================================================================================
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, 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.
(Exact name of registrant as specified in its charter)
Not Applicable
(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.)
6 Hollywood Court
South Plainfield, NJ 07080
(Address of principal executive offices)
(908) 754-2253
(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 October 31, 2003, there were 16,418,078 outstanding shares of common
stock, $.01 par value per share.
================================================================================
ABLE LABORATORIES, INC.
FORM 10-Q
QUARTERLY REPORT
SEPTEMBER 30, 2003
TABLE OF CONTENTS
Facing Page 1
Table of Contents.............................................................2
PART I. FINANCIAL INFORMATION(*)
Item 1. Financial Statements:
Condensed Balance Sheets.............................................3
Condensed Statements of Income.......................................4
Condensed Statements of Changes in Stockholders' Equity .............5
Condensed Statements of Cash Flows...................................6
Notes to Unaudited Condensed 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...................................................18
Item 2. Changes in Securities...............................................18
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.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ABLE LABORATORIES, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
2003 2002
------------- -------------
Current assets:
Cash and cash equivalents (including interest-bearing
deposits of $20,973,228 as of September 30, 2003) $ 22,152,239 $ 1,801,127
Accounts receivable, net of allowances of $20,250,171
and $13,054,246 12,664,216 7,873,526
Inventory 17,630,220 12,903,939
Deferred income tax asset 2,915,000 2,915,000
Prepaid expenses and other current assets 654,791 123,104
------------- -------------
Total current assets 56,016,466 25,616,696
------------- -------------
Property and equipment, net 13,715,075 9,932,523
------------- -------------
Other assets:
Debt financing costs, net of accumulated amortization 93,909 168,206
Cash deposits with bond trustee 522,184 517,262
Deferred income tax asset 12,798,600 14,725,000
Deposits and other assets 196,349 168,414
------------- -------------
Total other assets 13,611,042 15,578,882
------------- -------------
$ 83,342,583 $ 51,128,101
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 235,865 $ 617,012
Accounts payable 4,367,391 6,896,359
Accrued expenses 1,169,314 2,839,612
------------- -------------
Total current liabilities 5,772,570 10,352,983
Long-term debt, less current portion 3,935,000 6,083,343
------------- -------------
Total liabilities 9,707,570 16,436,326
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
23,100 and 53,150 shares of Series Q outstanding (liquidation
value $2,310,000 and $5,315,000) 231 532
Common stock, $.01 par value, 25,000,000 shares authorized,
16,297,404 and 12,554,206 shares issued and outstanding 162,974 125,542
Additional paid-in capital 115,369,545 82,423,790
Accumulated deficit (41,726,251) (47,783,489)
Unearned stock-based compensation (171,486) (74,600)
------------- -------------
Total stockholders' equity 73,635,013 34,691,775
------------- -------------
$ 83,342,583 $ 51,128,101
============= =============
See accompanying notes to unaudited condensed financial statements.
3
ABLE LABORATORIES, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Sales, net $ 20,864,912 $ 15,024,914 $ 54,808,673 $ 36,828,483
Cost of sales 10,886,705 7,676,763 29,281,638 19,259,778
------------ ------------ ------------ ------------
Gross profit 9,978,207 7,348,151 25,527,035 17,568,705
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 2,698,980 1,755,912 7,387,648 5,103,879
Research and development 3,068,403 2,214,984 7,471,098 4,942,839
------------ ------------ ------------ ------------
Total operating expenses 5,767,383 3,970,896 14,858,746 10,046,718
------------ ------------ ------------ ------------
Operating income 4,210,824 3,377,255 10,668,289 7,521,987
------------ ------------ ------------ ------------
Other income (expense):
Interest and financing expense (68,389) (175,088) (489,471) (369,320)
Loss on early retirement of debt -- -- (241,999) --
Miscellaneous income (expense), net 97,007 (196,549) 138,519 (94,847)
------------ ------------ ------------ ------------
Other income (expense), net 28,618 (371,637) (592,951) (464,167)
------------ ------------ ------------ ------------
Income before income taxes 4,239,442 3,005,618 10,075,338 7,057,820
Provision for income taxes 1,693,200 -- 4,018,100 --
------------ ------------ ------------ ------------
Net income 2,546,242 3,005,618 6,057,238 7,057,820
------------ ------------ ------------ ------------
Dividends on preferred stock 54,400 120,600 232,469 367,476
------------ ------------ ------------ ------------
Net income applicable to common stockholders $ 2,491,842 $ 2,885,018 $ 5,824,769 $ 6,690,344
============ ============ ============ ============
Net income per share:
Basic $ 0.16 $ 0.25 $ 0.41 $ 0.58
============ ============ ============ ============
Diluted $ 0.13 $ 0.19 $ 0.34 $ 0.44
============ ============ ============ ============
Weighted average shares outstanding:
Basic 15,964,903 11,586,562 14,093,029 11,503,156
============ ============ ============ ============
Diluted 19,446,592 15,870,836 18,070,456 16,162,339
============ ============ ============ ============
See accompanying notes to unaudited condensed financial statements.
