**U.S.
SECURITIES AND EXCHANGE COMMISSION**
  **Washington,
D.C. 20549**
  **FORM
10-Q**
  x
    QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
      the quarterly period ended: March 31, 2005
  o
    TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
      the transition period from ______________ to
  ______________
  
 **Commission
File Number 1-11352**
 
 
 **ABLE
LABORATORIES, INC.**
  (Exact
name of registrant as specified in its charter)
  **Not
Applicable**
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 **DELAWARE**
    
    **04-3029787**(*State
      or other jurisdiction of incorporation or organization*)
    
    (*IRS
      Employer*
      *Identification
      No.*)
 
 1 Able
Drive
 Cranbury,
NJ 08512
 ( *Address
of principal executive offices* )
 
 (609)
495-2800
 ( *Issuer’s
telephone number* )
 
 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 o
  Indicate
by checkmark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).   Yes x   No o
  As of
April 15, 2005 there were 18,516,801 outstanding shares of common stock, $.01
par value per share.
  
 
  
 **ABLE
LABORATORIES, INC.**
  **FORM
10-Q**
  **QUARTERLY
REPORT**
  **MARCH
31, 2005**
  **TABLE
OF CONTENTS**
  Facing
      Page
    
    1Table
      of Contents
    2PART
      I.
    FINANCIAL
      INFORMATION(*)Item
      1.
    Financial
      Statements:Condensed
      Balance Sheets
    3Condensed
      Statements of Income
    4Condensed
      Statements of Changes in Stockholders’ Equity
    5Condensed
      Statements of Cash Flows
    6Notes
      to Unaudited Condensed Financial Statements
    7Item
      2.
    Management’s
      Discussion and Analysis of Financial Condition and Results ofOperations
    10Item
      4.
    Controls
      and Procedures
    14PART
      II.
    OTHER
      INFORMATIONItem
      1.
    Legal
      Proceedings
    15Item
      5.
    Other
      Information
    15Item
      6.
    Exhibits
    16SIGNATURES
    
    17
 
 
 (*)  The
financial information at December 31, 2004 has been derived from the audited
financial statements at that date and should be read in conjunction therewith.
All other financial statements are unaudited.
    -2-
   **PART
I. FINANCIAL INFORMATION**
  ***Item
1. Financial Statements***
  **ABLE
LABORATORIES, INC.**
 **CONDENSED
BALANCE SHEETS**
 (Unaudited)
  **ASSETS**
  March
      31,
      2005
    
    December
      31,2004Current
      assets:Cash
      and cash equivalents
    
    $
    16,793,938
    
    $
    11,650,886Accounts
      receivable, net of allowances of $41,377,390 and
    $38,272,886
    
    
    17,589,167
    
    
    17,878,380Inventory
    
    
    20,548,064
    
    
    18,105,275Deferred
      income tax asset
    
    
    7,500,000
    
    
    7,500,000Prepaid
      expenses and other current assets
    
    
    1,394,846
    
    
    1,843,882Total
      current assets
    
    
    63,826,015
    
    
    56,978,423Property
      and equipment, net
    
    
    42,780,583
    
    
    40,228,942Other
      assets:Deferred
      income tax asset
    
    
    954,000
    
    
    2,743,000Goodwill
    
    
    3,922,655
    
    
    3,922,655Deposits
      and other assets
    
    
    424,258
    
    
    418,082Total
      other assets
    
    
    5,300,913
    
    
    7,083,737$
    111,907,511
    
    $
    104,291,102
  **LIABILITIES
AND STOCKHOLDERS’ EQUITY**
  Current
      liabilities:Accounts
      payable
    
    $
    5,026,607
    
    $
    2,742,823Accrued
      expenses
    
    
    4,340,073
    
    
    2,268,763Total
      current liabilities
    
    
    9,366,680
    
    
    5,011,586Long-term
      debt
    
    
    —
    
    
    3,000,000Total
      liabilities
    
    
    9,366,680
    
    
    8,011,586Stockholders’
      equity:Preferred
      stock, $.01 par value, 10,000,000 shares authorized, none
      outstanding
    
    
    —
    
    
    —Common
      stock, $.01 par value, 25,000,000 shares authorized, 18,515,468 and
      18,353,281 shares issued and outstanding
    
    
    185,155
    
    
    183,532Additional
      paid-in capital
    
    
    122,393,723
    
    
    120,804,537Accumulated
      deficit
    
    
    (19,985,686
    )
    
    (24,644,108
    )Unearned
      stock-based compensation
    
    
    (52,361
    )
    
    (64,445
    )Total
      stockholders’ equity
    
    
    102,540,831
    
    
    96,279,516$
    111,907,511
    
    $
    104,291,102
 
  
  See
accompanying notes to unaudited condensed financial statements.
 
