SciClone Pharmaceuticals, Inc.
SCICLONE PHARMACEUTICALS INC (Form: 10-Q, Received: 08/10/2015 17:58:08)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

_____________________________________________

 

FORM 10-Q

__________________________________ _______

  (Mark One)

 

 

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

 

For the quarterly period ended June 30 , 2015

 

OR

 

 

 

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

 

For the transition peri od 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

(I.R.S. employer

incorporation or organization)

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           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

 

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      

As of August   5 ,   2015 ,   50,250,672 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.

 

 

 


 

SCICLONE PHARMACEUTICALS , INC.

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

  

PAGE   NO.

 

PART I.

 

FINANCIAL INFORMATION

  

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

  

 

 

 

 

 

 

 

 

Condensed Consolidat ed Balance Sheets as of June 30 , 2015 and December 31, 2014  

  

 

  

 

 

 

 

 

Condens ed C onsolidated Statements of Operations for the three- and six- month periods ended June 30 , 2015 and  2014

  

 

  

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three- and six-month periods ended June 30 ,   2015 and 2014

  

 

  

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six -month periods ended June 30 , 2015 and 2014

  

 

  

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

  

 

  

 

 

 

Item 2.

 

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

  

 

18 

  

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

 

28 

  

 

 

 

Item 4.

 

Controls and Procedures

  

 

29 

  

 

 

 

PART II.

 

OTHER INFORMATION

  

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

  

 

29 

  

 

 

 

Item 1A.

 

Risk Factors

  

 

30 

  

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

 

53 

  

 

 

 

 

 

 

 

Item  3 .

 

Defaults Upon Senior Securities

  

 

53 

  

 

 

 

Item 4.

 

Mine Safety Disclosures

  

 

53 

  

 

 

 

Item 5.

 

Other Information

  

 

53 

  

 

 

 

Item 6.

 

Exhibits

  

 

54 

  

 

 

 

Signature  

 

 

  

 

55 

  

 

 

 

 

 

 

 

 

 

 

2

 


 

Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

SCICLONE PHARMACEUTICALS , INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

92,974 

 

$

86,228 

Accounts receivable, net of allowances of $1,139 and $998 as of June 30, 2015 and December 31, 2014, respectively

 

 

37,900 

 

 

40,268 

Inventories

 

 

12,017 

 

 

10,703 

Short-term investments

 

 

75 

 

 

75 

Prepaid expenses and other current assets

 

 

3,255 

 

 

2,597 

Deferred tax assets

 

 

196 

 

 

326 

Total current assets

 

 

146,417 

 

 

140,197 

Property and equipment, net

 

 

2,457 

 

 

1,848 

Goodwill

 

 

34,500 

 

 

34,521 

Other assets

 

 

12,526 

 

 

5,265 

Total assets

 

$

195,900 

 

$

181,831 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

5,365 

 

$

5,311 

Accrued and other current liabilities

 

 

29,873 

 

 

20,536 

Deferred revenue

 

 

 —

 

 

596 

Total current liabilities

 

 

35,238 

 

 

26,443 

Other long-term liabilities

 

 

62 

 

 

114 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

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

 

 

 —

 

 

 —

Common stock; $0.001 par value; 100,000,000 shares authorized;  50,212,033 and 49,948,897 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively

 

 

50 

 

 

50 

Additional paid-in capital

 

 

292,702 

 

 

287,108 

Accumulated other comprehensive income

 

 

3,307 

 

 

3,264 

Accumulated deficit

 

 

(135,459)

 

 

(135,148)

Total stockholders’ equity

 

 

160,600 

 

 

155,274 

Total liabilities and stockholders’ equity

 

$

195,900 

 

$

181,831 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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Table of Contents

 

 

SCICLONE PHARMACEUTICALS , INC.

CONDE NSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Product sales, net

 

$

37,202 

 

$

31,551 

 

$

70,370 

 

$

57,615 

Promotion services

 

 

744 

 

 

962 

 

 

1,144 

 

 

1,463 

Total net revenues

 

 

37,946 

 

 

32,513 

 

 

71,514 

 

 

59,078 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

5,681 

 

 

5,011 

 

 

10,278 

 

 

9,572 

Sales and marketing

 

 

12,964 

 

 

11,242 

 

 

24,021 

 

 

21,076 

Research and development

 

 

6,581 

 

 

804 

 

 

7,669 

 

 

2,280 

General and administrative

 

 

6,777 

 

 

5,816 

 

 

14,120 

 

 

11,849 

Estimated SEC and DOJ investigation loss

 

 

10,800 

 

 

 —

 

 

10,800 

 

 

 —

Total operating expenses

 

 

42,803 

 

 

22,873 

 

 

66,888 

 

 

44,777 

Income (loss) from operations

 

 

(4,857)

 

 

9,640 

 

 

4,626 

 

 

14,301 

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest and investment income

 

 

250 

 

 

23 

 

 

362 

 

 

42 

Interest and investment expense

 

 

 —

 

 

(19)

 

 

 —

 

 

(48)

Other income (expense), net

 

 

39 

 

 

30 

 

 

(24)

 

 

(89)

Income (loss) before (benefit) provision for income tax

 

 

(4,568)

 

 

9,674 

 

 

4,964 

 

 

14,206 

(Benefit) provision for income tax

 

 

(546)

 

 

34 

 

 

24 

 

 

432 

Net income (loss)

 

$

(4,022)

 

$

9,640 

 

$

4,940 

 

$

13,774 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

 

$

(0.08)

 

$

0.19 

 

$

0.10 

 

$

0.27 

Diluted net income (loss) per share

 

$

(0.08)

 

$

0.18 

 

$

0.09 

 

$

0.26 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing:

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

 

 

49,929 

 

 

51,620 

 

 

49,947 

 

 

51,788 

Diluted net income (loss) per share

 

 

49,929 

 

 

52,812 

 

 

52,426 

 

 

52,987 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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Table of Contents

 

SCICLONE PHARMACEUTICALS , INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

Net income (loss)

 

$

(4,022)

 

$

9,640 

 

$

4,940 

 

$

13,774 

Other comprehensive income (loss), net of income tax

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(13)

 

 

85 

 

 

43 

 

 

(774)

Total other comprehensive income (loss)

 

 

(13)

 

 

85 

 

 

43 

 

 

(774)

Total comprehensive income (loss)

 

$

(4,035)

 

$

9,725 

 

$

4,983 

 

$

13,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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Table of Contents

 

SCICLONE PHARMACEUTICALS , INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)  

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

 

2015

 

2014

Operating activities:

 

 

 

 

 

 

Net income

 

$

4,940 

 

$

13,774 

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

 

 

 

 

 

 

Non-cash expense related to stock-based compensation

 

 

2,076 

 

 

1,775 

Provision for doubtful accounts

 

 

541 

 

 

 —

Provision for expiring inventory

 

 

 —

 

 

275 

Depreciation and amortization

 

 

519 

 

 

431 

Loss on disposal of fixed assets

 

 

 

 

15 

Deferred income taxes

 

 

129 

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

1,827 

 

 

1,432 

Inventories

 

 

1,670 

 

 

3,559 

Prepaid expenses and other assets

 

 

(556)

 

 

(47)

Accounts payable

 

 

(2,962)

 

 

(5,858)

Accrued and other current liabilities

 

 

9,297 

 

 

(4,430)

Deferred revenue

 

 

(596)

 

 

(251)

Other long-term liabilities

 

 

(52)

 

 

(64)

Net cash provided by operating activities

 

 

16,835 

 

 

10,611 

Investing activities:

 

 

 

 

 

 

Loans to third party (Note 4)

 

 

(7,250)

 

 

 —

Purchases of property and equipment

 

 

(1,071)

 

 

(471)

Net cash used in investing activities

 

 

(8,321)

 

 

(471)

Financing activities:

 

 

 

 

 

 

Repurchase of common stock including commissions

 

 

(5,252)

 

 

(8,590)

Repayment of credit facility

 

 

 —

 

 

(1,616)

Proceeds from issuances of common stock, net

 

 

3,425 

 

 

1,278 

Net cash used in financing activities

 

 

(1,827)

 

 

(8,928)

Effect of exchange rate changes on cash and cash equivalents

 

 

59 

 

 

(27)

Net increase in cash and cash equivalents

 

 

6,746 

 

 

1,185 

Cash and cash equivalents, beginning of period 

 

 

86,228 

 

 

85,803 

Cash and cash equivalents, end of period

 

$

92,974 

 

$

86,988 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

 

SCICLONE PHARMACEUTICALS , INC.