4
ABLE LABORATORIES, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 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 -- -- 102,982 1,030 18,421 -- -- 19,451
Conversion of preferred stock (8,260) (82) 184,606 1,846 (1,764) -- -- --
Dividends on preferred stock -- -- -- -- (362,906) -- -- (362,906)
Warrants issued with debt -- -- -- -- 375,314 -- -- 375,314
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
======= ====== ========== ======== ============ ============ ========== ===========
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 -- -- 1,627,500 16,275 28,979,226 -- -- 28,995,501
Stock options and warrants
exercised -- -- 225,631 2,256 624,045 -- -- 626,301
Conversion of debt -- -- 126,097 1,260 2,148,693 -- -- 2,149,953
Conversion of preferred stock (30,050) (301) 1,763,970 17,641 (17,340) -- -- --
Dividends on preferred stock -- -- -- -- (232,469) -- -- (232,469)
Stock-based compensation -- -- -- -- 145,000 -- (145,000) --
Amortization of unearned
stock-based compensation -- -- -- -- -- -- 48,114 48,114
Tax benefit on stock options -- -- -- -- 1,298,600 -- -- 1,298,600
Net income -- -- -- -- -- 6,057,238 -- 6,057,238
------- ------ ---------- -------- ------------ ------------ ---------- -----------
Balance at September 30, 2003 23,100 $ 231 16,297,404 $162,974 $115,369,545 $(41,726,251) $ (171,486) $73,635,013
======= ====== ========== ======== ============ ============ ========== ===========
See accompanying notes to unaudited condensed financial statements
5
ABLE LABORATORIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
----------------------------
September 30, September 30,
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 6,057,238 $ 7,057,820
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Deferred income tax expense 2,932,500 --
State tax benefit for stock options 292,500 --
Loss on early retirement of debt 241,999 --
Amortization of unearned compensation 48,114 --
Depreciation and amortization 1,661,563 620,805
(Increase) decrease in operating assets:
Accounts receivable (4,790,690) (517,012)
Inventory (4,726,281) (7,302,092)
Prepaid expenses and other current assets (531,687) (66,893)
Deposits and other assets (32,857) (128,755)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (4,019,399) 6,119,690
------------ ------------
Net cash provided by (used for) operating activities (2,867,000) 5,783,563
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (5,354,630) (4,211,306)
Purchase of RxBazaar note receivable -- (2,250,000)
------------ ------------
Net cash provided by (used for) investing activities (5,354,630) (6,461,306)
------------ ------------
Cash flows from financing activities:
Net proceeds from stock warrants and options 626,301 19,451
Net proceeds from private stock placement 28,995,501 --
Net proceeds from debt obligations 11,589,422 2,300,000
Repayment of debt obligations (12,226,146) (548,307)
Preferred stock dividends paid (412,336) (425,756)
------------ ------------
Net cash provided by (used for) financing activities 28,572,742 1,345,388
------------ ------------
Net change in cash and cash equivalents 20,351,112 667,645
Cash and cash equivalents at beginning of period 1,801,127 1,155,266
------------ ------------
Cash and cash equivalents at end of period $ 22,152,239 $ 1,822,911
============ ============
Supplemental cash flow information:
Interest paid $ 407,967 $ 294,955
Income taxes paid 630,000 --
Conversion of debt into common stock 2,149,953 --
See accompanying notes to unaudited condensed financial statements.
