Item 7. Management’s Discussion and Analysis
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s
Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is intended to provide a reader of our consolidated
financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity
and certain other factors that may affect our future results. You should read the following discussion and analysis of our financial
condition and results of operations together with our financial statements and the related notes and other financial data included elsewhere
in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report,
including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks
and uncertainties. You should review Item 1A of this Annual Report for a discussion of important factors that could cause actual results
to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion
and analysis.
Results
of Operations:
For
the Years Ended March 31, 2024 and 2023
Revenue,
Cost of revenue and Gross profit:
For the Years Ended March 31,
Change
2024
2023
Dollars
Percentage
Manufacturing fees
$ 54,120,731
$ 29,187,573
$ 24,933,158
85 %
Licensing fees
2,504,397
4,967,541
(2,463,144 )
(50 )%
Total revenue
56,625,128
34,155,114
22,470,014
66 %
Cost of manufacturing
30,268,025
17,561,093
12,706,932
72 %
Gross profit
$ 26,357,103
$ 16,594,021
$ 9,763,082
59 %
Gross profit - percentage
47 %
49 %
Total
revenues for the year ended March 31, 2024 increased by $22.5 million or 66%, to $56.6 million, as compared to $34.2 million, for the
of the prior fiscal year, primarily due to the launch of the Elite label during the current fiscal year which achieved increased sales
for the year ended March 31, 2024, as compared to the prior year, which did not include any sales of Elite label products.
Manufacturing
fees revenue increased by $24.9 million, or 85%, primarily due to the launch of the Elite label during the current fiscal year which
achieved increased sales for the year ended March 31, 2024, as compared to the prior year, which did not include any sales of Elite label
products.
Licensing
fees revenue decreased by $2.5 million, or 50%. This decrease is primarily due to the expiration of the marketing alliance agreements
between the Company and Lannett Company, Inc. (the “Lannett Agreements”) on March 31, 2023. The revenue streams that were
generated during periods ending on or prior to March 31, 2023 and attributed to the Lannett Agreements, included profit splits on the
sale by Lannett of Amphetamine IR and Amphetamine ER. Since April 1, 2023, these products are now sold by the Company under its own label,
with revenues being recorded as manufacturing revenues instead of licensing fees going forward.
Cost
of revenue consists of manufacturing and assembly costs. Our cost of revenue increased by $12.7 million or 72%, to $30.3 million as compared
to $17.6 million for the prior fiscal year. This increase was due to an increased volume of products sold during the year ended March
31, 2024, as compared to the prior fiscal year, as noted above.
Our
gross profit margin was 47% during the year ended March 31, 2024 as compared to 49% during the prior fiscal year. The decrease is due
to increased manufacturing volumes resulting in decreased unit costs due to efficiencies of scale being achieved on the increased manufacturing
volume. In addition, the commercial launch of the Elite label and expiration of the Lannett Agreements resulted in higher net revenues
per unit being achieved. Both of these factors had the effect of increased gross profit margin.
48
Operating
expenses:
For the Years Ended March 31,
Change
2024
2023
Dollars
Percentage
Operating expenses:
Research and development
$ 6,883,351
$ 6,200,163
$ 683,188
11 %
General and administrative
7,145,114
5,122,272
2,022,842
39 %
Non-cash compensation
159,921
39,325
120,596
307 %
Impairment of intangible assets
—
292,807
(292,807 )
(100 )%
Depreciation and amortization
1,379,948
1,263,452
116,496
9 %
Total operating expenses
$ 15,568,334
$ 12,918,019
$ 2,650,315
21 %
Operating
expenses consist of research and development costs, general and administrative costs, non-cash compensation and depreciation and amortization
expenses. Operating expenses for the year ended March 31, 2024 increased by $2.7 million, or 21%, to $15.6 million as compared to $12.9
million for the prior fiscal year, largely due to an increase in research and development of $0.7 million and general and administrative
expenses of $2.0 million.
