UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transaction period from __________ to __.________
Commission File No. 0-24676
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2505723
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1150 ELIJAH McCOY DRIVE, DETROIT, MICHIGAN 48202
(Address of principal executive offices) (Zip Code)
TELEPHONE: (313) 871-8400
Registrant's telephone number, including area code
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 [ ]
As of August 7, 2003, registrant had 24,382,353 shares of common stock issued
and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
CARACO PHARMACEUTICAL LABORATORIES LTD.
UNAUDITED BALANCE SHEET
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PARTICULARS June 30, 2003 Dec. 31, 2002
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AUDITED
ASSETS
Current assets
Cash and cash equivalents $ 4,244,094 $ 534,228
Accounts receivable, net 9,399,084 5,484,135
Inventories 5,240,426 5,615,962
Prepaid expenses and deposits 913,028 471,314
---------------------------------------
Total current assets 19,796,632 12,105,639
---------------------------------------
Property, plant and equipment - at cost
Land 197,305 197,305
Building and improvements 7,494,518 7,346,797
Equipment 5,962,163 5,458,314
Furniture and fixtures 294,935 232,112
---------------------------------------
Total 13,948,921 13,234,528
Less: accumulated depreciation 5,804,752 5,487,018
---------------------------------------
Net property, plant & equipment 8,144,169 7,747,510
---------------------------------------
---------------------------------------
Total assets $27,940,801 $19,853,149
=======================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts Payable - Sun 2,460,665 2,024,028
Accounts payable 1,590,639 1,958,809
Accrued expenses 2,257,616 1,391,623
Current portion of notes payable to stockholders 5,610,000 5,850,000
Current portion of bank loans payable 4,375,000 625,000
EDC debt classified as current 1,213,082 1,004,000
Preferred stock dividends payable, current - 350,380
Accrued interest 428,245 549,052
---------------------------------------
Total current liabilities 17,935,247 13,752,892
---------------------------------------
Long-term liabilities
Notes payable to principal stockholders 3,850,000 3,850,000
EDC debt 5,785,115 6,598,547
Bank loans payable 13,125,000 15,275,000
---------------------------------------
Total long-term liabilities 22,760,115 25,723,547
---------------------------------------
---------------------------------------
Total liabilities 40,695,362 39,476,439
---------------------------------------
Stockholders' deficit
Common stock, no par value, authorized 30,000,000 shares; 40,794,881 40,457,028
issued and outstanding 24,142,995 shares
Additional paid in capital 282,858 282,858
Preferred stock dividends (350,380) (350,380)
Accumulated deficit (53,481,920) (60,012,796)
---------------------------------------
Total stockholders' deficit (12,754,561) (19,623,290)
---------------------------------------
---------------------------------------
Total liabilities and stockholders' deficit $27,940,801 $19,853,149
=======================================
See accompanying notes
2
CARACO PHARMACEUTICAL LABORATORIES, LTD.
UNAUDITED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------------------------------------------------
PARTICULARS SIX MONTHS ENDED THREE MONTHS ENDED
30-JUN 30-JUN
2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------------------
Net Sales $20,611,537 $ 8,929,408 $11,889,937 $ 5,627,449
Cost of goods sold 8,653,413 4,413,468 4,427,464 2,565,921
----------------------------------------------------------------------------------
Gross profit 11,958,124 4,515,940 7,462,473 3,061,528
Selling, general & administrative expenses 3,089,820 1,839,689 2,140,036 1,084,584
R&D cost 1,526,719 1,571,502 626,788 720,630
R&D cost - Affiliate - 2,790,720 - 2,790,720
----------------------------------------------------------------------------------
Operating income / (loss) 7,341,585 (1,685,971) 4,695,649 (1,534,406)
----------------------------------------------------------------------------------
Interest
Interest expense (817,722) (745,982) (375,470) (376,915)
Interest income 7,043 2,420 5,977 1,481
----------------------------------------------------------------------------------
Net interest expense (810,680) (743,562) (369,493) (375,434)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Net income / (loss) $ 6,530,906 $(2,429,533) $ 4,326,157 $(1,909,840)
----------------------------------------------------------------------------------
Net income / (loss) per common share
----------------------------------------------------------------------------------
Basic 0.27 (0.11) 0.18 (0.08)
----------------------------------------------------------------------------------
Diluted 0.26 (0.11) 0.17 (0.08)
----------------------------------------------------------------------------------
See accompanying notes
3
CARACO PHARMACEUTICAL LABORATORIES, LTD.