 -3-
   **ABLE
LABORATORIES, INC.**
 **CONDENSED
STATEMENTS OF INCOME**
 (Unaudited)
  Three
      Months EndedMarch
      31, 2005
    
    March
      31, 2004Sales,
      net
    
    $
    30,707,953
    
    $
    21,452,436Cost
      of sales
    
    
    14,005,209
    
    
    11,919,012Gross
      profit
    
    
    16,702,744
    
    
    9,533,424Operating
      expenses:Selling,
      general and administrative
    
    
    4,474,589
    
    
    2,998,416Research
      and development
    
    
    4,721,274
    
    
    3,546,388Total
      operating expenses
    
    
    9,195,863
    
    
    6,544,804Operating
      income
    
    
    7,506,881
    
    
    2,988,620Other
      income (expense):Interest
      and financing expense
    
    
    (35,906
    )
    
    (57,966
    )Miscellaneous
      income (expense), net
    
    
    60,447
    
    
    77,630Other
      income (expense), net
    
    
    24,541
    
    
    19,664Income
      before income taxes
    
    
    7,531,422
    
    
    3,008,284Provision
      for income taxes
    
    
    2,873,000
    
    
    1,155,000Net
      income
    
    
    4,658,422
    
    
    1,853,284Dividends
      on preferred stock
    
    
    —
    
    
    31,120Net
      income applicable to common stockholders
    
    $
    4,658,422
    
    $
    1,822,164Net
      income per share:Basic
    
    $
    0.25
    
    $
    0.11Diluted
    
    $
    0.24
    
    $
    0.10Weighted
      average shares outstanding:Basic
    
    
    18,434,173
    
    
    16,846,693Diluted
    
    
    19,630,209
    
    
    19,306,144
 
  
  See
accompanying notes to unaudited condensed financial statements.
 
 -4-
   **ABLE
LABORATORIES, INC.**
 **CONDENSED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**
 Three
Months Ended March 31, 2005 and 2004
 (Unaudited)
  Preferred
    
    Common
      Stock
    
    AdditionalPaid-in
    
    Accumulated
    
    Unearned
      Stock-BasedStock
    
    Shares
    
    Amount
    
    Capital
    
    Deficit
    
    Compensation
    
    TotalBalance
      at December 31, 2003
    
    $
    171
    
    
    16,761,216
    
    $
    167,611
    
    $
    116,060,210
    
    $
    (39,295,941
    )
    $
    (150,078
    )
    $
    76,781,973Stock
      options and warrants exercised
    
    
    —
    
    
    94,451
    
    
    945
    
    
    349,527
    
    
    —
    
    
    —
    
    
    350,472Conversion
      of preferred stock
    
    
    (27
    )
    
    155,678
    
    
    1,557
    
    
    (1,530
    )
    
    —
    
    
    —
    
    
    —Dividends
      on preferred stock
    
    
    —
    
    
    —
    
    
    —
    
    
    (31,120
    )
    
    —
    
    
    —
    
    
    (31,120
    )Amortization
      of unearned stock-based compensation
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    21,408
    
    
    21,408Tax
      benefit on stock options
    
    
    —
    
    
    —
    
    
    —
    
    
    515,000
    
    
    —
    
    
    —
    
    
    515,000Net
      income
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    1,853,284
    
    
    —
    
    
    1,853,284Balance
      at March 31, 2004
    
    $
    144
    
    
    17,011,345
    
    $
    170,113
    
    $
    116,892,087
    
    $
    (37,442,657
    )
    $
    (128,670
    )
    $
    79,491,017Balance
      at December 31, 2004
    
    $
    —
    
    
    18,353,281
    
    $
    183,532
    
    $
    120,804,537
    
    $
    (24,644,108
    )
    $
    (64,445
    )
    $
    96,279,516Stock
      options and warrants exercised
    
    
    —
    
    
    162,187
    
    
    1,623
    
    
    871,086
    
    
    —
    
    
    —
    
    
    872,709Stock-based
      compensation
    
    
    —
    
    
    —
    
    
    —
    
    
    156,100
    
    
    —
    
    
    —
    
    
    156,100Amortization
      of unearned stock-based compensation
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    12,084
    
    
    12,084Tax
      benefit on stock options
    
    
    —
    
    
    —
    
    
    —
    
    
    562,000
    
    
    —
    
    
    —
    
    
    562,000Net
      income
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    4,658,422
    
