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, 2000
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. 9,584,087 shares of Common
Stock, $.01 par value, were outstanding at May 10, 2000.
<PAGE>
INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
at December 31,1999 (unaudited) and
March 31,2000 3
Condensed Consolidated Statements of
Operations for the three months ended
March 31, 1999 and 2000 (unaudited) 4
Condensed Consolidated Statements of
Cash Flows for the three months ended
March 31, 1999 and 2000 (unaudited) 5
Notes to Condensed Consolidated
Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 11
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures
Index to Exhibits
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
Condensed Consolidated Balance Sheets
(Dollar amounts in 000's)
December 31, March 31,
1999 2000
(unaudited)
------- -------
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,453 $ 2,226
Accounts receivable, net 3,690 3,754
Inventories 5,184 4,686
Prepaid expenses 573 973
------- -------
Total current assets 11,900 11,639
Property, plant and equipment, net 10,985 10,866
Other assets 608 444
------- -------
Total assets $ 23,493 $22,949
======= =======
Liabilities and Shareholders' Investment
Note payable $ 200 $ 200
Accounts payable 1,871 1,107
Accrued liabilities 1,918 2,392
------- -------
Total current liabilities 3,989 3,699
Shareholders' investment:
Common stock 94 96
Capital in excess of par value 51,910 52,183
Deficit (32,500) (33,029)
------- -------
Total shareholders' investment 19,504 19,250
------- -------
Total liabilities and
shareholders' investment $ 23,493 $22,949
======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Condensed Consolidated Statements of Operations (unaudited)
(Dollar amounts and shares in 000's, except per share amounts)
Three Months Ended
March 31,
1999 2000
------- -------
<S> <C> <C>
Net sales $ 6,898 $ 7,125
Costs and expenses:
Cost of sales 3,611 3,630
Selling, general and administrative 2,551 2,623
Research and development 598 814
Research and development
clinical trials 1,173 623
Other income - (17)
Interest, net (30) (19)
------- -------
Loss from operations
before income taxes (1,005) (529)
Provision for income taxes - -
------- -------
Net loss $ (1,005) $ (529)
======= =======
Net loss per share -
basic and diluted $ (0.11) $ (0.06)
======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Condensed Consolidated Statements of Cash Flows (unaudited)
(Dollar amounts in 000's)
Three Months Ended
March 31,
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (1,005) $ (529)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 254 271
Provision for inventory obsolescence 125 45
Changes in assets and liabilities:
Receivables, net (225) (64)
Inventories 758 453
Prepaid expenses (320) (400)
Other assets (65) 164
Accounts payable and accrued
liabilities 58 (290)
-------- --------
Net used by operating activities (420) (350)
Cash flows from investing activities:
Purchases of property, plant
and equipment (156) (152)
-------- --------
Net cash used by investing activities (156) (152)
Cash flows from financing activities:
Issuances of common stock 51 275
-------- --------
Net cash provided by financing
activities 51 275
-------- --------
Net decrease in cash
and cash equivalents (525) (227)
Cash and cash equivalents,
beginning of period 3,931 2,453
-------- --------
Cash and cash equivalents,
end of period $ 3,406 $ 2,226
======= ========
Supplemental disclosure of cash flow
information
Cash paid during the period
for interest $ - $ 4
Cash paid during the period for federal,
state and local income taxes - -
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) Condensed Consolidated Financial Statements:
The condensed consolidated balance sheet as of March 31, 2000, the condensed
consolidated statements of operations and cash flows for the three month
periods ended March 31, 1999 and 2000 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, 2000 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 or Form 10-K for the year ended December 31, 1999.
(2) Net Loss Per Share:
Basic net loss available to common shareholders per share was computed by
dividing net loss by the weighted average number of common shares
outstanding of 9,351,000 and 9,427,000 at March 31, 1999 and 2000,
respectively.
