UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
FOR
THE QUARTERLY PERIOD ENDED
OR
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION
FILE NUMBER:
| (Exact Name of Registrant as Specified in Its Charter) |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
| (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| OTCQB |
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date: 1,017,881,199 shares of Common Stock were issued, and shares of Common Stock were outstanding as of February 14, 2024.
| ii |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| December 31, 2023 | March 31, 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance for expected credit losses of $ | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net of accumulated depreciation of $ | ||||||||
| Intangible assets, net of accumulated amortization of $- | ||||||||
| Finance lease - right-of-use asset | ||||||||
| Operating lease - right-of-use asset | ||||||||
| Deferred income tax asset | ||||||||
| Other assets: | ||||||||
| Restricted cash - debt service for NJEDA bonds | ||||||||
| Security deposits | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Deferred revenue, current portion | ||||||||
| Bonds payable, current portion, net of bond issuance costs | ||||||||
| Loans payable, current portion | ||||||||
| Related party loans payable (Note 7) | ||||||||
| Lease obligation - finance lease, current portion | ||||||||
| Lease obligation - operating lease, current portion | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Deferred revenue, net of current portion | ||||||||
| Bonds payable, net of current portion and bond issuance costs | ||||||||
| Loans payable, net of current portion and loan costs | ||||||||
| Lease obligation - finance lease, net of current portion | ||||||||
| Derivative financial instruments - warrants | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Common Stock; par value $; shares authorized; and shares issued as of December 31, 2023 and March 31, 2023, respectively; and shares outstanding as of December 31, 2023 and March 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock; shares as of December 31, 2023 and March 31, 2023, respectively, at cost | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-1 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months Ended December 31, | For the Nine Months Ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue: | ||||||||||||||||
| Manufacturing fees | $ | $ | $ | $ | ||||||||||||
| Licensing fees | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Cost of manufacturing | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Non-cash compensation through issuance of stock options | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Other income (expense): | ||||||||||||||||
| Change in fair value of derivative financial instruments - warrants | ( | ) | ( | ) | ||||||||||||
| Change in fair value of stock-based liabilities | ( | ) | ( | ) | ||||||||||||
| Interest expense and amortization of debt issuance costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain from settlement agreements | ||||||||||||||||
| Gain on sale of ANDA | ||||||||||||||||
| Interest income | ||||||||||||||||
| Other (expense) income, net | ( | ) | ( | ) | ||||||||||||
| (Loss) income before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||
| Net income attributable to common shareholders | $ | $ | $ | $ | ||||||||||||
| Basic net income per share attributable to common shareholders | $ | $ | $ | $ | ||||||||||||
| Diluted net income per share attributable to common shareholders | $ | $ | $ | $ | ||||||||||||
| Basic weighted average Common Stock outstanding | ||||||||||||||||
| Diluted weighted average Common Stock outstanding | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-2 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
| Series J Preferred Stock | Common Stock | Additional Paid-In | Treasury Stock | Accumulated | Total Shareholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Equity | ||||||||||||||||||||||||||||
| Balance as of April 1, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||||||
| Non-cash compensation through the issuance of employee stock options | — | — | — | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||||||
| Non-cash compensation through the issuance of employee stock options | — | — | — | |||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
| Shares issued in satisfaction of accrued director salaries | — | — | ||||||||||||||||||||||||||||||||||
| Shares issued in satisfaction of accrued consultant fees | — | — | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||||||
| Non-cash compensation through the issuance of employee stock options | — | — | — | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-3 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
| Series J Preferred Stock | Common Stock | Additional Paid-In | Treasury Stock | Accumulated | Total Shareholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Equity | ||||||||||||||||||||||||||||
| Balance as of April 1, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||||||
| Non-cash compensation through the issuance of employee stock options | — | — | — | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||||||
| Non-cash compensation through the issuance of employee stock options | — | — | — | |||||||||||||||||||||||||||||||||
| Shares issued in payment of director salaries | — | — | ||||||||||||||||||||||||||||||||||
| Shares issued in payment of consultant fees | — | — | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||||||
| Non-cash compensation through the issuance of employee stock options | — | — | — | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-4 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Nine Months Ended December 31, | ||||||||
| 2023 | 2022 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Bad debt expense | ||||||||
| Amortization of operating leases - right-of-use assets | ||||||||
| Non-cash compensation accrued | ||||||||
| Change in fair value of derivative financial instruments - warrants | ( | ) | ||||||
| Change in fair value of stock-based liabilities | ||||||||
| Gain on settlement of Common Stock to consultant | ( | ) | ||||||
| Non-cash compensation through the issuance of employee stock options | ||||||||
| Non-cash rent expense and lease accretion | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Deferred income tax asset | ( | ) | ||||||
| Accounts payable, accrued expenses and other current liabilities | ( | ) | ||||||
| Interest expense of finance lease liability | ( | ) | ||||||
| Lease obligations - operating leases | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payment of bond principal | ( | ) | ( | ) | ||||
| Proceeds from related party loans payable | ||||||||
| Proceeds from loans payable | ||||||||
| Amortization of finance leases - right-of-use assets | ||||||||
| Loan payments | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net change in cash and restricted cash | ( | ) | ||||||
| Cash and restricted cash, beginning of period | ||||||||
| Cash and restricted cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash and non-cash transactions: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Stock issued in satisfaction of accrued directors salaries and consultant fees | $ | $ | ||||||
| Recognition of right of use asset and lease liabilities entered into | $ | $ | ||||||
| Reconciliation of cash and restricted cash | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash - debt service for NJEDA bonds | ||||||||
| Total cash and restricted cash shown in statement of cash flows | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-5 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
Elite Pharmaceuticals, Inc. (the “Company” or “Elite”) was incorporated on October 1, 1997 under the laws of the State of Delaware, and its wholly-owned subsidiary Elite Laboratories, Inc. (“Elite Labs”) was incorporated on August 23, 1990 under the laws of the State of Delaware. On January 5, 2012, Elite Pharmaceuticals was reincorporated under the laws of the State of Nevada. Elite Labs engages primarily in researching, developing, licensing, manufacturing, and sales of generic, oral dose pharmaceuticals. The Company is equipped to manufacture controlled-release products on a contract basis for third parties and itself, if and when the product candidates are approved. These products include drugs that cover therapeutic areas for allergy, bariatric, attention deficit and infection. Research and development activities are performed with an objective of developing product candidates that will secure marketing approvals from the United States Food and Drug Administration (“FDA”), and thereafter, commercially exploiting such products.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the SEC. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Elite Labs. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain information or footnote disclosures normally included in condensed financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Form 10-K as filed with the SEC on June 29, 2023. The interim results for the nine months ended December 31, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending March 31, 2024 or for any future periods.
Segment Information
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 280 (“ASC 280”), Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.
The Company’s chief operating decision maker is the Chief Executive Officer, who reviews the financial performance and the results of operations of the segments prepared in accordance with GAAP when making decisions about allocating resources and assessing performance of the Company.
The Company has determined that its reportable segments are products whose marketing approvals were secured via an Abbreviated New Drug Application (“ANDA”) and products whose marketing approvals were secured via a New Drug Application (“NDA”). ANDA products are referred to as generic pharmaceuticals and NDA products are referred to as branded pharmaceuticals.
There are currently no intersegment revenues. Asset information by operating segment is not presented below since the chief operating decision maker does not review this information by segment. The reporting segments follow the same accounting policies used in the preparation of the Company’s condensed unaudited consolidated financial statements. Please see Note 15 for further details.
| F-6 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue Recognition
The Company generates revenue from manufacturing and licensing fees and sales of generic pharmaceuticals bearing the Elite label to pharmaceutical distributors for pharmacies and institutions. Manufacturing fees include the development of pain management products, manufacturing of a line of generic pharmaceutical products with approved ANDA, through the manufacture of formulations and the development of new products. Revenues earned from the sale of Elite label products are recorded at their net realizable value which consists of gross amounts invoiced reduced by contractual reductions, including, without limitation, chargebacks, discounts and program rebates, as applicable. Licensing fees include the commercialization of products either by license and the collection of royalties, or the expansion of licensing agreements with other pharmaceutical companies, including co-development projects, joint ventures and other collaborations.
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 controlled-release products on a contract basis for third parties, if, and when, the products are approved. These products include products using controlled-release drug technology. The Company also develops and markets (either on its own or by license to other companies) generic and proprietary controlled-release pharmaceutical products.
The Company recognizes revenue when the customer obtains control of the Company’s product based on the contractual shipping terms of the contract, at which time the performance obligation is deemed to be completed. 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 recognize revenue from the milestone when there is not a high probability of a reversal of revenue, which typically occurs near or upon achievement of the event.
| F-7 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 December 31, 2023.