6
ABLE LABORATORIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
Able Laboratories, Inc. ("Able") develops, manufactures, and sells
generic pharmaceuticals. 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 our Annual Report on Form 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 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 our
stock option plans generally have no intrinsic value at the grant date, and
under Opinion No. 25 no compensation cost is recognized for them. We do not plan
to adopt the fair value accounting model for stock-based employee compensation
under SFAS No. 123.
We have two stock-based compensation plans and stock options issued
outside of the plans. We apply APB Opinion No. 25 and related Interpretations in
accounting for stock options issued to employees and directors. Had compensation
cost for stock options issued to employees and directors been determined based
on the fair value at the grant dates consistent with SFAS No. 123, our net
income and net income per share would have been adjusted to the pro forma
amounts indicated below:
7
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income as reported $ 2,546,242 $ 3,005,618 $ 6,057,238 $ 7,057,820
Add stock-based compensation under APB No. 25 21,408 -- 48,114 --
Deduct stock-based employee compensation under SFAS No. 123 (268,021) (58,465) (650,603) (175,396)
----------- ----------- ----------- -----------
Pro forma net income 2,299,629 2,947,153 5,454,749 6,882,424
Less dividends on preferred stock 54,400 120,600 232,469 367,476
----------- ----------- ----------- -----------
Pro forma net income applicable to common stockholders $ 2,245,229 $ 2,826,553 $ 5,222,280 $ 6,514,948
=========== =========== =========== ===========
Net income per share:
Basic - as reported $ 0.16 $ 0.25 $ 0.41 $ 0.58
=========== =========== =========== ===========
Basic - Pro forma $ 0.14 $ 0.24 $ 0.37 $ 0.57
=========== =========== =========== ===========
Diluted - as reported $ 0.13 $ 0.19 $ 0.34 $ 0.44
=========== =========== =========== ===========
Diluted - Pro forma $ 0.12 $ 0.19 $ 0.30 $ 0.43
=========== =========== =========== ===========
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.
RECENT ACCOUNTING PRONOUNCEMENT
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability. Many of those instruments
were previously classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of this statement did not have any impact on our financial
position or results of operations.
2. INVENTORY
Inventory consists of the following:
September 30, December 31,
2003 2002
------------ ------------
Raw materials $ 9,547,192 $ 8,623,114
Work-in-progress 1,747,692 1,549,239
Finished goods 6,335,336 2,731,586
------------ ------------
$ 17,630,220 $ 12,903,939
============ ============
8
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30, December 31,
2003 2002
------------ ------------
Machinery and equipment $ 10,565,846 $ 6,962,823
Furniture, fixtures and computers 1,265,257 869,227
Leasehold improvements 5,631,624 4,190,768
Construction in process 336,000 421,279
------------ ------------
17,798,727 12,444,097
Less accumulated depreciation and amortization (4,083,652) (2,511,574)
------------ ------------
$ 13,715,075 $ 9,932,523
============ ============
4. DEBT
Debt consists of the following:
September 30, December 31,
2003 2002
------------ ------------
NJEDA bonds $ 1,030,000 $ 1,790,000
Equipment loans -- 2,890,078
Revolving credit agreement 3,000,000 --
Unsecured notes payable, net of discount 140,865 2,020,277
------------ ------------
Total 4,170,865 6,700,355
Less current portion 235,865 617,012
------------ ------------
Long-term debt $ 3,935,000 $ 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 agreement from $4,000,000 to $5,900,000. In addition, later in
April we increased the amounts available under our revolving credit agreement
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.
The equipment loan and revolver are secured by substantially all of
our assets including accounts receivable, inventory, furniture, fixtures,
equipment and intellectual property. The loans are subject to certain financial
covenants, including a fixed charge coverage ratio, a leverage ratio and a
current ratio.
9
We were in compliance with these covenants at September 30, 2003. In July 2003,
we repaid the equipment loan in full. The revolver currently bears interest at
LIBOR plus 1.5% based upon our current leverage ratio, requires no monthly
principal payments and matures in June 2005.
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.
