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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: September 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
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ABLE LABORATORIES, INC.
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(Exact name of registrant as specified in its charter)
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(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 October 30, 2002, there were 11,589,564 outstanding shares of common
stock, $.01 par value per share.
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ABLE LABORATORIES, INC.
FORM 10-Q
QUARTERLY REPORT
SEPTEMBER 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
Item 4. Controls and Procedures............................................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 17
Item 2. Changes in Securities.............................................. 17
Item 5. Other Information.................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................... 17
SIGNATURES ................................................................. 19
CERTIFICATIONS.............................................................. 20
(*) 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.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ABLE LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 1,822,911 $ 1,155,266
Accounts receivable, net of allowances of $18,676,326
and $8,116,822 5,163,215 4,646,203
Inventory 12,021,001 4,718,909
Prepaid expenses and other current assets 850,375 783,482
------------ ------------
Total current assets 19,857,502 11,303,860
------------ ------------
Property and equipment, net 8,147,891 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 171,806 182,606
Cash deposits with bond trustee 548,540 505,095
Deposits and other assets 195,927 110,617
------------ ------------
Total other assets 2,909,676 1,838,318
------------ ------------
$ 30,915,069 $ 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 10,625,283 4,568,443
------------ ------------
Total current liabilities 10,869,283 5,155,250
Long-term debt, less current portion 4,060,765 2,290,500
Deferred gain on sale of subsidiary -- 1,296,597
------------ ------------
Total liabilities 14,930,048 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, 11,589,564 and 11,301,976 shares issued
and outstanding 115,896 113,020
Additional paid-in capital 80,040,137 80,011,072
Accumulated deficit (64,171,609) (71,229,429)
------------ ------------
Total stockholders' equity 15,985,021 8,895,342
------------ ------------
$ 30,915,069 $ 17,637,689
============ ============
See accompanying notes to unaudited condensed
consolidated financial statements.
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ABLE LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Sales, net $ 15,024,914 $ 5,070,600 $ 36,828,483 $ 12,527,632
Cost of sales 7,676,763 2,997,511 19,259,778 8,477,089
------------ ------------ ------------ ------------
Gross profit 7,348,151 2,073,089 17,568,705 4,050,543
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 1,755,912 1,351,523 5,103,879 4,262,325
Research and development 2,214,984 527,024 4,942,839 1,536,270
------------ ------------ ------------ ------------
Total operating expenses 3,970,896 1,878,547 10,046,718 5,798,595
------------ ------------ ------------ ------------
Operating income (loss) 3,377,255 194,542 7,521,987 (1,748,052)
------------ ------------ ------------ ------------
Other income (expense):
Interest and financing expense (175,088) (141,447) (369,320) (907,277)
Loss on investment securities -- -- -- (50,000)
Miscellaneous income (expense) (196,549) 426,504 (94,847) 586,190
------------ ------------ ------------ ------------
Other income (expense), net (371,637) 285,057 (464,167) (371,087)
------------ ------------ ------------ ------------
Net income (loss) 3,005,618 479,599 7,057,820 (2,119,139)
Less returns to preferred stockholders:
Beneficial conversion features -- 6,552,244 -- 8,513,076
Dividends paid and accrued 120,600 170,068 367,476 326,848
------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders $ 2,885,018 $ (6,242,713) $ 6,690,344 $(10,959,063)
============ ============ ============ ============
Net income (loss) per share:
Basic $ 0.25 $ (0.71) $ 0.58 $ (1.36)
============ ============ ============ ============
Diluted $ 0.19 $ (0.71) $ 0.44 $ (1.36)
============ ============ ============ ============
Weighted average shares outstanding:
Basic 11,586,562 8,751,703 11,503,156 8,046,865
============ ============ ============ ============
Diluted 15,870,836 8,751,703 16,162,339 8,046,865
============ ============ ============ ============
See accompanying notes to unaudited condensed
consolidated financial statements.
