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, 2016 are not necessarily
indicative of the results that may be expected for the entire year.
Restatement of Previously Issued
Consolidated Financial Statements
As disclosed in the
Company’s Annual Report on Form 10-K for the year ended March 31, 2016, the Company has restated the consolidated financial
statements as of and for the years ended March 31, 2015 and 2014 and unaudited quarterly financial information for the first two
quarters in the year ended March 31, 2016 and the first three quarters in the year ended March 31, 2015, to correct prior periods
primarily related to (i) an error in accounting treatment for license agreement with Epic, in which the Company determined that
revenue relating to a $5,000,000 non-refundable payment, which was originally recognized in full during the quarterly period ended
June 30, 2015, should have been recognized, on a straight line basis, over the exclusivity period, coinciding with the five year
term of the Epic Collaborative Agreement, as this payment is attributed to the exclusive license and other rights granted to Epic
in the Epic Collaborative Agreement; and (ii) a determination that the Series I convertible preferred stock, which had originally
been classified as a derivative liability prior to the quarter ended December 31, 2015, should have been recorded as mezzanine
equity at the maximum redemption amount each reporting period with changes recorded in additional paid in capital.
These unaudited condensed
consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements
for the year ended March 31, 2016 included in the Company’s Fiscal 2016 Annual Report on Form 10-K, filed with the SEC on
June 15, 2016. In addition, the Company’s future Quarterly Reports on Form 10-Q for subsequent quarterly periods during the
current fiscal year will reflect the impact of the restatement in the comparative prior quarter and year-to-date periods.
Reclassifications
Certain reclassifications
have been made to the prior period financial statements to conform to the current period financial statement presentation. These
reclassifications had no effect on net earnings or cash flows as previously reported.
Segment Information
Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 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 U.S. GAAP when making decisions about allocating resources and assessing performance of the Company.
The Company has determined
that its reportable segments are products whose marketing approvals were secured via an Abbreviated New Drug Applications (“ANDA”)
and products whose marketing approvals were secured via a New Drug Application (“NDA”). ANDA products are referred
to as generic pharmaceuticals and NDA products are referred to as branded pharmaceuticals.
There are currently no
intersegment revenues. Asset information by operating segment is not presented below since the chief operating decision maker does
not review this information by segment. The reporting segments follow the same accounting policies used in the preparation of the
Company’s condensed unaudited consolidated financial statements.
Revenue Recognition
The Company enters into
licensing, manufacturing and development agreements, which may include multiple revenue generating activities, including, without
limitation, milestones, licensing fees, product sales and services. These multiple elements are assessed in accordance with ASC
605-25,
Revenue Recognition – Multiple-Element Arrangements
in order to determine whether particular components of
the arrangement represent separate units of accounting.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
An arrangement component
is considered to be a separate unit of accounting if the deliverable relating to the component has value to the customer on a standalone
basis, and if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially in control of the Company.
The Company recognizes
payments received pursuant to a multiple revenue agreement as revenue, only if the related delivered item(s) have stand-alone value,
with the arrangement being accordingly accounted for as a separate unit of accounting. If such delivered item(s) are considered
to either not have stand-alone value, the arrangement is accounted for as a single unit of accounting, and the payments received
are recognized as revenue over the estimated period of when performance obligations relating to the item(s) will be performed.
Whenever the Company determines
that an arrangement should be accounted for as a single unit of accounting, it determines the period over which the performance
obligations will be performed and revenue will be recognized. If it cannot reasonably estimate the timing and the level of effort
to complete its performance obligations under a multiple-element arrangement, revenues are then recognized on a straight-line basis
over the period encompassing the expected completion of such obligations, with such period being reassessed at each subsequent
reporting period.
Arrangement consideration
is allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price (the relative
selling price method). When applying the relative selling price method, the selling price of each deliverable is determined using
vendor-specific objective evidence of selling price, if such exists; otherwise, third-part evidence of selling price. If neither
vendor-specific objective evidence nor third-party evidence of selling price exists for a deliverable, the Company uses its best
estimate of the selling price for that deliverable when applying the relative selling price method. In deciding whether we can
determine vendor-specific objective evidence or third-party evidence of selling price, the Company does not ignore information
that is reasonably available without undue cost and effort.
When determining the selling
price for significant deliverables under a multiple-element revenue arrangement, the Company considers any or all of the following,
without limitation, depending on information available or information that could be reasonably available without undue cost and
effort: vendor-specific objective evidence, third party evidence or best estimate of selling price. More specifically, factors
considered can include, without limitation and as appropriate, size of market for a specific product, number of suppliers and other
competitive market factors, forecast market shares and gross profits, barriers/time frames to market entry/launch, intellectual
property rights and protections, exclusive or non-exclusive arrangements, costs of similar/identical deliverables from third parties,
contractual terms, including, without limitation, length of contract, renewal rights, commercial terms, profit allocations, and
other commercial, financial, tangible and intangible factors that may be relevant in the valuation of a specific deliverable.
Milestone payments are
accounted for in accordance with ASC 605-28,
Revenue Recognition – Milestone Method
for any deliverables or units
of accounting under which the Company must achieve a defined performance obligation which is contingent upon future events or circumstances
that are uncertain as of the inception of the arrangement providing for such future milestone payment. Determination of the substantiveness
of a milestone is a matter of subjective assessment performed at the inception of the arrangement, and with consideration earned
from the achievement of a milestone meeting all of the following:
|
·
|
It
must be either commensurate with the Company's performance in achieving the milestone or the enhancement of the value of the delivered
item(s) as a result of a specific outcome resulting from the Company's performance to achieve the milestone; and
|
|
·
|
It
relates solely to past performance; and
|
|
|
|
|
·
|
It
is reasonable relative to all of the deliverables and payment terms (including other
potential milestone consideration) within the arrangement.
|
Collaborative Arrangements
Contracts are considered
to be collaborative arrangements when they satisfy the following criteria defined in ASC 808,
Collaborative Arrangements
:
|
·
|
The
parties to the contract must actively participate in the joint operating activity; and
|
|
·
|
The
joint operating activity must expose the parties to the possibility of significant risk and rewards, based on whether or not the
activity is successful.
|
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The Company entered into
a sales and distribution licensing agreement with Epic Pharma LLC, 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.
