UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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. 9,309,200
shares of Common Stock, $.01 par value, were outstanding at October 30,
1998.
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This amendment to the Form 10-Q for the period ended September 30, 1998,
is filed for the purposes of (i) adding to Item 2 the section captioned
"Year 2000 Issues," and (ii) revising the paragraphs appearing under the
caption "Forward-Looking Statements," which caption is also added by
this amendment.
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
naturally occurring complex carbohydrate and other natural products for
therapeutics in 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 and
consumer products and bulk ingredients through its consumer products
subsidiary, Caraloe, Inc. (See Note 3 to the condensed consolidated
financial statements for financial information on each of the segments.)
The Company's research and product portfolio are primarily based on
complex carbohydrate technology derived naturally from the Aloe vera L.
plant.
Liquidity and Capital Resources
At September 30, 1998 and December 31, 1997, the Company held cash and
cash equivalents of $4,723,000 and $4,023,000, respectively. The net
increase in cash of $700,000 is attributable to the results of
operations and converting a certificate of deposit in the amount of
$1,250,000 to cash. The increases were offset by capital expenditures
of $1,079,000 during the period.
The Company has invested in inventory to support sales of bulk products
to Mannatech, Inc. and Aloe Commodities International, Inc ("ACI").
Receivables from these two customers totaled $451,000 and $457,000,
respectively, as of September 30, 1998. In June 1998, the Company
advanced ACI $200,000 on a short-term basis to enable ACI to invest in a
leaf supplier from which the Company expects to purchase Aloe vera L.
leaves pursuant to a letter of intent (discussed below) between the leaf
supplier and Caraloe. ACI obligation to repay this advance is
evidenced by a 60-day unsecured term note bearing interest at the rate
of 10% per annum. In September 1998, an amendment to the note was
signed extending the repayment date of the note to October 30, 1998, and
in November 1998 a second amendment to the note was signed extending the
repayment date of the note to 12/31/98. The Company continues to hold
$600,000 of ACI's Common Stock, that it purchased in 1996 and 1997.
As of October 31, 1998, the Company had no material capital commitments
other than its leases and agreements with suppliers. 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 letter of credit equal to 60% of the minimum purchase
commitment of $2,500,000, but allowed for the amount of the letter of
credit to be reduced by 60% of the payments made under the agreement.
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In April 1998, the letter of credit was reduced under this provision of
the agreement to $1,100,000. The supplier currently produces the
CarraSorb[TM] M Freeze Dried Gel and the Carrington[TM] (Aphthous Ulcer)
Patch for the Company. Both of these products represent new technology
and are still in the early phase of marketing. The Company had
approximately $487,000 of CarraSorb[TM] M and Carrington[TM] (Aphthous
Ulcer) Patch inventory on hand as of September 30, 1998.
The supply agreement also requires the Company to make minimum monthly
purchases of $30,000. In February 1998, the supply agreement was
amended to allow for unmet monthly minimum purchase amounts to be met by
prepayments, to be applied to future purchases under the agreement,
which allows the Company to keep inventory at levels appropriate for
sales demand. Current sales of both items are lower than the minimum
purchase requirement, but the Company believes that a licensing,
acceptance and demand for the new technology will increase and will
cause demand for these products to exceed the aggregate minimum purchase
requirement. As of September 30, 1998, the Company had purchased
products and made prepayments totaling approximately $883,000 from this
supplier. The Company is in full compliance with the agreement and, as
of October 31, 1998, had the available resources to meet all future
minimum purchase requirements. There is, however, no assurance that the
Company will be able to sell all of the products it is required to
purchase from this supplier. If and to the extent that the Company
makes prepayments under the agreement but does not apply those
prepayments to pay for products that it can sell, such prepayments would
eventually have to be charged against the Company's earnings. As of
September 30, 1998, prepayments of $302,000 have been made.
In November 1997, the Company entered into an agreement with Comerica
Bank-Texas for a $3,000,000 line of credit, collateralized by accounts
receivable and inventory. This credit facility is being used for
operating needs, as required, and to secure the letter of credit
described above. This resulted in reporting an additional $1,250,000 in
operating funds in April 1998, as the certificate of deposit which had
served as collateral for the letter of credit is no longer required.
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 for
advanced calcium alginate products for North and South America and the
People's Republic of China. Under the agreement, the Company made an
up-front payment of $500,000 to the supplier in November 1995, and in
July 1997 and October 1997, additional payments of $166,000 and
$167,000, respectively, were paid to this supplier upon delivery of the
CarraSmart[TM] Hydrocolloid, a new product launched in the third quarter
of 1997. These payments resulted in increasing the prepaid assets of the
Company. As of September 30, 1998, the net book value of this agreement
was $642,000.