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ABLE LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Nine Months Ended September 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 -- -- 43,680 436 (36) -- 400
Shares issued for investment securities 47,200 472 -- -- 4,719,528 -- 4,720,000
Shares issued in private placement 67,150 672 -- -- 6,314,583 -- 6,315,255
Conversion and redemption of preferred stock (63,981) (640) 2,436,384 24,364 (128,724) -- (105,000)
Conversion of debt and accrued interest -- -- 43,333 433 114,567 -- 115,000
Stock, options and warrants issued for
services -- -- 188,667 1,887 1,023,349 -- 1,025,236
Comprehensive income: Net loss -- -- -- -- -- (2,119,139) (2,119,139)
------- ------- ---------- -------- ----------- ------------ -----------
Balance at September 30, 2001 102,629 $ 1,026 9,245,532 $ 92,455 $77,418,707 $(68,875,661) $ 8,636,527
======= ======= ========== ======== =========== ============ ===========
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 -- -- 102,982 1,030 18,421 -- 19,451
Conversion of preferred stock (8,260) (82) 184,606 1,846 (1,764) -- --
Cash dividends on preferred stock -- -- -- -- (362,906) -- (362,906)
Warrants issued with debt -- -- -- -- 375,314 -- 375,314
Comprehensive income: Net income -- -- -- -- -- 7,057,820 7,057,820
------- ------- ---------- -------- ----------- ------------ -----------
Balance at September 30, 2002 59,650 $ 597 11,589,564 $115,896 $80,040,137 $(64,171,609) $15,985,021
======= ======= ========== ======== =========== ============ ===========
See accompanying notes to unaudited condensed
consolidated financial statements.
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ABLE LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 7,057,820 $ (2,119,139)
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 -- 1,025,236
Depreciation and amortization 620,805 690,895
(Increase) decrease in operating assets:
Accounts receivable (517,012) (4,178,138)
Inventory (7,302,092) (1,886,639)
Prepaid expenses and other current assets (66,893) (340,881)
Deposits and other assets (128,755) (420,294)
Increase in operating liabilities:
Accounts payable and accrued expenses 6,119,690 1,948,292
------------ ------------
Net cash provided by (used for) operating activities 5,783,563 (5,257,140)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (4,211,306) (960,681)
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 (6,461,306) 4,789,319
------------ ------------
Cash flows from financing activities:
Net proceeds from stock warrants and options 19,451 400
Net proceeds from private stock placement -- 5,540,255
Redemption of preferred stock -- (105,000)
Net proceeds from debt obligations 2,300,000 1,645,000
Repayment of debt obligations (548,307) (814,032)
Net change in line of credit -- (5,959,405)
Preferred stock dividends paid (425,756) --
------------ ------------
Net cash provided by financing activities 1,345,388 307,218
------------ ------------
Net change in cash and cash equivalents 667,645 (160,603)
Cash and cash equivalents at beginning of period 1,155,266 373,832
------------ ------------
Cash and cash equivalents at end of period $ 1,822,911 $ 213,229
============ ============
Supplemental cash flow information:
Interest paid $ 294,955 $ 666,352
Conversion of debt and accrued interest into common stock -- 115,000
Conversion of debt into preferred stock -- 775,000
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.
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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. Monroe Subsidiary, Inc. was dissolved on September 30, 2002.
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 with 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.
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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.
On July 26, 2002, RxBazaar completed a merger with a "public shell"
company, that is, a company that did not conduct operations but which had
completed a public offering under the Securities Act. As a result of RxBazaar's
merger and related reverse stock split, the 1,700,000 shares of RxBazaar common
stock held by Able were converted into 238,000 shares of RxBazaar common stock
and Able's investment in RxBazaar Series A Preferred stock is now convertible
into 345,333 shares of RxBazaar common stock.
In addition, in September 2002, Able received 239,841 shares of RxBazaar
common stock in payment of $479,682 in accrued dividends on the Series A
Preferred stock. Able is entitled to receive additional shares of common stock
if Able receives less than $479,682 in proceeds on the sale of the 239,841
dividend shares. After Able receives $479,682 in proceeds from the sale of
dividend shares, any unsold dividend shares will be returned to RxBazaar. Able
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has waived its rights to future dividends on the Series A Preferred stock in
exchange for RxBazaar agreeing to register the dividend shares, the common stock
held by Able and the common stock issuable on conversion of the Series A
Preferred. The RxBazaar registration statement was declared effective on
September 30, 2002. Able did not record any income on receipt of the dividend
shares due to the uncertainty of Able's ability to realize any benefit from
these shares as there is currently no active trading market for RxBazaar's
common stock.
