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UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________________ to ___________________________

 

Commission File No.: 000-54421

 

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CADISTA HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

Delaware		31-1259887
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

207 Kiley Drive Salisbury, Maryland		21801
(Address of principal executive offices)		(Zip Code)

  

Registrant’s telephone number, including area code: (410) 860-8500

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes      x          No     ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to file such files).

 

Yes      x          No     ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x	Smaller reporting company	¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes      ¨          No     x

As of August 13, 2013 the registrant had 117,797,180 shares of common stock issued and outstanding.

 

  

CADISTA HOLDINGS INC.

 

INDEX

 

		Page No.
PART I.  FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative And Qualitative Disclosure About Market Risk	20
Item 4.	Controls and Procedures	21
PART II.  OTHER INFORMATION		22
Item 6.	Exhibits	22
Signatures		23

  

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CADISTA HOLDINGS INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(UNAUDITED)

(All amounts in thousands United States Dollars, unless otherwise stated)

 

		June 30,				March 31,
		2013				2013
ASSETS
Current assets:
Cash and cash equivalents			17,126				5,615
Accounts receivable			20,347				22,063
Due from related parties			10,786				10,821
Inventories			23,962				23,431
Prepaid expenses and other current assets			384				630
Deferred tax assets (current)			4,781				4,644
Total current assets		$	77,386			$	67,204
Restricted cash			2				27
Loan to related party			20,000				20,000
Property, plant and equipment, net			19,890				19,427
Intangible assets, net			1,145				1,211
Total assets		$	118,423			$	107,869
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			3,091				3,734
Due to related parties			3,022				2,193
Other current liabilities			7,334				4,139
Dividend payable			66				66
Total current liabilities		$	13,513			$	10,132
Deferred tax liabilities(non-current)			1,289				1,254
Total  liabilities		$	14,802			$	11,386
Commitments and contingencies			—				—
Stockholders’ equity
Equity shares at $ 0.001 par value			118				118
120,000,000 shares authorized; issued and outstanding –   117,797,180 shares as of June 30, 2013 and March 31, 2013
Additional paid-in capital			38,755				38,755
Accumulated surplus			64,748				57,610
Total stockholders’ equity		$	103,621			$	96,483
Total liabilities and stockholders’ equity		$	118,423			$	107,869

 

(See accompanying notes to the condensed consolidated financial statements.)

  

 

CADISTA HOLDINGS INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

(UNAUDITED)

(All amounts in thousands United States Dollars, except per share data, unless otherwise stated)

  

		Three months ended June 30,
		2013				2012
Net revenues		$	25,657			$	29,874
Cost of revenues			12,052				10,494
Gross profit			13,605				19,380
Operating costs and expenses:
Research and development expenses			9				-
Selling, general and administration			1,840				1,117
Depreciation and amortization			542				414
Total operating costs and expenses			2,391				1,531
Operating income			11,214				17,849
Other income (expense), net			336				104
Income before income taxes			11,550				17,953
Income taxes			4,412				6,847
Net income		$	7,138			$	11,106
Net income per common share
Basic		$	0.06			$	0.09
Diluted		$	0.06			$	0.09

 

(See accompanying notes to the condensed consolidated financial statements.)

  

 

CADISTA HOLDINGS INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(UNAUDITED)

(All amounts in thousands United States Dollars, unless otherwise stated)

  

		Three months ended June 30,
		2013				2012
Cash flows from operating activities:
Net income		$	7,138			$	11,106
Adjustments to reconcile net income to net cash provided by  operating activities
Depreciation and amortization			542				414
Deferred income taxes			(102	)			(20	)
Provision for bad debts			112				2
Changes in operating assets and liabilities, net
Decrease/(increase) in accounts receivable			1,605				(1,991	)
(Increase)/decrease in inventories			(531	)			161
Decrease in dues from related parties			35				142
Increase/(decrease) in dues to related parties			829				(1,804	)
Increase in accounts payable  and other current liabilities			2,551				597
Decrease/(increase) in prepaid expenses and other current assets			246				(73	)
Net cash provided by operating activities		$	12,425			$	8,534
Cash flows from investing activities:
Purchase of property, plant and equipment		$	(939	)		$	(2,228	)
Net cash (used in) investing activities		$	(939	)		$	(2,228	)
Cash flows from financing activities:
Proceeds from short term borrowings, net		$	-			$	1
Net cash provided by financing activities		$	-			$	1
Net change in cash and cash equivalents		$	11,486			$	6,307
Cash and cash equivalents (including restricted cash)
Beginning of the period		$	5,642			$	2,169
End of the period		$	17,128			$	8,476
Supplementary cash flow information
Cash paid during the period for interest/commitment charges		$	-			$	22
Cash paid during the period for tax, net of refunds		$	1,776			$	6,524

 

(See accompanying notes to the condensed consolidated financial statements)

 

  

CADISTA HOLDINGS INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(UNAUDITED)

(All amounts in thousands United States Dollars, except earnings per share figures, unless otherwise stated)

 

1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

a)

Basis of Preparation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for the full fiscal year.

 

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto for the year ended March 31, 2013 included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on July 15, 2013. The balance sheet as at March 31, 2013 presented in this report has been derived from audited financial statements at that date, but does not include all of the information and disclosures required by GAAP for complete financial statements. Amounts presented in the financial statements and footnotes are rounded to the nearest thousands, except per share data and par values. Unless the context requires otherwise, references in these notes to the “Company,” “we,” “us” or “our” refers to Cadista Holdings Inc. and its subsidiary, Jubilant Cadista Pharmaceuticals Inc.

 

Certain reclassifications, regroupings and reworking have been made in the condensed consolidated financial statements of the prior period to conform to the classifications used in the current period. These changes had no impact on previously reported net income or stockholders’ equity.

 

b)

Recent Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income”. This amended guidance requires an entity to report, in one place, the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income. Reclassifications must be disclosed if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. The guidance is effective prospectively for reporting periods beginning after December 15, 2012. The guidance in this topic does not apply to the Company as the Company has no items of Other Comprehensive Income in any period presented and in such cases the Company is excluded from reporting other comprehensive income or comprehensive income.

 

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite Intangibles Assets for Impairment,” which amended the guidance in ASC 350-30 on testing indefinite-lived intangible assets, other than goodwill, for impairment allowing an entity to perform a qualitative impairment assessment. If the entity determines that it is not more likely than not that the fair value of the reporting unit is less than the carrying amount, further testing of indefinite-lived intangible assets for impairment is not required and the entity would not need to calculate the fair value of the asset and perform a quantitative impairment test. In addition, the standard did not amend the requirement to test these assets for impairment between annual tests if there is a change in events or circumstances; however, it revised the examples of events and circumstances that an entity should consider in interim periods, which are identical to those assessed in the annual qualitative assessment described above. ASU 2012-02 was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption being permitted. The Company believes that the adoption of this standard will not have a material impact on its consolidated statements.