Restricted Cash
As of December 31, 2016
and March 31, 2016, the Company had $388,959 of restricted cash, related to debt serve reserve in regards to the New Jersey Economic
Development Authority (“NJEDA”) bonds (see Note 6).
Inventory
Inventory
is recorded at the lower of cost or market on a first-in first-out basis.
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, 2016,
the Company did not identify any indicators of impairment.
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.
Stock-Based
Compensation
The Company accounts for
stock-based compensation in accordance with ASC Topic 718,
Compensation-Stock Compensation
. Under the fair value recognition
provisions of this topic, 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 Applicable
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 dilutive potential shares if their effect was
anti-dilutive.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The following is the
computation of earnings (loss) per share applicable to common shareholders for the periods indicated:
|
|
For the Three Months Ended
December 31,
|
|
|
For the Nine Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders - basic
|
|
$
|
1,666,750
|
|
|
$
|
(37,018,704
|
)
|
|
$
|
27,715,661
|
|
|
$
|
(32,610,594
|
)
|
Effect of dilutive instrument on net income (loss)
|
|
|
(1,571,471
|
)
|
|
|
34,237,786
|
|
|
|
(30,182,606
|
)
|
|
|
23,516,572
|
|
Net income (loss) attributable to common shareholders - diluted
|
|
$
|
95,279
|
|
|
$
|
(2,780,918
|
)
|
|
$
|
(2,466,945
|
)
|
|
$
|
(9,094,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding - basic
|
|
|
904,763,177
|
|
|
|
684,773,829
|
|
|
|
811,794,206
|
|
|
|
665,720,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options, warrants and convertible securities
|
|
|
5,742,114
|
|
|
|
151,761,342
|
|
|
|
5,742,114
|
|
|
|
151,761,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding - diluted
|
|
|
910,505,291
|
|
|
|
836,535,171
|
|
|
|
817,536,320
|
|
|
|
817,481,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.05
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.05
|
)
|
Fair Value of Financial Instruments
ASC Topic 820,
Fair
Value Measurements and Disclosures
("ASC Topic 820") provides a framework for measuring fair value in accordance
with generally accepted accounting principles.
ASC Topic 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 Topic 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 Topic 820 are described as follows:
|
●
|
Level 1 —
|
Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
|
|
●
|
Level 2 —
|
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
●
|
Level 3 —
|
Inputs that are unobservable for the asset or liability.
|
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Measured on a Recurring
Basis
The following table presents
information about our liabilities measured at fair value on a recurring basis as of December 31, 2016 and March 31, 2016, 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, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments - warrants
|
|
$
|
900,247
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
900,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments - warrants
|
|
$
|
10,368,567
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,368,567
|
|
See Note 12, 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.
Non-Financial Assets
that are Measured at Fair Value on a Non-Recurring Basis
Non-financial assets such
as intangible assets, and property and equipment are measured at fair value only when an impairment loss is recognized.
The Company did not record an impairment charge related to these assets in the periods presented.
Treasury Stock
The Company records treasury
stock at the cost to acquire it and includes treasury stock as a component of shareholders’ equity (deficit).
Recently
Issued Accounting Pronouncements
In May 2014, the FASB issued
ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The core principle of ASU 2014-09 is that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods and services. This standard is effective for fiscal years
and interim reporting periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14,
Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective Date.
The amendments in this update deferred the effective
date for implementation of ASU 2014-09 by one year and is now effective for annual reporting periods beginning after December 15,
2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2016 including interim reporting
periods within that period. Topic 606 is effective for the Company in the first quarter of fiscal 2019. The Company is currently
evaluating the effects of ASU 2014-09 and related ASUs noted below on its unaudited condensed financial statements.
From March through December
2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606):
Principal versus Agent
Considerations (Reporting Revenue Gross versus Net),
ASU 2016-10,
Revenue from Contracts with Customers (Topic
606):
Identifying Performance Obligations and Licensing,
ASU 2016-11,
Revenue Recognition (Topic 605)
and Derivatives and Hedging (Topic 815):
Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09
and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting,
ASU No. 2016-12,
Revenue from Contracts
with Customers (Topic 606):Narrow-Scope Improvements and Practical Expedients
and ASU No. 2016-20,
Technical Corrections
and Improvements to Topic 606, Revenue from Contracts with Customers.
These amendments are intended to improve and clarify
the implementation guidance of Topic 606. The effective date and transition requirements for the amendments are the same as the
effective date and transition requirements of ASU No. 2014-09 and ASU No. 2015-14.
In April 2015, the FASB
issued ASU 2015-3,
Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-3”). ASU 2015-3 revises previous
guidance to require that debt issuance costs be reported in the unaudited condensed consolidated financial statements as a direct
deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Prior to the amendments,
debt issuance costs were presented as a deferred charge (i.e. an asset) on the unaudited condensed consolidated financial statements.
This new guidance is effective for the annual period ending after December 15, 2015, and for annual periods and interim periods
thereafter. The amendments must be applied retrospectively. The Company has adopted the provisions of ASU 2015-03. Refer to Note
2 Change in Accounting Principle for the effect of adopting ASU 2015-03 on the condensed consolidated balance sheet as of March
31, 2016.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
In July 2015, the FASB
issued ASU 2015-11,
Simplifying the Measurement of Inventory (Topic 330)
(“ASU 2015-11”). The amendments in
ASU 2015-11 clarify the determination of net realizable value of inventory, applicable to measurement of inventory asset value
on the balance sheet. The amendments do not change the core principal of the guidance provided in Topic 330, specifically the valuation
of inventory at the lower of cost or market value, with market value being determined by the net realizable value of the inventory
item(s). The amendments clarify, however, that net realizable value is to be measured as the estimated selling price in the ordinary
course of business, less reasonably predicable costs of completion, disposal and transportation. The guidance is effective for
the annual period beginning after December 15, 2016, and for annual periods and interim periods thereafter, with early adoption
being optional and permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating
the effects of ASU 2015-11 on its unaudited condensed financial statements.