In late 1995, the Company began an initial Phase I dosing study using
CarraVex[TM] injectable (formerly CARN 750) in cancer patients involving
six cancer types. As of December 31, 1997, approximately $295,000 had
been expensed against this study. No expenses were incurred in the
first nine months of 1998, as the Company placed the study on clinical
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hold, pending further work on drug formulation.
During 1997, Caraloe experienced a sharp increase in sales of raw
materials processed at the Company's processing facility in Costa Rica.
As a result, 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
higher than the cost of leaves produced on its own farm.
The Company has been exploring other options to obtain the leaves it
needs at lower costs. In March 1998, Caraloe signed a letter of intent
to enter into a supply agreement with a company to be formed (the "leaf
supplier") for the purpose of growing Aloe vera L. plants at a location
in Costa Rica that is less than 15 miles from the Company's processing
plant. The proposed supply agreement would provide for Caraloe to
purchase from the leaf supplier, at mutually agreeable, locally
competitive prices, all of the leaves Caraloe needs, to the extent its
needs exceed the leaves available from the Company's farm plus up to
200,000 kilograms of leaves per month from another local source. The
terms of the proposed supply agreement have not been negotiated, and
there is no assurance that the proposed agreement will be entered into.
Subsequent to the letter of intent, the leaf supplier company was formed
as Aloe and Herbs International, Inc. ("Aloe and Herbs"), a Panamanian
corporation, and the Company received 1.5 million shares in the
corporation as founder's shares for its contribution of expertise in
farming of Aloe vera L. plants. The Company's ownership interest
represents 20% of the outstanding shares of Aloe and Herbs. The Company
also made a $25,000 cash investment in Aloe and Herbs toward the
commencement of its operations. In April 1998, Aloe and Herbs formed
Rancho Aloe, (C.R.) S.A., ("Rancho Aloe"), a wholly-owned Costa Rican
subsidiary, which acquired a 5,000 acre ranch near the Company's
processing plant to be used for farming Aloe vera L. plants. The
Company then purchased $405,000 of Aloe vera L. plants on behalf of
Rancho Aloe in May, 1998 and planted them on the Rancho Aloe farm in
exchange for accounts receivable and a 24-month unsecured note from
Rancho Aloe in the amount of $187,000, bearing interest at the rate of
10% per annum and payable in 12 monthly installments of principal and
interest beginning July 1, 1999. The accounts receivable from Rancho
Aloe will be repaid through discounts on the price of leaves that the
Company purchases from Rancho Aloe in the future. Due to the immaturity
of the plants, Rancho Aloe does not yet have the ability to supply Aloe
vera L. leaves to purchasers, and it is unlikely that it would be able
to supply the Company with any significant quantities of leaves before
the first quarter of 1999. There is no assurance that the Company will
be able to continue acquiring adequate supplies of Aloe vera L. leaves
from other sources or that it will be able to purchase leaves at costs
that will allow the Company's and Caraloe's products to be price-
competitive.
The Company has reformulated its proprietary product Aliminase[TM] and
is preparing for new Phase III clinical trials of that drug for the
treatment of ulcerative colitis. Although the Company hopes to begin
those trials during the first quarter of 1999, there can be no assurance
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as to whether or when such trials will begin or, if begun, whether or
not when they will be completed or what the results will be.
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 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.
Third Quarter of 1998 Compared With Third Quarter of 1997
Net sales were $6,003,000 in the third quarter of 1998, compared with
$6,229,000 in the third quarter of 1997, a decrease of $226,000 or 3.6%.
Caraloe, Inc., the Company's consumer products subsidiary, increased
sales from $1,547,000 to $1,827,000, or 18.0%. Caraloe sales to
Mannatech, Inc., which are primarily Manapol[R] powder, increased from
$1,197,000 in the third quarter of 1997 to $1,502,000 in the third
quarter of 1998. Sales of the Company's wound and skin care products
decreased from $4,618,000 in the third quarter of 1997 to $4,176,000, or
9.6%, in the third quarter of 1998. The decrease in wound care sales
was primarily due to generally soft conditions in the wound care market
created by potential changes in government reimbursement programs, the
impact of managed care, and consolidation of distributors.
Cost of sales increased from $2,576,000 to $2,766,000, or 7.4%. As a
percentage of sales, cost of sales increased from 41.4% in the third
quarter of 1997 to 46.1% in the third quarter of 1998. This was due to
the weighted impact of increased sales of Caraloe's products, which have
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a lower gross margin than the Company's wound and skin care products,
and to downward pricing pressures in the wound care market.
Selling, general and administrative expenses increased from $2,500,000
in the third quarter of 1997 to $2,509,000 in 1998.
Research and development expenses decreased to $680,000 from $742,000,
or 8.4%. This was due to an overall reduction of general operating
expenses.
Net interest income of $53,000 in the third quarter of 1998 compared to
$74,000 of net interest expense in the third quarter of 1997.