 

 

c)

Revenue Recognition

 

Revenue from sale of goods is recognized when significant risks and rewards in respect of ownership of the products are transferred to the customer and when the following criteria are met:

 

§ Persuasive evidence of an arrangement exists;

§ The price to the buyer is fixed and determinable; and

§ Collectability of the sales price is reasonably assured.

 

 

Revenue from sale of goods is shown net of provisions for estimated chargeback, rebates, returns, cash discounts, price protection reserve and other deductions.

 

The Company participates in prime vendor programs with a government entity whereby pricing on products is extended below the wholesale list price. This government entity purchases products through wholesalers at the lower prime vendor price, and the wholesalers charge the difference between their acquisition cost and the lower prime vendor price back to the Company. The Company determines its estimates of the prime vendor chargeback primarily based on historical experience regarding prime vendor chargebacks and current contract prices under the prime vendor programs. Accruals for chargebacks are reflected as a direct reduction to revenues and accounts receivable.

 

The Company sells its products directly to wholesalers, retail drug store chains, drug distributors, mail order pharmacies and other direct purchasers. The retail drug store chains also purchase our products through the wholesalers in the event of a stock out at a particular pharmacy store. The Company often negotiates product pricing directly with retail drug stores that purchase products through the Company’s wholesale customers. In those instances, chargeback credits are issued to the wholesaler for the difference between the invoice price paid to the Company by our wholesale customer for a particular product and the negotiated contract price that the retail drug store pays for that product to the wholesaler. In addition, the retail drug store charges the Company for the difference between the prices paid to the wholesaler and the negotiated contract price with them.

 

The Company’s chargeback provision and related reserve varies with changes in product mix, changes in customer pricing and changes to estimated wholesaler inventories. The provision for chargebacks also takes into account an estimate of the expected wholesaler sell-through levels to indirect customers at contract prices. Historically, the Company has validated the chargeback accrual annually through a review of the inventory reports obtained from its largest wholesale customers. Commencing with the Company’s 2012 fiscal year, the Company conducts such reviews quarterly based upon such inventory reports. This customer inventory information is used to verify the estimated liability for future chargeback claims based on historical chargeback and contract rates. These large wholesalers represent 85% - 90% of the Company’s chargeback payments. The Company continually monitors current pricing trends and wholesaler inventory levels to ensure the liability for future chargebacks is fairly stated. Accruals for these chargebacks are reflected as a direct reduction to revenues and accounts receivable.

 

The Company enters into revenue arrangements to sell multiple products and/or services (multiple deliverables). Revenue arrangements with multiple deliverables are evaluated to determine if the deliverables (items) can be divided into more than one unit of accounting. An item can generally be considered a separate unit of accounting if all of the following criteria are met:

 

§

The delivered item(s) has value to the customer on a standalone basis;

§

There is objective and reliable evidence of the fair value of the undelivered item(s); and

 

 

§

If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.

 

If an arrangement contains more than one element, the arrangement consideration is allocated among separately identified elements based on relative fair values of each element.

 

Revenues related to contract manufacturing arrangement are recognized when performance obligations are substantially fulfilled. Revenues related to development contracts are recognized on proportionate performance basis. Customarily for contract manufacturing and development services, the Company receives upfront non-refundable payments which are recorded as deferred revenue. These amounts are recognized as revenues as obligations are fulfilled under contract manufacturing arrangement and as milestones are achieved for development arrangements.

 

When the Company receives advance payments from customers for sale of products, such payments are reported as advances from customers until all conditions for revenue recognition are met.

 

Allowances for sales returns are estimated and provided for in the year of sales. Such allowances are made based on the historical trends. The Company has the ability to make a reasonable estimate of the amount of future returns due to large volumes of homogeneous transactions and historical experience with similar types of sales of products. In respect of new products launched or expected to be launched, the sales returns are not expected to be different from the existing products as such products relate to categories where established products exist and are sold in the market. Further, the Company evaluates the sales returns of all the products at the end of each reporting period and necessary adjustments, if any, are made.

 

The Company estimates the decline in prices for some of its products based on the expected additional competition in the foreseeable future. The Company has the ability to make a reasonable estimate of the expected decline in prices and the claims in respect of such price decline to be made applicable to the inventory with the customers as on the date of reduction in price. A reserve is established for price decline claims on the inventory with the customers.

  

d)

Income taxes

 

Income taxes are accounted for using the asset and liability method. The current charge for income taxes is calculated in accordance with the relevant tax regulations applicable to the Company. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance of any tax benefits of which future realization is uncertain.

 

The Company applies a two-step approach for recognizing and measuring uncertain tax positions.  The first step is to evaluate the tax position for recognition by determining, based on the technical merits, that the position will be more likely than not sustained upon examination. The second step is to measure the tax benefit as the largest amount of the tax benefit that is greater than 50% likely of being realized upon settlement. The Company includes interest and penalties related to unrecognized tax benefits within its provision for income tax expense.

 

e)

Net income per share

 

Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding during each period. Diluted net income per share is computed by dividing net income by the weighted average shares outstanding, as adjusted for the dilutive effect of common stock equivalents, which consist of stock options.

 

 

The table below reflects basic and diluted net income per share for the:

 

		Three months ended June 30,
		2013				2012
Net income available for common shareholders (basic and dilutive)		$	7,138			$	11,106
Weighted average shares outstanding:
Basic			117,797				117,797
Effect of dilutive stock			750				750
Diluted			118,547				118,547
Earnings per share (in US Dollars)
Basic		$	0.06			$	0.09
Diluted		$	0.06			$	0.09

 

2

FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, trade receivables, advances and investments. The cash resources of the Company are invested with money market funds and banks after an evaluation of the credit risk. By their nature, all such financial instruments involve risk including the credit risk of non-performance by counter parties. In management’s opinion, as of June 30, 2013 and 2012 there was no significant risk of loss in the event of non-performance of the counter parties to these financial instruments.

 

As of June 30, 2013, the Company had loans outstanding in the principal amount of $ 30,000, that it had extended to HSL Holdings Inc.(“HSL Holdings”), a wholly-owned subsidiary of Jubilant Life Sciences Holdings Inc. (“Jubilant Holdings”), the holder, through its wholly-owned subsidiary, of approximately 82% of the Company’s common stock. A $ 10,000 loan was funded pursuant to a loan agreement that the Company entered into on November 23, 2011 (the “2011 HSL Loan Agreement”), with an original maturity date of November 30, 2012 that has since been extended to November 29, 2013. A $ 20,000 loan was funded pursuant to a loan agreement that the Company entered into on January 30, 2013 (the “2013 HSL Loan Agreement;” collectively the 2011 HSL Loan Agreement and the 2013 HSL Loan Agreement are referred to as the “HSL Loan Agreements”), with a maturity date of January 31, 2015. Jubilant Holdings has guaranteed the prompt payment and performance, when due, of all obligations of HSL Holdings under both HSL Loan Agreements. By their nature, such loans involve risks including credit risk of non-performance by HSL Holdings and Jubilant Holdings. If HSL Holdings and Jubilant Holdings were to not perform their obligations under the HSL Loan Agreements the Company could lose some or all of its investment. In management’s opinion, as of June 30, 2013, there was no significant risk of loss as a result of such non-performance.

