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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: June 30, 2003
[_] 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.
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(Exact name of registrant as specified in its charter)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
DELAWARE 04-3029787
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6 Hollywood Court
South Plainfield, NJ 07080
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(908) 754-2253
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(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 filed such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
As of July 31, 2003, there were 15,668,555 outstanding shares of common stock,
$.01 par value per share.
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ABLE LABORATORIES, INC.
FORM 10-Q
QUARTERLY REPORT
JUNE 30, 2003
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 Income...................... 4
Condensed Consolidated Statements of Changes in
Stockholders' Equity ......................................... 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 4. Submission of Matters to a Vote of Security Holders.............. 17
Item 6. Exhibits and Reports on Form 8-K................................. 18
SIGNATURES ................................................................. 20
(*) The financial information at December 31, 2002 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)
JUNE 30, DECEMBER 31,
2002 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 31,658,609 $ 1,801,127
Accounts receivable, net of allowances of $12,653,445 and $13,054,246 14,456,632 7,873,526
Inventory 15,372,873 12,903,939
Deferred income tax asset 2,915,000 2,915,000
Prepaid expenses and other current assets 484,657 123,104
------------ ------------
Total current assets 64,887,771 25,616,696
------------ ------------
Property and equipment, net 12,986,162 9,932,523
------------ ------------
Other assets:
Debt financing costs, net of accumulated amortization 96,110 168,206
Cash deposits with bond trustee 481,609 517,262
Deferred income tax asset 13,406,600 14,725,000
Deposits and other assets 178,928 168,414
------------ ------------
Total other assets 14,163,247 15,578,882
------------ ------------
$ 92,037,180 $ 51,128,101
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 1,760,001 $ 617,012
Accounts payable 5,757,331 6,896,359
Accrued expenses 1,313,582 2,839,612
------------ ------------
Total current liabilities 8,830,914 10,352,983
Long-term debt, less current portion 13,717,260 6,083,343
------------ ------------
Total liabilities 22,548,174 16,436,326
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, 32,166 and 53,150 shares of Series Q
outstanding (liquidation value $3,216,600 and $5,315,000) 322 532
Common stock, $.01 par value, 25,000,000 shares authorized,
15,628,848 and 12,554,206 shares issued and outstanding 156,288 125,542
Additional paid-in capital 113,797,783 82,423,790
Accumulated deficit (44,272,493) (47,783,489)
Unearned stock-based compensation (192,894) (74,600)
------------ ------------
Total stockholders' equity 69,489,006 34,691,775
------------ ------------
$ 92,037,180 $ 51,128,101
============ ============
See accompanying notes to unaudited condensed
consolidated financial statements.
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ABLE LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Sales, net $ 18,943,696 $ 12,499,578 $ 33,943,761 $ 21,803,569
Cost of sales 9,943,280 6,568,183 18,394,933 11,583,015
------------ ------------ ------------ ------------
Gross profit 9,000,416 5,931,395 15,548,828 10,220,554
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 2,273,700 1,803,048 4,688,668 3,347,967
Research and development 2,276,083 1,707,792 4,402,695 2,727,855
------------ ------------ ------------ ------------
Total operating expenses 4,549,783 3,510,840 9,091,363 6,075,822
------------ ------------ ------------ ------------
Operating income 4,450,633 2,420,555 6,457,465 4,144,732
------------ ------------ ------------ ------------
Other income (expense):
Interest and financing expense (219,759) (113,925) (421,082) (194,232)
Loss on early retirement of debt (241,999) -- (241,999) --
Miscellaneous income (expense), net 51,981 42,850 41,512 101,702
------------ ------------ ------------ ------------
Other income (expense), net (409,777) (71,075) (621,569) (92,530)
------------ ------------ ------------ ------------
Income before income taxes 4,040,856 2,349,480 5,835,896 4,052,202
Provision for income taxes 1,613,900 -- 2,324,900 --
------------ ------------ ------------ ------------
Net income 2,426,956 2,349,480 3,510,996 4,052,202
Dividends on preferred stock 75,595 120,006 178,069 246,876
------------ ------------ ------------ ------------
Net income applicable to common stockholders $ 2,351,361 $ 2,229,474 $ 3,332,927 $ 3,805,326
============ ============ ============ ============
Net income per share:
Basic $ 0.17 $ 0.19 $ 0.25 $ 0.33
============ ============ ============ ============
Diluted $ 0.14 $ 0.15 $ 0.20 $ 0.25
============ ============ ============ ============
Weighted average shares outstanding:
Basic 13,516,125 11,524,018 13,141,577 11,460,762
============ ============ ============ ============
Diluted 17,471,244 16,097,317 17,319,932 16,272,780
============ ============ ============ ============
See accompanying notes to unaudited condensed
consolidated financial statements.
