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Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2002
 
or
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             .
 
Commission file number: 000-23265
 
 
SALIX PHARMACEUTICALS, LTD.
(Exact name of Registrant as specified in its charter)
 
Delaware
  
94-3267443
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
8540 Colonnade Center Drive, Suite 501
Raleigh, North Carolina 27615
(Address of principal executive offices, including zip code)
 
(919) 862-1000
(Registrant’s telephone number, including area code)
 
 
 
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    ¨
 
The number of shares of the Registrant’s Common Stock outstanding as of November 11, 2002 was 21,373,347.
 

Table of Contents
SALIX PHARMACEUTICALS, LTD.
 
TABLE OF CONTENTS
 
PART I.
   
FINANCIAL INFORMATION
     
Page No.
Item 1.
   
Condensed Consolidated Financial Statements
       
         
1
         
2
         
3
         
4
Item 2.
        
6
Item 3.
        
10
Item 4.
        
10
PART II.
   
OTHER INFORMATION
       
Item 6.
        
11
         
12
         
13

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Table of Contents
PART I.    FINANCIAL INFORMATION
 
Item 1.    Condensed Consolidated Financial Statements
 
SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. Dollars, in Thousands, Except Share Amounts)
 
      
September 30, 2002
(unaudited)
       
December 31, 2001
(audited)
  
ASSETS
                      
Current assets:
                      
Cash and cash equivalents
     
$
42,813
 
     
$
27,868
 
Short-term investments
     
 
14,582
 
     
 
—  
 
Accounts receivable, net
     
 
4,876
 
     
 
2,378
 
Inventory, net
     
 
9,362
 
     
 
6,274
 
Prepaid and other current assets
     
 
1,974
 
     
 
784
 
      
    
Total current assets
     
 
73,607
 
     
 
37,304
 
Property and equipment, net
     
 
1,165
 
     
 
1,067
 
Long-term investments
     
 
5,064
 
     
 
—  
 
Other assets
     
 
55
 
     
 
219
 
      
    
Total assets
     
$
79,891
 
     
$
38,590
 
      
    
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                      
Current liabilities:
                      
Accounts payable and accrued liabilities
     
$
10,242
 
     
$
8,094
 
Deferred revenue
     
 
3,123
 
     
 
2,902
 
      
    
Total current liabilities
     
 
13,365
 
     
 
10,996
 
Commitments
     
 
—  
 
     
 
—  
 
Stockholders’ equity:
                      
Preferred stock, $0.001 par value; 5,000,000 shares authorized, issuable in series, none outstanding
     
 
—  
 
     
 
—  
 
Common stock, $0.001 par value; 80,000,000 shares authorized, 21,356,606 shares issued and outstanding at September 30, 2002 and 16,708,681 shares issued and outstanding at December 31, 2001
     
 
21
 
     
 
17
 
Additional paid-in capital
     
 
131,201
 
     
 
73,461
 
Accumulated other comprehensive loss
     
 
(221
)
     
 
—  
 
Accumulated deficit
     
 
(64,475
)
     
 
(45,884
)
      
    
Total stockholders’ equity
     
 
66,526
 
     
 
27,594
 
      
    
Total liabilities and stockholders’ equity
     
$
79,891
 
     
$
38,590
 
      
    
 
The accompanying notes are an integral part of these financial statements.

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Table of Contents
SALIX PHARMACEUTICALS, LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(U.S. Dollars, In thousands, Except per Share Data)
 
    
Three months ended
September 30,
     
Nine months ended
September 30,
  
    
2002
     
2001
     
2002
     
2001
  
Revenues:
                                    
Product revenue
   
$
8,673
 
   
$
2,834
 
   
$
22,221
 
   
$
10,287
 
Revenue from collaborative agreements
   
 
—  
 
   
 
2,589
 
   
 
—  
 
   
 
5,788
 
    
  
  
  
Total revenues
   
 
8,673
 
   
 
5,423
 
   
 
22,221
 
   
 
16,075
 
Costs and expenses:
                                    
Cost of products sold
   
$
2,185
 
   
$
676
 
   
$
5,548
 
   
$
2,542
 
License fees and costs related to collaborative agreements
   
 
31
 
   
 
1,857
 
   
 
94
 
   
 
4,012
 
Research and development
   
 
7,069
 
   
 
1,561
 
   
 
13,085
 
   
 
4,452
 
Selling, general and administrative
   
 
8,392
 
   
 
6,564
 
   
 
22,828
 
   
 
17,726
 
    
  
  
  
Total cost and expenses
   
 
17,677
 
   
 
10,658
 
   
 
41,555
 
   
 
28,732
 
Loss from operations
   
 
(9,004
)
   
 
(5,235
)
   
 
(19,334
)
   
 
(12,657
)
Interest, and other income (expense), net
   
 
351
 
   
 
180
 
   
 
743
 
   
 
396
 
    
  
  
  
Net loss before tax
   
$
(8,653
)
   
$
(5,055
)
   
$
(18,591
)
   
$
(12,261
)
Income tax
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
    
  
  
  
Net loss
   
$
(8,653
)
   
$
(5,055
)
   
$
(18,591
)
   
$
(12,261
)
    
  
  
  
Net loss per share, basic and diluted
   
$
(0.41
)
   
$
(0.30
)
   
$
(0.92
)
   
$
(0.82
)
    
  
  
  
Shares used in computing net loss per share, basic and diluted
   
 
21,351
 
   
 
16,612
 
   
 
20,193
 
   
 
15,040
 
    
  
  
  
 
 
The accompanying notes are an integral part of these financial statements.

