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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: March 31, 2004
[_] 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 file 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 [X] No [_]
As of April 16, 2004 there were 17,022,665 outstanding shares of common stock,
$.01 par value per share.
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ABLE LABORATORIES, INC.
FORM 10-Q
QUARTERLY REPORT
MARCH 31, 2004
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............................................ 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 17
Item 2. Changes in Securities.............................................. 17
Item 5. Other Information.................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................... 17
SIGNATURES .................................................................. 20
(*) The financial information at December 31, 2003 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 BALANCE SHEETS
(Unaudited)
ASSETS
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Current assets:
Cash and cash equivalents $ 15,907,513 $ 20,065,248
Accounts receivable, net of allowances of $19,500,298 and $24,007,583 12,884,566 8,626,023
Inventory 16,828,172 16,602,608
Deferred income tax asset 4,760,000 4,760,000
Prepaid expenses and other current assets 1,741,486 1,644,068
------------ ------------
Total current assets 52,121,737 51,697,947
------------ ------------
Property and equipment, net 23,084,873 18,953,744
------------ ------------
Other assets:
Debt financing costs, net of accumulated amortization 89,507 91,708
Cash deposits with bond trustee 570,841 525,907
Deferred income tax asset 9,236,000 9,709,000
Goodwill 3,922,655 3,904,094
Deposits and other assets 470,087 481,755
------------ ------------
Total other assets 14,289,090 14,712,464
------------ ------------
$ 89,495,700 $ 85,364,155
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 242,283 $ 239,038
Accounts payable 4,444,059 3,293,168
Accrued expenses 1,383,341 1,114,976
------------ ------------
Total current liabilities 6,069,683 4,647,182
Long-term debt, less current portion 3,935,000 3,935,000
------------ ------------
Total liabilities 10,004,683 8,582,182
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, 14,373
and 17,025 shares of Series Q outstanding (liquidation value
$1,437,300 and $1,702,500) 144 171
Common stock, $.01 par value, 25,000,000 shares authorized,
17,011,345 and 16,761,216 shares issued and outstanding 170,113 167,611
Additional paid-in capital 116,892,087 116,060,210
Accumulated deficit (37,442,657) (39,295,941)
Unearned stock-based compensation (128,670) (150,078)
------------ ------------
Total stockholders' equity 79,491,017 76,781,973
------------ ------------
$ 89,495,700 $ 85,364,155
============ ============
See accompanying notes to unaudited condensed financial statements.
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ABLE LABORATORIES, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED
------------------------------
MARCH 31, MARCH 31,
2004 2003
------------ ------------
Sales, net $ 21,452,436 $ 15,000,065
Cost of sales 11,919,012 8,451,653
------------ ------------
Gross profit 9,533,424 6,548,412
------------ ------------
Operating expenses:
Selling, general and administrative 2,998,416 2,414,968
Research and development 3,546,388 2,126,612
------------ ------------
Total operating expenses 6,544,804 4,541,580
------------ ------------
Operating income 2,988,620 2,006,832
------------ ------------
Other income (expense):
Interest and financing expense (57,966) (201,323)
Miscellaneous income (expense), net 77,630 (10,469)
------------ ------------
Other income (expense), net 19,664 (211,792)
------------ ------------
Income before income taxes 3,008,284 1,795,040
Provision for income taxes 1,155,000 711,000
------------ ------------
Net income 1,853,284 1,084,040
Dividends on preferred stock 31,120 102,474
------------ ------------
Net income applicable to common stockholders $ 1,822,164 $ 981,566
============ ============
Net income per share:
Basic $ 0.11 $ 0.08
============ ============
Diluted $ 0.10 $ 0.06
============ ============
Weighted average shares outstanding:
Basic 16,846,693 12,762,868
============ ============
Diluted 19,306,144 17,144,389
============ ============
See accompanying notes to unaudited condensed financial statements.