In accordance with ASC 606-10-55-65, royalties are recognized when the subsequent sale of the customer’s products occurs.
c) Sale of product under the Elite label
The Company began direct sales of products under the Company’s own label on April 1, 2023. License agreements will remain in place for select products. With this transition, however, a large portion of the manufacturing and license fees now reported will be replaced with revenues from sales of Elite labeled pharmaceutical products to distributors for pharmacies and institutions.
The Company recognizes revenue when the customer obtains control of the Company’s product based on the contractual shipping terms, at which time the performance obligation is deemed to be completed. The Company is primarily responsible for fulfilling the promise to deliver the product and bears risk of loss while the inventory is in-transit to the purchaser. Revenue is measured as the amount of consideration earned from the sale of Elite labeled pharmaceutical products are recorded at their net realizable value which consists of gross amounts invoiced reduced by contractual reductions, including, without limitation, chargebacks, discounts and program rebates, as applicable.
Disaggregation of revenue
In the following table, revenue is disaggregated by type of revenue generated by the Company. The Company recognizes revenue at a point in time for all performance obligations. The table also includes a reconciliation of the disaggregated revenue with the reportable segments:
| For the Three Months Ended December 31, | For the Nine Months Ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| NDA: | ||||||||||||||||
| Licensing fees | $ | $ | $ | $ | ||||||||||||
| Total NDA revenue | ||||||||||||||||
| ANDA: | ||||||||||||||||
| Manufacturing fees | $ | $ | $ | $ | ||||||||||||
| Licensing fees | ||||||||||||||||
| Total ANDA revenue | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Selected information on reportable segments and reconciliation of operating income by segment to income from operations before income taxes are disclosed within Note 15.
| F-8 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Cash
Cash consists of cash on deposit with banks and money market instruments. The Company places its cash with high-quality, U.S. financial institutions and, to date has not experienced losses on any of its balances.
Restricted Cash
As
of December 31, 2023, and March 31, 2023, the Company had $
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.
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.
Inventory
Inventory is recorded at the lower of cost or net realizable value on specific identification by lot number basis.
Long-Lived Assets
The Company periodically evaluates the fair value of long-lived assets, which include property and equipment and intangibles, whenever events or changes in circumstances indicate that its carrying amounts may not be recoverable.
Property and equipment are stated at cost. Depreciation is provided on the straight-line method based on the estimated useful lives of the respective assets which range from three to forty years. Major repairs or improvements are capitalized. Minor replacements and maintenance and repairs which do not improve or extend asset lives are expensed currently.
Upon retirement or other disposition of assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is recognized in income.
Intangible Assets
The Company capitalizes certain costs to acquire intangible assets; if such assets are determined to have a finite useful life they are amortized on a straight-line basis over the estimated useful life. Costs to acquire indefinite lived intangible assets, such as costs related to ANDAs are capitalized accordingly.
The Company tests its intangible assets for impairment at least annually (as of March 31st) and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others and without limitation: a significant decline in the Company’s expected future cash flows; a sustained, significant decline in the Company’s stock price and market capitalization; a significant adverse change in legal factors or in the business climate of the Company’s segments; unanticipated competition; and slower growth rates.
| F-9 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During
the year ended March 31, 2023, the Company determined indicators of impairment occurred and recorded impairment expense of $
The following table summarizes the Company’s intangible assets as of and for the periods ended December 31, 2023 and March 31, 2023:
| December 31, 2023 | ||||||||||||||||||
| Estimated Useful Life | Gross Carrying Amount | Impairment losses | Accumulated Amortization | Net Book Value | ||||||||||||||
| Patent application costs | * | $ | $ | $ | $ | |||||||||||||
| ANDA acquisition costs | ||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||
| March 31, 2023 | ||||||||||||||||||
| Estimated Useful Life | Gross Carrying Amount | Impairment losses | Accumulated Amortization | Net Book Value | ||||||||||||||
| Patent application costs | * | $ | $ | ( | ) | $ | $ | |||||||||||
| ANDA acquisition costs | ( | ) | ||||||||||||||||
| $ | $ | ( | ) | $ | $ | |||||||||||||
Research and Development
Research and development expenditures are charged to expenses as incurred.
Contingencies
Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
On August 17, 2023, Elite filed a paragraph IV certification with its ANDA to generic Oxycontin and after Elite got acceptance of the ANDA by the FDA on September 19, 2023, Elite sent the patentee and NDA holder a Notice Letter as required under the Hatch-Waxman Act. On November 14, 2023, a patent infringement suit was filed in the District Court of New Jersey by Purdue Pharma. Elite obtained agreement with Purdue to stay the litigation for six months. Elite’s launch of a generic Oxycontin will depend on the approval by the FDA and the outcome of various litigations involving Purdue or the expiry of the patents listed on the Orange Book. As of December 31, 2023, the results of such proceedings cannot be predicted with certainty, but the Company does not anticipate that the final outcome, if any, arising out of any such matters will have a material adverse effect on its business, financial condition or results of operations.
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.
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 December 31, 2023, a summary of the tax years that remain subject to examination in our major tax jurisdictions are: United States – Federal, 2016 and forward. The Company did not record unrecognized tax positions for the nine months ended December 31, 2023.
The accounting treatment of warrants and preferred share series issued is determined pursuant to the guidance provided by ASC 470, Debt, ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, as applicable. Each feature of a freestanding financial instrument including, without limitation, any rights relating to subsequent dilutive issuances, dividend issuances, equity sales, rights offerings, forced conversions, optional redemptions, automatic monthly conversions, dividends and exercise is assessed with determinations made regarding the proper classification in the Company’s financial statements.
| F-10 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation. Under the fair value recognition provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, based on the terms of the awards. The cost of the stock-based payments to nonemployees that are fully vested and non-forfeitable as at the grant date is measured and recognized at that date, unless there is a contractual term for services in which case such compensation would be amortized over the contractual term. The Company accounts for forfeitures as they occur.
In accordance with the Company’s Director compensation policy and certain employment contracts, director’s fees and a portion of employee’s salaries are to be paid via the issuance of shares of the Company’s Common Stock (“Common Stock”), in lieu of cash, with the valuation of such share being calculated on a quarterly basis and equal to the average closing price of the Company’s Common Stock. The Company records earned but unissued stock-based compensation in accrued expenses.
Sale of ANDA
During
the quarter ended December 31, 2022, the Company entered into an agreement with Pyros Pharmaceuticals, Inc. (“Pyros”) pursuant
to which the Company sold to Pyros its rights in and to the Company’s approved abbreviated new drug applications (ANDAs) for its
generic Sabril drug (the “Sabril Product”). The Company sold its rights to Pyros for $
In conjunction with the sale of its Sabril Product to Pyros, the Company executed a Manufacturing and Supply Agreement (the “Pyros Agreement”) with Pyros. Under the terms of the Pyros Agreement, the Company will receive an agreed-upon price per drug for the manufacturing and packaging of Sabril over a term of three years. Revenue per the Pyros Agreement will be recognized as control of the manufactured and supplied drugs is transferred to Pyros (at the time of delivery).
The Company follows ASC 260, Earnings Per Share, which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying financial statements, basic earnings per share is computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the period. The computation of diluted net income per share does not include the change in fair value of derivative instruments or the conversion of securities that would have an antidilutive effect.
As the average market price of Common Stock for the three and nine months ended December 31, 2023 and 2022 did not exceed the exercise price of the warrants, the potential dilution from the warrants converting into shares of Common Stock for all periods have been excluded from the number of shares used in calculating diluted net income per share as their inclusion would have been antidilutive.
| F-11 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| For the Three Months Ended December 31, | For the Nine Months Ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator | ||||||||||||||||
| Net income - basic | $ | $ | $ | $ | ||||||||||||
| Effect of dilutive instrument on net income | ||||||||||||||||
| Net income - diluted | $ | $ | $ | $ | ||||||||||||
| Denominator | ||||||||||||||||
| Weighted average shares of Common Stock outstanding - basic | ||||||||||||||||
| Dilutive effect of stock options and convertible securities | ||||||||||||||||
| Weighted average shares of Common Stock outstanding - diluted | ||||||||||||||||
| Net income per share | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
Fair Value of Financial Instruments
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) provides a framework for measuring fair value in accordance with generally accepted accounting principles.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820 are described as follows:
| ● | Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. | |
| ● | Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. | |
| ● | Level 3 – Inputs that are unobservable for the asset or liability. |
| F-12 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Measured on a Recurring Basis
The following table presents information about our liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fell:
| Fair Value Measurement | ||||||||||||||||
| Amount at Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Balance as of April 1, 2023 | $ | $ | $ | $ | ||||||||||||
| Change in fair value of derivative financial instruments - warrants | ||||||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | $ | ||||||||||||
| Fair Value Measurement | ||||||||||||||||
| Amount at Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Balance as of April 1, 2022 | $ | $ | $ | $ | ||||||||||||
| Change in fair value of derivative financial instruments - warrants | ( | ) | ( | ) | ||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | ||||||||||||
See Note 11 for specific inputs used in determining fair value.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses, approximate their fair values because of the short maturity of these instruments. Based upon current borrowing rates with similar maturities the carrying value of long-term debt approximates fair value.
