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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 September 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
------------------------------- ---------------------------------
(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
November 7, 2003 was 10,247,120.
INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at September 30, 2003 (unaudited) and
December 31, 2002 3
Condensed Consolidated Statements of
Operations for the three and nine months
ended September 30, 2003 and 2002 (unaudited) 4-5
Condensed Consolidated Statements
of Cash Flows for the nine months
ended September 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 1. Legal Proceedings 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Amounts in thousands)
December 31, September 30,
2002 2003
------ ------
(unaudited)
ASSETS:
Current Assets:
Cash and cash equivalents $ 3,636 $ 1,664
Accounts receivable, net 2,370 4,160
Inventories, net 4,333 5,997
Prepaid expenses 542 423
------ ------
Total current assets 10,881 12,244
Property, plant and equipment, net 10,065 10,637
Customer relationships, net 954 825
Other assets, net 259 211
------ ------
Total assets $22,159 $23,917
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Line of credit $ 1,587 $ 1,587
Accounts payable 1,458 2,032
Accrued liabilities 1,256 1,399
Current portion of long-term debt and
capital lease obligations 730 1,077
Deferred revenue 1,922 2,010
------ ------
Total current liabilities 6,953 8,105
Long-term debt and capital lease obligations 1,517 2,227
Commitments and contingencies - -
SHAREHOLDERS' EQUITY:
Common stock 100 103
Capital in excess of par value 52,568 52,887
Accumulated deficit (38,976) (39,402)
Treasury stock at cost (3) (3)
------ ------
Total shareholders' equity 13,689 13,585
------ ------
Total liabilities and shareholders' equity $22,159 $23,917
====== ======
The accompanying notes are an integral part of these statements.
Condensed Consolidated Statements of Operations (unaudited)
(Dollar amounts and shares in thousands, except per share amounts)
Three Months Ended
September 30,
2002 2003
------ ------
Revenue:
Product sales, net $ 4,476 $ 6,915
Royalty income 617 617
------ ------
5,093 7,532
Cost of sales 3,051 5,035
------ ------
Gross margin 2,042 2,497
Expenses:
Selling, general and administrative 1,457 2,046
Research and development 530 288
Research and development-DelSite 586 623
Other (income) expense - (56)
Interest expense, net 10 62
------ ------
Net loss before income taxes (541) (466)
Provision for income taxes - -
------ ------
Net loss $ (541) $ (466)
====== ======
Net loss per common share
Basic and diluted $ (0.05) $ (0.05)
Weighted average shares outstanding
Basic and diluted 9,908 10,141
The accompanying notes are an integral part of these statements.
Condensed Consolidated Statements of Operations (unaudited)
(Dollar amounts and shares in thousands, except per share amounts)
Nine Months Ended
September 30,
2002 2003
------ ------
Revenue:
Product sales, net $11,326 $20,545
Royalty income 1,853 1,853
------ ------
13,179 22,398
Cost of sales 8,520 14,256
------ ------
Gross margin 4,659 8,142
Expenses:
Selling, general and administrative 4,409 5,891
Research and development 1,371 665
Research and development-DelSite 1,273 1,962
Other (income) expense 21 (124)
Interest expense, net 27 174
------ ------
Net loss before income taxes (2,442) (426)
Provision for income taxes - -
------ ------
Net loss $(2,442) $ (426)
====== ======
Net loss per common share
Basic and diluted $ (0.25) $ (0.04)
Weighted average shares outstanding
Basic and diluted 9,870 10,054
The accompanying notes are an integral part of these statements.
