NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Overview
Elite Pharmaceuticals,
Inc. (the “Company” or “Elite”) was incorporated on October 1, 1997 under the laws of the State of Delaware,
and its wholly-owned subsidiary Elite Laboratories, Inc. (“Elite Labs”) which was incorporated on August 23, 1990 under
the laws of the State of Delaware. On January 5, 2012, Elite Pharmaceuticals was reincorporated under the laws of the State of
Nevada. Elite Labs engages primarily in researching, developing and licensing proprietary orally administered, controlled-release
drug delivery systems and products with abuse deterrent capabilities and the manufacture of generic, oral dose pharmaceuticals.
The Company is equipped to manufacture controlled-release products on a contract basis for third parties and itself, if and when
the products are approved. These products include drugs that cover therapeutic areas for pain, allergy, bariatric and infection.
Research and development activities are done so with an objective of developing products that will secure marketing approvals from
the United States Food and Drug Administration (“FDA”), and thereafter, commercially exploiting such products.
Principles of Consolidation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the
United States (“GAAP”) and in conformity with the instructions on Form 10-Q and Rule 8-03 of Regulation S-X and the
related rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiary, Elite Laboratories, Inc. All significant
intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements
reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair
presentation of such statements. The results of operations for the three and six months ended September 30, 2017 are not necessarily
indicative of the results that may be expected for the entire year.
Going Concern
In connection with the
preparation of the financial statements as of and for the six month period ended September 30, 2017, the Company conducted an evaluation
as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity’s
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 not appear to be evidence of substantial doubt of the entity’s ability to continue
as a going concern.
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 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 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-party 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, and 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 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.
Cash
The Company considers all
highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist
of cash on deposit with banks and money market instruments. The Company places its cash and cash equivalents with high-quality,
U.S. financial institutions and, to date has not experienced losses on any of its balances.
Restricted Cash
As of September 30, 2017,
and March 31, 2017, the Company had $390,006 and $389,081, respectively, of restricted cash, related to debt service reserve in
regard to the New Jersey Economic Development Authority (“NJEDA”) bonds (see Note 6).
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 a first-in first-out basis.
Long-Lived Assets
The Company periodically
evaluates the fair value of long-lived assets, which include property and equipment and intangibles, whenever events or changes
in circumstances indicate that its carrying amounts may not be recoverable.
Property and equipment
are stated at cost. Depreciation is provided on the straight-line method based on the estimated useful lives of the respective
assets which range from three to forty years. Major repairs or improvements are capitalized. Minor replacements and maintenance
and repairs which do not improve or extend asset lives are expensed currently.
Upon retirement or other
disposition of assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss,
if any, is recognized in income.
Intangible Assets
The Company capitalizes
certain costs to acquire intangible assets; if such assets are determined to have a finite useful life they are amortized on a
straight-line basis over the estimated useful life. Costs to acquire indefinite lived intangible assets, such as costs related
to ANDAs are capitalized accordingly.
The Company tests its intangible
assets for impairment at least annually (as of March 31st) and whenever events or circumstances change that indicate impairment
may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such
indicators may include, among others and without limitation: a significant decline in the Company’s expected future cash
flows; a sustained, significant decline in the Company’s stock price and market capitalization; a significant adverse change
in legal factors or in the business climate of the Company’s segments; unanticipated competition; and slower growth rates.
As of September 30, 2017,
the Company did not identify any indicators of impairment.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO 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 income tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and net operating loss and other tax credit carry-forwards. These
items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The
Company records a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be
realized.
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 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 CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following is the
computation of earnings (loss) per share applicable to common shareholders for the periods indicated:
|
|
For the Three Months Ended September 30,
|
|
|
For the Six Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders - basic
|
|
$
|
1,815,183
|
|
|
$
|
27,095,241
|
|
|
$
|
(353,577
|
)
|
|
$
|
26,046,408
|
|
Effect of dilutive instrument on net loss
|
|
|
(4,023,176
|
)
|
|
|
(28,354,070
|
)
|
|
|
(4,162,436
|
)
|
|
|
(28,611,135
|
)
|
Net income (loss) attributable to common shareholders - diluted
|
|
$
|
(2,207,993
|
)
|
|
$
|
(1,258,829
|
)
|
|
$
|
(4,516,013
|
)
|
|
$
|
(2,564,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding - basic
|
|
|
782,424,624
|
|
|
|
806,868,491
|
|
|
|
800,772,162
|
|
|
|
765,055,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options, warrants and convertible securities
|
|
|
6,369,237
|
|
|
|
9,158,246
|
|
|
|
6,369,237
|
|
|
|
9,158,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding - diluted
|
|
|
788,793,861
|
|
|
|
816,026,737
|
|
|
|
807,141,399
|
|
|
|
774,213,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
0.03
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
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 CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Measured on a Recurring
Basis
The following table presents
information about our liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy
within which those measurements fell:
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
Amount at Fair
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments - warrants
|
|
$
|
3,155,702
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,155,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments - warrants
|
|
$
|
843,464
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
843,464
|
|
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 Adopted Accounting Pronouncements
In January 2017, the Financial
Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2017-01,
Business Combinations:
Clarifying the Definition of a Business
, which amends the current definition of a business. Under ASU 2017-01, to be considered
a business, an acquisition would have to include an input and a substantive process that together significantly contributes to
the ability to create outputs. ASU 2017-01 further states that when substantially all of the fair value of gross assets acquired
is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business. The new guidance
also narrows the definition of the term "outputs" to be consistent with how it is described in Topic 606,
Revenue
from Contracts with Customers
. The changes to the definition of a business will likely result in more acquisitions being accounted
for as asset acquisitions. The guidance is effective for the annual period beginning after December 15, 2017, with early adoption
permitted. The Company has elected to early adopt ASU 2017-01 and to apply it to any transaction, which occurred prior to the issuance
date that has not been reported in financial statements that have been issued or made available for issuance.