Research
and development costs during the year ended March 31, 2024 were $6.9 million, an increase of $0.7 million, or 11%, from approximately
$6.2 million of such costs for the prior year. The increase was a result of the timing and nature of product development activities during
the year ended March 31, 2024 as compared to the prior fiscal year.
General
and administrative expenses for the year ended March 31, 2024 were $7.1 million as compared to $5.1 million for the prior fiscal year,
an increase of $2.0 million or approximately 39%, largely due to an increased human resource headcount and costs as compared to the prior
fiscal year as well as infrastructure costs related to Elite label commercial activities resulting from the commercial launch of the
Elite label product line during the year ended March 31, 2024.
Non-cash
compensation expense for the year ended March 31, 2024 was $0.2 million as compared to $0.04 million for the prior fiscal year, an increase
of $0.1 million or approximately 307%, with such increase being attributed to the issuance to employees of options to purchase Common
Stock during the current fiscal year.
Depreciation
and amortization expenses from the year ended March 31, 2024 were $1.4 million as compared to $1.3 million for the prior fiscal year,
an increase of $0.1 million or approximately 9%. This increase is due to depreciation expense being recorded on an increased fixed asset
base which resulted from additional investments in capital manufacturing facilities.
As
a result of the foregoing, our income from operations during the year ended March 31, 2024 was $10.8 million, compared to income from
operations of $3.7 million for the prior fiscal year.
Other
income (expense):
For the Years Ended March 31,
Change
2024
2023
Dollars
Percentage
Other income (expense):
Change in fair value of derivative financial instruments - warrants
$ (5,776,297 )
$ 415,126
$ (6,191,423 )
(1491 )%
Change in fair value of stock-based liabilities
(5,743,468 )
—
(5,743,468 )
100 %
Interest expense and amortization of debt issuance costs
(588,622 )
(1,112,707 )
524,085
(47 )%
Gain from settlement agreements
1,761,792
—
1,761,792
— %
Gain on sale of ANDA
—
1,000,000
(1,000,000 )
(100 )%
Interest income
20,918
7,453
13,465
181 %
Other (expense) income, net
$ (10,325,677 )
$ 309,872
$ (10,635,549 )
(3432 )%
49
Other
income (expense) for the year ended March 31, 2024 was an other expense of $10.3 million, a decrease of $10.6 million from other income
of $0.3 million for the prior fiscal year. The decrease was primarily due to a net increases in other expenses totaling $12.9 million
and consisting of increased other expenses of $6.2 million relating to the change in fair value of warrant derivative instruments, $5.7
million relating to the change in fair value of stock-based liabilities and $1.0 million relating to gain on sale of ANDA, offset by
increases in other income totaling $2.3 million and consisting of $1.8 million gain from settlement agreements, $0.5 million relating
to decreased interest expense and amortization of debt issuance, and $0.01 million increase in interest income. The change in the fair
value of derivative instruments and stock-based liabilities is determined in large part by the change in the closing price of the Company’s
Common Stock as of the end of the period, as compared to the closing price at the beginning of the period, with a strong inverse relationship
between the fair value of the Company’s derivative instruments and stock-based liabilities and decreases in the closing price of
the Company’s Common Stock. The decrease in interest expense associated with the loans payable is due in large part to the Company
paying off the principal balance of the EWB loan during the fiscal year ended March 31, 2023, resulting in no interest on the EWB loan
incurred for the year ended March 31, 2024. The increased other income from gain from settlement agreements is the result of there being
a settlement agreement during the fiscal year ended March 31, 2024 as compared to there being no settlement agreement during the comparable
period of the prior fiscal year. The decrease in other income relating to gain of sale of ANDA is the result of there being a sale of
an ANDA during the fiscal year ended March 31, 2023 as compared to no sales of ANDA occurring during the fiscal year ended March 31,
2024.
