Elite Pharmaceuticals Inc (ELTP)

[WeeZuhl]

In Q1 they had total revenues of $7,538,744 and a net profit of $830,600. In Q2 they had total revenues of $7,399,892 - a reduction of 1.8% - and they had a net profit of $2,484,062 – an increase of 2.99X.

Since repetition is the mother’s milk of learning, let me repeat that point…Q2 had an increase in profit of nearly 3X despite a 1.8% reduction in revenues!

Now, let me ask two questions:
1) Which Q should the investor prefer?
2) Why?

The answers are layups…
1) Q2
2) Because the company has more revenues flowing to the BOTTOM LINE and that is indicative of a more efficient business; one unencumbered by debt.

HOW IS THAT A PROBLEM? AND, GIVEN HOW CRYSTAL CLEAR THAT IS, HOW CAN IT POSSIBLY BE MISAPPREHENDED?

The decrease in revenue in the current quarter is disappointing for several reasons. First, there is usually an increase in sales of ADHD drugs as kids go back to school. A lot of kids go on a so-called "Ritalin holiday" on breaks from school, and pharmacies usually stock up mid-late Summer for the Fall increase in sales. Shipments should have been way up this quarter, but they went down instead. Of course, this year is not typical because of COVID-19, so it would be unwise to put too much weight on the lack of a back-to-school effect. However, it is also unwise to somehow surmise these numbers indicate the company has become more efficient in the last 3 months.

The reason profit increased is because Q2 included more profit splits from previous quarters' shipments. We saw the manufacturing fees during the quarter that the customer received the product, and now those license fees are making their way in. This is the other reason why decreased manufacturing fees are disappointing- because they foretell decreases in license fees in future quarters. Fewer shipments also means more stock on hand and decrease in expenditures for API, which results in lower cost of revenue. In this case, the lower cost of revenue is due to decreased manufacturing and not increased efficiency. So yes, profit did increase while revenue decreased, but it was because of work done in previous quarters.

We had good reasons to expect more revenue, but we got less. That is a problem for the current quarter and upcoming quarters. Fewer manufacturing fees now mean fewer licensing fees in the future, and that is the true bottom line.