    
    —
    
    
    4,658,422Balance
      at March 31, 2005
    
    $
    —
    
    
    18,515,468
    
    $
    185,155
    
    $
    122,393,723
    
    $
    (19,985,686
    )
    $
    (52,361
    )
    $
    102,540,831
 
 
 See
accompanying notes to unaudited condensed financial statements
    -5-
   **ABLE
LABORATORIES, INC.**
 **CONDENSED
STATEMENTS OF CASH FLOWS**
 (Unaudited)
  Three
      Months EndedMarch
      31, 2005
    
    March
      31, 2004Cash
      flows from operating activities:Net
      income
    
    $
    4,658,422
    
    $
    1,853,284Adjustments
      to reconcile net income to net cash provided by (used for) operating
      activities:Deferred
      income tax expense
    
    
    2,259,000
    
    
    899,000State
      tax benefit for stock options
    
    
    92,000
    
    
    89,000Stock-based
      compensation
    
    
    156,100
    
    
    —Amortization
      of unearned compensation
    
    
    12,084
    
    
    21,408Depreciation
      and amortization
    
    
    926,389
    
    
    648,255(Increase)
      decrease in operating assets:Accounts
      receivable
    
    
    289,213
    
    
    (4,258,543
    )Inventory
    
    
    (2,442,789
    )
    
    (225,564
    )Prepaid
      expenses and other current assets
    
    
    449,036
    
    
    (97,418
    )Deposits
      and other assets
    
    
    (6,176
    )
    
    (33,266
    )Increase
      (decrease) in operating liabilities:Accounts
      payable and accrued expenses
    
    
    4,383,326
    
    
    1,484,627Net
      cash provided by (used for) operating activities
    
    
    10,776,605
    
    
    380,783Cash
      flows from investing activities:Purchase
      of property and equipment
    
    
    (3,478,030
    )
    
    (4,773,939
    )Purchase
      of LiquiSource assets
    
    
    —
    
    
    (18,561
    )Net
      cash provided by (used for) investing activities
    
    
    (3,478,030
    )
    
    (4,792,500
    )Cash
      flows from financing activities:Net
      proceeds from stock warrants and options
    
    
    872,709
    
    
    350,472Payment
      of debt obligations
    
    
    (3,000,000
    )
    
    —Preferred
      stock dividends paid
    
    
    (28,232
    )
    
    (96,490
    )Net
      cash provided by (used for) financing activities
    
    
    (2,155,523
    )
    
    253,982Net
      change in cash and cash equivalents
    
    
    5,143,052
    
    
    (4,157,735
    )Cash
      and cash equivalents at beginning of period
    
    
    11,650,886
    
    
    20,065,248Cash
      and cash equivalents at end of period
    
    $
    16,793,938
    
    $
    15,907,513Supplemental
      cash flow information:Interest
      paid
    
    $
    35,906
    
    $
    52,520Income
      taxes paid
    
    
    395,880
    
    
    499,045
 
  See
accompanying notes to unaudited condensed financial statements.
  
  -6-
   **ABLE
LABORATORIES, INC.**
  **NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**
  1.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
  **Business
and Basis of Presentation**
  Able
Laboratories, Inc. (“Able”) develops, manufactures, and sells generic
pharmaceuticals. The results of operations for the periods reported are not
necessarily indicative of those that may be expected for a full year. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) which are necessary for a fair statement of operating results for
the interim periods presented have been made.
  The
financial information included in this report has been prepared in conformance
with the accounting policies reflected in the financial statements included in
our Annual Report on Form 10-K for the year ended December 31, 2004 filed with
the Securities and Exchange Commission.
  **Use
of Estimates**
  In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the balance sheet date and
the reported amounts of revenue and expenses during the reporting period.
Material estimates that are particularly susceptible to significant change in
the near term relate to the carrying values of receivables, including allowances
for chargebacks, rebates and returns, inventory, and the valuation of deferred
tax assets. Actual results could differ from those estimates.
  **Stock-Based
Compensation**
  Statement
of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based
Compensation” encourages all entities to adopt a fair value based method of
accounting for employee stock compensation plans, whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” whereby compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date (or
other measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under our stock option plans generally have no
intrinsic value at the grant date, and under Opinion No. 25 no compensation cost
is recognized for them. In 2006, we plan to adopt the fair value accounting
model for stock-based employee compensation under SFAS No. 123, as revised in
December 2004 (see “Recent Accounting Pronouncements”).
  We have
two stock-based compensation plans and stock options issued outside of the
plans. We apply APB Opinion No. 25 and related Interpretations in accounting for
stock options issued to employees and directors. Had compensation cost for stock
options issued to employees and directors been determined based on the fair
value at the grant dates consistent with SFAS No. 123, our net income and net
income per share would have been adjusted to the pro forma amounts indicated
below:
  -7-
  Three
      Months Ended
      March
      31,2005
    