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ABLE LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended June 30, 2003 and 2002
(Unaudited)
PREFERRED STOCK COMMON STOCK ADDITIONAL UNEARNED
------------------- ----------------------- PAID-IN ACCUMULATED STOCK-BASED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
-------- -------- ---------- ---------- ------------ ------------ --------- -----------
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) -- -- --
Dividends on preferred stock -- -- -- -- (242,306) -- -- (242,306)
Warrants issued with debt -- -- -- -- 375,314 -- -- 375,314
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
======== ======== ========== ========== ============ ============ ========= ===========
Balance at December 31, 2002 53,150 $ 532 12,554,206 $ 125,542 $ 82,423,790 $(47,783,489) $ (74,600) $34,691,775
Sale of common stock -- -- 1,600,000 16,000 28,457,000 -- -- 28,473,000
Stock options and warrants
exercised -- -- 116,759 1,168 323,577 -- -- 324,745
Conversion of debt -- -- 126,097 1,260 2,148,693 -- -- 2,149,953
Conversion of preferred stock (20,984) (210) 1,231,786 12,318 (12,108) -- -- --
Dividends on preferred stock -- -- -- -- (178,069) -- -- (178,069)
Stock-based compensation -- -- -- -- 145,000 -- (145,000) --
Amortization of unearned
stock-based compensation -- -- -- -- -- -- 26,706 26,706
Tax benefit on stock options -- -- -- -- 489,900 -- -- 489,900
Net income -- -- -- -- -- 3,510,996 -- 3,510,996
-------- -------- ---------- ---------- ------------ ------------ --------- -----------
Balance at June 30, 2003 32,166 $ 322 15,628,848 $ 156,288 $113,797,783 $(44,272,493) $(192,894) $69,489,006
======== ======== ========== ========== ============ ============ ========= ===========
See accompanying notes to unaudited condensed
consolidated financial statements
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ABLE LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
------------------------------
JUNE 30, JUNE 30,
2003 2002
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Cash flows from operating activities:
Net income $ 3,510,996 $ 4,052,202
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Deferred income tax expense 1,698,000 --
State tax benefit for stock options 110,300 --
Loss on early retirement of debt 241,999 --
Amortization of unearned compensation 26,706 --
Depreciation and amortization 1,104,503 399,821
(Increase) decrease in operating assets:
Accounts receivable (6,583,106) 3,214,100
Inventory (2,468,934) (4,976,334)
Prepaid expenses and other current assets (361,553) 234,783
Deposits and other assets 25,139 (26,073)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (2,604,831) 1,688,762
------------ ------------
Net cash provided by (used for) operating activities (5,300,781) 4,587,261
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (4,073,961) (1,958,067)
Purchase of RxBazaar note receivable -- (2,250,000)
------------ ------------
Net cash provided by (used for) investing activities (4,073,961) (4,208,067)
------------ ------------
Cash flows from financing activities:
Net proceeds from stock warrants and options 324,745 13,201
Net proceeds from private stock placement 28,473,000 --
Net proceeds from debt obligations 11,589,422 2,300,000
Repayment of debt obligations (916,646) (509,807)
Preferred stock dividends paid (238,297) (184,678)
------------ ------------
Net cash provided by (used for) financing activities 39,232,224 1,618,716
------------ ------------
Net change in cash and cash equivalents 29,857,482 1,997,910
Cash and cash equivalents at beginning of period 1,801,127 1,155,266
------------ ------------
Cash and cash equivalents at end of period $ 31,658,609 $ 3,153,176
============ ============
Supplemental cash flow information:
Interest paid $ 344,882 $ 166,999
Income taxes paid 580,000 --
Conversion of debt into common stock 2,149,953 --
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. Monroe Subsidiary, Inc. was dissolved on September 30, 2002.
All significant inter-company balances and transactions have been eliminated in
consolidation.
