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”) which 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 and licensing proprietary orally administered,
controlled-release drug delivery systems and products with abuse deterrent capabilities and the 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 products are approved. These products include drugs that cover therapeutic areas for pain, allergy, bariatric
and infection. Research and development activities are done so with an objective of developing products 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”) and in conformity with the instructions on Form 10-Q and Rule 8-03 of Regulation
S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited condensed
consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Elite Laboratories, Inc.
All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated
financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management,
necessary for a fair presentation of such statements. The results of operations for the three and six months ended September 30,
2019 are not necessarily indicative of the results that may be expected for the entire year.
Reclassifications
Certain
reclassifications have been made to the prior period financial statements to conform to the current period financial statement
presentation. These reclassifications had no effect on net earnings or cash flows as previously reported.
Going
Concern
At
September 30, 2019, the Company had unrestricted cash balances totaling $2,256,388. The Company has incurred losses and negative
cash flows from operations, including operating losses of $454,532 and $2,652,972 for the three months ended September 30, 2019
and 2018, respectively, and $1,602,237 and $4,511,366 for the six months ended September 30, 2019 and 2018, respectively. In addition,
overall working capital, defined as current assets minus current liabilities decreased by $1,002,863 as of September 30, 2019.
Based
on the foregoing, the Company has determined that there did appear to be evidence of substantial doubt of its ability to continue
as a going concern. To continue as a going concern, the Company will need to do some or all of the following, without limitation:
obtain additional financing, increase sales of existing products, bring additional products in the pipeline to market and/or reduce
expenses. The successful development of the Company’s contemplated plan of operations, and its transition, ultimately, to
the attainment of profitable operations are necessary for the Company to continue operations.
The
accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates
the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements
included herein do not reflect any adjustments relating to the recoverability and reclassification of assets and liabilities that
might be necessary if the Company is unable to continue as a going concern.
Segment
Information
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 from the development of pain management products, manufacturing of a line of generic pharmaceutical
products with approved ANDA, commercialization of products either by license and the collection of royalties, or through the manufacture
of formulations and the development of new products and the expansion of licensing agreements with other pharmaceutical companies,
including co-development projects, joint ventures and other collaborations. The Company also generates revenue through its focus
on the development of various types of drug products, including branded drug products which require NDAs.
Under
ASC 606, Revenue from Contacts with Customers (“ASC 606”), the Company recognizes revenue when the customer
obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in
exchange for those goods or services. The Company recognize 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 and products utilizing abuse deterrent
technologies. The Company also develops and markets (either on its own or by license to other companies) generic and proprietary
controlled-release and abuse deterrent pharmaceutical products.
The
Company recognizes revenue when the customer obtains control of the Company’s product based on the contractual shipping
terms of the contract. Revenue on product are presented gross because the Company is primarily responsible for fulfilling the
promise to provide the product, is responsible to ensure that the product is produced in accordance with the related supply agreement
and bears risk of loss while the inventory is in-transit to the commercial partner. Revenue is measured as the amount of consideration
the Company expects to receive in exchange for transferring products to a customer.
b)
License Fees
The
Company enters into licensing and development agreements, which may include multiple revenue generating activities, including
milestones payments, licensing fees, product sales and services. The Company analyzes each element of its licensing and development
agreements in accordance with ASC 606 to determine appropriate revenue recognition. The terms of the license agreement may include
payment to the Company of licensing fees, non-refundable upfront license fees, milestone payments if specified objectives are
achieved, and/or royalties on product sales.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
If
the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated
relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines
standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling
price is not observable through past transactions, the Company estimates the standalone selling price taking into account available
information such as market conditions and internally approved pricing guidelines related to the performance obligations.
The
Company recognizes revenue from non-refundable upfront payments at a point in time, typically upon fulfilling the delivery of
the associated intellectual property to the customer. For those milestone payments which are contingent on the occurrence of particular
future events (for example, payments due upon a product receiving FDA approval), the Company determined that these need to be
considered for inclusion in the calculation of total consideration from the contract as a component of variable consideration
using the most-likely amount method. As such, the Company assesses each milestone to determine the probability and substance behind
achieving each milestone. Given the inherent uncertainty of the occurrence of future events, the Company will not recognize revenue
from the milestone until there is not a high probability of a reversal of revenue, which typically occurs near or upon achievement
of the event.
Significant
management judgment is required to determine the level of effort required under an arrangement and the period over which the Company
expects to complete its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance
obligations either are completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably
make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up
method.
When
determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly
before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in
ASC 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the
Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s
contracts contained a significant financing component as of September 30, 2019.
In
accordance with ASC 606-10-55-65, royalties are recognized when the subsequent sale of the customer’s products occurs.
Disaggregation
of revenue
In
the following table, revenue is disaggregated by type of revenue generated by the Company and timing of revenue recognition. The
table also includes a reconciliation of the disaggregated revenue with the reportable segments:
|
|
For the Three Months Ended September 30,
|
|
|
For the Six Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
NDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing fees
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Total NDA revenue
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
500,000
|
|
|
|
500,000
|
|
ANDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing fees
|
|
$
|
4,169,346
|
|
|
$
|
806,487
|
|
|
$
|
7,096,704
|
|
|
$
|
2,348,345
|
|
Licensing fees
|
|
|
215,641
|
|
|
|
306,562
|
|
|
|
397,523
|
|
|
|
682,402
|
|
Total ANDA revenue
|
|
|
4,384,987
|
|
|
|
1,113,049
|
|
|
|
7,494,227
|
|
|
|
3,030,747
|
|
Total revenue
|
|
$
|
4,634,987
|
|
|
$
|
1,363,049
|
|
|
$
|
7,994,227
|
|
|
$
|
3,530,747
|
|
Collaborative
Arrangements
Contracts
are considered to be collaborative arrangements when they satisfy the following criteria defined in ASC 808, Collaborative
Arrangements:
|
●
|
The
parties to the contract must actively participate in the joint operating activity; and,
|
|
|
|
|
●
|
The
joint operating activity must expose the parties to the possibility of significant risk and rewards, based on whether or not
the activity is successful.
|
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, in accordance with GAAP.
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, in accordance with GAAP.
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.
Restricted
Cash
As
of September 30, 2019, and March 31, 2019, the Company had $401,473 and $398,125 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 market on specific identification by lot number basis.
Long-Lived
Assets
The
Company periodically evaluates the fair value of long-lived assets, which include property and equipment and intangibles, whenever
events or changes in circumstances indicate that its carrying amounts may not be recoverable.
Property
and equipment are stated at cost. Depreciation is provided on the straight-line method based on the estimated useful lives of
the respective assets which range from three to forty years. Major repairs or improvements are capitalized. Minor replacements
and maintenance and repairs which do not improve or extend asset lives are expensed currently.
Upon
retirement or other disposition of assets, the cost and related accumulated depreciation are removed from the accounts and the
resulting gain or loss, if any, is recognized in income.
Intangible
Assets
The
Company capitalizes certain costs to acquire intangible assets; if such assets are determined to have a finite useful life they
are amortized on a straight-line basis over the estimated useful life. Costs to acquire indefinite lived intangible assets, such
as costs related to ANDAs are capitalized accordingly.
The
Company tests its intangible assets for impairment at least annually (as of March 31st) and whenever events or circumstances change
that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment
has occurred. Such indicators may include, among others and without limitation: a significant decline in the Company’s expected
future cash flows; a sustained, significant decline in the Company’s stock price and market capitalization; a significant
adverse change in legal factors or in the business climate of the Company’s segments; unanticipated competition; and slower
growth rates.
As
of September 30, 2019, the Company did not identify any indicators of impairment.
Please
also see Note 4 for further details on intangible assets.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Research
and Development
Research
and development expenditures are charged to expense as incurred.
Contingencies
Occasionally,
the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records
a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be
reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the
Company’s condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of
the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
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.
Warrants
and Preferred Shares
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 instruments 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 are assessed with determinations made regarding the proper classification in the Company’s financial
statements.
Stock-Based
Compensation
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, 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.
Earnings
(Loss) Per Share Attributable to Common Shareholders’
The
Company follows ASC 260, Earnings Per Share , which requires presentation of basic and diluted earnings (loss) 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 (loss) per share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding during the period. Diluted EPS excluded all potential dilutive shares if
their effect was anti-dilutive.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following is the computation of earnings (loss) per share applicable to common shareholders for the periods indicated:
|
|
For the Three Months Ended
September 30,
|
|
|
For the Six Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders – basic
|
|
$
|
(1,595,741
|
)
|
|
$
|
(2,583,532
|
)
|
|
$
|
(1,316,039
|
)
|
|
$
|
(4,271,298
|
)
|
Effect of dilutive instrument on net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss attributable to common shareholders - diluted
|
|
$
|
(1,595,741
|
)
|
|
$
|
(2,583,532
|
)
|
|
$
|
(1,316,039
|
)
|
|
$
|
(4,271,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding - basic
|
|
|
829,394,203
|
|
|
|
812,256,006
|
|
|
|
828,466,951
|
|
|
|
807,677,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options, warrants and convertible securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding – diluted
|
|
|
829,394,203
|
|
|
|
812,256,006
|
|
|
|
828,466,951
|
|
|
|
807,677,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
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.
|
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:
|
|
Amount at
|
|
|
Fair Value Measurement Using
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments – warrants
|
|
$
|
2,018,830
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,018,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments – warrants
|
|
$
|
2,487,830
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,487,830
|
|
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’ deficit.
