SciClone Pharmaceuticals, Inc.
SCICLONE PHARMACEUTICALS INC (Form: 10-Q, Received: 05/10/2011 16:19:21)
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 March 31, 2011

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 May 6, 2011, 56,571,922 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 MARCH 31, 2011

INDEX

 

     PAGE NO.  
PART I. FINANCIAL INFORMATION   
Item 1.    Financial Statements (Unaudited)   
  

Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010

     3   
  

Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2011 and 2010

     4   
  

Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2011 and 2010

     5   
  

Notes to Unaudited Condensed Consolidated Financial Statements

     6   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      12   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      17   
Item 4.    Controls and Procedures      18   
PART II. OTHER INFORMATION   
Item 1.    Legal Proceedings      19   
Item 1A.    Risk Factors      20   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      34   
Item 3.    Defaults Upon Senior Securities      34   
Item 4.    (Removed and Reserved)      34   
Item 5.    Other Information      34   
Item 6.    Exhibits      34   
Signature      35   

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

     March 31,
2011
    December 31,
2010
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 70,100      $ 53,017   

Short-term investments

     761        3,125   

Accounts receivable

     21,387        30,671   

Inventories

     7,654        7,078   

Prepaid expenses and other current assets

     1,888        2,057   
                

Total current assets

     101,790        95,948   

Property and equipment, net

     538        588   

Restricted investments

     409        380   

Other assets

     432        891   
                

Total assets

   $ 103,169      $ 97,807   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 2,690      $ 3,882   

Accrued liabilities

     10,415        8,247   
                

Total current liabilities

     13,105        12,129   

Long-term borrowing on line of credit

     2,500        2,500   

Other long-term liabilities

     826        990   

Commitments and contingencies

    

Stockholders’ equity:

    

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

     —          —     

Common stock; $0.001 par value; 75,000,000 shares authorized; 48,040,125 and 48,011,235 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively

     48        48   

Additional paid-in capital

     226,538        225,897   

Accumulated other comprehensive income

     127        67   

Accumulated deficit

     (139,975     (143,824
                

Total stockholders’ equity

     86,738        82,188   
                

Total liabilities and stockholders’ equity

   $ 103,169      $ 97,807   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

     Three Months Ended
March 31,
 
    
     2011     2010  

Product sales

   $ 21,662      $ 17,962   

Cost of product sales

     3,103        2,759   
                

Gross margin

     18,559        15,203   
                

Operating expenses:

    

Research and development

     3,109        2,675   

Sales and marketing

     5,228        4,948   

General and administrative

     5,958        3,197   
                

Total operating expenses

     14,295        10,820   
                

Income from operations

     4,264        4,383   

Non-operating income (expense):

    

Interest and investment income

     20        25   

Interest and investment expense

     (57     (19

Other income, net

     15        2   
                

Income before provision for income tax

     4,242        4,391   

Provision for income tax

     393        198   
                

Net income

     3,849      $ 4,193   
                

Basic net income per share

   $ 0.08      $ 0.09   

Diluted net income per share

   $ 0.08      $ 0.09   

See accompanying notes to unaudited condensed consolidated financial statements.

 

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SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Three Months Ended
March 31,
 
     2011     2010  

Operating activities:

    

Net income

   $ 3,849      $ 4,193   

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

    

Non-cash expense related to stock-based compensation

     525        324   

Depreciation and amortization

     83        104   

Realized gain on investments

     —          (76

Other non-cash expense

     —          68   

Changes in operating assets and liabilities:

    

Accounts receivable

     9,284        4,481   

Inventories

     (566     (963

Prepaid expenses and other assets

     611        294   

Accounts payable

     (1,192     (1,141

Accrued liabilities

     2,168        (161

Deferred revenue

     —          (141

Long-term liabilities

     (164     8   
                

Net cash provided by operating activities

     14,598        6,990   

Investing activities:

    

Purchases of property and equipment

     (12     (47

Purchases of available-for-sale investments

     (765     —     

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

     3,125        —     

Proceeds from the sale or maturity of trading security investments

     —          650   
                

Net cash provided by investing activities

     2,348        603   

Financing activities:

    

Proceeds from issuances of common stock

     106        259   
                

Net cash provided by financing activities

     106        259   

Effect of exchange rate changes on cash and cash equivalents

     31        —     
                

Net increase in cash and cash equivalents

     17,083        7,852   

Cash and cash equivalents, beginning of period

     53,017        29,687   
                

Cash and cash equivalents, end of period

   $ 70,100      $ 37,539   
                

Supplemental disclosure of cash flow information:

    

Income taxes paid related to foreign operations

   $ 227      $ 174   
                

Interest and unused line fees paid related to line-of-credit

   $ 42      $ —     
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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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, 2010 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. As permitted under those rules, certain footnotes or other information that are normally required by GAAP can be condensed or omitted. 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, 2010 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 March 31, 2011 and December 31, 2010 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.

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.

 

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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
March 31,
 
     2011      2010  

Numerator:

     

Net income

   $ 3,849       $ 4,193   

Denominator:

     

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

     48,020         47,255   

Effect of dilutive securities

     2,382         1,379   
                 

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

     50,402         48,634   
                 

Basic net income per share

   $ 0.08       $ 0.09   

Diluted net income per share

   $ 0.08       $ 0.09   

For the three months ended March 31, 2011 and 2010, outstanding stock options and warrants for 2,100,292 and 3,912,119 shares, respectively, 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. In addition, for the three months ended March 31, 2011 and 2010, shares subject to market or performance conditions of 130,000 and 1,240,000, respectively, were excluded from the calculation of diluted net income per share because the performance or market criteria had not been met.

Comprehensive Income

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

 

     Three Months Ended
March 31,
 
     2011      2010  

Net income

   $ 3,849       $ 4,193   

Other comprehensive income (loss):

     

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

     29         (24

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

     —           11   

Foreign currency translation

     31         —     
                 

Total comprehensive income

   $ 3,909       $ 4,180   
                 

 

2. Available-for-Sale Investments

The following is a summary of available-for-sale investments (in thousands):

 

     March 31, 2011  
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses for
More Than
12 Months
    Estimated
Fair Value
 

Corporate bonds maturing within 1 year

   $ 461       $ —         $ —        $ 461   

Commercial paper maturing within 6 months

     300         —           —          300   

Restricted long-term Italian state bonds maturing in 2013

     450         —           (41     409   
                                  

Total available-for-sale investments

   $ 1,211       $ —         $ (41   $ 1,170   
                                  

 

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     December 31, 2010  
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses for
More Than
12 Months
    Estimated
Fair Value
 
          

Foreign U.S. dollar term deposits maturing within 6 months

   $ 3,125       $ —         $ —        $ 3,125   

Restricted long-term Italian state bonds maturing in 2013

     450         —           (70     380   
                                  

Total available-for-sale investments

   $ 3,575       $ —         $ (70   $ 3,505   
                                  

The Company’s restricted long-term Italian state bonds secure its Italian value added tax filing arrangements. The unrealized losses on the Company’s restricted long-term Italian state bond investments are mainly as a result of currency translation. The Company intends and has the ability to hold its restricted long-term Italian state bond investments until recovery and is not likely to sell the investments before maturity.

 

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.

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

 

       Fair Value Measurements at March 31, 2011 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
March 31, 2011
 

Money market funds

   $ 24,992       $ —         $ —         $ 24,992   

U.S. Treasury bills

     10,000         —           —           10,000   

Corporate bonds

     —           461         —           461   

Commercial paper

     —           450         —           450   

Restricted long-term Italian state bonds

     409         —           —           409   
                                   

Total

   $ 35,401       $ 911       $ —         $ 36,312   
                                   

 

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       Fair Value Measurements at December 31, 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
December 31, 2010
 

Money market funds

   $ 12,900       $ —         $ —         $ 12,900   

Foreign U.S. dollar term deposits

     —           15,130         —           15,130   

Restricted long-term Italian state bonds

     380         —           —           380   
                                   

Total

   $ 13,280       $ 15,130       $ —         $ 28,410   
                                   

 

4. Inventories

Inventories consisted of the following (in thousands) :

 

     March 31,
2011
     December 31,
2010
 

Raw materials

   $ 1,669       $ 590   

Work in progress

     600         355   

Finished goods

     5,385         6,133   
                 
   $ 7,654       $ 7,078   
                 

 

5. Other Assets

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

 

     March 31,
2011
     December 31,
2010
 

Lease deposits

   $ 249       $ 249   

Value added tax receivable

     —           441   

Intangible assets

     45         53   

Other

     138         148   
                 
   $ 432       $ 891   
                 

 

6. Accrued Liabilities

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

 

     March 31,
2011
     December 31,
2010
 

Accrued professional fees

   $ 2,729       $ 1,184   

Accrued taxes, tax reserves and interest

     1,896         1,683   

Accrued compensation and benefits

     1,609         2,277   

Accrued sales and marketing expenses

     1,562         1,558   

Accrued manufacturing costs

     1,462         361   

Accrued clinical trial expense

     495         444   

Other

     662         740   
                 
   $ 10,415       $ 8,247   
                 

 

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7. Income Taxes

Provision for income tax of $0.4 million and $0.2 million for the three months ended March 31, 2011 and 2010, respectively, related to the Company’s foreign operations in China. The Company’s statutory tax rate in China was 22% for 2010 and is 24% for 2011. 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.

 

8. 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 has been and intends to continue to cooperate fully with the SEC and DOJ in the conduct of their investigations.

In response to these matters, the Company’s Board appointed a Special Committee of independent directors (the “Special Committee”) to oversee the Company’s response to the government inquiry. Based on an initial review, the Special Committee 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.

During the investigation, the Special Committee instructed management to (i) evaluate and to expand the Company’s training of employees regarding understanding and compliance with laws including the FCPA and other anti-bribery laws and regulations, (ii) evaluate existing compliance and anti-bribery policies and guidelines and to prepare new, more detailed policies and guidelines for implementation after review by our Board and/or committees of the Board, and (iii) implement a pre-approval policy for certain expenses including payments for, or reimbursement of, travel and entertainment expenses, and sponsorships of certain third party events.

The Special Committee has substantially concluded its investigation and on May 4 and 5, 2011 reported its findings and recommendations to the Board of Directors. As part of its continuing cooperation with the ongoing investigates of the SEC and the DOJ, the Special Committee has also reported findings to the SEC and DOJ.

The Special Committee found that:

 

   

the Company lacked appropriate internal controls to assure compliance with laws, including the FCPA, with respect to sales and marketing practices including payments for, or reimbursement of, third party gifts, travel and entertainment expenses, and sponsorships of certain conferences and symposia.

 

   

the Company failed to adequately implement existing controls and policies including its policy that employees comply with all applicable laws.

 

   

there was a lack of transparency between the Company’s operations in China and its operations in the U.S. such that U.S. management did not have adequate and appropriate information about the Company’s activities in China.

The Special Committee identified evidence of sales and marketing activities that might constitute potential violations of the FCPA.

The Special Committee made recommendations to the Board regarding remedial measures. Having considered the Special Committee’s recommendations, the Board has directed the Company to take a number of remedial measures, including the following:

 

   

adopt a new, more detailed policy regarding compliance with the FCPA and other laws specifically covering travel and entertainment, honoraria, meals, gifts and other matters, with the policy to be approved by the Special Committee.

 

   

expand the Company’s training of employees regarding understanding and compliance with laws, including the FCPA and other anti-bribery and anti-corruption laws and regulations.

 

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retain a senior professional with FCPA compliance experience who would be a member of the executive team and (i) report directly to the Special Committee at least quarterly on the Company’s implementation of remedial measures and its compliance with the FCPA and (ii) report independently to the Audit Committee or the Special Committee on legal compliance.

In light of the findings of the Special Committee regarding the lack of appropriate controls and failure to implement existing controls, the Board also determined that Dr. Friedhelm Blobel would not be paid a cash bonus for service in 2010 and that the amount payable under Dr. Blobel’s long term cash incentive plan for fiscal 2009 to 2011 would be reduced by $150,000, for an aggregate reduction of approximately $334,000 in the cash compensation Dr. Blobel would have been eligible to receive for performance in fiscal 2010. In addition, the Board determined that the payment of any bonus to Dr. Blobel for service in 2011 would be contingent upon his successful oversight as CEO of the implementation of appropriate remedial measures to assure compliance with FCPA and other anti-bribery laws and regulations during 2011.

Hans Schmid, the President of our subsidiary, SciClone Pharmaceuticals International Ltd. resigned effective as of May 9, 2011.

In addition, the Board extended the service of the Special Committee for at least one year so that the Special Committee can monitor the Company’s implementation of remedial measures.

The SEC’s and DOJ’s formal investigations are continuing. These continuing investigations 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 us or certain of our officers, directors and/or employees. We cannot predict what the outcome of those investigations will be, or the timing of any resolution. 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 consolidated financial statements as of March 31, 2011. As events occur, the Company will assess the potential liability related to its pending investigations and class action and derivative lawsuits and adjust its estimates accordingly. Such adjustments could materially impact the Company’s financial statements.

 

9. Subsequent Event

On April 18, 2011, the Company acquired NovaMed Pharmaceuticals, Inc. (“NovaMed”) pursuant to the terms of a Share Purchase Agreement (the “Agreement”) dated April 18, 2011 between SciClone, NovaMed, the shareholders of NovaMed and SciClone Pharmaceuticals Hong Kong Limited, a wholly-owned subsidiary of SciClone. Under the terms of the Agreement, the purchase price is comprised of up-front payments of approximately $24.7 million in cash and 8,298,110 shares of SciClone common stock valued at approximately $37.1 million, and a contingent right to receive additional cash consideration of up to $43.0 million based upon achievement of revenue and earnings targets for the 2011 and 2012 fiscal years.

 

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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; our expectations regarding our acquisition of NovaMed, the sufficiency of our resources to complete clinical trials and other new product development initiatives; the findings of our Special Committee and remedial measures we are taking or plan to take, 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, China-centric, specialty pharmaceutical company with a substantial international business and a product portfolio of novel therapies for cancer and infectious diseases. We are focused on continuing international sales growth, while containing clinical development and other costs.

Our international business and corporate strategy is focused primarily on the People’s Republic of China (“China”) where we believe we have built a solid reputation and established a strong brand through our many years of experience marketing ZADAXIN. We believe these strengths position us to benefit from expanding pharmaceutical markets in China and elsewhere. We believe China will rank second among global pharmaceutical markets by 2015, with projected annual growth rates of more than 20% annually over the next several years. We seek to grow our sales in the region while we leverage our strong balance sheet for in-licensing.

ZADAXIN, our brand of thymalfasin or thymosin alpha 1, has regulatory approval in over 30 countries for the treatment of HBV, as a vaccine adjuvant, for the treatment of HCV, and certain cancers and through March 31, 2011 all of our revenues were derived from sales of ZADAXIN, substantially all of which was sold to China.

As our approval in China for ZADAXIN is an Imported Drug License, all sales are made to licensed importers. Most of our ZADAXIN sales are made to two such importers and last year Sinopharm Group Co. Limited acquired a majority interest in these two large importers. Through March 31, 2011, 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 for ZADAXIN will remain in the historical range, however ZADAXIN prices in China are subject to regulation, and are currently under review by regulatory authorities. If a substantial reduction in the sale price to hospitals occurred, our gross margins for ZADAXIN would be substantially reduced.

To continue to grow ZADAXIN sales to China, our sales force is focused on increasing sales to the country’s largest hospitals (class 3 with over 500 beds) as well as smaller hospitals (class 2). These hospitals serve Tier 1 and Tier 2 cities which are the largest, and generally have the most affluent populations. In China, they are mainly located in the eastern part of the nation.

On April 18, 2011, we acquired NovaMed Pharmaceuticals, Inc. (“NovaMed”). NovaMed is a pharmaceutical company with more than 450 employees, broad sales and marketing and regulatory experience in China, as well as pharmaceutical assets including approved products and products in development in China. Novamed’s portfolio of 17 drug products spans four major therapeutic areas including oncology, cardiovascular disease, central nervous system disorders and urology/infection. NovaMed has established exclusive licensing and promotion agreements, for which it receives promotion fees, with a number of leading pharmaceutical companies.

 

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We believe the acquisition of NovaMed will position us as a leader and allow us to significantly expand our presence in China with additional key pharmaceutical assets, new therapeutic areas of focus, and an expanded management team, including an expanded sales force of over 680 professionals. Although we believe ZADAXIN will continue to lead our product sales, we anticipate the addition of NovaMed products will increase our future revenues and will strengthen our rapidly growing pharmaceutical business in China over the coming years.

We continue to look for in-licensing opportunities of late-stage or approved branded, well-differentiated products that are approved or have a clear regulatory pathway. We are also working towards regulatory approval in China for our in-licensed candidate, DC Bead, and NovaMed’s in-licensed candidate, Tramadol, both of which we believe may receive regulatory approval in 2011, and for our other product candidates and recently acquired products from NovaMed, 10 of which are in clinical trials or in other stages of the regulatory approval process in China.

We plan to continue our clinical development outside of China, driving cost-efficient phase 1 and 2 development of promising compounds while seeking development partners for more costly phase 3 trials. We are currently developing SCV-07, a small molecule synthetic peptide with immunomodulating properties, in a phase 2b clinical trial for the prevention of oral mucositis (“OM”).

OM is a common, painful, debilitating complication of cancer treatment, and we estimate that medical costs for the treatment of oral mucositis were approximately $4.2 billion in the U.S. and $10 billion worldwide in 2010. We announced the enrollment of the first patient in the Company’s phase 2b clinical trial of SCV-07 for the prevention of OM in January of 2011. The multicenter, randomized, double-blind, placebo-controlled study will enroll approximately 160 patients, who are receiving standard chemoradiation therapy for treatment of cancers of the head and neck, to assess the drug’s ability to modify the course of OM. The study will evaluate three doses of SCV-07 (0.1 mg/kg, 0.3 mg/kg and 1 mg/kg), including two higher doses than those used in the previous phase 2a study. The study’s primary efficacy endpoint is the reduction in proportion of patients with clinically assessed ulcerative OM (WHO Grade ³ 2) at the time that they have received a cumulative radiation dose of 45 Gy. The study’s secondary endpoints include incidence and duration of ulcerative and severe (WHO Grade ³ 3) OM, analgesic use and pain assessments, quality of life measurements, gastrostomy tube placement and use, breaks in radiation or chemotherapy treatment, and unscheduled office or hospital visits.

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”). We have been and intend to continue to cooperate fully with the SEC and DOJ in the conduct of their investigations.

In response to these matters, our Board appointed a Special Committee of independent directors (the “Special Committee”) to oversee our response to the government inquiry. Based on an initial review, the Special Committee 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.

During the investigation, the Special Committee instructed management to (i) evaluate and to expand the Company’s training of employees regarding understanding and compliance with laws including the FCPA and other anti-bribery laws and regulations, (ii) evaluate existing compliance and anti-bribery policies and guidelines and to prepare new, more detailed policies and guidelines for implementation after review by our Board and/or committees of the Board, and (iii) implement a pre-approval policy for certain expenses including payments for, or reimbursement of, travel and entertainment expenses, and sponsorships of certain third party events.

The Special Committee has substantially concluded its investigation and on May 4 and 5, 2011 reported its findings and recommendations to the Board of Directors. As part of its continuing cooperation with the ongoing investigates of the SEC and the DOJ, the Special Committee has also reported findings to the SEC and DOJ.

The Special Committee found that:

 

   

we lacked appropriate internal controls to assure compliance with laws, including the FCPA, with respect to sales and marketing practices including payments for, or reimbursement of, third party gifts, travel and entertainment expenses, and sponsorships of certain conferences and symposia.

 

   

we failed to adequately implement existing controls and policies including our policy that employees comply with all applicable laws.

 

   

there was a lack of transparency between our operations in China and our operations in the U.S. such that U.S. management did not have adequate and appropriate information about our activities in China.

The Special Committee identified evidence of sales and marketing activities that might constitute potential violations of the FCPA.

 

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The Special Committee made recommendations to the Board regarding remedial measures. Having considered the Special Committee’s recommendations, the Board has directed us to take a number of remedial measures, including the following:

 

   

adopt a new, more detailed policy regarding compliance with the FCPA and other laws specifically covering travel and entertainment, honoraria, meals, gifts and other matters, with the policy to be approved by the Special Committee.

 

   

expand our training of employees regarding understanding and compliance with laws, including the FCPA and other anti-bribery and anti-corruption laws and regulations.

 

   

retain a senior professional with FCPA compliance experience who would be a member of the executive team and (i) report directly to the Special Committee at least quarterly on our implementation of remedial measures and our compliance with the FCPA and (ii) report independently to the Audit Committee or the Special Committee on legal compliance.

The SEC’s and DOJ’s formal investigations are continuing. These continuing investigations 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 us or certain of our officers, directors and/or employees. We cannot predict what the outcome of those investigations will be, or the timing of any resolution.

Refer to Footnote 8 “Other Corporate Matters” and to Item 4 “Changes in Internal Controls” in this Form 10-Q for further information regarding the investigation and remedial measure, related litigation, and material weaknesses we have identified.

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, 2010, as filed with the SEC on March 31, 2011.

Results of Operations

Product Sales and Gross Margin:

The following table summarizes the period over period change in our product sales (in thousands), in our cost of product sales (in thousands) and our product gross margin:

 

     Three Months Ended
March 31,
    Change  
     2011     2010    

Product Sales

   $ 21,662      $ 17,962        21

Cost of Product Sales

     3,103        2,759        12

Product Gross Margin

     85.7     84.6  

Product sales were $21.7 million for the three months ended March 31, 2011, compared to $18.0 million for the three months ended March 31, 2010. Product sales to China were $20.9 million, or 96% of sales, for the three-month period ended March 31, 2011, compared to $17.0 million, or 95% of sales, for the three-month period ended March 31, 2010. Our overall revenue growth for the three-month period ended March 31, 2011, compared to the corresponding period in 2010, was attributable to an increase in the quantity of ZADAXIN sold primarily due to further market penetration in China. All product sales in each period were derived from sales of ZADAXIN. For the three-month period ended March 31, 2011, sales to two importing agents in China accounted for approximately 81% and 15% of our product sales. For the three-month period ended March 31, 2010, sales to two importing agents in China accounted for approximately 59% and 29% of our product sales. The largest customer was the same importing agents in each of these periods. Last year, Sinopharm Group Co. Limited acquired a majority interest in two of our large importers, Shanghai Lingyun Pharmaceutical Company Ltd. and Guangdong South Pharmaceutical Foreign Trade Company Ltd. We do not believe these acquisitions will impact our sales. Our experience with our largest importers has been good and we anticipate that we will continue to sell a majority of our product to them.

Gross margin was 85.7% for the three months ended March 31, 2011 compared to 84.6% for the three months ended March 31, 2010. The increase in gross margin for the three-month period ended March 31, 2011, compared to the three-month period ended March 31, 2010, was attributable to higher sales of ZADAXIN resulting in volume discounts and lower per vial production costs.

 

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We expect sales to increase in 2011 compared to 2010, due to increased unit sales of ZADAXIN related to further market penetration in China, and as a result of our acquisition of NovaMed in April 2011. There are discussions that government reimbursement levels in China for listed drugs could be reviewed in 2011 and that ZADAXIN’s list price could be included in such a review. We do not expect significant changes in gross margins in 2011 compared to 2010; however, we expect cost of product sales and gross margins to fluctuate from period to period depending upon the level of sales and price of our products, the absorption of product-related fixed costs, currency exchange fluctuations, any charges associated with excess or expiring finished product inventory and the timing of other inventory period costs.

Research and Development (“R&D”):

The following table summarizes the period over period change in our R&D expenses (in thousands):

 

     Three Months Ended
March 31,
     Change  
     2011      2010     

Research and Development

   $ 3,109       $ 2,675         16
        

R&D expenses for the three months ended March 31, 2011 increased by $0.4 million, or 16%, compared to the three-month period ended March 31, 2010. The increase in the three-month period ended March 31, 2011 was primarily related to our SCV-07 phase 2b clinical trial, which began enrollment in January 2011, for the treatment of oral mucositis.

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.

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 for the remainder of 2011, compared to 2010, primarily related to our SCV-07 phase 2b trial in oral mucositis and our acquisition of NovaMed in April 2011. We continue to evaluate opportunities to 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 table summarizes the period over period change in our sales and marketing expenses (in thousands) :

 

     Three Months Ended
March 31,
     Change  
     2011      2010     

Sales and Marketing

   $ 5,228       $ 4,948         6

Sales and marketing expenses for the three-month period ended March 31, 2011 increased by $0.3 million, or 6%, compared to the three-month period ended March 31, 2010, primarily related to increased conferences and local training seminars associated with our sales efforts for ZADAXIN in the 2011 period. We expect sales and marketing expenses in 2011 to be higher compared to 2010 due to increased sales efforts of ZADAXIN, primarily in China, and as a result of our acquisition of NovaMed in April 2011.

General and Administrative:

The following table summarizes the period over period change in our general and administrative expenses (in thousands) :

 

     Three Months Ended
March 31,
     Change  
     2011      2010     

General and Administrative

   $ 5,958       $ 3,197         86

 

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General and administrative expenses for the three-month period ended March 31, 2011 increased by $2.8 million, or 86%, compared to the three-month period ended March 31, 2010. Increases for the 2011 period, compared to the same period in 2010, primarily resulted from $1.9 million of higher corporate and legal expenses related to the SEC and DOJ investigations announced in August 2010, shareholder litigations that have been filed following the announcement of those investigations, and the conduct of an independent investigation by a special committee of our board of directors in order to evaluate whether any violation of the FCPA or other laws occurred and $0.6 million of higher legal, accounting and professional expenses in connection with our acquisition of NovaMed in April 2011. We expect our general and administrative expenses will increase in 2011, compared to 2010, related to corporate and legal expenses in connection with responding to the SEC and DOJ investigations announced in August 2010, shareholder litigations that have been filed following the announcement of those investigations, and the conduct of the independent investigation by our Special Committee, and as a result of our acquisition of NovaMed in April 2011.

Provision for Income Tax:

Provision for income tax was $0.4 million for the three-month period ended March 31, 2011, compared to $0.2 million for the three-month period ended March 31, 2010, and related to our foreign operations in China. The increases in the 2011 period compared to 2010 were due to increased operating activities in China and an increased statutory tax rate in China. We expect our tax expense will decrease in 2011, compared to 2010. In 2010, we recorded additional tax expense related to our uncertain tax position in China, and we do not expect a comparable tax expense for 2011, although the statutory tax rate in China was 22% for 2010 and is 24% for 2011.

Liquidity and Capital Resources

Days’ sales outstanding in accounts receivable, using the average receivables method, were 98, 98 and 97 days as of March 31, 2011, December 31, 2010 and March 31, 2010, 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
March 31, 2011
     As of
December 31, 2010
 

Cash and investments

   $ 71,270       $ 56,522   

 

     Three Months Ended
March 31,
 
     2011      2010  

Cash provided by (used in):

     

Operating activities

   $ 14,598       $ 6,990   

Investing activities

   $ 2,348       $ 603   

Financing activities

   $ 106       $ 259   

At March 31, 2011 and December 31, 2010, we had $71.3 million and $56.5 million, respectively, in cash and investments. Net cash provided by operating activities was $14.6 million for the three months ended March 31, 2011 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 accounts receivable of $9.3 million as a result of cash received from customers during the first quarter of 2011, and an increase in net accounts payable and accrued liabilities of $1.0 million mainly related to an increase in accrued manufacturing costs.

Net cash provided by operating activities was $7.0 million for the three months ended March 31, 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 accounts receivable of $4.5 million as a result of cash received from customers and an increase in inventory levels by $1.0 million to meet expected sales demands.

Net cash provided by investing activities was $2.3 million and $0.6 million for the three months ended March 31, 2011 and 2010, respectively. For the three months ended March 31, 1011, cash provided by investing activities was primarily related to the sale of available-for-sale investments, net of purchases of available-for-sale investments, and net of purchases of property and equipment. For the three months ended March 31, 2010, cash provided by investing activities was primarily related to the sale of trading security investments, net of purchases of property and equipment.

 

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Net cash provided by financing activities of $0.1 million and $0.3 million for the three months ended March 31, 2011 and 2010, respectively, consisted of proceeds from the issuances of common stock made under our stock award plans and the issuance of stock under our employee stock purchase plan.

Our subsidiaries, SciClone Pharmaceuticals International Ltd. and SciClone Pharmaceuticals International China Holding Ltd. as borrowers, have a loan and security agreement with Silicon Valley Bank (“SVB”) (“the Credit Facility”) for a financing facility up to $15 million for a term of 24 months. SciClone Pharmaceuticals, Inc. is the guarantor of the facility. The Credit Facility bears interest on borrowed funds at the bank’s prime rate plus 1.25% (5.25% at March 31, 2011) 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. As of March 31, 2011, we had borrowed $2.5 million on the Credit Facility and we were required to maintain a debt coverage ratio of 1.35 to 1 equal to $3.4 million of cash in SVB cash accounts to meet our financial liquidity covenant and were in compliance with all significant terms of the Credit Facility. The Credit 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.

In April 2011, we acquired NovaMed for a purchase price comprised of up-front payments of approximately $24.7 million in cash and 8,298,110 shares of SciClone common stock valued at approximately $37.1 million and a contingent right to receive additional cash consideration of up to $43.0 million, based upon achievement of revenue and earnings targets for the 2011 and 2012 fiscal years.

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, including the effects of our acquisition of NovaMed. 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 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 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 sales of our products, the timing and amount of manufacturing costs related to our products, the availability of complementary products, technologies and businesses, the initiation and continuation of 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, term deposits, commercial paper, corporate bonds, 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 March 31, 2011.

We do not hold any derivative financial instruments for speculation or trading purposes. Most of 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

 

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efforts in China are paid in local currency. In addition, we have certain cash balances and other assets denominated in euros and renminbi. 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

As of March 31, 2011, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures in ensuring that material information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, has been made known to them in a timely fashion. Based on this evaluation, and due to the material weaknesses described below, our President and Chief Executive Officer and Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2011 in timely alerting them to material information relating to us and our consolidated subsidiaries as required to be disclosed in the reports we file and submit under the Exchange Act as described below.

As a result of the material weaknesses, we have enhanced our disclosure controls and procedures and internal control over financial reporting to remediate the deficiencies that gave rise to the material weaknesses. While we have made progress in remediating these material weaknesses, as of March 31, 2011, these material weaknesses had not been fully remediated.

Compliance with Laws

In connection with our Special Committee’s investigation, our management identified a material weakness in our internal control over financial reporting as of December 31, 2010 regarding the implementation of our policy on compliance with applicable laws and this material weakness had not been fully remediated as of March 31, 2011. Our conclusion that we have this material weakness in our internal control over financial reporting is not based on quantified misstatements in our historical financial statements or our financial statements as of and for the period ended March 31, 2011, but instead on the determination that we did not design or maintain sufficient policies, procedures, controls, communications or training to mitigate the risk of violations of laws, including the FCPA.

The following activities to improve internal controls occurred in the first quarter of 2011:

 

   

Our initiation of more in-depth, Company-wide, comprehensive training of our personnel in the requirements of the FCPA and other laws, including training with respect to those areas of our operations that are most likely to raise FCPA compliance concerns and in the following newly adopted policies and guidelines:

1. Our adoption of a policy regarding the pre-approval of expenses for, or reimbursement of third parties for, certain travel expenses and sponsorship of attendance at medical, scientific or other events including review by our Compliance Officer or designee of these expenses;

2. Our determination to adopt and begin the process of implementing more detailed guidelines on gifts, reimbursement to doctors for attendance at medical and scientific or other events and on compliance with laws; and

 

   

Our identification of the need for more detail and back-up documentation for expense approvals or reimbursement requests relating to various expenses including third-party gifts, travel expenses, honoraria and sponsorship of attendance at medical, scientific or other events and our

 

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decision to implement at least two additional policies regarding these matters.

Accounting for Income Taxes

In our assessment of the effectiveness of internal control over financial reporting as of December 31, 2010, we also identified a material weakness in the Company’s internal controls over financial reporting for income taxes. The Company’s processes, procedures and controls related to financial reporting were not effective to ensure that tax exposures were correctly calculated and recorded. Specifically, our process of identifying and evaluating our foreign uncertain tax positions and related reserves were not designed effectively to provide for adequate and timely identification and recognition of income tax expense in accordance with U.S. GAAP, and there was a reasonable possibility that a material misstatement would not be prevented or detected in the consolidated financial statements and this material weakness had not been fully remediated as of March 31, 2011. The following activities to improve internal controls occurred in the first quarter of 2011:

 

   

We clarified our policy for supporting documentation related to expenses deducted on foreign tax returns to ensure the deductibility of all such expenses; and

 

   

We began implementing a process for evaluating changes that may be impacted by the international tax environment, where such changes may result in a significant or material increase of our foreign uncertain tax positions and related reserves.

As required by Rule 13a-15(d) of the Exchange Act, our management, including our CEO and CFO, conducted an evaluation of our “internal control over financial reporting” as defined in Exchange Act Rule 13a-15(f) to determine whether any changes in our internal control over financial reporting occurred during the first quarter of fiscal 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, other than as described above, there have been no such changes during the first quarter of fiscal 2011.

We have discussed these matters with our independent registered public accounting firm and our Audit Committee. There were no other changes in our internal controls over financial reporting during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.

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 alleged 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 sought 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 were ordered by the court to file an amended consolidated complaint on or before November 29, 2010. On November 24, 2010, before filing an amended complaint, the parties stipulated to the voluntary dismissal of the case without prejudice. Plaintiffs may re-file the complaint at a later date.