Notes to Unaudited Condensed Con solidated Financial Statements

Note 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 consolidated financial statements and the notes thereto for the year ended December 31, 2014 included in the Company’s Form 10-K as filed with the US Securities and Exchange Commission (“SEC”). The Company prepared the unaudited condensed consolidated financial statements following the requirements of the SEC 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 unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The interim financial information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement 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 unaudited condensed consolidated balance sheet data as of December 31, 2014 is derived from the audited consolidated 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.

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 the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.

Customer Concentration

In China, pharmaceutical products are imported and distributed through a tiered method of distribution. For the Company’s proprietary product ZADAXIN ® , the Company manufactures its product using its US and European contract manufacturers, and it generates its product sales revenue through sales of ZADAXIN products to Sinopharm Holding Hong Kong Co. Ltd. (“Sinopharm”). Sinopharm and its affiliates act as an importer, and also as the top “tier” of the distribution system (“Tier 1”) in China. The Company’s ZADAXIN sales occur when the importer purchases product from the Company, without any right of return except for damaged product or quality control issues and passage of title and risk of loss are transferred to Sinopharm at the time of shipment. After the Company’s sale of ZADAXIN to the importer, Sinopharm clears products through China import customs, sells directly to large hospitals and holds additional product it has purchased in inventory for sale to the next tier in the distribution system. The second-tier distributors are responsible for the further sale and distribution of the products they purchase from the importer, either through sales of product directly to the retail level (hospitals and pharmacies), or to third-tier local or regional distributors who, in turn, sell products to hospitals and pharmacies. The Company’s other product sales revenues result from the sale of the Company’s in-licensed products to importing agents and distributors.

Promotion services revenues result from fees received for exclusively promoting products for certain pharmaceutical partners. These importing agents, distributors and partners are the Company’s customers.

Sinopharm revenues relate to the Company’s China segment. Sinopharm contributed 92% of the Company’s total net revenue for both the three-month periods ended June 30, 2015 and 2014. Sinopharm contributed 92% and 93% of the

7


 

Company’s total net revenue for the six-month periods ended June 30, 2015 and 2014, respectively. There were no other customers that exceeded 10% of the Company’s total net revenue in the periods presented.

As of June 30, 2015, approximately $35.0 million, or 90%, of the Company's accounts receivable was attributable to one customer, Sinopharm, in China. The Company generally does not require collateral from its customers.

Accounts Receivable  

Receivable Reserve.   The Company records a receivable reserve based on a specific review of its overdue invoices. The Company’s estimate for a reserve is determined after considering its existing contractual payment terms, payment patterns of its customers and individual customer circumstances, the age of any outstanding receivables and its current customer relationships. Accounts receivable are written off at the point when they are considered uncollectible.

As of June 30, 2015, the Company had a receivable reserve of $1.1 million. The reserve includes $0.5 million from one customer that is more than one year past due. In October 2014, the Company’s subsidiary, SciClone Pharmaceuticals International China Holding Ltd (“SPIL China”) executed an agreement with this particular customer providing for settlement of the receivable balance, which at the time was $1.9 million, of which $1.0 million was paid in 2014. The remaining $0.9 million was scheduled to be paid in installments as follows: (i) $0.4 million before May 31, 2015, and (ii) $0.5 million by December 31, 2015. The Company collected $0.4 million in May 2015, and this gain on recovery was recorded as a $0.4 million reduction to general and administrative expense for the three- and six-month periods ended June 30, 2015. The Company will continue to maintain a full reserve on the remaining $0.5 million outstanding accounts receivable balance from this customer until payment is received. As of June 30, 2015, the Company had $0.5 million in fully reserved accounts receivable from another customer that are past due. The Company recognized $0.5 million of bad debt expense in general and administrative expense during the first quarter of 2015 due to uncertainty regarding the collectability of the customer’s outstanding receivable balance.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered or delivery has occurred, the price to the buyer is fixed or determinable and collectability is reasonably assured.

Product Revenue .   The Company recognizes product revenue from selling manufactured ZADAXIN product at the time of delivery. Sales of ZADAXIN to Sinopharm and its affiliates are recognized at time of shipment when title to the product is transferred to them. The Company also earns product revenue from purchasing medical products from pharmaceutical companies and selling them directly to importers or distributors. The Company recognizes revenue related to these products based on the “sell-in” method, when the medical products have been delivered to the importers or distributors. Payments by the importing agents and distributors are not contingent upon sale to the end user by the importing agents or distributors.

Promotion Services Revenue . The Company recognizes promotion services revenue after designated medical products are delivered to the distributors as specified in a promotion services contract, which marks the period when marketing and promotion services have been rendered and the revenue recognition criteria are met.

Revenue Reserve. The Company generally maintains a revenue reserve for product returns based on estimates of the amount of product to be returned by its customers which may result from expired or damaged product on delivery, or for price reductions on the related sales and is based on historical patterns, analysis of market demand and/or a percentage of sales based on industry trends, and management’s evaluation of specific factors that may increase the risk of product returns. Importing agents or distributors do not have contractual rights of return except under limited terms regarding product quality. However, the Company is expected to replace products that have expired or are deemed to be damaged or defective when delivered. The calculation of the revenue reserve requires estimates and involves a high degree of subjectivity and judgment. As a result of the uncertainties involved in estimating the revenue reserve, there is a possibility that materially different amounts could be reported under different conditions or using different assumptions.

8


 

As of June 30, 2015 and December 31, 2014, the Company’s revenue reserves were $0. 1 million.

Inventories

Inventories consist of raw materials, work in progress and finished products. Inventories are valued at the lower of cost or market (net realizable value), with cost determined on a first-in, first-out basis, and include amounts related to materials, labor and overhead. The Company periodically reviews the inventory in order to identify excess and obsolete items, including pharmaceutical products approaching their expiration dates. If obsolete or excess items are observed and there are no alternate uses for the inventory, the Company will record a write-down to net realizable value. For the three- and six-month periods ended June 30, 2015, the Company had no write-downs of inventory. For the three- and six-month periods ended June 30, 2014, the Company recorded inventory write-downs of $0.4 million related to carrying value reductions for excess Aggrastat ® product.

Loans Receivable

Loans receivable are due from a single third party (see Note 4). Loans are initially recorded, and continue to be carried, at unpaid principal balances under “other assets” on the unaudited condensed consolidated balance sheet. Carried balances are subsequently adjusted for payments of principal or adjustments to the allowance for loan losses to account for any impairment. Interest income is recognized over the term of the loans and is calculated using the simple-interest method, as the loans do not have associated premium or discount. If the loans were to experience impairment, interest income would not be recognized unless the likelihood of further loss was remote.

Although the measurement basis is unpaid principal (as adjusted for subsequent payments or impairment), not fair value, the loans receivable would qualify as Level 3 measurements under the fair value hierarchy (Note 2) due to the presence of significant unobservable inputs related to the counterparty, which is a private entity.

