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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Former Address: 6 Hollywood Court
South Plainfield, NJ 07080
Former Telephone: (908) 754-2253
DELAWARE 04-3029787
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1 Able Drive
Cranbury, NJ 08512
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 495-2800
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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 October 28, 2004 there were 17,947,585 outstanding shares of common stock,
$.01 par value per share.
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ABLE LABORATORIES, INC.
FORM 10-Q
QUARTERLY REPORT
SEPTEMBER 30, 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............................................ 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 18
Item 5. Other Information.................................................. 18
Item 6. Exhibits........................................................... 19
SIGNATURES .................................................................. 21
(*) 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.
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ABLE LABORATORIES, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
2004 2003
----------- -----------
Current assets:
Cash and cash equivalents $ 9,582,332 $20,065,248
Accounts receivable, net of allowances of
$29,814,286 and $24,007,583 13,926,818 8,626,023
Inventory 21,781,548 16,602,608
Deferred income tax asset 4,760,000 4,760,000
Prepaid expenses and other current assets 2,012,340 1,644,068
----------- -----------
Total current assets 52,063,038 51,697,947
----------- -----------
Property and equipment, net 35,316,059 18,953,744
----------- -----------
Other assets:
Debt financing costs, net of accumulated
amortization -- 91,708
Cash deposits with bond trustee -- 525,907
Deferred income tax asset 7,338,000 9,709,000
Goodwill 3,922,655 3,904,094
Deposits and other assets 694,224 481,755
----------- -----------
Total other assets 11,954,879 14,712,464
----------- -----------
$99,333,976 $85,364,155
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of
long-term debt $ -- $ 239,038
Accounts payable 5,064,874 3,293,168
Accrued expenses 2,321,406 1,114,976
----------- -----------
Total current liabilities 7,386,280 4,647,182
Long-term debt, less current portion 3,000,000 3,935,000
----------- -----------
Total liabilities 10,386,280 8,582,182
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000
shares authorized, 5,750 and 17,025 shares
of Series Q outstanding (liquidation value
$575,000 and $1,702,500) 58 171
Common stock, $.01 par value, 25,000,000
shares authorized, 17,918,234 and 16,761,216
shares issued and outstanding 179,182 167,611
Additional paid-in capital 119,673,513 116,060,210
Accumulated deficit (30,821,412) (39,295,941)
Unearned stock-based compensation (83,645) (150,078)
----------- -----------
Total stockholders' equity 88,947,696 76,781,973
----------- -----------
$99,333,976 $85,364,155
=========== ===========
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,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Sales, net $ 27,299,945 $ 20,864,912 $ 71,757,663 $ 54,808,673
Cost of sales 12,404,339 10,886,705 36,515,219 29,281,638
------------ ------------ ------------ ------------
Gross profit 14,895,606 9,978,207 35,242,444 25,527,035
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 3,555,674 2,698,980 10,183,850 7,387,648
Research and development 4,041,479 3,068,403 11,081,415 7,471,098
------------ ------------ ------------ ------------
Total operating expenses 7,597,153 5,767,383 21,265,265 14,858,746
------------ ------------ ------------ ------------
Operating income 7,298,453 4,210,824 13,977,179 10,668,289
------------ ------------ ------------ ------------
Other income (expense):
Interest and financing expense (42,141) (68,389) (150,726) (489,471)
Loss on early retirement of debt -- -- (118,440) (241,999)
Miscellaneous income (expense), net (56,175) 97,007 45,516 138,519
------------ ------------ ------------ ------------
Other income (expense), net (98,316) 28,618 (223,650) (592,951)
------------ ------------ ------------ ------------
Income before income taxes 7,200,137 4,239,442 13,753,529 10,075,338
Provision for income taxes 2,764,000 1,693,200 5,279,000 4,018,100
------------ ------------ ------------ ------------
Net income 4,436,137 2,546,242 8,474,529 6,057,238
Dividends on preferred stock 16,521 54,400 77,930 232,469
------------ ------------ ------------ ------------
Net income applicable to common stockholders $ 4,419,616 $ 2,491,842 $ 8,396,599 $ 5,824,769
============ ============ ============ ============
Net income per share:
Basic $ 0.25 $ 0.16 $ 0.49 $ 0.41
============ ============ ============ ============
Diluted $ 0.23 $ 0.13 $ 0.44 $ 0.34
============ ============ ============ ============
Weighted average shares outstanding:
Basic 17,623,007 15,964,903 17,206,420 14,093,029
============ ============ ============ ============
Diluted 19,497,309 19,446,592 19,391,772 18,070,456
============ ============ ============ ============
See accompanying notes to unaudited condensed financial statements.