 

The customers of the Company are primarily enterprises based in the United States and accordingly, trade receivables are concentrated in the United States. To reduce credit risk, the Company performs ongoing credit evaluation of customers. For the three months ended June 30, 2013, three customers had a 33%, 12% and 12% share in net product sales, respectively, and for the three months ended June 30, 2012 three customers had a 28%, 17% and 12% share, respectively, in net product sales; no other customer, individually accounted for more than 10% of net product sales during these periods. As of June 30, 2013, three customers had 36%, 15% and 10% shares, respectively, and as of June 30, 2012 three customers had 34%, 15% and 13% shares, respectively, in total trade receivables; no other customer individually accounted for more than 10% of the Company’s total trade receivables during these periods. For the three months ended June 30, 2013, two products collectively accounted for approximately 72% of net product sales and for the three months ended June 30, 2012, three products collectively accounted for approximately 86% of net product sales. A relatively small group of products, the raw materials for which are supplied by a limited number of vendors, represent a significant portion of net revenues. The maximum amount of loss due to credit risk that the Company would incur should the customer fail to perform is the amount of the outstanding receivable. The Company does not believe other significant concentrations of credit risk exist.

 

 

3

CASH AND CASH EQUIVALENTS

 

Cash and cash equivalents comprises the following:

 

		As of June 30, 2013				As of March 31, 2013
Cash in hand		$	1			$	1
Balances with banks in current accounts			3,222				1,538
Balances with banks in money market funds*			13,905				4,103
		$	17,128			$	5,642

 

Cash balances on checking accounts and payroll accounts with the bank are insured by the Federal Deposit Insurance Corporation up to an aggregate of $250.

 

*As of June 30, 2013 and March 31 2013, cash equivalents include restricted cash of $2 and $27, respectively, which represents the amount of a security bond given by the Company to a municipal government authority in connection with the Company’s construction of building improvements and a parking lot at its manufacturing facility in Salisbury, Maryland.

 

4

ACCOUNTS RECEIVABLES

 

Accounts receivable as of June 30, 2013 and 2012 are stated net of allowance for doubtful receivables and provision for chargebacks, returns, rebates, discounts, and shelf stock (i.e. price protection) adjustments.

 

The activity in the allowance for doubtful accounts receivable is given below:

 

		Three months ended  June 30,
		2013				2012
Balance at the beginning of the period		$	241			$	181
Charges to revenues and costs			112				2
Doubtful accounts written-off			-				-
Balance at the end of the period		$	353			$	183

 

5

INVENTORIES

 

Inventories consist of the following amounts:

 

		June 30,				March 31,
		2013				2013
Raw materials		$	10,871			$	11,423
Work in progress			3,054				2,467
Finished goods*			10,715				9,881
Stores and spares			412				335
		$	25,052			$	24,106
Provision for slow moving / obsolete inventory			(1,090	)			(675	)
		$	23,962			$	23,431

 

* includes adjustments for market value.

 

 

The activity in the allowance for slow moving/obsolete inventory is given below.

 

		Three months ended  June 30,
		2013				2012
Balance at the beginning of the period		$	675			$	161
Charges to revenues and costs, net *			1,021				47
Inventory written-off			(606	)			-
Balance at the end of the period		$	1,090			$	208

 

*During the three months ended June 30, 2013 and 2012, the Company has written down inventory by $ 521 (net of $ 500 recovered from vendor), and $ 47 respectively, resulting from the write-off of slow-moving and obsolete inventory. These amounts are included in the cost of revenues.

 

6.

SHORT TERM BORROWINGS

 

Jubilant Cadista Pharmaceuticals Inc. (“Cadista Pharmaceuticals”) had a Revolving Credit Facility (the“SBNY Revolver”) from State Bank of India, New York (“SBNY”) for an amount up to $ 6,500 to meet its working capital requirements (the “SBNY Credit Agreement”). The interest rate on the SBNY Revolver was 6 months LIBOR plus 275 basis points. There were no short term loans under the SBNY Revolver as of June 30, 2013 or March 31, 2013. The Company elected not to renew the credit facility when it expired on November 18, 2012. All guarantees and SBNY’s security interest in all collateral securing this credit facility were fully released in April 2013 when the Company and SBNY fully resolved all outstanding balances of immaterial amounts with respect to the credit facility.

 

In February 2012, Cadista Pharmaceuticals entered into an agreement (the “ICICI Credit Facility Agreement”) with ICICI Bank, New York for its working capital requirements in an amount up to $ 8,500. The ICICI Credit Facility Agreement provided for interest to accrue on any revolving loans funded under the agreement at the three month LIBOR rate plus 3.75% per annum and on any amounts funded by ICICI Bank, New York with respect to discounting of customer invoices at a rate equal to the three month LIBOR rate plus 3% per annum.

 

The ICICI Credit Facility Agreement had a one year term that expired on February 02, 2013. The Company elected not to pursue a renewal of the term, and the credit facility is now expired. There were no short term loans or other credit accommodations outstanding under the ICICI Credit Facility Agreement as of the date of its expiration or on March 31, 2013. ICICI Bank New York’s security interest in all collateral securing this credit facility has been released.

 

The details of average loan outstanding, average interest expense and weighted average rate of interest and interest rate on balance sheet date for loans and advances under both of the ICICI Credit Facility Agreement and the SBNY Credit Agreement are as follows:

   

Three months period ended		Average loan outstanding during the period (000’s)				Average interest expense during the period (000’s)				Average interest rate during the period
June 30, 2013			-				-				-
June 30, 2012			-			$	25	*			-

 

The interest rate as of June 30, 2012 was 3.90%.

 

* Commitment charges on the unutilized credit line

  

 

7

DEPRECIATION AND AMORTIZATION

 

The Company’s underlying accounting records do not contain an allocation of depreciation and amortization between “cost of revenues,” “research and development charges,” “selling general and administration expenses.” As such, the charge for depreciation and amortization has been presented as a separate line item on the face of the consolidated statements of income.