Non-Financial Assets that are Measured at Fair Value on a Non-Recurring Basis
Non-financial assets such as intangible assets, and property and equipment are measured at fair value only when an impairment loss is recognized. The Company did not record an impairment charge related to these assets in the periods presented.
Financial Instruments — Credit Losses (ASU 2016-13)
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“CECL”). The amendments in this update introduce a new accounting model to measure credit losses for financial assets measured at amortized cost. The FASB has also issued additional ASUs to clarify the scope and provide additional guidance for ASU 2016-13. Credit losses for financial assets measured at amortized cost should be determined based on the total current expected credit losses over the life of the financial asset or group of financial assets. In effect, the financial asset or group of financial assets should be presented at the net amount expected to be collected. Credit losses will no longer be recorded under the current incurred loss model for financial assets measured at amortized cost. The amendments also modify the accounting for available-for-sale debt securities whereby credit losses will be recorded through an allowance for credit losses rather than a write-down to the security’s cost basis, which allows for reversals of credit losses when estimated credit losses decline. Credit losses for available-for-sale debt securities should be measured in a manner similar to current GAAP.
The amendments were effective on April 1, 2023 for the Company, and must be applied using a modified retrospective approach with a cumulative-effect adjustment through retained earnings as of the beginning of the fiscal year upon adoption as required. While the standard modifies the measurement of the allowance for credit losses, it does not alter the credit risk of our trade or unbilled receivables.
The impact of applying the CECL methodology upon adoption effective on April 1, 2023 was immaterial to the Company’s consolidated financial statements.
The Company’s quantitative allowance for credit loss estimates under CECL was determined using the loss rate method, which is impacted by certain forecasted economic factors. In addition to the Company’s quantitative allowance for credit losses, the Company also incorporates qualitative adjustments that may relate to unique risks, changes in current economic conditions that may not be reflected in quantitatively derived results, or other relevant factors to further inform the Company’s estimate of the allowance for credit losses.
| F-13 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Additionally, due to the expansion of the time horizon over which the Company is required to estimate future credit losses, the Company may experience increased volatility in its future provisions for credit losses. Factors that could contribute to such volatility include, but are not limited to, changes in the composition and credit quality of customer base, economic conditions and forecasts, the allowance for credit loss models that are used, the data that is included in the models, the associated qualitative allowance framework, and the Company’s estimation techniques.
The
Company has had no recordable write offs for bad debts or uncollectible invoiced amounts during the for the nine months ended December
31, 2023 or the prior twelve months ended March 31, 2023. In applying the CECL methodology, the Company recorded an estimated allowance
of $
Treasury Stock
The Company records treasury stock at the cost to acquire it and includes treasury stock as a component of shareholders’ equity.
Recently Issued Accounting Pronouncements
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.
NOTE 2. INVENTORY
Inventory consisted of the following:
| December 31, 2023 | March 31, 2023 | |||||||
| Finished goods | $ | $ | ||||||
| Work-in-progress | ||||||||
| Raw materials | ||||||||
| Inventory | $ | $ | ||||||
NOTE 3. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| December 31, 2023 | March 31, 2023 | |||||||
| Land, building and improvements | $ | $ | ||||||
| Laboratory, manufacturing, warehouse and transportation equipment | ||||||||
| Office equipment and software | ||||||||
| Furniture and fixtures | ||||||||
| Property and equipment, gross | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense was $
| F-14 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. ACCRUED EXPENSES
As of December 31, 2023 and March 31, 2023, the Company’s accrued expenses consisted of the following:
| December 31, 2023 | March 31, 2023 | |||||||
| Salaries and fees payable in Common Stock inclusive of the change in fair value of Common stock underlying such liabilities | $ | $ | ||||||
| Income tax | ||||||||
| Co-development profit split | ||||||||
| Consultant contract fees | ||||||||
| Audit fees | ||||||||
| Director dues | ||||||||
| Legal and professional expense | ||||||||
| Employee bonuses | ||||||||
| Other accrued expenses | ||||||||
| Total accrued expenses | $ | $ | ||||||
NOTE 5. NJEDA BONDS
In
relation to the Series A Notes, the Company is required to maintain a debt service reserve. The debt service reserve is classified as
restricted cash on the accompanying unaudited consolidated balance sheets. The NJEDA Bonds require the Company to make an annual principal
payment on September 1st based on the amount specified in the loan documents and semi-annual interest payments on March 1st and September
1st, equal to interest due on the outstanding principal. The annual interest rate on the Series A Note is
The following tables summarize the Company’s bonds payable liability:
| December 31, 2023 | March 31, 2023 | |||||||
| Gross bonds payable | ||||||||
| NJEDA Bonds - Series A Notes | $ | $ | ||||||
| Less: Current portion of bonds payable (prior to deduction of bond offering costs) | ( | ) | ( | ) | ||||
| Long-term portion of bonds payable (prior to deduction of bond offering costs) | $ | $ | ||||||
| Bond offering costs | $ | $ | ||||||
| Less: Accumulated amortization | ( | ) | ( | ) | ||||
| Bond offering costs, net | $ | $ | ||||||
| Current portion of bonds payable - net of bond offering costs | ||||||||
| Current portions of bonds payable | $ | $ | ||||||
| Less: Bonds offering costs to be amortized in the next 12 months | ( | ) | ( | ) | ||||
| Current portion of bonds payable, net of bond offering costs | $ | $ | ||||||
| Long term portion of bonds payable - net of bond offering costs | ||||||||
| Long term portion of bonds payable | $ | $ | ||||||
| Less: Bond offering costs to be amortized subsequent to the next 12 months | ( | ) | ( | ) | ||||
| Long term portion of bonds payable, net of bond offering costs | $ | $ | ||||||
Amortization
expense was $
| F-15 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Maturities of bonds for the next five years, exclusive of the nine months ended December 31, 2023 are as follows:
| Years ending March 31, | Amount | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| $ | ||||
NOTE 6. LOANS PAYABLE
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 $
In
place of the EWB Term Loan, the Company has entered into a collateralized promissory note with individual lenders with rates comparable
to the EWB Term Loan but with less restrictive covenants (a “Promissory Note”). As of June 2, 2023, a Promissory Note was
placed with Nasrat Hakim, CEO and Chairman of the Board of Directors, for $
Loans payable consisted of the following:
| December 31, 2023 | March 31, 2023 | |||||||
| Mortgage loan payable | $ | $ | ||||||
| Equipment and insurance financing loans payable, between | ||||||||
| Less: Current portion of loans payable | ( | ) | ( | ) | ||||
| Long-term portion of loans payable | $ | $ | ||||||
The
interest expense associated with the loans payable was $
| F-16 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Loan principal payments for the next five years are as follows:
| Future principal balances | ||||
| Years ending March 31, | Amount | |||
| 2024 (excluding the nine months ended December 31, 2023) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 and thereafter | ||||
| Total remaining principal balance | $ | |||
NOTE 7. RELATED PARTY LOANS
The
Company has entered into a collateralized promissory note with individual lenders with rates comparable to the EWB Term Loan but with
fewer covenants (the “Hakim Promissory Note”). 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 Hakim Promissory
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 $
On
July 1, 2022, the EWB provided a mortgage loan (“EWB Mortgage Loan”) in the amount of $
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 $
NOTE 8. DEFERRED REVENUE
Deferred
revenues in the aggregate amount of $
| F-17 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9. COMMITMENTS AND CONTINGENCIES
Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
On August 17, 2023, Elite filed a paragraph IV certification with its ANDA to generic Oxycontin and after Elite got acceptance of the ANDA by the FDA on September 19, 2023, Elite sent the patentee and NDA holder a Notice Letter as required under the Hatch-Waxman Act. On November 14, 2023, a patent infringement suit was filed in the District Court of New Jersey by Purdue Pharma. Elite obtained agreement with Purdue to stay the litigation for six months. Elite’s launch of a generic Oxycontin will depend on the approval by the FDA and the outcome of various litigations involving Purdue or the expiry of the patents listed on the Orange Book. As of December 31, 2023, the results of such proceedings cannot be predicted with certainty, but the Company does not anticipate that the final outcome, if any, arising out of any such matters will have a material adverse effect on its business, financial condition or results of operations.
