Exhibit 10.2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER: 001-15697
| ELITE PHARMACEUTICALS, INC. |
| (Exact Name of Registrant as Specified in Its Charter) |
| nevada | 22-3542636 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
165 LUDLOW AVENUE NORTHVALE, new jersey |
07647 | |
| (Address of principal executive offices) | (Zip Code) |
| (201) 750-2646 |
| (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 | ||
Common Stock, par value $0.001 per share |
ELTP | 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. Yes ☒ No ☐
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). Yes ☒ No ☐
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 | ☐ |
| Non-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 ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date: 1,011,381,988 shares of Common Stock were issued, and shares of Common Stock were outstanding as of August 15, 2022.
| ii |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| June 30, 2022 | March 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 19,779,584 | $ | 8,535,357 | ||||
| Accounts receivable | 3,965,109 | 3,057,913 | ||||||
| Inventory | 7,617,163 | 6,741,170 | ||||||
| Prepaid expenses and other current assets | 507,923 | 526,949 | ||||||
| Total current assets | 31,869,779 | 18,861,389 | ||||||
| Property and equipment, net of accumulated depreciation of $13,641,313 and $13,348,565, respectively | 5,754,841 | 5,952,992 | ||||||
| Intangible assets, net of accumulated amortization of $-0-, respectively | 6,634,035 | 6,634,035 | ||||||
| Operating lease - right-of-use asset | 980,871 | 1,031,884 | ||||||
| Deferred income tax asset | 2,171,821 | 2,171,821 | ||||||
| Other assets: | ||||||||
| Restricted cash - debt service for NJEDA bonds | 405,163 | 405,039 | ||||||
| Security deposits | 291,738 | 91,738 | ||||||
| Total other assets | 696,901 | 496,777 | ||||||
| Total assets | $ | 48,108,248 | $ | 35,148,898 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,614,260 | $ | 1,430,985 | ||||
| Accrued expenses | 4,809,835 | 4,693,142 | ||||||
| Deferred revenue, current portion | 13,333 | 13,333 | ||||||
| Bonds payable, current portion, net of bond issuance costs | 100,822 | 100,822 | ||||||
| Loans payable, current portion | 334,134 | 253,006 | ||||||
| Lease obligation - operating lease, current portion | 207,373 | 202,953 | ||||||
| Total current liabilities | 7,079,757 | 6,694,241 | ||||||
| Long-term liabilities: | ||||||||
| Deferred revenue, net of current portion | 28,889 | 32,226 | ||||||
| Bonds payable, net of current portion and bond issuance costs | 1,143,394 | 1,139,848 | ||||||
| Loans payable, net of current portion and loan costs | 12,063,213 | 249,046 | ||||||
| Lease obligation - operating lease, net of current portion | 782,232 | 835,893 | ||||||
| Derivative financial instruments - warrants | 1,436,980 | 936,837 | ||||||
| Other long-term liabilities | 40,551 | 38,780 | ||||||
| Total long-term liabilities | 15,495,259 | 3,232,630 | ||||||
| Total liabilities | 22,575,016 | 9,926,871 | ||||||
| Shareholders’ equity: | ||||||||
| Series J convertible preferred stock; par value of $; shares authorized; issued and outstanding as of June 30, 2022 and March 31, 2022 | ||||||||
| Common stock; par value $; shares authorized; shares issued as of June 30, 2022 and March 31, 2022; shares outstanding as of June 30, 2022 and March 31, 2022. | 1,011,385 | 1,011,385 | ||||||
| Additional paid-in capital | 164,582,549 | 164,577,227 | ||||||
| Treasury stock; shares as of June 30, 2022 and March 31, 2022; at cost | (306,841 | ) | (306,841 | ) | ||||
| Accumulated deficit | (139,753,861 | ) | (140,059,744 | ) | ||||
| Total shareholders’ equity | 25,533,232 | 25,222,027 | ||||||
| Total liabilities and shareholders’ equity | $ | 48,108,248 | $ | 35,148,898 | ||||
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 June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue: | ||||||||
| Manufacturing fees | $ | 6,327,141 | $ | 5,750,036 | ||||
| Licensing fees | 1,345,767 | 1,306,753 | ||||||
| Total revenue | 7,672,908 | 7,056,789 | ||||||
| Cost of manufacturing | 3,675,061 | 3,503,262 | ||||||
| Gross profit | 3,997,847 | 3,553,527 | ||||||
| Operating expenses: | ||||||||
| Research and development | 955,443 | 1,202,192 | ||||||
| General and administrative | 1,718,104 | 1,070,664 | ||||||
| Non-cash compensation through issuance of stock options | 5,322 | 2,811 | ||||||
| Depreciation and amortization | 296,294 | 312,702 | ||||||
| Total operating expenses | 2,975,163 | 2,588,369 | ||||||
| Income from operations | 1,022,684 | 965,158 | ||||||
| Other income (expense): | ||||||||
| Change in fair value of derivative instruments | (500,143 | ) | 614,461 | |||||
| Interest expense and amortization of debt issuance costs | (216,787 | ) | (45,893 | ) | ||||
| Interest income | 129 | 42 | ||||||
| Other (expense) income, net | (716,801 | ) | 568,610 | |||||
| Income from operations before income taxes | 305,883 | 1,533,768 | ||||||
| Net benefit for sale of state net operating losses and credits | 855,350 | |||||||
| Net income attributable to common shareholders | $ | 305,883 | $ | 2,389,118 | ||||
| Basic net income per share attributable to common shareholders | $ | 0.00 | $ | 0.00 | ||||
| Diluted net income per share attributable to common shareholders | $ | 0.00 | $ | 0.00 | ||||
| Basic weighted average Common Stock outstanding | 1,011,381,988 | 1,009,199,886 | ||||||
| Diluted weighted average Common Stock outstanding | 1,011,381,988 | 1,009,199,886 | ||||||
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 March 31, 2022 | $ | 1,011,381,988 | $ | 1,011,385 | $ | 164,577,227 | 100,000 | $ | (306,841 | ) | $ | (140,059,744 | ) | $ | 25,222,027 | |||||||||||||||||||||
| Net income | — | — | — | 305,883 | 305,883 | |||||||||||||||||||||||||||||||
| Non-cash compensation through the issuance of employee stock options | — | — | 5,322 | — | 5,322 | |||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | 1,011,381,988 | $ | 1,011,385 | $ | 164,582,549 | 100,000 | $ | (306,841 | ) | $ | (139,753,861 | ) | $ | 25,533,232 | |||||||||||||||||||||
| 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 March 31, 2021 | 1,009,276,752 | $ | 1,009,279 | $ | 164,407,480 | 100,000 | $ | (306,841 | ) | $ | (148,957,989 | ) | $ | 16,151,929 | ||||||||||||||||||||||
| Net income | — | — | — | 2,389,118 | 2,389,118 | |||||||||||||||||||||||||||||||
| Non-cash compensation through the issuance of employee stock options | — | — | 2,811 | — | 2,811 | |||||||||||||||||||||||||||||||