As
a result of the foregoing, our net income before income taxes for the year ended March 31, 2024 was $0.5 million, compared to net income
before income taxes of $4.0 million for the prior fiscal year.
Liquidity
and Capital Resources
Capital
Resources
March 31, 2024
March 31, 2023
Change
Current assets
$ 40,014,189
$ 21,510,297
$ 18,503,892
Current liabilities
$ 13,049,764
$ 7,833,637
$ 5,216,127
Working capital
$ 26,964,425
$ 13,676,660
$ 13,287,765
The
Company considers cash and working capital balances as several of the factors the Company uses in evaluating its performance. As of March
31, 2024, the Company had cash on hand of $7.1 million and accounts receivable to be collected within expected operating cycles of $19.5
million. The Company believes that such resources, combined with the working capital surplus of $27.0 million and the continuation of
ongoing operations, are sufficient to fund operations through the next twelve months. For the year ended March 31, 2024, the Company
had income from operations totaling $10.8 million, net other expense totaling $10.3 million and a net income attributable to common shareholders
of $20.1 million. The Company’s other income (expense) and net income attributable to common shareholders are significantly influenced
by the fluctuations in the fair value of warrant derivatives with such fair value bearing a strong inverse correlation to the market
share price of the Company’s Common Stock as well as the recording of a discrete tax benefit of $17.3 million related to the Company’s release of the
valuation allowance against deferred tax assets related to U.S. federal net operating loss carryforwards and research and development
tax credits, which are expected to be realized based on demonstrated current profitability and the Company’s expectations of forecasted
income.
Our
working capital (total current assets less total current liabilities) increased by $13.3 million from $13.7 million as of March 31, 2023
to $27.0 million as of March 31, 2024, with such increase being primarily related to the increase in finished goods inventory and accounts
receivable, associated with increased customer orders during the year ended March 31, 2024 exceeding the increase in total current liabilities
over the same period.
Summary
of Cash Flows:
For the Years Ended March 31,
2024
2023
Net cash (used in) provided by operating activities
$ (3,281,558 )
$ 3,338,704
Net cash used in investing activities
$ (809,653 )
$ (5,736,618 )
Net cash provided by financing activities
$ 3,385,624
$ 1,702,199
Net
cash used in operating activities for the year ended March 31, 2024 was $3.3 million, which included net income of $20.1 million, increased
by depreciation and other non-cash expenses totaling $11.5 million and reduced by the change in operating assets and liabilities totaling
$11.9 million and tax benefit of $20.0 million.
Net
cash provided by operating activities for the year ended March 31, 2023 was $3.3 million, which included net income of $3.6 million,
offset by non-cash (income) expenses totaling $1.8 million and net increases in assets and decreases in liabilities totaling $2.0 million.
Net
cash used in investing activities for the year ended March 31, 2024 was comprised of purchases of property and equipment of approximately
$0.8 million.
Net
cash used in investing activities for the year ended March 31, 2023 was comprised of purchases of property and equipment of $5.7 million.
50
Net
cash provided by financing activities was $3.4 million for the year ended March 31, 2024 which consisted primarily of proceeds from related
party loans payable totaling $4.0 million offset by payments of bond and loan principal totaling $0.3 million.
Net
cash provided by financing activities was $1.7 million for the year ended March 31, 2023 which contained proceeds and loan payments related
to the EWB mortgage loan and equipment loans.
Hakim
Promissory Note
The
Company has entered into a collateralized promissory note with individual lenders with rates comparable to the EWB Term Loan but with
fewer restrictive covenants. These covenants include filing timely tax returns and financial statements, and an agreement not to sell,
lease, or transfer a substantial portion of the Company’s assets during the term of the note. On June 2, 2023, the Company entered
into a Promissory Note with Nasrat Hakim, CEO and Chairman of the Board of Directors, pursuant to which the Company borrowed funds in
the aggregate principal amount of $3,000,000 (the “Hakim Promissory Note”). The Hakim Promissory Note has an interest rate
of 9% for the first year and 10% for an optional second year and the proceeds were used for working capital and other business purposes.
