UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(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, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from To
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Commission file number 0-11997
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CARRINGTON LABORATORIES, INC.
(Exact name of registrant as specified in its Charter)
Texas 75-1435663
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2001 Walnut Hill Lane, Irving, Texas 75038
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Address of principal executive offices and Zip Code)
972-518-1300
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(Registrant's telephone number, including area code)
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(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
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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
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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. 8,771,017
shares of Common Stock, $.01 par value were outstanding at May 10, 1996.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Background
The Company is a research-based pharmaceutical and medical device
company engaged in the development, manufacturing and marketing of
carbohydrate- based therapeutics for the treatment of major illnesses
and the dressing and management of wounds and other skin conditions.
The Company sells nonprescription products through its wound and skin
care division; veterinary medical devices and pharmaceutical products
through its veterinary medical division; and consumer products through
its consumer products subsidiary, Caraloe, Inc. The Company's
research and product portfolio is primarily based on complex
carbohydrate technology derived naturally from the Aloe vera plant.
Liquidity and Capital Resources
At March 31, 1996 and December 31, 1995, the Company held cash and
cash equivalents of $8,054,000 and $6,222,000, respectively. The
increase in cash of $1,832,000 from March 31, 1995 to March 31, 1996
was largely attributable to the exercise of options and warrants (see
Note 5 to the consolidated financial statements) that resulted in an
additional $2,460,500 cash. The cash raised through the exercise of
options and warrants has been used for capital expenditures of
$104,000, and to fund ongoing research and development as well as
continuing operations.
Lower than forecasted sales of the Company's bulk Aloe vera products
and less than projected sales in the Company's wound and skin care
products during the latter half of 1995 through the first quarter of
1996 resulted in higher than expected inventory levels as of December
31, 1995 and March 31, 1996. The Company regularly evaluates its
inventory levels and adjusts production levels at both its Costa Rica
plant, where the bulk freeze-dried aloe vera extract is manufactured,
and at its U.S. plant to meet anticipated demand. As a result of these
evaluations, inventory reduction programs were initiated in the latter
part of 1995 and through 1996. As a result of these programs,
inventory levels were reduced by $622,000 during the first quarter of
1996. These programs included reduced production at the Company's
manufacturing facility in Irving, Texas. The lowering of production
levels resulted in unabsorbed overhead costs totaling $484,000 that
would have normally been capitalized into inventory. The unabsorbed
overhead was included in wound care cost of goods sold.
In January 1995, the Company entered into an agreement with
NationsBank of Texas, N.A. (the "Bank") for a $2,000,000 line of credit
and a $6,300,000 term loan. Proceeds from the term loan were used to
fund planned capital expenditures, a letter of credit required by a
supplier, as discussed below, and planned research projects. The line
of credit was to be used for operating needs, as required. As of
December 31, 1995, the Company was not in compliance with the term
loan's fixed charge ratio covenant. As of March 31, 1996, the Company
<PAGE>
was in discussions with the Bank to obtain a long-term resolution to
the non-compliance. Rather than amend the term loan, on April 29,
1996, the Company's management elected to pay off the entire term loan
balance of $2,977,000 plus $18,000 in accrued interest with available
cash to eliminate the interest expense on the term loan. All assets
previously collateralizing the term loan have been released by the
Bank. The Company has pledged a certificate of deposit (CD) to secure
the letter of credit as described below.
The line of credit agreement expired January 30, 1996. As of May
15, 1996, the Company is working with the Bank to establish a new line
of credit. As an agreement has not yet been reduced to writing or
signed by the parties, there can be no assurance as to whether or when
the Company will be able to secure a new line of credit.
In February 1995, the Company entered into a supply agreement with
its supplier of freeze-dried products. The agreement required that the
Company establish a $1,500,000 letter of credit. The term loan with
NationsBank was used to fund this letter of credit. The funding of the
letter of credit reduces the amount that the Company can borrow under
the term loan but does not increase the Company's debt unless the
letter of credit is utilized by the supplier. As of May 15, 1996 and
January 16, 1997, the supplier had not made a presentation for payment
under the letter of credit. On April 29, 1996, the Company's
management elected to pay off the entire term loan balance of
$2,977,000 plus $18,000 in accrued interest with available cash to
eliminate the interest expense on the term loan. The Company pledged a
$1,500,000 certificate of deposit (CD) to secure the letter of credit.