| Shares issued in payment of salaries | — | $ | 2,105,236 | $ | 2,106 | $ | 155,394 | — | $ | $ | 157,500 | |||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | 1,011,381,988 | $ | 1,011,385 | $ | 164,565,685 | 100,000 | $ | (306,841 | ) | $ | (146,568,871 | ) | $ | 18,701,358 | |||||||||||||||||||||
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 CASH FLOWS
(UNAUDITED)
| For the Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 305,883 | $ | 2,389,118 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 296,294 | 312,702 | ||||||
| Amortization of operating leases - right-of-use assets | 51,013 | 57,530 | ||||||
| Change in fair value of derivative financial instruments - warrants | 500,143 | (614,461 | ) | |||||
| Non-cash compensation accrued | 143,870 | 218,808 | ||||||
| Non-cash compensation through the issuance of employee stock options | 5,322 | 2,811 | ||||||
| Non-cash rent expense and lease accretion | 602 | 567 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | (907,196 | ) | 118,641 | |||||
| Inventory | (875,993 | ) | (1,690,615 | ) | ||||
| Prepaid expenses and other current assets | (180,974 | ) | 251,896 | |||||
| Accounts payable, accrued expenses and other current liabilities | 156,098 | 731,566 | ||||||
| Deferred revenue | (3,337 | ) | (3,333 | ) | ||||
| Lease obligations - operating leases | (49,241 | ) | (59,771 | ) | ||||
| Net cash (used in) provided by operating activities | (557,516 | ) | 1,715,459 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (94,597 | ) | (4,950 | ) | ||||
| Net cash used in investing activities | (94,597 | ) | (4,950 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from loans payable | 12,000,000 | |||||||
| Other loan payments | (103,536 | ) | (152,549 | ) | ||||
| Net cash provided by (used in) financing activities | 11,896,464 | (152,549 | ) | |||||
| Net change in cash and restricted cash | 11,244,351 | 1,557,960 | ||||||
| Cash and restricted cash, beginning of period | 8,940,396 | 3,597,781 | ||||||
| Cash and restricted cash, end of period | $ | 20,184,747 | $ | 5,155,741 | ||||
| Supplemental disclosure of cash and non-cash transactions: | ||||||||
| Cash paid for interest | $ | 216,787 | $ | 14,043 | ||||
| Financing of equipment purchases and insurance renewal | $ | $ | 244,124 | |||||
| Stock issued in payment of Directors fees, salaries and consulting expenses | $ | $ | 157,500 | |||||
| Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets | $ | $ | 1,042,799 | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-4 |
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 and manufacture 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.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). 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. The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair presentation of such statements. The results of operations for the three months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the entire year.
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 Applications (“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.
Revenue Recognition
The Company generates revenue primarily from manufacturing and licensing fees. 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. 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.
| F-5 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. 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-6 |
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 June 30, 2022.
In accordance with ASC 606-10-55-65, royalties are recognized when the subsequent sale of the customer’s products occurs.
The Company entered into a sales and distribution licensing agreement with Epic Pharma LLC, (“Epic”) dated June 4, 2015 (the “2015 Epic License Agreement”), which has been determined to satisfy the criteria for consideration as a collaborative agreement, and is accounted for accordingly. The 2015 Epic License Agreement expired on June 4, 2020 without renewal.
The Company entered into a Master Development and License Agreement with SunGen Pharma LLC dated August 24, 2016 (the “SunGen Agreement”), which has been determined to satisfy the criteria for consideration as a collaborative agreement, and is accounted for accordingly. On April 3, 2020, Elite and SunGen mutually agreed to discontinue any further joint product development activities.
Disaggregation of revenue
In the following table, revenue is disaggregated by type of revenue generated by the Company. The table also includes a reconciliation of the disaggregated revenue with the reportable segments:
| For the Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| NDA: | ||||||||
| Licensing fees | $ | $ | ||||||
| Total NDA revenue | ||||||||
| ANDA: | ||||||||
| Manufacturing fees | $ | 6,327,141 | $ | 5,750,036 | ||||
| Licensing fees | 1,345,767 | 1,306,753 | ||||||
| Total ANDA revenue | 7,672,908 | 7,056,789 | ||||||
| Total revenue | $ | 7,672,908 | $ | 7,056,789 | ||||
Cash
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market instruments. The Company places its cash and cash equivalents with high-quality, U.S. financial institutions and, to date has not experienced losses on any of its balances.
| F-7 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Restricted Cash
As of June 30, 2022, and March 31, 2022, the Company had $405,163 and $405,039, of restricted cash, respectively, related to debt service reserve in regard to the New Jersey Economic Development Authority (“NJEDA”) bonds (see Note 5).
Accounts Receivable
Accounts receivable are comprised of balances due from customers, net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated, and specific customer issues are reviewed on a periodic basis to arrive at appropriate allowances.
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 to . 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.
As of June 30, 2022, the Company did not identify any indicators of impairment.
Please also see Note 4 for further details on intangible assets.
Research and Development
Research and development expenditures are charged to expense as incurred.
| F-8 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 June 30, 2022, a summary of the tax years that remain subject to examination in our major tax jurisdictions are: United States – Federal, 2016 and forward, and State, 2013 and forward. The Company did not record unrecognized tax positions for the three months ended June 30, 2022 and June 30, 2021.
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.
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.
