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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 June 30, 2003
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 0-11997
CARRINGTON LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1435663
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2001 Walnut Hill Lane, Irving, Texas 75038
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(Address of principal executive offices and Zip Code)
972-518-1300
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(Registrant's telephone number, including area code)
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(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
The number of shares of the registrant's common stock outstanding as of
August 11, 2003 was 10,074,299.
INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at June 30,2003 (unaudited) and
December 31, 2002 3
Condensed Consolidated Statements of
Operations for the three and six months
ended June 30, 2003 and 2002 (unaudited) 4-5
Condensed Consolidated Statements
of Cash Flows for the six months
ended June 30, 2003 and 2002 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
Item 4. Controls and Procedures. 15
Part II. OTHER INFORMATION
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share amounts)
December 31, June 30,
2002 2003
------ ------
(unaudited)
ASSETS:
Current Assets:
Cash and cash equivalents $ 3,636 $ 1,908
Accounts receivable, net 2,370 3,483
Inventories, net 4,333 5,707
Prepaid expenses 542 718
------ ------
Total current assets 10,881 11,816
Property, plant and equipment, net 10,065 10,665
Customer relationships, net 954 873
Other assets, net 259 192
------ ------
Total assets $22,159 $23,546
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 1,587 $ 1,587
Accounts payable 1,458 2,224
Accrued liabilities 1,256 1,482
Current portion of long-term debt and
capital lease obligations 730 855
Deferred revenue 1,922 1,917
------ ------
Total current liabilities 6,953 8,065
Long-term debt and capital lease obligations 1,517 1,693
Commitments and Contingencies
SHAREHOLDERS' EQUITY:
Common Stock 100 101
Capital in excess of par value 52,568 52,626
Accumulated deficit (38,976) (38,936)
Treasury stock at cost (3) (3)
------ ------
Total shareholders' equity 13,689 13,788
------ ------
Total liabilities and shareholders' equity $22,159 $23,546
====== ======
The accompanying notes are an integral part of these statements.
Condensed Consolidated Statements of Operations (unaudited)
(Dollar amounts and shares in 000's, except per share amounts)
Three Months Ended
June 30,
2002 2003
------ ------
Revenue:
Product sales, net $ 3,729 $ 7,345
Royalty income 617 617
------ ------
4,346 7,962
Cost of sales 2,874 4,883
------ ------
Gross margin 1,472 3,079
Expenses:
Selling, general and administrative 1,454 1,968
Research and development 462 170
Research and development-DelSite 383 629
Other (income) expense 21 (68)
Interest expense, net 10 41
------ ------
Net income (loss) before income taxes (858) 339
Provision for income taxes - -
------ ------
Net income (loss) $ (858) $ 339
====== ======
Net income (loss) per common share
Basic $ (0.09) $ 0.03
Diluted $ (0.09) $ 0.03
Weighted average shares outstanding
Basic 9,871 10,026
Diluted 9,871 10,135
The accompanying notes are an integral part of these statements.
Condensed Consolidated Statements of Operations (unaudited)
(Dollar amounts and shares in 000's, except per share amounts)
Six Months Ended
June 30,
2002 2003
------ ------
Revenue:
Product sales, net $ 6,847 $13,631
Royalty income 1,235 1,235
------ ------
8,082 14,866
Cost of sales 5,465 9,221
------ ------
Gross margin 2,617 5,645
Expenses:
Selling, general and administrative 2,952 3,844
Research and development 849 377
Research and development-DelSite 679 1,340
Other (income) expense 21 (68)
Interest expense, net 17 112
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Net income (loss) before income taxes (1,901) 40
Provision for income taxes - -
------ ------
Net income (loss) $(1,901) $ 40
====== ======
Net income (loss) per common share
Basic $ (0.19) $ 0.00
Diluted $ (0.19) $ 0.00
Weighted average shares outstanding
Basic 9,849 10,009
Diluted 9,849 10,044
The accompanying notes are an integral part of these statements.