The supply agreement also requires the Company to accept minimum
monthly shipments of $30,000 and to purchase a minimum of $2,500,000
worth of product over a period of five years. At the request of the
supplier, the minimum buy quantities were waived for the three month
period ending December 31, 1996. The supplier currently produces the
CarraSorb(TM) M Freeze Dried Gel and the Aphthous Ulcer Patch for the
Company. Both of these products represent new technology and are still
in the product launch phase. The Company had approximately $61,000 and
$232,000 of CarraSorb(TM) M and Aphthous Ulcer Patch inventory on hand as
of May 15, 1996 and January 16, 1997, respectively. Current sales are
lower than the minimum purchase requirement but the Company believes
that as demand for the new technology increases, demand will exceed the
minimum purchase requirement. The Company is in full compliance with
the agreement and has the available resources to meet all future
minimum purchase requirements as of January 16, 1997.
From January 1996 through March 1996, 41 employees exercised options
for 82,516 shares of common stock. The option prices ranged from
$6.25 to $29.00 per share. A total of $1,421,500 was raised by the
Company through the exercise of these options. Warrants covering a
total of 20,000 shares were exercised at prices of $12.75 to $18.75 per
share, resulting in the Company's receipt of a total of $1,039,000.
<PAGE>
The Company began a large scale clinical trial during the third
quarter of 1995 for the testing of its Aliminase(TM) (formerly CARN
1000) oral capsules for the treatment of acute flare-ups of ulcerative
colitis. The Company estimates that the cost of this clinical trial
will be approximately $2,000,000, of which 20% was required as an
up-front payment. Payments made in advance to the clinical research
organization resulted in prepaid expenses increasing. In late 1995,
the Company began an initial Phase I study using an injectable
Alovex(TM) (formerly CARN 750) in cancer patients involving six cancer
types. The estimated cost of this study is $475,000. In the second
half 1996, the Company may begin a second large scale clinical trial
for the testing of Aliminase(R) oral capsules for the treatment of
ulcerative colitis. The cost of this trial is expected to be
approximately the same as the one that began in the third quarter of
1995.
In November 1995, the Company signed a licensing agreement with a
supplier of calcium alginates and other wound care products. Under the
agreement, the Company has exclusive marketing rights for ten years to
advanced calcium alginate products for North and South America and in
the People's Republic of China. Pursuant to the agreement, the Company
made an up-front payment to the supplier of $500,000. This payment
resulted in increasing the prepaid assets of the Company. Additional
payments totaling $500,000 will be made to the supplier as new
products are delivered.
In late 1995, the Company initiated an ongoing program to reduce
expenses and the cost of manufacturing thereby increasing the gross
margin on existing sales. This program includes a reduction in force in
Costa Rica as well as a change in the manufacturing process for Aloe
vera based raw materials. Product costs have been decreased through
changes in product packaging and other costs have been reduced through
competitive bidding. Where appropriate, the Company now complies with
lower USDA or food grade requirements instead of more stringent FDA
requirements. The Company is also restructuring the sales force to
position it for growth and is refocusing the sales effort to increase
market share in the alternative care markets. This program will
continue into the foreseeable future and will continually challenge the
costs of doing business and where possible, further reduce the cost of
operations. If the implementation of this program is successful, the
Company believes that its cash resources, including available cash and
improved revenues, will provide the funds necessary to finance its
current operations. The Company does not expect that these cash
resources will be sufficient to finance the major clinical studies
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 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
<PAGE>
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.
The production capacity of the Costa Rica plant is larger than the
Company's current usage level. Management believes, however, that the
cost of the Costa Rica facility will be recovered through operations.
The facility will provide for the production of products for large
scale clinical trials as well as future product demand. As of May 15,
1996, the Company had no material capital commitments other than its
promissory notes, leases, agreements with suppliers and clinical
trials.
Impact of Inflation
The Company does not believe that inflation has had a material
impact on its results of operations.
<PAGE>
First Quarter of 1996 Compared With First Quarter of 1995
Net sales were $5,514,000 in the first quarter of 1996, compared
with $6,276,000 in the first quarter of 1995. This decrease of
$762,000, or 12.1%, resulted from a decrease of $1,481,000 in sales of
the Company's wound and skin care products from $5,824,000 to
$4,253,000, or 27.0%. New product lines introduced in late January
accounted for $325,000 in wound and skin care sales during the first
quarter of 1996. The decrease in wound and skin care sales was
partially offset by a $771,000, or 182.1%, increase in sales of
Caraloe, Inc., the Company's consumer products subsidiary. Of this
increase, $675,000 is related to the sale of bulk Manapol(R).