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 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 conversion of securities that would have an antidilutive effect.
| F-9 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| For the Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Numerator | ||||||||
| Net income - basic | $ | 305,883 | $ | 2,389,118 | ||||
| Effect of dilutive instrument on net income | (614,461 | ) | ||||||
| Net income - diluted | $ | 305,883 | $ | 1,774,657 | ||||
| Denominator | ||||||||
| Weighted average shares of Common Stock outstanding - basic | 1,011,381,988 | 1,009,199,886 | ||||||
| Dilutive effect of stock options and convertible securities | ||||||||
| Weighted average shares of Common Stock outstanding - diluted | 1,011,381,988 | 1,009,199,886 | ||||||
| Net income per share | ||||||||
| Basic | $ | 0.00 | $ | 0.00 | ||||
| Diluted | $ | 0.00 | $ | 0.00 | ||||
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-10 |
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 Using | ||||||||||||||||
| Amount at Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Balance as of March 31, 2022 | $ | 936,837 | $ | 936,837 | ||||||||||||
| Change in fair value of derivative instruments | 500,143 | 500,143 | ||||||||||||||
| Balance as of June 30, 2022 | $ | 1,436,980 | $ | $ | $ | 1,436,980 | ||||||||||
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.
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
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update requires immediate recognition of management’s estimates of current expected credit losses (“CECL”). Under the prior model, losses were recognized only as they were incurred. The new model is applicable to all financial instruments that are not accounted for at fair value through net income. The standard is effective for fiscal years beginning after December 15, 2022 for public entities qualifying as smaller reporting companies. Early adoption is permitted. The Company is currently assessing the impact of this update on the consolidated financial statements and does not expect a material impact on the consolidated financial statements.
Management has evaluated other 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:
| June 30, 2022 | March 31, 2022 | |||||||
| Finished goods | $ | 397,061 | $ | 159,808 | ||||
| Work-in-progress | 23,737 | 1,203,204 | ||||||
| Raw materials | 7,196,365 | 5,378,158 | ||||||
| $ | 7,617,163 | $ | 6,741,170 | |||||
| F-11 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| June 30, 2022 | March 31, 2022 | |||||||
| Land, building and improvements | $ | 5,456,524 | $ | 5,456,524 | ||||
| Laboratory, manufacturing, warehouse and transportation equipment | 13,112,328 | 13,017,731 | ||||||
| Office equipment and software | 373,601 | 373,601 | ||||||
| Furniture and fixtures | 453,701 | 453,701 | ||||||
| 19,396,154 | 19,301,557 | |||||||
| Less: Accumulated depreciation | (13,641,313 | ) | (13,348,565 | ) | ||||
| $ | 5,754,841 | $ | 5,952,992 | |||||
Depreciation expense was $292,748 and $309,157 for the three months ended June 30, 2022 and June 30, 2021, respectively.
NOTE 4. INTANGIBLE ASSETS
The following table summarizes the Company’s intangible assets:
| June 30, 2022 | ||||||||||||||||||||||||
| Estimated | Gross | |||||||||||||||||||||||
| Useful | Carrying | Accumulated | Net Book | |||||||||||||||||||||
| Life | Amount | Additions | Reductions | Amortization | Value | |||||||||||||||||||
| Patent application costs | * | $ | 465,684 | $ | $ | $ | — | $ | 465,684 | |||||||||||||||
| ANDA acquisition costs | Indefinite | 6,168,351 | — | 6,168,351 | ||||||||||||||||||||
| $ | 6,634,035 | $ | $ | $ | — | $ | 6,634,035 | |||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||
| Estimated | Gross | |||||||||||||||||||||||
| Useful | Carrying | Accumulated | Net Book | |||||||||||||||||||||
| Life | Amount | Additions | Reductions | Amortization | Value | |||||||||||||||||||
| Patent application costs | * | $ | 465,684 | $ | $ | $ | — | $ | 465,684 | |||||||||||||||
| ANDA acquisition costs | Indefinite | 6,168,351 | — | 6,168,351 | ||||||||||||||||||||
| $ | 6,634,035 | $ | $ | $ | — | $ | 6,634,035 | |||||||||||||||||
| * | Patent application costs were incurred in relation to the Company’s abuse deterrent opioid technology. Amortization of the patent costs will begin upon the issuance of marketing authorization by the FDA. Amortization will then be calculated on a straight-line basis through the expiry of the related patent(s). |
| F-12 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. ACCRUED EXPENSES
As of June 30, 2022 and March 31, 2022, the Company’s accrued expenses consisted of the following:
| June 30, 2022 | March 31, 2022 | |||||||
| Salaries and fees payable in common stock | 3,750,000 | 3,625,000 | ||||||
| Income tax | 414,985 | 414,989 | ||||||
| Consultant contract fees | 153,333 | 153,333 | ||||||
| Audit fees | 140,000 | 140,000 | ||||||
| Director dues | 112,500 | 90,000 | ||||||
| EWB loan interest | 61,300 | |||||||
| Employee bonuses | 56,250 | 143,000 | ||||||
| Other accrued expenses | 121,467 | 126,820 | ||||||
| Total accrued expenses | $ | 4,809,835 | $ | 4,693,142 | ||||
NOTE 6. NJEDA BONDS
In August, 2005, the Company issued NJEDA tax exempt Bonds with Series A Notes outstanding. The Company is required to maintain a debt service reserve. The debt service reserve is classified as restricted cash on the accompanying unaudited condensed 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 6.5%. The NJEDA Bonds are collateralized by a first lien on the Company’s facility and equipment acquired with the proceeds of the original and refinanced bonds.
The following tables summarize the Company’s bonds payable liability:
| June 30, 2022 | March 31, 2022 | |||||||
| Gross bonds payable | ||||||||
| NJEDA Bonds - Series A Notes | $ | 1,360,000 | $ | 1,360,000 | ||||
| Less: Current portion of bonds payable (prior to deduction of bond offering costs) | (115,000 | ) | (115,000 | ) | ||||
| Long-term portion of bonds payable (prior to deduction of bond offering costs) | $ | 1,245,000 | $ | 1,245,000 | ||||
| Bond offering costs | $ | 354,454 | $ | 354,454 | ||||
| Less: Accumulated amortization | (238,670 | ) | (235,124 | ) | ||||
| Bond offering costs, net | $ | 115,784 | $ | 119,330 | ||||
| Current portion of bonds payable - net of bond offering costs | ||||||||
| Current portions of bonds payable | $ | 115,000 | $ | 115,000 | ||||
| Less: Bonds offering costs to be amortized in the next 12 months | (14,178 | ) | (14,178 | ) | ||||
| Current portion of bonds payable, net of bond offering costs | $ | 100,822 | $ | 100,822 | ||||
| Long term portion of bonds payable - net of bond offering costs | ||||||||
| Long term portion of bonds payable | 1,245,000 | $ | 1,245,000 | |||||
| Less: Bond offering costs to be amortized subsequent to the next 12 months | (101,606 | ) | (105,152 | ) | ||||
| Long term portion of bonds payable, net of bond offering costs | $ | 1,143,394 | $ | 1,139,848 | ||||
Amortization expense was $3,546 and $3,545 for the three months ended June 30, 2022 and June 30, 2021, respectively. As of June 30, 2022 and March 31, 2022, interest payable was $29,467 and $7,367, respectively.
