================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
[_] 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 1-11352
ABLE LABORATORIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
DELAWARE 04-3029787
- ------------------------------- -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
200 Highland Avenue
Suite 301
Needham, MA 02494
----------------------------------------
(Address of principal executive offices)
(781) 449-4926
---------------------------
(Issuer's telephone number)
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
----- -----
As of July 29, 2002, there were 11,585,533 outstanding shares of common stock,
$.01 par value per share.
================================================================================
ABLE LABORATORIES, INC.
FORM 10-Q
QUARTERLY REPORT
JUNE 30, 2002
TABLE OF CONTENTS
Facing Page...................................................................1
Table of Contents.............................................................2
PART I. FINANCIAL INFORMATION(*)
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets................................3
Condensed Consolidated Statements of Operations......................4
Condensed Consolidated Statements of Changes in Stockholders'
Equity (Deficit)...................................................5
Condensed Consolidated Statements of Cash Flows......................6
Notes to Unaudited Condensed Consolidated Financial Statements.......7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................16
Item 2. Changes in Securities...............................................16
Item 4. Submission of Matters to a Vote of Security Holders.................16
Item 5. Other Information...................................................17
Item 6. Exhibits and Reports on Form 8-K....................................17
SIGNATURES ..................................................................19
(*) The financial information at December 31, 2001 has been derived from the
audited financial statements at that date and should be read in conjunction
therewith. All other financial statements are unaudited.
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ABLE LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2002 2001
ASSETS ------------ ------------
Current assets:
Cash and cash equivalents $ 3,153,176 $ 1,155,266
Accounts receivable, net of allowances of $13,073,203 and $8,116,822 1,432,103 4,646,203
Inventory 9,695,243 4,718,909
Prepaid expenses and other current assets 548,699 783,482
------------ ------------
Total current assets 14,829,221 11,303,860
------------ ------------
Property and equipment, net 6,068,505 4,495,511
------------ ------------
Other assets:
Investment in RxBazaar securities -- 1,040,000
RxBazaar note receivable 1,993,403 --
Debt financing costs, net of accumulated amortization 175,406 182,606
Cash deposits with bond trustee 488,583 505,095
Deposits and other assets 153,202 110,617
------------ ------------
Total other assets 2,810,594 1,838,318
------------ ------------
$ 23,708,320 $ 17,637,689
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 244,000 $ 586,807
Accounts payable and accrued expenses 6,314,833 4,568,443
------------ ------------
Total current liabilities 6,558,833 5,155,250
Long-term debt, less current portion 4,055,734 2,290,500
Deferred gain on sale of subsidiary -- 1,296,597
------------ ------------
Total liabilities 10,614,567 8,742,347
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
59,650 shares of Series Q in 2002 and 67,910 shares of Series
L and Q in 2001 (liquidation value $5,965,000 and $6,791,000) 597 679
Common stock, $.01 par value, 25,000,000 shares authorized,
11,585,304 and 11,301,976 shares issued and outstanding 115,853 113,020
Additional paid-in capital 80,154,530 80,011,072
Accumulated deficit (67,177,227) (71,229,429)
------------ ------------
Total stockholders' equity 13,093,753 8,895,342
------------ ------------
$ 23,708,320 $ 17,637,689
============ ============
See accompanying notes to unaudited condensed
consolidated financial statements.
-3-
ABLE LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Sales, net $ 12,499,578 $ 3,530,737 $ 21,803,569 $ 7,457,032
Cost of sales 6,568,183 2,847,911 11,583,015 5,479,578
------------ ------------ ------------ ------------
Gross profit 5,931,395 682,826 10,220,554 1,977,454
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 1,803,048 1,093,099 3,347,967 2,910,802
Research and development 1,707,792 569,508 2,727,855 1,009,246
------------ ------------ ------------ ------------
Total operating expenses 3,510,840 1,662,607 6,075,822 3,920,048
------------ ------------ ------------ ------------
Operating income (loss) 2,420,555 (979,781) 4,144,732 (1,942,594)
------------ ------------ ------------ ------------
Other income (expense):
Interest and financing expense (113,925) (278,892) (194,232) (765,830)
Loss on investment securities -- -- -- (50,000)
Miscellaneous income 42,850 123,430 101,702 159,686
------------ ------------ ------------ ------------
Other income (expense), net (71,075) (155,462) (92,530) (656,144)
------------ ------------ ------------ ------------
Net income (loss) 2,349,480 (1,135,243) 4,052,202 (2,598,738)
Less returns to preferred stockholders:
Beneficial conversion features -- 170,833 -- 1,960,832
Dividends paid and accrued 120,006 119,615 246,876 156,780
------------ ------------ ------------ ------------
Net income (loss) applicable to common stock $ 2,229,474 $ (1,425,691) $ 3,805,326 $ (4,716,350)
============ ============ ============ ============
Net income (loss) per share:
Basic $ 0.19 $ (0.19) $ 0.33 $ (0.64)
============ ============ ============ ============
Diluted $ 0.15 $ (0.19) $ 0.25 $ (0.64)
============ ============ ============ ============
Weighted average shares outstanding:
Basic 11,524,018 7,651,144 11,460,762 7,391,645
============ ============ ============ ============
Diluted 16,097,317 7,651,144 16,272,780 7,391,645
============ ============ ============ ============
See accompanying notes to unaudited condensed
consolidated financial statements.