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 new revenue recognition guidance. The Company has completed its initial impact assessment and has commenced an in-depth
evaluation of the adoption impact, which involves review of selected revenue arrangements. Based on the Company’s preliminary
review, the Company believes that the timing and measurement of revenue for its customers will be similar to the Company’s
current revenue recognition. However, this view is preliminary and could change based on further analysis associated with the conversion
and implementation phases of our ASU 2014-09 project.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
From March 2016 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 February 2016, the FASB
issued ASU No. 2016-02, Leases (Topic 842), 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 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
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 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.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and
Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception
. Part I of this update addresses the complexity of accounting for
certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or
embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II
of this update addresses the difficulty of navigating
Topic 480, Distinguishing Liabilities from Equity
, because of the
existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the
indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities
and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting
effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The
Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. ASSET ACQUISITION
On May 15, 2017, Elite
Laboratories, Inc., a wholly-owned subsidiary of the Company entered into an asset purchase agreement with Mikah Pharma, LLC (“Mikah”
and/or the “Seller”), a related party, to acquire the Abbreviated New Drug Applications for Trimipramine Maleate Capsules
and testing data, studies, and formulations created in connection therewith including but not limited to (i) the
ANDA(s)
(
Trimipramine Maleate Capsules, 25, 50 and 100 mg ) (the “Product”), (ii) any
correspondence with the United States Food and Drug Administration in Seller’s files with respect to the ANDA(s), (iii) the
right of reference to the Drug Master Files, as set forth in the ANDA(s); (iv) the ANDA(s) Technology and Scientific Materials;
(v) all rights to manufacture, sell or otherwise exploit any products resulting therefrom including all rights to revenues generated
therefrom; and (vi) a royalty free limited license to use any ANDA(s) Technology and Scientific Materials which is common to the
Product and any other product of Seller, but only for Buyer’s use in connection with the manufacture of any product (the
“Purchased Assets”). Mikah is owned by Nasrat Hakim, the CEO, President and Chairman of the Board of the Company. For
consideration of the purchased assets, the Company issued a Secured Promissory Note for the principal sum of $1,200,000 (see Note
8).
The Company evaluated the
acquisition of the purchased assets under ASC 805,
Business Combinations
and ASU 2017-01 and concluded that as substantially
all of the fair value of the gross assets acquired is concentrated in an identifiable group of similar assets, the transaction
did not meet the requirements to be accounted for as a business combination and therefore was accounted for as an asset acquisition.
Accordingly, the purchase price of the purchased assets was allocated entirely to an identifiable intangible asset as follows:
ANDA acquisition costs
|
|
$
|
1,200,000
|
|
Total assets acquired
|
|
$
|
1,200,000
|
|
NOTE 3. INVENTORY
Inventory consisted of
the following:
|
|
September 30, 2017
|
|
|
March 31, 2017
|
|
Finished goods
|
|
$
|
257,353
|
|
|
$
|
221,657
|
|
Work-in-progress
|
|
|
229,879
|
|
|
|
283,086
|
|
Raw materials
|
|
|
5,221,600
|
|
|
|
5,911,223
|
|
|
|
|
5,708,832
|
|
|
|
6,415,966
|
|
Less: Inventory reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
5,708,832
|
|
|
$
|
6,415,966
|
|
NOTE 4. PROPERTY AND EQUIPMENT, NET
Property and equipment
consisted of the following:
|
|
September 30, 2017
|
|
|
March 31, 2017
|
|
Land, building and improvements
|
|
$
|
7,620,550
|
|
|
$
|
7,308,890
|
|
Laboratory, manufacturing and warehouse equipment
|
|
|
9,070,866
|
|
|
|
8,764,406
|
|
Office equipment and software
|
|
|
296,148
|
|
|
|
276,201
|
|
Furniture and fixtures
|
|
|
49,804
|
|
|
|
49,804
|
|
Transportation equipment
|
|
|
66,855
|
|
|
|
66,855
|
|
|
|
|
17,104,223
|
|
|
|
16,466,156
|
|
Less: Accumulated depreciation
|
|
|
(7,837,382
|
)
|
|
|
(7,426,752
|
)
|
|
|
$
|
9,266,841
|
|
|
$
|
9,039,404
|
|
Depreciation expense was