| F-13 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7. 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 $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. The EWB Term Loan bears interest at a rate of 6.48% (1.73% plus the prime rate (“Prime”)) and is repayable over five years, maturing on May 1, 2027. The EWB Revolver bears interest at a rate of [5.65% (0.87% plus Prime)] and matures on May 1, 2027. The total transaction costs associated with the EWB Loans incurred as of June 30, 2022, were $40,120, which are being amortized on a monthly basis over five years, beginning in April 2022. The EWB Loans are secured by a security interest in the personal property of the Company and Elite Labs. The EWB Loan Agreement contains customary representations, warranties and covenants. These covenants include, but are not limited to, maintaining maximum leverage ratios of 3.50 to 1.00, minimum liquidity of $5,000,000, minimum cash of $1,000,000, a fixed charge coverage ratio of 1.25 to 1.00 and restrictions on mergers or sales of assets and debt borrowings. As of June 30, 2022, the Company is in compliance with each financial covenant and the Company has not used any of the Revolving line of credit.
Loans payable consisted of the following:
| June 30, 2022 | March 31, 2022 | |||||||
| Equipment and insurance financing loans payable, between 3.30% and 12.02% interest and maturing between October 2022 and April 2027 | $ | 12,397,347 | $ | 502,052 | ||||
| Less: Current portion of loans payable | (334,134 | ) | (253,006 | ) | ||||
| Long-term portion of loans payable | $ | 12,063,213 | $ | 249,046 | ||||
The interest expense associated with the loans payable was $177,579 and $6,109 for the three months ended June 30, 2022 and June 30, 2021, respectively.
NOTE 8. DEFERRED REVENUE
Deferred revenues in the aggregate amount of $42,222 as of June 30, 2022, were comprised of a current component of $13,333 and a long-term component of $28,889. Deferred revenues in the aggregate amount of $45,559 as of March 31, 2022, were comprised of a current component of $13,333 and a long-term component of $32,226. These line items represent the unamortized amounts of a $200,000 advance payment received for a TAGI Pharma (“TAGI”) licensing agreement with a fifteen-year term beginning in and ending in . These advance payments were recorded as deferred revenue when received and are earned, on a straight-line basis over the life of the licenses. The current component is equal to the amount of revenue to be earned during the 12-month period immediately subsequent to the balance sheet date and the long-term component is equal to the amount of revenue to be earned thereafter.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Operating Leases – 135 Ludlow Ave.
The Company entered into an operating lease for a portion of a one-story warehouse, located at 135 Ludlow Avenue, Northvale, New Jersey (the “135 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 135 Ludlow Ave. modified lease property required significant leasehold improvements and qualifications, as a prerequisite, for its intended future use. Manufacturing, packaging, warehousing and regulatory activities are currently conducted at this location. Additional renovations and construction to further expand the Company’s manufacturing resources are in progress.
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 1,275 square feet of office space, with Elite taking occupancy on November 1, 2020. The Pompano Office has a term of three years, ending on October 31, 2023.
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.
| F-14 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Rent expense is recorded on the straight-line basis. Rent expense under the leases for the three months ended June 30, 2022 and June 30, 2021 was $64,578 and $62,877, respectively. Rent expense is recorded in general and administrative expense in the unaudited condensed consolidated statements of operations.
The table below shows the future minimum rental payments, exclusive of taxes, insurance and other costs, under the 135 Ludlow Ave. modified lease and the Pompano Office Lease:
| Years ending March 31, | Amount | |||
| 2023 (excluding the three months ended June 30, 2022) | 195,216 | |||
| 2024 | 254,050 | |||
| 2025 | 243,612 | |||
| 2026 | 248,484 | |||
| Thereafter | 189,144 | |||
| Total future minimum lease payments | 1,130,506 | |||
| Less: interest | (140,901 | ) | ||
| Present value of lease payments | $ | 989,605 | ||
The Company has an obligation for the restoration of its leased facility and the removal or dismantlement of certain property and equipment as a result of its business operation in accordance with ASC 410, Asset Retirement and Environmental Obligations – Asset Retirement Obligations . The Company records the fair value of the asset retirement obligation in the period in which it is incurred. The Company increases, annually, the liability related to this obligation. The liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the Company records either a gain or loss. As of June 30, 2022, and March 31, 2022, the Company had a liability of $40,551 and $38,780, respectively, recorded as other long-term liabilities.
NOTE 10. 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.
| F-15 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A summary of warrant activity is as follows:
| June 30, 2022 | March 31, 2022 | |||||||||||||||
| Warrant Shares | Weighted Average Exercise Price | Warrant Shares | Weighted Average Exercise Price | |||||||||||||
| Balance at beginning of period | 79,008,661 | $ | 0.1521 | 79,008,661 | $ | 0.1521 | ||||||||||
| Warrants granted pursuant to the issuance of Series J convertible preferred shares | ||||||||||||||||
| Warrants exercised, forfeited and/or expired, net | ||||||||||||||||
| Balance at end of period | 79,008,661 | $ | 0.1521 | 79,008,661 | $ | 0.1521 | ||||||||||
On April 28, 2017, the Company entered into an Exchange Agreement with Nasrat Hakim (“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 79,008,661 shares of its Common Stock (the “Series J Warrants” and, along with the Series J Preferred issued to Hakim, the “Securities”) in exchange for shares of Common Stock owned by Hakim. The fair value of the Series J Warrants was determined to be $6,474,674 upon issuance at April 28, 2017.
