. None of any Borrowers’ or any of their Subsidiaries’ properties or assets have been used by Borrowers or any of their Subsidiaries or, to the best of Borrowers’ knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrowers and each of their Subsidiaries have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all Government Authorities that are necessary to continue their respective businesses as currently conducted.

5.8 Subsidiaries; Investments . Borrowers do not own any stock, partnership interest or other equity securities except for Permitted Investments.

5.9 Tax Returns and Payments; Pension Contributions . Each Borrower has timely filed all required tax returns and reports (or timely extensions therefore), and each Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by such Borrower. A Borrower may defer payment of any contested taxes, provided that such Borrower (a) in good faith contests its obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (b) notifies Bank in writing of the commencement of, and any material development in, the proceedings, (c) posts bonds or takes any other steps required to prevent the governmental authority levying such contested taxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted Lien”. Borrowers are unaware of any claims or adjustments proposed for any of each Borrower’s prior tax years which could reasonably be expected to result in additional taxes becoming due and payable by such Borrower. Borrowers have paid all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrowers have not withdrawn from participation in, and have not permitted partial or complete termination of, or permitted the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of any Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.


 

5.10 Use of Proceeds . Borrowers shall use the proceeds of the Credit Extensions solely as working capital and not for personal, family, household or agricultural purposes.

5.11 Full Disclosure . No written representation, warranty or other statement of any Borrower in any certificate or written statement given to Bank, as of the date such representation, warranty, or other statement was made, taken together with all such written certificates and written statements given to Bank, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading (it being recognized by Bank that the projections and forecasts provided by Borrowers in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results).

6 AFFIRMATIVE COVENANTS

Borrowers jointly and severally shall do all of the following:

6.1 Government Compliance .

(a) Maintain each Borrower’s and all of such Borrower’s Subsidiaries’ legal existence and good standing in its respective jurisdictions of formation and maintain qualification in each jurisdiction in which the failure to so qualify could reasonably be expected to cause a Material Adverse Change. Borrowers shall comply, and have each of their Subsidiaries comply, with all laws, ordinances and regulations to which they are subject, noncompliance with which could reasonably be expected to cause a Material Adverse Change.

(b) Obtain all of the Governmental Approvals necessary for the performance by Borrowers of their obligations under the Loan Documents to which any Borrower is a party and the grant of a security interest to Bank in all of each Borrower’s property. Upon request by Bank, Borrowers shall promptly provide to Bank copies of any such obtained Governmental Approvals.

6.2 Financial Statements, Reports, Certificates . Provide Bank:

(a) The following:

(i) [Reserved];

(ii) monthly, within 20 days after the end of each month, a Transaction Report including: (A) domestic accounts receivable agings, aged by invoice date, (B) foreign accounts receivable agings, aged by invoice date, (C) accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, (D) reconciliations of accounts receivable agings (aged by invoice date), transaction reports and general ledger, and (E) other items which Bank may specify from time to time;

(iii) monthly, as soon as available, and in any event within 30 days after the end of each month, Parent prepared consolidated financial statements prepared in accordance with GAAP, consistently applied from one period to the next; provided that upon Bank’s request, Borrowers shall provide Parent prepared consolidating financial statements for such period (prepared in accordance with GAAP, consistently applied from one period to the next) within 10 days of such request;

(iv) monthly, within 30 days after the end of each month, a Compliance Certificate signed by a Responsible Officer, certifying that as of the end of such month, Borrowers were in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Bank shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks;

(v) [Reserved];


 

(vi) monthly, within 30 days after the end of each month, or upon request by Bank, the Global Cash Report;

(vii) [Reserved];

(viii) annually, within 20 days of approval by Parent’s Board of Directors, and in any event within 75 days following the end of Parent’s fiscal year, (A) Parent’s consolidated annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the 4 quarters following such fiscal year end and (B) Parent’s annual financial projections for the 4 quarters following such fiscal year end (on a quarterly basis) as approved by Parent’s Board of Directors, together with any related business forecasts used in the preparation of such annual financial projections;

(ix) annually, as soon as available, and in any event within 120 days following the end of Parent’s fiscal year, annual consolidated financial statements certified by, and with an unqualified opinion of, independent certified public accountants acceptable to Bank together with Parent prepared annual consolidating financial statements (prepared in accordance with GAAP, consistently applied from one period to the next); and

(x) promptly, other information as Bank may reasonably request.

(b) Within 5 days after filing, all of Parent’s reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission or a link thereto on Parent’s, a Borrower’s or another website on the Internet.

(c) Prompt written notice of Borrower’s knowledge of an event that materially adversely affects the value of the Intellectual Property.

(d) Monthly written notice of (i) any material change in the composition of the Intellectual Property and (ii) the registration of any copyright, including any subsequent ownership right of Borrowers in or to any copyright, patent or trademark not previously disclosed in writing to Bank.

6.3 Accounts Receivable .

(a) Schedules and Documents Relating to Accounts . Borrowers shall deliver to Bank transaction reports and schedules of collections, as provided in Section 6.2, on Bank’s standard forms; provided, however, that Borrowers failure to execute and deliver the same shall not affect or limit Bank’s Lien and other rights in all of Borrowers Accounts, nor shall Bank’s failure to advance or lend against a specific Account affect or limit Bank’s Lien and other rights therein. If reasonably requested by Bank, Borrowers shall furnish Bank with copies (or, at Bank’s request, originals) of all contracts, orders, invoices, and other similar documents, and all shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Accounts. In addition, Borrowers shall deliver to Bank, on its request, the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Accounts, in the same form as received, with all necessary indorsements, and copies of all credit memos.

(b) Disputes . Borrowers shall promptly notify Bank of all disputes or claims relating to Accounts. Borrowers may forgive (completely or partially), compromise, or settle any Account for less than payment in full, or agree to do any of the foregoing so long as (i) Borrowers do so in good faith, in a commercially reasonable manner, in the ordinary course of business, in arm’s-length transactions, and report the same to Bank in the regular reports provided to Bank; (ii) no Default or Event of Default has occurred and is continuing; and (iii) after taking into account all such discounts, settlements and forgiveness, the total outstanding Advances will not exceed the lesser of the Revolving Line or the Aggregate Borrowing Base.

(c) Collection of Accounts . Borrowers shall have the right to collect all Accounts, unless and until an Event of Default has occurred and is continuing. Bank may require, in its good faith business judgment, that all proceeds of Accounts of each Borrower shall be deposited by such Borrower into such Borrower’s lockbox account, or other “blocked account,” as Bank may specify, pursuant to blocked account agreements in such form as Bank may specify in its good faith business judgment, in which case proceeds deposited shall be applied on a daily basis as follows: all deposits will be, as Bank may determine from time to time in its reasonable judgment, either directed to the applicable Designated Deposit Account or applied to repay Borrowers’ Obligations to Bank.


 

(d) Returns . Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to a Borrower, Borrowers shall promptly (i) determine the reason for such return, (ii) issue a credit memorandum to the Account Debtor in the appropriate amount, and (iii) provide a copy of such credit memorandum to Bank, upon request from Bank. In the event any attempted return occurs after the occurrence and during the continuance of any Event of Default, Borrowers shall immediately notify Bank of the return of the Inventory.

(e) [Reserved.]

(f) No Liability . Bank shall not be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to an Account, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Account, or for settling any Account in good faith for less than the full amount thereof, nor shall Bank be deemed to be responsible for any of Borrowers’ obligations under any contract or agreement giving rise to an Account. Nothing herein shall, however, relieve Bank from liability for its own gross negligence or willful misconduct.

6.4 Remittance of Proceeds . Except as otherwise provided in Section 6.3(c), deliver, in kind, all proceeds arising from the disposition of any Collateral to Bank in the original form in which received by a Borrower not later than the following Business Day after receipt by such Borrower, to be applied to the Obligations pursuant to the terms of Section 9.4 hereof; provided that, if no Default or Event of Default has occurred and is continuing, Borrowers shall not be obligated to remit to Bank the proceeds of the sale of worn out or obsolete Equipment disposed of by Borrowers in good faith in an arm’s length transaction for an aggregate purchase price of $100,000 or less (for all such transactions in any fiscal year). Borrowers agree that they will maintain all proceeds of Collateral in an account maintained with Bank. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement.

6.5 Taxes; Pensions . Timely file, and require each of their Subsidiaries to timely file, all required tax returns and reports and timely pay, and require each of its Subsidiaries to timely file, all foreign, federal, state and local taxes, assessments, deposits and contributions owed by a Borrower or its Subsidiaries, except for deferred payment of any taxes contested pursuant to the terms of Section 5.9 hereof, and shall deliver to Bank, on demand, appropriate certificates attesting to such payments, and pay all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms.

6.6 Access to Collateral; Books and Records . At reasonable times, on two Business Day’s notice and during normal business hours (provided no notice is required and inspections and audits may be conducted at any time if an Event of Default has occurred and is continuing), Bank, or its agents, shall have the right to inspect the Collateral and the right to audit and copy any of Borrowers’ Books. Such audits and inspections shall be required semi-annually, or more frequently if conditions, in the sole determination of Bank, warrant more frequent audits and inspections, provided that, so long as no Event of Default has occurred and is continuing, such audit or inspections shall be limited to no more than 4 per year. The foregoing inspections and audits shall be at Borrowers’ expense, and the charge therefor shall be $850 per person per day (or such higher amount as shall represent Bank’s then-current standard charge for the same), plus reasonable out-of-pocket expenses In the event a Borrower and Bank schedule an audit more than ten (10) days in advance, and such Borrower cancels or seeks to reschedule the audit with less than ten (10) days written notice to Bank, then (without limiting any of Bank’s rights or remedies), Borrowers shall pay Bank a fee of $1,000 plus any out-of-pocket expenses incurred by Bank to compensate Bank for the anticipated costs and expenses of the cancellation or rescheduling.

6.7 Insurance . Keep its business and the Collateral (including Collateral in transit) insured for risks and in amounts standard for companies in Borrower’s industry and location and as Bank may reasonably request. Insurance policies shall be in a form, with companies, and in amounts that are satisfactory to Bank. All property policies shall have a lender’s loss payable endorsement showing Bank as the sole lender loss payee and waive subrogation against Bank, and all liability policies shall show, or have endorsements showing, Bank as an additional insured. All policies (or the loss payable and additional insured endorsements) shall provide that the insurer shall endeavor to give Bank at least 20 days notice before canceling, amending, or declining to renew its policy. At Bank’s request, Borrowers shall deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any property policy shall, at Bank’s option, be payable to Bank on account of the Obligations. If Borrowers fail to obtain insurance as required under this Section 6.7 or to pay any amount or furnish any required proof of payment to third persons and Bank, Bank may make all or part of such payment or obtain such insurance policies required in this Section 6.7, and take any action under the policies Bank deems prudent.


 

6.8 Operating Accounts .

(a) Maintain all of its, all of its Parent’s and all of its Subsidiaries’, primary operating and other deposit accounts and securities accounts located in the United States with Bank and Bank’s Affiliates, which accounts shall represent not less than 100% of the dollar value of Borrowers’, their Subsidiaries’ and their Parent’s accounts at all United States financial institutions.

(b) [Reserved]

(c) Provide Bank 5 days prior written notice before establishing any Collateral Account at or with any bank or financial institution other than Bank or Bank’s Affiliates. Except for Excluded Collateral Accounts, for each Collateral Account that a Borrower at any time maintains outside of Bank or Bank’s Affiliates, Borrowers shall cause the applicable bank or financial institution at or with which any Collateral Account is maintained to execute and deliver a Control Agreement or other appropriate instrument with respect to such Collateral Account to perfect Bank’s Lien in such Collateral Account in accordance with the terms hereunder. The provisions of the previous sentence shall not apply to deposit accounts exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of Borrowers’ employees and identified to Bank by Borrowers as such.

6.9 Financial Covenants .

Borrowers shall maintain, and cause Parent to maintain, at all times, unless otherwise noted, on a consolidated basis:

(a) Minimum Liquidity . Minimum Liquidity as set forth in Schedule 6.9(a).

6.10 Protection and Registration of Intellectual Property Rights . Borrowers shall: (a) subject to Section 6.10(c), protect, defend and maintain the validity and enforceability of its Intellectual Property; (b) promptly after receipt of knowledge thereof, advise Bank in writing of material infringements of its Intellectual Property that is material to its business; and (c) not allow any Intellectual Property material to a Borrower’s business to be abandoned, forfeited or dedicated to the public without Bank’s written consent. Following the occurrence of the IP Trigger:

(i) if a Borrower obtains any registered copyrights, then Borrowers shall immediately provide written notice thereof to Bank and shall execute such intellectual property security agreements and other documents and take such other actions as Bank shall request in its good faith business judgment to perfect and maintain a first priority perfected security interest in favor of Bank in such property.