In February 2016, the
FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”), which is effective for public entities
for annual reporting periods beginning after December 15, 2018. Under ASU 2016-02, 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. The Company
is currently evaluating the effects of ASU 2016-02 on its unaudited condensed financial statements.
In March 2016, the FASB
issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting (Topic 718)
(“ASU 2016-09”). The
amendments in ASU 2016-09 provide revised guidance in relation to the following with regards to share based payments: i) Accounting
for forfeitures, ii) Income tax effects, and iii) classification of excess tax benefits. The guidance is effective for the annual
period beginning after December 15, 2016, and for annual periods and interim periods thereafter, with early adoption being optional
and permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the effects of
ASU 2016-09 on its unaudited condensed financial statements.
In August 2016, the FASB
issued ASU 2016-15, Statement
of Cash Flows (Topic 230)
Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”).
ASU 2016-15 eliminates the diversity in practice related to the classification of certain
cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero-coupon bond, the settlement of contingent
liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method
investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow
classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing
and financing activities. The guidance is effective for the Company beginning after December 15, 2017, although early adoption
is permitted. The Company is currently evaluating the effects of ASU 2016-15 on its unaudited condensed consolidated financial
statements.
In November 2016, the FASB
issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230) Restricted Cash a consensus of the FASB Emerging Issues Task Force
(“ASU 2016-18”). ASU 2016-18 requires restricted cash and cash equivalents to be included with cash and cash equivalents
on the statement cash flows. The new standard is expected to be effective for fiscal years, and interim periods within those years,
beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effects of ASU 2016-18
on its unaudited 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 consolidated
financial statements and related disclosures.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 2. CHANGE IN ACCOUNTING PRINCIPLE
As noted in Note 1 Summary
of Significant Accounting Policies, the Company adopted the provisions of ASU 2015-03 and has retroactively reclassified its consolidated
balance sheet for the year ended March 31, 2016. During the fiscal year ended March 31, 2016, the Company had accounted for bond
offering costs associated with its NJEDA Bonds as an other asset within the Company’s consolidated balance sheet.
The following table is a summary of the effect of the reclassification
on the consolidated balance sheet as of March 31, 2016:
|
|
March 31, 2016
|
|
|
|
As
previously
filed
|
|
|
Adjustments
|
|
|
As
Reclassified
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
EDA bond offering costs
|
|
$
|
204,401
|
|
|
$
|
(204,401
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of EDA bonds payable
|
|
$
|
220,000
|
|
|
$
|
(14,178
|
)
|
|
$
|
205,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
EDA bonds payable- non-current
|
|
$
|
1,845,000
|
|
|
$
|
(190,223
|
)
|
|
$
|
1,654,777
|
|
NOTE 3. INVENTORY
Inventory as of December
31, 2016 and March 31, 2016 consisted of the following:
|
|
December 31, 2016
|
|
|
March 31, 2016
|
|
Finished goods
|
|
$
|
304,672
|
|
|
$
|
225,698
|
|
Work-in-progress
|
|
|
132,529
|
|
|
|
222,784
|
|
Raw materials
|
|
|
5,591,613
|
|
|
|
2,845,247
|
|
|
|
$
|
6,028,814
|
|
|
$
|
3,293,729
|
|
NOTE 4. PROPERTY AND EQUIPMENT, NET
Property and equipment
as of December 31, 2016 and March 31, 2016 consisted of the following:
|
|
December 31, 2016
|
|
|
March 31, 2016
|
|
Land, building and improvements
|
|
$
|
6,841,191
|
|
|
$
|
6,230,543
|
|
Laboratory, manufacturing and warehouse equipment
|
|
|
8,733,843
|
|
|
|
8,255,286
|
|
Office equipment and software
|
|
|
259,025
|
|
|
|
234,634
|
|
Furniture and fixtures
|
|
|
49,804
|
|
|
|
49,804
|
|
Transportation equipment
|
|
|
66,855
|
|
|
|
66,855
|
|
|
|
|
15,950,718
|
|
|
|
14,837,122
|
|
Less: Accumulated depreciation
|
|
|
(7,231,333
|
)
|
|
|
(6,726,401
|
)
|
|
|
$
|
8,719,385
|
|
|
$
|
8,110,721
|
|
Depreciation expense was
$166,602 and $173,914 for the three months and $504,932 and $492,625 for the nine months ended December 31, 2016 and 2015, respectively.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 5. INTANGIBLE ASSETS
The following table summarizes
the Company’s intangible assets as of December 31, 2016 and March 31, 2016:
|
|
December 31, 2016
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Net
Book
|
|
|
|
Life
|
|
|
Amount
|
|
|
|
Additions
|
|
|
|
Amortization
|
|
|
|
Value
|
|
Patent application costs
|
|
*
|
|
$
|
364,482
|
|
|
$
|
7,292
|
|
|
$
|
-
|
|
|
$
|
371,774
|
|
ANDA acquisition costs
|
|
Indefinite
|
|
|
6,047,317
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,047,317
|
|
|
|
|
|
$
|
6,411,799
|
|
|
$
|
7,292
|
|
|
$
|
-
|
|
|
$
|
6,419,091
|
|
|
|
March 31, 2016
|
|
|
Estimated
|
|
Gross
|
|
|
|
|
|
|
|
|
Useful
|
|
Carrying
|
|
|
|
Accumulated
|
|
Net Book
|
|
|
Life
|
|
Amount
|
|
Additions
|
|
Amortization
|
|
Value
|
Patent application costs
|
|
*
|
|
$
|
334,457
|
|
|
$
|
30,025
|
|
|
$
|
-
|
|
|
$
|
364,482
|
|
ANDA acquisition costs
|
|
Indefinite
|
|
|
6,047,317
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,047,317
|
|
|
|
|
|
$
|
6,381,774
|
|
|
$
|
30,025
|
|
|
$
|
-
|
|
|
$
|
6,411,799
|
|
* 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 6. 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.