Recently
Adopted Accounting Pronouncements
The
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases
(Topic 842 ) in February 2016 and subsequent ASUs in 2018 and 2019 (collectively referred to as “Topic 842”) on
the treatment of leases, which guidance is effective for annual reporting periods beginning after December 15, 2019 and early
adoption is permitted. Under Topic 842, lessees will be required to recognize the following for all leases (with the exception
of short-term leases) at the commencement date: 1) a lease liability, which is a lessee’s obligation to make lease
payments arising from a lease, measured on a discounted basis, and 2) a right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified asset for the lease term. Entities are allowed to apply Topic
842 using a modified retrospective approach either (1) retrospectively to each reporting period presented in the financial statements
with the cumulative effect adjustment recognized at the beginning of the earliest comparative period; or (2) retrospectively at
the beginning of the period of adoption through a cumulative-effective adjustment. The modified retrospective approach includes
a number of optional practical expedients that entities may elect to apply.
On
April 1, 2019, the Company adopted Topic 842 using the modified retrospective basis with a cumulative-effect adjustment at the
beginning of the period of adoption and therefore did not revise prior period information or disclosure. Further, the Company
elected the package of practical expedients upon transition that allows the Company not to reassess the lease classification for
expired and existing leases, whether initial direct costs qualify for capitalization for any expired or existing leases or whether
any expired contracts are or contain leases. The adoption of ASU 2016-02 resulted in the recognition of operating leases and lease
liabilities of approximately $0.6 million on the condensed consolidated balance sheet as of April 1, 2019. The operating leases
and lease liabilities relate to a real estate lease.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
impact of the adoption of Topic 842 on the accompanying condensed consolidated balance sheet as of April 1, 2019 was as follows:
|
|
March 31, 2019
|
|
|
Adoption Adjustment
|
|
|
April 1,
2019
|
|
Operating lease - right of use
|
|
$
|
-
|
|
|
$
|
554,088
|
|
|
$
|
554,088
|
|
Deferred rent liability
|
|
|
13,022
|
|
|
|
(13,022
|
)
|
|
|
-
|
|
Lease obligation - operating lease
|
|
|
-
|
|
|
|
191,817
|
|
|
|
191,817
|
|
Lease obligation - operating lease, net of current portion
|
|
|
-
|
|
|
|
375,293
|
|
|
|
375,293
|
|
See
additional lease disclosures in Note 9.
Recently
Issued Accounting Pronouncements
In
May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326), Targeted Transition Relief. The
ASU allows companies to elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that were previously
recorded at amortized cost and are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under
ASC 825-10. The ASU is effective when the entity adopts ASU 2016-13.
In
November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses.
The ASU changes the effective date of ASU 2016-13, Financial Instruments - Credit Losses, to fiscal years beginning after December
15, 2019, including interim periods within those fiscal years.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on
Financial Instruments (“ASU 2016-13”). The standard changes the methodology for measuring credit losses on financial
instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those
years, beginning after December 15, 2018. The Company is currently evaluating the impact the standard will have on our 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:
|
|
September 30, 2019
|
|
|
March 31, 2019
|
|
Finished goods
|
|
$
|
5,156
|
|
|
$
|
575,699
|
|
Work-in-progress
|
|
|
313,025
|
|
|
|
189,069
|
|
Raw materials
|
|
|
3,414,041
|
|
|
|
3,750,955
|
|
|
|
|
3,732,222
|
|
|
|
4,515,723
|
|
Less: Inventory reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
3,732,222
|
|
|
$
|
4,515,723
|
|
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:
|
|
September 30, 2019
|
|
|
March 31, 2019
|
|
Land, building and improvements
|
|
$
|
5,260,523
|
|
|
$
|
5,260,523
|
|
Laboratory, manufacturing, warehouse and transportation equipment
|
|
|
12,135,950
|
|
|
|
12,078,340
|
|
Office equipment and software
|
|
|
373,601
|
|
|
|
373,601
|
|
Furniture and fixtures
|
|
|
383,103
|
|
|
|
383,103
|
|
|
|
|
18,153,177
|
|
|
|
18,095,567
|
|
Less: Accumulated depreciation
|
|
|
(10,307,266
|
)
|
|
|
(9,651,718
|
)
|
|
|
$
|
7,845,911
|
|
|
$
|
8,443,849
|
|
Depreciation
expense was $328,140 and $313,395 for the three months, and $655,548 and $613,562 for the six months, ended September 30, 2019
and 2018, respectively.
NOTE
4. INTANGIBLE ASSETS
The
following table summarizes the Company’s intangible assets:
|
|
September 30, 2019
|
|
|
|
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, 2019
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Life
|
|
|
Amount
|
|
|
Additions
|
|
|
Reductions
|
|
|
Amortization
|
|
|
Value
|
|
Patent application costs
|
|
|
*
|
|
|
$
|
465,684
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
465,684
|
|
ANDA acquisition costs
|
|
|
Indefinite
|
|
|
|
7,247,317
|
|
|
|
-
|
|
|
|
(1,078,966
|
)
|
|
|
-
|
|
|
|
6,168,351
|
|
|
|
|
|
|
|
$
|
7,713,001
|
|
|
$
|
-
|
|
|
$
|
(1,078,966
|
)
|
|
$
|
-
|
|
|
$
|
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).
NOTE
5. NJEDA BONDS
During
August 2005, the Company refinanced a bond issue occurring in 1999 through the issuance of Series A and B Notes tax-exempt bonds
(the “NJEDA Bonds” and/or “Bonds”). During July 2014, the Company retired all outstanding Series B Notes,
at par, along with all accrued interest due and owed.
In
relation to the Series A Notes, the Company is required to maintain a debt service reserve. The debt serve 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.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following tables summarize the Company’s bonds payable liability:
|
|
September 30, 2019
|
|
|
March 31, 2019
|
|
Gross bonds payable
|
|
|
|
|
|
|
NJEDA Bonds - Series A Notes
|
|
$
|
1,575,000
|
|
|
$
|
1,670,000
|
|
Less: Current portion of bonds payable (prior to deduction of bond offering costs)
|
|
|
(105,000
|
)
|
|
|
(95,000
|
)
|
Long-term portion of bonds payable (prior to deduction of bond offering costs)
|
|
$
|
1,470,000
|
|
|
$
|
1,575,000
|
|
|
|
|
|
|
|
|
|
|
Bond offering costs
|
|
$
|
354,453
|
|
|
$
|
354,453
|
|
Less: Accumulated amortization
|
|
|
(199,676
|
)
|
|
|
(192,591
|
)
|
Bond offering costs, net
|
|
$
|
154,777
|
|
|
$
|
161,862
|
|
|
|
|
|
|
|
|
|
|
Current portion of bonds payable - net of bond offering costs
|
|
|
|
|
|
|
|
|
Current portions of bonds payable
|
|
$
|
105,000
|
|
|
$
|
95,000
|
|
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
|
|
$
|
90,822
|
|
|
$
|
80,822
|
|
|
|
|
|
|
|
|
|
|
Long term portion of bonds payable - net of bond offering costs
|
|
|
|
|
|
|
|
|
Long term portion of bonds payable
|
|
$
|
1,470,000
|
|
|
$
|
1,575,000
|
|
Less: Bond offering costs to be amortized subsequent to the next 12 months
|
|
|
(140,600
|
)
|
|
|
(147,685
|
)
|
Long term portion of bonds payable, net of bond offering costs
|
|
$
|
1,329,400
|
|
|
$
|
1,427,315
|
|
Amortization
expense was $3,540 and $3,544 for the three months, and $7,085 and $7,090 for the six months, ended September 30, 2019 and 2018,
respectively.
NOTE
6. LOANS PAYABLE
Loans
payable consisted of the following:
|
|
September 30, 2019
|
|
|
March 31, 2019
|
|
Equipment and insurance financing loans payable, between 3.5% and 12.73% interest and maturing between March 2019 and July 2024
|
|
$
|
958,639
|
|
|
$
|
1,272,298
|
|
Less: Current portion of loans payable
|
|
|
(361,182
|
)
|
|
|
(573,029
|
)
|
Long-term portion of loans payable
|
|
$
|
597,457
|
|
|
$
|
699,269
|
|
The
interest expense associated with the loans payable was $20,792 and $27,599 for the three months, and $44,879 and $58,720 for the
six months, ended September 30, 2019 and 2018, respectively.