Operating Leases
The Company entered into an operating lease for a portion of a one-story warehouse, located at 135 Ludlow Avenue, Northvale, New Jersey (the “Ludlow Ave. lease”) which began in 2010. On June 30, 2021, the Company exercised a renewal option, with such option including a term that begins on January 1, 2022 and expires on December 31, 2026. The Ludlow Ave. lease was terminated on July 1, 2022, when the Company purchased the underlying property.
In
October 2020, the Company entered into an operating lease for office space in Pompano Beach, Florida (the “Pompano Office Lease”).
The Pompano Office Lease is for approximately
The Company assesses whether an arrangement is a lease or contains a lease at inception. For arrangements considered leases or that contain a lease that is accounted for separately, the Company determines the classification and initial measurement of the right-of-use asset and lease liability at the lease commencement date, which is the date that the underlying asset becomes available for use. The Company has elected to account for non-lease components associated with its leases and lease components as a single lease component.
The Company recognizes a right-of-use asset, which represents the Company’s right to use the underlying asset for the lease term, and a lease liability, which represents the present value of the Company’s obligation to make payments arising over the lease term. The present value of the lease payments is calculated using either the implicit interest rate in the lease or an incremental borrowing rate.
Finance Leases
In
November 2023, the Company entered into an finance lease for equipment (the “Waters Equipment Lease”). The Waters Equipment
Lease is related to lab equipment with an acquisition cost of $
A
lease is classified as a finance lease if any of the following criteria are met:
| F-18 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Lease assets and liabilities are classified as follows on the condensed consolidated balance sheet:
| Lease | Classification | December 31, 2023 | ||||
| Assets | ||||||
| Finance | Finance lease – right-of-use asset | $ | ||||
| Operating | Operating lease – right-of-use asset | |||||
| Total leased assets | $ | |||||
| Liabilities | ||||||
| Current | ||||||
| Finance | Lease obligation – finance lease | $ | ||||
| Operating | Lease obligation – operating lease | |||||
| Long-term | ||||||
| Finance | Lease obligation – finance lease, net of current portion | |||||
| Operating | Lease obligation – operating lease, net of current portion | |||||
| Total lease liabilities | $ | |||||
Rent
expense is recorded on the straight-line basis. Rent expense under the 135 Ludlow Ave. modified lease was $
The table below shows the future minimum rental payments, exclusive of taxes, insurance and other costs, under the Pompano Office Lease and Waters Equipment Lease:
| Years ending March 31, | Operating Lease Amount | Financing Lease Amount | Total | |||||||||
| 2024 (excluding the nine months ended December 31, 2023) | $ | $ | $ | |||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| 2027 | ||||||||||||
| 2028 | ||||||||||||
| Thereafter | ||||||||||||
| Less: interest | ( | ) | ( | ) | ( | ) | ||||||
| Present value of lease payments | $ | $ | $ | |||||||||
The weighted-average remaining lease term and the weighted-average discount rate of our leases were as follows:
| Lease Term and Discount Rate | December 31, 2023 | |||
| Remaining lease term (years) | ||||
| Operating leases | ||||
| Finance leases | ||||
| Discount rate | ||||
| Operating leases | % | |||
| Finance leases | % | |||
| F-19 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10. PREFERRED STOCK
Series J convertible preferred stock
On
April 28, 2017, the Company created the Series J Convertible Preferred Stock (“Series J Preferred”) in conjunction with the
Certificate of Designations. A total of shares of Series J Preferred were authorized, shares are issued and outstanding, with
a stated value of $
NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS – WARRANTS
The Company evaluates and accounts for its freestanding instruments in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities.
The Company issued warrants, with a term of ten years, to affiliates in connection with an exchange agreement dated April 28, 2017, as further described in this note below.
The
Company has
On
April 28, 2017, the Company entered into an Exchange Agreement with Hakim, the Chairman of the Board, President, and Chief Executive
Officer of the Company, pursuant to which the Company issued to Hakim shares of its Series J Preferred and warrants to purchase
an aggregate of
The
Series J Warrants are exercisable for a period of
The exercise price is subject to adjustment for any issuances or deemed issuances of Common Stock or Common Stock equivalents at an effective price below the then exercise price. The Series J Warrants also provide for other standard adjustments upon the happening of certain customary events.
The fair value of the Series J Warrants was calculated using a Black-Scholes model. The following assumptions were used in the Black-Scholes model to calculate the fair value of the Series J Warrants:
| December 31, 2023 | March 31, 2023 | |||||||
| Fair value of the Company’s Common Stock | $ | $ | ||||||
| Volatility | % | % | ||||||
| Initial exercise price | $ | $ | ||||||
| Warrant term (in years) | ||||||||
| Risk free rate | % | % | ||||||
The changes in warrants (Level 3 financial instruments) measured at fair value on a recurring basis for the nine months ended December 31, 2023 were as follows:
| Balance at March 31, 2023 | $ | |||
| Change in fair value of derivative financial instruments - warrants | ||||
| Balance at December 31, 2023 | $ |
| F-20 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 12. SHAREHOLDERS’ EQUITY
Lincoln Park Capital Transaction - 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 $
The Company did not issue any shares of its Common Stock pursuant to the 2020 LPC Purchase Agreement during the three and nine months ended December 31, 2023 and 2022. In addition, there were no shares issued to Lincoln Park as additional commitment shares, pursuant to the 2020 LPC Purchase Agreement. The 2020 LPC Purchase Agreement expired on August 1, 2023.
Summary of Common Stock Activity
On
November 22, 2023, the Company issued
On
December 29, 2023, the Company issued
As of December 31, 2023, there were shares of Common Stock issued and shares of Common Stock outstanding.
Part of the compensation paid by the Company to its Directors and employees consists of the issuance of Common Stock or via the granting of options to purchase Common Stock.
Stock-based Director Compensation
The Company’s Director compensation policy, instituted in October 2009 and further revised in January 2016, includes provisions that a portion of director’s fees are to be paid via the issuance of shares of the Company’s Common Stock, in lieu of cash, with the valuation of such shares being calculated on quarterly basis and equal to the average closing price of the Company’s Common Stock.
During
the nine months ended December 31, 2023, the Company accrued director’s fees totaling $
| Balance of common stock owed at April 1, 2023 | $ | |||
| Awarded shares | ||||
| Change in fair value of stock-based liabilities | ||||
| Issuance of common stock on November 22, 2023 | ( | ) | ||
| Balance of common stock owed at December 31, 2023 | $ |
Stock-based Employee/Consultant Compensation
Employment contracts with the Company’s President and Chief Executive Officer and certain other employees and engagement contracts with certain consultants include provisions for a portion of each employee’s salaries or consultant’s fees to be paid via the issuance of shares of the Company’s Common Stock, in lieu of cash, with the valuation of such shares being calculated on a quarterly basis and equal to the average closing price of the Company’s Common Stock.
| Balance of common stock owed at April 1, 2023 | $ | |||
| Awarded shares | ||||
| Change in fair value of stock-based liabilities | ||||
| Common stock issued | ( | ) | ||
| Settlement of non-cash liability | ( | ) | ||
| Balance of common stock owed at December 31, 2023 | $ |
During
the nine months ended December 31, 2023, the Company accrued
| F-21 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On
November 6, 2023, the Company entered into a Settlement Agreement with a former executive who was terminated on February 7, 2022.
The employment agreement with the former executive included annual compensation of $
which was to be paid via the issuance
of shares of Common Stock. At the date of the former executive’s termination an aggregate of shares
of Common Stock (the “Deferred Shares”) were due to the former executive, with such number of shares representing an
aggregate of $
On
December 29, 2023, the Company issued
Options
Under its 2014 Stock Option Plan and prior options plans, the Company may grant stock options to officers, selected employees, as well as members of the Board of Directors and advisory board members. All options have generally been granted at a price equal to or greater than the fair market value of the Company’s Common Stock at the date of the grant. Generally, options are granted with a vesting period of up to three years and expire ten years from the date of grant.