$410,630 and $165,815 for the three months and $226,044 and $338,330 for the six months ended September 30, 2017 and 2016, respectively.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. INTANGIBLE ASSETS
The following table summarizes
the Company’s intangible assets:
|
|
September 30, 2017
|
|
|
Estimated
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
Carrying
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Life
|
|
Amount
|
|
|
Additions
|
|
|
Amortization
|
|
|
Value
|
|
Patent application costs
|
|
*
|
|
$
|
371,774
|
|
|
$
|
75,274
|
|
|
$
|
-
|
|
|
$
|
447,048
|
|
ANDA acquisition costs
|
|
Indefinite
|
|
|
6,047,317
|
|
|
|
1,200,000
|
|
|
|
-
|
|
|
|
7,247,317
|
|
|
|
|
|
$
|
6,419,091
|
|
|
$
|
1,275,274
|
|
|
$
|
-
|
|
|
$
|
7,694,365
|
|
|
|
March
31, 2017
|
|
|
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
|
|
* 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 summarize
the Company’s bonds payable liability:
|
|
September 30, 2017
|
|
|
March 31, 2017
|
|
Gross bonds payable
|
|
|
|
|
|
|
|
|
NJEDA Bonds - Series A Notes
|
|
$
|
1,760,000
|
|
|
$
|
1,845,000
|
|
Less: Current portion of bonds payable (prior to deduction of bond offering costs)
|
|
|
(90,000
|
)
|
|
|
(85,000
|
)
|
Long-term portion of bonds payable (prior to deduction of bond offering costs)
|
|
$
|
1,670,000
|
|
|
$
|
1,760,000
|
|
|
|
|
|
|
|
|
|
|
Bond offering costs
|
|
$
|
354,453
|
|
|
$
|
354,453
|
|
Less: Accumulated amortization
|
|
|
(171,320
|
)
|
|
|
(164,231
|
)
|
Bond offering costs, net
|
|
$
|
183,133
|
|
|
$
|
190,222
|
|
|
|
|
|
|
|
|
|
|
Current portion of bonds payable - net of bond offering costs
|
|
|
|
|
|
|
|
|
Current portions of bonds payable
|
|
$
|
90,000
|
|
|
$
|
85,000
|
|
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
|
|
$
|
75,822
|
|
|
$
|
70,822
|
|
|
|
|
|
|
|
|
|
|
Long term portion of bonds payable - net of bond offering costs
|
|
|
|
|
|
|
|
|
Long term portion of bonds payable
|
|
$
|
1,670,000
|
|
|
$
|
1,760,000
|
|
Less: Bond offering costs to be amortized subsequent to the next 12 months
|
|
|
(168,955
|
)
|
|
|
(176,044
|
)
|
Long term portion of bonds payable, net of bond offering costs
|
|
$
|
1,501,045
|
|
|
$
|
1,583,956
|
|
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Amortization expense was
$3,544 for the three months and $7,089 for the six months ended September 30, 2017 and 2016, respectively.
NOTE 7. LOANS PAYABLE
Loans payable consisted
of the following:
|
|
September 30, 2017
|
|
|
March 31, 2017
|
|
Equipment and insurance financing loans payable, between 3% and 13% interest and maturing between October 2017 and December 2022
|
|
$
|
979,833
|
|
|
$
|
993,760
|
|
Less: Current portion of loans payable
|
|
|
(363,533
|
)
|
|
|
(416,148
|
)
|
Long-term portion of loans payable
|
|
$
|
616,300
|
|
|
$
|
577,612
|
|
The interest expense associated
with the loans payable was $19,022 and $21,042 for the three months and $40,781 and $43,329 for the six months ended September
30, 2017 and 2016, respectively.
NOTE 8. RELATED PARTY SECURED PROMISSORY
NOTE WITH MIKAH PHARMA LLC
For consideration of the
assets acquired on May 15, 2017, as discussed in Note 2, 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. 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 $15,000 for the three months and $45,000 for the six months ended September
30, 2017, respectively.
NOTE 9. DEFERRED REVENUE
Deferred revenues in the
aggregate amount of $2,772,223 as of September 30, 2017, were comprised of a current component of $1,013,333 and a long-term component
of $1,758,890. Deferred revenues in the aggregate amount of $3,278,890 as of March 31, 2017, were comprised of a current component
of $1,013,333 and a long-term component of $2,265,557. 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.
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”).
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 September 30, 2017 and 2016 was $54,909 and $45,213, respectively and $109,818
and $90,426 for the six months ended September 30, 2017 and 2016, respectively. Rent expense is recorded in general and administrative
expense in the unaudited condensed consolidated statements of operations. Deferred rent as of September 30, 2017 and March 31,
2017 was $6,453 and $2,152, 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 September 30, 2017, and March 31, 2017, the Company had a liability of $30,516
and $29,616, 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. 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. In conjunction with the Certificate of Designations (“COD”), the shares
converted were retired, cancelled, and returned to the status of authorized by unissued preferred stock. There are 395.758 shares
authorized, 0 issued and outstanding as of September 31, 2017 and March 31, 2017, respectively.