 

8

INCOME TAXES

 

The Company estimates its effective tax rate (Federal and State) to be approximately 38.20% for the year ending March 31, 2014, as compared to 37.90% for the year ended March 31, 2013. The increase in effective tax rate is on account of lower tax depreciation estimated during the year resulting in the increase in current federal and state taxes due to the resulting higher projected taxable income for the year. The Company regularly assesses the future realization of deferred taxes and whether a valuation allowance against certain deferred tax assets is warranted. For the three months ended June 30, 2013, the Company has recognized a tax expense of $4,412, comprised of $4,514 of current tax and ($102) of deferred tax expense; compared to a tax expense of $6,847, comprised of $6,867 of current tax and ($20) of deferred tax expense for the comparable period of 2012. We are a party to a tax sharing agreement (the “Tax Sharing Agreement”), with an effective date of October 1, 2011, with Jubilant Holdings. The Tax Sharing Agreement sets forth, among other things, each of the Company’s and Jubilant Holding’s obligations in connection with filing consolidated Federal, state and foreign tax returns. The agreement provides that current income tax (benefit) is computed on a separate return basis and members of the tax group shall make payments (or receive reimbursement) to or from Jubilant Holdings to the extent their income (loses and other credits) contribute to (reduce) the consolidated income tax expense. The consolidating companies are reimbursed for the net operating losses or other tax attributes they have generated when utilized in the consolidated returns. As of June 30, 2013 the Company owes $3,786 towards federal taxes and $216 (including carryover from previous year) towards state taxes to Jubilant Holdings under the tax sharing agreement. The Company makes tax-sharing payments to Jubilant Holdings equal to the taxes that the Company would pay (or receive) if it filed returns on a stand-alone basis. During the three months ended June 30, 2013 the Company did not make any payments to Jubilant Holdings under the Tax Sharing Agreement.

  

9

CHANGES IN STOCKHOLDERS’ EQUITY

 

There have been no changes in the statement of stockholders’ equity during the three months ended June 30, 2013, other than the change in the balance of accumulated surplus due to the net income earned during the period.

 

10

SUBSEQUENT EVENTS

 

The Company evaluated all subsequent events that have occurred after the date of the accompanying financial statements and determined that there were no events or transactions occurring during this subsequent event reporting period which require recognition or disclosure in the Company’s consolidated financial statements.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis provides information that management believes is relevant to an understanding of our results of operations and financial condition. The discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the “Company,” “we,” “us,” or “our” refer to Cadista Holdings, Inc. and its subsidiary, Jubilant Cadista Pharmaceuticals Inc., and all amounts are in thousands United States Dollars.

  

Cautionary Note Regarding Forward-looking Statements

 

Certain statements in this Quarterly Report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including those concerning management’s expectations with respect to future financial performance, trends and future events. To the extent that any statements made in this Quarterly Report contain information that is not historical, such statements are essential forward-looking estimates and projections about us, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “should,” “scheduled,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Risk factors that might affect such forward-looking statements include those set forth in Item 1A (“Risk Factors”) of our Annual Report on Form 10-K for the year ended March 31, 2013, and from time to time in our other filings with the SEC, including current reports on Form 8-K, and general industry and economic conditions. The forward-looking statements in this Quarterly Report statement speak only as of the date hereof and caution should be taken not to place undue reliance on any such forward-looking statements. We disclaim any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

Overview

 

We are engaged in the development, manufacture, sale and distribution of prescription generic pharmaceutical products in the United States through our wholly-owned subsidiary, Jubilant Cadista Pharmaceuticals Inc. (“Cadista Pharmaceuticals”). Pharmaceutical products commonly referred to as “generics” are the pharmaceutical and therapeutic equivalents of brand-name drug products and are usually marketed under their established non-proprietary drug names, rather than under a brand name. Generic pharmaceuticals are generally sold at prices significantly less than the brand product. Generic pharmaceuticals contain the same active ingredient and are of the same route of administration, dosage form, strength and indication(s) as brand–name pharmaceuticals already approved for use in the United States by the Food and Drug Administration (“FDA”). In order to gain FDA approval for a generic drug, we must file and the FDA must approve an abbreviated new drug application (“ANDA”) for such drug.

 

We sell our products in the United States primarily through pharmaceutical wholesalers and to national and regional pharmacy chains, mass merchandisers, government agencies and mail order pharmacies. Our sales are generated primarily by our own sales force, with the support of our senior management team, customer services, and distribution employees. For the three months ended June 30, 2013 and June 30, 2012 approximately 96% and 93% of our product sales revenue, respectively, were derived from products sold under our own product label. The balance of our product sales revenue was comprised of private label product sales (which products are sold by a customer under its name). In addition to our product sales revenue, from time to time we provide drug development and manufacturing services to Jubilant Life Sciences Ltd. (“Jubilant”), the parent company of our principal stockholders, and third parties. There were no revenues from these drug development services during either the three month period ended June 30, 2013 or the three month period ended June 30, 2012.

 

We filed our first ANDA with the FDA in May, 1996, and through June 30, 2013 we have filed a total of 19 ANDAs with the FDA. Our first ANDA approval was received from the FDA in October, 1997. We did not receive any new product approvals in the three months ended June 30, 2013. For the three month period ended June 30, 2013 we reported net revenue of $25,657 representing a decrease of 14% as compared to the three month period ended June 30, 2012.

 

 

As of June 30, 2013, we marketed 17 products, all of which are prescription generic pharmaceutical products. Five of these products are marketed by us under a Master Supply Agreement that we entered into with Jubilant in May 2011, which was amended in December 2012 (as amended the “2011 Master Supply Agreement”). One of the 17 products currently marketed by us, Losartan Potassium Hydrochlorothiazide Tablets, the ANDA for which is owned by us and is not marketed under the 2011 Master Supply Agreement, we commenced marketing during the three months period ended June 30, 2013. As of June 30, 2013, our new product pipeline consisted of 21 products for which ANDAs were pending with the FDA (19 of which are ANDAs filed and owned by Jubilant with respect to which we have marketing rights under the 2011 Master Supply Agreement) and one additional product for which we have begun initial development activities, with the objective to assemble and file an ANDA with FDA.

 

We anticipate that our portfolio of marketed products will continue to grow as a result of launches of products under ANDAs that have already been approved, approval of our ANDAs (and Jubilant’s ANDAs covered under the 2011 Master Supply Agreement) currently under review by the FDA, approval of a future ANDA for the product that we currently have in an earlier stage of development, additional products as to which we acquire marketing rights pursuant to the 2011 Master Supply Agreement, our process of identifying new product development opportunities, and potentially acquiring FDA approved ANDAs from third parties. The specific timing of our new product launches is subject to a variety of factors, some of which are beyond our control; including the timing of FDA approval for ANDAs currently under review or that we file with respect to new products. The timing of these and other new product launches will have a significant impact on our results of operations.

 

The active compounds for our products, also called Active Pharmaceutical Ingredients (“APIs”) are purchased from specialized manufacturers, including Jubilant, and are essential to our business operations. Each individual API must be approved by the FDA as part of the ANDA approval process. API manufacturers are also regularly inspected by the FDA. We do not manufacture API for any of our products in our own facility. While we believe that there are alternative suppliers available for the API used in our products, any interruption of API supply or inability to obtain API used in our products, or any significant API price increase not passed on to our customers, could have a material adverse impact on our business operations and financial condition.

