NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
Elite Pharmaceuticals,
Inc. (the “Company” or “Elite”) was incorporated on October 1, 1997 under the laws of the State of Delaware,
and its wholly-owned subsidiary Elite Laboratories, Inc. (“Elite Labs”) which was incorporated on August 23, 1990 under
the laws of the State of Delaware. On January 5, 2012, Elite Pharmaceuticals was reincorporated under the laws of the State of
Nevada. Elite Labs engages primarily in researching, developing and licensing proprietary orally administered, controlled-release
drug delivery systems and products with abuse deterrent capabilities and the manufacture of generic, oral dose pharmaceuticals.
The Company is equipped to manufacture controlled-release products on a contract basis for third parties and itself, if and when
the products are approved. These products include drugs that cover therapeutic areas for pain, allergy, bariatric and infection.
Research and development activities are done so with an objective of developing products that will secure marketing approvals from
the United States Food and Drug Administration (“FDA”), and thereafter, commercially exploiting such products.
Principles of Consolidation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the
United States (“GAAP”) and in conformity with the instructions on Form 10-Q and Rule 8-03 of Regulation S-X and the
related rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiary, Elite Laboratories, Inc. All significant
intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements
reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair
presentation of such statements. The results of operations for the three and six months ended September 30, 2018 are not necessarily
indicative of the results that may be expected for the entire year.
Reclassifications
Certain reclassifications
have been made to the prior period financial statements to conform to the current period financial statement presentation. These
reclassifications had no effect on net earnings or cash flows as previously reported.
Segment Information
Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC 280”),
Segment Reporting
, establishes
standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making
group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is
the Chief Executive Officer, who reviews the financial performance and the results of operations of the segments prepared in accordance
with GAAP when making decisions about allocating resources and assessing performance of the Company.
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 generates
revenue from the development of pain management products, manufacturing of a line of generic pharmaceutical products with approved
ANDA, commercialization of products either by license and the collection of royalties, or through the manufacture of formulations
and the development of new products and the expansion of licensing agreements with other pharmaceutical companies, including co-development
projects, joint ventures and other collaborations. The Company also generates revenue through its focus on the development of various
types of drug products, including branded drug products which require NDAs.
Under ASC 606,
Revenue
from Contacts with Customers
(“ASC 606”), the Company recognizes revenue when the customer obtains control of promised
goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or
services. The Company recognize revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with
a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the
transaction price to the performance obligation(s) in the contract; and (v) recognize revenues when (or as) the Company satisfies
a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect
the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception,
once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each
contract and determines those that are performance obligations and assesses whether each promised good or service is distinct.
The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation
when (or as) the performance obligation is satisfied. Sales, value add, and other taxes collected on behalf of third parties are
excluded from revenue.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Nature of goods and services
The following is a
description of the Company’s goods and services from which the Company generates revenue, as well as the nature, timing of
satisfaction of performance obligations, and significant payment terms for each, as applicable:
a)
Manufacturing Fees
The Company is equipped
to manufacture controlled-release products on a contract basis for third parties, if and when the products are approved. These
products include products using controlled-release drug technology and products utilizing abuse deterrent technologies. The Company
also develops and markets (either on its own or by license to other companies) generic and proprietary controlled-release and abuse
deterrent pharmaceutical products.
The Company recognizes
revenue when the customer obtains control of the Company’s product based on the contractual shipping terms of the contract.
Revenue on product are presented gross because the Company is primarily responsible for fulfilling the promise to provide the product,
is responsible to ensure that the product is produced in accordance with the related supply agreement and bears risk of loss while
the inventory is in-transit to the commercial partner. Revenue is measured as the amount of consideration the Company expects to
receive in exchange for transferring products to a customer.
b)
License Fees
The Company enters
into licensing and development agreements, which may include multiple revenue generating activities, including milestones payments,
licensing fees, product sales and services. The Company analyzes each element of its licensing and development agreements in accordance
with ASC 606 to determine appropriate revenue recognition. The terms of the license agreement may include payment to the Company
of licensing fees, non-refundable upfront license fees, milestone payments if specified objectives are achieved, and/or royalties
on product sales.
If the contract contains
a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that
contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone
selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling
prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable
through past transactions, the Company estimates the standalone selling price taking into account available information such as
market conditions and internally approved pricing guidelines related to the performance obligations.
The Company recognizes
revenue from non-refundable upfront payments at a point in time, typically upon fulfilling the delivery of the associated intellectual
property to the customer. For those milestone payments which are contingent on the occurrence of particular future events (for
example, payments due upon a product receiving FDA approval), the Company determined that these need to be considered for inclusion
in the calculation of total consideration from the contract as a component of variable consideration using the most-likely amount
method. As such, the Company assesses each milestone to determine the probability and substance behind achieving each milestone.