NOTE
7. RELATED PARTY SECURED PROMISSORY NOTE WITH MIKAH PHARMA LLC
For
consideration of the assets acquired on May 15, 2017, the Company issued a Secured Promissory Note (the “Note”) to
Mikah for the principal sum of $1,200,000. The Note matures on December 31, 2020 in which the Company shall pay the outstanding
principal balance of the Note. Interest shall be computed on the unpaid principal amount at the per annum rate of ten percent
(10%); provided, upon the occurrence of an Event of Default as defined within the Note, the principal balance shall bear interest
from the date of such occurrence until the date of actual payment at the per annum rate of fifteen percent (15%). All interest
payable hereunder shall be computed on the basis of actual days elapsed and a year of 360 days. Installment payments of interest
on the outstanding principal shall be paid as follows: quarterly commencing August 1, 2017 and on November 1, February 1, May
1 and August 1 of each year thereafter. No principal or interest payments have been made on the Note since its issuance. All unpaid
principal and accrued but unpaid interest shall be due and payable in full on the Maturity Date. The interest expense associated
with the Note was $30,000 for the three months and $60,000 for the six months ended September 30, 2019 and 2018, respectively.
Accrued interest due and owing on this note was $285,000 and $225,000 as of September 30, 2019 and March 31, 2019, respectively.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8. DEFERRED REVENUE
Deferred
revenues in the aggregate amount of $745,557 as of September 30, 2019, were comprised of a current component of $680,000 and a
long-term component of $65,557. Deferred revenues in the aggregate amount of $1,252,223 as of March 31, 2019, were comprised of
a current component of $1,013,333 and a long-term component of $238,890. These line items represent the unamortized amounts of
a $200,000 advance payment received for a TAGI licensing agreement with a fifteen-year term beginning in September 2010 and ending
in August 2025 and the $5,000,000 advance payment Epic Collaborative Agreement with a five-year term beginning in June 2015 and
ending in May 2020. 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 date and the long-term component is equal to the amount of revenue to be earned thereafter.
NOTE
9. COMMITMENTS AND CONTINGENCIES
Occasionally,
the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records
a provision for a liability when it believes that 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.
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”). The 135 Ludlow Ave. lease is for approximately 15,000 square feet of floor space and
began on July 1, 2010. During July 2014, the Company modified the 135 Ludlow Ave. lease in which the Company was permitted to
occupy the entire 35,000 square feet of floor space in the building (“135 Ludlow Ave. modified lease”).
The
135 Ludlow Ave. modified lease includes an initial term, which expired on December 31, 2016 with two tenant renewal options of
five years each, at the sole discretion of the Company. On June 22, 2016, the Company exercised the first of these renewal options,
with such option including a term that begins on January 1, 2017 and expires on December 31, 2021.
The
135 Ludlow Ave. 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.
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 our leases and lease components as a single lease
component.
The
Company recognizes a right-of use asset, which represents the Company’s right to use the underlying asset for the lease
term, and a lease liability, which represents the present value of the Company’s obligation to make payments arising over
the lease term. The present value of the lease payments is calculated using either the implicit interest rate in the lease or
an incremental borrowing rate.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Lease
assets and liabilities are classified as follows on the condensed consolidated balance sheet at September 30, 2019:
Lease
|
|
Classification
|
|
As of
September 30, 2019
|
|
Assets
|
|
|
|
|
|
Operating
|
|
Operating lease – right to use asset
|
|
$
|
460,114
|
|
Total leased assets
|
|
|
|
$
|
460,114
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating
|
|
Lease obligation – operating lease
|
|
$
|
199,867
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
Operating
|
|
Lease obligation – operating lease, net of current portion
|
|
|
273,313
|
|
Total lease liabilities
|
|
|
|
$
|
473,180
|
|
Rent
expense is recorded on the straight-line basis. Rent expense under the 135 Ludlow Ave. modified lease for the three months ended
September 30, 2019 and 2018 was $54,888 and $54,909, and $109,776 and $109,818 for the six months ended September 30, 2019 and
2018, respectively. Rent expense is recorded in general and administrative expense in the unaudited condensed consolidated statements
of operations. The table below show the future minimum rental payments, exclusive of taxes, insurance and other costs, under the
135 Ludlow Ave. modified lease:
Years ending March 31,
|
|
Amount
|
|
2020 — Remaining
|
|
$
|
110,874
|
|
2021
|
|
|
225,063
|
|
2022
|
|
|
171,315
|
|
Total future minimum lease payments
|
|
|
507,252
|
|
Less: interest
|
|
|
(34,072
|
)
|
Present value of lease payments
|
|
$
|
473,180
|
|
The
weighted-average remaining lease term and the weighted-average discount rate of our lease was as follows:
Lease Term and Discount Rate
|
|
September 30, 2019
|
|
Remaining lease term (years)
|
|
|
|
Operating leases
|
|
|
2.3
|
|
|
|
|
|
|
Discount rate
|
|
|
|
|
Operating leases
|
|
|
6
|
%
|
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 September 30, 2019, and March 31, 2019, the Company had a liability
of $34,397 and $33,383 respectively and recorded as a component of other long-term liabilities.
NOTE
10. MEZZANINE EQUITY
Series
J convertible preferred stock
On
April 28, 2017, the Company created the Series J Convertible Preferred Stock (“Series J Preferred”) in conjunction
with the Certificate of Designations (“Series J COD”). A total of 50 shares of Series J Preferred were authorized,
24.0344 shares are issued and outstanding, with a stated value of $1,000,000 per share and a par value of $0.01 as of September
30, 2019.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
issued shares were pursuant to an Exchange Agreement with Nasrat Hakim, (“Hakim”) a related party and the Company’s
President, CEO and Chairman of the Board of Directors Pursuant to the Exchange Agreement the Company exchanged 158,017,321 shares
of Common Stock for 24.0344 shares of Series J Preferred and warrants to purchase 79,008,661 shares of common stock at $0.1521
per share. The aggregate stated value of the Series J Preferred issued was equal to the aggregate value of the shares of common
stock exchanged, with such value of each share of Common Stock exchanged being equal to the closing price of the Common Stock
on April 27, 2017. In connection with the Exchange Agreement, the Company also issued warrants to purchase 79,008,661 shares of
common stock at $0.1521 per share, and such warrants are classified as liabilities on the accompanying unaudited condensed consolidated
balance sheet as of September 30, 2019 (See Note 11).
Each
Series J Preferred is convertible at the option of the holder into shares of common stock, that is the earlier of (i) the date
that shareholder approval is obtained, and the requisite corporate action has been effected regarding a Fundamental Transaction
(as defined in the Series J COD); or (ii) not less than three years subsequent to the Original Issue Date (the date of the first
issuance of any shares of the Series J Preferred Stock) (the “Conversion Date”). The number of common shares is calculated
by dividing the Stated Value of such share of Series J Preferred by the Conversion Price. The conversion price for the Series
J Preferred shall equal $0.1521, subject to adjustment as discussed below.
Based
on the current conversion price, the Series J Preferred is convertible into 158,017,321 shares of common stock. The conversion
price is subject to the following adjustments: (i) stock dividends and splits, (ii) sale or grant of shares below the conversion
price, (iii) pro rata distributions; or (iv) fundamental changes (merger, consolidation, or sale of all or substantially all assets).
If
upon any Conversion Date there is not a sufficient number of authorized shares of Common Stock (that are not issued, outstanding
or reserved for issuance) available to effect the entire conversion of the then outstanding shares of Series J Preferred Stock
and the then outstanding common stock purchase warrants issued in conjunction therewith (an “Authorized Share Deficiency”),
such conversion shall not exceed the Issuable Maximum (as defined in the Series J COD); however, the Company shall use its best
efforts to obtain shareholder approval within two (2) years of the date of first issuance of Series J Preferred Stock to permit
the balance of the conversion. If shareholder approval is not obtained due to an insufficient number of shareholder votes for
passage, the Company shall continue to solicit for shareholder approval annually thereafter. As of September 30, 2019, the Company
does not have a sufficient number of unreserved authorized shares to effect the entire conversion, notwithstanding that the earliest
possible Conversion Date is April 28, 2020.
Solely
during any period of time during which an Authorized Share Deficiency exists commencing on or after the fourth anniversary of
the Original Issue Date (“Dividend Commencement Date” and collectively the “Dividend Entitlement Period”),
holders of Series J Preferred shall be entitled to receive, and the Company shall pay, dividends at the rate per share (as a percentage
of the Stated Value per share) of 20% per annum, payable quarterly, in arrears, on January 1, April 1, July 1 and October 1, in
cash or duly authorized, validly issued, fully paid and non-assessable shares of Series J Preferred, or a combination thereof
(the amount to be paid in shares of Series J Preferred, the “Dividend Share Amount”). The form of dividend payments
to each holder shall be made, at the option of the Holders, (i) in cash, to the extent that funds are legally available for the
payment of dividends in cash, (ii) in shares of Series J Preferred Stock, or (iii) a combination thereof. The Series J Preferred
shall rank senior to the common stock with respect to payment of dividends and pari passu to the common stock with respect to
liquidation, dissolution or winding up of the Company.