-4-
ABLE LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Six Months Ended June 30, 2002 and 2001
(Unaudited)
Preferred Stock Common Stock Additional
------------------------- ------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
---------- ------------ ---------- ------------ ------------ ------------ ------------
Balance at December 31, 2000 52,260 $ 522 6,533,468 $ 65,335 $ 65,375,440 $(66,756,522) $ (1,315,225)
Stock options and
warrants exercised -- -- 41,980 420 (20) -- 400
Shares issued for
investment securities 47,200 472 -- -- 4,719,528 -- 4,720,000
Shares issued in private
placement 6,000 60 -- -- 596,940 -- 597,000
Conversion and redemption
of preferred stock (37,722) (377) 1,349,025 13,490 (118,113) -- (105,000)
Conversion of debt and
accrued interest -- -- 43,333 433 114,567 -- 115,000
Stock and warrants issued
for services -- -- 188,667 1,887 879,691 -- 881,578
Comprehensive income:
Net loss -- -- -- -- -- (2,598,738) (2,598,738)
---------- ------------ ---------- ------------ ------------ ------------ ------------
Balance at June 30, 2001 67,738 $ 677 8,156,473 $ 81,565 $ 71,568,033 $(69,355,260) $ 2,295,015
========== ============ ========== ============ ============ ============ ============
Balance at December 31, 2001 67,910 $ 679 11,301,976 $ 113,020 $ 80,011,072 $(71,229,429) $ 8,895,342
Stock options and
warrants exercised -- -- 98,722 987 12,214 -- 13,201
Conversion of preferred
stock (8,260) (82) 184,606 1,846 (1,764) -- --
Cash dividends on
preferred stock -- -- -- -- (242,306) -- (242,306)
Warrants issued with debt -- -- -- -- 375,314 -- 375,314
Comprehensive income:
Net income -- -- -- -- -- 4,052,202 4,052,202
---------- ------------ ---------- ------------ ------------ ------------ ------------
Balance at June 30, 2002 59,650 $ 597 11,585,304 $ 115,853 $ 80,154,530 $(67,177,227) $ 13,093,753
========== ============ ========== ============ ============ ============ ============
See accompanying notes to unaudited condensed
consolidated financial statements.
-5-
ABLE LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
------------------------------
June 30, June 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 4,052,202 $ (2,598,738)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Gain on settlement of warrant put liability -- (26,472)
Loss on sale of investment securities -- 50,000
Stock, stock options and warrants issued for services -- 881,578
Depreciation and amortization 399,821 516,846
(Increase) decrease in operating assets:
Accounts receivable 3,214,100 (594,190)
Inventory (4,976,334) (1,553,053)
Prepaid expenses and other current assets 234,783 (417,339)
Deposits and other assets (26,073) (275,967)
Increase in operating liabilities:
Accounts payable and accrued expenses 1,688,762 3,428,746
------------ ------------
Net cash provided by (used for) operating activities 4,587,261 (588,589)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (1,958,067) (688,323)
Purchase of RxBazaar note receivable (2,250,000) --
Proceeds from sale of subsidiaries -- 4,800,000
Proceeds from sale of investment securities -- 950,000
------------ ------------
Net cash provided by (used for) investing activities (4,208,067) 5,061,677
------------ ------------
Cash flows from financing activities:
Net proceeds from stock warrants and options 13,201 400
Net proceeds from private stock placement -- 597,000
Redemption of preferred stock -- (105,000)
Net proceeds from debt obligations 2,300,000 870,000
Repayment of debt obligations (509,807) (468,508)
Net change in line of credit -- (5,959,405)
Increase in bank overdraft -- 225,492
Preferred stock dividends paid (184,678) --
------------ ------------
Net cash provided by (used for) financing activities 1,618,716 (4,840,021)
------------ ------------
Net change in cash and cash equivalents 1,997,910 (366,933)
Cash and cash equivalents at beginning of period 1,155,266 373,832
------------ ------------
Cash and cash equivalents at end of period $ 3,153,176 $ 6,899
============ ============
Supplemental cash flow information:
Interest paid $ 166,999 $ 603,254
Conversion of debt and accrued interest into common stock -- 115,000
Preferred stock issued for investment securities -- 4,720,000
Conversion of put liability to notes payable -- 750,000
Additional cash flow information is disclosed in Notes 2 and 5
See accompanying notes to unaudited condensed
consolidated financial statements.
-6-
ABLE LABORATORIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Able
Laboratories, Inc. (the "Company" or "Able") which is engaged in the manufacture
of generic pharmaceuticals and its inactive wholly-owned subsidiary, Monroe
Subsidiary, Inc. All significant inter-company balances and transactions have
been eliminated in consolidation.