    2004Net
      income as reported
    
    $
    4,658,422
    
    $
    1,853,284Add
      stock-based compensation under APB No. 25
    
    
    168,184
    
    
    21,408Deduct
      stock-based compensation under SFAS No. 123
    
    
    (907,623
    )
    
    (478,338
    )Pro
      forma net income
    
    
    3,918,983
    
    
    1,396,354Less
      dividends on preferred stock
    
    
    —
    
    
    31,120Pro
      forma net income applicable to common stockholders
    
    $
    3,918,983
    
    $
    1,365,234Net
      income per share:Basic
      - as reported
    
    $
    0.25
    
    $
    0.11Basic
      - pro forma
    
    $
    0.21
    
    $
    0.08Diluted
      - as reported
    
    $
    0.24
    
    $
    0.10Diluted
      - pro forma
    
    $
    0.20
    
    $
    0.07
 
 
 **Earnings
Per Share**
  Basic
earnings per share represents income available to common stock divided by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been issued, as well as any
adjustment to income applicable to common stockholders that would result from
the assumed issuance.
  **Recent
Accounting Pronouncements**
  In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS
No. 123R”). SFAS No. 123R establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123R requires that the grant date fair value of such equity instruments
be recognized as an expense in the historical financial statements as services
are performed. Prior to SFAS No. 123R, only certain pro forma disclosures of
fair value were required. The statement also expands the valuation models that
are allowed in calculating the fair value. On April 14, 2005, the SEC adopted a
rule that requires implementation of SFAS No. 123R as of the beginning of the
first fiscal year that begins after June 15, 2005. Accordingly we will adopt the
provisions of this statement commencing with the quarter ending March 31, 2006.
If we had included the fair value of employee stock options in our financial
statements, our net income would have been as disclosed in Note 1. Accordingly,
the adoption of SFAS No. 123R is expected to have an effect on our financial
statements.
  -8-
  2.  INVENTORY
  Inventory
consists of the following:
  **March
      31,**
      **2005**
    
    **December
      31, 2004**Raw
      materials
    
    $
    12,447,861
    
    $
    10,619,845Work-in-progress
    
    
    2,293,970
    
    
    2,124,380Finished
      goods
    
    
    5,806,233
    
    
    5,361,050$
    20,548,064
    
    $
    18,105,275
 
  3.  PROPERTY
AND EQUIPMENT
  Property
and equipment consists of the following:
  **March
      31,**
      **2005**
    
    **December
      31, 2004**Machinery
      and equipment
    
    $
    17,012,562
    
    $
    15,377,613Furniture,
      fixtures and computers
    
    
    4,816,904
    
    
    4,057,958Building
      and leasehold improvements
    
    
    23,804,289
    
    
    22,632,148Land
    
    
    561,000
    
    
    561,000Construction
      in process
    
    
    5,115,880
    
    
    5,203,88651,310,635
    
    
    47,832,605Less
      accumulated depreciation and amortization
    
    
    (8,530,052
    )
    
    (7,603,663
    )$
    42,780,583
    
    $
    40,228,942
 
  4.  REVOLVING
CREDIT AGREEMENT
  On March
2, 2004, we entered into a $20 million revolving credit agreement with our bank.
The revolver bears interest at LIBOR plus 1.25% based upon our current leverage
ratio, requires no monthly principal payments and matures in March
2007.
  The
revolver is secured by substantially all of our assets including accounts
receivable, inventory, furniture, fixtures, equipment and intellectual property.
The loan is subject to certain financial covenants, including a fixed charge
coverage ratio, a leverage ratio and a net worth test. In the first quarter of
2005, we repaid the outstanding balance of $3.0 million.
  -9-
  
