UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 June 30, 2003
OR
o 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.
| Delaware | 94-3116852 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. employer Identification no.) |
| 901 Mariner’s Island Blvd., Suite 205, San Mateo, 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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o
As of June 30, 2003, 38,257,025 shares of the registrant’s Common Stock, no par value, were issued and outstanding.
SCICLONE PHARMACEUTICALS, INC.
INDEX
| PAGE NO. | ||||||
PART I. FINANCIAL INFORMATION |
||||||
Item 1. Condensed Consolidated Financial Statements (Unaudited) |
||||||
Condensed Consolidated Balance Sheets as of June 30, 2003
and December 31, 2002 |
3 | |||||
Condensed Consolidated Statements of Operations for the
Three-month and Six-month periods ended June 30, 2003 and
2002 |
4 | |||||
Condensed Consolidated Statements of Cash Flows for the
Six-month periods ended June 30, 2003 and 2002 |
5 | |||||
Notes to Condensed Consolidated Financial Statements |
6 | |||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
11 | |||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
27 | |||||
Item 4. Controls and Procedures |
27 | |||||
PART II. OTHER INFORMATION |
||||||
Item 2. Changes in Securities and Use of Proceeds |
28 | |||||
Item 4. Submission of Matters to a Vote of Security Holders |
28 | |||||
Item 6. Exhibits and Reports on Form 8-K |
30 | |||||
Signatures |
32 | |||||
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SCICLONE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | ||||||||
| 2003 | 2002 | ||||||||
| (unaudited) | (Note 1) | ||||||||
ASSETS |
|||||||||
Current assets: |
|||||||||
Cash and cash equivalents |
$ | 25,363,000 | $ | 20,233,000 | |||||
Restricted short-term investments |
685,000 | 685,000 | |||||||
Other short-term investments |
324,000 | 232,000 | |||||||
Accounts receivable, net of allowance of
$638,000 in 2003 and 2002 |
11,923,000 | 9,276,000 | |||||||
Inventories |
2,936,000 | 3,431,000 | |||||||
Prepaid expenses and other current assets |
2,358,000 | 2,297,000 | |||||||
Total current assets |
43,589,000 | 36,154,000 | |||||||
Property and equipment, net |
90,000 | 111,000 | |||||||
Intangible assets, net |
647,000 | 682,000 | |||||||
Other assets |
148,000 | 164,000 | |||||||
Total assets |
$ | 44,474,000 | $ | 37,111,000 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|||||||||
Current liabilities: |
|||||||||
Accounts payable |
$ | 4,213,000 | $ | 3,150,000 | |||||
Accrued compensation and employee benefits |
839,000 | 1,089,000 | |||||||
Accrued clinical trials expense |
739,000 | 966,000 | |||||||
Accrued professional fees |
546,000 | 679,000 | |||||||
Deferred revenue |
895,000 | 895,000 | |||||||
Other accrued expenses |
224,000 | 259,000 | |||||||
Total current liabilities |
7,456,000 | 7,038,000 | |||||||
Deferred revenue |
671,000 | 1,119,000 | |||||||
Convertible notes payable |
5,600,000 | 5,600,000 | |||||||
Commitments and contingencies |
|||||||||
Shareholders’ equity: |
|||||||||
Common stock, no par value; 75,000,000
shares authorized; 38,257,025 and
36,904,916 shares issued and outstanding
at June 30, 2003 and December 31, 2002,
respectively |
161,334,000 | 156,290,000 | |||||||
Accumulated other comprehensive income |
167,000 | 79,000 | |||||||
Accumulated deficit |
(130,754,000 | ) | (133,015,000 | ) | |||||
Total shareholders’ equity |
30,747,000 | 23,354,000 | |||||||
Total liabilities and shareholders’ equity |
$ | 44,474,000 | $ | 37,111,000 | |||||
See notes to condensed consolidated financial statements
3
SCICLONE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three months ended | Six months ended | |||||||||||||||||
| June 30, | June 30, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Product sales |
$ | 16,207,000 | $ | 4,048,000 | $ | 21,207,000 | $ | 7,996,000 | ||||||||||
Contract revenue |
224,000 | 224,000 | 448,000 | 224,000 | ||||||||||||||
Total revenue |
16,431,000 | 4,272,000 | 21,655,000 | 8,220,000 | ||||||||||||||
Cost of product sales |
2,931,000 | 815,000 | 3,947,000 | 1,607,000 | ||||||||||||||
Gross margin |
13,500,000 | 3,457,000 | 17,708,000 | 6,613,000 | ||||||||||||||
Operating expenses: |
||||||||||||||||||
Research and development |
4,308,000 | 3,771,000 | 8,091,000 | 6,297,000 | ||||||||||||||
Sales and marketing |
3,025,000 | 2,066,000 | 5,254,000 | 4,074,000 | ||||||||||||||
General and administrative |
1,035,000 | 955,000 | 2,047,000 | 1,947,000 | ||||||||||||||
Total operating expenses |