UNAUDITED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------
PARTICULARS Six Months ended June 30,
2003 2002
---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income / (loss) $6,530,906 $(2,429,533)
Adjustments to reconcile net income / (loss) to
net cash provided by / (used in) operating activities
Depreciation 316,261 227,776
Common shares issued in lieu of cash for compensation 32,450 34,500
Common shares to be issued for R&D Cost - Affiliate - 2,790,720
Variable compensation expense for stock options 851,800 -
granted & extended to director
Changes in operating assets and liabilities
which provided (used) cash:
Accounts receivable (3,914,949) (2,580,958)
Inventories 375,536 (845,696)
Prepaid expenses and deposits (441,715) (98,680)
Accounts payable 68,467 142,288
Accrued expenses and Interest (106,615) 294,224
-------------------------------------
Net cash provided by / used in operating activities 3,712,143 (2,465,360)
-------------------------------------
Cash flows from investing activities:
-------------------------------------
Purchases of property, plant and equipment (712,947) (1,102,637)
-------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt 1,600,000 900,000
Proceeds from sale of shares in private placement - 1,692,000
Advance for Stock Option Exercise - 7,520
Net short term repayments - (75,000)
Proceeds from exercise of stock options 305,403 -
Payment of preferred stock dividends (350,380) -
Payments of EDC debt (604,350) (465,028)
Net Loans received from / (repaid to) Shareholders (240,000) 1,400,000
-------------------------------------
Net cash provided from financing activities 710,673 3,459,492
-------------------------------------
Net (decrease) in cash and cash equivalents 3,709,867 (108,506)
Cash and cash equivalents, beginning of period 534,228 241,110
-------------------------------------
Cash and cash equivalents, end of period $4,244,094 $ 132,604
=====================================
See accompanying notes
4
CARACO PHARMACEUTICAL LABORATORIES, LTD.
UNAUDITED STATEMENTS OF SHAREHOLDERS' DEFICIT FOR THE
SIX MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PREFERRED
PREFERRED STOCK COMMON STOCK PAID IN STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DIVIDENDS DEFICIT TOTAL
------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2003 - - $23,762,532 $40,457,028 $282,858 $(350,380) $(60,012,826) $(19,623,320)
Issuances of common stock 11,000 32,450 32,450
to directors as compensation in lieu
of cash
Issuances of common stock
upon exercise of stock options 369,463 305,403 305,403
Net Profit 6,530,906 6,530,906
------------------------------------------------------------------------------------------------
Balance at June 30, 2003 - - $24,142,995 $40,794,881 $282,858 $(350,380) $(53,481,920) $(12,754,561)
================================================================================================
See accompanying notes
5
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The balance sheet as of June 30, 2003 and the related statements of operations,
stockholders' deficit and cash flows for the three months and the six months
ended June 30, 2003 and 2002 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial statements have
been included. Such adjustments consisted only of normal recurring items.
Interim results are not necessarily indicative of results for the full year.
The financial statements as of June 30, 2003 and for the three months and six
months ended June 30, 2003 and 2002 should be read in conjunction with the
financial statements and notes thereto included in the Corporation's Annual
Report on Form 10-KSB for the year ended December 31, 2002.
The accounting policies followed by the Corporation with respect to the
unaudited interim financial statements are consistent with those stated in the
2002 Caraco Pharmaceutical Laboratories, Ltd., Annual Report on Form 10-KSB.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
Realization of a major portion of the assets is dependent upon the Corporation's
ability to meet its future financing requirements and the success of future
operations.
2. ORGANIZATION AND NATURE OF BUSINESS
Caraco Pharmaceutical Laboratories, Ltd. ("Caraco" or "the Corporation" which is
also referred to as we, us or our), is engaged in the business of developing,
manufacturing and marketing generic drugs for the ethical (prescription) and
over-the-counter (non-prescription or "OTC") markets.
A generic drug is a pharmaceutical product, which is the chemical and
therapeutic equivalent of a brand-name drug as to which the patent and/or market
exclusivity has expired. Generics are well accepted for substitution of brand
products as they sell at a discount to the branded product's price and for their
equivalence in quality and bioavailability.
Our present product portfolio includes 17 products in 29 strengths in 64 package
sizes. We are currently marketing all 17 products. The products are intended to
treat a variety of disorders including the following: hypertension, arthritis,
seizures, epilepsy, diabetes and pain management.
To date, we have submitted 14 ANDAs to the Food and Drug Administration ("FDA").
Of these, we have received approvals for 11 ANDAs, one of which was received
during the first quarter; we have 3 ANDAs pending approval. We also have 5 DESI
products.
