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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 March 31, 2005
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 May
6, 2005 was 10,745,339.
INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at March 31, 2005(unaudited) and
December 31, 2004 3
Condensed Consolidated Statements of
Operations for the three months ended
March 31, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements
of Cash Flows for the three months
ended March 31, 2005 and 2004 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
Item 4. Controls and Procedures 16
Part II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 17
Item 6. Exhibits 17
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Carrington Laboratories, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands)
March 31, December 31,
2005 2004
------ ------
(unaudited)
ASSETS:
Current Assets:
Cash and cash equivalents $ 2,456 $ 2,430
Accounts receivable, net 1,887 3,325
Inventories, net 5,265 4,614
Prepaid expenses 529 197
------ ------
Total current assets 10,137 10,566
Property, plant and equipment, net 11,752 11,674
Customer relationships, net 536 585
Other assets, net 169 192
------ ------
Total assets $22,594 $23,017
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Line of credit $ 1,587 $ 1,887
Accounts payable 1,999 1,674
Accrued liabilities 1,305 1,328
Current portion of long-term debt and
capital lease obligations 818 1,000
Deferred revenue 2,232 2,433
------ ------
Total current liabilities 7,941 8,322
Long-term debt and capital lease obligations 1,313 1,324
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock 107 107
Capital in excess of par value 53,762 53,713
Accumulated deficit (40,526) (40,446)
Treasury stock at cost (3) (3)
------ ------
Total shareholders' equity 13,340 13,371
------ ------
Total liabilities and shareholders' equity $22,594 $23,017
====== ======
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,
2005 2004
------ ------
Revenues:
Net product sales $ 7,255 $ 6,693
Royalty income 617 617
Grant income 310 30
------ ------
Total revenues 8,182 7,340
Cost and expenses:
Cost of product sales 4,872 4,573
Selling, general and administrative 1,841 1,864
Research and development 264 241
Research and development-DelSite 1,320 883
Other income (80) (27)
Interest expense, net 43 51
------ ------
Income (loss) before income taxes (78) (245)
Provision for income taxes 2 -
------ ------
Net income (loss) $ (80) $ (245)
====== ======
Basic and diluted earnings (loss) per share $ (0.01) $ (0.02)
====== ======
Basic and diluted average shares outstanding 10,731 10,433
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,
2005 2004
------ ------
Cash flows used in operating activities
Net loss $ (80) $ (245)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Provision for bad debts 23 -
Provision for inventory obsolescence 45 42
Depreciation and amortization 329 333
Changes in assets and liabilities:
Receivables 1,415 275
Inventories (696) 357
Prepaid expenses (332) (213)
Other assets 23 6
Accounts payable and accrued liabilities 301 (236)
Deferred revenue (201) (80)
------ ------
Net cash provided by operating activities 827 239
Investing activities:
Purchases of property, plant and equipment (357) (165)
------ ------
Net cash used in investing activities (357) (165)
Financing activities:
Principal payments on debt and capital lease
Obligations (493) (264)
Issuances of common stock 49 267
------ ------
Net cash provided by (used in) financing activities (444) 3
Net increase (decrease) in cash and cash equivalents 26 77
Cash and cash equivalents, beginning of period 2,430 1,920
------ ------
Cash and cash equivalents, end of period $ 2,456 $ 1,997
====== ======
Cash paid during the period for interest $ 52 $ 59
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, 2005, the condensed
consolidated statements of operations for the three month periods ended
March 31, 2005 and 2004 and the condensed consolidated statements of cash
flows for the three month periods ended March 31, 2005 and 2004 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, 2004. Certain prior year amounts have been reclassified
to conform with the 2004 presentation.
(2) New Pronouncements:
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs." This
Statement amends the guidance in ARB No. 43 to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and
wasted material. This Statement requires that those items be recognized as
current period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this Statement requires that the allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of SFAS No. 151 are
effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company anticipates no material effect from the adoption
of SFAS No. 151.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payments,"
which replaces SFAS No. 123 "Accounting for Stock Based Compensation", and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees"
and amends SFAS No. 95, "Statement of Cash Flows." SFAS No. 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair
values. As such, pro forma disclosure in lieu of expensing is no longer an
alternative. The new standard was to be effective in the first interim or
annual reporting period beginning after June 15, 2005. On April 14, 2005,
the Securities Exchange Commission approved a new rule that for public
companies delays the effective date of SFAS No. 123 (R) for annual periods
beginning after June 15, 2005. The Company is currently assessing the
impact that the statement may have on its financial statements.