 ***Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations***
  **INTRODUCTION**
  The
following information should be read in conjunction with the financial
statements and notes thereto in Part I, Item 1 of this Quarterly Report and with
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the year ended
December 31, 2004.
  **CERTAIN
FACTORS THAT MAY AFFECT FUTURE RESULTS**
  We do not
provide forecasts of our future financial performance. However, from time to
time, information provided by us or statements made by our employees may contain
“forward-looking” information that involves risks and uncertainties. In
particular, statements contained in this report which are not historical facts
constitute forward-looking statements and are made under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve substantial risks and uncertainties. You can
identify these statements by forward-looking words such as “may,” “will,”
“expect,” “anticipate,” “believe,” “estimate,” “continue,” and similar words.
You should read statements that contain these words carefully because they: (1)
discuss our future expectations; (2) contain projections of our future
operating results or financial condition; or (3) state other “forward-looking”
information. Various factors listed below, as well as any other instances of
cautionary language in this report, refer to or provide examples of risks,
uncertainties and events that may cause our actual results to be materially
different than the expectations described in our forward-looking statements. You
should be aware that the occurrence of any of the events described in these risk
factors and elsewhere in this report could materially and adversely affect our
business. All forward-looking statements included in this report are based on
information available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements.
  Each
forward-looking statement should be read in conjunction with the financial
statements and notes thereto in Part I, Item 1, of this report and with the
information contained in Item 2, including, but not limited to, the factors set
forth below, together with Management’s Discussion and Analysis of Financial
Condition and Results of Operations contained in our Annual Report on Form 10-K
for the year ended December 31, 2004, including but not limited to the section
therein entitled “Certain Factors That May Affect Future Results.”
  In
addition to the risks and uncertainties posed generally by the generic drug
industry, we face the following risks and uncertainties:
  ·
    we
      may have difficulty managing our growth, and we could experience material
      adverse effects, if we are unable to maintain adequate control over our
      operations as the number of our employees increases, our manufacturing
      capacity expands and our business operations grow more
      complex;
  ·
    if
      we are unable to retain our key personnel or continue to attract and
      retain additional qualified professionals we may be unable to carry out
      our plans to maintain or expand our
business;
  ·
    we
      face intense competition from other manufacturers of generic
      drugs;
  ·
    our
      revenues and gross profit from our existing generic drug products are
      likely to decline as competing firms introduce their own generic
      equivalents;
  -10-
  ·
    in
      some circumstances, we may retroactively reduce the price of products that
      we have already sold to customers but that have not been resold by such
      customers;
  ·
    our
      ability to develop liquid formulations is
unproven;
  ·
    we
      are obligated to issue a large number of shares of common stock at prices
      lower than the current market value, which may reduce the market price of
      our outstanding common stock;
  ·
    the
      value of our common stock has fluctuated widely in the past and investors
      could lose money on their investments in our
stock;
  ·
    we
      may face product liability for which we may not be adequately insured;
  ·
    we
      are subject to intense regulation by government agencies, and our failure
      to comply with regulations applicable to our business could delay our
      efforts to commercialize our proposed drug products or cause a material
      adverse effect on our business and results of operations;
    and
  ·
    we
      depend on third parties to supply the raw materials used in our products,
      and any failure to obtain a sufficient supply of raw materials from these
      suppliers could materially and adversely affect our
    business.
  We have
created a new Compliance Group within the company to assist us in performing a
comprehensive review of our operating practices. See Item 5 of this report,
“Product Recalls and Creation of New Officer Position.” This group is being
assisted by a highly reputable consulting firm that has specialized expertise in
this area. In the course of our review, we have encountered and may continue to
encounter evidence of departure from standard operating procedures and
regulatory requirements in the historical data or current operations that we
evaluate. We have taken corrective action, and may be required to take further
corrective action, such as filing appropriate reports with the FDA, continued
monitoring of such situations, or recalling or suspending distribution of an
affected product. At this time, we have not experienced a material adverse
impact on our business or operations in connection with our ongoing
comprehensive review, but we do not know the magnitude of the effect, if any,
that our review will have.
  Because
of the foregoing and other factors, we may experience material fluctuations in
our future operating results on a quarterly or annual basis which could
materially adversely affect our business, financial condition, operating results
and stock price.
  **OVERVIEW**
  We
develop, manufacture and sell generic drugs. In 2005, we expect to continue to
increase our sales of generic drug products by attempting to increase sales of
our existing products and by obtaining approvals from the FDA for new products.
To accomplish these objectives, in 2003, we entered into a long-term lease for
our new facility in Cranbury, New Jersey, which we intend to use for our solid
and semi-solid dosage manufacturing operations and our executive offices. In
2004, we moved our executive offices to our new facility and we plan to move our
manufacturing operations to the new facility in 2005. Also, in 2003, we
purchased the building located at 6 Hollywood Court, South Plainfield, New
Jersey, where we currently conduct all of our manufacturing operations and which
we intend to use in the future for our liquids manufacturing business. In
November 2003, we acquired substantially all the assets of LiquiSource, Inc., a
privately-held developer and manufacturer of liquid pharmaceuticals. We intend
to develop our liquids formulation capability and position ourselves to add
liquid products to our product line through our utilization of the assets we
acquired from LiquiSource.
  -11-
  In the
section of this Report entitled “Certain Factors That May Affect Future
Results,” we have described several risk factors which we believe are
significant. We consider each of these risks specific to us, although some are
industry or sector related issues which could also impact, to some degree, other
businesses in our market sector. You should give very careful consideration to