 

Results of Operations

 

		Three months ended  June 30
		2013				2012				Change
		$000’s				$000’s				$000’s				Percent
Revenues			25,657				29,874				(4,217	)			(14	)%
Costs of revenues (exclusive of depreciation and amortization)			12,052				10,494				1,558				15	%
Research and development expense (exclusive of depreciation and amortization)			9				-				9				-	%
Selling, general and administrative expense (exclusive of depreciation and amortization)			1,840				1,117				723				65	%
Depreciation and amortization			542				414				128				31	%
Income from operations			11,214				17,849				(6,635	)			(37	)%
Other income (expense), net			336				104				232				223	%
Income before income tax			11,550				17,953				(6,403	)			(36	)%
Income tax expense			4,412				6,847				(2,435	)			(36	)%
Net income			7,138				11,106				(3,968	)			(36	)%

 

 

Revenues

 

We generate revenue principally from the sale of generic pharmaceutical products, which include a variety of products and dosage forms. In addition to our product sales revenue, from time to time we provide drug development and manufacturing services to Jubilant and third parties. There were no revenues from these drug development services during the three months ended June 30, 2013 and June 30, 2012.

 

Revenues for the three months ended June 30, 2013 decreased 14% or $4,217 to $25,657 compared to revenues of $29,874 from the corresponding period of 2012. The decrease in revenues is mainly attributable to decrease in sales of Methylprednisolone and Meclizine and a small increase in sales of Lamotrigine, Prednisone and the other products that we sell pursuant to the 2011 Master Supply Agreement, Donepezil, Pantoprazole, Risperidone ODT, Olanzapine ODT and Valacyclovir.

 

Total revenues of our top selling products were as follows:

 

		Three months ended
		June 30
		2013				2012				Change				%
Product		$000’s				$000’s				$000’s
Methylprednisolone tablets			15,663				19,871				(4,208	)			(21.2	)
Meclizine			2,899				3,532				(633	)			(17.9	)
Other product revenues			7,095				6,471				624				9.6
Net product sales			25,657				29,874				(4,217	)			(14.1	)
Other revenues			-				-				-				-
Total revenues			25,657				29,874				(4,217	)			(14.1	)

 

During the three month period ended June 30, 2013, our top two products (Methylprednisolone and Meclizine) accounted for approximately 72% of our total net product sales and approximately 90% of our total consolidated gross margins for such three month period.

 

We launched Methylprednisolone tablets prior to July 2005. We sell Methylprednisolone tablets, which are the generic equivalent of Medrol®, in four strengths (4 mg, 8 mg, 16 mg, and 32 mg) and a total of two pack sizes for one strength and one pack size for the other three strengths. We believe that during each of the three month periods ended June 30, 2013 and 2012, there were at least four competitors supplying this generic product in the U.S. market in 4mg and 8 mg strengths. We do not believe that there are any competitors currently supplying this generic product in 16 mg or 32 mg strengths in the U.S. market. Methylprednisolone tablets are a steroid product. For the three months ended June 30, 2013 we realized lower revenues from Methylprednisolone products as compared to the three months ended June 30, 2012 primarily as a result of more competitive pricing in the market. There can be no assurance that we are aware of all activities in this market or plans of our competitors. There can be no assurance that new competitors will not commence supplying this generic product in the future. Any new competition could result in further reduction in unit price, and perhaps sales volume, which could negatively impact our revenue and gross margin in the future.

 

We launched Meclizine tablets in June 2010. We sell Meclizine tablets, which are the generic version of Antivert®, in 12.5 mg and 25 mg strengths and two pack sizes for each strength. Since our launch of Meclizine tablets, we believe that there have been two competitors supplying this generic product in the U.S. market through the end of our last fiscal year. Two additional competitors received FDA approval during our last fiscal year. We believe, of these two additional competitors, one has entered the market in the quarter ended June 30, 2013. We believe that the new competition has resulted in significant declines in our sales volume and unit price, and may also negatively impact our revenues and gross margins in future periods.

 

 

Our other product revenues (“Other Product Revenues”), in addition to sales from our top two products, during the three month ended June 30, 2013 consisted of sales of Terazosin capsules, Lamotrigine tablets, Cyclobenzaprine tablets, Oxcarbazepine tablets, HCTZ tablets and capsules, Prednisone tablets, Prochlorperazine tablets, Alendronate tablets, Donepezil tablets, Pantoprazole DR tablets, Risperidone ODT tablets, Valacyclovir tablets, Olanzapine ODT tablets and Losartan Potassium Hydrochlorothiazide tablets. Our revenues from sales of these other products increased during the three month ended June 30, 2013 compared to the corresponding periods of 2012. Donepezil tablets, Pantoprazole DR tablets, Risperidone ODT tablets, Valacyclovir tablets and Olanzapine ODT tablets are marketed pursuant to the 2011 Master Supply Agreement with Jubilant; we commenced marketing Donepezil tablets in the quarter ended September 30, 2011 and commenced marketing Risperidone ODT, Pantoprazole DR tablets, Valacyclovir tablets and Olanzapine ODT tablets, during the quarters ended June 30, 2012, September 30, 2012, December 31, 2012 and March 31, 2013, respectively. The increase in Other Product Revenues for three months ended June 30, 2013 compared to the corresponding period of 2012 was primarily attributable to an aggregate increase of $3,768 from the sales of Prednisone tablets, Lamotrigine tablets, Donepezil tablets, Alendronate tablets, Pantoprazole DR tablets, Risperidone ODT, Valacyclovir tablets, Olanzapine ODT tablets and Losartan Potassium Hydrochlorothiazide tablets offset by a reduction in the revenues generated from our sales of Terazosin capsules, Cyclobenzaprine tablets, Prochlorperazine tablets, Oxcarbazepine tablets, and HCTZ tablets and capsules. We believe that there is significant competition with respect to each of these generic products and that our pricing and gross margins for these products are always under pressure.

 

Gross Revenues to Total Revenue Deductions

 

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the results of operations during the reporting periods. The Company’s most significant estimates relate to the determination of sales reserves, sales return, price protection and allowances for accounts receivables and accrued liabilities, determination of useful lives for property, plant and equipment and intangible assets, and other long lived assets for impairment and realizability of deferred tax assets. Management believes that the estimates used in the preparation of the consolidated financial statements are prudent and reasonable. Actual results could differ from these estimates. Appropriate changes in estimates are made as management becomes aware of changes in circumstances surrounding the estimates.

 

Revenue from sale of goods is recognized when significant risks and rewards in respect of ownership of the products are transferred to the customer and when the following criteria are met:

 

§ Persuasive evidence of an arrangement exists;

§ The price to the buyer is fixed and determinable; and

§ Collectability of the sales price is reasonably assured.