A significant source of our funding has been from private placement offerings
and loans. Sun Pharmaceutical Industries, Limited, a specialty pharmaceutical
corporation organized under the laws of India ("Sun Pharma"), which owns
approximately 49% of our outstanding shares has contributed equity capital and
has advanced us loans and has assisted us in obtaining line of credit loans by
acting as guarantor. Also, pursuant to a products agreement with us, Sun Pharma
has transferred certain products to us. (See "Current Status of the Corporation"
and "Sun Pharmaceutical Industries, Limited." below.) Our manufacturing facility
and executive offices were constructed pursuant to a $9.1 million loan from the
Economic Development Corporation of the City of Detroit (the "EDC"). (See
"Current Status of the Corporation" and "Mortgage Note" below.)
6
3. CURRENT STATUS OF THE CORPORATION
We have been achieving sales necessary to support our operations since the
second quarter of 2002. Net sales for the three months and six months ended June
30, 2003 were $11.9 million and $20.6 million, respectively, as compared to $5.6
million and $8.9 million, respectively, for the same periods of 2002. We have
earned a gross profit of $7.5 million and $12.0 million, respectively, during
the three months and six months ended June 30, 2003 as compared to $3.1 million
and $4.5 during the same periods in 2002. We earned an operating profit of $4.7
million and $7.3 million, respectively, during the three months and six months
ended June 30, 2003 as compared to incurring operating losses of $1.5 million
and $1.7 million, respectively, during the same periods in 2002. After interest
costs, we have earned net income of $4.3 million and $6.5 million, respectively,
during the three months and six months ended June 30, 2003 as compared to a net
losses of $1.9 million and $2.4 million, respectively, during the same periods
of 2002. At June 30, 2003, we had a stockholders' deficit of $12.75 million as
compared to a deficit of $21.85 million at June 30, 2002. We have continued to
be dependent on the support of Sun Pharma; however, Sun Pharma is not legally
obligated to fund our operations. Sun Pharma is also subject to the prevailing
regulatory process in India and Sun Pharma may be constrained from fully
pursuing its business interests outside of India. We believe, however, that our
financial reliance on Sun Pharma has decreased because of the increased revenues
and higher cash flows from internal operations since the second quarter of 2002.
See "Sun Pharmaceutical Industries, Ltd." and "Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations." We received one
ANDA approval during the first quarter of 2003. See "Caraco's Products and
Product Strategy" below. We have 3 products pending approval with the FDA.
4. COMPUTATION OF EARNINGS / (LOSS) PER SHARE
Earnings / (Loss) per share is computed using the weighted average number of
common shares outstanding during each period and considers a dual presentation
and reconciliation of "basic" and "diluted" per share amounts. Diluted reflects
the potential dilution of all common stock equivalents.
The basic and diluted weighted average numbers of common shares outstanding for
the six months ended June 30, 2003 were 23,830,923 and 24,909,282, respectively.
The basic and diluted weighted average numbers of common shares outstanding for
the six months ending June 30, 2002 were 21,470,033 and 22,773,764 respectively.
5. MORTGAGE NOTE WITH EDC
Debt at June 30, 2003 includes $7.0 million payable to the Economic Development
Corporation of the City of Detroit ("EDC") related to funds advanced to the
Corporation pursuant to a Development and Loan Agreement (the "Agreement") dated
August 10, 1990 as amended. The note was collateralized by a first mortgage,
effectively, on all of the Corporation's property and equipment purchased
pursuant to the Agreement. The loan was restructured on April 23, 2003, with
the revised terms effective as of January 1, 2003. The loan has been extended
for six years, with interest rates starting at 2.75% and increasing to 5.16%.
Under the extension, the EDC retains a first mortgage on our property, and a
first lien on our furniture, fixtures equipment and intellectual property. The
EDC has removed its first lien on our accounts receivable and inventory.
Further, the EDC has eliminated the prior restriction on capital investment in
excess of $2 million by permitting us, so long as we are not in default of any
of our obligations, to purchase new capital assets and sell the existing capital
assets so long as a result of such transactions, the book value of our assets is
not reduced below the balance as of December 31, 2002 and the proceeds of any
such sales are retained by the Corporation. The obligations of the Corporation
to the EDC have been classified on the accompanying balance sheet in accordance
with the terms of the restructured loan.
6. SUN PHARMACEUTICAL INDUSTRIES LIMITED
Pursuant to the stock purchase agreement, Sun Pharma had, as of December 31,
1998, remitted a total of $7.5 million to us for the purchase of 5.3 million
common shares.