Given the inherent uncertainty of the occurrence of future events, the Company will not recognize revenue from the milestone until
there is not a high probability of a reversal of revenue, which typically occurs near or upon achievement of the event.
Significant management
judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects
to complete its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance obligations
either are completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such
estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.
When determining the
transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly
after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18,
the Company does not assess whether a significant financing component exists if the period between when the Company performs its
obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained
a significant financing component as of September 30, 2018.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
In accordance with
ASC 606-10-55-65, royalties are recognized when the subsequent sale of the customer’s products occurs.
Disaggregation of revenue
In the following table,
revenue is disaggregated by type of revenue generated by the Company and timing of revenue recognition. The table also includes
a reconciliation of the disaggregated revenue with the reportable segments:
|
|
For the Three Months Ended
September 30,
|
|
|
For the Six Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
NDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing fees
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Total NDA revenue
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
500,000
|
|
|
|
500,000
|
|
ANDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing fees
|
|
$
|
806,487
|
|
|
$
|
1,066,227
|
|
|
$
|
2,348,345
|
|
|
$
|
2,077,123
|
|
Licensing fees
|
|
|
306,562
|
|
|
|
307,354
|
|
|
|
682,402
|
|
|
|
749,228
|
|
Total ANDA revenue
|
|
|
1,113,049
|
|
|
|
1,373,581
|
|
|
|
3,030,747
|
|
|
|
2,826,351
|
|
Total revenue
|
|
$
|
1,363,049
|
|
|
$
|
1,623,581
|
|
|
$
|
3,530,747
|
|
|
$
|
3,326,351
|
|
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.
|
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,
2018, and March 31, 2018, the Company had $394,402 and $391,566, respectively, of restricted cash, related to debt service reserve
in regard to the New Jersey Economic Development Authority (“NJEDA”) bonds (see Note 5).
Accounts Receivable
Accounts receivable
are comprised of balances due from customers, net of estimated allowances for uncollectible accounts. In determining collectability,
historical trends are evaluated, and specific customer issues are reviewed on a periodic basis to arrive at appropriate allowances.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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,
2018, the Company did not identify any indicators of impairment.
Research and Development
Research and development
expenditures are charged to expense as incurred.
Contingencies
Occasionally, the Company
may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision
for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably
estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s
condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve
a series of complex judgments about future events and can rely heavily on estimates and assumptions.
Income Taxes
Income taxes are accounted
for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Where applicable, the Company records a valuation allowance to reduce any
deferred tax assets that it determines will not be realizable in the future.
Warrants and Preferred Shares
The accounting treatment
of warrants and preferred share series issued is determined pursuant to the guidance provided by ASC 470,
Debt
, ASC 480,
Distinguishing Liabilities from Equity
, and ASC 815,
Derivatives and Hedging
, as applicable. Each feature of a freestanding
financial instruments including, without limitation, any rights relating to subsequent dilutive issuances, dividend issuances,
equity sales, rights offerings, forced conversions, optional redemptions, automatic monthly conversions, dividends and exercise
are assessed with determinations made regarding the proper classification in the Company’s financial statements.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Stock-Based Compensation
The Company accounts
for stock-based compensation in accordance with ASC 718,
Compensation-Stock Compensation
. Under the fair value recognition
provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized
as an expense on a straight-line basis over the requisite service period, based on the terms of the awards. The cost of the stock-based
payments to nonemployees that are fully vested and non-forfeitable as at the grant date is measured and recognized at that date,
unless there is a contractual term for services in which case such compensation would be amortized over the contractual term.
In accordance with
the Company’s Director compensation policy and certain employment contracts, director’s fees and a portion of employee’s
salaries are to be paid via the issuance of shares of the Company’s common stock, in lieu of cash, with the valuation of
such share being calculated on a quarterly basis and equal to the average closing price of the Company’s common stock.
Earnings (Loss) Per Share 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 potential dilutive shares if their effect was
anti-dilutive.