(ii) if a Borrower decides to register any copyrights in the United States Copyright Office, Borrowers shall: (x) provide Bank with at least fifteen (15) days prior written notice of such Borrower’s intent to register such copyrights together with a copy of the application it intends to file with the United States Copyright Office (excluding exhibits thereto); (y) execute an intellectual property security agreement and such other documents and take such other actions as Bank may request in its good faith business judgment to perfect and maintain a first priority perfected security interest in favor of Bank in the copyrights intended to be registered with the United States Copyright Office; and (z) record such intellectual property security agreement with the United States Copyright Office contemporaneously with filing the copyright application(s) with the United States Copyright Office.

(iii) Borrowers shall promptly provide to Bank copies of all applications that any Borrower files for the registration of copyrights, together with evidence of the recording of the intellectual property security agreement necessary for Bank to perfect and maintain a first priority perfected security interest in such property.


 

6.11 Litigation Cooperation . From the date hereof and continuing through the termination of this Agreement, make available to Bank, without expense to Bank, Borrowers’ and its Subsidiaries’ officers, employees and agents and Borrowers’ books and records, to the extent that Bank may deem them reasonably necessary to prosecute or defend any third-party suit or proceeding instituted by or against Bank with respect to any Collateral or relating to a Borrower or its Subsidiary.

6.12 Further Assurances . Execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank’s Lien in the Collateral or to effect the purposes of this Agreement.

7 NEGATIVE COVENANTS

Borrowers, jointly and severally, shall not do any of the following without Bank’s prior written consent:

7.1 Dispositions . Convey, sell, lease, transfer or otherwise dispose of (collectively, “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for Transfers (a) of Inventory in the ordinary course of business; (b) of worn-out or obsolete Equipment; and (c) in connection with Permitted Liens and Permitted Investments.

7.2 Changes in Business, Ownership, or Business Locations . (a) Engage in or permit any of their Subsidiaries to engage in any business other than the businesses currently engaged in by such Borrower and its Subsidiaries, as applicable, or reasonably related thereto or (b) enter into any transactions or series of related transactions, or take any other actions, that cause, result in or permit SPIL not to be the wholly-owned Subsidiary of Parent or permit SPIL China not to be the wholly-owned Subsidiary of SPIL. Borrowers shall not, without at least 30 days prior written notice to Bank: (1) add any new offices or business locations, including warehouses (unless such new offices or business locations contain less than $50,000 in Borrower’s assets or property), (2) change its jurisdiction of organization, or (3) change any organizational number (if any) assigned by its jurisdiction of organization.

7.3 Mergers or Acquisitions . Merge or consolidate, or permit any of their Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of their Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person. A Subsidiary may merge or consolidate into another Subsidiary or into a Borrower.

7.4 Indebtedness . Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness.

7.5 Encumbrance . Create, incur, allow, or suffer any Lien on any of the Collateral, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, permit any Collateral not to be subject to the first priority security interest granted herein.

7.6 Maintenance of Collateral Accounts . Maintain any Collateral Account except pursuant to the terms of Section 6.8.(c) hereof.

7.7 Distributions; Investments . (a) Pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock, provided that a Borrower may (i) pay dividends solely in equity securities or (ii) pay dividends, make distributions and make payments to another Borrower or to Guarantor; or (b) directly or indirectly make any Investment other than Permitted Investments, or permit any of their Subsidiaries to do so.

7.8 Transactions with Affiliates . Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of a Borrower, except transactions that are in the ordinary course of Borrowers’ business, upon fair and reasonable terms that are no less favorable to Borrowers than would be obtained in an arm’s length transaction with a non-affiliated Person.

7.9 Subordinated Debt . (a) Make or permit any payment on any Subordinated Debt, except under the terms of the subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject, or (b) amend any provision in any document relating to the Subordinated Debt which would increase the amount thereof or adversely affect the subordination thereof to Obligations owed to Bank.


 

7.10 Compliance . Become an “investment company” or a company controlled by an “investment company”, under the Investment Company Act of 1940, as amended, or undertake as one of its important activities extending credit to purchase or carry margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System), or use the proceeds of any Credit Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to cause a Material Adverse Change, or permit any of its Subsidiaries to do so; withdraw or permit any Subsidiary to withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any present pension, profit sharing and deferred compensation plan which could reasonably be expected to result in any liability of a Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

7.11 [Reserved.]

7.12 Belgium VAT CD Account . Locate, store, or keep more than $150,000 in the Belgium VAT CD Account.

8 EVENTS OF DEFAULT

Any one of the following shall constitute an event of default (an “ Event of Default ”) under this Agreement:

8.1 Payment Default . Borrowers fail to (a) make any payment of principal or interest on any Credit Extension on its due date, or (b) pay any other Obligations within 3 Business Days after such Obligations are due and payable (which 3 Business Day grace period shall not apply to payments due on the Revolving Line Maturity Date). During the cure period, the failure to cure the payment default is not an Event of Default (but no Credit Extension will be made during the cure period);

8.2 Covenant Default .

(a) Borrowers fail or neglect to perform any obligation in Sections 6.2, 6.5, 6.7, 6.8, 6.9, 6.12 or violate any covenant in Section 7; or

(b) Borrowers fail or neglect to perform, keep, or observe any other term, provision, condition, covenant or agreement contained in this Agreement or any Loan Documents, and as to any default (other than those specified in this Section 8) under such other term, provision, condition, covenant or agreement that can be cured, have failed to cure the default within 10 days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the 10 day period or cannot after diligent attempts by Borrowers be cured within such 10 day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional period (which additional period shall not in any case exceed 30 days) to attempt to cure such default, and within such reasonable time period the failure to cure the default shall not be deemed an Event of Default (but no Credit Extensions shall be made during such cure period). Grace periods provided under this section shall not apply to any covenants set forth in subsection (a) above;

8.3 Material Adverse Change . A Material Adverse Change occurs;

8.4 Attachment; Levy; Restraint on Business . (a) (i) The service of process seeking to attach, by trustee or similar process, any funds of Borrowers or of any entity under control of Borrowers (including a Subsidiary) on deposit with Bank or any Bank Affiliate, or (ii) a notice of lien, levy, or assessment is filed against any of Borrowers’ assets by any government agency, and the same under subclauses (i) and (ii) hereof are not, within ten (10) days after the occurrence thereof, discharged or stayed (whether through the posting of a bond or otherwise); provided, however, no Credit Extensions shall be made during any ten (10) day cure period; and (b) (i) any material portion of Borrowers’ assets is attached, seized, levied on, or comes into possession of a trustee or receiver, or (ii) any court order enjoins, restrains, or prevents a Borrower from conducting any part of its business;


 

8.5 Insolvency . (a) A Borrower is unable to pay its debts (including trade debts) as they become due or otherwise becomes insolvent; (b) a Borrower begins an Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against a Borrower and not dismissed or stayed within 45 days (but no Credit Extensions shall be made while of any of the conditions described in clause (a) exist and/or until any Insolvency Proceeding is dismissed);

8.6 Other Agreements . There is a default in any agreement to which a Borrower or Guarantor is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of $100,000 or that could reasonably be expected to cause a Material Adverse Change; provided, however, that the Event of Default under this Section 8.6 caused by the occurrence of a default under such other agreement shall be cured or waived for purposes of this Agreement upon Bank receiving written notice from the party asserting such default of such cure or waiver of the default under such other agreement, if at the time of such cure or waiver under such other agreement (1) Bank has not declared an Event of Default under this Agreement or exercised any rights with respect thereto; (2) any such cure or waiver does not result in an Event of Default under any other provision of this Agreement or any Loan Document; and (3) in connection with any such cure or waiver under such other agreement, the terms of any agreement with such third party are not modified or amended in any manner which could in the good faith judgment of Bank be materially less advantageous to Borrowers or Bank;

8.7 Judgments . One or more judgments, orders, or decrees for the payment of money in an amount, individually or in the aggregate, of at least $100,000 (not covered by independent third-party insurance as to which liability has been accepted by such insurance carrier) shall be rendered against a Borrower and shall remain unsatisfied, unvacated, or unstayed for a period of 10 days after the entry thereof (provided that no Credit Extensions will be made prior to the satisfaction, vacation, or stay of such judgment, order, or decree);

8.8 Misrepresentations . A Borrower or any Person acting for a Borrower makes any representation, warranty, or other statement now or later in this Agreement, any Loan Document or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document, and such representation, warranty, or other statement is incorrect in any material respect when made;

8.9 Subordinated Debt . (a) Borrower is in default under or breaches any agreement between a Borrower and any creditor of a Borrower that signed a subordination, intercreditor, or other similar agreement with Bank, or (b) any creditor that has signed such an agreement with Bank breaches any terms of such agreement; or

8.10 Guaranty . (a) Any guaranty of any Obligation terminates or ceases for any reason to be in full force and effect; (b) any Guarantor does not perform any obligation or covenant under any guaranty of the Obligations; (c) any circumstance described in Sections 8.3, 8.4, 8.5, 8.7, or 8.8. occurs with respect to any Guarantor, (d) the liquidation, winding up, or termination of existence of any Guarantor; or (e) (i) a material impairment in the perfection or priority of Bank’s Lien in the collateral provided by Guarantor or in the value of such collateral or (ii) a material adverse change in the general affairs, management, results of operation, financial condition or the prospect of repayment of the Obligations occurs with respect to any Guarantor.

8.11 Change in Control . There is a Change in Control.

9 BANK’S RIGHTS AND REMEDIES

9.1 Rights and Remedies . While an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following:

(a) declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank);

(b) stop advancing money or extending credit for Borrowers’ benefit under this Agreement or under any other agreement between a Borrower and Bank;

(c) [Reserved];

(d) [Reserved];


 

(e) settle or adjust disputes and claims directly with Account Debtors for amounts on terms and in any order that Bank considers advisable, notify any Person owing a Borrower money of Bank’s security interest in such funds, and verify the amount of such account;

(f) make any payments and do any acts it considers necessary or reasonable to protect the Collateral or its security interest in the Collateral. Borrowers shall assemble the Collateral if Bank requests and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrowers grant Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank’s rights or remedies;

(g) apply to the Obligations any (i) balances and deposits of a Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of a Borrower;

(h) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Bank is hereby granted a non-exclusive, royalty-free license or other right to use, without charge, each Borrower’s labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank’s exercise of its rights under this Section, each Borrower’s rights under all licenses and all franchise agreements inure to Bank’s benefit;

(i) place a “hold” on any account maintained with Bank or deliver a notice of exclusive control, any entitlement order, or other directions or instructions pursuant to any Control Agreement or similar agreements providing control of any Collateral;

(j) demand and receive possession of Borrowers’ Books; and

(k) exercise all rights and remedies available to Bank under the Loan Documents or at law or equity, including all remedies provided under the Code (including disposal of the Collateral pursuant to the terms thereof).

9.2 Power of Attorney . Borrowers jointly and severally hereby irrevocably appoint Bank as their lawful attorney-in-fact, exercisable upon the occurrence and during the continuance of an Event of Default, to: (a) endorse each Borrower’s name on any checks or other forms of payment or security; (b) sign each Borrower’s name on any invoice or bill of lading for any Account or drafts against Account Debtors; (c) settle and adjust disputes and claims about the Accounts directly with Account Debtors, for amounts and on terms Bank determines reasonable; (d) make, settle, and adjust all claims under each Borrower’s insurance policies; (e) pay, contest or settle any Lien, charge, encumbrance, security interest, and adverse claim in or to the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; and (f) transfer the Collateral into the name of Bank or a third party as the Code permits. Borrowers jointly and severally hereby appoint Bank as its lawful attorney-in-fact to sign each Borrower’s name on any documents necessary to perfect or continue the perfection of Bank’s security interest in the Collateral regardless of whether an Event of Default has occurred until all Obligations (other than inchoate indemnity obligations or obligations under the Warrant) have been satisfied in full and Bank is under no further obligation to make Credit Extensions hereunder. Borrowers declare that Bank’s foregoing appointment as Borrowers’ attorney in fact, and all of Bank’s rights and powers, coupled with an interest, are irrevocable until all Obligations (other than inchoate indemnity obligations or obligations under the Warrant) have been fully repaid and performed and Bank’s obligation to provide Credit Extensions terminates.

9.3 Protective Payments . If Borrowers fail to obtain the insurance called for by Section 6.7 or fail to pay any premium thereon or fail to pay any other amount which Borrowers are obligated to pay under this Agreement or any other Loan Document, Bank may obtain such insurance or make such payment, and all amounts so paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then highest applicable rate, and secured by the Collateral. Bank will make reasonable efforts to provide Borrowers with notice of Bank obtaining such insurance at the time it is obtained or within a reasonable time thereafter. No payments by Bank are deemed an agreement to make similar payments in the future or Bank’s waiver of any Event of Default.