Condensed Consolidated Statements of Cash Flows (unaudited)
(Dollar amounts in thousands)
Nine Months Ended
September 30,
2002 2003
------ ------
Cash flows used in operating activities
Net loss $(2,442) $ (426)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Provision for bad debts - 75
Provision for inventory obsolescence 45 200
Depreciation and amortization 847 991
Changes in assets and liabilities:
Receivables (502) (1,865)
Inventories 972 (1,863)
Prepaid expenses (312) 119
Other assets 53 48
Accounts payable and accrued liabilities 233 673
Deferred revenue 512 88
------ ------
Net cash used in operating activities (594) (1,960)
Cash flows used in investing activities:
Purchases of property, plant and equipment (543) (1,392)
------ ------
Net cash used in investing activities (543) (1,392)
Cash flows provided by financing activities:
Proceeds from debt issuance - 1,500
Principal payments on debt and capital
lease obligations - (442)
Issuances of common stock 107 322
------ ------
Net cash provided by financing activities 107 1,380
------ ------
Net decrease in cash and cash equivalents (1,030) (1,972)
Cash and cash equivalents, beginning
of period 3,454 3,636
------ ------
Cash and cash equivalents, end of period $ 2,424 $ 1,664
====== ======
Supplemental disclosure of cash flow
information
Cash paid during the period for interest 46 174
Cash paid during the period for federal,
state and local income taxes 53 32
Assets acquired under capital leases - 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 September 30, 2003, the
condensed consolidated statements of operations for the three and nine month
periods ended September 30, 2002 and 2003 and the condensed consolidated
statements of cash flows for the nine month periods ended September 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 September 30, 2003 and for
all periods presented have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of
America 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 (FAS 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 Nine Months Ended
2002 2003 2002 2003
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Net loss (in thousands):
As reported $ (541) $ (466) $(2,442) $ (426)
Less: Stock-based compensation
expense determined under
fair value-based method (60) (110) (166 (330)
------ ------ ------ ------
Pro forma net loss (601) (576) (2,608) (756)
====== ====== ====== ======
Net loss per share:
As reported $ (0.05) $ (0.05) $ (0.25) $ (0.04)
Pro forma $ (0.06) $ (0.05) $ (0.26) $ (0.08)
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) Net 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 net 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 nine-month
periods ended September 30, 2002 and 2003, no effect was given to options or
warrants, because the effect of including these securities would have been
anti-dilutive. Total options and warrants outstanding as of September 30,
2003 and 2002 were 1,539,312 and 1,219,551, respectively.
(4) Concentration of Credit Risk:
Customers with significant receivable balances as of September 30, 2003,
defined as amounts in excess of ten percent (10%) of gross receivables
included Natural Alternatives ($1,579,000) and Medline Industries
($1,265,000). Of these amounts, $1,706,000 has been collected as of
November 6, 2003.
Customers with significant purchases for the third quarter and for the first
nine months of 2003, defined as amounts in excess of ten percent (10%)
of revenue, were: Natural Alternatives and Medline Industries, Inc.
Mannatech, Inc. was the only customer with purchases in excess of 10% of
revenues for the third quarter 2002.
(5) Inventories:
The following summarizes the components of inventory (in thousands):
December 31, September 30,
2002 2003
----- -----
Raw materials and supplies $1,776 $2,953
Work-in-process 624 747
Finished goods 1,933 2,297
----- -----
Total $4,333 $5,997
===== =====
The inventory balances are net of $632,000 and $832,000 of reserves for
obsolete and slow moving inventory at December 31, 2002 and September 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 were
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 September 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. As of September 30, 2003, the
Company was in compliance with all such covenants.
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 September 30, 2003, the Company provided a valuation allowance
against the entire balance of 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.
(9) Commitments:
In December 2002, the Company purchased 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. The Company paid CBI approximately $1.6
million, including approximately $0.5 million for inventory of CBI. In
addition, for the five year period ending in December 2007 the Company
agreed to pay CBI an amount equal to 9.0909% of Carrington's net sales 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. The Company paid CBI approximately
$29,000, $147,000 and $91,000 in April 2003, July 2003 and October 2003
related to the sale of CBI products to CBI's former customers in the
quarters ended March 31, June 30, 2003 and September 30, 2003, respectively.