On February 23, 2001, we completed the sale of our subsidiary, Superior
Pharmaceutical Company ("Superior") to RxBazaar, Inc. The results of operations
for the first quarter of 2001, include the operations of Superior up to the date
of sale.
The results of operations for the periods reported are not necessarily
indicative of those that may be expected for a full year. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
which are necessary for a fair statement of operating results for the interim
periods presented have been made.
The financial information included in this report has been prepared in
conformance with the accounting policies reflected in the financial statements
included in the Company's Annual Report on From 10-K for the year ended December
31, 2001 filed the Securities and Exchange Commission.
REVERSE STOCK SPLIT
On May 29, 2002, our stockholders approved a 1-for-15 reverse stock split
of our common stock. The reverse stock split became effective on June 3, 2002.
All common stock information presented herein has been retroactively restated to
reflect the reverse stock split.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Material estimates that are particularly
susceptible to significant change in the near term relate to the carrying values
of receivables, including allowances for chargebacks, rebates and returns,
inventory, investment in RxBazaar securities, RxBazaar note receivable and the
valuation of equity instruments issued by the company. Actual results could
differ from those estimates.
EARNINGS PER SHARE
Basic earnings per share represents income available to common stock
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
For 2001, options, warrants, put warrants and convertible securities were
anti-dilutive and excluded from the diluted earnings per share computations.
-7-
The net income (loss) applicable to common stockholders has been adjusted
for the stated dividends and the amortization of discounts on convertible
preferred stock due to beneficial conversion features.
2. DISPOSITION OF SUBSIDIARY
On February 23, 2001, the Company sold Superior to RxBazaar, Inc. for a
cash payment of $4,000,000, and the assumption by RxBazaar of the Company's
existing 13.5% senior subordinated debt in the amount of $2,248,875. The Company
was liable for the subordinated debt as a guarantor and had issued contingent
stock purchase warrants to the senior subordinated debt holders. The warrants
would have allowed the holders to purchase 166,667 shares of Able's common stock
at $.15 per share if the 13.5% senior subordinated debt was still outstanding on
June 17, 2002. In addition, the holders of the subordinated debt had the option
to convert such debt, in whole or in part, into common stock of the Company or
RxBazaar. The Company deferred the gain on the sale of $1,296,597 due to its
continuing ownership interest in RxBazaar and its guarantee of the subordinated
debt.
In connection with the sale of Superior Pharmaceutical Company, the
Company sold accounts receivable of $3,572,730, inventory of $4,790,316,
property and equipment of $191,715 and miscellaneous assets totaling $391,387,
net of accounts payable and accrued expenses of $4,596,654.
Selected operating information for Superior for the period ended February
23, 2001 included in the Company's statement of operations is as follows:
Sales, net .................................... $ 3,067,567
Cost of sales ................................. 2,812,726
------------
Gross profit .................................. 254,841
Selling, general and administrative expenses... 581,292
------------
Operating loss ............................ (326,451)
Miscellaneous income .......................... 120
------------
Net loss ...................................... $ (326,331)
============
On June 14, 2002, the Company purchased the senior subordinated debt of
RxBazaar for $2,250,000 and the contingent stock purchase warrants were
cancelled. In addition, the Company applied $1,040,000 of the deferred gain
against the carrying value of its investment in RxBazaar securities and the
$256,597 balance of the deferred gain was applied to the carrying value of the
$2,250,000 notes receivable from RxBazaar. The notes mature on June 17, 2004,
bear interest at 13.5% payable monthly, are secured by a second lien on
substantially all assets of RxBazaar and are subject to an inter-creditor
agreement with RxBazaar's asset-based lender. The Company has the right to
convert the notes into common stock of RxBazaar at the current market value of
RxBazaar's common stock. The Company has agreed that it will not convert the
notes if such conversion would result in the Company owning more than 19.9% of
the issued and outstanding stock of RxBazaar.
3. INVENTORY
Inventory consists of the following:
-8-
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
Raw materials $ 5,825,037 $ 2,968,959
Work-in-progress 790,147 231,376
Finished goods 3,080,059 1,518,574
------------ ------------
$ 9,695,243 $ 4,718,909
============ ============
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
Machinery and equipment $ 5,058,293 $ 3,710,644
Furniture, fixtures and computers 658,510 511,817
Leasehold improvements 2,309,239 1,845,514
------------ ------------
8,026,042 6,067,975
Less accumulated depreciation and
amortization (1,957,537) (1,572,464)
------------ ------------
$ 6,068,505 $ 4,495,511
============ ============
5. DEBT
Debt consists of the following:
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
Bridge loans $ -- $ 110,000
Machinery and equipment financing -- 86,025
NJEDA bonds 1,790,000 1,870,000
Equipment loan 577,500 654,500
Notes payable-put liability -- 156,782
Unsecured notes payable, net of
warrants discount 1,932,234 --
------------ ------------
Total debt 4,299,734 2,877,307
Less current portion 244,000 586,807
------------ ------------
Long-term debt $ 4,055,734 $ 2,290,500
============ ============
In June 2002, the Company borrowed $2,300,000 from existing institutional
and accredited investors, including certain officers of Able and RxBazaar, all
of whom are related parties. The unsecured notes mature on June 14, 2004 and
bear interest at 12% payable monthly. The Company also issued immediately
exercisable three-year warrants to purchase 170,200 shares of common stock at
$5.10 per share to the investors. Proceeds of $375,314 were allocated to the
warrants based on their estimated fair value and credited to additional paid-in
capital. This amount is reflected as a discount against the notes payable and
will be amortized to interest expense over the life of the notes. Proceeds of
this financing were used to purchase the 13.5% senior subordinated notes
receivable from RxBazaar.