Management considers impairment to exist when, based on current information or factors (such as payment history, value of collateral, and assessment of the counterparty’s current creditworthiness), it is probable that principal and interest payments will not be collected according to the contractual agreements. Management considers a loan payment delinquent when not received by the due date. As of June 30, 2015 and December 31, 2014, management concluded the loans receivable were not impaired, and there was no allowance for loan losses.

Net Income (Loss) Per Share

Basic net income (loss) per share has been computed by dividing net income (loss) 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, restricted stock units (RSUs), and the employee stock purchase plan using the treasury stock method. For the three months ended June 30, 2015, the impact of stock options, RSUs and the employee stock purchase plan were not included in the computation of diluted net loss per share because the inclusion would provide an anti-dilutive effect.

9


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(4,022)

 

$

9,640 

 

$

4,940 

 

$

13,774 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

49,929 

 

 

51,620 

 

 

49,947 

 

 

51,788 

Effect of dilutive securities

 

 

 —

 

 

1,192 

 

 

2,479 

 

 

1,199 

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

 

 

49,929 

 

 

52,812 

 

 

52,426 

 

 

52,987 

Basic net income (loss) per share

 

$

(0.08)

 

$

0.19 

 

$

0.10 

 

$

0.27 

Diluted net income (loss) per share

 

$

(0.08)

 

$

0.18 

 

$

0.09 

 

$

0.26 

 

For the three months ended June 30, 2015, outstanding stock options for 3,949,793 shares were excluded from the calculation of diluted net loss per share because the inclusion would provide an anti-dilutive effect. In addition, for the three months ended June 30, 2015, 306,731 shares subject to performance conditions were excluded from the calculation of diluted net loss per share because the performance criteria had not yet been met and the inclusion would provide an anti-dilutive effect. For the three months ended June 30, 2014, outstanding stock options and awards for 4,452,535 shares were excluded from the calculation of diluted net income per share because the effect from the assumed exercise of these options calculated under the treasury stock method would have been anti-dilutive. In addition, for the three months ended June 30, 2014, outstanding stock options for 50,000 shares subject to performance conditions were excluded from the calculation of diluted net income per share because the performance criteria had not yet been met.

For the six months ended June 30, 2015 and 2014, outstanding stock options and awards for 870,235 and 4,025,589 shares, respectively, were excluded from the calculation of diluted net income per share because the effect from the assumed exercise of these options calculated under the treasury stock method would have been anti-dilutive. In addition, for the six months ended June 30, 2015 and 2014, outstanding stock options and awards for 179,075 and 55,249 shares, respectively, subject to performance conditions were excluded from the calculation of diluted net income per share because the performance criteria had not yet been met.

New Accounting Standards Updates

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, "Revenue from Contracts with Customers" (“ASU 2014-09”), which contains new accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for the Company’s fiscal year beginning January 1, 2018, which reflects a one year deferral approved by the FASB in July 2015, with early application permitted provided that the effective date is not earlier than the original effective date. The Company is in the process of determining what impact, if any, the adoption of ASU 2014-09 will have on its financial statements and related disclosures. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In July 2015, the FASB issued ASU 2015-11, " Inventory (Topic 330): Simplifying the Measurement of Inventory " (“ASU 2015-11”) which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first -out ("LIFO"). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with

10


 

early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of adopting this guidance.

 

Note 2 —   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. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. 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 s   represent the Company’s fair value hierarchy for its financial assets (cash equivalents and short-term investments ) measured at fair value on a recurring basis ( in thousands ):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of June 30, 2015 Using

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

for

 

Observable

 

Unobservable

 

Balance

 

 

Identical Assets

 

Inputs

 

Inputs

 

as of

Description

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

June 30, 2015

Certificate of deposit

 

$

 —

 

$

75 

 

$

 —

 

$

75 

Money market funds

 

 

19,678 

 

 

 —

 

 

 —

 

 

19,678 

Total

 

$

19,678 

 

$

75 

 

$

 —

 

$

19,753 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2014 Using

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

for

 

Observable

 

Unobservable

 

Balance

 

 

Identical Assets

 

Inputs

 

Inputs

 

as of

Description

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

December 31, 2014

Certificate of deposit

 

$

 —

 

$

75 

 

$

 —

 

$

75 

Money market funds

 

 

19,678 

 

 

 —

 

 

 —

 

 

19,678 

Total

 

$

19,678 

 

$

75 

 

$

 —

 

$

19,753 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11


 

Note 3 —   Inventories

Inventories   consisted of the following (in thousands) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

Raw materials

 

$

4,876 

 

$

5,009 

Work in progress

 

 

85 

 

 

761 

Finished goods

 

 

7,056 

 

 

4,933 

 

 

$

12,017 

 

$

10,703 

 

Included in the Company’s inventory a s of June 30 , 2015 and December 31, 2014 ,   was  $ 3 .0 million and $ 3.1 million, respectively, in inventory held at distributors related t o products sold by its NovaMed Pharmaceuticals, Inc. and NovaMed Pharmaceuticals (Shanghai) Co. Ltd. subsidiaries .

Note 4 —   Loans Receivable

As part of the Company’s May 2013 license and supply agreement with Zensun (Shanghai) Science & Technology Co. Ltd (“Zensun”), the Company previously agreed to loan up to $12 million to Zensun. The entry into the license and supply agreement in the second quarter of 2013, pursuant to which the Company licensed the exclusive rights to promote, market, distribute, and sell Neucardin TM , a chronic heart failure product under development by Zensun (such rights licensed for the People’s Republic of China, Hong Kong and Macau) is more fully described in the Company’s quarterly report on Form 10-Q for the second quarter of 2013.

Pursuant to its agreement to loan funds, the Company loaned $12 million to Zensun . The extension of credit and funding to Zensun was accomplished through two of the Company's subsidiaries, SPIL China and SciClone Pharmaceuticals (China) Ltd. (“SciClone China”).

With respect to lender SciClone China, Zensun could request RMB-denominated borrowings for up to RMB 1,550,000 using an entrustment mechanism with a bank as an intermediary. In the third quarter of 2014, SciClone China entered into an entrusted loan agreement for RMB 1,550,000 (approximately US$250,000 as of June 30, 2015) with Zensun, using a major Chinese bank as the lending agent. SciClone China is the principal and ultimately bears the credit risk, not the bank. The loan bears interest at a fixed rate of 7.5% per annum, with interest payable quarterly, and Zensun is subject to obligations of the borrower as specified in the loan agreements. The loan term is sixty-six months. All outstanding principal and interest balances must be repaid by the maturity date, with prepayments permitted without penalty upon prior notice.

With respect to lender SPIL China, Zensun could request US-dollar denominated borrowings up to $11.75 million. As of June 30 , 2015, borrowings totaling $11.75 million had been requested by Zensun and paid by SPIL China with $4.5 mill ion lent in the second half of 2014 and $7 .25 million lent in the second quarter of 2015 . These borrowings bear interest at a fixed rate of 7.5% per annum payable annually in arrears at each interest payment date as defined in the agreement. These borrowings mature on September 26, 2017, with an option electable by the borrower to extend for two additional years provided certain conditions are met. All outstanding balances must be repaid by the maturity date, with prepayments permitted without penalty upon prior notice.

The proceeds of the two separate but related loans are to be used for working capital and general corporate purposes by Zensun. To secure the loans, Zensun pledged its entire equity interest in its subsidiary, Shanghai Dongxin Biochemical Technology Co. Ltd. (whose assets include real property) to SPIL China.

Management, on the basis of (i) a creditworthiness evaluation using recent Zensun financial information, (ii) consideration of the market value of the pledged security, and (iii) consideration of Zensun’s compliance with the terms of the loans and timely payment of interest, concluded there were no indications of loan impairment as of June 30 , 2015 or December 31, 2014; accordingly, there is no allowance for losses.