The fair value of option awards is estimated on the date of grant using the Black-Scholes option-pricing model. The exercise price of each award is generally not less than the per share fair value in effect as of that award date. The determination of fair value using the Black-Scholes model is affected by the Company’s share fair value as well as assumptions regarding a number of complex and subjective variables, including expected price volatility, risk-free interest rate and projected employee share option exercise behaviors. The Company estimates its expected volatility by using a combination of historical share price volatilities of similar companies within our industry. The expected term of the Company’s stock options for employees has been determined utilizing the “simplified” method for awards, since the Company does not have sufficient exercise history to estimate term of its historical option awards. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve. Expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
| December 31, 2023 | March 31, 2023 | |||||||
| Term (in years) | ||||||||
| Exercise Price | $-$ | $-$ | ||||||
| Dividend Yield | ||||||||
| Expected Volatility | %- | % | %- | % | ||||
| Risk Free Rate | %- | % | %- | % | ||||
| Shares |
Weighted | Weighted Average Remaining Contractual | Aggregate | |||||||||||||
| Underlying Options | Average Exercise Price | Term (in years) | Intrinsic Value | |||||||||||||
| Outstanding at March 31, 2023 | $ | $ | ||||||||||||||
| Granted | $ | $ | — | |||||||||||||
| Expired and Forfeited | ( | ) | $ | $ | — | |||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||
| Exercisable at December 31, 2023 | $ | $ | ||||||||||||||
The
aggregate intrinsic value for outstanding options is calculated as the difference between the exercise price of the underlying awards
and the quoted price of the Company’s Common Stock as of December 31, 2023 of $
On September 5, 2023, options were granted to the Chief Financial Officer pursuant to the 2014 Plan to purchase an aggregate of shares of Common Stock. The options have an exercise price of $ per share, the fair market value of the Common Stock on the date of grant.
| F-22 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On September 19, 2023, options were granted to one employee pursuant to the 2014 Plan to purchase an aggregate of shares of Common Stock. The options have an exercise price of $ per share, the fair market value of the Common Stock on the date of grant.
On October 2, 2023, options were granted to one employee pursuant to the 2014 Plan to purchase an aggregate of shares of Common Stock. The options have an exercise price of $ per share, the fair market value of the Common Stock on the date of grant.
The weighted-average grant-date fair value of stock options granted during the nine months ended December 31, 2023 under the 2014 Plan was $.
NOTE 14. CONCENTRATIONS AND CREDIT RISK
Revenues
Two
customers accounted for approximately
Two
customers accounted for approximately
Accounts Receivable
Two
customers accounted for approximately
One
customer accounted for approximately
Purchasing
Two
suppliers accounted for approximately
One
supplier accounted for approximately
NOTE 15. SEGMENT RESULTS
FASB ASC 280-10-50 requires use of the “management approach” model for segment reporting. The management approach is based on the way a company’s management organized segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
The Company has determined that its reportable segments are ANDAs for generic products and NDAs for branded products. The Company identified its reporting segments based on the marketing authorization relating to each and the financial information used by its chief operating decision maker to make decisions regarding the allocation of resources to and the financial performance of the reporting segments.
Asset information by operating segment is not presented below since the chief operating decision maker does not review this information by segment. The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements.
| F-23 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following represents selected information for the Company’s reportable segments:
| For the Three Months Ended December 31, | For the Nine Months Ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating Income by Segment | ||||||||||||||||
| ANDA | $ | $ | $ | $ | ||||||||||||
| Operating income by Segment | $ | $ | $ | $ | ||||||||||||
The
Company notes that there was
The table below reconciles the Company’s operating income by segment to income before income taxes as reported in the Company’s unaudited condensed consolidated statements of operations:
| For the Three Months Ended December 31, | For the Nine Months Ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating income by segment | $ | $ | $ | $ | ||||||||||||
| Corporate unallocated costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Interest expense and amortization of debt issuance costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Depreciation and amortization expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Significant non-cash items | ( | ) | ( | ) | ||||||||||||
| Change in fair value of derivative instruments | ( | ) | ( | ) | ||||||||||||
| Change in fair value of stock-based liabilities | ( | ) | ( | ) | ||||||||||||
| Income(Loss) before income taxes | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
NOTE 16. RELATED PARTY AGREEMENTS
Mikah Pharma, LLC Agreements
In May 2020, Praxgen (formerly known as SunGen Pharma LLC), pursuant to an asset purchase agreement, assigned its rights and obligations under the Praxgen Agreement for Amphetamine IR and Amphetamine ER to Mikah Pharma LLC (“Mikah”). The ANDAs for Amphetamine IR and Amphetamine ER are now registered under Elite’s name. Mikah will now be Elite’s partner with respect to Amphetamine IR and ER and will assume all the rights and obligations for these products from Praxgen. Mikah was founded in 2009 by Nasrat Hakim, a related party and the Company’s President, Chief Executive Officer and Chairman of the Board.
In June 2021, the Company entered into a development and license agreement with Mikah, pursuant to which Mikah will engage in the research, development, sales and licensing of generic pharmaceutical products. In addition, Mikah will collaborate to develop and commercialize generic products including formulation development, analytical method development, manufacturing, sales and marketing of generic products. Initially two generic products were identified for the parties to develop.
As
of December 31, 2023, the Company owes an aggregate of $
Consultants Agreements
Employment
contracts with certain consultants include provisions for a portion of the consultant’s fees to be paid via the issuance of shares
of the Company’s Common Stock, in lieu of cash, with the valuation of such shares being calculated on a quarterly basis and equal
to the average closing price of the Company’s Common Stock. On December 29, 2023, the Company issued
| F-24 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 17. INCOME TAXES
The
Company’s income tax benefit was $
The
Company’s income tax benefit was $
During
the nine months ended December 31, 2023, the Company recorded a discrete tax benefit of $
NOTE 18. SUBSEQUENT EVENTS
The Company has evaluated subsequent events from the balance sheet date through February 14, 2024, and note the following subsequent events:
140 Ludlow Office Lease
The Company entered into a five-year office lease agreement for a portion of a one-story warehouse, located at 140 Ludlow Avenue, Northvale, New Jersey (the 140 Ludlow Ave. lease”) which began on January 22, 2024 and ends on December 31, 2028.
| F-25 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations for the Nine Months Ended December 31, 2023 and 2022 should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended March 31, 2023. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms “Elite”, the “Company”, “we”, “us”, and “our” refer to Elite Pharmaceuticals, Inc. and subsidiary.
Background
Elite Pharmaceuticals, Inc., a Nevada corporation (the “Company”, “Elite”, “Elite Pharmaceuticals”, the “registrant”, “we”, “us” or “our”) was incorporated on October 1, 1997 under the laws of the State of Delaware, and its wholly-owned subsidiary, Elite Laboratories, Inc. (“Elite Labs”), was incorporated on August 23, 1990 under the laws of the State of Delaware. On January 5, 2012, Elite Pharmaceuticals was reincorporated under the laws of the State of Nevada.
We are a specialty pharmaceutical company principally engaged in the development and manufacture of oral, controlled-release products, using proprietary know-how and technology for the manufacture of generic pharmaceuticals. Our strategy includes developing generic versions of controlled-release drug products with high barriers to entry.
We occupy manufacturing, warehouse, laboratory and office space at 165 Ludlow Avenue and 135 Ludlow Avenue in Northvale, NJ (the “Northvale Facility”). The Northvale Facility operates under Current Good Manufacturing Practice and is a United States Drug Enforcement Agency registered facility for research, development and manufacturing. We are also party to an operating lease for office space at Pompano Beach, Florida (the “Pompano Office Lease”).
Strategy
We focus our efforts on the following areas: (i) manufacturing of a line of generic pharmaceutical products with approved Abbreviated New Drug Applications (“ANDAs”); (ii) development of additional generic pharmaceutical products; (iii) development of the other product candidates in our pipeline including the products with our partners; (iv) commercial exploitation of our products either by sales under our own label, by license and the collection of royalties, or through the manufacture of our formulations; and (v) development of new products and the expansion of our licensing agreements with other pharmaceutical companies, including co-development projects, joint ventures and other collaborations.
Our focus is on the development of various types of drug products, including generic drug products which require ANDAs as well as branded drug products which require New Drug Applications (“NDAs”) under Section 505(b)(1) or 505(b)(2) of the Drug Price Competition and Patent Term Restoration Act of 1984.
