Elite Pharmaceuticals, Inc. (OTCQB:ELTP) Q1 2023 Earnings Conference Call August 16, 2022 11:30 AM ET
Company Participants
Nasrat Hakim – President and Chief Executive Officer
Robert Chen – Chief Financial Officer, Secretary and Treasurer
Conference Call Participants
Operator
Good morning, ladies and gentlemen, and welcome to the Elite Pharmaceuticals Conference Call. At this time, all lines have been placed on a listen-only mode.
Before management begins speaking, the Company has the following statement. Elite would like to remind their listeners that remarks made during this call may contain forward-looking statements that involve risks and uncertainties that are subject to changes at any time, including, but not limited to, statements about Elite’s expectations regarding future operating results.
Forward-looking statements are made pursuant to the Safe Harbor provisions of the Federal Securities Laws and represent management’s current expectation. Actual results may differ materially. Elite disclaims any obligation to update or revise its forward-looking statements, except as required by law.
More complete information regarding forward-looking statements, risks and uncertainties can be found in the reports Elite files with the SEC, which are available on Elite’s website at elitepharma.com under the Investor Relations section. Elite encourages you to review these documents carefully.
With that covered, it is now my pleasure to turn the floor over to your host, Mr. Nasrat Hakim, President and Chief Executive Officer of Elite Pharmaceuticals. Sir, the floor is yours.
Nasrat Hakim
Thank you, Matthew, and good morning, ladies and gentlemen. Thank you for joining us today. My name is Nasrat Hakim, I’m Elite’s Chairman and CEO. This is Elite’s earnings call and our CFO, Mr. Robert Chen, will give us a summary of the company’s financials after which, I’ll come back with the corporate update and answer some of the questions that you have submitted to Dianne.
Robert, the floor is yours.
Robert Chen
Thank you, Nasrat, and thank you to everyone for joining our first quarter conference call today. Yesterday, we filed our 10-Q for our first quarter ended June 30th, year 2022. Elite is on a March fiscal year, a copy of the 10-Q is available in the Investor section of our website at elitepharma.com. It is also on sec.gov and many other websites that provide links to our filings.
Today, I would like to give you an overview of the financial and provide some commentary as well. Starting with the income statement, we had a strong sales of about $7.7 million for this quarter, up about $0.6 million or 9%, compared to the same quarter last year. This is primarily due to the strong sales of Amphetamine IR tablets and Amphetamine ER capsules. Again, I would like to remind you the strong, the important fact that our sales have been on an upward trend from $8 million in the fiscal year 2019, $18 million in 2020, $25 million in fiscal year 2021 and $32 million for year 2022.
Moving down, we come to cost of goods sold. As a general trend our cost of goods sold reflect direct proportionally in percentage increase in revenue. The company posted a gross profit of about $4 million and $0.4 million over last year, due to stronger revenue. Our operating income was about $1 million versus $0.97 million for prior quarter last year. Our operating expense maintained at a relative steady level at $3 million for this quarter versus $2.6 million for the prior quarter.
Our net income was about $0.3 million, compared to $2.4 million for the prior quarter. The main driver contributing to the decrease in net income are two major items: one, is the derivative and liabilities due to the outstanding stock warrants, about $1.1 million, and the other is the net operating loss of sales about $1 million, which the company does not have during this quarter.
Let me give you a brief explanation as to the calculation of the derivative liability. The change in the fair value of the derivative instrument is determined in large part by the change in the closing price of the company common stock with an inverse relationship. In other words, the higher the common stock price the larger than liability. So that’s why the variance is about $1.1 million. And also for your information, the transaction does not have an impact on the company’s cash flow.
Now let’s move down to balance sheet. Our working capital was strong at about $25 million, up about $12.6 million over the prior period. The increase in working capital reflects the company’s ability to control its spending and also to a great degree due to the $12 million loan we have obtained from the East West Bank in April this year. The loan will be used for general working capital purpose. Our cash flow, our cash — total cash on hand is about $20 million at June 30, year 2022.
So with that, I’ll now turn over the floor back to Nasrat for an overview on the company.
Nasrat Hakim
Thank you, Robert. We met six weeks ago, so we don’t have a tremendous update for you today. But as always, I’ll take this opportunity to update you on the impact of safety on the company, Elite’s financials, research and development pipeline, our commercial products, and then we’ll go to Q&A for the questions that you have already submitted to Dianne.
