Back to GetFilings.com
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 March 31, 2004
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
-----------------------------------------------------
(Address of principal executive offices and Zip Code)
972-518-1300
-----------------------------------------------------
(Registrant's telephone number, including area code)
(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
March 4, 2004 was 10,555,142.
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at March 31, 2004 (unaudited) and
December 31, 2003 3
Condensed Consolidated Statements of
Operations for the three months ended
March 31, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements
of Cash Flows for the three months
ended March 31, 2004 and 2003 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 14
About Market Risk
Item 4. Controls and Procedures. 15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 17
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Carrington Laboratories, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands)
March 31, December 31,
2004 2003
------ ------
(unaudited)
ASSETS:
Current Assets:
Cash and cash equivalents $ 1,997 $ 1,920
Accounts receivable, net 2,823 3,098
Inventories, net 5,561 5,960
Prepaid expenses 466 253
------ ------
Total current assets 10,847 11,231
Property, plant and equipment, net 10,419 10,538
Customer relationships, net 728 777
Other assets, net 232 238
------ ------
Total assets $22,226 $22,784
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Line of credit $ 1,587 $ 1,587
Accounts payable 2,261 2,037
Accrued liabilities 1,144 1,604
Current portion of long-term debt and
capital lease obligations 1,118 1,104
Deferred revenue 1,800 1,880
------ ------
Total current liabilities 7,910 8,212
Long-term debt and capital lease obligations 1,675 1,953
SHAREHOLDERS' EQUITY:
Common stock 105 104
Capital in excess of par value 53,266 53,000
Accumulated deficit (40,727) (40,482)
Treasury stock at cost (3) (3)
------ ------
Total shareholders' equity 12,641 12,619
------ ------
Total liabilities and shareholders' equity $22,226 $22,784
====== ======
The accompanying notes are an integral part of these statements.
Carrington Laboratories, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(Dollar amounts and shares in thousands, except per share amounts)
Three Months Ended
March 31,
2004 2003
------ ------
Revenue:
Net product sales $ 6,693 $ 6,287
Royalty income 617 617
Grant income, DelSite 30 -
------ ------
Total revenue 7,340 6,904
Cost of sales 4,573 4,337
------ ------
Gross margin 2,767 2,567
Expenses:
Selling, general and administrative 1,864 1,876
Research and development 241 207
Research and development-DelSite 883 711
Other income (27) -
Interest expense, net 51 71
------ ------
Net income (loss) before income taxes (245) (298)
Provision for income taxes - -
------ ------
Net income (loss) $ (245) $ (298)
====== ======
Basic and diluted earnings (loss) per share $ (0.02) $ (0.03)
Basic and diluted average shares outstanding 10,433 9,993
The accompanying notes are an integral part of these statements.
Carrington Laboratories, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(Dollar amounts in thousands)
Three Months Ended
March 31,
2004 2003
------ ------
Cash flows used in operating activities
Net loss $ (245) $ (298)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Provision for bad debts - 15
Provision for inventory obsolescence 42 45
Depreciation and amortization 333 317
Changes in assets and liabilities:
Receivables 275 (850)
Inventories 357 124
Prepaid expenses (213) (333)
Other assets 6 94
Accounts payable and accrued liabilities (236) (128)
Deferred revenue (80) 11
------ ------
Net cash provided by (used in) operating
activities 239 (1,003)
------ ------
Investing activities:
Purchases of property, plant and equipment (165) (615)
------ ------
Net cash used in investing activities (165) (615)
Financing activities:
Proceeds from debt issuance - 500
Principal payments on debt and capital lease
obligations (264) (196)
Issuances of common stock 267 32
------ ------
Net cash provided by financing activities 3 336
------ ------
Net (decrease) increase in cash and cash equivalents 77 (1,282)
Cash and cash equivalents, beginning of period 1,920 3,636
------ ------
Cash and cash equivalents, end of period $ 1,997 $ 2,354
====== ======
Cash paid during the period for interest $ 59 $ 75
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 March 31, 2004, the condensed
consolidated statements of operations for the three month periods ended
March 31, 2004 and 2003 and the condensed consolidated statements of cash
flows for the three month periods ended March 31, 2004 and 2003 of
Carrington Laboratories, Inc., (the "Company") 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 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, 2003. Certain prior year amounts have been reclassified
to conform with the 2004 presentation.