(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 SFAS 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 except per share data) illustrates the
effect on net loss and earnings per share if the Company had applied the
fair value recognition provision of SFAS 123 to stock based compensation:
----------------------------------------------------------------------------
Three Months Ended
March 31,
2005 2004
----------------------------------------------------------------------------
Net loss (in thousands):
As reported $ (80) $ (245)
Less: Stock-based compensation
expense determined under
fair value-based method (108) (833)
------ ------
Pro forma net loss $ (188) $(1,078)
Net loss per share:
As reported $ (0.01) $ (0.02)
Pro forma $ (0.02) $ (0.10)
----------------------------------------------------------------------------
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, 2005 and 2004, no effect was given to options or warrants because
the effect of including these securities would have been anti-dilutive.
Total options outstanding as of March 31, 2005 and 2004 were 1,832,906 and
1,568,224 respectively. Total warrants outstanding as of March 31, 2004
were 50,000.
(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 and personal 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 48% and 37% of the Company's total revenue during the quarter
ended March 31, 2005 and 2004, respectively. Sales to Medline Industries,
Inc., ("Medline") a customer in the Medical Services Division, accounted for
23% and 33% of the Company's total revenue during the quarter ended March
31, 2005 and 2004, respectively.
Customers with significant receivable balances as of March 31, 2005, defined
as amounts in excess of ten percent (10%) of gross receivables included
Natural Alternatives, ($660,000) and Medline ($579,000). Of these amounts,
$1,214,000 has been collected as of May 6, 2005.
(6) Inventories:
The following summarizes the components of inventory (in thousands):
March 31, December 31,
2005 2004
------ ------
Raw materials and supplies $ 2,501 $ 2,306
Work-in-process 675 514
Finished goods 2,852 2,613
Less obsolescence reserve (763) (819)
------ ------
Total $ 5,265 $ 4,614
====== ======
(7) Debt:
The Company has a $3.0 million 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 (5.75%) 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, 2005, there was
$1,587,000 outstanding on the credit line with $863,000 credit available for
operations, net of outstanding letters of credit of $550,000.
Effective July 1, 2004, the Company and Comerica negotiated an amendment to
the Company's credit facilities, which, among other things, redefined the
covenants that require the Company to maintain certain financial ratios. As
of March 31, 2005 the Company is in compliance with all of the covenant
provisions. The new covenants and the Company's position at March 31, 2005
are as follows:
Covenant Covenant Requirement Company's Position
-------- -------------------- ------------------
Total Net Worth $12,200,000 $12,761,901
Current Ratio 1.60 1.68
Liquidity Ratio 1.75 1.93
The covenant amount for these ratios will remain at these same fixed amounts
until maturity.
In September 2004, the Company received a loan of $350,000 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 (5.75%) plus 2.5%. As of March 31, 2005, there was $334,000
outstanding on the loan.
In July 2003, the Company received a loan of $1.0 million 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 (5.75%) 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 (with a carrying value of
$4,089,000). The proceeds of the loan are being used in the Company's
operations. As of March 31, 2005, there was $667,000 outstanding on
the loan. Both the line of credit and loan with Comerica are cross-
collateralized and cross-defaulted.
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 (5.75%) plus 2.0%. As of March 31, 2005, there was $397,000
outstanding on the loan. Both of the loans through Bancredito are secured
by land and equipment in Costa Rica (with a carrying value of approximately
$700,000).
Pursuant to the 2000 Distributor and License Agreement with Medline, the
Company is to receive $12.5 million in base royalties over a five-year
period ending November 30, 2005. In December 2002, Medline advanced the
Company $2,000,000 against future royalty payments due under the Distributor
and License Agreement. The amount bears interest at 6.5% and is being repaid
by reducing each quarterly royalty payment due from Medline through
September 2005 by approximately $200,000. As of March 31, 2005, there was
$391,000 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,
2005, and December 31, 2004, the Company provided a valuation allowance
against the entire balance of the net deferred tax asset due to the
uncertainty as to the realization of the asset. At December 31, 2004, the
Company had net operating loss carryforwards of approximately $27.3 million
for federal income tax purposes, which began expiring in 2004, and research
and development tax credit carryforwards of approximately $343,000, which
begin to expire in 2005, all of which are available to offset federal income
taxes due in current and future periods. For the three-month periods ended
March 31, 2005 and 2004, the Company recognized no benefit for income taxes.