Able has agreed that it will not convert any securities into shares of
RxBazaar common stock, if, immediately after such conversion, Able would own
more than 4.9% of the issued and outstanding common stock of RxBazaar.
3. INVENTORY
Inventory consists of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
Raw materials $ 8,044,626 $ 2,968,959
Work-in-progress 1,751,665 231,376
Finished goods 2,224,710 1,518,574
------------ ------------
$ 12,021,001 $ 4,718,909
============ ============
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
Machinery and equipment $ 5,558,075 $ 3,710,644
Furniture, fixtures and computers 738,525 511,817
Leasehold improvements 3,140,515 1,845,514
Construction in process 842,166 --
------------ ------------
10,279,281 6,067,975
Less accumulated depreciation and amortization (2,131,390) (1,572,464)
------------ ------------
$ 8,147,891 $ 4,495,511
============ ============
5. DEBT
Debt consists of the following:
SEPTEMBER 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 539,000 654,500
Notes payable-put liability -- 156,782
Unsecured notes payable, net of
warrants discount 1,975,765 --
------------ ------------
Total debt 4,304,765 2,877,307
Less current portion (244,000) (586,807)
------------ ------------
Long-term debt $ 4,060,765 $ 2,290,500
============ ============
-9-
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.
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 nine months ended September 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 3,501,523 shares of common stock.
7. SUBSEQUENT EVENT
In October 2002, we entered into a $4,000,000 equipment credit facility
with a commercial bank. Proceeds of the credit facility will be used to purchase
equipment, make leasehold improvements and repay certain existing loans and
equipment leases.
-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. 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. After careful
analysis, we decided to divest our distribution operations and continue only as
a generic drug development and manufacturing company. 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.
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 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 nine months ended September 30, 2002, we reported net income of
$7,057,820. Although we have reported profits in the past three 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.
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
-12-
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 SEPTEMBER 30, 2002 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2001
Sales for the three months ended September 30, 2002 increased by $9,954,314
or 196% to $15,024,914 compared to $5,070,600 for the three months ended
September 30, 2001. During the three months ended September 30, 2002 we had 15
FDA approved product families, in 25 different strengths, available for sale
compared to 12 FDA approved product families in 21 different strengths,
available for sale in the prior period. Sales for the third quarter of 2002
represent an increase of 20% over our sales of $12,499,578 for the second
quarter of 2002.
Cost of sales was $7,676,763 or 51% of sales for the three months ended
September 30, 2002, compared to $2,997,511 or 59% of sales for the three months
ended September 30, 2001. The improvement in our gross profit margin to 49% from
41% 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
September 30, 2002 were $1,755,912, compared to $1,351,523 for the three months
ended September 30, 2001. The increase of $404,389 is primarily due to an
increase in salaries and benefits, and insurance offset by a decrease in
investor relations expenses and professional fees of approximately $461,000,
$218,000, ($236,000) and ($23,000), respectively.
Research and development expenses for the three months ended September 30,
2002 were $2,214,984 compared to $527,024 for the three months ended September
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 September 30, 2002
and 2001 were approximately $342,000 and $185,000, respectively. We received FDA
approval for three new products during the three months ended September 30,
2002. As of September 30, 2002, we had twenty new products pending approval with
the FDA and will be increasing our research and development activities for
additional products over the next several months. In October 2002, we received
three approvals from the FDA.
Our operating income for the three months ended September 30, 2002
increased by $3,182,713 to $3,377,255 compared to $194,542 for the three months
ended September 30, 2001. This improvement is primarily due to a $5,275,062
improvement in our gross profit compared to the prior year.
Interest and financing expenses for the three months ended September 30,
2002 were $175,088, compared to $141,447 for the three months ended September
30, 2001. Interest expense increased as a result of the June 2002 borrowing of
$2,300,000 which was used to purchase the 13.5% senior subordinated notes
receivable from RxBazaar.
Miscellaneous expense of $196,549 for the three months ended September 30,
2002 primarily consists of interest income and income generated from licensing
agreements and is offset by reserves for potential payments to settle various
vendor disputes.