(10) 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
----------------------------------------------------------------------------
Quarter ended
September 30, 2002
Revenues to unaffiliated
customers $ 2,136 $ 2,957 $ - $ 5,093
Loss before income taxes (126) 364 (779) (541)
Identifiable assets 9,845 2,951 6,831 19,627
Capital expenditures - - 404 404
Depreciation and amortization 157 - 127 284
Quarter ended
September 30, 2003
Revenues to unaffiliated
customers $ 2,132 $ 5,400 $ - $ 7,532
Income before income taxes 151 67 (684) (466)
Identifiable assets 12,312 3,614 7,991 23,917
Capital expenditures - - 301 301
Depreciation and amortization 260 - 117 377
Nine months ended
September 30, 2002
Revenues to unaffiliated
customers $ 6,663 $ 6,516 $ - $13,179
Income (loss) before income
taxes (355) (229) (1,858) (2,442)
Capital expenditures - - 543 543
Depreciation and amortization 475 - 372 847
Nine months ended
September 30, 2003
Revenues to unaffiliated
customers $ 6,519 $15,879 $ - $22,398
Income before income taxes 925 785 (2,136) (426)
Capital expenditures - - 1,392 1,392
Depreciation and amortization 678 - 313 991
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 preceding 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 (10) 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 GelSite[TM] technology for controlled
release and delivery of bioactive pharmaceutical ingredients.
LIQUIDITY AND CAPITAL RESOURCES
Cash at September 30, 2003 was $1,664,000 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 $1,392,000 in capital expenditures to provide
additional infrastructure for its operations and reduced debt and capital
lease obligations of $442,000. These cash uses were partially offset by
proceeds from debt issuance of $1,500,000 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 lien on the Company's production facility and is used
for operating needs, as required. As of September 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 first 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. As of September 30, 2003, the Company was in compliance with all
such covenants.
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 were
used in the Company's operations.
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. The Company is
recognizing royalty income under this agreement on a straight-line basis.
At September 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 September 30,
2003 total $3,916,667. 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 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 September 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 September 30, 2003 compared to quarter ended September 30,
2002
Revenue for the quarter ended September 30, 2003 increased 47.9%, or
$2,439,000, to $7,532,000 as compared to $5,093,000 during the quarter ended
September 30, 2002. Caraloe revenue during the third quarter of 2003
increased 82.7%, or $2,443,000, to $5,400,000 versus $2,957,000 for the
same quarter last year. The increase in Caraloe revenue is attributable
to increased raw material sales of $1,052,000, increased specialty
manufacturing sales of $342,000 and sales of cosmetic products of $1,049,000
resulting from the acquisition of certain assets of the custom division of
CBI in December 2002.
Medical services revenue during the quarter ended September 30, 2003
decreased to $2,132,000 as compared to $2,136,000 during the quarter ended
September 30, 2002.
Gross margin was $2,497,000 during the quarter ended September 30, 2003 as
compared to $2,042,000 during the quarter ended September 30, 2002, an
increase of 22.3%. Gross margin as a percentage of revenue fell to 33.1%
during the third quarter of 2003 from 40.1% during the same quarter last
year. The decrease in gross margin is attributable to a shift in the mix of
products sold toward lower margin contract manufactured products and an
increase in unfavorable manufacturing variances of $264,000 attributable to
production variances, inventory shrinkage and other inventory adjustments.
Selling, general and administrative expenses during the quarter ended
September 30, 2003 increased $589,000 to $2,046,000 as compared to
$1,457,000 during the quarter ended September 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 during the quarter ended September
30, 2003 decreased to $288,000 as compared to $530,000 during the quarter
ended September 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 September 30, 2003 increased $37,000 or 6.3% to $623,000 as
compared to $586,000 during the quarter ended September 30, 2002 as product
development efforts for injectible and intranasal delivery platforms
continued and business development efforts increased.
Other income of $56,000 for the quarter ended September 30, 2003 resulted
from collections on a note receivable which had previously been reserved.
Net interest expense during the quarter ended September 30, 2003 increased
$52,000 to $62,000 versus $10,000 during the quarter ended September 30,
2002 as a result of increased debt balances.
Net loss for the third quarter of 2003 was $466,000 as compared to a net
loss of $541,000 for the same quarter last year, a decrease of $75,000
primarily due to volume-related increases in sales and gross margins. Loss
per share for the third quarter 2003 was $0.05 compared to loss per share of
$0.05 for the third quarter of 2002.
