10-Q 1 cli01q1b.txt 10 Q FOR QUARTER ENDED MARCH 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ To _______________ Commission file number 0-11997 CARRINGTON LABORATORIES, INC. (Exact name of registrant as specified in its charter) Texas 75-1435663 ------------------------------ -------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2001 Walnut Hill Lane, Irving, Texas 75038 ----------------------------------------------------- (Address of principal executive offices and Zip Code) 972-518-1300 ----------------------------------------------------- (Registrant's telephone number, including area code) ---------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 9,734,087 shares of Common Stock, $.01 par value, were outstanding at May 10, 2001. INDEX Page ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at December 31,2000 and March 31,2001 (unaudited) 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2000 and 2001 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 2001 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 11 Part II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Exhibits and Reports on Form 8-K 12 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Condensed Consolidated Balance Sheets (Dollar amounts in 000's) December 31, March 31, 2000 2001 ------ ------ (unaudited) Assets Cash and cash equivalents $ 3,200 $ 2,718 Accounts receivable, net 2,181 1,762 Inventories 4,723 5,419 Prepaid expenses 183 460 ------ ------ Total current assets 10,287 10,359 Property, plant and equipment, net 10,322 10,102 Other assets 93 88 ------ ------ Total assets $20,702 $20,549 ====== ====== Liabilities and Shareholders' Investment Note payable $ 763 $ 763 Accounts payable 1,764 1,270 Accrued liabilities 1,068 910 Deferred revenue, current 417 417 ------ ------ Total current liabilities 4,012 3,360 Deferred revenue, long-term 250 500 Shareholders' investment: Common stock 97 97 Capital in excess of par value 52,319 52,342 Deficit (35,976) (35,750) ------ ------ Total shareholders' investment 16,440 16,689 ------ ------ Total liabilities and shareholders' investment $20,702 $20,549 ====== ====== The accompanying notes are an integral part of these statements. Condensed Consolidated Statements of Operations (unaudited) (Dollar amounts and shares in 000's, except per share amounts) Three Months Ended March 31, 2000 2001 ----- ----- Net revenues $7,125 $4,657 Costs and expenses: Cost of sales 3,630 2,657 Selling, general and administrative 2,623 1,230 Research and development 814 574 Research and development clinical trials 623 - Other income (17) (19) Interest, net (19) (11) ----- ----- Income (loss) from operations before income taxes (529) 226 Provision for income taxes - - ----- ----- Net income (loss) $ (529) $ 226 ===== ===== Net income (loss) per share - basic and diluted $(0.06) $ 0.02 ===== ===== The accompanying notes are an integral part of these statements. Condensed Consolidated Statements of Cash Flows (unaudited) (Dollar amounts in 000's) Three Months Ended March 31, 2000 2001 ------ ------ Cash flows from operating activities Net income (loss) $ (529) $ 226 Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization 274 250 Provision for inventory obsolescence 45 45 Changes in operating assets and liabilities: Receivables, net (64) 601 Inventories 453 (741) Prepaid expenses (400) (277) Other assets 164 5 Accounts payable and accrued liabilities (290) (652) Deferred revenue - 250 ------ ------ Net cash used by operating activities (350) (475) Cash flows from investing activities: Purchases of property, plant and equipment (152) (30) ------ ------ Net cash used by investing activities (152) (30) Cash flows from financing activities: Issuances of common stock 275 23 ------ ------ Net cash provided by financing activities 275 23 ------ ------ Net decrease in cash and cash equivalents (227) (482) Cash and cash equivalents, beginning of period 2,453 3,200 ------ ------ Cash and cash equivalents, end of period $ 2,226 $ 2,718 ====== ====== Supplemental disclosure of cash flow information Cash paid during the period for interest $ 4 $ 19 Cash paid during the period for federal, state and local income taxes - - The accompanying notes are an integral part of these statements. Notes to Condensed Consolidated Financial Statements (unaudited) (1) Condensed Consolidated Financial Statements: The condensed consolidated balance sheet as of March 31, 2001, and the condensed consolidated statements of operations and cash flows for the three month periods ended March 31, 2000 and 2001, have been prepared by the Company without audit. In the opinion of management, all adjustments (which include all normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows at March 31, 2001 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report to shareholders on Form 10-K for the year ended December 31, 2000. (2) Net Income (Loss) Per Share: Basic net income (loss) available to common shareholders per share was computed by dividing net income (loss) by the weighted average number of common shares outstanding of 9,427,000 and 9,728,000 at March 31, 2000 and 2001, respectively. In calculating the diluted net income (loss) available to common shareholders per share for 2000 and 2001, no effect was given to options or warrants because the effect of including these securities would have been antidilutive. (3) Reportable Segments: The Company operates in two reportable segments: human and veterinary products sold through its Medical Services Division, and Caraloe, Inc., a consumer products subsidiary, which sells bulk raw materials, consumer beverages, and nutritional and skin care