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. On January 13, 2011, the derivative lawsuits were consolidated into

 

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a single action under the caption In re SciClone Pharmaceuticals, Inc. Shareholder Derivative Litigation , Case No. CIV 499030, and the court appointed lead plaintiffs’ counsel. The court ordered plaintiffs to file a consolidated complaint on or before March 18, 2011. On February 28, 2011, the parties agreed to a temporary stay of the consolidated action until and including April 15, 2011, subject to further applications of the parties to extend the stay, pending completion of the Company’s internal investigation. On April 15, 2011, the parties stipulated to extend the temporary stay to and including May 16, 2011.

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 responded to the demand letter and informed the shareholder that the board would consider the demand after its internal investigation is completed.

 

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 31, 2011 .

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 $21.1 million for the year ended December 31, 2010 and $3.8 million for the three months ended March 31, 2011. We have experienced significant operating losses in the past, and as of March 31, 2011, we had an accumulated deficit of approximately $140.0 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’ 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 (“thymosin alpha 1 or thymalfasin”) or our other products on the market in China;

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

   

progress and results of clinical trials and the regulatory approval process in the United States, Europe and in China;

 

   

our acquisition of NovaMed Pharmaceuticals, Inc. (“NovaMed”) including our ability to manage the risks associated with the acquisition;

 

   

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

 

   

timing and achievement of our corporate 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;

 

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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 acquisition of NovaMed involves a number of risks and we may not successfully integrate our and NovaMed’s businesses and may not realize the anticipated benefits of the acquisition. *

Achieving the benefits of the acquisition of NovaMed will depend in substantial part on the successful integration of the two companies’ operations and personnel. While at this time SciClone’s China operations and NovaMed’s business will be conducted in separate subsidiaries, we will need to operate as a combined organization and begin utilizing common business, information and communication systems, operating procedures, financial controls and human resource practices, including benefits, training and professional development programs. We will face significant challenges in integrating our organizations and operations in a timely and efficient manner. Some of the challenges and difficulties involved in this integration include:

 

   

retaining key employees of both organizations;

 

   

managing the acquisition and continuing operations in both organizations to successfully achieve the anticipated benefits of the acquisition;

 

   

preserving important relationships of both SciClone and NovaMed;

 

   

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

 

   

costs and delays in implementing common systems and procedures;

 

   

consolidating and rationalizing information technology and administrative infrastructures;

 

   

variability in our financial results which may result from acquisition-related expenses including the variation in the valuation of the earn-out, and periodic impairment charges that may result from the recording of goodwill and intangible assets in the acquisition;

 

   

implementing procedures, policies and processes related to FCPA compliance; and

 

   

integrating and documenting processes and controls in conformance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

Any one or all of these factors, many of which are outside of our control, may increase operating costs or lower anticipated financial performance. In addition, the combined company may lose distributors, suppliers, manufacturers and employees. Achieving anticipated synergies and the potential benefits underlying the two companies’ reasons for the merger will depend on successful integration of the two companies. In addition, the integration of NovaMed into SciClone will be a complex, time consuming and expensive process and will require significant attention from management and other personnel, which may distract their attention from the day-to-day business of the combined company. The diversion of management’s attention and any difficulties associated the integration could have a material adverse effect on the operating results of the company and on the value of our common stock, and could result in our not achieving the anticipated benefits of the acquisition. Failure to achieve our objectives could have a material adverse effect on the business and operating results of the company.

Charges to earnings resulting from the NovaMed acquisition may adversely affect our financial results and could adversely affect the market value of our common stock and the cash portion of the purchase price and other expenses will reduce our working capital. *

In accordance with U.S. generally accepted accounting principles, we will account for the NovaMed acquisition using the purchase method of accounting, which will result in charges to earnings that could have a material adverse effect on our results of operations. Under the purchase method of accounting, we will allocate the total estimated purchase price to NovaMed’s net tangible assets, amortizable intangible assets and in-process research and development based on their fair values as of the date of the acquisition, and record the excess of the purchase price over those fair values as goodwill. In addition, the purchase price will include an estimate of the value of the earn-out that may be payable in the future. We will incur additional depreciation and amortization expense over the useful lives of certain of the net tangible and intangible assets acquired in the acquisition. The amount of employee stock compensation expense we will incur will increase as a result of grants to a larger base of employees. We will also incur an expense if the valuation of the earn-out increases, which would occur if in any quarter it appears that the likelihood of payment of any portion of the earn-out has become more likely. The accounting measurement of the earn-out will be subject to change through December 2012 and may create earnings volatility for us every quarterly reporting period through December 2012. In addition, to the extent the value of goodwill becomes impaired, the combined company may be required to incur material charges relating to the impairment of goodwill. These charges, even though they would be non-cash charges, could have a material impact on our results of operations.

 

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We made substantial cash payments in the NovaMed acquisition and we have incurred significant other costs related to the acquisition which reduced our liquidity and could affect our operating results.

We used approximately $24.7 million of cash as part of the purchase price to acquire NovaMed. In addition, we estimate that we incurred investment banker costs of approximately $2.6 million and we have also incurred substantial legal and accounting and professional costs associated with the acquisition. These costs will reduce our cash and cash equivalents substantially. In addition, if the earn-out targets are achieved, we would need to use up to an additional $43.0 million in cash, which would materially reduce our cash available for operations.

The issuance of shares of SciClone common stock in the acquisition, and the registered sale of these shares could decrease the market value of our common stock.

We issued approximately 8,298,110 shares of our common stock in the NovaMed acquisition. Former NovaMed stockholders own approximately 15% of our outstanding common stock, after the transaction. We have granted registration rights for those shares and the shares are expected to be freely tradable on approximately October 18, 2011, however not more than 25% of such shares may be sold in any three month period thereafter. Although the shares will continue to be subject to such limitations until October 2012, sales of the shares could lead to a decrease in the market price of our common stock.

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

Our product revenue is highly dependent on the sale of ZADAXIN in China. For the three months ended March 31, 2011 and 2010, approximately 96% and 95%, respectively, of our ZADAXIN sales were to customers in China . We expect that the percentage of our revenues that come from the sale of ZADAXIN in China will decline significantly as a result of the NovaMed acquisition. However, we anticipate that sales of ZADAXIN will continue to be a majority of our revenue for at least the next two years. 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 and from the decisions of the National Development and Reform Commission (“NDRC”) pricing reform anticipated to be made in 2011.

In China, ZADAXIN is approved 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 for 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 thymalfasin, 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 a pricing advantage through the reputation of our imported, branded product. We believe such competition to continue with added new local manufacturers of generic thymalfasin 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, thymalfasin, the generic chemical name for our pharmaceutical product ZADAXIN, was included as a Category B product in the National Reimbursed Drug List (“NRDL”) and pricing for ZADAXIN on the NRDL is still being reviewed by the authorities. The price for pharmaceutical products is regulated in China both at the national and at the provincial level. These regulations, as well as regulation of the importation of pharmaceutical products 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. The Chinese government is increasing its efforts to reduce overall health care costs, including pricing controls on pharmaceutical products. 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 significantly 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 process and timing for any price restrictions 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.

Importers and distributors of ZADAXIN avail themselves of funds in China from banks to purchase, hold and distribute ZADAXIN. Substantial increases in restrictions on fund availability and/or increases in borrowing costs could limit the ability of our importers and distributors to finance their import and distribution process.

 

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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 to 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. 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 face risks related to the potential outcomes of the SEC investigation regarding FCPA compliance and other matters and DOJ investigation regarding the FCPA and our own investigation into such matters, including potential penalties, substantial expenses and the use of significant management time and attention, and changes in our marketing and sales practices that could affect our ability to generate revenue, any of which could adversely affect our business. *

In August 2010, we received notices of investigations by U.S. government agencies that relate to our operations in China including compliance with the FCPA and we subsequently initiated an internal investigation regarding these matters. In connection with the formal, non public SEC 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 appointed the Special Committee of independent directors to oversee our response to the government inquiry. The Special Committee conducted 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.

The Special Committee has substantially concluded its investigation and reached a number of findings, including that we lacked appropriate internal controls to assure compliance with laws, including the FCPA, with respect to sales and marketing practices including payments for, or reimbursement of, third party gifts, travel and entertainment expenses, and sponsorships of certain conferences and symposia. The Special Committee identified evidence of sales and marketing activities that might constitute potential violations of the FCPA. We are undertaking certain remedial measures recommended by the Special Committee and adopted by our Board of Directors. However, the SEC’s and DOJ’s formal investigations are continuing.

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. 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. 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

 

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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. In addition, we will incur additional expenses related to remediative measures we are undertaking, and could incur fines or other penalties. The period of time necessary to resolve the investigations by the DOJ and 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 are taking actions to improve our practices and policies regarding compliance with laws, and have identified a material weakness in our internal control over financial reporting relating to our implementation of our policy on compliance with laws. *

We have consistently maintained a policy that our employees comply with all applicable laws. However, in the course of evaluating our existing training, policies and internal controls over financial reporting and expense approval and expense reimbursement practices, and of the matters brought to the attention of management by the Special Committee, we determined that our guidelines, employee training and expense approval practices and our internal controls with respect to certain matters, including the payment for, or reimbursement of, third-party gifts, travel expenses, honoraria and sponsorship of certain third-party events required improvements in order to provide reasonable assurance that our policy on compliance with applicable laws was effective. In addition, management determined that we had a material weakness in our internal control over financial reporting as of December 31, 2010 relating to our implementation of our policy on compliance with laws. Subsequently, the Special Committee also made a similar finding with respect to our internal control over financial reporting.

During the first quarter of fiscal 2011, we initiated or commenced various remediation efforts to provide reasonable assurance of our implementation of our policy on compliance with laws, including the FCPA and other anti-bribery laws as described in Management’s Annual Report on, and Changes in, Internal Control over Financial Reporting”. As a result of adopting new practices, guidelines and other measures, certain of our sales and marketing practices will change. In particular these actions will impose restrictions and limitations on certain expenses including payments for, or reimbursement of, third-party gifts, travel expenses, honoraria and sponsorships of medical, scientific or other third-party events. Our efforts to implement these changes will require substantial effort and expense, and changes in types or amount of expenses we’ll pay or reimburse could adversely affect our ability to generate revenue.

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 three derivative lawsuits purportedly filed on behalf of the Company. The lawsuits which have been consolidated into one action 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 action lawsuits which alleged 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. Although the class action lawsuits have been dismissed, additional class action lawsuits could be filed. 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 lawsuits or demands are likely to result in any material recovery by, or expense to, SciClone. We believe we will continue to incur legal fees in responding to these lawsuits and to the demand. The expense of defending such litigation may be significant. The amount of time to resolve this and any additional lawsuit 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 and derivative lawsuits are often filed against public companies following a decline in the market price of their 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. The class action lawsuits have been dismissed and we are continuing to litigate the 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.

 

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We may not be able to successfully develop or commercialize our products in China or the United States. *

Following the acquisition of NovaMed, we have numerous products under development in China such as DC Bead, and Tramadol, and we are developing SCV-07, a small molecule synthetic peptide with immunomodulating properties, in a phase 2b clinical trial in the United States for the prevention of oral mucositis (“OM”). The regulatory approval processes in the United States, Europe and China are demanding, lengthy and expensive. We have committed significant resources, including capital and time, to develop and seek approval for products under development, and if we do not obtain approvals we are seeking, we may be unable to achieve any revenue from these products. All new drugs, including ours and NovaMed’s 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 of thymalfasin may also adversely affect our ability to market and sell thymalfasin in markets where it is approved for sale.

To fully develop these products and other products we may acquire, 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. We are obligated to make a milestone payment upon regulatory approval of certain products under development. 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.

Market acceptance of any product that is successfully developed and approved will depend on many factors, including our ability to convince prospective customers to use our products as an alternative to other treatments and therapies. 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. In addition, for certain products we may need to convince partners to manufacture or market our products. Failure to do any of the above will lead to an unfavorable outcome on the results of our operations.

Our success is dependent upon the success of our sales and marketing efforts in China, and we may experience difficulties in complying with regulations, slow collections or other matters that could adversely affect our revenue in China. *

Following the acquisition of NovaMed, we have numerous products on the market in China in addition to ZADAXIN. Our future revenue growth depends to a great extent on increased sales of ZADAXIN to China and the successful integration and increased sales of the products promoted or marketed by NovaMed. If we fail to continue to successfully market ZADAXIN or NovaMed’s product portfolio, 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 sales are concentrated in China and we face risks relating to operating in a China, including pricing and other regulations, slow payment cycles and exposure to fluctuations in the Chinese economy.

The Chinese government is increasing its efforts to reduce overall health care costs, including pricing controls on pharmaceutical products. 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. The process and timing for any price restrictions is unpredictable. Further, the successful sales and marketing of all of NovaMed’s products requires continuing compliance with other regulations in China relating to the import, manufacture, approval and distribution of products and if we or our partners are not able to obtain or maintain necessary licenses or other approvals, our operations would be adversely affected.

Our sales and marketing strategy in China depends significantly upon agreements with third parties. Except for ZADAXIN, our rights to develop, market and sell our products in China, including the products currently promoted or sold by our subsidiary, NovaMed, are held by us under license, promotion, distribution or marketing agreements with third parties. This includes agreements for products on the market including DepaKine, Stilnox, Tritace and Aggrastat, and products in the regulatory review process, including DC Bead and Tramadol, which we believe may receive regulatory approval in 2011, and our other product candidates, including several of NovaMed’s products in clinical trial, are held under license, distribution or marketing agreements. The third parties to these agreements are generally not under an obligation to renew the agreements. If any of these agreements are terminated, or if they are not renewed, our ability to distribute, or develop, the products or product

 

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candidates could be terminated and our business could be adversely affected. Disputes may arise with our collaborators, including disputes over the performance of each party’s obligations under the agreements, ownership rights to intellectual property, know-how or technologies developed with our collaborators, and disputes could cause us to incur legal costs and could result in disruptions in our business.

We experience other issues with managing sales operations in China 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 these matters, or if significant political, economic or regulatory changes occur, our results could be adversely affected.

Our operations throughout the world including China are potentially subject to the laws and regulations of the United States including the FCPA, 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.

Our business strategy is dependent in part upon our agreements with third parties for the rights to develop and commercialize products, or promote products, particularly in China. If we fail to maintain such agreements, or if we fail to acquire additional, our business will suffer. *

Our sales and marketing strategy in China depends significantly upon agreements with third parties. Except for ZADAXIN, our rights to develop market and sell our products in China, including the products currently promoted or sold by our subsidiary, NovaMed, are held by us under license, promotion, distribution or marketing agreements with third parties. This includes agreements for products on the market including DepaKine, Stilnox, Tritace and Aggrastat, and products in the regulatory review process, including DC Bead and Tramadol, which we believe may receive regulatory approval in 2011, and our other product candidates, including several of NovaMed’s products in clinical trial, are held under license, distribution or marketing agreements. The third parties to these agreements are generally not under an obligation to renew the agreements. If any of these agreements are terminated, or if they are not renewed, our ability to distribute, or develop, the products or product candidates could be terminated and our business could be adversely affected. Disputes may arise with our collaborators, including disputes over the performance of each party’s obligations under the agreements, ownership rights to intellectual property, know-how or technologies developed with our collaborators, and disputes could cause us to incur legal costs and could result in disruptions in our business.

All of our products were originally obtained by us under licenses, promotion, distribution or similar third-party agreements. We do not conduct product discovery and our ability to bring new products to market is dependent upon our entering into additional acquisition, in-licensing, promotion or distribution agreements, particularly in China. The competition for attractive products is intense, and we cannot assure you that we will be able to negotiate in-license, promotion or distribution agreements for additional products in the future on acceptable terms, if at all.

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

Our business is concentrated 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, regulatory and economic environment. The role of the Chinese central and local governments in the Chinese economy is significant. Chinese

 

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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. *

Imported products in China, including ZADAXIN, are distributed through 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 ZADAXIN shipment to determine whether it satisfies China’s quality assurance requirements. In order to efficiently manage this process, the importing agents typically place large, and therefore relatively few, orders for ZADAXIN within an annual period. Therefore, our ZADAXIN 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 ZADAXIN and most of our ZADAXIN sales are now through two importers so our receivables from those importers are material, and if we were unable to collect receivables from those importers or any other importer, our business and cash-flow would be adversely affected. Our 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 fluctuations in our ZADAXIN revenue.

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. *

Most 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 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. A weaker U.S. dollar would increase our in-country China operating expenses, and with the addition of NovaMed, our China operating expenses have increased. 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.

We have recently acquired NovaMed Pharmaceuticals, Inc. and may engage in further 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. *

 

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We have recently acquired NovaMed Pharmaceuticals, Inc. and may engage in 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

 

   

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 cannot predict the safety profile of the use of thymalfasin, DC Bead, Tramadol, SCV-07, or other drugs we may develop 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, and dacarbazine are known to cause adverse patient reactions. We cannot predict how thymalfasin, DC Bead, Tramadol, SCV-07 or other drugs we may develop 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, Tramadol, SCV-07, or other drugs we may develop when used in certain combination therapies.

If third-party reimbursement is not available or patients cannot otherwise pay for ZADAXIN, DC Bead, Tramadol, SCV-07, or other drugs we may develop 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, Tramadol, SCV-07 or other drugs we may develop. 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 or Tramadol in China. 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.

 

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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.

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 commercial products. 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. We currently have only one approved finished vial manufacturer and two approved active pharmaceutical ingredient (“API”) suppliers. If we experience a problem with the manufacturer or our suppliers our sales may suffer. We and NovaMed have each experienced difficulties with obtaining product from manufacturers in the past . During 2010, we experienced difficulties validating upgrades to equipment with one of our API manufacturers. 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 new suppliers 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 our products in any period and impair our relationships with customers and our competitive position and may increase the cost of material produced. In addition, each of the products that are marketed through our new NovaMed subsidiary is manufactured by, or obtained from, a single source.

We also rely on third parties, who are subject to regulatory oversight, to supply drug product for our clinical trials. For example, Biocompatibles is the sole supplier of DC Bead, Solvay Peptides S.A. is our sole supplier of SCV-07, and Depakine, Stilnox, Tritace and other products in either finished product or active pharmaceutical ingredient are manufactured by or for Sanofi-Aventis, Pfizer and other partners of our subsidiary, NovaMed. Any unanticipated deficiencies in these suppliers, or the suppliers of our raw materials, and/or recall of the manufacturing lots or similar action regarding the pegylated interferon alpha or ribavirin 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.

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.

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, Biocompatibles is providing SciClone with product samples and the necessary supporting documents to obtain regulatory approval in China for DC Bead. 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 retain our key personnel, or are unable to attract and retain additional, highly skilled and experienced personnel, including the ability to expand our sales staff, our business will suffer. *

 

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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. In addition, if we are unable to retain key personnel from the acquisition of NovaMed particularly sales and marketing personnel with expertise in the products they promote and regulatory personnel, our business may suffer and could result in our not achieving the anticipated benefits of the acquisition.

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.

We are undertaking corrective measures based upon the findings of our Special Committee relating to its investigation of matters relating to the FCPA as well as relating to managements’ evaluation of internal control over financial reporting which could have adverse effects on our business, including the loss of personnel, and changes in marketing, sales and educational practices or programs. 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, we used $24.7 million of our cash and cash equivalents to acquire NovaMed, will incur substantial investment banking, legal and other fees, and the potential earn-out payments related to the acquisition, if targets are met, could be up to $43.0 million in cash. 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 and Tramadol in China, and for our other products and products we acquired as a result of the NovaMed acquisition, the execution and successful completion of clinical trials in the U.S. and China, securing partnerships for those programs that lead to regulatory approvals in major pharmaceutical markets, and successfully continuing NovaMed’s sales and integrating NovaMed into our business. 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.

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.

 

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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 thymalfasin 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. *

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 SEC which was later declared effective by the SEC and will allow us to sell securities in one or more offerings. In addition, we issued 8,298,110 shares of the Company’s common stock to NovaMed under the terms of the acquisition in April 2011. 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.

 

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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. Most of our cash, and cash equivalents are held by a limited number of financial institutions. To date, we have not experienced any losses on our 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.

We have material weaknesses in our internal control over financial reporting and if we are not able to remediate these weaknesses, 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. Our management has determined that as of December 31, 2010, we had two material weaknesses in our internal control over financial reporting that have not been remediated. In addition, we determined that our disclosure controls were not working effectively as of December 31, 2010. The material weaknesses relate to our controls over (i) our implementation of our policy on compliance with laws and (ii) our accounting for income taxes, as discussed in Item 4. Changes in Internal Controls of this Form 10-Q. During the first quarter of fiscal 2011, the Company initiated or commenced various remediation efforts to address the weaknesses. While we have made significant progress in remediating these material weaknesses, as of March 31, 2011 they had not been fully remediated. Although we are taking steps to remediate these material weaknesses, 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. 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. The United States government may propose 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

 

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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.

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.

 

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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)

   Share Purchase Agreement dated April 18, 2011 by and among SciClone Pharmaceuticals, Inc., SciClone Pharmaceuticals Hong Kong Limited, NovaMed Pharmaceuticals, Inc. and the listed sellers represented by Mark Lotter.

10.2 (1)**

   Change in Control Agreement effective April 18, 2011 by and between Mr. Mark Lotter and SciClone Pharmaceuticals Hong Kong Limited.

10.3 (1)**

   Employment Agreement by and between SciClone Pharmaceuticals Hong Kong Limited and Mark Lotter, dated April 18, 2011.

10.4 (1)**

   Secondment Contract between SciClone Pharmaceuticals Hong Kong Limited and NovaMed Pharmaceuticals (Shanghai) Co., Ltd. and Mark Lotter, dated April 18, 2011.

10.5 (1)**

   Director Services Agreement between NovaMed Pharmaceuticals, Inc. and Mr. Mark Lotter, dated April 18, 2011.

10.6 (1)**

   Director Services Agreement between SciClone Pharmaceuticals International Ltd. and Mr. Mark Lotter, dated April 18, 2011.

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.
** Management compensatory plan or arrangement.

 

34


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: May 10, 2011    

/s/ Gary S. Titus

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

 

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Table of Contents

INDEX TO EXHIBITS

 

Exhibit

Number

 

Exhibit

10.1 (1)   Share Purchase Agreement dated April 18, 2011 by and among SciClone Pharmaceuticals, Inc., SciClone Pharmaceuticals Hong Kong Limited, NovaMed Pharmaceuticals, Inc. and the listed sellers represented by Mark Lotter.
10.2 (1)**   Change in Control Agreement effective April 18, 2011 by and between Mr. Mark Lotter and SciClone Pharmaceuticals Hong Kong Limited.
10.3 (1)**   Employment Agreement by and between SciClone Pharmaceuticals Hong Kong Limited and Mark Lotter, dated April 18, 2011.
10.4 (1)**   Secondment Contract between SciClone Pharmaceuticals Hong Kong Limited and NovaMed Pharmaceuticals (Shanghai) Co., Ltd. and Mark Lotter, dated April 18, 2011.
10.5 (1)**   Director Services Agreement between NovaMed Pharmaceuticals, Inc. and Mr. Mark Lotter, dated April 18, 2011.
10.6 (1)**   Director Services Agreement between SciClone Pharmaceuticals International Ltd. and Mr. Mark Lotter, dated April 18, 2011.
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.
** Management compensatory plan or arrangement.

 

36

Exhibit 10.1

S HARE P URCHASE A GREEMENT

THIS SHARE PURCHASE AGREEMENT (this “ Agreement ”) dated as of April 18, 2011 is by and among SciClone Pharmaceuticals, Inc., a Delaware corporation (“ Parent ”), SciClone Pharmaceuticals Hong Kong Limited, a company incorporated and existing under the laws of Hong Kong and wholly-owned subsidiary of Parent (“ Purchaser ”), NovaMed Pharmaceuticals, Inc., an exempted company incorporated with limited liability under the laws of the Cayman Islands (“ Target ”), and the undersigned individuals as set forth on the signature pages hereto (each a “ Seller ” and collectively, the “ Sellers ”), and, with respect to Sections 2, 7, 9, 10 and 11, Mark Lotter as the Seller Representative.

R ECITALS

W HEREAS , Target, through its wholly owned subsidiary in China NovaMed Pharmaceuticals (Shanghai) Co., Ltd. (诺凡麦医药贸易(上海)有限公司) (the “ China Sub ”), engages in the business of (i) in-licensing, distributing off-shore, importing and trading within the Shanghai Wai Gao Qiao Free Trade Zone and development, registration, sales promotion and marketing in the People’s Republic of China (the “ PRC ”) of pharmaceutical products for consumption in the PRC; and (ii) providing outsourced services to third party pharmaceutical manufacturers in connection with their pharmaceutical products in the PRC (including promotion, marketing, assistance with obtaining market authorizations and registrations, appointment of and liaison with third party distributors and identification and negotiation of tender bids);

W HEREAS , Target holds all registered capital of China Sub, a wholly foreign owned enterprise (“ WFOE ”) duly organized and existing under the laws of the PRC;

W HEREAS , Sellers collectively are the owners and holders of record of an aggregate of 5,723,140 Series B Preferred Shares of Target, par value $0.0001 per share (the “ Series B Shares ”), and 15,271,429 Common Shares of Target, par value $0.0001 per share (the “ Common Shares ”) (of which immediately prior to the date hereof, 3,571,429 of such Common Shares were issued upon conversion of previously outstanding Series A Preferred Shares of Target, par value $0.0001 per share (the “ Series A Shares ”) (the Common Shares and the Series B Shares, collectively, the “ Shares ”, which collectively constitute all of the issued and outstanding shares of Target as of immediately prior to Closing);

W HEREAS , certain Sellers and affiliates collectively are the owners and holders of record of Convertible Promissory Notes (the “ Notes ”) with an outstanding aggregate principal amount of $3,500,000;

W HEREAS , each Seller holds such Shares and Notes as set forth opposite such Seller’s name on the Consideration and Indemnification Schedule being delivered concurrently herewith (the “ Allocation Schedule ”);

W HEREAS , each Seller desires to sell to Purchaser, and Purchaser desires to purchase and acquire from each Seller, the number of Shares set forth opposite each Seller’s name on the Allocation Schedule, collectively aggregating to all of the Shares, on the terms and conditions hereinafter set forth herein;

W HEREAS , the Board of Directors of Target has unanimously approved this Agreement and the transactions contemplated hereby; and

W HEREAS , the Board of Directors of each of Parent and Purchaser has unanimously approved this Agreement and the transactions contemplated hereby.


A GREEMENT

N OW , T HEREFORE , in consideration of the mutual terms, conditions and other agreements set forth herein and intending to be legally bound hereby, the parties hereto hereby agree as follows:

1. Purchase and Sale of Shares . Subject to all the terms and conditions of this Agreement, at the Closing, each Seller shall sell, transfer and deliver to Purchaser, and Purchaser shall purchase and acquire from each Seller, the number of Shares set forth opposite each Seller’s name on the Allocation Schedule, free and clear of any and all Encumbrances (as hereinafter defined), for the consideration specified in Section 2 below.

2. Purchase Price .

2.1 Consideration Amounts . Subject to and upon the terms and conditions of this Agreement, in consideration of and as payment in full for the Shares, Parent and Purchaser shall pay to Sellers collectively, subject to applicable withholding taxes, if any, an aggregate amount equal to:

(a) Cash Purchase Price Amount . A cash amount equal to $25,000,000, which amount shall be decreased by each of the following: (i) the Option Repurchase Amount (as defined in Section 7.8 below), (ii) any working capital shortfall in accordance with Section 2.3(b) below, (iii) the aggregate amount of Target Transaction Expenses (as defined in Section 11.4 and that remain unaccrued and unpaid at Closing) set forth on the Closing Transaction Expense Certificate (as defined in Section 7.5) and (iv) any Debt of Target (as defined in Section 5.23) that remains outstanding and owing as of the Closing (the “ Outstanding Debt Amount ”) (the cash amount, as adjusted pursuant to clauses (i) through (iv), the “ Cash Purchase Price ”); plus

(b) Share Purchase Price Amount . 8,298,110 duly authorized and issued shares of common stock of Parent (“ Parent Common Stock ”) (calculated as the quotient of $32,000,000 divided by $3.8563 (the per share price equal to the average of the thirty (30) day volume weighted average trailing per price share of the Parent Common Stock as reported on the close of the NASDAQ Global Market on December 14, 2010), rounded up to the nearest whole share) (the “ Share Purchase Price ,” together with the Cash Purchase Price, the “ Initial Consideration ”, which Initial Consideration shall be subject to the escrow provisions of Section 2.4 and the indemnification provisions of Section 9); plus

(c) Contingent Consideration Amount . An additional amount of cash, payable on a contingent basis, consisting of potential payments under a Sales Revenue Earn-Out and an EBITDA Earn-Out (together, the “ Contingent Consideration ”, which Contingent Consideration shall be subject to modification under Section 2.1(d) and the indemnification provisions of Section 9), in each case determined as follows:

(i) A “ Sales Revenue Earn-Out ” shall be payable if Target achieves certain target metrics based upon the sales revenue of Target for the sale of, and sale commissions received for, the legacy products of Target acquired hereby and listed on Schedule 2.1(c) hereto and subsequent additions thereto as approved in accordance with the provisions of Section 2.1(e)(i) herein (the “ Legacy Products ”) as recognized under U.S. GAAP and as determined (x) in Parent’s audited financial statements for the period following the Closing to the end of fiscal year 2011, (y) in the Stub Sales Revenue Certificate for the period beginning on January 1, 2011 through the Closing (such period, the “ Stub Period ”) without duplication of any amounts in the foregoing clause and (z) in Parent’s audited financial statements for fiscal year 2012 (such Target revenue for the combined years 2011 and 2012, the “ Cumulative Sales Revenue ”), and shall be determined as follows:

(A) If the Cumulative Sales Revenue is equal to or greater than Full Earn-Out Revenue Target as set forth on Schedule 2.1(c) (such amount, the “ Full Earn-Out Revenue Target ”), an aggregate cash amount equal to $11,500,000 shall be payable as the Sales Revenue Earn-Out.

 

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(B) If the Cumulative Sales Revenue is at least equal to the Earn-Out Revenue Floor as set forth on Schedule 2.1(c) (calculated as 80% of the Full Earn-Out Revenue Target; such amount, the “ Earn-Out Revenue Floor ”) but less than the Full Earn-Out Revenue Target, an aggregate cash payment between zero and $11,500,000 shall be payable as the Sales Revenue Earn-Out, which amount shall be calculated proportionally by interpolating between such amounts by the portion of the Cumulative Sales Revenue in excess of the Earn-Out Revenue Floor as compared to the Earn-Out Revenue Range as set forth on Schedule 2.1(c) (calculated as 20% of the Full Earn-Out Revenue Target; such amount, the “ Earn-Out Revenue Range ”), determined by multiplying $11,500,000 by a quotient, the numerator of which is the portion of the Cumulative Sales Revenue in excess the Earn-Out Revenue Floor and the denominator which is the Earn-Out Revenue Range.

(C) If the Cumulative Sales Revenue is less than the Earn-Out Revenue Floor, the amount of the Sales Revenue Earn-Out shall be zero.

For purposes of this Agreement, the “ Stub Sales Revenue Certificate ” shall mean a certificate delivered by Seller Representative to Parent sixty (60) Business Days following the Closing setting forth the sales revenue of Target for the Legacy Products during the Stub Period (the “ Stub Sales Revenue ”). The Stub Sales Revenue Certificate shall be certified by Seller Representative as to the accuracy of such certificate as of the date of delivery. Parent shall review the calculation of the Stub Sales Revenue as set forth on the Stub Sales Revenue Certificate concurrently with the audit of its 2011 fiscal year and shall, within thirty (30) Business Days following completion of the audit of its financial statements for its 2011 fiscal year, provide to Seller Representative a written confirmation of its agreement or disagreement with the amount of Stub Sales Revenue provided in the Stub Sales Revenue Certificate. If Parent shall disagree with the amount of Stub Sales Revenue provided in the Stub Sales Revenue Certificate, Parent and Seller Representative shall mutually review the matter and negotiate in good faith for up to fifteen (15) Business Days (or such other period of time as the parties mutually agree) to attempt to agree on the calculation of the Stub Sales Revenue. If the parties are unable to agree on the calculation of Stub Sales Revenue within the fifteen (15) Business Day period specified in the preceding sentence, then the disputed portion(s) of such calculation shall be immediately submitted to a firm of independent certified public accountants mutually acceptable to Parent and Seller Representative for resolution, the fees of which shall be borne in proportion to the extent Parent, on the one hand, and Sellers, on the other hand, are found to be the “non-prevailing party” as determined by such accounting firm. For purposes of the preceding sentence, the extent to which Parent or Sellers are a “non-prevailing” party shall be determined as a percentage, with (i) the numerator being (x) with respect to Parent, the amount by which Parent’s calculation of the Stub Sales Revenue is less than the amount determined by the firm of independent certified public accountants and (y) with respect to Sellers, the amount by which Seller Representative’s calculation of the Stub Sales Revenue is greater than the amount determined by the firm of independent certified public accountants, and (ii) the denominator being the amount of Stub Sales Revenue in dispute. In the event any party’s percentage as a “non-prevailing party” is greater than 100%, all of such fees shall be proportioned to such party. Notwithstanding the foregoing, if the firm of independent certified public accountants otherwise determines that the foregoing allocation of responsibility for fees does not adequately address the dispute at issue and the non-prevailing party cannot be adequately determined as such, then such fees shall be borne equally by the parties. Any decision of such accounting firm with respect to the disputed portion(s) of the calculation of Stub Sales Revenue shall be final and binding on the parties hereto and may not be submitted to arbitration. Sellers shall fully and promptly cooperate with Parent in providing any information requested by Parent for review of the Stub Sales Revenue, including any work papers utilized in determining the Stub Sales Revenue.