We believe that our business strategy enables us to reduce its risk by having a diverse product portfolio that includes generic products in various therapeutic categories and to build collaborations and establish licensing agreements with companies with greater resources thereby allowing us to share costs of development and improve cash-flow.
| 1 |
Commercial Products
We own, license, contract manufacture or have contractual rights to receive royalties from the following products currently approved for commercial sale:
| Product | Branded Product Equivalent |
Therapeutic Category |
Launch Date | |||
| Phentermine HCl 37.5mg tablets | Adipex-P® | Bariatric | April 2011 | |||
| Phendimetrazine Tartrate 35mg tablets | Bontril® | Bariatric | November 2012 | |||
| Phentermine HCl 15mg and 30mg capsules | Adipex-P® | Bariatric | April 2013 | |||
| Naltrexone HCl 50mg tablets | Revia® | Addiction Treatment | September 2013 | |||
| Isradipine 2.5mg and 5mg capsules | N/A | Cardiovascular | January 2015 | |||
| Trimipramine Maleate Immediate Release 25mg, 50mg and 100mg capsules | Surmontil® | Antidepressant | May 2017 | |||
| Dextroamphetamine Saccharate, Amphetamine Aspartate, Dextroamphetamine Sulfate, Amphetamine Sulfate Immediate Release 5mg, 7.5mg, 10mg, 12.5mg, 15mg, 20mg and 30mg tablets | Adderall® | Central Nervous System Stimulant | April 2019 | |||
| Dantrolene Sodium Capsules 25mg, 50mg and 100mg | Dantrium® | Muscle Relaxant | June 2019 | |||
| Dextroamphetamine Saccharate, Amphetamine Aspartate, Dextroamphetamine Sulfate, Amphetamine Sulfate Extended Release 5mg, 10mg, 15mg, 20mg, 25mg, and 30mg capsules | Adderall XR® | Central Nervous System Stimulant | March 2020 | |||
| Loxapine Succinate 5mg, 10mg, 25mg and 50gm capsules | Loxapine® | Antipsychotic | May 2021 |
Products Under FDA Review
SequestOx™ - Immediate Release Oxycodone with sequestered Naltrexone
SequestOx™ is our abuse-deterrent candidate for the management of moderate to severe pain where the use of an opioid analgesic is appropriate. SequestOx™ is an immediate-release Oxycodone Hydrochloride containing sequestered Naltrexone which incorporates 5mg, 10mg, 15mg, 20mg and 30mg doses of oxycodone into capsules.
In January 2016, the Company submitted a 505(b)(2) New Drug Application for SequestOx™, after receiving a waiver of the $2.3 million filing fee from the FDA. In March 2016, the Company received notification of the FDA’s acceptance of this filing and that such filing has been granted priority review by the FDA with a target action under the Prescription Drug User Fee Act of July 14, 2016.
On July 15, 2016, the FDA issued a Complete Response Letter, or CRL, regarding the NDA. The CRL stated that the review cycle for the SequestOx™ NDA is complete and the application is not ready for approval in its present form.
On July 7, 2017, the Company reported topline results from a pivotal bioequivalence fed study for or SequestOx™. The mean Tmax (the amount of time that a drug is present at the maximum concentration in serum) of SequestOx™ was 4.6 hr. with a range of 0.5 hr. to 12 hr. and the mean Tmax of the comparator, Roxicodone®, was 3.4 hr. with a range of 0.5 hr. to 12 hr. A key objective for the study was to determine if the reformulated SequestOx™ had a similar Tmax to the comparator when taken with a high fat meal. Based on these results, the Company paused clinical trials for this formulation of SequestOx™. On January 30, 2018, the Company reported positive topline results from a pilot study conducted for a modified SequestOx™ wherein, based on the results of this pilot study, the modified SequestOx™ formulation is expected to achieve bioequivalence with a Tmax range equivalent to the reference product when conducted in a pivotal trial under fed conditions. The Company has provided the pilot data to the FDA, requesting clarification as to the requirements for resubmission of the NDA. The FDA has provided guidance for repeated bio-equivalence studies in order to bridge the new formulation to the original SequestOx™ studies and also extended our filing fee waiver until July 2023. Due to the prohibitive cost of such repeated bio-equivalence studies and the uncertain commercial viability given the regulatory and competitive landscape, the Company has paused development of this product candidate.
There can be no assurances of the Company conducting future clinical trials, or if such trials are conducted, there can be no assurances of the success of any future clinical trials, or if such trials are successful, there can be no assurances that an intended future resubmission of the NDA product filing, if made, will be accepted by or receive marketing approval from the FDA. In addition, even if marketing authorization is received, there can be no assurances that there will be future revenues or profits, or that any such future revenues or profits would be in amounts that provide adequate return on the significant investments made to secure this marketing authorization.
| 2 |
Generic Products Filed
Currently the Company has filed a generic antimetabolite ANDA and a generic dopamine agonist ANDA and these products are under review by the FDA. On August 17, 2023, the Company also submitted an ANDA for an opiate analgesic for pain management and it was accepted for review by FDA on September 19, 2023. On December 21, 2023, the FDA accepted for review an ANDA for an undisclosed generic drug product in a class of medications known as central nervous stimulants.
Approved Products Not Yet Commercialized
Acetaminophen and Codeine Phosphate
The Company received approval on September 10, 2019 from the FDA of an ANDA for a generic version of Tylenol® with Codeine (acetaminophen and codeine phosphate) 300mg/7.5mg, 300mg/15mg, 300mg/30mg and 300mg/60mg tablets. Acetaminophen with codeine is a combination medication indicated for the management of mild to moderate pain, where treatment with an opioid is appropriate and for which alternative treatments are inadequate. Acetaminophen with codeine products have annual U.S. sales of approximately $45 million according to IQVIA (formerly QuintilesIMS Health Data). The Company is not pursuing licensing deals for any opioids at this time until the market changes. The Company will wait for the market to stabilize before pursuing these opportunities.
Doxycycline Hyclate Tablets
The Company received approval in April 2022 from the FDA of an ANDA for a generic version of an antibiotic product. According to QVIA (formerly QuintilesIMS Health) data, the branded product for this antibiotic and its equivalents had total annual U.S. sales of approximately $85 million for the twelve months ending September 30, 2019. The product is jointly owned by Elite and Praxgen Pharmaceuticals LLC, formerly SunGen Pharma LLC, (“Praxgen”).
There can be no assurances in relation to any of the above approved products not yet commercialized, that there will be future revenues of profits, or that any such future revenues or profits would be in amounts that provide adequate return on the significant investments made to secure these marketing authorizations.
Critical Accounting Policies and Estimates
The preparation of the unaudited condensed consolidated financial statements and related disclosures in conformity with GAAP, and our discussion and analysis of the Company’s financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in the Company’s unaudited condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material. We have identified below the critical accounting policies, which are assumptions made by management about matters that are highly uncertain and that are of critical importance in the presentation of our financial position, results of operations and cash flows. Due to the need to make estimates about the effect of matters that are inherently uncertain, materially different amounts could be reported under different conditions or using different assumptions. On a regular basis, we review our critical accounting policies and how they are applied in the preparation our financial statements.
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.
Revenue Recognition - The Company generates revenue from manufacturing and licensing fees and sales of generic pharmaceuticals bearing the Elite label to pharmaceutical distributors for pharmacies and institutions. Manufacturing fees include the development of pain management products, manufacturing of a line of generic pharmaceutical products with approved ANDA, through the manufacture of formulations and the development of new products. Revenues earned from the sale of Elite label products are recorded at their net realizable value which consists of gross amounts invoiced reduced by contractual reductions, including, without limitation, chargebacks, discounts and program rebates, as applicable. Licensing fees include the commercialization of products either by license and the collection of royalties, or the expansion of licensing agreements with other pharmaceutical companies, including co-development projects, joint ventures and other collaborations.
| 3 |
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 controlled-release products on a contract basis for third parties, if, and when, the products are approved. These products include products using controlled-release drug technology. The Company also develops and markets (either on its own or by license to other companies) generic and proprietary controlled-release pharmaceutical products.
The Company recognizes revenue when the customer obtains control of the Company’s product based on the contractual shipping terms of the contract, at which time the performance obligation is deemed to be completed. 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 recognize revenue from the milestone when 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.
| 4 |
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 December 31, 2023.
In accordance with ASC 606-10-55-65, royalties are recognized when the subsequent sale of the customer’s products occurs.
c) Sale of product under the Elite label
The Company began direct sales of products under the Company’s own label on April 1, 2023. License agreements will remain in place for select products. With this transition, however, a large portion of the manufacturing and license fees now reported will be replaced with revenues from sales of Elite labeled pharmaceutical products to distributors for pharmacies and institutions.
The Company recognizes revenue when the customer obtains control of the Company’s product based on the contractual shipping terms, at which time the performance obligation is deemed to be completed. The Company is primarily responsible for fulfilling the promise to deliver the product and bears risk of loss while the inventory is in-transit to the purchaser. Revenue is measured as the amount of consideration earned from the sale of Elite labeled pharmaceutical products are recorded at their net realizable value which consists of gross amounts invoiced reduced by contractual reductions, including, without limitation, chargebacks, discounts and program rebates, as applicable.
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.
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 December 31, 2023, a summary of the tax years that remain subject to examination in our major tax jurisdictions are: United States – Federal, 2016 and forward. The Company did not record unrecognized tax positions for the nine months ended December 31, 2023.