2

Table of Contents
SALIX PHARMACEUTICALS, LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(U.S. Dollars, in Thousands)
 
    
Nine months ended
September 30,
  
    
2002
     
2001
  
Cash flows from operating activities
                  
Net loss
   
$
(18,591
)
   
$
(12,261
)
Adjustments to reconcile net loss to net cash used in operating activities:
                  
Depreciation and amortization
   
 
296
 
   
 
144
 
Loss on disposal of equipment
   
 
—  
 
   
 
21
 
Changes in assets and liabilities:
                  
Accounts receivable, inventory and other current assets
   
 
(6,612
)
   
 
2,541
 
Accounts payable and other current liabilities
   
 
2,148
 
   
 
1,575
 
Deferred revenue
   
 
—  
 
   
 
(4,163
)
    
  
Net cash used in operating activities
   
 
(22,759
)
   
 
(12,143
)
Cash flows from investing activities
                  
Purchases of property and equipment
   
 
(394
)
   
 
(918
)
Proceeds from sale of property and equipment
   
 
—  
 
   
 
4
 
Purchases of investments
   
 
(21,805
)
   
 
—  
 
Proceeds from maturity of investments
   
 
2,159
 
   
 
—  
 
    
  
Net cash used in investing activities
   
 
(20,040
)
   
 
(914
)
Cash flows from financing activities
                  
Proceeds from issuance of common stock
   
 
57,744
 
   
 
32,221
 
    
  
Net cash provided by financing activities
   
 
57,744
 
   
 
32,221
 
Net increase in cash and cash equivalents
   
 
14,945
 
   
 
19,164
 
Cash and cash equivalents at beginning of period
   
 
27,868
 
   
 
13,244
 
    
  
Cash and cash equivalents at end of period
   
$
42,813
 
   
$
32,408
 
    
  
 
 
The accompanying notes are an integral part of these financial statements.

3

Table of Contents
SALIX PHARMACEUTICALS, LTD.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
September 30, 2002
(Unaudited)
 
1.    Organization and Basis of Presentation
 
The Company became a Delaware corporation on December 31, 2001 pursuant to a reorganization and continuation of the Company as a domestic entity.
 
These statements are stated in United States dollars and are prepared under accounting principles generally accepted in the United States. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
 
The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring items), which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows. These financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Report and with the audited consolidated financial statements for the fiscal year ended December 31, 2001 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the Securities and Exchange Commission. The results of operations for interim periods are not necessarily indicative of results to be expected for a full year or any future period.
 
2.    Commitments
 
At September 30, 2002, the Company had binding purchase order commitments for inventory purchases aggregating approximately $7.5 million over 10 months.
 
3.    Investments
 
The Company considers all investments that have a maturity of greater than three months and less than one year to be short-term investments. All securities with maturities beyond one year are considered long-term investments. The Company’s short-term and long-term investments consist of government agency and high-grade corporate bonds. The Company has the intent and ability to hold these investments until maturity; therefore, the investments are classified as held-to-maturity and are reported at amortized cost.
 
4.    Inventory
 
Inventory at September 30, 2002 consisted of $5.4 million of raw materials and $4.0 million of finished goods. Inventory at December 31, 2001 consisted of $3.6 million of raw materials and $2.7 million of finished goods. As of September 30, 2002, the Company had approximately $1.7 million in raw material inventories relating to products that had not been approved by the U.S. Food and Drug Administration.
 
5.    Revenue Recognition
 
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, which among other guidance clarifies certain conditions to be met in order to recognize revenue. SAB 101 requires companies to recognize certain up-front non-refundable fees over the term of the related agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a separate earnings process. In the fourth quarter of 2000, the Company implemented SAB 101. As a result of the adoption of SAB 101, $8.7 million of the $11.7 million initial payment received and recognized in full during the second quarter of 2000 from Shire Pharmaceuticals Group plc was deferred and recognized as revenue ratably through the end of 2001.

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Table of Contents
 
Due to the uniqueness of each of its licensing arrangements, the Company analyzes each element of each contract, including milestone payments, to determine the appropriate revenue recognition. In accordance with SAB 101, the Company recognizes revenue upon achievement of contractual milestones only when and to the extent the Company concludes that a separate earnings process has been culminated or the milestone is representative of the level of effort and progress toward completion of a long-term contract.
 
6.    Research and Development
 
Research and development costs, both internal and externally contracted, are expensed as incurred. These costs include direct expenditures for goods and services, as well as indirect expenditures such as salaries, administrative expenses and various allocated costs.
 
7.    Equity Offering
 
On March 15, 2002, the Company completed a public offering of its common stock. The Company raised approximately $57.4 million, net of offering costs, through the issuance of 4,600,000 shares of common stock.
 
8.    Recent Accounting Pronouncements
 
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill’s impairment and that intangible assets other than goodwill be amortized over their useful lives. SFAS No. 141 is effective for all business combinations initiated after September 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after September 30, 2001. The provisions of SFAS No. 142 became effective for the Company on January 1, 2002. The adoption of SFAS No. 141 and SFAS No. 142 did not have a material impact on the Company’s results of operations or financial position.
 
In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires an entity to record a liability for an obligation associated with the retirement of an asset at the time that the liability is incurred by capitalizing the cost as part of the carrying value of the related asset and depreciating it over the remaining useful life of that asset. The standard is effective for the Company beginning January 1, 2003. The Company does not expect the adoption of SFAS No. 143 to have a material impact on the Company’s results of operations or financial position.
 
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” SFAS No. 144 addresses how and when to measure impairment on long-lived assets and how to account for long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange or distribution to owners. The new provisions supersede SFAS No. 121, which addressed asset impairment and certain provisions of APB Opinion 30 related to reporting the effects of the disposal of a business segment, and require expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred rather than the measurement date. Under S