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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
From the transition period from to
Commission File Number: 0-27854
BONE CARE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1527471
(State of Incorporation) (IRS Employer
Identification No.)
1600 Aspen Commons, Suite 300
Middleton, Wisconsin 53562
(Address of Principal Executive Offices)
608-662-7800
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of January 31, 2004, there were 14,321,179 shares of the registrant's common
stock issued and outstanding.
BONE CARE INTERNATIONAL, INC.
FORM 10-Q
For the quarterly period ended December 31, 2003
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Condensed Balance Sheets
December 31, 2003 and June 30, 2003................................................................... 3
Condensed Statements of Operations
Three and Six Months Ended December 31, 2003 and 2002................................................. 4
Condensed Statements of Cash Flows
Six Months Ended December 31, 2003 and 2002........................................................... 5
Notes to Condensed Financial Statements............................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................ 12
ITEM 4. CONTROLS AND PROCEDURES............................................................................... 12
PART II-OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................... 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................................... 13
SIGNATURES....................................................................................................... 14
INDEX TO EXHIBITS................................................................................................ 15
Bone Care(R) and Hectorol(R) are registered trademarks of Bone Care
International, Inc., in the U.S. A community trademark application for
Hectorol(R) is pending in the European Community Trademark Office, Japan, and
selected other countries. Hectorol(R) is the brand name for the active drug
substance, doxercalciferol. This filing may also include trademarks of other
companies.
BONE CARE INTERNATIONAL, INC.
Condensed Balance Sheets
(unaudited)
December 31, June 30,
ASSETS 2003 2003
- -------------------------------------------------------------------------------- ----------------- ----------------
Current assets:
Cash and cash equivalents.............................................. $ 2,328,366 $ 3,065,218
Marketable securities.................................................. 8,650,000 13,624,826
Accounts receivable, net .............................................. 3,259,476 2,814,753
Inventory purchased from related party................................. 2,570,691 305,688
Inventory purchased from others........................................ 2,611,073 1,774,916
Other current assets................................................... 1,310,191 778,725
----------------- ----------------
Total current assets............................................... 20,729,797 22,364,126
Long-term securities........................................................ 910,888 913,401
Property, plant and equipment, net ....................................... 1,647,358 1,889,000
Patent fees, net............................................................ 1,485,862 1,322,670
Goodwill.................................................................... 359,165 359,165
----------------- ----------------
$ 25,133,070 $ 26,848,362
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current liabilities:
Accounts payable....................................................... $ 4,719,006 $ 2,684,838
Accrued compensation payable........................................... 1,257,812 2,028,783
Accrued clinical study and research costs.............................. 387,063 603,048
Other accrued liabilities.............................................. 164,662 102,601
Allowance for sales returns............................................ 150,000 336,620
----------------- ----------------
Total current liabilities.......................................... 6,678,543 5,755,890
Long-term liabilities....................................................... - 649,880
Commitments and contingencies (Note 2)
Shareholders' equity:
Preferred stock-authorized 2,000,000 shares of $.001 par value;
none issued.......................................................... - -
Common stock-authorized 28,000,000 shares of no par value; issued
and outstanding 14,319,679 and 14,218,522 shares as of December 31,
2003 and June 30, 2003, respectively................................. 74,232,813 73,640,801
Accumulated deficit.................................................... (55,778,286) (53,198,209)
----------------- ----------------
Total shareholders' equity......................................... 18,454,527 20,442,592
----------------- ----------------
$ 25,133,070 $ 26,848,362
================= ================
The accompanying notes to the condensed financial statements are an
integral part of these statements.
-3-
BONE CARE INTERNATIONAL, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended December 31, Six Months Ended December 31,
---------------------------------- ----------------------------------
2003 2002 2003 2002
---------------------------------- ----------------------------------
Product Sales................................... $ 9,115,485 $ 3,743,013 $ 17,240,527 $ 9,160,413
Cost and expenses
Cost of product sales from related party... 1,501,201 -- 2,854,265 --
Cost of product sales from others.......... 929,907 1,459,838 1,994,487 2,969,444
Research and development................... 1,653,228 1,693,892 3,446,388 3,370,515
Selling, general and administrative........ 5,546,350 4,869.290 11,627,549 8,946,378
---------------------------------- ----------------------------------
9,630,686 8,023,020 19,922,689 15,286,337
---------------------------------- ----------------------------------
Loss from operations....................... (515,201) (4,280,007) (2,682,162) (6,125,924)
Interest income, net............................ 37,176 152,312 102,085 367,091
---------------------------------- ----------------------------------
Net loss................................... $ (478,025) .$ (4,127,695) $ (2,580,077) $ (5,758,833)
================================== ==================================
Net loss per common share -- basic and
diluted.................................... $ (0.03) $ (0.29) $ (0.18) $ (0.41)
================================== ==================================
Shares used in computing basic and diluted
net loss per common share................... 14,300,232 14,157,425 14,270,479 14,157,099
================================== ==================================
The accompanying notes to the condensed financial statements are an integral
part of these statements.