The
holders of the Series J Preferred shall have voting rights on any matter presented to the shareholders of the Company for their
action or consideration at any meeting of shareholders of the Company (or by written consent of shareholders in lieu of meeting).
Each holder shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares
of Series J Preferred held by the holder are convertible as of the record date for determining the shareholders entitled to vote
on such matter regardless of whether an Authorized Share Deficiency Exists.
The
Company has determined that the Series J Preferred host instrument was more akin to equity than debt and that the above identified
conversion feature, subject to adjustments, was clearly and closely related to the host instrument, and accordingly bifurcation
and classification of the conversion feature as a derivative liability was not required. The Company has accounted for the Series
J Preferred as contingently redeemable preferred stock for which redemption is not probable. Accordingly, the Series J Preferred
is presented in mezzanine equity based on their initial measurement amount (fair value), as required by ASC 480-10-S99, Distinguishing
Liabilities from Equity – SEC Materials. No subsequent adjustment of the initial measurement amounts for these contingently
redeemable Series J Preferred is necessary unless the redemption of the Series J Preferred becomes probable. Accordingly, the
amount presented as temporary equity for the contingently redeemable Series J Preferred outstanding is its issuance-date fair
value. The Series J Preferred was initially measured at its fair value, $13,903,960 at April 28, 2017.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
fair value of the Series J Preferred issued by the Company pursuant to the exchange agreement was calculated using a Monte Carlo
Simulation of stock price and expected future behaviors related to shareholder approval provisions. The following are the key
assumptions used in the Monte Carlo Simulation:
|
|
April 28,
2017
|
|
Fair value of the Company's common stock
|
|
$
|
0.1521
|
|
Conversion price
|
|
$
|
0.1521
|
|
Number of Series J Preferred issued
|
|
|
24.0344
|
|
Fully diluted shares outstanding as of measurement date
|
|
|
923,392,780
|
|
Risk-free rate
|
|
|
2.30
|
%
|
Volatility
|
|
|
90
|
%
|
Shareholder approval threshold
|
|
$
|
0.1521
|
|
Probability of approval is ending stock price is greater than threshold - midpoint
|
|
|
82.50
|
%
|
Probability of approval is ending stock price is less than threshold - midpoint
|
|
|
17.50
|
%
|
Trials
|
|
|
200,000
|
|
Authorized,
issued and outstanding shares, along with carrying value and change in value are as follows:
|
|
September 30,
2019
|
|
|
March 31,
2019
|
|
Shares authorized
|
|
|
50.000
|
|
|
|
50.000
|
|
Shares outstanding
|
|
|
24.0344
|
|
|
|
24.0344
|
|
Par value
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Stated value
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
Conversion price
|
|
$
|
0.1521
|
|
|
$
|
0.1521
|
|
Common Stock to be issued upon conversion
|
|
|
158,017,321
|
|
|
|
158,017,321
|
|
Carrying value of Series J convertible preferred stock
|
|
$
|
13,903,960
|
|
|
$
|
13,903,960
|
|
NOTE
11. DERIVATIVE FINANCIAL INSTRUMENTS – WARRANTS
The
Company evaluates and accounts for its freestanding instruments in accordance with ASC 815, Accounting for Derivative Instruments
and Hedging Activities.
The
Company issued warrants, with terms of five to seven years, to various corporations and individuals, in connection with the sale
of securities, loan agreements and consulting agreements.
A
summary of warrant activity is as follows:
|
|
September 30,
2019
|
|
|
March 31,
2019
|
|
|
|
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
|
|
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
fair value of the warrants issued prior to Fiscal 2018, were all calculated using the Black-Scholes model and the following assumptions:
|
|
March 31,
2017
|
|
Fair value of the Company’s common stock
|
|
$0.15
|
|
Volatility (based on the Company’s historical volatility)
|
|
72.5% - 73.1%
|
|
Exercise price
|
|
$0.0625
|
|
Estimated life (in years)
|
|
1.0 - 1.1
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
1.02% - 1.03%
|
|
On
April 28, 2017, the Company entered into an exchange agreement (the “Exchange Agreement” ) with Nasrat Hakim,
the Chairman of the Board, President, and Chief Executive Officer of the Company, pursuant to which the Company issued to Mr.
Hakim 23.0344 shares of its newly designated Series J Convertible Preferred Stock ( “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 Mr. Hakim, the “Securities”) in exchange for 158,017,321 shares of Common
Stock owned by Mr. 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 on the earlier of (i) the date
that Shareholder Approval is obtained, and the requisite corporate action has been effected; or (ii) 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 happening of certain customary events. The Series
J Warrants are not exercisable during any period when an Authorized Share Deficiency exists and will expire on the expiry date,
without regards to the existence of an Authorized Shares Deficiency (see Note 10). As of September 30, 2019, the Company does
not have a sufficient number of unreserved authorized shares to effect the entire conversion of the Series J Preferred, therefore
the Series J Warrants are not currently exercisable. Please also see Note 10.
The
fair value of the warrants issued by the Company pursuant to the issuance of Series J convertible preferred shares (79,008,661
warrant shares) was calculated using a Monte Carlo Simulation because of the probability assumptions associated with the Shareholder
Approval provisions. The following are the key assumptions used in the Monte Carlo Simulation:
|
|
September 30,
2019
|
|
|
March 31, 2019
|
|
Fair value of the Company's common stock
|
|
$
|
0.0857
|
|
|
$
|
0.9900
|
|
Initial exercise price
|
|
$
|
0.1521
|
|
|
$
|
0.1521
|
|
Number of common warrants
|
|
|
79,008,661
|
|
|
|
79,008,661
|
|
Fully diluted shares outstanding as of measurement date
|
|
|
832,942,060
|
|
|
|
824,946,559
|
|
Warrant term (in years)
|
|
|
7.58
|
|
|
|
8.08
|
|
Risk-free rate
|
|
|
1.63
|
%
|
|
|
2.35
|
%
|
Volatility
|
|
|
90.00
|
%
|
|
|
90.00
|
%
|
Shareholder approval threshold
|
|
$
|
0.1580
|
|
|
$
|
0.1580
|
|
Probability of approval is ending stock price is greater than threshold - midpoint
|
|
|
82.50
|
%
|
|
|
82.50
|
%
|
Probability of approval is ending stock price is greater than threshold - midpoint
|
|
|
17.50
|
%
|
|
|
17.50
|
%
|
Trials
|
|
|
100,000
|
|
|
|
100,000
|
|
Fair value of derivative financial instruments - warrants
|
|
$
|
2,018,830
|
|
|
$
|
2,487,830
|
|
The
changes in warrants (Level 3 financial instruments) measured at fair value on a recurring basis for the six months ended September
30, 2019 were as follows:
Outstanding at March 31, 2019
|
|
$
|
2,487,830
|
|
Change in fair value of derivative financial instruments - warrants
|
|
|
(469,000
|
)
|
Balance at September 30, 2019
|
|
$
|
2,018,830
|
|
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
12. SHAREHOLDERS’ EQUITY
Lincoln
Park Capital – April 10, 2014 Purchase Agreement
In
April 2014, the Company entered into a Purchase Agreement (the “Lincoln Park Purchase Agreement” and/or “Purchase
Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with Lincoln
Park Capital Fund, LLC (“Lincoln Park”). Pursuant to the terms of the Purchase Agreement, Lincoln Park agreed
to purchase from the Company up to $40 million of common stock (subject to certain limitations) from time to time over a 36-month
period that ended June 1, 2017. Pursuant to the terms of the Registration Rights Agreement, the Company filed with the SEC registration
statements to register for resale under the Securities Act the shares that have been or may be issued to Lincoln Park under the
Purchase Agreement.
Upon
execution of the Purchase Agreement, the Company issued 1,928,641 shares of common stock to Lincoln Park pursuant to the Purchase
Agreement as consideration for its commitment to purchase additional shares of common stock under that agreement and the Company
was obligated to issue up to an additional 1,928,641 commitment shares to Lincoln Park pro rata as up to $40.0 million of common
stock purchased by Lincoln Park.
The
Purchase Agreement expired on June 1, 2017. During the term of the Purchase Agreement, the Company sold an aggregate of 110.6
million shares to Lincoln Park, for aggregate gross proceeds of approximately $27.0 million. In addition, the Company issued an
aggregate of 3.2 million commitment shares.
Lincoln
Park Capital – May 1, 2017 Purchase Agreement
On
May 1, 2017, the Company entered into a purchase agreement (the “2017 LPC Purchase Agreement”), together with
a registration rights agreement (the “2017 LPC Registration Rights Agreement”), with Lincoln Park.
Under
the terms and subject to the conditions of the 2017 LPC Purchase Agreement, the Company has the right to sell to and Lincoln Park
is obligated to purchase up to $40 million in shares of common stock, subject to certain limitations, from time to time, over
the 36-month period commencing on June 5, 2017. The Company may direct Lincoln Park, at its sole discretion and subject to certain
conditions, to purchase up to 500,000 shares of common stock on any business day, provided that at least one business day has
passed since the most recent purchase, increasing to up to 1,000,000 shares, depending upon the closing sale price of the common
stock (such purchases, “ Regular Purchases ”). However, in no event shall a Regular Purchase be more than $1,000,000.
