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EX-31.2 - EXHIBIT 31.2 - Cadista Holdings Inc.v385357_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - Cadista Holdings Inc.v385357_ex32-1.htm

 

 

 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 2014

 

¨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

 

 

 

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, 2014 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  21
     
Item 4. Controls and Procedures 22
     
PART II.  OTHER INFORMATION   23
     
Item 6. Exhibits 23
     
Signatures 24

 

i
 

 

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, 
   2014   2014 
ASSETS          
           
Current assets:          
Cash and cash equivalents   20,073    11,110 
Restricted cash   25    25 
Accounts receivable, net of allowances   25,501    23,443 
Due from related parties   45,957    45,688 
Inventories, net of allowances   22,829    25,573 
Prepaid expenses and other current assets   755    609 
Deferred tax assets, current   10,391    9,438 
Total current assets  $125,531   $115,886 
           
Property, plant and equipment, net   22,091    21,269 
Intangible assets, net   882    948 
Total assets  $148,504   $138,103 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable   2,919    1,738 
Due to related parties   3,603    1,993 
Other current liabilities   9,961    6,882 
Dividend payable   66    66 
Total current liabilities  $16,549   $10,679 
Deferred tax liabilities(non-current)   1,044    1,017 
Total  liabilities  $17,593   $11,696 
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, 2014 and March 31, 2014          
Additional paid-in capital   38,755    38,755 
Accumulated surplus   92,038    87,534 
Total stockholders’ equity  $130,911   $126,407 
Total liabilities and stockholders’ equity  $148,504   $138,103 

 

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

 

1
 

  

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, 
   2014   2013 
         
Net revenues  $25,003   $25,657 
Cost of revenues   16,565    12,052 
Gross profit   8,438    13,605 
           
Operating costs and expenses:          
Research and development expenses   -    9 
Selling, general and administration   1,725    1,840 
Depreciation and amortization   568    542 
           
Total operating costs and expenses   2,293    2,391 
           
Operating income   6,145    11,214 
Other income (expense), net   739    336 
Income before income taxes   6,884    11,550 
Income taxes   2,380    4,412 
Net income  $4,504   $7,138 
           
Net income per common share          
Basic  $0.04   $0.06 
Diluted  $0.04   $0.06 

 

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

 

2
 

  

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, 
   2014   2013 
Cash flows from operating activities:          
Net income  $4,504   $7,138 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation and amortization   568    542 
Deferred income taxes   (927)   (102)
Other non-cash items   3,053    1,133 
Changes in operating assets and liabilities, net          
Decrease / (Increase) in accounts receivable   (2,058)   1,605 
(Increase) in inventories   (309)   (1,552)
(Increase) / Decrease in dues from related parties   (269)   35 
Increase in dues to related parties   1,610    829 
Increase in accounts payable and other current liabilities   3,534    2,551 
(Increase) / Decrease in prepaid expenses and other current assets   (145)   246 
Net cash provided by operating activities  $9,561   $12,425 
           
Cash flows from investing activities:          
Purchase of property, plant and equipment  $(598)  $(939)
           
Net cash (used in) investing activities  $(598)  $(939)
           
Cash flows from financing activities:          
           
Proceeds from short term borrowings, net  $-   $- 
           
Net cash provided by financing activities  $-   $- 
           
Net change in cash and cash equivalents  $8,963   $11,486 
           
Cash and cash equivalents (including restricted cash)          
Beginning of the period  $11,135   $5,642 
End of the period  $20,098   $17,128 
           
 Supplementary cash flow information          
 Cash paid during the period for interest/commitment charges  $-   $- 
 Cash paid during the period for tax, net of refunds  $522   $1,776 

 

(See accompanying notes to the condensed consolidated financial statements)

 

3
 

  

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)

 

1SUMMARY 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, 2014 included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on June 27, 2014. The balance sheet as at March 31, 2014 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 July 2013, the FASB issued guidance to address the diversity in practice related to the financial statement presentation of unrecognized tax benefits as either a reduction of a deferred tax asset or a liability when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists. This guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company’s financial statement presentation is in accordance with this guidance; therefore this pronouncement is not expected to have a material impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the revised guidance will require the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The guidance will require the Company to (1) identify the contract(s) with a customer (2) identify the performance obligations in the contract (3) determine the transaction price (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the Company satisfies a performance obligation. The amendments in this Update are effective for the Company for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.