-9-
6. PREFERRED STOCK
In January 2002, the $676,000 balance of Series L was converted into
96,556 shares of common stock.
In January 2002, the conversion ratio of the Series Q was fixed at
approximately 58.70 shares of common stock for each share of Series Q. During
the six months ended June 30, 2002, 1,500 shares of Series Q were converted into
88,050 shares of common stock. The outstanding 59,650 shares of Series Q are
convertible into approximately 3,501,455 shares of common stock.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following information should be read in conjunction with the
consolidated financial statements and notes thereto in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
We do not provide forecasts of our future financial performance. However,
from time to time, information provided by us or statements made by our
employees may contain "forward-looking" information that involves risks and
uncertainties. In particular, statements contained in this Form 10-Q which are
not historical facts constitute forward-looking statements and are made under
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements involve substantial risks and uncertainties.
You can identify these statements by forward-looking words such as "may",
"will", "expect", "anticipate", "believe", "estimate", "continue", and similar
words. You should read statements that contain these words carefully because
they: (1) discuss our future expectations; (2) contain projections of our future
operating results or financial condition; or (3) state other "forward-looking"
information. Various factors listed below, as well as any cautionary language in
this report, provide examples of risks, uncertainties and events that may cause
actual results to be materially different than the expectations described in our
forward-looking statements. You should be aware that the occurrence of any of
the events described in these risk factors and elsewhere in this Form 10-Q could
materially and adversely affect our business. All forward-looking statements
included in this Form 10-Q are based on information available to the Company on
the date hereof, and we assume no obligation to update any such forward-looking
statements.
Each forward-looking statement should be read in conjunction with the
consolidated financial statements and notes thereto in Part I, Item 1, of this
Quarterly Report and with the information contained in Item 2, including, but
not limited to, the factors set forth below, together with Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, including, but not limited to, the section therein entitled
"Certain Factors That May Affect Future Results," as well as the factors
discussed in our Registration Statement on Form S-3, File No. 333-90654, filed
with the Securities and Exchange Commission on June 17, 2002, and amended
thereafter, under the heading "Risk Factors."
In addition to the risks and uncertainties posed generally by the generic
drug industry, we face the following risks and uncertainties:
o if we incur losses, then the value of our common stock will likely
decline;
o we may have difficulty managing our growth;
o we depend on a number of key personnel;
o we face intense competition from other manufacturers of generic drugs;
o we are obligated to issue a large number of shares of common stock at
prices lower than market value;
-11-
o conversion of outstanding shares of convertible preferred stock may
reduce the market price and dilute the relative voting power of our
outstanding common stock;
o the value of the common stock has fluctuated widely in the past and
investors could lose money on their investment in our stock;
o we may face product liability for which we are not adequately insured;
and
o intense regulation by government agencies may delay our efforts to
gain necessary government approvals of our proposed drug products.
Because of the foregoing and other factors, we may experience material
fluctuations in our future operating results on a quarterly or annual basis
which could materially adversely affect our business, financial condition,
operating results and stock price.
OVERVIEW
We develop, make and sell generic drugs. From our inception in 1988 until
1996, we focused primarily on developing new drugs and licensing the resulting
products and technologies to others. Beginning in 1996, we began shifting our
focus and through acquiring three separate companies became a generic drug
manufacturing and distribution business. In 1996 we acquired Able Laboratories,
Inc., our generic drug development and manufacturing business. In 1997 and 1998,
respectively, we acquired Superior Pharmaceutical Company and Generic
Distributors, Incorporated, our distribution operations.
Generic drug development, manufacturing and distribution is a highly
competitive business and there are several companies with substantially greater
resources that compete with us. Our distribution businesses sold mostly our
competitors' products and the combination of manufacturing and distribution
business did not create the strategic advantages we were seeking. On the
contrary, we found that we were divided both financially and managerially. As
our financial performance failed to meet expectations, our senior lender
restricted our borrowing ability and as a result we faced a working capital
shortage. After careful analysis, we decided to divest our distribution
operations and continue only as a generic drug development and manufacturing
company selling only our own products to customers. In November 2000, we sought
and obtained the approval of our shareholders to sell the Superior distribution
business and we completed the sale on February 23, 2001. We sold the assets of
our Generic Distributors, Incorporated subsidiary in a separate transaction on
December 29, 2000. On May 18, 2001, we merged our subsidiary, Able Laboratories,
Inc., into our parent company and changed our name to Able Laboratories, Inc.