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, 2002 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 and notes receivable and the
valuation of deferred tax assets. Actual results could differ from those
estimates.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" encourages all entities to adopt a fair value
based method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date (or other measurement date) over the amount an employee must
pay to acquire the stock. Stock options issued under the Company's stock option
plans generally have no intrinsic value at the grant date, and under Opinion No.
25 no compensation cost is recognized for them. The Company does not plan to
adopt the fair value accounting model for stock-based employee compensation
under SFAS No. 123.
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The Company has two stock-based compensation plans and stock options
issued outside of the plans. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for stock options issued to employees and
directors. Had compensation cost for the Company's stock options issued to
employees and directors been determined based on the fair value at the grant
dates consistent with SFAS No. 123, the Company's net income and net income per
share would have been adjusted to the pro forma amounts indicated below:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income as reported $ 2,426,956 $ 2,349,480 $ 3,510,996 $ 4,052,202
Add stock-based compensation under APB No. 25 17,381 -- 26,706 --
Deduct stock-based employee compensation under
SFAS No. 123 (258,792) (58,466) (382,582) (116,931)
------------ ------------ ------------ ------------
Pro forma net income 2,185,545 2,291,014 3,155,120 3,935,271
Less dividends on preferred stock 75,595 120,006 178,069 246,876
------------ ------------ ------------ ------------
Net income applicable to common stockholders $ 2,109,950 $ 2,171,008 $ 2,977,051 $ 3,688,395
============ ============ ============ ============
Net income per share:
Basic - as reported $ 0.17 $ 0.19 $ 0.25 $ 0.33
============ ============ ============ ============
Basic - Pro forma $ 0.16 $ 0.19 $ 0.23 $ 0.32
============ ============ ============ ============
Diluted - as reported $ 0.14 $ 0.15 $ 0.20 $ 0.25
============ ============ ============ ============
Diluted - Pro forma $ 0.13 $ 0.14 $ 0.18 $ 0.24
============ ============ ============ ============
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.
The net income applicable to common stockholders has been adjusted for
the stated dividends on convertible preferred stock.
2. INVENTORY
Inventory consists of the following:
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
Raw materials $ 8,677,115 $ 8,623,114
Work-in-progress 1,521,709 1,549,239
Finished goods 5,174,049 2,731,586
------------ ------------
$ 15,372,873 $ 12,903,939
============ ============
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3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
Machinery and equipment $ 9,642,743 $ 6,962,823
Furniture, fixtures and computers 1,215,526 869,227
Leasehold improvements 5,561,910 4,190,768
Construction in process 97,879 421,279
------------ ------------
16,518,058 12,444,097
Less accumulated depreciation
and amortization (3,531,896) (2,511,574)
------------ ------------
$ 12,986,162 $ 9,932,523
============ ============
4. DEBT
Debt consists of the following:
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
NJEDA bonds $ 1,030,000 $ 1,790,000
Equipment loans 7,409,500 2,890,078
Revolving credit agreement 6,900,000 --
Unsecured notes payable, net of discount 137,761 2,020,277
------------ ------------
Total 15,477,261 6,700,355
Less current portion 1,760,001 617,012
------------ ------------
Long-term debt $ 13,717,260 $ 6,083,343
============ ============
NJEDA BONDS
In May 2003, we repurchased $670,000 of our outstanding industrial
revenue bonds for $656,600 upon completion of our tender offer. We recorded a
loss on early retirement of debt of $51,962 after the write-off of $65,362 of
deferred debt financing costs.
EQUIPMENT LOANS AND REVOLVING CREDIT AGREEMENT
In October 2002, we entered into a $4,000,000 non-restoring equipment
loan agreement with a commercial bank. On February 24, 2003, we entered into a
new $4,000,000 revolving credit agreement and increased the equipment loan to
$5,800,000 by amending the existing loan agreement.
In early April 2003, we increased the amount available under our
revolving credit facility from $4,000,000 to $5,900,000. In addition, later in
April we increased the amounts available under our revolving credit facility
from $5,900,000 to $10,000,000 and increased the amounts available under our
non-restoring equipment loan facility from $5,800,000 to $10,000,000. All
material terms under both the loan agreements remain unchanged.