The following tables summarizes
the Company’s bonds payable liability as of December 31, 2016 and March 31, 2016, respectively.
|
|
December 31, 2016
|
|
March 31, 2016
|
Gross bonds payable
|
|
|
|
|
|
|
|
|
NJEDA Bonds - Series A Notes
|
|
$
|
1,845,000
|
|
|
$
|
2,065,000
|
|
Less: Current portion of bonds payable (prior to deduction
of bond offering costs)
|
|
|
(85,000
|
)
|
|
|
(220,000
|
)
|
Long-term portion of bonds payable (prior to deduction
of bond offering costs)
|
|
$
|
1,760,000
|
|
|
$
|
1,845,000
|
|
|
|
|
|
|
|
|
|
|
Bond offering costs
|
|
$
|
354,453
|
|
|
$
|
354,453
|
|
Less: Accumulated amortization
|
|
|
(160,686
|
)
|
|
|
(150,052
|
)
|
Bond offering costs, net
|
|
$
|
193,767
|
|
|
$
|
204,401
|
|
|
|
|
|
|
|
|
|
|
Current portion of bonds payable - net of bond offering costs
|
|
|
|
|
|
|
|
|
Current portions of bonds payable
|
|
$
|
85,000
|
|
|
$
|
220,000
|
|
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
|
|
$
|
70,822
|
|
|
$
|
205,822
|
|
|
|
|
|
|
|
|
|
|
Long term portion of bonds payable - net of bond offering costs
|
|
|
|
|
|
|
|
|
Long term portion of bonds payable
|
|
$
|
1,760,000
|
|
|
$
|
1,845,000
|
|
Less: Bond offering costs to be amortized subsequent
to the next 12 months
|
|
|
(179,589
|
)
|
|
|
(190,223
|
)
|
Long term portion of bonds payable, net of bond offering
costs
|
|
$
|
1,580,411
|
|
|
$
|
1,654,777
|
|
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Amortization expense was $3,544 for the three
months and $10,633 for the nine months ended December 31, 2016 and 2015, respectively.
NOTE 7. LOANS PAYABLE
Loans Payable as of December
31, 2016 and March 31, 2016 consisted of the following:
|
|
December 31, 2016
|
|
March 31, 2016
|
Equipment and insurance financing loans payable, between 6% and 13% interest and maturing between May 2017 and January 2022
|
|
$
|
882,416
|
|
|
$
|
863,773
|
|
Less: Current portion of loans payable
|
|
|
(439,265
|
)
|
|
|
(342,944
|
)
|
Long-term portion of loans payable
|
|
$
|
443,151
|
|
|
$
|
520,829
|
|
The interest expense associated
with the loans payable was $21,603 and $26,081 for the three months and $64,932 and $68,986 for the nine months ended December
31, 2016 and 2015, respectively.
NOTE 8. LINE OF CREDIT – RELATED PARTY
During October 2013, the
Company entered into a bridge loan agreement (the “Hakim Loan Agreement”) with Mr. Nasrat Hakim, the Company’s
President and CEO. Under the terms of the Hakim Loan Agreement, the Company has the right, at its sole discretion, to a line of
credit (“Hakim Credit Line”) in the maximum principal amount of up to $1,000,000 at any one time. The purpose of the
Hakim Credit Line is to support the acceleration of the Company’s product development activities. The outstanding amount
is evidenced by a promissory note, which matured on March 31, 2016, as amended. On March 31, 2016, the entire unpaid principal
balance plus accrued interest thereon was due and payable in full. The Company could have prepaid any amounts owed without penalty.
Any such prepayments shall first be attributable to interest due and owing and then to principal. Interest only shall be payable
quarterly on January 1, April 1, July 1 and October 1 of each year. Prior to maturity or the occurrence of an Event of Default
as defined in the Hakim Loan Agreement, the Company may borrow, repay, and re-borrow under the Hakim Credit Line through maturity.
Amounts borrowed under the Hakim Credit Line bore interest at the rate of 10% per annum.
As of March 31, 2016,
the principal balance owed under the Hakim Credit Line was $718,309, with an additional $70,784 in accrued interest being also
owed, in accordance with the terms and conditions of the Hakim Credit Line. This principal balance was paid in full on May 23,
2016. Accrued interest consisting of $70,784 due and owed on March 31, 2016, plus $9,134 in interest due, owed and expensed during
the period April 1, 2016 through May 23, 2016 was paid on May 24, 2016. Accordingly, as of December 31, 2016, there are no amounts
due and owing under the Hakim Loan Agreement or the Hakim Line of Credit and both have expired.
NOTE 9. DEFERRED REVENUE
Deferred revenues in the
aggregate amount of $3,532,223 as of December 31, 2016, were comprised of a current component of $1,013,333 and a long-term component
of $2,518,890. Deferred revenues in the aggregate amount of $4,292,220 as of March 31, 2016, were comprised of a current component
of $1,013,333 and a long-term component of $3,278,887. 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 10. 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Legal Proceedings
Arbitration with Precision
Dose, Inc.
On May 9, 2014, Precision
Dose Inc., the parent company of TAGI Pharmaceuticals, Inc., commenced an arbitration against the Company alleging that the Company
failed to properly supply, price and satisfy gross profit minimums regarding Phentermine 37.5mg tablets, as required by the parties’
agreements. Elite denied Precision Dose’s allegations and has counterclaimed that Precision Dose is no longer entitled to
exclusivity rights with respect to Phentermine 37.5mg tablets, and is responsible for certain costs, expenses, price increases
and lost profits relating to Phentermine 37.5mg tablets and the parties’ agreements. The parties have reached agreement
in settlement of these issues, with Precision Dose agreeing to pay certain amounts to the Company in exchange for Elite agreeing
to restore exclusivity rights with respect to Phentermine 37.5mg tablets, subject to certain defined conditions. Both parties
have been complying with the agreed settlement terms and the Company has notified the Arbitrator of this settlement, requesting
the issuance of proceeding termination documents.
Due to the agreements
reached and adhered to with regards to this issue, the Company has determined that no contingency loss needs to be recorded.
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 expires 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.