The original maturity date of the Hakim Promissory Note is June 2, 2024, with an optional second year extension. The second year extension
of the Hakim Promissory Note was agreed to by both parties, with the maturity date being extended to June 2, 2025.
Caskey
Promissory Note
On
June 30, 2023, the Company entered into a collateralized promissory note with Davis Caskey (the “Caskey Promissory Note”).
The Caskey Promissory Note has a principal balance of $1,000,000 and an interest rate of 9% for the first year and 10% for an optional
second year. The Caskey Promissory Note is subject to the same covenants as are contained in the Hakim Promissory Note. The proceeds
were used for working capital and other business purposes. The original maturity date of the Caskey Promissory Note is June 30, 2024,
with both parties agreeing to the optional second year extension, as provided in the Caskey Promissory Note. The Caskey Promissory Note
has a current maturity date of June 30, 2025.
East
West Bank
On
April 2, 2022, the Company and Elite Labs entered into a Loan and Security Agreement (the “EWB Loan Agreement”) with East
West Bank (“EWB”). Pursuant to the EWB Loan Agreement, the Company and Elite Labs received one term loan for a principal
amount of $12,000,000 (the “EWB Term Loan”) and a revolving line of credit up to $2,000,000 (the “EWB Revolver,”
together with the “EWB Term Loan,” the EWB Loans”), each of which shall be used for working capital. As of March 31,
2023, the principal and interest on the EWB Term Loan has been paid in full by the Company and the EWB Loan Agreement is terminated.
On
July 1, 2022, EWB provided a mortgage loan (“EWB Mortgage Loan”) in the amount of $2.55 million for the purchase of the property
at 135-137 Ludlow Avenue, which was formerly a lease held by the Company. The EWB Mortgage Loan matures in 10 years and bears interest
at a rate of 4.75% fixed for 5 years then adjustable at WSJP plus 0.5% with floor rate of 4.5%. The total transaction costs associated
with the EWB Mortgage Loan incurred as of March 31, 2024, were $13,251, which are being amortized on a monthly basis over ten years,
beginning in July 2022. The EWB Mortgage Loan contains customary representations, warranties and covenants. These covenants include maintaining
a minimum debt coverage ratio of 1.50 to 1.00 tested annually and a minimum trailing 12-month debt coverage ratio of 1.50 to 1.00. As
of March 31, 2024, and through the date of filing of this quarterly report on Form 10-Q, the Company was not aware of the existence of
any violations of financial covenants included in the EWB Mortgage Loan.
Lincoln
Park Capital – July 8, 2020 Purchase Agreement
On
July 8, 2020, the Company entered into a purchase agreement (the “2020 LPC Purchase Agreement”), and a registration rights
agreement, with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park has committed to purchase
up to $25.0 million of the Company’s Common Stock, $0.001 par value per share, from time to time over the term of the 2020 LPC
Purchase Agreement, at the Company’s direction. The 2020 LPC Purchase Agreement expired on August 1, 2023.
During
the years ended March 31, 2024 and 2023, the Company did not issue any shares of Common Stock to Lincoln Park.
NJEDA
Bonds
On
August 31, 2005, the Company successfully completed a refinancing of a prior 1999 bond issue through the issuance of new tax-exempt bonds
(the “Bonds”). The refinancing involved borrowing $4,155,000, evidenced by a 6.5% Series A Note in the principal amount of
$3,660,000 maturing on September 1, 2030 and a 9% Series B Note in the principal amount of $495,000 maturing on September 1, 2012. The
net proceeds, after payment of issuance costs, were used (i) to redeem the outstanding tax-exempt Bonds originally issued by the Authority
on September 2, 1999, (ii) refinance other equipment financing and (iii) for the purchase of certain equipment to be used in the manufacture
of pharmaceutical products. As of March 31, 2016, all of the proceeds were utilized by the Company for such stated purposes.
