oc, are you badgering me for a perspective? (That was humor) Well, it so happens I have something for you...
Exactly what have we learned from the flurry of attenuated arguments against Elite? More heat than light. How about a short Q&A of recent points of note? And I will enumerate them so they are easier to identify…
Q1: What does the noise of today have to do with Elite’s future?
A1: Nothing. What follows is meant to help enlighten investors.
Q2: What was the improvement of revenues YOY?
A2: The move was from $7.5 M to $18 M.
Q3: What was the forward guidance offered by Nasrat at the EOY CC?
A3: Q1 2021 expected to be about $7 M. That will be a doubling of Q1 2020 and near the amount the company made for each of the preceding years – 2018 & 2019.
Q4: What is the normal time to peak revenues for newly commercialized drugs?
A4: The range is 3-5 years. Generic Adderall IR is one year into commercialization and XR is just getting started.
Q5: How can we characterize Elite’s debt levels?
A5: Minimal. And, absent worries about debt creating financial hardships.
Q6: What can be said about the new LPC agreement that has not already been said?
A6: First, there is a lower basement of three cents rather than the ten cents of the old agreement. That matters because there has been a consistent and concerted effort to keep the p/s under ten cents to prevent Elite from accessing the capital necessary to fund the business and not incur debt. That effort has seen the p/s below a dime for the previous 28 out of 30 months. Oh yeah, the new agreement ends in three years (2023).
Q7: Why was the poison pill mentioned in the 2020 Annual Report and has not been mentioned in any others?
A7: It was mentioned in this annual report because it offers a clear explanation that shows neither Nasrat nor LPC could leverage a hostile takeover. And, it was mentioned in the 2014 Annual Report. And, if read it reveals that there is a provision for shareholders prior to October 2013 who would be able to receive shares at a price of $2.10 for each share they hold.
Q8: Why is that important to note?
A8: Well, the poison pill expires in November 2023 and, while Elite could renew, it would require some additional steps.
Q9: Like what?
A9: A valuation analysis. If you note the $2.10 it should be obvious that it is the mid-point of the valuation analysis done in 2013 exactly for this reason. Because Elite would be valued differently today, a new valuation analysis would be needed; with factors affecting the valuation being its increased revenues (and nearing profitability) and very different product portfolio, as well as the additional total diluted shares outstanding.
Q10: What does that all look like?
A10: Great question. Okay, we know that today’s Elite will be valued differently. And, we know about dilution making shareholders unhappy (which does raise the point about debt that seems to be lost, but I digress). So, let’s look at the real influence of dilution and begin by considering the old valuation mid-point of $2.10 was based on the issued shares of 494,811,263 (in November 2013). If we use the $2.10 as a baseline, adjusted for the currently diluted shares outstanding of 824,946,559 PLUS the redemption of the Series J that will be 158,000,000 it equals 982,946,559. Now a little math…494,811,263 divided by 982,946,559 = .5036 or 50.36%. Now, what is 50.36% of $2.10? It is $1.06. That means, based on the current dilution including Series J, holding steady the old valuation midpoint of $2.10, Elite’s shares would be valued at $1.06.
Q11: Wow. Why is it selling for 7 cents?
A11: Because it is on the OTC and being manipulated. But, remember, how a company is valued has nothing to do with the emotionalism that affects the p/s. And, clearly, Elite would do another valuation analysis for any number of reasons, including the potential action involving Mikah.
Q12: What about the action with Mikah?
A12: That is TBD. I expect it is being hashed out right now. It should be somewhat simple and I would be surprised if it was not address on the next CC; at least the intended direction.
Q13: Are there any issues about Mikah?
A13: A couple worth noting. First, concern has been expressed by some that the Mikah-Elite agreement in December 2018 was signed by Nasrat for Mikah and Ward for Elite was somehow a conflict of interest. This gets it exactly wrong in reverse. The conflict of interest would have been created had one person (Nasrat) signed for both agreeing entities. Second, clearly Mikah had the financial wherewithal to pay cash for the SunGen solid dose portfolio. If it merges with Elite, yes there is a price, but it does not necessarily mean more shares. Rather, an agreement could be made that designates a portion of the then combined revenues over a period of time as payment; with that to be paid in its entirety if there is a change of control (the newly combined company gets acquired). OBTW: All of Mikah’s assets would fold into the new Elite balance sheet and, with all the revenues coming into the new Elite’s coffers, the valuation analysis would be stronger.
Q14: As a small generic drug company is it unlikely Elite will attract a buyer?
Q14: No. And, the reason for that is, if acquired, not only does the company not have much debt, but Elite’s entire G&A could be eliminated; as well as its R&D and commercialization, which would be subsumed into an existing organizational infrastructure, with incumbent operational synergies. This also means Elite’s partnerships (Lannett, Glenmark, Precision Dose, etc.) would be extraneous, thus they would be ended, freeing up those revenue dollars for the acquirer. In short, Elite would be a cash generator for the acquirer; having very little operating expense. In fact, if so desired, a larger company would be able to shed the manufacturing plant and would, without question, have a supply chain with lower costs, including access to better/cheaper/more consistent API. All of which makes Elite a low-cost cash cow. Bigger companies look for these dream opportunities and, typically, overpay.
Q15: Anything else?
A15: Any mistakes are entirely intentional. And, I will be taking a short hiatus. I have a book to finish by September.