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ABLE LABORATORIES, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2004 and 2003
(Unaudited)
PREFERRED STOCK COMMON STOCK ADDITIONAL UNEARNED
---------------- -------------------- PAID-IN ACCUMULATED STOCK-BASED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
------ -------- ---------- -------- ------------ ------------ ------------ -----------
Balance at December 31, 2002 53,150 $ 532 12,554,206 $125,542 $ 82,423,790 $(47,783,489) $ (74,600) $34,691,775
Stock options and warrants
exercised -- -- 13,404 134 6,117 -- -- 6,251
Conversion of preferred stock (8,410) (84) 493,678 4,937 (4,853) -- -- --
Dividends on preferred stock -- -- -- -- (102,474) -- -- (102,474)
Amortization of unearned
stock-based compensation -- -- -- -- -- -- 9,325 9,325
Tax benefit on stock options -- -- -- -- 13,600 -- -- 13,600
Net income -- -- -- -- -- 1,084,040 -- 1,084,040
------ -------- ---------- -------- ------------ ------------ ------------ -----------
Balance at March 31, 2003 44,740 $ 448 13,061,288 $130,613 $ 82,336,180 $(46,699,449) $ (65,275) $35,702,517
====== ======== ========== ======== ============ ============ ============ ===========
Balance at December 31, 2003 17,025 $ 171 16,761,216 $167,611 $116,060,210 $(39,295,941) $ (150,078) $76,781,973
Stock options and warrants
exercised -- -- 94,451 945 349,527 -- -- 350,472
Conversion of preferred stock (2,652) (27) 155,678 1,557 (1,530) -- -- --
Dividends on preferred stock -- -- -- -- (31,120) -- -- (31,120)
Amortization of unearned
stock-based compensation -- -- -- -- -- -- 21,408 21,408
Tax benefit on stock options -- -- -- -- 515,000 -- -- 515,000
Net income -- -- -- -- -- 1,853,284 -- 1,853,284
------ -------- ---------- -------- ------------ ------------ ------------ -----------
Balance at March 31, 2004 14,373 $ 144 17,011,345 $170,113 $116,892,087 $(37,442,657) $ (128,670) $79,491,017
====== ======== ========== ======== ============ ============ ============ ===========
See accompanying notes to unaudited condensed financial statements
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ABLE LABORATORIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
------------------------------
MARCH 31, MARCH 31,
2004 2003
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Cash flows from operating activities:
Net income $ 1,853,284 $ 1,084,040
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Deferred income tax expense 899,000 524,100
State tax benefit for stock options 89,000 3,000
Amortization of unearned compensation 21,408 9,325
Depreciation and amortization 648,255 489,401
(Increase) decrease in operating assets:
Accounts receivable (4,258,543) (2,924,609)
Inventory (225,564) (1,205,538)
Prepaid expenses and other current assets (97,418) 75,926
Deposits and other assets (33,266) (114,810)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 1,484,627 (1,770,268)
------------ ------------
Net cash provided by (used for) operating activities 380,783 (3,829,433)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (4,773,939) (1,888,068)
Purchase of LiquiSource assets (18,561) --
------------ ------------
Net cash provided by (used for) investing activities (4,792,500) (1,888,068)
------------ ------------
Cash flows from financing activities:
Net proceeds from stock warrants and options 350,472 6,251
Net proceeds from debt obligations -- 5,753,255
Repayment of debt obligations -- (85,000)
Preferred stock dividends paid (96,490) (238,196)
------------ ------------
Net cash provided by (used for) financing activities 253,982 5,436,310
------------ ------------
Net change in cash and cash equivalents (4,157,735) (281,191)
Cash and cash equivalents at beginning of period 20,065,248 1,801,127
------------ ------------
Cash and cash equivalents at end of period $ 15,907,513 $ 1,519,936
============ ============
Supplemental cash flow information:
Interest paid $ 52,520 $ 152,208
Income taxes paid 499,045 380,000
See accompanying notes to unaudited condensed financial statements.
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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, 2003
filed with the Securities and Exchange Commission.
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 assets and liabilities as of the balance
sheet date and 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:
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THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
---------- ----------
Net income as reported $1,853,284 $1,084,040
Add stock-based compensation under APB No. 25 21,408 9,325
Deduct stock-based compensation under SFAS No. 123 (478,338) (123,790)
---------- ----------
Pro forma net income 1,396,354 969,575
Less dividends on preferred stock 31,120 102,474
---------- ----------
Pro forma net income applicable to common stockholders $1,365,234 $ 867,101
========== ==========
Net income per share:
Basic - as reported $ 0.11 $ 0.08
========== ==========
Basic - Pro forma $ 0.08 $ 0.07
========== ==========
Diluted - as reported $ 0.10 $ 0.06
========== ==========
Diluted - Pro forma $ 0.07 $ 0.06
========== ==========
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 applicable to common stockholders that would
result from the assumed issuance.