Rent
expense is recorded on the straight-line basis. Rents paid in excess is recognized as deferred rent. Rent expense under the 135
Ludlow Ave. modified lease for the three-month ended December 31, 2016 and 2015 was $45,213 and $45,214, respectively and $135,639
and $90,427 for the nine months ended December 31, 2016 and 2015 respectively. Rent expense is recorded in general and administrative
expense in the unaudited condensed consolidated statements of operations. Deferred rent as of December 31, 2016 and March 31,
2016 was zero and $19,528, respectively and recorded as a component of other long-term liabilities.
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, 2016 and March 31, 2016, the Company had a liability
of $29,177 and $27,895, respectively and recorded as a component of other long-term liabilities.
NOTE 11. MEZZANINE EQUITY - SERIES I CONVERTIBLE PREFERRED STOCK
On February 6, 2014, the
Company created the Series I Convertible Preferred Stock (“Series I Preferred”). A total of 495.758 shares of Series
I Preferred were authorized, 100 shares are issued and outstanding, with a stated value of $100,000 per share and a par value
of $0.01 as of March 31, 2016. On August 16, 2016, the 100 shares issued and outstanding were converted into 142,857,143 shares
of common stock at the stated conversion price of $0.07 (See Note 13). In conjunction with the Certificate of Designations (“COD”),
the shares converted were retired, canceled and returned to the status of authorized by unissued preferred stock, leaving a total
of 395.758 shares of Series I Preferred authorized and no shares of Series I Preferred outstanding at December 31, 2016.
The COD for the Series I Preferred contained
the following features:
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Background
|
·
|
Conversion
feature - the Series I Preferred Shares may be converted, at the option of the Holder, into the Company’s Common Stock
at a stated conversion price of $0.07.
|
|
·
|
Subsequent
dilutive issuances - if the Company issues options at a price below the Conversion Price, then the Conversion Price will be
reduced.
|
|
·
|
Subsequent
dividend issuances - if the Company issues Common Stock in lieu of cash in satisfaction of its dividend obligation on its
Series C Certificate, the applicable Conversion Price of the Series I Preferred is adjusted.
|
The Company
has determined that the Series I Preferred host instrument was more akin to equity than debt and that the above financial instruments
were clearly and closely related to the host instrument, with bifurcation and classification as a derivative liability being not
required.
Based on the
Company’s review of the COD, the host instrument, the Series I Preferred Shares, was classified as mezzanine equity. The
above identified embedded financial instruments: Conversion Feature, Subsequent Dilutive Issuances and Subsequent Dividend Issuances
will not be bifurcated from the host and are therefore classified as mezzanine equity with the Series I Preferred. The Series
I Preferred was carried at the maximum redemption value, with changes in this value charged to retained earnings or to additional
paid-in capital in the absence of retained earnings.
Changes in
carrying value are also subtracted from net income (loss), (in a manner like the treatment of dividends paid on preferred stock),
in arriving at net income (loss) available to common shareholders used in the calculation of earnings per share.
Authorized,
issued and outstanding shares, along with carrying value and change in value as of the periods presented are as follows:
|
|
December 31, 2016
|
|
March 31, 2016
|
Shares authorized
|
|
|
395.758
|
|
|
|
495.758
|
|
Shares outstanding
|
|
|
-
|
|
|
|
100
|
|
Par value
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Stated value per share
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
Conversion price
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
Common shares to be issued upon redemption
|
|
|
-
|
|
|
|
142,857,143
|
|
Closing price on valuation date
|
|
|
N/A
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
Carrying value of Series I convertible preferred stock
|
|
$
|
-
|
|
|
$
|
44,285,715
|
|
|
|
For the Three Months
Ended
December 31,
|
|
For the Nine Months Ended
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Change in carrying value of convertible preferred share mezzanine equity
|
|
$
|
-
|
|
|
$
|
(24,785,740
|
)
|
|
$
|
20,714,286
|
|
|
$
|
(23,428,573
|
)
|
NOTE 12. DERIVATIVE FINANCIAL INSTRUMENTS – WARRANTS
The
Company evaluates and accounts for its freestanding instruments in accordance with ASC 815,
Accounting for Derivative Instruments
and Hedging Activities
.
The
Company issued warrants, with terms of five to seven years, to various corporations and individuals, in connection with the sale
of securities, loan agreements and consulting agreements.
A
summary of warrant activity is as follows:
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
|
December 31, 2016
|
|
March 31, 2016
|
|
|
Warrant Shares
|
|
Weighted
Average
Exercise Price
|
|
Warrant Shares
|
|
Weighted
Average
Exercise Price
|
Balance at beginning of year
|
|
|
41,586,066
|
|
|
$
|
0.0625
|
|
|
|
89,870,034
|
|
|
$
|
0.0625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercised, forfeited and/or expired, net
|
|
|
(32,206,847
|
)
|
|
|
|
|
|
|
(48,283,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
9,379,219
|
|
|
$
|
0.0625
|
|
|
|
41,586,066
|
|
|
$
|
0.0625
|
|
The fair value of
the warrants was calculated using the Black-Scholes model and the following assumptions:
|
|
December 31, 2016
|
|
March 31, 2016
|
Fair value of the Company's common stock
|
|
$
|
0.15
|
|
|
$
|
0.31
|
|
Volatility (based on the Company's historical volatility)
|
|
|
75%
- 76%
|
|
|
|
52%
- 81%
|
|
Exercise price
|
|
$
|
0.0625
|
|
|
|
$
0.0625 - 0.25
|
|
Estimated life (in years)
|
|
|
1.2
- 1.3
|
|
|
|
0.2
- 2.1
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
|
0.81
|
%
|
|
|
0.18%
- 0.73%
|
|
The changes in warrants
(Level 3 financial instruments) measured at fair value on a recurring basis for the nine months ended December 31, 2016 were as
follows:
Balance as of March 31, 2016
|
|
$
|
10,368,567
|
|
Change in fair value of derivative financial instruments
- warrants
|
|
|
(9,468,320
|
)
|
Balance as of December 31, 2016
|
|
$
|
900,247
|
|
NOTE 13. SHAREHOLDERS’ EQUITY (DEFICIT)
Lincoln Park Capital
On April 10, 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 has 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. Pursuant to the terms of the
Registration Rights Agreement, we have 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. The latest registration statement,
which updates the prior registration statements, was declared effective by the SEC on July 13, 2016.
