Elite Pharmaceuticals - Q3 2024

Transcript

Operator (participant)

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 change 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 expectations. 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 (Chairman, President, and CEO)

Thank you, Matthew, and good morning, ladies and gentlemen. Thank you for joining us today. My name is Nasrat Hakim. I am Elite's Chairman and CEO. This is our earnings call. Our CFO, Carter Ward, will give us a summary of the company's financials, after which I'll give a brief update and answer some of the questions you've submitted to Diane. Carter, you have the floor.

Carter Ward (CFO)

Thank you, Nasrat, and good morning, everybody. Thank you to everybody calling in today. Yesterday, we filed our 10-Q for the third quarter of our 2024 fiscal year. We have a fiscal year ending March 31, so December 31st 2023, is the third quarter of our 2024 fiscal year. It is available on elitepharma.com, sec.gov, and anyplace else you get your SEC filings. So please, if you haven't seen it yet, we'd appreciate you taking a look at that. I'm going to give you a little context and go over some of the more relevant areas of the financial statements. And along the way, we received a lot of questions. Thank you so much for all the questions. We really did get a lot last night, and I'll do my best to answer all of them as I go through. So let's start with the P&L.

Total revenues for the quarter were $15.5 million. You can compare that to $9.3 million for December 2022, last year, for that quarter, and $14.2 million for the September 2023 quarter, the last quarter. Percentage-wise, that's a 67% year-on-year increase, and it's a 9% increase since the last quarter. I got a lot of questions, and the answer to the question is yes, Prasco shipment made in December is included in the revenue numbers. For the full nine months on our P&L, the revenues were $38.7 million for this year. You can compare that to $25.5 million last year. That is a 52% year-on-year increase. Our operating income for the quarter ended December 31, 2023, was $3.5 million. Compare that to $2 million for last year. The last quarter, the September quarter, it was $1.9 million.

So percentage-wise, it's a 75% year-on-year increase and 84% increase over September 2023 quarter. For the full nine months, our operating income was $7.1 million, and that's compared to $4.1 million for the full nine months ended last year, December 31, 2022. Percentage-wise, 73% year-on-year increase. Now, whichever way you look at our operating revenues, our operating profits, you're only going to see significant year-on-year increases. The biggest change this year as compared to last year was obviously the successful launch of our Elite label in April of 2023. So 2022 numbers didn't have this. 2023 does. It's been very, very successful, and our P&L clearly demonstrates just how successful the Elite label has been. The Elite label has boosted our growth, but even before that, our revenue streams were expanding. They were solidifying and growing before we even launched the Elite labels.

Just to give you a little history, in 2019, our revenues were $7.6 million for a full year, full 12 months. In fiscal year 2020, it was $18 million. And then 2021, it was $25 million. 2022, it was $32 million. And last fiscal year, ended March 31, 2023, it was $34 million. So that's nice growth. And this year, with only nine months into our fiscal year, only three quarters there, we've already booked almost $39 million in revenues. And last year was a good year, and for the whole 12 months, it was $34. So we're already above last year's full-year results. So there's no doubting the importance of the Elite label launch, but it's just added more steam to the company that had already been moving steadily in a positive direction for more than four years.

Moving down the P&L, I want to talk about R&D and research and development and G&A, which is general and administrative expenses, because they both give some insight into what we're putting together. R&D, as I've said over and over again, R&D is the lifeblood of any pharmaceutical company, and we are no exception. We spent $1.4 million this quarter and $5.2 million for the nine months on R&D, on product development. Nasrat, as he usually does, will speak more on product development. But from a finance perspective, we're continuing to fund development of new products, and more importantly, we're doing it from cash flows generated by current commercial operations. Always like to see that. G&A expenses, general and admin expenses, they were up around $500,000 from last year's December 2022 quarter. This year was $1.7 million for the quarter versus $1.2 million last year, December quarter.

Now, the increase is mostly due to hiring more people. The Elite label operations, the launch, the operations, and our expansion plans require a larger HR footprint. We need more people and more infrastructure. It's a good result because there's more opportunities. There's more jobs available here, so that's always nice. As the growth continues, we expect to have better utilization of the infrastructure, so our utilization rates are going to increase, and we're looking for improved efficiency of these costs as compared to top-line revenues. So you look at that in a proportion standpoint. I did get a question on the income tax benefit down below the line of $18.3 million for the nine months ended December 31, 2023. This is also going to answer I had a similar question on the future tax benefits going forward of our NOL, our net operating loss carryforward.