Condensed Consolidated Statements of Cash Flows (unaudited)
(Dollar amounts and shares in 000's, except per share amounts)
Six Months Ended
June 30,
2002 2003
------ ------
Cash flows used in operating activities
Net income (loss) $(1,901) $ 40
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Provision for bad debts 13 30
Provision for inventory obsolescence (15) 192
Depreciation and amortization 564 616
Changes in assets and liabilities:
Receivables (438) (1,143)
Inventories 804 (1,566)
Prepaid expenses (303) (176)
Other assets 40 67
Accounts payable and accrued liabilities (395) 949
Deferred revenue 250 (5)
------ ------
Net cash used in operating activities (1,381) (996)
Cash flows used in investing activities:
Purchases of property, plant and equipment (139) (910)
------ ------
Net cash used in investing activities (139) (910)
Cash flows provided by financing activities:
Proceeds from debt issuance 0 500
Principal payments on debt and capital
lease obligations 0 (381)
Issuances of common stock 74 59
------ ------
Net cash provided by financing activities 74 178
Net decrease in cash and cash equivalents (1,446) (1,728)
Cash and cash equivalents, beginning
of period 3,454 3,636
------ ------
Cash and cash equivalents, end of period $ 2,008 $ 1,908
====== ======
Supplemental disclosure of cash flow
information
Cash paid during the period for interest 31 43
Cash paid during the period for federal,
state and local income taxes 39 32
Assets acquired under capital leases 182 182
The accompanying notes are an integral part of these statements.
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) Condensed Consolidated Financial Statements:
The condensed consolidated balance sheet as of June 30, 2003, the condensed
consolidated statements of operations for the three and six month periods
ended June 30, 2002 and 2003 and the condensed consolidated statements of
cash flows for the six month periods ended June 30, 2002 and 2003 have been
prepared by the Company without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of management,
all adjustments (which include all normal recurring adjustments) necessary
to present fairly the consolidated financial position, results of operations
and cash flows at June 30, 2003 and for all periods presented have been
made. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's
annual report to shareholders on Form 10-K for the year ended December 31,
2002. Certain amounts have been reclassified to conform with the 2003
presentation.
(2) Stock-Based Compensation:
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees and Financial Accounting Standards Board Interpretation
No. 44, Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25. Under APB 25, the Company recognizes
no compensation expense related to employee or director stock options when
options are granted with exercise prices at the estimated fair value of the
stock on the date of grant, as determined by the Board of Directors.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (FAS1 123), Accounting for Stock-
Based Compensation and Statement of Financial Accounting Standards No. 148
(FAS 148), Accounting for Stock-Based Compensation - Transition and
Disclosure - An Amendment of FASB Statement No. 123. Under the provisions
of FAS 123, pro forma compensation expense related to options issued to
employees is disclosed based on the fair value of options on the grant date.
The following table (in thousands) illustrates the effect on net income
(loss) if the Company had applied the fair value recognition provision of
FAS 123 to stock based compensation:
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Three Months Ended Six Months Ended
2002 2003 2002 2003
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Net income (loss) (in thousands):
As reported $ (858) $ 339 $(1,901) $ 40
Less: Stock-based compensation
expense determined under
fair value-based method (52) (160) (106) (220)
------ ------ ------ -----
Pro forma net income (loss) (910) 179 (2,007) (180)
====== ====== ====== =====
Net income (loss) per share:
As reported (0.09) 0.03 (0.19) 0.00
Pro forma (0.09) 0.02 (0.20) (0.02)
Because options vest over a period of several years and additional awards
are generally made each year, the pro forma information presented above is
not necessarily indicative of the effects on reported or pro forma net
earnings or losses for future years.
The Company follows the provisions of FAS 123 and Emerging Issues Task Force
No. 96-19, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Connection with Selling Goods or Services, for
equity instruments granted to non-employees. The Company expenses the fair
value of these equity instruments over the respective vesting term.
(3) Income (loss) Per Share:
Basic income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during
the period.
When the effects are not anti-dilutive, diluted income (loss) per common
share is computed by dividing net income by the weighted average number of
shares outstanding and the impact of all dilutive potential common shares,
primarily stock options. The dilutive impact of stock options is determined
by applying the "treasury stock" method.
In calculating the diluted loss per share for the three-month and six-month
periods ended June 30, 2002, no effect was given to options or warrants,
because the effect of including these securities would have been anti-
dilutive. Options and warrants outstanding for the three-month and six-
month periods ended June 30, 2003 were not included in the computation of
diluted income per share when the exercise price of the respective security
was greater than the average market price of the common shares and,
therefore, the effect would be anti-dilutive.