8,368,000 | 6,792,000 | 15,392,000 | 12,318,000 | ||||||||||||||
Income (loss) from operations |
5,132,000 | (3,335,000 | ) | 2,316,000 | (5,705,000 | ) | ||||||||||||
Interest and investment income |
43,000 | 76,000 | 96,000 | 152,000 | ||||||||||||||
Interest and investment expense |
(90,000 | ) | (90,000 | ) | (181,000 | ) | (180,000 | ) | ||||||||||
Other income (expense), net |
39,000 | 4,000 | 31,000 | (15,000 | ) | |||||||||||||
Net income (loss) |
$ | 5,124,000 | $ | (3,345,000 | ) | $ | 2,262,000 | $ | (5,748,000 | ) | ||||||||
Earnings per share: |
||||||||||||||||||
Basic net income (loss) per share |
$ | 0.14 | $ | (0.10 | ) | $ | 0.06 | $ | (0.17 | ) | ||||||||
Diluted net income (loss) per share |
$ | 0.13 | $ | (0.10 | ) | $ | 0.06 | $ | (0.17 | ) | ||||||||
Weighted average shares used in
computing: |
||||||||||||||||||
Basic net income (loss) per share |
37,672,876 | 33,595,568 | 37,497,477 | 33,092,358 | ||||||||||||||
Diluted net income (loss) per share |
40,490,411 | 33,595,568 | 39,338,964 | 33,092,358 | ||||||||||||||
See notes to condensed consolidated financial statements
4
SCICLONE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Six months ended | ||||||||||
| June 30, | ||||||||||
| 2003 | 2002 | |||||||||
Operating activities: |
||||||||||
Net income (loss) |
$ | 2,262,000 | $ | (5,748,000 | ) | |||||
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
||||||||||
Depreciation and amortization |
90,000 | 292,000 | ||||||||
Changes in operating assets and liabilities: |
||||||||||
Accounts receivable |
(2,647,000 | ) | (867,000 | ) | ||||||
Inventories |
495,000 | 164,000 | ||||||||
Prepaid expenses and other current assets |
(59,000 | ) | 777,000 | |||||||
Accounts payable and other accrued expenses |
1,027,000 | (151,000 | ) | |||||||
Accrued compensation and employee benefits |
(250,000 | ) | (298,000 | ) | ||||||
Accrued clinical trials expense |
(226,000 | ) | 817,000 | |||||||
Accrued professional fees |
(132,000 | ) | (18,000 | ) | ||||||
Deferred revenue |
(448,000 | ) | 2,461,000 | |||||||
Net cash provided by (used in) operating activities |
112,000 | (2,571,000 | ) | |||||||
Investing activities: |
||||||||||
Purchase of property and equipment |
(20,000 | ) | (43,000 | ) | ||||||
Payment on purchase of marketable securities |
(4,000 | ) | (7,000 | ) | ||||||
Net cash used in investing activities |
(24,000 | ) | (50,000 | ) | ||||||
Financing activities: |
||||||||||
Proceeds from issuance of common stock, net of
financing costs |
5,042,000 | 10,524,000 | ||||||||
Net cash provided by financing activities |
5,042,000 | 10,524,000 | ||||||||
Net increase in cash and cash equivalents |
5,130,000 | 7,903,000 | ||||||||
Cash and cash equivalents, beginning of period |
20,233,000 | 15,518,000 | ||||||||
Cash and cash equivalents, end of period |
$ | 25,363,000 | $ | 23,421,000 | ||||||
See notes to condensed consolidated financial statements
5
SCICLONE PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| 1. | Basis of Presentation | |
| The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles consistent with those applied in, and should be read in conjunction with, the audited financial statements for the year ended December 31, 2002 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The interim financial information reflects all 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, 2002 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. | ||
| 2. | Significant Accounting Policies | |
| Revenue Recognition | ||
| The Company recognizes revenue from product sales at the time of shipment. There are no significant customer acceptance requirements or post shipment obligations on the part of the Company. Sales to importing agents or distributors are recognized at time of shipment when title to the product is transferred to them, and they do not have contractual rights of return except under limited terms regarding product quality. However, the Company will replace products that have expired or are deemed to be damaged or defective when delivered. Payments by the importing agents and distributors are not contingent upon sale to the end user by the importing agents or distributors. | ||
| Contract revenue for research and development is recorded as earned based on the performance requirements of the contract. Nonrefundable contract fees for which no further performance obligations exist, and there is no continuing involvement by the Company, are recognized on the earlier of when the payments are received or when collection is assured. | ||