We recorded net income of $3,005,618 for the three months ended September
30, 2002, compared to a net income of $479,599 for the three months ended
September 30, 2001. We recorded net income applicable to common stock of
$2,885,018 or $0.25 per share, for the three months ended September 30, 2002,
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compared to a net loss applicable to common stock of $(6,242,713) or $(0.71) per
share for the three months ended September 30, 2001. Diluted earnings per share
were $0.19 for the three months ended September 30, 2002, compared to a diluted
loss per share of $(0.71) for the three months ended September 30, 2001.
RESULTS OF OPERATIONS-- NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2001
Sales for the nine months ended September 30, 2002 were $36,828,483
compared to $12,527,632 for the nine months ended September 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 $24,300,851 or 194% net increase in sales for the nine months ended
September 30, 2002 as compared to the nine months ended September 30, 2001.
Since June 30, 2001, Able has received FDA approval for 10 new product families
in 15 different product strengths. Since the sale of Superior, our quarterly
sales have increased by an average of 34% per quarter.
Cost of sales was $19,259,778 or 52% of sales for the nine months ended
September 30, 2002, compared to $8,477,089 or 68% of sales for the nine months
ended September 30, 2001. The increase in the gross profit margin to 48% from
32% is due to the higher margins of new products being manufactured at Able
Laboratories. Our gross profit margin for the first and second quarters of 2002
was 46% and 47%, respectively.
Selling, general and administrative expenses for the nine months ended
September 30, 2002 were $5,103,879 compared to $4,262,325 for the nine months
ended September 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 $1,422,846 for the nine months ended
September 30, 2002 compared to the prior year. The increase is primarily due to
an increase in sales commissions of approximately $190,000 and an increase in
salaries and benefits of approximately $1,146,000. As of September 30, 2002, we
had 28 full-time employees in selling, general and administrative positions
compared to 17 full-time employees in similar positions at September 30, 2001.
We expect to add additional employees in the future to support our sales growth.
Research and development expenses for the nine months ended September 30,
2002 were $4,942,839, compared to $1,536,270 for the nine months ended September
30, 2001. The increase in expenses relates to an increased rate of filings with
the FDA for new product approvals. Costs of biostudies and outside assays
conducted by independent contract research organizations for the nine months
ended September 30, 2002 were approximately $1,812,000 and $460,000, compared to
$587,000 and $36,000 for the nine months ended September 30, 2001, respectively.
As of September 30, 2002, we had twenty 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 nine months ended September 30, 2002 increased
by $9,270,039 to $7,521,987, compared to our operating loss of $(1,748,052) for
the nine months ended September 30, 2001. This improvement is due primarily to a
$13,518,162 increase in our gross profit compared to the prior year. Our
operating income has also improved from the $1,724,177 and $2,420,555 reported
for the first and second quarters of 2002.
Interest and financing expenses for the nine months ended September 30,
2002 were $369,320, compared to $907,277 for the nine months ended September 30,
2001. Our interest and financing expenses decreased by $537,957 as our senior
secured debt was paid off and our senior subordinated debt
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was eliminated as a result of the February 23, 2001 sale of Superior. In
addition, we paid off several other debt obligations during the nine months
ended September 30, 2002. Partially offsetting these savings was additional
interest incurred on our new borrowing of $2,300,000.
We recorded net income of $7,057,820 for the nine months ended September
30, 2002, compared to a net loss of $(2,119,139) for the nine months ended
September 30, 2001. We recorded net income applicable to common stock of
$6,690,344, or $0.58 per share, for the nine months ended September 30, 2002,
compared to a net loss applicable to common stock of $(10,959,063) or $(1.36)
per share for the nine months ended September 30, 2001. Diluted earnings per
share were $0.44 for the nine months ended September 30, 2002 compared to a
diluted loss per share of $(1.36) for the nine months ended September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, we had working capital of $8,988,219 compared to
working capital of $6,148,610 at December 31, 2001. Cash was $1,822,911 as of
September 30, 2002, compared to $1,155,266 at December 31, 2001. The $2,839,609
increase in working capital is primarily due to our net income of $7,057,820 for
the nine months ended September 30, 2002 offset by our additional investment of
$4,211,306 in property and equipment. We expect to make additional investments
of approximately $900,000 in property and equipment in the next quarter.
Significant changes in our working capital components include an increase of
$7,302,092 in inventory to support our sales growth and an increase of $517,012
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 increase in accounts
receivable correlates to our increased sales volume. 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.