New Accounting Pronouncements
For a description of recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our financial statements, see “Note 1. Summary of Significant Accounting Polices: Recently Issued Accounting Pronouncements” in Part II, Item 1 of this Form 10-Q.
| 5 |
Results of Operations
The following set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
Three months ended December 31, 2023 compared to the three months ended December 31, 2022
Revenue, Cost of revenue and Gross profit:
For the Three Months Ended December 31, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | Percentage | |||||||||||||
| Manufacturing fees | $ | 14,791,110 | $ | 7,798,159 | $ | 6,992,951 | 90 | % | ||||||||
| Licensing fees | 747,690 | 1,451,907 | (704,217 | ) | (49 | )% | ||||||||||
| Total revenue | 15,538,800 | 9,250,066 | 6,288,734 | 68 | % | |||||||||||
| Cost of manufacturing | 8,497,727 | 4,330,841 | 4,166,886 | 96 | % | |||||||||||
| Gross profit | $ | 7,041,073 | $ | 4,919,225 | $ | 2,121,848 | 43 | % | ||||||||
| Gross profit - percentage | 45 | % | 53 | % | ||||||||||||
Total revenues for the three months ended December 31, 2023 increased by $6.3 million or 68%, to $15.5 million, as compared to $9.3 million, for the corresponding period of the prior year, primarily due to the launch of the Elite label during the current fiscal year which achieved increased sales for the quarter ended December 31, 2023, as compared to the comparable quarter of the prior year, which did not include any sales of Elite label products.
Manufacturing fees revenue increased by $7.0 million, or 90%, primarily due to the launch of the Elite label during the current fiscal year which achieved increased sales for the quarter ended December 31, 2023, as compared to the comparable quarter of the prior year, which did not include any sales of Elite label products.
Licensing fees revenue decreased by $0.7 million, or 49%. This decrease is primarily due to the expiration of the marketing alliance agreements between the Company and Lannett Company, Inc. dated March 6, 2019 and April 9, 2019 (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 $4.2 million or 96%, to $8.5 million as compared to $4.3 million for the corresponding period in the prior fiscal year. This increase was due to an increased volume of products sold during the three months ended December 31, 2023, as compared to the comparable period of the prior fiscal year, as noted above.
Our gross profit margin was 45% during the three months ended December 31, 2023 as compared to 53% during the comparable period of the prior fiscal year. The decrease is due to total revenues consisting of a greater proportion of manufacturing revenues, as compared to the comparable period of the prior year, with the associated increase in costs of manufacturing resulting in lower gross profit margins as compared to the comparable period of the prior year which included a greater proportion of license fees that does not have a cost of manufacturing.
| 6 |
Operating expenses:
For the Three Months Ended December 31, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | Percentage | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | $ | 1,403,790 | $ | 1,443,361 | $ | (39,571 | ) | (3 | )% | |||||||
| General and administrative | 1,711,275 | 1,186,049 | 525,226 | 44 | % | |||||||||||
| Non-cash compensation | 49,815 | 13,030 | 36,785 | 282 | % | |||||||||||
| Depreciation and amortization | 343,537 | 317,685 | 25,852 | 8 | % | |||||||||||
| Total operating expenses | $ | 3,508,417 | $ | 2,960,125 | $ | 548,292 | 19 | % | ||||||||
Operating expenses consist of research and development costs, general and administrative costs, non-cash compensation and depreciation and amortization expenses. Operating expenses for the three months ended December 31, 2023 increased by $0.5 million, or 19%, to $3.5 million as compared to $3.0 million for the corresponding period in the prior fiscal year, largely due to an increase in general and administrative costs of $0.5 million.
Research and development costs during the three months ended December 31, 2023 were $1.4 million, a decrease of less than $0.1 million, or 3%, from approximately $1.4 million of such costs for the comparable period of the prior year.
General and administrative expenses for the three months ended December 31, 2023 were $1.7 million, an increase of $0.5 million or approximately 44% from the comparable period of the prior fiscal year, largely due to an increased human resource headcount and costs as compared to the comparable period of the prior year.
Non-cash compensation expense for the three months ended December 31, 2023 and 2022 was less than $0.1 million.
Depreciation and amortization expenses from the three months ended December 31, 2023 were $0.3 million, which was virtually unchanged from $0.3 million in such costs for the comparable period of the prior fiscal year.
As a result of the foregoing, our income from operations during the three months ended December 31, 2023 was $3.5 million, compared to income from operations of $2.0 million for the comparable period of the prior fiscal year.
Other income (expense):
For the Three Months Ended December 31, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | Percentage | |||||||||||||
| Other income (expense): | ||||||||||||||||
| Change in fair value of derivative financial instruments - warrants | $ | (2,417,772 | ) | $ | 372,894 | $ | (2,790,666 | ) | (748 | )% | ||||||
| Change in fair value of stock-based liabilities | (2,854,556 | ) | — | (2,854,556 | ) | — | % | |||||||||
| Interest expense and amortization of debt issuance costs | (121,628 | ) | (322,681 | ) | 201,053 | (62 | )% | |||||||||
| Gain from settlement agreements | 1,761,792 | — | 1,761,792 | — | % | |||||||||||
| Gain on sale of ANDA | — | 1,000,000 | (1,000,000 | ) | (100 | )% | ||||||||||
| Interest income | 5,249 | 15 | 5,234 | 34,893 | % | |||||||||||
| Other (expense) income, net | $ | (3,626,915 | ) | $ | 1,050,228 | $ | (4,677,143 | ) | (445 | )% | ||||||
| 7 |
Other income (expense) for the three months ended December 31, 2023 was an other expense of $3.6 million, a decrease of $4.7 million from an other income of $1.1 million for the comparable period of the prior fiscal year. The decrease was primarily due to net increases of other expenses of $2.9 million relating to the change in fair value of stock-based liabilities and $2.8 million relating to the change in fair value of derivative financial instruments, a decrease in other income of $1.0 million from Gain on sale of ANDA that occurred in the prior year only, offset by a decrease in other expenses of $0.2 million relating to the decrease in interest expense and amortization of debt issuance costs in the current fiscal year as compared to the comparable period of the prior fiscal year. 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 our derivatives 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 three months ended December 31, 2023.
As a result of the foregoing, our net loss before income taxes for the three months ended December 31, 2023 was $0.1 million, compared to net income before income taxes of $3.0 million for the comparable period of the prior fiscal year.
Nine months ended December 31, 2023 compared to the nine months ended December 31, 2022
Revenue, Cost of revenue and Gross profit:
For the Nine Months Ended December 31, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | Percentage | |||||||||||||
| Manufacturing fees | $ | 36,208,217 | $ | 21,312,663 | $ | 14,895,554 | 70 | % | ||||||||
| Licensing fees | 2,467,844 | 4,200,888 | (1,733,044 | ) | (41 | )% | ||||||||||
| Total revenue | 38,676,061 | 25,513,551 | 13,162,510 | 52 | % | |||||||||||
| Cost of manufacturing | 20,437,354 | 12,360,935 | 8,076,419 | 65 | % | |||||||||||
| Gross profit | $ | 18,238,707 | $ | 13,152,616 | $ | 5,086,091 | 39 | % | ||||||||
| Gross profit - percentage | 47 | % | 52 | % | ||||||||||||
Total revenues for the nine months ended December 31, 2023 increased by $13.2 million or 52%, to $38.7 million, as compared to $25.5 million, for the corresponding period of the prior year, primarily due to the launch of the Elite label during the current fiscal year which achieved increased sales for the nine months ended December 31, 2023, as compared to the comparable quarter of the prior year, which did not include any sales of Elite label products.
Manufacturing fees revenue increased by $14.9 million, or 70%, primarily due to the launch of the Elite label during the current fiscal year which achieved increased sales for the nine months ended December 31, 2023, as compared to the comparable quarter of the prior year, which did not include any sales of Elite label products.
Licensing fees revenue decreased by $1.7 million, or 41%. This decrease is primarily due to the expiration of the marketing alliance agreements between the Company and Lannett Company, Inc. dated March 6, 2019 and April 9, 2019 (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 $8.1 million or 65%, to $20.4 million as compared to $12.4 million for the corresponding period in the prior fiscal year. This increase was due to an increased volume of products sold during the nine months ended December 31, 2023, as compared to the comparable period of the prior fiscal year, as noted above.