The COD for the Series
I Preferred contained the following features:
|
·
|
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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
|
|
September 30, 2017
|
|
|
March 31, 2017
|
|
Shares authorized
|
|
|
395.758
|
|
|
|
395.758
|
|
Shares outstanding
|
|
|
-
|
|
|
|
-
|
|
Par value
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Stated value
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
Conversion price
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
Common shares to be issued upon redemption
|
|
|
-
|
|
|
|
-
|
|
Closing price on valuation date
|
|
$
|
0.10
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
Carrying value of Series I convertible preferred stock
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
|
For the Six Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Change in carrying value of convertible preferred share mezzanine equity - Series I
|
|
$
|
-
|
|
|
$
|
22,857,143
|
|
|
$
|
-
|
|
|
$
|
20,714,286
|
|
Series J convertible preferred stock
On April 28, 2017, the
Company created the Series J Convertible Preferred Stock (“Series J Preferred”) in conjunction with the Certificate
of Designations (“Series J COD”). A total of 50 shares of Series J Preferred were authorized, 24.0344 shares are issued
and outstanding, with a stated value of $1,000,000 per share and a par value of $0.01 as of September 30, 2017.
The issued shares were
pursuant to an Exchange Agreement with Nasrat Hakim, (“Hakim”) a related party and the Company’s President, CEO
and Chairman of the Board of Directors. Per 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 $1.1521 per share. The aggregate
stated value of the Series J Preferred issued was equal to the aggregate value of the shares of common stock exchanged, with such
value of each share of Common Stock exchanged being equal to the closing price of the Common Stock on April 27, 2017. In connection
with the Exchange Agreement, the Company also issued warrants to purchase 79,008,661 shares of common stock at $0.1521 per share,
and such warrants are classified as liabilities on the accompanying unaudited condensed consolidated balance sheet (See Note 12).
Each Series J Preferred
is convertible at the option of the holder into shares of common stock, that is the earlier of (i) the date that shareholder approval
is obtained and the requisite corporate action has been effected regarding a Fundamental Transaction (as defined in the Series
J COD); or (ii) not less than three years subsequent to the Original Issue Date (the date of the first issuance of any shares of
the Series J Preferred Stock) (the “Conversion Date”). The number of common shares is calculated by dividing the Stated
Value of such share of Series J Preferred by the Conversion Price. The conversion price for the Series J Preferred shall equal
$0.1521, subject to adjustment as discussed below.
Based on the current conversion
price, the Series J Preferred is convertible into 158,017,321 shares of common stock. The conversion price is subject to the following
adjustments: (i) stock dividends and splits, (ii) sale or grant of shares below the conversion price, (iii) pro rata distributions;
or (iv) fundamental changes (merger, consolidation, or sale of all or substantially all assets).
If upon any Conversion
Date there is not a sufficient number of authorized shares of Common Stock (that are not issued, outstanding or reserved for issuance)
available to effect the entire conversion of the then outstanding shares of Series J Preferred Stock and the then outstanding common
stock purchase warrants issued in conjunction therewith (an “Authorized Share Deficiency”), such conversion shall not
exceed the Issuable Maximum (as defined in the Series J COD); however, the Company shall use its best efforts to obtain shareholder
approval within two (2) years of the date of first issuance of Series J Preferred Stock to permit the balance of the conversion.
If shareholder approval is not obtained due to an insufficient number of shareholder votes for passage, the Company shall continue
to solicit for shareholder approval annually thereafter. As of September 30, 2017, 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 pair 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 Material
. 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, $13,903,957.
The fair value of the Series
J Preferred issued by the Company pursuant to the exchange agreement was calculated using a Monte Carlo Simulation of stock price
and expected future behaviors related to shareholder approval provisions. The following are the key assumptions used in the Monte
Carlo Simulation:
|
|
April 28, 2017
|
|
Fair value of the Company's common stock
|
|
$
|
0.1521
|
|
Conversion price
|
|
$
|
0.1521
|
|
Number of Series J Preferred issued
|
|
|
24.0344
|
|
Fully diluted shares outstanding as of measurement date
|
|
|
923,392,780
|
|
Risk-free rate
|
|
|
2.30
|
%
|
Volatility
|
|
|
90.00
|
%
|
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
|
%
|
Authorized, issued and
outstanding shares, along with carrying value and change in value as of the periods presented are as follows:
|
|
September 30, 2017
|
|
|
March 31, 2017
|
|
Shares authorized
|
|
|
50
|
|
|
|
-
|
|
Shares outstanding
|
|
|
20.0344
|
|
|
|
-
|
|
Par value
|
|
$
|
0.01
|
|
|
$
|
-
|
|
Stated value
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
Conversion price
|
|
$
|
0.15
|
|
|
$
|
-
|
|
Common shares to be issued upon conversion
|
|
|
158,017,321
|
|
|
|
-
|
|
Carrying value of Series J convertible preferred stock
|
|
$
|
13,903,957
|
|
|
$
|
-
|
|
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
|
|
September 30, 2017
|
|
|