LETTER OF CREDIT
During September 2003, our bank issued a letter of credit for
$1,287,632 as a security deposit under a new lease agreement (see Note 5). The
letter of credit will expire in September 2004, at which time we have the option
to post a new letter of credit or provide a cash deposit. The amount available
under our revolving credit agreement is reduced by the full amount of the letter
of credit.
5. LEASE AGREEMENT
In September 2003, we signed a lease for a 225,000 square foot
facility that will be used for manufacturing, distribution, research and
development, and administrative offices. The lease is for an initial term of 12
years with two five-year options. Minimum future lease payments are $107,303 for
2003, $911,337 for 2004, $1,287,632 for 2005, $1,287,632 for 2006, $1,287,632
for 2007 and $9,926,232 for 2008 to 2015. The lease also requires us to pay for
real estate taxes, maintenance and utilities. We expect to consolidate a
substantial portion of our existing operations in the new facility upon
expiration of current lease obligations.
6. 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. We 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. In August 2003, investors exercised rights to purchase
27,500 additional shares of common stock for approximate gross proceeds of
$522,500. The balance of the rights expired on October 14, 2003.
7. 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 23,100 shares of Series Q are convertible into 1,355,997 shares of
common stock.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following information should be read in conjunction with the
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 our 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 us 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
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 our
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. Operating a combined manufacturing and
distribution business did not produce the desired competitive advantages in this
environment. 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 us.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are more fully described in Note 1
to our financial statements included in this Quarterly Report and in Note 1 to
our financial statements included in our Annual Report
12
on Form 10-K for the year ended December 31, 2002 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. 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 nine months ended September 30,
2003. We did not make any changes in those policies during the period.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2002
Sales for the three months ended September 30, 2003 increased by
$5,839,998, or 38.9%, 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 September 30, 2003 were $20,864,912, compared to $15,024,914 for the three
months ended September 30, 2002. During the three months ended September 30,
2003, we had 21 FDA approved product families, in 47 different strengths,
available for sale, compared to 15 FDA approved product families in 25 different
strengths, available for sale during the three months ended September 30, 2002.
Cost of sales was $10,886,705, or 52.2% of sales, for the three months
ended September 30, 2003, compared to $7,676,763, or 51.1% of sales, for the
three months ended September 30, 2002. The increase in our gross profit by
$2,630,056, from $7,348,151 for the three months ended September 30, 2002 to
$9,978,207 for the three months ended September 30, 2003 is primarily
attributable to increased sales of our products.
Selling, general and administrative expenses for the three months
ended September 30, 2003 were $2,698,980, compared to $1,755,912 for the three
months ended September 30, 2002. The increase of $943,068 is primarily due to
increases in salaries and benefits, business insurance, advertising and trade
show expenses, and professional fees of approximately $177,000, $184,000,
$300,000, and $234,000, respectively. We added several new employees to support
our sales effort during the three months ended September 30, 2003. The increased
expenses for business insurance relate to increased product sales which require
additional insurance coverage. We increased our presence at a number of industry
trade shows in addition to increasing our marketing expenses. The increased
expenses for professional fees pertain to computer system upgrades.
Research and development expenses for the three months ended September
30, 2003 were $3,068,403, compared to $2,214,984 for the three months ended
September 30, 2002. A significant portion 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, 2003 and 2002 were approximately $973,000 and $342,000,
respectively. We received FDA approval for 3 new products during the three
months ended September 30, 2003. As of October 15,
13
2003, we had 17 abbreviated new drug applications 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 September 30, 2003
increased by $833,569 to $4,210,824, compared to $3,377,255 for the three months
ended September 30, 2002. This improvement is primarily due to an increase in
our sales volume, which resulted in a $2,630,056 increase in gross profit. The
increase in gross profit was partially offset by our increased investment in
research and development expenses of $853,419 and the $943,068 increase in
selling, general and administrative expenses.
Interest and financing expenses for the three months ended September
30, 2003 were $68,389, compared to $175,088 for the three months ended September
30, 2002. Interest expense decreased as we paid down debt obligations in July
2003 with our June 2003 private placement proceeds. Miscellaneous income
primarily consists of interest income from cash deposits resulting from the sale
of common stock, partially offset by miscellaneous expenses.