The equipment loan and revolver are secured by substantially all of the
Company's assets including accounts receivable, inventory, furniture, fixtures,
equipment and intellectual property. The loan is subject to certain financial
-9-
covenants, including a fixed charge coverage ratio, a leverage ratio and a
current ratio. We were in compliance with these covenants at June 30, 2003. The
equipment loan bears interest at LIBOR plus 2.5% and currently requires monthly
principal payments of $127,270. The revolving loan currently bears interest at
LIBOR plus 1.5% based upon the Company's current leverage ratio, requires no
monthly principal payments and matures in June 2005.
In July 2003, we repaid the equipment loan in full and paid down the
revolving credit agreement by $3,000,000.
UNSECURED NOTES PAYABLE
In June 2003, we converted $2,150,000 of notes into 126,097 shares of
common stock at $17.05 per share, the fair value of the stock on the transaction
date, and repaid $47 of notes in cash. We also wrote-off $190,037 of unamortized
discount on the notes, which was recorded as a loss on early retirement of debt.
5. COMMON STOCK
In June 2003, we sold 1,600,000 shares of common stock at $19.00 per
share for gross proceeds of $30,400,000. Net proceeds were $28,473,000 after
commissions and expenses. The Company granted the investors rights to purchase
up to an additional 440,000 shares at $19.00 per share. The rights became
exercisable on July 18, 2003 upon the effectiveness of a registration statement
for the resale of the common stock. The rights expire 60 trading days after July
18, 2003.
6. PREFERRED STOCK
The Series Q carries an 8% dividend and is convertible to common stock at
approximately 58.7 shares of common stock for each share of Series Q. The
outstanding 32,166 shares of Series Q are convertible into 1,888,181 shares of
common stock.
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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, 2002.
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, 2002, 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. 333-106964, filed
with the Securities and Exchange Commission on July 11, 2003, 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 we may have difficulty managing our growth;
o we depend on a number of key personnel and if we are unable to retain
our key personnel or continue to attract additional qualified
professionals we may be unable to carry out our plans to maintain or
expand our business;
o we face intense competition from other manufacturers of generic
drugs;
o our revenues and gross profit from individual generic pharmaceutical
products are likely to decline as our competitors introduce their own
generic equivalents;
-11-
o in some circumstances, we may retroactively reduce the price of
products that we have already sold to customers but that have not
been resold by such customers;
o new developments by other manufacturers could render our products
uncompetitive or obsolete;
o we are obligated to issue a large number of shares of common stock at
prices lower than market value;
o the conversion of outstanding shares of convertible preferred stock
or the exercise of other derivative securities may reduce the market
price of our outstanding common stock;
o the value of our common stock has fluctuated widely in the past and
investors could lose money on their investments in our stock;
o we may face product liability for which we may not be adequately
insured;
o intense regulation by government agencies may delay our efforts to
commercialize our proposed drug products; and
o we depend on third parties to supply the raw materials used in our
products; any failure to obtain a sufficient supply of raw materials
from these suppliers could materially and adversely affect our
business.
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, manufacture and sell generic drugs. In 1996 we acquired our
generic drug development and manufacturing business. In 1997 and 1998,
respectively, we acquired Superior Pharmaceutical Company and Generic
Distributors, Inc., our former 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. After careful analysis, we decided to divest our
distribution operations and continue only as a generic drug development and
manufacturing company. We sold the assets of Generic Distributors, Inc. on
December 29, 2000 and sold Superior Pharmaceutical Company on February 23, 2001.
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 the Company.
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, 2002 filed with the
Securities and Exchange Commission. Certain of our accounting policies are
-12-
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by our
management. As a result, these policies are subject to an inherent degree of
uncertainty. In applying these policies, our management makes estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures. We base our estimates and judgments on our
historical experience, the terms of existing contracts, our observance of trends
in the industry, information that we obtain from our customers and outside
sources, and on various other assumptions that we believe to be reasonable and
appropriate under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Our significant accounting policies, including inventory valuation,
revenue recognition, accounts receivable allowances for chargebacks, rebates,
and similar items, and income taxes are each discussed in more detail in our
Annual Report on Form 10-K. We have reviewed and determined that those policies
remain our critical accounting policies for the six months ended June 30, 2003.