March 31, 2017
|
|
|
|
Warrant
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Warrant Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Balance at beginning of period
|
|
|
9,379,219
|
|
|
$
|
0.0625
|
|
|
|
41,586,066
|
|
|
$
|
0.0625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants granted pursuant to the issuance of Series J convertible preferred shares
|
|
|
79,008,661
|
|
|
$
|
0.1521
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercised, forfeited and/or expired, net
|
|
|
(2,910,532
|
)
|
|
|
|
|
|
|
(32,206,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
85,477,348
|
|
|
$
|
0.1426
|
|
|
|
9,379,219
|
|
|
$
|
0.0625
|
|
The fair value of the warrants
issued by the Company prior to April 1, 2017 (9,379,219 warrant shares) was calculated using the Black-Scholes model and the following
assumptions:
|
|
September 30, 2017
|
|
|
March 31, 2017
|
|
Fair value of the Company's common stock
|
|
$
|
0.10
|
|
|
$
|
0.15
|
|
Volatility (based on the Company's historical volatility)
|
|
|
98.1%-103.1
|
%
|
|
|
72.5%-73.1
|
%
|
Exercise price
|
|
$
|
0.0625
|
|
|
$
|
0.0625
|
|
Estimated life (in years)
|
|
|
0.5-0.6
|
|
|
|
1.0-1.1
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
|
1.20%-1.21
|
%
|
|
|
1.02%-1.03
|
%
|
Fair value of derivative financial instruments – warrants
|
|
$
|
306,290
|
|
|
$
|
843,464
|
|
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 $6,474,673 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 11). As of September 30, 2017, 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 11.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO 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:
|
|
September 30, 2017
|
|
|
April 28, 2017
|
|
Fair value of the Company's common stock
|
|
$
|
0.1010
|
|
|
$
|
0.1521
|
|
Initial exercise price
|
|
$
|
0.1521
|
|
|
$
|
0.1521
|
|
Number of common warrants
|
|
|
79,008,661
|
|
|
|
79,008,661
|
|
Fully diluted shares outstanding as of measurement date
|
|
|
781,736,280
|
|
|
|
923,392,780
|
|
Warrant term (in years)
|
|
|
9.58
|
|
|
|
10.00
|
|
Risk-free rate
|
|
|
2.31
|
%
|
|
|
2.30
|
%
|
Volatility
|
|
|
90.00
|
%
|
|
|
90.00
|
%
|
Shareholder approval threshold
|
|
$
|
0.1580
|
|
|
$
|
0.1521
|
|
Probability of approval is ending stock price is greater than threshold - midpoint
|
|
|
82.50
|
%
|
|
|
82.50
|
%
|
Probability of approval is ending stock price is greater than threshold - midpoint
|
|
|
17.50
|
%
|
|
|
17.50
|
%
|
Trials
|
|
|
100,000
|
|
|
|
200,000
|
|
Fair value of derivative financial instruments - warrants
|
|
$
|
2,849,412
|
|
|
$
|
6,474,673
|
|
The changes in warrants
(Level 3 financial instruments) measured at fair value on a recurring basis for the six months ended September 30, 2017 were as
follows:
Balance as of March 31, 2017
|
|
$
|
843,464
|
|
Fair value of warrants granted pursuant to the issuance of Series J convertible preferred shares
|
|
|
6,474,674
|
|
Change in fair value of derivative financial instruments - warrants
|
|
|
(4,162,436
|
)
|
Balance as of September 30, 2017
|
|
$
|
3,155,702
|
|
NOTE 13. SHAREHOLDERS’ EQUITY (DEFICIT)
Lincoln Park Capital – April 10,
2014 Purchase Agreement
On April 10, 2014, the
Company entered into a Purchase Agreement (the “2014 LPC Purchase Agreement”) and a Registration Rights Agreement with
Lincoln Park Capital Fund, LLC (“Lincoln Park”). Pursuant to the terms of the 2014 LPC Purchase Agreement, Lincoln
Park had 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.
Upon execution of the Purchase
Agreement, the Company issued 1,928,641 shares of our common stock to Lincoln Park pursuant to the Purchase Agreement as consideration
for its commitment to purchase additional shares of our common stock under that agreement and were obligated to issue up to an
additional 1,928,641 commitment shares to Lincoln Park pro rata as up to $40 million of the Company’s common stock is purchased
by Lincoln Park.
The 2014 LPC Purchase Agreement
expired on June 1, 2017. During the term of the 2014 LPC 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. 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 5,540,550 shares of common stock and are required to issue up to
5,540,550 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 our shares.
The net proceeds received by us under the 2017
LPC Purchase Agreement will depend on the frequency and prices at which the Company sell 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.
Summary of Common Stock Activity
During the six months ended
September 30, 2017, the Company issued the following shares of Common Stock:
Issuance of shares of
common stock pursuant to the exercise of warrants
The Company issued 2,910,532
shares of its common stock totaling $181,908 in connection with the exercise of cash warrants.
Issuance of shares of
common stock to Lincoln Park
The Company issued 5,540,551
shares of its common stock as initial commitment shares pursuant to the 2017 LPC Purchase Agreement, 132,375 shares of its common
stock as additional commitment shares, pursuant to the 2017 LPC 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 7,449,381 shares
of its common stock for proceeds totaling $955,691 in connection with the 2017 LPC Purchase Agreement with Lincoln Park.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Stock-based Director Compensation
The Company’s Director
compensation policy was instituted in October 2009 and further revised in January 2016, includes provisions that a portion of director’s
fees are to be paid via the issuance of shares of the Company’s common stock, in lieu of cash, with the valuation of such
shares being calculated on quarterly basis and equal to the average closing price of the Company’s common stock.