The Series J Warrants are exercisable for a period of 10 years from the date of issuance, commencing April 28, 2020. The initial exercise price is $0.1521 per share and the Series J Warrants can be exercised for cash or on a cashless basis. 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. Such exercise price adjustment feature prohibits the Company from being able to conclude the warrants are indexed to its own stock and thus such warrants are classified as liabilities and measured initially and subsequently at fair value. The Series J Warrants also provide for other standard adjustments upon the occurrence 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:
| June 30, 2022 | March 31, 2022 | |||||||
| Fair value of the Company’s Common Stock | $ | 0.0500 | $ | 0.0350 | ||||
| Volatility | 72.42 | % | 76.55 | % | ||||
| Initial exercise price | $ | 0.1521 | $ | 0.1521 | ||||
| Warrant term (in years) | 4.8 | 5.1 | ||||||
| Risk free rate | 3.04 | % | 2.40 | % | ||||
The changes in warrants (Level 3 financial instruments) measured at fair value on a recurring basis for the three months ended June 30, 2022 were as follows:
| Balance at March 31, 2022 | $ | 936,837 | ||
| Change in fair value of derivative financial instruments - warrants | 500,143 | |||
| Balance at June 30, 2022 | $ | 1,436,980 |
| F-16 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11. 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 (the “2020 LPC 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, $ par value per share, from time to time over the term of the 2020 LPC Purchase Agreement, at the Company’s direction.
The Company did not issue any shares of its Common Stock pursuant to the 2020 LPC Purchase Agreement during the three months ended June 30, 2022. In addition, there were no shares issued to Lincoln Park as additional commitment shares, pursuant to the 2020 LPC Agreement.
As of June 30, 2022, the Company has issued an aggregate of shares of Common Stock for net proceeds of $469,105 to Lincoln Park as initial commitment shares.
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.
As of June 30, 2022, the Company accrued director’s fees totaling $112,500, which will be paid via cash payments totaling $37,500 and the issuance of shares of Common Stock. The Company anticipates that these shares of Common Stock will be issued prior to the end of the current fiscal year.
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.
During the three months ended June 30, 2022, the Company accrued salaries totaling $193,750 owed to the Company’s President and Chief Executive Officer and certain other employees which will be paid via the issuance of shares of Common Stock.
As of June 30, 2022, the Company owed its President and Chief Executive Officer and certain other employees’ salaries totaling $3,750,000 which will be paid via the issuance of shares of Common Stock.
| F-17 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. A summary of the activity of Company’s 2014 Stock Option Plan for the three months ended June 30, 2022 is as follows:
| Shares
Underlying Options | Weighted
Average Exercise Price | Weighted
Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at March 31, 2022 | 5,650,000 | $ | 0.14 | $ | — | |||||||||||
| Granted | 1,100,000 | $ | 0.04 | $ | 13,970 | |||||||||||
| Outstanding at June 30, 2022 | 6,750,000 | $ | 0.14 | $ | — | |||||||||||
| Exercisable at June 30, 2022 | 4,530,001 | $ | 0.16 | $ | — | |||||||||||
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 June 30, 2022 and March 31, 2022 of $0.09 and $0.10, respectively.
As of June 30, 2022, there was $ in unrecognized stock based compensation expense that will be recognized over years.
NOTE 13. CONCENTRATIONS AND CREDIT RISK
Revenues
One customer accounted for approximately 85% of the Company’s revenues for the three months ended June 30, 2022.
One customer accounted for approximately 83% of the Company’s revenues for the three months ended June 30, 2021.
Accounts Receivable
Two customers accounted for approximately 90% of the Company’s accounts receivable as of June 30, 2022. These two customers accounted for approximately 80% and 10% of accounts receivable each, respectively.
Two customers accounted for approximately 91% the Company’s accounts receivable as of March 31, 2022. These two customers accounted for approximately 78% and 13% of accounts receivable each, respectively.
Purchasing
Two suppliers accounted for approximately 66% of the Company’s purchases of raw materials for the three months ended June 30, 2022. These two suppliers accounted for approximately 56% and 10% of purchases each, respectively.
Two suppliers accounted for approximately 52% of the Company’s purchases of raw materials for the three months ended June 30, 2021. These two suppliers accounted for approximately 38% and 14% of purchases each, respectively.
NOTE 14. 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.
| F-18 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
The following represents selected information for the Company’s reportable segments:
| For the Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating Income by Segment | ||||||||
| ANDA | $ | 2,252,145 | $ | 2,351,334 | ||||
| NDA | $ | |||||||
| $ | 2,252,145 | $ | 2,351,334 | |||||
The table below reconciles the Company’s operating income by segment to income from operations before provision for income taxes as reported in the Company’s unaudited condensed consolidated statements of operations.
| For the Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating income by segment | $ | 2,252,145 | $ | 2,351,334 | ||||
| Corporate unallocated costs | (716,872 | ) | (851,856 | ) | ||||
| Interest income | 129 | 42 | ||||||
| Interest expense and amortization of debt issuance costs | (216,787 | ) | (45,893 | ) | ||||
| Depreciation and amortization expense | (296,294 | ) | (312,702 | ) | ||||
| Significant non-cash items | (216,295 | ) | (221,618 | ) | ||||
| Change in fair value of derivative instruments | (500,143 | ) | 614,461 | |||||
| Income from operations before income taxes | $ | 305,883 | $ | 1,533,768 | ||||
NOTE 15. RELATED PARTY AGREEMENTS WITH MIKAH PHARMA, LLC
On December 3, 2018, the Company executed a development agreement with Mikah Pharma, LLC (“Mikah”), pursuant to which Mikah and the Company will collaborate to develop and commercialize generic products including formulation development, analytical method development, bioequivalence studies and manufacture of development batches of generic products. Mikah was founded in 2009 by Hakim, a related party and the Company’s President, Chief Executive Officer and Chairman of the Board. As of March 31, 2021, the Company has incurred costs which are $238,451 in excess of advanced payments received to date from Mikah. This balance due from Mikah was offset, in full, against accrued interest due and owing to Mikah pursuant to the Secured Promissory Note, dated May 15, 2017, issued by the Company to Mikah.
In May 2020, SunGen Pharma LLC (“SunGen”), pursuant to an asset purchase agreement, assigned its rights and obligations under the SunGen Agreement for Amphetamine IR and Amphetamine ER to Mikah Pharmaceuticals. 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 SunGen. Mikah Pharmaceuticals 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 Pharma LLC, pursuant to which Mikah Pharma LLC will engage in the research, development, sales and licensing of generic pharmaceutical products. In addition, Mikah Pharma LLC 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.
| F-19 |
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 16. INCOME TAXES
The Company’s effective tax rate and income tax expense for the three months ended June 30, 2022 was $0. The Company has evaluated its deferred tax assets, specifically its net operating loss carryovers, for realizability and has provided a valuation allowance on the majority of its deferred tax assets. The valuation allowance is the reason that the effective tax rate and income tax expense are different than the statutory rate of 21%.