12


 

The two loans are included in “other assets” on the Company’s unaudited condensed consolidated balance sheet as of June 30 , 2015 and December 31, 2014. Interest income on the loans amounted to $0. 2 million and $0.3 million for the three - and six - months ended June 30 , 2015 , respectively, and is included in interest and investment income in the unaudited condensed consolidated statement s of operations .

Note 5 —   Goodwill

The following table represents the changes in goodwill for the six months ended June 30 , 2015 ( in thousands ):

 

 

 

Balance as of December 31, 2014

$

34,521 

Translation adjustments

 

(21)

Balance as of June 30, 2015

$

34,500 

 

 

 

 

 

 

Note 6 Accrued and Other Current Liabilities

Accrued and other current liabilities consisted of the following   (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

Accrued sales and marketing expenses

 

$

6,642 

 

$

5,383 

Accrued taxes, tax reserves and interest

 

 

4,102 

 

 

5,208 

Accrued compensation and benefits

 

 

2,603 

 

 

4,176 

Accrued estimated SEC and DOJ investigation loss (Note 9)

 

 

12,800 

 

 

2,000 

Accrued professional fees

 

 

1,986 

 

 

1,819 

Accrued manufacturing costs

 

 

1,053 

 

 

95 

Accrued license fee

 

 

 —

 

 

1,000 

Other

 

 

687 

 

 

855 

 

 

$

29,873 

 

$

20,536 

 

 

 

 

 

Note 7 — Accumulated Other Comprehensive Income

Changes in the composition of accumulated other comprehensive income (loss) for the three - and si x- months ended June 30 , 2015 and 2014 are as follows ( in thousands ):

 

 

 

 

 

 

 

Balances as of April 1, 2015

 

$

3,320 

Other comprehensive loss related to foreign currency translation

 

 

(13)

Balances as of June 30, 2015

 

$

3,307 

 

 

 

 

 

 

 

Balances as of April 1, 2014

 

$

3,317 

Other comprehensive income related to foreign currency translation

 

 

85 

Balances as of June 30, 2014

 

$

3,402 

 

 

 

 

 

 

Balances as of January 1, 2015

 

$

3,264 

Other comprehensive income related to foreign currency translation

 

 

43 

Balances as of June 30, 2015

 

$

3,307 

 

 

 

 

 

 

Balances as of January 1, 2014

 

$

4,176 

Other comprehensive loss related to foreign currency translation

 

 

(774)

Balances as of June 30, 2014

 

$

3,402 

 

 

 

 

13


 

Note 8 — Stockholders’ Equity

Stock-based Compensation

The following table summarizes the stock-based compensation expenses included in the unaudited condensed consolidated statements of operations  ( in thousands ):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

Sales and marketing

 

$

227 

 

$

284 

 

$

468 

 

$

485 

Research and development

 

 

62 

 

 

12 

 

 

94 

 

 

59 

General and administrative

 

 

981 

 

 

597 

 

 

1,514 

 

 

1,231 

 

 

$

1,270 

 

$

893 

 

$

2,076 

 

$

1,775 

Stock Options

During the six months ended June 30 , 2015 , the Company granted options to purchase a total of 1,350 ,500 shares of common stock and options to purchase 789 , 151 shares of common stock were exercised. As of June 30 , 2015 , there was approximately $ 6. 9 million of unrecognized compensation expense, net of forfeitures, related to non-vested stock options, which is expected to be recognized over a weighted-average remaining period of approximately 2. 75 years.

Restricted Stock Units (RSUs) and Restricted Performance Stock Units (PSUs)

During the six months ended June 30 , 2015 ,   3 88 ,000 RSUs and 300,000 PSUs were granted at a weighted- average grant date fair value per share of $ 8. 9 5, and 93,017 RSUs were released . The PSUs will vest and be released on meeting performance goals (including revenue and product expansion targets) within an established time frame. If the performance goals are not met within the established time frame, the PSUs will expire. The Company recognizes expense related to the PS Us over the period of time the C ompany determines that it is probable that the performance goals will be achieved. If it is subsequently determined that the performance goals are not probable of achievement, the expense related to the PSUs is reversed. For the three-   and six-month period s ended June 30, 2015, the Company recorded approximately $29,000 of expense related to the PSUs . As of June 30 , 2015 , there was approximately $ 2 . 7 million of unrecognized compensation cost, net of forfeitures, related to non-vested RSUs and PSUs , which is expected to be recognized over a weighted-average remaining period of approximately 2.59 years.  

Repurchase of Common Stock

The Company repurchased and retired 595,013 shares at a cost of $ 5.3 million during the six -month period ended June 30 , 2015 . As of June 30 , 2015 , $ 10.0   million of the $80 .5 million share repurchase program authorized by the Board of Directors was available for future share repurchases. Repurchased shares have been retired and constitute authorized but unissued shares.

 

Note 9  — Commitments and Contingencies  

Legal Matters  

The Company is a party to various legal proceedings and subject to government investigations, as noted in this section below. All legal proceedings and any government investigations are subject to inherent uncertainties, unfavorable rulings or other adverse events which could occur. Unfavorable outcomes could include substantial monetary damages or awards, injunctions or other remedies, and if any of these were to occur, the possibility exists for a material adverse impact on the Company’s business, results of operations, financial position, and overall trends. The Company might also conclude that settling one or more such matters is in the best interests of its stockholders and its business, and any such settlement could include substantial payments.

14


 

As previously disclosed, since 2010 the SEC and the US Department of Justice (“DOJ”) have each been conducting formal investigations of us regarding a range of matters, including the possibility of violations of the Foreign Corrupt Practices Act (“FCPA”), primarily related to certain historical sales and marketing activities with respect to our China operations. 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 in order to evaluate whether any violation of the FCPA or other laws occurred. The Company continue s to cooperate fully with the SEC and DOJ in the conduct of their investigations.

The Company has engaged in settlement discussions with the SEC related to its investigation into possi ble violations of the FCPA by the Company. The Company has reached agreement in principle regarding a proposed settlement of these matters with the staff of the SEC, subject to documentation and final approval by the Commission ers of the SEC . Under the terms of the proposed resolution, the Company, without admitting or denying liability, would consent to the entry of an administrative order requiring that the Company cease and desist from any future violations of the FCPA. The Company also would agree to pay disgorgement of $9.4 million, prejudgment interest of $0.9 million and a civil money penalty of $2.5 million.

The Company has not yet reached a resolution of these matters with the DOJ and management continues to work diligently to obtain closure on this matter.

The Company previously recorded a charge of $2.0 million in the fourth quarter of 2013 related to the possibility of a settlement, and recorded an additional charge of $10.8 million associated with the proposed settlement with the SEC for the second quarter of 2015. The present estimated loss, which totals $12.8 million, may be subject to change based on the results of any final settlement with the SEC relating to these matters; it may also be subject to change based on the results of settlement discussions with the DOJ related to its separate investigation. Monetary losses could be mat erially different than the $12.8 million presently accrued; however, any such amounts cannot be reasonably estimated given they are substantially dependent on further discussion and negotiation.

NovaMed was a party to a Distribution and Supply Agreement with MEDA Pharma GmbH & Co. KG (“MEDA”). Following the Company’s acquisition of NovaMed, MEDA claimed it had a right to terminate the agreement under a change of control provision. NovaMed does not believe that MEDA had a right of termination under the agreement. NovaMed filed an application for binding arbitration with the China International Economic and Trade Arbitration Commission (“CIETAC”) on July 26, 2012. On April 3, 2014, CIETAC issued the final Award of the Arbitral Tribunal. The Arbitral Tribunal found that MEDA did have a right to terminate the agreement upon a change of control, but that MEDA must make reasonable reimbursement to NovaMed before any product rights are returned to MEDA. The amount that must be paid includes $333,333 as “unjust enrichment” plus an amount for reasonable compensation for such services provided by NovaMed to MEDA. The amount of such payment for services was not determined by the Arbitral Tribunal, but was left to be determined by NovaMed. On April 30, 2014, NovaMed informed MEDA that its determination of reasonable compensation for its services was  $ 3,314,629 , including the $333,333 for unjust enrichment. MEDA made a counter offer and the parties were attempting to resolve the matter without an additional arbitration proceeding. I n December 2014, NovaMed filed a “Request for Second Arbitration” with CIETAC in order to enforce its right to compensation. The arbitration case is pending with CIETAC and no hearing has taken place yet. T he amount of any final payment to NovaMed remains uncertain , and as such the Company has not recognized it as a gain contingency .