 

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(ii) An “ EBITDA Earn-Out ” shall be payable if Parent achieves certain target metrics based upon Parent’s Adjusted EBITDA as determined (x) in Parent’s audited financial statements for fiscal year 2011, (y) in the Stub EBITDA Certificate for the Stub Period without duplication of any amounts in the foregoing clause and (z) in Parent’s audited financial statements for fiscal year 2012 (such Adjusted EBITDA for the combined fiscal years 2011 and 2012, the “ Cumulative EBITDA ”). For purposes of this Agreement, “ EBITDA ” shall mean the net income/(loss) as reflected in the Parent’s audited financial statements, less interest, taxes, depreciation and amortization as determined under U.S. GAAP as reflected in Parent’s audited financial statements and “ Adjusted EBITDA ” shall mean EBITDA as adjusted by Parent each year to exclude from expenses the following: (a) Parent’s U.S. research and development expenses (excluding any depreciation and amortization already adjusted for); (b) any amounts paid by Parent as an upfront licensing fee for new products which Parent or Target may decide to sell or distribute after Closing; (c) any amounts attributable as share based compensation expenses of Target for grants made to employees of Target for post-Closing retention purposes; (d) any legal and forensic accounting costs incurred and payable by Parent, any fines or penalties assessed against Parent by any Governmental Authority and payable, or any settlement amounts agreed to by Parent with any Governmental Authority and payable with respect to the pending formal, non-public investigation being conducted by the U.S. Securities and Exchange Commission (“ SEC ”); (e) any legal, auditing or financial advisor costs payable to third parties and incurred by Parent prior to or on the date hereof for the acquisition contemplated under this Agreement; (f) any legal, auditing or financial advisor costs payable to third parties and incurred after the date hereof by Parent in connection with any negotiation of any potential Parent Change in Control Transaction, in each case as determined in Parent’s financial statement consolidation included in the work papers utilized in Parent’s audited financial statements; and (g) milestone payments that may be required to be paid in the Earn-Out Period by Target to its partners for regulatory success, net of amounts amortized by Parent. The EBITDA Earn-Out shall be determined as follows:

(A) If the Cumulative EBITDA is equal to or greater than the Full Earn-Out EBITDA Target as set forth on Schedule 2.1(c) (such amount the “ Full Earn-Out EBITDA Target ”), an aggregate cash amount equal to $11,500,000 shall be payable as the EBITDA Earn-Out.

(B) If the Cumulative EBITDA is at least equal to the Earn-Out EBITDA Floor as set forth on Schedule 2.1(c) (calculated as eighty percent (80%) of the Full Earn-Out EBITDA Target; such amount, the “ Earn-Out EBITDA Floor ”) but less than the Full Earn-Out EBITDA Target, an aggregate cash payment between zero and $11,500,000 shall be payable as the EBITDA Earn-Out, which amount shall be calculated proportionally by interpolating between such amounts by the portion of the Cumulative EBITDA in excess of the Earn-Out EBITDA Floor as compared to the Earn-Out EBITDA Range as set forth on Schedule 2.1(c) (calculated as 20% of the Full Earn-Out EBITDA Target; such amount, the “ Earn-Out EBITDA Range ”), determined by multiplying $11,500,000 by a quotient, the numerator of which is the portion of the Cumulative EBITDA in excess of the Earn-Out EBITDA Floor and the denominator which is the Earn-Out EBITDA Range.

(C) If the Cumulative EBITDA is less than the Earn-Out EBITDA Floor, the amount of the EBITDA Earn-Out shall be zero.

 

4


(D) If the Cumulative EBITDA is greater than the Full Earn-Out EBITDA Target, subject to Section 2.1(d), in addition to the amount payable under Section 2.1(c)(ii)(A), an additional amount between zero and $10,000,000 shall be payable (as calculated, the “ EBITDA Overperformance Amount ”), with such amount calculated proportionally by interpolating between such amounts by the portion of by which the Cumulative EBITDA exceeds the Full Earn-Out EBITDA Target as compared to the Earn-Out EBITDA Range, determined by multiplying $10,000,000 by a quotient, the numerator of which is the portion of the Cumulative EBITDA in excess of the Full Earn-Out EBITDA Target and the denominator which is the Earn-Out EBITDA Range. Notwithstanding the foregoing, in the event the Cumulative EBITDA exceeds the Earn-Out EBITDA Cap as set forth on Schedule 2.1(c) (calculated as one hundred and twenty percent (120%) of the Full Earn-Out EBITDA, such amount, the “ Earn-Out EBITDA Cap ”), the EBITDA Overperformance Amount shall equal $10,000,000.

(E) For purposes of this Agreement, the “ Stub EBITDA Certificate ” shall mean a certificate delivered by Seller Representative to Parent sixty (60) Business Days following the Closing setting forth Target’s EBITDA in the Stub Period (the “ Stub EBITDA ”). The Stub EBITDA Certificate shall be certified by Seller Representative as to the accuracy of such certificate as of the date of delivery. Parent shall review the calculation of the Stub EBITDA as set forth on the Stub EBITDA Certificate concurrently with the audit of its 2011 fiscal year and shall, within thirty (30) Business Days following completion of the audit of its financial statements for its 2011 fiscal year, provide to Seller Representative a written confirmation of its agreement or disagreement with the amount of Stub EBITDA provided in the Stub EBITDA Certificate. If Parent shall disagree with the amount of Stub EBITDA provided in the Stub EBITDA Certificate, Parent and Seller Representative shall mutually review the matter and negotiate in good faith for up to fifteen (15) Business Days (or such other period of time as the parties mutually agree) to attempt to agree on the calculation of the Stub EBITDA. If the parties are unable to agree on the calculation of Stub EBITDA within the fifteen (15) Business Day period specified in the preceding sentence, then the disputed portion(s) of such calculation shall be immediately submitted to a firm of independent certified public accountants mutually acceptable to Parent and Seller Representative for resolution, the fees of which shall be borne in proportion to the extent Parent, on the one hand, and Sellers, on the other hand, are found to be the “non-prevailing party” as determined by such accounting firm. For purposes of the preceding sentence, the extent to which Parent or Sellers are a “non-prevailing” party shall be determined as a percentage, with (i) the numerator being (x) with respect to Parent, the amount by which Parent’s calculation of the Stub EBITDA is less than the amount determined by the firm of independent certified public accountants and (y) with respect to Sellers, the amount by which Seller Representative’s calculation of the Stub EBITDA is greater than the amount determined by the firm of independent certified public accountants, and (ii) the denominator being the amount of Stub EBITDA in dispute. In the event any party’s percentage as a “non-prevailing party” is greater than 100%, all of such fees shall be proportioned to such party. Notwithstanding the foregoing, if the firm of independent certified public accountants otherwise determines that the foregoing allocation of responsibility for fees does not adequately address the dispute at issue and the non-prevailing party cannot be adequately determined as such, then such fees shall be borne equally by the parties. Any decision of such accounting firm with respect to the disputed portion(s) of the calculation of Stub EBITDA shall be final and binding on the parties hereto. Sellers shall fully and promptly cooperate with Parent in providing any information requested by Parent for review of the Stub EBITDA, including any work papers utilized in determining the Stub Sales EBITDA.

Any amounts of Contingent Consideration determined as set forth above shall be subject to modification set forth in paragraph (d) below and be paid in accordance with Sections 2.2(c), 2.2(d), 2.2(e), 2.2(f) and 2.2(g) below. Parent’s obligations to pay the Contingent Consideration shall be subject to reduction pursuant to the right of set-off for any indemnification obligations of Sellers as contemplated by Section 9 hereof.

 

5


(d) Contingent Consideration Modification .

(i) Except for as set forth in Sections 2.2(d), 2.2(e) and 2.2(f), in the event that Parent, Purchaser and Target achieve the customer condition set forth in Schedule 2.1(d) prior to the date of the determination of both the Sales Revenue Earn-Out and the EBITDA Earn-Out pursuant to Sections 2.2(c)(i) and 2.2(c)(ii), respectively, the amount of Contingent Consideration, if any, payable to Sellers shall be increased by an amount of $10,000,000.

(ii) Except for as set forth in Sections 2.2(d), 2.2(e) and 2.2(f), in the event that Parent, Purchaser and Target do not achieve the customer condition set forth in Schedule 2.1(d) prior to the date of the determination of both the Sales Revenue Earn-Out and the EBITDA Earn-Out pursuant to Sections 2.2(c)(i) and 2.2(c)(ii), respectively, (A) the amount of Contingent Consideration, if any, payable to Sellers shall be decreased by an amount of $10,000,000 and (B) the EBITDA Overperformance Amount, if any, shall be reduced by 50% such that all references to $10,000,000 in Section 2.1(c)(ii)(D) shall be $5,000,000. For purposes of clarity, in no event shall the amount of Contingent Consideration payable be a negative amount such that an amount of Initial Consideration would be reduced or would be repayable by the Sellers as a result.

(e) Earn-Out Resolution .

(i) In the event that Sellers wish to add a product which Target has decided to sell or distribute after the Closing to Schedule 2.1(c)(i) after the Closing Date (such product, the “ Additional Legacy Product ”), Seller Representative shall notify Parent in writing of such request, which notification shall include (A) a confirmation that no upfront capital investment, including any licensing fee, is payable for such Additional Legacy Product, (B) five year detailed projections of earnings and cash flow along with supporting documentation and (C) such other information as Parent may reasonably request. Parent shall accept such Additional Legacy Product to be added to Schedule 2.1(c)(i) if Parent determines in good faith that (A) such Additional Legacy Product requires no upfront capital investment, including any licensing fee, payable by Parent, Purchaser or one of their affiliates and (B) such Additional Legacy Product is gross profit neutral or accretive to the gross profit margin of all the then-existing Category I Legacy Products, taken as a whole, within one year of the addition. To the extent Seller Representative and Parent are unable to reach agreement as to the addition of the Additional Legacy Product to Schedule 2.1(c)(i) after good faith discussions, Seller Representative shall have a right to raise the matter with a committee of Parent’s Board of Directors consisting of Messrs. Peter Barrett, Gregg Lapointe and Jon Saxe (or such replacements on the committee as may be reasonably agreed to between either Mr. Barrett or Seller Representative, on the one hand, and Parent on the other hand), which shall consider the matter in good faith.

(ii) In the event Parent operates the Target’s business in a manner which Sellers’ Representative believes would materially and negatively affect the Contingent Consideration, Sellers’ Representative and the Chief Executive Officer of Parent shall discuss the matter and whether any modifications should be made to the Contingent Consideration as a result. To the extent Sellers’ Representative and the Chief Executive Officer of Parent are unable to resolve the matter after good faith discussions, Sellers’ Representative shall have a right to raise the matter with a committee of Parent’s Board of Directors consisting of Messrs. Peter Barrett, Gregg Lapointe and Jon Saxe (or such replacements on the committee as may be reasonably agreed to between either Mr. Barrett or Seller Representative, on the one hand, and Parent on the other hand), which shall consider the matter in good faith.

(iii) Notwithstanding anything contrary in this Agreement, Parent shall have the right to operate and manage Parent’s businesses and Target’s businesses as determined by Parent in its sole discretion.

 

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2.2 Consideration Payments . Purchaser shall pay to Sellers the Initial Consideration and Contingent Consideration in the following manner:

(a) Cash Purchase Price Payment . At Closing, against and upon surrender of the share certificates by Sellers representing all of the Shares, in exchange for receipt of the purchased Shares from each Seller as set forth across each Seller’s name in the Allocation Schedule under the column entitled “Shares”, Purchaser shall pay the Cash Purchase Price payable pursuant to Section 2.1(a) hereof by a wire transfer of immediately available funds, which Cash Purchase Price shall be apportioned among and payable to each Seller as set forth across each Seller’s name in the Allocation Schedule under the column entitled “Closing Cash Purchase Price”; provided, however, that the portion of the Cash Purchase Price to be actually paid to Sellers at Closing shall have been reduced by the amount of the Working Capital Escrow Amount and the Indemnification Escrow Amount, which amount shall be deposited with Wells Fargo Bank, National Association (the “ Escrow Agent ”) by Purchaser from the Initial Consideration to be held in escrow pursuant to the terms and conditions of an Escrow Agreement being entered into concurrently herewith (the “ Escrow Agreement ”) as set forth across each Seller’s name in the Allocation Schedule under the columns entitled “Indemnification Escrow Amount” and “Working Capital Escrow Amount” and in accordance with the terms set forth in Section 2.4 below for recourse for the indemnities provided by Sellers herein and for amounts owed to Purchaser, if applicable, pursuant to Section 2.3(d) below.

(b) Share Purchase Price Payment . At Closing, against and upon surrender of the share certificates by Sellers representing all of the Shares, in exchange for receipt of the purchased Shares from each Seller as set forth across each Seller’s name in the Allocation Schedule under the column entitled “Shares”, Purchaser shall deliver the duly authorized and issued shares of Parent Common Stock issuable pursuant to Section 2.1(b) hereof which Share Purchase Price shall be apportioned among and payable to each Seller as set forth across each Seller’s name in the Allocation Schedule under the column entitled “Closing Share Purchase Price”; provided , however , the portion of the Share Purchase Price to be actually paid to Sellers at Closing shall have been reduced by the amount of the Indemnification Escrow Amount, which amount shall be deposited with the Escrow Agent by Purchaser from the Initial Consideration to be held in escrow pursuant to the terms and conditions of the Escrow Agreement as set forth across each Seller’s name in the Allocation Schedule under the column entitled “Indemnification Escrow Amount” and in accordance with the terms set forth in Section 2.4 below for recourse for the indemnities provided by Sellers herein. The shares issued hereunder shall be in certificated form and shall contain the appropriate restrictive legends as contemplated hereunder.

(c) Contingent Consideration Payment .

(i) Sales Revenue Earn-Out . The Sales Revenue Earn-Out shall be paid following the completion of the audit of the consolidated financial statements of Parent for the year ending December 31, 2012 (the “ 2012 Audit ”) in the ordinary course of business. Within twenty (20) Business Days of the completion of the 2012 Audit, Purchaser shall pay to Sellers in cash by a wire transfer of immediately available funds, a portion of the Sales Revenue Earn-Out equal to such Seller’s Contingent Payment Participation Percentage of the Sales Revenue Earn-Out, subject to offset for any Damages payable pursuant to Section 9 hereof. To the extent Purchaser Indemnified Person has submitted in good faith a Claim Notice pursuant to Section 9.5 to Seller Representative with respect to a Claim which remains unresolved prior to date of payment of any Sales Revenue Earn-Out, subject to Section 9.3, an amount equal to the Damages claimed in the Claim Notice shall be withheld from payment by Parent and set aside pending final resolution of the Claim Notice, after which Parent shall release and pay any portions thereof which are not offset for any Damages payable pursuant to Section 9. For purposes of this Agreement, “ Contingent Payment Participation Percentage ” shall mean the percentage set forth across such Seller’s name in the Allocation Schedule under the column entitled “Contingent Payment Participation Percentage”.

 

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(ii) EBITDA Earn-Out . The EBITDA Earn-Out shall be paid following the completion of 2012 Audit in the ordinary course of business. Within twenty (20) Business Days of the completion of the 2012 Audit, Purchaser shall pay to Sellers by a wire transfer of immediately available funds, a portion of the EBITDA Earn-Out equal to such Seller’s Contingent Payment Participation Percentage of the EBITDA Earn-Out and, if applicable, the EBITDA Overperformance Amount, subject to offset for any Damages payable pursuant to Section 9 hereof.

(iii) Earn-Out Modification . The $10,000,000 increase to the Contingent Consideration under Section 2.1(d), if payable, shall be paid to each Seller in proportion to its Contingent Payment Participation Percentage at the same when the Sales Revenue Earn-Out and the EBITDA Earn-out are paid to such Seller, subject to offset for any Damages payable pursuant to Section 9 hereof.

(d) Contingent Consideration Payment upon Parent Change in Control .

(i) In the event that at any time prior to the last day of the Earn-Out Period, the closing of a Parent Change in Control Transaction is consummated (“ Acceleration Event ”), the Sales Revenue Earn-Out payable under Section 2.1(c)(i) shall be modified as follows:

(A) In the event the Acceleration Event occurs prior to the one year anniversary of the Closing, then as full and final settlement of the Contingent Payment amounts, each of the Sales Revenue Earn-Out and the EBITDA Earn-Out shall be deemed to equal $11,500,000, the EBITDA Overperformance Amount shall be deemed to equal zero and no increase of Contingent Consideration under Section 2.1(d)(i) nor reduction under Section 2.1(d)(ii) shall take effect regardless of whether the customer condition set forth in Schedule 2.1(d) is achieved or not achieved, such that the amount of Contingent Consideration payable under this Agreement shall equal $23,000,000, and

(B) In the event the Acceleration Event occurs on or after the one year anniversary of the Closing but prior to December 31, 2012, then the EBITDA Overperformance Amount shall be deemed to equal zero, no increase of Contingent Consideration under Section 2.1(d)(i) nor reduction under Section 2.1(d)(ii) shall take effect regardless of whether the customer condition set forth in Schedule 2.1(d) is achieved or not achieved and as full and final settlement of the Contingent Payment amounts, the amount of Contingent Consideration payable under this Agreement shall equal one of the following:

1) $11,500,000, if 80% of neither Sales Revenue Earn-Out nor the EBITDA Earn-Out is achieved,

2) $17,250,000, if at least 80% of one of either Sales Revenue Earn-Out or the EBITDA Earn-Out is achieved or

3) $23,000,000, if at least 80% of both Sales Revenue Earn-Out and the EBITDA Earn-Out is achieved.

 

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For purposes of the above, 80% of Sales Revenue Earn-Out shall be deemed to have been achieved if the Cumulative Sales Revenue is equal to or greater than the applicable adjusted Minimum Earn-Out Revenue Target through the period ending March 31, 2012, June 30, 2012 or September 30, 2012, as the case may be, set forth on Schedule 2.2(d)(i) (calculated as 80% of the adjusted Full Earn-Out Revenue Target, with Cumulative Sales Revenue of Target determined in accordance with Section 2.1(c)(i), except that the periods used to determine Cumulative Sales Revenue shall be the Stub Period and the Measurement Period only, and shall not be audited unless audited financial statements for the respective period are independently required. For purposes of the above, 80% of the EBITDA Earn-Out shall be deemed to have been achieved if the Cumulative EBITDA is equal to or greater than the applicable adjusted Minimum Earn-Out EBITDA Target for the period ending March 31, 2012, June 30, 2012 or September 30, 2012, as the case may be, set forth on Schedule 2.2(d)(i) (calculated as 80% of the adjusted Full Earn-Out EBITDA Target, with Cumulative EBITDA of Parent determined in accordance with Section 2.1(c)(ii), except that the periods used to determine Cumulative EBITDA shall be the Stub Period and the Measurement Period only, and shall not be audited unless audited financial statements for the respective period are independently required.

(ii) For purposes of this Agreement:

(A) “ Earn-Out Period ” shall mean the period commencing on the Closing Date and ending on December 31, 2012.

(B) “ Measurement Period ” means the period following the Closing through the last full fiscal quarter of Parent prior the Acceleration Event.

(C) “ Parent Change in Control Transaction ” means (1) the sale, lease, license, or other disposition by Parent of all or substantially all of its assets; or (2) Parent’s consolidation, merger or other reorganization with another entity in which the holders of Parent’s outstanding voting stock immediately prior to such transaction own, immediately after such transaction, securities representing less than fifty percent (50%) of the voting power of the successor entity, or, if the successor entity is wholly-owned as a result of such transaction, the parent entity.

(iii) Any Sales Revenue Earn-Out or EBITDA Earn-Out payable under this Section 2.2(d) shall be due and payable as soon as practicable after the closing date of the Acceleration Event, subject to offset for any Damages payable pursuant to Section 9 hereof. To the extent Purchaser Indemnified Person has submitted in good faith a Claim Notice pursuant to Section 9.5 to Seller Representative with respect to a Claim which remains unresolved prior to date of payment of any Sales Revenue Earn-Out or EBITDA Earn-Out, subject to Section 9.3, an amount equal to the Damages claimed in the Claim Notice shall be withheld from payment by Parent and set aside pending final resolution of the Claim Notice, after which Parent shall release and pay any portions thereof which are not offset for any Damages payable pursuant to Section 9.

(e) Contingent Consideration Payment upon Lotter Termination without Cause . In the event the Employment Agreement (defined below) and Mark Lotter’s employment with Purchaser is terminated by Parent, Purchaser or its affiliates without Cause (as defined in Section 2.2(g)(ii) below) prior to December 31, 2012, then as full and final settlement of the Contingent Payment amounts, each of the Sales Revenue Earn-Out and the EBITDA Earn-Out shall be deemed to equal $11,500,000, the EBITDA Overperformance Amount shall be deemed to equal zero and no increase of Contingent Consideration under Section 2.1(d)(i) nor reduction under Section 2.1(d)(ii) shall take effect regardless of whether the customer condition set forth in Schedule 2.1(d) is achieved or not achieved, such that the amount of Contingent Consideration payable under this Agreement shall equal $23,000,000. Notwithstanding the foregoing, in the event Mr. Lotter’s termination is for Cause or, if without Cause, is approved by the majority of the members of a committee of Parent’s Board of Directors consisting of Messrs. Peter Barrett, Gregg Lapointe and Jon Saxe (or such replacements on the committee as may be reasonably agreed to between either Mr. Barrett or Seller Representative, on the one hand, and Parent on the other hand), the acceleration of the Contingent Payment provided for by this paragraph shall not be triggered. For purposes of clarity, except for an amendment that constitutes constructive or de facto termination of Mr. Lotter, any amendment of the Employment Agreement or of Mr. Lotter’s employment agreed to between Mr. Lotter and Parent shall in each case not trigger the acceleration of the Contingent Payment provided for by this paragraph. Any Contingent Consideration payable under this Section 2.2(e) shall be due and payable as soon as practicable after the completion of the 2012 Audit, subject to offset for any Damages payable pursuant to Section 9 hereof. To the extent Purchaser Indemnified Person has submitted in good faith a Claim Notice pursuant to Section 9.5 to Seller Representative with respect to a Claim which remains unresolved prior to date of payment of any Sales Revenue Earn-Out or EBITDA Earn-Out, subject to Section 9.3, an amount equal to the Damages claimed in the Claim Notice shall be withheld from payment by Parent and set aside pending final resolution of the Claim Notice, after which Parent shall release and pay any portions thereof which are not offset for any Damages payable pursuant to Section 9.

 

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(f) Contingent Consideration Payment upon Failure of Board Appointment . In the event Parent is unable to comply in all material respects with the requirements of Section 7.9 of this Agreement such that as a result, Sellers are unable to effect the designation of Seller Nominees to Parent’s Board of Directors during any time in the Earn-Out Period, then as full and final settlement of the Contingent Payment amounts, each of the Sales Revenue Earn-Out and the EBITDA Earn-Out shall be deemed to equal $11,500,000, the EBITDA Overperformance Amount shall be deemed to equal zero and no increase of Contingent Consideration under Section 2.1(d)(i) nor reduction under Section 2.1(d)(ii) shall take effect regardless of whether the customer condition set forth in Schedule 2.1(d) is achieved or not achieved. Notwithstanding the foregoing, the acceleration of the Contingent Payment provided for by this paragraph shall not be triggered in the event Sellers do not vote any shares of Parent Common Stock held or beneficially controlled by them in favor of the election of Seller Nominees where such shares, had they been voted in favor of Seller Nominees, would have otherwise resulted in the election of Seller Nominees. Any Contingent Consideration payable under this Section 2.2(f) shall be due and payable as soon as practicable after the completion of the 2012 Audit, subject to offset for any Damages payable pursuant to Section 9 hereof. To the extent Purchaser Indemnified Person has submitted in good faith a Claim Notice pursuant to Section 9.5 to Seller Representative with respect to a Claim which remains unresolved prior to date of payment of any Sales Revenue Earn-Out or EBITDA Earn-Out, subject to Section 9.3, an amount equal to the Damages claimed in the Claim Notice shall be withheld from payment by Parent and set aside pending final resolution of the Claim Notice, after which Parent shall release and pay any portions thereof which are not offset for any Damages payable pursuant to Section 9.

(g) Deferred Contingent Consideration Payment .

(i) With respect to Mr. Mark Lotter, the payment and delivery of the respective portion of any Contingent Consideration (the “ Deferred Contingent Consideration ”) that may otherwise become due and payable to his holding company Spearing Limited under the terms of this Agreement shall be automatically deferred until the fifth (5th) anniversary of the Closing Date in the event Mr. Lotter ceases at any time after the Closing Date through the date of payment of the Contingent Consideration to be an employee of Parent, Purchaser or one of their affiliates, except as a result of such Mr. Lotter’s death, disability or termination by Parent, Purchaser or one of their affiliates without Cause, unless otherwise determined in writing by Parent in its sole discretion. Any Deferred Contingent Consideration deferred pursuant to this Section 2.2(g) shall accrue simple interest from the date on which the Deferred Contingent Consideration was otherwise payable or deliverable pursuant to Section 2.2(c), 2.2(d), 2.2(e) and 2.2(f) of this Agreement until the date of delivery of such Deferred Contingent Consideration pursuant to this Section 2.2(g), at the prime percentage rate as published by Silicon Valley Bank in effect on the date such amount was otherwise deliverable pursuant to Section 2.2(c), 2.2(d) 2.2(e) and 2.2(f) of this Agreement and adjusted quarterly to the prime percentage rate as published by Silicon Valley Bank and in effect on the last Business Day of each calendar quarter thereafter until the date of delivery of such Deferred Contingent Consideration pursuant to this Section 2.2(g). For the purposes of the immediately foregoing sentence, the value of any Deferred Contingent Consideration shall be calculated as of the date on which the Deferred Contingent Consideration was otherwise deliverable pursuant to Section 2.2(c), 2.2(d), 2.2(e) and 2.2(f). Any such interest shall be paid in cash and shall be paid only on or after the date on which Parent delivers the Deferred Contingent Consideration to Mr. Lotter pursuant to this Section 2.2(g).

 

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(ii) For purposes of this Agreement, “ Cause ” means the occurrence of any of the following: (A) theft, fraud, dishonesty, gross negligence or willful misconduct by Mr. Lotter in connection with the performance of his duties pursuant to his Employment Agreement; (B) a willful breach of the material terms of his Employment Agreement by Mr. Lotter; (C) a material failure to fulfill or perform his duties under his Employment Agreement, other than due to illness or injury, which breach or failure is not cured to the reasonable satisfaction of the Board of Directors of Parent within thirty (30) days after written notice from the Board of Directors of Parent to Mr. Lotter; (D) conviction of a felony or a crime or civil violation which involves moral turpitude or would be considered harmful to the reputation or goodwill of Parent, Purchaser, or any of its affiliates (or plea of guilty or nolo contendere ); (E) a repeated or ongoing failure to comply with the reasonable directions and instructions of the Board of Directors of Parent in connection with the performance of Mr. Lotter’s duties and responsibilities hereunder following an initial notice of warning from the Board of Directors of Parent with respect thereto (provided, however, that his performance of duties as Seller Representative in itself, and not as an employee of Parent, Purchaser or their affiliates, shall not constitute failure to comply with the reasonable directions and instructions of the Board of Directors of Parent); (F) use or possession of illicit drugs or abuse of alcohol, while performing duties for Parent, Purchaser, or one of its affiliates or while on the premises of Parent, Purchaser, or one of its affiliates; or (G) commission of any act, or failure to act, in bad faith, which, in the reasonable determination of the Board of Directors of Parent, in any material respect impairs the reputation of, or in any material respect harms, Parent, Purchaser, or one of its affiliates.

2.3 Working Capital Adjustment to Purchase Price .

(a) Not later than three (3) Business Days prior to the Closing, Target shall provide Parent with an estimated balance sheet of Target as of the Closing (the “ Estimated Closing Balance Sheet ”) and a statement of the estimated Closing Working Capital (as defined in Section 2.3(e) below) derived from the Estimated Closing Balance Sheet (“ Estimated Closing Working Capital Statement ”), along with reasonable documentation supporting the calculation of the estimated Closing Working Capital. The Estimated Closing Balance Sheet and Estimated Closing Working Capital Statement shall be prepared by Target in accordance with United States generally accepted accounting principles (“ U.S. GAAP ”) applied using the same accounting methods, practices, principles, policies and procedures, with consistent classifications, judgments and valuation and estimation and accrual methodologies that were used in the preparation of the Financial Statements (as defined in Section 5.5 below) as if such Estimated Closing Balance Sheet and Estimated Closing Working Capital Statement were being prepared as of a fiscal year end; provided, however, that in the event there is a conflict between U.S. GAAP and the classifications, judgments and valuation and estimation and accrual methodologies that were used in the preparation of the Financial Statements, the classifications, judgments and valuation and estimation and accrual methodologies under U.S. GAAP shall be used in preparing the Estimated Closing Balance Sheet and Estimated Closing Working Capital Statement.

(b) If the amount of Closing Working Capital as set forth on the Estimated Closing Working Capital Statement is less than the Expected Working Capital Amount, an amount equal to the shortfall by which the Closing Working Capital as set forth on the Estimated Closing Working Capital Statement is less than the Expected Working Capital Amount shall be deducted from the Cash Purchase Price to be paid at Closing.

 

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(c) Parent shall have sixty (60) Business Days following Closing to review the calculation of the Closing Working Capital as set forth on the Estimated Closing Working Capital Statement. Sellers shall fully and promptly cooperate with Parent in providing any information requested by Parent for review of the Estimated Closing Working Capital Statement. The calculation of the Closing Working Capital as set forth on the Estimated Closing Working Capital Statement shall have been deemed to have been accepted by Parent unless within the sixty (60) Business Day period after Closing Parent shall deliver to Seller Representative a balance sheet of Target as of the Closing (the “ Revised Closing Balance Sheet ”) and a statement of Closing Working Capital derived from the balance sheet of Target as of the Closing (the “ Revised Closing Working Capital Statement ”). The Revised Closing Balance Sheet and the Revised Closing Working Capital Statement shall be prepared in accordance with U.S. GAAP applied using the same accounting methods, practices, principles, policies and procedures, with consistent classifications, judgments and valuation and estimation and accrual methodologies that were used in the preparation of the Financial Statements as if such Revised Closing Balance Sheet was being provided to auditors in connection with a fiscal year end; provided, however, that in the event there is a conflict between U.S. GAAP and the classifications, judgments and valuation and estimation and accrual methodologies that were used in the preparation of the Financial Statements, the classifications, judgments and valuation and estimation and accrual methodologies under U.S. GAAP shall be used preparing the Revised Closing Balance Sheet and the Revised Closing Working Capital Statement. Upon Parent’s delivery of the Revised Closing Balance Sheet and the Revised Closing Working Capital Statement to Seller Representative, the parties will mutually review the matter and negotiate in good faith for up to fifteen (15) Business Days (or such other period of time as the parties mutually agree) to attempt to agree on the calculation of Closing Working Capital. If the parties are unable to agree on the calculation of Closing Working Capital within the fifteen (15) Business Day period specified in the preceding sentence, then the disputed portion(s) of such calculation shall be immediately submitted to a firm of independent certified public accountants mutually acceptable to Parent and Seller Representative for resolution, the fees of which shall be shared equally between Parent, on the one hand, and Sellers collectively, on the other hand. Any decision of such accounting firm with respect to the disputed portion(s) of the calculation of Closing Working Capital shall be final and binding on the parties hereto.

(d) No later than five (5) Business Days following the final determination of Closing Working Capital in accordance with Section 2.3(c) above, the Cash Purchase Price shall be adjusted as provided herein to reflect the Closing Working Capital determined. If the Closing Working Capital as finally determined is greater than the amount equal to the Expected Working Capital Amount less the amount, if any, of any shortfall previously deducted from the Cash Purchase Price in accordance with Section 2.3(b) above, then (i) the amount by which the Closing Working Capital Amount exceeds such amount shall each be added to the Purchase Price and (ii) Parent shall pay to Sellers, or cause Purchaser or one of its affiliates to pay to Sellers, an aggregate amount of such excess in accordance with Sellers’ Pro-rata Interests along with release of the Working Capital Escrow Amount. For purposes of this Agreement, “ Pro-rata Interest ” shall mean the percentage interest equal to the number of Shares held by Seller immediately prior to Closing divided by the aggregate number of Shares outstanding immediately prior to Closing, which percentage shall be set forth across each Seller’s name in the Allocation Schedule under the column entitled “Pro-rata Interest”. If the Closing Working Capital as finally determined is less than the amount equal to the Expected Working Capital Amount less the amount, if any, of any shortfall previously deducted from the Cash Purchase Price in accordance with Section 2.3(b) above, then the amount of shortfall shall be paid to Parent (or if Purchaser shall otherwise determine, to Purchaser or one of its affiliates) out of the Working Capital Escrow Amount in accordance with Sellers’ Pro-rata Interests. In the event that the portion of the Working Capital Escrow Amount that is remaining after any payments owed to Parent pursuant to Section 2.3(c) have been made is insufficient to cover the amount owed to Parent pursuant to this Section 2.3(d), such shortfall shall be paid by Sellers, in accordance with each Seller’s Pro-rata Interest of such shortfall amount, to Parent (or if Purchaser shall otherwise determine, to Purchaser or one of its affiliates) within ten (10) Business Days after final determination. In the event the full amount owing to Parent is not paid within such ten (10) Business Day period, Parent shall have a right to satisfy such amount at its sole discretion out of the Indemnification Escrow Amount, which payment shall be apportioned in accordance with each Seller’s Pro-rata Interest of the Indemnification Escrow Amount.