-4-
BONE CARE INTERNATIONAL, INC.
Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended
December 31,
-------------------------------------
2003 2002
---------------- ----------------
Cash flows from operating activities:
Net loss................................................................. $(2,580,077) $(5,758,833)
Adjustments to reconcile net loss to net cash used in operating activities:
Acceleration of stock option vesting..................................... 227,500 --
Depreciation of fixed assets............................................. 383,529 335,760
Amortization of patents.................................................. 81,893 80,814
Gain on disposal of fixed assets......................................... (7,876) --
Loss on write-off of patents............................................. -- 29,106
Changes in assets and liabilities:
(Increase) decrease in accounts receivable............................... (444,723) 1,052,411
(Increase) decrease in inventory......................................... (3,101,160) 342,638
Increase in other current assets......................................... (531,466) (485,664)
Increase in other long-term assets....................................... -- (110,300)
Increase in accounts payable............................................. 2,034,168 449,050
Increase (decrease) in accrued liabilities............................... (924,895) 855,863
Increase (decrease) in long-term liabilities............................. (649,880) 437,691
Increase (decrease) in allowance for sales returns....................... (186,620) 73,420
---------------- ----------------
Net cash used in operating activities.................................. (5,699,607) (2,698,044)
---------------- ----------------
Cash flows from investing activities:
Maturities of marketable securities, net................................. 4,977,339 3,496,392
Proceeds from the sale of property, plant and equipment.................. 17,753 --
Purchase of property, plant and equipment................................ (151,764) (413,672)
Patent fees.............................................................. (245,085) (158,010)
---------------- ----------------
Net cash provided by investing activities.............................. 4,598,243 2,924,710
---------------- ----------------
Cash flow from financing activities:
Proceeds from exercise of stock options.................................. 364,512 2,110
---------------- ----------------
Net cash provided by financing activities.............................. 364,512 2,110
---------------- ----------------
Net increase (decrease) in cash and cash equivalents................... (736,852) 228,776
Cash and Cash Equivalents at beginning of period................................ 3,065,218 2,023,969
---------------- ----------------
Cash and Cash Equivalents at end of period...................................... $ 2,328,366 $ 2,252,745
================ ================
The accompanying notes to the condensed financial statements are an
integral part of these statements.
-5-
BONE CARE INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Bone Care International, Inc. ("Bone Care," "we," or the "Company") is
a specialty pharmaceutical company engaged in discovering, developing and
commercializing improved vitamin D-hormone therapies to treat secondary
hyperparathyroidism in patients with kidney (or renal) disease, and other
diseases, including osteoporosis, psoriasis and cancers of the prostate, breast
and colon. In June 1999, Bone Care received approval from the U.S. Food and Drug
Administration for an oral formulation of Hectorol(R), and in May 2000 Bone Care
received approval for the intravenous formulation to manage secondary
hyperparathyroidism in kidney dialysis patients. Hectorol(R) Injection has not
been approved for sale outside of the U.S. and Hectorol(R) Capsules are approved
for sale only in the U.S. and Canada. In December 2001 we filed a supplemental
New Drug Application with the FDA to treat secondary hyperparathyroidism in
chronic kidney disease (CKD) patients. We received an "approvable letter" from
the FDA in October 2002, for which we have provided our response. If approved,
this would expand the approved indication for Hectorol(R) Capsules.
Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared from the books and records of Bone Care in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnote
disclosures required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Interim results are not necessarily
indicative of the results that may be expected for the year. These financial
statements should be read in conjunction with the financial statements and
footnotes thereto for the year ended June 30, 2003 included in the Company's
Form 10-K as filed with the Securities and Exchange Commission.