-4-
ABLE LABORATORIES, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 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
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
======= ======== ========== ======== ============ ============ ========= ============
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 -- -- 495,159 4,952 1,596,739 -- -- 1,601,691
Conversion of preferred stock (11,275) (113) 661,859 6,619 (6,506) -- -- --
Dividends on preferred stock -- -- -- -- (77,930) -- -- (77,930)
Amortization of unearned
stock-based compensation -- -- -- -- -- -- 66,433 66,433
Tax benefit on stock options -- -- -- -- 2,101,000 -- -- 2,101,000
Net income -- -- -- -- -- 8,474,529 -- 8,474,529
------- -------- ---------- -------- ------------ ------------ --------- ------------
Balance at September 30, 2004 5,750 $ 58 17,918,234 $179,182 $119,673,513 $(30,821,412) $ (83,645) $ 88,947,696
======= ======== ========== ======== ============ ============ ========= ============
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,
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 8,474,529 $ 6,057,238
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Deferred income tax expense 4,108,000 2,932,500
State tax benefit for stock options 364,000 292,500
Loss on early retirement of debt 118,440 241,999
Amortization of unearned compensation 66,433 48,114
Depreciation and amortization 2,015,602 1,661,563
(Increase) decrease in operating assets:
Accounts receivable (5,300,795) (4,790,690)
Inventory (5,178,940) (4,726,281)
Prepaid expenses and other current assets (368,272) (531,687)
Deposits and other assets 313,438 (32,857)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 3,048,305 (4,019,399)
------------ ------------
Net cash provided by (used for) operating activities 7,660,740 (2,867,000)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (18,368,287) (5,354,630)
Purchase of LiquiSource assets (18,561) --
------------ ------------
Net cash provided by (used for) investing activities (18,386,848) (5,354,630)
------------ ------------
Cash flows from financing activities:
Net proceeds from stock warrants and options 1,601,691 626,301
Net proceeds from private stock placement -- 28,995,501
Net proceeds from debt obligations -- 11,589,422
Repayment of debt obligations (1,200,600) (12,226,146)
Preferred stock dividends paid (157,899) (412,336)
------------ ------------
Net cash provided by (used for) financing activities 243,192 28,572,742
------------ ------------
Net change in cash and cash equivalents (10,482,916) 20,351,112
Cash and cash equivalents at beginning of period 20,065,248 1,801,127
------------ ------------
Cash and cash equivalents at end of period $ 9,582,332 $ 22,152,239
============ ============
Supplemental cash flow information:
Interest paid $ 141,096 $ 407,967
Income taxes paid $ 712,303 $ 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, 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, 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,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income as reported $ 4,436,137 $ 2,546,242 $ 8,474,529 $ 6,057,238
Add stock-based compensation under
APB No. 25 19,200 21,408 66,433 48,114
Deduct stock-based compensation under
SFAS No. 123 (902,532) (268,021) (2,105,736) (650,603)
------------ ------------ ------------ ------------
Pro forma net income 3,552,805 2,299,629 6,435,226 5,454,749
Less dividends on preferred stock 16,521 54,400 77,930 232,469
------------ ------------ ------------ ------------
Pro forma net income applicable to
common stockholders $ 3,536,284 $ 2,245,229 $ 6,357,296 $ 5,222,280
============ ============ ============ ============
Net income per share:
Basic - as reported $ 0.25 $ 0.16 $ 0.49 $ 0.41
============ ============ ============ ============
Basic - pro forma $ 0.20 $ 0.14 $ 0.37 $ 0.37
============ ============ ============ ============
Diluted - as reported $ 0.23 $ 0.13 $ 0.44 $ 0.34
============ ============ ============ ============
Diluted - pro forma $ 0.18 $ 0.12 $ 0.33 $ 0.30
============ ============ ============ ============
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, assuming the acquisition of
LiquiSource had been made as of the beginning of 2003, are as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
2003 2003
------------ ------------
Sales, net $ 21,399,910 $ 56,364,239
Net income applicable to common stockholders $ 2,585,987 $ 6,204,170
Net income per share:
Basic $ 0.16 $ 0.44
Diluted $ 0.14 $ 0.36
-8-
3. INVENTORY
Inventory consists of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ ------------
Raw materials $ 13,079,422 $ 9,247,553
Work-in-progress 1,724,494 2,153,363
Finished goods 6,977,632 5,201,692
------------ ------------