these risks when you evaluate us.
  **CRITICAL
ACCOUNTING POLICIES**
  Our
significant accounting policies are more fully described in Note 1 to our
financial statements included in this Quarterly Report and in Note 1 to our
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2004 filed with the Securities and Exchange Commission.
Certain of our accounting policies are particularly important to the portrayal
of our financial position and results of operations. These policies require the
application of significant judgment by management and as a result, are subject
to an inherent degree of uncertainty. In applying these policies, our management
makes estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures. We base our
estimates and judgments on our historical experience, the terms of existing
contracts, our observance of trends in the industry, information that we obtain
from our customers and outside sources, and on various other assumptions that we
believe to be reasonable and appropriate under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
  Our
significant accounting policies, including inventory valuation, revenue
recognition, accounts receivable allowances for chargebacks, rebates, and
similar items, and income taxes are each discussed in more detail in our Annual
Report on Form 10-K. We have reviewed and determined that those policies remain
our critical accounting policies for the three months ended March 31, 2005. We
did not make any changes in those policies during the period.
  **Results
of Operations — Three Months Ended March 31, 2005 Compared to Three Months Ended
March 31, 2004.**
  Net sales
for the three months ended March 31, 2005 increased by $9,255,517 or 43.1%, from
the corresponding period in 2004, primarily due to a greater number of products
available for sale as well as higher demand for our existing products. Net sales
for the three months ended March 31, 2005 were $30,707,953 compared to
$21,452,436 for the three months ended March 31, 2004. As of March 31, 2005, we
had 30 FDA approved product families, in 70 different strengths, available for
sale, compared to 22 FDA approved product families in 51 different strengths,
available for sale as of March 31, 2004.
  Cost of
sales was $14,005,209, or 45.6% of sales, for the three months ended March 31,
2005, compared to $11,919,012, or 55.6% of sales, for the three months ended
March 31, 2004. The increase in our gross profit of $7,169,320, or 75.2%, from
$9,533,424 for the three months ended March 31, 2004 to $16,702,744 for the
three months ended March 31, 2005 is primarily attributable to a favorable
product mix including sales of an increased number of first-to-market products.
  Selling,
general and administrative expenses for the three months ended March 31, 2005
were $4,474,589, compared to $2,998,416 for the three months ended March 31,
2004. The increase of $1,476,173 is primarily due to increases in salaries and
benefits, our expanded sales and marketing efforts and the implementation of our
Oracle ® ERP
system. Salaries and benefits increased due to new employees added after March
31, 2004, including key additions to our senior management team. These expenses
were necessary to support our growth effort throughout 2004 and 2005.
  -12-
 Research
and development expenses for the three months ended March 31, 2005 were
$4,721,274, compared to $3,546,388 for the three months ended March 31, 2004. A
significant portion of these expenses relate to research which is currently
being conducted to develop generic drugs. The increase of $1,174,886 is
primarily due to increases in salaries and benefits paid to research and
development personnel. We have added additional employees, including new senior
management, to support our increased activity in research and development. As of
April 15, 2005, we had six abbreviated new drug applications pending approval
with the FDA and we expect to increase our research and development activities
for additional products over the next several months. We expect to file 15 to 20
new ANDAs during 2005.
  Our
operating income for the three months ended March 31, 2005 increased by
$4,518,261, or 151.2%, to $7,506,881, compared to $2,988,620 for the three
months ended March 31, 2004. This increase is due to a $7,169,320 increase in
gross profit resulting from an increase in our sales of new products, partially
offset by our increased investment in research and development expenses of
$1,174,886 and the $1,476,173 increase in selling, general and administrative
expenses.
  Interest
and financing expenses for the three months ended March 31, 2005 were $35,906,
compared to $57,966 for the three months ended March 31, 2004. Interest expense
decreased because we paid off $1,030,000 in New Jersey Economic Development
Authority bonds in May 2004, unsecured notes payable of $150,000 in June 2004
and our revolving credit agreement of $3,000,000 in March 2005.
  Income
tax expense for the three months ended March 31, 2005 was $2,873,000, compared
to income tax expense of $1,155,000 for the three months ended March 31, 2004.
Our effective tax rate for the three months ended March 31, 2005 and 2004 was
38.2% and 38.4%, respectively. The decrease in our effective tax rate is due to
a lower effective rate for state taxes. Our income tax expense is primarily a
non-cash expense. We do not expect to pay federal income tax, other than the
alternative minimum tax, until we fully utilize our net operating loss
carryforwards.
  We
recorded net income of $4,658,422 for the three months ended March 31, 2005,
compared to net income of $1,853,284 for the three months ended March 31, 2004.
We recorded net income applicable to common stock of $4,658,422 or $0.24 per
diluted share, for the three months ended March 31, 2005, compared to net income
applicable to common stock of $1,822,164 or $0.10 per diluted share for the
three months ended March 31, 2004.
  **LIQUIDITY
AND CAPITAL RESOURCES**
  As of
March 31, 2005, we had working capital of $54,459,335, compared to working
capital of $51,966,837 at December 31, 2004. Cash was $16,793,938 as of March
31, 2005, compared to $11,650,886 at December 31, 2004. The $2,492,498 increase
in working capital is primarily due to our net income of $4,658,422 for the
three months ended March 31, 2005 and non-cash expenses for deferred taxes,
depreciation and amortization of $3,197,473 being offset by our additional
investment of $3,478,030 in property and equipment and the repayment of our
$3,000,000 revolving credit agreement. We expect to make additional investments
in property and equipment during the next twelve months at our new Cranbury, New
Jersey facility, that we will fund with cash from operating profits. Our new
facility should allow us to expand our current manufacturing capabilities and
alleviate certain current manufacturing constraints. In addition, the new
facility should allow us to consolidate a substantial portion of our existing
operations upon expiration of current lease obligations.
  Other
significant changes in our working capital components from December 31, 2004 to
March 31, 2005 include an increase of $2,442,789 in inventory and an increase of
$4,355,094 in accounts payable and accrued expenses. The increase in inventory
corresponds with our increased sales and production activity, as $1,828,016 of
the increase consists of raw materials. The increase in accounts
 