(4) Concentration of Credit Risk:
Customers with significant receivable balances as of June 30, 2003, defined
as amounts in excess of ten percent (10%) of gross receivables included
Mannatech, Inc. ($1,359,000), Medline Industries ($730,000), Joan Rivers
Worldwide Ltd., ($533,000) and one other contract manufacturing customer
($396,000). Of these amounts, $2,739,000 has been collected as of August
11, 2003.
Customers with significant purchases for the second quarter 2003, defined as
amounts in excess of ten percent (10%) of revenue, were: Mannatech, Inc.,
Medline Industries, Inc., and Joan Rivers Worldwide, Ltd. Mannatech, Inc.
was the only customer with purchases in excess of 10% of revenues for the
second quarter 2002.
(5) Inventories:
The following summarizes the components of inventory (in thousands):
December 31, June 30,
2002 2003
----- -----
Raw materials and supplies $1,776 $3,031
Work-in-process 624 751
Finished goods 1,933 1,925
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Total $4,333 $5,707
===== =====
The inventory balances are net of $632,000 and $791,000 of reserves for
obsolete and slow moving inventory at December 31, 2002 and June 30, 2003.
(6) Debt:
In March 2003, the Company received a loan of $500,000 from Bancredito, a
Costa Rica bank, with interest and principal to be repaid in monthly
installments over eight years. The interest rate on the loan is the U.S.
Prime Rate plus 2.0%. The loan is secured by a mortgage on an unused, 164-
acre parcel of land owned by the Company in Costa Rica plus a lien on
specified oral patch production equipment. The proceeds of the loan will be
used in the Company's operations.
In July 2003, the Company received a loan of $1,000,000 from Comerica Bank-
Texas ("Comerica") under a variable rate installment note with interest and
principal to be repaid in monthly installments over five years. The
interest rate on the loan is the U.S. Prime Rate plus 0.5%. The loan is
collateralized by the Company's accounts receivable and inventory and by a
lien on the Company's production facility in Irving, TX. The proceeds of
the loan are being used in the Company's operations.
The Company also has a $3,000,000 line of credit with Comerica structured as
a demand note without a stated maturity date and with an interest rate equal
to the Comerica prime rate plus 0.5%. The line of credit is collateralized
by the Company's accounts receivable and inventory and by a first lien on
the Company's production facility and is used for operating needs, as
required. As of June 30, 2003, there was $1,587,000 outstanding on the
credit line with $713,000 credit available for operations.
The credit facility with Comerica includes covenants that require the
Company to maintain certain financial ratios. The Company was not in
compliance with one of the covenant ratios as of June 30, 2003. Comerica
has agreed to waive compliance with this financial covenant until September
30, 2003.
Pursuant to the 2000 Distributor and License Agreement with Medline
Industries, Inc., ("Medline") the Company is to receive $12,500,000 in base
royalties over a five-year period ending November 30, 2005. In December
2002, the Company received an advance on future royalty payments due from
Medline of $2.0 million, which was recorded in the Company's financial
statements as a loan to be repaid in quarterly installments through
September 2005. The interest rate on the loan is 6.0%.
(7) Income Taxes:
The tax effects of temporary differences including net operating loss
carryforwards have given rise to net deferred tax assets. At December 31,
2002, and June 30, 2003, the Company provided a valuation allowance against
the entire deferred tax asset due to the uncertainty as to the realization
of the asset. At December 31, 2002, the Company had net operating loss
carryforwards of approximately $42,000,000 for federal income tax purposes,
which began expiring in 2003, and research and development tax credit
carryforwards of approximately $748,000, which began expiring in 2003, all
of which are available to offset federal income taxes due in current and
future periods.
(8) Contingencies:
From time to time in the normal course of business, the Company is party
to various matters involving claims or possible litigation. Management
believes the ultimate resolution of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
In December 2002, the Company entered into an agreement to acquire certain
assets of the Custom Division of Creative Beauty Innovations, Inc. ("CBI"),
including specialized manufacturing customer information, intellectual
property and equipment. CBI is a privately held manufacturer of skin and
cosmetic products with operations in Carrollton, Texas.