Our gross profit margin was 47% during the nine months ended December 31, 2023 as compared to 52% during the comparable period of the prior fiscal year. The decrease is due to total revenues consisting of a greater proportion of manufacturing revenues, as compared to the comparable period of the prior year, with the associated increase in costs of manufacturing resulting in lower gross profit margins as compared to the comparable period of the prior year which included a greater proportion of license fees that does not have a cost of manufacturing.
| 8 |
Operating expenses:
For the Nine Months Ended December 31, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | Percentage | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | $ | 5,165,684 | $ | 3,775,107 | $ | 1,390,577 | 37 | % | ||||||||
| General and administrative | 4,906,187 | 4,356,752 | 549,435 | 13 | % | |||||||||||
| Non-cash compensation | 107,592 | 24,325 | 83,267 | 342 | % | |||||||||||
| Depreciation and amortization | 999,059 | 933,531 | 65,528 | 7 | % | |||||||||||
| Total operating expenses | $ | 11,178,522 | $ | 9,089,715 | $ | 2,088,807 | 23 | % | ||||||||
Operating expenses consist of research and development costs, general and administrative costs, non-cash compensation and depreciation and amortization expenses. Operating expenses for the nine months ended December 31, 2023 increased by $2.1 million, or 23%, to $11.2 million as compared to $9.1 million for the corresponding period in the prior fiscal year, largely due to an increase in research and development of $1.4 million and general and administrative expenses of $0.5 million.
Research and development costs during the nine months ended December 31, 2023 were $5.2 million, an increase of $1.4 million, or 37%, from approximately $3.8 million of such costs for the comparable period of the prior year. The increase was a result of the timing and nature of product development activities during the nine months ended December 31, 2023 as compared to the comparable period of the prior fiscal year.
General and administrative expenses for the nine months ended December 31, 2023 were $4.9 million as compared to $4.4 million for the corresponding period in the prior fiscal year, an increase of $0.5 million or approximately 13%, largely due to an increased human resource headcount and costs as compared to the comparable period of the prior fiscal year.
Non-cash compensation expense for the nine months ended December 31, 2023 was $0.1 million as compared to $0.02 million for the comparable period of the prior fiscal year, an increase of $0.1 million or approximately 342%, 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 nine months ended December 31, 2023 were $1.0 million, which was virtually unchanged from $0.9 million in such costs for the comparable period of the prior fiscal year.
As a result of the foregoing, our income from operations during the nine months ended December 31, 2023 was $7.1 million, compared to income from operations of $4.1 million for the comparable period of the prior fiscal year.
Other income (expense):
For the Nine Months Ended December 31, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | Percentage | |||||||||||||
| Other income (expense): | ||||||||||||||||
| Change in fair value of derivative financial instruments - warrants | $ | (5,075,489 | ) | $ | 561,070 | $ | (5,636,559 | ) | (1,005 | )% | ||||||
| Change in fair value of stock-based liabilities | (4,921,376 | ) | — | (4,921,376 | ) | 100 | % | |||||||||
| Interest expense and amortization of debt issuance costs | (371,478 | ) | (782,221 | ) | 410,743 | (53 | )% | |||||||||
| Gain from settlement agreements | 1,761,792 | — | 1,761,792 | — | % | |||||||||||
| Gain on sale of ANDA | — | 1,000,000 | (1,000,000 | ) | (100 | )% | ||||||||||
| Interest income | 16,085 | 187 | 15,898 | 8,502 | % | |||||||||||
| Other (expense) income, net | $ | (8,590,466 | ) | $ | 779,036 | $ | (9,369,502 | ) | (1,203 | )% | ||||||
Other income (expense) for the nine months ended December 31, 2023 was an other expense of $8.6 million, a decrease of $9.4 million from an other income of $0.8 million for the comparable period of the prior fiscal year. The decrease was primarily due to a net increases in other expenses of $5.6 million relating to the change in fair value of derivative instruments, and $4.9 million in change in fair value of stock-based liabilities, net decrease in other income of $1.0 million relating to a gain on sale of ANDA in the comparable period of the prior fiscal year that did not occur in the current fiscal year, offset by $1.8 million in gain from settlement agreements in the current year that did not occur in the comparable period of the prior fiscal year, and an increase in other income resulting from a net $0.4 million decrease in interest expense and amortization of debt issuance costs as compared to the comparable period of the prior fiscal year. Please note that 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 our derivatives 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 nine months ended December 31, 2023.
| 9 |
As a result of the foregoing, our net loss before income taxes for the nine months ended December 31, 2023 was $1.5 million, compared to net income before income taxes of $4.8 million for the comparable period of the prior fiscal year.
Liquidity and Capital Resources
Capital Resources
| December 31, 2023 | March 31, 2023 | Change | ||||||||||
| Current assets | $ | 37,156,502 | $ | 21,510,297 | $ | 15,646,205 | ||||||
| Current liabilities | $ | 19,158,799 | $ | 7,833,637 | $ | 11,325,162 | ||||||
| Working capital | $ | 17,997,703 | $ | 13,676,660 | $ | 4,321,043 | ||||||
Our working capital (total current assets less total current liabilities) increased by $4.3 million from $13.7 million as of March 31, 2023 to $18.0 million as of December 31, 2023, with such increase being primarily related to the increase in finished goods inventory and accounts receivable, associated with increased customer orders during the nine months ended December 31, 2023.
Summary of Cash Flows:
| For the Nine Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Net cash (used in) provided by operating activities | $ | (5,341,537 | ) | $ | 370,021 | |||
| Net cash used in investing activities | $ | (406,007 | ) | $ | (5,200,407 | ) | ||
| Net cash provided by financing activities | $ | 3,747,073 | $ | 14,204,231 | ||||
Net cash used in operating activities for the nine months ended December 31, 2023 was $5.3 million, which included, without limitation, net income of $16.8 million, increased by depreciation and other non-cash expenses totaling $10.1 million and reduced by increases in accounts receivable and inventory totaling $17.9 million.
Net cash used in investing activities for the nine months ended December 31, 2023 was comprised of purchases of property and equipment of approximately $0.4 million.
Net cash provided by financing activities was $3.7 million for the nine months ended December 31, 2023 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.
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 will be used for working capital and other business purposes. The original maturity date of the Caskey Promissory Note is June 30, 2024, with an optional second year extension. The second year extension must be exercised by both parties 60 days prior to the original maturity date.
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 (the “Hakim Promissory Note”). 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 Hakim Promissory 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 has an interest rate of 9% for the first year and 10% for an optional second year and the proceeds will be 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 must be exercised by both parties 60 days prior to the original maturity date.
| 10 |
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, the 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 December 31, 2023, 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 December 31, 2023, 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 three and nine months ended December 31, 2023 and 2022, the Company did not issue any shares of Common Stock to Lincoln Park.
Recent Developments
On December 12, 2023, the Company announced the first shipment of generic Adderall XR® to its distribution and marketing partner Prasco, LLC (“Prasco”). The Company has a non-exclusive Manufacturing, Supply and Distribution Agreement with Prasco, and Burel Pharmaceuticals, LLC to market Elite’s generic version of Adderall® XR in the United States. Elite’s product is co-owned with Mikah Pharma.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2023 at the reasonable assurance level.
| 11 |
Management’s Report on Internal Control Over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are achieved. Further, the design of a control system must be balanced against resource constraints, and therefore the benefits of controls must be considered relative to their costs. Given the inherent limitations in all systems of controls, no evaluation of controls can provide absolute assurance all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Accordingly, given the inherent limitations in a cost-effective system of internal control, financial statement misstatements due to error or fraud may occur and may not be detected. Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance of achieving their objectives. We conduct periodic evaluations of our systems of controls to enhance, where necessary, our control policies and procedures.
Management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Management has used the framework set forth in the report entitled “Internal Control—Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of our internal control over financial reporting. Based on its evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2023 at the reasonable assurance level.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report.
| 12 |
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pending Litigation
On August 17, 2023, Elite filed a paragraph IV certification with its ANDA to generic Oxycontin and after Elite got acceptance of the ANDA by the FDA on September 19, 2023, Elite sent the patentee and NDA holder a Notice Letter as required under the Hatch-Waxman Act. On November 14, 2023, a patent infringement suit was filed in the District Court of New Jersey by Purdue Pharma. Elite obtained agreement with Purdue to stay the litigation for six months. Elite’s launch of a generic Oxycontin will depend on the approval by the FDA and the outcome of various litigations involving Purdue or the expiry of the patents listed on the Orange Book.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, except as set forth in our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
During
the fiscal quarter ended December 31, 2023, none of the Company’s directors or officers (as defined in Rule 16a-1(f) of the Securities
Exchange Act of 1934, as amended)
| 13 |
ITEM 6. EXHIBITS
| Exhibit No. | Description | |
| 31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) and Rule 15d-14(a)* | |
| 31.2 | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) and Rule 15d-14(a)* | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** | |
| 32.2 | Certification of 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.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
** Furnished herewith.
| 14 |
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.
| ELITE PHARMACEUTICALS, INC. | ||
| February 14, 2024 | By: | /s/ Nasrat Hakim |
Nasrat Hakim Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer) | ||
| February 14, 2024 | By: | /s/ Carter Ward |
Carter Ward Chief Financial Officer (Principal Accounting and Financial Officer) | ||
| 15 |