2. ACQUISITION OF LIQUISOURCE, INC.
On November 17, 2003, we acquired substantially all the net assets of
LiquiSource, Inc. for cash. LiquiSource was a privately held developer and
manufacturer of prescription generic liquid pharmaceuticals. The acquisition has
been accounted for as a purchase and the results of operations of LiquiSource
have been included in our financial statements since the date of acquisition. We
acquired inventory of $250,000, property and equipment of $68,565 and other
assets totaling $30,000, net of accounts payable and accrued expenses of
$88,861. We recorded goodwill of $3,922,655 for the excess of the purchase price
over the net assets acquired, which includes acquisition costs of $63,770.
Goodwill will not be amortized but will be tested at least annually for
impairment. For income tax purposes, we expect the full amount of the goodwill
to be deductible over its fifteen-year amortization period.
Unaudited pro forma operating results for the three months ended March
31, 2003, assuming the acquisition of LiquiSource had been made as of the
beginning of 2003, are as follows:
Sales, net $15,457,697
Net income applicable to common stockholders $ 1,053,791
Net income per share:
Basic $ 0.08
Diluted $ 0.07
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3. INVENTORY
Inventory consists of the following:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Raw materials $ 9,332,379 $ 9,247,553
Work-in-progress 1,838,295 2,153,363
Finished goods 5,657,498 5,201,692
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$ 16,828,172 $ 16,602,608
============ ============
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Machinery and equipment $ 11,294,958 $ 10,671,907
Furniture, fixtures and computers 1,876,338 1,678,832
Building and leasehold improvements 12,002,025 9,107,877
Land 561,000 561,000
Construction in process 2,595,215 1,535,981
------------ ------------
28,329,536 23,555,597
Less accumulated depreciation and
amortization (5,244,663) (4,601,853)
------------ ------------
$ 23,084,873 $ 18,953,744
============ ============
5. DEBT
Debt consists of the following:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
NJEDA bonds $ 1,030,000 $ 1,030,000
Revolving credit agreement 3,000,000 3,000,000
Unsecured notes payable, net of discount 147,283 144,038
------------ ------------
Total 4,177,283 4,174,038
Less current portion 242,283 239,038
------------ ------------
Long-term debt $ 3,935,000 $ 3,935,000
============ ============
REVOLVING CREDIT AGREEMENT
On March 2, 2004, we entered into a new $20 million revolving credit
agreement with our existing lender. This new revolver replaces the existing
revolving credit facility of $10 million. The new revolver bears interest, at
inception, at LIBOR plus 1.25% based upon our current leverage ratio and
requires no
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monthly principal payments. In addition, the new revolver is expandable to $30
million upon our request and the approval of the bank. The revolver matures in
March 2007.
The revolver is 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. We used this
new revolver to repay the entire outstanding balance under the old revolver of
$3.0 million.
NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY SERIES 1999A BONDS
See "Liquidity and Capital Resources" below for information regarding
the repayment of our 1999 loan from the New Jersey Economic Devekopment
Authority and the authority's pending redemption of the Series 1999A bonds
issued in connection with the loan.
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 14,373 shares of Series Q are convertible into 843,710 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
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, 2003.
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 other instances of
cautionary language in this report, refer to or provide examples of risks,
uncertainties and events that may cause our 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, 2003, 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 if we are unable to retain our key personnel or continue to attract
and retain 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 drug products
are likely to decline as competing firms introduce their own
equivalent products;
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;
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o our ability to develop liquid formulations is unproven;
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
for no additional consideration at prices lower than the current
market value;
o 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 or our failure to comply
with applicable regulations may delay or impede our efforts to
commercialize our proposed drug products (see Item 5, "Other
Information -- FDA Warning Letter" below); and
o we depend on third parties to supply the raw materials used in our
products, and 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. Generic drug development,
manufacturing and distribution is a highly competitive business and there are
several companies with substantially greater resources that compete with us.