7
Further, Sun Pharma has made loans to us, the details of which as of June 30,
2003, are summarized below:
8% Promissory note payable to Sun Pharma, principal balance $5,300,000
payable in full in October 2003, with interest payable quarterly.
8% Promissory note payable to Sun Pharma, principal balance 3,850,000
payable in full in August 2006, with interest payable
quarterly.
8% promissory note payable to Sun Pharma Global, Inc., a 200,000
wholly owned subsidiary of Sun Pharma ("Sun Global"), payable by
October 2003 with interest payable quarterly.
8% short term loan to Sun Pharma, payable upon demand 110,000
----------
Notes payable to Sun Pharma and Sun Global $9,460,000
==========
Since June 30, 2003, we have paid off $5.6 million of the above loans to Sun
Pharma and its affiliates, and the only loan pending to be paid to Sun is the
$3.85 million loan shown above.
In August 1997, we entered into an agreement, whereby Sun Pharma was required to
transfer to us the technology formula for 25 generic pharmaceutical products
over a period of five years through August 2002. The agreement has expired. We
exchanged 544,000 shares of our common stock for each technology transfer of an
ANDA product (when a bio-equivalency study was successfully completed) and
181,333 shares for each technology transfer of a DESI (Drug Efficacy Study
Implementation) product. The products provided to us from Sun Pharma were
selected by mutual agreement. Under such agreement, we conducted, at our
expense, all tests including bioequivalency studies. As of June 30, 2003, Sun
Pharma delivered to us the technology for 13 products. A total of 5,802,666
shares were issued to Sun Pharma and its affiliates in exchange for the
technology transfer under the old and now expired agreement.
We entered into a new product agreement with Sun Global for the transfer of the
technology formula for 25 generic products over a period of 5 years in November
2002 replacing the previous product agreement with Sun Pharma. Under such
agreement, we conduct, at our expense, all tests including bioequivalency
studies. Sun Global receives 544,000 shares of a new class of preferred stock
(convertible into common stock after three years) for each ANDA product
transferred upon the ANDA successfully passing the bioequivalency study. Our
shares issued to Sun Global in exchange for the transfer of the products are
valued at market and are included in research and development expenses.
Depending on the number of products transferred and the fair value of the shares
attributable thereto, the issuance of preferred stock to Sun Global could cause
our research and development expenses to increase to an amount which would
significantly decrease profit or create a loss. Preferred shares are be earned
by Sun Global even if the product is not successfully produced and marketed.
Sun Pharma has assisted us, by acting as guarantor, in obtaining line of credit
loans from ICICI Bank Limited and The Bank of Nova Scotia in the amount of $5.0
million and $12.5 million, respectively. Such lines have been fully utilized.
In connection with the technology transfer, Sun Pharma has established a
Research and Development Center in Mumbai, India with a staff of 30 persons,
including PhDs, pharmacy graduates, analytical chemists and regulatory
professionals. Sun Pharma primarily performs formulation and analytical
development for us at this laboratory.
Sun Pharma supplies us with certain raw materials and also the machinery and
equipment to increase productivity and production. During the six months ended
June 30, 2003, we purchased $3.9 million in raw materials and $0.16 million in
machinery from Sun. During the year ended December 31, 2002, we purchased $2.4
million in raw materials and $0.3 million in machinery and equipment from Sun
Pharma. Such purchases have been made at competitive prices and at better
payment terms. Sun is an primary supplier of a significant portion of our raw
materials, but is not the sole
8
supplier for such raw materials. Sun has also provided us with qualified
technical professionals. Twenty-one of our technical professional employees were
former Sun Pharma employees.