In the past, the Company's wound and skin care products have been
marketed primarily to hospitals and select acute care providers. This
market has become increasingly competitive as a result of pressures to
control health care costs. Hospital and distributors have reduced
their inventory levels and the number of suppliers used. Also, health
care providers have formed group purchasing consortiums to leverage
their buying power. This environment required the Company to offer
greater discounts and allowances to maintain customer accounts. In
February 1996, the Company revised its price list to more accurately
reflect current market conditions. Overall wound care prices were
lowered by a weighted average of 19.1%. With the February price
reduction, the Company expects, and has begun to realize, a decrease in
the amount of discounts required. In addition to these cost pressures,
over the last several years the average hospital stay has decreased
over 50%, resulting in more patients being treated at alternative care
facilities and at home by home health care providers. This also had a
negative impact on sales since the Company's sales force had been
primarily focused on the hospital market. To counter the market
changes, the sales force is now also aggressively pursuing the
alternative care markets.
To continue to grow its wound care business, the Company realized
that it had to expand from the $38 million hydrogel market in which it
currently competes to a much larger segment of the billion dollar plus
wound care market. To achieve this objective, an aggressive program of
new product development and licensing was undertaken in 1995 with the
goal of creating a complete line of wound care products to address all
stages of wound management. As a result of this program, the Company
launched three new wound care product lines in late January 1996. The
Company expects to launch additional products in 1996.
The decrease in the Company's wound and skin care products was
partially offset by an increase in sales of Caraloe, Inc., the
Company's consumer products subsidiary. Caraloe's sales increased from
$424,000 to $1,195,000, or 181.8%. Sales to Mannatech increased from
$285,000 to $1,103,000. Of this, $1,051,000 is related to the sale of
bulk Manapol(R). Sales of the Company's veterinary products increased
from $61,000 to $66,000. In March 1996, the Company entered into an
agreement with Farnam Companies, Inc., a leading marketer of veterinary
products, to promote and sell its veterinary line on a broader scale.
<PAGE>
Cost of sales increased from $1,639,000 to $2,930,000, or 78.8%. As
a percentage of sales, cost of sales increased from 26.1% to 53.1%.
This increase is largely attributable to the increased sales of bulk
Manapol(R), which has a substantially lower profit margin, 8%, as
compared to the Company's wound and skin care products. Additionally,
all of the new products introduced in the first quarter of 1996 are
manufactured for the Company by third-party manufacturers and have a
lower profit margin than the products manufactured by the Company. As
discussed earlier, also included in cost of goods sold is $484,000 of
unabsorbed overhead resulting from programs to reduce inventory levels.
Also, the increased discounts and lowering of prices, as discussed
earlier, resulted in the Company's wound and skin care product costs
increasing by approximately 4.9% as a percentage of sales.
To accelerate new product development and reduce overhead, the
Company was restructured in 1995. The restructuring included the lay-
off of twenty high level and under-utilized positions in
administration, marketing, and research and development for a net
reduction in salaries and benefits of approximately $120,000 per month.
Also, the Company relocated its manufacturing operations to its current
facility on Walnut Hill in Irving, Texas and immediately realized a
reduction in overhead and production costs as the new facility is more
efficient than the prior location. As the Walnut Hill facility is
owned by the Company, rent and other facility expenses related to the
former production facility of approximately $25,000 per month were
eliminated. Each of these items is expected to reduce future expenses
and improve cash flow results. As a result of the restructuring,
approximately $1.4 million of one-time charges were taken during 1995.
Of these charges, approximately $61,000 of unpaid severance
compensation was paid in the first quarter of 1996. An additional
$214,000 remained unpaid as of March 31, 1996.
Selling, general and administrative expenses decreased to $2,830,000
from $3,576,000, or 20.9%. This decrease was attributable to
approximately $700,000 in one-time charges in the first quarter of
1995. In the first quarter of 1996, decreased sales resulted in lower
distribution costs to the Company. This was partially offset as the
Company incurred approximately $150,000 in additional costs related to
the cost of launching three new product lines.
Research and development (R&D) expenses increased to $1,948,000 from
$1,473,000, or 32.3%. This increase was the result of beginning the
large scale clinical trial for the testing of Aliminase(TM) oral
capsules for the treatment of acute flare-ups of ulcerative colitis
during the third quarter of 1995. Additional R&D costs related to the
ongoing Cancer research contributed to the increase in R&D during the
first quarter of 1996 as well. These costs were partially offset by a
reduction of internal salaries.
Net interest income of $36,000 was realized in the first quarter of
1996 versus net interest costs of $69,000 in the first quarter of 1995,
due to having more excess cash to invest.
<PAGE>
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: January __, 1996 By:
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Carlton E. Turner,
President
Date: January __, 1996 By:
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Sheri L. Pantermuehl,
Chief Financial Officer
<PAGE>
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: January __, 1996 By: /s/ Carlton E. Turner
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Carlton E. Turner,
President
Date: January __, 1996 By: /s/ Sheri L. Pantermuehl
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Sheri L. Pantermuehl,
Chief Financial Officer
<PAGE>