 

As customary in the pharmaceutical industry, our gross product sales are subject to a variety of deductions in arriving at reported net product sales. When we recognize revenue from the sale of our products, an estimate of sales returns and allowances (“SRA”) is recorded which reduces product sales. Accounts receivable and/or accrued liabilities are also reduced and/or increased by the SRA amount. These adjustments include estimates for chargebacks, rebates, cash discounts and returns and other allowances, including shelf stock adjustments (price protection). These provisions are estimated based on historical payment experience, historical relationship to revenues, estimated customer inventory levels and current contract sales terms with direct and indirect customers. The estimation process used to determine our SRA provision has been applied on a consistent basis and no material adjustments, other than for shelf stock adjustments and for chargebacks, have been necessary to increase or decrease our reserves for SRA as a result of a significant change in underlying estimates. Historically, until the quarter ended September 30, 2011, the Company did not experience any material shelf stock adjustments (i.e. credits issued to a customer, in accordance with specific terms agreed to with the customer, to reflect price reductions and based upon the amount of the product the customer has in its inventory). Accordingly, the Company did not create any reserve for the shelf stock adjustments. As a result of the Company’s currently selling certain products where the Company expects increased competition resulting in lower prices, the Company has assessed that there is a greater chance that it will experience shelf stock adjustments than it has in the past and has established a reserve for these adjustments, which is referred to as the “Price Protection Reserve”. Historically, the Company did not include in its reserve for chargebacks an estimation of charges by retail drug stores for the difference between the price paid to a wholesaler and our negotiated contract price with the retailer. Commencing with our fiscal year ended March 31, 2013, we have included the estimate for these charges as the Company has assessed that there is a greater chance that it will incur these charges than in the past.

 

 

We use a variety of methods to assess the adequacy of our SRA reserves to ensure that our financial statements are fairly stated. This includes periodic reviews of customer inventory data, customer contract programs and product pricing trends to analyze and validate the SRA reserves. The Company does not expect future payments of SRA to materially exceed our current estimates. However, if future SRA payments were to materially exceed our estimates, such adjustments may have a material adverse impact on our financial position, results of operations and cash flows.

 

Our gross revenues for the three month periods ended June 30, 2013 and June 31, 2012, before deductions for chargebacks, rebates and incentive programs (including rebates paid under federal and state government Medicaid drug reimbursement programs), sales returns and other sales allowances were as follows (in $ thousands):

 

		Three months ended
		June 30
		2013				2012
Description			$000’s				$000’s
Gross revenues			32,010				37,911
Chargebacks			3,024				3,699
Rebates, fees, incentives and cash discounts			2,206				3,421
Medicaid/ISA fees			405				483
Returns			807				351
Price protection reserve			(89	)			83
Net product sales			25,657				29,874
Net  to Gross %			80.2	%			78.8	%

 

The following tables summarize the roll forward for the three month periods ended June 30, 2013 and June 30, 2012 in the accounts affected by the estimated provisions described below (in $ thousands):

 

		For the three months ended June 30, 2013
Accounts receivable reserves		Beginning balance				Provision recorded for current period sales				Provision (reversal) recorded for prior period sales(1)				Credits processed				Ending balance
Chargebacks			1,963				3,024				-				3,254				1,733
Rebates and incentive programs			2,751				2,062				-				2,244				2,569
Returns			1,280				807				-				681				1,406
Cash discounts and other			578				549				-				611				516
Price protection reserve			1,174				22				(111	)			380				705
Total			7,746				6,464				(111	)			7,170				6,929

  

 

		For the three months ended June 30, 2012
Accounts receivable  reserves		Beginning balance				Provision recorded for current period sales				Provision (reversal) recorded for prior period sales(1)				Credits processed				Ending balance
Chargebacks			1,427				3,699				-				3,261				1,865
Rebates and incentive programs			4,264				3,271				-				2,467				5,068
Returns			1,807				351				-				668				1,490
Cash discounts and other			455				633				-				581				507
Price protection reserve			1,354				83				-				84				1,353
Total			9,307				8,037				-				7,061				10,283

 

⁽¹⁾ Unless specific in nature, the amount of provision or reversal of reserves related to prior periods for chargebacks is not determinable on a product or customer specific basis; however, based upon historical analysis and analysis of activity in subsequent periods, we have determined that our chargeback estimates remain reasonable.

 

Cost of Revenues

 

Cost of revenues include our production and packaging costs, third party acquisition costs for materials supplied by others, inventory reserve charges and shipping and handling costs incurred by us to transport products to customers. Cost of revenues does not include costs for amortization, including for acquired product rights or other acquired intangibles, nor depreciation, including with respect to our facility or equipment.

 

Cost of revenues increased 15% or $1,558 to $12,052 in the three months ended June 30, 2013 compared to $10,494 for the comparable period of 2012. This increase in cost of revenues was mainly attributable to increase in volumes of products with higher manufacturing cost and an increase in production related payroll and write off of short dated inventories.

 

Our cost of revenues as a percentage of net revenues in the three months ended June 30, 2013, increased 12% from the three months ended June 30, 2012, increasing from 35% in the three months ended June 30, 2012 to 47% in the three months ended June 30, 2013. The majority of such 12% increase was attributable to the higher percentage sales of products with relatively low margins due to higher volumes of products with higher manufacturing cost and price erosion with respect to other lower manufacturing cost products during the quarter ended June 30, 2013.

 

Research and Development Expenses

 

Research and development (“R&D”) expenses consist mainly of personnel-related costs, API costs, contract research and bio-study costs associated with the development of our products. R&D expenses do not include any amortization or depreciation costs.

 

R&D expenses increased $9 to $9 for the three months ended June 30, 2013 compared to Nil in the corresponding period of 2012. This increase was primarily a result of $9 of expenses for the new products which the Company is exploring.

 

 

Selling, General and Administrative Expenses

 

Selling, general and administrative (“SG&A”) expenses consist mainly of personnel-related costs, advertising and promotion costs, professional services costs and insurance and travel costs. SG&A expenses do not include any amortization or depreciation costs.

 

SG&A expenses increased 65% or $723 to $1,840 for three months ended June 30, 2013 compared to $1,117 in the corresponding period of 2012. The increase in expense was the result of increase of $434 in legal and professional charges and $21 in payroll and benefits offset by a decrease of $19 in bank charges.

 

Depreciation and Amortization

 

Depreciation and amortization consists of depreciation on our real and personal property and amortization on an ANDA that we acquired in 2002.

 

Depreciation and amortization increased 31% or $128 to $542 for the three months ended June 30, 2013 compared to $414 in the corresponding period of 2012. This increase is due to the acquisition of capital assets, we acquired during our last fiscal year on which we claim depreciation in the current period and due to change in useful life of some of the assets from 4 years to 1 year.