 

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(e) For purposes of this Section 2.3:

(i) “ Closing Working Capital ” means (A) the Included Current Assets of Target less (B) the Included Current Liabilities of Target, determined as of the Closing.

(ii) “ Expected Working Capital Amount ” means $8,000,000; provided, however, that

(A) any amounts of the following audit-related fees shall not be included in the Included Current Liabilities of Target regardless of their accounting treatment under U.S. GAAP: (1) if Parent elects to have Target continue with the completion of the preparation of audited financial statements for Target’s fiscal years 2009 and 2010 using Target’s current firm of independent certified public accountants, any incremental fees incurred or to be incurred by Target to such firm for the audits of the fiscal years 2009 and 2010 as conducted by such firm which are solely a result of Parent’s requirement for an unqualified audit opinion for the accounting for share based reserves (provided, however, that any non-incremental fees incurred or to be incurred shall be accrued in the Included Current Liabilities), or (2) if Parent elects to have Target continue with the completion of the preparation of audited financial statements for Target’s fiscal years 2009 and 2010 with a separate firm of independent certified public accountants as chosen by Parent in its sole discretion, all fees incurred by Target to such firm for the audits of the fiscal years 2009 and 2010 as conducted by such firm. Target shall proceed with any engagement as so elected by Parent, which election shall be made by Parent in its sole discretion.

(B) any amounts of Target’s pre-paid liabilities existing at Closing for previous in-licensed product payments shall be included in the Included Current Assets of Target in a manner consistent with the manner accounted for in Target’s Financial Statements regardless of their accounting treatment under U.S. GAAP.

(iii) “ Included Current Assets ” means cash, cash equivalents, short-term investments, accounts receivable, net, other receivables and pre-paid expenses to the extent recognized by Parent under U.S. GAAP of Target due within one year; provided, however, Included Current Assets shall not include any deferred tax assets.

(iv) “ Included Current Liabilities ” means notes payable, accounts payable, accruals and other liabilities, and other payables of Target as of the type historically included in Target’s Financial Statements; provided, however, Included Current Liabilities shall not include any amounts to be paid for the Option Repurchase Amount nor any deferred tax liabilities.

 

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2.4 Escrow and Adjustment Payments . The portion of the Initial Consideration otherwise to be paid to Sellers at Closing shall be reduced by (i) an amount equal to fifteen percent (15%) of the Cash Purchase Price and fifteen percent (15%) of the Share Purchase Price (the “ Indemnification Escrow Amount ”), which Indemnification Escrow Amount shall be held in escrow by the Escrow Agent pursuant to the terms of the Escrow Agreement for the period beginning on the Closing Date and ending on the date that is eighteen (18) months after the Closing Date (the “ Survival Period ”) to satisfy any claims by Purchaser for indemnification pursuant to Section 9 hereof, and (ii) an amount equal $500,000 (the “ Working Capital Escrow Amount ”), which Working Capital Escrow Amount shall be held in escrow by the Escrow Agent pursuant to the terms of the Escrow Agreement to satisfy any amounts owed by Sellers to Purchaser pursuant to Section 2.3(d) hereof. The Indemnification Escrow Amount and the Working Capital Escrow Amount shall be escrowed by Sellers in proportion to each Seller’s Pro-Rata Interest, as set forth under the captions “Indemnification Escrow Amount” and “Working Capital Escrow Amount” set forth next to such Seller’s name on the Allocation Schedule. Within ten (10) Business Days of the final determination of the Closing Working Capital in accordance with Section 2.3(c), the portion of the Working Capital Escrow Amount and accrued interest remaining after satisfaction of amounts owed to Parent, Purchaser or one of their affiliates pursuant to Section 2.3(d) hereof (if any) shall be released from the escrow and delivered to each Seller or such Seller’s representative in accordance with each Seller’s Pro-rata Interest. Within ten (10) Business Days after the date that is twelve (12) months after the Closing Date, 50% of the Indemnification Escrow Amount and accrued interest remaining after satisfaction of claims (if any) made in accordance with Section 9.4 and Section 9.5 prior to the date that is twelve (12) months after the Closing Date, if any, shall be released from escrow and delivered to such Seller; provided , however , should any indemnification claim made prior to the date that is twelve (12) months after the Closing Date fail to reach final determination and satisfaction prior to the date that is twelve (12) months after the Closing Date, a portion of the 50% of the Indemnification Escrow Amount and accrued interest remaining that would otherwise be released pursuant to the foregoing that the parties reasonably determine in good faith as sufficient to satisfy 50% of all amounts with respect to such indemnification claim shall be retained in escrow pending final resolution of such claim in accordance with the provisions of the Escrow Agreement. Within ten (10) Business Days after the expiration of the Survival Period, the Indemnification Escrow Amount and accrued interest remaining after satisfaction of claims made in accordance with Section 9.4 and Section 9.5 prior to the expiration of the Survival Period pursuant to the immediately preceding sentence, if any, shall be released from escrow and delivered to such Seller; provided , however , should any indemnification claim made prior to the expiration of the Survival Period fail to reach final determination and satisfaction prior to the expiration of the Survival Period, a portion of the Indemnification Escrow Amount that the parties reasonably determine in good faith as sufficient to satisfy all amounts with respect to such indemnification claim shall be retained in escrow pending final resolution of such claim in accordance with the provisions of the Escrow Agreement.

2.5 Payment of Transfer Taxes and Fees . All transfer, documentary, sales, use, stamp and registration taxes, and all conveyance fees, recording charges and other fees and charges (including any penalties and interest) incurred in connection with the consummation of the transactions contemplated by this Agreement, shall be borne equally by Sellers on the one hand and Purchaser on the other hand.

2.6 Payment of Other Amounts at Closing . Simultaneous with the payment of the Cash Purchase Price and Share Purchase Price at Closing, each of each of the following shall be paid or repaid pursuant to the Allocation Schedule: (i) the Option Repurchase Amount, (ii) the aggregate amount of Target Transaction Expenses set forth on the Closing Transaction Expense Certificate and (iii) any Outstanding Debt Amount (including without limitation the premium amount payable under the terms of the Notes).

3. Closing . Subject to the satisfaction or waiver of all closing actions and deliveries set forth in this Agreement, the consummation of the purchase and sale of the Shares (the “ Closing ”) shall take place on the close of business on the date hereof at the offices of Maples & Calder in the Cayman Islands (the date on which the Closing occurs is referred to herein as the “ Closing Date ”).

 

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4. Representations and Warranties of Sellers . Each Seller represents and warrants to Purchaser, severally and not jointly with other Sellers and as to such Seller itself that the statements contained in this Section 4 are true and correct.

4.1 Authority and Binding Obligation . Such Seller has all requisite power and authority (and with respect to Sellers that are individuals, full legal capacity) to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action on the part of such Seller. This Agreement constitutes the valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other Laws of general application affecting enforcement of creditors’ rights generally, or (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.

4.2 Title to Shares . Such Seller (i) has good and valid title to the Shares as set forth across its name in the Allocation Schedule under the column entitled “Existing Holdings” beneficially and of record, free and clear of any and all liens, encumbrances, claims, charges, options, security interests, pledges, rights of first refusal, or other title retention agreement or other restrictions of any kind whatsoever (“ Encumbrances ”) other than those arising under the Memorandum and Articles of Association of Target, (ii) immediately prior to the Closing, will have good and valid title to the Shares beneficially and of record, free and clear of any Encumbrances and (iii) will have the sole right to transfer the Shares to Purchaser. Such Seller represents that other than with respect to this Agreement, such Seller is not a party to, or bound by, any agreement, instrument or understanding restricting the transfer of any of the Shares held by Seller or governing the voting of the Shares held by Seller. Such Seller hereby confirms that the number and type of Shares as is set forth across such Seller’s name on the Allocation Schedule is true and correct in all respects.

4.3 No Conflicts . The execution and delivery of this Agreement by such Seller does not, and the consummation of the transactions contemplated hereby will not, conflict with any other commitment or obligation of such Seller, or result in any violation of judgment, order, decree, statute, law, ordinance, rule or regulation applicable to such Seller. No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative or regulatory agency, department, body or commission or any government, any political subdivision thereof or instrumentality (“ Governmental Authority ”) is required by or with respect to Seller in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby.

4.4 Investment Representations . Each Seller receiving any of shares of Parent Common Stock understands that such shares of Parent Common Stock (i) have not been registered under the Securities Act of 1933, as amended (the “ Securities Act ”) and (ii) are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon such Seller’s representations contained in this Agreement. Each Seller who receiving any of shares of Parent Common Stock hereby represents and warrants as follows:

(a) Seller is an “accredited investor” within the meaning of Rule 501(a) promulgated under the Securities Act (an “ Accredited Investor ”).

 

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(b) Seller acknowledges that the Seller Representative, on behalf of, and as an agent and representative of, Sellers, has been provided an opportunity to examine all documents and ask questions of, and has received answers thereto from, Parent and its representatives regarding the business, management, and financial affairs of Parent and its Subsidiaries, and the terms of the transactions contemplated by this Agreement, and the Seller Representative has obtained all traditional information requested by it of Parent and its Subsidiaries and their respective representatives to verify the accuracy of all information furnished to them regarding the acquisition of the Parent Common Stock.

(c) Seller must bear the economic risk of this investment indefinitely unless the shares of Parent Common Stock are registered pursuant to the Securities Act, or an exemption from registration is available.

(d) Seller is acquiring the shares of Parent Common Stock for Seller’s own account for investment only, and not with a view towards their distribution.

(e) Seller acknowledges and agrees that the shares of Parent Common Stock are “restricted securities” as defined in Rule 144 promulgated under the Securities Act as in effect from time to time and must be held indefinitely unless they are subsequently registered under the Securities Act pursuant to the Registration Statement (as defined herein) or an exemption from such registration is available. Seller has been advised or is aware of the provisions of Rule 144, which permits limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things: the availability of certain current public information about the Purchaser and the resale occurring following the required holding period under Rule 144. Each certificate evidencing shares of Parent Common Stock to be issued pursuant to this Agreement shall bear the following legends, as applicable:

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”). SUCH SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION WITHOUT AN EXEMPTION UNDER THE SECURITIES ACT OR AN OPINION OF LEGAL COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.”

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND MAY NOT BE TRANSFERRED TO A “U.S. PERSON” (AS DEFINED IN THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON, IN THE ABSENCE OF COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER THE SECURITIES ACT OR AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.”

and any legends required by state or foreign securities laws.

4.5 No Obligations or Agreements . Except for that certain First Amended and Restated Shareholders Agreement dated December 12, 2007 between Sellers and Target and as set forth in the Disclosure Schedule (as defined in Section 5), such Seller is not a party to any agreement to which Target is also a party nor does Target have any obligation to such Seller for any claims, controversies, actions, causes of action, cross-claims, counter-claims, rights, demands, debts, compensatory damages, liquidated damages, punitive or exemplary damages, other damages, claims for costs and attorneys’ fees, or liabilities of any nature whatsoever in law and in equity, both past and present.

 

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5. Representations and Warranties of Target . Target represents and warrants to Purchaser that the statements contained in this Section 5 are true and correct, except as disclosed in a document of even date herewith and delivered by Target to Purchaser on the date hereof referring to the representations and warranties in this Agreement (the “ Disclosure Schedule ”). The Disclosure Schedule will be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Section 5 and Section 4, and the disclosure in any such numbered and lettered Section of the Disclosure Schedule shall qualify only the corresponding subsection in this Section 5 and Section 4, provided, however, that such disclosure shall also be deemed to qualify each other subsection of this Section 5 and Section 4 to the extent that it is reasonably apparent that such disclosure is responsive to such other subsection without any independent knowledge on the part of the reader regarding the matter disclosed. For purposes of this Section 5, unless the context expressly indicates otherwise, references to the “Target” shall be deemed to include any Subsidiaries of Target, including the China Sub, even if not separately mentioned. As used herein, an entity shall be deemed to be a “ Subsidiary ” of a party if such party directly or indirectly owns, beneficially or of record, at least 50% of the outstanding equity interests of such entity.

5.1 Organization and Qualification . Each of Target and its Subsidiaries is a legal entity duly organized, validly existing and, where applicable, in good standing under the laws of its respective jurisdiction of incorporation or organization. Each of Target and its Subsidiaries has full power and authority to conduct its business to the extent now conducted and as proposed to be conducted, and to own, use and lease its assets and properties. Each of Target and its Subsidiaries is duly qualified to do business and is in good standing in each jurisdiction in which the transaction of its business makes such qualification necessary and failure to be so qualified and in good standing would have a material adverse effect on Target or its Subsidiaries. The China Sub has passed all annual inspections conducted by the relevant PRC Governmental Authorities since its inception. Target has provided to Purchaser correct and complete copies of the organizational documents of Target and its Subsidiaries, including Memorandum and Articles of Association and Bylaws, each as amended to the date of this Agreement, and written resolutions of Target’s meetings of its shareholders and boards of directors. All the organizational documents of Target and its Subsidiaries are valid, complete and updated, and if so required and as applicable, have been duly approved and filed with the appropriate Governmental Authorities.

5.2 Authority and Binding Obligation . Target has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action on the part of Target, including approval of the board of directors and shareholders of Target. This Agreement has been duly executed and delivered by Target and assuming the due authorization, execution and delivery hereof by the parties (other than Target) hereto, constitutes the legal, valid and binding obligations of Target, enforceable against Target in accordance with its terms, except as may be limited by any bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity.

 

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5.3 Capitalization .

(a) The authorized share capital of Target is $50,000 divided into 490,705,431 Common Shares, par value $0.0001 per share, of which 15,271,429 shares are issued and outstanding, 3,571,429 Series A Preferred Shares, par value $0.0001 per share, none of which are issued and outstanding and 5,723,140 Series B Preferred Shares, par value $0.0001 per share, of which 5,723,140 shares are issued and outstanding. The Allocation Schedule sets forth a true and correct description of all issued and outstanding Shares of Target, the record holders thereof and the type and number of each of the Shares held. The Shares are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. All outstanding securities of Target have been issued in compliance with applicable securities laws. Except as disclosed on Section 5.3(a) of the Disclosure Schedule, there are not outstanding (i) any options, warrants or other rights to purchase from Target any shares or other ownership interests in or any other securities of Target, (ii) any securities convertible into or exchangeable for shares or securities of Target or (iii) any other contract, understanding, commitments, rights or obligations of any kind of Target to issue additional shares, warrants or other securities of Target. There are no outstanding contractual obligations of Target to repurchase, redeem or otherwise acquire any outstanding shares of or other ownership interests in Target. Except as disclosed on Section 5.3(a) of the Disclosure Schedule, there are no voting trusts, stockholders agreements, proxies or other agreements or understandings to which Target or Sellers are a party with respect to the voting or transfer of the Shares.

(b) Other than the China Sub, Target does not have any Subsidiaries nor does it presently own, directly or indirectly, any capital stock or other equity interest in any other corporation, limited liability company, partnership, joint venture or other entity. The registered capital of the China Sub is US$14,000,000.00, which has been duly and validly subscribed, fully paid and injected in a timely manner in accordance with the relevant PRC laws and regulations. China Sub has not reduced or increased such registered capital as of the date hereof.

(c) There are not outstanding (i) any options, warrants or other rights to purchase from any Subsidiary of Target any capital stock or other ownership interests in or any other securities of any Subsidiary of Target, (ii) any securities convertible into or exchangeable for shares of such capital stock or securities of any Subsidiary of Target or (iii) any other contract, understanding, commitments, rights or obligations of any kind for any Subsidiary of Target to issue additional shares of capital stock, options, warrants or other securities of any Subsidiary of Target. There are no outstanding contractual obligations of Target’s Subsidiaries to repurchase, redeem or otherwise acquire any outstanding shares of capital stock or other ownership interests in any Subsidiary. There are no voting trusts, stockholders agreements, proxies or other agreements or understandings to which any Subsidiary of Target or Sellers are a party with respect to the voting or transfer of any securities of any Subsidiary of Target.

5.4 No Conflicts . Except as disclosed on Section 5.4 of the Disclosure Schedule, the execution and delivery of this Agreement by Target does not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of payment, termination, cancellation or acceleration of any material obligation or loss of any material benefit, or result in the imposition of any Encumbrance on any assets or property of Target, under (a) any of the organizational documents of Target or (b) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Target’s properties or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority is required by or with respect to Target in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby.

 

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5.5 Financial Information .

(a) Target has provided to Purchaser true and complete copies of: (i) the consolidated audited balance sheets of Target as of each of the years ended December 31, 2008 and 2009 and the related consolidated statements of operations and statements of cash flows for the calendar year then ended (ii) the consolidated unaudited balance sheets of Target as of the year ended December 31, 2010 (the “ Recent Balance Sheet ”) and the related consolidated statements of operations and statements of cash flows for the calendar year then ended and (iii) the consolidated unaudited balance sheets of Target as of the fiscal quarter ended March 31, 2011 (the “ Q1 Balance Sheet ”) and the related consolidated statements of operations and statements of cash flows for the quarter then ended ((i), (ii) and (iii) collectively, the “ Financial Statements ”). The Financial Statements (including, in each case, any notes thereto) (A) were derived from and in accordance with the books and records of Target, (B) were prepared in accordance with U.S. GAAP applied on a basis consistent with the periods presented (except that the unaudited financial statements do not have notes thereto and that the Financial Statements do not account for share based compensation based upon an independent share valuation), (C) present fairly in all material respects the financial condition of Target and its Subsidiaries as at the respective dates thereof and for the respective periods indicated therein, except as otherwise noted therein (subject to normal and recurring year-end adjustments, the effect of which will not, individually or in the aggregate, be materially adverse) and (D) are true, complete and correct in all material respects.

(b) Target has in place systems and processes that are adequate and customary for private companies operating primarily in the PRC at the same stage of development as Target and that (i) provide reasonable assurances regarding the reliability of the Financial Statements and (ii) in a timely manner accumulate and communicate to Target’s principal executive officer and principal financial officer the type of information that would be required to be disclosed in the Financial Statements (such systems and processes are herein referred to as the “ Controls ”). The accounting books of the China Sub are complete and created in accordance with current PRC laws, regulations, rules and PRC GAAP, and its financial statements are prepared in accordance with current PRC laws, regulations, rules and PRC GAAP. The aforementioned accounting books and financial statements completely, truly and accurately reflect in all material respects the financial status and profits and losses of China Sub by the end of relative fiscal periods. Target and its Subsidiaries have not received notice of any material complaint, allegation, assertion or claim regarding the appropriateness or operations of the Controls that has not been resolved prior to the date hereof. There have been no instances of fraud, whether or not material, that involves management or other employees that have a significant role in Target’s Controls which occurred during any period covered by the Financial Statements.

5.6 No Undisclosed Liabilities . Target has no other liabilities or obligations of any nature (whether known or unknown and whether absolute, accrued, contingent or otherwise) except for liabilities or obligations reflected or reserved against in the Financial Statements or current liabilities incurred since December 31, 2010 in the ordinary course of business which, individually or in the aggregate, are not material in nature or amount, other than liabilities arising in connection with the negotiation and consummation of the transactions contemplated hereunder. Target does not have any “off balance sheet” arrangements consisting of any transaction, agreement or other contractual arrangement to which an entity unconsolidated with Target is a party, under which Target has any obligation under a guarantee contract, any obligation under a contract that would be accounted for as a derivative instrument, any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets, or any obligation arising out of a variable interest in an unconsolidated entity providing for financing, liquidity, market risk or credit risk support to, or engaging in leasing, hedging or research and development services with, Target.

 

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5.7 Absence of Changes . Since December 31, 2010, Target and its Subsidiaries have conducted their business in the ordinary course consistent with past practice and other than in connection with or for purposes of the transactions contemplated hereunder, there has not occurred (a) any change, event or condition (whether or not covered by insurance) that has or could reasonably be expected to resulted in a material adverse effect on Target or its Subsidiaries; (b) any acquisition, sale or transfer of any material asset of Target or its Subsidiaries other than in the ordinary course of business and consistent with past practice; (c) (i) any change in accounting methods or practices (including any change with respect to revenue recognition policies or any change in depreciation or amortization policies or rates) by Target or its Subsidiaries or (ii) any revaluation by Target or its Subsidiaries or any of its assets; (d) the entry of or the conclusion of any Material Contract (as defined in Section 5.8) entered into by Target or its Subsidiaries, other than in the ordinary course of business and as provided to Purchaser, or any material amendment or termination of, or default under, any Material Contract to which Target or its Subsidiaries is a party or by which it is bound, other than in the ordinary course of business and as provided to Purchaser; (e) any amendment or change to the Second Amended and Restated Memorandum and Articles of Association of Target; (f) any increase in or modification of the compensation or benefits payable or to become payable by Target or its Subsidiaries to any of its directors or employees; (g) any acceleration of the shipment of Products to its customers outside of the ordinary course; or (h) any agreement by Target or its Subsidiaries to do any of the things described in the preceding clauses (a) through (h) (other than negotiations with Purchaser and its representatives regarding the transactions contemplated by this Agreement and similar negotiations with other third parties).

5.8 Contracts and Commitments .

(a) Target has provided Parent or Purchaser with, or has otherwise given Parent or Purchaser access to an online electronic datasite containing, a true and correct copy of all Material Contracts. “ Material Contract ” means any contract, agreement or commitment to which Target or its Subsidiaries is a party and in which Target or its Subsidiaries has any current or ongoing obligation, commitment or liability:

(i) with expected receipts or expenditures in excess of Two Hundred Thousand Dollars ($200,000) under such Material Contract;

(ii) requiring Target to indemnify any Person in excess of Two Hundred Thousand Dollars ($200,000), provided however, that an indemnity obligation shall be deemed to be in excess of such amount unless the magnitude of such obligation is expressly capped at Two Hundred Thousand Dollars ($200,000);

(iii) granting any exclusive rights or any rights to any party under any Target Registered Intellectual Property Rights (as defined in Section 5.10(a) below);

(iv) relating to, or evidencing, or guaranteeing, or providing security for, indebtedness for borrowed or loaned money or for the deferred purchase price of property (whether incurred, assumed, guaranteed or secured by any asset) that involves financial obligations on the part of the Target in excess of $200,000;

(v) with any Key Customer (as defined in Section 5.24(a)) or Distributor (as defined in Section 5.24(b));

(vi) with any director, officer or affiliate of Target;

 

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(vii) that is not entered in the ordinary course of business;

(viii) that in any way purports to prohibit, impair or restrict the business activity of Target or Target’s acquisition of property (tangible or intangible), or to limit the freedom of Target to engage in any line of business or to compete with any third party in any jurisdiction;

(ix) relating to the employment of, or the performance of services by, an employee or consultant, pursuant to which Target is or may become obligated to make any severance (other than as required by PRC laws and regulations), termination, change of control or similar payment to any current or former employee or director, or pursuant to which Target is or may become obligated to make any bonus, commission or similar payment (other than payments constituting base salary) to any current or former employee or director;

(x)(a) relating to the acquisition, issuance, voting, registration, sale or transfer of any securities of Target or its Subsidiaries, (b) providing any Person with any preemptive right, right of participation, right of maintenance or any similar right with respect to any securities of Target, or (c) providing Target or its Subsidiaries with any right of first refusal with respect to, or right to repurchase or redeem, any securities;

(xi) containing any grant by Target to a third party, or to Target by a third party, of any assignment, license, covenant not to sue, consent, coexistence right, release, or immunity, with respect to any Intellectual Property Rights (as defined in Section 5.10(a) below) (other than purchase orders with customers and vendors entered into in the ordinary course of business, employee invention assignment and non-disclosure agreements, and licenses of Intellectual Property Rights incident to the purchase of tangible properties), except for any of the foregoing related to the use of generally available, off the shelf, computer software for a total, enterprise-wide fee of no more than Ten Thousand U.S. Dollars ($10,000) in any year of the Material Contract;

(xii) the purchase, sale, lease or other disposition of equipment, goods, materials, supplies, or capital assets, or for the performance of services which are not terminable without penalty on thirty (30) days’ notice (other than purchase orders with customers and vendors entered into in the ordinary course of business), in any case involving more than One Hundred Thousand Dollars ($100,000);

(xiii) under which Target is lessor of or permits any third party to hold or operate any personal property owned or controlled by Target, that cannot be terminated on sixty (60) days notice or less without payment of any material penalty by Target;

(xiv) providing for collective bargaining, or similar arrangement (other than as solely required under PRC law);

(xv) granting powers of attorney or similar authorizations by Target to third parties (other than letter of authorizations solely for administrative purposes in the ordinary course of business, none of which are material to Target or its operations);

(xvi) that, as a result of the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, will require (or purport to require) Target to obtain from any Person consent relating to a change in control of Target;

 

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(xvii) that, as a result of the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, will require (or purports to require) Target to grant any license or other right with respect to any of its Intellectual Property Rights, or be obligated to pay any material royalties or other amounts;

(xviii) relating to the generation of data or information to support the registration or approval of any Product, including agreements relating to any human clinical trials or pre-clinical toxicology data;

(xix) relating to sponsorship of any research or development work, including by any university or institution or any faculty member, student or other investigator or researcher thereof;

(xx) relating to the distribution, marketing or sales of any Product;

(xxi) relating to express obligations imposed to monitor or report safety-related events concerning any Product, and the acquisition, retention, handling or sharing of any data or information related to such events; or

(xxii) that is otherwise material to Target.

All Material Contracts of Target or its Subsidiaries are listed or, in certain circumstances where the contracts are too numerous to practicably list, are collectively described in Section 5.8(a) of the Disclosure Schedule.

(b) With respect to each Material Contract: (i) the Material Contract is legal, valid, binding and enforceable and in full force and effect with respect to Target or its Subsidiaries and, to Target’s knowledge, is legal, valid, binding, enforceable and in full force and effect with respect to each other party thereto, in either case subject to the effect of bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and except as the availability of equitable remedies may be limited by general principles of equity; (ii) except as set forth in Section 5.8(b) of the Disclosure Schedule, the Material Contract will continue to be legal, valid, binding and enforceable and in full force and effect immediately following the Closing in accordance with its terms as in effect prior to the Closing, subject to the effect of bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and except as the availability of equitable remedies may be limited by general principles of equity; and (iii) neither Target nor, to Target’s knowledge, its Subsidiaries or any other party is in material breach or default of the terms thereof, and no event has occurred that with notice or lapse of time would constitute a material breach or default of the terms thereof by Target or its Subsidiaries or, to Target’s knowledge, by any such other party, or permit termination, modification or acceleration, under such Material Contract. No party to a Material Contract has threatened in writing termination, diminution of benefits to Target or its Subsidiaries, or non-renewal of, any Material Contract, nor has Target or its Subsidiaries received any written notice or written warning of any alleged material nonperformance, material delay in delivery or other material noncompliance by Target or its Subsidiaries. Neither Target nor its Subsidiaries is a party to any oral contract or agreement.

(c) Without limiting the foregoing Section 5.8(b)(iii), Target and its Subsidiaries, have not engaged in, and as of the date of this Agreement are not engaged in or planning, any conduct that would breach Target’s or any of its Subsidiaries’ obligations of non-competition under any Material Contract, including the promotion, distribution or sale by Target or its Subsidiaries of any Product that would compete with any other Product that Target or its Subsidiaries has the right or obligation to promote, distribute or sell.

 

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5.9 Taxes . For the purposes of this Agreement, “ Tax ” and collectively “ Taxes ” mean any and all federal, state and local taxes of any country, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, stamp transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts and any obligations under any agreements or arrangements with any other Person with respect to such amounts and including any liability for taxes of a predecessor entity; and “ Tax Return ” means any return, declaration, report, claim for refund, information return or other document filed or required to be filed or supplied to a tax authority in connection with the determination, assessment, collection or payment of Taxes or as otherwise required by laws, regulations or administrative requirements relating to any Tax, including any schedule or attachment thereto, and including any amendment thereof. Except as described on Section 5.9 of the Disclosure Schedule:

(a) Target has filed or caused to be filed on a timely basis, all Tax Returns required to have been filed. All such Tax Returns are complete and correct in all material respects. Target has provided to Purchaser correct and complete copies of its national, provincial, local and foreign income and franchise Tax Returns which it has filed since its inception and has made available to Purchaser all other Tax Returns which have been filed by Target. Target has not received written notice from any state, local, or foreign taxing jurisdiction that it has not filed a Tax Return required to be filed by it.

(b) Target has, within the time and in the manner prescribed by law, paid all Taxes that were due and payable, whether or not shown on any Tax Return, and Target will pay, within the time and in the manner prescribed by law, all Taxes that become due and payable on or before the Closing. As of the Closing Date, Target’s liability for any unpaid Taxes will not exceed the reserve for unpaid Taxes then carried on such Target’s books and records.

(c) There is no agreement, waiver or consent providing for an extension of time with respect to the assessment of any Taxes or the filing of any Tax Returns.

(d) There are no outstanding (i) powers of attorney granted by Target concerning any Tax matter, (ii) agreements entered into with any taxing authority that would have a continuing effect on Target after the Closing Date or (iii) Encumbrances (and immediately following the Closing Date there will be no Encumbrances) on the assets of Target relating to or attributable to Taxes other than Encumbrances for Taxes not yet due and payable. Target is not a party to any Tax allocation or sharing agreement. Target is not a participant in any joint venture, partnership or similar arrangement.

(e) Except as set forth in Section 5.9(e) of the Disclosure Schedule, Target has never been audited by any taxing authority. There is no examination, action, suit, Proceeding, investigation, audit, claim demand, deficiency or additional assessment against Target underway or pending (or any threat of any of the foregoing that has been communicated to Target) with respect to any Tax. No waivers of statutes of limitations have been given with respect to any material Taxes with respect to Target, which waivers are in effect as of the date hereof.

(f) Target does not have, or has ever had, any “permanent establishment” as defined in any applicable tax convention, outside the country of Target’s place of organization and Target has not received any notice from any taxing authority in a jurisdiction where such entity has not filed Tax Returns that it may be subject to taxation in such jurisdiction. All related party transactions involving Target are in compliance with applicable transfer pricing principles.

 

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(g) All Taxes required to be withheld or collected by Target on or before the Closing have been or will be withheld or collected and paid when due to the appropriate agency or authority. Target has complied with all information reporting requirements with respect thereto.

(h) Target will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date solely as a result of any: (i) change in method of accounting for a taxable period ending on or prior to the Closing Date; (ii) “closing agreement” with any tax authority executed on or prior to the Closing Date; (iii) installment sale or open transaction disposition made on or prior to the Closing Date; (iv) prepaid amount received on or prior to the Closing Date.

(i) Target has not engaged in, or been a party to, any transaction or series of transactions or scheme or arrangement of which the main purpose, or one of the main purposes, was or could be construed to be the illegal evasion of Taxes.

5.10 Intellectual Property Rights .

(a) For purposes of this Section 5.10(a), the term “ Intellectual Property Rights ” means any and all industrial and intellectual property rights and all rights associated therewith, whether registered or unregistered and including all common law rights, throughout the world, including all copyrights, copyright registrations and applications therefor (“ Copyrights ”); all trademarks and service marks, trademark and service marks registrations, trademark and service mark applications, tradenames, logos, trade dress and any and all goodwill associated with and symbolized by the foregoing items (“ Marks ”); all Internet domain name registrations, Internet and World Wide Web URLs or addresses (collectively, “ Domain Names ”); all patents, and applications therefore and all reissues, reexaminations, substitutions, divisions, renewals, extensions, supplemental protection certificates, provisionals, continuations and continuations-in-part (“ Patents ”); all trade secrets, moral rights, right of publicity, right of privacy, authors’ rights, contract and licensing rights (“ Proprietary Rights ”); and all other intellectual property rights as may exist now and/or hereafter come into existence and all renewals and extensions thereof, regardless of whether such rights arise under the law of the United States or any other state, country or jurisdiction throughout the world. The term “ Target Registered Intellectual Property Rights ” shall mean all United States, international and foreign: (A) Patents; (B) registered Marks, applications to register trademarks, intent-to-use applications, or other registrations or applications related to the Marks; (C) registered Domain Names; (D) registered Copyrights and applications for copyright registration; and (E) any other Intellectual Property Right that is the subject of an application, certificate, filing, registration or other similar document; in each case issued, filed with, or recorded by any Governmental Authority and owned by, or registered or filed in the name of, Target. “ In-Bound Licenses ” means all licenses, sublicenses and other contracts pursuant to which a third party authorizes Target to use, practice any rights under, or grant sublicenses with respect to, any Intellectual Property Rights owned or controlled by such third party. “ Target-Owned IP Rights ” means all Intellectual Property Rights, including Target Registered Intellectual Property Rights, that are owned by or filed in the name of Target (whether exclusively, jointly with another Person, or otherwise). “ Target IP Rights ” means all Target-Owned IP Rights and all of Target’s Intellectual Property Rights under the In-Bound Licenses. “ Out-Bound Licenses ” means all licenses, sublicenses and other contracts pursuant to which Target authorizes a third party to use, practice any rights under, or grant sublicenses with respect to, any Target IP Rights.