Purchase Obligations

Under agreements with certain of the Company’s pharmaceutical partners, the Company is committed to certain annual minimum product purchases where the contract is subject to termination if the an nual minimum order is not met. As of June 30 , 2015 , the Company did not have any material unmet purchase obligations.

 

 

 

15


 

Note 10 — Development and Commercialization Agreement

In May 2015, Ther avance Biopharma, Inc. (“Theravan ce Biopharma”) granted the Company exclusive development and commercialization rights to VIBATIV ®   (telavancin) in China, as well as the Hong Kong SAR, the Macau SAR, Taiwan and Vi e tnam, in exchange for upfront and reg ulatory milestone payments totaling $6 million. SciClone will be responsible for all aspects of devel opme n t and commercialization in the partnered regions, including pre- and post-launch activities and product registration. Ther avance Biopharma will sell to SciClone all clinical and commercial product required to develop and commercialize VIBATIV in China and the Company’s other licensed territories .  

For the three- and six-months ended June 30, 2015, the Company recognized $5.5 million in research and development expense s related to its new in- license   arrangements,   primarily with Theravance Biopharma . There was no similar expense recognized in the three- and six-month periods ended June 30, 2014.

 

Note 1 1 — Income Taxes

The provision for income taxes primarily relates to taxable income of the Company’s China operations. The Company recorded a n income tax benefit of $0.5 million for the three months ended June 30, 2015, compared to income tax expense of $34,000 for the three month s ended June 30 , 2014 .   The provision for income tax was $24,000 and $0.4 million for the six-month periods ended June 30, 2015 and 2014, respectively. Th e   decrease s of $0.6 million and $0. 4 million   in the provision for income tax for the three- and six- month period s ended June 30 , 2015 , compared to the same period s of the prior year ,   mainly related to a reduction   in the Company’s liabilities for uncertain tax positions in China due to certain tax years becoming closed to assessment due to the statute of limitations , and lower tax related to restructuring the Company’s China business . The Company’s statutory tax rate in China was 25% in 2015 and 2014 .  

The Company has not recorded any significant US federal or state income taxes for the three- and six-month periods ended June 30, 2015 and 2014 .   As of June 30, 2015, the Company determined it would be necessary to repatriate a dividend from its foreign subsidiary as a result of the estimated SEC/DOJ investigation loss (as previously described in Note 9) from the current year earnings and profits of its foreign subsidiaries , which were not part of the cumulative pool of undistributed earnings of foreign subsidiaries as of December 31, 2014. Additionally, the Company determined that $146.4 million of accumulated undistributed earnings of foreign subsidiaries , exclusive of the dividend repatriation to be satisfied out of current year earnings and profits, continues to be indefinitely reinvested outside of the US. Based u pon its current year projections of tax deductible corporate expenses and other offsetting factors, the Company does not expect that the dividend income or the nondeductible estimated settlement loss will lead to any incremental income tax liability. Upon distribution of its foreign undistributed earnings, the Company may be subject to US federal and state income taxes, although determining the amount of tax liability is not practicable as it is dependent on a variety of factors, including but not limited to the amounts of US tax loss carryforwards and tax credit carryforwards available at the time of the repatriation. Based on the Company’s current operating plan, it does not anticipate the need to repatriate cash and cash equivalents held by foreign subsidiaries in the foreseeable future, other than amounts related to the SEC/DOJ investigation loss. Should undistributed earnings need to be remitted, the Company will accrue for income taxes not previously recognized.

 

Note 12 Segment Information and Geographic Data

The Company reports segment information based on the internal reporting used by management for evaluating segment performance based on management’s estimates of the appropriate allocation of resources to segments.

T he Company operates and manages its business primarily on a geographic basis. Accordingly, the Company determined its operating segments and reporting units, which are generally based on the nature and location of its customers, to be 1) China, and 2) Rest of the World, including the US and Hong Kong.

The Company evaluates the performance of its operating segments based on revenues and operating income (loss). Revenues for geographic segments are generally based on the location of customers. Operating income (loss) for each segment includes revenues, related cost of sales and operating expenses directly attributable to the segment. Operating income (loss) for

16


 

each segment excludes non-operating income and expense.   Summary information by operating segment for the three - and six- month periods ended June 30 , 2015 and 2014 is as follows ( in thousands ):  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

China

 

$

36,285 

 

$

31,287 

 

$

68,712 

 

$

56,966 

Rest of the World (including the US and Hong Kong)

 

 

1,661 

 

 

1,226 

 

 

2,802 

 

 

2,112 

Total net revenues

 

$

37,946 

 

$

32,513 

 

$

71,514 

 

$

59,078 

Income (loss) from operations:

 

 

 

 

 

 

 

 

 

 

 

 

China

 

$

7,657 

 

$

11,438 

 

$

20,001 

 

$

19,021 

Rest of the World (including the US and Hong Kong)

 

 

(12,514)

 

 

(1,798)

 

 

(15,375)

 

 

(4,720)

Total income (loss) from operations

 

$

(4,857)

 

$

9,640 

 

$

4,626 

 

$

14,301 

Non-operating income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

China

 

$

285 

 

$

39 

 

$

332 

 

$

(86)

Rest of the World (including the US and Hong Kong)

 

 

 

 

(5)

 

 

 

 

(9)

Total non-operating income (expense), net

 

$

289 

 

$

34 

 

$

338 

 

$

(95)

Income (loss) before (benefit) provision for income tax:

 

 

 

 

 

 

 

 

 

 

 

 

China

 

$

7,942 

 

$

11,477 

 

$

20,333 

 

$

18,935 

Rest of the World (including the US and Hong Kong)

 

 

(12,510)

 

 

(1,803)

 

 

(15,369)

 

 

(4,729)

Total income (loss) before (benefit) provision for income tax

 

$

(4,568)

 

$

9,674 

 

$

4,964 

 

$

14,206 

 

Long-lived assets as of June 30, 2015 by operating segment are as follows ( in thousands ):

 

 

 

 

 

 

 

 

China

 

$

48,142 

Rest of the World (including the US and Hong Kong)

 

 

1,341 

 

 

$

49,483 

 

 

 

 

 

Note 13 — Subsequent E vent  

In August 2015, Cardiome Pharma Corp. (“Cardiome”) , from whom the Company licensed Aggrastat ,   and the Company mutually agreed to end their collaboration for Aggrastat ,   resulting in the Company’s obligation to   return all rights to the product to Cardiome. There were no financial penalties incurred by the Company arising from the mutual termination of the agreement. The Company recorded Aggrastat revenues of $2.0 million and $0.6 million for the six months ended June 30, 2015 and 2014, respectively . The terms of the agreement provide for repurchase of the Company’s Aggrastat inventory at cost; as the Company had previously written down the related inventory prior to December 31, 2014 to a substantially lower amount based upon lower-than-expected demand, it was concluded that the remaining Aggrastat inventory as of June 30, 2015 was appropriately stated.