Revenue Recognition Policy
Bone Care records sales and the related costs of Hectorol(R) Capsules
and Hectorol(R) Injection based on shipments to its customers reduced by the
estimated future returns and allowances. Revenue is recognized at the time of
shipment as risk of loss has transferred to the customer, delivery has occurred,
and collectibility is reasonably certain. Customers have a right to return
product if they are unable to sell it prior to the expiration date. In
accordance with Statement of Financial Accounting Standard (SFAS) No. 48,
"Revenue Recognition When Right of Return Exists", Bone Care's December 31, 2003
and June 30, 2003 balance sheets include an accrual of $150,000 and $336,620,
respectively, for the estimated amount of future returns, based on historical
experience, related to Hectorol(R) Capsules and Hectorol(R) Injection.
Accounts Receivable
Accounts receivable is stated net of allowance for doubtful accounts of
$80,440 and $111,200 at December 31, 2003 and June 30, 2003, respectively.
Inventory
Inventory is stated at the lower of cost or market; cost is determined
by the first-in, first-out method. Inventory consisted of the following:
-6-
December 31, June 30,
2003 2003
--------------------------------------
Raw materials $ 1,810,853 $ 1,293,329
Work in process 528,640 182,998
Finished goods 2,842,271 604,277
--------------------------------------
$ 5,181,764 $ 2,080,604
======================================
Property, Plant and Equipment
Bone Care periodically evaluates the carrying value of property and
equipment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the expected future undiscounted cash flows are less
than the carrying amount of the asset, a loss is recognized for the differences
between the fair value and the carrying value of the asset. Property, plant and
equipment consisted of the following:
December 31, June 30,
2003 2003
---------------------------------------
Leasehold Improvements $ 588,632 $ 588,632
Furniture and Fixtures 516,359 545,547
Machinery and Other Equipment 3,219,757 3,100,108
---------------------------------------
4,324,748 4,234,287
Less: Accumulated Depreciation (2,677,390) (2,345,287)
---------------------------------------
$ 1,647,358 $ 1,889,000
=======================================
Patent Fees
Legal costs incurred to register patents are amortized on a straight
line basis over the life of the patent. Bone Care continuously evaluates whether
events and circumstances have occurred that indicate the remaining estimated
useful life of intangibles may warrant revision or that the remaining balance of
intangibles may not be recoverable. When factors indicate that intangibles
should be evaluated for possible impairment, Bone Care assesses recoverability
from expected future operations using undiscounted cash flows. Impairment would
be recognized in operating results if the expected undiscounted cash flows were
less than the carrying value of the asset. Impairment would be measured using
fair value. Patent fees are stated net of accumulated amortization of $1,213,845
and $1,131,952 at December 31, 2003 and June 30, 2003, respectively.
Stock Based Compensation
Bone Care's stock-based compensation related to employees and
non-employee directors is recognized using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and thus there is no compensation expense for
options granted with exercise prices equal to the fair value of Bone Care's
common stock on the date of the grant. Pro forma net loss and loss per share had
Bone Care elected to adopt the "fair-value based method" of SFAS No. 123 are as
follows:
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------------
Net loss as reported........................ $ (478,025) $ (4,127,695) $ (2,580,077) $ (5,758,833)
Compensation expense recognized........... - - 227,500 -
Less pro forma compensation expense....... (779,844) (396,351) (1,665,840) (708,861)
------------- ------------- ------------- ------------
Pro forma net loss.......................... $ (1,257,869) $ (4,524,046) $ (4,018,417) $ (6,467,694)
============= ============= ============= =============
Net loss per share -- basic and diluted
As reported............................... $ (0.03) $ (0.29) $ (0.18) $ (0.41)
Pro forma................................. $ (0.09) $ (0.32) $ (0.28) $ (0.46)
-7-
Reclassifications
Certain prior period amounts in the condensed financial statements and
the notes have been reclassified to conform to the fiscal 2004 presentation.
(2) COMMITMENTS AND CONTINGENCIES
We have entered into various contractual obligations and commercial
commitments. The following table summarizes these contractual obligations as of
December 31, 2003:
Less Than
Total 1 Year 1-3 Years
----- ------ ---------
Operating Lease Obligations (1).................... $1,390,400 $ 685,619 $ 704,781
Purchase Commitment (2)............................ 1,898,658 1,744,462 154,196
---------- ---------- ---------
Total.............................................. $3,289,058 $2,430,081 $ 858,977
========== ========== =========
(1) Represents office and laboratory facilities in Middleton, WI.