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 is obligated
to issue up to an additional 1,928,641 commitment shares to Lincoln Park pro rata as up to $40 million of common stock purchased
by Lincoln Park. Through December 31, 2016, we have sold to Lincoln Park an aggregate of 89.7 million shares under the Purchase
Agreement for aggregate gross proceeds of approximately $24.0 million. In addition, we have issued an additional 1.2 million Commitment
Shares.
The Company, from
time to time and at the Company’s sole discretion but no more frequently than every other business day, direct Lincoln Park
to purchase (a “Regular Purchase”) up to 500,000 shares of common stock on any such business day, increasing up to
800,000 shares, depending upon the closing sale price of the common stock, provided that in no event shall Lincoln Park purchase
more than $760,000 worth of common stock on any single business day. The purchase price of shares of common stock related to the
future Regular Purchase funding will be based on the prevailing market prices of such shares at the time of sales (or over a period
of up to ten business days leading up to such time), but in no event, will shares be sold to Lincoln Park on a day the Common
Stock closing price is less than the floor price of $0.10 per share, subject to adjustment.
In addition to Regular
Purchases, on any business day on which the Company has properly submitted a Regular Purchase notice and the closing sale price
is not below $0.15, the Company may purchase (an “Accelerated Purchase”) an additional “accelerated amount”
under certain circumstances. The amount of any Accelerated Purchase cannot exceed the lesser of three times the number of purchase
shares purchased pursuant to the corresponding Regular Purchase; and 30% of the aggregate shares of the Company’s common
stock traded during normal trading hours on the purchase date. The purchase price per share for each such Accelerated Purchase
will be equal to the lower of (i) 97% of the volume weighted average price during the purchase date; or (ii) the closing sale
price of the Company’s common stock on the purchase date.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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.
Other than as set forth
above, there are no trading volume requirements or restrictions under the Purchase Agreement, and the Company will control the
timing and amount of any sales of the Company’s common stock to Lincoln Park.
The Company’s sales
of shares of common stock to Lincoln Park under the 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 9.99% of the
then outstanding shares of common stock.
The Purchase Agreement
and the 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 Purchase
Agreement at any time, at no cost or penalty. Actual sales of shares of common stock to Lincoln Park under the Purchase Agreement
will depend on a variety of factors to be determined by the Company from time to time, including, without limitation, market conditions,
the trading price of the Common Stock and determinations by the Company as to appropriate sources of funding for the Company and
its operations. There are no trading volume requirements or restrictions under the Purchase Agreement. Lincoln Park has no right
to require any sales by the Company, but is obligated to make purchases from the Company as it directs in accordance with the
Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short
selling or hedging of Company shares.
The net proceeds under
the Purchase Agreement to the Company will depend on the frequency and prices at which the Company sells shares of its stock to
Lincoln Park.
Common Stock
During the nine months ended December 31,
2016, the Company issued the following shares of common stock:
Issuance of shares
of common stock pursuant to the exercise of warrants and stock options
The Company issued 29,662,876
shares of its common stock totaling $1,856,480 in connection with the exercise of warrants and stock options.
Issuance of shares
of common stock in payment of employee salaries
The Company issued 42,938
shares of its common stock totaling $13,750 pursuant to employment contracts with certain employees.
Issuance of shares
of common stock to Lincoln Park
The Company issued 278,215
shares of its common stock with a value totaling $69,425 on the date of issuance, in connection with the Purchase Agreement with
Lincoln Park as consideration for their commitment to purchase additional shares of the Company’s common stock. In addition,
the Company issued 26,859,647 shares of its common stock for proceeds totaling $5,770,163 in connection with the Purchase Agreement
with Lincoln Park.
Conversion of Series
I convertible preferred stock
On August 16, 2016, Mr.
Nasrat Hakim, the Company’s President and CEO, converted 100 shares of the Series I convertible preferred stock, such shares
having a total stated value of $10 million, at the stated conversion price of $0.07 into 142,857,143 shares of the Company’s
common stock, with such shares being valued at $23,571,429, based upon the closing price of the Company’s Common Stock on
the date of the conversion.
NOTE 14. 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.
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, 2016, 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, 2016, the Company accrued director’s fees totaling $58,361, which will be paid via the issuance of 288,172
shares of Common Stock.
As of December 31, 2016,
the Company owes its Directors a total of 334,295 shares of Common Stock in payment of director fees totaling $73,361 due and
owing. The Company anticipates that these shares of Common Stock will be issued during prior to the end of the current fiscal
year.
Stock-based Employee Compensation
Employment contracts with
the Company’s President and Chief Executive Officer, Chief Financial Officer and certain other employees includes provisions
for a portion of each employee’s salaries 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, 2016, the Company issued 42,938 shares of common stock to certain employees in payment of salaries in the aggregate
amount of $13,750, consisting of $6,250 of related employee salaries earned during the nine months ended December 31, 2016 and
$7,500 in related employee salaries due and owing as of March 31, 2016, the end of the immediately prior fiscal year. Please note
that these shares were issued to employees that resigned from their positions with the Company and represented those shares due
and owing as of the date of such resignations.
During the nine months
ended December 31, 2016, the Company accrued salaries and fees totaling $631,000 owed to the Company’s President and Chief
Executive Officer, Chief Financial Officer and certain other employees and consultants, which are to be paid via the issuance
of a total of 3,073,032 shares of Common Stock, inclusive of shares issued to employees that resigned from the Company during
the nine months ended December 31, 2016.
As of December 31, 2016,
the Company owes its President and Chief Executive Officer, Chief Financial Officer and certain other employees and consultants,
a total of 3,696,875 shares of Common Stock in payment of salaries and fees totaling $833,167 due and owing. The Company anticipates
that these shares of common stock will be issued prior to the end of the current fiscal year.