(2) New Accounting Pronouncements:
The FASB has issued Interpretation No. 46, "Consolidation of Variable
Interest Entities". FIN 46 addresses the consolidation by business
enterprises of variable interest entities whose equity holders have not
provided sufficient equity to allow the entity to finance its own activities
or whose equity holders lack the essential characteristics of a controlling
financial interest. FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the
risk of loss from the entity's activities or entitled to receive a majority
of the entity's residual returns, or both. The provisions of FIN 46 were
effective March 31, 2004 for entities formed before February 2003. Adoption
of FIN 46 had no material effect to the Company.
(3) 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 quoted market price of the
stock on the date of grant.
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:
----------------------------------------------------------------------------
Three Months Ended
March 31,
2004 2003
----------------------------------------------------------------------------
Net loss (in thousands):
As reported $ (245) $ (298)
Less: Stock-based compensation
expense determined under
fair value-based method (833) (85)
------ ------
Pro forma net loss $(1,078) $ (383)
Net loss per share:
As reported $ (0.02) $ (0.03)
Pro forma $ (0.10) $ (0.04)
----------------------------------------------------------------------------
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.
(4) 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 periods ended
March 31, 2004 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 March 31, 2004 and 2003 were
1,618,224, and 1,219,551 respectively.
(5) Concentration of Credit Risk:
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable. The
Company's customers are not concentrated in any specific geographic region
but are concentrated in the health care industry. Significant sales,
defined as amounts in excess of ten percent (10%) of revenue, were made to
two customers. Sales to Natural Alternatives International, Inc., ("Natural
Alternatives") a customer in the Consumer Services Division, accounted for
37% and 33% of the company's total revenue during the quarter ended March
31, 2004 and 2003, respectively. Sales to Medline Industries, Inc.,
("Medline") a customer in the Medical Services Division, accounted for 33%
and 30% of the company's total revenue during the quarter ended March 31,
2004 and 2003, respectively.
Customers with significant receivable balances as of March 31, 2004, defined
as amounts in excess of ten percent (10%) of gross receivables included
Natural Alternatives, ($1,051,000) and Medline ($855,000). Of these
amounts, $1,299,640 has been collected as of May 4, 2004.
(6) Inventories:
The following summarizes the components of inventory (in thousands):
March 31, December 31,
2004 2003
------ ------
Raw materials and supplies $ 2,581 $ 3,009
Work-in-process 880 638
Finished goods 2,877 3,048
Less obsolescence reserve (777) (735)
------ ------
Total $ 5,561 $ 5,960
====== ======
(7) 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. As of March 31, 2004, there was $449,000
outstanding on the loan.
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, Texas. The proceeds of
the loan are being used in the Company's operations. As of March 31, 2004,
there was $867,000 outstanding on the loan.
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 March 31, 2004, there was $1,587,000 outstanding on
the credit line with $713,000 credit available for operations, net of
outstanding letters of credit of $700,000.
The credit facility with Comerica includes covenants that require the
Company to maintain certain financial ratios. The Company was not in
compliance with two of the covenant ratios as of March 31, 2004. Comerica
has waived the events of noncompliance for the period ended March 31, 2004.
Pursuant to the 2000 Distributor and License Agreement with 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%. As of March 31, 2004, there was $1,136,000 outstanding on the
advance.
(8) Income Taxes:
The tax effects of temporary differences including net operating loss
carryforwards have given rise to net deferred tax assets. At March 31, 2004
and December 31, 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, 2003, the Company had net
operating loss carryforwards of approximately $43,600,000 for federal income
tax purposes, which began expiring in 2003, and research and development tax
credit carryforwards of approximately $386,000, which began expiring in
2003, all of which are available to offset federal income taxes due in
current and future periods. For the three months ended March 31, 2004 and
2003, the Company recognized no benefit for income taxes.
(9) 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.
(10) 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, equipment and
selected inventories. CBI is a privately held manufacturer of skin and
cosmetic products with operations in Carrollton, Texas. Under the Agreement
the Company paid CBI approximately $1.6 million, including approximately
$0.6 million for inventory. In addition, for the five-year period ending in
December 2007, the Company agreed to pay CBI an amount equal to 9.0909% of
the Company's net sales up to $6.6 million per year and 8.5% of the
Company's net sales over $6.6 million per year of CBI products to CBI's
transferring customers. The acquired assets include equipment and other
physical property previously used by CBI's Custom Division to compound and
package cosmetic formulations of liquids, creams, gels and lotions into
bottles, tubes or cosmetic jars. Carrington uses these assets in a
substantially similar manner. The Company provides services to these
customers through its Consumer Services Division. The Company recorded
royalty expense of approximately $60,000 related to the sale of CBI products
to CBI's former customers in the quarter ended March 31, 2004.