$ 21,781,548 $ 16,602,608
============ ============
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ ------------
Machinery and equipment $ 11,968,453 $ 10,671,907
Furniture, fixtures and computers 2,597,127 1,678,832
Building and leasehold improvements 19,866,660 9,107,877
Land 561,000 561,000
Construction in process 6,930,644 1,535,981
------------ ------------
41,923,884 23,555,597
Less accumulated depreciation and amortization (6,607,825) (4,601,853)
------------ ------------
$ 35,316,059 $ 18,953,744
============ ============
5. DEBT
Debt consists of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ ------------
NJEDA bonds $ -- $ 1,030,000
Revolving credit agreement 3,000,000 3,000,000
Unsecured notes payable, net of discount -- 144,038
------------ ------------
Total 3,000,000 4,174,038
Less current portion -- 239,038
------------ ------------
Long-term debt $ 3,000,000 $ 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 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.
-9-
The revolver is secured by substantially all of our assets including
accounts receivable, inventory, furniture, fixtures, equipment and intellectual
property. The loan is subject to certain financial covenants, including a fixed
charge coverage ratio, a leverage ratio and a net worth test. In the first
quarter of 2004, we used this new revolver to repay the entire outstanding
balance under the old revolver of $3.0 million.
NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY BONDS
In May 2004, we repaid the entire outstanding principal and accrued
interest on the bonds to the New Jersey Economic Development Authority. The May
2004 payment included a principal payment of $1,030,000, the face value of the
bonds, and accrued interest of $41,200. In connection with the redemption, we
paid a call premium of $20,600, other fees and expenses of approximately $9,800
and wrote off the $88,040 balance of deferred debt financing costs resulting in
a loss on early retirement of $118,440. The Authority redeemed the bonds in June
2004.
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 5,750 shares of Series Q are convertible into 337,531 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, 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 report 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 report could materially and adversely affect our
business. All forward-looking statements included in this report 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 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 our existing generic drug
products are likely to decline over time 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;
-11-
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 Abbreviated New Drug Application (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 capability and
position ourselves to add liquid 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 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.
-12-
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. These policies require the
application of significant judgment by management and as a result, 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 September 30,
2004. We did not make any changes in those policies during the period.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2003
Net sales for the three months ended September 30, 2004 increased by
$6,435,033 or 30.8%, from the corresponding period in 2003, primarily due to a
greater number of products available for sale as well as higher demand for our
existing products. Net sales for the three months ended September 30, 2004 were
$27,299,945, compared to $20,864,912 for the three months ended September 30,
2003. As of September 30, 2004, we had 28 FDA approved product families, in 73
different strengths, available for sale, compared to 21 FDA approved product
families in 47 different strengths, available for sale as of September 30, 2003.
Cost of sales was $12,404,339, or 45.4% of sales, for the three months
ended September 30, 2004, compared to $10,886,705, or 52.2% of sales, for the
three months ended September 30, 2003. The increase in our gross profit of
$4,917,399, from $9,978,207 for the three months ended September 30, 2003 to
$14,895,606 for the three months ended September 30, 2004 is primarily
attributable to a favorable product mix including sales of an increased number
of first-to-market products, offset by approximately $715,000 of expenses
incurred while building our new Cranbury, New Jersey manufacturing facility. We
expect that the ongoing move will continue to affect our gross margins in this
manner until we complete the move and achieve the manufacturing efficiencies
that we expect the new facility to offer.