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
|
|
Weighted Average
|
|
|
|
|
Shares
|
|
Average
|
|
Remaining Contractual
|
|
Aggregate Intrinsic
|
|
|
Underlying Options
|
|
Exercise Price
|
|
Term (in years)
|
|
Value
|
Outstanding at April 1, 2016
|
|
|
7,609,667
|
|
|
$
|
0.48
|
|
|
|
6.5
|
|
|
$
|
904,409
|
|
Granted
|
|
|
870,000
|
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
Forfeited and expired
|
|
|
(1,907,000
|
)
|
|
|
1.29
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(100,000
|
)
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
6,472,667
|
|
|
$
|
0.21
|
|
|
|
6.9
|
|
|
$
|
361,298
|
|
Exercisable at December 31, 2016
|
|
|
5,019,335
|
|
|
$
|
0.19
|
|
|
|
6.4
|
|
|
$
|
211,665
|
|
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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, 2016 and March 31, 2016 of $0.15 and $0.31.
The fair value of the
options was calculated using the Black-Scholes model and the following assumptions:
|
|
December 31, 2016
|
|
March 31, 2016
|
Volatility (based on the Company's historical volatility)
|
|
|
119%
- 121%
|
|
|
|
119%
- 120%
|
|
Exercise price
|
|
$
|
0.17 - 0.42
|
|
|
$
|
0.23
- 0.42
|
|
Estimated term (in years)
|
|
|
10
|
|
|
|
10
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
|
2.4%
- 1.8%
|
|
|
|
2.1%
- 2.2%
|
|
Forfeiture rate
|
|
|
0.0
|
%
|
|
|
2.7
|
%
|
Fair value of options granted
|
|
$
|
317,634
|
|
|
$
|
129,913
|
|
Non-cash compensation through issuance of stock options
|
|
$
|
258,954
|
|
|
$
|
333,363
|
|
NOTE 15. SALE OF NEW JERSEY STATE NET OPERATING
LOSSES
During the three months
ended December 31, 2016, Elite Labs, a wholly owned subsidiary of Elite, received final approval from the New Jersey Economic Development
Authority for the sale of net tax benefits of $1,286,842 relating to New Jersey net operating losses and net tax benefits of $745,891
relating to R&D tax credits. The Company sold the net tax benefits approved for sale at a transfer price equal to ninety-two
cents for every benefit dollar for total proceeds of $1,870,114.
NOTE 16. CONCENTRATIONS AND CREDIT RISK
Revenues
Three customers accounted
for substantially all the Company’s revenues for the three months ended December 31, 2016. These three customers accounted
for approximately 41%, 37% and 17% of revenues each, respectively. The same three customers accounted for approximately 46%, 32%
and 17% of revenues for the nine months ended December 31, 2016.
Three customers accounted
for substantially all the Company’s revenues for the three months ended December 31, 2015. These three customers accounted
for approximately 49%, 29% and 15% of revenues each, respectively. The same three customers accounted for approximately 46%, 34%
and 12% of revenues for the nine months ended December 31, 2015.
Accounts Receivable
Three customers accounted
for all the Company’s accounts receivable as of December 31, 2016. These three customers accounted for approximately 41%,
35%, and 24% of accounts receivable as of December 31, 2016.
Four customers accounted for substantially all the Company’s accounts receivable as of March 31,
2016. Included in these customers are three customers that accounted for approximately 54%, 30% and 8% of accounts receivable as
of March 31, 2016.
Purchasing
Three suppliers
accounted for more than 65% of the Company’s purchases of raw materials for the nine months ended December 31, 2016. These
three suppliers accounted for approximately 48%, 9% and 8% of purchases each, respectively.
For the nine
months ended December 31, 2015, the same three suppliers accounted for more than 69% of the Company’s purchases. These three
suppliers accounted for approximately 30%, 28% and 11% of purchases each, respectively.
NOTE 17. SEGMENT RESULTS
FASB ASC 280-10-50 requires
use of the “management approach” model for segment reporting. The management approach is based on the way a company’s
management organized segments within the company for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management structure, or any other manner in which management
disaggregates a company.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The Company has determined
that its reportable segments are Abbreviated New Drug Applications (“ANDA”) for generic products and New Drug Applications
(“NDA”) 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 and nine months ended December 31, 2016 and 2015.
|
|
For the Three Months
Ended December 31,
|
|
For the Nine Months Ended
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANDA
|
|
$
|
2,080,649
|
|
|
$
|
1,943,876
|
|
|
$
|
7,537,493
|
|
|
$
|
6,720,155
|
|
NDA
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
750,000
|
|
|
|
583,333
|
|
|
|
$
|
2,330,649
|
|
|
$
|
2,193,876
|
|
|
$
|
8,287,493
|
|
|
$
|
7,303,488
|
|
|
|
For the Three Months Ended December 31,
|
|
For the Nine Months Ended December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Operating (Loss) Income by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANDA
|
|
$
|
(302,110
|
)
|
|
$
|
1,065,439
|
|
|
$
|
(38,576
|
)
|
|
$
|
3,134,402
|
|
NDA
|
|
|
(351,186
|
)
|
|
|
(2,895,668
|
)
|
|
|
(1,240,085
|
)
|
|
|
(9,316,110
|
)
|
|
|
$
|
(653,296
|
)
|
|
$
|
(1,830,229
|
)
|
|
$
|
(1,278,661
|
)
|
|
$
|
(6,181,708
|
)
|
The table below
reconciles the Company’s operating income (loss) by segment to income from operations before provision for income taxes
as reported in the Company’s unaudited condensed consolidated statements of operations.
|
|
For the Three Months Ended
December 31,
|
|
For the Nine Months Ended
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Operating loss by segment
|
|
$
|
(653,296
|
)
|
|
$
|
(1,830,229
|
)
|
|
$
|
(1,278,661
|
)
|
|
$
|
(6,181,708
|
)
|
Corporate unallocated costs
|
|
|
(1,017,047
|
)
|
|
|
(367,147
|
)
|
|
|
(2,017,976
|
)
|
|
|
(1,113,997
|
)
|
Interest income
|
|
|
3,151
|
|
|
|
-
|
|
|
|
9,407
|
|
|
|
-
|
|
Interest expense and amortization of debt issuance costs
|
|
|
(55,563
|
)
|
|
|
(68,119
|
)
|
|
|
(181,883
|
)
|
|
|
(207,376
|
)
|
Depreciation and amortization expense
|
|
|
(21,032
|
)
|
|
|
(166,825
|
)
|
|
|
(64,408
|
)
|
|
|
(492,625
|
)
|
Significant non-cash items
|
|
|
(31,048
|
)
|
|
|
(348,598
|
)
|
|
|
(803,538
|
)
|
|
|
(1,098,316
|
)
|
Change in fair value of derivative instruments
|
|
|
1,571,471
|
|
|
|
(9,452,046
|
)
|
|
|
9,468,320
|
|
|
|
(87,999
|
)
|
(Loss) income from operations
|
|
$
|
(203,364
|
)
|
|
$
|
(12,232,964
|
)
|
|
$
|
5,131,261
|
|
|
$
|
(9,182,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 18. 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 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 (“NDA”) 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. Please see Note 21, “Subsequent Events”
below regarding the Company’s End of Review meeting held with the FDA subsequent to the end of the December 31, 2016 quarter.