 

17


 

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 of current or anticipated products; the sufficiency of our resources to complete clinical trials and other new product development initiatives; government regulatory actions that may affect product reimbursement, product pricing or otherwise affect the scope of our sales and marketing; the timing and outcome of clinical trials; prospects for ZADAXIN ® and our plans for its enhancement and commercialization as well as our expectations regarding other products; future size of the hepatitis B virus (“HBV”) and hepatitis C virus (“HCV”) and other markets, particularly in China; 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 the outcome 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, Inc. (NASDAQ: SCLN) is a United States (“US”)-headquartered, China-focused, specialty pharmaceutical company with a substantial commercial business and a product portfolio of therapies for oncology, infectious diseases and cardiovascular disorders. We are focused on continuing to grow our revenue and profitability. Our business and corporate strategy is focused primarily on the People’s Republic of China (“China”) where we have built a solid reputation and established a strong brand through many years of experience marketing our lead product, ZADAXIN   (thymalfasin). In addition, we have an established product promotion business model with large pharmaceutical partners and we are focused on establishing profitability in all of these collaborations. We believe our sales and marketing strengths position us to benefit from the long-term expansion of the pharmaceutical market in China. This pharmaceutical market currently ranks third among the global pharmaceutical markets, and we believe China will rank second among global pharmaceutical markets by 2020. We seek to expand our presence in China and increase revenues by growing sales and profits of our current product portfolio, launching new products from our development pipeline, adding new, profitable product services agreements and leveraging our strong cash position to in-license additional products.

We operate in two segments which are generally based on the nature and location of our customers: 1) China and 2) the Rest of the World, which includes our US and Hong Kong operations.

We have two categories of revenues: “product sales revenues” and “promotion services revenues.” Our product sales revenues result from our proprietary and in-licensed products, including our lead product, ZADAXIN; products from Pfizer International Tra ding (Shanghai) Ltd. (“Pfizer”); and Aggrastat ® an intervention cardiology product launched in China in 2009 in-licensed from Cardiome Pharma Corp (“Cardiome”) .   In August 2015, we and Cardiome mutually agreed to end our collaboration for Aggrastat , and return all rights to the product to Cardiome .   We recorded Aggrastat revenues of $2.0 million and $0.6 million for the six months ended June 30, 2015 and 2014, respectively. We do not anticipate that the termination of this agreement will adversely affect our profitability.

ZADAXIN has the highest margins in our portfolio as it is a premium product sold exclusively by SciClone. In addition, we anticipate that new marketed products, when and if introduced, can increase the future revenues and profitability of our pharmaceutical business in China over the coming years. Our “promotion services revenues” result from fees we receive for

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exclusively promoting products in China under services agreements with certain pharmaceutical partners including Baxter International, Inc. (“Baxter”). We refer to these agreements as promotion agreements, service agreements and distribution contract rights agreements. We recognize promotion services revenues as a percentage of our collaborators’ product sales revenue for these exclusively promoted products. Over time, as additional proprietary or in-licensed products come to the market, we aim to shift our product mix towards those products providing higher margin for us.

ZADAXIN is approved in over 30 countries and may be used for the treatment of HBV, HCV, and certain cancers, and as a vaccine adjuvant according to the local regulatory approvals we have in these countries. In China, thymalfasin is included in the treatment guidelines issued by the Ministry of Health (“MOH”) for liver cancer, as well as guidelines for treatment of chronic HBV (issued by both the Chinese Medical Association and the Asian-Pacific Association for the Study of the Liver) and invasive fungal infections of critically ill patients (issued by the Chinese Medical Association). Our sales force is focused on increasing sales to the country’s largest hospitals (class 3A with over 500 beds) as well as mid-size hospitals (class 2A). These hospitals serve Tier 1 and Tier 2 cities located mostly in the eastern part of China, which are the largest and generally have the most affluent populations. We are widening our market strategies by targeting numerous smaller hospitals as well as hospitals in some Tier 3 cities. We are also seeking to expand the indications for which ZADAXIN could be used, including sepsis.  

In August 2014, we, along with our partner BTG plc (“BTG”), announced that the China Food and Drug Administration had approved the registration of DC Bead ®   for the embolization of malignant hypervascularized tumors. DC Bead may be used to treat liver cancer, a large and growing indication in China, and we believe our oncology sales team and academic marketing liaisons have established high quality relationships with medical professionals and institutions that specialize in cancer treatment, which we believe will be a valuable asset as we prepare for commercial launch of DC Bead which we anticipate to occur in the third quarter of 2015 . BTG and SciClone previously entered into an agreement granting SciClone exclusive licensing and distribution rights to DC Bead in China. Under the agreement, we will purchase product from BTG at a specified price for sale in China.

We are also pursuing the registration of several other therapeutic products in China. These include: Loramyc ® , a mucoadhesive tablet formulation of miconazole lauriad to treat oropharyngeal candidiasis; and RapidFilm ® , an oral film formulation of ondansetron to treat nausea induced by chemotherapy.

In December 2014, we entered into a strategic partnership with The Medicines Company for two cardiovascular products in China. The partnership includes an agreement granting us a license and the exclusive rights in China to promote two products including 1) Angiomax ®   (bivalirudin) for Injection, an anticoagulant indicated in patients undergoing percutaneous coronary intervention (PCI) with provisional use of glycoprotein IIb/IIIa inhibitor (GPI) and in patients with, or at risk of, heparin-induced thrombocytopenia and thrombosis syndrome undergoing PCI for which a Phase 3 registration trial was completed in China and is currently under review by the China Food and Drug Administration for marketing approval, and 2) Cleviprex ®   (clevidipine) Injectable Emulsion, a third-generation dihydropyridine calcium channel blocker indicated for the reduction of blood pressure when oral therapy is not feasible or desirable for which a clinical trial application (CTA) for China was filed in 2013. Under the terms of the agreement, we will be responsible for all aspects of commercialization, including pre-and post-launch activities, for both products in the China market (excluding Hong Kong and Macao). We have also agreed to participate in the China registration process for both products. Financial terms of the agreement, in addition to net sales royalties payable to The Medicines Company, include the following additional payments to The Medicines Company: an upfront payment   made in the fourth quarter of 2014; a project support services fee; and regulatory/commercial success milestone payments of up to an aggregate of $50.5 million.  

Our agreement with Baxter is for a 5-year term, through December 2017, and our agreement with Pfizer is for a 5-year term, through June 2019. We are pursuing additional agreements to generate additional revenue. We continue to seek in-licensing arrangements for well-differentiated products at various stages of development that, if not yet approved, have a defined regulatory approval pathway in China. Our objective is to in-license products that provide us with higher margins,

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augmenting our product sales revenue and profitability, and we continue to explore opportunities to optimize our promotion services revenues.

In May 2015, Theravance Biopharma, Inc. (“Theravan ce Biopharma”) granted SciClone exclusive development and commercialization rights to VIBATIV ®   (telavancin) in China, as well as the Hong Kong SAR, the Macau SAR, Taiwan and Vietnam, in exchange for upfront and regulatory milestone payments totaling $6 million. SciClone will be responsible for all aspects of development and commercialization in the partnered regions, including pre- and post-launch activities and product registration. SciClone will initially develop VIBATIV for hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP), and additional indications may include complicated skin and skin structure infections (cSSSI) and potentially bacteremia. Theravance Biopharma will sell to SciClone all clinical and commercial product required to develop and commercialize VIBATIV in China and our other licensed territories .  

For the three- and six-months ended June 30, 2015, we recognized $5.5 million in research and development expenses related to our new in-license arrangements, primarily with Theravance Biopharma. There was no similar expense recognized in the three- and six-month periods ended June 30, 2014.