So I'm going to answer both of those together because they're both related. Elite, in the past, was not profitable for many years, and we had built up large net operating losses, NOLs, carryforwards on our tax returns that we filed with the IRS. These are tax deductions that we can take going forward as we become profitable or as we are profitable. Prior to this year, the tax effect of these tax deductions were fully reserved, meaning it was in our balance sheet, but we didn't meet the criteria to demonstrate that we were going to be reasonably and consistently profitable in order to realize the benefit of these tax deductions, to be able to take these tax deductions. Prior to this year, that was the case, so they weren't there.

Now, we've been profitable for several years, and we meet the criteria demonstrating a reasonable expectation of profits going forward. So now, these NOL carryforwards have a value to us, a real value in the form of tax deductions against real profits. So there was a partial release of this reserve in March 31, a small amount, but the big release was this year. In September of this year, the reserve was fully released. So now we're showing that we have a future tax benefit that we will be able to use going forward. So when that happens, you have to book an asset, which we have. We have a Deferred tax asset on our balance sheet of $20.2 million. So there was a question about what is the value going forward of these tax deductions. There it is. It's on our balance sheet.

It will be there every reporting period, every quarter. You'll see that. We do an evaluation every quarter on what's the value there income tax-wise as the tax rates change, so will this. But as of December 31, the value going forward is $20.2 million, and that's a real deduction we expect to be able to take in the years going forward. The flip side is when we release the reserve, we record essentially it's a tax benefit. It's like a negative income tax, and that was $18.3 million, one-time benefit on our P&L statement. So moving to the cash flow, our operating burn for the nine months ended this year, December 31, 2023, was $5.3 million. Strong revenues, strong profits coupled with cash burn may not make sense at first, but it is quite normal for companies with rapid growth.

We are a textbook example of the importance of working capital during the initial phase of rapid growth, which is what we're going through. Sales are strong. Profits are increasing. But also, on the flip side, inventory and receivables are also growing. Those two together grew almost $18 million for us. Whenever you have this type of growth, it takes, in our industry, approximately 9-12 months for these receivables and inventories to start rotating into positive cash flow. We have to buy the inventory, manufacture, sell it, ship it, collect our accounts receivable. So there's a whole process, and roughly, it takes 9-12 months before what I call rotations happen and we start achieving positive cash flows. We are now nine months into that, and we're just entering that phase.

As we continue to grow, I look for the inventory and the receivables from the prior periods, things that we already booked, to start generating working capital, and that working capital will support the ongoing revenue expansion. So as long as we keep going up, there's always going to be working capital demands as you go up until you hit a steady state, and then things level off. Now, onto the balance sheet. Our working capital, that's current assets minus current liabilities, has increased by $4.3 million, approximately 32% over the past nine months since March 31. Profits drive working capital, and our financials, they clearly demonstrate this. So I had some questions on total liabilities increasing at a rate that is faster than the rate that total assets have been increasing. So this is a question on the rates of increase.

Now, to answer that question, really, I want to point you to three lines on our financial statements. On the balance sheet, there's the warrant derivative liability, and there's the accrued expenses in the liability side. And then also, on our P&L statement, there are two lines there, change in fair value of stock-based liabilities and change in fair value of derivatives that are on our P&L. On the accrued expenses, approximately $7 million of $11.9 million in accrued expenses are for stock-based liabilities. You can look at note 4 in our financial statements, give you a little more details of that. And the warrant derivatives are obviously 100% stock-based. Now, these liabilities are essentially valued as our stock price is valued. So if the stock price goes up, and it has gone up quite a bit over the past few months, so then we have to adjust the liability.

We have to make the liability higher. So it's not really any new liabilities. It's just that accounting rules, they require that we have to revalue existing liabilities, which is what we did. And the net effect of all of these revaluations is recorded on our P&L. Whenever we adjust the liability, there's a P&L expense. And for the quarter, the change in fair value, so the increase in these liabilities, is $5.3 million for the quarter. That's on our P&L statement. And for the nine months, it was $10 million. So we booked change in value of liabilities of $5.3 million for the quarter and $10 million for the nine months. I also got a question on our inventory level. Now, our inventory levels have increased from the beginning of the fiscal year, from $9.6 million to $14.3 million on December 31.