The purchase price of shares of common stock related to the future funding will be based on the prevailing market prices of such
shares at the time of sales. In addition, the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases
under certain circumstances. In the case of both Regular Purchases and accelerated purchases, the purchase price per share will
be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar
transaction occurring during the business days used to compute the purchase price. Sales of shares of common stock to Lincoln
Park under the 2017 LPC Purchase Agreement are limited to no more than the number of shares that would result in the beneficial
ownership by Lincoln Park and its affiliates, at any single point in time, of more than 4.99% of the then outstanding shares of
common stock.
In
connection with the 2017 LPC Purchase Agreement, the Company issued to Lincoln Park 5,540,551 shares of common stock and is required
to issue up to 5,540,551 additional shares of Common Stock pro rata as the Company requires Lincoln Park to purchase shares under
the 2017 LPC Purchase Agreement over the term of the agreement. Lincoln Park has represented to the Company, among other things,
that it is an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act
of 1933, as amended (the “Securities Act”)). The Company sold the securities in reliance upon an exemption from registration
contained in Section 4(a)(2) under the Securities Act. The securities sold may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements.
The
2017 LPC Purchase Agreement and the 2017 LPC Registration Rights Agreement contain customary representations, warranties, agreements
and conditions to completing future sale transactions, indemnification rights and obligations of the parties. The Company has
the right to terminate the 2017 LPC Purchase Agreement at any time, at no cost or penalty. Actual sales of shares of common stock
to Lincoln Park under the 2017 LPC Purchase Agreement will depend on a variety of factors to be determined by us from time to
time, including, among others, market conditions, the trading price of the Common Stock and determinations by us as to the appropriate
sources of funding for us and our operations. There are no trading volume requirements or, other than the limitation on beneficial
ownership discussed above, restrictions under the 2017 LPC Purchase Agreement. Lincoln Park has no right to require any sales
by the Company but is obligated to make purchases from the Company as directed in accordance with the 2017 LPC Purchase Agreement.
Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of
the Company’s shares.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
net proceeds received by the Company under the 2017 LPC Purchase Agreement will depend on the frequency and prices at which the
Company sells shares of common stock to Lincoln Park. A registration statement on Form S-3 was filed with the SEC on May 10, 2017
and was declared effective on June 5, 2017.
During
the six months ended September 30, 2019, a total of 7,895,233 shares were sold to Lincoln Park pursuant to the 2017 LPC Agreement
for net proceeds totaling $723,887. In addition, 100,268 shares were issued to Lincoln Park as additional commitment shares, pursuant
to the 2017 LPC Agreement. During the six months ended September 30, 2018, a total of 14,142,083 shares were sold to Lincoln Park
pursuant to the 2017 LPC Agreement for net proceeds totaling $1,396,284. In addition, 193,405 shares were issued to Lincoln Park
as additional commitment shares, pursuant to the 2017 LPC Agreement.
NOTE
13. STOCK-BASED COMPENSATION
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 was instituted in October 2009 and further revised in January 2016, includes provisions
that a portion of director’s fees are to be paid via the issuance of shares of the Company’s common stock, in lieu
of cash, with the valuation of such shares being calculated on quarterly basis and equal to the average closing price of the Company’s
common stock.
During
the six months ended September 30, 2019, the Company did not issue any shares of common stock to its Directors in payment of director’s
fees.
During
the six months ended September 30, 2019, the Company accrued director’s fees totaling 45,000, which will be paid via cash
payments totaling $15,000 and the issuance of 413,854 shares of Common Stock.
As
of September 30, 2019, the Company owed its Directors a total of $52,500 in cash payments and 1,207,470 shares of Common Stock
in payment of director fees totaling $157,500 due and owing. 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, Chief Financial 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 six months ended September 30, 2019, the Company did not issue any shares pursuant to employment contracts with the Company’s
President and Chief Executive Officer, Chief Financial Officer or certain other employees. During the six months ended September
30, 2019, the Company did not issue any shares pursuant to the engagement contracts with certain consultants.
As
of September 30, 2019, the Company accrued salaries totaling $402,500 owed to the Company’s President and Chief Executive
Officer, Chief Financial Officer and certain other employees which will be paid via the issuance of 4,967,480 shares of Common
Stock.
As
of September 30, 2019, the Company owed its President and Chief Executive Officer, Chief Financial Officer and certain other employees’
salaries totaling $1,908,750 which will be paid via the issuance of 19,650,002 shares of Common Stock.
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.
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Shares
|
|
|
Weighted Average
|
|
|
Remaining Contractual
|
|
|
Aggregate
|
|
|
|
Underlying Options
|
|
|
Exercise
Price
|
|
|
Term (in years)
|
|
|
Intrinsic Value
|
|
Outstanding at April 1, 2019
|
|
|
6,158,000
|
|
|
$
|
0.15
|
|
|
|
5.0
|
|
|
$
|
87,330
|
|
Forfeited and expired
|
|
|
(283,000
|
)
|
|
$
|
0.15
|
|
|
|
7.8
|
|
|
$
|
-
|
|
Outstanding at September 30, 2019
|
|
|
5,875,000
|
|
|
$
|
0.14
|
|
|
|
4.3
|
|
|
$
|
-
|
|
Exercisable at September 30, 2019
|
|
|
5,541,668
|
|
|
$
|
0.14
|
|
|
|
4.3
|
|
|
$
|
-
|
|
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 common stock as of September 30, 2019 and March 31, 2019 of $0.09 and $0.10, respectively.
NOTE
14. CONCENTRATIONS AND CREDIT RISK
Revenues
Three
customers accounted for approximately 87% of the Company’s revenues for the six months ended September 30, 2019. These three
customers accounted for approximately 44%, 30%, and 13% of revenues each. The same three customers accounted for approximately
55%, 23%, and 11% of revenues each, respectively, for the three months ended September 30, 2019.
Two
customers accounted for substantially all the Company’s revenues for the six months ended September 30, 2018. These two
customers accounted for approximately 56% and 25% of revenues each, respectively. The same two customers accounted for approximately
58% and 32% of revenues each, respectively, for the three months ended September 30, 2018.
Accounts
Receivable
Three
customers accounted for approximately 84% the Company’s accounts receivable as of September 30, 2019. These three customers
accounted for approximately 60%, 14% and 10% of accounts receivable each.
Four
customers accounted for substantially all the Company’s accounts receivable as of March 31, 2019. These four customers accounted
for approximately 38%, 34%, 19%, and 4% of accounts receivable each.
Purchasing
Seven
suppliers accounted for more than 85% of the Company’s purchases of raw materials for the six months ended September 30,
2019. Included in these seven suppliers were three suppliers that accounted for approximately 35%, 18%, and 15% of purchases each.
Seven
suppliers accounted for more than 85% of the Company’s purchases of raw materials for the six months ended September 30,
2018. Included in these seven suppliers are two suppliers that accounted for approximately 43% and 13% of purchases each.
NOTE
15. SEGMENT RESULTS
FASB
ASC 280-10-50 requires use of the “management approach” model for segment reporting. The management approach is based
on the way a company’s management organized segments within the company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner
in which management disaggregates a company.
The
Company has determined that its reportable segments are Abbreviated New Drug Applications 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.
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
September 30,
|
|
|
For the Six Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Operating Loss by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
ANDA
|
|
$
|
759,049
|
|
|
$
|
(410,581
|
)
|
|
$
|
106,654
|
|
|
$
|
(546,502
|
)
|
NDA
|
|
|
64,041
|
|
|
|
(268,665
|
)
|
|
|
271,745
|
|
|
|
(506,027
|
)
|
|
|
$
|
823,090
|
|
|
$
|
(679,246
|
)
|
|
$
|
378,399
|
|
|
$
|
(1,052,529
|
)
|
The
table below reconciles the Company’s operating loss by segment to loss from operations before provision for income taxes
as reported in the Company’s unaudited condensed consolidated statements of operations.