 

9.4 Application of Payments and Proceeds . If an Event of Default has occurred and is continuing, Bank may apply any funds in its possession, whether from Borrowers’ account balances, payments, proceeds realized as the result of any collection of Accounts or other disposition of the Collateral, or otherwise, to the Obligations in such order as Bank shall determine in its sole discretion. Any surplus shall be paid to Borrowers by credit to the Designated Deposit Accounts or to other Persons legally entitled thereto; Borrowers shall remain liable to Bank for any deficiency. If Bank, in its good faith business judgment, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Bank shall have the option, exercisable at any time, of either reducing the Obligations by the principal amount of the purchase price or deferring the reduction of the Obligations until the actual receipt by Bank of cash therefor.

9.5 Bank’s Liability for Collateral . So long as Bank complies with reasonable banking practices regarding the safekeeping of the Collateral in the possession or under the control of Bank, Bank shall not be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person. Borrowers bear all risk of loss, damage or destruction of the Collateral.

9.6 No Waiver; Remedies Cumulative . Bank’s failure, at any time or times, to require strict performance by Borrowers of any provision of this Agreement or any other Loan Document shall not waive, affect, or diminish any right of Bank thereafter to demand strict performance and compliance herewith or therewith. No waiver hereunder shall be effective unless signed by Bank and then is only effective for the specific instance and purpose for which it is given. Bank’s rights and remedies under this Agreement and the other Loan Documents are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank’s exercise of one right or remedy is not an election, and Bank’s waiver of any Event of Default is not a continuing waiver. Bank’s delay in exercising any remedy is not a waiver, election, or acquiescence.

9.7 Demand Waiver . Each Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which a Borrower is liable.

10 NOTICES

All notices, consents, requests, approvals, demands, or other communication by any party to this Agreement or any other Loan Document must be in writing and shall be deemed to have been validly served, given, or delivered: (a) upon the earlier of actual receipt and 3 Business Days after deposit in the U.S. mail, first class, registered or certified mail return receipt requested, with proper postage prepaid; (b) upon transmission, when sent by electronic mail or facsimile transmission; (c) 1 Business Day after deposit with a reputable overnight courier with all charges prepaid; or (d) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address, facsimile number, or email address indicated below. Bank or Borrowers may change their mailing or electronic mail address or facsimile number by giving the other party written notice thereof in accordance with the terms of this Section 10.

 

If to Borrowers or
a Borrower:
   SciClone Pharmaceuticals International Ltd.
   Windsor House, Room 3401A
   311 Gloucester Road
   Causeway Bay
   Hong Kong
   Attn: Hans P. Schmid, Managing Director
   Fax: (011) 852-2508-1500
   email: hschmid@spil.org
   or


 

     SciClone Pharmaceuticals International China Holding Ltd.
   Windsor House, Room 3401A
   311 Gloucester Road
   Causeway Bay
   Hong Kong
   Attn: Hans P. Schmid, Managing Director
   Fax: (011) 852-2508-1500
   email: hschmid@spil.org
   With a copy, in each case, to:
   SciClone Pharmaceuticals, Inc.
   950 Tower Lane, Suite 900
   Foster City, CA 94404
   Attn: Gary Titus, Chief Financial Officer
   Fax: (650) 350-4867
   Email: gtitus@sciclone.com
If to Bank:    Silicon Valley Bank
   555 Mission Street, Suite 900
   San Francisco, CA 94105
   Attn: Benjermin Colombo
   Fax: (415) 615-0076
   Email: bcolombo@svb.com

11 CHOICE OF LAW, VENUE, JURY TRIAL WAIVER AND JUDICIAL REFERENCE

California law governs the Loan Documents without regard to principles of conflicts of law. Each Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California; provided, however, that nothing in this Agreement shall be deemed to operate to preclude Bank from bringing suit or taking other legal action in any other jurisdiction to realize on the Collateral or any other security for the Obligations, or to enforce a judgment or other court order in favor of Bank. Bank and each Borrower expressly submit and consent in advance to such jurisdiction in any action or suit commenced in any such court, and Bank and each Borrower hereby waive any objection that each may have based upon lack of personal jurisdiction, improper venue, or forum non conveniens and each hereby consents to the granting of such legal or equitable relief as is deemed appropriate by such court. Each Borrower hereby waives personal service of the summons, complaints, and other process issued in such action or suit and agrees that service of such summons, complaints, and other process may be made by registered or certified mail addressed to the Borrowers at the address set forth in Section 10 of this Agreement and that service so made shall be deemed completed upon the earlier to occur of a Borrower’s actual receipt thereof or 3 days after deposit in the U.S. mails, proper postage prepaid.

TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWERS AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies of any nature between them arising at any time shall be decided by a reference to a private judge, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California Superior Court) appointed in accordance with California Code of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, in Santa Clara County, California; and the parties


hereby submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to and in accordance with the provisions of California Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall have the power, among others, to grant provisional relief, including without limitation, entering temporary restraining orders, issuing preliminary and permanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential and all records relating thereto shall be permanently sealed. If during the course of any dispute, a party desires to seek provisional relief, but a judge has not been appointed at that point pursuant to the judicial reference procedures, then such party may apply to the Santa Clara County, California Superior Court for such relief. The proceeding before the private judge shall be conducted in the same manner as it would be before a court under the rules of evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall be conducted in the same manner as it would be before a court under the rules of discovery applicable to judicial proceedings. The private judge shall oversee discovery and may enforce all discovery rules and order applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the selected or appointed private judge shall have the power to decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant to the California Code of Civil Procedure § 644(a). Nothing in this paragraph shall limit the right of any party at any time to exercise self-help remedies, foreclose against collateral, or obtain provisional remedies. The private judge shall also determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.

12 GENERAL PROVISIONS

12.1 Termination Prior to Revolving Line Maturity Date . This Agreement may be terminated by Borrowers prior to the Revolving Line Maturity Date, effective 3 Business Days after written notice of termination is given to Bank. Notwithstanding any such termination, Bank’s lien and security interest in the Collateral shall continue until Borrowers fully satisfy their Obligations (other than inchoate indemnity obligations or obligations under the Warrant). If such termination is at Borrowers’ election or at Bank’s election due to the occurrence and continuance of an Event of Default, Borrowers shall promptly pay to Bank, in addition to the payment of any other expenses or fees then-owing, (a) any Minimum Monthly Interest due for the time between the effective termination date and the next anniversary of the Effective Date and (b) a termination fee in an amount equal to 1.0% of the Revolving Line, provided that no termination fee shall be charged if the credit facility hereunder is replaced with a new facility from another division of Silicon Valley Bank.

12.2 Successors and Assigns . This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrowers may not assign this Agreement or any rights or obligations under it without Bank’s prior written consent (which may be granted or withheld in Bank’s discretion). Bank has the right, without the consent of or notice to Borrowers, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank’s obligations, rights, and benefits under this Agreement and the other Loan Documents.

12.3 Indemnification . Borrowers, jointly and severally, agree to indemnify, defend and hold Bank and its directors, officers, employees, agents, attorneys, or any other Person affiliated with or representing Bank (each, an “Indemnified Person”) harmless against: (a) all obligations, demands, claims, and liabilities (collectively, “Claims”) asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by such Indemnified Person from, following, or arising from transactions between Bank and a Borrower (including reasonable attorneys’ fees and expenses), except for Claims or losses directly caused by such Indemnified Person’s gross negligence or willful misconduct.

12.4 Time of Essence . Time is of the essence for the performance of all Obligations in this Agreement.

12.5 Severability of Provisions . Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision.

12.6 Correction of Loan Documents . Bank may correct obvious errors and fill in any blanks in this Agreement and the other Loan Documents consistent with the agreement of the parties.

12.7 Amendments in Writing; Integration . All amendments to this Agreement must be in writing and signed by both Bank and Borrowers. This Agreement and the Loan Documents represent the entire agreement about this subject matter and supersede prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement and the Loan Documents merge into this Agreement and the Loan Documents.


 

12.8 Counterparts . This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement.

12.9 Survival . All covenants, representations and warranties made in this Agreement continue in full force until this Agreement has terminated pursuant to its terms and all Obligations (other than inchoate indemnity obligations, obligations under the Warrant and any other obligations which, by their terms, are to survive the termination of this Agreement) have been satisfied. The obligation of Borrowers in Section 12.2 to indemnify Bank shall survive until the statute of limitations with respect to such claim or cause of action shall have run.

12.10 Confidentiality . In handling any confidential information, Bank shall exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made: (a) to Bank’s Subsidiaries or Affiliates (such Subsidiaries and Affiliates, together with Bank, collectively, “ Bank Entities ”); (b) to prospective transferees or purchasers of any interest in the Credit Extensions (provided, however, Bank shall use commercially reasonable efforts to obtain such prospective transferee’s or purchaser’s agreement to the terms of this provision); (c) as required by law, regulation, subpoena, or other order; (d) to Bank’s regulators or as otherwise required in connection with Bank’s examination or audit; (e) as Bank considers appropriate in exercising remedies under the Loan Documents; and (f) to third-party service providers of Bank so long as such service providers have executed a confidentiality agreement with Bank with terms no less restrictive than those contained herein. Confidential information does not include information that either: (i) is in the public domain or in Bank’s possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (ii) is disclosed to Bank by a third party if Bank does not know that the third party is prohibited from disclosing the information.

Bank Entities may use confidential information, including, without limitation, for reporting purposes and the development and distribution of databases and market analyses so long as such confidential information is aggregated and anonymized prior to distribution unless otherwise expressly permitted by this Agreement. The provisions of this Section 12.10 shall survive the termination of this Agreement.

12.11 Attorneys’ Fees, Costs and Expenses . In any action or proceeding between one or more Borrowers and Bank arising out of or relating to the Loan Documents, the prevailing party shall be entitled to recover its reasonable attorneys’ fees and other costs and expenses incurred, in addition to any other relief to which it may be entitled.

12.12 Termination of Prior Loan Agreement . Upon the effectiveness of this Agreement and the Guaranty, the Loan and Security Agreement dated as of November 14, 2008, by and among Borrowers and Bank is hereby terminated.

13 DEFINITIONS

13.1 Definitions . As used in this Agreement, the following capitalized terms have the following meanings:

Account ” is any “account” as defined in the Code with such additions to such term as may hereafter be made, and includes, without limitation, all accounts receivable and other sums owing to a Borrower.

Account Debtor ” is any “account debtor” as defined in the Code with such additions to such term as may hereafter be made.

Advance ” or “ Advances ” means an advance (or advances) under the Revolving Line.

Affiliate ” of any Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.


 

Agreement ” is defined in the preamble hereof.

Availability Amount ” is (a) the lesser of (i) the Revolving Line or (ii) the amount available under the Borrowing Base, minus (b) any amounts used for Cash Management Services, and minus (c) the outstanding principal balance of any Advances.

Bank ” is defined in the preamble hereof.

Bank Expenses ” are all audit fees and expenses, costs, and expenses (including reasonable attorneys’ fees and expenses) for preparing, amending, negotiating, administering, defending and enforcing the Loan Documents (including, without limitation, those incurred in connection with appeals or Insolvency Proceedings) or otherwise incurred with respect to Borrower.

Bankruptcy-Related Defaults ” is defined in Section 9.1.

Belgium VAT CD Account ” means account number 6459015993 maintained by SPIL with Union Bank.

Board of Directors ” of any Person is the governing body of such Person charged by the law establishing such Person with managing the business and affairs of the Person and exercising, or directing the exercise of, all of such Person’s powers.

Borrower ” is defined in the preamble hereof.

Borrowers’ Books ” are all Borrowers’ and each Borrower’s books and records including ledgers, federal and state tax returns, records regarding Borrower’s assets or liabilities, the Collateral, business operations or financial condition, and all computer programs or storage or any equipment containing such information.

Borrowing Base ” is 65% of the accounts receivables correctly listed on the consolidated balance sheet of Parent, as determined by Bank from the most recent consolidated financial statements of Parent provided to Bank by the Borrowers pursuant to Section 6.2; provided, however, that Bank may decrease the foregoing percentage in its good faith business judgment based on events, conditions, contingencies, or risks which, as determined by Bank, may adversely affect Collateral.

Borrowing Resolutions ” are, with respect to any Person, those resolutions adopted by such Person’s Board of Directors (or equivalent) and delivered by such Person to Bank approving the Loan Documents to which such Person is a party and the transactions contemplated thereby, together with a certificate executed by its secretary (or equivalent) on behalf of such Person certifying that (a) such Person has the authority to execute, deliver, and perform its obligations under each of the Loan Documents to which it is a party, (b) that attached as Exhibit A to such certificate is a true, correct, and complete copy of the resolutions then in full force and effect authorizing and ratifying the execution, delivery, and performance by such Person of the Loan Documents to which it is a party, (c) the name(s) of the Person(s) authorized to execute the Loan Documents on behalf of such Person, together with a sample of the true signature(s) of such Person(s), and (d) that Bank may conclusively rely on such certificate unless and until such Person shall have delivered to Bank a further certificate canceling or amending such prior certificate.

Business Day ” is any day that is not a Saturday, Sunday or a day on which Bank is closed.