 -13-
 
 payable
and accrued expenses is primarily the result of our increased raw materials
purchases and the build out of our new Cranbury facility. The accounts
receivable balance decreased by $289,213 as sales levels for the current period
were consistent with the prior quarter. The accounts receivable allowance
consists of allowances for returns, doubtful accounts, customer chargebacks,
rebates, and pricing adjustments. Our allowance for chargebacks, rebates,
returns, pricing adjustments and other allowances consists primarily of
allowances stipulated by contracts with major drug wholesalers and are customary
in the generic drug industry. We establish these allowances as we recognize the
sales and monitor these allowances on an ongoing basis. To date, actual amounts
have not differed materially from our estimates.
  On March
2, 2004, we entered into a $20 million revolving credit agreement with our
existing lender. The revolver bears interest at LIBOR plus 1.25% based upon our
current leverage ratio, requires no monthly principal payments and matures in
March 2007. We repaid the $3,000,000 outstanding balance in March 2005 and we
currently have no debt outstanding.
  The
revolver is secured by substantially all of our assets including accounts
receivable, inventory, furniture, fixtures, equipment and intellectual property.
The loans are subject to certain financial covenants, including a fixed charge
coverage ratio, a leverage ratio and a net worth test.
  We expect
to fund our working capital needs from operations and from amounts available for
borrowing under our revolving credit agreement.
  ***Item
4. Controls and Procedures***
  “Disclosure
controls and procedures” are controls and other procedures designed to ensure
that we timely record, process, summarize and report the information that we are
required to disclose in the reports that we file or submit with the SEC. These
include controls and procedures designed to ensure that such information is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
  We
maintain a system of disclosure controls and procedures that is designed to
provide reasonable assurance that information which is required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act of
1934, as amended, is accumulated and communicated to management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure. As required under the
Sarbanes-Oxley Act of 2002, our principal executive officer and principal
financial officer conducted a review of our disclosure controls and procedures
as of March 31, 2005. They concluded, as of the evaluation date, that our
disclosure controls and procedures are effective.
  The
process of designing and reviewing our system of internal accounting controls
involves, among other things, management’s judgments with respect to the
relative cost and expected benefits of specific control measures. Because of its
inherent limitations, a system of internal control over financial reporting can
provide only reasonable assurance and may not prevent or detect misstatements.
During the three months ended March 31, 2005, there were no changes in our
internal control over financial reporting that have affected, or are reasonably
likely to affect, materially our internal control over financial
reporting.
  