In 2004, we expect to continue to increase our sales of generic drug
products by attempting to increase sales of our existing products and by
obtaining ANDA approvals from the FDA for new products. Also, in November 2003,
we acquired substantially all the assets of LiquiSource, Inc., a privately-held
developer and manufacturer of liquid pharmaceuticals. We intend to develop our
liquids formulation ability and position ourselves to add liquids products to
our product line, through our utilization of the assets we acquired from
LiquiSource. To accomplish these objectives, in 2003 we entered into a long-term
lease for our new facility in Cranbury, New Jersey, which we intend to use for
our solid and semi-solid dosage manufacturing operations and our executive
offices. Also in 2003, we purchased the building and leasehold improvements at
our facility located at 6 Hollywood Court, South Plainfield, New Jersey, where
we currently conduct all of our manufacturing operations and which we intend to
use in the future for our liquids manufacturing business.
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.
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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 on Form 10-K for the year
ended December 31, 2003 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 three months ended March 31,
2004. We did not make any changes in those policies during the period.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2003
Sales for the three months ended March 31, 2004 increased by $6,452,371
or 43.0%, from the corresponding period in 2003, 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 March 31, 2004 were $21,452,436, compared to
$15,000,065 for the three months ended March 31, 2003. During the three months
ended March 31, 2004, we had 22 FDA approved product families, in 51 different
strengths, available for sale, compared to 18 FDA approved product families in
37 different strengths, available for sale during the three months ended March
31, 2003.
Cost of sales was $11,919,012, or 55.6% of sales, for the three months
ended March 31, 2004, compared to $8,451,653, or 56.3% of sales, for the three
months ended March 31, 2003. The increase in our gross profit of $2,985,012,
from $6,548,412 for the three months ended March 31, 2003 to $9,533,424 for the
three months ended March 31, 2004 is primarily attributable to a favorable
product mix including sales of an increased number of first-to-market products,
offset partially by approximately $400,000 of expenses incurred while building
our new Cranbury, NJ manufacturing facility.
Selling, general and administrative expenses for the three months ended
March 31, 2004 were $2,998,416, compared to $2,414,968 for the three months
ended March 31, 2003. The increase of $583,448 is primarily due to increases in
salaries and benefits, business insurance, and advertising and trade show
expenses of approximately $306,000, $297,000 and $261,000, respectively. These
increased expenses were partially offset by cost savings of approximately
$157,000 and $130,000 in sales commissions and investor relations fees,
respectively. We added several new employees after March 2003 to support our
growth effort throughout 2003 and the three months ended March 31, 2004. 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 cost reductions are the direct result of our increased focus on
reducing our dependence on third party vendors. The expiration of our sales
agreement with Bi-Coastal
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Pharmaceutical Corporation contributed to the commissions cost savings. Our
decision to move the majority of our investor relations activities in-house
resulted in the investor relations cost savings.
Research and development expenses for the three months ended March 31,
2004 were $3,546,388, compared to $2,126,612 for the three months ended March
31, 2003. A significant portion of these expenses relate to research which is
currently being conducted to develop generic drugs. The increase of $1,419,776
is primarily due to an increase in milestone payments to raw material suppliers
working in conjunction with us to develop new products and biostudies and
outside assays conducted by independent contract research organizations of
approximately $521,000 and $615,000, respectively. The balance of approximately
$284,000 is due to increased activity in supporting a higher number of research
projects offset by various cost savings in other areas. These support activities
include quality assurance, stability testing and regulatory support. At this
time approximately 40 quality and regulatory employees are providing support
function for the primary research and development activity. We received FDA
approval for one new product during the three months ended March 31, 2004. As of
April 16, 2004, we had 18 abbreviated new drug applications pending approval
with the FDA and we expect to increase our research and development activities
for additional products over the next several months.
Our operating income for the three months ended March 31, 2004 increased
by $981,788 to $2,988,620, compared to $2,006,832 for the three months ended
March 31, 2003. This improvement is primarily due to an increase in our sales
volume, which resulted in a $2,985,012 increase in gross profit. The increase in
gross profit was partially offset by our increased investment in research and
development expenses of $1,419,776 and the $583,448 increase in selling, general
and administrative expenses.
Interest and financing expenses for the three months ended March 31, 2004
were $57,966, compared to $201,323 for the three months ended March 31, 2003.