The sale of the two distribution subsidiaries involved complex financial
transactions. The future outcome of our current strategy is still unknown. In
the section of this Report entitled "Certain Factors That May Affect Future
Results," we have described several risk factors which we believe are
significant. We consider each of these risks specific to us, although some are
industry or sector related issues which could also impact to some degree other
businesses in our market sector. You should give very careful consideration to
these risks and pay special attention to the recent developments when you
evaluate Able Laboratories.
Through December 31, 2001, we financed our operating losses primarily
through the proceeds from public and private stock offerings and debt offerings.
For the six months ended June 30, 2002, we reported net income of $4,052,202.
Although we have reported profits in the past two quarters, we have incurred
substantial losses since inception. Since generic drug manufacturing is a highly
competitive business, we cannot provide any assurance that we will be
consistently profitable in the future.
-12-
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are more fully described in Note 1 to
our condensed consolidated financial statements included in this Quarterly
Report and in Note 1 to our consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission. Certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by our
management. Actual results may differ from these estimates under different
assumptions or conditions. Our significant accounting policies, including
inventory valuation, revenue recognition and accounts receivable allowances, are
each discussed in more detail in our Annual Report on Form 10-K.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE
MONTHS ENDED JUNE 30, 2001
Sales for the three months ended June 30, 2002 increased by $8,968,841 or
254% to $12,499,578 compared to $3,530,737 for the three months ended June 30,
2001. During the three months ended June 30, 2002 we had 13 FDA approved product
families, in 22 different strengths, available for sale compared to 5 FDA
approved product families in 12 different strengths, available for sale in the
prior period. There were no sales from our former subsidiaries Superior and GDI
in the three months ended June 30, 2002 or 2001.
Cost of sales was $6,568,183 or 53% of sales for the three months ended
June 30, 2002, compared to $2,847,911 or 81% of sales for the three months ended
June 30, 2001. The improvement in our gross profit margin to 47% from 19% is due
to the higher gross profit margins on our recently approved products and
manufacturing efficiencies achieved as a result of higher production volumes.
Selling, general and administrative expenses for the three months ended
June 30, 2002 were $1,803,048, compared to $1,093,099 for the three months ended
June 30, 2001. The increase of $709,949 is primarily due to an increase in
salaries and benefits and sales commissions of approximately $611,000 and
$46,000, respectively.
Research and development expenses for the three months ended June 30,
2002 were $1,707,792 compared to $569,508 for the three months ended June 30,
2001. All of these expenses relate to research which is currently being
conducted to develop generic drugs. Costs of biostudies conducted by independent
contract research organizations for the three months ended June 30, 2002 and
2001 were approximately $1,092,000 and $135,000, respectively. We currently have
seventeen new products pending approval with the FDA and will be increasing our
research and development activities for additional products over the next
several months.
Our operating income for the three months ended June 30, 2002 increased
by $3,400,336 to $2,420,555, compared to a loss of $(979,781) for the three
months ended June 30, 2001. This improvement is primarily due to a $5,248,569
improvement in our gross profit compared to the prior year.
Interest and financing expenses for the three months ended June 30, 2002
were $113,925, compared to $278,892 for the three months ended June 30, 2001.
Interest expense decreased as a result of the payoff of certain short-term loans
that were outstanding in the prior year.
We recorded net income of $2,349,480 for the three months ended June 30,
2002, compared to a net loss of $(1,135,243) for the three months ended June 30,
2001. We recorded net income applicable to common stock of $2,229,474 or $0.19
per share, for the three months ended June 30, 2002, compared to a
-13-
net loss applicable to common stock of $(1,425,691) or $(0.19) per share for the
three months ended June 30, 2001. Diluted earnings per share were $0.15 for the
three months ended June 30, 2002, compared to a diluted loss per share of
$(0.19) for the three months ended June 30, 2001.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS
ENDED JUNE 30, 2001
Sales for the six months ended June 30, 2002 were $21,803,569 compared to
$7,457,032 for the six months ended June 30, 2001. The sales for 2001 included
$3,067,567 in net sales of our distribution subsidiary, Superior Pharmaceutical,
which we sold in February 2001 and which added no revenue during the 2002
period. This $3,067,567 decrease was offset by a significant increase in sales
of our recently approved generic drugs resulting in a $14,346,537 or 192% net
increase in sales for the six months ended June 30, 2002 as compared to the six
months ended June 30, 2001. Since March 2001, Able has received FDA approval for
thirteen new products. Following the sale of Superior, our sales for the second
quarter of 2001 were $3,530,737. Sales increased by 44% from the second quarter
of 2001 to $5,070,600 in the third quarter of 2001, increased by 39% to
$7,066,599 in the fourth quarter of 2001 and increased by 32% to $9,303,991 in
the first quarter of 2002. Sales for the second quarter of 2002 of $12,499,578
represent an increase of 34% over our sales for the first quarter of 2002.