 

4
 

 

 

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;
§Delivery has occurred and/or services have been rendered; 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 billback (difference between the prices paid to the wholesaler and the negotiated contract price with them). Accruals for such billback is based upon historical purchasing patterns of qualified customers who purchase product directly from us and supplement their purchases indirectly through our wholesale customers. Accruals for bill back claims are reflected as a direct reduction to revenues and accounts receivable.

 

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

 

5
 

 

§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.

 

Rebates include volume related incentives to direct and indirect customers and Medicaid rebates based on claims from Medicaid benefit providers. Volume rebates are generally offered to customers as an incentive to continue to carry our products and to encourage greater product sales. These rebate programs include contracted rebates based on customers’ purchases made during an applicable monthly, quarterly or annual period. The provision for rebates is estimated based on our customers’ contracted rebate programs and our historical experience of rebates paid. Any significant changes to our customer rebate programs are considered in establishing our provision for rebates. We continually monitor our customer rebate programs to ensure that the liability for accrued rebates is fairly stated. The provision for Medicaid rebates is based upon historical experience of claims submitted by the various states. We monitor Medicaid legislative changes to determine what impact such legislation may have on our provision for Medicaid rebates. Our accrual of Medicaid rebates is based on historical payment rates and is reviewed on a quarterly basis against actual claim data to ensure the liability is fairly stated.

 

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.

 

6
 

  

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,
 
   2014   2013 
Net income available for common shareholders (basic and dilutive)  $4,504   $7,138 
           
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  $0.04   $0.06 
Diluted  $0.04   $0.06 

 

2FINANCIAL 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, 2014 and 2013 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, 2014, the Company had loans outstanding in the aggregate principal amount of $ 30,000, that it had extended to HSL Holdings Inc. (“HSL Holdings”), a wholly-owned subsidiary of Jubilant Pharma 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 28, 2014. 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.

 

In addition, as of June 30, 2014, we had a loan outstanding in the principal amount of $ 15,000 (the “Draximage Loan”) that we had extended to Jubilant Draximage Inc. (“Draximage”), a wholly-owned subsidiary of Jubilant Pharma Limited (“Jubilant Pharma”), which together with its wholly-owned subsidiary, owns Jubilant Holdings. $12,000 of the Draximage Loan was funded on August 23, 2013 pursuant to a loan agreement of the same date with the Company (the “Draximage Loan Agreement”). The remaining $ 3,000 of the Draximage Loan was funded, in accordance with the Draximage Loan Agreement, on September 30, 2013. The $ 15,000 Draximage Loan has a maturity date of August 22, 2014. Jubilant Pharma has guaranteed the prompt payment and performance, when due, of all obligations of Draximage under the Draximage Loan Agreement.

 

7
 

  

By their nature, such loans involve risks including credit risk of non-performance by HSL Holdings, Jubilant Holdings, Draximage and Jubilant Pharma. If HSL Holdings, Jubilant Holdings, Draximage and Jubilant Pharma were to not perform their respective obligations under the HSL Loan Agreements and the Draximage Loan Agreement the Company could lose some or all of its investments. In management’s opinion, as of June 30, 2014, 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, 2014, five customers had a 15%, 14%, 12%, 12% and 11% share in net product sales, respectively, and for the three months ended June 30, 2013 three customers had a 33%, 12% 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, 2014, three customers had 39%, 19% and 11% shares, respectively, and as of June 30, 2013 three customers had 36%, 15% and 10% 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, 2014, two products collectively accounted for approximately 57% of net product sales and for the three months ended June 30, 2013, two products collectively accounted for approximately 72% 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.

 

3CASH AND CASH EQUIVALENTS

 

Cash and cash equivalents comprises the following:

 

   As of
June 30, 2014
   As of
March 31, 2014
 
Cash in hand  $1   $1 
Balances with banks in current accounts   1,978    5,522 
Balances with banks in money market funds*   18,119    5,612 
   $20,098   $11,135 

 

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, 2014 and March 31, 2014, cash equivalents include restricted cash of $25 and $25, 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.