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders – basic
|
|
$
|
(2,583,532
|
)
|
|
$
|
1,815,183
|
|
|
$
|
(4,271,298
|
)
|
|
$
|
(353,577
|
)
|
Effect of dilutive instrument on net (loss) income
|
|
|
-
|
|
|
|
(4,023,176
|
)
|
|
|
-
|
|
|
|
(4,162,436
|
)
|
Net loss attributable to common shareholders – diluted
|
|
$
|
(2,583,532
|
)
|
|
$
|
(2,207,993
|
)
|
|
$
|
(4,271,298
|
)
|
|
$
|
(4,516,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding – basic
|
|
|
812,256,006
|
|
|
|
782,424,624
|
|
|
|
807,677,777
|
|
|
|
800,772,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options warrants and convertible securities
|
|
|
-
|
|
|
|
6,369,237
|
|
|
|
-
|
|
|
|
6,369,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding – diluted
|
|
|
812,256,006
|
|
|
|
788,793,861
|
|
|
|
807,677,777
|
|
|
|
807,141,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Fair Value of Financial Instruments
ASC 820,
Fair Value
Measurements and Disclosures
(“ASC 820”) provides a framework for measuring fair value in accordance with generally
accepted accounting principles.
ASC 820 defines fair
value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC 820 establishes a fair value hierarchy that distinguishes between (1) market participant
assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own
assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable
inputs).
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The fair value hierarchy
consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy
under ASC 820 are described as follows:
|
·
|
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
|
|
·
|
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
·
|
Level 3 – Inputs that are unobservable for the asset or liability.
|
Measured on a Recurring
Basis
The following table
presents information about our liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value
hierarchy within which those measurements fell:
|
|
|
Amount
at
|
|
|
|
Fair Value Measurement Using
|
|
|
|
|
Fair
Value
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments - warrants
|
|
$
|
2,241,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,241,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments - warrants
|
|
$
|
2,667,871
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,667,871
|
|
See Note 11, for specific
inputs used in determining fair value.
The carrying amounts
of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses and other current
assets, accounts payable and accrued expenses, approximate their fair values because of the short maturity of these instruments.
Non-Financial Assets
that are Measured at Fair Value on a Non-Recurring Basis
Non-financial assets
such as intangible assets, and property and equipment are measured at fair value only when an impairment loss is recognized. The
Company did not record an impairment charge related to these assets in the periods presented.
Treasury Stock
The Company records
treasury stock at the cost to acquire it and includes treasury stock as a component of shareholders’ equity.
Recently Adopted Accounting Pronouncements
In November 2016, the
FASB issued ASU No. 2016-18
, Restricted Cash (ASC 230): Statement of Cash Flows (“ASU No. 2016-18”).
ASU No.
2016-18 requires that a statement of cash flows explain the change during the period in the total of cash and amounts generally
described as restricted cash. Restricted cash will be included with cash and cash equivalents when reconciling the beginning
of period and end of period balances on the statement of cash flows upon adoption of this standard. As a result of the adoption
of the new guidance, the Company increased the beginning of year total amount shown on the condensed consolidated statement of
cash flows by $391,566 and $389,081 for the six months ended September 30, 2018 and 2017, respectively. These amounts represent
the balance of restricted cash included in the consolidated balance sheets as of March 31, 2018 and 2017, respectively. Restricted
cash is related to debt service reserve in regard to the NJEDA bonds (see Note 5).
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
As of April 1, 2018,
the Company adopted ASU 2017-09,
Compensation-Stock Compensation (ASC 718): Scope of Modification Accounting
, which clarifies
when to account for a change to the terms or conditions of a share-based payment award as a modification. The new standard does
not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if the fair
value, vesting conditions, or classification of the award changes as a result of the change in terms or conditions. The adoption
of this standard did not materially impact the Company’s stock-based compensation expense as no awards were modified during
the six months ended September 30, 2018.
In August 2016, the
FASB issued ASU 2016-15,
Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments
, to clarify
guidance on the classification of certain cash receipts and cash payments in the statement of cash flow. The standard is effective
for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December
15, 2017. The Company’s adoption of this standard as of April 1, 2018 had no impact to the Company’s condensed consolidated
financial statements for the six months ended September 30, 2018.
Recently Issued
Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (ASC 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. In July 2018, the FASB
issued ASU 2018-10, Codification Improvements to ASC 842 (Leases), and ASU 2018-11, Leases (ASC 842), Targeted Improvements, which
provide (i) narrow amendments to clarify how to apply certain aspects of the new lease standard, (ii) entities with an additional
transition method to adopt the new standard, and (ii) lessors with a practical expedient for separating components of a contract.
All ASUs are effective for annual periods and interim periods within those annual periods beginning after December 15, 2018 and
is effective for the Company for the year ending March 31, 2020. The Company is currently evaluating the effects of ASU 2016-02
on its financial statements and related disclosures.