(2) Purchase commitment for active pharmaceutical ingredients used in
Hectorol(R) production and pre-clinical research and prescriber data
for market research.
(3) NET LOSS PER SHARE
Net loss per share is based on a weighted average number of shares of
common stock of 14,300,232 and 14,270,479 for the three months and six months
ended December 31, 2003, respectively, and shares of common stock of 14,157,425
and 14,157,099 for the three months and six months ended December 31, 2002,
respectively. Options to purchase common stock have been excluded from the
calculation of diluted earnings per share, as the impact of these options on
diluted earnings per share would be anti-dilutive. The excluded options totaled
2,117,952 and 1,468,033 for the quarters ended December 31, 2003 and 2002,
respectively.
(4) COMPREHENSIVE INCOME (LOSS)
Total comprehensive loss was $478,025 and $4,145,680 for the quarters
ended December 31, 2003 and 2002, respectively. Total comprehensive loss was
$2,580,077 and $5,794,804 for the six months ended December 31, 2003 and 2002,
respectively. Comprehensive loss is comprised of net loss and changes in
unrealized gains and losses on available-for-sale securities.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our audited
financial statements, including the related footnotes, presented in our Annual
Report on Form 10-K for the year ended June 30, 2003.
Statements included in this Form 10-Q which do not relate solely to
historical matters are intended to be, and are hereby identified as, forward
looking statements for purposes of the safe harbor provisions of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward looking statements may be identified by words including "believe,"
"may," "will," "estimate," "continue," "anticipate," "intend," "plan," "expect"
and similar expressions. Forward looking statements, including without
limitation those relating to our future business prospects, sales, cost of
sales, profitability, financial resources or products and production schedules,
are subject to risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward looking statements due to
important risks and factors, including those identified herein or identified
from time to time in our filings with the Securities and Exchange Commission. We
disclaim any obligation to update any such risks or factors or to publicly
announce any revisions to any of the forward-looking statements contained
herein, unless otherwise required by law.
OVERVIEW
Bone Care International, Inc. ("Bone Care," "we," or the "Company") is
a specialty pharmaceutical company engaged in discovering, developing and
commercializing improved vitamin D-hormone therapies to treat secondary
hyperparathyroidism in patients with kidney (or renal) disease, and other
diseases, including osteoporosis, psoriasis and cancers of the prostate, breast
and colon. In June 1999, Bone Care received approval from the U.S. Food and Drug
Administration for an oral formulation of Hectorol(R), and in May 2000 Bone Care
received approval for the intravenous formulation to manage secondary
hyperparathyroidism in kidney dialysis patients. Hectorol(R) Injection has not
been approved for sale outside of the U.S. and Hectorol(R) Capsules are approved
for sale only in the U.S. and Canada. In December 2001 we filed a supplemental
New Drug Application with the FDA to treat secondary hyperparathyroidism in
chronic kidney disease (CKD) patients. We received an "approvable letter" from
the FDA in October 2002, for which we have provided our response. If approved,
this would expand the approved indication for Hectorol(R) Capsules.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 1 to the
Notes to the Financial Statements in the Company's Form 10-K for the year ended
June 30, 2003. These condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these condensed financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent liabilities. On an
on-going basis, we evaluate our estimates, including those related to our
provision for sales returns and allowances, allowance for doubtful accounts, and
our estimate of excess and obsolete inventory. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis of
judgments regarding the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Sales Returns and Allowances
When revenue is recognized, Bone Care simultaneously records an
estimate of various costs, which reduce product sales. These costs include
estimates for product returns, allowances or chargebacks, rebates, and
discounts. Estimates are based on a variety of factors including historical
return experience, rebate and chargeback agreements, inventory levels at our
wholesale customers, and estimated sales by our wholesale customers to other
third parties who have contracts with us. Actual experience associated with any
of these items may differ materially from our estimates. Factors are reviewed
that influence our estimates and, if necessary, adjustments are made when we
believe that actual product returns, allowances or chargebacks, rebates, and
discounts may differ from established reserves.
