ELTP Elite Pharmaceuticals Inc (QB)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2019

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM _______________ TO _______________

 

COMMISSION FILE NUMBER: 001-15697

 

ELITE PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

NEVADA		22-3542636
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

165 LUDLOW AVENUE NORTHVALE, NEW JERSEY		07647
(Address of principal executive offices)		(Zip Code)

 

(201) 750-2646

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock, par value $0.001 per share		ELTP		OTCQB

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 839,290,672 shares of common stock were issued, and 839,190,670 shares of common stock were outstanding as of February 4, 2020

 

 

 

		PAGE
PART I	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of December 31, 2019 (Unaudited) and March 31, 2019 (Audited)	F-1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2019 and 2018 (Unaudited)	F-3
	Condensed Consolidated Statement of Changes in Shareholders’ Equity (Deficit) for the Three and Nine Months Ended December 31, 2019 and 2018 (Unaudited)	F-4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2019, and 2018 (Unaudited)	F-6
	Notes to the Unaudited Condensed Consolidated Financial Statements	F-7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
ITEM 3.	Quantitative and Qualitative Disclosure About Market Risk	22
ITEM 4.	Controls and Procedures	23
PART II	OTHER INFORMATION	24
ITEM 1.	Legal Proceedings	24
ITEM 1A.	Risk Factors	24
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
ITEM 3.	Defaults Upon Senior Securities	24
ITEM 4.	Mine Safety Disclosures	24
ITEM 5.	Other Information	24
ITEM 6.	Exhibits	25
SIGNATURES		29

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		December 31, 2019				March 31, 2019
		(Unaudited)				(Audited)
ASSETS
Current assets:
Cash		$	1,870,080			$	2,277,643
Accounts receivable, net of allowance for doubtful accounts of $-0-, respectively			2,565,323				1,321,805
Inventory			3,810,401				4,515,723
Prepaid expenses and other current assets			796,496				741,371
Total current assets			9,042,300				8,856,542
Property and equipment, net of accumulated depreciation of $10,634,174 and $9,651,718, respectively			7,519,003				8,443,849
Intangible assets, net of accumulated amortization of $-0-, respectively			6,634,035				6,634,035
Operating lease - right to use asset			412,063				-
Other assets:
Restricted cash - debt service for NJEDA bonds			403,575				398,125
Security deposits			75,534				69,383
Total other assets			479,109				467,508
Total assets		$	24,086,510			$	24,401,934
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	986,016			$	1,375,347
Accrued expenses			4,423,761				3,713,601
Deferred revenue, current portion			430,000				1,013,333
Bonds payable, current portion, net of bond issuance costs			90,822				80,822
Loans payable, current portion			356,137				573,029
Lease obligation - operating lease			203,984				-
Customer deposits			55,652				150,000
Senior secured promissory note - related party			1,200,000				-
Total current liabilities			7,746,372				6,906,132
Long-term liabilities:
Deferred revenue, net of current portion			62,224				238,890
Bonds payable, net of current portion and bond issuance costs			1,332,945				1,427,315
Senior secured promissory note - related party			-				1,200,000
Loans payable, net current portion			530,480				699,269
Lease obligation - operating lease, net of current portion			221,166				-
Derivative financial instruments - warrants			5,078,525				2,487,830
Other long-term liabilities			34,916				46,402
Total long-term liabilities			7,260,256				6,099,706
Total liabilities			15,006,628				13,005,838

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-1

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(continued)

 

		December 31, 2019				March 31, 2019
		(Unaudited)				(Audited)
Mezzanine equity
Series J convertible preferred stock; par value $0.01; 50 shares authorized, 24.0344 issued and outstanding as of March 31, 2019			-				13,903,960
Shareholders’ equity (deficit):
Series J convertible preferred stock; par value of $0.01; 50 shares authorized; 24.0344 issued and outstanding as of December 31, 2019			13,903,960				-
Common stock; par value $0.001; 1,445,000,000 shares authorized, 833,953,570 shares issued and 833,853,570 outstanding as of December 31, 2019; 995,000,000 shares authorized, 824,946,559 shares issued and 824,846,559 shares outstanding as of March 31, 2019			833,956				824,949
Additional paid-in capital			149,631,585				148,780,087
Treasury stock; 100,000 shares as of December 31, 2019 and March 31, 2019; at cost			(306,841	)			(306,841	)
Accumulated deficit			(154,982,778	)			(151,806,059	)
Total shareholders’ equity (deficit)			9,079,882				(2,507,864	)
Total liabilities, mezzanine equity and shareholders’ equity (deficit)		$	24,086,510			$	24,401,934

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-2

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		For the Three Months Ended December 31,								For the Nine Months Ended December 31,
		2019				2018				2019				2018
Manufacturing fees		$	3,754,721			$	2,108,487			$	10,851,425			$	4,456,832
Licensing fees			1,300,392				585,479				2,197,915				1,767,881
Total revenue			5,055,113				2,693,966				13,049,340				6,224,713
Cost of revenue			2,163,376				1,771,136				7,529,918				3,890,086
Gross profit			2,891,737				922,830				5,519,422				2,334,627
Operating expenses:
Research and development			986,832				2,454,098				3,032,357				6,236,192
General and administrative			878,540				748,151				2,358,588				2,245,900
Non-cash compensation through issuance of stock options			11,802				36,547				53,518				109,641
Depreciation and amortization			323,368				321,164				986,001				891,390
Total operating expenses			2,200,542				3,559,960				6,430,464				9,483,123
Income (loss) from operations			691,195				(2,637,130	)			(911,042	)			(7,148,496	)
Other (expense) income:
Interest expense			(94,514	)			(89,897	)			(283,649	)			(279,037	)
Change in fair value of derivative instruments - warrants			(3,059,695	)			380,976				(2,590,695	)			807,347
Proceeds from sale of ANDAs			600,000				-				600,000				-
Interest income			2,334				1,733				10,667				4,570
Other (expense) income, net			(2,551,875	)			292,812				(2,263,677	)			532,880
Loss from operations before income tax			(1,860,680	)			(2,344,318	)			(3,174,719	)			(6,615,616	)
Income tax provision			-				-				(2,000	)			-
Net loss attributable to common shareholders		$	(1,860,680	)		$	(2,344,318	)		$	(3,176,719	)		$	(6,615,616	)
Basic net loss per share attributable to common shareholders		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.01	)
Diluted net loss per share attributable to common shareholders		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.01	)
Basic weighted average Common Stock outstanding			829,394,203				819,412,807				828,466,951				811,603,678
Diluted weighted average Common Stock outstanding			829,394,203				819,468,881				828,466,951				811,659,752

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-3

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

 

		Series J Preferred Stock								Common Stock								Additional Paid-In				Treasury Stock								Accumulated				Total Shareholders’ Equity
		Shares				Amount				Shares				Amount				Capital				Shares				Amount				Deficit				(Deficit)
Balance as of March 31, 2019			-			$	-				824,946,559			$	824,949			$	148,780,087				100,000			$	(306,841	)		$	(151,806,059	)		$	(2,507,864	)
Net income			-				-				-				-				-				-				-				279,702				279,702
Common Stock sold pursuant to the Lincoln Park purchase agreement			-				-				4,000,000				4,000				336,300				-				-				-				340,300
Common Stock issued as additional commitment shares pursuant to the LPC purchase agreement			-				-				47,136				47				4,153				-				-				-				4,200
Costs associated with raising capital			-				-				-				-				(4,200	)			-				-				-				(4,200	)
Non-cash compensation through the issuance of employee stock options			-				-				-				-				26,194				-				-				-				26,194
Balance at June 30, 2019			-			$	-				828,993,695			$	828,996			$	149,142,534				100,000			$	(306,841	)		$	(151,526,357	)		$	(1,861,668	)
Net loss			-				-				-				-				-				-				-				(1,595,741	)			(1,595,741	)
Common Stock sold pursuant to the Lincoln Park purchase agreement			-				-				3,895,233				3,895				379,692				-				-				-				383,587
Common Stock issued as additional commitment shares pursuant to the LPC purchase agreement			-				-				53,132				53				5,915				-				-				-				5,968
Costs associated with raising capital			-				-				-				-				(5,968	)			-				-				-				(5,968	)
Non-cash compensation through the issuance of employee stock options			-				-				-				-				15,522				-				-				-				15,522
Balance at September 30, 2019			-			$	-				832,942,060			$	832,944			$	149,537,695				100,000			$	(306,841	)		$	(153,122,098	)		$	(3,058,300	)
Net loss			-				-				-				-				-				-				-				(1,860,680	)			(1,860,680	)
Common Stock sold pursuant to the Lincoln Park purchase agreement			-				-				1,000,000				1,000				82,100				-				-				-				83,100
Common Stock issued as additional commitment shares pursuant to the LPC purchase agreement			-				-				11,510				12				1,030				-				-				-				1,042
Costs associated with raising capital			-				-				-				-				(1,042	)			-				-				-				(1,042	)
Non-cash compensation through the issuance of employee stock options			-				-				-				-				11,802				-				-				-				11,802
Reclassification of mezzanine equity to permanent equity			24			$	13,903,960				-				-				-				-				-				-				13,903,960
Balance at December 31, 2019			24			$	13,903,960				833,953,570			$	833,956			$	149,631,585				100,000			$	(306,841	)		$	(154,982,778	)		$	9,079,882

  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-4

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

(continued)

 

 

		Series J Preferred Stock								Common Stock												Treasury Stock
		Shares				Amount				Shares				Amount				Additional Paid-In Capital				Shares				Amount				Accumulated Deficit				Total Shareholders' Equity
Balance as of March 31, 2018			-			$	-				802,626,761			$	802,629			$	146,602,502				100,000			$	(306,841	)		$	(142,526,738	)		$	4,571,552
Net loss			-				-				-				-				-				-				-				(1,687,766	)			(1,687,766	)
Common Stock sold pursuant to the Lincoln Park purchase agreement			-				-				2,000,000				2,000				166,170				-				-				-				168,170
Common Stock issued as additional commitment shares pursuant to the LPC purchase agreement			-				-				23,297				23				2,161				-				-				-				2,184
Costs associated with raising capital			-				-				-				-				(2,161	)			-				-				-				(2,161	)
Non-cash compensation through the issuance of employee stock options			-				-				-				-				36,549				-				-				-				36,549
Balance at June 30, 2018			-			$	-				804,650,058			$	804,652			$	146,805,221				100,000			$	(306,841	)		$	(144,214,504	)		$	3,088,528
Net loss			-				-				-				-				-				-				-				(2,583,532	)			(2,583,532	)
Common Stock sold pursuant to the Lincoln Park purchase agreement			-				-				12,142,083				12,142				1,215,972				-				-				-				1,228,114
Common Stock issued as additional commitment shares pursuant to the LPC purchase agreement			-				-				170,108				171				17,962				-				-				-				18,133
Costs associated with raising capital			-				-				-				-				(18,160	)			-				-				-				(18,160	)
Non-cash compensation through the issuance of employee stock options			-				-				-				-				36,545				-				-				-				36,545
Balance at September 30, 2018			-			$	-				816,962,249			$	816,965			$	148,057,540				100,000			$	(306,841	)		$	(146,798,036	)		$	1,769,628
Net loss			-				-				-				-				-				-				-				(2,344,318	)			(2,344,318	)
Common Stock sold pursuant to the Lincoln Park purchase agreement			-				-				3,500,000				3,500				270,045				-				-				-				273,545
Common Stock issued as additional commitment shares pursuant to the LPC purchase agreement			-				-				37,890				37				3,099				-				-				-				3,136
Costs associated with raising capital			-				-				-				-				(3,132	)			-				-				-				(3,132	)
Non-cash compensation through the issuance of employee stock options			-				-				-				-				36,547				-				-				-				36,547
Balance at December 31, 2018			-			$	-				820,500,139			$	820,502			$	148,364,099				100,000			$	(306,841	)		$	(149,142,354	)		$	(264,594	)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-5

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		For the Nine Months Ended December 31,
		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(3,176,719	)		$	(6,615,616	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			993,086				941,814
Amortization of operating leases - right to use assets			(142,025	)			-
Change in fair value of derivative financial instruments - warrants			2,590,695				(807,347	)
Non-cash compensation accrued			723,720				1,365,000
Non-cash compensation through the issuance of employee stock options			53,518				109,641
Non-cash rent expense and lease accretion			1,555				4,738
Change in operating assets and liabilities:
Accounts receivable			(1,243,518	)			15,436
Inventory			705,322				705,616
Prepaid expenses and other current assets			21,849				(144,849	)
Accounts payable, accrued expenses and other current liabilities			(402,759	)			528,805
Deferred revenue and customer deposits			(854,368	)			(760,000	)
Lease obligations - operating leases			141,960				-
Net cash used in operating activities			(587,684	)			(4,656,762	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment			(3,148	)			(19,130	)
Net cash used in investing activities			(3,148	)			(19,130	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of stock			806,987				1,669,829
Payment of bond principal			(95,000	)			(90,000	)
Other loan payments			(523,268	)			(398,046	)
Net cash provided by financing activities			188,719				1,181,783
Net change in cash and restricted cash			(402,113	)			(3,494,109	)
Cash and restricted cash, beginning of period			2,675,768				7,570,803
Cash and restricted cash, end of period		$	2,273,655			$	4,076,694
Supplemental disclosure of cash and non-cash transactions:
Cash paid for interest		$	168,560			$	151,754
Financing of equipment purchases and insurance renewal		$	54,462			$	477,116
Commitment shares issued to Lincoln Park Capital		$	11,098			$	23,453
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets		$	554,088			$	-

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-6

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Overview

 

Elite Pharmaceuticals, Inc. (the “Company” or “Elite”) was incorporated on October 1, 1997 under the laws of the State of Delaware, and its wholly-owned subsidiary Elite Laboratories, Inc. (“Elite Labs”) 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 nine months ended December 31, 2019 are not necessarily indicative of the results that may be expected for the entire year.

 

Going Concern

 

At December 31, 2019, the Company had unrestricted cash balances totaling $1,870,080. The Company has incurred losses and negative cash flows from operations, including operating income of $691,195 and loss of $2,637,130 for the three months ended December 31, 2019 and 2018, and operating losses of $911,042 and $7,148,496 for the nine months ended December 31, 2019 and 2018, respectively. In addition, overall working capital, defined as current assets minus current liabilities decreased by $654,482 as of December 31, 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.

 

F-7

 

  

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 unaudited condensed 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.

 

F-8

 

  

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 December 31, 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 December 31,								For the Nine Months Ended December 31,
		2019				2018				2019				2018
NDA:
Licensing fees		$	250,000			$	250,000			$	750,000			$	750,000
Total NDA revenue			250,000				250,000				750,000				750,000
ANDA:
Manufacturing fees		$	3,754,721			$	2,108,487			$	10,851,425			$	4,456,832
Licensing fees			1,050,392				335,479				1,447,915				1,017,881
Total ANDA revenue			4,805,113				2,443,966				12,299,340				5,474,713
Total revenue		$	5,055,113			$	2,693,966			$	13,049,340			$	6,224,713

 

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.

 

F-9

 

 

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 December 31, 2019, and March 31, 2019, the Company had $403,575 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 December 31, 2019, the Company did not identify any indicators of impairment.

 

Please also see Note 4 for further details on intangible assets.

 

F-10

 

 

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.

 

F-11

 

 

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 December 31,								For the Nine Months Ended December 31,
		2019				2018				2019				2018
Numerator
Net loss attributable to common shareholders – basic		$	(1,860,680	)		$	(2,344,318	)		$	(3,176,719	)		$	(6,615,616	)
Effect of dilutive instrument on net loss			-				(380,976	)			-				(807,347	)
Net loss attributable to common shareholders - diluted		$	(1,860,680	)		$	(2,725,924	)		$	(3,176,719	)		$	(7,422,963	)
Denominator
Weighted average shares of common stock outstanding - basic			829,394,203				819,412,807				828,446,951				811,603,678
Dilutive effect of stock options, warrants and convertible securities			-				56,074				-				56,074
Weighted average shares of common stock outstanding – diluted			829,394,203				819,468,881				828,466,951				811,659,752
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.