|
|
For the Three Months Ended
September 30,
|
|
|
For the Six Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Operating loss by segment
|
|
$
|
823,090
|
|
|
$
|
(679,246
|
)
|
|
$
|
378,399
|
|
|
$
|
(1,052,529
|
)
|
Corporate unallocated costs
|
|
|
(793,672
|
)
|
|
|
(1,421,985
|
)
|
|
|
(1,000,789
|
)
|
|
|
(2,444,344
|
)
|
Interest income
|
|
|
5,287
|
|
|
|
1,582
|
|
|
|
8,333
|
|
|
|
2,837
|
|
Interest expense and amortization of debt issuance costs
|
|
|
(91,464
|
)
|
|
|
(106,002
|
)
|
|
|
(189,134
|
)
|
|
|
(189,140
|
)
|
Depreciation and amortization expense
|
|
|
(331,680
|
)
|
|
|
(366,522
|
)
|
|
|
(662,633
|
)
|
|
|
(570,226
|
)
|
Significant non-cash items
|
|
|
(154,271
|
)
|
|
|
(185,219
|
)
|
|
|
(319,215
|
)
|
|
|
(444,267
|
)
|
Change in fair value of derivative instruments
|
|
|
(1,053,031
|
)
|
|
|
173,860
|
|
|
|
469,000
|
|
|
|
426,371
|
|
Loss from operations
|
|
$
|
(1,593,741
|
)
|
|
$
|
(2,583,532
|
)
|
|
$
|
(1,316,039
|
)
|
|
$
|
(4,271,298
|
)
|
NOTE
16. COLLABORATIVE AGREEMENT WITH EPIC PHARMA LLC
On
June 4, 2015, the Company entered into the 2015 Epic License Agreement, which provides for the exclusive right to market, sell
and distribute, by Epic Pharma LLC (“Epic”) of SequestOx™, an abuse deterrent opioid which employs the Company’s
proprietary pharmacological abuse-deterrent technology. Epic will be responsible for payment of product development and pharmacovigilance
costs, sales, and marketing of SequestOx™, and Elite will be responsible for the manufacture of the product. Under the 2015
Epic License Agreement, Epic will pay Elite non-refundable payments totaling $15 million, with such amount representing the cost
of an exclusive license to ELI-200, the cost of developing the product and certain filings and a royalty based on an amount equal
to 50% of profits derived from net product sales as defined in the 2015 Epic License Agreement. The initial term of the exclusive
right to product development sales and distribution is five years (“Epic Exclusivity Period”); the license is renewable
upon mutual agreement at the end of the initial term.
In
June 2015, Elite received non-refundable payments totaling $5.0 million from Epic for the exclusive right to product development
sales and distribution of SequestOx™ pursuant to the Epic Collaborative Agreement, under which it agreed to not permit marketing
or selling of SequestOx™ within the United States of America to any other party. Such exclusive rights are considered a
significant deliverable element of the Epic Collaborative Agreement pursuant to ASC 605-25, Revenue Recognition – Multiple
Element Arrangements. These nonrefundable payments represent consideration for certain exclusive rights to ELI-200 and will
be recognized ratably over the Epic Exclusivity Period.
In
addition, in January 2016, a New Drug Application for SequestOx™ was filed, thereby earning the Company a non-refundable
$2.5 million milestone, pursuant to the 2015 Epic License Agreement. The filing of this NDA represents a significant deliverable
element as defined within the Epic Collaborative pursuant to ASC 605-25, Revenue Recognition – Multiple Element Arrangements.
Accordingly, the Company has recognized the $2.5 million milestone, which was paid by Epic and related to this deliverable as
income during the year ended March 31, 2016.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
To
date, the Company received payments totaling $7.5 million pursuant to the 2015 Epic License Agreement, with all amounts being
non-refundable. An additional $7.5 million is due upon approval by the FDA of the NDA filed for SequestOx™, and license
fees based on commercial sales of SequestOx™. Revenues relating to these additional amounts due under the 2015 Epic License
Agreement will be recognized as the defined elements are completed and collectability is reasonably assured.
Please
note that on July 15, 2016, the FDA issued a Complete Response Letter, or CRL, regarding the NDA. The CRL stated that the review
cycle for the SequestOx™ NDA is complete and the application is not ready for approval in its present form.
On
July 7, 2017, the Company reported topline results from a pivotal bioequivalence fed study for or SequestOx™. The mean Tmax
(the amount of time that a drug is present at the maximum concentration in serum) of SequestOx™ was 4.6 hr. with a range
of 0.5 hr. to 12 hr. and the mean Tmax of the comparator, Roxicodone®, was 3.4 hr. with a range of 0.5 hr. to 12 hr. A key
objective for the study was to determine if the reformulated SequestOx™ had a similar Tmax to the comparator when taken
with a high fat meal. Based on these results, the Company paused clinical trials for this formulation of SequestOx™. On
January 30, 2018, the Company reported positive topline results from a pilot study conducted for a modified SequestOx™ wherein,
based on the results of this pilot study, the modified SequestOx™ formulation is expected to achieve bioequivalence with
a Tmax range equivalent to the reference product when conducted in a pivotal trial under fed conditions. The Company has provided
the pilot data to the FDA, requesting clarification as to the requirements for resubmission of the NDA. The FDA has provided guidance
for repeated bio-equivalence studies in order to bridge the new formulation to the original SequestOx™ studies and also
extended our filing fee waiver until July 2020. Due to the prohibitive cost of such repeated bio-equivalence studies, the Company
has paused development of this product.
The
2015 Epic License Agreement expires on June 4, 2020, and Epic has previously advised the Company of their desire to extend this
agreement. While discussions are ongoing, they are directly correlated to the regulatory status of SequestOx™. Furthermore,
there can be no assurances that the parties will reach mutual agreement to extend the term of this agreement and no assurances
that the terms and conditions of the agreement will be similar in all material aspects in the event that the agreement is extended
by mutual consent of the parties. Non-receipt by the Company of the remaining $7.5 million milestone will have a material adverse
effect on the Company’s financial condition.
NOTE
17. COLLABORATIVE AGREEMENT WITH SUNGEN PHARMA LLC
On
August 24, 2016, the Company entered into the SunGen Agreement. The SunGen Agreement provides that Elite and SunGen Pharma LLC
will engage in the research, development, sales, and marketing of four generic pharmaceutical products. Two of the products are
classified as CNS stimulants (the “CNS Products”) and two of the products are classified as beta blockers (the “Beta
Blocker Products”).
Under
the terms of the SunGen Agreement, Elite and SunGen will share in the responsibilities and costs in the development of these products
and will share in the profits from sales of the Products. Upon approval, the know-how and intellectual property rights to the
products will be owned jointly by Elite and SunGen. SunGen shall have the exclusive right to market and sell the Beta Blocker
Products using SunGen’s label and Elite shall have the exclusive right to market and sell the CNS Products using Elite’s
label. Elite will manufacture and package all four products on a cost-plus basis.
On
December 1, 2016 and July 24, 2017, Elite Labs and SunGen executed an amendment to the parties’ 2016 Development and License
Agreement (the “Amended Agreement”), to undertake and engage in the research, development, sales and marketing of
four additional generic pharmaceutical products bringing the total number of products under the amended agreement to eight. The
product classes for the additional four products include antidepressants, antibiotics, and antispasmodics.
Under
the terms of the Amended Agreement, Elite and SunGen will share in the responsibilities and costs in the development of these
products and will share substantially in the profits from sales of the products. Upon approval, the know-how and intellectual
property rights to the products will be owned jointly by Elite and SunGen. Three products will be owned jointly by Elite and SunGen;
three shall be owned by SunGen while Elite shall have the marketing rights once the products are approved by the FDA; and two
shall be owned by Elite while SunGen shall have the marketing rights once the products are approved by the FDA. Elite will manufacture
and package all eight products on a cost-plus basis.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On
December 10, 2018, the Company received approval from the FDA for an ANDA filed for a generic version of Adderall®, an immediate-release
mixed salt of a single entity amphetamine product (Dextroamphetamine Saccharate, Amphetamine Aspartate, Dextroamphetamine Sulfate,
Amphetamine Sulfate), with strengths of 5mg, 7.5mg. 10mg, 12.5mg, 15mg, 20mg, and 30mg tablets. The product is indicated for the
treatment of Attention Deficit Hyperactivity Disorder (ADHD) and Narcolepsy. This approval represents the first FDA approval received
for a product co-developed with SunGen under the SunGen Agreement. The first commercial shipment of this product occurred in April
2019. The product is currently marketed by Lannett Company Inc. (“Lannett”) under license granted pursuant a strategic
marketing alliance dated March 11, 2019 (the “Lannett Alliance”).
On
May 24, 2018, the Company filed an ANDA with the FDA for a generic version of an extended release CNS stimulant. The ANDA represents
the second filing for a product co-developed with SunGen under the SunGen Agreement. This product will also be marketed by Lannett
pursuant to the Lannett Alliance.
On
January 3, 2019, the Company filed an ANDA with the FDA for a generic version of an antibiotic product. The ANDA represents the
third filing for a product co-developed with SunGen under the SunGen Agreement.
There
can be no assurances that any of these products, even those for which ANDAs have been filed, will receive marketing authorization
and achieve commercialization within a reasonable time period, or at all. In addition, even if marketing authorization is received,
including the product for which such marketing authorization has already been received, there can be no assurances that there
will be future revenues of profits, or that any such future revenues or profits would be in amounts that provide adequate return
on the significant investments made to secure these marketing authorizations.
NOTE
18. RELATED PARTY TRANSACTION AGREEMENTS WITH EPIC PHARMA LLC
The
Company has entered into two agreements with Epic which constitute agreements with a related party due to the management of Epic
including a member on our Board of Directors at the time such agreements were executed.