The Company incurred $2,000 of foreign income tax expense related to the
Company's operations in Costa Rica during the first quarter of 2005. There
was no foreign income tax expense incurred in the first quarter of 2004.
(9) Contingencies:
From time to time in the normal course of business, the Company is a 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"). As part of the
purchase price for the acquired assets, 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
transferred customers. The Company recorded royalty expense of approximately
$62,000 related to the sale of CBI products to CBI's transferred customers
in the quarter ended March 31, 2005.
On May 3, 2004, the Company retained Redington, Inc. to provide certain
investor relations services. In addition to cash payments for their
consulting services, Redington was also granted a non-qualified stock option
to purchase 150,000 shares of the Company's Common Stock at a price of $4.15
per share, the closing price on that date. The options are exercisable
based upon the attainment of certain sustained share price levels. During
the period, if it becomes probable that the share price levels would be
achieved, a charge to the statement of operations will be recorded based on
the fair value of the options at that time.
(11) Reportable Segments:
The Company operates in three reportable segments: 1) Medical Services
Division, which sells a comprehensive line of wound and skin care 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. ("DelSite"), a research and development subsidiary
responsible for the development of the Company's proprietary GelSite[R]
technology for controlled release and delivery of bioactive pharmaceutical
ingredients.
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, 2005
Revenues from external
customers $ 2,672 $ 5,200 $ 310 $ - $ 8,182
Income (loss) before
income taxes (694) 1,626 (1,010) - (78)
Identifiable assets 7,324 10,725 1,402 3,143 22,594
Capital expenditures 26 192 139 - 357
Depreciation and
amortization 29 223 77 - 329
Quarter ended March 31, 2004
Revenues from external
customers $ 2,890 $ 4,420 $ 30 $ - $ 7,340
Income (loss) before
income taxes (390) 998 (853) - (245)
Identifiable assets 6,845 12,245 520 2,616 22,226
Capital expenditures - 88 77 - 165
Depreciation and
amortization 72 236 25 - 333
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 three business segments. The Company generates revenues
through the sales of prescription and non-prescription medical products
through its Medical Services Division. It also generates revenues through
the sales of consumer and bulk raw material nutritional products and sales
of specialized product development and manufacturing services to customers
in the cosmetic and nutraceutical markets through its Consumer Services
Division, formerly referred to as Caraloe, Inc. In addition, the Company
generates revenues from research grant awards through its DelSite subsidiary
that is engaged in the research, development and marketing of the Company's
proprietary GelSite[R] technology for controlled release and delivery of
bioactive pharmaceutical ingredients.
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 2000, the Company entered into a Distributor and License
Agreement with Medline granting Medline exclusive rights to distribute the
Company's wound care products in the US. 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 2004 approximately 34% of the Company's
revenues were generated through product sales and royalties in its Medical
Services Division and 64% through sales of products and services in its
Consumer Services Division and 2% through U.S. Federal grant income in its
DelSite research and development subsidiary.
Since 2001, significant sales, defined as amounts in excess of ten percent
(10%) of revenue, were made to two customers: Natural Alternatives and
Medline. Sales to Natural Alternatives, a customer in the Consumer Services
Division, accounted for 48% and 37% of the Company's total revenue during
the quarter ended March 31, 2005 and 2004, respectively. Sales to Natural
Alternatives are governed by a joint supply agreement with Natural
Alternatives and Mannatech, Inc. ("Mannatech"). Due to the nature of the
product and the Company's relationship with Natural Alternatives and
Mannatech, the Company expects this supply agreement will be renewed prior
to its expiration at the end of November 2005. Sales to Medline, a
customer in the Medical Services Division, accounted for 23% and 33% of the
Company's total revenue during the quarter ended March 31, 2005 and 2004,
respectively. Effective April 9, 2004, the Company entered into an amendment
to the Distributor and License Agreement which, among other things, extended
the term of the Distributor and License Agreement and the accompanying
Supply Agreement through November 30, 2008.
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[R]
technology for controlled release and delivery of bioactive pharmaceutical
ingredients. The Company's Gelsite[R] polymer technology is the basis for
its GelVac[TM] Nasal Powder vaccine delivery system, a novel polysaccharide
that turns from a powder to a gel upon contact with the nasal fluids,
resulting in controlled release and increased nasal residence time of
vaccine antigens. Additional revenues to the Company arise from time to
time through research grants awarded to DelSite.