 

Measured on a Recurring Basis

 

The following table presents information about our liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fell:

 

						Fair Value Measurement Using
		Amount at Fair Value				Level 1				Level 2				Level 3
December 31 2019
Liabilities
Derivative financial instruments – warrants		$	5,078,525			$	-			$	-			$	5,078,525
March 31, 2019
Liabilities
Derivative financial instruments – warrants		$	2,487,830			$	-			$	-			$	2,487,830

F-12

 

  

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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.

 

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. 

 

F-13

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recently Issued Accounting Pronouncements

 

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606. The ASU clarifies when transactions between collaborative participants are in the scope of ASC 606. The ASU also provides some guidance on presentation of transactions not in the scope of ASC 606. ASU 2018-18 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. The Company is currently evaluating the impact the standard will have on our condensed consolidated financial statements.

 

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 condensed consolidated financial statements. 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 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 October 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842). The ASU amends and defers the effective dates of credit losses, derivatives and leases standards for certain companies. The ASU allows deferral of the credit losses standard to January 1, 2023 for SEC filers considered small reporting companies. The ASU allows deferral of the derivatives and hedging and leasing standards to January 1, 2021 for non-public entities. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The ASU amends ASU 2016-13 and extends the recovery guidance to purchased financial assets with credit deterioration. The ASU is effective when the entity adopts ASU 2016-13. The Company is currently evaluating the impact the standard will have on our condensed 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 condensed consolidated financial statements and related disclosures.

 

NOTE 2. INVENTORY

 

Inventory consisted of the following:

 

		December 31, 2019				March 31, 2019
Finished goods		$	55,521			$	575,699
Work-in-progress			238,052				189,069
Raw materials			3,516,828				3,750,955
			3,810,401				4,515,723
Less: Inventory reserve			-				-
		$	3,810,401			$	4,515,723

F-14

 

 

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:

 

		December 31, 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			(10,634,174	)			(9,651,718	)
		$	7,519,003			$	8,443,849

 

Depreciation expense was $326,908 and $317,618 for the three months, and $982,456 and $931,180 for the nine months, ended December 31, 2019 and 2018, respectively.

 

NOTE 4. INTANGIBLE ASSETS

 

The following table summarizes the Company’s intangible assets:

 

		December 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			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 1^st based on the amount specified in the loan documents and semi-annual interest payments on March 1^st and September 1^st, 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.

 

F-15

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following tables summarize the Company’s bonds payable liability:

 

		December 31, 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		$	354,454			$	354,453
Less: Accumulated amortization			(203,221	)			(192,591	)
Bond offering costs, net		$	151,233			$	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			(137,055	)			(147,685	)
Long term portion of bonds payable, net of bond offering costs		$	1,332,945			$	1,427,315

 

Amortization expense was $3,545 and $3,544 for the three months, and $10,630 and $10,636 for the nine months, ended December 31, 2019 and 2018, respectively.

 

NOTE 6. LOANS PAYABLE

 

Loans payable consisted of the following:

 

		December 31, 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		$	886,817			$	1,272,298
Less: Current portion of loans payable			(356,137	)			(573,029	)
Long-term portion of loans payable		$	530,480			$	699,269

 

The interest expense associated with the loans payable was $18,291 and $28,025 for the three months, and $63,170 and $86,765 for the nine months, ended December 31, 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 $90,000 for the nine months ended December 31, 2019 and 2018, respectively. Accrued interest due and owing on this note was $315,000 and $225,000 as of December 31, 2019 and March 31, 2019, respectively.

 

F-16

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 8. DEFERRED REVENUE

 

Deferred revenues in the aggregate amount of $492,224 as of December 31, 2019, were comprised of a current component of $430,000 and a long-term component of $62,224. 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.

 

Lease assets and liabilities are classified as follows on the condensed consolidated balance sheet at December 31, 2019:

 

Lease		Classification		As of December 31, 2019
Assets
Operating		Operating lease – right to use asset		$	412,063
Total leased assets				$	412,063
Liabilities
Current
Operating		Lease obligation – operating lease		$	203,984
Long-term
Operating		Lease obligation – operating lease, net of current portion			221,166
Total lease liabilities				$	425,150

 

Rent expense is recorded on the straight-line basis. Rent expense under the 135 Ludlow Ave. modified lease for the three months ended December 31, 2019 and 2018 was $18,296 and $54,909, and $128,072 and $164,757 for the nine months ended December 31, 2019 and 2018, respectively. Rent expense is recorded in general and administrative expense in the unaudited condensed consolidated statements of operations.

 

F-17

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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		$	55,986
2021			225,063
2022			171,315
Total future minimum lease payments			452,634
Less: interest			(27,214	)
Present value of lease payments		$	425,150

 

The weighted-average remaining lease term and the weighted-average discount rate of our lease was as follows:

 

Lease Term and Discount Rate		December 31, 2019
Remaining lease term (years)
Operating leases			2.0
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 December 31, 2019, and March 31, 2019, the Company had a liability of $34,916 and $33,383, respectively, and recorded as a component of other long-term liabilities.

 

NOTE 10. PREFERRED STOCK

 

Series J convertible preferred stock

 

On April 28, 2017, the Company created the Series J Convertible Preferred Stock (“Series J Preferred”) in conjunction with the Certificate of Designations (“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 December 31, 2019.

 

The shares were issued 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 were classified as liabilities on the accompanying unaudited condensed consolidated balance sheet as of December 31, 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).

 

F-18

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 March 31, 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.

 

The fair value of the Series J Preferred issued by the Company pursuant to the exchange agreement was calculated using a Monte Carlo Simulation because of the probability assumptions associated with the shareholder approval provisions; the following are the Monte Carlo inputs:

 

		April 28, 2017
Fair value of the Company’s common stock		$	0.1521
Initial exercise 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			90.00	%
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 greater than threshold - midpoint			17.50	%
Trials			200,000

 

Authorized, issued and outstanding shares, along with carrying value as of March 31, 2019 are as follows:

 

Shares authorized			50
Shares outstanding			24.0344
Par value		$	0.01
Stated value		$	1,000,000
Conversion price		$	0.1521
Common shares to be issued upon redemption			158,017,321
Carrying value of Series J convertible preferred stock		$	13,903,960

 

F-19

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Increase in Authorized Shares

 

An amendment to the Company’s Articles of Incorporation to increase the number of shares of common stock the Company is authorized to issue from 995,000,000 shares to 1,445,000,000 shares was approved at the Company’s Annual Meeting of Shareholders held on December 4, 2019. Prior to the approval of the increase in the number of authorized shares, there were insufficient authorized shares if the Series J Preferred Stock were converted. As a result, the shares were classified in mezzanine equity. After the approval of the increase in the number of authorized shares, there are now sufficient authorized shares if the Series J Preferred Stock were converted. With the approval of the increase in the number of authorized shares, there is no longer the presumption that a cash settlement will be required. Therefore, the Series J Preferred has been reclassified from mezzanine equity to permanent equity at its current carrying amount of $13,903,960 on the accompanying condensed consolidated balance sheet.

 

NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS – WARRANTS

 

The Company evaluates and accounts for its freestanding instruments in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities.

 

The Company issued warrants, with a term of seven years, to Nasrat Hakim, pursuant to the Exchange Agreement detailed below.

 

A summary of warrant activity is as follows:

 

		December 31 2019								March 31, 2019
		Warrant Shares				Weighted Avg. Exercise Price				Warrant Shares				Weighted Avg. Exercise Price
Balance at beginning of period			79,008,661			$	0.1521				79,008,661			$	0.1521
Warrants granted pursuant to the issuance of Series J convertible preferred shares			-				-				-				-
Warrants exercised, forfeited and/or expired, net			-				-				-				-
Balance at end of period			79,008,661			$	0.1521				79,008,661			$	0.1521

 

On April 28, 2017, the Company entered into an exchange agreement (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 March 31, 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.

 

F-20

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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:

 

		March 31, 2019
Fair value of the Company’s common stock		$	0.9900
Initial exercise price		$	0.1521
Number of common warrants			79,008,661
Fully diluted shares outstanding as of measurement date			824,946,559
Warrant term (in years)			8.08
Risk-free rate			2.35	%
Volatility			90.00	%
Shareholder approval threshold		$	0.1580
Probability of approval is ending stock price is greater than threshold - midpoint			82.50	%
Probability of approval is ending stock price is greater than threshold - midpoint			17.50	%
Trials			100,000
Fair value of derivative financial instruments - warrants		$	2,487,830

 

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 Black-Scholes model instead of a Monte Simulation because the probability with the shareholder approval provisions was no longer a factor. The following assumptions were used in the Black-Scholes model to calculate the fair value of warrants issued by the Company pursuant to the issuance of Series J convertible preferred shares (79,008,661 warrant shares):

 

		December 31, 2019
Fair value of the Company’s common stock		$	0.0925
Volatility			83.89	%
Initial exercise price		$	0.1521
Warrant term (in years)			7.3
Risk free rate			1.83	%

 

The changes in warrants (Level 3 financial instruments) measured at fair value on a recurring basis for the nine months ended December 31, 2019 were as follows:

 

Outstanding at March 31, 2019		$	2,487,830
Change in fair value of derivative financial instruments - warrants			2,590,695
Balance at December 31, 2019		$	5,078,525

 

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.

 

F-21

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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.

 

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 nine months ended December 31, 2019, a total of 8,895,233 shares were sold to Lincoln Park pursuant to the 2017 LPC Agreement for net proceeds totaling $806,987. In addition, 111,778 shares were issued to Lincoln Park as additional commitment shares, pursuant to the 2017 LPC Agreement. During the nine months ended December 31, 2018, a total of 17,642,083 shares were sold to Lincoln Park pursuant to the 2017 LPC Agreement for net proceeds totaling $1,669,829. In addition, 231,295 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.

 

F-22

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 nine months ended December 31, 2019, the Company did not issue any shares of common stock to its Directors in payment of director’s fees.

 

During the nine months ended December 31, 2019, the Company accrued director’s fees totaling 67,500, which will be paid via cash payments totaling $22,500 and the issuance of 585,417 shares of Common Stock.

 

As of December 31, 2019, the Company owed its Directors a total of $60,000 in cash payments and 1,379,033 shares of Common Stock in payment of director fees totaling $180,000 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 nine months ended December 31, 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 nine months ended December 31, 2019, the Company did not issue any shares pursuant to the engagement contracts with certain consultants.

 

As of December 31, 2019, the Company accrued salaries totaling $603,750 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 7,854,334 shares of Common Stock.

 

As of December 31, 2019, the Company owed its President and Chief Executive Officer, Chief Financial Officer and certain other employees’ salaries totaling $2,110,000 which will be paid via the issuance of 22,536,856 shares of Common Stock.

 

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 December 31, 2019			5,875,000			$	0.14				4.0			$	-
Exercisable at December 31 2019			5,541,668			$	0.14				4.0			$	67,500

 

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 December 31, 2019 and March 31, 2019 of $0.0925 and $0.10, respectively.

 

F-23

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 14. CONCENTRATIONS AND CREDIT RISK

 

Revenues

 

Three customers accounted for approximately 94% of the Company’s revenues for the nine months ended December 31, 2019. These three customers accounted for approximately 57%, 24%, and 13% of revenues each. The same three customers accounted for approximately 69%, 12%, and 13% of revenues each, respectively, for the three months ended December 31, 2019.

 

Three customers accounted for substantially all the Company’s revenues for the nine months ended December 31, 2018. These three customers accounted for approximately 63%, 17%, and 16% of revenues each, respectively. The same three customers accounted for approximately 58%, 21%, and 7% of revenues each, respectively, for the three months ended December 31, 2018.

 

Accounts Receivable

 

Three customers accounted for approximately 90% the Company’s accounts receivable as of December 31, 2019. These three customers accounted for approximately 60%, 22% and 8% 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

 

Eight suppliers accounted for more than 85% of the Company’s purchases of raw materials for the nine months ended December 31, 2019. Included in these eight suppliers were three suppliers that accounted for approximately 34%, 25%, and 11% of purchases each.

 

Seven suppliers accounted for more than 75% of the Company’s purchases of raw materials for the nine months ended December 31, 2018. Included in these seven suppliers are two suppliers that accounted for approximately 40%, 16%, and 15% of purchases each.

 

NOTE 15. SEGMENT RESULTS

 

ASC 280-10-50 requires use of the “management approach” model for segment reporting. The management approach is based on the way a company’s management organized segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

 

The Company has determined that its reportable segments are ANDAs for generic products and NDAs for branded products. The Company identified its reporting segments based on the marketing authorization relating to each and the financial information used by its chief operating decision maker to make decisions regarding the allocation of resources to and the financial performance of the reporting segments.

 

Asset information by operating segment is not presented below since the chief operating decision maker does not review this information by segment. The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements.

 

The following represents selected information for the Company’s reportable segments:

 

		For the Three Months Ended December 31,								For the Nine Months Ended December 31,
		2019				2018				2019				2018
Operating Income (Loss) by Segment
ANDA		$	2,431,906			$	(582,822	)		$	2,538,560			$	(1,129,324	)
NDA			135,500				(744,393	)			407,245				(1,250,420	)
		$	2,567,406			$	(1,327,215	)		$	2,945,805			$	(2,379,744	)

 

F-24

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 December 31,								For the Nine Months Ended December 31,
		2019				2018				2019				2018
Operating income (loss) by segment		$	2,567,406			$	(1,327,215	)		$	2,945,805			$	(2,379,744	)
Corporate unallocated costs			(739,790	)			(667,002	)			(1,740,579	)			(3,111,346	)
Interest income			2,334				1,733				10,667				4,570
Interest expense			(94,515	)			(89,897	)			(283,649	)			(279,037	)
Depreciation and amortization expense			(323,368	)			(321,164	)			(986,001	)			(891,390	)
Non-cash items			(213,052	)			(321,749	)			(532,267	)			(766,016	)
Change in fair value of derivative instruments – warrants			(3,059,695	)			380,976				(2,590,695	)			807,347
Loss from operations		$	(1,860,680	)		$	(2,344,318	)		$	(3,176,719	)		$	(6,615,616	)

 

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.

 

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.

 

F-25

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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.

 

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 6, 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.

 

F-26

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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.

 

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;

 

F-27

 

  

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) 

 

●

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”);

 

●

Strategic Marketing Alliance with Glenmark Pharmaceuticals, Inc. USA dated May 22, 2018 (the “Glenmark Alliance”).

 

●

Strategic Marketing Alliance with Lannett Company. Inc. dated March 6, 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.

 

F-28

 

  

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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.

 

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.

 

F-29

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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”).

 

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.

 

F-30

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company received a total of $480,000 from Mikah, $150,000 and $330,000 in January and September of 2019, respectively, 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 $452,348 pursuant to this agreement. As of December 31, 2019, the balance of the customer deposit from Mikah was $55,653 and was included in the financial statement line of customer deposits on the accompanying condensed consolidated balance sheet.

 

NOTE 21. OTHER INCOME – PROCEEDS FROM SALE OF ANDAs

 

Sale of ANDAs for Oxycodone Hydrochloride and Acetaminophen, USP CII (generic version of Percocet®)

 

Approved ANDAs for a generic version of Percocet^® (oxycodone hydrochloride and acetaminophen, USP CII) 5mg, 7.5mg and 10mg tablets with 325mg of acetaminophen were sold to Nostrum Laboratories Inc. (“Nostrum”) for cash consideration totaling $300,000. The three related approved ANDA’s were developed by Elite, with the costs of such development being charged to expense in the periods incurred, in accordance with generally accepted accounting principles.