NOTE 17. COVID-19 UPDATE
In December 2019, the Novel Corona Virus, COVID-19 was reported to have emerged in Wuhan, China. In March 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak a global pandemic. Governments at the national, state and local level in the United States, and globally, have implemented aggressive actions to reduce the spread of the virus, with such actions including, without limitation, lockdown and shelter in place orders, limitations on non-essential gatherings of people, suspension of all non-essential travel, and ordering certain businesses and governmental agencies to cease non-essential operations at physical locations. Under current and applicable laws and regulations, the Company’s business is deemed essential and it has continued to operate in all aspects of its pharmaceutical manufacturing, distribution, product development, regulatory compliance and other activities. The Company’s management has developed and implemented a range of measures to address the risks, uncertainties, and operational challenges associated with operating in a COVID-19 environment. The Company is closely monitoring the rapidly evolving and changing situation and are implementing plans intended to limit the impact of COVID-19 on our business so that the Company can continue to manufacture those medicines used by end user patients. Actions the Company has taken to date are, without limitation, further described below.
Workforce
The Company has taken and will continue to take, proactive measures to provide for the well-being of its workforce while continuing to safely produce pharmaceutical products. The Company has implemented alternative working practices, which include, without limitation, modified schedules, shift rotation and work at home abilities for appropriate employees to best ensure adequate social distancing. In addition, the Company increased its already thorough cleaning protocols throughout its facilities and has prohibited visits from non-essential visitors. Certain of these measures have resulted in increased costs.
Manufacturing and Supply Chain
During the three months ended June 30, 2022, and as of the date of this Quarterly Report on Form 10-Q, the Company has not experienced material, detrimental issues related to COVID-19 in its manufacturing, supply chain, quality assurance and regulatory compliance activities, and has been able to operate without interruption. The Company has taken, and plans to continue to take, commercially practical measures to keep its facilities open. The Company’s supply chains remain intact and operational, and the Company is in regular communications with its suppliers and third-party partners. A prolonging of the current situation relating to COVID-19 may result in an increased risk of interruption in the Company supply chain in the future, with no assurances given as the materiality of such future interruption on the Company’s business, financial condition, results of operations and cash flows.
NOTE 18. SUBSEQUENT EVENTS
On April 8, 2022, the Company entered into an Agreement for Sale and Purchase of Real Estate to purchase the building located at 135-137 Ludlow Avenue in Northvale, NJ. The Company had leased the entire 35,000 square feet of floor space since 2014. This property is occupied by the Company’s Quality Assurance department, commercial manufacturing, packaging, and warehouse. The closing of the Agreement for Sale and Purchase of Real Estate occurred on July 1, 2022.
On July 1, 2022, the EWB provided a mortgage loan in the amount of $2.55 million for the purchase of the above property. The 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%.
| F-20 |
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 three months ended June 30, 2022 and June 30, 2021 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, 2022. 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 (“cGMP”) and is a United States Drug Enforcement Agency (“DEA”) registered facility for research, development and manufacturing.
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 products in our pipeline including the products with our partners; (iv) commercial exploitation of our products either 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 (the “Drug Price Competition Act”).
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 (“Phentermine 37.5mg”) |
Adipex-P® | Bariatric | April 2011 | |||
Phendimetrazine Tartrate 35mg tablets (“Phendimetrazine 35mg”) |
Bontril® | Bariatric | November 2012 | |||
Phentermine HCl 15mg and 30mg capsules (“Phentermine 15mg” and “Phentermine 30mg”) |
Adipex-P® | Bariatric | April 2013 | |||
Naltrexone HCl 50mg tablets (“Naltrexone 50mg”) |
Revia® | Addiction Treatment | September 2013 | |||
Isradipine 2.5mg and 5mg capsules (“Isradipine 2.5mg” and “Isradipine 5mg”) |
n/a | Cardiovascular | January 2015 | |||
| Oxycodone HCl Immediate Release 5mg, 10mg, 15mg, 20mg and 30mg tablets (“OXY IR 5mg”, “Oxy IR 10mg”, “Oxy IR 15mg”, “OXY IR 20mg” and “Oxy IR 30mg”) | Roxycodone® | Pain | March 2016 | |||
| Trimipramine Maleate Immediate Release 25mg, 50mg and 100mg capsules (“Trimipramine 25mg”, “Trimipramine 50mg”, “Trimipramine 100mg”) | 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 (“Amphetamine IR 5mg”, “Amphetamine IR 7.5mg”, “Amphetamine IR 10mg”, “Amphetamine IR 12.5mg”, “Amphetamine IR 15mg”, “Amphetamine IR 20mg” and “Amphetamine IR 30mg”) | Adderall® | Central Nervous System (“CNS”) Stimulant | April 2019 | |||
| Dantrolene Sodium Capsules 25mg, 50mg and 100mg (“Dantrolene 25mg”, “Dantrolene 50mg”, “Dantrolene 100mg”) | Dantrium® | Muscle Relaxant | June 2019 | |||
| Dextroamphetamine Saccharate, Amphetamine Aspartate, Dextroamphetamine Sulfate, Amphetamine Sulfate Extended Release 5mg, 10mg, 15mg, 20mg, 25mg, and 30mg capsules (“Amphetamine ER 5mg”, “Amphetamine ER 10mg”, “Amphetamine ER 15mg”, “Amphetamine ER 20mg”, “Amphetamine ER 25mg”, and “Amphetamine ER 30mg”) | Adderall XR® | Central Nervous System (“CNS”) Stimulant | March 2020 | |||
| Loxapine Succinate 5mg, 10mg, 25mg and 50gm capsules (“Loxapine 5mg”, “Loxapine 10mg”, “Loxapine 25mg”, and Loxapine 50mg”) | Loxapine® | Antipsychotic | May 2021 |
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). 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. The Company is not pursuing licensing deals for any opioids at this time and, in light of the current market and litigation around opioid products, the Company has no plans to commercialize this product at this time.