 

4ACCOUNTS RECEIVABLES

 

Accounts receivable as of June 30, 2014 and 2013 are stated net of allowance for doubtful receivables and provision for chargebacks, returns, rebates, discounts, and shelf stock (i.e. price protection) adjustments.

 

8
 

  

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

 

   Three months ended
June 30,
 
   2014   2013 
Balance at the beginning of the period  $351   $241 
Charges to revenues and costs   -    112 
Doubtful accounts written-off   -    - 
Balance at the end of the period  $351   $353 

  

5INVENTORIES

 

Inventories consist of the following amounts:

 

   June 30,   March 31, 
   2014   2014 
Raw materials  $11,079   $11,487 
Work in progress   2,380    2,210 
Finished goods*   12,357    13,905 
Stores and spares   583    545 
   $26,399   $28,147 
Provision for slow moving / obsolete inventory   (3,570)   (2,574)
   $22,829   $25,573 

 

* includes adjustments for market value.

 

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

 

   Three months ended
June 30,
 
   2014   2013 
Balance at the beginning of the period  $2,574   $675 
Charges to revenues and costs, net *   3,053    1,021 
Inventory written-off   (2,057)   (606)
Balance at the end of the period  $3,570   $1,090 

 

*During the three months ended June 30, 2014 and 2013, the Company has written down/off inventory by $1,620 (net of $ 1,433 recovered from vendor), and $521 (net of $500 recovered from vendor) respectively, on account of slow-moving, obsolete and rejected inventory. These amounts are included in the cost of revenues.

 

6DEPRECIATION 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” and ‘‘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.

 

9
 

 

 

7INCOME TAXES

 

The Company estimates its effective tax rate (Federal and State) to be approximately 34.57% for the year ending March 31, 2015, as compared to 37.02% for the year ended March 31, 2014. The decrease in effective tax rate is on account of a onetime true up of taxes for the year ended March 31, 2014, in respect of combined tax returns filed by Jubilant Holdings in some of the states. 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, 2014, the Company has recognized a tax expense of $2,380, comprised of $3,307 of current tax and ($927) of deferred tax expense; compared to a tax expense of $4,412, comprised of $4,514 of current tax and ($102) of deferred tax expense for the comparable period of 2013. 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, 2014, the Company, under the Tax Sharing Agreement, had a payment obligation of $5,309 towards federal taxes and $1,402 towards state taxes to Jubilant Holdings, including carryover from previous years. 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, 2014 the Company did not make any payments to Jubilant Holdings under the Tax Sharing Agreement.

 

8CHANGES IN STOCKHOLDERS’ EQUITY

 

There have been no changes in the statement of stockholders’ equity during the three months ended June 30, 2014, other than the change in the balance of accumulated surplus due to the net income earned during the period.

 

9SUBSEQUENT 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.

 

10
 

  

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 essentially 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 may include, but are not limited to:

 

·A significant percentage of our revenues are generated from sales to a small number of customers;
·A significant percentage of our revenues are generated from sales from a small number of products;
·Increasing competition for our products, and the concomitant risk of declining revenues and profits as a result;
·Our ability to maintain a supply of raw materials, which are supplied by a limited number of our vendors, necessary to satisfy market demand for our key products, Methylprednisolone and Meclizine Tablets;
·Our ability to maintain a supply of our new products through our supply agreement with Jubilant Life Sciences Ltd.;
·Our ability to continue to develop and commercialize new products in a timely and cost-effective manner,;
·Our ability to maintain a supply of high-quality API and other raw materials in the quantities we require on a timely basis from our suppliers;
·Our or our suppliers’ ability to comply with the regulatory standards applicable to pharmaceutical drug manufacturers;
·Any change in the regulations, enforcement procedures or regulatory policies established by the FDA and other regulatory agencies;
·Our ability to retain our key personnel in a highly competitive market;
·Any legal actions relating to, among other things, product liability claims or intellectual property infringement;
·General industry and economic conditions;
·The continuing consolidation of our distribution network and the concentration of our customer base; and
·Those risk factors set forth in Item 1A (“Risk Factors”) of our Annual Report on Form 10-K for the year ended March 31, 2014, and from time to time in our other filings with the SEC, including current reports on Form 8-K.