 

Sale of ANDAs for Hydrocodone bitartrate and acetaminophen tablets USP CII (generic version of Norco)

 

Approved ANDAs for a generic version of Norco^® (hydrocodone bitartrate and acetaminophen tablets USP CII) 2.5mg/325mg, 5mg/325mg, 7.5mg/325mg and 10mg/325mg tablets were sold to Nostrum for cash consideration totaling $300,000. The four related approved ANDA’s were developed by Elite, with the costs of such development being charged to expense in the periods incurred, in accordance with generally accepted accounting principles.

 

NOTE 22. SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events from the condensed consolidated balance sheet date through February 10, 2020. The following are material subsequent events:

 

Common Stock issued and sold pursuant to the Lincoln Park Purchase Agreement

 

Subsequent to December 31, 2019 and up to February 4, 2020 (the latest practicable date), a total of 5,337,102 shares of Common Stock were issued to Lincoln Park, with such shares consisting of 5,265,484 purchase shares and 71,618 additional commitment shares. Total proceeds from these transactions was $517,037.

 

Sale of ANDA for Hydromorphone HCl oral tablet – 8mg

 

On February 3, 2020, Elite sold the ANDA for generic Hydromorphone HCl 8mg tablet to Nostrum for cash consideration totaling $300,000. The carrying value for the asset related to the ANDA was $0.

 

F-31

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

THREE AND NINE MONTHS ENDED DECEMBER 31, 2019 (UNAUDITED)

COMPARED TO THE

THREE AND NINE MONTHS ENDED DECEMBER 31, 2018 (UNAUDITED)

 

The following discussion of our financial condition and results of operations for the three and nine months ended December 31, 2019 and 2018 should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended March 31, 2019. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

Unless expressly indicated or the context requires otherwise, the terms “Elite”, the “Company”, “we”, “us”, and “our” refer to Elite Pharmaceuticals, Inc. and subsidiary.

 

Background

 

Elite Pharmaceuticals, Inc., a Nevada corporation (the “Company”, “Elite”, “Elite Pharmaceuticals”, the “registrant”, “we”, “us” or “our”) was incorporated on October 1, 1997 under the laws of the State of Delaware, and its wholly-owned subsidiary, Elite Laboratories, Inc. (“Elite Labs”), was incorporated on August 23, 1990 under the laws of the State of Delaware. On January 5, 2012, Elite Pharmaceuticals was reincorporated under the laws of the State of Nevada.

 

We are a specialty pharmaceutical company principally engaged in the development and manufacture of oral, controlled-release products, using proprietary know-how and technology, particularly as it relates to abuse resistant products and the manufacture of generic pharmaceuticals. Our strategy includes improving off-patent drug products for life cycle management, developing generic versions of controlled-release drug products with high barriers to entry and the development of branded and generic products that utilize our proprietary and patented abuse resistance technologies.

 

We occupy manufacturing, warehouse, laboratory and office space at 165 Ludlow Avenue and 135 Ludlow Avenue in Northvale, NJ (the “Northvale Facility”). The Northvale Facility operates under Current Good Manufacturing Practice (“cGMP”) and is a United States Drug Enforcement Agency (“DEA”) registered facility for research, development and manufacturing.

 

Strategy

 

We focus our efforts on the following areas: (i) development of our pain management products; (ii) manufacturing of a line of generic pharmaceutical products with approved Abbreviated New Drug Applications (“ANDAs”); (iii) development of additional generic pharmaceutical products; (iv) development of the other products in our pipeline including the products with our partners; (v) commercial exploitation of our products either by license and the collection of royalties, or through the manufacture of our formulations; and (vi) development of new products and the expansion of our licensing agreements with other pharmaceutical companies, including co-development projects, joint ventures and other collaborations.

 

Our focus is on the development of various types of drug products, including branded drug products which require New Drug Applications (“NDAs”) under Section 505(b)(1) or 505(b)(2) of the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Drug Price Competition Act”) as well as generic drug products which require ANDAs.

 

We believe that our business strategy enables us to reduce its risk by having a diverse product portfolio that includes both branded and generic products in various therapeutic categories and to build collaborations and establish licensing agreements with companies with greater resources thereby allowing us to share costs of development and improve cash-flow.

 

1

 

 

Commercial Products

 

We own, license or contract manufacture the following products currently being sold commercially:

 

Product		Branded Product Equivalent		Therapeutic Category		Launch Date
Phentermine HCl 37.5mg tablets (“Phentermine 37.5mg”)		Adipex-P®		Bariatric		April 2011
Hydromorphone HCl 8mg tablets (“Hydromorphone 8mg”)		Dilaudid®		Pain		March 2012
Phendimetrazine Tartrate 35mg tablets (“Phendimetrazine 35mg”)		Bontril®		Bariatric		November 2012
Phentermine HCl 15mg and 30mg capsules (“Phentermine 15mg” and “Phentermine 30mg”)		Adipex-P®		Bariatric		April 2013
Naltrexone HCl 50mg tablets (“Naltrexone 50mg”)		Revia®		Pain		September 2013
Isradipine 2.5mg and 5mg capsules (“Isradipine 2.5mg” and “Isradipine 5mg”)		n/a		Cardiovascular		January 2015
Oxycodone HCl Immediate Release 5mg, 10mg, 15mg, 20mg and 30mg tablets (“OXY IR 5mg”, “Oxy IR 10mg”, “Oxy IR 15mg”, “OXY IR 20mg” and “Oxy IR 30mg”)		Roxycodone®		Pain		March 2016
Trimipramine Maleate Immediate Release 25mg, 50mg and 100mg capsules (“Trimipramine 25mg”, “Trimipramine 50mg”, “Trimipramine 100mg”)		Surmontil®		Antidepressant		May 2017
Methadone HCl 5mg and 10mg tablets (“Methadone 5mg” and “Methadone 10mg”)		Dolophine®		Pain		November 2018
Dextroamphetamine Saccharate, Amphetamine Aspartate, Dextroamphetamine Sulfate, Amphetamine Sulfate Immediate Release 5mg, 7.5mg, 10mg, 12.5mg, 15mg, 20mg and 30mg tablets (“Amphetamine IR 5mg”, “Amphetamine IR 7.5mg”, “Amphetamine IR 10mg”, “Amphetamine IR 12.5mg”, “Amphetamine IR 15mg”, “Amphetamine IR 20mg” and “Amphetamine IR 30mg”)		Adderall		Central Nervous System (“CNS”) Stimulant		April 2019
Dantrolene Sodium Capsules 25mg, 50mg and 100mg (“Dantrolene 25mg”, “Dantrolene 50mg”, “Dantrolene 100mg”		Dantrium®		Muscle Relaxant		June 2019

 

Note: Phentermine 37.5mg is also referred to as “Phentermine Tablets”. Phentermine 15mg and Phentermine 30mg are collectively and individually referred to as “Phentermine Capsules”. Hydromorphone 8mg is also referred to as “Hydromorphone Tablets”. Phendimetrazine 35mg is also referred to as “Phendimetrazine Tablets”. Naltrexone 50mg is also referred to as “Naltrexone Tablets”. Isradipine 2.5mg and Isradipine 5mg are collectively and individually referred to as “Isradipine Capsules”. Oxy IR 5mg, Oxy IR 10mg, Oxy IR 15mg Oxy IR 20mg and Oxy IR 30mg are collectively and individually referred to as “Oxy IR”. Trimipramine 25mg, Trimipramine 50mg, and Trimipramine 100mg are collectively and individually referred to as “Trimipramine Capsules”. Methadone 5mg and Methadone 10mg are collectively and individually referred to as “Methadone Tablets”. Amphetamine IR 5mg, Amphetamine IR 7.5mg, Amphetamine IR 10mg, Amphetamine IR 12.5mg, Amphetamine IR 15mg, Amphetamine IR 20mg and Amphetamine IR 30mg are collectively and individually referred to as “Amphetamine IR Tablets”. Dantrolene 25mg, Dantrolene 50mg and Dantrolene 100mg are collectively and individually referred to as “Dantrolene Capsules”.

 

Phentermine 37.5mg

 

The approved ANDA for Phentermine 37.5mg was acquired pursuant to an asset purchase agreement with Epic Pharma LLC (“Epic”) dated September 10, 2010 (the “Phentermine Purchase Agreement”).

 

Sales and marketing rights for Phentermine 37.5mg are included in the licensing agreement between the Company and Precision Dose Inc. (“Precision Dose”) dated September 10, 2010 (the “Precision Dose License Agreement”). Please see the section below titled “Precision Dose License Agreement” for further details of this agreement.

 

The first shipment of Phentermine 37.5mg was made to Precision Dose’s wholly owned subsidiary, TAGI Pharmaceuticals Inc. (“TAGI”), pursuant to the Precision Dose License Agreement, with such initial shipment triggering a milestone payment under this agreement. Phentermine 37.5mg is currently being manufactured by Elite and distributed by TAGI under the Precision Dose License Agreement.

 

2

 

 

Hydromorphone 8mg

 

The approved ANDA for Hydromorphone 8mg was acquired pursuant to an asset purchase agreement with Mikah Pharma LLC (“Mikah Pharma”) dated May 18, 2010 (the “Hydromorphone Purchase Agreement”). Transfer of the manufacturing process of Hydromorphone 8mg to the Northvale Facility, a prerequisite of the Company’s commercial launch of the product, was approved by the FDA on January 23, 2012. Sales and marketing rights for Hydromorphone 8mg are included in the Precision Dose License Agreement. Please see the section below titled “Precision Dose License Agreement” for further details of this agreement.

 

The first shipment of Hydromorphone 8mg was made to TAGI, pursuant to the Precision Dose License Agreement, in March 2012, with such initial shipment triggering a milestone payment under this agreement. Hydromorphone 8mg is currently being manufactured by Elite and distributed by TAGI under the Precision Dose License Agreement.

 

Pursuant to an asset purchase agreement executed on January 16, 2020, on February 3, 2020, Elite sold the ANDA for Hydromorphone tablet to Nostrum Laboratories Inc. (“Nostrum”)  for cash consideration totaling $300,000. The carrying value for the asset related to the ANDA was zero, due to an asset impairment recorded during the fiscal year ended March 31, 2011.

 

Phendimetrazine Tartrate 35mg

 

The ANDA for Phendimetrazine 35mg was acquired by Elite as part of the asset purchase agreement between the Company and Mikah Pharma, dated August 1, 2013 (the “Mikah ANDA Purchase”). Please see “2013 ANDA Purchase Agreement” below for more information on this agreement. The Northvale Facility was already an approved manufacturing site for this product as of the date of the Mikah ANDA Purchase. Prior to the acquisition of this ANDA, Elite had been manufacturing this product on a contract basis pursuant to a manufacturing and supply agreement with Mikah Pharma, dated June 1, 2011.

 

Phendimetrazine 35mg is currently a commercial product being manufactured by Elite and distributed by Glenmark Pharmaceuticals Inc., USA (“Glenmark”) on a non-exclusive basis, and by Elite.

 

On January 2, 2018, the Company announced that it received approval of its abbreviated new drug application (“ANDA”) from the FDA for Phendimetrazine Tartrate Tablets USP, 35mg. This product approval is from an ANDA that the Company filed approximately six years ago. This approval resulted in the Company having a second, approved ANDA for this product. The Company has been selling this product pursuant to the marketing authorization achieved from the first approved ANDA. The Company is currently considering strategic options for utilization of this approved ANDA, with such options including, without limitation, divestiture.

 

Phentermine 15mg and Phentermine 30mg

 

Phentermine 15mg capsules and Phentermine 30mg capsules were developed by the Company, with Elite receiving approval of the related ANDA in September 2012.

 

Sales and marketing rights for Phentermine 15mg and Phentermine 30mg are included in the Precision Dose License Agreement. Please see the section below titled “Precision Dose License Agreement” for further details of this agreement.

 

The first shipments of Phentermine 15mg and Phentermine 30mg were made to TAGI, pursuant to the Precision Dose License Agreement, in April 2013, with such initial shipments triggering a milestone payment under this agreement. Phentermine 15mg and Phentermine 30mg are currently being manufactured by Elite and distributed by TAGI under the Precision Dose License Agreement.

 

Naltrexone 50mg

 

The approved ANDA for Naltrexone 50mg was acquired by the Company pursuant to an asset purchase agreement between the Company and Mikah Pharma dated August 27, 2010 (the “Naltrexone Acquisition Agreement”) for aggregate consideration of $200,000.

 

Sales and marketing rights for Naltrexone 50mg are included in the Precision Dose License Agreement. Please see the section below titled “Precision Dose License Agreement” for further details of this agreement.

 

The first shipment of Naltrexone 50mg was made to TAGI, pursuant to the Precision Dose License Agreement, in September 2013, with such initial shipment triggering a milestone payment under this agreement. Naltrexone 50mg is currently being manufactured by Elite and distributed by TAGI under the Precision Dose License Agreement.

 

Isradipine 2.5mg and Isradipine 5mg

 

The approved ANDAs for Isradipine 2.5mg and Isradipine 5mg were acquired by Elite as part of the Mikah ANDA Purchase.

 

Isradipine 2.5mg and Isradipine 5mg are currently a commercial product being manufactured by Elite and distributed by Glenmark, on an exclusive basis.

 

3

 

  

Oxycodone 5mg, Oxycodone 10mg, Oxycodone 15mg, Oxycodone 20mg and Oxycodone 30mg (“Oxy IR”)

 

We received notification from Epic in October 2015 of the approval by the FDA of Epic’s ANDA for Oxy IR. This product was an Identified IR Product in the Epic Strategic Alliance Agreement Dated March 18, 2009 (the “Epic Strategic Alliance”). Oxy IR was developed at the Northvale Facility pursuant to the Epic Strategic Alliance, in which we are entitled to a Product Fee of 15% of Profits as defined in the Epic Strategic Alliance. The first commercial sale of Oxy IR occurred in March 2016, and sales by Epic of this product are ongoing.

 

Trimipramine 25mg, Trimipramine 50mg, and Trimipramine 100mg

 

Through Elite Labs, Elite acquired an approved and currently marketed ANDA for Trimipramine Maleate Capsules (“Trimipramine”) 25mg, 50mg and 100mg, from Mikah Pharma.

 

Trimipramine 25mg, Trimipramine 50mg and Trimipramine 100mg are currently a commercial product being manufactured by Elite and distributed by Glenmark, on an exclusive basis.

 

Amphetamine IR Tablets

 

On December 10, 2018, the Company received approval from the FDA for Amphetamine IR Tablets, 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 5 mg, 7.5mg, 10mg, 12.5mg, 15mg, 20mg, and 30mg tablets. The product is a central nervous system stimulant and is indicated for the treatment of Attention Deficit Hyperactivity Disorder (“ADHD”) and Narcolepsy. According to QVIA (formerly QuintilesIMS Health) data the branded product and its equivalents had total U.S. sales of $365 million for the twelve months ending September 30, 2018. This is the first product approval for our Elite and SunGen Pharma LLC (“SunGen”) collaboration. The product is jointly owned. Elite manufactures and packages the product on a cost-plus basis. Amphetamine IR Tablets are currently sold pursuant to the Lannett Alliance, with first commercial shipment of this product occurring in April 2019. Please see the section below titled “Strategic Marketing Alliance with Lannett Company Inc.” for further details on the Lannett Alliance.

 

Dantrolene 25mg, Dantrolene 50mg and Dantrolene 100mg

 

The approved ANDAs for Isradipine 2.5mg and Isradipine 5mg were acquired by Elite as part of the Mikah ANDA Purchase. Elite manufactures and packages Dantrolene Capsules on a cost-plus basis. Dantrolene Capsules are currently sold pursuant to the Lannett Alliance, with the first commercial shipment of this product occurring in June 2019. Please see the section below titled “Strategic Marketing Alliance with Lannett Company Inc.” for further details on the Lannett Alliance.