In May 2013, we entered into a framework agreement with Zensun (Shanghai) Science & Technology Co., Ltd. (“Zensun”) for the exclusive promotion, marketing, distribution and sale of Neucardin TM in China, Hong Kong and Macao. Neucardin is a novel, first-in-class therapeutic for the treatment of patients with intermediate to advanced heart failure, for which a New Drug Application (“NDA”) was submitted to and accepted for review by the China Food and Drug Administration (“CFDA”) in 2012. The CFDA subsequently informed Zensun that its Phase 2 data is insufficient, and has asked Zensun to submit a new NDA once the ongoing Phase 3 study reached its endpoints. In 2014, we loaned Zensun a total of approximately $4.75 million pursuant to the terms of the framework agreement, and we loaned an additional $7.25 million to Zensun on April 1, 2015 (refer to Note 4 to the unaudited condensed consolidated financial statements appearing under Part I, Item 1 for further information regarding the Zensun loans).

In June 2013, we entered into a license agreement with Taiwan Liposome Company (“TLC”) which granted us a license and the exclusive rights in China, Hong Kong and Macao to promote, market, distribute and sell ProFlow ®   for the treatment of peripheral arterial disease (“PAD”) and other indications. PAD is a serious cardiovascular condition in which blood flow to the limbs (usually the legs) is restricted due to arterial plaque build-up. Under the terms of the agreement, TLC will be responsible for the continued development including potential clinical trials and regulatory activities, as well as the manufacture and supply of ProFlow, and we will be responsible for all aspects of commercialization including pre-and post-launch activities. The agreement provides for the principal terms of the arrangement between SciClone and TLC, and in March 2014, the companies entered into a supplemental collaboration and lic ense agreement. TLC was notified by the CFDA that ProFlow did not receive clinical trial approval and TLC is in the process of appealing the decision. We are currently in discussions with TLC to revise our license agreement, and as an alternative, may in-license an oncology product from them .  

Recent governmental policy changes in China have eliminated national regulation of the maximum retail drug prices for most drugs, effective as of June 1, 2015, including for those on the National Reimbursement Drug List . Decisions by provincial authorities appear to be emerging as the primary governmental mechanism for price controls. As an example, the Zhejiang provincial authority announced a price limitation for sales of Z ADAXIN   in the province in April 2015 that became effective in May 2015. We were able to mitigate the impact of this price limitation by shifting an equitable portion of the burden of the price reduction to our distributor in our sales channel; accordingly, the impact of the price reduction for the second quarter of 2015, the quarter in which the reduction became effective, was $1.8 million. For f isc al 2015, we expect the impact of this and other potential decisions in other provinces to be offset by volume increases and changes in our arrangeme nt with our China distributor. 

As previously disclosed, since 2010 the US Securities and Exchange Commission (“ SEC ”) and the US Department of Justice (“DOJ”) have each been conducting formal investigations of us regarding a range of matters, including the po ssibility of violations of the F oreign Corrupt Practices Act (“FCPA”). We have reached agreement in principle regarding a proposed

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settlement of these matters with the staff of the SEC, s ubject to documentation and final approval by the Commissioners of the SEC. The agreement in principle , which includes disgorgement, prejudgment interest, and penalties totaling $12.8 million, is contingent upon the execution of formal settlement documents and approval of the settlement by the SEC’s governing Commission.

We have not yet reached a resolution of these matters with the DOJ and management continues to work diligently to obtain closure on this matter .  

We previously recorded a charge of $2.0 million in the fourth quarter of 2013 related to t he possibility of a settlement, and recorded an additional charge of $10.8 million associated with the proposed settlement with the SEC for the second quarter of 2015. The present estimated loss of $12.8 million may be subject to change based on the results of any settlement with the SEC relating to these matters; it may also be subject to change based on the results of settlement discussions with the DOJ related to its separate investigation. (refer to Note 9 to the unaudited condensed consolidated financial statements appearing under Part I, Item 1 and “Legal Proceedings” in Part II, Item 1 for further information regarding the SEC and DOJ investigations).

We believe our cash, cash equivalents and short-term investments as of June 30, 2015 and ongoing revenue generating business operations will be sufficient to support our current operating plan for at least the next 12 months. Our results may fluctuate from quarter to quarter and we may report losses in the future.

Results of Operations                               

Revenues :

The following table s summarize the period over period change in our product sales and promotion services (in thousands):  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

 

 

Six Months Ended

  

 

 

 

June 30,

 

 

 

June 30,

 

 

 

  

2015

  

2014

  

Change

 

2015

  

2014

  

Change

Product sales, net

 

$

37,202 

  

$

31,551 

  

18% 

 

$

70,370 

  

$

57,615 

  

22% 

Promotion services

 

 

744 

 

 

962 

 

-23%

 

 

1,144 

 

 

1,463 

 

-22%

Total net revenues

 

$

37,946 

 

$

32,513 

 

17% 

 

$

71,514 

 

$

59,078 

 

21% 

Product sales were $ 37.2 million for the three-month period ended June 30 , 2015 , compared to $31.6 million for the corresponding period in 2014, an increase of $ 5.6 million, or 18 %. ZADAXIN sales were $ 35.5 million for the three-month period ended June 30, 2015, compared to $30.3 million for the corresponding period of 2014, an increase of $ 5.2 million that mainly related to an increase in volume sold , offset partially by a reduction in the list price of ZADAXIN in the Zhejiang province since May 2015.

Product sales were $ 70.4 million for the six-month period ended June 30 , 2015 , compared to $57.6 million for the corresponding period in 2014, an increase of $ 12.8 million, or 22 %. ZADAXIN sales were $ 66.7 million for the six-month period ended June 30, 2015, compared to $55.0 million for the corresponding period of 2014, an increase of $11.7 million that mainly related to an increase in volume sold, offset partially by a reduction in the list price of ZADAXIN in the Zhejiang province since May 2015. We anticipate that ZADAXIN revenues in 2015 will be higher than 2014.

In China, pharmaceutical products are imported and distributed through a tiered method of distribution. For our proprietary product ZADAXIN, we manufacture our product using our US and European contract manufacturers, and we generate our product sales revenue through sales of ZADAXIN product to Sinopharm Holding Hong Kong Co. Ltd. (“Sinopharm”) . Sinopharm and its affiliates act as an importer, and also as the top “tier” of the distribution system (“Tier 1”) in China. Our ZADAXIN sales occur when Sinopharm purchases product from us without any right of return except for damaged product or quality control issues. Passage of title and risk of loss are transferred to Sinopharm at the time of shipment. After the sale, Sinopharm clears products through China import customs, sells directly to large hospitals and holds additional product it

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has purchased in inventory for sale to the next tier in the distribution system. The second-tier distributors are responsible for the further sale and distribution of the products they purchase from the importer, either through sales of product directly to the retail level (hospitals and pharmacies), or to third-tier local or regional distributors who, in turn, sell products to hospitals and pharmacies.

Promotion services revenue was $0.7 million for the three-month period ended June 30, 2015, compared to $1.0 million for the corresponding period in 2014. Promotion services revenue was $1.1 million for the six-month period ended June 30, 2015, compared to $ 1.5 million for the correspo nding period in 2014.   Our promotion services revenue relates to products promoted under our agreement with Baxter . In addition, for the three- and six-month periods ended June 30, 2014, we recorded $0.2 million of promotion services revenue related to the termination of our promotion agreement with Sanofi Aventis S.A. (“Sanofi”) .

Our Baxter promotion agreement is for a 5-year term, through December 2017. Our Pfizer product distribution agreement is for a 5-year term, through June 2019 . In August 2015, we and Cardiome , from whom we licensed Aggrastat®, mutually agreed to end our collaboration for Aggrastat , and return all rights to the product to Cardiome. We recorded Aggrastat revenues of $2.0 million and $0.6 million for the six months ended June 30, 2015 and 2014, respectively. We do not anticipate that the termination of this agreement will adversely affect our profitability.