 

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. Other factors besides those listed here could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, as amended.

 

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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, 2014 and June 30, 2013 approximately 92% and 96% 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 ultimate parent company of our principal stockholder, and third parties. There were no revenues from these drug development services during either the three month period ended June 30, 2014 or the three month period ended June 30, 2013.

 

As of June 30, 2014, we marketed 19 products, all of which are prescription generic pharmaceutical products. Six 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”). In addition, as of June 30, 2014, we had a pipeline consisting of 17 products for which ANDAs were filed with the FDA that had not yet been approved (including 15 products, the ANDAs for which were filed and are owned by Jubilant and are covered under the 2011 Master Supply Agreement) and one additional product still in development for which an ANDA has not yet been filed. During the quarter ended June 30, 2014, Jubilant received ANDA approvals with respect to the following products that we have the right to market under the 2011 Master Supply Agreement: Spironolactone Tablets, in 25, 50 and 100 mg dosages, which is the generic equivalent to Aldactone®, for which final approval was granted by the FDA; and Memantine Tablets, in 5 and 10 mg dosages, which is the generic equivalent of Namenda®, for which tentative approval was granted by the FDA but will not be able to be marketed by us until the patent listed in the FDA’s Orange Book with respect to the innovator product expires in April 2015.

 

We filed our first ANDA with the FDA in May, 1996, and through June 30, 2014 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 for the ANDAs owned by us in the three months ended June 30, 2014. For the three month period ended June 30, 2014 we reported net revenue of $25,003 representing a decrease of 3% as compared to the three month period ended June 30, 2013.

 

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 for which we acquire marketing rights pursuant to the 2011 Master Supply Agreement, 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 or Jubilant files with respect to new products. The timing of these and other new product launches will have a significant impact on our results of operations.

 

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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
     
   2014   2013   Change 
   $000’s   $000’s   $000’s   Percent 
Revenues   25,003    25,657    (654)   (3)%
Costs of revenues
(exclusive of depreciation and amortization)
   16,565    12,052    4,513    37%
Research and development expense
(exclusive of depreciation and amortization)
   -    9    (9)   (100)%
Selling, general and administrative expense
(exclusive of depreciation and amortization)
   1,725    1,840    (115)   (6)%
Depreciation and amortization   568    542    26    5%
Income from operations   6,145    11,214    (5,069)   (45)%
Other income (expense), net   739    336    403    120%
Income before income tax   6,884    11,550    (4,666)   (40)%
Income tax expense   2,380    4,412    (2,032)   (46)%
Net income   4,504    7,138    (2,634)   (37)%

 

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 either the three month period ended June 30, 2014 or the three month period ended June 30, 2013.

 

Revenues for the three months ended June 30, 2014 decreased 3% or $654 to $25,003 compared to revenues of $25,657 from the corresponding period of 2013. The decrease in revenues is mainly attributable to a decrease in sales of Methylprednisolone (due to reduction in volume and price erosion), offset by an increase in sales of Prednisone and products that we sell pursuant to the 2011 Master Supply Agreement (i.e. Donepezil, Pantoprazole, Valacyclovir, Olanzapine ODT and Escitolapram).

 

Total revenues of our top selling products were as follows:

 

   Three months ended         
   June 30         
   2014   2013   Change   % 
                 
Product  $000’s   $000’s   $000’s     
Methylprednisolone tablets   9,004    15,663    (6,659)   (42.5)
Prednisone   5,183    453    4,730    1044.2 
Other product revenues   10,816    9,541*   1,275    13.4 
Net product sales   25,003    25,657    (654)   (2.5)
Other revenues   -    -    -    - 
Total revenues   25,003    25,657    (654)   (2.5)

 