(11) Reportable Segments:
The Company operates in three reportable segments: 1) Medical Services
Division, which sells human and veterinary medical products through
distributors and provides manufacturing services to customers in medical
products markets; 2) Consumer Services Division, which provides bulk raw
materials, finished products and manufacturing services to customers in the
cosmetic and nutraceutical markets and 3) DelSite Biotechnologies, Inc., a
research and development subsidiary responsible for the development of the
Company's proprietary GelSiteJ technology for controlled release and
delivery of bioactive pharmaceutical ingredients.
The Company previously reported its results in two segments: Medical
Services Division and Caraloe, Inc. The Caraloe activities have been
renamed the Consumer Services Division. In addition, due to the growing
significance of DelSite's operations, the Company has decided to report
DelSite as a separate segment. DelSite was previously reported as part of
the Corporate operations category.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes.
Assets which are used in more than one segment are reported in the segment
where the predominant use occurs. Total cash for the Company is included in
the Corporate Assets figure.
Reportable Segments (in thousands)
Medical Consumer
Services Services DelSite Corporate Total
----------------------------------------------------------------------------
Quarter ended March 31, 2004
Revenues to unaffiliated
customers $ 2,890 $4,420 $ 30 $ - $ 7,340
Income (loss) before
income taxes (365) 973 (853) - (245)
Identifiable assets 6,199 12,891 520 2,616 22,226
Capital expenditures - 88 77 - 165
Depreciation and
amortization 96 212 25 - 333
Quarter ended March 31, 2003
Revenues to unaffiliated
customers $ 2,861 $ 4,043 $ - $ - $ 6,904
Income (loss) before
income taxes (381) 794 (711) - (298)
Identifiable assets 7,862 11,793 322 2,310 22,287
Capital expenditures - 433 182 - 615
Depreciation and
amortization 153 143 21 - 317
(12) Subsequent Events:
Effective April 9, 2004, the Company entered into an Amendment to the
Distributor and License Agreement and Supply Agreement (the "Amendment")
with Medline. The Amendment modified certain provisions contained in that
certain Distributor and License Agreement, dated as of November 3, 2000,
between the Company and Medline (the "Distributor Agreement") and that
certain Supply Agreement dated as of November 3, 2000, between the Company
and Medline (the "Supply Agreement"). Among other things, the Amendment
extends the term of the Distributor Agreement and the term of the Supply
Agreement through November 30, 2008 and, subject to certain refund rights
more specifically described in the Amendment, provides that the Company will
receive a $1.25 million advance payment of royalties in consideration of the
extended term of the Distributor Agreement. The Company received the funds
on April 21, 2004.
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
operates in three reportable segments: 1) Medical Services Division, which
sells human and veterinary medical products through distributors and
provides manufacturing services to customers in medical products markets;
2) Consumer Services Division, which provides bulk raw materials, finished
products and manufacturing services to customers in the cosmetic and
nutraceutical markets and 3) DelSite Biotechnologies, Inc., a research and
development subsidiary responsible for the development of the Company's
proprietary GelSiteJ technology for controlled release and delivery of
bioactive pharmaceutical ingredients.
The Company previously reported its results in two segments: Medical
Services Division and Caraloe, Inc. The Caraloe activities have been
renamed the Consumer Services Division. In addition, due to the growing
significance of DelSite's operations, the Company has decided to report
DelSite as a separate segment. DelSite was previously reported as part of
the Corporate operations category.
Products sold through the Medical Services Division include hydrogels, wound
cleansers, hydrocolloids, advanced wound covering products, incontinence-
care products and two lines of condition-specific products. Many products
sold through this division contain the Company's proprietary, medical-grade
raw material, Acemannan Hydrogel[TM]. The Company regularly engages in
development projects to create line extensions and other new products for
this category. Products sold through the Consumer Services Division include
Manapol[R] and other proprietary and non-proprietary raw materials sold to
nutraceutical and cosmetic customers; nutritional products sold under the
AloeCeuticals[R] brand; skin care products sold under the Snow and Sun[TM]
brand and private-labeled products manufactured to customer specifications,
including powders, creams, liquids, gels, lotions, drinks, tablets and
capsules for various customers.
Prior to 1996, the Company generated most of its revenues from product sales
in its Medical Services Division. In 1996, the Company launched its line of
raw materials, including Manapol[R] powder, through its Consumer Services
Division. In 2001, the Company created its specialty manufacturing group to
provide services to cosmetic, nutraceutical and medical markets. In
December 2002, the Company acquired the assets of the custom division of
CBI, which substantially increased revenues for the Consumer Services
Division. In 2003 approximately 29% of the Company's revenues were
generated through product sales and royalties in its Medical Services
Division and 71% through sales of products and services in its Consumer
Services Division.