Cash Equivalents ” means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof having maturities of not more than 1 year from the date of acquisition; (b) commercial paper maturing no more than 1 year after its creation and having the highest rating from either Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc.; (c) Bank’s certificates of deposit issued maturing no more than 1 year after issue; and (d) money market funds at least ninety-five percent (95%) of the assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) of this definition.

Cash Management Services ” is defined in Section 2.1.4.

Change in Control ” means any event, transaction, or occurrence as a result of which (a) any “person” (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as an amended (the


Exchange Act ”)), other than a Major Investor or a trustee or other fiduciary holding securities under an employee benefit plan of a Borrower, is or becomes a beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Parent, representing 25% or more of the combined voting power of Parent’s then outstanding securities; (b) a Major Investor is or becomes a beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Parent, representing 35% or more of the combined voting power of Parent’s then outstanding securities; or (c) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the Board of Directors of Parent (together with any new directors whose election by the Board of Directors of Parent was approved by a vote of at least two-thirds of the directors then still in office who either were directions at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason other than death or disability to constitute a majority of the directors then in office.

Code ” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of California; provided, that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Bank’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of California, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes on the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.

Collateral ” is any and all properties, rights and assets of Borrowers described on Exhibit A .

Collateral Account ” is any Deposit Account, Securities Account, or Commodity Account.

Commodity Account ” is any “commodity account” as defined in the Code with such additions to such term as may hereafter be made.

Compliance Certificate ” is that certain certificate in the form attached hereto as Exhibit B .

Contingent Obligation ” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.

Control Agreement ” is any control agreement entered into among the depository institution at which a Borrower maintains a Deposit Account or the securities intermediary or commodity intermediary at which a Borrower maintains a Securities Account or a Commodity Account, one or more Borrowers, and Bank pursuant to which Bank obtains control (within the meaning of the Code) over such Deposit Account, Securities Account, or Commodity Account.

Credit Extension ” is any Advance, amount utilized for Cash Management Services, or any other extension of credit by Bank for one or more Borrower’s benefit.

Debt Coverage Ratio ” is defined in Schedule 6.9(a).

Default Rate ” is defined in Section 2.3(b).

Deposit Account ” is any “deposit account” as defined in the Code with such additions to such term as may hereafter be made.


 

Designated Deposit Account ” is a separate deposit account for each Borrower that has been designated by a Borrower in writing as such Borrower’s “Designated Deposit Account” and which designation has been accepted by Bank in writing.

Dollars ,” “ dollars ” and “ $ ” each mean lawful money of the United States.

Domestic Subsidiary ” means a Subsidiary organized under the laws of the United States or any state or territory thereof or the District of Columbia.

EBITDA ” shall mean (a) Net Income, plus (b) Interest Expense, plus (c), to the extent deducted in the calculation of Net Income, depreciation expense and amortization expense, plus (d) income tax expense, and minus (e) non-cash items.

Effective Date ” is the date Bank executes this Agreement as indicated on the signature page hereof.

Equipment ” is all “equipment” as defined in the Code with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.

ERISA ” is the Employee Retirement Income Security Act of 1974, and its regulations.

Event of Default ” is defined in Section 8.

Excluded Collateral Accounts ” means (a) the Belgium VAT CD Account, (b) Collateral Accounts that (i) have been identified to Bank in writing, (ii) are located in Italy, the People’s Republic of China, Singapore, or Vietnam, and (iii) in the aggregate, do not exceed $8,500,000 at any time, provided that not more than $5,000,000 of such $8,500,000 aggregate may be located in the People’s Republic of China, (c) so long as the account balances therein (in the aggregate for both accounts) do not exceed $7,500,000, account numbers 600-886-857-002 and 600-886-857-274 maintained with HSBC in Hong Kong, (d) so long as the account balance therein does not exceed $1,000,000, account number CP 12507 DE with UBS in the United States of America, and (e) so long as the account balance therein does not exceed $100,000, account number 6304-6021 maintained with E*TRADE Financial Corporation.

Foreign Currency ” means lawful money of a country other than the United States.

Foreign Subsidiary ” means any Subsidiary which is not a Domestic Subsidiary.

Funding Date ” is any date on which a Credit Extension is made to or on account of Borrower which shall be a Business Day.

GAAP ” is generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other Person as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination.

General Intangibles ” is all “general intangibles” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation, all copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, any patents, trademarks, service marks and, to the extent permitted under applicable law, any applications therefor, whether registered or not, any trade secret rights, including any rights to unpatented inventions, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income and other tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.


 

Global Cash Report ” is a report intended to allow Bank to monitor the cash balances of the consolidated group of companies of which the Borrowers are a part. The form of the report is to be mutually developed by Borrowers and Bank, but shall contain not less than a listing of each Collateral Account of Borrowers and Parent and the month-end balance in such account.

Governmental Approval ” is any consent, authorization, approval, order, license, franchise, permit, certificate, accreditation, registration, filing or notice, of, issued by, from or to, or other act by or in respect of, any Governmental Authority.

Governmental Authority ” is any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization.

Guarantor ” is any present or future guarantor of the Obligations, including the Parent.

Guaranty ” is that certain Unconditional Guaranty and Security Agreement by and between Bank and Parent and dated on or about the Effective Date, as amended.

Indebtedness ” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations, and (d) Contingent Obligations.

Indemnified Person ” is defined in Section 12.3.

Initial Audit ” is Bank’s inspection of Borrowers’ Accounts, the Collateral, and Borrowers’ Books.

Insolvency Proceeding ” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

Intellectual Property ” is (i) any copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, (ii) any patents, patent applications and like protections, including improvements, divisions, continuations, renewals, reissues, extensions, and continuations-in-part of the same, (iii) trademarks, service marks and, to the extent permitted under applicable law, any applications therefor, whether registered or not, and the goodwill of the business of any Borrower connected with and symbolized thereby, (iv) know-how, operating manuals, trade secret rights, rights to unpatented inventions, any Intellectual Property rights in computer software, (v) licenses and license rights relating to the foregoing, and (vi) any claims for damage by way of any past, present, or future infringement of any of the foregoing.

Interest Expense ” means for any fiscal period, interest expense (whether cash or non-cash) determined in accordance with GAAP for the relevant period ending on such date, including, in any event, interest expense with respect to any Credit Extension and other Indebtedness of Borrowers and their Subsidiaries, including, without limitation or duplication, all commissions, discounts, or related amortization and other fees and charges with respect to letters of credit and bankers’ acceptance financing and the net costs associated with interest rate swap, cap, and similar arrangements, and the interest portion of any deferred payment obligation (including leases of all types).

Inventory ” is all “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrowers’ custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

Investment ” is any beneficial ownership interest in any Person (including stock, partnership interest or other securities), and any loan, advance or capital contribution to any Person.


 

IP Security Agreements ” means that certain Intellectual Property Security Agreement (Borrowers) dated on or about the Effective Date by and among Bank and Borrowers, as amended and that certain Intellectual Property Security Agreement (Guarantor) dated on or about the Effective Date by and between Bank and Guarantor.

IP Trigger ” means the occurrence of an Event of Default.

Lien ” is a claim, mortgage, deed of trust, levy, charge, pledge, security interest or other encumbrance of any kind, whether voluntarily incurred or arising by operation of law or otherwise against any property.

Liquidity ” is unrestricted cash and Cash Equivalents in accounts maintained with Bank or Bank’s Affiliates in which Bank has a properly perfected first priority security interest.

Loan Documents ” are, collectively, this Agreement, the IP Security Agreement, the Warrant, the Perfection Certificate, any note, or notes or guaranties executed by a Borrower or any Guarantor in connection with this Agreement, and any other present or future agreement between a Borrower any Guarantor or for the benefit of Bank in connection with this Agreement, all as amended, restated, or otherwise modified.

Major Investor ” is any Person who, as of the Prior Loan Agreement Effective Date, was the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Parent representing not less than 20% of the combined voting power of Parent’s then outstanding securities.

Material Adverse Change ” is (a) a material impairment in the perfection or priority of Bank’s Lien in the Collateral or in the value of such Collateral; (b) a material adverse change in the business, operations, or financial condition of a Borrower; (c) a material impairment of the prospect of repayment of any portion of the Obligations or (d) Bank determines, based upon information available to it and in its reasonable judgment, that there is a reasonable likelihood that Borrowers shall fail to comply with one or more of the financial covenants in Section 6 during the next succeeding month.

Minimum Monthly Interest ” is one twelfth of the product of (a) $2,500,000 multiplied by (b) the sum of (i) the Prime Rate in effect at the time of determination plus (ii) the Prime Rate Margin.

Net Income ” means, as calculated on a consolidated basis for Borrowers and their Subsidiaries for any period as at any date of determination, the net profit (or loss), after provision for taxes, of Borrowers and their Subsidiaries for such period taken as a single accounting period.

Obligations ” are Borrowers’ or Guarantor’s obligation to pay when due any debts, principal, interest, Bank Expenses and other amounts a Borrower or Guarantor owes Bank now or later, whether under this Agreement, the Loan Documents, or otherwise, including, without limitation, all obligations relating to letters of credit (including reimbursement obligations for drawn and undrawn letters of credit), cash management services, and foreign exchange contracts, if any, and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of a Borrower or Guarantor assigned to Bank, and the performance of Borrower’s duties under the Loan Documents.

Operating Documents ” are, for any Person, such Person’s formation documents, as certified by the Secretary of State, Registrar of Companies, or equivalent entity of such Person’s state or country of formation on a date that is no earlier than 30 days prior to the Effective Date, and, (a) if such Person is a corporation, its bylaws (or equivalent) in current form, (b) if such Person is a limited liability company, its limited liability company agreement (or similar agreement), and (c) if such Person is a partnership, its partnership agreement (or similar agreement), each of the foregoing with all current amendments or modifications thereto.

Overadvance ” is defined in Section 2.2.

Parent ” is SciClone Pharmaceuticals, Inc., a Delaware corporation, the parent of Borrowers.

Perfection Certificate ” is defined in Section 5.1.

Permitted Indebtedness ” is:

(a) Borrowers’ Indebtedness to Bank under this Agreement and the other Loan Documents;


 

(b) Indebtedness existing on the Effective Date and shown on the Perfection Certificate;

(c) Subordinated Debt;

(d) unsecured Indebtedness to trade creditors and Indebtedness with respect to surety bonds and similar obligations, in each case incurred in the ordinary course of business;

(e) Indebtedness incurred as a result of endorsing negotiable instruments received in the ordinary course of business;

(f) Indebtedness to the extent secured by a Permitted Lien under clause (c), (d) or (i) of the definition of Permitted Liens;

(g) Indebtedness of a Borrower to another Borrower or to Parent;

(h) Indebtedness of a Borrower to any Subsidiary that is not also a Borrower and Contingent Obligations of any Subsidiary that is not also a Borrower with respect to obligations of a Borrower (provided that the primary obligations are not prohibited hereby), and Indebtedness of any Subsidiary that is not also a Borrower to a Borrower in an aggregate principal amount not to exceed $250,000 or any other Subsidiary and Contingent Obligations of any Subsidiary with respect to obligations of any other Subsidiary (provided that the primary obligations are not prohibited hereby);

(i) [reserved];

(j) other Indebtedness not exceeding $250,000 in the aggregate outstanding at any time; and

(k) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (a) through (h) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrowers’ or their Subsidiaries, as the case may be.

Permitted Investments ” are:

(a) Investments shown on the Perfection Certificate and existing on the Effective Date;

(b) Cash Equivalents;

(c) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of Borrowers’ business;

(d) Investments consisting of deposit accounts in which Bank has a perfected security interest;

(e) Investments accepted in connection with Transfers permitted by Section 7.1;

(f) Investments of Subsidiaries that are not also a Borrower in or to other Subsidiaries that are not a Borrower, Parent or a Borrower and Investments by Borrowers in Subsidiaries that are not also a Borrower not to exceed $250,000 in the aggregate in any fiscal year;

(g) Investments consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Parent pursuant to employee stock purchase plans or agreements approved by such Borrower’s Board of Directors;

(h) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business;


 

(i) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business; provided that this paragraph (i) shall not apply to Investments of any Borrower in any Subsidiary;

(j) joint ventures or strategic alliances in the ordinary course of any Borrower’s business consisting of the non-exclusive licensing of technology, the development of technology or the providing of technical support, provided that any cash investments by Borrower do not exceed $250,000 in the aggregate in any fiscal year;

(k) Investments of SPIL in or to SPIL China; and

(l) other Investments not exceeding $100,000 in the aggregate outstanding at any time.