Regarding safety and COVID-19 my concerns have not changed about the effect of the pandemic on supply chain and inflation and business continuity. All it takes is one missing component to bring the manufacturing and shipping to a halt. For us or any other industry, this is not limited to Elite or Pharmaceuticals. To-date, our commercial products have not been materially affected by the supply chain problems. This is not to say that we have not been impacted, we are feeling the impact on our R&D pipeline mostly in the form of delays in clinical trials that continue to affect us.
Regarding financials, Robert hit on the right numbers. Revenues, profits and cash flow, I am very pleased with the direction the sales are going and hope our sales and marketing partners continue on this path. Our cash position is solid, it is a combination of profits we made and money we borrowed. The money we made supports working capital and R&D, and the money we borrowed was to support business ventures, including the potential purchase of the Amphetamine IR and ER.
More than two years ago, SunGen informed us that they lost their financial backup and they were in the market to sell their shares of Amphetamine IR and ER to raise cash. They would not accept payments in Elite’s stock and Elite does not have the cash to buy the ANDAs. Our former CFO, Carter Ward, tries to get Elite alone, but was turned down due to lack of profitability. By the time Mark Brickman joined us, we had a better financial track record and we were able to get a loan.
Three things happened while we’re seeking the loan. First, the owner of the building that houses Elite’s manufacturing, DEA [volts] (ph), quality, packaging and warehouse decided to sell the building. The man is 91-years-old and he decided to exit the business. Second, Lannett received approval for Amphetamine ER, which indicates that they could be manufacturing and selling their own product. And the third Mark was no longer with us.
Buying the building instead of leasing it was not on the table 12-months ago and neither was parting from Lannett at this time. As to the building, quick analysis showed us that moving out would cost us a lot more than staying and buying the building. And I’ll go through the analysis for you in a minute. The building was offered to us at a warehouse price, not as a pharmaceutical building, which the rents will be a lot higher. So if we buy another warehouse, we will have to retrofit it at a tremendous cost.
And moving to a rental or a building that we purchased would require tech transfer of all the products and bioequivalency for some anything that’s an ER would require a brand new clinical trials and that costs a lot of money. So we got loan, we invested a couple of million and financed the rest and closed in July. This action was a very positive step for Elite. The alternative would have been much more costly.
With respect to acquiring the second half of Amphetamine IR and ER, the Board of Directors is and will soon decide if and when and under what terms to make an offer to purchase the assets. In which case, the money we borrowed could be utilized to purchase the ANDAs. If not, it will be utilized to enhance R&D.
Speaking of R&D, Elite continues to spend significant amount on research and development. It is our number one priority and number one focus. Our goal is to create a new set of products that are diverse enough that they stabilize the company, in case we get a hit on one of the products such as Amphetamine IR or ER, then the company will not be materially affected and will survive. The more pillars we can add to stabilize the company, the better it is for all of us.
Elite is working on a number of generic ANDAs. Currently, we have a three clinical trials that we signed contract for. One will be done in the U.S. and two in India. Two of the three are difficult products that take longer than the average time to execute the clinical trials. Bottom line, many opportunities are currently being pursued and you will hear about them at the appropriate time. Right now, all I can tell you is we have about half a dozen ANDAs that we are working on actively and about a dozen that range from the early stages all the way to clinical trials.
This year 2022, we have received two approvals from FDA. One ANDA for, doxycycline tablets a product we co-own with SunGen plus or Praxgen and the other is Vigabatrin, which is owned by Elite. Regarding Doxy, we will be working with our partner to determine the next steps. Regarding Vigabatrin, the sales and marketing is licensed to Lannett, this product includes a REMS component, and we’ll need to work on it with Lannett for the next few months to ensure that they are a part of the REMS system.
On the commercial front, Amphetamine ER and IR are two products that are in a very competitive market. They have done very well for us. We have done very well to-date with our partner Lannett. And as I stated before, they have approval for their own IR and ER, we have not received an official notice that Lannett wishes to terminate the sales and distribution agreement for these products. However, okay, we cannot take anything for granted. We need to take and/or take in all the necessary management measures to protect Elite, if that happens. By finding and searching for a new sales and marketing partner just in case or by going at it ourselves.
To that end, we are getting licensed in all 50 States each State has its own unique requirements. We have already filled out the applications for all 50 States. And we have already received responses from more than half of them that we are already approved, so we’re approved in half and the other half are pending. We are interviewing three PL for distribution, we do not have warehouses, we do not have distribution systems. This is what Lannett and TAGI and Epic do on our behalf. So we’re interviewing third-party logistics for distribution and comparing prices to find the best deal for a small company like us. We have also interviewed VPs for sales and marketing to be ready to select somebody as soon as we — if we hear from Lannett.