Allowance for Doubtful Accounts
An allowance is maintained for estimated losses resulting from the
inability of customers to make required payments. Credit terms are extended on
an uncollateralized basis primarily to wholesale drug distributors and
independent dialysis clinics throughout the U.S. Management specifically
analyzes accounts receivable, historical bad debts, customer credit-worthiness,
-9-
percentage of accounts receivable by aging category, and changes if any, in
customer payment terms when evaluating the adequacy of the allowance for
doubtful accounts. If the financial condition of our customers were to
deteriorate, resulting in impairment in their ability to make payments,
additional allowances may be required. Our actual losses from uncollectible
accounts have been immaterial to date.
Excess and Obsolete Inventory
Inventories are stated at the lower of cost or market, with cost
determined on the first-in, first-out method. In evaluating whether inventory is
stated at the lower of cost or market, management considers such factors as the
amount of inventory on hand, expiration dates, and the estimated time to sell
such inventory. As appropriate, provisions are made to reduce inventories to
their net realizable value. Cost of inventories that potentially may not sell
prior to expiration or are deemed of no commercial value have been written-off
when identified.
RESULTS OF OPERATIONS
Three months ended December 31, 2003 compared with three months ended
December 31, 2002
Product sales of Hectorol(R) (Injection and Capsules) were $9,115,485
for the quarter ended December 31, 2003, an increase of $5,372,472, or 144%,
from the quarter ended December 31, 2002. Sales of Hectorol(R) Injection were
$7,897,288 for the quarter ended December 31, 2003, an increase of $5,131,419,
or 186%, from the same period in 2002. The increase in sales of Hectorol(R)
Injection in the second fiscal quarter of 2004 was primarily the result of:
o Manufacturing constraints in the second quarter of 2003,
o The efforts of an expanded and more experienced sales force,
o The implementation of new and effective marketing programs, and
o A price increase effective July 1, 2003 (approximately $1.5 million).
Sales of Hectorol(R) Capsules were $1,218,197 for the quarter ended
December 31, 2003, an increase of $241,053, or 25%, from the same period in 2002
due primarily to the expansion of the sales and marketing efforts and a July 1,
2003 price increase.
Cost of product sales was $2,431,108 and $1,459,838 for the quarters
ended December 31, 2003 and 2002, respectively, representing approximately 27%
and 39%, respectively, of product sales. The increase of cost of product sales
of $971,270 in the second quarter of 2004 versus the same period in 2003 was due
to the higher sales volumes in 2004 offset partially by manufacturing validation
expenses in the second quarter of 2003 for Hectorol(R) Injection. As a percent
of sales, cost of product sales were 12% lower in the second quarter of 2004
from 2003 due to lower manufacturing validation expenses of approximately
$450,000.
Research and development (R&D) expense was $1,653,228 in the quarter
ended December 31, 2003, a decrease of $40,664, or 2%, from the same quarter in
2002. The decrease in R&D expense was primarily due to a reduction in
pre-clinical activities and lower consulting expenses offset partially by higher
personnel expenses for the senior R&D management and additions in our regulatory
and clinical support groups.
Selling, general and administrative (SG&A) expense was $5,546,350 in
the quarter ended December 31, 2003, an increase of $677,060, or 14%, from the
same quarter in 2002. The increase in SG&A expense was primarily due to
marketing promotional programs in support of our sales growth representing
approximately $190,000, consulting expenses related to strategic business
activities of approximately $190,000, expansion of our field sales force
representing approximately $180,000, and professional legal fees of
approximately $110,000 principally related to an increase in contractual,
personnel and corporate governance activity.
Six months ended December 31, 2003 compared with six months ended
December 31, 2002
Product sales of Hectorol(R) (Injection and Capsules) were $17,240,527
for the six months ended December 31, 2003, an increase of $8,080,114, or 88%,
from the six months ended December 31, 2002. Sales of Hectorol(R) Injection were
$14,933,347 for the six months ended December 31, 2003, an increase of
$7,981,618, or 115%, from the same period in 2002. The increase in sales of
Hectorol(R) Injection in the first six months of 2004 was primarily the result
of:
-10-
o Manufacturing constraints in the first and second quarters of 2003,
o The efforts of an expanded and more experienced sales force,
o The implementation of new and effective marketing programs, and
o A price increase effective July 1, 2003 (approximately $2.3 million)
Sales of Hectorol(R) Capsules were $2,307,180 for the six months ended
December 31, 2003, an increase of $98,496, or 4%, from the same period in 2002
due primarily to a price increase implemented July 1, 2003.