Cost of sales was $11,583,015 or 53% of sales for the six months ended
June 30, 2002, compared to $5,479,578 or 73% of sales for the six months ended
June 30, 2001. The increase in the gross profit margin to 47% from 27% is due to
the higher margins of new products being manufactured at Able Laboratories. Our
cost of sales for the third and fourth quarters of 2001 was 59% and 57%,
respectively. Our cost of sales for the first and second quarters of 2002 was
54% and 53%, respectively.
Selling, general and administrative expenses for the six months ended
June 30, 2002 were $3,347,967 compared to $2,910,802 for the six months ended
June 30, 2001. Expenses declined by $581,292 as a result of the sale of
Superior; however, the savings were offset by increased selling, general and
administrative costs at our manufacturing facility. Excluding costs related to
Superior, our expenses increased by $1,018,457 for the six months ended June 30,
2002 compared to the prior year. The increase is primarily due to an increase in
sales commissions of approximately $323,000 and an increase in salaries and
benefits of approximately $685,000. As of June 30, 2002, we had 25 full-time
employees in selling, general and administrative positions compared to 20
full-time employees in similar positions at March 31, 2002. We expect to add
additional employees in the future to support our sales growth.
Research and development expenses for the six months ended June 30, 2002
were $2,727,855, compared to $1,009,246 for the six months ended June 30, 2001.
The increase in expenses relates to an increased rate of filings with the FDA
for new product approvals. Costs of biostudies conducted by independent contract
research organizations for the six months ended June 30, 2002 and 2001 were
approximately $1,470,000 and $401,000, respectively. We currently have seventeen
new products pending approval with the FDA and expect to increase our research
and development activities for a broad range of products over the next several
months.
Our operating income for the six months ended June 30, 2002 increased by
$6,087,326 to $4,144,732, compared to our operating loss of $(1,942,594) for the
six months ended June 30, 2001. This improvement is due primarily to a
$8,243,100 increase in our gross profit compared to the prior year. Our
operating income has also improved from the $194,542 and $546,932 reported in
the third and fourth quarters of 2001 to $1,724,177 and $2,420,555 for the first
and second quarters of 2002.
Interest and financing expenses for the six months ended June 30, 2002
were $194,232, compared to $765,830 for the six months ended June 30, 2001. Our
interest and financing expenses decreased by
-14-
$571,598 as our senior secured debt was paid off and our senior subordinated
debt was eliminated as a result of the February 23, 2001 sale of Superior. In
addition, we paid off several other debt obligations during the six months ended
June 30, 2002.
We recorded net income of $4,052,202 for the six months ended June 30,
2002, compared to a net loss of $(2,598,738) for the six months ended June 30,
2001. We recorded net income applicable to common stock of $3,805,326, or $0.33
per share, for the six months ended June 30, 2002, compared to a net loss
applicable to common stock of $(4,716,350) or $(0.64) per share for the six
months ended June 30, 2001. Diluted earnings per share were $0.25 for the six
months ended June 30, 2002 compared to a diluted loss per share of $(0.64) for
the six months ended June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, we had working capital of $8,270,388 compared to
working capital of $6,148,610 at December 31, 2001. Cash was $3,153,176 as of
June 30, 2002, compared to $1,155,266 at December 31, 2001. The $2,121,778
increase in working capital is primarily due to our net income of $4,052,202 for
the six months ended June 30, 2002 offset by our additional investment of
$1,958,067 in property and equipment. We expect to make additional investments
of approximately $1,000,000 in property and equipment in the next quarter.
Significant changes in our working capital components include an increase of
$4,976,334 in inventory to support our sales growth and a decrease of $3,214,100
in accounts receivable. As we introduced new products in 2001, we granted
extended payment terms on sales to certain customers. In 2002, we have granted
limited extended payment terms to our customers. The accounts receivable
allowance includes allowances for customer chargebacks, rebates, other pricing
adjustments and doubtful accounts. Processing of certain allowances may occur
after collection of the original receivable. We expect to fund our working
capital needs from operations. If we need additional working capital, we intend
to seek a line of credit or other debt financing before selling additional
equity securities, although there is no guarantee that we will be able to secure
such financing.
During the six months ended June 30, 2002, we paid down our debt
obligations by $509,807. We paid off our obligations under our bridge loans, a
machinery and equipment financing and our notes payable-put liability. Current
maturities of debt obligations decreased to $244,000 at June 30, 2002 from
$586,807 at December 31, 2001.