products. The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes. Corporate Income (Loss) Before Income Taxes set forth in the following table includes research and development expenses which were related to the development of pharmaceutical products not associated with the reporting segments. Assets which are used in more than one segment are reported in the segment where the predominant use occurs. The Company's production facility in Costa Rica, which provides bulk ingredients for all segments, and total cash for the Company are included in the Corporate Assets figure. Reportable Segments (in thousands) Medical Caraloe, Services Inc. Corporate Total ---------------------------------------------------------------------------- March 31, 2000 Revenues from unaffiliated customers $ 3,701 $ 3,424 $ - $ 7,125 Income (loss) before income taxes (81) 774 (1,222) (529) Identifiable assets 12,958 1,367 8,624 22,949 Capital expenditures - - 152 152 Depreciation and amortization 160 - 114 274 March 31, 2001 Revenue from unaffiliated customers $ 2,430 $ 2,227 $ - $ 4,657 Income (loss) before income taxes 134 733 (641) 226 Identifiable assets 12,348 715 7,486 20,549 Capital expenditures - - 122 122 Depreciation and amortization - - 250 250 ------------------ (4) Income Taxes: The tax effects of temporary differences have given rise to deferred tax assets. At December 31, 2000 and March 31, 2001, the Company provided a valuation allowance against the entire deferred tax asset due to the uncertainty as to the realization of the asset. At December 31, 2000, the Company had net operating loss carryforwards of approximately $41,400,000 for federal income tax purposes, which expire beginning in 2001, and research and development tax credit carryforwards of approximately $660,000, which expire beginning in 2001, all of which are available to offset federal income taxes due in future periods. The entire provision from the first quarter 2001 was offset by an decrease in the valuation allowance. (5) Contingencies: From time to time in the normal course of business, the Company is party to various matters involving claims or possible litigation. Management believes the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Background The Company is a research-based biopharmaceutical, medical device, raw materials and nutraceutical company engaged in the development, manufacturing and marketing of naturally-derived complex carbohydrates and other natural product therapeutics for the treatment of major illnesses, the dressing and management of wounds and nutritional supplements. The Company is comprised of two business segments. See Note (3) to the unaudited condensed consolidated financial statements for financial information about these business segments. The Company sells, using a network of distributors, prescription and nonprescription human and veterinary products through its Medical Services Division and consumer and bulk raw material products through its consumer products subsidiary, Caraloe, Inc. The Company's research and product portfolio are based primarily on complex carbohydrates isolated from the Aloe vera L. plant. Liquidity and Capital Resources At December 31, 2000 and March 31, 2001, the Company held cash and cash equivalents of $3,200,000 and $2,718,000, respectively. The decrease in cash of $482,000 is primarily due to increases in inventory balances and reductions in accounts payable offset by lower accounts receivable balances. The Company has invested in inventory to support sales of bulk products to a single customer. Receivables from this customer totaled $517,500 as of March 31, 2001. As of May 1, 2001, all of this balance had been collected. Pursuant to the Distributor and License Agreement with Medline Industries, the Company is to receive $12,500,000 in base royalties over a five-year period. The Company received $875,000 under this agreement in its year ended December 31, 2000 and will receive $3,375,000, $2,875,000, 2,375,000, $1,875,000 and $1,125,000 during the years December 31, 2001-2005, respectively. The Company is recognizing royalty income under this agreement on a straight-line basis. At March 31, 2001, the Company had received $917,000 more in royalties than it had recognized in income. As of March 31, 2001, the Company had no material capital commitments. In November 1997, the Company entered into an agreement with Comerica Bank- Texas for a $3,000,000 line of credit, secured by accounts receivable and inventory. As of March 31, 2001, there was $763,000 outstanding under this credit facility. This credit facility is also used to secure an $800,000 letter of credit to guarantee rental payments on a lease signed in January 2001. As a result of the current level of sales of raw materials produced at the Company's processing facility in Costa Rica, the Company's demand for Aloe vera L. leaves has exceeded and continues to exceed both the current and the normal production capacity of its farm. It has therefore been necessary for the Company to purchase Aloe vera L. leaves from other sources at costs that are sometimes significantly higher than the cost of leaves produced on its own farm. In March 1998, the Company, with four other investors, formed Aloe and Herbs International, Inc., a Panamanian corporation ("Aloe & Herbs"), with the sole intent of acquiring a 5,000-acre tract of land in Costa Rica to be used for the production of Aloe vera L. leaves to be sold to the Company at competitive, local market rates. This would allow the Company to save approximately 50% on the per-kilogram cost of leaves as compared to the cost of importing leaves from other Central and South American countries. Aloe & Herbs subsequently formed a wholly-owned