51
Interest
is payable semi-annually on March 1 and September 1 of each year. The Bonds are collateralized by a first lien on the Company’s
facility and equipment acquired with the proceeds of the original and refinanced Bonds. The related Indenture requires the maintenance
of a Debt Service Reserve Fund of $366,000 in relation to the Series A Notes.
Bond
issue costs of $354,454 were paid from the bond proceeds and are being amortized over the life of the bonds. Amortization of bond issuance
costs amounted to $14,185 for the fiscal year ended March 31, 2024.
The
NJEDA Bonds require the Company to make an annual principal payment on September 1st of varying amounts as specified in the loan documents
and semi-annual interest payments on March 1st and September 1st, equal to interest due on the outstanding principal at the applicable
rate for the semi-annual period just ended.
In
addition, the Company had previously received Notices of Default from the Trustee of the NJEDA Bonds as a result of the utilization of
the debt service reserve being used to pay interest payments as well as the company’s failure to make scheduled principal payments.
All monetary defaults were cured during Fiscal 2015 and the Company is current on all NJEDA Bond interest and principal payments. See
the Risk Factor in Part I, Item 1A entitled “ We have substantial indebtedness which may adversely affect our financial condition
NJEDA Bonds ”.
As
of the date of filing of this Annual Report on Form 10-K, there are no interest or principal amounts in arrears. The Series B Notes were
retired, at par in July 2014.
Recent
Developments
On
May 20, 2024, the Company reported that it received approval for the FDA for a generic version of Methotrexate Sodium 2.5mg tablets.
Methotrexate Sodium belongs to a class of drugs known as antimetabolites and will be sold under the Elite Laboratories Inc. label. As
of the date of filing of this Annual Report on Form 10-K, this product had not yet been commercially launched.
Off-Balance
Sheet Arrangements
We
have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or
capital resources that would be considered material to investors.
Effects
of Inflation
We
are subject to price risks arising from price fluctuations in the market prices of the products that we sell. Management does not believe
that inflation risk is material to our business or our consolidated financial position, results of operations, or cash flows.
Critical
Accounting Policies and Estimates
Our
significant accounting policies are disclosed in Note 1 of our Consolidated Financial Statements included elsewhere in this Annual Report
on Form 10-K. The following discussion addresses our most critical accounting policies, which are those that are both important to the
portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
52
Revenue
Recognition
The
Company generates revenue from the development of pain management products, manufacturing of a line of generic pharmaceutical products
with approved ANDA, commercialization of products either by license and the collection of royalties, or through the manufacture of formulations
and the development of new products and the expansion of licensing agreements with other pharmaceutical companies, including co-development
projects, joint ventures and other collaborations. The Company also generates revenue through its focus on the development of various
types of drug products, including branded drug products which require NDAs.
Under
ASC 606, Revenue from Contacts with Customers (“ASC 606”), the Company recognizes revenue when the customer obtains control
of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods
or services. The Company recognizes revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with a
customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction
price to the performance obligation(s) in the contract; and (v) recognize revenues when (or as) the Company satisfies a performance obligation.
The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled
to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within
the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance
obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the
transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Sales,
value add, and other taxes collected on behalf of third parties are excluded from revenue.
Nature
of goods and services
The
following is a description of the Company’s goods and services from which the Company generates revenue, as well as the nature,
timing of satisfaction of performance obligations, and significant payment terms for each, as applicable:
a)
Manufacturing Fees
The
Company is equipped to manufacture immediate release and controlled release products that are sold under the Elite Laboratories Inc.
label (the “Elite Label”). The Company recognizes revenue when its customers obtain control of the Elite Labeled products.