 

Filed products under FDA review

 

SequestOx™ - Immediate Release Oxycodone with sequestered Naltrexone

 

SequestOx™ is our lead abuse-deterrent candidate for the management of moderate to severe pain where the use of an opioid analgesic is appropriate. SequestOx™ is an immediate-release Oxycodone Hydrochloride containing sequestered Naltrexone which incorporates 5mg, 10mg, 15mg, 20mg and 30mg doses of oxycodone into capsules.

 

In January 2016, the Company submitted a 505(b)(2) New Drug Application for SequestOx™, after receiving a waiver of the $2.3 million filing fee from the FDA. In March 2016, the Company received notification of the FDA’s acceptance of this filing and that such filing has been granted priority review by the FDA with a target action under the Prescription Drug User Fee Act (“PDUFA”) of July 14, 2016.

 

On July 15, 2016, the FDA issued a Complete Response Letter, or CRL, regarding the NDA. The CRL stated that the review cycle for the SequestOx™ NDA is complete and the application is not ready for approval in its present form.

 

On July 7, 2017, the Company reported topline results from a pivotal bioequivalence fed study for or SequestOx™. The mean Tmax (the amount of time that a drug is present at the maximum concentration in serum) of SequestOx ^TM 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 ^TM 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.

 

4

 

  

There can be no assurances of the Company conducting future clinical trials, or if such trials are conducted, there can be no assurances of the success of any future clinical trials, or if such trials are successful, there can be no assurances that an intended future resubmission of the NDA product filing, if made, will be accepted by or receive marketing approval from the FDA, and accordingly, there can be no assurances that the Company will earn and receive the additional $7.5 million or future license fees (please see “Licensing, Manufacturing and Development Agreements; Sales and Distribution Licensing Agreement with Epic Pharma LLC for SequestOx™” below). 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 or profits, or that any such future revenues or profits would be in amounts that provide adequate return on the significant investments made to secure this marketing authorization.

 

Oxycodone Hydrochloride extended release (generic version of Oxycontin®)

 

On September 20, 2017, the Company filed an ANDA with the FDA for generic version of Oxycontin® (extended release Oxycodone Hydrochloride). OxyContin® is approved for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. IMS reported approximately $2.3 billion in revenue for OxyContin® and its equivalents in 2016. The FDA requested additional information relating to this filing, compliance with which would require significant resources. Development of this product is currently paused, with the Company evaluating the feasibility of the continued development of this product.

 

There can be no assurances that any of these products will receive marketing authorization and achieve commercialization within this time period, or at all. 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 these marketing authorizations.

 

Approved Products Not Yet Commercialized

 

Loxapine 5mg, 10mg, 25mg and 50mg capsules (“Loxapine Capsules”)

 

A PAS has been filed with the FDA for transfer of manufacturing of this product to the Northvale Facility, with such PAS being under review by the FDA. The approved ANDAs for Loxapine Capsules were acquired as part of the 2013 ANDA acquisition between the Company and Mikah Pharma. Please see the section below titled “Asset Acquisition Agreements” for further details on the 2013 ANDA acquisition agreement.

 

Acetaminophen and Codeine Phosphate, USP CII (generic version of Tylenol® with Codeine)

 

On September 18, 2018, the Company filed an ANDA with the FDA for a generic version of Tylenol® with Codeine (acetaminophen and codeine phosphate) 300mg/15mg, 300mg/30mg and 300mg/60mg tablets. Acetaminophen with codeine is a combination medication indicated for the management of mild to moderate pain, where treatment with an opioid is appropriate and for which alternative treatments are inadequate. Acetaminophen with codeine products have annual U.S. sales of approximately $45 million according to IQVIA (formerly QuintilesIMS Health Data). The Company received approval of this ANDA in September 2019. Elite has not yet launched this product and is seeking a partner for this product.

 

Generic version of extended release Central Nervous System stimulant (generic version of Adderall XR®)

 

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. According to IMS Health data, the branded product and its equivalents had total U.S. sales of approximately $1.6 billion for the twelve months ended September 30, 2017. On December 12, 2019, the Company reported that it received approval from the US Food and Drug Administration for a generic version of Adderall XR®, an extended-release mixed salt of a single entity Amphetamine product (Dextroamphetamine Saccharate, Amphetamine Aspartate, Dextroamphetamine Sulfate, Amphetamine Sulfate) with strengths of 5 mg, 10 mg, 15 mg, 20 mg, 25 mg and 30 mg tablets. This is the second product approval for our Elite and SunGen Pharma LLC (“SunGen”) collaboration. The product is jointly owned. Elite manufactures and packages the product on a cost-plus basis. Amphetamine XR Tablets will be sold pursuant to the Lannett Alliance. The Company expects to launch this product during the current fiscal year ending March 31, 2020. Please see the section below titled “Strategic Marketing Alliance with Lannett Company Inc.” for further details on the Lannett Alliance.

 

Discontinued and Transferred Products

 

The FDA’s Generic Drug User Fee Amendment (“GDUFA”) fee structure includes fee brackets that are based on the number of ANDAs owned as of the April 1st annual measurement date. As of the measurement date in 2018, the Company qualified as a medium sized company, which is defined as an entity that owns between 6 and 19 ANDAs. During the fiscal year ending March 31, 2019, the Company received approval for several ANDAs, which, when added to those approved in prior periods resulted in the Company owning in excess of 19 ANDA’s and would have required classification as a large sized company as of the 2019 measurement date. Based on the latest fee schedule published by the FDA in August 2018, the annual fee for a large company is $1.1 million higher than the fee we paid as a qualified medium company. Qualifying as a large sized company would accordingly result in a significant increase in annual regulatory fees.

 

5

 

  

Prior to the April 1, 2019 measurement date, the Company conducted an evaluation of all ANDAs owned to determine the feasibility of incurring such increased annual fees in relation to the value and place of each ANDA in the company’s current and future operations and strategic plans. Based on this study, the Company identified the following ANDAs for sale and, if sale was not possible prior to the measurement date, discontinuance, so as to ensure that total ANDAs owned at the measurement date were not greater than 19, allowing the Company to qualify as a medium sized entity, as opposed to a large sized entity, which would have resulted in increased regulatory costs in excess of $1 million annually.

 

Hydroxyzine HCl

 

Approved ANDAs for Hydroxyzine HCl 10mg, 25mg and 50mg tablets (“Hydroxyzine Tablets”) were sold to Epic Pharma LLC for cash consideration totaling $450,000. The three related approved ANDA’s had an aggregate carrying value of $787,000, with such sale resulting in a recognized loss of $337,000 during the fiscal year ended March 31, 2019.

 

Phentermine Capsules

 

Approved ANDAs for Phentermine 30mg and 15mg capsules and Phentermine 30mg seeded capsules were discontinued in March 2019. These three ANDAs had an aggregate carrying value of $291,000, which was recognized as a loss during the fiscal year ended March 31, 2019

 

Oxycodone Hydrochloride and Acetaminophen, USP CII (generic version of Percocet®)

 

Approve ANDAs for a generic version of Percocet® (oxycodone hydrochloride and acetaminophen, USP CII) 5mg, 7.5mg and 10mg tablets with 325mg of acetaminophen were sold to Nostrum for cash consideration totaling $300,000. The three related approved ANDA’s were developed by Elite, with the costs of such development being charged to expense in the periods incurred, in accordance with generally accepted accounting principles.

 

Hydrocodone bitartrate and acetaminophen tablets USP CII (generic version of Norco)

 

Approved ANDAs for a generic version of Norco^® (hydrocodone bitartrate and acetaminophen tablets USP CII) 2.5mg/325mg, 5mg/325mg, 7.5mg/325mg and 10mg/325mg tablets were sold to Nostrum for cash consideration totaling $300,000. The four related approved ANDA’s were developed by Elite, with the costs of such development being charged to expense in the periods incurred, in accordance with generally accepted accounting principles.

 

Asset Acquisition Agreements

 

Generic Phentermine Capsules

 

On September 10, 2010, together with our wholly owned subsidiary, Elite Laboratories, Inc., executed a purchase agreement (the “Phentermine Purchase Agreement”) with Epic for the purpose of acquiring from Epic, an ANDA for a generic phentermine product (the “Phentermine ANDA”), with such being filed with the FDA at the time the Phentermine Purchase Agreement was executed. On February 4, 2011, the FDA approved the Phentermine ANDA. The acquisition of the Phentermine ANDA closed on March 31, 2011 and Elite paid the full acquisition price of $450,000 from the purchase agreement with Epic Pharma.

 

This product is being marketed and distributed by Precision Dose and its wholly owned subsidiary, TAGI, pursuant to the Precision Dose License Agreement, a description of which is set forth below.

 

Generic Hydromorphone HCl Product

 

On May 18, 2010, we executed an asset purchase agreement with Mikah Pharma (the “Hydromorphone Purchase Agreement”). Pursuant to the Hydromorphone Purchase Agreement, the Company acquired from Mikah Pharma an approved ANDA for Hydromorphone 8 mg for aggregate consideration of $225,000, comprised of an initial payment of $150,000, which was made on May 18, 2010. A second payment of $75,000 was due to be paid to Mikah Pharma on June 15, 2010, with the Company having the option to make this payment in cash or by issuing to Mikah Pharma 937,500 shares of our common stock. We elected and did issue 937,500 shares of Common Stock during the quarter ended December 31, 2010, in full payment of the $75,000 due to Mikah Pharma pursuant to the Hydromorphone Purchase Agreement dated May 18, 2010.

 

This product is currently being marketed and distributed by Precision Dose and its wholly owned subsidiary, TAGI, pursuant to the Precision Dose License Agreement, a description of which is set forth below.

 

6

 

  

Generic Naltrexone Product

 

On August 27, 2010, we executed an asset purchase with Mikah Pharma (the “Naltrexone Acquisition Agreement”). Pursuant to the Naltrexone Acquisition Agreement, Elite acquired from Mikah Pharma the ANDA number 75-274 (Naltrexone Hydrochloride Tablets USP, 50 mg), and all amendments thereto, that have to date been filed with the FDA seeking authorization and approval to manufacture, package, ship and sell the products described in this ANDA within the United States and its territories (including Puerto Rico) for aggregate consideration of $200,000. In lieu of cash, Mikah Pharma agreed to accept product development services to be performed by us.

 

This product is being marketed and distributed by Precision Dose and its wholly owned subsidiary, TAGI, pursuant to the Precision Dose License Agreement, a description of which is set forth below.

 

2013 ANDA Purchase Agreement

 

On August 1, 2013, Elite executed a purchase agreement with Mikah (the “2013 ANDA Purchase Agreement”) pursuant to which, Elite acquired, for aggregated consideration of $10,000,000, inclusive of imputed interest, approved ANDAs for the following products: Hydroxyzine HCl 10mg, 25mg and 50mg tablets (“Hydroxyzine Tablets”), Phentermine Capsules, Phentermine Tablets, Phendimetrazine Tablets, Isradipine Capsules, Dantrolene Capsules and Loxapine 5mg, 10mg, 25mg and 50mg capsules (“Loxapine Capsules”). In addition, Elite acquired one ANDA under review by the FDA, which is not expected to be approved and for which no value was assigned.

 

The Company issued a secured, non-interest bearing, convertible note for the aggregate consideration, with such note being due in August 2016. This note was amended on February 7, 2014 to make it convertible into shares of the Company’s Series I Convertible Preferred Stock. On February 7, 2014, this note was converted into 100 shares of the Company’s Series I Preferred Stock and retired.

 

On August 16, 2016, these 100 shares of Series I Preferred Stock were converted into 142,857,143 shares of Common Stock, with such shares being included in the exchange agreement dated April 28, 2017 pursuant to which shares were returned to the company, in exchange for shares of Series J Preferred Stock and Warrants, both of which are still outstanding. Please see “Certain Relationships and Related Transactions, And Director Independence”, below for further details of these transactions.

 

The following is a summary of the status of the ANDAs acquired pursuant to the 2013 ANDA Purchase Agreement:

 

Product		Status
Hydroxyzine Tablets		Transferred to Epic Pharma
Phentermine Capsules		Discontinued
Phentermine Tablets		Commercial
Phendimetrazine Tablets		Commercial
Isradipine Capsules		Commercial
Dantrolene Capsules		Commercial
Loxapine Capsules		Manufacturing site transfer in progress

 

Trimipramine

 

In May 2017, through Elite Labs, we acquired from Mikah Pharma an FDA approved ANDA for Trimipramine for aggregate consideration of $1,200,000. Trimipramine is currently manufactured by Elite and marketed by Glenmark pursuant to the Glenmark Strategic Alliance. Trimipramine is a generic version of Surmontil®, a tricyclic antidepressant. Surmontil® and generic Trimipramine have total US sales of approximately $2 million in 2016 according to IMS Health Data. The ANDA purchased by Elite is currently the only marketed generic Trimipramine product.

 

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Licensing, Manufacturing and Development Agreements

 

Sales and Distribution Licensing Agreement with Epic Pharma LLC for SequestOx™

 

On June 4, 2015, we executed an exclusive License Agreement (the “2015 SequestOx™ License Agreement”) with Epic, to market and sell in the U.S., SequestOx™, an immediate release oxycodone with sequestered naltrexone capsule, owned by us. Epic will have the exclusive right to market ELI-200 and its various dosage forms as listed in Schedule A of the Agreement. Epic is responsible for all regulatory and pharmacovigilance matters related to the products. Pursuant to the 2015 SequestOx™ License Agreement, Epic will pay us non-refundable payments totaling $15 million, with such amount representing the cost of an exclusive license to SequestOx™, the cost of developing the product, the filing of an NDA with the FDA and the receipt of the approval letter for the NDA from the FDA. As of the date of filing of this quarterly report on Form 10-Q, the Company has received $7.5 million of the $15 million in non-refundable payments due pursuant to the 2015 SequestOx™ License Agreement, with such amount consisting of $5 million being due and owing on the execution date of the 2015 SequestOx™ License Agreement, and $2.5 million being earned as of January 14, 2016, the date of Elite’s filing of an NDA with the FDA for the relevant product. Both of these non-refundable fees (i.e., the $5 million fee and the $2.5 million fee), have been paid by Epic.

 

The remaining $7.5 million in non-refundable payments due pursuant to the 2015 SequestOx™ License Agreement is due on the FDA’s approval of SequestOx™ for commercial sale in the United States of America (please see the paragraph below for further details). In addition, we will receive a license fee computed as a percentage (50%) of net sales of the products as defined in the 2015 SequestOx™ License Agreement and is entitled to multi-million-dollar minimum annual license fees we will manufacture the product for sale by Epic on a cost-plus basis and both parties agree to execute a separate Manufacturing and Supply Agreement. The license fee is payable quarterly for the term of the 2015 SequestOx™ License Agreement. The term of the 2015 SequestOx™ License Agreement is five years and may be extended for an additional five years upon mutual agreement of the parties. Elite can terminate the 2015 SequestOx™ License Agreement on 90 days’ written notice in the event that Epic does not pay us certain minimum annual license fees over the initial five-year term of the 2015 SequestOx™ License Agreement. Either party may terminate this 2015 SequestOx™ License Agreement upon a material breach and failure to cure that breach by the other party within a specified period.

 

Please see the above section titled “SequestOx™ - Immediate Release Oxycodone with sequestered Naltrexone” for further details on this product and especially note that, as of the date of filing of this Quarterly Report on Form 10-Q, the NDA filed for this product has not been approved by the FDA. Furthermore, the 2015 SequestOx™ License Agreement has a five-year term, expiring 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 agreement of the parties.

 

Manufacturing and License Agreement with Epic Pharma LLC

 

On October 2, 2013, we executed the Epic Pharma Manufacturing and License Agreement (the “Epic Manufacturing and License Agreement”). This agreement, which expired on October 2, 2018, granted Epic certain rights to manufacture, market and sell in the United States and Puerto Rico the twelve approved ANDAs acquired by us pursuant to the 2013 ANDA Purchase Agreement. Of the twelve approved ANDAs, Epic had an exclusive right to market six products as listed in Schedule A of the Epic Manufacturing and License Agreement, and a non-exclusive right to market six products as listed in Schedule D of the Epic Manufacturing and License Agreement. Pursuant to the Epic Manufacturing and License Agreement, we received a license fee and milestone payments. The license fee was computed as a percentage of the gross profit, as defined in the Epic Manufacturing and License Agreement, earned by Epic from the sale of the products. The manufacturing cost used for the calculation of the license fee was a predetermined amount per unit plus the cost of the active pharmaceutical ingredient (“API”) and the sales cost for the calculation was predetermined based on net sales.