Cost of product sales was $4,848,752 and $2,969,444 for the six months
ended December 31, 2003 and 2002, respectively, representing approximately 28%
and 32%, respectively, of product sales. The increase of cost of product sales
of $1,879,308 in the first six months of 2004 versus the same period in 2003 was
due to the higher sales volumes in 2004 offset partially by manufacturing
validation expenses in 2003 for Hectorol(R) Injection. As a percent of sales,
cost of product sales were 4% lower in the second quarter of 2004 from 2003 due
to lower manufacturing validation expenses of approximately $355,000.
R&D expense was $3,446,388 for the six months ended December 31, 2003,
an increase of $75,873, or 2%, from the same period in 2002. The increase in
expense was primarily due to higher personnel expenses for the senior R&D
management and additions in our regulatory and clinical support groups,
partially offset by lower consulting and pre-clinical research expenses.
SG&A expense was $11,627,549 for the six months ended December 31,
2003, an increase of $2,681,171, or 30%, from the six months ended December 31,
2002. The increase in SG&A expenses was primarily due to marketing promotional
programs representing approximately $740,000, the expansion of our field sales
force representing approximately $490,000, severance expenses for the former
Vice President of Finance of approximately $393,000, consulting expenses related
to strategic business activities of approximately $280,000, expenses associated
with the recruitment, professional legal fees of approximately $215,000
principally related to an increase in contractual, personnel and corporate
governance activity, and hiring and relocation of the new Vice President of
Finance of approximately $213,000.
LIQUIDITY AND CAPITAL RESOURCES
We require cash to fund our operations, make capital expenditures and
for strategic investments. Our cash and cash equivalents, marketable securities
and long-term securities balances as of December 31, 2003 were $2,328,366,
$8,650,000 and $910,888, respectively, totaling $11,889,254, a reduction in
total of $5,714,191 from the June 30, 2003 balances. Our cash is invested in
highly liquid, interest-bearing, investment grade and government securities in
order to preserve principal.
Cash used in operating activities was $5,699,607 for the six months
ended December 31, 2003 primarily to fund the net operating loss of $2,580,077,
for inventory purchases in anticipation of increased future demand for our
products and to pay for accrued liabilities, principally management bonus
compensation related to fiscal year end June 30, 2003.
We used $151,764 in cash for the purchase of capital assets, primarily
computer and laboratory equipment. Our cash position was enhanced by $364,512
from stock option proceeds in the six months ended December 31, 2003.
Our cash and investments to-date have been used to fund our operations
and capital needs. We anticipate that annual expenditures for our active
pharmaceutical ingredient, contract manufacturing, research projects,
development of our current and planned products, regulatory activity, growth of
our sales force, expansion of our marketing programs and development of the
infrastructures to accommodate the planned growth and development, will increase
in future years. Profits from product sales, if any, may not be sufficient to
support these activities. There can be no assurance that we will be able to
achieve profitability or positive cash flow from operations. We anticipate that
we may require additional financing in the future to finance our anticipated
growth and development largely through equity or debt financing and/or strategic
or corporate alliances. We believe that our existing cash position as of
December 31, 2003 is adequate to fund our operations at least until our second
quarter of fiscal year 2005. However, there can be no assurance that we will not
require additional capital prior to that time. There can be no assurance that
additional equity or debt financing or corporate collaborations will be
available on terms acceptable to us, if at all. The failure of the Company to
achieve profitability or to raise capital on acceptable terms if and when needed
would have a material adverse effect on our business, financial condition and
results of operations.
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We currently have no internal manufacturing capabilities. We rely on
third party contractors to produce our active pharmaceutical ingredient and for
the subsequent manufacturing and packaging of finished injection and capsule
products. We rely on one supplier to formulate and package Hectorol(R)
Injection, one supplier to formulate Hectorol(R) Capsules and one supplier to
package Hectorol(R) Capsules. Although other suppliers, formulators and vendors
are available and could provide these goods and services to us on comparable
terms, any change in suppliers could cause a delay in manufacturing and a
possible loss of sales, which would adversely affect operating results. We
believe that our suppliers have sufficient capacities to meet the currently
expected demand for our products from existing and new customers and patients.
At June 30, 2003, we had state tax net operating loss carryforwards of
approximately $44,337,000 and state research and development tax credit
carryforwards of approximately $621,000, which will begin expiring in 2006 and
2011, respectively. We also had federal net operating loss carryforwards of
approximately $48,770,000 and research and development tax credit carryforwards
of approximately $2,040,000, which will begin expiring in 2011 and 2012,
respectively.