| Revenue associated with substantive performance milestones is recognized based on the achievement of the milestones, as defined in the respective agreements and provided that (i) the milestone event is substantive and its achievement is not reasonably assured at the inception of the agreement, and (ii) there are no future performance obligations associated with the milestone payment. | ||
| Net Income (Loss) Per Share | ||
| Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share includes any dilutive impact from convertible debt, stock options and warrants outstanding using the treasury stock method. |
6
| The following is a reconciliation of the numerator and denominator used in basic and diluted income (loss) per share computations for the three-month and six-month periods in 2003 and 2002, respectively: |
| Three months ended | Six months ended | |||||||||||||||||
| June 30, | June 30, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Numerator: |
||||||||||||||||||
Net income (loss) |
$ | 5,124,000 | $ | (3,345,000 | ) | $ | 2,262,000 | $ | (5,748,000 | ) | ||||||||
Effect of dilutive securities: |
||||||||||||||||||
Interest on convertible note |
24,000 | — | — | — | ||||||||||||||
Net income (loss) used for diluted income (loss)
per share |
$ | 5,148,000 | $ | (3,345,000 | ) | $ | 2,262,000 | $ | (5,748,000 | ) | ||||||||
Denominator: |
||||||||||||||||||
Weighted-average shares outstanding used
for basic income (loss) per share |
37,672,876 | 33,595,568 | 37,497,477 | 33,092,358 | ||||||||||||||
Effect of dilutive securities: |
||||||||||||||||||
Stock options |
2,241,170 | — | 1,637,493 | — | ||||||||||||||
Warrants |
299,835 | — | 203,994 | — | ||||||||||||||
Convertible note |
276,530 | — | — | — | ||||||||||||||
Weighted-average shares and dilutive stock
options used for diluted income (loss) per share |
40,490,411 | 33,595,568 | 39,338,964 | 33,092,358 | ||||||||||||||
| Accounting For Stock-Based Compensation | ||
| The Company accounts for its stock option and employee stock purchase plans under the provisions of Accounting Principles Board Opinion 25 (“APB 25”) and related Interpretations. Accordingly, the Company does not recognize compensation expense in accounting for its stock option and employee stock purchase plans for awards to employees and directors granted with exercise prices at fair market value. | ||
| Pro forma information regarding net income (loss) and net income (loss) per share is required by Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) and has been determined as if the Company had accounted for its stock awards under the fair value method of that Statement. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the three month and six month periods ended June 30, 2003 and the corresponding period in 2002: risk-free interest rates of 2.00%; dividend yield of 0%; volatility factors of the expected market price of the Company’s common stock of 0.95, respectively, and a weighted average expected life of the option of 4.00 years. | ||
| The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock awards have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, in the Company’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and stock purchases. | ||
| The following table illustrates the Company’s pro forma net income (loss) and net income (loss) per share, had compensation expense for the Company’s option and employee purchase plans been determined based on the fair value at the grant date consistent with the provisions of SFAS 123, as amended by SFAS 148: |
7
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net income (loss) — as reported |
$ | 5,124,000 | $ | (3,345,000 | ) | $ | 2,262,000 | $ | (5,748,000 | ) | ||||||
Total stock-based employee compensation
expense determined under the fair value
based method for all awards |
(731,000 | ) | (591,000 | ) | (1,300,000 | ) | (1,116,000 | ) | ||||||||
Net income (loss) — pro forma |
$ | 4,393,000 | $ | (3,936,000 | ) | $ | 962,000 | $ | (6,864,000 | ) | ||||||
Basic net income (loss) per share — as
reported |
$ | 0.14 | $ | (0.10 | ) | $ | 0.06 | $ | (0.17 | ) | ||||||
Diluted net income (loss) per share — as reported |
$ | 0.13 | $ | (0.10 | ) | $ | 0.06 | $ | (0.17 | ) | ||||||
Basic net income (loss) per share — pro forma |
$ | 0.12 | $ | (0.12 | ) | $ | 0.03 | $ | (0.21 | ) | ||||||
Diluted net income (loss) per share — pro
forma |
$ | 0.11 | $ | (0.12 | ) | $ | 0.03 | $ | (0.21 | ) | ||||||
| The effects of applying SFAS 123 for pro forma disclosures are not likely to be representative of the effects on reported net income (loss) for future years due to the different number of options granted each year. |