During the six months ended
September 30, 2017, the Company did not issue any shares of common stock to its Directors in payment of director’s fees.
During the six months
ended September 30, 2017, the Company accrued director’s fees totaling $60,000, which will be paid via cash payments totaling
$20,000 and the issuance of 283,860 shares of Common Stock.
As of September 30, 2017,
the Company owes its Directors a total of $30,000 in cash payments and 419,061 shares of Common Stock in payment of director fees
totaling $60,000 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 six months ended
September 30, 2017, the Company did not issue any shares pursuant to employment contracts with the Company’s President and
Chief Executive Officer, Chief Financial Officer or certain other employees.
During the six months
ended September 30, 2017, the Company accrued salaries and fees totaling $414,500 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 2,941,503 shares of Common Stock.
As of September 30, 2017,
the Company owes its President and Chief Executive Officer, Chief Financial Officer and certain other employees and consultants,
a total of 4,342,519 shares of Common Stock in payment of salaries and fees totaling $621,750 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.
|
|
Shares
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
Underlying
|
|
|
Average
|
|
|
Remaining Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term (in years)
|
|
|
Value
|
|
Outstanding at March 31, 2017
|
|
|
6,737,667
|
|
|
$
|
0.20
|
|
|
|
6.7
|
|
|
$
|
258,747
|
|
Granted
|
|
|
560,000
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
Forfeited and expired
|
|
|
(216,667
|
)
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
7,081,000
|
|
|
$
|
0.17
|
|
|
|
6.6
|
|
|
$
|
93,740
|
|
Exercisable at September 30, 2017
|
|
|
5,041,000
|
|
|
$
|
0.15
|
|
|
|
5.9
|
|
|
$
|
93,290
|
|
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO 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 September 30, 2017 and March 31, 2017 of $0.10 and $0.15, respectively.
The fair value of the options
was calculated using the Black-Scholes model and the following assumptions:
|
|
September
30, 2017
|
|
|
March
31, 2017
|
|
Volatility (based on
the Company's historical volatility)
|
|
|
121.4%
- 123.2
|
%
|
|
|
120%
- 121
|
%
|
Exercise price
|
|
$
|
0.0935
- 0.2370
|
|
|
$
|
0.13-0.33
|
|
Estimated
term (in years)
|
|
|
10
|
|
|
|
10
|
|
Risk free interest
rate (based on 1-year treasury rate)
|
|
|
2.2%
- 2.4
|
%
|
|
|
1.5%
- 2.5
|
%
|
Forfeiture rate
|
|
|
4.7%
- 20.1
|
%
|
|
|
2.3%
- 4.6
|
%
|
Fair value of options granted
|
|
$
|
79,215
|
|
|
$
|
373,055
|
|
Non-cash compensation
through issuance of stock options
|
|
$
|
170,758
|
|
|
$
|
357,955
|
|
NOTE 15. CONCENTRATIONS AND CREDIT RISK
Revenues
Three customers accounted
for substantially all the Company’s revenues for the six months ended September 30, 2017. These three customers accounted
for approximately 56%, 29% and 5% of revenues each, respectively. The same three customers accounted for approximately 53%, 28%
and 10% of revenues for the three months ended September 30, 2017.
Three customers accounted
for substantially all the Company’s revenues for the six months ended September 30, 2016. These three customers accounted
for approximately 48%, 31% and 17% of revenues each, respectively. The same three customers accounted for approximately 48%, 26%
and 19% of revenues for the three months ended September 30, 2016.
Accounts Receivable
Three customers accounted
for all the Company’s accounts receivable as of September 30, 2017. These three customers accounted for approximately 43%,
35%, and 15% of accounts receivable each, respectively.
Four customers accounted
for all the Company’s accounts receivable as of March 31, 2017. These four customers accounted for approximately 53%, 17%,
14%, and 12% of accounts receivable as of March 31, 2017.
Purchasing
Seven suppliers
accounted for more than 82% of the Company’s purchases of raw materials for the six months ended September 30, 2017. Included
in these seven suppliers are two suppliers that accounted for approximately 38% and 11% of purchases each, respectively.
Five suppliers
accounted for more than 80% of the Company’s purchases of raw materials for the six months ended September 30, 2016. Included
in these five suppliers are two suppliers that accounted for approximately 52% and 12% of purchases each, respectively.
NOTE 16. SEGMENT RESULTS
FASB ASC 280-10-50 requires
use of the “management approach” model for segment reporting. The management approach is based on the way a company’s
management organized segments within the company for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates
a company.
The Company has determined
that its reportable segments are Abbreviated New Drug Applications (“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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Asset information by operating
segment is not presented below since the chief operating decision maker does not review this information by segment. The reporting
segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial
statements.