The Company received approval on June 27, 2022 from the FDA of an ANDA for a generic version of Sabril® (Vigabatrin USP) 500 mg powder for solution packet. Vigabatrin is an antiepileptic drug indicated for refractory complex partial seizures and used as an adjunctive therapy in patients who have inadequately responded to several alternative treatments. We are evaluating potential commercial opportunities.
The Company received approval on April 4, 2022 from the FDA of an ANDA for a generic version of Doxycycline (doxycycline hyclate) 100mg tablets. Doxycycline hyclate is an antibiotic that is used to treat a wide variety of bacterial infections. This product was co-developed and co-owned by Elite and Praxgen Pharmaceuticals LLC, formerly SunGen Pharma LLC. We are evaluating potential commercial opportunities.
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.
| 2 |
There were no significant changes during the three months ended June 30, 2022 to the items that we disclosed as our significant accounting policies and estimates described in “Note 1, Summary of Significant Accounting Policies” to the Company’s financial statements as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
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 June 30, 2022 compared to June 30, 2021
Revenue, Cost of revenue and Gross profit:
| For the Three Months Ended June 30, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | Percentage | |||||||||||||
| Manufacturing fees | $ | 6,327,141 | $ | 5,750,036 | $ | 577,105 | 10 | % | ||||||||
| Licensing fees | 1,345,767 | 1,306,753 | 39,014 | 3 | % | |||||||||||
| Total revenue | 7,672,908 | 7,056,789 | 616,119 | 9 | % | |||||||||||
| Cost of manufacturing | 3,675,061 | 3,503,262 | 171,799 | 5 | % | |||||||||||
| Gross profit | $ | 3,997,847 | $ | 3,553,527 | $ | 444,320 | 13 | % | ||||||||
| Gross profit - percentage | 52 | % | 50 | % | ||||||||||||
Total revenues for the three-month period ended June 30, 2022 increased by $0.6 million or 9%, to $7.7 million, as compared to $7.1 million, for the corresponding period of the prior year, primarily due to the increased sales of Amphetamine IR Tablets and Amphetamine ER Capsules during the three month period ended June 30, 2022 as compared to the comparable period of the prior fiscal year.
Manufacturing fees increased by $0.6 million, or 10%, primarily due to increased sales of Amphetamine IR Tablets and Amphetamine ER Capsules during the three month period ended June 30, 2022 as compared to the comparable period of the prior fiscal year.
Licensing fees increased by less than $0.1 million, or 3%. This increase is primarily due to licensing fees earned from the sale of Amphetamine ER Capsules and Amphetamine IR Tablets during the three months ended June 30, 2022 as compared to the comparable period of the prior fiscal year.
Costs of revenue consists of manufacturing and assembly costs. Our costs of revenue increased by $0.2 million or 5%, to $3.7 million as compared to $3.5 million for the corresponding period in the prior fiscal year. This increase was due in large part to an increase in manufacturing revenues, and also due to an improved margin on products sold during the three months ended June 30, 2022, as compared to the comparable period of the prior fiscal year.
Our gross profit margin was 52% during the three months ended June 30, 2022 as compared to 50% during the comparable period of the prior fiscal year.
| 3 |
Operating expenses:
| For the Three Months Ended June 30, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | Percentage | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | $ | 955,443 | $ | 1,202,192 | $ | (246,749 | ) | (21 | )% | |||||||
| General and administrative | 1,718,104 | 1,070,664 | 647,440 | 60 | % | |||||||||||
| Non-cash compensation | 5,322 | 2,811 | 2,511 | 89 | % | |||||||||||
| Depreciation and amortization | 296,294 | 312,702 | (16,408 | ) | (5 | )% | ||||||||||
| Total operating expenses | $ | 2,975,163 | $ | 2,588,369 | $ | 386,794 | 15 | % | ||||||||
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 June 30, 2022 increased by $0.4 million, or 15%, to $3.0 million as compared to $2.6 million for the corresponding period in the prior fiscal year.
Research and development costs for the three months ended June 30, 2022 were $1.0 million, a decrease of $0.2 million, or 21%, from approximately $1.2 million of such costs for the comparable period of the prior year. The decrease was a result of the timing and nature of product development activities during the three month period ended June 30, 2022 as compared to the comparable period of the prior fiscal year.
General and administrative expenses for the three months ended June 30, 2022 were $1.7 million, an increase of $0.6 million, or 60% from $1.1 million of such costs for the comparable period of the prior year due to increased spending in professional expense.
Non-cash compensation expense for the three months ended June 30, 2022 and June 30, 2021 was less than $0.1 million.
Depreciation and amortization expenses for the three months ended June 30, 2022 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 for the three months ended June 30, 2022 was $1.0 million, compared to income from operations of $1.0 million for the comparable period of the prior fiscal year.
Other income (expense):
| For the Three Months Ended June 30, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | Percentage | |||||||||||||
| Other income (expense): | ||||||||||||||||
| Change in fair value of derivative instruments | $ | (500,143 | ) | $ | 614,461 | $ | (1,114,604 | ) | (181 | )% | ||||||
| Interest expense and amortization of debt issuance costs | (216,787 | ) | (45,893 | ) | (170,894 | ) | 372 | % | ||||||||
| Interest income | 129 | 42 | 87 | 207 | % | |||||||||||
| Other income (expense), net | $ | (716,801 | ) | $ | 568,610 | $ | (1,285,411 | ) | (226 | )% | ||||||
Other income (expense) for the three months ended June 30, 2022 was $0.7 million, a decrease of $1.3 million from the other income, net of $0.6 million for the comparable period of the prior fiscal year. The decrease in other income (expense) was due to expense relating to changes in the fair value of our outstanding derivative warrants during the three months ended June 30, 2022. Please note that the change in the fair value of derivative instruments 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 decreases in the closing price of the Company’s Common Stock. Please see Note 11 to the Unaudited Condensed Consolidated Financial Statements above. The increase in interest expense was primarily attributable to the increased interest payments related to the loan the Company obtained from East West Bank.
| 4 |
As a result of the foregoing, our net income before the net benefit from sale of net operating loss credits for the three months ended June 30, 2022 was $0.3 million, compared to net income $1.5 million for the comparable period of the prior fiscal year.