Sun Pharma beneficially owns approximately 49% of the currently outstanding
shares of Caraco. Five of the eight members of the Board of Directors of Caraco
are affiliated with Sun Pharma. The Chief Executive Officer and Chief Financial
Officer of Caraco are affiliated with Sun Pharma. As a result, Sun Pharma is
subject to a number of conflicts of interest. Sun Pharma is engaged in the same
business as Caraco, and there may be conflicts in determining which products
will be transferred to Caraco by Sun Pharma's wholly-owned subsidiary, Sun
Global, pursuant to its products agreement and which to keep, and how much to
charge for active raw materials, equipment and/or production machinery it sells
or leases to Caraco. At this time, we are substantially dependent on Sun Pharma
and its affiliates for the development of new products. We only have a small
in-house development center. We are not prohibited, however, from expanding our
in-house development center or from contracting with third parties for
technology transfers. We are also considering manufacturing on a contract basis
certain products of which the technology and ownership would belong to Sun
Pharma. There may also be conflicts in determining when and how its loans to
Caraco shall be repaid, whether to continue to perform its formulation and
analytical research at its Mumbai facility on behalf of Caraco, and whether and
how much it shall fund Caraco's operations and which Sun Pharma employees, if
any, it determines to transfer to Caraco. Although Caraco and Sun Pharma
attempt, to the extent possible, to avoid conflicts by causing Caraco directors
who are affiliated with Sun Pharma to abstain from voting on matters in which
Sun Pharma is an interested party, and requiring all business relationships to
be on terms no less favorable than with unaffiliated parties, such requirements
will not necessarily deter Sun Pharma from taking actions it believes are in Sun
Pharma's best interests but which may be detrimental to Caraco. This could
include keeping products with a greater potential for itself. It could also
include situations in which, although other shareholders believe it would be
advantageous for Caraco to take certain actions, for example, a merger or sale
of significant assets, Sun Pharma would not agree and would block it. Caraco
believes, that with respect to most matters, Sun Pharma's substantial investment
in Caraco will provide it with an economic incentive to assist Caraco and to
favor arrangements, which are beneficial to both Sun Pharma and Caraco.
7. TERM LOAN FROM ICICI BANK
The Corporation had obtained a term loan of $5 million from ICICI Bank of India
with the guarantee of Sun Pharma. This term loan has been used to finance
research and development activities, upgrade facilities, repay loans and meet
working capital requirements. Interest payments are due quarterly, with
quarterly principal payments scheduled to be made from December 2003 through
September 2005. That portion of the loan, which is due within one year from June
30, 2003, has been classified as current.
8. TERM LOAN FROM BANK OF NOVA SCOTIA
The Corporation had obtained term loans of $12.5 million from the Bank of Nova
Scotia with the guarantee of Sun Pharma. This term loan has been used to finance
research and development activities, upgrade facilities, repay other loans and
meet working capital requirements. Interest payments are due quarterly, with
semi-annual principal payments scheduled to be made from February 2004 through
September 2005. That portion of the loan which is due within one year from June
30, 2003, has been classified as current.
9. COMMON STOCK ISSUANCES
We issued 11,000 shares of common stock during the second quarter of 2003 to the
directors as compensation for attendance at board and committee meetings held
during 2002. We have also issued to our officers and employees, 368,263 shares
of common stock upon their exercise of their stock options during the second
quarter of 2003.
10. SALES & CUSTOMERS
Shipments to one wholesale customer, namely Amerisource Bergen, accounted for
approximately 72% and 65% of sales during the six months ended June 30 2003 and
the year ended December 31, 2002, respectively. Balances due from this customer
represented approximately 80% of accounts receivable at June 30, 2003 and
December 31, 2002. Certain of our customers, such as
9
Amerisource Bergen, act as the intermediary in the distribution channel for our
products. Therefore, even though the sales are initially recorded as made to the
wholesaler, the end user would be a secondary customer. For example, the
Veterans Administration procures our products from Amerisource Bergen.
11. LITIGATION.
On February 12, 2003, C. Arnold Curry filed a complaint in the Wayne County
Circuit Court alleging breach of a written employment agreement. Mr. Curry is
seeking 175,000 shares of our common stock (35,000 shares for each of the first
five ANDAs approved by the FDA). We intend to vigorously defend ourselves
against these claims, which we believe have no merit.
We have been named as one of two defendants and as one of several defendants in
two separate product liability suits, involving Miraphen which contains
phenylpropanolame (PPA), one in federal court in Pennsylvania and another in
state court in New Jersey, respectively. These lawsuits seek damages generally
for personal injury as well as punitive damages under a variety of liability
theories including strict products liability, breach of warranty and negligence.