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* Sales of Meclizine tablets accounted for over ten percent (10%) of our total revenues in the quarter ended June 30, 2013, and were shown separately from “Other product revenues” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Quarterly Report on Form 10-Q for such quarter (the “June 2013 Form 10-Q). The entry of an additional competitor in the quarter ended June 30, 2014, resulted in further declines in our sales volume and unit price of Meclizine tablets so that its sales did not constitute at least ten percent (10%) of our revenues for the quarter ended June 30, 2014. Accordingly, sales of Meclizine tablets have been included in “Other product revenues” for the quarter ended June 30, 2014 in the table above, and, for comparison purposes, “Other product revenues” for the quarter ended June 30, 2013 have been revised to include sales of Meclizine tablets for such quarter that had previously been shown separately in the June 2013 Form 10-Q.

 

During the three month period ended June 30, 2014, our top two products (Methylprednisolone and Prednisone) accounted for approximately 57% of our total net product sales and approximately 92% 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 period ended June 30, 2014 and June 30, 2013, there were at least four competitors supplying this generic product in the U.S. market in 4mg and 8 mg strengths. We believe that there is one competitor currently supplying this generic product in 16 mg or 32 mg strengths in the U.S. market. Methylprednisolone tablets are a steroid product. The volume of Methylprednisolone products sold during the three months period ended June 30, 2014 was significantly lower than the three month period ended June 30, 2013, and pricing was also materially more competitive than in our three month period ended June 30, 2013 resulting in a material reduction of our net revenues from sales of this product during the three month period ended June 30, 2014. Pricing was materially more competitive in the three month period ended June 30, 2014 as compared to the three month period ended June 30, 2013, primarily as result of: competitors more aggressively pursuing market share; continued consolidation of wholesalers and retailers into large buying groups; and customers more aggressively seeking lower prices. We currently anticipate that these market dynamics will continue and that pricing for Methylprednisolone will continue to be very competitive. 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 sales volume, which could negatively impact our revenue and gross margin in the future.

 

We launched Prednisone tablets in January 2006. We sell Prednisone tablets, which are the generic version of Deltasone®, in 1 mg, 5 mg, 10 mg and 20 mg strengths and two pack sizes for each strength. We believe that there were 5 competitors supplying this generic product in the U.S. market through the end of our fiscal year ended March 31, 2014. Prednisone tablets are a steroid product. The volume of Prednisone products sold during the three months period ended June 30, 2014 was significantly higher than the three month period ended June 30, 2013, primarily as a result of our increasing supply to one customer, resulting in a material increase of our net revenues from sales of this product during the three month period ended June 30, 2014. 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 sales volume, which could negatively impact our revenue and gross margin in the future.

 

Our other product revenues (“Other Product Revenues”), in addition to sales from our top two products, during the three month period ended June 30, 2014 consisted of sales of Terazosin capsules, Lamotrigine tablets, Cyclobenzaprine tablets, Oxcarbazepine tablets, HCTZ capsules, Meclizine tablets, Prochlorperazine tablets, Alendronate tablets, Donepezil tablets, Pantoprazole DR tablets, Risperidone ODT tablets, Valacyclovir tablets, Olanzapine ODT tablets, Losartan Potassium Hydrochlorothiazide tablets, Losartan Potassium tablets, Escitolapram tablets and Anipryl tablets. Our revenues from sales of these other products increased during the three month period ended June 30, 2014 compared to the corresponding periods of 2013. Donepezil tablets, Pantoprazole DR tablets, Risperidone ODT tablets, Valacyclovir tablets, Olanzapine ODT tablets and Escitalopram 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 and Escitolapram tablets during the quarter ended December 31, 2013. The increase in Other Product Revenues for the three months ended June 30, 2014 compared to the corresponding period of 2013 was primarily attributable to an aggregate increase of $3,511 from the sales of Prochlorperazine tablets, Lamotrigine tablets, Donepezil tablets, Pantoprazole DR tablets, Valacyclovir tablets, Olanzapine ODT tablets, Losartan Potassium Hydrochlorothiazide tablets, Losartan Potassium tablets, Escitolapram tablets and Anipryl tablets offset by a reduction in the revenues generated from our sales of Terazosin capsules, Meclizine tablets, Cyclobenzaprine tablets, Alendronate tablets, Oxcarbazepine tablets, Risperidone ODT tablets and HCTZ 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.

