Delaware

94-3267443

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

YES  x

 NO  o

Page No.

PART I.

FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets as of March 31, 2003(unaudited) and December 31, 2002 (audited)

1

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002 (unaudited)

2

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 (unaudited)

3

Notes to Condensed Consolidated Financial Statements

4

Item 2.

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

6

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

10

Item 4.

Controls and Procedures

10

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

10

Item 6.

Exhibits and Reports on Form 8-K

11

Signatures

12

Certifications

13

March 31, 2003

December 31, 2002

(unaudited)

(audited)

ASSETS

Current assets:

Cash and cash equivalents

$

28,576

$

34,531

Short-term investments

11,342

14,165

Accounts receivable, net

7,655

5,980

Inventory, net

9,424

10,210

Prepaid and other current assets

2,177

2,080

Total current assets

59,174

66,966

Long-term investments

7,042

7,052

Property and equipment, net

1,216

1,284

Total assets

$

67,432

75,302

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

1,577

$

3,029

Accrued liabilities

7,731

8,676

Deferred revenue

3,150

3,208

Total current liabilities

12,458

14,913

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, 21,375,846 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively.

21

21

Additional paid-in capital

131,298

131,300

Accumulated other comprehensive loss

(248

)

(306

)

Accumulated deficit

(76,097

)

(70,626

)

Total stockholders’ equity

54,974

60,389

Total liabilities and stockholders’ equity

$

67,432

$

75,302

Three months ended
March 31,

2003

2002

Revenues:

Product revenue

$

11,522

$

6,211

Total revenues

11,522

6,211

Costs and expenses:

Cost of products sold

$

2,764

$

1,566

License fees and costs related to collaborative agreements

31

31

Research and development

5,150

2,485

Selling, general and administrative

9,619

6,978

Total cost and expenses

17,564

11,060

Loss from operations

(6,042

)

(4,849

)

Interest, and other income (expense), net

570

125

Net loss before tax

$

(5,472

)

$

(4,724

)

Income tax

—  

—  

Net loss

$

(5,472

)

$

(4,724

)

Net loss per share, basic and diluted

$

(0.26

)

$

(0.26

)

Shares used in computing net loss per share, basic and diluted

21,376

17,895

Three months ended
March 31,

2003

2002

Cash Flows From Operating Activities

Net loss

$

(5,472

)

$

(4,724

)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

116

90

Changes in assets and liabilities:

Accounts receivable, inventory and other assets

(986

)

(886

)

Accounts payable and other current liabilities

(2,397

)

(599

)

Deferred revenue

(58

)

(50

)

Net cash used in operating activities

(8,797

)

(6,169

)

Cash Flows From Investing Activities

Purchases of property and equipment

(48

)

(154

)

Proceeds from maturity of investments

2,834

—  

Net cash provided by (used in) investing activities

2,786

(154

)

Cash Flows From Financing Activities

Proceeds from issuance of common stock

(2

)

57,595

Net cash (used in) provided by financing activities

(2

)

57,595

Effect of exchange rate changes on cash

58

—  

Net (decrease) increase in cash and cash equivalents

(5,955

)

51,272

Cash and cash equivalents at beginning of period

34,531

27,868

Cash and cash equivalents at end of period

$

28,576

$

79,140

1.

Organization and Basis of Presentation

     Salix Pharmaceuticals, Ltd., (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, 2002 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 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 March 31, 2003, the Company had binding purchase order commitments for inventory purchases aggregating approximately $10.6 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 March 31, 2003 consisted of  $6.8 million of raw materials and $2.6 million of finished goods.  Inventory at December 31, 2002 consisted of $7.3 million of raw material and $2.9 million of finished goods.  As of March 31, 2003, the Company had approximately $2.2 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 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.

     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 April 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”).  SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (“Issue 94-3”).  SFAS 146 addresses the accounting and reporting for costs associated with exit or disposal activities resulting from entities increasingly engaging in exit and disposal activities where certain costs associated with those activities were recognized as liabilities at a plan (commitment) date under Issue 94-3 but did not meet the definition of a liability in FASB Concepts Statement No. 6, “Elements of Financial Statements.” The standard became effective for us beginning January 1, 2003.  The adoption of SFAS 146 had no impact on our results of operations or financial position.

     In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others (an interpretation of FAS No. 5, 57 and 107 and rescission of FAS Interpretation No. 34)” (“FIN 45”), which modifies the accounting and enhances the disclosure of certain types of guarantees.  FIN 45 requires that upon issuance of certain guarantees, the guarantor must recognize a liability for the fair value of the obligation it assumes under the guarantee. The provisions of FIN 45 for the initial recognition and measurement are to be applied to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of annual periods that end after December 15, 2002. The adoption of FIN 45 had no impact on our results of operations or financial position for the three months ending, nor as of, March 31, 2003.

9.

Comprehensive Loss

     Comprehensive loss is comprised of net loss and other comprehensive loss.  Other comprehensive loss includes certain changes in the shareholders’ equity of the Company that are excluded from net loss.  Specifically, other comprehensive loss includes foreign currency translation adjustments.

     Comprehensive loss for the three months ended March 31, 2003 and 2002 was as follows:

Three months ended March 31,

2003

2002

Net loss

$

(5,472

)

$

(4,724

)

Cumulative foreign currency translation adjustments

58

—  

Comprehensive loss

$

(5,414

)

$

(4,724

)

March 31,

2003

2002

Net loss:

As reported

$

(5,472

)