On
June 4, 2015, the Company entered into the 2015 Epic License Agreement (please see Note 16 above). The 2015 Epic License Agreement
includes milestone payments totaling $10 million upon the filing with and approval of an NDA with the FDA. The Company has determined
these milestones to be substantive, with such assessment being made at the inception of the 2015 Epic License Agreement, and based
on the following:
|
●
|
The
Company’s performance is required to achieve each milestone; and
|
|
|
|
|
●
|
The
milestones will relate to past performance, when achieved; and
|
|
|
|
|
●
|
The
milestones are reasonable relative to all of the deliverables and payment terms within the 2015 Epic License Agreement
|
After
marketing authorization is received from the FDA, Elite will receive a license fee which is based on profits achieved from the
commercial sales of ELI-200. On January 14, 2016, the Company filed an NDA with the FDA for SequestOx™, thereby earning
a $2.5 million milestone pursuant to the 2015 Epic License Agreement. The Company has received payment of this amount from Epic.
An additional $7.5 million is due upon approval by the FDA of the NDA filed for SequestOx™. Please note that on July 15,
2016, the FDA issued a Complete Response Letter, or CRL, regarding the NDA. The CRL stated that the review cycle for the SequestOx™
NDA is complete and the application is not ready for approval in its present form. On December 21, 2016, the Company met with
the FDA for an end-of-review meeting to discuss steps that it could take to obtain approval of SequestOx™. Based on this
and the meeting minutes received from the FDA on January 23, 2017, the Company formulated a plan to address the issues cited by
the FDA in the CRL, with such plan including, without limitation, modifying the SequestOx™ formulation, conducting bioequivalence
and bioavailability fed and fasted studies, comparing the modified formulation to the original formulation. On July 7, 2017, the
Company reported topline results from a pivotal bioequivalence fed study for SequestOx™. This study resulted in a mean Tmax
of 4.6 hours, with a range of 0.5 hour to 12 hours and a mean Tmax of the comparator, Roxicodone® of 3.4 hours
with a range of 0.5 hour to 12 hours. A key objective of this study was to determine if the reformulated SequestOx™ had
a similar Tmax to the comparator when taken with a high fat meal. Based on these results, the Company will pause, not proceed,
with the rest of the clinical trials, and seek clarity from the FDA before deciding on the next steps for immediate release SequestOx™.
There can be no assurances of the success of any future clinical trials, or if such trials are successful, there can be no assurances
that an intended future resubmission of the NDA product filing, if made, will be accepted by or receive marketing approval from
the FDA, and accordingly, there can be no assurances that the Company will earn and receive the additional $7.5 million or future
license fees. If the Company does not receive these payments or fees, it will materially and adversely affect our financial condition.
In addition, even if marketing authorization is received, there can be no assurances that there will be future revenues of profits,
or that any such future revenues or profits would be in amounts that provide adequate return on the significant investments made
to secure this marketing authorization.
On
October 2, 2013, Elite executed the Epic Pharma Manufacturing and License Agreement (the “Epic Generic Agreement”).
The Epic Generic Agreement, which expired on October 2, 2018 granted rights to Epic to manufacture twelve generic products whose
ANDA’s are owned by Elite, and to market, in the United States and Puerto Rico, six of these products on an exclusive basis,
and the remaining six products on a non-exclusive basis. These products were to be manufactured at Epic, with Epic being responsible
for the manufacturing site transfer supplements that are a prerequisite to each product being approved for commercial sale. In
addition, Epic was to be responsible for all regulatory and pharmacovigilance matters, as well as all marketing and distribution
activities. Elite has no further obligations or deliverables under the Epic Generic Agreement.
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Pursuant
to the Epic Generic Agreement, Elite was to receive $1.8 million, payable in increments that require the commercialization of
all six exclusive products if the full amount is to be received, plus license fees equal to a percentage that is not less than
50% and not greater than 60% of profits achieved from commercial sales of the products, as defined in the Epic Generic Agreement.
The Epic Generic Agreement expired on October 2, 2018 with Epic launching four of the six exclusive products and Elite collecting
$1.0 million of the total $1.8 million fee.
The
2015 Epic License Agreement contains license fees that will be earned and payable to the Company, after the FDA has issued marketing
authorization(s) for the related product(s). License fees are based on commercial sales of the products achieved by Epic and calculated
as a percentage of net sales dollars realized from such commercial sales. Net sales dollars consist of gross invoiced sales less
those costs and deductions directly attributable to each invoiced sale, including, without limitation, cost of goods sold, cash
discounts, Medicaid rebates, state program rebates, price adjustments, returns, short date adjustments, charge backs, promotions,
and marketing costs. The rate applied to the net sales dollars to determine license fees due to the Company is equal to an amount
negotiated and agreed to by the parties to each agreement, with the following significant factors, inputs, assumptions, and methods,
without limitation, being considered by either or both parties:
|
●
|
Assessment
of the opportunity for each product in the market, including consideration of the following, without limitation: market size,
number of competitors, the current and estimated future regulatory, legislative, and social environment for abuse deterrent
opioids and the other generic products to which the underlying contracts are relevant;
|
|
●
|
Assessment
of various avenues for monetizing SequestOx™ and the twelve ANDA’s owned by the Company, including the various
combinations of sites of manufacture and marketing options;
|
|
●
|
Elite’s
resources and capabilities with regards to the concurrent development of abuse deterrent opioids and expansion of its generic
business segment, including financial and operational resources required to achieve manufacturing site transfers for twelve
approved ANDA’s;
|
|
●
|
Capabilities
of each party with regards to various factors, including, one or more of the following: manufacturing, marketing, regulatory
and financial resources, distribution capabilities, ownership structure, personnel, assessments of operational efficiencies
and entity stability, company culture and image;
|
|
●
|
Stage
of development of SequestOx™ and manufacturing site transfer and regulatory requirements relating to the commercialization
of the generic products at the time of the discussions/negotiations, and an assessment of the risks, probability, and time
frames for achieving marketing authorizations from the FDA for each product.
|
|
●
|
Assessment
of consideration offered; and
|
|
●
|
Comparison
of the above factors among the various entities with whom the Company was engaged in discussions relating to the commercialization
of SequestOx™ and the manufacture/marketing of the twelve generics related to the Epic Generic Agreement.
|
This
transaction is not to be considered as an arms-length transaction.
Please
also note that, effective April 7, 2016, all Directors on the Company’s Board of Directors that were also owners/managers
of Epic had resigned as Directors of the Company and all current members of the Company’s Board of Directors have no relationship
to Epic. Accordingly, Epic no longer qualifies as a party that is related to the Company.
NOTE
19. MANUFACTURING, LICENSE AND DEVELOPMENT AGREEMENTS
The
Company has entered into the following active agreements:
|
●
|
License
agreement with Precision Dose, dated September 10, 2010 (the “Precision Dose License Agreement”);
|
|
●
|
Development
and License Agreement with SunGen (the “SunGen Agreement”);
|
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
●
|
Strategic
Marketing Alliance with Glenmark Pharmaceuticals, Inc. USA dated May 29, 2018 (the “Glenmark Alliance”).
|
|
●
|
Strategic
Marketing Alliance with Lannett Company. Inc. dated March 11, 2019 (the “Lannett-SunGen Product Alliance”)
|
|
●
|
Strategic
Marketing Alliance with Lannett Company. Inc. dated April 9, 2019 (the “Lannett-Elite Product Alliance”)
|
The
Precision Dose Agreement provides for the marketing and distribution, by Precision Dose and its wholly owned subsidiary, TAGI
Pharma, of Phentermine 37.5mg tablets (launched in April 2011), Phentermine 15mg capsules (launched in April 2013), Phentermine
30mg capsules (launched in April 2013), Hydromorphone 8mg tablets (launched in March 2012), Naltrexone 50mg tablets (launched
in September 2013) and certain additional products that require approval from the FDA which has not been received. Precision Dose
will have the exclusive right to market these products in the United States and Puerto Rico and a non-exclusive right to market
the products in Canada. Pursuant to the Precision Dose License Agreement, Elite received $200k at signing, and is receiving milestone
payments and a license fee which is based on profits achieved from the commercial sale of the products included in the agreement.
Revenue
from the $200k payment made upon signing of the Precision Dose Agreement is being recognized over the life of the Precision Dose
Agreement.