 

14
 

  

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 allowances for accounts receivable, inventories, reserves for sales returns, rebates, chargebacks, price protection and bill back claims, determination of useful lives for property, plant and equipment and intangible assets, and realization of deferred tax assets. The estimates are made using historical information and other relevant factors available to management. 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;

§ Delivery has occurred and/or services have been rendered; 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.

 

15
 

  

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, 2014 and June 30, 2013, 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 
   2014   2013 
Description   $000’s    $000’s 
Gross revenues   55,655    32,010 
Chargebacks   24,780*   3,024 
Rebates, fees, incentives and cash discounts   3,495    2,206 
Medicaid/ISA fees   450    405 
Returns   1,042    807 
Price protection reserve   885    (89)
Net product sales   25,003    25,657 
Net  to Gross %   44.9%   80.2%

 

* Chargebacks increased significantly during the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013, primarily as the result of a pharmacy chain purchasing product through a wholesaler during the quarter ended June 30, 2014 rather than directly from us as it did in the quarter ended June 30, 2013.

  

The following tables summarize the roll forward for the three month period ended June 30, 2014 and June 30, 2013 in the accounts affected by the estimated provisions described below (in $ thousands):

 

   For the three months ended June 30, 2014 
Accounts receivable
reserves
  Beginning
balance
   Provision
recorded
for
current
period
sales
   Provision
(reversal)
recorded
for prior
period
sales(1)
   Credits
processed
   Ending
balance
 
Chargebacks   10,076    24,780    -    17,982    16,874 
Rebates and incentive programs   4,505    2,835    -    2,597    4,743 
Returns   1,555    1,042    -    230    2,367 
Cash discounts and other   828    1,110    -    842    1,096 
Price protection reserve   574    885    -    585    874 
Total   17,538    30,652    -    22,236    25,954 

 

 

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   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 

 

(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 37% or $4,513 to $16,565 in the three months ended June 30, 2014 compared to $12,052 for the comparable period of 2013. This increase in cost of revenues was mainly attributable to increase in volumes of products with higher manufacturing cost/ cost of purchased products, write down/off of short dated/obsolete inventory, cost of rejected inventory and an increase in production related payroll.

 

Our cost of revenues as a percentage of net revenues in the three months ended June 30, 2014, increased 19% from the three months ended June 30, 2013, increasing from 47% in the three months ended June 30, 2013 to 66% in the three months ended June 30, 2014. The majority of such 19% increase was attributable to the higher percentage sales of products with relatively low margins due to higher volumes of products with higher manufacturing cost/ cost of purchased products and price erosion with respect to other lower manufacturing cost products during the quarter ended June 30, 2014.

 

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 decreased $9 to Nil for the three months ended June 30, 2014 compared to $9 in the corresponding period of 2013. This decrease was primarily a result of $9 of expenses during the three month period ended June 30, 2013 for the new products which the Company is exploring.

 

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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 decreased 6% or $115 to $1,725 for the three months ended June 30, 2014 compared to $1,840 in the corresponding period of 2013. The decrease in expense was primarily the result of decrease of $47 in FDA user fee, $53 in payroll and benefits, $2 in bank charges, offset by an increase of $8 in legal and professional 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 5% or $26 to $568 for the three months ended June 30, 2014 compared to $542 in the corresponding period of 2013. 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.

