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 September 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 October 30, 2003, registrant had 24,564,828 shares of common stock issued
and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
1
CARACO PHARMACEUTICAL LABORATORIES LTD.
UNAUDITED BALANCE SHEET
30-Sep-03 30-Dec-02
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,851,831 $ 534,228
Accounts receivable, net 6,409,638 5,484,135
Inventories 7,483,310 5,615,962
Prepaid expenses and deposits 1,476,282 471,314
------------ ------------
Total current assets 18,221,061 12,105,639
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 197,305 197,305
Building and improvements 7,614,122 7,346,797
Equipment 6,390,585 5,458,314
Furniture and fixtures 349,114 232,112
------------ ------------
Total 14,551,126 13,234,528
Less: accumulated depreciation 5,910,620 5,487,018
------------ ------------
Net property, plant & equipment 8,640,506 7,747,510
------------ ------------
------------ ------------
Total assets $ 26,861,567 $ 19,853,149
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable - Sun 2,667,579 2,024,028
Accounts payable 667,143 1,958,809
Accrued expenses 1,760,223 1,391,623
Current portion of notes payable to stockholders - 5,850,000
Current portion of bank loans payable 8,750,000 625,000
EDC debt classified as current 1,214,753 1,004,000
Preferred stock dividends payable, current - 350,380
Accrued interest 128,820 549,082
------------ ------------
Total current liabilities 15,188,518 13,752,892
------------ ------------
LONG-TERM LIABILITIES
Notes payable to principal stockholder - Sun 2,850,000 3,850,000
EDC debt 5,478,143 6,598,547
Bank loans payable 8,750,000 15,275,000
------------ ------------
Total long-term liabilities 17,078,143 25,723,547
------------ ------------
------------ ------------
Total liabilities 32,266,661 39,476,439
------------ ------------
STOCKHOLDERS' DEFICIT
Common stock, no par value, authorized 30,000,000 shares; 41,498,569 40,449,508
issued and outstanding shares - 24,518,428 shares
Additional paid in capital 2,378,735 282,858
Subscription in advance for stock option exercise 11,500 7,520
Preferred stock dividends (350,380) (350,380)
Accumulated deficit (48,943,518) (60,012,796)
------------ ------------
Total stockholders' deficit (5,405,094) (19,623,290)
------------ ------------
------------ ------------
Total liabilities and stockholders' deficit $ 26,861,567 $ 19,853,149
============ ============
See accompanying notes
2
CARACO PHARMACEUTICAL LABORATORIES, LTD.
UNAUDITED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED THREE MONTHS ENDED
30th September 30th September
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales 32,905,662 14,828,849 12,294,125 5,899,441
Cost of goods sold 13,112,198 7,448,809 4,458,785 3,035,340
----------- ----------- ----------- -----------
Gross profit 19,793,464 7,380,040 7,835,340 2,864,101
Selling, general and administrative expenses 5,689,566 2,648,202 2,599,745 808,963
R&D cost 2,018,029 2,541,449 491,310 969,947
R&D cost - Affiliate (see note 7 on R&D
expense) - 2,790,720 - -
----------- ----------- ----------- -----------
Operating income / (loss) 12,085,869 (600,331) 4,744,285 1,085,191
Interest
Interest expense (1,041,381) (1,130,898) (223,660) (384,917)
Interest income 24,790 10,798 17,747 8,377
----------- ----------- ----------- -----------
Net interest expense (1,016,591) (1,120,100) (205,914) (376,540)
----------- ----------- ----------- -----------
Net income / (loss) 11,069,277 (1,720,431) 4,538,371 708,651
=========== =========== =========== ===========
Net income / (loss) per common share
----------- ----------- ----------- -----------
Basic 0.46 (0.08) 0.19 0.03
----------- ----------- ----------- -----------
Diluted 0.44 (0.08) 0.18 0.03
----------- ----------- ----------- -----------
See accompanying notes
3
CARACO PHARMACEUTICAL LABORATORIES, LTD.
