Elite Pharmaceuticals, Inc. (OTCQB:ELTP) Q2 2023 Earnings Conference Call November 15, 2022 11:30 AM ET
Company Participants
Nasrat Hakim – President and Chief Executive Officer
Robert Chen – Chief Financial Officer
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 statements. Elite would like to remind their listeners that remarks made during this call may contain forward-looking statements that involve risks and uncertainties and 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, Paul, 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 our earnings call and our CFO, 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, you have the floor.
Robert Chen
Thank you, Nasrat, and thank you to everyone for joining our second quarter conference call today. Yesterday, we filed our 10-Q for our second quarter ended September 30, 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.
Now, I would like to give an overview of the financial and some commentary as well. Let me start with the income statement. We had a strong sales of about $8.6 million for this quarter of a little bit as compared to same quarter last year. Our sales on Amphetamine IR Tablets and Amphetamine ER Capsules remain steady.
Moving down to cost of goods sold. As a general trend, our cost of goods sold reflect direct proportionally to the level of revenue at about $4.8 million for both periods. The company post a gross profit of about a $3.8 million for both periods. Our operating expense stand in about $2.7 million for this quarter and a $2.3 million for the prior quarter. The increase in operating expense was largely due to the increase spending in product development.
As a result, our operating income was about $1.1 million versus a $1.4 million for prior quarter last year. Our net income was about $1.5 million as compared to $1.8 million for the prior quarter. The main driver contributing to the decrease in net income was the increase spending in interest payment.
Now, I’m going to move to six-month period ended September 30, 2022. We had a strong sales of about $16.3 million versus $15.6 million for the same quarter last year, up about $0.6 million or 4%. This is primary due to the strong – stronger sales of Amphetamine IR Tablets and Amphetamine ER Capsules. Just for your information, as I like to mention to remind you a gentle reminder, the company has been on a upward trend in the sales including $8 million in 2019, $18 million in 2020, $25 million in fiscal year 2021 and $32 million for last year.
For the first two quarters, the cost of goods sold was about $8.4 million versus $8.3 million for last year, and the gross profit was about $7.8 million, a $0.5 million over last year due to stronger revenue. Our operating expenses stand in about $5.7 million versus a $5 million for both periods. The increase in operating expense was mostly attributable to the increase in payroll and the professional expenses. Our operating income was about a $2.1 million versus $2.4 million for the same period last year.
Our net income for the six-month ended September 30, 2022 was about $1.8 million as compared to $4.2 million for the – for prior period. The main drivers contributing to the decrease in net income, including the following three factors. The first one about $0.8 million from the derivative liability due to outstanding stock warrants and $0.9 million for annual sales, which a company does not have during this period and a $0.4 million spending increase in interest payments.
For your information, that change in the fair value of derivative instrument is determined in large part by the change in closing price of the company common stock with an inverse relationship. In other words, the higher the common stock price, the larger the liability. So for your information as well, this transaction does not have any impact on our – on companies at cash flow.
Let me now move down to our balance sheet. Our working capital was a strong at about $24 million, up about $12 million as compared to March 31, 2022. The increase in working capital reflects the company’s ability to control is a spending and also to a great degree due to the $12 million loan we have obtained from East West Bank in April this year. The loan will be used for general working purpose. Our total cash on hand is about $19 million at September 30, 2022.
With that, I will now turn the floor back to Nasrat for the overview on the company.
Nasrat Hakim
Thank you, Robert. Today, I’ll update you on Elite’s ongoing activities, pipeline, progress, and commercial strategy before we go to Q&A. But first let me say a couple of thoughts about revenues and profits. We had another solid quarter with good numbers in revenues, profits, and cash flow. For four years now, Elite has had a very good run with increased revenues quarter-to-quarter and year-to-year.
Going from $8 million to $32 million and becoming profitable, that is not an easy task for an OTC company or any company for that matter. We have faced a lot of challenges, FDA, DEA, partnership, cash flow, the pandemic, et cetera. At the end of the day, the audited SEC filed numbers tell the story of how we figured out.