The Company's wholly-owned subsidiary, 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. Additional revenues to the Company arise from
time to time through research grants awarded to DelSite.
LIQUIDITY AND CAPITAL RESOURCES
Cash at March 31, 2004 was $1,997,000 versus $1,920,000 at December 31,
2003. The increase in cash was primarily due to decreases in accounts
receivable balances and inventory levels. In addition, the Company invested
$165,000 in capital expenditures to provide additional infrastructure for
its operations and reduced debt and capital lease obligations of $264,000.
These cash uses were partially offset by proceeds from stock option
exercises of $267,000.
The Company has a line of credit with Comerica Bank-Texas ("Comerica") that
provides for borrowings of up to $3,000,000 based on the level of qualified
accounts receivable and inventory. The line of credit is collateralized by
accounts receivable and inventory. Borrowings under the line of credit bear
interest at Comerica's prime rate plus 0.5%. The credit facility with
Comerica includes covenants that require the Company to maintain certain
financial ratios. The Company was not in compliance with two of the covenant
ratios as of March 31, 2004. Comerica has waived the events of non-
compliance for the period ended March 31, 2004. The Company and Comerica
may amend the covenants in the future. As of March 31, 2004, there was
$1,587,000 outstanding on the credit line with $713,000 credit available for
operations, net of outstanding letters of credit of $700,000.
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. As of March 31, 2004, there was $867,000
outstanding on the loan.
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. As of March 31, 2004, there was $449,000
outstanding on the loan.
Pursuant to the Distributor Agreement with Medline, the Company is to
receive $12,500,000 in base royalties over a five-year period ending
November 30, 2005. As discussed in Note 12 to the unaudited Condensed
Consolidated Financial Statements herein, effective April 9, 2004, the
Company entered into an Amendment to the Distributor Agreement. The
Amendment modified certain provisions contained in the Distributor Agreement
and the Supply Agreement. Among other things, the Amendment extends the
term of the Distributor Agreement and the term of the Supply Agreement
through November 30, 2008, and subject to certain refund rights more
specifically described in the Amendment, provides that the Company will
receive an additional $1.25 million of royalties, to be paid upon the
signing of the Amendment, in consideration of the extended term of the
Distributor Agreement. The Company received the funds on April 21, 2004.
The Company continues to recognize royalty income under this agreement, as
amended, on a straight-line basis. At March 31, 2004, the Company had
received $1,667,000 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 March 31, 2004 total $2,500,000. 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
advance bears interest at 6.5% and is being repaid by reducing each
quarterly royalty payment due from Medline by approximately $200,000. As of
March 31, 2004, there was $1,136,000 outstanding on the advance.
The Company anticipates capital expenditures in 2004 of approximately $1.8
million. The expenditures will primarily be comprised of production and
laboratory equipment and facility modifications.
Presently, the Company's debt/equity ratio is 0.76 to 1. Based on its
current estimates, management believes that the Company has the capacity to
incur additional debt, and, in 2004, the Company intends to seek additional
financing to be used as working capital. The Company anticipates that such
borrowings, together with the expected cash flows from operations and
licensing agreements and expected revenues from government grant programs,
will provide the funds necessary to finance its current operations,
including expected levels of research and development for at least the next
twelve months. 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, borrowings, licensing arrangements or
other means. Management believes that each of the enumerated financing
avenues is presently available to the Company. However, there is no
assurance that the Company will be able to obtain such funds on satisfactory
terms when they are needed.
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 March 31, 2004 compared to quarter ended March 31, 2003
Revenue for the quarter ended March 31, 2004, increased 6.3%, or $436,000,
to $7,340,000 as compared to $6,904,000 during the quarter ended March 31,
2003. Consumer Services revenue during the first quarter of 2004 increased
9.3%, or $377,000, to $4,420,000 versus $4,043,000 for the same quarter
last year. The increase in Consumer Services revenue is attributable to
increased raw material sales of $319,000, decreased specialty manufacturing
sales of $281,000 and increased sales of cosmetic products of $339,000
resulting from the acquisition of certain assets of the custom division of
CBI in December 2002.
Medical services revenue during the quarter ended March 31, 2004, increased
slightly to $2,890,000 as compared to $2,861,000 during the quarter ended
March 31, 2003. The relatively flat sales are attributable to soft wound
care product sales to Medline.