In calculating the diluted net loss available to common shareholders per
share for 1999 and 2000, no effect was given to options, warrants or
convertible securities, 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)
<PAGE>
<TABLE>
Medical Caraloe,
Services Inc. Corporate Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, 1999
Sales to unaffiliated customers $ 3,889 $ 3,009 $ - $ 6,898
Income (loss) before income taxes 78 457 (1,540) (1,005)
Identifiable assets 13,647 1,315 8,389 23,351
Capital expenditures 97 - 59 156
Depreciation and amortization 176 - 78 254
March 31, 2000
Sales to 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 157 - 114 271
</TABLE>
(4) Income Taxes:
The tax effects of temporary differences have given rise to deferred tax
assets. At December 31, 1999 and March 31, 2000, 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, 1999, the
Company had net operating loss carryforwards of approximately $41,400,000
for federal income tax purposes, which expire beginning in 2000, and
research and development tax credit carryforwards of approximately $748,000,
which expire beginning in 2000, all of which are available to offset federal
income taxes due in future periods. The entire benefit from the first
quarter 2000 loss was offset by an increase in the valuation allowance.
(5) Commitments and Contingencies:
In February 1995, the Company entered into a commitment to purchase $2.5
million of freeze-dried products from its principal supplier over a 66-month
period ending in August 2000. The commitment, which also provides for
monthly minimum purchases, is required to be supported to the extent of 60%
of the remaining commitment by a letter of credit from a bank or a pledged
certificate of deposit. Through March 31, 2000, the Company has purchased
$722,000 of products pursuant to this commitment and made prepayments of
$689,000 toward future deliveries under the commitment.
In the fourth quarter of 1999, the Company determined that it could no
longer satisfy the minimum purchase requirements of the agreement, and thus
the Company established a reserve of $1,042,000 for estimated losses under
this contract. Of this amount, $698,000 is recorded in accrued liabilities
and $344,000 offsets the aforementioned prepayments. The Company is
currently negotiating with OFD regarding purchase arrangements beyond the
term of the current agreement.
<PAGE>
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 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, 1999 and March 31, 2000, the Company held cash and cash
equivalents of $2,453,000 and $2,226,000, respectively. The decrease in
cash of $227,000 is primarily attributable to significant cash outlays for
the completion of the Aliminase[TM] clinical trial.
The Company has invested in inventory to support sales of bulk products to
Mannatech, Inc. Receivables from this customer totaled $880,000 as of March
31, 2000. As of May 1, 2000, all of this balance had been collected.
As of March 31, 2000, the Company had no material capital commitments.
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. 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.
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. The
Company is continuing its effort to develop the markets for its freeze-dried
products. Due to the unique technology of these products, this effort has
taken longer than was initially expected. See Note (5) to the condensed
consolidated financial statements.
<PAGE>
As of March 31, 2000, the Company had paid this supplier a total of
$1,411,000 for products purchased and prepayments made under the agreement.
The Company is in full compliance with the agreement and, as of March 31,
2000, had the available resources to meet all future minimum purchase
requirements. In the fourth quarter of 1999, the Company determined that it
could no longer satisfy the minimum purchase requirements of the agreement
and thus the Company established a reserve of $1,042,000 for estimated
losses under this contract. Of this amount, $698,000 is recorded in accrued
liabilities and $344,000 offsets the aforementioned prepayments. The
Company is currently negotiating with OFD regarding purchase arrangements
beyond the term of the current agreement.
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. This credit facility is used to secure the letter of credit
described above and used for operating needs, as required. As of March 31,
2000, there was $200,000 outstanding under this credit facility.
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 the People's Republic of
China. 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 March 31, 2000, the net book value of this
agreement was $506,000.
As a result of sharp increases in 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 continued 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 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, 2000, Aloe & Herbs repaid $9,400 of its debt to the Company.
This amount has been reflected in Other Income.
<PAGE>
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.
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 2000 Compared With First Quarter of 1999
Net sales were $7,125,000 in the first quarter of 2000, an increase of
$227,000, or 3.3%, compared with $6,898,000 in the first quarter of 1999.