Nine months ended September 30, 2003 compared to nine months ended September
30, 2002
Revenue for the nine months ended September 30, 2003 increased $9,219,000,
or 69.9%, to $22,398,000 as compared to $13,179,000 for the nine months
ended September 30, 2002. Caraloe revenue for the nine months ended
September 30, 2003 increased $9,363,000 or 143.7% to $15,879,000 as compared
to $6,516,000 for the nine months ended September 30, 2002. The increase in
Caraloe revenue is primarily attributable to increased raw material sales of
$4,490,000, sales of cosmetic products of $2,856,000 resulting from the
acquisition of certain assets of the custom division of CBI in December,
2002 and increased specialty manufacturing sales of $2,017,000.
Medical services revenue during the nine months ended September 30, 2003
decreased $144,000 or 2.2% to $6,519,000 as compared to $6,663,000 for the
nine months ended September 30, 2002
Gross margin for the nine months ended September 30, 2003 increased
$3,483,000 or 74.8% to $8,142,000 as compared to $4,659,000 for the nine
months ended September 30, 2003. Gross margin as a percentage of revenue
increased to 36.3% for the nine months ended September 30, 2003 from 35.3%
for the nine months ended September 30, 2002. The gross margin improvement
is attributable to increased plant utilization which resulted in a decrease
in unfavorable manufacturing variances of $464,000 and a shift in the mix of
products toward higher margin sales.
Selling, general and administrative expenses for the nine months ended
September 30, 2003 increased $1,482,000 or 33.6% to $5,891,000 as compared
to $4,409,000 for the nine months ended September 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 nine months ended September
30, 2003 decreased to $665,000 as compared to $1,371,000 for the nine months
ended September 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 nine
months ended September 30, 2003 increased $689,000 or 54.1% to $1,962,000 as
compared to $1,273,000 for the nine months ended September 30, 2002 as
product development efforts for injectible and intranasal delivery platforms
continued and business development efforts increased.
Other income of $124,000 for the nine months ended September 30, 2003
resulted from collections on a note receivable which had previously been
reserved. Other expense of $21,000 for the nine months ended September 30,
2002 resulted from the disposal of certain obsolete production equipment.
Net interest expense for the nine months ended September 30, 2003 increased
$147,000 to $174,000 as compared to $27,000 for the nine months ended
September 30, 2002 as the result of increased debt balances.
Net loss for the nine months ended September 30, 2003 decreased $2,016,000
or 82.6% to $426,000 from a net loss of $2,442,000. Loss per share for the
nine months ended September 30, 2003 was $0.04 as compared to a loss per
share of $0.25 for the nine months ended September 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
The Company's management under the supervision and with the participation of
its principal executive officer and principal financial officer, evaluated
the effectiveness of its disclosure controls and procedures as of the end of
the period covered by this report. Based on that evaluation, its principal
executive officer and principal financial officer concluded that the
Company's disclosure controls and procedures as of the end of the period
covered by this report have been designed and are functioning effectively to
provide reasonable assurance that the information required to be disclosed
by the Company in reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. We believe that a controls system,
no matter how well designed and operated, can not provide absolute assurance
that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected. During
the third quarter 2003, the Company discovered that certain inventory
and accounts payable reconciliation procedures had not been adequately
performed. The Company has implemented new reconciliation procedures to
prevent this from recurring. No other change in the Company's internal
control over financial reporting occurred during our most recent fiscal
quarter, that has materially affected, or is reasonably likely to
materially affect our internal control over financial reporting.
Part II OTHER INFORMATION
Item 1. Legal Proceedings.
On April 3, 2001, Arthur Singer, a former employee of the Company (the
"Plaintiff"), filed a lawsuit entitled Arthur Singer vs. Carrington
Laboratories, Inc. and Carlton Turner, CV-01-2084 in the United States
District Court for the Eastern District of New York, Long Island Division,
alleging multiple causes of action against the company and its chief
executive officer (the "Defendants") and seeking damages in excess of $4.0
million, plus legal fees and expenses. The Plaintiff, who was formerly
employed by the Company as a sales representative, alleges in substance that
the Company failed to pay the full amount of commissions owed to him; that
the Defendants breached an alleged contract of employment with him; that the
Company deprived him of the opportunity to exercise some vested stock
options, prevented some of his unvested stock options from vesting and
caused all of his options to expire earlier than they otherwise would have;
and that the Defendants misrepresented that the Company intended to retain
him as an employee, fraudulently induced him to remain in its employ and
breached alleged covenants of fair dealing.