There can be no assurances
that this product 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
this marketing authorization.
NOTE 19. 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 18 above). The 2015 Epic License Agreement includes milestone payments
totaling $10 million upon the filing with and approval of a New Drug Application (“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. 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. The Company currently is evaluating the points
raised in the CRL and intends to request an End of Review meeting with the FDA to determine the pathway forward for SequestOx™.
There can be no assurances of the Company receiving marketing authorization for SequestOx™, 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
On October 2, 2013, Elite
executed the Epic Pharma Manufacturing and License Agreement (the “Epic Generic Agreement”), which 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
will 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 is 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 will 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. While Epic has launched four
of the six exclusive products and Elite has collected $1.0 million of the $1.8 million total fee, collection of the remaining
$800k is contingent upon Epic filing the required supplements with and receiving approval from the FDA for the remaining exclusive
generic products. There can be no assurances of Epic filing these supplements, or getting approval of any supplements filed. Accordingly,
there can be no assurances of Elite receiving the remaining $800k due under the Epic Generic Agreement, or future license fees
related thereto. Please also note that all commercialization, regulatory, manufacturing, marketing and distribution activities
are being conducted solely by Epic, without Elite’s participation.
Both the 2015 Epic License
Agreement and the Epic Generic Agreement contain 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:
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·
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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;
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·
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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;
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·
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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;
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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;
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·
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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.
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·
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Assessment
of consideration offered; and
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·
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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.
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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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 20. MANUFACTURING, LICENSE AND DEVELOPMENT AGREEMENTS
The Company has entered into the following
active agreements:
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License
agreement with Precision Dose, dated September 10, 2010 (the “Precision Dose License Agreement”)
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Manufacturing
and Supply Agreement with Ascend Laboratories Inc., dated June 23, 2011 and as amended on September 24, 2012 and January 19,
2015 (the “Ascend Manufacturing Agreement”) and
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Master Development and
License Agreement with SunGen Pharma LLC dated August 24, 2016 (the “SunGen Agreement”)
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The Precision Dose Agreement
provides for the marketing and distribution, by Precision Dose and its wholly owned subsidiary, TAGI Pharma, of Phentermine 37.5mg
tablets (launched in April 2011), Phentermine 15mg capsules (launched in April 2013), Phentermine 30mg capsules (launched in April
2013), Hydromorphone 8mg tablets (launched in March 2012), Naltrexone 50mg tablets (launched in September 2013) and certain additional
products that require approval from the FDA which has not been received. Precision Dose will have the exclusive right to market
these products in the United States and Puerto Rico and a non-exclusive right to market the products in Canada. Pursuant to the
Precision Dose License Agreement, Elite received $200k at signing, and is receiving milestone payments and a license fee which
is based on profits achieved from the commercial sale of the products included in the agreement.
Revenue
from the $200k payment made upon signing of the Precision Dose Agreement is being recognized over the life of the Precision Dose
Agreement.
The milestones, totaling
$500k (with $405k already received), consist of amounts due upon the first shipment of each identified product, as follows: Phentermine
37.5mg tablets ($145k), Phentermine 15 & 30mg capsules ($45k), Hydromorphone 8mg ($125k), Naltrexone 50mg ($95k) and the balance
of $95k due in relation to the first shipment of generic products which still require marketing authorizations from the FDA, and
to which there can be no assurances of such marketing authorizations being granted and accordingly there can be no assurances
that the Company will earn and receive these milestone amounts. These milestones have been determined to be substantive, with
such determination being made by the Company after assessments based on the following:
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The
Company’s performance is required to achieve each milestone; and
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The milestones
will relate to past performance, when achieved; and
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The milestones
are reasonable relative to all of the deliverables and payment terms within the Precision Dose License Agreement.
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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:
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·
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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;
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·
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Assessment
of various avenues for monetizing the generic products, including the various combinations of sites of manufacture and marketing
options;
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·
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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;
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·
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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;
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·
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Assessment
of consideration offered by Precision and other entities with whom discussions were conducted; and
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·
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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.
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ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The Ascend Manufacturing
Agreement provides for the manufacturing by Elite of Methadone 10mg for supply to Ascend Laboratories LLC (“Ascend”).
Ascend is the owner of the approved ANDA for Methadone 10mg, and the Northvale Facility is an approved manufacturing site for
this ANDA. There are no license fees or milestones relating to this agreement. All revenues earned are recognized as manufacturing
revenues on the date of shipment of the product, when title for the goods is transferred, and for which the price is agreed to
and it has been determined that collectability is reasonably assured. The initial shipment of Methadone 10mg pursuant to the Ascend
Manufacturing Agreement occurred in January 2012.
The SunGen Agreement executed
on August 24, 2016 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.
NOTE 21. SUBSEQUENT EVENTS
The Company has evaluated
subsequent events from the balance sheet date through February 9, 2017, the date the accompanying financial statements were issued.
The following are material subsequent events.
Common Stock sold pursuant to the Lincoln
Park Purchase Agreement
Subsequent to December,
2016 and up to February 1, 2017 (the latest practicable date), a total of 6,604,914 shares of Common Stock were sold and
48,354 additional commitment shares were issued, pursuant to the Lincoln Park Purchase Agreement. Proceeds received from such
transactions totaled $1.0 million.