The Federal lawsuit does not set forth a specific dollar amount of damages
requested; the state lawsuit seeks damages of $20 million. We are only in the
initial stages of discovery. Our products liability insurer has informed us that
we are not covered by insurance because the policy does not apply to any claim
relating to any product containing PPA. Although the ultimate outcome of these
cases and the potential effect on us cannot be determined, we believe we have
substantial defenses to the claims and we will vigorously defend the lawsuits
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report, other than the historical financial and business information, may
contain forward-looking statements. Those statements include statements
regarding the intent, belief, and current expectation of the Corporation. The
statements are not guarantees of future performance and are subject to risks and
uncertainties that cannot be predicted or quantified. Consequently, actual
results could differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include: (i) that the
information is of a preliminary nature and may be subject to further adjustment;
(ii) not obtaining FDA approval for new products or delays in receiving FDA
approvals; (iii) governmental restrictions on the sale of certain products; (iv)
dependence on key personnel; (v) development by competitors of new or superior
products or cheaper products or new technology for the production of products or
the entry into the market of new competitors; (vi) market and customer
acceptance and demand for new pharmaceutical products, (vii) availability of raw
materials, (viii) timing and success of product development and launch (ix)
integrity and reliability of the Corporation's data; and (x) other risks
identified in this report and identified from time to time in the Corporation
reports and registration statements filed with the Securities and Exchange
Commission.
The following discussion and analysis provides information that management
believes is relevant to an understanding of the Corporation's results of
operations and financial condition. The discussion should be read in conjunction
with the financial statements and notes thereto.
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THREE MONTHS AND
SIX MONTHS ENDED JUNE 30, 2002
NET SALES. Net sales for the three months and six months ended June 30, 2003
were $11,889,937 and $20,611,537, respectively, as compared to $5,627,449 and
$8,929,408, respectively for the same periods of 2002 reflecting increases of
almost 131% and 111%, respectively. The increases are due to the higher
production and marketing of most of our products following the achievement of
substantial compliance with cGMPs. Sales of Metformin Hydrochloride, Tramadol
Hydrochloride and Metoprolol Tartrate accounted for 86% of our net sales for the
three and
10
six months ended June 30, 2003. Sales of Metformin Hydrochloride primarily
increased because of our contract with the Veterans Administration as well as
the sales to other customers; however, the sales of Metformin Hydrochloride to
such agency have been made at lower sales prices. (See "Gross Profit" below).
GROSS PROFIT. We earned gross profits of $7,462,473 and $11,958,124,
respectively, during the three months and six months ended June 30, 2003 as
compared to gross profits of $3,061,528 and $4,515,940, respectively, during the
corresponding periods in 2002. The improvement was primarily due to higher sales
volumes with improved margins due to change in sales mix to more profitable
products such as Metoprolol Tartrate, Metformin Hydrochloride; Tramadol
Hydrochloride and Oxaprozin; acquiring raw materials at more competitive prices;
reduction in manufacturing costs due to increased batch sizes; improved
efficiency in the overall manufacturing process associated with higher
utilization of plant capacity; utilization of equipment installed during the
year ended December 31, 2002 of $1.6 million and during the six months ended
June 30, 2003 of $0.7 million; and enhanced ability to absorb operational
overheads due to higher sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months and six months ended June 30, 2003
were $2,140,036 and $3,089,820, respectively, as compared to $1,084,584 and
$1,839,689, respectively, for the same periods in 2002. The overall increases
are 97% and 67% for the two periods. Selling, general and administrative
expenses have effectively decreased down to 18% and 15% of net sales during the
three months and six months ended June 30, 2003 from almost 19% and 21% of net
sales during the same periods in 2002.
The actual increases of $1.25 million and $1.06 million, respectively for the
two periods were due to additional professional costs ($0.28 million) primarily
in connection with the ongoing litigation against the Company (see Note 11
above), and recording of variable compensation expense on stock options granted
and extended to a director ($0.85 million) and costs associated with development
of improved services and quality measures to customers.
RESEARCH AND DEVELOPMENT EXPENSES. Cash research and development expenses of
$626,788 and $1,526,719, respectively, for the three months and six months ended
June 30, 2003 were lower by 3% and 13% when compared with $720,630 and
$1,571,502, respectively, incurred during the corresponding period of 2002. The
major reason for the lower cash research and development expenses was that there
were no expenditures for bio-study costs during the second quarter of 2003.
No non-cash R&D charge has been recorded for the three month and six months
ended June 30, 2003 because no products have been transferred by Sun Global with
respect to the products agreement and, accordingly, no preferred shares have
been earned. We recorded expenditures of $2,790,720 for the three months and six
months ended June 30, 2002 for non-cash R&D charges relating to common shares
earned by Sun Pharma for 2 product transfers.
DEPRECIATION EXPENSE. We incurred depreciation expense of $316,261 for the first
six months ended June 30, 2003 as compared to $227,776 incurred in the
corresponding period of 2002. Depreciation has increased due to additional
investment into capital assets of $1.6 million during 2002 and additional
capital investments of $0.7 million during the first six months of 2003.