 

The Epic Manufacturing and License Agreement expired on October 2, 2018, in accordance with terms and conditions therein.

 

Trimipramine Acquisition

 

On May 16, 2017, we executed an asset purchase agreement with Mikah Pharma, and acquired from Mikah Pharma (the “Trimipramine Acquisition”) an FDA approved ANDA for Trimipramine for aggregate consideration of $1,200,000, payable pursuant to a senior secured note due on December 31, 2020 (the “Trimipramine Note”). Mikah Pharma is owned by Nasrat Hakim, the CEO, President, and a director of the Company.

 

The Trimipramine Note bears interest at the rate of 10% per annum, payable quarterly. All principal and unpaid interest is due and payable on December 31, 2020. Pursuant to a security agreement, repayment of the Note is secured by the ANDA acquired in the Acquisition.

 

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Trimipramine Distribution Agreement with Dr. Reddy’s Laboratories, Inc. and Manufacturing Agreement with Epic

 

On May 17, 2017, in conjunction with the Trimipramine Acquisition, the Company executed an assignment agreement with Mikah Pharma, pursuant to which the Company acquired all rights, interests, and obligations under a supply and distribution agreement (the “Reddy’s Trimipramine Distribution Agreement”) with Dr. Reddy’s Laboratories, Inc. (“Dr. Reddy’s”) originally entered into by Mikah Pharma on May 7, 2017 and relating to the supply, sale and distribution of generic Trimipramine Maleate Capsules 25mg, 50mg and 100mg.

 

On May 22, 2017, the Company executed an assignment agreement with Mikah Pharma, pursuant to which the Company acquired all rights, interests and obligations under a manufacturing and supply agreement with Epic originally entered into by Mikah in 2011 and amended on June 30, 2015 and relating to the manufacture and supply of Trimipramine (the “Trimipramine Manufacturing Agreement”).

 

Under the Trimipramine Manufacturing Agreement, Epic manufactured Trimipramine under license from the Company pursuant to the FDA approved and currently marketed Abbreviated New Drug Application that was acquired in conjunction with the Company’s entry into these agreements.

 

Under the Reddy’s Trimipramine Distribution Agreement, the Company supplied Trimipramine on an exclusive basis to Dr. Reddy’s and Dr. Reddy’s was responsible for all marketing and distribution of Trimipramine in the United States, its territories, possessions, and commonwealth. The Trimipramine was manufactured by Epic and transferred to Dr. Reddy’s at cost, without markup.

 

Dr. Reddy’s paid the Company a share of the profits, calculated without any deduction for cost of sales and marketing, derived from the sale of Trimipramine. The Company’s share of these profits was in excess of 50%.

 

The Reddy’s Trimipramine Distribution Agreement was terminated by mutual consent of the parties on August 1, 2018.

 

Ascend Methadone Manufacturing and Supply Agreement

 

On June 23, 2011 and as amended on September 24, 2012, January 19, 2015, July 20, 2015 and as extended on August 9, 2016, we entered into an agreement to manufacture and supply Methadone 10mg tablets (the “Ascend Methadone”) to ThePharmaNetwork LLC (the “Ascend Methadone Manufacturing and Supply Agreement”). ThePharmaNetwork LLC was subsequently acquired by Alkem Laboratories Ltd (“Alkem”) and now goes by the name Ascend Laboratories LLC (“Ascend”) and is a wholly owned subsidiary of Alkem.

 

Ascend is the owner of the approved ANDA for Ascend Methadone, and the Northvale Facility is an approved manufacturing site for this ANDA. The Ascend Methadone Manufacturing and Supply Agreement provides for the manufacturing and packaging by the Company of Ascend Methadone.

 

The initial shipment of Ascend Methadone pursuant to the Ascend Methadone Manufacturing and Supply Agreement occurred in January 2012.

 

On August 26, 2016, the Ascend Methadone Manufacturing and Supply Agreement was amended and extended through December 31, 2017.

 

Subsequent to the expiration of the Ascend Methadone Manufacturing and Supply Agreement, the Company honored purchase orders from Ascend, to manufacture Ascend Methadone. The commercial terms on those purchase orders honored were similar to those included in the expired agreement. The last shipment of Ascend Methadone pursuant to purchase orders honored subsequent to the expiration of the Ascend Methadone Manufacturing and Supply Agreement occurred in April 2018 and there will be no further manufacture or shipments of Ascend Methadone.

 

Precision Dose License Agreement

 

On September 10, 2010, we executed a License Agreement with Precision Dose (the “Precision Dose License Agreement”) to market and distribute Phentermine 37.5mg, Phentermine 15mg, Phentermine 30mg, Hydromorphone 8mg, Naltrexone 50mg, and certain additional products that require approval from the FDA, through its wholly-owned subsidiary, TAGI, in the United States, Puerto Rico and Canada. Phentermine 37.5mg was launched in April 2011. Hydromorphone 8mg was launched in March 2012. Phentermine 15mg and Phentermine 30mg were launched in April 2013. Naltrexone 50mg was launched in September 2013. 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 will receive a license fee and milestone payments. The license fee will be computed as a percentage of the gross profit, as defined in the Precision Dose License Agreement, earned by Precision Dose as a result of sales of the products. The license fee is payable monthly for the term of the Precision Dose License Agreement. The milestone payments will be paid in six installments. The first installment was paid upon execution of the Precision Dose License Agreement. The remaining installments are to be paid upon FDA approval and initial shipment of the products to Precision Dose. The term of the Precision Dose License Agreement is 15 years and may be extended for 3 successive terms, each of 5 years.

 

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Master Development and License Agreement with SunGen Pharma LLC

 

On August 24, 2016, as amended we entered into an agreement with SunGen Pharma LLC (“SunGen”) (the “SunGen Agreement”) to undertake and engage in 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 received approval from the FDA for Amphetamine IR Tablets (the first of the two CNS Products) and has filed ANDA’s for the second CNS Product as well as ANDA filed for an antibiotic product.

 

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.

 

On January 10, 2018, the Company reported positive topline results from pivotal bioequivalence studies for an undisclosed extended-release generic product in co-development with SunGen Pharma. The topline results indicate that the generic product is bioequivalent to the branded product. The studies were single dose crossover comparative bioavailability studies in healthy male and female volunteers in both the fed and fasting states. A fasting study with product beads sprinkled on to applesauce also demonstrated bioequivalence to the branded product. MS Health reported approximately $1.6 billion in revenue for the generic market for this product in 2017.

 

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. According to IMS Health data, the branded product and its equivalents had total U.S. sales of approximately $1.6 billion for the twelve months ended September 30, 2017. The Company received a request from the FDA for additional information to which the Company has responded. The filing is under review by the FDA.

 

On December 10, 2018, the Company received approval from the FDA for Amphetamine IR Tablets, 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 a central nervous system stimulant and is indicated for the treatment of Attention Deficit Hyperactivity Disorder (“ADHD”) and Narcolepsy. According to QVIA (formerly QuintilesIMS Health) data the branded product and its equivalents had total U.S. sales of $365 million for the twelve months ending June 30, 2018. This is the first product approval for our Elite and SunGen Pharma LLC (“SunGen”) collaboration. The product is jointly owned. Elite will manufacture and package the product on a cost-plus basis and the parties are negotiating an agreement for sales of the product. Amphetamine IR Tablets is currently sold pursuant to the Lannett Alliance, with first commercial shipment of this product occurring in April 2019. Please see the section below titled “Strategic Marketing Alliance with Lannett Company Inc.” for further details on the Lannett Alliance.

 

On January 3, 2019, the Company filed an ANDA with the FDA for a generic version of an antibiotic product. According to QVIA (formerly QuintilesIMS Health) data, the branded product for this antibiotic and its equivalents had total annual U.S. sales of approximately $94 million for the twelve months ending September 30, 2018. The product is jointly owned by Elite and SunGen. Upon approval by the FDA of this ANDA, Elite will manufacture and package the product on a cost-plus basis. The ANDA is currently under review by the FDA.

 

There can be no assurances that any of these products will receive marketing authorization and achieve commercialization within this time period, or at all. In addition, even if marketing authorization is received, and even for those products for which 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 or provide sufficient financial contributions to support costs of operations and overheads.

 

Strategic Marketing Alliance with Glenmark Pharmaceuticals, Inc. USA

 

On May 22, 2018, and as amended on August 1, 2018, we entered into a license, manufacturing and supply agreement with Glenmark Pharmaceuticals Inc. USA (“Glenmark”) to market the two Elite generic products described below in the United States with the option to add products in the future (the “Glenmark Alliance”).

 

Pursuant to the Glenmark Alliance, Glenmark 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 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 the following ANDA approved generic products: Methadone 10mg, Methadone 5mg, Trimipramine 25mg, Trimipramine 50mg, Trimipramine 100mg, and effective October 2, 2018, upon expiration of the Epic Manufacturing and License Agreement, exclusive marketing rights to the following ANDA approved generic products: Isradipine 2.5mg and Isradipine 5mg. The Glenmark 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 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.

 

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The first commercial shipment of Methadone Tablets pursuant to the Glenmark Alliance occurred in November 2018. The first commercial shipment of Isradipine Capsules pursuant to the Glenmark Alliance occurred in March 2019. The first commercial shipment of Trimipramine Capsules occurred in April 2019.

 

There can be no assurances that there will be future revenues of profits, earned pursuant to the Glenmark Alliance, or that any such future revenues or profits would be in amounts that provide adequate return on the significant investments made to secure the marketing authorizations for products included in the Glenmark Alliance or provide sufficient financial contributions to support costs of operations and overheads.

 

Strategic Marketing Alliances with Lannett Company Inc.

 

The Company has entered into two separate license, supply and distribution agreements with Lannett Company Inc. (“Lannett”). The first agreement, dated March 6, 2019, relates to products that were co-developed with SunGen (the “Lannett-SunGen Product Alliance”). The second agreement, dated April 9, 2019, relates to products that were solely developed by Elite (the “Lannett-Elite Product Alliance”). Both agreements are collectively and individually referred to as the “Lannett Alliance”.

 

Pursuant to Lannett-SunGen Product Alliance with 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 profit 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.

 

Products Under Development

 

Elite’s research and development activities include developing its proprietary abuse deterrent technology and the development of a range of abuse deterrent opioid products that utilize this technology or other approaches to abuse deterrence.

 

Elite’s proprietary abuse-deterrent technology utilizes the pharmacological approach to abuse deterrence and consists of a multi-particulate capsule which contains an opioid agonist in addition to naltrexone, an opioid antagonist used primarily in the management of alcohol dependence and opioid dependence. When this product is taken as intended, the naltrexone is designed to pass through the body unreleased while the opioid agonist releases over time providing therapeutic pain relief for which it is prescribed. If the multi-particulate beads are crushed or dissolved, the opioid antagonist, naltrexone, is designed to release. The absorption of the naltrexone is intended to block the euphoria by preferentially binding to same receptors in the brain as the opioid agonist and thereby reducing the incentive for abuse or misuse by recreational drug abusers.

 

We filed an NDA for the first product to utilize our abuse deterrent technology, Immediate Release Oxycodone 5mg, 10mg, 15mg, 20mg and 30mg with sequestered Naltrexone (collectively and individually referred to as “SequestOx™”), on January 14, 2016. Please see “Filed products under FDA review; SequestOx™ - Immediate Release Oxycodone with sequestered Naltrexone” above and please note that continued development of this product is currently paused.

 

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On September 20, 2017, the Company filed an ANDA with the FDA for generic version of OxyContin® (extended release Oxycodone Hydrochloride). Please see “Filed products under FDA review; Oxycodone Hydrochloride extended release (generic version of OxyContin ®” above. Please note that there can be no assurances of this product receiving marketing authorization or achieving commercialization. In addition, even if marketing authorization is received and the product is commercialized, there can be no assurances of future revenues or profits in such amounts that would provide adequate return on the significant investments made to secure marketing authorization for this product.

 

On May 30, 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. Please see “Filed products under FDA review Generic version of extended release Central Nervous System stimulant” above. Please note that there can be no assurances of this product receiving marketing authorization or achieving commercialization. In addition, even if marketing authorization is received and the product is commercialized, there can be no assurances of future revenues or profits in such amounts that would provide adequate return on the significant investments made to secure marketing authorization for this product. Please also see the section below titled “Master Development and License Agreement with SunGen Pharma LLC”.

 

On January 3, 2019, the Company filed an Abbreviated New Drug Application with the US Food and Drug Administration for a generic version of an antibiotic product. Please see “Filed products under FDA review” above. Please note that there can be no assurances of this product receiving marketing authorization or achieving commercialization. In addition, even if marketing authorization is received and the product is commercialized, there can be no assurances of future revenues or profits in such amounts that would provide adequate return on the significant investments made to secure marketing authorization for this product. Please also see the section below titled “Master Development and License Agreement with SunGen Pharma LLC”.

 

The Company believes that the abuse deterrent technology can be applied to and incorporated into a wide range of opioids used today for pain management and has, to date, identified additional products for potential development. All of these products are at early stages of development, with research and development activities mainly consisting of in-house process development and laboratory studies. Extensive efficacy and safety studies, similar to those conducted for SequestOx™, Generic Oxy/APAP and Generic Hydrocodone/APAP, have not yet been conducted for these other products. As a result, costs incurred in relation to the development of these products have not been material.

 

Research and development costs were $7.6 million and $9.6 million for years ended March 31, 2019 and 2018, respectively. Costs incurred relate to the development of the abuse deterrent opioid product, SequestOx™, the ongoing development of our abuse deterrent opioid and other products in addition to a focus on clinical trials for generic products.

 

Please note that, while the FDA is required to review applications within certain timeframes, during the review process, the FDA frequently requests that additional information be submitted. The effect of such request and subsequent submission can significantly extend the time for the NDA review process. Until an NDA is actually approved, there can be no assurances that the information requested and submitted will be considered adequate by the FDA to justify approval. The packaging and labeling of our developed products are also subject to FDA regulation. Based on the foregoing, it is impossible to anticipate the amount of time that will be needed to obtain FDA approval to market any product. In addition, there can be no assurances of the Company filing the required application(s) with the FDA or of the FDA approving such application(s) if filed, and the Company’s ability to successfully develop and commercialize products incorporating its abuse deterrent technology is subject to a high level of risk as detailed in “Item 1A-Risk Factors-Risks Related to our Business” of the Annual Report on Form 10-K for the year ended March 31, 2019.

 

Abuse-Deterrent and Sustained Release Opioids

 

The abuse-deterrent opioid products utilize our patented abuse-deterrent technology that is based on a pharmacological approach. These products are combinations of a narcotic agonist formulation intended for use in patients with pain, and an antagonist, formulated to deter abuse of the drug. Both, agonist and antagonist, have been on the market for a number of years and sold separately in various dose strengths. We have filed INDs for two abuse resistant products under development and have tested products in various pharmacokinetic and efficacy studies. Products utilizing the pharmacological approach to deter abuse such as Suboxone®, a product marketed in the United States by Reckitt Benckiser Pharmaceuticals, Inc., and Embeda®, a product marketed in the United States by Pfizer, Inc., have been approved by the FDA and are being marketed in the United States.

 

We have developed, licensed to Epic the marketing rights to SequestOx™, immediate release Oxycodone with Naltrexone, and retain the rights to the remainder of these abuse resistant and sustained release opioid products. We may license these products at a later date to a third party who could provide funding for the remaining clinical studies and who could provide sales and distribution for the product.