UNAUDITED STATEMENTS OF CASH FLOWS
Nine Months ended September 30,
2003 2002
------------ ------------
Cash flows from operating activities:
Net income / (loss) $ 11,069,277 $ (1,720,431)
Adjustments to reconcile net income / (loss) to
net cash provided by / used in operating activities
Depreciation 422,179 348,571
Common shares issued in lieu of cash for compensation 262,450 34,500
Common shares to be issued for R&D Cost - Affiliate - 2,790,720
Variable compensation expense for stock options 1,833,612 -
granted and extended to director
Changes in operating assets and liabilities
which provided / (used) cash:
Accounts receivable (925,503) (1,975,558)
Inventories (1,867,348) (1,872,650)
Prepaid expenses and deposits (1,004,969) (177,559)
Accounts payable (648,115) 662,893
Accrued expenses and Interest 210,663 (81,033)
------------ ------------
Net cash provided by / (used) in operating activities 9,352,247 (1,990,549)
------------ ------------
Cash flows from investing activities:
------------ ------------
Purchases of property, plant and equipment (1,315,204) (1,273,055)
------------ ------------
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 11,500 7,520
Net short term repayments - (75,000)
Proceeds from exercise of stock options 779,091 -
Payment of preferred stock dividends (350,380) -
Payments of EDC debt (909,651) (554,000)
Net Loans (repaid to) / received from shareholders (6,850,000) 1,400,000
------------ ------------
Net cash (used in) / provided by financing activities (5,719,440) 3,370,520
------------ ------------
Net increase in cash and cash equivalents 2,317,603 106,916
Cash and cash equivalents, beginning of period 534,228 241,110
------------ ------------
------------ ------------
Cash and cash equivalents, end of period $ 2,851,831 $ 348,026
============ ============
See accompanying notes
4
CARACO PHARMACEUTICAL LABORATORIES, LTD.
UNAUDITED STATEMENTS OF SHAREHOLDERS' DEFICIT FOR THE
NINE MONTHS ENDED SEPTEMBER 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) $(60,012,796) $(19,623,290)
Issuances of common stock
to directors as compensation
in lieu of cash 31,000 262,450 262,450
Subscriptions in advance 11,500 11,500
Issuances of common stock
upon exercise of stock options 724,896 779,091 2,095,877 2,874,968
Net Profit 11,069,277 11,069,277
---------- ---------- ----------- ----------- ---------- --------- ------------ ------------
Balance at September 30, 2003 - - 24,518,428 $41,510,069 $2,378,735 $(350,380) $(48,943,518) $ (5,405,095)
========== ========== =========== =========== ========== ========= ============ ============
See accompanying notes
5
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The balance sheet as of September 30, 2003 and the related statements of
operations, stockholders' deficit and cash flows for the three months and the
nine months ended September 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 September 30, 2003 and for the three months and
nine months ended September 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.
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 30 strengths in 70 package
sizes. We are currently marketing 16 of the products in 28 strengths and 62
package sizes. The products are intended to treat a variety of disorders
including the following: hypertension, arthritis, epilepsy, diabetes and pain
management.
To date, we have submitted 14 Abbreviated New Drug Applications (ANDAs) to the
Food and Drug Administration ("FDA"). Of these, we have received approvals for
12 ANDAs, one each of which was received during the first quarter and the third
quarter; we have 2 ANDAs pending approval. We also have 5 Drug Efficacy Study
Implementations (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 48% 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.)