Net income for the third quarter of 1998 was $101,000, versus a net
income of $463,000 for the third quarter of 1997. This was due
primarily to the decrease in wound care sales, which was partially
offset by a reduction in selling expenses and research expenditures.
Assuming dilution, net income per share was $0.01 in the third quarter
of 1998, compared to net income per share of $0.05 during the same
period in 1997.
First Nine Months of 1998 Compared With First Nine Months of 1997
Net sales were $17,818,000 in the first nine months of 1998, compared
with $17,433,000 in the first nine months of 1997. This increase of
$385,000, or 2.2%, resulted from an increase of $1,532,000 in sales of
Caraloe, Inc., the Company's consumer products subsidiary. Caraloe's
sales increased from $3,636,000 to $5,168,000, or 42.1%. Caraloe's
sales to Mannatech, Inc., which were primarily Manapol[R] powder,
increased from $2,642,000 in 1997 to $3,842,000 in 1998.
Partially offsetting the above sales increase was a decrease in sales of
the Company's wound and skin care and veterinary products from
$13,797,000 in 1997 to $12,650,000 in 1998, or 8.3%. Decreased wound
care sales are primarily due to generally soft conditions in the wound
care market created by potential changes in government reimbursement
programs, the impact of managed care, and consolidation of distributors.
Cost of sales increased from $6,970,000 in 1997 to $7,946,000 in 1998,
or 14.0%. As a percentage of sales, cost of sales increased from 40.0%
in the first nine months of 1997 to 44.6% in the first nine months of
1998. As was true for the third quarter, this was due to the weighted
impact of increased sales of Caraloe's products, which have a lower
gross margin than the Company's wound and skin care products, and to
downward pricing pressures in the wound care market.
Selling, general and administrative expenses decreased from $8,018,000
in 1997 to $7,791,000 in 1998, or 3.7%. This decrease was primarily
attributable to lower selling expenses which were reduced in response to
the lower wound care sales volume.
Research and development ("R&D") expenses decreased from $2,336,000 in
1997 to $1,925,000 in 1998, or 17.6%. Contributing to the decrease in
R&D expenses was a reduction of internal salaries and general operating
expenses.
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Net interest income of $167,000 was realized in the first nine months of
1998, versus net interest expense of $24,000 in the first nine months of
1997. In the first nine months of 1997, the Company realized losses on
its mutual fund account of $204,000, or 1.8% of the beginning year cash
balance, when the account was converted to cash to meet the financing
needs of the Company.
Net income for the first nine months of 1998 was $313,000 versus a net
income of $15,000 for the first nine months of 1997. This change was
primarily the result of reduced selling expenses and R & D expenditures.
Assuming dilution, net income available to common shareholders per share
was $0.03 in the first nine months of 1998, compared to a loss available
to common shareholders per share of less than $0.01 in 1997. The net
income available to common shareholders per common share in 1997
included the recognition of a $70,000, or $0.01 per common share, deemed
dividend on the Company's Series E Convertible Preferred Stock.
YEAR 2000 ISSUES
Like many other organizations, the Company faces the prospect of what
will happen to computers and other microprocessor controlled equipment
using two digit data fields when they encounter dates beyond 1999, as
they may recognize the "00" of the Year 2000 as the year 1900. This
phenomenon, known as the Year 2000 or Y2K issue, may impact the Company
in some manner, although the extent of any impact cannot be fully
determined at this time. The Company has undertaken considerable
efforts to assess its situation in areas that are determinable at this
time.
With respect to information technology systems, the Company has
historically followed a policy of purchasing or licensing commercially
available computer software packages for use in operating its business.
These packages are typically maintained by their developers, and newer
releases of the packages are periodically made available to the users of
the packages for purchase, license or as part of annual maintenance
programs. The Company typically installs these packages with little or
no custom modification to the programs contained therein. Accordingly,
the Company expects to incur little, if any, cost for custom developed
software. The Company's primary business application software used in
its Costa Rica facility was found during 1998 not to be ready for the
Year 2000, and the Company subsequently acquired a newer release of the
software package which is Y2K ready. This upgrade will be installed
during the first or second quarter of 1999. The costs incurred to date
to replace or upgrade software packages is approximately $30,000.
With respect to non-information technology systems, the Company has
initiated efforts to assess its exposure due to the Y2K impact on
the portions of its production and laboratory equipment which are
microprocessor controlled. The Company has determined that there are no
significant pieces of equipment in its U.S. facilities that are not Year
2000 ready. The identified non-conforming equipment will be upgraded or
replaced at an estimated cost of $20,000, and the target date for
completing this task is the second quarter of 1999. A Y2K review of the
manufacturing and laboratory equipment in the Company's Costa Rica
facility should be completed by the end of the first quarter of 1999.