Permitted Liens ” are:

(a) Liens existing on the Effective Date and shown on the Perfection Certificate or arising under this Agreement and the other Loan Documents;

(b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrowers maintain adequate reserves on their Books, provided that no notice of any such Lien has been filed or recorded under the Internal Revenue Code of 1986, as amended, and the Treasury Regulations adopted thereunder;

(c) purchase money Liens (i) on Equipment acquired or held by Borrowers incurred for financing the acquisition of the Equipment securing no more than $250,000 in the aggregate amount outstanding, or (ii) existing on Equipment when acquired, but, in either case, only if the Lien is confined to the property and improvements and the proceeds of the Equipment;

(d) Liens of carriers, warehousemen, suppliers, or other Persons that are possessory in nature arising in the ordinary course of business so long as such Liens attach only to Inventory, securing liabilities in the aggregate amount not to exceed $100,000 and which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto;

(e) Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security and other like obligations incurred in the ordinary course of business (other than Liens imposed by ERISA);

(f) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), but only if any extension, renewal or replacement Lien is limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase;

(g) leases or subleases of real property granted in the ordinary course of business, and leases, subleases, non-exclusive licenses or sublicenses of property (other than real property or Intellectual Property) granted in the ordinary course of Borrowers’ business, but only if the leases, subleases, licenses and sublicenses do not prohibit granting Bank a security interest;

(h) (i) non-exclusive licenses of Intellectual Property granted to third parties in the ordinary course of business, (ii) exclusive licenses of Intellectual Property that could not result in a legal transfer of title of the licensed property that are exclusive only in respects other than territory or exclusive as to territory only as to discreet geographical areas outside of the United States and (iii) other non-exclusive licenses of Intellectual Property that could not result in a legal transfer of title of the licensed property;

(i) Liens arising from attachments or judgments, orders, or decrees in circumstances not constituting an Event of Default under Sections 8.4 and 8.7;


 

(j) Liens in favor of other financial institutions arising in connection with Borrowers’ deposit or securities accounts held outside the United States at such institutions, provided that Bank has a perfected security interest in the amounts held in such deposit or securities accounts;

(k) [reserved]; and

(l) Liens securing inter-company Indebtedness that is also a Permitted Investment.

Permitted Location ” is defined in Section 5.2.

Person ” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.

Prime Rate ” is Bank’s most recently announced “prime rate,” even if it is not Bank’s lowest rate.

Prime Rate Margin ” is 125 basis points.

Prior Loan Agreement Effective Date ” is November 14, 2008.

Registered Organization ” is any “registered organization” as defined in the Code with such additions to such term as may hereafter be made

Remaining Months Liquidity Ratio ” is defined in Schedule 6.9(a).

Requirement of Law ” is as to any Person, the organizational or governing documents of such Person, and any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

Reserves ” means, as of any date of determination, such amounts as Bank may from time to time establish and revise in its good faith business judgment, reducing the amount of Advances and other financial accommodations which would otherwise be available to Borrowers (a) to reflect events, conditions, contingencies or risks which, as determined by Bank in its good faith business judgment, do or may adversely affect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Accounts), (ii) the assets or business of any Borrower or any Guarantor, or (iii) the security interests and other rights of Bank in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Bank’s good faith belief that any collateral report or financial information furnished by or on behalf of any Borrower or any Guarantor to Bank is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which Bank determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default.

Responsible Officer ” is any of the Borrowers’ Chief Executive Officers, Presidents, Chief Financial Officers, Controllers, Directors or Secretaries.

Revolving Line ” is an Advance or Advances in an amount equal to $15,000,000.

Revolving Line Maturity Date ” is October 1, 2012.

Securities Account ” is any “securities account” as defined in the Code with such additions to such term as may hereafter be made.

Subordinated Debt ” is Indebtedness incurred by a Borrower that is subordinated to all of Borrowers’ now existing or hereafter arising Indebtedness to Bank (pursuant to a subordination, intercreditor, or other similar agreement in form and substance satisfactory to Bank entered into between Bank and the other creditor), on terms acceptable to Bank.


 

Subsidiary ” means, with respect to any Person, any Person of which more than 50.0% of the voting stock or other equity interests (in the case of Persons other than corporations) is owned or controlled directly or indirectly by such Person or one or more of Affiliates of such Person.

Transaction Report ” is that certain report of transactions and schedule of collections in the form attached hereto as Exhibit C.

Transfer ” is defined in Section 7.1.

Unused Revolving Line Facility Fee ” is defined in Section 2.4(d).

Warrant ” is that certain Warrant to Purchase Stock dated November 14, 2008, executed by Parent in favor of Bank.

[Signature page follows. ]


 

IN WITNESS WHEREOF , the parties hereto have caused this Loan and Security Agreement to be executed as of the Effective Date.

 

BORROWERS:
S CI C LONE  P HARMACEUTICALS  I NTERNATIONAL  L TD .
By  

/s/ Hans Schmid

Name:  

Hans P. Schmid

Title:  

President & Managing Director

S CI C LONE  P HARMACEUTICALS  I NTERNATIONAL  C HINA   H OLDING  L TD .
By  

/s/ Hans Schmid

Name:  

Hans P. Schmid

Title:  

Director

BANK:
S ILICON V ALLEY B ANK
By  

/s/ Ben Columbo

Name:  

Ben Columbo

Title:  

SRM

[ Signature Page to Loan and Security Agreement ]


 

Schedule 6.9(a) - Minimum Liquidity

At all times, Borrowers shall maintain, and cause Parent to maintain, Liquidity such that their:

 

  (i) Debt Coverage Ratio is equal to or greater than 1.35 to 1.00; and

 

  (ii) Remaining Months Liquidity Ratio is equal to or greater than 6.00 to 1.00.

Debt Coverage Ratio ” means the ratio of (A) Liquidity to (B) Obligations.

Remaining Months Liquidity Ratio ” means the ratio of (A) Liquidity to the absolute value of (B) the sum of (1) Parent’s consolidated EBITDA for the trailing three months plus (2) capital expenditures during such trailing three months; provided that if (B) is greater than or equal to zero, the Remaining Months Liquidity Ratio shall be deemed to be 6.00 to 1.00.


 

EXHIBIT A

Collateral Description

The Collateral consists of all Borrowers’ and all of each Borrower’s right, title and interest in and to the following personal property:

All goods, Accounts (including health-care receivables), Equipment, Inventory, contract rights or rights to payment of money, leases, license agreements, franchise agreements, General Intangibles, commercial tort claims, documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), securities, and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located; and

all Borrowers’ Books relating to the foregoing, and any and all claims, rights and interests in any of the above and all substitutions for, additions, attachments, accessories, accessions and improvements to and replacements, products, proceeds and insurance proceeds of any or all of the foregoing.

Notwithstanding the foregoing, the Collateral does not include any of the following:

 

  (a) any Account, contract right, license or other General Intangible of a Borrower, or any permit, instrument, promissory note or chattel paper of a Borrower, if and to the extent such Account, contract right, General Intangible, permit, instrument, promissory note or chattel paper contains restrictions on assignments and the creation of Liens, or under which such an assignment or Lien would cause a default to occur under such Account, contract rights, license, General Intangible, permit, instrument, promissory note or chattel paper (other than to the extent that any such term would be rendered ineffective pursuant to Sections 9-406(d), 9-407(a) or 9-408(a) of Article 9 of the Code); provided, that immediately upon the ineffectiveness, lapse or termination of any such provision, the Collateral shall include, and each Borrower shall be deemed to have granted a security interest in, all such right, title and interests as if such provision had never been in effect; and

 

  (b) any government permit or franchise that prohibits Liens on or collateral assignment of such permit or franchise.

Until the occurrence of the IP Trigger, notwithstanding the foregoing, the Collateral also does not include any Intellectual Property; provided that, whether the Collateral includes or excludes Intellectual Property, the Collateral shall always include all Accounts and all proceeds arising from or out of, or relating to, Intellectual Property. If a judicial authority (including a U.S. Bankruptcy Court) would hold that a security interest in the underlying Intellectual Property is necessary to have a security interest in such Accounts and such proceeds, then the Collateral shall automatically, and effective as of the Effective Date, include the Intellectual Property to the extent necessary to permit perfection of Bank’s security interest in such Accounts and proceeds.

Pursuant to the terms of a certain negative pledge arrangement with Bank, each Borrower has agreed not to encumber any of its Intellectual Property without Bank’s prior written consent.


 

EXHIBIT B

Compliance Certificate

 

TO:    SILICON VALLEY BANK   Date:   

 

FROM:   

S CI C LONE P HARMACEUTICALS I NTERNATIONAL L TD . and

S CI C LONE P HARMACEUTICALS I NTERNATIONAL C HINA H OLDING L TD .

    

The undersigned authorized officers of S CI C LONE P HARMACEUTICALS I NTERNATIONAL L TD . and S CI C LONE P HARMACEUTICALS I NTERNATIONAL C HINA H OLDING L TD . (collectively, the “Borrowers”) jointly and severally certify that under the terms and conditions of the Loan and Security Agreement between Borrowers and Bank dated as of August      , 2010 (the “Agreement”):

(1) Borrowers are in complete compliance for the period ending                      with all required covenants except as noted below; (2) there are no Events of Default; (3) all representations and warranties in the Agreement are true and correct in all material respects on this date except as noted below; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; (4) Borrowers, Parent, and each of their Subsidiaries, have timely filed all required tax returns and reports (or timely extensions therefore), and Borrowers and Parent have timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by them except as otherwise permitted pursuant to the terms of Section 5.9 of the Agreement; and (5) no Liens have been levied or claims made against Borrowers, Parent, or any of their Subsidiaries relating to unpaid employee payroll or benefits of which Borrower has not previously provided written notification to Bank.

Attached are the required documents supporting the certification. The undersigned certify that these are prepared in accordance with GAAP consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The undersigned acknowledge that no borrowings may be requested at any time or date of determination that any Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. Capitalized terms used but not otherwise defined herein shall have the meanings given them in the Agreement.

Please indicate compliance status by circling Yes/No under “Complies” column.

 

Reporting Covenant

  

Required

  

Complies

Transaction Report    Monthly, within 20 days    Yes    No
Compliance Certificate    Monthly, within 30 days    Yes    No
Parent prepared consolidated financial statements    Monthly, within 30 days    Yes    No
Global Cash Report    Monthly, within 30 days    Yes    No
Audited, consolidated financial statement    Annually, within 120 days of FYE    Yes    No
Board approved projections and plan    Annually, within 20 days of approval by board, but no later than 75 days from FYE.    Yes    No
10-K, 10-Q and 8-K    Within 5 days of filing with SEC    Yes    No

 

The following Intellectual Property was registered (or a registration application submitted) after the Effective Date (if no registrations, state “None”:                                                                                                                                                                          

 

 

 

Financial Covenants

  

Required

  

Actual

  

Complies

Maintain Liquidity such that, at all times:         
Debt Coverage Ratio    ³ 1.35 to 1.00                  to 1.00    Yes    No
Remaining Months Liquidity Ratio    ³ 6.00 to 1.00                  to 1.00    Yes    No

QE = Quarter Ending; FYE = Fiscal Year Ending

[ continued on next page ]


 

The following are the exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions to note.”)

 

 

 

 

 

S CI C LONE P HARMACEUTICALS I NTERNATIONAL L TD .     BANK USE ONLY
By  

 

    Received by:  

 

Name:  

 

      AUTHORIZED SIGNER
Title:  

 

    Date:  

 

      Verified:  

 

        AUTHORIZED SIGNER
S CI C LONE P HARMACEUTICALS I NTERNATIONAL     Date:  

 

C HINA H OLDING L TD .      
      Compliance Status:              Yes          No
By:  

 

     
Name:  

 

     
Title:  

 

     


 

EXHIBIT C

Transaction Report

[EXCEL spreadsheet to be provided separately from lending officer.]


 

EXHIBIT D

OFFICERS’ CERTIFICATE

This Officers’ Certificate is furnished pursuant to Section 3.1(q) of the Loan and Security Agreement (the “ Loan Agreement ”), dated as of August      , 2010, by and among S ILICON V ALLEY B ANK , a California corporation (“ Bank ”), S CI C LONE P HARMACEUTICALS I NTERNATIONAL L TD . , a Cayman Islands exempted company (“ SPIL ”) and S CI C LONE P HARMACEUTICALS I NTERNATIONAL C HINA H OLDING L TD . , a Cayman Islands exempted company (“ SPIL China ,” and together with SPIL, collectively, “ Borrowers ” and each a “ Borrower ”). The Obligations of Borrowers are guaranteed by S CI C LONE P HARMACEUTICALS , I NC . , a Delaware corporation (“ Guarantor ”) pursuant to that certain Unconditional Guaranty and Security Agreement (the “ Guaranty ”), by and between Bank and Guarantor, dated as of August      , 2010. Capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement or Guaranty, as required by the context.

The undersigned hereby each certify in their capacity as Responsible Officers of SPIL, SPIL China and the Guarantor that:

(a) all of the representations and warranties of the Borrowers under Section 5 of the Loan Agreement, which Borrowers hereby make as of the date hereof, are true and correct;

(b) all of the representations and warranties of the Guarantor under Section 3 of the Guaranty, which Guarantor hereby makes as of the date hereof, are true and correct;

(c) no Default or Event of Default has occurred and is continuing as of the date hereof; and

(d) both before and after giving effect to the transactions contemplated herein, and the payment and accrual of all transaction costs in connection with the foregoing, each Borrower and Guarantor is and will be solvent.