These revenues are offset by variable consideration, which may include, without limitation, chargebacks, distribution fees, rebates,
group purchasing organization fees, prompt payment cash discounts, consideration payable to the customer, billbacks, Medicaid and other
government pricing programs, price protection and shelf stock adjustments, sales returns and profit shares. The Company’s estimates
for variable consideration are adjusted as required at each reporting period for specific known developments that may result in a change
in the amount of total consideration it expects to receive as well as updating estimate assumptions to reflect current and/or historical
trends.
Like
most competitors in this market, our marketing partners, or us in the case of prospective direct sales made by the Company, also give
credits for chargebacks to wholesalers that have contracts with our marketing partners, or us, prospectively, for their sales to hospitals,
group purchasing organizations, pharmacies, or other customers. A chargeback is the difference between the price the wholesaler pays
and the price that the wholesaler’s end-customer pays for a product. Although, our marketing partners establish, and prospectively
we would also establish reserves based on prior experience and best estimates of the impact that these policies may have in subsequent
periods, we cannot ensure that such reserves established are adequate or that actual product returns, rebates, allowances, and chargebacks
will not exceed estimates. Differences between established reserves and actual amounts of such credits and charges, could result in a
material adverse effect on our business, financial condition, results of operations, cash flow and stock price.
The
Company is also equipped to manufacture immediate release and controlled-release products on a contract basis for third parties, if and
when the products are approved. These products include products using immediate release technology, controlled-release drug technology
and products utilizing abuse deterrent technologies. The Company also develops and markets (either on its own or by license to other
companies) generic and proprietary controlled-release and abuse deterrent pharmaceutical products.
53
The
Company recognizes revenue when the customer obtains control of the Company’s product
based on the contractual shipping terms of the contract. Revenue on product are presented
gross because the Company is primarily responsible for fulfilling the promise to provide
the product, is responsible to ensure that the product is produced in accordance with the
related supply agreement and bears risk of loss while the inventory is in-transit to the
commercial partner. Revenue is measured as the amount of consideration the Company expects
to receive in exchange for transferring products to a customer.
b)
License Fees
The
Company enters into licensing and development agreements, which may include multiple revenue generating activities, including milestones
payments, licensing fees, product sales and services. The Company analyzes each element of its licensing and development agreements in
accordance with ASC 606 to determine appropriate revenue recognition. The terms of the license agreement may include payment to the Company
of licensing fees, non-refundable upfront license fees, milestone payments if specified objectives are achieved, and/or royalties on
product sales.
If
the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative
standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone
selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable
through past transactions, the Company estimates the standalone selling price taking into account available information such as market
conditions and internally approved pricing guidelines related to the performance obligations.
The
Company recognizes revenue from non-refundable upfront payments at a point in time, typically upon fulfilling the delivery of the associated
intellectual property to the customer. For those milestone payments which are contingent on the occurrence of particular future events
(for example, payments due upon a product receiving FDA approval), the Company determined that these need to be considered for inclusion
in the calculation of total consideration from the contract as a component of variable consideration using the most-likely amount method.
As such, the Company assesses each milestone to determine the probability and substance behind achieving each milestone. Given the inherent
uncertainty of the occurrence of future events, the Company will not recognize revenue from the milestone until there is not a high probability
of a reversal of revenue, which typically occurs near or upon achievement of the event.
Significant
management judgment is required to determine the level of effort required under an arrangement and the period over which the Company
expects to complete its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance
obligations either are completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make
such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.
When
determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before
or significantly after performance, resulting in a significant financing component. Applying the practical expedient in ASC 606-10-32-18,
the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations
under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing
component as of March 31, 2024.
In
accordance with ASC 606-10-55-65, royalties are recognized when the subsequent sale of the customer’s products occurs.
Accounts
Receivable and Allowance for Expected Credit Losses
Accounts
receivable are comprised of balances due from customers, net of estimated allowances for expected credit losses, and other contractual
deductions, including, without limitation, chargebacks, discounts and program rebates. In determining collectability, historical trends
are evaluated, and specific customer issues are reviewed on a periodic basis to arrive at appropriate allowances.