In March 2004 DelSite received a Small Business Innovation Research (SBIR)
grant award of up to $888,000 over a two-year period. The grant will fund
additional development of GelVac[TM], DelSite's intranasal vaccine delivery
platform technology. In October 2004 DelSite received notification of a $6
million grant over a three-year period from the National Institute of
Allergy and Infectious Diseases. The $6 million grant is to fund the
development of an inactivated influenza nasal powder vaccine against the
H5N1 strain, commonly known as bird flu, utilizing the Company's proprietary
GelVac[TM] delivery system. The grant was awarded under a biodefense and
SARS product development initiative and will fund a three-year preclinical
program.
LIQUIDITY AND CAPITAL RESOURCES
Cash at March 31, 2005 was $2,456,000 versus $2,430,000 at December 31, 2004
an increase of $26,000. The increase was primarily due to a $1,415,000
reduction in accounts receivable with this being mostly offset by a $696,000
increase in inventory, a $332,000 increase in prepaid expenses and $357,000
in capital expenditures to acquire operating assets.
The Company has a line of credit with Comerica that provides for borrowings
of up to $3.0 million 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 (5.75%) plus 0.5%. Effective July 1, 2004, the
Company and Comerica negotiated an amendment to the Company's credit
facilities, which, among other things, redefined the covenants that require
the Company to maintain certain financial ratios. As of March 31, 2005 the
Company is in compliance with all of the covenant provisions. The new
covenants and the Company's position at March 31, 2005 are as follows:
Covenant Covenant Requirement Company's Position
-------- -------------------- ------------------
Total Net Worth $12,200,000 $12,761,901
Current Ratio 1.60 1.68
Liquidity Ratio 1.75 1.93
The covenant amount for these ratios will remain at these same fixed amounts
until maturity. As of March 31, 2005, there was $1,587,000 outstanding on
the credit line with $863,000 credit available for operations, net of
outstanding letters of credit of $550,000.
In September 2004, the Company received a loan of $350,000 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 (5.75%) plus 2.5%. The loan is secured by certain of the
Company's equipment. The proceeds of the loan are being used in the
Company's operations. As of March 31, 2005, there was $334,000 outstanding
on the loan.
In July 2003, the Company received a loan of $1.0 million 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 (5.75%) 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, 2005, there was
$667,000 outstanding on the loan. Both of the credit facilities with
Comerica are cross-collateralized and cross-defaulted.
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 (5.75%) 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, 2005, there was
$397,000 outstanding on the loan.
Pursuant to the Distributor and License Agreement with Medline, the Company
is to receive $12.5 million in base royalties over a five-year period ending
November 30, 2005. Effective April 9, 2004, the Company entered into an
Amendment (the "Amendment") to the Distributor and License Agreement. The
Amendment modified certain provisions contained in the Distributor and
License Agreement and the Supply Agreement. Among other things, the
Amendment extends the term of the Distributor and License 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 and License 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,
2005, the Company had received $2.2 million 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, 2005 total $750,000
million. 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, 2005, there was $391,000
outstanding on the advance.
The Company anticipates capital expenditures in 2005 of approximately $1
million. The Company has spent $357,000 in the first three months of 2005
and anticipates spending $643,000 in the remaining nine months of the year.
The expenditures will primarily be comprised of production and laboratory
equipment and facility modifications.
Presently, the Company's debt/equity ratio is 0.69 to 1. Based on its
current estimates, management believes that the Company has the capacity to
incur additional debt, and, in 2005, the Company may seek additional
financing to be used as working capital to fund additional research and
development projects. The Company anticipates that any 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
additional 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
which may be 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 in Costa Rica
at prices comparable to the cost of acquiring leaves from the Company's
farm. From time to time the Company also imports leaves from Central and
South America at prices comparable to those in the local market. The
Company anticipates that the suppliers it currently uses will be able to
meet all of its requirements for leaves for the foreseeable future.
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 Rica 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, 2005 compared to quarter ended March 31, 2004
Revenue
-------
Revenue for the quarter ended March 31, 2005 increased 11.5%, or $842,000,
to $8,182,000 as compared to $7,340,000 during the quarter ended March 31,
2004.