Now, a positive balance sheet means that Elite will continue to invest in R&D to diversify our product and support our growth. I’ll have more to say about that shortly. And it also means that Elite has the ability to invest in its own sales and distribution organization to allow Elite to sell selected products directory to wholesalers and distributors. And I’ll say more about that as well.
I’ll start with an update on the status of our current commercial products. Elite’s products are classified into two categories as far as sales and marketing is concerned. Products that are distributed through our partner, which are the majority of our products and our revenues today, and products that are sold directly by us to distributors.
A TAGI distributes Elite’s Naltrexone and the Bariatric products. TAGI has been with us for a very long time and the revenues and profits from TAGI are steady. Prasco distributes Loxapine Capsules under their Burel Pharmaceutical label and Loxapine has captured a modest market share and we are hoping to do better in the future.
Praxgen is our partner for Doxycycline tablets. No decision have been made on that yet. Epic is our partner and distributor for Isradipine and Trimipramine. We believe these products have an upside potential. Lannett is our partner in Dantrolene and of course an Amphetamine IR and ER, although, the Amphetamine products are in a very competitive market. Lannett and Elite have done a very good job at marketing them and have done very well to-date. Amphetamine IR continues to be on the FDA’s shortage list, Elite will be selling these products under Elite label beginning in the second quarter of 2023, April 1, 2023.
Going forward, Elite will still have the two categories that I just spoke of, except the majority of the products and the majority of the revenue will be coming from products sold by Elite on Elite’s label. Amphetamine IR and ER will be sold directly under Elite’s label beginning April 1, 2023. Isradipine and Trimipramine similarly will be sold under Elite’s label about the same time. We also retained the rights to Vigabatrin, a product that was approved earlier this year.
The rest of the products will be evaluated on case by case basis and figure out how we can bring them home or if it’s in our best interest to keep them with a partner. In addition to selling our products in the U.S., Elite has several opportunities for the sale of our products outside the United States. We continue to work on these details and look forward to successful sales in the future. Elite will provide updates on ongoing products and negotiations with overseas companies as we reach milestone or material events.
So let me explain. When a company orders $25,000, $50,000 or $100,000 worth of Elite’s product, because they want to test the market overseas. That is not a material event, because it’s a one-time thing. So we do not [indiscernible] But if the same company comes back to us now and say, that process was very successful, now I’m going to own a $100,000 a week, that becomes a very material event and that’s when we [indiscernible] okay. So we are working with overseas companies and we will let you know when and if anything materializes.
Elite has taken significant strategic steps to start selling our own products under our own label. We waited for the right time to start our own sales and distribution and the time is now. It was my hope that we will reach about $60 million in revenues before we start our own sales and marketing. But the event that unfolded with Lannett and others forced us to accelerate that and I am not unhappy about the prospect, especially with Kirko joining us. We are setting up the structure and national distribution for Elite’s labels for selected products and NDC numbers, and we will begin distributing in Q2 of 2023.
Direct sales will allow Elite to retain a larger share of the product profits and more direct control of the product sales and pricing strategy for those products. It’s an important step that makes Elite more complete pharmaceutical company with all operational structures including sales and marketing. The most important step for sales and distribution was making a key new hire. Elite hired Kirko Kirkov as our Chief Commercial Officer. Kirko will set up the required structure and will oversee Elite sales and distribution. Kirko comes with a strong background in commercial sales and distribution with over 15 years in pharmaceutical management and commercial operations. He previously worked for Vertice Pharma as their General Manager, and before that he was at Sandoz for many years in various capacities, both in the U.S. and overseas.
Kirko started out at Sandoz with overseas responsibilities as the country’s head in Bulgaria and then Russia before he took a senior position with Sandoz in U.S. commercial operation. Kirko’s best talent is not his excellent experience and outstanding education including graduate degrees from MIT. It really is his great personality and love to sell. I am and we are very excited to have Kirko as our part of the executive team.