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 nine months ended
September 30, 2003 were $12.3 million and $32.9 million, respectively, as
compared to $5.9 million and $14.8 million, respectively, for the same periods
of 2002. We have earned a gross profit of $7.8 million and $19.8 million,
respectively, during the three months and nine months ended September 30, 2003
as compared to $2.9 million and $7.4 million during the same periods in 2002. We
earned operating income of $4.7 million and $12.1 million, respectively, during
the three months and nine months ended September 30, 2003 as compared to
operating income of $1.1 million and an operating loss of $0.6 million,
respectively, during the same
6
periods in 2002. After interest costs, we have earned net income of $4.5 million
and $11.1 million, respectively, during the three months and nine months ended
September 30, 2003 as compared to a net income of $0.7 million and a net loss of
$1.7 million, respectively, during the same periods of 2002. At September 30,
2003, we had a stockholders' deficit of $5.4 million as compared to a deficit of
$19.6 million at December 30, 2002. See "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
4. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation No. (FIN) 46 "Consolidation of Variable Interest
Entities." This standard clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," and addresses
consolidation by business enterprises of variable interest entities, more
commonly known as "Special Purpose Entities" or "SPE'S." FIN 46 requires
existing unconsolidated variable interest entities' interests to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risk
among the parties involved. FIN 46 also enhances the disclosure requirements
related to variable interest entities. The interpretation is effective with
respect to interests in variable interest entities created after January 31,
2003. For interests in variable interest entities created before February 1,
2003, the interpretation applies to the first interim or annual reporting period
beginning after June 15, 2003. The subject matter of FIN 46 is not currently
applicable to the Corporation; accordingly, it is not expected that the
provisions of FIN 46 will have a material impact on financial position, results
of operations or cash flows of the Corporation.
In April 2003 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 149, which amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments imbedded in
other contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in paragraph 6 (b) of SFAS No. 133,
clarifies when a derivative contains a financing component, amends a definition
to conform to language used in FASB interpretation No. 45, and amends certain
other existing pronouncements. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003. The subject matter of SFAS No. 149 is not
currently applicable to the Corporation; accordingly, it is not expected that
the provisions of SFAS No. 149 will have a material impact on the financial
position, results of operations or cash flows of the Corporation.
In May 2003 the FASB issued SAFS No. 150, which establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both debt and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise was effective for the
beginning of the first interim period beginning after June 15, 2003. It is to be
implemented by cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption. The subject matter
of SFAS No. 150 is not currently applicable to the Corporation; accordingly, it
is not expected that provisions of statement No. 150 will have a material impact
on the financial position, results of operations or cash flows of the
Corporation.
5. 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 nine months ended September 30, 2003 were 23,997,673 and 25,317,464,
respectively. The basic and diluted weighted average numbers of common shares
outstanding for the nine months ending September 30, 2002 were both 21,593,243.
7
6. MORTGAGE NOTE WITH EDC
Our manufacturing facility and executive offices were constructed in 1990 and
financed by $9.1 million loan pursuant to a Development and Loan Agreement dated
August 10, 1990 (the "Agreement") from the Economic Development Corporation of
the City of Detroit (the "EDC").
At September 30, 2003, the loan from the EDC has been reduced to $6.7 million.
The loan 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, but 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% p.a. and increasing to 5.16% p.a. 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 to purchase new capital assets and sell the existing capital
assets, as long as we are not in default of any of our obligations. Further, we
have to ensure that 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
Corporation retains the proceeds of any such sales. The obligations of the
Corporation to the EDC have been appropriately classified on the accompanying
balance sheet in accordance with the terms of the restructured loan.
7. SUN PHARMACEUTICAL INDUSTRIES LIMITED
Pursuant to a 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.
Sun Pharma and its affiliates have loaned us approximately $10.0 million. Prior
to June 30, 2003, we have repaid $0.5 million of these loans. Between June 30,
2003 and September 30, 2003, we have repaid an additional $6.6 million of these
loans, leaving, as of September 30, 2003, a loan balance of approximately $2.9
million payable to Sun Pharma by August 2006 at an interest rate of 8.0% p.a.
payable quarterly.
Sun Pharma has also assisted us, by acting as guarantor, in obtaining line of
credit loans from ICICI Bank Limited and The Bank of Nova Scotia in the amounts
of $5.0 million and $12.5 million, respectively. Such lines are fully utilized
as of September 30, 2003.