[ Remainder of page intentionally left blank—signature page to follow ]


 

IN WITNESS WHEREOF, the undersigned have executed this Officers’ Certificate this      day of August 2010.

 

BORROWERS:
S CI C LONE P HARMACEUTICALS I NTERNATIONAL L TD .
By  

 

Name:  

 

Title:  

 

S CI C LONE P HARMACEUTICALS I NTERNATIONAL C HINA H OLDING L TD .
By  

 

Name:  

 

Title:  

 

GUARANTOR:
S CI C LONE P HARMACEUTICALS , I NC .
By  

 

Name:  

 

Title:  

 

 

Exhibit 10.2

LICENSE AGREEMENT

This License Agreement is entered into and made effective as of July 28, 1997, by and among SciClone Pharmaceuticals, Inc., a California corporation, and SciClone Pharmaceuticals International, Ltd., a Cayman corporation (collectively “Licensee”), and Edward T. Wei, an individual (“Licensor”), with respect to the facts set forth below.

RECITALS

A. Licensee is engaged in development of medical products which may be able to utilize the Licensed Technology (defined below).

B. By assignment, Licensor is the owner of, and Licensor has the exclusive right to grant a license to, the Licensed Technology, except those patents or applications issued or filed in Russia Licensor has furnished to Licensee copies of the assignment documents for the Licensed Technology, consisting of an Assignment and an Acknowledgment from the Russian Inventors (defined below) and an assignment from Verta Ltd. and Cytokin Ltd., each a Russian company (collectively the “Russian Companies”), who were the employers of the Russian Inventors.

C. Licensor desires to grant to Licensee, and Licensee wishes to acquire, an exclusive worldwide (excluding Russia) license to the Licensed Technology, subject to the terms and conditions set forth herein. The Licensed Technology is also known as the “Bestim” Technology.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth herein, Licensor and Licensee hereby agree as follows:

1. Definitions. Capitalized terms shall have the meaning set forth below.

1.1. Affiliate . The term “Affiliate” shall mean any entity which directly or indirectly controls, is controlled by or is under common control with a party. The term “control” as used herein means the possession of the power to direct or cause the direction of the management and the policies of an entity, or person, whether through the ownership of a majority of the outstanding voting securities or by contract or otherwise.

1.2. Combination Product . The term “Combination Product” shall have the meaning as defined in Section 4.3.1 below.

1.3. Component Product . The term “Component Product” shall have the meaning as defined in Section 4.4.1 below.


 

1.4. Composition of Matter Patent Claims . The term “Composition of Matter Patent Claims” shall mean those certain patent claims which constitute composition of matter claims (other than method of use claims) within the Licensed Patents which are eventually allowed by the applicable governmental patent office, from and after the date when a valid patent issues for said claims, if at all. If a valid patent so issues in one or more countries but not in other countries, then the Net Sales realized from each such issuing country shall be treated as Net Sales realized from Composition of Matter Patent Claims.

1.5. Confidential Information . The term “Confidential Information” shall mean any and all proprietary or confidential information of Licensor or Licensee which may be exchanged between the parties at any time and from time to time in connection with this Agreement. Information shall not be considered confidential to the extent that it:

a. is publicly disclosed through no fault of any party hereto, either before or after it becomes known to the receiving party; or

b. was known to the receiving party prior to the date of disclosure, which knowledge was acquired independently and not from the other party hereto (or such party’s employees or agents); or

c. is subsequently disclosed to the receiving party in good faith by a third party who has a right to make such disclosure; or

d. has been published by a third party as a matter of right; or

e. is developed or acquired totally independent from and with any benefit from any confidential information received from the disclosing party.

1.6. Effective Date . The term “Effective Date” shall mean when all of the. following documents have been executed by all of the parties thereto: (i) this Agreement, (ii) the Inventors’ Acknowledgment of Assignment, (iii) the Russian Companies’ Acknowledgment of Assignment, and (iv) the Research Funding Agreement.

1.7. Inventors’ Acknowledgment of Assignment . The term “Inventors’ Acknowledgment of Assignment” shall mean the document by that name approved by SciClone.

1.8. Licensed Patents . The term “Licensed Patents” shall mean the patent rights described on Exhibit A attached hereto, plus all patents issued based on divisionals, continuations, continuations-in-part, reissues, re-examinations and extensions of the patent rights described in paragraph 1 of Exhibit A, together with all corresponding foreign patents, except for those issuing in Russia, and together with all related pending patent applications and inventor’s certificates, and together with all patents and patent applications covering improvements to the inventions described in the foregoing, filed or issued in any country, except in Russia.

1.9. Licensed Product . The term “Licensed Product(s)” shall mean any product or process which cannot be developed, manufactured, used or sold (i) without infringing on the valid issued claims of the Licensed Patents, or (ii) without utilizing the Licensed Technology.


 

1.10. Licensed Technology . The term “Licensed Technology” shall mean the Licensed Patents, plus all improvements thereto developed by Licensor, the Russian Companies or the Russian Inventors (defined below), and all data, studies, know-how, technology, confidential information and other intellectual property rights belonging to Licensor, the Russian Companies or the Russian Inventors, which relate to the Licensed Patents or are conceived or reduced to practice by one or more of such parties during the term of the Research Funding Agreement.

1.11. Licensed Territory . The term “Licensed Territory” shall mean worldwide, except for Russia.

1.12. Method of Use Patent Claims . The term “Method of Use Patent Claims” shall mean those certain patent claims within the Licensed Patents which are eventually allowed by the applicable governmental patent office, from and after the date when a valid patent issues for said claims, if at all. If a valid patent so issues in one or more countries but not in other countries, then the Net Sales realized from each such issuing country shall be treated as Net Sales realized from Method of Use Patent Claims.

1.13. Net Sales . The term “Net Sales” shall mean the gross amount received by Licensee, or its Affiliates and sublicensees, or any of them, on sales to first customers of Licensed Products for therapeutic use after deducting (i) discounts actually given, (ii) credits for claims, allowances, retroactive price reductions or returned goods, (iii) transportation and insurance costs and (iv) sales taxes, value added taxes or other governmental charges paid in connection with sales of Licensed Products (but excluding what is commonly known as income taxes). For purposes of determining Net Sales, a sale shall be deemed to have occurred when a Licensed Product is shipped for delivery and payment has been received for said shipment. Sales of Licensed Products by Licensee or its Affiliates or a sublicensee thereof to any Affiliate or sublicensee which is a reseller thereof shall not be considered in the computation of Net Sales, and only the subsequent sales of such Licensed Products by Affiliates or sublicensees to unrelated parties shall be deemed Net Sales hereunder. Sales of Licensed Products for research purposes, or for the purpose of conducting clinical trials necessary or desirable in connection with securing regulatory approval of any Licensed Product in the Licensed Territory, shall not be considered in the computation of Net Sales. In the event that a Licensed Product is a Combination Product, then the Net Sales from said Licensed Product/Combination Product shall be determined in accordance with the formula set forth in Section 4.3 below. In the event that a Licensed Product is a Component Product, then the Net Sales from said Licensed Product/Component Product shall be determined in accordance with the formula set forth in Section 4.4 below.

1.14. PTO . The term “PTO” shall mean the United States Patent and Trademark Office.

1.15. Research Funding Agreement . The term “Research Funding Agreement” shall mean the document by that name, as signed by all of the parties thereto, including Licensee, Licensor and the Russian Companies, a signed copy of which has been furnished to Licensee.


 

1.16. Russian Inventors . The term “Russian Inventors” shall mean the following named individuals, who were co-inventors or participants for the conception and development of the Licensed Technology:

Alexander A. Kolobov

Andrey S. Simbirtsev

Sergey V. Kulikov

Alexey N. Prusakov

Natalia M. Kalinina

Natalia V. Pigareva

Alexander U. Kotov

Vladimir M. Shpen

Oleg A. Kaurov

Sergey A. Ketlinsky

1.17. Russian Companies’ Acknowledgment of Assignment . The term “Russian Companies’ Acknowledgment of Assignment” shall mean the document by that name, as signed by the Russian Companies, a signed copy of which has been furnished to Licensee.

1.18. Russia . The term “Russia” shall mean the geographical territory now known as the country of Russia.

1.19. Specified Countries . The term “Specified Countries” shall mean:

Australia

Belgium

Canada

Denmark

France

Germany

Japan

Netherlands

Sweden

Switzerland

United Kingdom

United States of America

2. License Grants.

Licensor hereby grants to Licensee an exclusive license in the Licensed Territory to utilize the Licensed Technology, to use, make, have made, sell, offer to sell, import and export all products and/or processes and/or services, with the full right to grant sublicenses, subject to the terms of this Agreement.


 

3. License Fee, Licensor’s Past Patent Costs and Milestone Payments.

3.1. License Fee and Licensor’s Past Patent Costs . Within ten (10) business days after the Effective Date, Licensee shall pay to Licensor a license fee of $47,500, plus $10,000 for reimbursement of Licensor’s past patent costs.

3.2. Milestone Payments .

3.2.1. Within ten (10) business days after Licensee files its first New Drug Application (“NDA”) seeking regulatory approval for a Licensed Product in one of the Specified Countries, Licensee shall pay to Licensor a milestone payment of $100,000 in cash. It is understood and agreed that Licensee shall only be obligated to make one $100,000 payment to Licensor pursuant to this paragraph regardless as to the number of NDAs filed by Licensee for Licensed Product(s) in one or more of the Specified Countries. It is further understood and agreed that Licensee shall not be obligated to make any payment to Licensor pursuant to this paragraph upon an NDA filing by Licensee in any Country not included in the list of Specified Countries.

3.2.2. Within ten (10) business days after Licensee receives its first governmental regulatory approval to commercially market and sell a Licensed Product in one of the Specified Countries, Licensee shall pay to Licensor a milestone payment of $300,000 in cash. It is understood and agreed that Licensee shall only be obligated to make one $300,000 payment to Licensor pursuant to this paragraph regardless as to the number of governmental approvals obtained by Licensee to commercially market and sell Licensed Product(s) in one or more of the Specified Countries. It is further understood and agreed that Licensee shall not be obligated to make any payment to Licensor pursuant to this paragraph upon Licensee receiving governmental regulatory approval to commercially market and sell a Licensed Product in any Country not included in the list of Specified Countries.

4. Royalties.

4.1. Percentage Royalty As additional consideration for the exclusive license granted pursuant to Section 2 hereof, Licensee shall pay to Licensor a royalty on a country-by-country basis, based upon the Net Sales of Licensed Products sold in each country, as follows:

4.1.1. Composition of Matter Patent Claims . For the Net Sales realized by Licensee (or its Affiliates) from a particular country in which there are validly issued patent rights for the Composition of Matter Patent Claims, Licensee shall pay a royalty of four percent (4%) of said Net Sales, payable for the life of said applicable patent.

4.1.2. Method of Use Patent Claims . For the Net Sales realized by Licensee (or its Affiliates) from a particular country in which there are validly issued patent rights for the Method of Use Patent Claims, but not for Composition of Matter Patent Claims, Licensee shall pay a royalty of three percent (3%) of said Net Sales, payable for the life of said applicable patent. If both Sections 4.1.1 and 4.1.2 are applicable to the same Net Sales (i.e., validly issued patent rights are for both Composition of Matter Patent Claims and Method of Use Patent Claims), then Licensee shall pay the four percent (4%) royalty (and not 4% plus 3%).


 

4.1.3. Other Licensed Technology . For the Net Sales realized by Licensee (or its Affiliates) from a particular country in which there are no validly issued patent rights for the Composition of Matter Patent Claims or the Method of Use Claims, Licensee shall pay a royalty of two percent (2%) of said Net Sales, payable up through the fifth anniversary of the first commercial sale of a Licensed Product in any country. For avoidance of doubt and for an example, if the first such sale occurs in the year 2000 in one country, then Licensee’s royalty obligation will cease in all countries five years later (in 2005) since there is no patent protection.

4.1.4. Competitive Compositions . In the event that the Russian Companies or Licensor develop or acquire a composition or compound which is competitive with the Licensed Product, and the exclusive rights to said competitive composition or compound have not been granted to Licensee, then the royalty rates specified in Sections 4.1.1, 4.1.2 and 4.1.3 shall be reduced to two percent (2%), one and one-half percent (1.5%) and one percent (1%) of Net Sales, respectively.

4.2. Sublicensee Payments . In the case of Net Sales realized by a sublicensee of Licensee, instead of Licensee or a sublicensee paying the royalties to Licensor based upon the provisions in Sections 4.1, Licensee shall pay to Licensor an amount equal to twenty-five percent (25%) of the cash actually received by Licensee from the sublicensee on account of the sublicensee’s Net Sales or on account of the sublicense agreement, including payments made by the sublicensee to Licensee in the nature of running royalties, license fees and milestone payments (“Included Sublicensee Payments”), but excluding payments made by the sublicensee to Licensee to purchase Licensee’s stock or to fund a specific research and/or development project (“Excluded Sublicensee Payments”).