Elite is also strengthening its financial group and will add more functionality as we see progress. For warehousing and distribution, Elite has chosen a 3PL, third party logistics, that will work with Elite to provide functionality on a contract basis. This allows Elite to focus on sales and operations. As Elite’s at sub-distribution and warehousing, we are integrating the various pieces of Elite structure with our 3PL partner, such as a commercial financial operation, customer support, compendial testing, ERP, EDI, manufacturing, shipping, distribution. All of that is being coordinated with the 3PL partner.
We also are contracting with wholesalers distributors and group purchasing organizations and institutions as a supplier to sell our own products obviously. And we are securing sales and distribution licenses in each state and territory. To-date, we have 47 states. We are licensed in 47 states and the District of Columbia and we have three states that are pending.
I will continue to update you on our progress in these key initiatives as we achieve more milestones. On the development front, lead continues to invest in product development. Our goal is to commercialize a new competitive products to continue to grow and diversify our portfolio and also to give Kirko something to sell or more to sell. Currently, Elite has three products that are in clinical trials or bioequivalency studies.
One of these products we recently announced positive results. We expect to file the ANDA later this year as soon as we receive the final report from the CRO. The two other products are in clinical trials. One should be completed in January, February timeframe, meaning the clinical trials should be completed then, I’m filed in Q1 of 2023, and the second hopefully will be completed toward the end Q1 of 2023 and we’ll file it sometime in Q2 2023.
Additional products in development now are being readied for future and upcoming DE studies for next year. We will update you on the other development products and as we progress, as we get material events such as a DE study – successful DE study, a filing or an approval.
To wrap up, Elite is executing on its growth, obtaining product approvals, launching new products, and starting a new sales on marketing distribution department. We look forward to another great quarter.
Let’s go to Q&A. Diane sent me a list of all the questions that the stockholders have submitted. So I’ll take them from the top and go through them one by one.
Question-and-Answer Session
A – Nasrat Hakim
There are lot of reasons why people put their products on the discontinued list. It makes the reportings for pharmacovigilance for adverse drug events and other reportings for regulatory purposes easier. It also makes the investigations easier. If somebody complains about, let’s say, Adderall IR and they don’t know what the lot number is. The FDA will send a notification to everybody. And if you are on the discontinued list, you say, hey, I’m not making the products on this continued list, so you don’t have to investigate.
There are advantages to doing that. And it’s really not that difficult to get it back off of the discontinued list. Literally, Lannett can have a large quantity and notify the Orange Book and within a week or two be in the market.
Second question, in August 2022, Praxgen discontinued Doxycycline, did they change their mind and no longer want to launch this product to delete?
No. Again, they put it on the espionage for the same reason as Lannett, so they can do less work for regulatory and what have you. Okay.
SequestOx, are you still thinking about submitting SequestOx or have you begun the process, if the later when is your target date for resubmission assuming all as well?
We have never withdrawn SequestOx. It’s still a pending application with the FDA. We just did not finish all of the clinical trials they ask us to do. That’ll cost tons of money, millions of dollars, but we cannot resubmit what has not been withdrawn. It’s still an active application. We have decided not to pursue it because of financials as I’ve explained many times before.
Dexcel, any new news on Dexcel front. Israel has no Adderall at all. Does the situation influence the Ministry of Health’s approval?
No. This is a decision for them. They are the experts in their own country. They will be working with their country. We are here to support them anytime they need us. We have absolutely no control and no knowledge of actually how they do things in Israel. They’re our partner. When they tell us they’re ready, we are ready.
DEA, I always get the same questions about DEA. Did Elite reach his quota for the year for Adderall products? Did Elite experience any API shortage? Did the DEA FDA increase Elite’s quota?
We have had no quota issues. We have requested quota from the DEA on regular basis. We have support the request with all the material documents that we have given them. And they have helped us out and approved it. Now many times the approval came in, in the last second where they gave us a heart attack and we’re sitting here nervously awaiting the approval and the quota. But every time they have come through for us to date, as you can see from all the revenues we’re making, we have not had any issues with the DEA. They do control the market. They are very good at that. They do not issue quota to anybody. You have to go through a lot of very important steps in showing them sales and showing them projections and showing them consumption before they allow it. So they do a very good job.