In June 2002, we eliminated our off-balance-sheet risk which consisted of
our guarantee of the $2,250,000 senior subordinated debt assumed by RxBazaar in
connection with the sale of Superior. If the debt had remained outstanding on
June 17, 2002, contingent warrants to purchase 166,667 shares of our common
stock at $.15 per share would have become exercisable by the senior subordinated
debt holders. In June 2002, we borrowed $2,300,000 from existing related party
institutional and accredited investors. Proceeds of this borrowing were used to
purchase the $2,250,000 senior subordinated debt of RxBazaar thereby eliminating
the off-balance sheet risk. RxBazaar is current with its payments on this
obligation but is in default of certain loan covenants. The warrants to purchase
166,667 shares at $.15 per share were cancelled and new warrants to purchase
170,200 shares of common stock at $5.10 per share were issued to noteholders in
connection with our new borrowing of $2,300,000.
-15-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 27, 2001, Novopharm USA, Inc. filed a complaint against Able
Laboratories, Inc. in the Superior Court of New Jersey (Middlesex County).
Novopharm's complaint alleges that we breached a joint commercialization
agreement for the development, production, marketing, and sale of generic
clorazepate dipotassium tablets. In its complaint, Novopharm seeks approximately
$2,000,000 claimed to be due for payments made by Novopharm to improve our
facilities and in respect of Novopharm's raw material purchase costs, and makes
claims for compensation for assistance rendered by Novopharm to us and for our
sales of clorazepate dipotassium tablets.
Novopharm served its complaint on Able on January 15, 2002, and we
answered on February 19, 2002, denying liability. We also made counterclaims
against Novopharm, asserting that it failed to pay us $900,000 for clorazepate
sales, and failed to undertake promised sales efforts. Further, we asserted that
Novopharm's only recovery for advances and raw material costs was through sales
under the joint commercialization agreement, and that Novopharm had breached a
separate product agreement, failing to pay us $269,000. In court, we intend to
contest Novopharm's claims vigorously, but we are also discussing the
possibility of resolving our differences through means other than litigation.
We are also involved in certain other legal proceedings from time to time
incidental to our normal business activities. While the outcome of any such
proceedings, including the Novopharm suit, cannot be accurately predicted, we do
not believe the ultimate resolution of any existing matters should have a
material adverse effect on our financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
(c) Sales of Unregistered Securities. In the three months ended June 30,
2002, we sold the following securities in reliance on one or more exemptions
from registration under the Securities Act including the exemption under Section
4(2) thereof and Rule 506 promulgated thereunder:
On June 14, 2002, we issued unsecured promissory notes with an aggregate
principal amount of $2,300,000 to institutional or accredited investors. The
notes bear interest at a rate of 12% payable monthly. We also issued immediately
exercisable three-year warrants to purchase 170,200 shares of common stock at a
price of $5.10 per share to such investors.
During the quarter ending June 30, 2002, we issued 110,511 shares of
common stock upon the exercise of options and warrants and conversion of
convertible preferred stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 29, 2002 we held our annual meeting of stockholders. Two matters
were presented for stockholder consideration: to elect directors for the ensuing
year and to approve a plan of recapitalization that will result in a 1-for-15
reverse split of our common stock. As of the record date for the meeting, there
were 15,107,105 votes eligible to be cast at the meeting; of these, 10,892,844
were present in person or represented by proxy. The results for each of these
proposals were as follows:
-16-
Proposal 1: To elect a board of directors for the ensuing year:
Name For Abstain
---- --- -------
James B. Klint, MD 10,794,831 98,012
F. Howard Schneider 10,794,011 98,833
Harry Silverman 10,798,738 94,105
Dhananjay G. Wadekar 10,762,413 130,431
Proposal 2: To approve a plan of recapitalization that will result in a
1-for-15 reverse split of our common stock:
For.............................. 8,019,046
Against.......................... 350,330
Abstain.......................... 13,071
All share numbers have been adjusted to reflect the 1-for-15 reverse
split of our common stock, which was effective on June 3, 2002.
ITEM 5. OTHER INFORMATION
Our Chief Executive Officer and Chief Financial Officer has furnished to
the Securities and Exchange Commission the certification with respect to this
Report that is required by Section 906 of the Sarbanes-Oxley Act of 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
The following exhibits, required by Item 601 of Regulation S-K are filed
as part of this Quarterly Report on Form 10-Q. Exhibit numbers, where
applicable, in the left column correspond to those of Item 601 of Regulation
S-K.
EXHIBIT
NO. ITEM
- ------- ----
3.1 Restated Certificate of Incorporation (filed as Exhibit 3a to the
Company's Report on Form 10-Q for the Quarter ended June 30, 1998, as
amended on September 14, 1998, and incorporated herein by reference).
3.2 Certificate of Amendment of Certificate of Incorporation dated May 31,
2000 (filed as Exhibit 3.2 to the Company's Report on Form 10-QSB for
the quarter ended June 30, 2000 and incorporated herein by reference).
-17-
3.3 Amended and Restated By-Laws dated as of May 26, 2000 (filed as
Exhibit 3.3 to the Company's Report on Form 10-QSB for the quarter
ended June 30, 2000 and incorporated herein by reference).