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 March 31, 2004 was
$1,155,000, compared to income tax expense of $711,000 in the prior period. Our
effective tax rate for the three months ended March 31, 2004 and 2003 was 38.4%
and 39.6%, respectively. The decrease in our effective tax rate is due to a
lower effective rate for state taxes. 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 $1,853,284 for the three months ended March 31,
2004, compared to net income of $1,084,040 for the three months ended March 31,
2003. We recorded net income applicable to common stock of $1,822,164 or $0.11
per share, for the three months ended March 31, 2004, compared to net income
applicable to common stock of $981,566 or $0.08 per share for the three months
ended March 31, 2003. Diluted earnings per share were $0.10 for the three months
ended March 31, 2004, compared to diluted earnings per share of $0.06 for the
three months ended March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, we had working capital of $46,052,054, compared to
working capital of $47,050,765 at December 31, 2003. Cash was $15,907,513 as of
March 31, 2004, compared to $20,065,248 at December 31, 2003. The $998,711
decrease in working capital is primarily due to our net income of $1,853,284 for
the three months ended March 31, 2004 and non-cash expenses for deferred taxes,
depreciation and amortization of $1,568,663 being offset by our additional
investment of $4,773,939 in property and equipment. We expect to make additional
investments of approximately $10,000,000 in property and equipment during 2004.
Most of the investments will be made at our new
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facility. 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.
Other significant changes in our working capital components include an
increase of $4,258,543 in accounts receivable. The increase in accounts
receivable is primarily due to a slow-down in collections that occurred during
the first quarter of 2004. 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.
On March 2, 2004, we entered into a new $20 million revolving credit
agreement with our existing lender. This new revolver replaces the existing
revolving credit facility of $10 million. The new revolver bears interest, at
inception, at LIBOR plus 1.25% based upon our current leverage ratio and
requires no monthly principal payments. In addition, the new revolver is
expandable to $30 million upon our request and the approval of the bank. The
revolver matures in March 2007.
The revolver is 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. We used this
new revolver to repay the entire outstanding balance under the old revolver of
$3.0 million.
In May 2004, we repaid the entire outstanding principal and accrued
interest of a note payable to the New Jersey Economic Development Authority
evidencing our debt underlying the Authority's 8% Series 1999A Industrial
Development Revenue Bonds, with a face value of $1,030,000. We expect that the
Authority will redeem the bonds in early June 2004. The total payoff amount to
retire the bonds consistent of a $1,101,600 cash disbursement, including a
$20,600 call premium equal to 2% of the face value of the bonds, accrued
interest of $41,200 and estimated fees and expenses of $10,000. This cash
disbursement was achieved through the use of escrowed funds held by the bonds'
trustee totaling approximately $586,000 resulting in a net cost outlay of
approximately $516,000.
We expect to fund our working capital needs from operations and from
amounts available from borrowings under our revolving credit agreement.
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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During the three months ended March 31, 2004, 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.
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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. During the quarter ending March
31, 2004, we issued 1,184 shares of common stock upon the exercise of warrants
in reliance on one or more exemptions under the Securities Act including Section
3(a)(9) of the Act and Rule 506 under the Act.
ITEM 5. OTHER INFORMATION
FDA Warning Letter
Our facilities are subject to periodic FDA inspection for, among other
things, conformance to current Good Manufacturing Practices, or cGMP. Following
an inspection, the FDA typically provides its observations, if any, in the form
of a Form 483 notice. In January 2004, the FDA initiated an inspection of our
South Plainfield, New Jersey manufacturing facility. Following the inspection,
the FDA issued to us a Form 483 notice concerning our compliance with cGMP,
including certain observations by the inspectors related to our failure to
report adverse drug events in accordance with the applicable rules and
regulations. Although we responded to the Form 483 to address and correct the
deficiencies, the FDA further issued a warning letter on April 23, 2004 relating
to these observations. We are currently reviewing each of the observations in
the warning letter and will prepare a written response with an explanation of
the corrective actions that we have taken.
We expect to be able to address the FDA's observations in a timely and
effective manner, and we believe that the warning letter may not materially
affect our operations. Since receiving the warning letter, we have received 4
new ANDA approvals. We can, however, give no assurance that we will receive
approval from the FDA to market the products covered by our pending and planned
applications, or that regulation by the FDA or other government agencies will
not delay or impede our efforts to commercialize our proposed products. See
"Certain Factors That May Affect Future Results," above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
The following exhibits, required by Item 601 of Regulation S-K are
filed as part of this Quarterly Report on Form 10-Q. Exhibit numbers, where
applicable, in the left column correspond to those of Item 601 of Regulation
S-K.