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With respect to third parties, the Company has undertaken to assess the
potential impact to its operations of its vendors and customers not
being prepared for the Year 2000 impact on their systems. The Company
surveyed all of its vendors from whom the Company made purchases
totaling $5,000 or more in a recent 12 month period. To date, the
Company has received responses from approximately 83% of the vendors
surveyed, and the majority of vendors responding indicated that they
were addressing the issue but were not yet fully ready. The Company
made specific oral inquiries of local U.S. utility companies (electric,
gas, water and telephone), each of which indicated it has made
significant strides toward readiness but is not yet fully ready.
Because of the material effect that the failure of any one of these
utilities, particularly the electric company, to provide service to the
Company as a result of Year 2000 unreadiness could have on the Company,
and because of the uncertain responses that these utility companies have
provided, the Company cannot provide assurance that its operations will
not be materially affected by the Year 2000 issue, nor can it quantify
the impact that a failure of one of these utilities to provide service
would cause. The Company has also surveyed the Costa Rican utility
company providing service to its facility in Costa Rica and received a
similar response. The Company plans to have face-to-face meetings with
representatives of the Costa Rican utility Company in order to more
fully determine its state of readiness.
The most reasonably likely worst case scenario for the Company is a
disruption in power to its manufacturing plants, as discussed above.
As part of its contingency plan for dealing with these material
uncertainties, the Company has initiated an inventory program designed
to have several months of inventory of its core wound care and raw
material products on hand by the end of the third quarter of 1999. The
cost of this inventory program is estimated not to exceed $500,000.
The Company will also be sending a similar survey to its significant
customers in order to assess their Y2K readiness. The disruption in a
customer's business due to this issue could also have a negative impact
on the Company's sales and profitability, although the impact to the
Company cannot be determined at this time.
The costs of the Company's Y2K remediation programs are being funded
with cash flows from operations and are not expected to exceed $100,000,
excluding the inventory buildup. Some of these costs relate solely to
the upgrade of existing functionality. In total, these costs are not
expected to be substantially different from the normal recurring costs
of systems and equipment upgrades and therefore are not expected to have
a material adverse effect on the Company's overall results of operations
or cash flows.
Forward Looking Statements
All statements other than statements of historical fact contained in
this report, including 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
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future and other matters, are forward - looking statements.
Forward-looking statements in this report generally include or are
accompanied by words such as "anticipates", "believes", "estimated",
"expects", "intends", "hopes", "exploring" or words of similar import.
Such forward-looking statements include, but are not limited to,
statements regarding the Company's belief that it will be able to sell
all of the freeze dried, calcium alginate and certain other wound care
products that it is required to purchase under its existing agreements
with the suppliers of those products; the Company's plan to enter into
(or to have Caraloe enter into) an agreement with a supplier that will
sell Aloe vera L. leaves to the Company or Caraloe at prices equal to or
less than the Company's cost of growing leaves on its own farm, and to
continue purchasing Aloe vera L. leaves from other sources as necessary;
the Company's plan to conduct PhaseIII clinical trials of Aliminase[TM];
the Company's belief that its available cash and revenues from
operations will provide the funds necessary to finance its current
operations; estimates of the costs of replacing or upgrading software
and equipment and building up inventory to deal with Y2K issues and
various other matters.
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 demand for the Company's freeze dried, calcium
alginate and certain other wound care products may not be sufficient to
enable it to sell the products it is required to purchase from its
suppliers under existing supply agreements; that the Company may be
unable to negotiate a satisfactory agreement with the leaf supplier that
proposes to grow Aloe vera L. leaves and sell them to the Company, or
the leaf supplier may be unable to supply such leaves when they are
needed by the Company, and the Company may not be able to purchase
sufficient quantities of Aloe vera L. leaves to enable it to satisfy the
demand for the Company's and Caraloe's products or to meet the Company's
or Caraloe's obligations under supply agreements with customers, or the
cost of purchasing such leaves may be so high that the Company and
Caraloe will not be able to sell their products at competitive prices;
that the Company may be unable to obtain the approval of the FDA, or to
obtain the funds necessary, to proceed with the planned clinical trials
of Aliminase[TM]; that the Company may suffer adverse effects from Y2K
problems affecting the Company or its vendors or customers; and that the
Company's available cash and expected cash flow from operations may not
be sufficient to finance the Company's current operations for a variety
of reasons.
All forward-looking statements in this report are expressly qualified in
their entirety by the cautionary statements in the two immediately
preceding paragraphs.
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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.
CARRINGTON LABORATORIES, INC.
(Registrant)
Date: March 2, 1999 By: /s/ Carlton E. Turner
Carlton E. Turner,
President and C.E.O.
(principal executive
officer)
Date: March 2, 1999 By: /s/ Robert W. Schnitzius
Robert W. Schnitzius
Chief Financial Officer
(principal financial and
accounting officer)
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