Selling, general and administrative expenses for the three months
ended September 30, 2004 were $3,555,674, compared to $2,698,980 for the three
months ended September 30, 2003. The increase of $856,694 is primarily due to
increases in salaries and benefits of approximately $641,000 and advertising and
trade show expenses of approximately $507,000. We added several new employees
after September 30, 2003 to support our growth effort throughout 2003 and 2004.
We increased our presence at a number of industry trade shows, in addition to
increasing our marketing and promotional expenses. These increased expenses were
partially offset by cost savings of approximately $199,000 and $62,000 in sales
commissions and investor relations fees, respectively, in addition to various
other additional cost savings. The cost reductions are the direct result of our
increased focus on reducing our dependence on third party
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vendors. The expiration of our sales agreement with Bi-Coastal Pharmaceutical
Corporation in January 2004 contributed to the commissions cost savings. Our
decision to move the majority of our investor relations activities in-house in
May 2003 resulted in the investor relations cost savings.
Research and development expenses for the three months ended September
30, 2004 were $4,041,479, compared to $3,068,403 for the three months ended
September 30, 2003. A significant portion of these expenses relate to research
which is currently being conducted to develop generic drugs. The increase of
$973,076 is primarily due to an increase in salaries expense of approximately
$622,000, as well as approximately $200,000 in milestone payments to raw
material suppliers and others working with us to develop new products and
biostudies and outside assays conducted by independent contract research
organizations. The balance of approximately $225,000 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 59 quality
and regulatory employees are providing support function for our primary research
and development activities. We received FDA approval for five new products
during the three months ended September 30, 2004. As of October 28, 2004, we had
five 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. We expect to file 15 to 20 new ANDAs over
the next several months.
Our operating income for the three months ended September 30, 2004
increased by $3,087,629 to $7,298,453, compared to $4,210,824 for the three
months ended September 30, 2003. This increase is primarily due to a $4,917,399
increase in gross profit resulting from an increase in our sales of new
products, partially offset by our increased investment in research and
development expenses of $973,076 and the $856,694 increase in selling, general
and administrative expenses.
Interest and financing expenses for the three months ended September
30, 2004 were $42,141, compared to $68,389 for the three months ended September
30, 2003. Interest expense decreased as we paid off $1,030,000 in New Jersey
Economic Development Authority bonds in May 2004 and unsecured notes payable of
$150,000 in June 2004.
Income tax expense for the three months ended September 30, 2004 was
$2,764,000, compared to income tax expense of $1,693,200 for the three months
ended September 30, 2003. Our effective tax rate for the three months ended
September 30, 2004 and 2003 was 38.4% and 39.9%, 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 $4,436,137 for the three months ended
September 30, 2004, compared to net income of $2,546,242 for the three months
ended September 30, 2003. We recorded net income applicable to common stock of
$4,419,616 or $0.25 per share, for the three months ended September 30, 2004,
compared to net income applicable to common stock of $2,491,842 or $0.16 per
share for the three months ended September 30, 2003. Diluted earnings per share
were $0.23 for the three months ended September 30, 2004, compared to diluted
earnings per share of $0.13 for the three months ended September 30, 2003.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2003
Sales for the nine months ended September 30, 2004 increased by
$16,948,990 or 30.9%, from the corresponding period in 2003, primarily due to a
greater number of products available for sale as well as
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higher demand for our existing products. Sales for the nine months ended
September 30, 2004 were $71,757,663, compared to $54,808,673 for the nine months
ended September 30, 2003.