We did not make any changes in those policies during the period.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE
MONTHS ENDED JUNE 30, 2002
Sales for the three months ended June 30, 2003 increased by $6,444,118,
or 51.6%, primarily due to a greater number of products available for sale as
well as higher demand for our products. Sales for the three months ended June
30, 2003 were $18,943,696, compared to $12,499,578 for the three months ended
June 30, 2002. During the three months ended June 30, 2003, we had 19 FDA
approved product families, in 44 different strengths, available for sale,
compared to 13 FDA approved product families in 22 different strengths,
available for sale during the three months ended June 30, 2002.
Cost of sales was $9,943,280, or 52.5% of sales, for the three months
ended June 30, 2003, compared to $6,568,183, or 52.5% of sales, for the three
months ended June 30, 2002. The increase in our gross profit by $3,069,021, from
$5,931,395 for the three months ended June 30, 2002 to $9,000,416 for the three
months ended June 30, 2003 is primarily attributable to increased sales of our
products. Gross profit remained constant as a percentage of sales. Selling,
general and administrative expenses for the three months ended June 30, 2003
were $2,273,700, compared to $1,803,048 for the three months ended June 30,
2002. The increase of $470,652 is primarily due to increases in salaries and
benefits, advertising and trade show expenses, and investor relations costs of
approximately $218,000, $222,000, and $40,000, respectively, offset by decreases
in other expense categories. We added several new employees to support our sales
effort during the three months ended June 30, 2003. During that same period we
increased our presence at a number of industry trade shows in addition to
increasing our marketing activities.
Research and development expenses for the three months ended June 30,
2003 were $2,276,083, compared to $1,707,792 for the three months ended June 30,
2002. 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, 2003 and
2002 were approximately $693,000 and $1,092,000, respectively. We received FDA
approval for 7 new products during the three months ended June 30, 2003. As of
July 31, 2003, we had 15 new products pending approval with the FDA and we
expect to 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, 2003 increased
by $2,030,078 to $4,450,633, compared to $2,420,555 for the three months ended
June 30, 2002. This improvement is primarily due to an increase in our sales
volume, which resulted in a $3,069,021 increase in gross profit. The increase in
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gross profit was partially offset by our increased investment in research and
development expenses of $568,291 and the $470,652 increase in selling, general
and administrative expenses.
Interest and financing expenses for the three months ended June 30, 2003
were $219,759, compared to $113,925 for the three months ended June 30, 2002.
Interest expense increased as a result of new loan agreements entered into to
finance our investment in plant improvements and equipment, and our increased
need for working capital to support our growth.
Income tax expense for the three months ended June 30, 2003 was
$1,613,900 or $0.09 per diluted share compared to no provision for income taxes
in the prior period. Our effective tax rate for the three months ended June 30,
2003 was 39.9%. Our income tax expense is primarily a non-cash expense. We do
not expect to pay federal income tax, other than the alternative minimum tax,
until we fully utilize our net operating loss carryforwards.
We recorded net income of $2,426,956 for the three months ended June 30,
2003, compared to net income of $2,349,480 for the three months ended June 30,
2002. We recorded net income applicable to common stock of $2,351,361 or $0.17
per share, for the three months ended June 30, 2003, compared to net income
applicable to common stock of $2,229,474 or $0.19 per share for the three months
ended June 30, 2002. Diluted earnings per share were $0.14 for the three months
ended June 30, 2003, compared to diluted earnings per share of $0.15 for the
three months ended June 30, 2002.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS
ENDED JUNE 30, 2002
Sales for the six months ended June 30, 2003 increased by $12,140,192, or
55.7%, primarily due to higher demand, to $33,943,761, compared to $21,803,569
for the six months ended June 30, 2002.
Cost of sales was $18,394,933, or 54.2% of sales for the six months ended
June 30, 2003, compared to $11,583,015, or 53.1% of sales, for the six months
ended June 30, 2002. The decrease in our gross profit margin to 45.8% from 46.9%
is primarily attributable to sub-optimal utilization of the Company's
manufacturing capacity in the first quarter of 2003. As part of our capacity
expansion, the Company's manufacturing facility underwent substantial
reconfiguration resulting in downtime and unabsorbed labor costs and other
overhead in the first quarter of 2003. All current manufacturing upgrades,
relocations and additional equipment installations are now complete, allowing
the Company to resume normal manufacturing operations. Gross profit margin for
the first quarter of 2003 was 43.7% compared to the second quarter of 2003 gross
profit margin of 47.5%.