On May 31, 2001, the Defendants filed a motion seeking to have the complaint
dismissed or to have the case transferred to Texas. On August 28, 2001, the
Defendants' motion to transfer was granted, and the case was transferred to
the United States District Court for the Northern District of Texas, Dallas
Division, as Case No. 01-CV-1776.
The Defendants and Plaintiff then both filed motions for summary judgment.
On October 3, 2003, the court denied the Plaintiffs motion for summary
judgment and granted Defendants motion for summary judgment for all
complaints except two, the alleged damages for which total approximately
$56,000. The court has set January 5, 2004 as the date for trial of
the remaining claims. The Company believes that the remaining claims are
without merit and intends to defend the lawsuit vigorously.
On June 22, 2001, a lawsuit styled Swiss-American Products, Inc. v. G. Scott
Vogel and Carrington Laboratories Inc., Cause No. 01-5163-A, was filed in
the 193rd Judicial District Court of Dallas County, Texas. On June 25,
2001, the Company was served with this lawsuit, an Ex Parte Temporary
Restraining Order, and an Order Appointing Independent Third Party Expert
Pursuant to Temporary Restraining Order. The suit alleges, among other
things, that Mr. Vogel (the Company's former Vice President, Operations)
improperly obtained proprietary information of Swiss-American Products, Inc.
("Plaintiff") from a former employer that manufactured products under
contract for Plaintiff, and used that information on behalf of the Company,
in breach of certain common law duties and a confidentiality agreement
between his former employer and Plaintiff. The suit further alleges that
Mr. Vogel and the Company ("Defendants") conspired to unlawfully disclose,
convert and misappropriate Plaintiff's trade secrets.
The suit seeks permanent injunctive relief, including a permanent injunction
prohibiting Defendants from disclosing or using to Plaintiff's disadvantage
any confidential proprietary information belonging to Plaintiff which Mr.
Vogel allegedly obtained from his former employer, or from developing or
marketing products based on Plaintiff's formulas or other information
allegedly taken from Mr. Vogel's former employer. The suit also seeks to
recover damages in an unspecified amount from Defendants.
Following a hearing on July 30, 2001, the trial court entered an order
setting the case for trial on July 30, 2002 and granted a temporary
injunction that prohibits Defendants from (i) disclosing or using any of
Plaintiff's confidential, proprietary or trade secret information; (ii)
developing or marketing a wound cleanser product that is the same or
substantially the same as reflected in a formula that is at issue in the
lawsuit (although this prohibition expressly does not apply to products
actively manufactured and sold by the Company before January 1, 2001 using
the exact same formula then in effect); and (iii) destroying, concealing,
altering, removing or disposing of any documents, files, computer data or
other things relating to Plaintiff or Mr. Vogel's former employer, or
containing or referring to trade secrets or confidential or proprietary
information of Plaintiff or Mr. Vogel's former employer.
A trial was held on October 7, 2003. Three days into the proceeding a
mistrial was declared due to juror misconduct. The trial judge ordered the
two parties to mediate the suit and in the event mediation efforts are not
successful, the court has set a new trial date of June 1, 2004.
The Company believes that Plaintiff's claims are without merit and intends
to vigorously defend against those claims.
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 predecessor 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
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
On August 25, 2003, the Company filed a Current Report on
Form 8-K in which it reported that the audit committee of its
board of directors had dismissed Ernst & Young LLP as the
Company's independent public accountants and appointed Grant
Thornton LLP to serve as its independent public accountants
for the fiscal year ending December 31, 2003, and, on August
28, 2003, an amendment to such current report on Form 8-K/A
correcting certain of the information contained in the
original report.
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: November 13, 2003 By: /s/ Carlton E. Turner
-----------------------------
Carlton E. Turner,
President and
Chief Executive Officer
(principal executive officer)
Date: November 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.
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