Caraloe, Inc., the Company's consumer products subsidiary, increased sales
from $3,009,000 to $3,424,000. Caraloe sales to Mannatech, Inc., which are
primarily Manapol[R] powder, increased from $2,726,000 in the first quarter
of 1999 to $3,080,000 in the first quarter of 2000. Sales of the Company's
wound and skin care products decreased 4.8%, due to product mix and intense
downward pricing pressure, to $3,701,000 in the first quarter of 2000 as
compared to $3,889,000 in the first quarter of 1999. Domestic sales of
wound care products were $3,600,000 in 2000 compared to $3,500,000 in 1999.
Cost of sales increased from $3,611,000 to $3,630,000, or 0.5%. As a
percentage of sales, cost of sales decreased from 52.3% in the first quarter
of 1999 to 50.9% in the first quarter of 2000. This was due to operating
efficiencies achieved in the Company's Costa Rica operations.
Selling, general and administrative expenses increased from $2,551,000 in
the first quarter of 1999 to $2,623,000 in 2000.
<PAGE>
Research and development expenses decreased to $1,437,000 from $1,771,000,
or 18.9%. This was due to the impact of the costs of the clinical trial of
Aliminase[TM] in the first quarter of 1999. All costs related to the
conclusion of the Aliminise[TM] trial have been included in the quarter
ended March 31, 2000.
Net interest income of $19,000 in the first quarter of 2000 compared to
$30,000 of net interest income in the first quarter of 1999.
Net loss for the first quarter of 2000 was $529,000, compared with net loss
of $1,005,000 during the first quarter of 1999. Assuming dilution, the net
loss for the first quarter of 2000 was $0.06 per share, compared to net
income of $0.11 per share for the same quarter of 1999. Excluding
Aliminase[TM] clinical trial expenses, net income for the first quarter of
2000 was $94,000, or $0.01 per share.
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 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" or words of similar import. Such
forward-looking statements include, but are not limited to, statements
regarding the Company's plan or ability to achieve growth in demand for or
sales of products, to reduce expenses and manufacturing costs and increase
gross margin on existing sales, to initiate, continue or complete clinical
and other research programs, to obtain financing when it is needed, to fund
its operations from revenue and other available cash resources, to enter
into licensing agreements, to develop and market new products and increase
sales of existing products, to obtain government approval to market new
products, 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, to purchase or produce
sufficient supplies of Aloe vera L. leaves at reasonable costs and to
negotiate agreements with suppliers.
<PAGE>
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 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's efforts to improve its sales and reduce its costs may not be
sufficient to enable it 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 the Company's sales of products it is contractually obligated to
purchase from suppliers may not be sufficient to enable and justify its
fulfillment of those contractual purchase obligations, that other parties
who owe the Company substantial amounts of money may be unable to pay what
they owe the Company, 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, 1999, as described in
the Company's Form 10-K Annual Report for the year then ended.
Part II OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K
a. Exhibits:
27.1 Financial Data Schedule
b. Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K
during the quarter ended March 31, 2000.
<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: May 15, 2000 By: /s/ Carlton E. Turner,
--------------------------
Carlton E. Turner,
President and C.E.O.
(principal executive
officer)
Date: May 15, 2000 By: /s/ Robert W. Schnitzius
----------------------------
Robert W. Schnitzius,
Chief Financial Officer
(principal financial and
accounting officer)
<PAGE>
INDEX TO EXHIBITS
Item Description
No.
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from (1) Statements of Balance Sheets, (2) Statements of
Operations and (3) Statements of Cash Flows, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,226
<SECURITIES> 0
<RECEIVABLES> 4,133
<ALLOWANCES> 379
<INVENTORY> 4,686
<CURRENT-ASSETS> 11,639
<PP&E> 21,110
<DEPRECIATION> 10,244
<TOTAL-ASSETS> 22,949
<CURRENT-LIABILITIES> 3,699
<BONDS> 0
0
0
<COMMON> 96
<OTHER-SE> 19,154
<TOTAL-LIABILITY-AND-EQUITY> 22,949
<SALES> 7,125
<TOTAL-REVENUES> 7,161
<CGS> 3,630
<TOTAL-COSTS> 4,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> (529)
<INCOME-TAX> (529)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (529)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