Under the agreement, Carrington paid CBI $1,001,000 and agreed (i) to
purchase inventory of CBI for an amount not greater than $700,000, to be
paid six months after closing and (ii) to pay CBI an amount equal to 9.0909%
of Carrington's net sales for the next five years of CBI products to CBI's
former customers, up to $6.6 million per year, and 8.5% of Carrington's net
sales of CBI products to CBI's former customers in excess of $6.6 million
per year. During the second quarter, the Company paid CBI approximately
$583,000 for inventory acquired after closing. The Company paid CBI
approximately $29,000 and $147,000 in April 2003 and July 2003 related to
the sale of CBI products to CBI's former customers in the quarters ended
March 31 and June 30, 2003, respectively.
(9) Reportable Segments:
The Company operates in two reportable segments: its Medical Services
Division, which sells human and veterinary products, and Caraloe, Inc., a
consumer products subsidiary, which sells bulk raw materials, consumer
beverages, and nutritional and skin care products, and also provides
services for the development and manufacture of nutritional, cosmetic and
medical products on a contract basis through its contract manufacturing
group.
Segments (in thousands)
Medical Caraloe,
Services Inc. Corporate Total
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Quarter Ended
June 30, 2002
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Revenues to unaffiliated
customers $ 2,193 $ 2,153 $ - $ 4,346
Loss before income taxes (22) (382) (454) (858)
Identifiable assets 10,175 2,915 6,337 19,427
Capital expenditures - - 34 34
Depreciation and amortization 158 - 122 280
Quarter ended
June 30, 2003
Revenues to unaffiliated
customers $ 1,898 $ 6,064 $ - $ 7,962
Income before income taxes 522 487 (670) 339
Identifiable assets 11,752 3,646 8,148 23,546
Capital expenditures - - 295 295
Depreciation and amortization 194 - 105 299
Six months ended
June 30, 2002
Revenues to unaffiliated
customers $ 4,528 $ 3,554 $ - $ 8,082
Income (loss) before income
taxes (229) (593) (1,070) (1,901)
Capital expenditures - - 139 139
Depreciation and amortization 318 - 246 564
Six months ended
June 30, 2003
Revenues to unaffiliated
customers $ 4,387 $10,479 $ - $14,866
Income before income taxes 804 688 (1,452) 40
Capital expenditures - - 910 910
Depreciation and amortization 418 - 198 616
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes.
Corporate losses before income taxes set forth in the following table
includes DelSite research and development expenses, which were related to
the development of pharmaceutical products not associated with the reporting
segments. Assets which are used in more than one segment are reported in
the segment where the predominant use occurs. Corporate assets include all
cash, the Company's production facility in Costa Rica, which provides bulk
ingredients for both segments, and assets related to DelSite's operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
BACKGROUND
The Company is a research-based biopharmaceutical, medical device, raw
materials and nutraceutical company engaged in the development,
manufacturing and marketing of naturally-derived, complex carbohydrates and
other natural product therapeutics for the treatment of major illnesses, the
dressing and management of wounds and nutritional supplements. The Company
is comprised of two business segments. See Note (9) to the unaudited
condensed consolidated financial statements for financial information
about these business segments. The Company sells, using a network of
distributors, prescription and nonprescription human and veterinary products
through its Medical Services Division, and consumer and bulk raw material
products and product development and manufacturing services through its
subsidiary, Caraloe, Inc. The Company's research and product portfolio are
based primarily on complex carbohydrates isolated from the Aloe vera L.
plant.
The Company's wholly-owned subsidiary, DelSite Biotechnologies, Inc.
("DelSite"), operates independently from the Company's research and
development program and is responsible for the research, development and
marketing of the Company's proprietary GelSiteTM technology for controlled
release and delivery of bioactive pharmaceutical ingredients.
LIQUIDITY AND CAPITAL RESOURCES
Cash at June 30, 2003 was $1,908,000 versus $3,636,000 at December 31, 2002.
The decrease in cash was primarily due to increases in accounts receivable
balances arising from the increase in sales and additional inventory needed
to support the increased level of operations. In addition, the Company
invested $910,000 in capital expenditures to provide additional
infrastructure for its operations and reduced debt and capital lease
obligations of $196,000. These cash uses were partially offset by proceeds
from debt issuance of $500,000 described in the Notes to Condensed
Consolidated Financial Statements.