 

Other income (expense), net

 

Other income (expense), net consists of interest and other finance costs, offset against interest income.

 

Other income, net increased 223% or $232 to $336 for the three month ended June 30, 2013 compared to $104 in the corresponding period of 2012. This increase was primarily the result of an increase in interest income as a result of a $10 million loan given to our affiliate company, HSL Holdings Inc. (“HSL Holdings”), which we funded on November 25, 2011 (the “2011 HSL Loan”), that bears interest a rate equal to five percent (5%) per annum and interest income on a $20 million loan we provided to HSL Holdings on January 30, 2013 that bears interest at a rate equal to four percent (4%) per annum (the “2013 HSL Loan;” collectively, the 2011 HSL Loan together with the 2013 HSL Loan are referred to as the “HSL Loans”).

 

Income Tax Expense

 

The income tax expense decreased by $2,435 to $4,412 for the three month period ended June 30, 2013 compared to $6,847 in the corresponding period of 2012. The income tax expense represents the current and deferred tax due to profits made by us and our future prospects. As our profits decreased during the three month period ended June 30, 2013 as compared to profits for the corresponding period of last year, the current tax expense recognized in the period decreased.

 

During the quarter ended December 31, 2011, we entered into a tax sharing agreement with Jubilant Life Sciences Holdings, Inc. (“Jubilant Holdings”), with an effective date of October 1, 2011 (the “Tax Sharing Agreement”). The Tax Sharing Agreement sets forth, among other things, each of the Company’s and Jubilant Holding’s obligations in connection with filing consolidated Federal, state and foreign tax returns. The agreement provides that current income tax expense (or benefit) is computed on a separate return basis and members of the tax group shall make payments (or receive reimbursement) to or from Jubilant Holdings to the extent their income (or losses and other credits) contribute to (or reduce) the consolidated income tax expense. The consolidating companies are reimbursed for the net operating losses or other tax attributes they have generated when utilized in the consolidated returns.

 

As of June 30, 2013, the Company owes $3,786 towards federal taxes and $216 (including carryover from previous year) towards state taxes to Jubilant Holdings under the tax sharing agreement. The Company makes tax-sharing payments to Jubilant Holdings equal to the taxes that the Company would pay (or receive) if it filed returns on a stand-alone basis. During the three months ended June 30, 2013 the Company did not make any payments to Jubilant Holdings under the Tax Sharing Agreement.

 

 

Liquidity and Capital Resources

 

Our primary uses of cash are to fund working capital requirements, product development costs, and operating expenses. Historically, we have funded our operations primarily through cash flow from operations, private placements of equity securities to, and loan advances from, Jubilant including its affiliates and borrowings under our term loan and revolving credit facilities with our banks. As of June 30, 2013, we had no outstanding borrowings under bank credit facilities, and we elected not to renew the $6,500 revolving credit facility we had with State Bank of India, New York Branch (“SBNY”), which expired on November 18, 2012, and the $8,500 revolving credit facility we had with ICICI Bank NY (“ICICIBNY”), which expired on February 2, 2013. As of June 30, 2013, our principal sources of liquidity consisted of cash and cash equivalents (excluding restricted cash of $2) of $17,126. In addition, the $30,000 principal amount of loans we had outstanding as of June 30, 2013 to our affiliate company, HSL Holdings, is another potential source of liquidity. $10,000 principal amount of such loans is repayable upon 30 days prior notice and $20,000 principal amount of such loans is repayable upon 60 days prior notice.

 

Funding Requirements

 

Our future capital requirements will depend on a number of factors, including: the continued commercial success of our existing products; launching five products that are represented by three ANDAs owned by us that have been approved and the two ANDAs owned by us that are pending approval by the FDA as of June 30, 2013; the development of one new product that is currently being developed by us and for which an ANDA is expected to be filed with the FDA for review; the launch of additional products, that we market pursuant to our 2011 Master Supply Agreement with Jubilant, the launch by Jubilant of certain of our products outside of the United States pursuant to the master supply agreement that we entered into with Jubilant in December 2012 (pursuant to which Jubilant acquired exclusive marketing rights to nine of our products in 27 countries outside of the United States); and successfully identifying and sourcing other new product opportunities.

 

Based on our existing business plan, we believe our existing sources of liquidity as of June 30, 2013 will be sufficient to fund our planned operations, including the continued development of our product pipeline, for at least the next 12 months. However, we may require additional funds earlier than we currently anticipate in the event we change our business plan or encounter unexpected developments, including unforeseen competitive conditions within our product markets, changes in the regulatory environment, the loss of key relationships with suppliers or customers.

 

If required, additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities or by selling convertible debt securities, further dilution to our existing stockholders may result. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, debt financings or collaboration arrangements. Some of these transactions may be with Jubilant and its affiliates and some may be with third parties.

 

If adequate funds are not available, we may be required to terminate, significantly modify or delay the development or commercialization of new products. We may elect to raise additional funds even before we need them if the conditions for raising capital are favorable.

 

Cash Flows

 

On June 30, 2013, cash and cash equivalents (excluding restricted cash $2) on hand totaled $17,126, working capital (excluding cash and cash equivalents) totaled $46,747 and our current ratio (current assets to current liabilities) was approximately 5.73 to 1. Our working capital as of June 30, 2013 decreased approximately $4,710 to $46,747 compared to our working capital as of March 31, 2013 (which was $51,457) primarily because of decrease in accounts receivable and increase in other current liabilities.

 

 

The following tables summarize our cash flows provided by/(used in) operating, investing and financing activities for the three months ended June 30, 2013 and June 30, 2012.

  

		For the three months ended June 31,  (in thousands)
		2013				2012
Net cash provided by/(used in):
Operating activities			12,425				8,534
Investing activities			(939	)			(2,228	)
Financing activities			-				1
Net increase (decrease) in cash and cash equivalents		$	11,486			$	6,307

 

Operating activities:    Cash flows from operations represent net income adjusted for certain non-cash items and changes in assets and liabilities. Net cash provided by operating activities was $12,425 for the three month period ended June 30, 2013, compared to $8,534 for the comparable period of 2012. This net increase in cash in the first three month period of our 2014 fiscal year compared to the corresponding period of our 2013 fiscal year was primarily due to an increase in other current liabilities and due to related parties. Inventories in the three month period of our 2013 fiscal year increased over the comparable period of the prior year as a result causing a $531 use of cash. There is a cash increase of $1,640 on account of accounts receivable, including due from related parties. Other current assets decreased by $246 during the three month period ended June 30, 2013 as compared to the corresponding period of our 2013 fiscal year.