Grant revenue in the amount of $30,000 has been generated from a Small
Business Innovation Research (SBIR) biodefense grant to DelSite. This is
the first quarter for grant revenue to be reported. The total amount of the
grant awarded is up to $888,000 over a two-year period, depending on actual
expenses for approved research. The grant will fund additional development
of GelVac[TM], DelSite's intranasal vaccine delivery platform technology.
Gross margin was $2,767,000 during the quarter ended March 31, 2004, as
compared to $2,567,000 during the quarter ended March 31, 2003, an increase
of 7.8%. Gross margin as a percentage of revenue grew to 37.7% during the
first quarter of 2004 from 37.2% during the same quarter last year. The
increase in gross margin is attributable to a decrease in unfavorable
manufacturing variances of $193,000 which was the result of higher
production volumes, thus creating more efficient operations.
Selling, general and administrative expenses during the quarter ended March
31, 2004, decreased $12,000 to $1,864,000 as compared to $1,876,000 during
the quarter ended March 31, 2003.
Product-support research and development during the quarter ended March 31,
2004, increased to $241,000 as compared to $207,000 during the quarter ended
March 31, 2003, primarily due to new product development costs. 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 March 31, 2004, increased $172,000 or 24.2% to
$883,000 as compared to $711,000 during the quarter ended March 31, 2003, as
product development efforts for injectible and intranasal delivery platforms
continued and business development efforts increased.
Other income of $27,000 for the quarter ended March 31, 2004, resulted from
collections on a note receivable which had previously been reserved.
Net interest expense during the quarter ended March 31, 2004, decreased
$20,000 from the quarter ended March 31, 2003, to $51,000 for the quarter
ended March 31, 2004, as a result of lower interest rates on existing debt.
Net loss for the first quarter of 2004 was $245,000 as compared to a net
loss of $298,000 for the same quarter last year, a decrease of $53,000
primarily due to volume-related increases in sales and gross margins. Loss
per share for the first quarter 2004 was $0.02 compared to loss per share of
$0.03 for the first quarter of 2003.
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 for
"Forward-Looking Statements"
Certain statements contained in this report are "forward-looking statements"
within the meaning of Section 27A of the Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. 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;
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, 2003.
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, 2003, as described in the
Company's Annual Report on Form 10-K for the year then ended. See also,
"Item 2. 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 the Company's 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. There have
been no significant changes in the Company's internal control over financial
reporting during our most recent fiscal quarter that have materially
affected, or are 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, alleged 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 three, the alleged damages for which total approximately
$56,000.
On January 5, 2004, a jury trial was held to settle the remaining claims,
with the jury finding for the Plaintiff on one claim, awarding $28,162, plus
interest, for unpaid commissions, and finding for the Defendants on a second
claim. The judge dismissed the third claim at the end of testimony, citing
lack of sufficient evidence to support the Plaintiff's claim. The court
awarded no legal fees or expenses to the Plaintiff. Total judgment was for
approximately $35,000, which was recorded as of the period ended December
31, 2003. The Company has received notice of Plaintiff's intention to
appeal the court's ruling on legal fees.
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 such mediation is scheduled to occur on
May 17, 2004. 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 2. Changes in Securities and Use of Proceeds.
EQUITY SECURITIES REPURCHASE PROGRAM
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 March 31, 2004.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment to Distributor and License Agreement and
Supply Agreement with Medline Industries, Inc. dated
April 9, 2004 (filed as Exhibit 10.1 to the Company's
Form 8-K filed April 22, 2004, and incorporated herein
by reference).
32.1 Rule 13a-14(a)/15d-14(a) Certification.
32.2 Rule 13a-14(a)/15d-14(a) Certification.
32.3 Section 1350 Certification.
32.4 Section 1350 Certification.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K for the
quarter ended March 31, 2004.
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: May 12, 2004 By: /s/ Carlton E. Turner
-----------------------------
Carlton E. Turner,
President and
Chief Executive Officer
(principal executive officer)
Date: May 12, 2004 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 Amendment to Distributor and License Agreement and Supply
Agreement with Medline Industries, Inc. dated April 9, 2004
(filed as Exhibit 10.1 to the Company's Form 8-K filed April 22,
2004, and incorporated herein by reference).
31.1 CEO Certification of SEC Reports Pursuant to Rule 13a-14(a)/15d-
14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 CFO Certification of SEC Reports Pursuant to Rule 13a-14(a)/15d-
14(a), as adopted Pursuant to Section 302 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.