Income tax expense for the three months ended September 30, 2003 was
$1,693,200 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 September
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 $2,546,242 for the three months ended
September 30, 2003, compared to net income of $3,005,618 for the three months
ended September 30, 2002. The net income for the third quarter of 2003 includes
the aforementioned income tax provision of $1,693,200. Beginning with the first
quarter of 2003, we report our net income after recording a provision for income
taxes as we utilize the deferred tax asset recognized during the fourth quarter
of 2002. We recorded net income applicable to common stock of $2,491,842 or
$0.16 per share, for the three months ended September 30, 2003, compared to net
income applicable to common stock of $2,885,018 or $0.25 per share for the three
months ended September 30, 2002. Diluted earnings per share were $0.13 for the
three months ended September 30, 2003, compared to diluted earnings per share of
$0.19 for the three months ended September 30, 2002.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2002
Sales for the nine months ended September 30, 2003 increased by
$17,980,190, or 48.8%, primarily due to higher demand and a greater number of
products available for sale, to $54,808,673, compared to $36,828,483 for the
nine months ended September 30, 2002.
Cost of sales was $29,281,638, or 53.4% of sales for the nine months
ended September 30, 2003, compared to $19,259,778, or 52.3% of sales, for the
nine months ended September 30, 2002. The decrease in our gross profit margin to
46.6% from 47.7% is primarily attributable to sub-optimal utilization of our
manufacturing capacity in the first quarter of 2003. As part of our capacity
expansion, our manufacturing facility underwent substantial reconfiguration
resulting in downtime and unabsorbed labor costs and other overhead in the first
quarter of 2003. In the second and third quarters of 2003, all manufacturing
upgrades, relocations and additional equipment installations were complete,
allowing us 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% and the third quarter of 2003 gross profit margin of
47.8%.
14
Selling, general and administrative expenses for the nine months ended
September 30, 2003 were $7,387,648, compared to $5,103,879 for the nine months
ended September 30, 2002. The increase of $2,283,769 is primarily due to
increases in salaries and benefits, business insurance, advertising and trade
show expenses, and professional fees of approximately $648,000, $245,000,
$803,000, and $418,000, respectively. We have added several new employees to
support our sales effort for the nine months ended September 30, 2003. The
increased expenses for business insurance relate to increased product sales
which require additional insurance coverage. We increased our presence at a
number of trade shows in 2003 in addition to increasing our marketing expenses.
The increased expenses for professional fees pertain to computer system
upgrades.
Research and development expenses for the nine months ended September
30, 2003 were $7,471,098, compared to $4,942,839 for the nine months ended
September 30, 2002. A significant portion of these expenses relate to research
which is currently being conducted to develop generic drugs. The increase of
$2,528,259 is primarily due to an increase in milestone payments and biostudies
expense of approximately $550,000 and $240,000, respectively. The balance of
approximately $1,738,000 is due to increased activity in supporting a higher
number of research projects. These support activities include quality assurance,
stability testing and regulatory support. At this time approximately 40
employees are providing the support function for the primary research and
development activity. We received FDA approval for 15 new products during the
nine months ended September 30, 2003. As of October 15, 2003, we had 17
abbreviated new drug applications pending approval with the FDA and will be
increasing our research and development activities for additional products over
the next several months.
Our operating income for the nine months ended September 30, 2003
increased by $3,146,302 to $10,668,289, compared to $7,521,987 for the nine
months ended September 30, 2002. This improvement is primarily due to an
increase in our sales volume, which resulted in a $7,958,330 increase in gross
profit. The increase in gross profit was partially offset by our increased
investment in research and development expenses of $2,528,259 and the $2,283,769
in selling, general and administrative expenses.
Interest and financing expenses for the nine months ended September
30, 2003 were $489,471, compared to $369,320 for the nine months ended September
30, 2002. Interest expense increased as a result of new loan agreements entered
into late in 2002 and early in 2003 to finance our investment in plant
improvements and equipment, and our increased need for working capital to
support our growth. In July 2003, we paid down debt obligations with our June
2003 private placement proceeds.