The
milestones, totaling $500k (with $405k already received), consist of amounts due upon the first shipment of each identified product,
as follows: Phentermine 37.5mg tablets ($145k), Phentermine 15 & 30mg capsules ($45k), Hydromorphone 8mg ($125k), Naltrexone
50mg ($95k) and the balance of $95k due in relation to the first shipment of generic products which still require marketing authorizations
from the FDA, and to which there can be no assurances of such marketing authorizations being granted and accordingly there can
be no assurances that the Company will earn and receive these milestone amounts. These milestones have been determined to be substantive,
with such determination being made by the Company after assessments based on the following:
|
●
|
The
Company’s performance is required to achieve each milestone; and
|
|
●
|
The
milestones will relate to past performance, when achieved; and
|
|
●
|
The
milestones are reasonable relative to all of the deliverables and payment terms within the Precision Dose License Agreement.
|
The
license fees provided for in the Precision Dose Agreement are calculated as a percentage of net sales dollars realized from commercial
sales of the related products. Net sales dollars consist of gross invoiced sales less those costs and deductions directly attributable
to each invoiced sale, including, without limitation, cost of goods sold, cash discounts, Medicaid rebates, state program rebates,
price adjustments, returns, short date adjustments, charge backs, promotions, and marketing costs. The rate applied to the net
sales dollars to determine license fees due to the Company is equal to an amount negotiated and agreed to by the parties to the
Precision Dose License Agreement, with the following significant factors, inputs, assumptions, and methods, without limitation,
being considered by either or both parties:
|
●
|
Assessment
of the opportunity for each generic product in the market, including consideration of the following, without limitation: market
size, number of competitors, the current and estimated future regulatory, legislative, and social environment for each generic
product, and the maturity of the market;
|
|
●
|
Assessment
of various avenues for monetizing the generic products, including the various combinations of sites of manufacture and marketing
options;
|
|
●
|
Capabilities
of each party with regards to various factors, including, one or more of the following: manufacturing resources, marketing
resources, financial resources, distribution capabilities, ownership structure, personnel, assessment of operational efficiencies
and stability, company culture and image;
|
|
●
|
Stage
of development of each generic product, all of which did not have FDA approval at the time of the discussions/negotiations
and an assessment of the risks, probability, and time frame for achieving marketing authorizations from the FDA for the products;
|
|
●
|
Assessment
of consideration offered by Precision and other entities with whom discussions were conducted; and
|
|
|
|
|
●
|
Comparison
of the above factors among the various entities with whom the Company was engaged in discussions relating to the commercialization
of the generic products.
|
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
SunGen Agreement provides for the research, development, sales and marketing of eight generic pharmaceutical products. Two of
the products are classified as CNS stimulants (the “CNS Products”), two of the products are classified as beta blockers
and the remaining four products consist of antidepressants, antibiotics and antispasmodics. To date, the Company has filed ANDAs
with the FDA for the two CNS Products and one antibiotic identified in the SunGen Agreement. The Company received FDA approval
of the ANDA filed for the first CNS Product in December 2018 and achieved commercial launch in April 2019, with such product being
marketed pursuant to the Lannett Alliance.
Under
the terms of the SunGen Agreement, Elite and SunGen will share in the responsibilities and costs in the development of these products
and will share substantially in the profits from sales. Upon approval, the know-how and intellectual property rights to the products
will be owned jointly by Elite and SunGen. Three of the eight products will be jointly owned, three products will be owned by
SunGen, with Elite having exclusive marketing rights and the remaining two products will be owned by Elite, with SunGen having
exclusive marketing rights. Elite will manufacture and package all eight products on a cost-plus basis.
The
Glenmark Alliance, provides for the manufacture by Elite and marketing by Glenmark of identified generic products under license
from Elite. In addition to the purchase prices for the products, Elite will receive license fees well in excess of 50% of gross
profits. Gross profit is defined as net sales less the price paid to Elite for the products, distribution fees (less than 10%)
and shipping costs. Glenmark will have semi-exclusive marketing rights to the ANDA approved generic product, phendimetrazine 35mg
tablets, and exclusive marketing rights to generic Methadone HCl. Collectively, the brand products and their generic equivalents
had total annual sales of approximately $33.6 million in 2017, according to Quintiles IMS Health data. The Agreement has an initial
term of three years and automatically renews for one-year periods absent prior written notice of non-renewal. In addition to customary
termination provisions, the Agreement permits Glenmark to terminate with regard to a product on at least three months’ prior
written notice if it determines to stop marketing and selling such product, and it permits Elite to terminate with regard to a
product if at any time after the first twelvemonths from the first commercial sale, the average license fee paid by Glenmark for
such product is less than $100,000 for a six-month sales period.
Pursuant
to Lannett-SunGen Product Alliance with Lannett Company Inc. (“Lannett”), Lannett will be the exclusive U.S. marketer
and distributor for two generic products co-developed and co-owned by Elite and SunGen – Amphetamine IR Tablets and a second
product which is an extended release CNS stimulant that is currently under review by the FDA. Elite will manufacture and Lannett
will purchase the products from Elite and then sell and distribute them. In addition to the purchase prices for the products,
Elite will receive license fees in excess of 50% of net profits, which will be shared equally with SunGen, pursuant to the SunGen
Agreement. The Lannett-SunGen Product Alliance has an initial term of three years and automatically renews for one-year periods
absent prior written notice of non-renewal. In addition to customary termination provisions, the Agreement permits Lannett to
terminate with regard to a product on at least six months’ prior written notice, and it permits Elite or Lannett to terminate
with regard to a product if at any time after the first twelve months from the first commercial sale, the average license fee
paid by Lannett for such product is less than $300,000 for a six month sales period. In addition to manufacturing fees and license
fees, Lannett will also pay a milestone, of $750,000 upon commercial launch of the extended release CNS stimulant product that
is currently under review by the FDA. This milestone payment will be shared equally by Elite and SunGen, pursuant to the SunGen
Agreement.
The
first commercial shipment of Amphetamine IR Tablets, a generic version of Adderall®, with strengths of 5mg, 7.5mg,
10mg, 12.5mg, 15mg, 20mg and 30mg, pursuant to the Lannett-SunGen Product Alliance occurred in April 2019.
Pursuant
to the Lannett-Elite Product Alliance, Lannett will be the exclusive U.S. marketer and distributor for Dantrolene Capsules. Elite
will manufacture and Lannett will purchase Dantrolene Capsules from Elite and then sell and distribute them. In addition to the
purchase prices for the products, Elite will receive license fees in excess of 50% of net profits. Net profits is defined as net
sales less the price paid to Elite for the products, distribution fees (less than 10%) and shipping costs. The Lannett-Elite Product
Alliance has an initial term of three years and automatically renews for one-year periods absent prior written notice of non-renewal.
In addition to customary termination provisions, the Agreement permits Lannett to terminate with regard to a product on at least
six months’ prior written notice and it permits Elite or Lannett to terminate with regard to a product if at any time after
the first twelve months from the first commercial sale, the average license fee paid by Lannett for such product is less than
$300,000 for a six month sales period.
NOTE
20. RELATED PARTY AGREEMENTS WITH MIKAH PHARMA LLC
Pursuant
to an asset acquisition, on May 17, 2017, Elite Labs, executed an assignment agreement with Mikah, pursuant to which the Company
acquired all rights, interests, and obligations under a supply and distribution agreement (the “Reddy’s Distribution
Agreement”) with Dr. Reddy’s Laboratories, Inc. (“Dr. Reddy’s”) originally entered into by Mikah
on May 7, 2017 and relating to the supply, sale and distribution of generic Trimipramine Maleate Capsules 25mg, 50mg and 100mg
(“Trimipramine”).
ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On
May 22, 2017, the Company executed an assignment agreement with Mikah, pursuant to which the Company acquired all rights, interests
and obligations under a manufacturing and supply agreement with Epic originally entered into by Mikah on June 30, 2015 and relating
to the manufacture and supply of Trimipramine (the “Epic Trimipramine Manufacturing Agreement”). Pursuant to this
agreement, Epic manufactured Trimipramine under license from Elite. In September 2018, Elite successfully transferred manufacturing
of Trimipramine to the Northvale Facility, resulting in the irrelevance of the Epic Trimipramine Manufacturing Agreement. Trimipramine
is currently manufactured by Elite.
Mikah
is owned by Nasrat Hakim, the CEO, President and Chairman of the Board of the Company.
The
Reddy’s Distribution Agreement was concluded by mutual consent in August 2018.
Trimipramine
is one of the products included in the Glenmark Strategic Alliance and is currently marketed and distributed by Glenmark.
On
December 3, 2018, the Company executed a development agreement with 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.
The
Company received $150,000 from Mikah in January of 2019 as an advance payment for the purchase of pharmaceutical materials relating
to future product development conducted pursuant to this agreement. This amount was recorded as a deposit and contained within
the customer deposits financial statement line item on the condensed consolidated balance sheet. As of the date of this report,
the Company has purchased raw materials with an aggregate cost of $397,500 pursuant to this agreement. As of September 30, 2019,
the balance of the customer deposit from Mikah was $55,652 and was included in the financial statement line of customer deposits
on the accompanying condensed consolidated balance sheet.
NOTE
21. SUBSEQUENT EVENTS
The Company has evaluated
subsequent events from the balance sheet date through November 12, 2019, the date the accompanying financial statements were issued.
The following are material subsequent events.
Common Stock issued
and sold pursuant to the Lincoln Park Purchase Agreement
Subsequent to September
30, 2019 and up to November 12, 2019, a total of 505,755 shares of Common Stock were issued to Lincoln Park, with such shares consisting
of 500,000 purchase shares and 5,755 additional commitment shares. Total proceeds from these transactions was $41,550.