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. 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 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 bio-equivalency studies. Pursuant to such
agreement, Sun Pharma delivered to us the technology for 13 products. This
agreement has expired and, as noted below, we have entered into a new agreement
with an affiliate of Sun Pharma.
In November 2002, we entered into a new products agreement with Sun Pharma
Global, Inc., an affiliate of Sun Pharma ("Sun Global"), for the transfer of the
technology formula for 25 generic products over a period of 5 years. Under such
agreement, we conduct, at our expense, all tests including bio-equivalency
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 bio-equivalency study. Shares
issued to Sun Global in exchange for the product transfers are valued at market
and are included as non-cash research and development expenses. Depending on the
number of products transferred and the fair value of the preferred shares
attributable thereto, the preferred shares earned by Sun Global could cause our
non-cash 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 for the product transfers even if the product is not successfully
produced and marketed.
8
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 machinery and equipment to
increase our production and productivity.
Sun has also provided us with qualified technical professionals, who are
currently working at the facility.
8. 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
September 30, 2003, $2,500,000, has been classified as current on the
accompanying balance sheet.
9. 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
September 30, 2003, $6,250,000, has been classified as current on the
accompanying balance sheet.
10. COMMON STOCK ISSUANCES
We issued 31,000 shares of common stock to the directors as compensation for
attendance at board and committee meetings held during 2002 and 2003. We have
also issued to our officers, employees and certain ex-employees, 724,896 shares
of common stock upon exercise of their stock options during the second and third
quarters of 2003.
11. SALES AND CUSTOMERS
A major portion of our business with our customers is facilitated by the use of
wholesalers like AmeriSource-Bergen, Cardinal Health, etc., who have large
warehousing facilities to store products of multiple companies. We have
independent contracts with our end customers, who procure our goods from the
wholesalers. The role of the wholesalers is solely to act as an intermediary in
the supply chain. Therefore, even though the sales are initially recorded as
made to the wholesaler, the end user is a secondary customer. It is the end
customer who decides the wholesaler through whom it would like to procure our
products.
Invoicing of such shipments to one such wholesaler, namely AmeriSource Bergen,
accounted for approximately 72% and 65% of net sales during the nine months
ended September 30, 2003 and year-end 2002, respectively. Balances due from this
wholesaler represented approximately 78% of accounts receivable at September 30,
2003 and 80% of accounts receivables at December 31, 2002.
12. 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
phenylpropanalomine (PPA), one in federal court in Pennsylvania and
9
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; (x) conflicts of interests
between Sun Pharma and its affiliates and the Corporation, which are all engaged
in the same business, in among other things, determining which products to
transfer to us and which to keep for themselves, how much to charge us for
active raw materials, equipment and/or production machinery, when and how their
loans to us shall be repaid, whether to continue to perform formulation and
analytical research for us at its Mumbai facility, whether and how much it shall
fund our operations, and which employees, if any, it determines to transfer to
us; and (xi) 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 NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002
NET SALES. Net sales for the three months and nine months ended September 30,
2003 were $12,294,125 and $32,905,662, respectively, as compared to $5,899,441
and $14,828,849, respectively, for the same periods of 2002 and reflect
increases of almost 108% and 122%, respectively. The increases are due to the
higher production and marketing of most of our products. Sales of Metformin
Hydrochloride and Metoprolol Tartrate accounted for 78% of our net sales for the
three and nine months ended September 30, 2003.
GROSS PROFIT. We earned gross profits of $7,835,340 and $19,793,464,
respectively, during the three months and nine months ended September 30, 2003
as compared to gross profits of $2,864,101 and $7,380,040, 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 Metroprolol 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 $1.6 million and $1.3
million equipment installed during the year ended December 31, 2002 and during
the nine months ended September 30, 2003, respectively; and enhanced ability to
absorb operational overheads due to higher sales.