 

Other income (expense), net

 

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

 

Other income, net increased 120% or $403 to $739 for the three months ended June 30, 2014 compared to $336 in the corresponding period of 2013. This increase was primarily the result of an increase in interest income as a result of a $10,000 loan given to our affiliate company, HSL Holdings Inc. (“HSL Holdings”), which we funded on November 25, 2011 (the “2011 HSL Loan”), that currently bears interest a rate equal to five percent (5%) per annum and interest income on a $20,000 loan we provided to HSL Holdings on January 30, 2013 that currently 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”). In addition, on August 23, 2013 we entered into a loan agreement with our affiliate, Jubilant Draximage Inc. (“Draximage”), pursuant to which we provided a $15,000 loan to Draximage (the “Draximage Loan”), which was funded in two installments. A $12,000 installment was funded on August 23, 2013 and a $3,000 installment was funded on September 30, 2013. The Draximage Loan bears interest at an initial rate of four percent (4%) per annum, which interest rate may be reset on each September 1 and March 1 (each, a “Reset Date”), commencing with March 1, 2014, based upon the increase in the Six Month Libor Rate over such rate on August 15, 2013 (the “Reference Date”) (with the resets subject to a floor of four percent (4%) per annum and a cap of seven percent (7%) per annum). Pursuant to amendments to the loan agreements with HSL Holdings that we entered into in November 2013, identical interest reset provisions were added with respect to the HSL Loans, with the following differences: there is no cap of seven percent (7%) per annum with respect to the resets; the interest rate on the 2013 HSL Loan is subject to a floor of four percent (4%) per annum and the interest rate on the 2011 HSL Loan is subject to a floor of five percent (5%) per annum; there is no adjustment to the 2011 HSL Loan unless there is at least a one hundred (100) basis point increase in the Six Month Libor Rate on the applicable Reset Date over the Six Month Libor Rate on the Reference Date. There were no adjustments to the interest rates on the HSL Loans or the Draximage Loan on March 1, 2014 as a result of the interest rate reset provisions.

 

During the quarter ended June 30, 2014, the Company also received a state property tax refund of $255 by claiming a manufacturing exemption on property taxes for the prior tax periods.

 

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Income Tax Expense

 

The income tax expense decreased by $2,032 to $2,380 for the three month period ended June 30, 2014 compared to $4,412 in the corresponding period of 2013. 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, 2014 as compared to profits for the corresponding period of 2013, the tax on profits also was reduced.

 

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, 2014, the Company, under the Tax Sharing Agreement, had a payment obligation of $5,309 towards federal taxes and $1,402 towards state taxes to Jubilant Holdings, including carryover from previous years. 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, 2014 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, 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, 2014, we had no outstanding borrowings under any bank credit facilities. As of June 30, 2014, our principal sources of liquidity consisted of cash and cash equivalents (excluding restricted cash of $25) of $20,073. In addition, the $30,000 principal amount of loans we had outstanding as of June 30, 2014 to our affiliate company, HSL Holdings, and $15,000 to another affiliate company, Draximage, are other potential sources of liquidity. $25,000 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 four products that are represented by two 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, 2014;

 

·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 the 2011 Master Supply Agreement with Jubilant;

 

·The launch by Jubilant of certain of our products outside of the United States pursuant to the 2012 Master Supply Agreement; and

 

·Successfully identifying and sourcing other new product and business opportunities.

 

Based on our existing business plan, we believe our existing sources of liquidity as of June 30, 2014 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.

 

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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, 2014, cash and cash equivalents (excluding restricted cash $25) on hand totaled $20,073, working capital (excluding cash and cash equivalents) totaled $88,884 and our current ratio (current assets to current liabilities) was approximately 7.59 to 1. Our working capital as of June 30, 2014 decreased approximately $5,188 to $88,884 compared to our working capital as of March 31, 2014 (which was $94,072) primarily because of increase in accounts payable, due to related parties and other current liabilities, and a decrease in inventories, offset by an increase in accounts receivable.

 

The following tables summarize our cash flows provided by/(used in) operating, investing and financing activities for the three months ended June 30, 2014 and June 30, 2013.