Cost of sales was $36,515,219, or 50.9% of sales, for the nine months
ended September 30, 2004, compared to $29,281,638, or 53.4% of sales, for the
nine months ended September 30, 2003. The increase in our gross profit of
$9,715,409, from $25,527,035 for the nine months ended September 30, 2003 to
$35,242,444 for the nine months ended September 30, 2004 is primarily
attributable to a favorable product mix including sales of an increased number
of first-to-market products, offset partially by approximately $1,697,000 of
expenses incurred in connection with our new Cranbury, NJ manufacturing
facility.
Selling, general and administrative expenses for the nine months ended
September 30, 2004 were $10,183,850, compared to $7,387,648 for the nine months
ended September 30, 2003. The increase of $2,796,202 is primarily due to
increases in salaries and benefits, business insurance, and advertising and
trade show expenses of approximately $1,168,000, $488,000 and $2,011,000,
respectively. These increased expenses were partially offset by cost savings of
approximately $609,000 and $218,000 in sales commissions and investor relations
fees, respectively. We added several new employees after September 30, 2003 to
support our growth effort throughout 2003 and 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 and promotional 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 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 nine months ended September
30, 2004 were $11,081,415, compared to $7,471,098 for the nine months ended
September 30, 2003. A significant portion of these expenses relate to research
which is currently being conducted to develop generic drugs. The increase of
$3,610,317 is primarily due to an increase in salaries expense of approximately
$1,201,000, as well as milestone payments to raw material suppliers and others
working with us to develop new products and biostudies and outside assays
conducted by independent contract research organizations of approximately
$1,678,000. The balance of approximately $805,000 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 59 quality
and regulatory employees are providing support function for the primary research
and development activity. We received FDA approval for seven new products during
the nine months ended September 30, 2004.
Our operating income for the nine months ended September 30, 2004
increased by $3,308,890 to $13,977,179, compared to $10,668,289 for the nine
months ended September 30, 2003. This improvement is primarily due to an
increase in our sales volume, which resulted in a $9,715,409 increase in gross
profit. The increase in gross profit was partially offset by our increased
investment in research and development expenses of $3,610,317 and the $2,796,202
increase in selling, general and administrative expenses.
Interest and financing expenses for the nine months ended September
30, 2004 were $150,726, compared to $489,471 for the nine months ended September
30, 2003. Interest expense decreased as we paid down debt obligations in July
2003 with our June 2003 private placement proceeds and as we paid off $1,030,000
in New Jersey Economic Development Authority bonds and unsecured notes payable
of $150,000 in May 2004 and June 2004, respectively.
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Income tax expense for the nine months ended September 30, 2004 was
$5,279,000, compared to income tax expense of $4,018,100 for the nine months
ended September 30, 2003. Our effective tax rate for the nine months ended
September 30, 2004 and 2003 was 38.4% and 39.9%, 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 $8,474,529 for the nine months ended
September 30, 2004, compared to net income of $6,057,238 for the nine months
ended September 30, 2003. We recorded net income applicable to common stock of
$8,396,599 or $0.49 per share, for the nine months ended September 30, 2004,
compared to net income applicable to common stock of $5,824,769 or $0.41 per
share for the nine months ended September 30, 2003. Diluted earnings per share
were $0.44 for the nine months ended September 30, 2004, compared to diluted
earnings per share of $0.34 for the nine months ended September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, we had working capital of $44,676,758,
compared to working capital of $47,050,765 at December 31, 2003. Cash was
$9,582,332 as of September 30, 2004, compared to $20,065,248 at December 31,
2003. The $2,374,007 decrease in working capital is primarily due to our net
income of $8,474,529 for the nine months ended September 30, 2004 and non-cash
expenses for deferred taxes, depreciation and amortization of $6,190,035 being
offset by our additional investment of $18,368,287 in property and equipment.
The repayment of our New Jersey Economic Development Authority bonds in May 2004
decreased working capital by approximately $409,000 as we used deposits held by
the bond trustee to repay the majority of the outstanding $1,030,000 debt. The
Authority redeemed the bonds in June 2004. We expect to make additional
investments of approximately $10,000,000 in property and equipment during the
next twelve months at our new Cranbury, New Jersey facility, for which we intend
to use operating profits and cash on hand. 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 $5,300,795 in accounts receivable, an increase of $5,178,940 in
inventory and an increase of $2,978,136 in accounts payable and accrued
expenses. The increase in accounts receivable is primarily due to large sales
volume at end of quarter as we launched several new products. 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. The increase in
inventory corresponds with our increased sales activity, as most of the
$5,178,940 increase consists of raw materials. The increase in accounts payable
and accrued expenses is the direct result of our increased raw materials
purchases and the build out of our new Cranbury facility.