 

We also developed controlled release technology for oxycodone under a joint venture with Elan which terminated in 2002. According to the Elan Termination Agreement, we acquired all proprietary, development and commercial rights for the worldwide markets for the products developed by the joint venture, including the sustained release opioid products. Upon licensing or commercialization of an oral controlled release formulation of oxycodone for the treatment of pain, we will pay a royalty to Elan pursuant to the Elan Termination Agreement. If we were to sell the product itself, we will pay a 1% royalty to Elan based on the product’s net sales, and if we enter into an agreement with another party to sell the product, we will pay a 9% royalty to Elan based on our net revenues from this product. We are allowed to recoup all development costs including research, process development, analytical development, clinical development and regulatory costs before payment of any royalties to Elan.

 

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Patents

 

Since our incorporation, we have secured the following patents, of which two have been assigned for a fee to another pharmaceutical company. Our patents are:

 

PATENT		EXPIRATION DATE
U.S. patent 6,620,439		October 2020
U.S. patent 6,926,909		April 2023
U.S. patent 8,182,836		April 2024
U.S. patent 8,425,933		April 2024
U.S. patent 8,703,186		April 2024
Canadian patent 2,521,655		April 2024
Canadian patent 2,541,371		September 2024
U.S. patent 9,056,054		June 2030
E.P. patent 1615623		April 2024
U.S. patent 10213388		April 2030

 

We also have pending applications for two additional U.S. patents non-provisional patents and one provisional patent application and one foreign patent application. We intend to apply for patents for other products in the future; however, there can be no assurance that any of the pending applications or other applications which we may file will be granted. We have also filed corresponding foreign applications for key patents.

 

Prior to the enactment in the United States of new laws adopting certain changes mandated by the General Agreement on Tariffs and Trade (“GATT”), the exclusive rights afforded by a U.S. Patent were for a period of 17 years measured from the date of grant. Under GATT, the term of any U.S. Patent granted on an application filed subsequent to June 8, 1995 terminates 20 years from the date on which the patent application was filed in the United States or the first priority date, whichever occurs first. Future patents granted on an application filed before June 8, 1995, will have a term that terminates 20 years from such date, or 17 years from the date of grant, whichever date is later.

 

Under the Drug Price Competition Act, a U.S. product patent or use patent may be extended for up to five years under certain circumstances to compensate the patent holder for the time required for FDA regulatory review of the product. Such benefits under the Drug Price Competition Act are available only to the first approved use of the active ingredient in the drug product and may be applied only to one patent per drug product. There can be no assurance that we will be able to take advantage of this law.

 

Also, different countries have different procedures for obtaining patents, and patents issued by different countries provide different degrees of protection against the use of a patented invention by others. There can be no assurance, therefore, that the issuance to us in one country of a patent covering an invention will be followed by the issuance in other countries of patents covering the same invention, or that any judicial interpretation of the validity, enforceability, or scope of the claims in a patent issued in one country will be similar to the judicial interpretation given to a corresponding patent issued in another country. Furthermore, even if our patents are determined to be valid, enforceable, and broad in scope, there can be no assurance that competitors will not be able to design around such patents and compete with us using the resulting alternative technology.

 

Trademarks

 

SequestOx™ is a trademark owned by Elite, for which United States trademark registration is being sought.

 

We currently plan to license at least some of our products to other entities in the marketing of pharmaceuticals but may also sell products under our own brand name in which case we may register trademarks for those products.

 

Terminated Agreements

 

Terminated Agreement – Methadone Manufacturing and Supply Agreement

 

On December 31, 2017, the Methadone Manufacturing and Supply Agreement terminated in accordance with the terms of the agreement.

 

Other Business Factors and Details

 

Government Regulation and Approval

 

The design, development, and marketing of pharmaceutical compounds, on which our success depends, are intensely regulated by governmental regulatory agencies, in particular the FDA. Non-compliance with applicable requirements can result in fines and other judicially imposed sanctions, including product seizures, injunction actions and criminal prosecution based on products or manufacturing practices that violate statutory requirements. In addition, administrative remedies can involve voluntary withdrawal of products, as well as the refusal of the FDA to approve ANDAs and NDAs. The FDA also has the authority to withdraw approval of drugs in accordance with statutory due process procedures.

 

Before a drug may be marketed, it must be approved by the FDA either by an NDA or an ANDA, each of which is discussed below.

 

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NDAs and NDAs under Section 505(b) of the Drug Price Competition Act

 

The FDA approval procedure for an NDA is generally a two-step process. During the Initial Product Development stage, an investigational new drug application (“IND”) for each product is filed with the FDA. A 30-day waiting period after the filing of each IND is required by the FDA prior to the commencement of initial clinical testing. If the FDA does not comment on or question the IND within such 30-day period, initial clinical studies may begin. If, however, the FDA has comments or questions, they must be answered to the satisfaction of the FDA before initial clinical testing may begin. In some instances, this process could result in substantial delay and expense. Initial clinical studies generally constitute Phase I of the NDA process and are conducted to demonstrate the product tolerance/safety and pharmacokinetic in healthy subjects.

 

After Phase I testing, extensive efficacy and safety studies in patients must be conducted. After completion of the required clinical testing, an NDA is filed, and its approval, which is required for marketing in the United States, involves an extensive review process by the FDA. The NDA itself is a complicated and detailed application and must include the results of extensive clinical and other testing, the cost of which is substantial. However, the NDA filings contemplated by us, which are already marketed drugs, would be made under Sections 505 (b)(1) or 505 (b)(2) of the Drug Price Competition Act, which do not require certain studies that would otherwise be necessary; accordingly, the development timetable should be shorter. While the FDA is required to review applications within a certain timeframe, during the review process, the FDA frequently requests that additional information be submitted. The effect of such request and subsequent submission can significantly extend the time for the NDA review process. Until an NDA is actually approved, there can be no assurance that the information requested and submitted will be considered adequate by the FDA to justify approval. The packaging and labeling of our developed products are also subject to FDA regulation. It is impossible to anticipate the amount of time that will be needed to obtain FDA approval to market any product.

 

Whether or not FDA approval has been obtained, approval of the product by comparable regulatory authorities in any foreign country must be obtained prior to the commencement of marketing of the product in that country. We intend to conduct all marketing in territories other than the United States through other pharmaceutical companies based in those countries. The approval procedure varies from country to country, can involve additional testing, and the time required may differ from that required for FDA approval. Although there are some procedures for unified filings for certain European countries, in general each country has its own procedures and requirements, many of which are time consuming and expensive. Thus, there can be substantial delays in obtaining required approvals from both the FDA and foreign regulatory authorities after the relevant applications are filed. After such approvals are obtained, further delays may be encountered before the products become commercially available.

 

ANDAs

 

The FDA approval procedure for an ANDA differs from the procedure for an NDA in that the FDA waives the requirement of conducting complete clinical studies, although it normally requires bioavailability and/or bioequivalence studies. “Bioavailability” indicates the rate and extent of absorption and levels of concentration of a drug product in the blood stream needed to produce a therapeutic effect. “Bioequivalence” compares the bioavailability of one drug product with another, and when established, indicates that the rate of absorption and levels of concentration of the active drug substance in the body are equivalent for the generic drug and the previously approved drug. An ANDA may be submitted for a drug on the basis that it is the equivalent of a previously approved drug or, in the case of a new dosage form, is suitable for use for the indications specified.

 

The timing of final FDA approval of an ANDA depends on a variety of factors, including whether the applicant challenges any listed patents for the drug and whether the brand-name manufacturer is entitled to one or more statutory exclusivity periods, during which the FDA may be prohibited from accepting applications for, or approving, generic products. In certain circumstances, a regulatory exclusivity period can extend beyond the life of a patent, and thus block ANDAs from being approved on the patent expiration date.

 

In May 1992, Congress enacted the Generic Drug Enforcement Act of 1992, which allows the FDA to impose debarment and other penalties on individuals and companies that commit certain illegal acts relating to the generic drug approval process. In some situations, the Generic Drug Enforcement Act requires the FDA to not accept or review ANDAs for a period of time from a company or an individual that has committed certain violations. It also provides for temporary denial of approval of applications during the investigation of certain violations that could lead to debarment and also, in more limited circumstances, provides for the suspension of the marketing of approved drugs by the affected company. Lastly, the Generic Drug Enforcement Act allows for civil penalties and withdrawal of previously approved applications. Neither we nor any of our employees have ever been subject to debarment. We do not believe that we receive any services from any debarred person.

 

Controlled Substances

 

We are also subject to federal, state, and local laws of general applicability, such as laws relating to working conditions. We are also licensed by, registered with, and subject to periodic inspection and regulation by the Drug Enforcement Agency (“DEA”) and New Jersey state agencies, pursuant to federal and state legislation relating to drugs and narcotics. Certain drugs that we currently develop or may develop in the future may be subject to regulations under the Controlled Substances Act and related statutes. As we manufacture such products, we may become subject to the Prescription Drug Marketing Act, which regulates wholesale distributors of prescription drugs.

 

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cGMP

 

All facilities and manufacturing techniques used for the manufacture of products for clinical use or for sale must be operated in conformity with cGMP regulations issued by the FDA. We engage in manufacturing on a commercial basis for distribution of products and operate our facilities in accordance with cGMP regulations. If we hire another company to perform contract manufacturing for us, we must ensure that our contractor’s facilities conform to cGMP regulations.

 

Compliance with Environmental Laws

 

We are subject to comprehensive federal, state and local environmental laws and regulations that govern, among other things, air polluting emissions, wastewater discharges, solid and hazardous waste disposal, and the remediation of contamination associated with current or past generation handling and disposal activities, including the past practices of corporations as to which we are the legal successor or in possession. We do not expect that compliance with such environmental laws will have a material effect on our capital expenditures, earnings, or competitive position in the foreseeable future. There can be no assurance, however, that future changes in environmental laws or regulations, administrative actions or enforcement actions, or remediation obligations arising under environmental laws will not have a material adverse effect on our capital expenditures, earnings, or competitive position.

 

Competition

 

We have competition with respect to our principal areas of operation. We develop and manufacture generic products, products using controlled-release drug technology, products utilizing abuse deterrent technologies, and we develop and market (either on our own or by license to other companies) generic and proprietary controlled-release and abuse deterrent pharmaceutical products. In both areas, our competition consists of those companies which develop controlled release, abuse deterrent drugs and alternative drug delivery systems. We do not represent a significant presence in the pharmaceutical industry.

 

An increasing number of pharmaceutical companies have become interested in the development and commercialization of products incorporating advanced or novel drug delivery systems. Some of the major pharmaceutical companies have invested and are continuing to invest significant resources in the development of their own drug delivery systems and technologies and some have invested funds in such specialized drug delivery companies. Many of these companies have greater financial and other resources as well as more experience than we do in commercializing pharmaceutical products. Certain companies have a track record of success in developing controlled-release drugs. Significant among these are, without limitation, Pfizer, Sandoz (a Novartis company), Mylan Laboratories, Inc., Endo Pharmaceuticals, Inc., Teva Pharmaceuticals Industries Ltd., Amneal Laboratories, Inc., Mallinckrodt, and Aurobindo. Each of these companies has developed expertise in certain types of drug delivery systems, although such expertise does not carry over to developing a controlled-release version of all drugs. Such companies may develop new drug formulations and products or may improve existing drug formulations and products more efficiently than we can. In addition, almost all of our competitors have vastly greater resources than we do. While our product development capabilities and, if obtained, patent protection may help us to maintain our market position in the field of advanced drug delivery, there can be no assurance that others will not be able to develop such capabilities or alternative technologies outside the scope of our patents, if any, or that even if patent protection is obtained, such patents will not be successfully challenged in the future. 

 

In addition to competitors that are developing products based on drug delivery technologies, there are also companies that have announced that they are developing opioid abuse-deterrent products that might compete directly or indirectly with Elite’s products. These include, but are not limited to Pfizer Inc., Collegium Pharmaceuticals, Inc., and Purdue Pharma LP

 

We also face competition in the generic pharmaceutical market. The principal competitive factors in the generic pharmaceutical market include: (i) introduction of other generic drug manufacturers’ products in direct competition with our products under development, (ii) introduction of authorized generic products in direct competition with any of our products under development, particularly if such products are approved and sold during exclusivity periods, (iii) consolidation among distribution outlets through mergers and acquisitions and the formation of buying groups, (iv) ability of generic competitors to quickly enter the market after the expiration of patents or exclusivity periods, diminishing the amount and duration of significant profits, (v) the willingness of generic drug customers, including wholesale and retail customers, to switch among pharmaceutical manufacturers, (vi) pricing pressures and product deletions by competitors, (vii) a company’s reputation as a manufacturer and distributor of quality products, (viii) a company’s level of service (including maintaining sufficient inventory levels for timely deliveries), (ix) product appearance and labeling and (x) a company’s breadth of product offerings.

 

Sources and Availability of Raw Materials; Manufacturing

 

A significant portion of our raw materials may be available only from foreign sources. Foreign sources can be subject to the special risks of doing business abroad, including:

 

●

greater possibility for disruption due to transportation or communication problems;

 

●

the relative instability of some foreign governments and economies;

 

15

 

  

●

interim price volatility based on labor unrest, materials or equipment shortages, export duties, restrictions on the transfer of funds, or fluctuations in currency exchange rates; and

 

●

uncertainty regarding recourse to a dependable legal system for the enforcement of contracts and other rights.

 

While we currently obtain the raw materials that we need from over 20 suppliers, some materials used in our products are currently available from only one supplier or a limited number of suppliers. The FDA requires identification of raw material suppliers in applications for approval of drug products. If raw materials were unavailable from a specified supplier, FDA approval of a new supplier could delay the manufacture of the drug involved.

 

We have acquired pharmaceutical manufacturing equipment for manufacturing our products. We have registered our facilities with the FDA and the DEA.

 

Dependence on One or a Few Major Customers

 

Each year we have had one or a few customers that have accounted for a large percentage of our limited revenues, therefore the termination or restructuring of a contract with a customer may result in the loss of material amount or substantially all of our revenues. We are constantly working to develop new relationships with existing or new customers, but despite these efforts we may not, at the time that any of our current contracts expire, have other contracts in place generating similar or material revenue. We have agreements with Epic, Precision Dose and Ascend for the licensing, sales and distribution of products that we manufacture. We are currently renegotiating a licensing contract with Epic, which may result in the termination of an existing contract or an amended licensing contract that is materially different from that already in place. We receive revenues to manufacture these products and also receive a profit split or royalties based on in-market sales of the products.

 

Critical Accounting Policies and Estimates

 

The preparation of the unaudited condensed consolidated financial statements and related disclosures in conformity with GAAP, and our discussion and analysis of its financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Note 1 – Summary of Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q describes the significant accounting policies and methods used in the preparation of our unaudited condensed consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.

 

16

 

 

Results of Operations

 

The following set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.

 

Three months ended December 31, 2019 compared to December 31, 2018

 

Revenue, Cost of revenue and Gross profit:

 

		For the Three Months Ended December 31,								Change
		2019				2018				Dollars				Percentage
Manufacturing fees		$	3,754,721			$	2,108,487			$	1,646,234				78	%
Licensing fees			1,300,392				585,479				714,913				122	%
Total revenue			5,055,113				2,693,966				2,361,147				88	%
Cost of revenue			2,163,376				1,771,136				392,420				22	%
Gross profit		$	2,891,737			$	922,830			$	1,968,907				213	%
Gross profit - percentage			57	%			34	%

 

Total revenues for the three months ended December 31, 2019 increased by $2.4 million or 88%, to $5.1 million, as compared to $2.7 million for the corresponding period in 2018, primarily due to revenues earned from Amphetamine IR Tablets, which were launched during the current fiscal year and increased sales of Isradipine during the three months ended December 31, 2019 as compared to the three months ended December 31, 2018.