INTEREST EXPENSE. Interest expense, which was incurred in connection with our
mortgage obligation to the EDC, interest on notes payable to Sun Pharma and Sun
Global as well as on term loans granted to us by ICICI Bank and the Bank of Nova
Scotia, and guaranteed by Sun Pharma, was $375,470 and $817,722 for the three
and six months ended June 30, 2003, respectively as compared to $376,915 and
$745,982, respectively, for the same periods of 2002, respectively. The increase
in the amount of interest is due to the increase in borrowing levels. During the
six months ended June 30, 2003, we utilized $1.6 million of the remaining draw
from Bank of Nova Scotia and borrowed $0.61 from Sun Pharma (demand loans) to
finance increased working capital. $0.5 million of the demand loans borrowed
from Sun Pharma during the first quarter of 2003 was repaid during the second
quarter of 2003.
RESULTS OF OPERATIONS. We earned net income of $4,326,158 and $6,530,906,
respectively, for the three and six months ended June 30, 2003 as compared to
net losses of $1,909,840 and $2,429,533, respectively, for the same periods of
2002, reflecting improvement of almost 327% and 369%, respectively, for the
comparable periods of 2003 and 2002. The significantly improved results of
operations in the current three-month and six-month periods as compared to the
previous respective periods are primarily due to significantly higher sales
volumes, improved cost
11
absorption due to increased sales, improved product mix, obtaining more
competitive prices for raw materials and having no non-cash research and
development expenses.
A number of uncertainties exist that may influence the Corporation's future
operating results, including general economic conditions, changes in conditions
affecting the pharmaceutical industry primarily related to generic drug
competition, obtaining additional financing, government restrictions on sale of
certain products, obtaining new FDA approvals, development by competitors of new
or superior products or new technology for production of products, the entry
into the market of new competitors, and the cost of non-cash research and
development expenses with respect to preferred shares to be earned by Sun Global
(valued at the market price when earned) for products anticipated to be
transferred under the products agreement.
LIQUIDITY AND CAPITAL RESOURCES
For the first time since inception, at June 30, 2003, the Corporation had
positive working capital of $1,861,384 compared with a negative working capital
of $1,647,253 at December 31, 2002. The positive working capital position has
primarily been on account of our recently profitable operations and the cash
recovery of our receivables improving during the course of the second quarter.
The negative working capital positions as of December 31, 2002 and 2001
respectively were mainly due to the classification of the $5.85 million loan
payable to Sun Pharma and its affiliates as current as it becomes due in October
2003.
To enable the Corporation to fund its research and development activities, repay
certain term loans and fund working capital needs, Sun Pharma has become a
security guarantor for credit lines of $5 million from ICICI Bank of India and
$12.5 million from Bank of Nova Scotia. As of June 30, 2003, the Corporation has
received $5 million from ICICI Bank of India and $12.5 million from Bank of Nova
Scotia through these credit facilities. Further, the Corporation has received an
additional short-term loan of $0.5 million during the first quarter of 2003 and
$0.1 million during the beginning of the second quarter of 2003 from Sun Pharma
to help the Corporation finance its increased working capital requirements. The
short term loan of $0.5 million from Sun Pharma has been repaid during the
second quarter The cash generated out of the operations has generally been
sufficient to fund the operations of the Corporation as well as repay a portion
of the restructured EDC debt.
FDA
We underwent FDA inspections in November 2002 and we were found to be in
substantial compliance with cGMPs. Although we did receive an FDA 483, we do not
believe the observations are material and we have taken appropriate remedial
actions. During the first quarter of 2003, we received approval for one of the
then pending ANDAs. We now have 3 ANDAs pending approval.
FUTURE OUTLOOK
We have experienced difficult times in the past. With our having been found to
be in substantial compliance by the FDA with respect to cGMPs during the second
quarter of 2001 and the fourth quarter of 2002, and also with the approvals of
11 ANDAs during 2001, 2002 and 2003, management believes that our future outlook
is brighter. Revenues have been constantly improving and consequently, so have
operational profits, net income and cash flows. Also, management is focused on
cost controls and consumption controls. Management's future plans for improving
profitability, cash flow positions and operations include increased sales (see
below) and infusion of additional funding through the issuance of equity. We
also expect Sun Pharma to continue to support us, as it has in the past.