10
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months and nine months ended September 30,
2003 were $2,599,745 and $5,689,566, respectively, as compared to $808,863 and
$2,648,202, respectively, for the same periods in 2002. This represents
increases of 221% and 114% for the two periods, respectively. Selling, general
and administrative expenses have marginally increased to 21% and 17% of net
sales during the three months and nine months ended September 30, 2003 from 14%
and 18% of net sales during the same periods in 2002.
The increase of $3.0 million for the nine-month period was due to additional
professional costs ($0.5 million) primarily in connection with the ongoing
litigation against the Company (See note 12 of the notes to the financial
statements), and recording of variable compensation expense on stock options
granted and extended to a director ($1.8 million) and other costs related to
sales and marketing.
RESEARCH AND DEVELOPMENT EXPENSES. Cash research and development expenses of
$491,310 and $2,018,029, respectively, for the three months and nine months
ended September 30, 2003 were lower by 50% and 21%, respectively, when compared
with $969,947 and $2,541,449, respectively, incurred during the corresponding
periods 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 and third quarters of 2003.
No non-cash R&D charges have been recorded for the three month and nine months
ended September 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 nine months
ended September 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 $422,179 for the nine
months ended September 30, 2003 as compared to $348,571 during 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
$1.3 million during the first nine months of 2003.
INTEREST EXPENSE. Interest expense was $223,660 and $1,041,381 for the three and
nine months ended September 30, 2003, respectively, as compared to $384,917 and
$1,130,898, respectively, for the same periods of 2002, 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. The reduction in
interest expense, which was partially offset by an additional borrowing of $1.6
million from bank of Nova Scotia during the first quarter of 2003, is primarily
due to our repaying $6.6 million of our debt to Sun Pharma during the third
quarter of 2003.
RESULTS OF OPERATIONS. We earned net income of $4,538,371 and $11,069,277,
respectively, for the three and nine months ended September 30, 2003 as compared
to net income of $708,651 and a net loss of $1,720,431, respectively, for the
same periods of 2002, reflecting improvement of almost 540% and 743%,
respectively. The significantly improved results of operations in the current
three-month and nine-month periods as compared to the corresponding periods of
2002 are primarily due to significantly higher sales volumes, improved cost
absorption due to increased sales, improved product mix, obtaining more
competitive prices for raw materials and having no non-cash research and
development expenses.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, the Corporation had positive working capital of $3.0
million compared with a negative working capital of $1.6 million at December 31,
2002. The positive working capital position is primarily due to our profitable
operations during 2003. As of December 31, 2002, the negative working capital
was mainly due to the classification of the $5.9 million loan payable to Sun
Pharma and its affiliates as current since these loans were due to mature in
October 2003.
To enable the Corporation to fund the development of its facility in 1990, the
Corporation borrowed $9.1 million from the EDC. The EDC loan was restructured
effective as of January 1, 2003. As of September 30, 2003, $6.7 million is
11
outstanding. To enable the Corporation to fund its research and development
activities and working capital needs, Sun Pharma has (i) loaned the Corporation
a total of approximately $10.0 million, of which approximately $2.9 is
outstanding as of September 30, 2003; and (ii) become a security guarantor for a
credit lines of $5 million from ICICI Bank of India and $12.5 million from Bank
of Nova Scotia. As of September 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
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 each of the first and third quarters of 2003, we received
approval for one of the then pending ANDAs. We now have 2 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
12 ANDAs during 2001, 2002 and 2003, management believes that our future outlook
is brighter. Revenues have been constantly improving and consequently, so have
operating income, net income and cash flows. The Corporation expects revenues to
improve during the rest of 2003. The Corporation has raised its 2003 revenue
estimate to $45 million. Also, management is focused on cost controls and
consumption controls. Management's plans for improving profitability, cash flow
and operations for the remainder of 2003 and for 2004 are set forth below. We
also expect Sun Pharma to continue to support us, as it has in the past.