4.3. Combination Product .

4.3.1. Definition of Combination Product . As used herein, the term “Combination Product” shall mean a Licensed Product which cannot be manufactured, used or sold without (i) infringing the Licensed Patents, and also (ii) infringing one or more patents held by Licensee or a third party (referred to herein as “other patent rights”).

4.3.2. Net Sales of Combination Product . The Net Sales of a Combination Product shall be based upon the proportional value of the contribution of the Licensed Patents, as compared with the aggregate value of all patent rights used for the Combination Product and determined in accordance with the following formula:

 

  X =      × C  
        , where

X = the Net Sales attributable to the portion of the Combination Product which is attributable to the Licensed Patents, on which Net Sales Licensee shall pay the royalty rate set forth in Section 4.1; and


 

A = the value of the contribution of the Licensed Patents (as compared to the value of the contributions of the other patent rights) used in the Combination Product; and

B = The aggregate value of all patent rights used for the Combination Product, consisting of both the Licensed Patents and all other patent rights used in the Combination Product; and

C = the Net Sales for the Combination Product.

The values described above shall be determined by the parties hereto in good faith. In the absence of agreement as to said values, the values shall be determined by arbitration in accordance with the provisions of Section 12.2 hereof.

4.4. Component Product .

4.4.1. Definition of Component Product . As used herein, the term “Component Product” shall mean a Licensed Product which is a distinct component of a larger product which contains multiple components (including, as an example of additional components, proprietary methods sold or licensed with the Component Product).

4.4.2. Net Sales of Component Product . The Net Sales of a Component Product shall be based upon the proportional value of the cost to manufacture the Component Product (or the sale price of the Component Product if it is sold separately), as compared with the aggregate value of all components of the aggregate larger product (including methods sold or licensed with the Component Product and the Component Product) and determined in accordance with the following formula:

 

  X =      × C  
        , where

X = the Net Sales attributable to the Component Product, on which Licensee is obligated to pay the royalty rate set forth in Section 4.1; and

A = the value of the Component Product, based upon cost to manufacture the Component Product, or the sales price of the Component Product if it is sold separately; and

B = The value of the aggregate larger product, with all components (including methods sold or licensed with the Component Product, and the Component Product), based upon the same criteria as used for A above; and

C = the Net Sales for the aggregate larger product.


 

The values described above shall be determined by the parties in good faith. In the absence of agreement as to said values, the values shall be determined by arbitration in accordance with the provisions of Section 12.2 hereof.

4.5. Quarterly Payments .

4.5.1. Sales by Licensee . With regard to Net Sales made by Licensee or its Affiliates, royalties shall be payable by Licensee quarterly, within ninety (90) days after the end of each calendar quarter, based upon Net Sales of Licensed Products during such preceding calendar quarter, commencing with the calendar quarter in which the first commercial sale of any Licensed Product is made.

4.5.2. Sales by Sublicensees . With regard to cash actually received by Licensee from sublicensees of Licensee or its Affiliates, based upon Net Sales made by said sublicensees, amounts owed to Licensor shall be payable by Licensee quarterly, within one hundred twenty (120) days after the end of each calendar quarter, based upon Included Sublicensee Payments actually received by Licensee from sublicensee during such preceding calendar quarter, commencing with the calendar quarter in which Licensee actually receives Included Sublicensee Payments.

4.6. Duration of Royalty Obligations . The royalty obligations of Licensee as to each Licensed Product shall terminate on a country-by-country basis as follows: (i) with respect to royalties payable pursuant to Section 4.1.1 or 4.1.2 hereof, termination shall occur concurrently with the expiration of the last to expire of the Composition of Matter Patent Claims and Method of Use Patent Claims licensed hereunder utilized by or in such Licensed Product in each such country, or (ii) with respect to royalties payable pursuant to Section 4.1.3 hereof, termination shall occur as specified in Section 4.1.3 herein, if applicable. Notwithstanding any other provision of this Agreement, in the event that, based upon a challenge by a party other than Licensee, its Affiliates or sublicensees, the existing favorable claims of the Licensed Patents are held to be invalid by the PTO or other applicable foreign governmental authority or any competent court of law, this Agreement shall remain in effect, unless otherwise terminated by Licensee, and Licensee shall thereafter have no further obligation to pay any royalties hereunder.

4.7. Reports . Licensee shall furnish to Licensor at the same time as each royalty payment is made by Licensee, a written report of Net Sales of Licensed Products (or, in the case of Included Sublicensee Payments, the aggregate amount of such payments) and the royalty due and payable thereon, including a description of any offsets or credits deducted therefrom, on a product-by-product and country-by-country basis, for the calendar quarter upon which such royalty payment is based.

4.8. Records . Licensee shall keep, and cause its Affiliates and sublicensees to keep, complete records and accounts of all sales of Licensed Products in sufficient detail to enable the royalties payable on Net Sales of each Licensed Product and Included Sublicensee Payments to be determined. Licensor shall have the right to appoint an independent certified public accounting firm approved by Licensee, which approval shall not be unreasonably withheld, to audit, upon delivery of advance written notice and during normal business hours without interruption of normal business operations, the records of Licensee, its Affiliates and sublicensees as necessary to verify the royalties payable pursuant to this Agreement. Licensee or its Affiliates shall pay to


Licensor an amount equal to any additional royalties to which Licensor is entitled as disclosed by the audit. Such audit shall be at Licensor’s expense. Licensor may exercise its right of audit hereunder no more frequently than once in any calendar year. The accounting firm shall disclose to Licensor only such information as is necessary to verify the accuracy of the royalty payments required hereunder, and all such information shall be treated as Confidential Information by Licensor. Licensee, its Affiliates and sublicensees shall preserve and maintain all records required for audit for a period of three (3) years after the calendar quarter to which the record applies.

4.9. Foreign Taxes . Any tax required to be withheld by Licensee or its Affiliates under the laws of any foreign country for the account of Licensor shall be paid by Licensee or its Affiliates for and on behalf of Licensor to the appropriate governmental authority and deducted from any royalties payable by Licensee hereunder.

5. Sublicense Rights . Licensee shall have the sole and exclusive right to grant sublicenses to any party with respect to the rights conferred upon Licensee under this Agreement, provided, however, that any such sublicense shall be subject in all respects to all of the provisions contained in this Agreement. Licensee shall pay Licensor, or cause its sublicensees to pay Licensor, amounts owed by Licensee to Licensor on account of Included Sublicensee Payments as specified in Section 4.2 hereof.

6. Obligations Related to Commercialization .

6.1. Commercial Development Obligation . In order to maintain Licensee’s exclusive license rights granted hereunder in force, Licensee, its Affiliates or sublicensees shall use reasonable efforts to develop the Licensed Technology into a commercially viable Licensed Product, as promptly as is reasonably and commercially feasible, and thereafter to produce and sell reasonable quantities of the Licensed Product. Licensee shall keep Licensor generally informed as to Licensee’s, its Affiliates’ or sublicensees’ progress in such development, production and sale.

6.2. Governmental Approvals and Marketing of Licensed Products . Licensee shall have sole authority for, and shall be responsible for, obtaining all necessary governmental approvals for the development, production, distribution, sale and use of any Licensed Product, at Licensee’s expense. Licensee shall have sole responsibility for any warning labels, packaging and instructions as to the use of Licensed Products and for the quality control for any Licensed Product.

6.3. Product Liability Indemnity . Licensee hereby agrees to indemnify, defend and hold harmless Licensor from and against any liability or expense arising from any product liability claim asserted by any party as to any Licensed Product made or sold by Licensee or its Affiliates and sublicensees, other than any claim which arises due to a breach by Licensor, any Russian Inventor or the Russian Companies of any covenant, warranty or representation made to Licensee.

7. Representations and Warranties . Licensor hereby represents and warrants that (i) he is the rightful and sole owner of exclusive worldwide rights (except those patents and applications issued or filed in Russia) to the Licensed Technology, (ii) the Licensed Technology is not subject to any lien, license, assignment (other than an assignment to Licensor), security interest or other encumbrances, (iii) he has made full disclosure to Licensee of all communications with respect to


the Licensed Technology with the PTO and any foreign patent agencies, (iv) he has the power and authority to enter into this Agreement and grant the license provided for hereunder, and (v) he has no knowledge that the Licensed Technology infringes any patents or other intellectual property rights of third parties, or that any third party is in any way infringing the Licensed Technology covered by this Agreement.

8. Patent Matters .

8.1. Patent Prosecution and Maintenance . From and after the date of this Agreement, the provisions of this Section 8.1 shall control the prosecution and maintenance of the Licensed Patents in the Licensed Territory. Licensee shall direct and control (i) the preparation, filing and prosecution of all domestic and foreign patent applications in the Licensed Territory relating to Licensed Technology (including any interferences and foreign oppositions); and (ii) the maintenance of any patents issuing therefrom. Licensee shall select the patent attorney, and the fees and expenses incurred by Licensee with respect to services performed by such patent counsel and any filing or other fees shall be paid by Licensee. Licensor, the Russian Companies and Russian Inventors shall assist Licensee and patent counsel employed or retained by Licensee as necessary to accomplish the patent processes described hereunder and in the Research Funding Agreement. Licensor, the Russian Inventors and the Russian Companies shall sign all documents which are reasonably necessary to enable Licensee to prosecute and maintain all patent matters. Licensor shall use diligent efforts to obtain the cooperation and participation of the Russian Companies and the Russian Inventors when reasonably necessary or appropriate for the presentation or maintenance of the Licensed Products. Licensee shall use good faith and due diligence in determining which foreign countries, in addition to the United States, in which to file for and maintain patent rights, depending on the commercial benefits Licensee can reasonably anticipate in each country. In as much as Licensee is paying all patent costs, the ultimate decision as to all patent prosecution and maintenance matters shall be made by Licensee.

8.2. Information to Licensor . Licensee shall keep Licensor informed with regard to the patent applications, re-examination and maintenance processes. Licensee shall deliver to Licensor copies of all material patent applications, amendments, related correspondence, and other related matters. Licensor shall keep Licensee informed with regard to the Russian patent applications, re-examinations and maintenance process with respect to the Licensed Technology. Licensor shall deliver to Licensee English translations of copies of all material patent applications, related correspondence, and other related matters with respect to the Licensed Technology. Licensee shall pay reasonable expenses for translation of such materials, provided, however, that such expenses are pre-approved by Licensee in writing.

8.3. Patent Costs . The parties hereto agree that the exclusive license granted hereunder is in part in consideration for Licensee’s payment of past and future patent costs and expenses as described herein. Licensee shall pay for all expenses incurred by Licensee pursuant to Sections 8.1 and 8.2 hereof. Licensee shall not pay for any patent costs paid or incurred by Licensor or the Russian Inventors or the Russian Companies, other than as specified in Section 3.1 hereof.

8.4. Ownership . The Licensed Patents and the patent applications filed and the patents obtained pursuant to Section 8.1 hereof shall be owned by Licensor, and included in Licensed Technology and the exclusive license granted in this Agreement.


 

8.5. Infringement Actions .

8.5.1. Prosecution and Defense of Infringements . Licensee shall have the right but not the obligation to prosecute any and all infringements of any Licensed Patent and to defend all charges of infringement arising as a result of the exercise by Licensee, its Affiliates or sublicensees of the rights granted in this Agreement. Licensee may enter into settlements, stipulated judgments or other arrangements respecting such infringement, at its own expense. Licensor shall permit any action to be brought in his name if required by law, and Licensee shall hold Licensor harmless from any costs, expenses of liability respecting all such infringements or charges of infringement, except such infringements as shall result from any breach of covenant, warranty or representation made by Licensor herein. Licensor agrees to provide, or use diligent effort to obtain from the Russian Inventors and Russian Companies, all necessary assistance of a technical nature which Licensee may require in any litigation arising with respect to the Licensed Technology. In the event Licensee elects not to prosecute any infringement, Licensee shall notify Licensor in writing promptly and Licensor shall have the right to prosecute such infringement on his own behalf. If Licensee elects to prosecute an infringement, then Licensor shall not be entitled to do so.

8.5.2. Allocation of Recovery . Any damages or other recovery from an infringement action undertaken by Licensee pursuant to Section 8.5.1 shall be retained by Licensee as its exclusive property; but any such recovery, net of Licensee’s costs of litigation, shall be treated as “Net Sales” and Licensee shall pay a royalty thereon pursuant to Section 4.1 above. If Licensee elects to not prosecute an infringement, and Licensor does prosecute said infringement, then Licensor shall retain any recovery received from said prosecution.

9. Interests in Intellectual Property Rights .

9.1. Preservation of Title . Licensor shall retain full ownership and title to Licensed Technology, and any other patents licensed under this Agreement and shall use his reasonable best efforts to preserve and maintain such full ownership and title.