The stakes are too high for us not to be ready, in case if that happens. Having our own sales and marketing force is something that I’ve always wanted for Elite. I was planning on it once we get few more ANDAs, and maybe four more, to make it financially more feasible. But this may accelerate the process and whatever happens, we’ll be ready for it.
Okay. Moving on to the rest of the commercial product line. Loxapine is marketed by Prasco under the Burel Pharmaceutical label. It is one of those products that was affected by the supply chain, because we could not get a critical component, actually a budget capsule for that. In the amount that they needed for sales and marketing. We got very little, just to barely cover the market that they already have. We expect to resolve these issues and expect future growth for this product. Isradipine and trimipramine are distributed by Epic. There are interesting products they have very limited competition. And with Epic, we’re already seeing a little more profit and revenues. Naltrexone and the Bariatric line are distributed by TAGI with a steady revenue stream.
To wrap up, Elite is executing on its growth plans, working on new product approvals and capitalizing on its commercial product line. Our sales and distribution partners are performing well. We look forward to another profitable year.
Let’s go to Q&A. As always, you sent your questions to Diane and many of you ask the same question in a different way. So we group them and if we pick a question, that’s all the different in the news, please understand this because other people ask the same question.
Question-and-Answer Session
A – Nasrat Hakim
And we’ll start with the first one about the corporate finance. Question number one. Given how cheap the stock is valued on the OTC market? Has management considered using some free cash flow to conduct buyback? I believe that even if a small amount of stock is removed from the float 1 million to 2 million shares. And the subsequent press release would assist in raising the Company’s market capitalization.
Robert, would you take that one?
Robert Chen
Sure. Thank you, Nasrat. I think this is a good question, so sometime a company will engage in a stock buyback program when it has extra cash. A key upside of a buyback for investors is the reduction in a supply of shares. When there are a few shares to go around that can trigger a rise in price. And this is a pretty general phenomenon. But unfortunately, this phenomenon may or may not necessarily happen to an OTC stock price. And even when it does happen is a short lived. At the same time, the earnings per share EPS may improve with the stock buyback.
However, given the number of our common stock outstanding, the net effect will be quite minimal. So at this stage, as our CEO repeatedly emphasized, I believe the company believes the best way to move forward is to continue to build up its foundation with increased revenue through its product development program. And this product development program require huge outflow of cash. So as such, the company will not engage in a stock buyback at this point. That will be my answer to this question. Give it back to you, Nasrat.
Nasrat Hakim
Thank you, Robert.
Robert Chen
Thank you.
Nasrat Hakim
Thank you, Robert. The next question, what are the financial reasons for the purchase of the building that we previously rented?
As I stated, the building was going to be sold whether we like it or not. The owner wants to sell it, they sell it. The entities that were interested in buying it are the ones who bought pretty much everybody on our street and they were going to make it into a retirement plan. So moving out would cost us a lot more than buying the building, and moving out the renting, which require that we go through tech transfer of all the products and clinical trials.
So just let me walk you through the financials. Well, I’m not going to go through the — when we last gave the financials, I’ll give you the general picture. If we actually moved out and the new building is a warehouse, we have to spent a lot of money retrofitting it, and we have spent a lot of money dismantling all the equipment that are spot to the walls that are built in into the plummings of electrical and gases and all of that cost a lot of money sometimes more then the equipment is worth free, okay?
And when you’re doing that, what are you going to manufacture with? We got [indiscernible] marketing supply. In addition, the FDA requires that you set up a new company, make lots in there, put them on three months’ stability and then submit it to the FDA to steady to be approved to continue there. So there is massive downtime. In addition, they required us to go back and receive the clinical trials for any product that’s an extended release. When you do the math, and I have done the math, you would pay more than the twice of the building and the cost of tech transfer and clinical trials and equipment movement. So it makes absolutely no sense to leave, okay.
So buying the building was really the best option for Elite. We were very happy that the owner sold it as, as a warehouse at the warehouse price, he didn’t say now to pharmaceutical company, I want more money. And as I said, moving anywhere else would have cost us a lot more. So it was a win-win for us.
Question number three, another similar question. There are two, three similar questions, I’m just going to read one. Perhaps the follow-up questions can be answered in tomorrow’s call. How is Hakim going to allocate the $12 million loan? I mean, A, hire uncertainty in new drug applications, other people ask pretty much the same question in a different way.