subsidiary, Rancho Aloe (C.R.), S.A., a Costa Rican corporation ("Rancho Aloe"), which acquired the land in March 1998. The Company loaned $487,000 to Aloe & Herbs during 1998. The Company reserved all of its loans to Aloe & Herbs at December 31, 1998, due to uncertainty regarding Aloe & Herbs' ability to meet significant mortgage obligations in 1999 and 2000. In April 2000, Aloe & Herbs refinanced its mortgage, removing the financial uncertainty. The Company will recognize income on debt payments as collected from Aloe & Herbs. During the quarter ended March 31, 2001, Aloe & Herbs repaid $26,033 of its debt to the Company. This amount has been reflected in Other Income. The Company believes that its available cash resources and expected cash flows from operations will provide the funds necessary to finance its current operations. However, the Company does not expect that its current cash resources will be sufficient to finance the major clinical studies and costs of filing new drug applications necessary to develop its products to their full commercial potential. Additional funds, therefore, may have to be raised through equity offerings, borrowings, licensing arrangements or other means, and there is no assurance that the Company will be able to obtain such funds on satisfactory terms when they are needed. The Board of Directors recently authorized the Company to repurchase up to one million shares of its outstanding Common Stock. The Company believes it has the financial resources necessary to repurchase shares from time to time pursuant to the Board's repurchase authorization. Regulation The Company is subject to regulation by numerous governmental authorities in the United States and other countries. Certain of the Company's proposed products will require governmental approval prior to commercial use. The approval process applicable to prescription pharmaceutical products usually takes several years and typically requires substantial expenditures. The Company and any licensees may encounter significant delays or excessive costs in their respective efforts to secure necessary approvals. Future United States or foreign legislative or administrative acts could also prevent or delay regulatory approval of the Company's or any licensees' products. Failure to obtain requisite governmental approvals or failure to obtain approvals of the scope requested could delay or preclude the Company or any licensees from marketing their products, or could limit the commercial use of the products, and thereby have a material adverse effect on the Company's liquidity and financial condition. Impact of Inflation The Company does not believe that inflation has had a material impact on its results of operations. First Quarter of 2001 Compared With First Quarter of 2000 Net revenues were $4,657,000 in the first quarter of 2001, a decrease of $2,468,000, or 34.6%, compared with $7,125,000 in the first quarter of 2000. Caraloe, Inc., the Company's consumer products subsidiary had decreased revenues from $3,424,000 to $2,227,000. Caraloe sales to a single customer, which were primarily Manapol[R] powder, decreased from $3,080,000 in the first quarter of 2000 to $1,849,000 in the first quarter of 2001. Revenues of the Company's wound and skin care products decreased 34.3%, due primarily to the impact of discounted pricing in the Distributor and License Agreement with Medline Industries, Inc., ("Medline"). While total revenue from the Company's wound and skin care products decreased to $2,430,000 in 2001 from $3,701,000 in the first quarter of 2000, unit volume was 5.3% higher. Cost of sales decreased from $3,630,000 to $2,657,000, or 26.8%. As a percentage of sales, cost of sales increased from 50.9% in the first quarter of 2000 to 57.1% in the first quarter of 2001. This was due primarily to the discounted pricing of wound and skin care products as discussed above. Selling, general and administrative expenses decreased from $2,623,000 in the first quarter of 2000 to $1,230,000 in 2001. This decrease was primarily the result of Medline's assuming all marketing costs of the Company's wound and skin care products as well as reductions in expenses associated with streamlining the Company's other departments. Research and development expenses, excluding clinical trials, decreased to $574,000 from $814,000, or 29.5%. This was due to the impact of refocusing and prioritizing research projects. The first quarter of 2000 also included $623,000 of costs related to the conclusion of the Aliminase[TM] clinical trial. No such clinical trial expenses were incurred in the first quarter of 2001. Net interest income was $11,000 in the first quarter of 2001 as compared to $19,000 in the first quarter of 2000. Net income for the first quarter of 2001 was $226,000, compared with a net loss of ($529,000) during the first quarter of 2000. Assuming dilution, the net income for the first quarter of 2001 was $0.02 per share, compared to net loss of ($0.06) per share for the same quarter of 2000. The Company's Board of Directors authorized a repurchase of its Company Stock during the first quarter of 2001. See "Liquidity and Capital Resources". Forward Looking Statements All statements other than statements of historical fact contained in this report, including but not limited to statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations (and similar statements contained in the Notes to Condensed Consolidated Financial Statements) concerning the Company's financial position, liquidity, capital resources and results of operations, its prospects for the future and other matters, are forward-looking statements. Forward- looking statements in this report generally