 
    -14-
   **PART
II - OTHER INFORMATION**
  **ITEM
1. LEGAL PROCEEDINGS**
  We are
involved in certain legal proceedings from time to time incidental to our normal
business activities. While the outcome of any such proceedings cannot be
accurately predicted, we do not believe the ultimate resolution of any existing
matters should have a material adverse effect on our financial position or
results of operations.
  **ITEM
5. OTHER INFORMATION**
  
 *Product
Recalls and Creation of New Officer Position*
 
 During
the quarter ended March 31, 2005, we conducted voluntary product recalls
affecting three product families: metronidazole capsules, 375 mg, for
noncompliance with labeling requirements for antibacterial drug products,
promethazine hydrochloride suppositories,12.5mg and 25mg, for stability failure,
and prochlorperazine suppositories, USP, 2.5mg and 5mg, for stability
failure.  Recently we also decided to recall one batch of methylphenidate
ER 20 mg tablets, for improper laboratory practices and noncompliance with
standard operating procedures. As a result of our internal review of these
events, and as part of our ongoing efforts to maintain our regulatory compliance
and the quality and integrity of our operations, we have initiated a thorough
internal evaluation of our operating practices with the knowledge of the
FDA.  To aid us in achieving this objective we have created a new executive
officer position, Vice President, Compliance, and promoted Iva Klemick, our
former Director of Regulatory Affairs, to serve in this position, reporting
directly to our President and Chief Operating Officer.  We have also
retained the services of a highly reputable outside consulting firm to assist us
in this initiative.  Our consultants will review current practices and
historical data and make recommendations for improvements and/or corrective
action, and will also train employees in our new Compliance Group to perform
these activities in the future. Over the next several months we expect to
continue this effort to assess our practices and identify and address any
issues, working proactively with our internal management resources, our outside
consultants and the FDA.
   -15-
  **ITEM
6. EXHIBITS**
  (a)  List
of Exhibits
  The
following exhibits, required by Item 601 of Regulation S-K are filed as part of
this Quarterly Report on Form 10-Q. Exhibit numbers, where applicable, in the
left column correspond to those of Item 601 of Regulation S-K.
  ****Exhibit****No.**
    
    **Item**3.1
    
    Restated
      Certificate of Incorporation (filed as Exhibit 3a to our Report on Form
      10-Q for the Quarter ended June 30, 1998, as amended on September 14,
      1998, and incorporated herein by reference).3.2
    
    Certificate
      of Amendment of Certificate of Incorporation dated May 31, 2000 (filed as
      Exhibit 3.2 to our Report on Form 10-QSB for the quarter ended June 30,
      2000 and incorporated herein by reference).3.3
    
    Amended
      and Restated By-Laws dated as of May 26, 2000 (filed as Exhibit 3.3 to our
      Report on Form 10-QSB for the quarter ended June 30, 2000 and incorporated
      herein by reference).3.4
    
    Certificate
      of Amendment of Certificate of Incorporation dated May 9, 2001 (filed as
      Exhibit 3.3 to our Report on Form 10-Q for the quarter ended June 30, 2001
      and incorporated herein by reference).3.5
    
    Certificate
      of Ownership and Merger dated May 18, 2001 (filed as Exhibit 99.1 to our
      Current Report on Form 8-K dated May 18, 2001 and incorporated herein by
      reference).3.6
    
    Certificate
      of Amendment of Certificate of Incorporation dated May 31, 2002 (filed as
      Exhibit 3.7 to our Report on Form 10-Q for the quarter ended June 30,
      2002, and incorporated herein by reference).31.1
    
    Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the principal
      executive officer.31.2
    
    Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the principal
      financial officer.32.1
    
    Certification
      of principal executive officer and principal financial officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.**
 
 
  -16-
  
  **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.
  ABLE LABORATORIES,
      INC.Dated: May 10,
2005
    By:
    /s/ Dhananjay G.
      WadekarDhananjay G. WadekarChief
      Executive Officer
  ****By:
    /s/ Nitin
      V. KotakNitin
      V. KotakVice
      President, Finance and Accounting and
      Treasurer
 
 
 
 
  -17-
  **EXHIBIT
INDEX**
 ****Exhibit****No.**
    
    **Item**31.1
    
    Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the principal
      executive officer.31.2
    
    Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the principal
      financial officer.32.1
    
    Certification
      of principal executive officer and principal financial officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.**
 
    -18-