 

Manufacturing fees increased by $1.65 million, or 78%, primarily due to revenues earned from the manufacture of Amphetamine IR Tablets, which were launched during the current fiscal year and increased revenues earned from the manufacture of Isradipine during the three months ended December 31, 2019 as compared to the three months ended December 31, 2018.

 

Licensing fees increased by $0.7 million, or 122%. This increase is primarily due to license fees earned from in-market sales of Amphetamine IR Tablets, which were launched during the current fiscal year.

 

Costs of revenue consists of manufacturing and assembly costs. Our costs of revenue increased by $0.4 million or 22%, to $2.2 million as compared to $1.8 million for the corresponding period in 2018. This increase was due in large part to the increase in manufacturing revenues as compared to the comparable period of the prior year, which have a strong positive correlation to these costs of revenues.

 

Our gross profit margin was 57% during the three months ended December 31, 2019 as compared to 34% during the three months ended December 31, 2018. The increase in gross margin is due to the product mix during the current fiscal year consisting of lower manufacturing margin products, as compared with the comparable period of the prior year, combined with the timing of in market sales of the recently launched Amphetamine IR and Dantrolene products resulting in a lag in the timing of license fees, which are correlated to in market sales.

 

Operating expenses:

 

		For the Three Months Ended December 31,								Change
		2019				2018				Dollars				Percentage
Operating expenses:
Research and development		$	986,832			$	2,454,098			$	(1,467,266	)			-60	%
General and administrative			878,540				748,151				130,389				17	%
Non-cash compensation			11,802				36,547				(24,745	)			-68	%
Depreciation and amortization			323,368				321,164				2,204				1	%
Total operating expenses		$	2,200,542			$	3,559,960			$	(1,359,418	)			-38	%

 

Operating expenses consist of research and development costs, general and administrative, non-cash compensation and depreciation and amortization expenses. Operating expenses for the three months ended December 31, 2019 decreased by $1.4 million or 38% to $2.2 million, as compared to $3.6 million for the corresponding period in 2018.

 

Research and development costs for the three months ended December 31, 2019 were $1.0 million, a decrease of $1.5 million, or 60%, from $2.5 million of such costs for the comparable period of the prior year. The decrease was a result of the timing and nature of product development activities during the three months ended December 31, 2019 as compared to the comparable period of the prior year.

 

17

 

 

General and administrative expenses for the three months ended December 31, 2019 were $0.88 million, an increase of $0.13 million or 17% from $0.75 million of such costs for the comparable period of the prior year with such increase being attributed in large part to increased costs and headcounts relating to regulatory compliance and remediation of internal control weaknesses being in excess of ongoing cost reduction and control initiatives.

 

Non-cash compensation expense for the three months ended December 31, 2019 and 2018 was $0.01 million and $0.04 million, respectively.

 

Depreciation and amortization expenses for the three months ended December 31, 2019 were $0.323 million, a decrease of $0.002 million or approximately 1% from $0.321 million of such costs for the comparable period of the prior year. The decrease was due to capital expenditures for the current fiscal quarter, and related depreciation charges for such expenditures being less than decreased depreciation charges contained in depreciation schedules for assets placed into service in prior periods.

 

As a result of the foregoing, our loss from operations for the three months ended December 31, 2019 was $0.7 million, compared to a loss from operations of $2.6 million for the three months ended December 31, 2018.

 

Other income (expense):

 

		For the Three Months Ended December 31,								Change
		2019				2018				Dollars				Percentage
Other income (expense):
Interest expense		$	(94,514	)		$	(89,897	)		$	(4,617	)			5	%
Change in fair value of derivative instruments – warrants			(3,059,695	)			380,976				(3,440,671	)			-903	%
Proceeds from sale of ANDAs			600,000				-				600,000				100	%
Interest income			2,334				1,733				601				35	%
Other (expense) income, net		$	(2,551,875	)		$	292,812			$	(2,844,687	)			-972	%

 

Other (expense) income, net for the three months ended December 31, 2019 was other expense of $2.55 million, a decrease of $2.84 million from the net other income of $0.29 million for the comparable period of the prior year. The decrease in other income (expense) was due to derivative income relating to changes in the fair value of our outstanding warrants during the three months ended December 31, 2019. Please note that the change in the fair value of derivative instruments is determined in large part by the change in the closing price of the Company’s Common Stock as of the end of the period, as compared to the closing price at the beginning of the period, with a strong inverse relationship between the fair value of our derivatives instruments and decreases in the closing price of the Company’s Common Stock. Please see Note 10 to the unaudited condensed consolidated financial statements above.

 

As a result of the foregoing, our net loss for the three months ended December 31, 2019 was $1.9 million, compared to a net loss of $2.3 million for the comparable period of the prior year.

 

Nine months ended December 31,2019 compared to December 31, 2018

 

Revenue, Cost of revenue and Gross profit:

 

		For the Nine Months Ended December 31,								Change
		2019				2018				Dollars				Percentage
Manufacturing fees		$	10,851,425			$	4,456,832			$	6,394,593				143	%
Licensing fees			2,197,915				1,767,881				430,034				24	%
Total revenue			13,049,340				6,224,713				6,824,627				110	%
Cost of revenue			7,529,918				3,890,086				3,639,832				94	%
Gross profit		$	5,519,422			$	2,334,627			$	3,184,795				136	%
Gross profit - percentage			42	%			38	%

18

 

 

Total revenues for the nine months ended December 31, 2019 increased by $6.8 million or 110%, to $13.0 million, as compared to $6.2 million, for the corresponding period in 2018 primarily due to revenues earned from Amphetamine IR Tablets and Dantrolene Tablets, which were launched during the current fiscal year and increased sales of Isradipine during the nine months ended December 31, 2019 as compared to the nine months ended December 31, 2018.

 

Manufacturing fees increased by $6.4 million, or 143%, due to revenues earned from the manufacture of Amphetamine IR Tablets and Dantrolene Tablets, which were launched during the current fiscal year and revenues earned from manufacture of Isradipine during the nine months ended December 31, 2019 as compared to the nine months ended December 31, 2018.

 

Licensing fees increased by $0.4 million, or 24%. This increase is primarily due to license fees earned from in-market sales of Amphetamine IR Tablets, which were launched during the current fiscal year.

 

Costs of revenue consists of manufacturing and assembly costs. Our costs of revenue increased by $3.6 million or 94%, to $7.5 million as compared to $3.9 million for the corresponding period in 2018. This increase was due in large part to increase in manufacturing revenues compared to the comparable period of the prior year, which have a strong positive correlation to these costs of revenues.

 

Our gross profit margin was 42% during the nine months ended December 31, 2019 as compared to 38% during the nine months ended December 31, 2018. The increase in gross margin is due to the product mix during the current fiscal year consisting of lower manufacturing margin products, as compared with the comparable period of the prior year, combined with the timing of in market sales of the recently launched Amphetamine IR and Dantrolene products resulting in a lag in the timing of license fees, which are correlated to in market sales.

 

Operating expenses:

 

		For the Nine Months Ended December 31,								Change
		2019				2018				Dollars				Percentage
Operating expenses:
Research and development		$	3,032,357			$	6,236,192			$	(3,203,835	)			-51	%
General and administrative			2,358,588				2,245,900				112,688				5	%
Non-cash compensation			53,518				109,641				(56,123	)			-51	%
Depreciation and amortization			986,001				891,390				94,611				11	%
Total operating expenses		$	6,430,464			$	9,483,123			$	(3,052,659	)			-32	%

 

Operating expenses consist of research and development costs, general and administrative, non-cash compensation and depreciation and amortization expenses. Operating expenses for the nine months ended December 31, 2019 decreased by $3.1 million or 32% to $6.4 million, as compared to $9.5 million for the corresponding period in 2018.

 

Research and development costs for the nine months ended December 31, 2019 were $3.0 million, a decrease of $3.2 million, or 51%, from $6.2 million of such costs for the comparable period of the prior year. The decrease was a result of the timing and nature of product development activities during the nine months ended December 31, 2019 as compared to the comparable period of the prior year.

 

General and administrative expenses for the nine months ended December 31, 2019 were $2.4 million, an increase of $0.1 million or 5% from $2.2 million of such costs for the comparable period of the prior year with such increase being attributed in large part to increased costs and headcounts relating to regulatory compliance and remediation of internal control weaknesses being in excess of ongoing cost reduction and control initiatives.

 

Non-cash compensation expense for the nine months ended December 31, 2019 and 2018 was $0.05 million and $0.1 million, respectively.

 

Depreciation and amortization expenses for the nine months ended December 31, 2019 were $1.0 million, an increase of $0.1 million or 11% from $0.9 million of such costs for the comparable period of the prior year. The increase was due to acquisitions of additional fixed assets as well as additional equipment being placed into service during the current fiscal year, in particular equipment required for compliance with new serialization regulations.

 

As a result of the foregoing, our loss from operations for the nine months ended December 31, 2019 was $0.9 million, compared to a loss from operations of $7.1 million for the nine months ended December 31, 2018.

 

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Other income (expense):

 

		For the Nine Months Ended December 31,								Change
		2019				2018				Dollars				Percentage
Other income (expense):
Interest expense		$	(283,649	)		$	(279,037	)		$	(4,612	)			2	%
Change in fair value of derivative instruments – warrants			(2,590,695	)			807,347				(3,398,042	)			-421	%
Proceeds from sale of ANDAs			600,000				-				600,000				100	%
Interest income			10,667				4,570				6,097				133	%
Other (expense) income, net		$	(2,263,677	)		$	532,880			$	(2,796,557	)			-525	%

 

Other (expense) income, net for the nine months ended December 31, 2019 was other expense of $2.3 million, a decrease of $2.8 million from the net other income of $0.5 million for the comparable period of the prior year. The decrease in other income (expense) was due to derivative income relating to changes in the fair value of our outstanding warrants during the nine months ended December 31, 2019. Please note that the change in the fair value of derivative instruments is determined in large part by the change in the closing price of the Company’s Common Stock as of the end of the period, as compared to the closing price at the beginning of the period, with a strong inverse relationship between the fair value of our derivatives instruments and decreases in the closing price of the Company’s Common Stock.

 

As a result of the foregoing, our net loss for the nine months ended December 31, 2019 was $3.2 million, compared to a net loss of $6.6 million for the comparable period of the prior year.

 

Liquidity and Capital Resources

 

Capital Resources

 

		December 31, 2019				March 31, 2019				Change
Current assets		$	9,042,300			$	8,856,542			$	185,758
Current liabilities		$	7,746,372			$	6,906,132			$	840,240
Working capital		$	1,295,928			$	1,950,410			$	(654,482	)

 

The Company’s condensed consolidated financial statements are prepared using generally accepted accounting principles in the United States applicable to a going concern, which contemplated the realization of assets and the satisfaction of liabilities in the normal course of business. For the nine months ended December 31, 2019 and 2018, the Company recorded a net loss from operations of approximately $0.9 million and $7.1 million, respectively. For the nine months ended December 31, 2019 and 2018, the Company recorded a net decrease in cash of approximately $0.4 million and $3.5 million, respectively. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern.

 

In connection with the preparation of the financial statements for the three and nine months ended December 31, 2019, the Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to its ability to continue as a going concern within one year after the date of the issuance, or the date the financial statements were available for issuance, noting 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 do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities should we be unable to continue as a going concern. 

 

Please also note that while the equity line available under the 2017 LPC Purchase Agreement had approximately $35 million available for purchase of shares of Common Stock, the ability of the Company to access these funds is strongly and directly correlated to the trading price of Common Stock in the OTC Market. Accordingly, absent an increase in the such trading price of Common Stock, to a price that is significantly above the closing price of $0.0925 on December 31, 2019, the Company will be unable to realize a significant portion of the remaining equity line through sales of Common Stock to Lincoln Park pursuant to the 2017 LPC Purchase Agreement, resulting in substantial doubt as to the availability of adequate financial resources required for continued operations on a going concern basis.

 

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Our working capital (total current assets less total current liabilities) decreased by $0.65 million from $1.95 million as of March 31, 2019 to $1.30 million as of December 31, 2019, with such decrease being primarily related to the income from operations of $0.7 million offset by the reclassification from long term to current liabilities of the $1.2 million note payable to related party.

 

The Company does not anticipate being profitable for the fiscal year ending March 31, 2020, due in large part to manufacture revenues and license fees not being at volumes and contributions sufficient to fund increased operating and product development costs. In order to finance these significant costs, the Company entered into the 2017 LPC Purchase Agreement. Due to the factors described above, the Company’s ability to access funds available under the 2017 LPC Purchase Agreement may be limited, resulting in an adverse effect on the Company’s liquidity and ability to operate. Please see below for further details on the financing transactions with Lincoln Park.

 

In addition, the Company had previously received Notices of Default from the Trustee of the NJEDA Bonds as a result of the utilization of the debt service reserve being used to pay interest payments as well as the company’s failure to make scheduled principal payments. All monetary defaults were cured during Fiscal 2015 and the Company is current on all NJEDA Bond interest and principal payments. See “NJEDA Bonds” below and the Risk Factor in Part I, Item 1A of our Annual Report on Form 10-K for the year ended March 31, 2019 entitled “A notice of default was issued by the New Jersey Economic Development Authority in relation to prior obligations of our tax-exempt bonds. Although we are current in our payments under these bonds, If the principal balances due under these bonds are accelerated pursuant to the notice of default, our ability to operate in the future will be materially and adversely affected”.

 

Summary of Cash Flows:

 

		For the Nine Months Ended December 31,
		2019				2018
Net cash used in operating activities		$	(587,684	)		$	(4,656,762	)
Net cash used in investing activities		$	(3,148	)		$	(19,130	)
Net cash provided by financing activities		$	188,719			$	1,181,783

 

Net cash used in operating activities for the nine months ended December 31, 2019 was $0.6 million, which included net loss of $3.2 million, amortization of operating leases – rights to use assets of $0.1 million and changes in operating assets and liabilities of $1.63 million. These instances of decreases in cash are offset by non-cash expenses including depreciation and amortization of $1.0 million, change in fair value of derivative financial instruments – warrants of $2.6 million, non-cash compensation accrued of $0.7 million and non-cash compensation from the issuance of options of $0.05 million.

 

Net cash used in investing activities for the nine months ended December 31, 2019 was $0.003 million.

 

Net cash provided by financing activities was $0.2 million for the nine months ended December 31, 2019 which consist primarily of proceeds from the issuance of common stock pursuant to the 2017 LPC Purchase Agreement (see below) offset by loan and bond payments.

 

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.

 

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In connection with the 2017 LPC Purchase Agreement, the Company issued to Lincoln Park 5,540,551 shares of common stock and the Company 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 us, 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”)). We 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.

 

The net proceeds received by 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 nine months ended December 31, 2019, the Company sold 8,895,233 shares of its common stock for proceeds totaling $806,987 in connection with the 2017 LPC Purchase Agreement with Lincoln Park. In addition, during the nine months ended December 31, 2019, the Company issued 111,778 shares of its Common Stock as additional commitment shares pursuant to the 2017 LPC Purchase Agreement.

 

Increase in Authorized Shares

 

An amendment to the Company’s Articles of Incorporation to increase the number of shares of common stock the Company is authorized to issue from 995,000,000 shares to 1,445,000,000 shares was approved at the Company’s Annual Meeting of Shareholders held on December 4, 2019. Prior to the approval of the increase in the number of authorized shares, there were insufficient authorized shares if the Series J Preferred Stock were converted. As a result, the shares were classified in mezzanine equity. After the approval of the increase in the number of authorized shares, there are now sufficient authorized shares if the Series J Preferred Stock were converted. With the approval of the increase in the number of authorized shares, there is no longer the presumption that a cash settlement will be required. Therefore, the Series J Preferred has been reclassified from mezzanine equity to permanent equity at its current carrying amount of $13,903,960 on the accompanying condensed consolidated balance sheet.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We believe that our market risk exposures are immaterial as we do not have instruments for trading purposes, and reasonable possible near-term changes in market rates or prices will not result in material near-term losses in earnings, material changes in fair values or cash flows for all instruments.