The following represents selected information
for the Company’s reportable segments:
|
|
For the Three Months Ended September 30,
|
|
|
For the Six Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANDA
|
|
$
|
1,373,581
|
|
|
$
|
2,435,698
|
|
|
$
|
2,826,351
|
|
|
$
|
5,456,844
|
|
NDA
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
$
|
1,623,581
|
|
|
$
|
2,685,698
|
|
|
$
|
3,326,351
|
|
|
$
|
5,956,844
|
|
|
|
For the Three Months Ended September 30,
|
|
|
For the Six Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Operating Income (Loss) by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANDA
|
|
$
|
(663,291
|
)
|
|
$
|
90,613
|
|
|
$
|
(1,094,981
|
)
|
|
$
|
263,534
|
|
NDA
|
|
|
(688,124
|
)
|
|
|
(280,222
|
)
|
|
|
(1,364,689
|
)
|
|
|
(888,899
|
)
|
|
|
$
|
(1,351,415
|
)
|
|
$
|
(189,609
|
)
|
|
$
|
(2,459,670
|
)
|
|
$
|
(625,365
|
)
|
The table below reconciles
the Company’s operating loss by segment to income (loss) from operations before provision for income taxes as reported in
the Company’s unaudited condensed consolidated statements of operations.
|
|
For the Three Months Ended
September 30,
|
|
|
For the Six Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Operating loss by segment
|
|
$
|
(1,351,415
|
)
|
|
$
|
(189,609
|
)
|
|
$
|
(2,459,670
|
)
|
|
$
|
(625,365
|
)
|
Corporate unallocated costs
|
|
|
(601,132
|
)
|
|
|
(541,307
|
)
|
|
|
(1,271,761
|
)
|
|
|
(1,003,432
|
)
|
Interest income
|
|
|
4,419
|
|
|
|
3,147
|
|
|
|
8,401
|
|
|
|
6,256
|
|
Interest expense and amortization of debt issuance costs
|
|
|
(82,541
|
)
|
|
|
(57,377
|
)
|
|
|
(153,272
|
)
|
|
|
(126,320
|
)
|
Depreciation and amortization expense
|
|
|
(7,177
|
)
|
|
|
(20,984
|
)
|
|
|
(13,953
|
)
|
|
|
(43,376
|
)
|
Significant non-cash items
|
|
|
(170,147
|
)
|
|
|
(452,699
|
)
|
|
|
(625,758
|
)
|
|
|
(772,490
|
)
|
Change in fair value of derivative instruments
|
|
|
4,023,176
|
|
|
|
5,496,927
|
|
|
|
4,162,436
|
|
|
|
7,896,849
|
|
Income (loss) from operations
|
|
$
|
1,815,183
|
|
|
$
|
4,238,098
|
|
|
$
|
(353,577
|
)
|
|
$
|
5,332,122
|
|
NOTE 17. 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 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 hr., with a range of 0.5 hr. to 12 hr. and a mean Tmax of the comparator, Roxicodone
®
of 3.4 hr. with a
range of 0.5 hr. to 12 hr. 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.
NOTE 18. COLLABORATIVE AGREEMENT WITH SUNGEN
PHARMA LLC
On August 24, 2016, as
amended, 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 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 (the “Beta Blocker
Products”) and the remaining four products consist of antidepressants, antibiotics and antispasmodics.
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 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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. 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 hr., with a range of 0.5 hr. to 12 hr. and a mean Tmax of the comparator, Roxicodone
®
of 3.4 hr. with a
range of 0.5 hr. to 12 hr. 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”), 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
|
·
|
Assessment of the opportunity for each product in the market, including consideration of the following,
without limitation: market size, number of competitors, the current and estimated future regulatory, legislative, and social environment
for abuse deterrent opioids and the other generic products to which the underlying contracts are relevant;
|
|
·
|
Assessment of various avenues for monetizing SequestOx™ and the twelve ANDA’s owned
by the Company, including the various combinations of sites of manufacture and marketing options;
|
|
·
|
Elite’s resources and capabilities with regards to the concurrent development of abuse deterrent
opioids and expansion of its generic business segment, including financial and operational resources required to achieve manufacturing
site transfers for twelve approved ANDA’s;
|
|
·
|
Capabilities of each party with regards to various factors, including, one or more of the following:
manufacturing, marketing, regulatory and financial resources, distribution capabilities, ownership structure, personnel, assessments
of operational efficiencies and entity stability, company culture and image;
|
|
·
|
Stage of development of SequestOx™ and manufacturing site transfer and regulatory requirements
relating to the commercialization of the generic products at the time of the discussions/negotiations, and an assessment of the
risks, probability, and time frames for achieving marketing authorizations from the FDA for each product.
|
|
·
|
Assessment of consideration offered; and
|
|
·
|
Comparison of the above factors among the various entities with whom the Company was engaged in
discussions relating to the commercialization of SequestOx™ and the manufacture/marketing of the twelve generics related
to the Epic Generic Agreement.
|
This transaction is not
to be considered as an arms-length transaction.
Please also note that,
effective April 7, 2016, all Directors on the Company’s Board of Directors that were also owners/managers of Epic had resigned
as Directors of the Company and all current members of the Company’s Board of Directors have no relationship to Epic. Accordingly,
Epic no longer qualifies as a party that is related to the Company.