include or are accompanied by words such as "anticipate", "believe", "estimate", "expect", "intend", "will", "would", "should" or words of similar import. Such forward-looking statements include, but are not limited to, statements regarding the Company's ability to save approximately 50% on the per-kilogram cost of Aloe vera L. leaves by purchasing them from Rancho Aloe; the ability of Aloe & herbs to repay the debt that it owes to the Company; the Company's belief that the claims of the Plaintiff identified under Item 1 Part II of this report are without merit, and the Company's intention to vigorously defend itself against those claims; the adequacy of the Company's cash resources and cash flow from operations to finance its current operations; and the Company's intention, plan or ability to repurchase shares of its outstanding Common Stock. Although the Company believes that the expectations reflected in its forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements include but are not limited to the possibilities that the Company may be unable to obtain the quantity or quality of Aloe vera L. leaves it needs from Rancho Aloe at savings of approximately 50% of the per-kilogram cost charged by some other suppliers, that Aloe & Herbs may not be able to pay its debts to the Company, that the claims of parties with whom the Company is involved in litigation may not be without merit and the Company may be unable to resolve its disputes with third parties in a satisfactory manner, that the Company's cash resources and cash flow from operations may not be adequate to finance its current operations, that the Company may be unable to obtain the funds needed to carry out large scale clinical trials and other research and development projects, that the results of the Company's clinical trials may not be sufficiently positive to warrant continued development and marketing of the products tested, that new products may not receive required approvals by the appropriate government agencies or may not meet with adequate customer acceptance, that the Company may not be able to obtain financing when needed, that the Company may not be able to obtain appropriate licensing agreements for products that it wishes to market or products that it needs assistance in developing, that the Company may not be able to fund its operating costs from revenues and available cash resources, that one or more of the customers that the Company expects to purchase significant quantities of products from the Company or Caraloe may fail to do so, that competitive pressures may require the Company to lower the prices of or increase the discounts on its products that other parties who owe the Company substantial amounts of money may be unable to pay what they owe the Company, that the Company's patents may not provide the Company with adequate protection, that the Company's manufacturing facilities may be inadequate to meet demand, that the Company's distributors may be unable to market the Company's products successfully, that the Company may be unable to reach satisfactory agreements with its important suppliers, that the Company may not be able to use its tax loss carryforwards before they expire, that the Company may not have sufficient financial resources necessary to repurchase shares of its outstanding Common Stock when it is desirable to do so, and that the Company may be unable to produce or obtain, or may have to pay excessive prices for, the raw materials or products it needs. All forward-looking statements in this report are expressly qualified in their entirety by the cautionary statements in the two immediately preceding paragraphs. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company's exposure to market risk from changes in foreign currency exchange rates and the supply and prices of Aloe vera L. leaves has not changed materially from its exposure at December 31, 2000, as described in the Company's Form 10-K Annual Report for the year then ended. Part II OTHER INFORMATION Item 1 Legal Proceedings. On April 3, 2001, Arthur Singer, a former employee of the Company (the "Plaintiff"), filed a lawsuit entitled Arthur Singer vs. Carrington Laboratories, Inc. and Carlton Turner, CV-01-2084 in the United States District Court for the Eastern District of new York, Long Island Division, alleging multiple causes of action against the company and its chief executive officer (the "Defendants"). The Plaintiff, who was formerly employed by the Company as a sales representative, alleges in substance that the Company failed to pay the full amount of commissions owed to him; that the Defendants breached an alleged contract of employment with him; that the Company deprived him of the opportunity to exercise some vested stock options and prevented some of his unvested stock options from vesting; and breached alleged covenants of fair dealing. The Company believes that the Plaintiff's claims are without merit, and in addition, that the Defendants should not be subject to jurisdiction in New York, and it intends to defend the lawsuit vigorously. Item 2. Exhibits and Reports on Form 8-K. a. Exhibits: b. Reports on Form 8-K: The Registrant did not file any reports on Form 8-K during the quarter ended March 31, 2001. 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. CARRINGTON LABORATORIES, INC. (Registrant) Date: May 14, 2001 By: /s/ Carlton E. Turner ------------------------- Carlton E. Turner, President and C.E.O. (principal executive officer) Date: May 14, 2001 By: /s/ Robert W. Schnitzius ---------------------------- Robert W. Schnitzius, Chief Financial Officer (principal financial and accounting officer) INDEX TO EXHIBITS Item Description No. None