 

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(b) Section 5.10(b) of the Disclosure Schedule sets forth a true, accurate and complete list of all Target Registered Intellectual Property Rights and a brief description of all material, unregistered Intellectual Property Rights (other than trade secret rights) owned by Target including all Internet addresses for websites, or other Domain Names, owned and/or operated by or for Target. Target possesses unencumbered and unrestricted exclusive ownership of all Target Registered Intellectual Property Rights, including as set forth on Section 5.10(b) of the Disclosure Schedule. For each item of such Target Registered Intellectual Property Rights, Section 5.10(b) of the Disclosure Schedule sets forth the applicable applicant or registrant, jurisdiction, and application or registration number. All necessary registration, maintenance and renewal fees due in connection with all Target Registered Intellectual Property Rights have been paid timely, and all documents, recordations, and certificates required to be filed, including any necessary responses to office actions, affidavits of use, renewal applications, assignment recordals and other documents and certificates in connection with such registered Intellectual Property Rights have been filed (when due) with the appropriate authorities in the relevant jurisdictions for the purposes of prosecuting, maintaining and perfecting such Target Registered Intellectual Property and recording Target’s ownership interests therein. Section 5.10(b) of the Disclosure Schedule sets forth a list of all actions that are required to be taken by Target within 90 days of the date hereof with respect to any of Target Registered Intellectual Property in order to avoid prejudice to, impairment or abandonment of such Target Registered Intellectual Property.

(c) Section 5.10(c) of the Disclosure Schedule sets for a true, accurate and complete list of all In-Bound Licenses, excluding solely “shrink-wrap” or similar commercially available end-user licenses. Except as expressly stated on Section 5.10(c) of the Disclosure Schedule, (i) each In-Bound License is in effect as of the date hereof and is a valid and binding agreement of Target, (ii) none of the In-Bound Licenses have expired or been terminated, (iii) Target has not issued or received, and is not aware of, any notice, or intent to issue a notice, that could trigger the termination of any of the In-Bound Licenses, (iv) to the knowledge of Target, no party to any of the In-Bound Licenses is, or is accused of being, in material breach of any agreement or obligation within the In-Bound Licenses, and (v) Target has not assigned or otherwise transferred to any Person any of the In-Bound Licenses, nor any rights or obligations thereunder.

(d) Target and its Subsidiaries are not parties to any Out-Bound Licenses, or any agreements which grant any Person rights to or under any Target IP Rights or grants any Person the right to sublicense any Target IP Rights.

(e) To the knowledge of Target, none of the Products, now or in the past, infringes upon, misappropriates or misuses any proprietary rights or Intellectual Property Rights of any other Person, and Target has not received any notice of any such infringement.

(f) To the knowledge of Target, (i) there is no unauthorized use, unauthorized disclosure, infringement or misappropriation, or other violation any Target IP Rights by any Person, including current and former employees of Target and (ii) Target has not filed any lawsuit or issued any written communication to any Person alleging any such infringement, misappropriation, or other violation, or invited any Person to take a license with respect to any Target IP Rights.

(g) Target has not been sued in any Proceeding (or received any written notice or, to the knowledge of Target, threat) that involves (i) any claim of infringement, misuse, misappropriation or other violation of any Intellectual Property right of any Person or, (ii) that contests the validity, ownership or right of Target to exercise any Intellectual Property Right or operate its business as currently conducted. Target has not received any written communication that involves an offer to license Target or grant Target any other rights or immunities under any Intellectual Property Right of any Person, or any statement that Target must or should obtain such a license or grant, other than the Intellectual Property Rights licensed to Target pursuant to an In-Bound License.

 

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(h) Target has not received any opinion from its professional advisors, including opinion of legal counsel, that any Product or the operation of the business of Target, as previously or currently conducted, or as currently proposed to be conducted by Target, infringes or misappropriates any Intellectual Property Rights of any Person (other than the Target IP Rights).

(i) Target owns or possesses sufficient legal ownership or license rights to all Intellectual Property Rights necessary for the operation of Target’s business as now conducted and as proposed to be conducted without any known conflict with, infringement upon, or misappropriation of, the rights of any other Person, failure to so own or possess which will have a material adverse effect on Target or its Subsidiaries. Without limiting the foregoing, the Target IP Rights include any and all Intellectual Property Rights that are used or practiced in any manner in the conduct of the business of Target as currently conducted or as currently proposed to be conducted by Target. Target is the sole owner of all right, title and interest in and to all of the Target-Owned IP Rights, free and clear of all Encumbrances and restrictions whatsoever, and has not granted any rights or licenses in, to or under any Target-Owned IP Rights.

5.11 Real Property . Target does not own any real property and is not a party to any agreement or option to purchase any real property or interest therein. Section 5.11 of the Disclosure Schedule sets forth a list of each lease or sublease for real property to which Target or its Subsidiaries is a party or which covers any premises at which Target operates its business or maintain any of its assets. Target or its Subsidiaries have, subject to the terms and conditions of its leases, a valid leasehold interest in each leased real property listed in Section 5.11 of the Disclosure Schedule, free and clear of any and all Encumbrances. Neither Target nor its Subsidiaries have (i) made any material alterations, additions or improvements to any leased premises that are required to be removed (or of which any landlord or sublandlord could require removal) at termination of the applicable lease term, except for customary office renovations and decorations, or (ii) entered into any written sublease, license, option, right, concession or other agreement or arrangement granting to any Person the right to use or occupy any real property leased by Target or its Subsidiaries or any portion thereof or interest therein. To the knowledge of Target, no zoning or similar land use restrictions are presently in effect or anticipated or proposed by any governmental entity that would impair the operation of the businesses of Target or its Subsidiaries as presently conducted or which would impair the use, occupancy and enjoyment of any of the real property leased by Target or its Subsidiaries.

5.12 Privacy and Data Collection .

(a) To the knowledge of Target, no Person has obtained unauthorized access to any personally identifiable information stored on the computer systems owned or operated by Target, nor has there been any other unauthorized acquisition of material computerized data of Target that has compromised the security, confidentiality or integrity of any such information. Target has complied with all applicable legal requirements and its internal privacy policies relating to the use, collection, storage, disclosure and transfer of any personally identifiable information collected by it or by third parties having authorized access to the records of Target. The execution, delivery and performance of this Agreement will comply with all applicable legal requirements relating to privacy and with Target’s privacy policies. Target has not received a complaint regarding the collection, use or disclosure of personally identifiable information.

(b) Target has implemented and maintains a security plan, customary for private companies operating primarily in China, which (i) identifies internal and external risks to the security of all trade secret, confidential or non-public information included in the Target IP Rights, including personally identifiable information; (ii) implements, monitors and improves adequate and effective administrative, electronic and physical safeguards to control those risks; and (iii) maintains notification procedures in compliance with applicable legal requirements in the case of any breach of security compromising unencrypted data containing personally identifiable information. Target has not experienced any breach of security or otherwise unauthorized access by third parties to the Confidential IP Information, including personally identifiable information in Target’s possession, custody or control.

 

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5.13 Accounts Receivable . The accounts receivable of Target shown on the Recent Balance Sheet and the Q1 Balance Sheet and the accounts receivable arising since the Recent Balance Sheet, (a) arose from bona fide transactions engaged in or entered into by Target in the ordinary course of business, (b) except to the extent of any reserve for doubtful accounts, have been collected or, to the knowledge of Target, are collectible in the book amounts thereof and (c) are not subject to any claim of offset, recoupment, setoff, or counter-claim and Target has no knowledge of any specific facts or circumstances that they believe would give rise to any such claim. The allowance for collection losses on the Recent Balance Sheet and Q1 Balance Sheet was established in the ordinary course of business consistent with past practice and in accordance with U.S. GAAP.

5.14 Officers, Directors and Bank Accounts .

(a) Section 5.14(a) of the Disclosure Schedule lists the names of all directors and names and titles of all officers above the director level of Target and each of its Subsidiaries as of the date hereof.

(b) Section 5.14(b) of the Disclosure Schedule lists the name and location of each bank or other institution in which Target and any of its Subsidiaries has any deposit account or safe deposit box, all account numbers, and the names of all Persons authorized to act in connection therewith.

5.15 Transactions with Interested Persons . Neither the officers or directors of Target, nor to the knowledge of Target, their respective spouses, children, or other Person living in their household: (a) own directly or indirectly any more than 5% equity interest in, or serves as an officer or director of, any client, competitor or supplier of Target, its Subsidiaries or any organization which has a contract or arrangement with Target; (b) have any loans or receivables outstanding to Target or its Subsidiaries other than cash advances made from time to time pursuant to Target’s policies and practices and reflected in Target’s Financial Statements; (c) are otherwise indebted to Target or its Subsidiaries; (d) own any property, real or personal, tangible or intangible, required for or used in the businesses of Target; or (e) are owed any money or property by Target or its Subsidiaries, other than wages or salary earned in the ordinary course of business. The consummation of the transactions contemplated by this Agreement will not (either alone, or upon the occurrence of any act or event, or with the lapse of time, or both) result in any benefit or payment (severance or otherwise) arising or becoming due from Target or its Subsidiaries or any of its successors or assigns (including Purchaser) of any thereof to any Person (including Target and its Subsidiaries).

5.16 Insurance . Section 5.16 of the Disclosure Schedule sets forth a true, correct and accurate list (including, without limitation, the name of the carrier, the coverage limits and premium amounts) of each of the policies of insurance with respect to the business of Target, each of which policies is in full force and effect. Target has provided to Purchaser a true, correct and complete copy of each such insurance policy. All of the insurable properties of Target are insured. Target has no knowledge that any of such policies will not be renewed (upon the same terms and conditions as are currently in effect) upon the expiration thereof. Target has not been refused any insurance by an insurance carrier during the past three years nor has any insurance policy been cancelled with respect to Target or its business. There is no claim by Target pending under any of such policies. All premiums due and payable under all such policies have been paid, and Target is otherwise in compliance in all material respects with the terms of such policies. There have been no historical gaps in Target’s insurance policies. Target’s current and historical policy limits have not been materially eroded by the payment of claims, and none of the current or historical insurers of Target have filed for protection under any applicable bankruptcy laws or is otherwise in the process of liquidating. There are no claims against Target being handled under a reservation of rights letter.

 

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5.17 Litigation . There are no asserted claims, disputes, legal actions, decrees, judgments, orders, settlement agreements, arbitration or other proceeding, suit or governmental investigation (“ Proceeding ”) currently pending or, to the knowledge of Target, threatened against Target, its officers or directors, or its Subsidiaries. Target and its Subsidiaries are not subject to any outstanding, nor is in violation of or in default with respects too, any judgment, writ, injunction, settlement agreement, order, or decree.

5.18 Books and Records . Target has made and will make available for inspection by Parent and Purchaser upon reasonable request all the books and records relating to the business of Target and each of its Subsidiaries. Such books and records of Target and each of its Subsidiaries have been maintained in the ordinary course of business. All documents furnished or caused to be furnished to Parent and Purchaser by Target are true and correct copies, and there are no amendments or modifications thereto except as set forth in such documents.

5.19 Corruption . To the knowledge of Target, neither Target nor its Subsidiaries, nor any director, officer, employee or other person associated with or acting on behalf of Target or its Subsidiaries (a) has made any direct or indirect unlawful payment or offer of payment of anything of value to any official, representative or employee of any government or government-affiliated entity (including any state-owned or partially state-owned entity), any political party official, or any candidate for political office, in each case in violation of the applicable anti-corruption laws of jurisdictions in which the Target or its Subsidiaries conducts its businesses or to which it is otherwise subject, (b) has violated any other anti-bribery or anti-corruption laws of any jurisdiction to which Target or its Subsidiaries are subject, or (c) has made any bribe, promise of payment, rebate, payoff, influence payment, kickback or other unlawful payment in violation of the laws of jurisdictions in which the Target or its Subsidiaries conduct their business. Further, the Target has represented that it and its Subsidiaries (x) are not party to or beneficiaries of any contract or agreement, including any product purchasing agreement, that was the product of or that was influenced by the unlawful payment or promise of payment of anything of value to any government official, representative or employee; and (y) do not operate in the United States or the United Kingdom. For purposes of the foregoing sentence, “operate” shall mean market, produce, develop products, hold assets and/or bank accounts, maintain an office, and/or conduct regular business operations.

5.20 Compliance with Laws .

(a) Each of Target and its Subsidiaries has conducted and is conducting its business within the permitted scope of its business and in material compliance with all material laws, statutes, rules, regulations, decrees or orders of any governmental entity applicable to it and its properties. The Target has represented that it and its Subsidiaries do not operate in the United States and the United Kingdom. For purposes of the foregoing sentence, “operate” shall mean market, produce, develop products, hold assets and/or bank accounts, maintain an office, and/or conduct regular business operations. Neither Target nor its Subsidiaries has received notice of, or has otherwise had or obtained knowledge of, any material violation of any material law, statute, rule, regulation, decree or order of any governmental entity, in each case applicable to any of Target’s or its Subsidiaries’ properties or Products.

 

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(b) Each of Target and its Subsidiaries holds all material permits, authorizations licenses, certificates, registrations, exemptions and approvals of all governmental agencies or entities which are necessary for the businesses and operations of Target and its Subsidiaries, as applicable, as currently conducted and as proposed to be conducted (the “ Permits ”), and has complied in all material aspects with all laws, regulations or orders applicable to Target and its Subsidiaries. There is no fine or penalty relating to any such Permit or arising from any violation of any such Permit. Each such Permit is valid, binding and in full force and effect, and has passed all inspections such as the annual inspections requested by the Governmental Authorities regarding such approval, license or certificate. Neither Target nor any of its Subsidiaries has received any notice or communication from or on behalf of any governmental agency or entity (i) alleging any violation of any Permit or that Target or any of its Subsidiaries requires any Permit required for its business that currently is not held by Target or the applicable Subsidiary, or (ii) requesting Target or any of it Subsidiaries take any compliance or remedial action in respect of any activities carried out directly or indirectly by Target or any of it Subsidiaries. Except for routine annual inspections, no regulatory agency or governmental body is currently auditing or, to Target’s knowledge, intending to audit Target and its Subsidiaries.

(c) All Product (as defined in Section 5.24(c)) registrations and approvals which Target or its Subsidiaries have assisted in successfully obtaining, are current and valid, and to the knowledge of Target, all other Product registrations and approvals which Target or its Subsidiaries have been involved with, are current and valid. No additional registrations or approvals with respect to Target are required for the operation of Target’s business as now conducted in all material respects.

(d) To the knowledge of Target, there has not occurred any event, happening or fact which threatens or otherwise puts into question the validity of any Target’s claims with respect to its Products. Target has not received any notice (written or oral) or correspondence from the any governmental or regulatory agency or from any other Person which questions Target’s ability to promote, market or distribute the Products as currently being promoted, marketed or distributed or as Target plans to promote, market or distribute such Products in the future, or which questions Target’s claims made with respect to its Products. To Target’s knowledge, no governmental or regulatory agency is currently investigating or threatening to investigate any claim made by Target with respect to its Products.

5.21 Employees; Labor Relations .

(a) Except as solely required by PRC law and except as set forth on Section 5.21(a) of the Disclosure Schedule, no director, officer or employee of Target or any of its Subsidiaries or consultant who provides services to Target or any of its Subsidiaries (such director, officer, employee or consultant, collectively, the “ Service Providers ”) is subject to any contracts, written or unwritten, that specify a particular employment or service term of more than one (1) year. Target and its Subsidiaries do not have any contractual obligation to pay any of such Service Providers any severance benefits in connection with their termination of employment or service, except as required by PRC law.

(b) To the knowledge of Target, none of the key Service Providers have a present intention to terminate his, her or its employment with either Target or, as applicable, any of its Subsidiaries, whether before, at or after the Closing. Neither Target nor its Subsidiaries has a present intention to terminate the employment of any of the key Service Providers.

 

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(c) To the knowledge of Target, no Service Provider is a party to, or is otherwise bound by, any agreement, including any confidentiality, non-competition or proprietary rights agreement, between such employee and any other Person that adversely affects or will affect the performance of that Service Provider’s duties as Service Provider of Purchaser or its affiliates following the Closing Date.

(d) Target and its Subsidiaries are in compliance in all material respects with, and there are no outstanding claims against Target or any of its Subsidiaries alleging that Target or any of its Subsidiaries is not in material compliance with any national, provincial or other applicable PRC laws respecting employment and employment practices, terms and conditions of employment and wages and hours with respect to the Service Providers including, without limitation, employment standards, occupational health and safety, pay equity and employment equity, or that Target or any of its Subsidiaries has been engaged in any unfair labor practice with respect to its employees.

(e) There is not presently pending or, to the knowledge of Target, threatened by any employee of Target or any of its Subsidiaries any: (i) strike, slowdown, picketing or work stoppage; or (ii) charge, grievance proceeding, unfair labor practice complaint or other claim against or affecting Target or any of its Subsidiaries relating to the alleged violation of any law pertaining to labor relations or employment matters (including any concerning wages, salaries, holidays, paid time off, insurance, pension, illness injury or disability).

(f) Except as required by PRC law, neither Target nor any of its Subsidiaries is a party to any union agreement or collective bargaining agreement, and there are no work rules or practices agreed to between Target or any of its Subsidiaries, on the one hand, and any labor organization or employee organization, on the other hand.

(g) No employee of Target or any of its Subsidiaries is on long-term disability leave, or receiving compensation for employment related injuries.

(h) All accruals for unpaid vacation pay, premiums for unemployment insurance, health premiums, pension plan premiums or any other governmental fees or charges relating to the employees of Target or any of its Subsidiaries, accrued wages, salaries and commissions and employee benefit plan payments with respect to the employees of Target or any of its Subsidiaries have been accurately reflected in the books and records of Target or the applicable Subsidiary.

(i) Section 5.21(i) of the Disclosure Schedule contains a complete and accurate list of all of Service Providers of Target and its Subsidiaries as of the date hereof.

5.22 Employee Benefit Matters . For the purposes of this Agreement, “ Employee Plan ” means any employee benefit plan and any other profit sharing, pension, cash balance, compensation, deferred compensation, stock option, stock purchase, incentive, fringe benefit, severance, post-retirement, scholarship, disability, sick leave, vacation, individual employment, consulting or compensation, commission, bonus, payroll practice, retention or other plan, agreement, policy, trust fund or arrangement maintained, sponsored, participated in or contributed to by Target or any of its Subsidiaries at any time preceding the Closing Date or that has been approved by Target or any of its Subsidiaries before the Closing Date but is not yet effective, or with respect to which Target or any of its Subsidiaries has any liability or other obligation at any time preceding the Closing Date.

 

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(a) Section 5.22(a) of the Disclosure Schedule contains an accurate and complete list of each Employee Plan which Target or any of its Subsidiaries maintains or sponsors (or have ever maintained or sponsored) with respect to employees of Target or any of its Subsidiaries (the “ Listed Plans ”). Target and its Subsidiaries have made available to Parent and Purchaser with respect to each Listed Plan copies of the current plan documents, including all amendments. There are no other material benefits to which any employee of Target or any of its Subsidiaries is entitled or any employee benefit plan for which Target or any of its Subsidiaries has any obligation or liability for which Target or any of its Subsidiaries, Purchaser or Parent will have any obligation or liability after the Closing Date. Target and its Subsidiaries have complied, and are now in compliance, in all material respects with all provisions of laws affecting the Listed Plans, including all laws and regulations applicable to all of Target’s or any of its Subsidiaries’ employee benefit plans, programs, policies, practices, and other arrangements providing benefits to any current or former employee, officer or director of Target or any of its Subsidiaries or beneficiary or dependent thereof, whether or not written, and whether covering one Person or more than one Person sponsored or maintained by Target or any of its Subsidiaries, to which Target or any of its Subsidiaries contribute or is obligated to contribute, or with respect to which Target or any of its Subsidiaries has or may have any material liability, and each Listed Plan has been maintained, funded, and administered in accordance with its material terms.

(b) There are no pending or threatened claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations which have been asserted or instituted against any Listed Plan, any fiduciaries thereof with respect to their duties to any Listed Plan or the assets of any of the trusts under any Listed Plan which could reasonably be expected to result in any material liability of Target or any of its Subsidiaries to any Person, including without limitation any Governmental Authority.

(c) All payments of Target or any of its Subsidiaries required by any Listed Plan, any collective bargaining agreement or by law (including all contributions, insurance premiums, or intercompany charges) have been timely made. Any funds required to be withdrawn from the China Sub’s annual after-tax profits and paid to any statutory common reserve fund, statutory common welfare fund or any other compulsory fund for employees have been timely withdrawn and paid.

(d) Neither of Target nor any of its Subsidiaries are subject to any material lien or excise or other Taxes under any law applicable to any Listed Plan.

(e) Neither the execution or delivery of this Agreement nor the consummation of the transactions contemplated hereby will (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Listed Plan that will or may result in any material payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund or otherwise set aside or provide benefits with respect to any current or former employee, director or consultant of Target or any of its subsidiaries.

(f) Except as disclosed in Disclosure Schedule 5.3(a), no Listed Plan provides for any benefits to any Person who, at the time the benefit is to be provided, is a former director, officer or employee of, or other provider of services to Target or any of its Subsidiaries (or a beneficiary of any such Person), nor have any representations, agreements, covenants or commitments been made to provide such benefits to any such Person.

(g) Target and its Subsidiaries have no liability arising from the recharacterization under applicable laws of any Person engaged by Target or any of its Subsidiaries as an independent contractor, leased employee or similar service provider as an employee of Target or any of its Subsidiaries.

 

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5.23 Indebtedness . Section 5.23 of the Disclosure Schedule sets forth a list of all of the following with respect to Target: (a) obligations for the payment of principal, interest, penalties, fees (including loan management fees) or other liabilities for borrowed money (including guarantees) and collection costs thereof, incurred or assumed, (b) any obligations to reimburse the issuer of any letter of credit, surety bond, debentures, promissory notes, performance bond or other guarantee of contractual performance, in each case to the extent drawn or otherwise not contingent, (c) all obligations under conditional sale or other title retention agreements relating to the property or assets of Target, (d) all net payments that Target would have to make in the event of any early termination on the date the Debt is being determined in respect of outstanding interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging agreements, (e) any obligation of Target that, in accordance with U.S. GAAP, would be required to be reflected as indebtedness on the balance sheet of Target, (f) all obligations for the deferred purchase price of assets, property or services, including, without limitation, any royalty or earn-out payments, (g) all unfunded, present or contingent obligations relating to retention commitments, change of control/transaction related or similar bonuses and other payments (including bonus or severance payments), pensions, post retirement welfare plans and retirement indemnities (except as required under PRC law), assuming, in each case, that all such amounts are accelerated and due on or prior to the Closing whether or not such amounts are actually accelerated and due on or prior to the Closing, (h) all unfunded, present or contingent obligations relating to payments owed to any Shareholders or other members of management of Target, (i) any liability relating to any capitalized lease obligations and (j) any payments, fines, fees, penalties, expenses or other amounts applicable to or otherwise incurred in connection with or as a result of any prepayment or early satisfaction of any obligation described above (collectively, “ Debt ”). With respect to determination of the amounts set forth above, it shall be assumed, in each case, that all such amounts are accelerated and due on or prior to the Closing whether or not such amounts are actually accelerated and due on or prior to the Closing. Target is not in material default under any of the agreements or other instruments listed in Section 5.23 of the Disclosure Schedule, nor is Target aware of any event that, with the passage of time, or notice, or both, reasonably could be expected to result in an event of default thereunder.

5.24 Customers and Distributors .

(a) Section 5.24(a) of the Disclosure Schedule sets forth a list of all Persons from and for whom which Target undertakes to promote and/or distribute in PRC Products manufactured by such Person under license, that accounted for more than Two Hundred and Fifty Thousand Dollars ($250,000) of the net revenues of Target for the calendar years ended December 31, 2009 and December 31, 2010 (each, a “ Key Customer ”). No Key Customer shall have indicated an intention to decrease the purchase of Target’s services with respect to the Products in any material amount, individually or in the aggregate. There has not occurred any event, happening, or fact which would lead Target to reasonably believe that any Key Customer would decrease the purchase of Target’s services with respect to the Products in any material amount, individually or in the aggregate.

(b) Section 5.24(b) of Target Disclosure Schedule accurately identifies any distributor, whether in the PRC or anywhere outside of the PRC, that (i) within the two (2) years prior to the Closing Date had an agreement to perform, or (ii) has a contract or proposed agreement to perform, any distributor or distribution services with respect to the Products to or for Target (the “ Distributors ”). Target has provided to Purchaser complete and accurate copies of all current agreements with each of the distributors and any amendments thereto. Target does not have a present intention to terminate its relationship with any Distributor. There has not occurred any event, happening, or fact which would lead Target to reasonably believe that any of the Distributors intend to materially reduce the volume of business transacted by such Distributor with Target.

 

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(c) Target has not received any written notice indicating, and no event, happening or fact which would likely lead Target to reasonably believe, that any Key Customer or Distributor, intends to cease dealing with Target, (ii) is materially dissatisfied with the Products or otherwise with its relationship with Target, or (iii) is threatened with bankruptcy or insolvency. “ Product ” shall mean any pharmaceutical product that is promoted, marketed, or distributed by Target at any time prior to the Closing.

(d) As of the date hereof, neither Target nor its Subsidiaries manufactures, packages, labels, researches or develops (including any joint venture, teaming, etc), sells or distributes any pharmaceutical product.

(e) As of the date hereof, neither Target nor its Subsidiaries has inventory of any pharmaceutical product and, except as described on Section 5.24(e) of the Disclosure Schedule, has not purchased, sold or otherwise transferred any pharmaceutical product during the twelve (12) months prior to the date hereof.

(f) Since December 31, 2010, other than in the ordinary course of business consistent with past practice, Target has not established, terminated or maintained any sales incentive or bonus program, trade promotion spending or allowance (including customers allowances and performance-based promotion spending), or other trade practices or policies, whether for the benefit of customers, distributors, suppliers, employees or representatives of Target or any of its Subsidiaries, that would reasonably be expected to materially increase, or has increased, trade inventories or materially accelerate shipments of the Products.

(g) Since December 31, 2010, except as in the ordinary course of business consistent with past practice, Target has not (i) taken or currently intends to take any action with regard to any material adjustment of price or terms not announced prior to the date of this Agreement related to the customers, suppliers or distributors of Target or (ii) materially amended, modified or altered, or intends to materially amend, modify or alter, the pricing schedule or pricing list for any Product, including providing promotions, coupons, discounts or price increases.

5.25 Service Liability . Target has not been notified in writing of any claims for (and Target has no knowledge of any threatened claims for) any Product recalls or warranty obligations relating to any Product other than in the ordinary course of business consistent with past practice. Target has not, within the three (3) years prior to the Closing Date, had any material liability arising out of any injury to individuals or property as a result of promoting, marketing or distributing of any Product. To the knowledge of Target, no facts or circumstances exist that would reasonably be likely to give rise to any future material liability of Target arising out of any injury to individuals or property as a result of the promoting, marketing, or distributing of any Product.

5.26 Tangible Assets . The interests of Target in its assets (tangible and intangible) constitute all of the interests in such assets that are required to conduct the business of Target in a manner, and at levels of activity and productivity, consistent with the manner and levels at which such businesses are currently conducted by Target. The machinery, equipment and other tangible assets that Target owns are free from material defects (patent and latent), have been maintained in accordance with normal industry practice, generally are in good operating condition and repair (subject to normal wear and tear), conform in all material respects to all applicable laws relating to their use and operation, are suitable for the purposes for which they are being used, and are generally sufficient for the continued conduct of Target’s business immediately after the Closing in substantially the same manner as conducted prior to the Closing. The China Sub has never provided any guarantee or granted any collateral on any of its assets as security for any third party’s debt and liabilities.

 

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5.27 Brokers’ and Finders’ Fees . Target is not obligated to pay any fees or expenses of any broker, finder or employee of Target in connection with the origin, negotiation, or execution of this Agreement or in connection with any transactions contemplated hereby, except for financial advisory services of Cowen Latitude Asia, whose engagement letter has been made available to Parent.

5.28 Environmental Matters . Neither Target nor its Subsidiaries are in violation of any applicable statute, law, regulation relating to the environment or occupational health and safety, and no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. No hazardous substance has, or has been, used, stored, released or disposed of by Target or any of its Subsidiaries or by any other Person on any property owned, leased or used by Target or any of its Subsidiaries. To the knowledge of Target, no hazardous substance is present in, on or under any property, including the land and the improvements, ground water and surface water thereof, that Target or any of its Subsidiaries has at any time owned, operated, occupied or leased. No action, Proceeding, revocation proceeding, amendment procedure, writ, injunction or claim is pending, or to the knowledge of Target, threatened, concerning any environmental or occupational health and safety matters against Target or any of its Subsidiaries. To the knowledge of Target, there are no facts and circumstances that reasonably could be expected to result in a liability under any applicable environmental law in respect of Target or its Subsidiaries in connection with the operation of their business or the use of any property or facility. Target does not have and has not ever commissioned any environmental reports relating to any of Target’s or Subsidiaries’ leased or subleased real property.

5.29 No Other Representations and Warranties . Except for the representations and warranties of Target contained in this Section 5, Target is not making and has not made, and no other Person is making or has made on behalf of Target, any express or implied representation or warranty in connection with this Agreement.

6. Representations and Warranties of Parent and Purchaser . Parent and Purchaser jointly and severally represent and warrant to each Seller and Target that the statements contained in this Section 6 are true and correct.

6.1 Organization and Qualification . Parent is a Delaware corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the Cayman Islands. Each of Parent and Purchaser has all requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby.

6.2 Authority and Binding Obligation . The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action on the part of Parent and Purchaser. This Agreement constitutes the valid and binding obligation of Parent and Purchaser enforceable against Parent and Purchaser in accordance with its terms, except as may be limited by the laws of bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and except as the availability of equitable remedies may be limited by general principles of equity.

6.3 No Conflicts . The execution and delivery of this Agreement by each of Parent and Purchaser does not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of payment, termination, cancellation or acceleration of any material obligation or loss of any material benefit, or result in the imposition of any Encumbrance on any assets or property of Parent or Purchaser, under (a) any of the organizational documents of Parent or Purchaser or (b) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Parent or Purchaser’s properties or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority is required by or with respect to Parent or Purchaser in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby.

 

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6.4 Capitalization . The authorized capital stock of Parent consists of 75,000,000 shares of common stock, $.001 par value, and 10,000,000 shares of preferred stock, $.001 par value, of which there were issued and outstanding as of December 31, 2010, 48,011,235 shares of Common Stock and no shares of preferred stock. All outstanding shares of Parent have been duly authorized, validly issued, fully paid and are nonassessable.

6.5 Issuance of Shares . The issuance and delivery of Parent Common Stock as the Share Purchase Price in accordance with this Agreement shall be, at or prior to the Closing, duly authorized by all necessary corporate action on the part of Parent, and, when issued at Closing as contemplated hereby, such shares of Parent Common Stock will be duly and validly issued, fully paid and nonassessable. Such Parent Common Stock, when so issued and delivered in accordance with the provisions of this Agreement, shall be free and clear of all Encumbrances, other than restrictions on transfer created by applicable securities laws and will not have been issued in violation of their respective properties or any preemptive rights or rights of first refusal or similar rights.

6.6 Available Funds . Purchaser has funds sufficient to pay all amounts payable pursuant to Section 2 hereof and all related fees and expenses.

6.7 Brokers’ and Finders’ Fee . Neither Parent nor Purchaser has incurred or become liable for any broker’s commissions or finder’s fee relating to or in connection with the transactions contemplated by this Agreement, or otherwise dealt with any brokers or finders in connection herewith or any of the transactions contemplated by this Agreement, except for the financial advisory services of Piper Jaffray & Co. and Lazard Frères & Co. LLC .

6.8 SEC Reports . Parent has timely filed all reports required to be filed with the SEC prior to the date hereof (“ Parent SEC Reports ”) and other documents required to be filed by it under the Securities Exchange Act of 1934, as amended (“ Exchange Act ”) and, as of their respective dates and all Parent SEC Reports complied with all of the rules and regulations of the SEC with respect thereto. As of their respective dates, the Parent SEC Report did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances under which they were made, not misleading, except to the extent as may have been corrected by a subsequently filed Parent SEC Report prior to the date hereof. Parent’s consolidated financial statements (including any notes to such financial statements) included within Parent SEC Report (i) have been prepared in all material respects in accordance with the published rules and regulations of U.S. GAAP and the SEC applied on a consistent basis throughout the periods involved, and (ii) fairly present in all material respects, the consolidated financial position of Parent as of the respective dates thereof and the consolidated results of operations and cash flows for the period indicated.

6.9 No Other Representations and Warranties . Except for the representations and warranties of Parent contained in this Section 6, Parent is not making and has not made, and no other Person is making or has made on behalf of Parent, any express or implied representation or warranty in connection with this Agreement.

 

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7. Understandings and Covenants .

7.1 Mutual Cooperation . The parties hereto will cooperate with each other to prepare and file all necessary documentation, to effect all applications, notices, petitions and filings, and to obtain as promptly as possible all consents, authorizations, orders or approvals of any third party, whether private or governmental, required in connection with the transactions contemplated by this Agreement. The parties hereto will coordinate and cooperate with one another in exchanging such information and reasonable assistance as the other may request in connection with all of the foregoing.