Liquidity and Capital Resources
Capital Resources
| June 30, 2022 | March 31, 2022 | Change | ||||||||||
| Current assets | $ | 31,869,779 | $ | 18,861,389 | $ | 13,008,390 | ||||||
| Current liabilities | $ | 7,079,757 | $ | 6,694,241 | $ | 385,516 | ||||||
| Working capital | $ | 24,790,022 | $ | 12,167,148 | $ | 12,622,874 | ||||||
Our working capital (total current assets less total current liabilities) increased by $12.6 million from $12.2 million as of March 31, 2022 to $24.8 million as of June 30, 2022, with such increase being primarily related to the cash proceeds of $12.0 million from the new loan during the three months ended June 30, 2022.
Summary of Cash Flows:
| For the Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash (used in) provided by operating activities | $ | (557,516 | ) | $ | 1,715,459 | |||
| Net cash used in investing activities | $ | (94,597 | ) | $ | (4,950 | ) | ||
| Net cash provided by (used in) financing activities | $ | 11,896,464 | $ | (152,549 | ) | |||
Net cash used in operating activities for the three months ended June 30, 2022 was $(0.6) million, which included net income of $0.3 million and increases in non-cash expenses totaling $1.0 million, offset by net changes in assets and liabilities totaling $1.9 million.
Net cash used in investing activities for the three months ended June 30, 2022 was comprised of purchases of property and equipment of less than $0.1 million.
Net cash provided by financing activities was $11.9 million for the three months ended June 30, 2022 which proceeds from loan issuances totaling $12.0 million, offset by loan payments totaling $0.1 million.
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.
During the three months ended June 30, 2022 and June 30, 2021, respectively, there were no shares sold to Lincoln Park pursuant to the 2020 LPC Purchase Agreement. In addition, there were no shares issued to Lincoln Park as additional commitment shares, pursuant to the 2020 LPC Purchase Agreement.
| 5 |
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 June 30, 2022 at the reasonable assurance level.
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 June 30, 2022 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.
| 6 |
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pending Litigation
We may be subject from time to time to various claims and legal actions arising during the ordinary course of our business. We believe that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on our results of operations, financial condition or cash flows.
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, 2022.
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
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. The EWB Term Loan bears interest at a rate of 6.48% (1.73% plus the prime rate (“Prime”)) and is repayable over five years, maturing on May 1, 2027. The EWB Revolver bears interest at a rate of (5.65% (0.87% plus Prime)) and matures on May 1, 2027. The total transaction costs associated with the EWB Loans incurred as of June 30, 2022, were $40,120, which are being amortized on a monthly basis over five years, beginning in April 2022. The EWB Loans are secured by a security interest in the personal property of the Company and Elite Labs. The EWB Loan Agreement contains customary representations, warranties and covenants. These covenants include, but are not limited to, maintaining maximum leverage ratios of 3.50 to 1.00, minimum liquidity of $5,000,000, minimum cash of $1,000,000, a fixed charge coverage ratio of 1.25 to 1.00 and restrictions on mergers or sales of assets and debt borrowings. As of June 30, 2022, the Company is in compliance with each financial covenant and the Company has not used any of the Revolving line of credit The foregoing description of the EWB Loan Agreement does not purport to be complete and is qualified in its entirety by the terms and conditions of the EWB Loan Agreement, a copy of which is attached hereto as Exhibit 10.3 and is incorporated by reference herein.
On April 8, 2022, the Company entered into an Agreement for Sale and Purchase of Real Estate, by and between Clyde Wesp and Margaret Wesp as Trustees of the Wesp Family Joint Living Trust UTD November 19, 2015 and the Company, to purchase the building located at 135-137 Ludlow Avenue in Northvale, New Jersey for a purchase price of $5,100,000.00 (the “Real Estate Agreement”). The Company had leased the entire 35,000 square feet of floor space since 2014. This property is occupied by the Company’s Quality Assurance department, commercial manufacturing, packaging, and warehouse. The purchase was contingent upon the Company’s ability to obtain a sufficient commercial mortgage loan, and the purchase closed on July 1, 2022.
On July 1, 2022, the EWB provided a mortgage loan in the amount of $2.55 million for the purchase of the above property. The 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 foregoing description of the Real Estate Agreement does not purport to be complete and is qualified in its entirety by the terms and conditions of the Real Estate Agreement, a copy of which is attached hereto as Exhibit 10.2 and is incorporated by reference herein.
| 7 |
ITEM 6. EXHIBITS
| * | Filed herewith. |
| ** | Furnished herewith. |
| 8 |
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. | ||
| August 15, 2022 | By: | /s/ Nasrat Hakim |
Nasrat Hakim Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer) | ||
| August 15, 2022 | By: | /s/ Robert Chen |
Robert Chen Chief Financial Officer (Principal Accounting and Financial Officer) | ||
| 9 |
Exhibit 10.2
Exhibit 10.3
Exhibit 31.1
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
I, Nasrat Hakim, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 of Elite Pharmaceuticals, Inc. (the “Registrant”) | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | ||
| c. | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| d. | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
| 5. | The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and | ||
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
| Date: August 15, 2022 | /s/ Nasrat Hakim |
Nasrat Hakim Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer)
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Exhibit 31.2
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
I, Robert Chen, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 of Elite Pharmaceuticals, Inc. (the “Registrant”) | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have : |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | ||
| c. | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| d. | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
| 5. | The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and | ||
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
| Date: August 15, 2022 | /s/ Robert Chen |
Robert Chen Chief Financial Officer (Principal Accounting and Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Elite Pharmaceuticals, Inc. (the “Registrant”) on Form 10-Q for the quarter ended June 30, 2022 filed with the Securities and Exchange Commission (the “Report”), I, Nasrat Hakim, Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
Information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
| Date: August 15, 2022 | /s/ Nasrat Hakim |
Nasrat Hakim Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer) |
This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
A signed original of this written statement required by Section 906 has been provided to Elite Pharmaceuticals, Inc. and will be retained by Elite Pharmaceuticals Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Elite Pharmaceuticals, Inc. (the “Registrant”) on Form 10-Q for the quarter ended June 30, 2022 filed with the Securities and Exchange Commission (the “Report”), I, Robert Chen, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
Information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
| Date: August 15, 2022 | /s/ Robert Chen |
Robert Chen Chief Financial Officer (Principal Accounting and Financial Officer) |
This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
A signed original of this written statement required by Section 906 has been provided to Elite Pharmaceuticals, Inc. and will be retained by Elite Pharmaceuticals Inc. and furnished to the Securities and Exchange Commission or its staff upon request.