The FDA directed the manufacturers and distributors of Guaifenesin LA which,
including us, consists of 66 companies, to cease manufacturing Guaifenes LA by
May 23, 2003 and to cease all sales after November 2003. The FDA has determined
that Guaifenesin LA is a new drug which requires a new drug application and
approval before it may be manufactured and sold. We intend to comply with the
FDA's directive. We do not intend to file a new drug application with the FDA
with respect to Guaifenesin LA, however, we are seeking clarification from the
FDA as to whether application to manufacture and sell Guaifenesin LA may be made
other than through a new drug application. Net sales of Guaifenesin LA during
the year ended December 31, 2002 and during the six months ended June 30, 2003
were $1.65 million and $1.00 million, respectively.
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As disclosed, under the products agreement between Sun Global and us, Sun Global
has agreed to transfer the technology for 25 products to us over a five year
period in exchange for 544,000 preferred shares (which are convertible on a
one-to-one basis into common shares) per product. In light of the current market
price of our common shares, however, each product will be analyzed carefully and
selected by the directors on the our Board's Independent Committee only if the
cost of the transfer technology can be justified. At this time, no products have
yet been selected and agreed to between Sun Global and the directors of the
Independent Committee.
During the first and second quarters of 2003, the Corporation has generated
substantial revenues as compared to the past. Capacity utilizations are
improving and costs are being controlled. The Corporation expects revenues to
improve during the rest of 2003. The Corporation has raised its 2003 revenue
estimate to $42 million.
Management's continued plans for the remainder of 2003 include:
o Continued focus on FDA compliance.
o Continued research and development activities.
o Increased market share for certain existing products and
recently introduced new products and enhanced customer reach
and satisfaction.
o Prompt introduction of new approved products to the market.
o Striving to capture larger market share for existing products.
o Achieving operational efficiencies by attaining economies of
scale, cost reduction per unit, and obtaining additional cost
reductions for active substances acquired from competitors
and/or Sun Pharma.
o Increase the width and depth of product portfolio to serve
customers effectively.
o Increase the number of products, as well as anticipated volume
increases for existing products, which, in turn, will improve
manufacturing capacity utilization.
o Considering alternative ways of increasing cash flow including
developing, manufacturing and marketing ANDAs owned by Sun
Pharma.
o Locating and utilizing facilities of contract-manufacturers to
enhance production and therefore sales.
o Possible raising of equity capital through additional number
of registered shares, by Form SB-2, which was recently
declared effective by the SEC.
o Raising of additional lines of credit to support increasing
working capital requirements.
ITEM 3. CONTROLS AND PROCEDURES
a. The term "disclosure controls and procedures" is defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act
of 1934 (the "Exchange Act"). These rules refer to the
controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is
recorded, processed, summarized and reported within required
time periods. Our Chief Executive Officer and our Chief
Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period
covered by the report (the "Evaluation Date"), and have
concluded that, as of the Evaluation Date, our disclosure
controls and procedures are effective in providing them with
material information
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relating to the Corporation known to others within the
Corporation which is required to be included in our periodic
reports filed under the Exchange Act.
b. There have been no changes in the Corporation's internal
controls over financial reporting that occurred during the
period this Form 10-Q was being prepared that has materially
affected, or is reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of the Corporation was held on
June 3, 2003 in Detroit, Michigan for the purpose of electing three directors
for three year terms expiring in 2006 and upon the election and qualification of
their successors and for the purpose of approving the amendment to Amended and
Restated Articles of Incorporation increasing the number of common shares to 50
million and of preferred shares to 15 million.
The results of the voting were as follows:
Name of Director Votes for Votes Against
Dilip S. Shanghvi 21,024,939 18,095
Jitendra N. Doshi 21,024,939 18,095
Jay F. Joliat 21,025,039 17,995
The names of the other directors and their remaining terms are as
follows:
Name of Director Term
Narendra N. Borkar 2004
Phyllis Harrison-Ross 2004
Sudhir Valia 2004
Sailesh T. Desai 2005
David A. Hagelstein 2005
The following are the results with respect to the amendment to Amended
and Restated Articles of Incorporation increasing the number of common shares to
50 million and of preferred shares to 15 million:
For Against Abstained Unvoted
16,642,823 130,632 22,200 4,122,789
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
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On May 6, 2003, the Corporation filed a Form 8-K disclosing in Item 9
thereof and including as an exhibit the press release announcing its result of
operations for the first quarter ended March 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARACO PHARMACEUTICAL LABORATORIES, LTD.
By: /s/ Narendra N. Borkar
-----------------------------
Narendra N. Borkar
Chief Executive Officer
By: /s/ Jitendra N. Doshi
-----------------------------
Jitendra N. Doshi
Chief Financial Officer
Dated: August 8, 2003
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EXHIBIT INDEX
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Principal Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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