7.2 Confidentiality .

(a) “ Confidential Information ” means information of Target that is confidential and proprietary to Target and not generally available to the public. Notwithstanding anything to the contrary, “Confidential Information” does not include information that (i) is or becomes generally available to the public other than as a result of a breach of this Agreement by a Seller or Purchaser, as applicable, (ii) was available to a Seller or the Purchase, as applicable, on a non-confidential basis prior to its disclosure by Target to such Seller or Purchaser, (iii) becomes available to a Seller or Purchaser, as applicable, on a non-confidential basis from another source, provided that such other source is not known by such Seller or Purchaser to be bound by, and to such Seller or Purchaser’s knowledge such disclosure does not breach, directly or indirectly, a confidentiality agreement between such other source and Target or (iv) is required to be disclosed by any applicable law, subpoena, court order, regulation, or judicial or administrative process, provided that, to the extent practicable and permitted by applicable law or regulation, such Seller or Purchaser, as applicable, provides notice of such requirement to Target for the purpose of enabling Target to seek a protective order or otherwise prevent such disclosure.

(b) Each Seller agrees not to disclose any of Target’s Confidential Information, directly or indirectly, or use it in any way, without the authorization of Purchaser after the Closing Date. Each Seller is hereby authorized to use Target’s Confidential Information on behalf of Purchaser in performance of such Seller’s duties as an employee or agent of Purchaser.

(c) Until the Closing, Purchaser shall (i) treat and hold as confidential any Confidential Information of Target, (ii) shall not use any of Target’s Confidential Information except in connection with this Agreement and the transactions contemplated hereby, and (iii) if this Agreement is terminated for any reason whatsoever, shall return to Target all tangible embodiments (including electronic and all other copies) thereof which are in its possession or control. From and after the Closing, Target shall treat and hold as confidential any Confidential Information and shall deliver to Purchaser and not retain all tangible embodiments (including electronic and all other copies) thereof which are in its possession or control.

7.3 Waiver of Share Transfer Restrictions . Each Seller expressly (i) consents to and approves of the transfer of the Shares contemplated hereby such that the sale hereunder is not restricted by Section 6.9 of that certain First Amended and Restated Shareholders Agreement dated December 12, 2007 between Sellers and Target and (ii) waives any transfer restrictions, procedural requirements or other obligations under such agreement or under Target’s Second Amended and Restated Memorandum of Association and Schedule A thereto with respect to the transfer of the Shares contemplated hereby, including those contained in Section 8 of Schedule A to Target’s Second Amended and Restated Memorandum of Association.

 

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7.4 Share Consideration Lock-Up . Each Seller hereby agrees that such Seller will not (and will cause such Seller’s Affiliates not to), without the prior written consent of Parent (which consent may be withheld in its sole discretion), directly or indirectly, sell, offer, contract or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of, or publicly announce an intention to do any of the foregoing, (a) any shares of Parent’s Common Stock issued as part of the Share Purchase Price hereunder for a period commencing on the Closing Date and continuing through the close of trading on the six (6) month anniversary of the Closing Date (the “ Lock-Up Period ”); and (b) more than twenty-five percent (25%) of the shares of Parent Common Stock issued as part of the Share Purchase Price hereunder in any three (3) month period following the Lock-Up Period through the close of trading on the eighteen (18) month anniversary of the Closing Date. The foregoing restrictions shall not apply to the transfer of any or all of such shares (i) by gift to the immediate family of such Seller, (ii) by will or intestate succession, (iii) to a trust the beneficiaries of which are exclusively Seller and/or a member or members of Seller’s immediate family, (iv) in dispositions of such shares to a spouse, former spouse, child or other dependent pursuant to a domestic relations order or settlement agreement, (v) if Seller is a trust, to any beneficiary of Seller or to the estate of any such beneficiary, (vi) if Seller is a corporation, limited liability company or partnership, to any affiliate (within the meaning set forth in Rule 405 as promulgated by the SEC under the Securities Act, (vii) if Seller is a partnership or limited liability company, to the partners, former partners, members or former members of the undersigned, as applicable, or to the estates of any such partners, former partners, members or former members or (viii) with the prior written consent Parent; provided, however, that in any of (i) through (vii) above, but not (viii), it shall be a condition to such transfer that the transferee executes and delivers to Parent a separate lock-up agreement in a form reasonably satisfactory to Parent providing for the same restrictions as provided under this Section 7.4, and that there shall be no further transfer of such shares except in accordance with the lock-up agreement. For purposes of this Section 7.4, “immediate family” shall mean any relationship by blood, marriage or adoption, not more remote than first cousin. Each Seller also agrees and consents to the entry of stop transfer instructions with Parent’s transfer agent and registrar against the transfer of such shares except in compliance with the foregoing restrictions. This provisions of this Section 7.4 are irrevocable and will be binding on each Seller the respective successors, heirs, personal representatives, and assigns of Seller effective upon the Closing.

7.5 Closing Certificates . Target shall prepare and deliver to Parent and Purchaser certificates executed by the Chief Executive Officer and Chief Financial Officer of Target dated as of the Closing Date, certifying the Allocation Schedule, Target Transaction Expenses (the “ Closing Transaction Expense Certificate ”) and aggregate Outstanding Debt Amount (the “ Target Outstanding Debt Certificate ”) not later than three (3) Business Days prior to the Closing Date (or such shorter time as may be permitted by Purchaser) along with copies of the documents or instruments evidencing the amounts set forth on any such drafts and evidencing payment in full of the amounts set forth in such documents or instruments . Target shall also deliver to Parent and Purchaser the Estimated Closing Balance Sheet simultaneously with the delivery to Parent and Purchaser of Target Outstanding Debt Certificate.

7.6 Strategic Direction . Parent hereby confirms its intention to become a specialty pharmaceutical company primarily focused on the PRC. Parent confirms that its SCV-07 Phase II development spending of oral mucositis (“ OM ”) is expected to conclude after the phase 2b OM trials is complete and that in the event of a lack of success of Parent in its SCV-07 Phase II trial, as may be reasonably determined by Parent, no further U.S. based research and development shall be pursued by Parent during Parent’s fiscal years 2011 and 2012. However, if the SCV-07 Phase II trial is successful and the SCV-07 asset demonstrates strategic value to Parent or its Subsidiaries, as may be reasonably determined by Parent, Parent shall pursue further development through a self-funding model where no further material funding from Parent will be required. Furthermore, Parent intends that such SCV-07 asset will be available also for PRC-based development.

 

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7.7 China Management . Concurrently with the execution of this Agreement, Mr. Mark Lotter shall have entered into an Employment Agreement (the “ Employment Agreement ”) and Secondment Contract with Purchaser and its affiliated entities. In addition, Parent and Mr. Lotter shall mutually designate such employee of the PRC operations of the combined company with several years of experience with Zadaxin ® to be responsible for the marketing and sales of Zadaxin, which employee shall directly report to Mr. Lotter and be designated as a member of the senior management team of the PRC operations.

7.8 Option Repurchase. Sellers and Target shall have caused the termination of all outstanding options under Target’s 2007 Equity Incentive Plan or otherwise, as of the Closing Date, and shall have obtained an agreement from each of the holders of options under Target’s 2007 Equity Incentive Plan that their options are thereby being terminated in exchange for an aggregate cash amount equal to $3,745,094.58 and a right to participate in the Contingent Consideration in the amount as set forth in the Allocation Schedule (collectively, the “ Option Repurchase Amount ”), which amounts shall be paid by Purchaser on behalf of the Company to Synotek Limited as designated and directed by each holder of options in full settlement of the options.

7.9 Board Rights . From and after the Closing, through the date of determination by Parent of any Contingent Consideration payable (or determination that no Contingent Consideration is payable), in connection with any annual or special meeting of the stockholders of Parent called for the purpose of electing the members of the Board of Directors during such period, or whenever members of the Board of Directors are elected by written consent, Sellers shall be entitled, but not obligated, to nominate by written notice to Parent individual(s) (“ Seller Nominees ”) for membership to Parent’s Board of Directors to occupy up to two seats on Parent’s Board of Directors (it being understood that if the identities of such nominees are different than the previous persons nominated by Sellers, Sellers shall cause their current Board representative(s) to resign from Parent’s Board of Directors in connection with such nomination). Subject to the satisfaction of all legal and governance requirements regarding service as a director of Parent and to the reasonable approval of Parent’s Nominating and Corporate Governance Committee (“ Governance Committee ”) (such approval not to be unreasonably withheld, conditioned or delayed) (all such requirements and approval, “ Board Membership Qualifications ”), Parent shall, subject to the fiduciary duties of its Board of Directors, recommend to its stockholders the election of Seller Nominees at the applicable annual or special meeting.

(a) Any such Seller Nominee (including any successor nominee) shall, subject to applicable law and the fiduciary duties of Parent’s Board of Directors, be Parent’s and the Governance Committee’s nominee to serve on the Board of Directors. Parent shall, subject to the fiduciary duties of its Board of Directors, use its reasonable best efforts to have such Board representative elected as a director of Parent and Parent shall solicit proxies for each such individual to the same extent as it does for any of its other nominees to the Board of Directors.

(b) The Sellers shall have the power to designate a replacement for any Seller Nominee upon the death, resignation, retirement, disqualification or removal from office of a director currently serving as Seller Nominee, as the case may be, subject to satisfaction of all Board Membership Qualifications and the fiduciary duties of Parent’s Board of Directors. Parent’s Board of Directors will promptly take all action reasonably required to fill the vacancy resulting therefrom with such individual (including (i) such individual, subject to applicable law, being Parent’s and the Governance Committee’s nominee to serve on the Board of Directors, (ii) using reasonable best efforts to have such individual elected as director of Parent and (iii) Parent soliciting proxies for such individual to the same extent as it does for any of its other nominees to the Board of Directors), subject to its applicable fiduciary duties.

 

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(c) Sellers shall cause each such Seller Nominee nominated or designated by Sellers in accordance with this Section to tender his or her voluntary resignation from the Board of Directors prior to settlement and payment of the Contingent Consideration pursuant to the provisions of Section 2.2 hereunder (or determination by Parent that no Contingent Consideration is payable), to be effective upon the later of settlement and payment of the Contingent Consideration (or determination by Parent that no Contingent Consideration is payable) or upon acceptance by Parent’s Board of Directors, which resignation shall be subject to consideration by Parent’s Board of Directors for acceptance, in which case such Seller Nominee would cease to continue as a member of the Board of Directors of Parent, or declination, in which case the Seller Nominee may be asked to continue as a member of the Board of Directors of Parent.

(d) In the event that any Seller Nominee is not elected to Parent’s Board of Directors by the stockholders of Parent at any election of directors held during period from the Closing through the date of determination by Parent of any Contingent Consideration payable (or determination that no Contingent Consideration is payable), then, subject to the fiduciary duties of Parent’s Board of Directors, Parent shall promptly thereafter, and in any event prior to the 30 calendar day period after the failure of Parent’s stockholders to elect such persons to Parent’s Board of Directors, appoint to Parent’s Board of Directors two nominees of Sellers to serve as Seller Nominees. Sellers shall use reasonable discretion to ensure that any Seller Nominee designated for election or appointment hereunder has the appropriate business experience and background such that Parent’s Board of Directors is able to in good faith nominate or appoint such individual to Parent’s Board of Directors in a manner consistent with the fiduciary duties of Parent’s Board of Directors. Sellers shall cooperate with Parent in any proposed designee for Parent’s Board of Directors and shall furnish to Parent any and all information reasonably required to facilitate the election or appointment of Seller Nominees to Parent’s Board of Directors, with the identification and information about any alternative Seller Nominee to be appointed in the 30 calendar day period after any failure of Parent’s stockholders to elect such persons to Parent’s Board of Directors to be provided to Parent no later than fifteen days prior to the end of the 30 calendar day period.

7.10 Standstill . Each Seller hereby agrees that for so long as they hold any shares of Parent Common Stock, neither he or it nor any of their affiliates (as such term is defined under the Exchange Act) will in any manner, directly or indirectly:

(a) effect, seek, offer or propose (whether publicly or otherwise) to effect, or cause or participate in, or in any way assist any other Person to effect, seek, offer or propose (whether publicly or otherwise) to effect or participate in any “solicitation” of “proxies” (as such terms are used in the proxy rules of the SEC) or consents to vote any voting securities of Parent other than proxies and votes as solicited by Parent;

(i) form, join or in any way participate in a “group” (as defined under the Exchange Act) with respect to the securities of Parent;

(ii) make any public announcement with respect to, or submit an unsolicited proposal for or offer of (with or without condition), any extraordinary transaction involving Parent or its securities or assets; or

(iii) otherwise act, alone or in concert with others, to seek to control or influence the management, Board of Directors or policies of Parent except as may be otherwise specifically contemplated by this Agreement; or

 

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(b) vote or provide consent with respect to any and all of the Shares beneficially owned by Seller, by proxy, instruction or otherwise (in each case to the extent such Shares are eligible to so vote), in connection with any election or removal of directors for a slate of directors which names more than two (2) directors nominated by or affiliated with either Sellers, any current or previous affiliate of any Seller or any current or previous affiliate of Target.

Each Seller also agree during such period not to request Parent (or its directors, officers, employees or agents), directly or indirectly, to amend or waive any provision of this Section 7.10 (including this sentence).

7.11 Registration Statement . Parent shall use its reasonable best efforts to cause the shares of Parent Common Stock issued pursuant to Section 2.1(b) hereunder (together with all equity securities issued or issuable directly or indirectly with respect to any such shares of Parent Common Stock by way of a unit or stock dividend or unit or stock split or in connection with a combination of units or shares, recapitalization, merger, consolidation or other reorganization, the “ Registrable Securities ”) to be registered under the Securities Act so as to permit the resale thereof, and in connection therewith shall use its reasonable best efforts to prepare and file a registration statement (the “ Registration Statement ”) with the SEC with respect to the Registrable Securities as soon as practicable after the Closing Date and shall use its reasonable best efforts to cause the Registration Statement to become effective prior to the expiration of the Lock-Up Period; provided , however , that each holder of Registrable Securities (“ Holder ”) shall provide all such information and materials to Parent and take all such action as may be necessary in order to permit Parent to comply with all applicable requirements of the SEC and to obtain any desired acceleration of the effective date of such Registration Statement. Such provision of information and materials is a condition precedent to the obligations of Parent pursuant to this Section 7.11. In addition, in the event Parent is unable to file a Form 8-K including any required financial statements of Target within the 71 calendar day period after which the initial Form 8-K is required to be filed for the consummation of the transactions contemplated by this Agreement and such failure to timely file is due to the failure of Parent and Target to complete any audited financial statements of Target required to be filed, then the Registration Statement shall not be required to become effective prior to the expiration of the Lock-Up Period but only at such time as may be reasonable practicable thereafter and 50% of the fees and costs incurred for Parent’s Form S-1 registration statement shall be shared by Sellers and deducted from the Indemnification Escrow Amount. Parent shall not be required to effect more than one (1) registration under this Section 7.11. The offering made pursuant to such registration shall not be underwritten.

(a) Effectiveness . Parent shall: (i) prepare and file with the SEC the Registration Statement in accordance with this Section 7.11 with respect to the shares of Registrable Securities and shall use its reasonable best efforts to cause the Registration Statement to remain effective for a period ending on the first to occur of (i) the date all of the shares registered thereunder are sold or may be sold under Rule 144 in one three-month period (assuming compliance by Holders with the provisions thereof) or (ii) eighteen (18) months after the Closing, subject to Section 7.11(b); (ii) prepare and file with the SEC such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary, and comply with the provisions of the Securities Act with respect to the sale or other disposition of all securities proposed to be registered in the Registration Statement until the termination of effectiveness of the Registration Statement; and (iii) for so long as Parent is required to cause the Registration Statement to remain effective, furnish to each Holder such number of copies of any prospectus (including any preliminary prospectus and any amended or supplemented prospectus) as required by the Securities Act, and such other documents as each Holder may reasonably request in order to effect the offering and sale of the shares of Registrable Securities to be offered and sold.

 

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(b) Suspension of Effectiveness . Notwithstanding any other provision of this Section 7.11, Parent shall have the right at any time to require that all Holders suspend open market offers and sales of Registrable Securities whenever, and for so long as, in the reasonable, good-faith judgment of Parent after consultation with counsel, there is in existence material undisclosed information or events with respect to Parent (the “ Suspension Right ”). In the event Parent exercises the Suspension Right, such suspension will continue for the period of time reasonably necessary for disclosure to occur at a time that is not materially detrimental to Parent or until such time as the information or event is no longer material, each as reasonably determined in good faith by Parent after consultation with counsel. Parent will promptly give the Seller Representative notice, in a writing signed by an executive officer of Parent, of any such suspension (the “ Suspension Notice ”). Parent agrees to notify the Seller Representative promptly upon termination of the suspension (the “ Resumption Notice ”). Upon receipt of either a Suspension Notice or Resumption Notice, Parent shall immediately notify each Holder concerning the status of the Registration Statement. The period during which Parent is required to cause the Registration Statement to remain effective shall be extended by a period equal in length to any and all periods during which open market offers and sales of Registrable Securities are suspended pursuant to exercise of the Suspension Right.

(c) Expenses . Except as set forth in the first paragraph of this Section 7.11, Parent shall pay all of the out-of-pocket expenses incurred in connection with the registration of Registrable Securities pursuant to this Section 7.11, including all registration and filing fees, exchange listing fees, printing expenses, transfer agents’ and registrars’ fees, the fees and disbursements of Parent’s outside counsel and independent accountants. Sellers shall be responsible for any fees or disbursements of their own counsel incurred in connection with the registration of Registrable Securities pursuant to this Section 7.11.

7.12 Further Assurances . From time to time, at Parent and Purchaser’s request, whether on or after the Closing Date and without further consideration, each Seller shall execute and deliver or cause to be executed and delivered such further instruments of conveyance and transfer and take such other action as Parent and Purchaser reasonably may require more effectively to convey and transfer to Parent and Purchaser title to the Shares and to effectuate the transactions contemplated hereby. From time to time after the Closing, at Target’s request, whether on or after the Closing Date and without further consideration, Parent and Purchaser shall take such action (including, without limitation, executing and delivering documents) as Target reasonably may require more effectively to effectuate the transactions contemplated hereby.

8. Closing Actions and Deliverables .

8.1 Parent and Purchaser . At or prior to Closing, Parent and Purchaser shall have taken the following actions and shall have delivered the following deliverables:

(a) Actions .

(i) Board of Directors . Parent shall have increased the size of its Board of Directors by two (2) members for a total of ten (10) directors, and shall have appointed each of Mr. Lotter and Mr. Peter Barrett to Parent’s Board of Directors to fill the vacancies created in the Board of Directors as a result of such increase, effective upon Closing.

 

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(b) Deliverables . Parent and Purchaser shall have delivered the following:

(i) Parent and Purchaser shall have delivered to each of Sellers immediately available funds of amounts with respect to the applicable Cash Purchase Price and shares of Parent Common Stock with respect to the Share Purchase Price to be paid at Closing (less the amounts, in each case, to be deposited in the Indemnification Escrow Amount and the Working Capital Escrow Amount) in the amounts set forth on the Allocation Schedule and delivered in the manner provided in Section 2 hereof.

(ii) Parent and Purchaser shall have delivered to the Escrow Agent the Working Capital Escrow Amount and the Indemnification Escrow Amount for deposit into escrow pursuant to the Escrow Agreement.

(iii) Parent and Purchaser shall have delivered to Target an opinion dated the Closing Date of DLA Piper LLP (US), US counsel to Parent, in a form reasonably satisfactory to Target.

(iv) Parent and Purchaser shall have delivered to Target the Escrow Agreement duly executed by Parent and Purchaser.

8.2 Target and Sellers . At or prior to Closing, Target and Sellers shall have taken the following actions and shall have delivered the following deliverables:

(a) Actions .

(i) All outstanding Notes shall have been repaid under the terms of the Notes with the principal and interest accrued on Target’s books through March 31, 2011 paid out of Target’s working capital immediately prior to Closing and accrued interest after March 31, 2011 and the premium amount as reflected in the Target Outstanding Debt Certificate paid out of the Cash Purchase Price at Closing as contemplated under Section 2.1(a).

(ii) All outstanding Series A Shares shall have converted to Common Shares pursuant to Section 4(a) of Schedule A of Target’s Second Amended and Restated Memorandum and Articles of Association.

(iii) Target shall have caused the termination of all outstanding options under Target’s 2007 Equity Incentive Plan or otherwise, as of the Closing Date, and shall have obtained an agreement from each of the holders of options under Target’s 2007 Equity Incentive Plan that their options are thereby being terminated in exchange for their respective portion of the Option Repurchase Amount.

(b) Deliverables . Target and Sellers shall have delivered to Parent and Purchaser the following:

(i) Share certificates representing the Shares and accompanying assignments and letters of transmittals transferring and conveying to Purchaser title to the Shares, as owner, free and clear of all Encumbrances.

(ii) Share certificates representing all Series A Shares as converted to Common Shares.

(iii) Respective payoff letters for the Convertible Promissory Notes in a form reasonably satisfactory to Parent.

 

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(iv) Noncompetition agreements from Probio Inc. and Lion Sight International Limited, duly executed by each.

(v) The Closing Transaction Expense Certificate; provided, however, that such receipt shall not be deemed to be an agreement by Parent or Purchaser that the Closing Transaction Expense Certificate is accurate and shall not diminish Parent and Purchaser’s remedies hereunder to be indemnified for Indemnifiable Transaction Expenses.

(vi) The Target Outstanding Debt Certificate; provided, however, that such receipt shall not be deemed to be an agreement by Parent or Purchaser that Target Outstanding Debt Certificate is accurate and shall not diminish Parent and Purchaser’s remedies hereunder if Target Outstanding Debt Certificate is not accurate.

(vii) Opinions dated as of the Closing Date of Katten Muchin Rosenman LLP, as U.S. counsel to Target, Duan & Duan Law Offices, as PRC counsel to Target, and Walkers, as Cayman counsel to Target, in forms reasonably satisfactory to Parent and Purchaser.

(viii) The Escrow Agreement duly executed by Seller Representative.

(ix) Resolutions of the Board of Directors of Target, certified as being correct and complete and then in full force and effect, authorizing the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, including the transfer of the shares.

(x) An officer’s certificate of Target certifying the Estimated Closing Balance Sheet and the Estimated Closing Working Capital Statement.

(xi) A certificate, dated as of a recent date, of Register of Companies in and for the Cayman Islands as to the good standing of Target.

(xii) An updated and amended Register of Members dated as of the Closing, as certified by the registered agent of Target, reflecting the transfer of the shares from Sellers to Purchaser.

(xiii) Duly-executed written resignations and releases, effective as of the Closing, of each of (a) the directors and officers of Target and (b) to the extent requested by Parent or Purchaser at least three (3) Business Days prior to the Closing Date, the legal representative, directors, general manager, supervisor and officers of the WFOE.

(xiv) The official seals and statutory books (including minute books) and books of account of Target and the WFOE made up to the Closing Date.

9. Survival and Indemnification .

9.1 Survival of Representations .

(a) All representations and warranties of Sellers and Target contained in this Agreement or in any certificate or schedule delivered pursuant hereto shall survive the Closing during the Survival Period and shall thereafter be terminated and shall have no further force or effect, except that (i) representations and warranties of each Seller in Sections 4.1 (Authority and Binding Obligation) and 4.2 (Title to Shares ) and (ii) representations and warranties of Target in Sections 5.1 (Organization and Qualification), 5.2 (Authority and Binding Obligation) and 5.3 (Capitalization) (collectively, the “ Fundamental Representations ”) shall survive for the period of their applicable statute of limitations and shall thereafter be terminated and of no further force or effect, and (iii) representations and warranties of Target in Section 5.9 (Taxes) shall survive for a period of three years after the Closing Date. All representations and warranties of Parent and Purchaser contained in this Agreement or in any certificate or schedule delivered pursuant hereto shall survive the Closing and shall thereafter be terminated and have no further force or effect on the 18 month anniversary of the Closing Date.

 

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(b) The right of Parent and Purchaser hereunder to recover any relief (including, without limitation, any Damages (as defined in Section 9.2(a) below)) against Sellers resulting from, arising out of or incurred with respect to any inaccuracy in, breach or violation of or default under any particular representation or warranty contained in this Agreement shall terminate upon, and be forever barred from and following, the termination under Section 9.1(a) of such representation or warranty; provided, however, if Parent or Purchaser provides to Seller Representative written notice, prior to the day of termination of such representation or warranty, of a claim made in good faith pertaining to the inaccuracy in, breach or violation of or default under such representation or warranty (which notice shall contain all information required of a Claim Notice (as defined and described in Section 9.5(a)), then, subject to the other provisions of this Section 9, such claim shall survive termination of such representation or warranty indefinitely until such claim is finally resolved. The same principle shall apply with respect to indemnity claims made by Sellers against Parent and Purchaser in connection with breach of the representations and warranties of the Parent and Purchaser prior to the day of termination of such representation or warranty. Except as expressly provided in this Section 9.1(b), upon termination of any particular representation or warranty contained in this Agreement, no party shall be entitled to recover any relief (including, without limitation, any Damages) resulting from, arising out of or incurred with respect to any inaccuracy in, breach or violation of or default under such terminated representation or warranty.

(c) All covenants and agreements under this Agreement shall survive until fully performed, unless limited by their terms or purpose.

9.2 Indemnification .

(a) Liability of an Individual Seller with respect to its Representations and Warranties and Other Matters . Each Seller shall severally and not jointly with other Sellers indemnify and shall hold Parent, Purchaser and their officers, directors, agents, attorneys and employees, and each Person, if any, who controls or may control Purchaser (individually a “ Purchaser Indemnified Person ” and collectively the “ Purchaser Indemnified Persons ”) harmless from and against any actual liability, loss, cost, expense, claim, lien or other damage, including, without limitation, reasonable attorneys’ fees and expenses (all of the foregoing items for purposes of this Agreement are referred to as “ Damages ”), resulting from, arising out of or incurred with respect to:

(i) any misrepresentation or breach or default of any representation or warranty of such Seller given or made by such individual Seller herein or in any certificate or schedule delivered pursuant hereto at the Closing;

(ii) any failure of such Seller to perform or observe any covenant or agreement contained herein on the part of such individual Seller to be performed or observed; or

(iii) Parent or Purchaser’s enforcement of their rights under this Section 9.2(a).

 

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(b) Liability of an Individual Seller with respect to Target’s Representations and Warranties and Other Matters . In addition to the indemnification provided in Section 9.2(a) above, subject to the limitations set forth in this Section 9, each Seller (as defined below) shall severally and not jointly with other Sellers indemnify and shall hold Purchaser Indemnified Persons harmless from and against any Damages resulting from, arising out of or incurred with respect to:

(i) any misrepresentation or breach or default of any representation or warranty given or made by Target herein or in any certificate or schedule delivered pursuant hereto at the Closing;

(ii) any failure of Target to perform or observe any covenant or agreement contained herein on the part of Target to be performed or observed;

(iii) any amounts required to be refunded to Parent and Purchaser under Section 2.3;

(iv) any understatement of the Outstanding Debt Amount as set forth in Target Outstanding Debt Certificate;

(v) any Indemnifiable Transaction Expenses;

(vi) any “ Covered Matter ” listed on Schedule 9.2(b)(vi) ;

(vii) any inaccuracies or disputes resulting from Sellers’ allocation under the Allocation Schedule; or

(viii) Parent or Purchaser’s enforcement of their rights under this Section 9.2(b).

Sellers’ indemnification obligations under this Section 9.2(b) of this Agreement shall be in accordance with their Pro-rata Interests and as set forth across each Seller’s name in the Allocation Schedule under the column entitled “Pro-Rata Interests”.

For all breaches or defaults of any Seller’s representations, warranties, covenants or agreements or with respect to any other matter for which indemnification is provided for under Section 9.2(a), the indemnification obligations of each Seller to the Purchaser Indemnified Persons shall be several and not joint and shall be specific to the Seller in breach or default of any representations, warranties, covenants or agreements. For all breaches or defaults of Target’s representations, warranties, covenants or agreements or with respect to any other matter for which indemnification is provided for under Section 9.2(b), the indemnification obligations of Sellers to the Purchaser Indemnified Persons shall also be several and not joint, with liability of each Seller’s to be apportioned based upon each Seller’s Pro-rata Interests. Subject always to Section 9.3 below, in order to fulfill the obligations of any Seller pursuant to Sections 9.2(a) or 9.2(b), Damages owed to Purchaser Indemnified Persons shall be paid: (i) first, out of any cash or shares of Parent Common Stock held as the Indemnification Escrow Amount of such Seller, at Sellers’ election; and (ii) second out of the amounts payable to any such Seller as Contingent Consideration under Section 2 hereof as a right of set-off against such amounts; and in the event (A) any Damages to Purchaser Indemnified Persons exceed the amount of the Indemnification Escrow Amount or amounts payable to a Seller as Contingent Consideration under Section 2 hereof or (B) arise after the payment of the Contingent Consideration or release of the Indemnification Escrow Amount, such amounts shall be paid by such Seller directly from any proceeds actually received by such Seller. For purposes of satisfying any indemnification claim for Damages hereunder, the value of Parent Common Stock shall be the then-current market value of the Parent Common Stock at the close of market on the date of resolution of such indemnifiable claim. Should any indemnification claim made prior to the expiration of the Survival Period fail to reach final determination and satisfaction prior to the expiration of the Survival Period, a portion of the Indemnification Escrow Amount that the parties reasonably determine in good faith as sufficient to satisfy all amounts with respect to such indemnification claim shall be retained in escrow pending final resolution of such claim in accordance with the provisions of the Escrow Agreement.

 

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(c) Parent and Purchaser’s Indemnification Obligations . Parent and Purchaser shall indemnify, save and keep Target and Seller and their respective officers, directors, shareholders partners and agents (“ Seller Indemnified Persons ”) harmless against and from all Damages sustained by such Seller Indemnified Persons as a result of:

(i) any breach of any representation or warranty made by Parent and Purchaser under this Agreement and any ancillary document; and

(ii) any breach of, or failure to comply with, any of the covenants or obligations of Parent and Purchaser under this Agreement and any ancillary document.

(d) Calculating Damages . For the sole purpose of determining the amount of any Damages in respect of the failure of any representation or warranty to be true and correct as of any particular date (but not for determining whether or not any breaches of representations or warranties have occurred), subject to Sections 9.3 and 9.4, any materiality, material adverse effect or similar standard or qualification contained in such representation or warranty shall be disregarded.

9.3 Maximum Indemnification; Limitations .

(a) The liability of each Seller to Purchaser Indemnified Persons for indemnification for misrepresentations, breaches or defaults of representations and warranties of Sellers and Target under Section 9.2(a) and (b) involving representations and warranties which do not constitute Fundamental Representations shall be capped at such Seller’s Pro-rata Interest of the sum of the Indemnification Escrow Amount plus one third (1/3) of the Contingent Consideration that may be payable to Sellers pursuant to Section 2 hereof, and the liability of each Seller to Purchaser Indemnified Persons for indemnification for breach of the Fundamental Representations shall be capped at fifty percent (50%) of such Seller’s Pro-rata Interest of the sum of the Initial Consideration paid to Sellers plus fifty percent (50%) of the Contingent Consideration that may be payable to Sellers pursuant to Section 2 hereof.

(b) The liability of Parent and Purchaser to Seller Indemnified Persons for indemnification for misrepresentations, breaches or defaults of representations and warranties of Parent and Purchaser shall be capped at an amount equal to value of the proceeds in the Indemnification Escrow Amount measured as of the Closing Date.

(c) Notwithstanding the foregoing, any limitation contained in the provisions of this Section 9.3 shall not apply to finally adjudicated fraud or criminal activity.

 

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9.4 Damage Threshold . Notwithstanding anything to the contrary set forth herein, no party shall have Liability for breaches of a representation or warranty under Section 9.2(a)(i), 9.2(b)(i) or 9.2(c)(i) and no party may receive any Damages or other payment for Damages under such sections unless and until the aggregate amount of Damages owed to such indemnified party exceeds Three Hundred Thousand Dollars (US$300,000) or its equivalent in other currencies (the “ Indemnity Threshold ”) and a certificate to that effect has been delivered by the indemnified party to the indemnifying party. Thereafter, an indemnified party shall be entitled to receive indemnities in excess of such Indemnity Threshold. Notwithstanding the foregoing, the Indemnity Threshold shall not apply for any breach of a Fundamental Representation.

9.5 Procedures for Indemnification .

(a) Purchaser Indemnified Person(s) may seek indemnification from the Sellers and Seller Indemnified Person(s) may seek indemnification from Parent (in each case, the “ Indemnified Person ”) for any Damages with respect to an indemnification claim under this Agreement (a “ Claim ”) for which Sellers or Parent may, respectively, be liable (the “ Indemnifying Person ”) by promptly giving written notice (a “ Claim Notice ”) to the Seller Representative (as defined in Section 10.1 below) (if a claim by Purchaser Indemnified Person(s)) or to Parent (if a claim by Seller Indemnified Person(s)) specifying in reasonable detail the Damages claimed (and a good faith reasonable estimate thereof), including the date each such item was paid, or properly accrued or arose and the nature of the misrepresentation or breach or default of representation, warranty, covenant or agreement to which such item is related.