  

   For the three months ended June 30,
(in thousands)
 
   2014   2013 
Net cash provided by/(used in):          
Operating activities   9,561    12,425 
Investing activities   (598)   (939)
Financing activities   -    - 
Net increase (decrease) in cash and cash equivalents  $8,963   $11,486 

 

Operating activities: Cash flows from operations represent net income adjusted for certain non-cash items and changes in assets and liabilities. Net cash provided in operating activities was $9,561 for the three month period ended June 30, 2014, compared to $12,425 for the three month period ended June 30, 2013. This net decrease in cash in 2014 compared to 2013 was primarily due to net income of $7,198 (after adjustments of noncash items amounting to an aggregate of $2,694) in the three month period ended June 30, 2014 as compared to $8,711 (after adjustments of noncash items amounting to an aggregate of $1,573) in the three month period ended June 30, 2013, offset by less cash used in an acquisition of inventory of $309 in the three month period ended June 30, 2014 as compared to $1,552 in the three month period ended June 30, 2013. Accounts receivable increased during the three month period ended June 30, 2014 causing a $2,058 use of cash as compared to $1,605 cash provided in the three month period ended June 30, 2013 as a result of a decrease of accounts receivable during that three month period. Accounts payable, amounts due to/from related parties and prepaid expenses and other current assets increased by a net amount of $4,730, resulting in a net positive adjustment for such amount to cash flow for the three month period ended June 30, 2014, as compared to a net increase of $3,661, resulting in a net positive adjustment for such amount to cash flow for the three month period ended June 30, 2013.

 

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 $598 for the three months ended June 30, 2014, compared to $939 for the three month period ended June 30, 2013. During the three month period ended June 30, 2014, capital expenditures primarily consisted of the expenditure on expansion of a new building at our Salisbury, Maryland facility and 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 Salisbury, Maryland facility that we modified during the previous fiscal year.

 

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Financing activities:  Financing cash flows consist primarily of borrowings and repayments of debt. There was no cash provided from or used with respect to financing activities during either of the three month period ended June 30, 2014 or June 30, 2013.

 

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, 2014, which contains our audited financial statements for our fiscal year ended March 31, 2014. 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, 2014, we had cash and cash equivalents of $20,098, 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 “2011HSL Loan”), that was outstanding as of June 30, 2014, currently bears interest at a rate equal to five percent (5%) per annum, has a current maturity date of November 28, 2014, 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”), currently 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. The $15,000 Draximage Loan, we funded during the quarter ended September 2013, has a current maturity date of August 22, 2014 and payment may be demanded at any time by us upon 30 days’ prior notice. The Draximage Loan bears interest at an initial rate of four (4%) per annum, which interest rate may be reset on each September 1 and March 1 (each a “Reset Date”), commencing March 1, 2014, based upon the increase in the Six Month Libor Rate over such rate on August 15, 2013 (the “Reference Date”) (with the resets subject to a floor of four percent (4%) per annum and a cap of seven percent (7%) per annum). Pursuant to amendments to the loan agreements with HSL Holdings that we entered into in November 2013, identical interest reset provisions were added with respect to the HSL Loans, with the following differences: there is no cap of seven percent (7%) per annum with respect to the resets; the interest rate on the 2013 HSL Loan is subject to a floor of four percent (4%) per annum and the interest rate on the 2011 HSL Loan is subject to a floor of five percent (5%) per annum; there is no adjustment to the 2011 HSL Loan unless there is at least a one hundred (100) basis point increase in the Six Month Libor Rate on the applicable Reset Date over the Six Month Libor Rate on the Reference Date. There were no adjustments to the interest rates on the HSL Loans or the Draximage Loan on March 1, 2014 as a result of the interest rate reset provisions. Due to the short-term nature of our cash and cash equivalent investments and the 2011 HSL Loan and the Draximage Loan and the demand features of the HSL Loans and Draximage 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 and the Draximage Loan to fluctuate.

 

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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 have been putting in place several changes to internal controls and procedures as part of the implementation, as is expected with a major system implementation, including adding several system based controls to reduce the dependence on the manual oversight controls. 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.

 

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PART II

 

OTHER INFORMATION

 

Item 6. Exhibits

 

31.1Certification of Periodic Report by Chief Executive Officer pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

31.2Certification of Periodic Report by Chief Financial Officer pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

32.1Certification 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.

 

101.1The following materials from Cadista’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 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.

 

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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, 2014 CADISTA HOLDINGS INC.
     
  By:   /s/ Scott Delaney
    Scott Delaney
    Chief Executive Officer
     
  By: /s/ Kamal Mandan
    Kamal Mandan
    Chief Financial Officer

 

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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, 2014 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.

 

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