Can you please confirm the dates of the new ANDAs? As I’ve shared with you every time we spoke, we’ve encountered lots of delays from the CROs for the clinical trials. So in 2022, I was hoping for four ANDAs, we’ve gotten one and we’ll apply the second one, we will have two this year. Mainly, due to the delay in clinical trials, the – and that I’m waiting for the clinical trials, I’m waiting for in January, February timeframe, we signed the contract and initiated the process last January. It was supposed to be done in June, July. It’s not going to be done until January, February this year. Again, due to delays, regulatory issues with the Indian government and also COVID and restrictions and all of that. So I cannot give you a date, because I am at the mercy of others in supporting us.
From Elite standpoint, we’re ready, but we have to have the clinical trials done before we can submit, okay. So last year or this year 2022, we’ll have two ANDAs this coming year within the first half, I hope, again, barring no delays in the clinical trials, we will have two more. And then we will sit down and talk to our CROs about a more realistic schedule for delivery. I don’t want them to just sign at the dot line to commit us financially and later on take a lot longer. Even though, I truly believe everything that happened was unexpected. The recruiting have changed, because of COVID and other factors. And India also added additional requirement of three months stability for clinical trials that are done in there, okay? So we will share with you material events as they happen. I cannot make exact predictions because of the reasons I just explained.
Does Elite now own all of Mikah share of Adderall? No. The Board of Directors actually came up with a plan and an offer, which was acceptable. And then as soon as that happened, we received an official notification from Lannett terminating the agreement, and we decide to go for sales and marketing group. These two variables make things uncertain and we did not want to create MS. So we’re back in offer now and we’ll revisit this issue later on.
What are your yearly predictions for Elite revenues? We don’t do predictions, but I will give you a lagging indicator. As you heard from Robert, the first half of the year, we got $16.3 million. So extrapolate and see what you think that will happen.
How long before Elite is fully self-sufficient in sales, marketing, and distribution? It definitely is going to be before April 1, 2023. We’re almost there right now. I would say we’re about 80% of the way. As I’ve – as you’ve seen from what I said or heard from what I said, I am very pleased with the Kirko and he is on the right path working with Robert in finance with Doug in production with Chris in business development. The team is working very, very closely together to get us there and we’re almost there.
I read this question anyways. Is there any way to have the SEC investigate what is happening to Elite stock? The company is doing the right things. The CEO is managing risk properly, the revenues are going up. The company is cash flow positive and still the price of the stock goes down.
There is no logical explanation. You are correct. That’s all I can say. It’s very frustrating. We’re doing all the right things. Four or five years ago, the stock was $0.15 or even before that $0.30, when we were not making in any money. And now that we are actually a viable company where the profitable company, which you don’t see too many on the OTC that are or even on NASDAQ frankly.
We still the stock goes down. So there is no rhyme and reason with it. I’m hoping that all will change when we get more products, our own sales and marketing and maybe make a transition to a better exchange.
Are you – are any companies offering to buy Elite? Well, when your house is not for sale, nobody comes and makes an offer on it. We will – that will be offers on Elite when we have better financial statements and we put Elite out there just like we did with Epic and other companies that have been a part of, right.
Last question. Can Mr. Kirko sell our Adderall anywhere in the U.S. that Lannett doesn’t and/or sell the – to the pharmacies that are out of stock? Or does he have to wait till March 30? The fact is he has to wait till April 1, 2023, selling it to anyone other than Lannett in the United States. Underline that because we have partners overseas and it’s fine. In the United States, we can only make a product for Lannett to sell and they can only buy a law sell product that’s made by us till April 1. They are not allowed to sell their own product and we are not allowed to make our product for anybody else. That’s how the contract is.
Okay. Well, thank you, Robert for very good numbers and thank you, Paul. And thank you, ladies and gentlemen. We’re looking for hopefully another good quarter, this quarter a news of filing an ANDA and hopefully one more successful clinical trial before we talk next on the middle of February. Have a great day. Thank you.
Operator
Thank you, ladies and gentlemen. This does conclude today’s conference. You may disconnect at this time and have a wonderful day. Thank you for your participation.
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