Consumer Services revenue for the quarter increased 17.6%, or $780,000, to
$5,200,000 versus $4,420,000 for the same quarter last year. The increase
in Consumer Services revenue was primarily attributable to increased raw
material sales of $842,000 to Natural Alternatives, which was partially
offset by decreased specialty manufacturing sales of $62,000.
Medical Services revenue during the quarter ended March 31, 2005 decreased
by 7.5%, or $218,000, to $2,672,000 as compared to $2,890,000 for the
quarter ended March 31, 2004. The decrease in Medical Services revenue was
primarily attributable to soft wound care product sales to Medline.
DelSite grant revenues increased to $310,000 for the first quarter ended
March 31, 2005, as compared to $30,000 from March 31, 2004, as the Small
Business Innovation Research ("SBIR") biodefense grant awarded to DelSite
did not start until March 2004. Grant revenue in the amount of $63,000 was
recognized under the SBIR grant for the first quarter ended March 31, 2005.
Additionally, in October of 2004 DelSite received a $6 million grant award
from National Institute of Allergy and Infectious Diseases ("NIAID") under a
biodefense and SARS product development initiative that will fund a three-
year preclinical program. Grant revenue in the amount of $247,000 was
recognized under this grant for the quarter ended March 31, 2005.
Product-Related Gross Margin
----------------------------
Product-related gross margins for the first quarter ended March 31, 2005
were $3,000,000, a $263,000, or 9.6%, increase over March 31, 2004, which
had product-related gross margins of $2,737,000. Product-related gross
margin as a percentage of revenue grew to 38.1% during the first quarter of
2005 from 37.4% during the same quarter last year. The increase in product-
related gross margin was primarily attributable to a favorable shift in the
mix of products sold and reductions in cost of goods sold.
Selling, General and Administrative Expenses
--------------------------------------------
The Company experienced a decrease of $23,000, or 1.2%, in selling, general
and administrative expenses during the first quarter ended March 31, 2005.
These expenses totaled $1,841,000 as compared to $1,864,000 during the
quarter ended March 31, 2004.
Research and Development
------------------------
Specialized research and development expenses in support of the Company's
ongoing operations rose by $23,000, or 9.5%, to $264,000 for the quarter
ended March 31, 2005, as compared to $241,000 for the quarter ended March
31, 2004. The Company continues to focus the efforts of this group on
product development in support of its manufacturing business.
DelSite operates independently from the Company's specialized research and
development program and is responsible for research, development and
marketing of the Company's proprietary Gelsite[R] technology for controlled
release and delivery of bioactive pharmaceutical ingredients. DelSite
expenses during the quarter ended March 31, 2005, increased $437,000, or
49.5%, to $1,320,000 as compared to $883,000 during the quarter ended March
31, 2004, as product development efforts for injectible and intranasal
delivery platforms continued.
Other Income
------------
Other income during the quarter ended March 31, 2005 increased $53,000, or
196.3%, to $80,000 as compared to $27,000 for the quarter ended March 31,
2004. Other income primarily consists of collections the Company has
received from Rancho Aloe against a fully reserved note receivable balance.
Interest Expense
----------------
Net interest expense during the quarter ended March 31, 2005 decreased
$8,000, or 15.7%, to $43,000 as compared to $51,000 for the quarter ended
March 31, 2004. The decrease in net interest expense was a result of lower
debt balances.
Income Taxes
------------
The Company incurred $2,000 of foreign income tax expense in the quarter
ended March 31, 2005 related to its operations in Costa Rica. There was no
foreign income tax expense incurred in the quarter ended March 31, 2004, as
the operations in Costa Rica became subject to foreign income tax effective
July 1, 2004.
Net Loss
--------
Net loss for the quarter ended March 31, 2005 decreased by $165,000, or
67.3%, to $80,000 as compared to $245,000 for the quarter ended March 31,
2004. The decrease was attributable to the reasons discussed above. Loss
per share for the first quarter of 2005 was $0.01 per share compared to a
loss per share of $0.02 for the first quarter of 2004.
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, 2004.
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 the Company's 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, 2004, 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, cannot 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 changes in the Company's internal control over financial reporting
during its 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) 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, 2005.
Item 6. Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification.
31.2 Rule 13a-14(a)/15d-14(a) Certification.
32.1 Section 1350 Certification.
32.2 Section 1350 Certification.
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, 2005 By: /s/ Carlton E. Turner
-----------------------------
Carlton E. Turner,
President and
Chief Executive Officer
(principal executive officer)
Date: May 12, 2005 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)/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.