COMMITMENTS
We have entered into various contractual obligations and commercial
commitments. The following table summarizes these contractual obligations as of
December 31, 2003:
Less Than
Total 1 Year 1-3 Years
----- ------ ---------
Operating Lease Obligations (1).................... $1,390,400 $ 685,619 $ 704,781
Purchase Commitment (2)............................ 1,898,658 1,744,462 154,196
---------- ---------- ---------
Total.............................................. $3,289,058 $2,430,081 $ 858,977
========== ========== =========
(1) Represents office and laboratory facilities in Middleton, WI.
(2) Purchase commitment for active pharmaceutical ingredients used in
Hectorol(R) production and pre-clinical research and prescriber data
for market research.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our sales from inception to date have been made to U.S. customers and,
as a result, we have not had any exposure to factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. However,
in future periods, we may sell in foreign markets, including Europe and Asia. As
our sales are made in U.S. dollars, a strengthening of the U.S. dollar at that
time could make our products less competitive in foreign markets.
As of December 31, 2003, we held $8,650,000 and $910,888 in short-term
and long-term marketable securities, respectively. The investments have been
made for investment (as opposed to trading) purposes. Interest rate risk with
respect to our investments is not significant as all such investments are in
U.S. dollar cash equivalents and are:
o short-term investments, which are by their nature less sensitive to
interest rate movements, or
o have maturities in excess of one year and are expected to be held to
maturity, thereby eliminating the risks associated with interest
rate changes.
ITEM 4. CONTROLS AND PROCEDURES
As of December 31, 2003, our management, including our Chief Executive
Officer and Chief Financial Officer, have conducted an evaluation of the
effectiveness of disclosure controls and procedures, pursuant to Rule 13a-15 of
the Securities Exchange Act of 1934, as amended. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this report has been made known to them in a
timely fashion.
In connection with the evaluation by our management, including our
Chief Executive Officer and Chief Financial Officer, of our internal control
over financial reporting, pursuant to Exchange Act Rule 13a-15(d), no changes
during the quarter ended December 31, 2003 were identified that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on November 19, 2003, the
following matters were submitted to a vote of security holders:
(a) Two directors were elected for terms of three years each, as follows:
Director Votes FOR Votes WITHHELD
-------- --------- --------------
Paul L. Berns 13,896,101 38,550
Edward Staiano, Ph.D. 13,733,197 201,454
(b) The 2003 Stock Incentive Plan was approved, as follows:
Votes FOR Votes AGAINST Votes ABSTAIN Broker NON-VOTE
--------- ------------- ------------- ---------------
9,909,885 447,200 28,637 3,518,929
(c) The selection of Deloitte & Touche LLP as the Company's independent
auditors for fiscal year ending June 30, 2004 was ratified, as follows:
Votes FOR Votes AGAINST Votes ABSTAIN Broker NON-VOTE
--------- ------------- ------------- ---------------
13,899,997 31,617 3,037 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits furnished:
31.1 Rule 13a-14(a) certification of President and Chief Executive Officer
31.2 Rule 13a-14(a) certification of Vice President and Chief Financial
Officer
32.1 Certification Pursuant to Section 1350 of Chapter 63 of Title
18 of the United States Code
32.2 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code
(b) Reports on Form 8-K
On October 28, 2003, we filed a Form 8-K under items 7 and 9 (pursuant to
item 12) relating to our October 27, 2003 press release announcing our
financial results for the quarter ended September 30, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BONE CARE INTERNATIONAL, INC.
(Registrant)
Date: February 10, 2004 /s/Paul L. Berns
---------------------------------------------
Paul L. Berns
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 10, 2004 /s/ Brian J. Hayden
---------------------------------------------
Brian J. Hayden
Vice President -- Finance and Chief Financial
Officer
(Principal Financial and Accounting Officer)
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BONE CARE INTERNATIONAL, INC.
INDEX TO EXHIBITS
For the Quarterly Period Ended December 31, 2003
No. Description Page
31.1 Rule 13a-14(a) certification of President and Chief Executive Officer...................................................16
31.2 Rule 13a-14(a) certification of Vice President and Chief Financial Officer..............................................17
...
32.1 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code..............................18
32.2 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code..............................19
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