But our inventory as of September 30 was $15.2 million. So that's a $900,000 decrease from September to December. This is all pretty standard supply chain metrics going on here. We're always challenged. We're trying to achieve just-in-time inventory, but we also have to make sure we have enough stock levels to support. There's lead times and regulatory and all the things that we have to do to support our manufacturing operations. So we're always trying to monitor our inventory levels. There's really nothing more than just ordinary supply chain metrics going on here. We continue to look at that, but there are no issues. So to sum things up, when you look at December 2022, compared to December 2023, Elite Pharmaceuticals, we are looking at a very different company than from one year ago. Revenues are up 67%. Operating profits are up 77%.

Nine months' revenue are already more than last year's 12-months' revenue. Our working capital is increasing. Our debt is low, and our balance sheet is strong and continues to strengthen. So very different company, all of which is for the better when compared to the last year. So very happy to see all of the things that have been going on lately. So that concludes my presentation. Now, our CEO, Mr. Nasrat Hakim, will provide his comments.

Nasrat Hakim (Chairman, President, and CEO)

Thank you, Carter. Most of the questions this time were about financials, so I asked Carter to handle them, and he was kind enough to embed them in his presentation. I'll say a couple of words about financials before I talk about sales and distribution, research and development, facility, and infrastructure, and then go to Q&A. $15.5 million in revenues makes this our best quarter ever. For the past four-five years, as you heard from Carter, every year, our revenues have been better than the year before. And therefore, every year has been our best year until the next year. Last year's revenues were $34 million. Within nine months of this year, we've achieved $39 million, and we still have a quarter to go. Our goal for the current fiscal year was $40 million. Then we modified it to north of $40 million.

It is safe to say that we'll achieve our goal for the current fiscal year and will surpass it the following year. As Carter outlined, our income four or five years ago was in the single digits. We made $7 million. Then we jumped to the teens, and then the 20s, and then the 30s, $30 million, $34 million last year. We're skipping the 40s, and we're jumping straight to the 50s this year. We will continue to grow the year after and the year after. We are not flattening in sales. We are actually growing, and I see all the signs for us to continue to grow as I just have reported to you. Elite successfully transitioned from a CMO private label model to a national distribution with the Elite label.

We created an organizational structure to support our new business model and increased production, revenues, and profits for all of Elite products, not just amphetamine IR, which are the stars of the show, but also for the rest of our commercial products, the bariatric products, phentermine, and phendimetrazine. Our hypertension drug is isradipine. Our antidepressant and nerve pain drug, trimipramine. Our schizophrenia and agitation drug, loxapine. All of them have increased and have been sold under Elite's label since April 1st, 2023, and they are all growing. Elite's transition to direct sales is complete and has been a tremendous success. A major credit goes to Kirko, Doug, and their teams. Our partner, Prasco, that has a non-exclusive license for selling amphetamine, launched their product in January. We shipped inventory to them in December of 2023, but the actual launch just happened last month, January 2024.

Our other partner, Precision Dose, they have a license for naltrexone and phentermine tablets and capsules. Naltrexone is in short supply and is doing particularly well. Elite maintained a strong cash position during our transition to sales. We have supported working capital needs as well as R&D pipeline costs while maintaining our cash levels. Regarding the research and development pipeline, Elite has four ANDAs filed under FDA review: an antimetabolite ANDA used to treat inflammatory arthritis, a generic dopamine agonist ANDA for the treatment of Parkinson's, an ANDA for treatment of pain management, a CNS stimulus ANDA used for attention deficit disorder, and all of them are under FDA review. Elite continues to provide support to whatever FDA requests they make, and they make a lot of requests. Elite will issue a PR upon approval.

Regarding the pain management ANDA, generic oxycodone, one of the common outcomes of ANDA filing is a lawsuit by the brand company. Most generic companies contend with such lawsuits in the standard course of business. Elite too has a complaint filed as a part of a Paragraph IV filing. This is an expected event, and Elite expects to manage this as a normal course of business. Elite has other products in the formulation development stage that have not reached a reportable milestone yet. We will update you on them upon reaching these milestones. Regarding the facility and infrastructures, with our success in moving to direct sales, Elite is expanding our inventory and packaging space to meet the growing demands. We have taken an additional 34,000 sq ft to support expanded packaging inventory and warehouse.