 

Investing activities:  Investing cash flows consist primarily of capital expenditures and proceeds from sales of property, plant or equipment and a short term loan, given to an affiliate company. Net cash used in investing activities was $939 for the three months ended June 30, 2013, compared to $2,228 for the three month period ended June 30, 2012. During the three month period ended June 30, 2013, capital expenditures primarily consisted of the purchase of equipment for the manufacture of new products to be installed in the portion of our facility that we modified during our last fiscal year and during the three month period ended June 30, 2012, capital expenditures primarily consisted of the purchase of equipment to replace old equipment and modification of the building at our Maryland facility.

 

Financing activities:  Financing cash flows consist primarily of borrowings and repayments of debt. Net cash provided from financing activities was $Nil for the three months ended June 30, 2013, compared to $1 in the three months ended June 30, 2012. The decrease in cash flow from financing activities was the result of no borrowings under any of the credit facilities during the three month period ended June 30, 2013 compared to $1 of borrowing under our credit facilities for the period ended June 30, 2012.

 

Bank Facilities

 

Cadista Pharmaceuticals had a Revolving Credit Facility (the “SBNY Revolver”) from SBNY for an amount up to $6,500 to meet its working capital requirements (the “SBNY Credit Agreement”). We elected not to renew the credit facility when it expired on November 18, 2012 and there was no loan outstanding on the expiration date or on March 31, 2013 or on June 30, 2013. All guarantees and SBNY’s security interest in all collateral securing this credit facility have been released. The interest rate on the SBNY Revolver was 6 months LIBOR plus 275 basis points.

 

On February 2, 2012 Cadista Pharmaceuticals entered into a credit facility agreement (the “ICICI Bank Credit Facility Agreement”) with ICICI Bank NY, providing for borrowings and other credit accommodations of up to $8,500. The ICICI Credit Facility Agreement provided for interest to accrue on any revolving loans funded under the agreement at the three month LIBOR rate plus 3.75% per annum and on any amounts funded by ICICI Bank NY with respect to discounting of customer invoices at a rate equal to the three month LIBOR rate plus 4% per annum.

  

The ICICI Credit Facility Agreement had a one year term that expired on February 2, 2013. We elected not to pursue a renewal of the term, and the credit facility is now expired. There were no short term loans or other credit accommodations outstanding under the ICICI Credit Facility Agreement on the date of its expiration or on March 31, 2013 or on June 30, 2013. ICICI Bank NY’s security interest in all collateral securing this credit facility has been released.

 

 

Off-Balance Sheet Arrangements

 

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, net revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Critical Accounting Policies

 

Our critical accounting policies are set forth in the Annual Report on Form 10-K for our fiscal year ended March 31, 2013, which contains our audited financial statements for our fiscal year ended March 31, 2013. There has been no change, update or revision to our critical accounting policies subsequent to our filing of such Form 10-K. The application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties, and as a result, actual results could differ from these estimates.

 

Recent Accounting Pronouncements

 

See Note 1(b), “Summary of Significant Accounting Policies – Recent Accounting Pronouncements,” for a discussion of new accounting guidance. The Company believes that there has not been and there will be no material impact of the adoption of these new accounting pronouncements on its financial statements.

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

At June 30, 2013, we had cash and cash equivalents of $17,128, inclusive of restricted cash. These amounts are held primarily in cash and money market funds. We do not enter into investments for trading or speculative purposes. The $10,000 HSL Loan that we funded in November 2011 (the “2011 HSL Loan”), that was outstanding as of June 30, 2013, bears interest at a rate equal to five percent (5%) per annum, has a current maturity date of November 29, 2013, and payment may be demanded at any time by us upon 30 days’ prior notice. The $20,000 HSL loan that we funded in January 2013 (the “2013 HSL Loan”; collectively, the 2011 HSL Loan and the 2013 HSL Loan are referred to as the “HSL Loans”), bears interest at a rate equal to four percent (4%) per annum, has a current maturity date of January 31, 2015 and payment may be demanded by us at any time upon 60 days’ notice. Due to the short-term nature of our cash and cash equivalent investments and the 2011 HSL Loan and the demand feature of the 2013 HSL Loan, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. However, a change in prevailing interest rates may cause the value of our HSL Loans to fluctuate.

 

While we operate primarily in the U.S., we do have foreign currency considerations. We generally incur sales and pay our expenses in U.S. Dollars. All of our vendors that supply us with API are located in a number of foreign jurisdictions, including India, and we believe they generally incur their respective operating expenses in local currencies. As a result, these suppliers may be exposed to currency rate fluctuations and experience an effective increase in their operating expenses in the event their local currency fluctuate vis-à-vis the U.S. Dollar. In this event, such suppliers may elect to stop providing us with these services or attempt to pass these increased costs back to us through increased prices for API sourcing that they supply to us. Historically we have not used derivatives to protect against adverse movements in currency rates.

 

We do not have any foreign currency or any other material derivative financial instruments.

 

 

Item 4. Controls and Procedures

 

(a)

Evaluation of disclosure controls and procedures.

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information is recorded, processed, summarized and reported accurately and on a timely basis in the Company’s periodic reports filed with the SEC. Based upon such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective to provide such reasonable assurance. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

 

(b)

Changes in internal controls over financial reporting.

 

We have implemented an enterprise resource planning system (“ERP”) system, developed by SAP, to replace certain of our legacy computer systems. The system became operational during the quarter ended December 31, 2012. We put in place several changes to internal controls and procedures as part of the implementation, as is expected with a major system implementation. Other than changes required by the implementation of the SAP ERP system, none of which materially impair or significantly alter the effectiveness of the internal controls over financial reporting, there were no material changes in internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially, or is reasonably likely to materially affect, the effectiveness of our internal controls over financial reporting.

 

 

PART II

 

OTHER INFORMATION

 

Item 6. Exhibits

 

31.1

Certification of Periodic Report by Chief Executive Officer pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

31.2

Certification of Periodic Report by Chief Financial Officer pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

32.1

Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.1

The following materials from Cadista’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 are formatted in XBRL (eXtensible Business Reporting Language): (i) the condensed Consolidated Balance Sheets, (ii) the condensed Consolidated Statements of Income, (iii) the condensed Consolidated Statements of Cash Flows, and (iv) notes to the condensed Consolidated Financial Statements.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Date : August 13, 2013	CADISTA HOLDINGS INC.
	By :  /s/ Scott Delaney
	Scott Delaney
	Chief Executive Officer
	By : /s/ Kamal Mandan
	Kamal Mandan
	Chief Financial Officer

  

 

EXHIBIT INDEX

 

EXHIBIT NO.		DESCRIPTION
31.1		Certification of Periodic Report by Chief Executive Officer pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
31.2		Certification of Periodic Report by Chief Financial Officer pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
32.1		Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.1		The following materials from Cadista’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 are formatted in XBRL (eXtensible Business Reporting Language): (i) the condensed Consolidated Balance Sheets, (ii) the condensed Consolidated Statements of Income, (iii) the condensed Consolidated Statements of Cash Flows, and (iv) notes to the condensed Consolidated Financial Statements.