NOTE 20. 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”); and,
|
|
·
|
Manufacturing and Supply Agreement with Ascend Laboratories Inc., dated June 23, 2011 and as amended
on September 24, 2012, January 19, 2015 and July 20, 2015, and as extended on August 9, 2016 (the “Ascend Manufacturing Agreement”)
|
|
·
|
Development and License Agreement with SunGen (the “July 2017 SunGen Agreement”)
|
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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue
from the $200k payment made upon signing of the Precision Dose Agreement is being recognized over the life of the Precision Dose
Agreement.
The milestones, totaling
$500k (with $405k already received), consist of amounts due upon the first shipment of each identified product, as follows: Phentermine
37.5mg tablets ($145k), Phentermine 15 & 30mg capsules ($45k), Hydromorphone 8mg ($125k), Naltrexone 50mg ($95k) and the balance
of $95k due in relation to the first shipment of generic products which still require marketing authorizations from the FDA, and
to which there can be no assurances of such marketing authorizations being granted and accordingly there can be no assurances that
the Company will earn and receive these milestone amounts. These milestones have been determined to be substantive, with such determination
being made by the Company after assessments based on the following:
|
·
|
The Company’s performance is required to achieve each milestone; and
|
|
·
|
The milestones will relate to past performance, when achieved; and
|
|
·
|
The milestones are reasonable relative to all of the deliverables and payment terms within the
Precision Dose License Agreement.
|
The license fees provided
for in the Precision Dose Agreement are calculated as a percentage of net sales dollars realized from commercial sales of the related
products. Net sales dollars consist of gross invoiced sales less those costs and deductions directly attributable to each invoiced
sale, including, without limitation, cost of goods sold, cash discounts, Medicaid rebates, state program rebates, price adjustments,
returns, short date adjustments, charge backs, promotions, and marketing costs. The rate applied to the net sales dollars to determine
license fees due to the Company is equal to an amount negotiated and agreed to by the parties to the Precision Dose License Agreement,
with the following significant factors, inputs, assumptions, and methods, without limitation, being considered by either or both
parties:
|
·
|
Assessment of the opportunity for each generic product in the market, including consideration of
the following, without limitation: market size, number of competitors, the current and estimated future regulatory, legislative,
and social environment for each generic product, and the maturity of the market;
|
|
·
|
Assessment of various avenues for monetizing the generic products, including the various combinations
of sites of manufacture and marketing options;
|
|
·
|
Capabilities of each party with regards to various factors, including, one or more of the following:
manufacturing resources, marketing resources, financial resources, distribution capabilities, ownership structure, personnel, assessment
of operational efficiencies and stability, company culture and image;
|
|
·
|
Stage of development of each generic product, all of which did not have FDA approval at the time
of the discussions/negotiations and an assessment of the risks, probability, and time frame for achieving marketing authorizations
from the FDA for the products;
|
|
·
|
Assessment of consideration offered by Precision and other entities with whom discussions were
conducted; and,
|
|
·
|
Comparison of the above factors among the various entities with whom the Company was engaged in
discussions relating to the commercialization of the generic products.
|
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 and expires on December 31, 2017. The Company is evaluating extension of this agreement and
there have not been any formal negotiations of such with Ascend to date.
The new Development and
License Agreement with SunGen is to collaborate, develop and commercialize generic pharmaceutical products based upon a unique
drug delivery platform used for extended release products. The Company and SunGen intend to begin with the development of five
generic extended release products and to develop additional such products subsequently. More than a dozen products utilize this
type of technology. This new co-development agreement will build upon the success of the first development agreement between the
Company and SunGen and signed in 2016.
Under the terms of the
July 2017 SunGen Agreement, the Company and SunGen will share the responsibilities and costs of the development and marketing
of the products. Upon FDA approval, the products will be owned jointly by Elite and SunGen. Elite will manufacture and package
all products on a cost-plus basis.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 21. RELATED PARTY AGREEMENTS WITH MIKAH PHARMA LLC
Pursuant to the asset acquisition
as discussed in Note 2
,
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 “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 Pharma LLC (“Epic”) originally entered into by Mikah on June 30, 2015
and relating to the manufacture and supply of Trimipramine (the “Manufacturing Agreement”).
Mikah is owned by Nasrat Hakim, the CEO, President
and Chairman of the Board of the Company.
Under the Manufacturing
Agreement, Epic will manufacture Trimipramine under license from the Company pursuant to the FDA approved and currently marketed
ANDA that was acquired in conjunction with the Company’s entry into these agreements (see Note 2).
Under the Distribution
Agreement, the Company will supply Trimipramine on an exclusive basis to Dr. Reddy’s and Dr. Reddy’s will be responsible
for all marketing and distribution of Trimipramine in the United States, its territories, possessions and commonwealth. The Trimipramine
will be manufactured by Epic and transferred to Dr. Reddy’s at cost, without markup.
Dr. Reddy’s will pay to 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 is in excess of 50%
NOTE 22. SUBSEQUENT EVENTS
The Company has evaluated
subsequent events from the balance sheet date through November 2, 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 September
30, 2017 and up to November 2, 2017 (the latest practicable date), a total of 2,719,900 shares of Common Stock were sold and 34,961
additional commitment shares were issued, pursuant to the Lincoln Park Purchase Agreement. Proceeds received from such transactions
totaled $252,409.