We closed the deal and took possession of the facility literally right across from our manufacturing facility in January. Now, the hard work begins. You first need permits for construction to modify the inside of the facility and separate it into two parts and what have you. We are working with IT and servers and installing cameras and security. We're working on setting up the vault and working with the DEA on what else they need, the form of security, vault, in order for them to come in and approve the facility. We purchased the packaging line. Now, we need to deliver it and install it, qualify it, make batches on it, put these batches on stability, and file or ask FDA for approval, have the FDA come in and inspect the facility. At the end of the day, we'll have duplicate equipment for manufacturing and packaging.

We already have validated and qualified our Niro. So now we can make pellets. We have three times the capacity of making what we used to. We have bought new encapsulators and a new packaging line. On the packaging line alone, once this packaging line is qualified and operational, we will have two packaging lines, and the capacity actually will increase by three- to fourfold because the new packaging line is a lot faster and more modern than the old one, which was really a very good packaging line. In summary, Elite has shown strong growth this quarter and is executing its strategy of commercial, sales, and distribution, and research and development growth. We look forward to talking to you again about more success in June when we file the 10-K. Let's go to Q&A.

As I said before, Carter handled all the financial questions, and there were a lot of them, and many of them came in late last night or early this morning. I will be addressing the non-financial parts with a couple of comments in generalities about financials. First question is on drug development pipeline. We know SequestOx was shelved due to costs. Do you anticipate resuming any NDA-type R&D in the future? Or do you think Elite will stick to mainly filing for large-market ANDAs generics? Is it possible to improve upon an existing generic drug with our controlled-release or abuse-deterrent tech and still be filed as ANDA? Or is it necessary to file NDA?A comprehensive question that has a lot of parts, so let me answer it this way.

A few years ago, we shifted the company's focus, and we created the three-prong approach, the three-basket approach. One is the NDAs and the ARC technology. Two is partnerships in order to elevate cost and bring in ideas. And three is our own products. And all three are active at any moment if the circumstances are right. To move forward with an NDA, NDA requires a lot of money, okay? And it could risk the company. So will we do it now? No. Will we do it in the future when we have money? Of course, okay? Everything needs to be done in context. You got to figure out what do you have, what are you risking, and what do you want to do to protect the company. Can we use our technology? Our technology is definitely usable in a lot of things, including something like Pfizer's technology.

We have the same technology as they do. So if there was a way for us to make a generic out of their OxyER, then that will be an ANDA, okay? Still, keep in mind, we're still targeting high-level generics because they are the most lucrative, least cost, and best and fastest to the market. Has the BE trial started yet for the third needle-mover that is expected to be filed sometime in calendar year 2024? We do a lot of pilot studies, but of course, we do not announce because most of them are for you to learn on how to modify the formulation. And once we are comfortable and go to a BE, we only announce if the BE passes. So we will definitely do that in this case.

If there is a BE trial and if it does pass, then we will announce it at that time. A question on legal for oxycodone. I see discussion a lot on investment message boards regarding the generic oxycodone. My question for the next conference call is, is there a lawsuit pending regarding oxycodone? And if so, what are the details and circumstances that can be shared? As I said before, okay, Elite filed a Paragraph IV certification with its ANDA to generic oxycodone. And after Elite got accepted by the FDA, after the ANDA got accepted by the FDA, Elite sent the patentee, as was required by law, and the NDA holder a notice letter, and that's required by Hatch-Waxman, okay? This was followed by a patent infringement lawsuit filed in the District Court of New Jersey by Purdue Pharma, standard procedure.

Elite obtained an agreement with Purdue to stay litigation for six months. Elite's launch of the generic oxycodone will depend on the approval by the FDA and the outcome of the various litigations involved with Purdue, okay? Or if their patent expired, and especially those that are listed in the Orange Book, okay? A question about our partner, TAGI Precision Dose. I noticed in November 2023 that our three products with TAGI were changed from the TAGI label to Precision Dose label. What was the reason for the label change? Well, the honest reason is that because our partnera and client requested it. Said, "Hey, we want to call ourselves Precision Dose only from now on." Then they changed their mind. They didn't want to keep some under TAGI. But that's really as far as we're concerned. They asked us to do this. They're selling it. We'll do it.