54
The
allowance for expected credit losses is based on the probability of future collection under
the current expected credited loss (“CECL”) impairment model under Accounting
Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic
326), Measurement of Credit Losses on Financial Assets, which was adopted by the Company
on April 1, 2023, as discussed below within Recently Adopted Accounting Pronouncements. Under
the CECL impairment model, the Company determines its allowance by applying a loss-rate method
based on an aging schedule using the Company’s historical loss rate. The Company also
considers reasonable and supportable current information in determining its estimated loss
rates, such as external forecasts, macroeconomic trends or other factors including customers’
credit risk and historical loss experience. The adequacy of the allowance is evaluated on
a regular basis. Account balances are written off after all means of collection are exhausted
and the balance is deemed uncollectible. Subsequent recoveries are credited to the allowance.
Changes in the allowance are recorded as adjustments to credit losses in the period incurred.
Prior
to April 1, 2023, trade receivables were presented net of allowance for expected credit losses based on the credit risk of specific clients,
past collection history, and management’s evaluation of other risks. Expected credit losses stemming from unbilled receivables
expected to be billed between March 31, 2024 and March 31, 2028 include additional risk premiums estimated based on factors such as projected
inflation, projected decreases in GDP, and projected unemployment.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. Where applicable, the Company records a valuation allowance to reduce
any deferred tax assets that it determines will not be realizable in the future.
The
Company recognizes the benefit of an uncertain tax position that it has taken or expects to take on income tax returns it files if such
tax position is more likely than not to be sustained on examination by the taxing authorities, based on the technical merits of the position.
These tax benefits are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
The
Company operates in multiple tax jurisdictions within the United States of America. The Company remains subject to examination in all
tax jurisdiction until the applicable statutes of limitation expire. As of March 31, 2024, a summary of the tax years that remain
subject to examination in our major tax jurisdictions are: United States – Federal, 2014 and forward, and State, 2010 and forward.
The Company did not have any unrecognized tax positions for the years ended March 31, 2024 and 2023.
55
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. This update requires immediate recognition of management’s estimates of current expected credit losses (“CECL”).
Under the prior model, losses were recognized only as they were incurred. The new model is applicable to all financial instruments that
are not accounted for at fair value through net income. The standard is effective for fiscal years beginning after December 15, 2022
for public entities qualifying as smaller reporting companies. Early adoption is permitted. The Company is currently assessing the impact
of this update on the consolidated financial statements and does not expect a material impact on the consolidated financial statements.
In
December 2023, the FASB issued ASU 2023-09 (Topic 740), Improvements to income tax disclosures, which enhances the disclosure requirements
for the income tax rate reconciliation, domestic and foreign income taxes paid, requiring disclosure of disaggregated income taxes paid
by jurisdiction, unrecognized tax benefits, and modifies other income tax-related disclosures. The amendments are effective for annual
periods beginning after December 15, 2024. Early adoption is permitted and should be applied prospectively. The Company is currently
evaluating the effect of adopting this guidance on its consolidated financial statements.
In
November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segments,” which aims
to improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public
entities to enable investors to develop more decision-useful financial analyses. Currently, Topic 280 requires that a public entity disclose
certain information about its reportable segments. Topic 280 also requires other specified segment items and amounts to be disclosed
under certain circumstances. The amendments in this ASU do not change or remove those disclosure requirements and do not change how a
public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine
its reportable segments. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal
years beginning after December 15, 2024. Early adoption is permitted. We do not expect that the requirements of ASU 2023 – 07 will
have a material impact on our consolidated financial statements.
Management
has evaluated recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant
impact on our consolidated financial statements and related disclosures.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
Applicable.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached
hereto and filed as a part of this Annual Report on Form 10-K are our Consolidated Financial Statements, beginning on page F-1.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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