In October 2002, we entered into a $4,000,000 equipment credit facility
with a commercial bank. Proceeds of the credit facility will be used to purchase
equipment, make leasehold improvements and repay certain existing loans and
equipment leases.
We expect to fund our working capital needs from operations. If we need
additional working capital to fund future expansion, we will 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 nine months ended September 30, 2002, we paid down our debt
obligations by $548,307. 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 September 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.
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On July 26, 2002, RxBazaar completed a merger with a "public shell"
company, that is, a company that did not conduct operations but which had
completed a public offering under the Securities Act. As a result of RxBazaar's
merger and a related reverse stock split, the 1,700,000 shares of RxBazaar
common stock held by Able were converted into 238,000 shares of RxBazaar common
stock and Able's investment in RxBazaar Series A Preferred stock is now
convertible into 345,333 shares of RxBazaar common stock.
In addition, in September 2002, Able received 239,841 shares of RxBazaar
common stock in payment of $479,682 in accrued dividends on the Series A
Preferred stock. Able is entitled to receive additional shares of common stock
if Able receives less than $479,682 in proceeds on the sale of the 239,841
dividend shares. After Able receives $479,682 in proceeds from the sale of
dividend shares, any unsold dividend shares will be returned to RxBazaar. Able
has waived its rights to future dividends on the Series A Preferred stock in
exchange for RxBazaar agreeing to register the dividend shares, the common stock
held by Able and the common stock issuable on conversion of the Series A
Preferred. The RxBazaar registration statement was declared effective on
September 30, 2002. Able did not record any income on receipt of the dividend
shares due to the uncertainty of Able's ability to realize any benefit from
these shares as there is currently no active trading market for RxBazaar's
common stock.
Able has agreed that it will not convert any securities into shares of
RxBazaar common stock, if, immediately after such conversion, Able would own
more than 4.9% of the issued and outstanding common stock of RxBazaar.
ITEM 4. CONTROLS AND PROCEDURES
"Disclosure controls and procedures" are controls and other procedures
designed to ensure that we timely record, process, summarize and report the
information that we are required to disclose in the reports that we file or
submit with the SEC. These include controls and procedures designed to ensure
that such information is accumulated and communicated to our management,
including our President and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
As required under the Sarbanes-Oxley Act of 2002, our President and
principal financial officer conducted a review of our disclosure controls and
procedures as of a date within 90 days of the date of this report. He concluded,
as of the evaluation date, that our disclosure controls and procedures are
effective. We have made no significant changes since the evaluation date to our
internal controls relating to accounting and financial reporting.
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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 September
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:
During the quarter ending September 30, 2002, we issued 4,260 shares of
common stock upon the exercise of options and warrants.
ITEM 5. OTHER INFORMATION
Our Chief Executive Officer and principal 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.
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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 June 3,
2002 (filed as Exhibit 3.7 to the Company's Report on Form 10-Q for the
quarter ended June 30, 2002).
10.1 Credit Agreement between the Company and Citizens Bank of Massachusetts
dated October 24, 2002.
10.2 Non-Restoring Credit Facility Note dated October 24, 2002.
10.3 Master Note dated October 24, 2002.
10.4 Security Agreement between the Company and Citizens Bank of
Massachusetts dated October 24, 2002.
(b) Reports on Form 8-K
The Company did not file any current reports on Form 8-K during the quarter
ended September 30, 2002.
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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: November 13, 2002 By: /s/ Dhananjay G. Wadekar
------------------------------------------
Dhananjay G. Wadekar
Principal Executive Officer and
Principal Financial and Accounting Officer
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CERTIFICATIONS
I, Dhananjay G. Wadekar, President, Chief Executive Officer and principal
financial officer of Able Laboratories, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Able Laboratories,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Dhananjay G. Wadekar
----------------------------------
Dhananjay G. Wadekar
President, Chief Executive Officer
and Principal Financial Officer
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EXHIBIT INDEX
EXHIBIT
NO. ITEM
- ------- ----
10.1 Credit Agreement between the Company and Citizens Bank of
Massachusetts dated October 24, 2002.
10.2 Non-Restoring Credit Facility Note dated October 24, 2002.
10.3 Master Note dated October 24, 2002.
10.4 Security Agreement between the Company and Citizens Bank of
Massachusetts dated October 24, 2002.
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