(b) If the Seller Representative with respect to a Claim by Purchaser Indemnified Person(s) or if the Parent with respect to a Claim by Seller Indemnified Person(s), in each case that is the subject of a Claim Notice given pursuant to Section 9.5(a): (i) agrees with the Indemnified Person with respect to such Claim, a mutually acceptable memorandum setting forth such agreement shall be prepared and signed by both parties, or (ii) disputes the existence or the amount of such Claim or the Indemnifying Person’s obligation hereunder to indemnify the Indemnified Person therefor, the Indemnifying Person shall notify the Indemnified Person in writing (with reasonable specificity) within fifteen (15) Business Days following the Indemnifying Person’s receipt of the Claim Notice (the “ Response Notice ”), and then the parties will negotiate in good faith to resolve such Claim for up to twenty (20) Business Days or such other period of time as the parties mutually agree. If the parties should then so agree with respect to resolution of such Claim, a mutually acceptable memorandum setting forth such agreement shall be prepared and signed by both parties. Any amounts owed to an Indemnified Person shall be paid no later than five (5) Business Days after resolution hereunder in the manner contemplated by Section 9.2.

(c) If (i) no Response Notice is received by the Indemnified Person within fifteen (15) Business Days after the Indemnifying Person’s receipt of the Claim Notice or (ii) the parties are unable to agree on resolution of the Claim within the twenty (20) Business Day negotiation period specified in Section 9.5(b) after Indemnified Person’s receipt of a Response Notice, then the Claim will be deemed disputed and the matter shall be subject to resolution under the provisions of Section 11.7.

(d) With respect to all references to the Indemnifying Person or Indemnified Person in this Section, all notices to be given to or by Sellers shall be given by or to Seller Representative.

 

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9.6 Third-Party Claims . In the event that a Purchaser Indemnified Person becomes aware of a third-party claim which could result in Damages for which it or any other Purchaser Indemnified Person may be entitled to indemnification hereunder, such Purchaser Indemnified Person shall promptly and without delay notify Seller Representative of such third-party claim, and Sellers shall be entitled, at their own expense, to participate in any defense of such claim; provided , however , that no delay or failure on the part of Parent or Purchaser in notifying Seller Representative shall relieve Sellers from any obligation hereunder unless Sellers are thereby prejudiced (and then solely to the extent of such prejudice). Purchaser Indemnified Persons shall be entitled to assume the defense of such third-party claim with counsel of its selection. Purchaser Indemnified Persons shall keep Seller Representative informed of all material developments and events relating to such Claim, and shall deliver to Seller Representative, within five (5) Business Days after Purchaser Indemnified Person’s receipt thereof, copies of all notices, correspondence and documents (including court papers) received by Purchaser relating to such Claim. Purchaser Indemnified Person shall have the right in its sole discretion to settle any such Claim; provided , however , in the event that the Seller Representative has not consented to any such settlement in writing prior to such settlement, Seller Representative shall retain the right to object under this Section 9 to the amount of any Claim by Purchaser Indemnified Person for indemnity with respect to such settlement, including the reasonableness of the amount of such settlement; provided further , however , that in the event that Seller Representative has consented in writing to any settlement of any third-party claim to which any Purchaser Indemnified Person is entitled to indemnification under this Section 9, Seller Representative shall have no power or authority to object under any provision of this Section 9 to the amount of any Claim by Parent or Purchaser for indemnity with respect to such settlement.

9.7 Limitation on Indemnity; Exclusivity of Remedy . Except in respect of claims based upon fraud or violation of the federal securities laws, the indemnification accorded by this Section 9 shall be the sole and exclusive remedy of the parties indemnified under this Section 9; provided , however , that any Damages recovered by Purchaser Indemnified Persons for any Claim made pursuant to this Section 9 shall be reduced by the amount of recovery proceeds from any insurance policy (including title insurance) held by Target covering such Claim and actually paid to Purchaser Indemnified Persons; provided further , however , that should such recovery from the insurance policy result in an increase to such policy’s insurance premium, such reduction to Damages shall be offset by the total amount of such premium increase. Notwithstanding the foregoing, in the event of any breach or failure in performance after the Closing Date of any covenant or agreement, a non-breaching party shall also be entitled to seek specific performance, injunction or other equitable relief. The covenants of any party shall terminate according to the terms of such covenant and the expiration of the applicable statute of limitations.

9.8 Tax Treatment of Indemnification Payments . Any indemnification payments made pursuant to this Agreement shall be treated for Tax purposes as an adjustment to the purchase price for the Shares.

10. Seller Representative .

10.1 Designation and Replacement of Seller Representative . Sellers have agreed that it is desirable to designate a representative to act on behalf of Sellers for certain limited purposes, as specified herein (the “ Seller Representative ”) as Seller’s agent, proxy and attorney-in-fact. Sellers hereby appoint and designate Mark Lotter as the initial Seller Representative. The appointment and agency created hereby is irrevocable, and shall be deemed to be coupled with an interest. Seller Representative may resign at any time, but no resignation shall be effective until a new Seller Representative, who shall be reasonably able to perform the duties of the Seller Representative and reasonably satisfactory to Parent and Purchaser, has been appointed and agrees in a writing delivered to Parent and Purchaser to be bound by the terms of this Agreement. Subject to the foregoing, in the event of the death, incapacity, resignation or removal of a Seller Representative, a new Seller Representative shall be appointed by a vote or consent of a majority of Sellers (pro rata in accordance with their Pro-rata Interest), such appointment to become effective upon the later of the date set forth in notice of such vote or written consent or the date such notice of such vote or written consent is received by Parent and Purchaser or Target. All decisions, actions, consents and instructions by the Seller Representative shall be binding upon all of Sellers, and no Seller shall have the right to object to, dissent from, protest or otherwise contest the same. Parent and Purchaser shall be entitled to rely on any action taken or decisions made by the Seller Representative, as being the action or decision of Sellers, and Parent and Purchaser is hereby relieved from any liability to any Person for acts done by them in accordance with any such decision, act, consent or instruction.

 

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10.2 Authority and Rights of the Seller Representative; Limitations on Liability . The Seller Representative shall have such powers and authority as are necessary to carry out the functions assigned to it under this Agreement; provided , however , that the Seller Representative shall have no obligation to act on behalf of Sellers, except as expressly provided herein or therein. Without limiting the generality of the foregoing, the Seller Representative shall have full power, authority and discretion (i) to negotiate, settle, compromise or take any other action to otherwise handle any claim for indemnification by any Purchaser Indemnified Person pursuant to Section 9 hereof; (ii) to resolve any and all post-closing disputes by and on behalf of Sellers; and (iii) to act on behalf of Sellers with respect to any and all other matters hereunder. The Seller Representative shall have no liability to Parent, Purchaser, Target or Sellers with respect to actions taken or omitted to be taken in its capacity as the Seller Representative, except with respect to the Seller Representative’s gross negligence or willful misconduct. The Seller Representative shall at all times be entitled to rely on any directions received from a majority of Sellers. All decisions, actions, consents and instructions by the Seller Representative shall be binding upon all of Sellers, and no Seller shall have the right to object to, dissent from, protest or otherwise contest the same.

10.3 Representations of the Seller Representative . The Seller Representative represents and warrants to Parent and Purchaser that the Seller Representative has all requisite power and authority to execute and deliver this Agreement and to perform all obligations to be performed by it hereunder and to consummate the transactions contemplated hereby. This Agreement has been and duly and validly executed and delivered by the Seller Representative and constitutes a legal, valid and binding obligation of the Seller Representative, enforceable against the Seller Representative in accordance with his or her respective terms, except as enforcement may be limited by general principles of equity, whether considered in a Proceeding at law or in equity, and by applicable bankruptcy, insolvency, moratorium and similar laws affecting creditors’ rights generally. The execution, delivery and performance by the Seller Representative of this Agreement and the consummation by the Seller Representative of the transactions contemplated hereby do not and will not (i) conflict with or violate any provision of law applicable to the Seller Representative or by which any property or asset of the Seller Representative is bound or affected, (ii) conflict with, result in any breach of, constitute a default (or an event that, with notice or lapse of time or both, would become a default) under, require any consent of any Person pursuant to, give to others any rights of termination, acceleration or cancellation of, or other change of any right or obligation or the loss of any benefit to which the Seller Representative is entitled under, any provision of any agreement, indenture or other instrument to which the Seller Representative is a party of by which the Seller Representative or any of his or her assets may be bound, or (iii) result in the creation or imposition of any Encumbrance on any assets of the Seller Representative or result in a violation or revocation of any license, permit, franchise, certificate, approval or other similar authorization affecting, or relating in any way to, the assets or business of the Seller Representative from any Governmental Authority or other Person, except to the extent that the occurrence of any of the foregoing would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of the Seller Representative to perform his or her obligations under this Agreement.

 

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11. Miscellaneous .

11.1 Waivers . Any waiver of any of the terms or conditions of this Agreement must be in writing and must be duly executed by or on behalf of the party to be charged with such waiver. The failure of a party to exercise any of its rights hereunder or to insist upon strict adherence to any term or condition hereof on any one occasion shall not be construed as a waiver or deprive that party of the right thereafter to insist upon strict adherence to the terms and conditions of this Agreement at a later date. Further, no waiver of any of the terms and conditions of this Agreement shall be deemed to or shall constitute a waiver of any other term of condition hereof (whether or not similar).

11.2 Notices . All notices and other communications under this Agreement shall be in writing and shall be deemed to have been duly given only if done in the following ways: (i) on the day of delivery if delivered personally, (ii) two (2) Business Days after the date of mailing if mailed by registered or certified first class mail, postage prepaid, (iii) the next Business Day following deposit with an overnight air courier service which guarantees next day delivery, or (iv) when sent by facsimile (with a copy promptly sent by registered or certified mail return receipt requested), to the other party at the following address (or to such Person or Persons or such other address or addresses as a party may specify by notice pursuant to this provision):

 

(a) If to Parent or Purchaser, to:

 

SciClone Pharmaceuticals, Inc.

950 Tower Lane, Suite 900

Foster City, CA 94404

Attention: Chief Executive Officer

Facsimile: (650) 350-4871

 

With a copy to:

 

DLA Piper LLP (US)

2000 University Avenue

East Palo Alto, CA 94303

Attention: Eric H. Wang, Esq.

Facsimile: (650) 687-1205

 

(b) If to Target, to:

NovaMed Pharmaceuticals, Inc.

Room 2601, Central Plaza

No. 227 North Huang Pi Road

Shanghai, 200003,China

Attention: Chief Executive Officer

Facsimile: +86 (21) 6375 8810

 

With a copy to:

Katten Muchin Rosenman LLP

525 West Monroe Street

Chicago, IL 60661-3693

Attention: Feng Xue, Esq.

Facsimile: (312) 577-8807

 

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(c) If to Sellers or the Seller Representative, to such address as is set forth under his or its name on the Allocation Schedule:

11.3 Amendments . At any time prior to the Closing Date, this Agreement may be amended, supplemented or modified by a writing signed on behalf of each of the parties hereto; provided, however, that Seller Representative execute a valid and binding amendment, supplement or modification on behalf of all Sellers to the extent such amendment, supplement or modification does not adversely affect the amount of consideration payable to, or the amount of liability of, any Seller hereunder.

11.4 Expenses . Parent and Purchaser shall bear the expenses of Parent and Purchaser in connection with this Agreement and the transactions to effectuate this Agreement. Target shall bear the expenses of Target and Sellers in connection with this Agreement and the transactions to effectuate this Agreement, including, without limitation, financial advisors’, attorneys’ and accountants’ fees and any transfer taxes, if any, in connection with the transactions to effectuate this Agreement (“ Target Transaction Expenses ”). Notwithstanding anything in the foregoing, in the event that any Target Transaction Expenses have not been accrued or paid by Target prior to the Closing, such expenses shall be set forth on the Closing Transaction Expense Certificate and deducted from the Purchase Price payable to Sellers under Section 2 hereof. Any Target Transaction Expenses that (i) remain unaccrued and unpaid by Target as of the Closing and (ii) have not been set forth on the Closing Transaction Expense Certificate are collectively referred to as “ Indemnifiable Transaction Expenses ” and shall constitute “Damages” for purposes of Section 9.

11.5 Entire Agreement . This Agreement and the documents and instruments and other agreements specifically referred to herein or delivered pursuant hereto, including the schedules hereto, including the Disclosure Schedule, together constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof except for that certain Mutual Confidential Disclosure Agreement dated September 13, 2008 which shall continue in full force and effect, and shall survive any termination of this Agreement or the Closing, in accordance with its terms.

11.6 Governing Law . This Agreement is governed by, and all disputes arising under or in connection with this Agreement shall be resolved in accordance with, the laws of Delaware (to the exclusion of its conflict of laws rules), except that the arbitration clause and any arbitration thereunder shall be governed by the Federal Arbitration Act, Chapters 1 and 2.

11.7 Arbitration .

(a) All disputes arising out of or in connection with this Agreement shall be submitted to the International Court of Arbitration of the International Chamber of Commerce and shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce (the “ ICC Rules ”) by one or more arbitrators appointed in accordance with the said ICC Rules. The arbitration shall be conducted in the English language. The place of arbitration shall be San Francisco, California. In addition to the ICC Rules, the parties agree that the arbitration shall be conducted according to the IBA Rules of Evidence, as current as of the date of this Agreement.

(b) The parties undertake to keep confidential all awards in their arbitration, together with all materials in the proceedings created for the purpose of the arbitration and all other documents produced by another party in the proceedings not otherwise in the public domain, save and to the extent that disclosure may be required of a party by legal duty, to protect or pursue a legal right or to enforce or challenge an award in legal proceedings before a court or other judicial authority.

 

51


(c) The arbitrator(s) are authorized to include in their award an allocation to any party of such costs and expenses, including attorneys’ fees, as the arbitrator(s) shall deem reasonable. Judgment upon any award(s) rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The parties hereby waive all objection which it may have at any time to the laying of venue of any proceedings brought in such courts, waives any claim that such proceedings have been brought in an inconvenient forum and further waives the right to object with respect to such proceedings that any such court does not have jurisdiction over such party.

(d) Notwithstanding the foregoing, with respect to the Non-Competition Agreements of Mr. Lotter, Probio Inc. and Lion Sight International Limited, Parent and Purchaser shall have the option, at their sole election, to enforce such agreements in the courts and according to the law of the jurisdiction specified in those Non-Competition Agreements.

11.8 Section and Paragraph Headings . The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

11.9 Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

11.10 Parties in Interests . Nothing contained in this Agreement, express or implied, is intended to confer upon any Person, other than the parties hereto and their permitted assignees, any rights or remedies under or by reason of this Agreement. No assignment of this Agreement or any rights hereunder by any party shall be given any effect without the prior written consent of the other party. Notwithstanding the foregoing, upon written notice to Sellers prior to Closing, Parent shall have the right to substitute another of its wholly-owned Subsidiaries as “Purchaser” hereunder. Such Subsidiary shall deliver a duly executed signature page as “Purchaser” to this Agreement and shall agree to be bound as Purchaser hereunder. Subject to the preceding sentences, this Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective successors and assigns.

11.11 Definition of knowledge, Business Day and Dollars . For purposes of this Agreement, (a) the term “ knowledge ” as applied to (i) Sellers shall mean any and all information which any of Sellers actually knew of without any obligation on the part of the Sellers to investigate and (ii) Target shall mean any and all information which was actually known or reasonably should have been known by any executive officer or key employee of Target; (b) the term “ Business Day ” shall mean a day (i) other than a Saturday or Sunday and (ii) on which commercial banks are open for business in California; and (c) all references to monetary amounts shall be in U.S. currency and dollar amounts shall mean U.S. dollars.

11.12 Rules of Construction . The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.

11.13 Severability . In the event that any of the provisions of this Agreement shall be held by a court or other tribunal of competent jurisdiction to be illegal, invalid or unenforceable, such provisions shall be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect.

[REMAINDER OF PAGE INTENTIONALLY BLANK]

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

 

PARENT
SCICLONE PHARMACEUTICALS, INC.

By:

 

/s/ F. Blobel

Name:

Title:

 

Friedhelm Blobel, Ph.D.

President and Chief Executive Officer

 

PURCHASER

SCICLONE PHARMACEUTICALS

HONG KONG LIMITED

By:

 

/s/ F. Blobel

Name:

Title:

 

Friedhelm Blobel, Ph.D.

Director

 

TARGET
NOVAMED PHARMACEUTICALS, INC.

By:

 

/s/ Mark Lotter

Name:

Title:

 

Mark Lotter

Director

 

SELLER REPRESENTATIVE
 

            /s/ Mark Lotter

MARK LOTTER

[Signature Page to Share Purchase Agreement]


SELLERS

LION SIGHT INTERNATIONAL

LIMITED

By:  

/s/ Y. Slew

Name:   Yibo Slew
Title:   Director
PROBIO, INC.
By:  

/s/ Philip Xiao

Name:   Philip Xiao
Title:   Director
ATLAS VENTURE FUND VII, L.P.
By:  

/s/ K. Laguerre

Name:   Kristen Laguerre
Title:   Vice President
FIDELITY ASIA PRINCIPALS FUND L.P.
By:  

/s/ Mattle Heall

Name:  
Title:  
FIDELITY ASIA VENTURES FUND L.P.
By:  

/s/ Mattle Heall

Name:  
Title:  

BEACON BIOVENTURES FUND II

LIMITED PARTNERSHIP

By:  

/s/ Stephen Knight

Name:   Stephen Knight
Title:   Vice President

[Signature Page to Share Purchase Agreement]


SELLERS

SPEARING LIMITED

By:

 

/s/ Mark Lotter

Name:

  Mark Lotter

Title:

 

[Signature Page to Share Purchase Agreement]


SELLERS (INDIVIDUALS AND TRUSTS)

/s/ Yipling Yi

Yipling Yi

THE BRODY FAMILY TRUST U/T/D 8-15-86
By:  

/s/ William R. Brody

Name:   William R. Brody
Title:   Trustee

IMPORTANT INDIVIDUAL AND TRUST SELLER ACKNOWLEDGEMENT : By signing above, each Seller who is an individual or trust hereby acknowledges that he or it: (i) has read and understands this Agreement , (ii) has full authority and capacity to sign this Agreement without further consent or agreement from any other trustee or Person (with respect to a trust) or from his or her spouse (with respect to an individual), unless such trustee, Person or spouse co-signs this Agreement herewith, (iii) understands that such Seller is making individual representations and warranties as set forth in Section 4 hereof and (iv) understands that such Seller is providing for indemnities for breaches of such individual representations and is providing for indemnities with respect to other matters, each as set forth in Section 9 hereof.

[Signature Page to Share Purchase Agreement]


1.   Purchase and Sale of Shares      2   
2.   Purchase Price      2   
  2.1    Consideration Amounts      2   
  2.2    Consideration Payments      7   
  2.3    Working Capital Adjustment to Purchase Price      11   
  2.4    Escrow and Adjustment Payments      14   
  2.5    Payment of Transfer Taxes and Fees      14   
  2.6    Payment of Other Amounts at Closing      14   
3.   Closing      14   
4.   Representations and Warranties of Sellers      15   
  4.1    Authority and Binding Obligation      15   
  4.2    Title to Shares      15   
  4.3    No Conflicts      15   
  4.4    Investment Representations      15   
  4.5    No Obligations or Agreements      16   
5.   Representations and Warranties of Target      17   
  5.1    Organization and Qualification      17   
  5.2    Authority and Binding Obligation      17   
  5.3    Capitalization      18   
  5.4    No Conflicts      18   
  5.5    Financial Information      19   
  5.6    No Undisclosed Liabilities      19   
  5.7    Absence of Changes      20   
  5.8    Contracts and Commitments      20   
  5.9    Taxes      23   
  5.10    Intellectual Property Rights      24   
  5.11    Real Property      26   
  5.12    Privacy and Data Collection      26   
  5.13    Accounts Receivable      27   
  5.14    Officers, Directors and Bank Accounts      27   
  5.15    Transactions with Interested Persons      27   
  5.16    Insurance      27   
  5.17    Litigation      28   
  5.18    Books and Records      28   
  5.19    Corruption      28   
  5.20    Compliance with Laws      28   
  5.21    Employees; Labor Relations      29   
  5.22    Employee Benefit Matters      30   
  5.23    Indebtedness      32   
  5.24    Customers and Distributors      32   
  5.25    Service Liability      33   
  5.26    Tangible Assets      33   
  5.27    Brokers’ and Finders’ Fees      34   
  5.28    Environmental Matters      34   
  5.29    No Other Representations and Warranties      34   
6.   Representations and Warranties of Parent and Purchaser      34   


  6.1    Organization and Qualification      34   
  6.2    Authority and Binding Obligation      34   
  6.3    No Conflicts      34   
  6.4    Capitalization      35   
  6.5    Issuance of Shares      35   
  6.6    Available Funds      35   
  6.7    Brokers’ and Finders’ Fee      35   
  6.8    SEC Reports      35   
  6.9    No Other Representations and Warranties      35   
7.   Understandings and Covenants      36   
  7.1    Mutual Cooperation      36   
  7.2    Confidentiality      36   
  7.3    Waiver of Share Transfer Restrictions      36   
  7.4    Share Consideration Lock-Up      37   
  7.5    Closing Certificates      37   
  7.6    Strategic Direction      37   
  7.7    China Management      38   
  7.8    Option Repurchase      38   
  7.9    Board Rights      38   
  7.10    Standstill      39   
  7.11    Registration Statement      40   
  7.12    Further Assurances      41   
8.   Closing Actions and Deliverables      41   
  8.1    Parent and Purchaser      41   
  8.2    Target and Sellers      42   
9.   Survival and Indemnification      43   
  9.1    Survival of Representations      43   
  9.2    Indemnification      44   
  9.3    Maximum Indemnification; Limitations      46   
  9.4    Damage Threshold      47   
  9.5    Procedures for Indemnification      47   
  9.6    Third-Party Claims      48   
  9.7    Limitation on Indemnity; Exclusivity of Remedy      48   
  9.8    Tax Treatment of Indemnification Payments      48   
10.   Seller Representative      48   
  10.1    Designation and Replacement of Seller Representative      48   
  10.2    Authority and Rights of the Seller Representative; Limitations on Liability      49   
  10.3    Representations of the Seller Representative      49   
11.   Miscellaneous      50   
  11.1    Waivers      50   
  11.2    Notices      50   
  11.3    Amendments      51   
  11.4    Expenses      51   
  11.5    Entire Agreement      51   
  11.6    Governing Law      51   
  11.7    Arbitration      51   


  11.8    Section and Paragraph Headings      52   
  11.9    Counterparts      52   
  11.10    Parties in Interests      52   
  11.11    Definition of knowledge, Business Day and Dollars      52   
  11.12    Rules of Construction      52   
  11.13    Severability      52   

EXHIBIT 10.2

ANNEXURE 1 - CHANGE IN CONTROL AGREEMENT

This Change in Control Agreement (“Agreement”) is effective as of April 18, 2011, by and between Mr. Mark Lotter (“Employee”) and SciClone Pharmaceuticals Hong Kong Limited (the “Company”).

RECITALS

A. Under the employment agreement between the Company and Employee dated April 18, 2011 (to which this Agreement has been annexed to) and including any subsequent amendments thereto (the “Employment Agreement”), Employee will serve as the Chief Executive Officer of NovaMed Pharmaceutical Trading (Shanghai) Co. Ltd. and SciClone Pharmaceuticals (China) Limited and will perform significant strategic and management responsibilities necessary to the continued conduct of the Company’s business and operations.

B. The Board of Directors of the Company (the “Board”) has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of Employee, notwithstanding the possibility or occurrence of a Change in Control (as defined below) of the Company.

C. The Board believes that it is imperative to provide Employee with certain ex-gratia benefits upon Employee’s termination of employment following a Change in Control that will provide Employee with enhanced financial security and provide sufficient incentive and encouragement to Employee to remain with the Company following a Change in Control.

AGREEMENT

Employee and the Company agree as set forth below:

1.  Limitation On Compensation On Termination Following A Change in Control . If Employee’s employment with the Company terminates following a Change in Control, but on or before the first anniversary of the Change in Control, Employee will not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement.

2.  Ex-Gratia Benefits Upon Termination following a Change in Control . Subject to the limitations set forth in Sections 3 and 4 below, if Employee’s employment with the Company terminates following a Change in Control but on or before the first anniversary of such Change in Control, then Employee will be entitled to receive, in addition to the compensation and benefits earned by Employee through the date of his termination, ex-gratia benefits as follows:

(a)  Termination by Involuntary Termination . If Employee’s employment with the Company is terminated as a result of Involuntary Termination, then Employee will be entitled to receive the following ex-gratia benefits:

(i) Employee will be entitled to receive an ex-gratia payment in an amount equal to the sum of (A) one hundred ten percent (110%) of his annual China salary and HK salary (as each such term is defined in his Employment Agreement) as in effect at the time of such termination. Any ex-gratia payment to which Employee is entitled pursuant to this section will be paid in a lump sum, less applicable withholding, within thirty (30) days following Employee’s termination, subject to the provisions of Section 2(a)(vi) hereof. The Company shall assist the Employee with withholding and paying any income tax due in the People’s Republic of China (“PRC”) on such ex-gratia payment.


(ii) Employee will be entitled to receive a separation bonus equal to fifty percent (50%) of the average of the Employee’s annual performance bonus paid for the two (2) most recent fiscal years for which bonuses have been paid prior to the termination date. The Company shall assist the Employee with withholding and paying any income tax due in the PRC on such bonus.

(iii) With respect to any unvested options to purchase shares of stock of SciClone Pharmaceuticals, Inc., a Delaware corporation (“US Parent”) held by Employee which options are (A) subject to time-based vesting based upon the Employee’s length of continued service with the Company and (B) subject to vesting based upon the achievement of Company performance metrics, Employee will immediately become vested in full at the time of such termination. Employee shall be solely responsible for any withholding and payment of any income tax due worldwide as a result of Employee’s option exercises.

(iv) The exercise period for any unexercised portion of all nonstatutory stock options held by Employee as at the date of such Involuntary Termination will be extended to be twelve (12) months after the date of such Involuntary Termination.

(v) The Company will continue to pay any premiums resulting from the provision of insurance to the Employee in accordance with clause 5.4 of the Employment Agreement until the earlier of (A) the one year anniversary of Employee’s Involuntary Termination, or (B) the date on which Employee commences New Employment.

(vi) To the extent, if any, required in order to avoid the imposition of additional tax on Employee or the Company, the payments set forth in Sections 2(a)(i) and 2(a)(ii) hereof will not commence, and the accelerated vesting as to options provided under Section 2(a)(iii) hereof, will not be effective until the date occurring six months after the date of Involuntary Termination.

(b)  Voluntary Resignation; Termination For Cause . If Employee’s employment terminates by reason of Employee’s voluntary resignation (but not as a result of an Involuntary Termination) or as a result of Employee’s termination for Cause, then Employee will not be entitled to receive any ex-gratia pay or benefits under this Agreement.

(c)  Disability; Death . If the Company terminates Employee’s employment as a result of Employee’s Disability, or death, then Employee will not be entitled to receive any ex-gratia pay or benefits under this Agreement.

3.  Release of Claims; Resignation . Employee’s entitlement to any ex-gratia pay or benefits under Section 2(a) is conditioned upon Employee’s execution and delivery to the Company of (a) a general release of known and unknown claims in the form attached hereto as Schedule A and (b) a resignation from all of Employee’s positions with the Company, including from the Board of Directors and any committees thereof on which Employee serves, in a form satisfactory to the Company.


4.  Parachute Payments . In the event that any payment or benefit received or to be received by Employee pursuant to this Agreement or otherwise (collectively, the “Payments”) would result in a “parachute payment” as described in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding the other provisions of this Agreement, the amount of such Payments will not exceed the amount which produces the greatest after-tax benefit to Employee. For purposes of the foregoing, the greatest after-tax benefit will be determined within thirty (30) days of the occurrence of such payment to Employee, in Employee’s sole and absolute discretion. If no such determination is made by Employee within thirty (30) days of the occurrence of such payment, the Company will promptly make such determination in a fair and equitable manner.

5.  Consulting Services . During the three (3) months following any Involuntary Termination for which Employee receives the ex-gratia pay and benefits described in Section 2(a) hereof, Employee will be retained by the Company as an independent contractor to provide consulting services to the Company at its request for up to five (5) hours per week. These services will include any reasonable requests for information or assistance by the Company, including, but not limited to, the transition of Employee’s duties. Such services will be provided at mutually convenient times. For the actual provision of such services, the Company will pay to Employee a consulting fee of $400.00 per hour, plus reasonable out-of-pocket expenses (for example, travel and lodging).

6.  Definition of Terms . The following terms referred to in this Agreement will have the following meanings:

(a) “ Cause ” will have the meaning as defined in the Employment Agreement.

(b) “ Change in Control ” will mean: (i) a merger or other transaction in which US Parent, or substantially all of its assets is sold or merged and as a result of such transaction, the holders of the US Parent’s common stock prior to such transaction do not own or control a majority of the outstanding shares of the successor corporation, (ii) the election of nominees constituting a majority of the board of the US Parent which nominees were not approved by a majority of the board of the US Parent prior to such election, or (iii) the acquisition by a third party of twenty percent (20%) or more of the US Parent’s outstanding shares which acquisition was without the approval of a majority of the board of the US Parent in office prior to such acquisition.

(c) “ US Parent Group ” will mean the US Parent and its related companies (as the term is defined under section 49BA(9) of the Companies Ordinance (Cap. 32)).

(d) “ Constructive Dismissal ” will mean resignation by the Employee in circumstances in which the Labour Tribunal or court of Hong Kong SAR determines to be sufficient for the Employee to treat his or her employment as being terminated by the Employer.

(e) The phrases “ determined by the Board ,” “ decided by the Board ,” mean in each case a determination or decision made by the affirmative vote of at least a majority of the total then-authorized number of members of the Board calculated without counting Employee, if he is then a member of the Board.

(f) “ Disability ” means the inability of Employee, in the opinion of a licensed, qualified medical practitioner, to perform the essential functions of Employee’s position with the Company Group, with or without reasonable accommodation, because of the sickness or injury of Employee.


(g) “ Involuntary Termination ” will mean the occurrence of either of the following events after a Change in Control, but on or before the first anniversary of such Change in Control:

(i) termination by US Parent Group of Employee’s employment without Cause; or

(ii) Employee’s Constructive Dismissal;

provided, however , that “Involuntary Termination” will not include any termination of Employee’s employment that is (1) for Cause, (2) a result of Employee’s death or Disability, or (3) a result of Employee’s voluntary resignation.

(h) “ New Employment ” will mean any full-time employment, but not including any consultancy that is less than full-time, obtained by Employee after the termination of Employee’s employment with the Company or US Parent Group.

7.  Successors .

(a)  Company’s Successors . Any successor to the Company or to all or substantially all of the Company’s business and/or assets will be bound by this Agreement in the same manner and to the same extent as the Company. For all purposes under this Agreement, the term “Company” will include any successor to the Company’s business and/or assets.

(b)  Employee’s Successors . All rights of Employee hereunder will inure to the benefit of, and be enforceable by, Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. The Employee will have no right to assign any of his obligations or duties under this Agreement to any other person or entity.

8.  Notice . Notices and all other communications contemplated by this Agreement will be in writing and will be deemed to have been duly given when personally delivered or when mailed by registered or certified mail, return receipt requested and postage prepaid. In the case of Employee, mailed notices will be addressed to Employee at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices will be addressed to its corporate headquarters, and all notices will be directed to the attention of its Secretary.

9.  Miscellaneous Provisions .

(a)  No Duty to Mitigate . The Employee will not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking New Employment or in any other manner), nor will any such payment be reduced by any earnings that Employee may receive from any other source.

(b)  Waiver . No provision of this Agreement will be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Employee and by an authorized officer of the Company (other than Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party will be considered a waiver of any other condition or provision or of the same condition or provision at another time.


(c)  Choice of Law . This agreement is governed by the law applicable in Hong Kong SAR and the parties irrevocably and unconditionally submit to the non-exclusive jurisdiction of the court of Hong Kong SAR.

(d)  Severability . The invalidity or unenforceability of any provision or provisions of this Agreement will not affect the validity or enforceability of any other provision hereof, which will remain in full force and effect.

(e)  Prior Agreements . This Agreement supersedes all prior understandings and agreements, whether written or oral, regarding the subject matter of this Agreement.

[The remainder of this page is intentionally blank]


IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

 

SCICLONE PHARMACEUTICALS HONG KONG LIMITED
By:  

/s/ F. Blobel

  Friedhelm Blobel, Ph.D.
  Director
EMPLOYEE

/s/ Mark Lotter

Mr. Mark Lotter

[Signature Page to Change of Control Agreement]


Schedule A

DEED OF RELEASE

WITHOUT PREJUDICE

SUBJECT TO CONTRACT

This Deed dated                       is entered into between Mark Lotter (the “Employee”) and SciClone Pharmaceuticals Hong Kong Limited (the “Company”).

In exchange for the ex-gratia pay and benefits described in the Change in Control Agreement between SciClone Pharmaceuticals Hong Kong Limited (the “Company”) and the Employee dated April 18, 2011 (“Change in Control Agreement”), the Employee hereby releases the Company, SciClone Pharmaceuticals, Inc. (“US Parent”) and US Parent’s related companies (as the term is defined under section 49BA(9) of the Companies Ordinance (Cap. 32))(“Related Company”), and their officers, directors, employees, attorneys, stockholders, successors, assigns and affiliates (the “Beneficiaries”), of and from any action, application, arbitration, cause of action, complaint, cost, debt due, demand, determination, inquiry, judgment and verdict: (a) at law, (b) in equity, (c) arising under any legislation, and whether made in Hong Kong or in any other country or jurisdiction, and whether made under Hong Kong law or any other law (“Claims”), at any time prior to and including the execution date of this Deed, including, but not limited to all present and future Claims arising from the Employee’s employment with the Company or the termination of that employment.