But the rest of the story is that the gentleman who started TAGI retired and sold his share to Precision Dose. And now it's Precision Dose that owns both companies, and I think they are transitioning to one name only. There is no impact on Elite whatsoever. Prasco-Burel, are you still happy with the Prasco-Burel agreement now that we have officially launched with them? So far, are they selling our Adderall as well as you hoped? Okay. They are a good partner. Prasco has been a very good partner. They have just started transition to us as a supplier, and they are doing very well. We have no complaints. Dexcel and international opportunities. Any update on potential foreign market opportunities such as Dexcel? I'll make a broad statement about Dexcel and any country outside of the United States.

All we can do, okay, is support our partners with our FDA-approved data that we have. The rest is up to them. They have to take it to their country, work with the dossier, what's required there, what's their Ministry of Health. Every time their Ministry of Health asks them a question, they come back and ask us to do more testing, and we'll be happy to do it for them. Sometimes they ask you for stability, so you have to do certain things that are different than we do for FDA. We cannot interfere with that. That's not our specialty. Our specialty is FDA. They handle their part. They are successful. We launch. They're not successful. We don't. We've been partners with Dexcel for a couple of years now, and we are looking forward to them getting someday an approval so we can launch.

But as of today, I have not heard them say, "Hey, let's go ahead and launch." All right. Corporate update. Let me scroll down. I believe Nasrat mentioned an ETA of being moved into the new packaging storage facilities around June. Is everything still progressing as expected with this? Are we still running the same number of shifts as previously mentioned at our main manufacturing facility? The answer is yes and yes. We are on target. We are on target to finish on June or hopefully before. And we're still running the same shifts as before. And once the new facility is commissioned, we continue to operate under the same shift because now we have multiple equipment. We don't have to go to a second shift. We'll have more people running one or one and a half shifts.

My question is in regard to manufacturing capacity currently and growth in the near future at our existing headquarters in New Jersey. Also, how is the new vault construction going? Thank you for all you do. The new packaging and warehousing sites will be of tremendous help. Once finished, we will be covered for the next five years, okay? That will really help cover our growth for the next five years. The construction of the vault is going on time, and we're working with the DEA to make sure that every step we take is approved by them before we implement it. How would you rate the growth brought by the sales and distribution team compared to before April 1st? The sales and distribution team, Kirko and his team, are doing excellent.

The fact is Kirko and Doug, I mean, don't forget operations because the Kirko and Doug and the sales and operations team go hand in hand, in addition to the quality team and regulatory affairs team and the entire supporting structure for the organization. They are all doing an excellent job to date. Notice that we went through this whole transition without a dip or interruption in supply. That's really a testament to Kirko's leadership and his great communication skills and Doug and the operations team and our quality and regulatory team. Financial questions, we moved most of them to Carter, but somebody asked about stock buyback, okay? It's the same issue. We're not buying any stock back right now. We have better use for our money. Stock manipulation, we are on the OTC. I cannot say much about that.

An interesting question about employee stock purchase from a gentleman that said, "In the past, I have worked for companies that allowed employees the option to have a fixed amount of money deducted from their paycheck to buy company stocks at a slight discount." It gave all of the employees the opportunity to have a stake in the company. Does Elite offer such a program? I have worked for companies that offer similar programs, and I really enjoyed that, and they gave us 15% discount to buy it. Elite does not have such a program. As a matter of fact, we've heard uproars from the stockholders when we paid people in shares before, even the board. So to do this is not feasible at this time. Now, if we go to NASDAQ, it'll be more possible.

It's a very good idea, and someday we'll implement it, but right now, it can be done. Last question. Let's see. Company's futures. What would Mr. Hakim say is the likelihood that Elite will uplift to NASDAQ within the next five years? What would Mr. Hakim say is the likelihood that Elite will get bought out by a larger rival within the next five years? Two things I'll say to that. One, cut that prediction in half or more than half. Five years is a very long time to do either. We are at a point where our fundamentals are solid, and we are in a growth stage, as I said earlier. We're not flattening out at $30 million and $40 million. We skipped the 40s, went to 50s. And we'll talk in June once I have a little more data, what I expect for the future.

But definitely, the year after, we're going to beat that, and the year after, we're going to beat that. So we're at a growth stage. So the fundamentals are looking great. A buyout is looking great, and five years is way too long for that. So I would say either of these will happen in a couple of years. All right. That was the last question. It's been a great quarter. We're looking forward to a great year ending in June. So we'll talk to you after we file the 10-K in June. Have a wonderful day. And thank you, Matthew.

Operator (participant)

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.