Income tax expense for the nine months ended September 30, 2003 was
$4,018,100 or $0.22 per diluted share compared to no provision for income taxes
in the prior period. Our effective tax rate for the nine months ended September
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 $6,057,238 for the nine months ended
September 30, 2003, compared to net income of $7,057,820 for the nine months
ended September 30, 2002. The net income for the nine months ended September 30,
2003 includes the aforementioned income tax provision of $4,018,100. Beginning
with the first quarter of 2003, we report our net income after recording a
provision for income taxes as we utilize the deferred tax asset recognized
during the fourth quarter of 2002. We recorded net income applicable to common
stock of $5,824,769 or $0.41 per share, for the nine months ended September 30,
2003, compared to net income applicable to common stock of $6,690,344 or $0.58
per share for the nine months ended September 30, 2002. Diluted earnings per
share were $0.34 for the nine months ended September 30, 2003, compared to
diluted earnings per share of $0.44 for the nine months ended September 30,
2002.
15
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, we had working capital of $50,243,896,
compared to working capital of $15,263,713 at December 31, 2002. Cash was
$22,152,239 as of September 30, 2003, compared to $1,801,127 at December 31,
2002. The $34,980,183 increase in working capital is primarily due to our net
income of $6,057,238 for the nine months ended September 30, 2003 and our recent
sales of $30,922,500 of common stock, offset by our additional investment of
$5,354,630 in property and equipment. Significant changes in our working capital
components include an increase of $4,726,281 in inventory to support our sales
growth and an increase of $4,790,690 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 nine months ended September 30, 2003, we sold 1,627,500 shares
of common stock for gross proceeds of $30,922,500 and converted $2,150,000 of
unsecured notes payable into common stock. During that time, we paid off
$7,409,500 in equipment loans and paid down our revolving credit agreement by
$3,900,000. The remaining proceeds from the issuance of common stock will be
used to support our planned manufacturing and research and development expansion
over the next several quarters.
During September 2003, our bank issued a letter of credit for
$1,287,632 as a security deposit under a new lease agreement. The amount
available under our revolving credit agreement is reduced by the full amount of
the letter of credit. Our new facility should allow us to expand our current
manufacturing capabilities and alleviate certain current manufacturing
constraints. In addition, the new facility should allow us to consolidate a
substantial portion of our existing operations upon expiration of current lease
obligations.
We expect to fund our working capital needs from our operations, along
with certain proceeds from our June 2003 common stock issuance.
RECENT ACCOUNTING PRONOUNCEMENT
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability. Many of those instruments
were previously classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of this statement did not have any impact on our financial
position or results of operations.
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.
16
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.
During the three months ended September 30, 2003, there were no
changes in our internal control over financial reporting that have affected, or
are reasonably likely to affect, materially our internal control over financial
reporting.
17
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
September 30, 2003, we issued the following securities in transactions exempt
from the registration requirements of the Securites Act, under one or more
exemptions including that provided by Rule 506, which was available to us
because the securities were issued to a limited number of accredited investors
in transactions not involving any general solicitation or advertising.
In August 2003, certain of the investors in our June 30, 2003 private
placement purchased 27,500 shares of common stock pursuant to the additional
investment rights that we granted in that private placement. These shares were
issued for gross proceeds of $522,500. The balance of the additional investment
rights issued in the June 2003 private placement expired on October 14, 2003.
During the quarter ending September 30, 2003, we issued 8,973 shares
of common stock upon the exercise of warrants in reliance on the exemption
provided by Rule 506 under the Securities Act.
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
NUMBER 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).
18
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).
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 Lease Agreement dated September 17, 2003 between the Company and
Matrix Cranbury Associates, LLC.
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 July 28, 2003, we filed a Form 8-K relating to the press release
reporting our financial results for the quarter ended June 30, 2003.
19
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 14, 2003 By: /s/ Dhananjay G. Wadekar
----------------------------
Dhananjay G. Wadekar
Chief Executive Officer
By: /s/ Robert Weinstein
----------------------------
Robert Weinstein
Chief Financial Officer
20
EXHIBIT INDEX
EXHIBIT
NUMBER ITEM
- ------ ----
10.1 Lease Agreement dated September 17, 2003 between the Company and
Matrix Cranbury Associates, LLC.
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.
21