So the money will be allocated as needed by the company. A part of it was allocated to the down payment and the building that I just went through analysis of why we wanted to buy it. Another could be a potential purchase of the other 50% interest in the IR and ER potential purchase of other ANDAs and/or a current R&D project and their clinical trials. Meaning, right now, we have certain budgets for clinical trials that we have the extra money. We could increase the number of products that go through the clinical trials or expedite it. It also could go to investments in sales and marketing department and infrastructure for that. We are open, we would look at what is the best for Elite, and the Board of Directors will make the final determination.
The next question, another stock that I own, SNGX is about to have a skin cancer drug. So part the NDA process or through the NDA process. SNGX does not have any manufacturing capability and is located nearby in Princeton, New Jersey. Would management consider speaking with them and seeing if the — if an agreement could be reached to work together to make their skin cancer and potential psoriasis creams?
Thank you so very much for thinking of Elite and for suggesting that. Unfortunately, this is the wrong technology for us. We don’t have the facility to make a creams and ointment or a sterile product and that’s what you need for cancer, and that’s what you’re describing. This is a different facility, a brand is for [indiscernible] before, but it requires different equipment, different packaging lines, it’s not the same as business as we’re in.
Question number five. Would rather Chen bring over to Elite any new drugs from [KBT] (ph). Robert?
Robert Chen
Sure. Thank you, Nasrat. This is — again is a very interesting question. KBT, where I worked before is currently engaging in — on a drug for chronic kidney disease is a branded product, which is in its early clinical Stage 3. So it remains years away probably two to three years before you can file it registration with FDA. So it’s not something we would pursue even we have the opportunity to do so at this point. Give it back to you, Nasrat. Thank you.
Nasrat Hakim
Thank you, Robert. When is this Dexcel launch expected? Okay, we really are anxious and looking forward to that. But you understand that the Israeli government have to take the application from the U.S. and run it through their system, because this is a brand new application for Dossier and they come back and ask for certain testing to be done. They have their own standards, they accept some stuff on Dossier, but not everything. So Dexcel is working very hard to get the approval, but we do not know when would that happen. This is not something that we are handling or can handle. We get updates from Dexcel anytime they hear from the Israeli government, they call us, say, please run this search for us. Please do the following work for us. And we’re on top of it trying to push as much as we can from our side, but we are depending on our partner to come through from the other side, okay? And as soon as that happen, it’s something that we will notify you or inform you about in future calls.
All right. Last question, it’s a set of questions that I’ll combine together that are all about Oxy, ER. Are we pursuing a partnership or are the prospects of partners? What’s the expected generic income from it? Are we using our unique [ADF] (ph) formulation with it? So a lot of questions about what we announced in the 10-K the last time.
So first, let me say, no, we’re not using our own ADF. This is — this formulation that we have disclosed that we’re working on is a straight generic equivalent of Oxycodone. No one has entered the market yet to compete with Oxycodone as a generic. Couples of companies made a brand new products, but nobody has done that. And that’s because, of course, Purdue had a ton of patents and they went back to FDA and changed their regulations and asked for more clinical trials and quite a few other things. So we are running the last set of clinical trials that we believe the regulations calls for today. Well, actually that the regulations does call for today, okay? And we hope that we could file by Q2 of 2023. If all goes well, and please remember that part, okay?
We are working on something, just because we’re working on something, it doesn’t mean that the FDA is not going to change their mind and add the requirement. But if all stays constant, we believe this is the last clinical trial that we need to conduct and we will be able to file next year, okay? We don’t have a partner, and we have now looked at that, because if we do have sales and marketing, then we don’t need a partner. If we don’t, then we stay with the land, then we might. All of that will come to fruition after we file, the FDA accepts the application, we settle whatever patents and lawsuit Purdue has and get an approval. When you get close to that within — we’ll know hopefully within a year plus or minus where there were changes that the FDA comes back with the complete response letter or ask a little questions about this and that.
Once we get to that point after filing, then we’ll have a better idea. As of today, we’re making all the right choices, we’re taking all the right steps, we’re following the guidance to achieve, we’re checking with experts to make sure everything goes well. And if all goes well, the filing will be in Q2 of 2023, okay.
That was the last question and that concludes our meeting for today. Thank you, Matthew, and thank you ladies and gentlemen for joining us and have a wonderful day.
Operator
Thank you, ladies and gentlemen. This concludes today’s event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
Be the first to comment