The Company has a $3,000,000 line of credit with Comerica Bank-Texas
("Comerica") structured as a demand note without a stated maturity date and
with an interest rate equal to the Comerica prime rate plus 0.5%. The line
of credit is collateralized by the Company's accounts receivable and
inventory and by a first lien on the Company's production facility and is
used for operating needs, as required. As of June 30, 2003, there was
$1,587,000 outstanding on the credit line with $713,000 credit available for
operations.
In July 2003, the Company received a loan of $1,000,000 from Comerica under
a variable rate installment note with interest and principal to be repaid in
monthly installments over five years. The interest rate on the loan is the
U.S. Prime Rate plus 0.5%. The loan is collateralized by the Company's
accounts receivable and inventory and by a lien on the Company's production
facility in Irving, TX. The proceeds of the loan are being used in the
Company's operations.
The credit facility with Comerica includes covenants that require the
Company to maintain certain financial ratios. The Company was not in
compliance with one of the covenant ratios as of June 30, 2003. Comerica
has agreed to waive their financial covenant until September 30, 2003.
Pursuant to the 2000 Distributor and License Agreement with Medline
Industries, Inc., ("Medline") the Company is to receive $12,500,000 in base
royalties over a five-year period ending November 30, 2005. In December
2002, the Company received an advance on future royalty payments due from
Medline of $2.0 million which was recorded in the Company's financial
statements as a loan to be repaid in quarterly installments through
September 2005. The Company is recognizing royalty income under this
agreement on a straight-line basis. At June 30, 2003 the Company had
received $1,917,000 more in royalties than it had recognized in income,
which is recorded as deferred revenue on the balance sheet. Royalties to be
received subsequent to June 30, 2003 total $4,125,000.
The Company anticipates that its available cash resources and expected cash
flows from operations, will provide the funds necessary to finance its
current operations, including expected levels of research and development.
However, the Company does not expect that its current cash resources will be
sufficient to finance future major clinical studies and costs of filing new
drug applications necessary to develop its products to their full commercial
potential. Additional funds, therefore, may need to be raised through
equity offerings, additional borrowings, licensing arrangements or other
means, and there is no assurance that the Company will be able to obtain
such funds on satisfactory terms when they are needed.
In March 2001, the Board of Directors authorized the Company to repurchase
up to one million shares of its outstanding Common Stock. The Company
believes it has the financial resources necessary to repurchase shares from
time to time pursuant to the Board's repurchase authorization. The Company
did not repurchase any shares of its outstanding Common Stock during the
quarter ended June 30, 2003.
As a result of the current level of sales of raw materials produced at the
Company's processing facility in Costa Rica, the Company's demand for Aloe
vera L. leaves has exceeded and continues to exceed both the current and the
normal production capacity of its farm. It has therefore been necessary for
the Company to purchase Aloe vera L. leaves from other sources.
Since March 1998, the Company has been a minority investor in Aloe and Herbs
International, Inc., a Panamanian corporation ("Aloe & Herbs"), the owner of
Rancho Aloe (C.R.), S.A., a Costa Rican corporation, which produces Aloe
vera L. leaves and sells them to the Company at competitive, local market
rates.
RESULTS OF OPERATIONS
Quarter ended June 30, 2003 compared to quarter ended June 30, 2002
Revenue for the quarter ended June 30, 2003 increased 83.2%, or $3,616,000,
to $7,962,000 as compared to $4,346,000 during the quarter ended June 30,
2002. Caraloe revenue during the second quarter of 2003 increased 181.2%,
or $3,911,000, to $6,064,000 versus $2,153,000 for the same quarter last
year. The increase in Caraloe revenue is attributable to increased raw
material sales of $1,644,000, increased specialty manufacturing sales of
$784,000 and sales of cosmetic products of $1,483,000 resulting from the
acquisition of certain assets of the custom division of CBI in December
2002.
Medical services revenue during the quarter ended June 30, 2003 decreased to
$1,898,000 as compared to $2,193,000 during the quarter ended June 30, 2002.
Gross margin was $3,079,000 during the quarter ended June 30, 2003 as
compared to $1,472,000 during the quarter ended June 30, 2002, an increase
of 109.2%. Gross margin as a percentage of revenue rose to 38.7% during the
second quarter of 2003 from 33.9% during the same quarter last year. The
increase in gross margin is attributable to a shift in the mix of products
sold toward higher margin raw material and specialty manufacturing sales and
increased plant utilization which resulted in a decrease in unfavorable
manufacturing variances of $419,000.