We continue to assess the financial performance of the products we promote and distribute under our agreements and their overall value within our entire portfolio of products. Over time, we anticipate the product mix that we promote will change, which may affect our revenues and profitability in the future. If any of these agreements are determined to no longer be beneficial to us and are allowed to expire, or if third parties will not renegotiate, renew or extend the agreements on terms acceptable to us, our revenues would be adversely affected and our profitability may be adversely or beneficially affected. On the other hand, if we are successful in negotiating better terms, there may be a positive impact on our revenues and profitability.

Total China revenues were $ 36 . 3 million, or 96 % of total revenues for the three-month period ended June 30, 2015, compared to $31.3 million, or 96% of total revenues for the corresponding period in 2014. Rest of the World segment revenues were $1.7 million, or 4% of our revenues for the three-month period ended June 30, 2015, compared to $1.2 million, or 4% of our revenues for the three-month period ended June 30, 2014 and related to sales of ZADAXIN product.  

Total China revenues were $ 68.7 million, or 96% of total revenues for the six-month period ended June 30, 2015, compared to $57.0 million, or 96% of total revenues for the corresponding period in 2014. Rest of the World segment revenues were $2.8 million or 4% of our revenues for the six-month period ended June 30, 2015, compared to $2.1 million, or 4% of our revenues for the six-month period ended June 30, 2014 and related to sales of ZADAXIN product.  

For the three -month period s ended June 30, 2015 and 2014,   sales to   Sinopharm in Chin a accounted for approximately 92% of our revenues. For the six-month period s ended June 30, 2015 and 2014,   sales to   Sinopharm in Chin a accounted for approximately 92% and 93 %, respectively, of our revenues. Our experience with Sinopharm has been good and we anticipate that we will continue to sell a majority of our product to them .  

Cost of Product Sales:

The following table s summarize the period over period change in our cost of product sales   (in thousands ) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

 

 

Six Months Ended

  

 

 

 

June 30,

 

 

 

June 30,

 

 

 

  

2015

  

2014

  

Change

 

2015

  

2014

  

Change

Cost of product sales

  

$

5,681 

  

$

5,011 

  

13% 

 

$

10,278 

  

$

9,572 

  

7% 

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Cost of product sales was $5.7 million and $5.0 million for the three-month periods ended June 30, 2015 and 2014, respectively. ZADAXIN cost of sales increased $0.5 million for the three-month period ended June 30, 2015, compared to the same period of last year, due to increased volume sold. Cost of product sales related to oncology products increased $0.3 million related to an increase in product sold in the second quarter ended June 30, 2015, compared to the same period last year.

Cost of product sales increased $0.7 million to $10.3 million for the six-month period ended June 30, 2015, compared to $9.6 million for the six-month period ended June 30, 2014, respectively, primarily related to an increase in ZADAXIN cost of sales due to increased volume sold.

We expect our ZADAXIN cost of product sales and gross margins to fluctuate from period to period depending on 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   such as manufacturing process improvements for the goal of future cost reductions.

Overall, we expect our gross margin percentages in 2015 to remain comparable to 2014, although they may fluctuate from quarter to quarter.

Sales and Marketing :

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

 

 

Six Months Ended

  

 

 

 

June 30,

 

 

 

June 30,

 

 

 

  

2015

  

2014

  

Change

 

2015

  

2014

  

Change

Sales and marketing

  

$

12,964 

  

$

11,242 

  

15% 

 

$

24,021 

  

$

21,076 

  

14% 

Sales and marketing expenses for the three months ended June 30, 2015 increased by $1.7 million, or 15%, compared to the same period in 2014 . Sales and marketing expenses for the six months ended June 30, 2015 increased by $2.9 million, or 14%, compared to the same period in 2014. The increases for both the three and six-month periods   ended June 30, 2015, compared to the same periods in 2014, related to growth in our sales and marketing efforts for ZADAXIN.

We anticipate total sales and marketing expenses for t he year ending December 31, 2015   to be higher than those incurred for the year ended December 31, 2014 related to growth in our sales and marketing efforts for ZADAXIN and DC Bead, including headcount related expenses.

Research and Development (“R&D”):

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

 

 

Six Months Ended

  

 

 

 

June 30,

 

 

 

June 30,

 

 

 

  

2015

  

2014

  

Change

 

2015

  

2014

  

Change

Research and development

 

$

6,581 

  

$

804 

  

719% 

 

$

7,669 

  

$

2,280 

  

236% 

 

R&D expenses for the three   months ended June 30, 2015, in creased $5.8 million, or 719%, compared to the same period in 2014. R&D expenses for the six months ended June 30, 2015, in creased $ 5.4 million, or 236 %, compared to the same period in 2014. For the three- and six-month periods ended June 30, 2015, we recorded $5.5 million in R&D expenses related to our new in-license arrangements, primarily with Theravance Biopharma for VIBATIV. There was no similar expense recognized in the three- and six-month periods ended June 30, 2014.

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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.

We anticipate our total research and development expenses to increase in 2015 compared to 2014, related to potential license fee payments, milestone payments expected to occur under license arrangements and related to research and development activities in China.  

General and Administrative (G&A) :

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

 

 

Six Months Ended

  

 

 

 

June 30,

 

 

 

June 30,

 

 

 

  

2015

  

2014

  

Change

 

2015

  

2014

  

Change

General and administrative

 

$

6,777 

  

$

5,816 

  

17% 

 

$

14,120 

  

$

11,849 

  

19% 

 

G&A expenses for the three-month period ended June 30, 2015 in creased by $1.0 million, or 17 %, compared to the same period in 2014. The increases in G&A for the three-month period ended June 30, 2015, compared to the same period in 2014, mainly related to growth in our China organization, partially offset by a $0.4 million credit to bad debt expense for collection of accounts receivables from a particular customer that had been fully reserved prior to 2015. G&A expenses for the six -month period ended June 30, 2015 in creased by $2.3 million, or 19 %, compared to the same period in 2014. The increases in G&A expenses for the six-month period ended June 30, 2015, compared to the same period in 2014, mainly related to growth in our China organization.

We expect our G&A expenses in 2015 to increase compared to 2014 related to growth in our business. O ngoing discussions with the SEC and DOJ are unpredictable and may result in higher legal costs that affect our general and administrative expenses or the timing thereof. Refer to Part II, Item 1 “Legal Proceedings” and Part I, Item 1, Note 9 “Contingencies and Commitments” and the section below “Estimated SEC and DOJ Investigation Loss” for further information on this matter. We do not expect to incur any significant a cquisition-related costs in 2015 , though we continue to evaluate opportunities in China, which may result in increased general and administrative expenses in the future.

Estimated SEC and DOJ Investigation Loss:

We previously recorded a charge of $2.0 million in the fourth quarter of 2013 related to the possibility of a settlement with the SEC and DOJ regarding their investigation into possible violations of the FCPA by us, and we recorded an additional charge of $10.8 million associated with the proposed settlement with the SEC in the second quarter of 2015. We have not yet reached a resolution of these matters with the DOJ and management continues to work diligently to obtain closure on this matter. The present estimated loss, which totals $12.8 million, is subject to change based on the results of any final settlement with the SEC relating to these matters; it may also be subject to change based on the results of settlement discussions with the DOJ related to its separate investigation.   Refer to Part II, Item 1 “Legal Proceedings” and Part I, Item 1, Note 9 “Contingencies and Commitments” for further information on this matter.

(Benefit) Provision for Income Tax:

The (benefit) provision for income taxes primarily relates to taxable income of our China operations. We recorded a n   income tax benefit of $0.5 million for the three months ended June 30, 2015, compared to income tax e xpense of $34,000 for the three month s  e nded June 30, 2014 . The provision for income tax was $24,000 and $0.4 million for the six-month periods ended June 30, 2015 and 2014, respectively. The decreases of $0.6   million and $0.4 million in the provision for income tax for the three- and six-month periods ended June 30, 2015, compared to the same periods of the prior year, mainly related to a reduction in our liabilities for uncertain tax positions in China due to certain tax years becoming closed to assessment due to

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