The Employee acknowledges that the payments and benefits referred to in the Change in Control Agreement are made in full and final satisfaction of any and all contractual and statutory or other entitlements that the Employee has, or may have, from the Beneficiaries in connection with the Employee’s employment with the Company or the termination of that employment.

If the Employee breaches his obligations under this Deed before the Company has paid the Employee the ex-gratia pay and benefits described in the Change in Control Agreement, then without prejudice to any claim which the Company may make against the Employee for loss or damage the Company suffers, the Company will have no obligation to pay the Employee the ex-gratia pay and benefits described in the Change in Control Agreement and the Company will only pay the Employee any amounts which it is required to pay to the Employee under the Employee’s employment agreement with the Company dated April 18, 2011 (“Employment Agreement”) including any subsequent amendments thereto and under any applicable statute as a result of the termination of the Employee’s employment. This clause does not affect nor derogate from any other paragraph of this Release (including, for the avoidance of doubt, the enforceability of this Deed).

If the Employee breaches his obligations under this Deed after the Company has paid the Employee the ex-gratia pay and benefits described in the Change in Control Agreement, then without prejudice to any claim which the Company may make against the Employee for loss or damage the Company suffers, the Employee must repay to the Company the gross amounts of the ex-gratia pay and benefits described in the Change in Control Agreement less any amounts which the Company was required to pay the Employee under the Employment Contract and any applicable statute as a result of the termination of the Employee’s employment. This clause does not affect nor derogate from any other paragraph of this Deed (including, for the avoidance of doubt, the enforceability of this Deed).


The Employee acknowledges that to the extent that the termination of the Employee’s employment was a result of a decision by the Company, the termination was for a valid reason in accordance with the Employment Ordinance (Cap. 57).

The Employee acknowledges that the Employee has obligations to the Beneficiaries which survive the termination of the Employee’s employment (including obligations with respect to confidential information and post-employment restrictions) and undertake again to the Company, in the same terms as are contained in the Employment Agreement, as at the date hereof.

The Employee acknowledges that a Beneficiary may plead this Deed as a bar to any proceedings commenced by the Employee in respect of which a release is given in this Deed.

If despite this Deed the Company, the US Parent or Related Company becomes obligated to pay the Employee any bonus or end of year payment (as defined in the Employment Ordinance Cap. 57) (“Bonus”), severance payment (as defined in the Employment Ordinance Cap. 57) (“Severance Payment”), long service payment (as defined in the Employment Ordinance Cap. 57 (“Long Service Payment”), payment in lieu of notice of termination (“Payment in lieu”), or any other payment owed under the Employment Agreement or otherwise (“Other Payment”), then the Company may claim from the Employee by way of set off, counterclaim or otherwise for the repayment of the ex-gratia payment and benefits referred to in the Change of Control Agreement which are above relevant contractual or statutory requirements, to the extent of its liabilities to pay the Bonus, Severance Payment, Long Service Payment, Payment in lieu or Other Payment.

Part or all of any provision of this Deed that is illegal or unenforceable may be severed from this Deed and the remaining provisions continue in force.

This Deed is governed by the law applicable in Hong Kong Special Administrative Region and the parties subject to the non-exclusive jurisdiction of Hong Kong courts and labour tribunal.

This Deed, although marked “Without Prejudice”, will upon signature by both parties be treated as an open document evidencing an agreement binding on the parties.

This Deed contains the entire agreement between the Company and the Employee regarding the subjects above, and it cannot be modified except by a document signed by the Employee and an authorized representative of the Company.

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SIGNING PAGE

IN WITNESS whereof this agreement has been executed and delivered as a Deed on the day and year first before written.

 

Executed as a deed by SciClone Pharmaceuticals Hong Kong Limited acting by Dr. Friedhelm Blobel, a Director and Gary

Titus, a Director

    

 

Signature of director

 

Director

 

Signature of director/secretary

 

Director

  

SIGNED SEALED AND DELIVERED BY Mark Lotter:

     

In the presence of:

 

                                                                                  

    

 

  

Signature of witness

     Signature of employee   

Exhibit 10.3

 

 

 

 

DATED         April 18, 2011

 

 

 

 

EMPLOYMENT AGREEMENT

 

 

 

 

 

 

 


CONTENTS

 

1.

   DEFINED TERMS & INTERPRETATION      2   

2.

   APPOINTMENT, POSITION AND TERM      2   

3.

   EMPLOYEE’S DUTIES      3   

4.

   WORKING HOURS      4   

5.

   REMUNERATION, BENEFITS AND REVIEW      4   

6.

   BONUS      5   

7.

   OPTIONS      5   

8.

   EXPENSES      6   

9.

   EMPLOYEE’S LEAVE AND HOLIDAYS      6   

10.

   SICKNESS ALLOWANCE      6   

11.

   CONFIDENTIAL INFORMATION      7   

12.

   INTELLECTUAL PROPERTY AND MORAL RIGHTS      8   

13.

   TERMINATION      9   

14.

   ENTITLEMENTS ON TERMINATION      11   

15.

   WHAT HAPPENS AFTER TERMINATION OF EMPLOYMENT      12   

16.

   RESTRAINT ON THE EMPLOYEE’S CONDUCT      13   

17.

   GENERAL      16   

SCHEDULE 1 - INTERPRETATION

     19   

SCHEDULE 2 - DUTIES (CLAUSE 3.1.1)

     21   

SIGNING PAGE

     22   

ANNEXURE 1 - CHANGE IN CONTROL AGREEMENT

     23   

ANNEXURE 2 - PERSONAL DATA COLLECTION STATEMENT

     24   


This Employment Agreement is entered into as of April 18, 2011 by and between SciClone Pharmaceuticals Hong Kong Limited (Employer) and Mark Lotter (Employee).

WHEREAS, the Employer desires to employ the Employee upon the terms and conditions as set forth in this Agreement;

WHEREAS, the Employee desires to be employed by the Employer, and to perform the duties assigned to him hereunder, upon the terms and conditions set forth herein; and

WHEREAS, the Employee will be seconded to NovaMed Pharmaceutical Trading (Shanghai) Co. Ltd. ( China Sub ) and SciClone Pharmaceuticals (China) Limited ( SciClone China ) pursuant to the terms of a secondment agreement;

NOW, THEREFORE, in consideration of transactions contemplated hereby and the respective covenants and agreements of the parties herein contained, the parties hereto, intending to be legally bound hereby, agree as follows:

 

1. DEFINED TERMS & INTERPRETATION

The interpretation provisions of this document are in Schedule 1 and Annexure 1 where relevant.

 

2. APPOINTMENT, POSITION AND TERM

 

  2.1 Appointment and position

Subject to the Employee obtaining and maintaining at the Employer’s cost all immigration requirements, the Employer will initially employ the Employee in the position of Chief Executive Officer of the China Sub and SciClone China ( CEO ) or subject to clause 13.2, such other position as determined by the Employer from time to time of no less equivalent status, reporting to the Chief Executive Officer of SciClone Pharmaceuticals, Inc. ( SciClone US ) or as the Employer may direct.

 

  2.2 Location

Initially, the Employee will be based in China, although the Employee may be required to travel to Hong Kong or various other locations pursuant to the performance of his duties, and may be required to be based at a different location.

 

  2.3 Commencement

The Employee’s employment in accordance with this Agreement will commence on April 18, 2011 ( Effective Date ) and will continue for an indefinite period unless and until terminated in accordance with clause 12 below and subject to the terms and where relevant, definitions set out in the Change in Control Agreement annexed to this Agreement as Annexure 1 ( Change in Control Agreement ).


3. EMPLOYEE’S DUTIES

 

  3.1 Duties Employee must perform

The Employee must:

 

  3.1.1 perform to the best of the Employee’s abilities and knowledge the duties assigned to the Employee from time to time which may include duties for the benefit of any Related Company of the Employer. The duties initially assigned to the Employee include those listed in Schedule 2;

 

  3.1.2 work such hours as are reasonably necessary to perform the Employee’s duties (overtime is not payable);

 

  3.1.3 use all reasonable efforts to promote the interests of the Employer;

 

  3.1.4 disclose to the Employer any facts which might involve a conflict between the Employee’s interests and the interests of the Employer;

 

  3.1.5 comply with the Employer’s Employee Handbook and all policies of the Employer in place or as varied or replaced from time to time that are intended to apply to the Employee, including by not limited to the FCPA and Insider Trading Policy (although these do not form part of the Employee’s contract of employment); and

 

  3.1.6 comply with all laws and the rules and regulations of external agencies applying to the Employee’s position and the duties assigned to the Employee.

 

  3.1.7 provide to Employer such documents, invoices etc. as may be required to claim maximum deduction from income taxes, which are paid by Employer.

 

  3.2 What the Employee must not do

Without limiting the Employee’s duties, during the Employee’s employment the Employee must not:

 

  3.2.1 act in a manner that could be reasonably deemed to be in conflict with the Employer’s best interests;

 

  3.2.2 on discovery, allow a conflict as provided under clause 3.2.1 between the Employee’s interests and the interests of the Employer to continue;

 

  3.2.3 without the prior approval of the Employer, which approval shall not be unreasonably withheld, prepare to be engaged or involved, or engage or be involved in any business or employment other than for the Employer or where the Employee holds or is interested in investments (quoted or unquoted) representing not more than one percent (1%) of the issued investments of any class of any one such company;

 

  3.2.4 compete with the Employer;

 

  3.2.5 in performing the Employee’s duties, accept any financial or other benefit except from the Employer; and

 

  3.2.6 discriminate or harass another person.


4. WORKING HOURS

The Employee’s normal working hours shall be 9.00am to 6.00pm with one (1) hour of lunch on Mondays to Fridays and such additional hours as are necessary for the proper performance of the Employee’s duties. The Employee acknowledges that the Employee shall not receive further remuneration in respect of such additional hours.

 

5. REMUNERATION, BENEFITS AND REVIEW

 

  5.1 Salary

In respect of the Employee’s job responsibilities as Chief Executive Officer of the China Sub and SciClone China ( CEO ), the Employer will pay to the Employee an amount in US$ such that the after tax amount to be received shall be US$245,000 per annum, payable monthly in arrears on or about the 28th day of each calendar month and all days in the month are deemed to be fully paid ( China salary ). The Employer shall assist the Employee with withholding and paying any income tax due in the PRC.

In respect of the Employee’s direct job responsibilities with the Employer outside of the PRC, the Employer will pay the Employee US$82,000 per annum, payable monthly in arrears on or about the 28th day of each calendar month and all days in the month are deemed to be fully paid ( HK salary ). The Employee is responsible for paying any salaries tax due in HK.

In case of any incomplete calendar month, the China salary and/or HK salary shall be pro-rated according to the number of days, which the Employee has actually worked during such calendar month.

 

  5.2 Payment in Other Currencies

In case any remuneration is paid in a currency other than US$, the US$ amount shall be converted into such currency at an exchange rate which exists as of January 1 of that particular calendar year. This exchange rate will be in effect for all relevant payments throughout the full calendar year until the following calendar year when a new exchange rate will be established accordingly.

 

  5.3 Mandatory Provident Fund

In addition to the Employee’s China salary and HK salary, unless exempted (or to the extent the Employee is exempted), the Employer will contribute the minimum amount required under applicable laws into a MPF. The Employee may elect to make additional contributions, which will have to be provided by the Employee.

 

  5.4 Insurance benefits

In addition to the China salary and HK salary, the Employer will take reasonable steps to provide for the Employee and for the Employee’s spouse and children, at the Employer’s cost, medical insurance capped at US$ 2,103.49 per month as long as the Employee provides written evidence of health insurance in an amount not above the Employer’s contribution.

The Employee will also be entitled to participate in SciClone US’s life insurance plan subject to the terms, conditions and overall administration of SciClone US’s life insurance plan.


  5.5 Review

The Employee’s China salary, HK salary and other compensation will initially be reviewed by the Chief Executive Officer of SciClone US on the first anniversary of the Effective Date and may be subject to adjustment at that time; provided, however, that such China salary and HK salary will not be reduced below the annual China salary and HK salary then being paid to the Employee unless a reduction is part of a salary reduction applicable to all members of the Employer’s executive team. Thereafter, the Employee’s China salary, HK salary, and compensation will be reviewed on an annual basis. Any adjustment to the Employee’s China salary, HK salary and/or other compensation will be in the sole discretion of the Chief Executive Officer of SciClone US.

 

6. BONUS

 

  6.1 Annual Bonus

In addition to the China salary and HK salary, the Employer may in its discretion pay an annual bonus to the Employee ( Target Bonus ) with an initial target amount equal to forty-four percent (44%) of the Employee’s annual China salary plus HK salary. The bonus will be earned based on your achievement of business objectives as established annually by SciClone US’s President and Chief Executive Officer.

Such bonus, if earned, shall typically be paid not later than the date that is two and one-half months following the close of the year in which such bonus is earned.

The Target Bonus for the Employee’s first year of employment, (calendar year 2011) will be prorated from the Effective Date to the end of calendar year.

Whether the Employer pays the Employee the Target Bonus and, if so, the amount and date the Bonus is paid, are in the discretion of the Employer and do not give rise to any obligations on the Employer concerning later decisions by the Employer regarding the Target Bonus.

To be entitled to be paid the Target Bonus, the Employee must be employed by the Employer (and not serving notice) on the date the Target Bonus is paid.

Nothing in this clause is intended to restrict the Employer’s right to determine after the end of any Bonus period whether a bonus may be payable to the Employee in a later bonus period and if so, then how much and on what terms.

 

7. OPTIONS

The Employee will be granted stock options under SciClone US’s 2005 Equity Incentive Plan, a copy of which will be provided to the Employee after the commencement of employment.


8. EXPENSES

The Employer will pay or reimburse the Employee for the Employee’s reasonable travel and out of pocket expenses properly substantiated with receipts and approved by the Employer in accordance with the Employer’s business expense reimbursement policy and practices. All reimbursements must be claimed promptly, but otherwise not later than the calendar month after the expense is incurred.

 

9. EMPLOYEE’S LEAVE AND HOLIDAYS

 

  9.1 Annual leave

Annual leave will apply as follows:

 

  9.1.1 The Employer will grant the Employee annual leave of 20 Business Days per leave year and pro rata for each incomplete leave year. The Employer has elected to use a common leave year being the 12-month period ending 31 December for the calculation of annual leave.

 

  9.1.2 for annual leave in excess of the minimum statutory requirement, the Employer may grant annual leave on a pro rata basis during the year in which it accrues or in advance;

 

  9.1.3 any annual leave taken will first be applied against any statutory annual leave entitlement;

 

  9.1.4 when taking annual leave, Statutory Holidays, Saturdays and Sundays will not be counted as annual leave days;

 

  9.1.5 untaken annual leave in excess of the minimum statutory requirement will be forfeited, unless otherwise agreed in writing, if not taken in the year it falls due; and

 

  9.1.6 subject to applicable law, on termination of the Employee’s employment other than termination in accordance with clause 13.3 (Termination without notice), the Employer will pay the Employee accrued but untaken annual leave and pro rata annual leave calculated since the end of the last leave year at the rate the Employee would have been paid had the leave been granted.

 

  9.2 Holidays

The Employer will pay the Employee for Statutory Holidays although the Employee is not required to work on these days.

 

  9.3 Rest day

Sunday is a rest day.

 

10. SICKNESS ALLOWANCE

The Employee is entitled to sickness allowance in accordance with the provisions of the Employment Ordinance (Cap. 57).


Application for sickness leave for more than one day must be supported by a valid medical certificate. Any sickness leave taken without the support of a valid medical certificate will be deemed to be unpaid or annual leave as appropriate. Any paid sickness leave taken by the Employee will be deducted from the sickness day credits accumulated by the Employee.

The Employee must if requested by the Employer undergo a medical examination by a medical practitioner appointed by the Employer, at the cost of the Employer, and be certified as fit to carry out the inherent requirements of the employment. The Employee consents to the disclosure of the result of any such medical examination to the Employer.

 

11. CONFIDENTIAL INFORMATION

 

  11.1 Duty not to disclose

Without limiting the Employee’s duties at law, the Employee must keep Confidential Information confidential.

 

  11.2 Exceptions to duty not to disclose

Notwithstanding clause 11.1, the Employee may disclose Confidential Information:

 

  11.2.1 the Employee is required to disclose in the course of the Employee’s duties with the Employer;

 

  11.2.2 that was public knowledge when this Agreement was signed or became so at a later date (other than as a result of a breach of confidentiality by the Employee); or

 

  11.2.3 that the Employee is required by a court, tribunal or law to disclose (in which event, the Employee must inform the Employer prior to disclosure).

 

  11.3 Disclosure in the course of the Employee’s duties

The Employee may only disclose Confidential Information under clause 11.2.1 if:

 

  11.3.1 the disclosure is solely for the purpose of performing the Employee’s duties with the Employer; and

 

  11.3.2 the disclosure is to persons who:

 

  11.3.2.1 are aware and agree that the Confidential Information must be kept confidential; or

 

  11.3.2.2 have signed any confidentiality obligation required by the Employer from time to time;

 

  11.3.2.3 have a need to know (and only to the extent that each has a need to know); or

 

  11.3.2.4 have been approved by the person or persons nominated by the Employer from time to time.


  11.4 Preservation of Confidential Information

The Employee must take whatever measures are reasonably necessary to preserve the Confidential Information, including:

 

  11.4.1 complying with all security measures established to safeguard Confidential Information from access or unauthorised use;

 

  11.4.2 keeping Confidential Information under the Employee’s control; and

 

  11.4.3 not removing Confidential Information from, or accessing Confidential Information from outside, the Employer’s premises without the prior approval of the Employer.

 

  11.5 Notification of breach

The Employee must immediately notify the Employer of any suspected or actual unauthorised use, copying or disclosure of Confidential Information.

 

  11.6 Indemnification

The Employee hereby undertakes to indemnify and keep indemnified the Employer against any loss or damage suffered by the Employer arising from the breach of the Employee’s obligations under this clause 11. Notwithstanding the aforesaid and without prejudice to any other rights or remedies that the Employer may have, the Employee acknowledges and agrees that damages alone would not be an adequate remedy for any breach by the Employee of this clause 11, and accordingly the Employer shall be entitled, without proof of special damages, to the remedies of injunction, specific performance or other equitable relief for any threatened or actual breach of this clause 11.

 

12. INTELLECTUAL PROPERTY AND MORAL RIGHTS

 

  12.1 Assignment by Employee

The Employee:

 

  12.1.1 presently assigns to the Employer future Intellectual Property Rights in all inventions, models, designs, drawings, plans, software, reports, proposals and other materials created or generated by the Employee (whether alone or with the Employer, its other employees, agents or contractors) for use by the Employer (or a Related Company of SciClone US); and

 

  12.1.2 acknowledges that by virtue of this clause, on their creation, all such future rights will vest in the Employer.

 

  12.2 Employee’s assistance

The Employee must do all things reasonably requested by the Employer to enable the Employer to assure further the rights assigned under clause 12.1.


  12.3 Moral Rights

The Employee:

 

  12.3.1 voluntarily and unconditionally consents to all or any acts or omissions by the Employer, or persons authorised by the Employer, in relation to any and all works made or to be made by the Employee (whether before or after this consent is given) in the course of the employment ( Works ) which would otherwise infringe the Employee’s Moral Rights;

 

  12.3.2 waives any and all future Moral Rights in the Works; and

 

  12.3.3 acknowledges that the Employee has given this consent

 

  12.3.3.1 voluntarily; and

 

  12.3.3.2 without reliance on any statement or representation made by the Employer, a Related Company of SciClone US or anyone acting on their behalf.

 

13. TERMINATION

 

  13.1 Termination with notice or payment in lieu

Either the Employer or the Employee may at any time terminate the Employee’s employment by;

 

  13.1.1 giving to the other notice of 60 days, in writing of their intention to do so; or

 

  13.1.2 paying to the other party a sum calculated in accordance with the Employment Ordinance (Cap. 57) in lieu of the period of notice required in clause 13.1.1.

Either the Employer or the Employee, having given proper notice in accordance with clause 13.1.1, may at any time thereafter terminate the Employee’s employment by paying to the other party such proportion of the sum referred to in clause 13.1.2 as is proportionate to the period between the termination of the Employee’s employment and the time when the notice given would have expired.

Even though the Employee’s position, title or report may change during the employment, unless otherwise agreed the period of notice of termination will not change.

 

  13.2 Employment during notice period

Following the provision of notice to terminate the Employee’s employment by either party or, if the Employer is undertaking an investigation at any time during the employment, the Employer may by written notice require the Employee not to perform any services (or to perform only specified services) for the Employer or any Related Company of the Employer until the termination of the employment or a specified date.


During any period of Garden Leave, the Employer shall be under no obligation to provide any work to, or vest any powers in the Employee, who shall have no right to perform any services for the Employer or any Related Company of the Employer.

During any period of Garden Leave the Employee shall:

 

  13.2.1 continue to receive salary and all contractual benefits in the usual way and subject to the terms of any benefit arrangement;

 

  13.2.2 remain an employee of the Employer and bound by the terms of this Agreement;

 

  13.2.3 not, without the prior written consent of the Employer, attend the Employee’s place of work or any other premises of the Employer;

 

  13.2.4 not, without the prior written consent of the Employer, contact or deal with (or attempt to contact or deal with) any officer, employee, consultant, client, customer, supplier, agent, distributor, shareholder, advisor or other business contact of the Employer or any Related Company of the Employer; and

 

  13.2.5 (except during any periods taken as holiday in the usual way) ensure that the Employer knows where the Employee will be and how the Employee can be contacted during each working day and shall comply with any written requests to contact a specified employee of the Employer at specified intervals.

 

  13.3 Termination without notice

The Employee’s employment maybe terminated by the Employer at any time without notice in any of the following circumstances:

 

  13.3.1 theft, fraud, dishonesty, gross negligence or wilful misconduct by the Employee in connection with the performance of his duties;

 

  13.3.2 a wilful breach of the material terms of this Agreement by the Employee;

 

  13.3.3 a material failure to fulfil or perform the Employee’s duties, other than due to illness or injury, which breach or failure is not cured to the reasonable satisfaction of the Chief Executive Officer of SciClone US within (30) days after written notice from the Chief Executive Officer of SciClone US to the Employee;

 

  13.3.4 conviction by a court of a serious criminal offence;

 

  13.3.5 repeated or ongoing failure to comply with the reasonable directions and instructions of the Chief Executive Officer of SciClone US in connection with the performance of the Employee’s duties and responsibilities following an initial notice of warning from the Chief Executive Officer of SciClone US;

 

  13.3.6 use or possession of illicit drugs or abuse of alcohol, while performing the Employee’s duties or while on the Employer’s premises;

 

  13.3.7 commission of any act, or failure to act, in bad faith, which, in the reasonable determination of the Chief Executive Officer of SciClone US, in any material respect impairs the reputation of, or in any material respect harms, the Employer, SciClone US and the Related Companies of SciClone US;


  13.3.8 the Employee’s breach of clause 11 (Confidential Information);

 

  13.3.9 discrimination or harassment of any other person by the Employee;

 

  13.3.10 the Employee accepting employment with the Employer in breach of clause 17.1 (Warranties);

 

  13.3.11 bankruptcy of the Employee;

 

  13.3.12 the Employee’s serious breach of any rules issued by the Employer from time to time; or

 

  13.3.13 on any other ground on which the Employer would be entitled to terminate this Agreement without notice at common law.

 

14. ENTITLEMENTS ON TERMINATION

 

  14.1 Voluntary Resignation

In the event that the Employee voluntarily resigns from his employment with the Employer, the Employee will be entitled to no compensation or benefits from the Employer other than those earned under clause 5, 6, and 7 of this Agreement through the date of such termination. Voluntary resignation also includes employment termination as a result of the Employee’s death or Disability (as defined in the Change of Control Agreement).

 

  14.2 Termination for Cause

In the event that the Employee’s employment is terminated for Cause, the Employee will be entitled to no compensation or benefits from the Employer other than those to which the Employee is entitled to under statute or under this Agreement.

 

  14.3 Termination without Cause

Provided that:

 

  14.3.1 the Employee’s employment is terminated in circumstances amounting to Termination without Cause;

 

  14.3.2 such termination is not governed by the conditions specified in the Change in Control Agreement;

 

  14.3.3 the Employee signs a general release of known and unknown claims in a form satisfactory to the Employer (which may be in the form of Schedule A to the Change in Control Agreement); and


  14.3.4 the Employee resigns from all of Employee’s positions with the Employer, the SciClone US Board as well as other boards of directors of any Related Company of SciClone US;

the Employee will receive the following benefits:

 

  14.3.5 subject to the provisions of clause 14.4 below, continued payment of the Employee’s final China salary plus HK salary, at a rate equal to 110% of the combined China salary plus HK salary for each payroll period for the twelve (12) month period following the date of such Termination without Cause. Such payments will be made in accordance with the Employer’s normal payroll procedures. The Employer shall assist the Employee with withholding and paying any income tax due in the PRC on such payments; and

 

  14.3.6 Employee will be entitled to receive a separation bonus equal to fifty percent (50%) of the average of the Employee’s actual annual bonus paid for the two (2) most recent fiscal years for which bonuses have been paid prior to the termination date. The Employer shall assist the Employee with withholding and paying any income tax due in the PRC on such bonus;

 

  14.3.7 The Employer will continue to pay any premiums resulting from the provision of insurance to the Employee in accordance with clause 5.4 of this Agreement until the earlier of (A) the one year anniversary of the Employee’s Termination without Cause, or (B) the date on which the Employee commences New Employment as defined under the Change in Control Agreement.

 

  14.4 To the extent, if any, required in order to avoid the imposition of additional tax on the Employee or the Employer, the payments set out in clause 14.3.5 and clause 14.3.6 above will not commence until the date occurring six months after the date of Involuntary Termination as defined in the Change of Control Agreement.

 

  14.5 The Employee will be entitled to no other benefits except as described in clauses 14.3.5, 14.3.6 and 14.3.7.

 

  14.6 The execution and delivery by the Employee of this Agreement will constitute also his immediate resignation from all his positions with the Employer as well as from the SciClone US Board and other boards of directors of any Related Company of SciClone US, on the date of the Employee’s Termination without Cause, unless otherwise agreed in writing by the Employer and the Employee.

 

15. WHAT HAPPENS AFTER TERMINATION OF EMPLOYMENT

 

  15.1 Requirements following termination

If the Employee’s employment is terminated for any reason, then:

 

  15.1.1 the Employee must resign from the SciClone US Board, the board of directors of a Related Company of SciClone US, without claim for compensation for loss of office, and the Employee authorises the Company Secretary of the Employer to do all things necessary to give effect to such resignations on the Employee’s behalf;


  15.1.2 the Employee must return all the Employer’s property (including property leased by the Employer) to the Employer on termination including all written or machine readable material, Confidential Information, software, computers, credit cards, keys and vehicles;

 

  15.1.3 the Employee’s obligations under clause 11 continue after termination; and

 

  15.1.4 the Employee must not record any Confidential Information in any form after termination.

 

  15.2 Employee’s assistance with legal proceedings

After the Employee’s employment ends, the Employer may require the Employee to assist in any threatened or actual legal or other proceedings in which the Employer, SciClone US or a Related Company is involved, for which the Employee will be reimbursed all reasonable costs.

 

16. RESTRAINT ON THE EMPLOYEE’S CONDUCT

 

  16.1 Scope of restrain t

 

  16.1.1 The Employee shall not directly or indirectly for the Restricted Period be engaged on the Employee’s own account or in the capacity of employee, officer, consultant, adviser, partner, principal or agent in providing the Restricted Services and/or the Restricted Proposed Services for any company which carries on any business or venture which:

 

  16.1.1.1 is or is about to be in competition with any of the Businesses with which the Employee has been concerned or involved to any material extent during the Relevant Period; or

 

  16.1.1.2 requires or might reasonably be thought by the Employer to require the Employee to disclose or make use of any Confidential Information in order to properly discharge the Employee’s duties to or to further the Employee’s interest in that business or venture.

 

  16.1.2 The Employee shall not directly or indirectly for the Restricted Period after the Termination Date hold any Restricted Shareholding in any company which carries on any business or venture which:

 

  16.1.2.1 is or is about to be in competition with any of the Businesses with which the Employee has been concerned or involved to any material extent during the Relevant Period; or in relation to which the Employee at the Termination Date possesses Confidential Information; or

 

  16.1.2.2 requires or might reasonably be thought by the Employer to require the Employee to disclose or make use of any Confidential Information in order to properly discharge the Employee’s duties to or to further the Employee’s interest in that business or venture.


  16.1.3 The Employee shall not directly or indirectly, whether on the Employee’s own behalf or on behalf of another person, firm or company:

for the Restricted Period:

 

  16.1.3.1 accept, seek, canvass or solicit any business, orders or custom for any Restricted Services from any Restricted Person;

 

  16.1.3.2 accept, seek, canvass or solicit any business, orders or custom for any Restricted Proposed Services from any Restricted Person;

 

  16.1.3.3 accept, seek, canvass or solicit any business, orders or custom for any Restricted Services from any Restricted Contact;

 

  16.1.3.4 accept, seek, canvass or solicit any business, orders or custom for any Restricted Proposed Services from any Restricted Contact;

 

  16.1.3.5 solicit or entice away or seek to entice away from the Employer or hire any person employed or engaged by the Employer in any of the Businesses in a senior managerial, technical, supervisory, sales or marketing capacity, or who by reason of such employment or engagement is likely to have knowledge of any trade secrets or Confidential Information of the Employer, and was a person with whom the Employee dealt during the Relevant Period in the course of the Duties and;

at any time after the Termination Date:

 

  16.1.3.6 induce or seek to induce by any means involving the disclosure or use of Confidential Information any Restricted Person or Restricted Contact to cease dealing with the Employer or to restrict or vary the terms upon which it deals with the Employer;

 

  16.1.3.7 be held out or represented by the Employee or any other person, as being in any way connected with or interested in the Employer; or

 

  16.1.3.8 disclose to any person, or make use of any Confidential Information.

 

  16.2 Definitions

In this clause, the following words have these meanings.

Businesses ” means specialty pharmaceutical business and any trade or other commercial activity which is carried on by the Employer or a Related Company of SciClone US in China, or which the Employer or a Related Company of SciClone US shall have determined to carry on with a view to profit in the immediate or foreseeable future in China.

engage in ” means to participate, assist or otherwise be directly or indirectly involved as a member, shareholder, unitholder, director, consultant, adviser, contractor, principal, agent, manager, employee, beneficiary, partner, associate, trustee or financier.


“Relevant Period” means the 12 month period immediately preceding the Termination Date.

“Restricted Contact means any person, firm or company with whom or of which the Employee has dealt or of which or of whom the Employee has knowledge by virtue of the duties in the Relevant Period and who or which shall at the Termination Date be negotiating with or be in material discussions with the Employer for the supply of Restricted Services or Restricted Proposed Services.

“Restricted Period means the period beginning on the day after the Termination Date equal to twelve (12) months less any period during which the Employer has exercised its right to send the Employee on garden leave pursuant to sub-clause 13.2.

“Restricted Person” means any person firm or company with whom or of which the Employee has dealt or of whom or of which the Employee has knowledge by virtue of the Employee’s duties in the Relevant Period and to whom or of which the Employer shall at any time during the Relevant Period have supplied any Restricted Services.

“Restricted Proposed Services means any services which are, at the Termination Date, proposed to be provided by the Employer or a Related Company of SciClone US at any time during the 6 months following the Termination Date and in respect of which or the marketing of which the Employee’s duties were directly concerned or for which the Employee was responsible or materially involved during the Relevant Period or in relation to which the Employee possesses Confidential Information at the Termination Date.

“Restricted Services means any services of a kind which have been provided by the Employer in the ordinary course of the Businesses at any time during the Relevant Period and in respect of which or the marketing of which the Employee’s duties were directly concerned or for which the Employee was responsible or materially involved during the Relevant Period or in relation to which the Employee possesses Confidential Information at the Termination Date.

“Restricted Shareholding means the direct or indirect control or ownership (whether jointly or alone) of shares in a company which, together with shares held by any person acting in concert with the Employee carry 25% or more of the voting rights of that company.

Termination Date” means the date on which the employment terminates.

 

  16.3 Evidence of compliance by Employee

The Employer may require the Employee to provide evidence confirming to the satisfaction of the Employer that the Employee is not in breach of clause 16.1.

 

  16.4 Restraint is reasonable

The Employee acknowledges that each restriction specified in clause 16.1 is reasonable and necessary to protect the Employer’s legitimate interests.


  16.5 Separate and severable restrictions

Each restriction in clause 16.1 are intended to be separate and severable. If any of these are found to be void, but would be valid if some portion were deleted, then such portions will apply with such modifications as may be necessary to make them valid or effective.

 

  16.6 Notification of restrictions

The Employee agrees that in the event of receiving from any person, company, business entity or other organisation an offer of employment or for services (whether oral or in writing) either during the continuance of this Agreement or during the continuance in force of any of the restrictions set out in clause 11 or 16.1, the Employee will forthwith provide to such offeror a full and accurate copy of these clauses 11 and 15.1 and notify the Employer of such offer.

 

17. GENERAL

 

  17.1 Warranties by Employee