9.2. Ownership of Improvements and Additional Intellectual Property .

9.2.1. Developed by Licensee . Any improvements to Licensed Technology conceived, developed or reduced to practice by Licensee, its Affiliates or sublicensees or their employees shall remain the sole and exclusive property of such party, and shall not be included in Licensed Technology under this Agreement.

9.2.2. License Grant Back . Licensee hereby grants to Licensor an exclusive license in Russia to utilize Licensee’s, its Affiliates’ or sublicensees’ improvements to Licensed Technology, to use, make, have made, sell or offer to sell all products and/or processes and/or services, with full right to grant sublicenses, subject to Licensor paying to Licensee a royalty on Net Sales which utilize said improvements, at the same royalty rates as specified in Section 4 hereof. All other terms of this Agreement which are applicable to Licensee shall be applicable to Licensor, as a licensee to use the improvements in Russia with respect to this section 9.2.2, specifically including items in Sections 4, 5, 6, 8 (in Russia), 11 and 12.


 

9.2.3. Developed by Licensor or the Russian Companies . Any improvements to the Licensed Technology conceived, developed or reduced to practice by Licensor during the term of this Agreement, or by the Russian Companies during the term of the Research Funding Agreement, shall be included in Licensed Technology and subject to the exclusive license granted hereunder. Examples of such anticipated improvements, include without limitation: (i) novel methods of synthesis, formulation or delivery of Bestim and related analogs, (ii) therapeutic use applications which cover indications not previously covered in patents, and (iii) new composition of matter claims for Bestim analogs.

10. Confidentiality and Publication .

10.1. Treatment of Confidential Information . The parties hereto and the Russian Companies agree that during the term of this Agreement, and for a period of five (5) years after this Agreement terminates, a party receiving Confidential Information of the other party will, excepting only to the extent needed in connection with the performance of this Agreement or the other agreements referenced herein, (i) maintain in confidence such Confidential Information, (ii) not disclose such Confidential Information to any third party without prior written consent of the other party and (iii) not use such Confidential Information for any purpose except those permitted by this Agreement.

10.2. Publications . In order to protect the rights granted to Licensee hereunder, Licensor and the Russian Companies shall submit to Licensee copies of proposed publications of Licensor or the Russian Companies which contain subject matter relating to intellectual property licensed hereunder, and shall afford Licensee thirty (30) days to review such proposed publications. Upon timely written request by Licensee, Licensor shall delay any such publication to facilitate the preparation and filing of a patent application, which delay shall not exceed thirty (30) days from the date Licensee requests such delay.

11. Term and Termination .

11.1. Term . The term of this Agreement and the license granted hereunder shall commence on the Effective Date and continue until expiration of the last patent included within the Licensed Patents, unless sooner terminated pursuant to this Section 11.

11.2. Termination Without Cause . This Agreement may be terminated by Licensee for any reason, at Licensee’s sole discretion, upon delivery to Licensor of sixty (60) days’ prior written notice of termination.

11.3. Termination Upon Default . Upon the failure of a party to perform any obligation required of it or him to be performed hereunder, and the failure to cure within sixty (60) days after receipt of written notice from the other party specifying in reasonable detail the nature of such default, the non-defaulting party may deliver to the defaulting party written notice of intent to terminate, such termination to be effective upon the date set forth in such notice.

Such termination rights shall be in addition to and not in substitution for any other remedies that may be available to the non-defaulting party. Termination pursuant to this Section 11.3 shall not relieve the defaulting party from liability and damages to the other party for breach of this Agreement. Waiver by either party of a single default or a succession of defaults shall not deprive such party of any right to terminate this Agreement arising by reason of any subsequent default.


 

11.4. Bankruptcy or Insolvency . The parties agree that the rights and licenses granted under Section 2 of this Agreement, and any intellectual property conceived or reduced to practice during the course of the Research Funding Agreement, are and shall be deemed to be, for purposes of Section 365 (a) of the U.S. Bankruptcy Code, licenses or rights to “intellectual property” as defined under Section 101 of the U.S. Bankruptcy Code. The parties agree that Licensee, as a licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the U.S. Bankruptcy Code. The parties further agree that in the event of the bankruptcy or insolvency of Licensee, this Agreement and the rights granted to Licensee hereunder may be transferred by Licensee or any trustee appointed for the estate of Licensee, provided such transferee shall agree in writing to comply with all of the terms and conditions set forth herein and to cure any financial defaults by Licensee. In the event of the bankruptcy or insolvency of Licensee or Licensor, this Agreement shall remain in full force and effect.

11.5. Rights Upon Expiration . Neither party shall have any further rights or obligations upon the regularly scheduled expiration of this Agreement other than the obligation of Licensee to make any and all reports and payments for the final quarter period. Provided, however, that upon such expiration, each party shall be required to continue to abide by its confidentiality obligations as described in Section 10, and Licensee shall continue to abide by its obligation to indemnify Licensor as described in Section 6.3 for products sold prior to the termination.

11.6. Rights Upon Termination . Notwithstanding any other provision of this Agreement, upon any termination of this Agreement prior to the regularly scheduled expiration date of this Agreement, the license granted hereunder shall terminate. Except as otherwise provided in Section 11.7 of this Agreement with respect to work-in-progress, upon such termination, Licensee shall have no further right to develop, manufacture or sell any Licensed Products, or to otherwise use any Licensed Technology. Any such termination shall not relieve either party from any obligations accrued to the date of such termination. Upon such termination, each party shall be required to abide by its nondisclosure obligations as described in Section 10.1, and, provided termination was not initiated by Licensee due to Licensor’s breach hereunder, Licensee shall continue to abide by its obligations to indemnify Licensor as described in Section 6.3 for products sold prior to the termination.

11.7. Work-in-Progress . Upon any early termination of this Agreement and the license granted hereunder, Licensee shall be entitled to finish any work-in-progress and to sell any completed inventory of Licensed Products which remain on hand as of the date of termination, so long as Licensee pays to Licensor the royalties applicable to such sales in accordance with the terms and conditions as set forth in this Agreement.

12. General Provisions .

12.1. Independent Contractors . The relationship between Licensor and Licensee is that of independent contractors. Licensor and Licensee are not joint venturers, partners, principal and agent, master and servant, employer or employee, and have no other relationship other than independent contracting parties. Licensor and Licensee shall have no power to bind or obligate each other in any manner, other than as is expressly set forth in this Agreement.


 

12.2. Arbitration . Any matter or disagreement arising under this Agreement shall be submitted for decision to a panel of three neutral arbitrators with expertise in the subject matter to be arbitrated. One arbitrator shall be selected by each party and the two arbitrators so selected shall select the third arbitrator. The arbitration shall be conducted in accordance with the Rules of the American Arbitration Association. The decision and award rendered by the arbitrators shall be final and binding. Judgment upon the award may be entered in any court having jurisdiction thereof. Any arbitration shall be held in Santa Clara County, California, or such other place as may be mutually agreed upon in writing by the parties.

12.3. Entire Agreement; Modification . This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof. There shall be no amendments or modifications to this Agreement, except by a written document which is signed by both parties. The parties acknowledge that they are also parties to related agreements entitled (i) Research Funding Agreement, (ii) Russian Companies’ Acknowledgment, and (iii) Consulting Agreement.

12.4. Headings . The headings of the several sections are inserted for convenience of reference and are not intended to be a part of or affect the meaning or interpretation of this Agreement.

12.5. Governing Law . This Agreement shall be construed and enforced in accordance with the laws of the State of California, without regard to conflict of laws rules.

12.6. Severability . If any one or more of the provisions of this Agreement is held to be invalid or unenforceable by a court of competent jurisdiction, it shall be considered severed from this Agreement and shall not serve to invalidate the remaining provisions thereof. The parties shall make a good faith effort to replace any invalid or unenforceable provision with a valid and enforceable provision such that the objectives contemplated by them when entering this Agreement may be realized.

12.7. No Waiver . Any delay in enforcing a party’s rights under this Agreement or any waiver as to a particular default or other matter shall not constitute a waiver of such party’s rights to the future enforcement of its rights under this Agreement, excepting only as to an express written and signed waiver as to a particular matter for a particular period of time.

12.8. Notices . Any notices required by this Agreement shall be in writing, shall refer to this Agreement and shall be sent by registered or certified mail, postage prepaid, or by facsimile, telex or cable, charges prepaid, or by overnight courier, charges prepaid to the addresses set forth below unless subsequently changed by written notice to the other party:

 

For Licensee:   

SciClone Pharmaceuticals, Inc.

901 Mariner’s Island Blvd.

San Mateo, CA 94404

Attention: Alfred Rudolf, M.D.

Fax No.: (415) 358-3469

For Licensor:   

Edward T. Wei

480 Grizzly Peak Blvd.

Berkeley, CA 94708

Fax No.: 510-524-9040


 

Notice shall be deemed delivered upon the earlier of (i) when received, (ii) three (3) days after deposit into the mail, or (iii) the date notice is sent via facsimile, telex or cable, (iv) the day immediately following delivery to overnight courier (except Sunday and holidays).

12.9. Binding Upon Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of any successors in interest and assigns of Licensor and Licensee. Neither this Agreement nor any interest hereunder is assignable in part or in whole without the prior written consent of the other, which consent shall not be unreasonably withheld; provided , however , that Licensee may assign this Agreement without Licensor’s consent (i) to any of its Affiliates, or (ii) to any successor to Licensee by merger or consideration, or to the acquiror of all or substantially all of the business unit to which this Agreement relates, in each case, any such successor or assignee shall expressly assume in writing the performance of all the terms and conditions of this Agreement to be performed by the assigning party.

12.10. Interpretation of Agreement . Each of the parties hereto has reviewed the terms of this Agreement with such party’s counsel. Therefore, notwithstanding Section 1654 of the California Civil Code, the terms of the Agreement shall not be interpreted against either party in the event of any uncertainty with regard to the language in this Agreement.

12.11. Counterparts This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same Agreement. Signatures may be transmitted by facsimile.

IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives as of the date set forth above.

 

LICENSOR:     LICENSEE:
    SCICLONE PHARMACEUTICALS, INC.

/s/ Edward T. Wei, Ph.D.

    By:  

/s/ D.R. Sellers

Edward T. Wei, Ph.D.    
    SCICLONE PHARMACEUTICALS INTERNATIONAL LTD.
    By:  

/s/ Mark A. Culhane


 

EXHIBIT A

Licensed Technology and Licensed Patents

 

1. All the inventions, patent applications, patent rights, know-how and technology which are described in the following pending patent applications:

U.S. Application Serial No. 08/634,718, filed April 18, 1996

PCT Application No. PCT/US 96/17913, filed November 13, 1996

The Inventors are:

Alexander A. Kolobov

Andrey S. Simbirtsev

Sergey V. Kulikov

Alexey N. Prusakov

Natalia M. Kalinina

Natalia V. Pigareva

Alexander U. Kotov

Vladimir M. Shpen

Oleg A. Kaurov

Sergey A Ketlinsky

 

2. All patents issued based on divisionals, continuations, continuations-in-part, reissues, re-examinations and extensions of the patent rights described in paragraph 1 above, together with all corresponding foreign patents, except for those issued in Russia, and together with all related pending patent applications and inventor’s certificates, and together with all patents and patent applications covering improvements to the inventions described in the foregoing, filed or issued in any country except in Russia.

 

3. All future patent applications and patents filed and issued in individual countries as a result of “going national” under the PCT Application identified in paragraph 1 above.

 

EXHIBIT 31.1

RULE 13a-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Friedhelm Blobel, Ph.D., certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of SciClone Pharmaceuticals, Inc. (the “Registrant”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 8, 2010  

/s/ Friedhelm Blobel, Ph.D.

  Friedhelm Blobel, Ph.D.
  Chief Executive Officer

 

EXHIBIT 31.2

RULE 13a-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Gary S. Titus, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of SciClone Pharmaceuticals, Inc. (the “Registrant”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 8, 2010  

/s/ Gary S. Titus

  Gary S. Titus
  Senior Vice President, Finance and Chief Financial Officer
  (Principal Financial Officer)

 

EXHIBIT 32.1

SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Friedhelm Blobel, Chief Executive Officer, of SciClone Pharmaceuticals, Inc. (the “Registrant”), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:

(1) the Quarterly Report on Form 10-Q of the Registrant, to which this certification is attached as an exhibit (the “Report”), fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

Date: November 8, 2010  

/s/ Friedhelm Blobel, Ph.D.

  Friedhelm Blobel, Ph.D.
  Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to SciClone Pharmaceuticals, Inc. and will be retained by SciClone Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

EXHIBIT 32.2

SECTION 1350 CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Gary S. Titus, Senior Vice President, Finance and Chief Financial Officer, of SciClone Pharmaceuticals, Inc. (the “Registrant”), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:

(1) the Quarterly Report on Form 10-Q of the Registrant, to which this certification is attached as an exhibit (the “Report”), fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

Date: November 8, 2010  

/s/ Gary S. Titus

  Gary S. Titus
  Senior Vice President, Finance and Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to SciClone Pharmaceuticals, Inc. and will be retained by SciClone Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.