3.4 Certificate of Designations, Preferences and Rights of Series Q
Preferred Stock of Able Laboratories, Inc. (filed as Exhibit 4.1 to
the Company's Current Report on Form 8-K filed August 31, 2001 and
incorporated by reference).
3.5 Certificate of Amendment of Certificate of Incorporation dated May 9,
2001 (filed as Exhibit 3.3 to the Company's Report on Form 10-QSB for
the quarter ended June 30, 2001 and incorporated herein by reference).
3.6 Certificate of Ownership and Merger dated May 18, 2001 (filed as
Exhibit 99.1 to the Company's Current Report on Form 8-K dated May 18,
2001 and incorporated herein by reference).
3.7 Certificate of Amendment of Certificate of Incorporation dated May 31,
2002.
10.1 Form of Subscription Agreement for the 12% Unsecured Promissory Notes
and Warrants dated as of June 5, 2002.
10.2 Form of 12% Unsecured Promissory Note dated June 14, 2002.
10.3 Form of Warrant to Purchase Stock dated June 14, 2002 (filed as
Exhibit 4.9 to the Company's Registration Statement on Form S-3 filed
June 17, 2002, and incorporated by reference).
10.4 Lease dated July 24, 2002, by and between Kennedy Montrose, L.L.C. and
the Company for property located at 600 Montrose Avenue, South
Plainfield, New Jersey 07080.
10.5 Lease dated July 17, 2002, by and between Jay F. Antenen, Jr., Jay F.
Antenen, Sr., and Donald M. Houpt, III and the Company for property
located at 11590 Century Boulevard, Cincinnati, Ohio 45246.
10.6 Employment Agreement dated May 29, 2002 by and between the Company and
Dhananjay G. Wadekar.
10.7 Lease dated April 25, 2002, by and between P&R Fasteners, Inc. and the
Company for property located at 5 Hollywood Court, South Plainfield,
New Jersey 07080.
(b) Reports on Form 8-K
The Company did not file any current reports on Form 8-K during the
quarter ended June 30, 2002.
-18-
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.
ABLE LABORATORIES, INC.
Dated: August 8, 2002 By: /s/ Dhananjay G. Wadekar
-----------------------------------------
Dhananjay G. Wadekar
Principal Executive Officer and Principal
Financial and Accounting Officer
-19-
EXHIBIT INDEX
EXHIBIT
NO. ITEM
- ------- ----
3.1 Restated Certificate of Incorporation (filed as Exhibit 3a to the
Company's Report on Form 10-Q for the Quarter ended June 30, 1998, as
amended on September 14, 1998, and incorporated herein by reference).
3.2 Certificate of Amendment of Certificate of Incorporation dated May 31,
2000 (filed as Exhibit 3.2 to the Company's Report on Form 10-QSB for
the quarter ended June 30, 2000 and incorporated herein by reference).
3.3 Amended and Restated By-Laws dated as of May 26, 2000 (filed as
Exhibit 3.3 to the Company's Report on Form 10-QSB for the quarter
ended June 30, 2000 and incorporated herein by reference).
3.4 Certificate of Designations, Preferences and Rights of Series Q
Preferred Stock of Able Laboratories, Inc. (filed as Exhibit 4.1 to
the Company's Current Report on Form 8-K filed August 31, 2001 and
incorporated by reference).
3.5 Certificate of Amendment of Certificate of Incorporation dated May 9,
2001 (filed as Exhibit 3.3 to the Company's Report on Form 10-QSB for
the quarter ended June 30, 2001 and incorporated herein by reference).
3.6 Certificate of Ownership and Merger dated May 18, 2001 (filed as
Exhibit 99.1 to the Company's Current Report on Form 8-K dated May 18,
2001 and incorporated herein by reference).
3.7 Certificate of Amendment of Certificate of Incorporation dated May 31,
2002.
10.1 Form of Subscription Agreement for the 12% Unsecured Promissory Notes
and Warrants dated as of June 5, 2002.
10.2 Form of 12% Unsecured Promissory Note dated June 14, 2002.
10.3 Form of Warrant to Purchase Stock dated June 14, 2002 (filed as
Exhibit 4.9 to the Company's Registration Statement on Form S-3 filed
June 17, 2002, and incorporated by reference).
10.4 Lease dated July 24, 2002, by and between Kennedy Montrose, L.L.C. and
the Company for property located at 600 Montrose Avenue, South
Plainfield, New Jersey 07080.
10.5 Lease dated July 17 , 2002, by and between Jay F. Antenen, Jr., Jay F.
Antenen, Sr., and Donald M. Houpt, III and the Company for property
located at 11590 Century Boulevard, Cincinnati, Ohio 45246.
10.6 Employment Agreement dated May 29, 2002 by and between the Company and
Dhananjay G. Wadekar.
10.7 Lease dated April 25, 2002, by and between P&R Fasteners, Inc. and the
Company for property located at 5 Hollywood Court, South Plainfield,
New Jersey 07080.
20