The FDA had directed the manufacturers and distributors of Guaifenesin LA,
which, including us, consists of 66 companies, to cease manufacturing
Guaifenesin 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. We have
discontinued to market the product since the third quarter of 2003. Net sales of
Guaifenesin LA during the year ended December 31, 2002 and during the nine
months ended September 30, 2003 were $1.65 million and $1.38 million,
respectively.
As disclosed, under the products agreement dated November 21, 2002, 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. Depending
on the number of products transferred to us pursuant to the products agreement
between Sun Global and us and the fair value of the preferred shares
attributable thereto, the preferred shares earned by Sun Global could cause our
non-cash research and development expenses to increase to an amount which would
significantly decrease profit or create a loss. Since the date of the products
agreement, however, no products have yet been selected and agreed upon by the
Company, the Independent Committee of Directors of the Company and Sun Global.
While they are engaged in discussions, the Company has decided to perform
research and development for certain products ("Products") (currently six)
presented for consideration by Sun Global pursuant to the products agreement.
However, if the Company does not select and accept any such Products for itself
for filing as ANDAs with the FDA, Sun Global will reimburse the Company for all
of its research and development and other costs associated with such Product.
Sun Global may then file the ANDA with the FDA in its name, and the Company and
Sun Global may negotiate an agreement pursuant to which the Company will
manufacture and market the Product. The consideration payable to the Company
will be no less favorable than what unrelated third parties would receive.
Management's continued plans for the remainder of 2003 and 2004 include:
(a) Continued focus on FDA compliance.
(b) Continued research and development activities.
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(c) Continued expenditures for capital investment
including equipment and expansion of capacity.
(d) Increased market share for certain existing products
and recently introduced new products and enhanced
customer reach and satisfaction.
(e) Prompt introduction of new approved products to the
market.
(f) Achieving further operational efficiencies by
attaining economies of scale and cost reduction per
unit.
(g) Increase the number of products, as well as
anticipated volume increases for existing products,
which, in turn, will improve manufacturing capacity
utilization.
(h) Considering alternative ways of increasing cash flow
including developing, manufacturing and marketing
ANDAs owned by Sun Pharma.
(i) Locating and utilizing facilities of
contract-manufacturers to enhance production and
therefore sales.
(j) Possible raising of equity capital through the sale
of common stock registered on Form SB-2.
(k) Raising of additional lines of credit to support
increasing working capital requirements.
(l) Further reducing debt, if adequately supported by
positive cash flows.
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, who is also our
Chief Financial Officer, has evaluated the effectiveness of
our disclosure controls and procedures as of the end of the
period covered by the report (the "Evaluation Date"), and has
concluded that, as of the Evaluation Date, our disclosure
controls and procedures are effective in providing him with
material information 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-QSB was being prepared that has materially
affected, or is reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
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PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the nine months ended September 30, 2003, we issued 31,000 shares of our
common stock to our non-employee directors for past attendance at board and
committee meetings. The shares of common stock were issued pursuant to
exemptions from registration under Section 4(2), 4(6) and Regulation D under the
Securities Act of 1933.
ITEM 5. OTHER INFORMATION
Jitendra N. Doshi was promoted to the position of interim Chief Executive
Officer of the Corporation, effective as of October 1, 2003, following the
retirement of Narenda N. Borkar, the former Chief Executive Officer of the
Corporation, on September 30, 2003. Mr. Doshi was the Chief Operating Officer
(since June 2001) and is the Chief Financial Officer (since November 2002) of
the Corporation.
On October 1, 2003, David A. Hagelstein resigned as a director of the
Corporation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer and 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.
On July 31, 2003, the Corporation filed a Form 8-K disclosing in Item
12 thereof and including as an exhibit the press release announcing its result
of operations for the second quarter ended June 30, 2003.
SIGNATURE
In accordance with 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/ Jitendra N. Doshi
----------------------------------------
Jitendra N. Doshi
Chief Executive Officer
and Chief Financial Officer
Dated: November 5, 2003
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EXHIBIT INDEX
31.1 Certification of Chief Executive Officer and 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.
15