Selling, general and administrative expenses for the six months ended
June 30, 2003 were $4,688,668, compared to $3,347,967 for the six months ended
June 30, 2002. The increase of $1,340,701 is primarily due to increases in
salaries and benefits, advertising and trade show expenses, investor relations,
and professional fees of approximately $471,000, $503,000, $197,000, and
$185,000, respectively.
Research and development expenses for the six months ended June 30, 2003
were $4,402,695, compared to $2,727,855 for the six months ended June 30, 2002.
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 six months ended June 30, 2003 and 2002 were
approximately $1,079,000 and $1,470,000, respectively. We received FDA approval
for eleven new products during the six months ended June 30, 2003. As of July
31, 2003, we had 15 new products pending approval with the FDA and will be
increasing our research and development activities for additional products over
the next several months.
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Our operating income for the six months ended June 30, 2003 increased by
$2,312,733 to $6,457,465, compared to $4,144,732 for the six months ended June
30, 2002. This improvement is primarily due to an increase in our sales volume,
which was offset by our increased investment in research and development
expenses.
Interest and financing expenses for the six months ended June 30, 2003
were $421,082, compared to $194,232 for the six months ended June 30, 2002.
Interest expense increased as a result of new loan agreements entered into to
finance our investment in plant improvements and equipment, and our increased
need for working capital to support our growth.
Income tax expense for the six months ended June 30, 2003 was $2,324,900
or $0.13 per diluted share compared to no provision for income taxes in the
prior period. Our effective tax rate for the six months ended June 30, 2003 was
39.8%. Our income tax expense is primarily a non-cash expense. We do not expect
to pay federal income tax, other than the alternative minimum tax, until we
fully utilize our net operating loss carryforwards.
We recorded net income of $3,510,996 for the six months ended June 30,
2003, compared to net income of $4,052,202 for the six months ended June 30,
2002. We recorded net income applicable to common stock of $3,332,927 or $0.25
per share, for the six months ended June 30, 2003, compared to net income
applicable to common stock of $3,805,326 or $0.33 per share for the six months
ended June 30, 2002. Diluted earnings per share were $0.20 for the six months
ended June 30, 2003, compared to diluted earnings per share of $0.25 for the six
months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, we had working capital of $56,056,857, compared to
working capital of $15,263,713 at December 31, 2002. Cash was $31,658,609 as of
June 30, 2003, compared to $1,801,127 at December 31, 2002. The $40,793,144
increase in working capital is primarily due to our net income of $3,510,996 for
the six months ended June 30, 2003, the net increase in long-term debt and our
recent sale of $30,400,000 of common stock, offset by our additional investment
of $4,073,961 in property and equipment. Significant changes in our working
capital components include an increase of $2,468,934 in inventory to support our
sales growth and an increase of $6,583,106 in accounts receivable. The accounts
receivable allowance consists of allowances for returns, doubtful accounts,
customer chargebacks, rebates, and pricing adjustments. Our allowance for
chargebacks, rebates, returns, pricing adjustments and other allowances consists
primarily of allowances stipulated by contracts with major drug wholesalers and
are customary in the generic drug industry. We establish these allowances as we
recognize the sales and monitor these allowances on an ongoing basis. To date,
actual amounts have not differed materially from our estimates.
In the six months ended June 30, 2003, we sold 1,600,000 shares of common
stock for gross proceeds of $30,400,000 and converted $2,150,000 of unsecured
notes payable into common stock. In July 2003, we paid off our $7,409,500
equipment loans and paid down our revolving credit agreement by $3,000,000. The
remaining proceeds from the issuance of common stock will be used to support the
Company's planned manufacturing and research and development expansion over the
next several quarters.
We expect to fund our working capital needs from operations and proceeds
from our common stock issuance.
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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 Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
As required under the Sarbanes-Oxley Act of 2002, our Chief Executive
Officer and Chief Financial Officer conducted a review of our disclosure
controls and procedures as of the end of the period covered by this report. They
concluded, as of the evaluation date, that our disclosure controls and
procedures are effective.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in certain legal proceedings from time to time incidental
to our normal business activities. While the outcome of any such proceedings
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,
2003, 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 30, 2003, we issued 1,600,000 shares of common stock at $19 per
share for gross proceeds of $30,400,000. Net proceeds were $28,473,000 after
commissions and expenses. Also, on June 30, 2003, we granted the investors
additional investment rights to purchase up to an additional 440,000 shares of
common stock at $19 per share. The additional investment rights became
exercisable on July 18, 2003 and remain exercisable for 60 trading days.