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.
-16-
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 net worth test. We used this
new revolver to repay the entire outstanding balance under the old revolver of
$3.0 million.
We expect to fund our working capital needs from operations and from
amounts available for borrowing 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.
During the three months ended September 30, 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. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, management
expects to make an evaluation of our internal control over financial reporting
as of December 31, 2004, as to which our independent auditors will report on in
connection with their audit of our financial statements for December 31, 2004
and the year then ended. In connection with and in preparation for this
evaluation, we have expanded our testing and documentation of certain of our
internal controls, but as of the date of this report we have not made material
changes to such internal controls.
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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 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 have reviewed each of the observations in the warning
letter and submitted a written response with an explanation of the corrective
actions that we plan to take. To date, the FDA has not responded.
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 16
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.
RxBazaar Notes Receivable
We hold senior subordinated notes of RxBazaar, Inc. in the principal
amount of $2,250,000 ("Notes") initially due on June 17, 2004. We also hold
477,841 shares of common stock, shares of Series A Preferred Stock convertible
into 345,333 shares of common stock and warrants to purchase additional common
stock. As of September 30, 2004, the Notes and equity remain outstanding and
have been carried at a net valuation of zero on our balance sheet since December
31, 2002.
In June 2004, we agreed to extend the maturity date of the Notes by one
year and to forgive certain interest payments. We also agreed that, if RxBazaar
achieved certain capital raising objectives, we would forgive the outstanding
principal amount of the Notes. In August 2004, RxBazaar notified us that it had
commenced an orderly wind-down of its operations, and on September 10, 2004,
RxBazaar filed an assignment for the benefit of creditors. As a result of this
development, we have agreed to assign the Notes and our security interest to
another secured creditor, conditioned on that creditor paying to us cash amounts
from proceeds it receives from the liquidation. We do not expect that any
disposition of the Notes or our equity interest will have a material impact on
our financial condition or results of operations.
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ITEM 6. EXHIBITS
(a) List of Exhibits
----------------
The following exhibits, required by Item 601 of Regulation S-K are
filed as part of this Quarterly Report on Form 10-Q. Exhibit numbers, where
applicable, in the left column correspond to those of Item 601 of Regulation
S-K.
EXHIBIT
NO. ITEM
- ------- ----
3.1 Restated Certificate of Incorporation (filed as Exhibit 3a to our
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 our 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 our 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
our 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 our 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 our 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 our Report on Form 10-Q for the
quarter ended June 30, 2002, and incorporated herein by reference).
10.1 *Employment Agreement dated September 7, 2004, with Joan Janulis
(filed as Exhibit 10.1 to our Current Report on Form 8-K filed on
September 13, 2004 and incorporated herein by reference).
10.2 *Employment Agreement dated September 7, 2004, with Janet Penner
(filed as Exhibit 10.2 to our Current Report on Form 8-K filed on
September 13, 2004 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).
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32.1 Certification by Chief Executive Officer and Chief Financial Officer
of Periodic Report Pursuant to 18 U.S.C. Section 1350.
- ----------------------
* Management contract or compensatory plan, contract or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABLE LABORATORIES, INC.
Dated: November 9, 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
- --- ----
10.1 *Employment Agreement dated September 7, 2004, with Joan Janulis
(filed as Exhibit 10.1 to our Current Report on Form 8-K filed on
September 13, 2004 and incorporated herein by reference).
10.2 *Employment Agreement dated September 7, 2004, with Janet Penner
(filed as Exhibit 10.2 to our Current Report on Form 8-K filed on
September 13, 2004 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.
- ----------------------
* Management contract or compensatory plan, contract or arrangement.
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