 

We maintain all our cash, cash equivalents and restricted cash in three financial institutions, and we perform periodic evaluations of the relative credit standing of these institutions. However, no assurances can be given that the third-party institutions will retain acceptable credit ratings or investment practices.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the controls evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the date of their evaluation, our disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting, specifically with respect to insufficient segregation of duties, oversight of work performed and lack of compensating controls in our finance and accounting functions due to limited personnel and resources that were disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

 

Changes in Internal Controls

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the end of the period covered by this Quarterly Report. As of March 31, 2019, we identified a material weakness related to the ineffective review and verification of internally prepared reports and analyses utilized in the financial closing process, that was disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

 

Remediation Efforts to Address Material Weaknesses

 

We continue to revise and evaluate the existing control environment documentation, designing and implementing controls, policies and procedure documentation that is consistent with our current personnel, resources and capabilities. Please note that these material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time, allowing management, through testing, to reach a conclusion on such controls design and operational efficacy. There is also a strong direct correlation between resources and our ability to remediate, in accordance with COSO criteria, the above referenced material weaknesses in internal controls. Accordingly, improvement in our financial position is a critical component of our ability to achieve effective disclosure controls and procedures. As such, the Company has hired and engaged additional personnel and resources for the accounting, and material management functions to help remediate identified material weaknesses.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEDURES

 

Pending Litigation

 

There have been no material developments in any of the legal proceedings discussed in Item 3 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

 

ITEM 1A. RISK FACTORS

 

None.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

Exhibit No.		Description
3.1(a)		Articles of Incorporation of Elite-Nevada, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on January 9, 2012.
3.1(b)		Certificate of Designations of the Series G Convertible Preferred Stock as filed with the Secretary of State of the State of Nevada on April 18, 2013, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, dated April 18, 2013 and filed with the SEC on April 22, 2013.
3.1(c)		Certificate of Designation of the Series H Junior Participating Preferred Stock, incorporated by reference to Exhibit 2 (contained in Exhibit 1) to the Registration Statement on Form 8-A filed with the SEC on November 15, 2013.
3.1(d)		Certificate of Designations of the Series I Convertible Preferred Stock as filed with the Secretary of State of the State of Nevada on February 6, 2014, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, dated February 6, 2014 and filed with the SEC on February 7, 2014.
3.1(e)		Certificate of Designations of the Series J Convertible Preferred Stock as filed with the Secretary of State of the State of Nevada on May 3, 2017, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, dated April 28, 2017 and filed with the SEC on April 28, 2017.
3.2(a)		Amended and Restated By-Laws of the Company, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K dated March 17, 2014 and filed with the SEC on March 18, 2014.
4.1		Form of specimen certificate for Series G Convertible Preferred Stock of the Company, incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, dated April 18, 2013 and filed with the SEC on April 22, 2013.
4.2		Form of specimen certificate for Series I Convertible Preferred Stock of the Company, incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, dated February 6, 2014 and filed with the SEC on February 7, 2014.
4.3		Rights Agreement, dated as of November 15, 2013, between the Company and American Stock Transfer & Trust Company, LLC., incorporated by reference to Exhibit 1 to the Registration Statement on Form 8-A filed with the SEC on November 15, 2013.
4.4		Form of Series H Preferred Stock Certificate, incorporated by reference to Exhibit 1 to the Registration Statement on Form 8-A filed with the SEC on November 15, 2013.
4.5		Warrant to purchase shares of Common Stock issued to Nasrat Hakim dated April 28, 2017 incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, dated April 28, 2017, and filed with the SEC on April 28, 2017.
10.1		Elite Pharmaceuticals, Inc. 2014 Equity Incentive Plan, incorporated by reference to Appendix B to the Company’s Definitive Proxy Statement for its Annual Meeting of Shareholders, filed with the SEC on April 3, 2014.
10.2		Form of Confidentiality Agreement (corporate), incorporated by reference to Exhibit 10.7 to the Form SB-2.
10.3		Form of Confidentiality Agreement (employee), incorporated by reference to Exhibit 10.8 to the Form SB-2.
10.4		Loan Agreement, dated as of August 15, 2005, between New Jersey Economic Development Authority (“NJEDA”) and the Company, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, dated August 31, 2005 and filed with the SEC on September 6, 2005.
10.5		Series A Note in the aggregate principal amount of $3,660,000.00 payable to the order of the NJEDA, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, dated August 31, 2005 and filed with the SEC on September 6, 2005.
10.6		Series B Note in the aggregate principal amount of $495,000.00 payable to the order of the NJEDA, incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, dated August 31, 2005 and filed with the SEC on September 6, 2005.

 

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10.7		Mortgage from the Company to the NJEDA, incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K, dated August 31, 2005 and filed with the SEC on September 6, 2005.
10.8		Indenture between NJEDA and the Bank of New York as Trustee, dated as of August 15, 2005, incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K, dated August 31, 2005 and filed with the SEC on September 6, 2005.
10.9		Strategic Alliance Agreement, dated as of March 18, 2009, by and among the Company, Epic Pharma, LLC and Epic Investments, LLC, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, dated March 18, 2009 and filed with the SEC on March 23, 2009.
10.10		Amendment to Strategic Alliance Agreement, dated as of April 30, 2009, by and among the Company, Epic Pharma, LLC and Epic Investments, LLC, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, dated April 30, 2009 and filed with the SEC on May 6, 2009.
10.11		Second Amendment to Strategic Alliance Agreement, dated as of June 1, 2009, by and among the Company, Epic Pharma, LLC and Epic Investments, LLC, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, dated June 1, 2009, and filed with the SEC on June 5, 2009.
10.12		Third Amendment to Strategic Alliance Agreement, dated as of Aug 18, 2009, by and among the Company, Epic Pharma LLC and Epic Investments, LLC, incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q, for the period ending June 30, 2009 and filed with the SEC on August 19, 2009.
10.13		Employment Agreement, dated as of November 13, 2009, by and between the Company and Carter J. Ward, incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q, for the period ending September 30, 2009 and filed with the SEC on November 16, 2009.
10.14		Elite Pharmaceuticals Inc. 2009 Equity Incentive Plan, as adopted November 24, 2009, incorporated by reference to Exhibit 10.1 to the Registration Statement Under the Securities Act of 1933 on Form S-8, dated December 18, 2009 and filed with the SEC on December 22, 2009.
10.15		License Agreement, dated as of September 10, 2010, by and among Precision Dose Inc. and the Company, incorporated by reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q, for the period ended September 30, 2010 and filed with the SEC on November 15, 2010 (Confidential Treatment granted with respect to portions of the Agreement).
10.16		Manufacturing and Supply Agreement, dated as of September 10, 2010, by and among Precision Dose Inc. and the Company, incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q, for the period ended September 30, 2010 and filed with the SEC on November 15, 2010 (Confidential Treatment granted with respect to portions of the Agreement).
10.17		August 1, 2013 Employment Agreement with Nasrat Hakim, incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K, dated August 1, 2013 and filed with the SEC on August 5, 2013.
10.18		August 1, 2013 Mikah LLC Asset Purchase Agreement, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K/A, dated August 1, 2013 and filed with the SEC on August 30, 2018. (Confidential Treatment granted with respect to portions of the Agreement).
10.19		August 1, 2013 Secured Convertible Note from the Company to Mikah Pharma LLC., incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, dated August 1, 2013 and filed with the SEC on August 5, 2013.
10.20		August 1, 2013 Security Agreement from the Company to Mikah Pharma LLC., incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, dated August 1, 2013 and filed with the SEC on August 5, 2013.
10.21		October 15, 2013 Hakim Credit Line Agreement, incorporated by reference to Exhibit 10.16 to the Quarterly Report on Form 10-Q for the period ended September 30, 2013.

 

26

 

 

10.22		October 2, 2013 Manufacturing and Licensing Agreement with Epic Pharma LLC, incorporated by reference to Exhibit 10.17 to the Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2013 and filed with the SEC on April 25, 2014. Confidential Treatment granted with respect to portions of the Agreement.
10.23		February 7, 2014 Amendment to Secured Convertible Note from the Company to Mikah, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, dated February 7, 2014 and filed with the SEC on February 7, 2014.
10.24		Employment Agreement with Dr. G. Kenneth Smith, dated October 20, 2014, incorporated by reference to Exhibit 10.82 to the Quarterly Report on Form 10-Q for the period ended September 30, 2014 and filed with the SEC on November 14, 2014.
10.25		January 28, 2015 First Amendment to the Loan Agreement between Nasrat Hakim and Elite Pharmaceuticals dated October 15, 2013, incorporated by reference to Exhibit 10.83 to the Quarterly Report on Form 10-Q for the period ended December 31, 2014 and filed with the SEC on February 17, 2015.
10.26		January 28, 2015 Termination of Development and License Agreement for Mikah-001 between Elite Pharmaceuticals, Inc. and Mikah Pharma LLC and Transfer of Payment, incorporated by reference to Exhibit 10.84 to the Quarterly Report on Form 10-Q for the period ended December 31, 2014 and filed with the SEC on February 17, 2015.
10.27		June 4, 2015 License Agreement with Epic Pharma LLC, incorporated by reference to Exhibit 10.85 to Amendment No. 1 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2015 and filed with the SEC on July 11, 2016. (Confidential Treatment granted with respect to portions of the Agreement).
10.28		Amendment No. 1 to Hakim Employment Agreement, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on January 29, 2016.
10.29		August 24, 2016 Master Development and License Agreement between Elite and SunGen Pharma LLC. incorporated by reference to Exhibit 10.44 to the Quarterly Report on Form 10-Q for the period ended September 30, 2016 and filed with the SEC on November 9, 2016. (Confidential Treatment granted with respect to portions of the Agreement).
10.30		Purchase Agreement between the Company and Lincoln Park Capital LLC dated May 1, 2017, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, dated May 2, 2017 and filed with the SEC on May 2, 2017.
10.31		Registration Rights Agreement between the Company and Lincoln Park Capital LLC dated May 1, 2017, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, dated May 2, 2017 and filed with the SEC on May 2, 2017.
10.32		April 28, 2017 Exchange Agreement between the Company and Nasrat Hakim, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, dated April 28, 2017 and filed with the SEC on April 28. 2017.
10.33		May 2017 Trimipramine Acquisition Agreement from Mikah Pharma, incorporated by reference to Exhibit 10.50 to the Annual Report on Form 10-K, for the period ended March 31, 2017 and filed with the SEC on June 14, 2017.
10.34		May 2017 Secured Promissory Note from the Company to Mikah Pharma, incorporated by reference to Exhibit 10.51 to the Annual Report on Form 10-K, for the period ended March 31, 2017 and filed with the SEC on June 14, 2017.
10.35		May 2017 Security Agreement between the Company to Mikah Pharma, incorporated by reference to Exhibit 10.52 to the Annual Report on Form 10-K, for the period ended March 31, 2017 and filed with the SEC on June 14, 2017.
10.36		May 2017 Assignment of Supply and Distribution Agreement between Dr. Reddy’s Laboratories and Mikah Pharma, incorporated by reference to Exhibit 10.53 to the Annual Report on Form 10-K, for the period ended March 31, 2017 and filed with the SEC on June 14, 2017.
10.37		May 2017 Assignment of Manufacturing and Supply Agreement between Epic and Mikah Pharma, incorporated by reference to Exhibit 10.54 to the Annual Report on Form 10-K, for the period ended March 31, 2017 and filed with the SEC on June 14, 2017.
10.38		Supply and Distribution Agreement between Dr. Reddy’s Laboratories and Mikah Pharma, incorporated by reference to Exhibit 10.55 to the Annual Report on Form 10-K, for the period ended March 31, 2017 and filed with the SEC on June 14, 2017. (Confidential Treatment granted with respect to portions of the Agreement).

 

27

 

 

10.39		Manufacturing and Supply Agreement between Epic and Mikah Pharma, incorporated by reference to Exhibit 10.56 to the Annual Report on Form 10-K, for the period ended March 31, 2017 and filed with the SEC on June 14, 2017. (Confidential Treatment granted with respect to portions of the Agreement).
10.40		Master Development And License Agreement For Products Between Elite Pharmaceuticals, Inc. And SunGen dated July 6, 2017, incorporated by reference to Exhibit 10.57 to the Quarterly Report on Form 10-Q for the period ended June 30, 2017 and filed with the SEC on August 9, 2017. (Confidential Treatment granted with respect to portions of the Agreement).
10.41		First Amendment To Master Development And License Agreement For Products Between Elite Pharmaceuticals, Inc. and SunGen Pharma, LLC, incorporated by reference to Exhibit 10.59 to the Quarterly Report on Form 10-Q for the period ended June 30, 2017 and filed with the SEC on August 9, 2017. (Confidential Treatment granted with respect to portions of the Agreement).
10.42		Second Amendment To Master Development And License Agreement For Products Between Elite Pharmaceuticals, Inc. and SunGen Pharma, LLC, incorporated by reference to Exhibit 10.58 to the Quarterly Report on Form 10-Q for the period ended June 30, 2017 and filed with the SEC on August 9, 2017. (Confidential Treatment granted with respect to portions of the Agreement).
10.43		May 22, 2018 License, Manufacturing and Supply Agreement with Glenmark Pharmaceuticals Inc. USA, incorporated by reference to Exhibit 10.60 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2018 and filed with the SEC on June 14, 2018. (Confidential treatment granted with respect to portions of the Agreement).
10.44		August 1, 2018 Amendment to the Glenmark Pharmaceuticals Inc. USA License, Supply and Distribution Agreement (portions of this Agreement have been redacted in compliance with Regulation S-K Item 601(b)(10)).*
10.45		License, Supply And Distribution Agreement effective March 6, 2019 by and between Elite Pharmaceuticals, Inc., and Elite Laboratories, Inc. and Lannett Company, Inc., USA (portions of this Agreement have been redacted in compliance with Regulation S-K Item 601(b)(10)).*
10.46		License, Supply And Distribution Agreement effective April 9, 2019 by and between Elite Pharmaceuticals, Inc., and Elite Laboratories, Inc. and Lannett Company, Inc., USA, incorporated by reference to Exhibit 10.49 to the Annual Report on Form 10-K for the period ended March 31, 2019 and filed with the SEC on June 21, 2019 (portions of this Agreement have been redacted in compliance with Regulation S-K Item 601(b)(10)).
10.47		License, Supply And Distribution Agreement effective March 6, 2019 by and between Elite Pharmaceuticals, Inc., and Elite Laboratories, Inc. and Lannett Company, Inc., USA, incorporated by reference to Exhibit 10.50 to the Annual Report on Form 10-K for the period ended March 31, 2019 and filed with the SEC on June 21, 2019 (portions of this Agreement have been redacted in compliance with Regulation S-K Item 601(b)(10)).
10.48		Development Agreement effective December 3, 2018 by and between Mikah Pharma LLC and Elite Laboratories, Inc., incorporated by reference to Exhibit 10.51 to the Annual Report on Form 10-K for the period ended March 31, 2019 and filed with the SEC on June 21, 2019 (portions of this Agreement have been redacted in compliance with Regulation S-K Item 601(b)(10)).
10.49		Asset Purchase Agreement dated November 13, 2019 by and between the Company and Nostrum Laboratories Inc.*
10.50		January 2, 2020 Amendment to the Glenmark Pharmaceuticals Inc. USA License, Supply and Distribution Agreement (portions of this Agreement have been redacted in compliance with Regulation S-K Item 601(b)(10)).*
10.51		Asset Purchase Agreement executed January 16, 2020 by and between the Company and Nostrum Laboratories Inc.*
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

*	Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	ELITE PHARMACEUTICALS, INC.
February 10, 2020	By:	/s/ Nasrat Hakim
		Nasrat Hakim Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer)
February 10, 2020	By:	/s/ Carter J. Ward
		Carter J. Ward Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)

 

 

29