Selling, general and administrative expenses during the quarter ended June
30, 2003 increased $514,000 to $1,968,000 as compared to $1,454,000 during
the quarter ended June 30, 2002 as a result of increased distribution and
marketing costs associated the acquisition of the custom division of CBI.
Product-support research and development during the quarter ended June 30,
2003 decreased to $170,000 as compared to $462,000 during the quarter ended
June 30, 2002 primarily due to costs for process validation projects
conducted and completed in 2002. The Company continues to focus the efforts
of this group on product development in support of its manufacturing
business. Research and development for DelSite during the quarter ended
June 30, 2003 increased $246,000 or 64.7% to $629,000 as compared to
$383,000 during the quarter ended June 30, 2002 as product development
efforts for injectible and intranasal delivery platforms continued and
business development efforts increased.
Other income of $68,000 for the quarter ended June 30, 2003 resulted from
collections on a note receivable which had previously been reserved. Other
expense of $21,000 for the quarter ended June 30, 2002 resulted from the
disposal of certain obsolete production equipment.
Net interest expense during the quarter ended June 30, 2003 increased
$31,000 to $41,000 versus $10,000 during the quarter ended June 30, 2002 as
a result of increased debt balances.
Net income for the second quarter of 2003 was $339,000 as compared to a net
loss of $858,000 for the same quarter last year, an increase of $1,197,000
primarily due to volume-related increases in sales and gross margins.
Earnings per share for the second quarter 2003 was $0.03 compared to loss
per share of $0.09 for the second quarter of 2002.
Six months ended June 30, 2003 compared to six months ended June 30, 2002
Revenue for the six months ended June 30, 2003 increased $6,784,000, or
83.9%, to $14,866,000 as compared to $8,082,000 for the six months ended
June 30, 2002. Caraloe revenue for the six months ended June 30, 2003
increased $6,925,000 or 194.8% to $10,479,000 as compared to $3,554,000 for
the six months ended June 30, 2002. The increase in Caraloe revenue is
primarily attributable to increased raw material sales of $3,437,000, sales
of cosmetic products of $1,832,000 resulting from the acquisition of certain
assets of the custom division of CBI in December, 2002 and increased
specialty manufacturing sales of $1,656,000.
Medical services revenue during the six months ended June 30, 2003 decreased
$141,000 or 3.1% to $4,387,000 as compared to $4,528,000 for the six months
ended June 30, 2002
Gross margin for the six months ended June 30, 2003 increased $3,028,000 or
115.7% to $5,645,000 as compared to $2,617,000 for the six months ended June
30, 2003. Gross margin as a percentage of revenue increased to 38.0% for
the six months ended June 30, 2003 from 32.4% for the six months ended June
30, 2002. The increase in gross margin is attributable to a shift in the
mix of products toward higher margin sales and increased plant utilization
which resulted in a decrease in unfavorable manufacturing variances of
$728,000.
Selling, general and administrative expenses for the six months ended June
30, 2003 increased $892,000 or 30.2% to $3,844,000 as compared to $2,952,000
for the six months ended June 30, 2002 as a result of increased distribution
and marketing costs associated with the acquisition of the custom division
of CBI.
Product-support research and development for the six months ended June 30,
2003 decreased to $377,000 as compared to $849,000 for the six months ended
June 30, 2002 primarily due to costs for process validation projects
conducted and completed in 2002. The Company continues to focus the efforts
of this group on product development in support of its manufacturing
business. Research and development for DelSite for the six months ended
June 30, 2003 increased $653,000 or 97.4% to $1,340,000 as compared to
$679,000 for the six months ended June 30, 2002 as product development
efforts for injectible and intranasal delivery platforms continued and
business development efforts increased.
Other income of $68,000 for the six months ended June 30, 2003 resulted from
collections on a note receivable which had previously been reserved. Other
expense of $21,000 for the six months ended June 30, 2002 resulted from the
disposal of certain obsolete production equipment.
Net interest expense for the six months ended June 30, 2003 increased
$95,000 to $112,000 as compared to $17,000 for the six months ended June 30,
2002 as the result of increased debt balances.