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EXHIBIT
NO. ITEM
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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).
10.1 *Amended and Restated Employment Agreement dated March 1, 2004 with
Nitin Kotak (filed as Exhibit 10.3 to the Company's Report on Form 10-K
for the year ended December 31, 2003 and incorporated herein by
reference).
10.2 *Amended and Restated Employment Agreement dated March 1, 2004 with
Robert Weinstein (filed as Exhibit 10.4 to the Company's Report on Form
10-K for the year ended December 31, 2003 and incorporated herein by
reference).
10.3 *Amended and Restated Employment Agreement dated March 1, 2004 with
Shailesh Daftari (filed as Exhibit 10.5 to the Company's Report on Form
10-K for the year ended December 31, 2003 and incorporated herein by
reference).
10.4 *Amended and Restated Employment Agreement dated March 1, 2004 with
Shashikant Shah (filed as Exhibit 10.6 to the Company's Report on Form
10-K for the year ended December 31, 2003 and incorporated herein by
reference).
10.5 *Amended and Restated Employment Agreement dated March 1, 2004 with
Hemanshu N. Pandya (filed as Exhibit 10.7 to the Company's Report on
Form 10-K for the year ended December 31, 2003 and incorporated herein
by reference).
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10.6 *Amended and Restated Employment Agreement dated March 1, 2004 with
Konstantin Ostaficiuk (filed as Exhibit 10.8 to the Company's Report on
Form 10-K for the year ended December 31, 2003 and incorporated herein
by reference).
10.7 *Amended and Restated Employment Agreement dated March 1, 2004 with
Kamlesh Haribhakti (filed as Exhibit 10.9 to the Company's Report on
Form 10-K for the year ended December 31, 2003 and incorporated herein
by reference).
10.8 *Amended and Restated Employment Agreement dated March 1, 2004 with Iva
Klemick (filed as Exhibit 10.10 to the Company's Report on Form 10-K
for the year ended December 31, 2003 and incorporated herein by
reference).
10.9 *Amended and Restated Employment Agreement dated March 1, 2004 with
Howard Schneider (filed as Exhibit 10.11 to the Company's Report on
Form 10-K for the year ended December 31, 2003 and incorporated herein
by reference).
10.10 Credit Agreement with Citizens Bank of Massachusetts dated March 2,
2004 (filed as Exhibit 10.53 to the Company's Report on Form 10-K for
the year ended December 31, 2003 and incorporated herein by reference).
10.11 Revolving Credit Note in favor of Citizens Bank of Massachusetts dated
March 2, 2004 (filed as Exhibit 10.54 to the Company's Report on Form
10-K for the year ended December 31, 2003 and incorporated herein by
reference).
10.12 Security Agreement with Citizens Bank of Massachusetts dated March 2,
2004 (filed as Exhibit 10.55 to the Company's Report on Form 10-K for
the year ended December 31, 2003 and incorporated herein by reference).
10.13 Pledge Agreement dated March 2, 2004 in favor of Citizens Bank of
Massachusetts (filed as Exhibit 10.56 to the Company's Report on Form
10-K for the year ended December 31, 2003 and incorporated herein by
reference).
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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* Management contract or compensatory plan, contract or arrangement.
(b) Reports on Form 8-K
On February 26, 2004, we filed a Form 8-K relating to the press release
reporting our financial results for the year ended December 31, 2003.
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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: May 7, 2004 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
- ------- ----
10.10 Credit Agreement with Citizens Bank of Massachusetts dated March 2,
2004 (filed as Exhibit 10.53 to the Company's Report on Form 10-K for
the year ended December 31, 2003 and incorporated herein by reference).
10.11 Revolving Credit Note in favor of Citizens Bank of Massachusetts dated
March 2, 2004 (filed as Exhibit 10.54 to the Company's Report on Form
10-K for the year ended December 31, 2003 and incorporated herein by
reference).
10.12 Security Agreement with Citizens Bank of Massachusetts dated March 2,
2004 (filed as Exhibit 10.55 to the Company's Report on Form 10-K for
the year ended December 31, 2003 and incorporated herein by reference).
10.13 Pledge Agreement dated March 2, 2004 in favor of Citizens Bank of
Massachusetts (filed as Exhibit 10.56 to the Company's Report on Form
10-K for the year ended December 31, 2003 and incorporated herein by
reference).
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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