In June 2003, we issued 126,097 shares of common stock at $17.05 per
share upon the conversion of $2,150,000 of promissory notes.
During the quarter ending June 30, 2003, we issued 5,688 shares of common
stock upon the exercise of warrants.
During the quarter ending June 30, 2003, we granted stock options to
purchase a total of 85,000 shares of common stock at exercise prices ranging
from $11.50 to $17.05 per share.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 28, 2003 we held our annual meeting of stockholders. Two matters
were presented for stockholder consideration: to elect directors for the ensuing
year and to approve the 2003 Stock Incentive Plan. As of the record date for the
meeting, there were 15,809,370 votes eligible to be cast at the meeting; of
these, 13,962,611 were present in person or represented by proxy. The results
for each of these proposals were as follows:
Proposal 1: To elect a board of directors for the ensuing year:
NAME FOR ABSTAIN
-------------------------- ---------- ---------
Elliot F. Hahn, Ph.D. 13,850,620 111,990
F. Howard Schneider, Ph.D. 12,918,118 1,044,492
Harry Silverman 13,850,620 111,990
Jerry Treppel 13,850,664 111,946
Dhananjay G. Wadekar 12,918,145 1,044,465
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Proposal 2: To approve the 2003 Stock Incentive Plan:
For...........................12,862,477
Against........................1,021,438
Abstain...........................78,694
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).
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-Q 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 (filed as Exhibit 3.7 to the Company's Report on
Form 10-Q for the quarter ended June 30, 2002, and incorporated
herein by reference).
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4.1 Form of Additional Investment Right dated June 30, 2003 (filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K on June
30, 2003, and incorporated herein by reference).
10.1 Stock Option in the name of Elliot Hahn dated April 10, 2003.
10.2 Second Amendment to Credit Agreement between the Company and
Citizens Bank of Massachusetts dated April 10, 2003 (filed as
Exhibit 99.1 to the Company's Current Report on Form 8-K on April
15, 2003, and incorporated herein by reference).
10.3 Amended and Restated Revolving Credit Note dated April 10, 2003
(filed as Exhibit 99.2 to the Company's Current Report on Form
8-K on April 15, 2003, and incorporated herein by reference).
10.4 Third Amendment to Credit Agreement between the Company and
Citizens Bank of Massachusetts dated April 30, 2003 (filed as
Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2003, and incorporated herein by
reference).
10.5 Amended and Restated Master Note dated April 30, 2003 (filed as
Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2003, and incorporated herein by
reference).
10.6 Amended and Restated Revolving Credit Note dated April 30, 2003
(filed as Exhibit 10.9 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003, and incorporated
herein by reference).
10.7 Securities Purchase Agreement dated as of June 30, 2003 among
Able Laboratories, Inc. and the purchasers identified on the
signature pages thereof (filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K on June 30, 2003, and incorporated
herein by reference).
10.8 2003 Stock Incentive Plan (included as Appendix B to the
Company's definitive Proxy Statement for its annual meeting of
stockholders held on May 28, 2003, and incorporated herein by
reference).
10.9 Form of Conversion Agreement dated June 2003.
31.1 Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31.2 Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a).
32.1 Certification by Chief Executive Officer and Chief Financial
Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K
-------------------
On April 15, 2003, we filed a Form 8-K relating to the amendment of our
secured line of credit, on May 6, 2003, we filed a Form 8-K relating to the
press release reporting our financial results for the quarter ended March 31,
2003, on June 18, 2003, we filed a Form 8-K relating to the conversion of
$2,150,000 of promissory notes into common stock and on June 30, 2003, we filed
a Form 8-K relating to the sale of 1,600,000 shares of common stock.
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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: August 14, 2003 By: /s/ Dhananjay G. Wadekar
---------------------------
Dhananjay G. Wadekar
Chief Executive Officer
By: /s/ Robert Weinstein
---------------------------
Robert Weinstein
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NO. ITEM
- ------- ----
10.1 Stock Option in the name of Elliot Hahn dated April 10, 2003.
10.9 Form of Conversion Agreement dated June 2003.
31.1 Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31.2 Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a).
32.1 Certification by Chief Executive Officer and Chief Financial
Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.
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