Net income for the six months ended June 30, 2003 increased $1,941,000 or
102.1% to $40,000 from a net loss of $1,901,000. Earnings per share for the
six months ended June 30, 2003 was $0.00 as compared to a loss per share of
$(0.19) for the six months ended June 30, 2002.
OTHER ITEMS
Governmental Regulation
The Company is subject to regulation by numerous governmental authorities in
the United States and other countries. Certain of the Company's proposed
products will require governmental approval prior to commercial use. The
approval process applicable to pharmaceutical products and therapeutic
agents usually takes several years and typically requires substantial
expenditures. The Company and any licensees may encounter significant
delays or excessive costs in their respective efforts to secure necessary
approvals. Future United States or foreign legislative or administrative
acts could also prevent or delay regulatory approval of the Company's or any
licensees' products. Failure to obtain requisite governmental approvals or
failure to obtain approvals of the scope requested could delay or preclude
the Company or any licensees from marketing their products, or could limit
the commercial use of the products, and thereby have a material adverse
effect on the Company's liquidity and financial condition.
Cautionary Statements for the Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995
Certain statements contained in this report are "forward-looking statement"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to risks, uncertainties and other factors,
which could cause actual results to differ materially from future results
expressed or implied by such forward-looking statements. Potential risks
and uncertainties include, but are not limited to the ability of the Company
and/or DelSite to obtain sufficient funds to finance DelSite's proposed
activities; the ability of DelSite to successfully exploit the Company's new
drug delivery technology; the adequacy of the Company's cash resources and
cash flow from operations to finance its current operations; and the
Company's intention, plan or ability to repurchase shares of its outstanding
Common Stock, the Company's ability to obtain the quantity or quality of raw
materials it needs and the impact of governmental regulations. For further
information about the risks, uncertainties and other factors that could
cause the Company's results to differ materially from the results indicated
by such forward-looking statements refer to the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Fluctuations in interest rates on any variable rate debt instruments, which
are tied to the prime rate, would affect our earnings and cash flows
but would not affect the fair market value of the variable rate debt.
The Company's exposure to market risk from changes in foreign currency
exchange rates and the supply and prices of Aloe vera L. leaves has not
changed materially from its exposure at December 31, 2002, as described in
the Company's Annual Report on Form 10-K for the year then ended. See also,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Item 4. Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of June 30, 2003 to provide
reasonable assurance that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's rules and forms.
There has been no change in our internal controls over financial reporting
that occurred during the three months ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.
Part II OTHER INFORMATION
Item 5. Other Information
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934
(the "Act"), as added by Section 202 of the Sarbanes-Oxley Act of 2002, the
Company is responsible for disclosing any non-audit services approved by the
Company's Audit Committee (the "Committee") to be performed by Ernst & Young
LLP("E&Y"), the Company's external auditor. Non-audit services are defined
in the Act as services other than those provided in connection with an audit
or a review of the financial statements of the Company. On May 7, 2003 the
Committee approved the engagement of E&Y to assist the Company in preparing
procedures for its evaluation of internal controls in compliance with
Section 404 of the Sarbanes-Oxley Act of 2002, with fees not to exceed
$15,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 First Amendment to Credit Agreement
32.1 Rule 13a-14(a) Certification.
32.2 Rule 13a-14(a) Certification.
32.3 Section 906 Certification.
32.4 Section 906 Certification.
(b) Reports on Form 8-K
None.
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.
CARRINGTON LABORATORIES, INC.
(Registrant)
Date: August 13, 2003 By: /s/ Carlton E. Turner
-----------------------------
Carlton E. Turner,
President and
Chief Executive Officer
(principal executive officer)
Date: August 13, 2003 By: /s/ Robert W. Schnitzius
-----------------------------
Robert W. Schnitzius,
Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
INDEX TO EXHIBITS
Item Description
No.
10.1 First Amendment to Credit Agreement dated July 3, 2003 by and
between Carrington Laboratories, Inc., Caraloe, Inc., DelSite
Biotechnologies, Inc. and Comerica Bank-Texas.
31.1 CEO Certification of SEC Reports Pursuant to Rule 13a-14(a), as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
31.2 CFO Certification of SEC Reports Pursuant to Rule 13a-14(a), as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.1 CEO Certification of SEC Reports Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 CFO Certification of SEC Reports Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002