In
June 2018, the FASB issued ASU 2018-07,
Compensation-Stock Compensation (ASC 718): Improvements to Nonemployee Share-Based
Payment Accounting
, which expands the scope of ASC 718 to include share-based payment transactions for acquiring goods
and services from nonemployees and applies to all share-based payment transactions in which a grantor acquires goods or services
to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASC 718 does not apply to share-based
payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services
to customers as part of a contract accounted for under ASC 606. This update is effective for public business entities for fiscal
years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no
earlier than an entity’s adoption date of ASC 606. The Company is evaluating the effect that this update will have on its
financial statements and related disclosures.
In
August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement
. ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds
additional disclosures. The ASU is effective for annual periods, including interim periods within those annual periods, beginning
after December 15, 2019. Early adoption is permitted. The Company is evaluating the effect that this update will have on its financial
statements and related disclosures.
Management
has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a
significant impact on our consolidated financial statements and related disclosures.
NOTE 2. INVENTORY
Inventory consisted
of the following:
|
|
September 30, 2018
|
|
|
March 31, 2018
|
|
Finished goods
|
|
$
|
63,107
|
|
|
$
|
229,204
|
|
Work-in-progress
|
|
|
112,285
|
|
|
|
297,350
|
|
Raw materials
|
|
|
4,310,550
|
|
|
|
4,371,447
|
|
|
|
$
|
4,485,942
|
|
|
$
|
4,898,001
|
|
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 3. PROPERTY AND EQUIPMENT, NET
Property and equipment
consisted of the following:
|
|
September 30, 2018
|
|
|
March 31, 2018
|
|
Land, building and improvements
|
|
$
|
7,675,317
|
|
|
$
|
7,675,317
|
|
Laboratory, manufacturing and warehouse equipment
|
|
|
9,480,837
|
|
|
|
9,302,277
|
|
Office equipment and software
|
|
|
505,068
|
|
|
|
308,434
|
|
Furniture and fixtures
|
|
|
49,804
|
|
|
|
49,804
|
|
Transportation equipment
|
|
|
66,855
|
|
|
|
66,855
|
|
|
|
|
17,777,881
|
|
|
|
17,402,687
|
|
Less: Accumulated depreciation
|
|
|
(9,022,541
|
)
|
|
|
(8,408,979
|
)
|
|
|
$
|
8,755,340
|
|
|
$
|
8,993,708
|
|
Depreciation expense
was $313,395 and $226,044 for the three months and $613,562 and $410,630 for the six months ended September 30, 2018 and 2017,
respectively.
NOTE 4. INTANGIBLE ASSETS
The following table
summarizes the Company’s intangible assets:
|
|
September 30, 2018
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Life
|
|
|
Amount
|
|
|
Additions
|
|
|
Amortization
|
|
|
Value
|
|
Patent application costs
|
|
|
*
|
|
|
$
|
465,684
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
465,684
|
|
ANDA acquisition costs
|
|
|
Indefinite
|
|
|
|
7,247,317
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,247,317
|
|
|
|
|
|
|
|
$
|
7,713,001
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,713,001
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Life
|
|
|
Amount
|
|
|
Additions
|
|
|
Amortization
|
|
|
Value
|
|
Patent application costs
|
|
|
*
|
|
|
$
|
371,774
|
|
|
$
|
93,910
|
|
|
$
|
-
|
|
|
$
|
465,684
|
|
ANDA acquisition costs
|
|
|
Indefinite
|
|
|
|
6,047,317
|
|
|
|
1,200,000
|
|
|
|
-
|
|
|
|
7,247,317
|
|
|
|
|
|
|
|
$
|
6,419,091
|
|
|
$
|
1,293,910
|
|
|
$
|
-
|
|
|
$
|
7,713,001
|
|
Patent application
costs were incurred in relation to the Company’s abuse deterrent opioid technology. Amortization of the patent costs will
begin upon the issuance of marketing authorization by the FDA. Amortization will then be calculated on a straight-line basis through
the expiry of the related patent(s).
NOTE 5. NJEDA BONDS
During August 2005,
the Company refinanced a bond issue occurring in 1999 through the issuance of Series A and B Notes tax-exempt bonds (the “NJEDA
Bonds” and/or “Bonds”). During July 2014, the Company retired all outstanding Series B Notes, at par, along with
all accrued interest due and owed.
In relation to the
Series A Notes, the Company is required to maintain a debt service reserve. The debt serve reserve is classified as restricted
cash on the accompanying unaudited condensed consolidated balance sheets. The NJEDA Bonds require the Company to make an annual
principal payment on September 1
st
based on the amount specified in the loan documents and semi-annual interest payments
on March 1
st
and September 1
st
, equal to interest due on the outstanding principal. The annual interest rate
on the Series A Note is 6.5%. The NJEDA Bonds are collateralized by a first lien on the Company’s facility and equipment
acquired with the proceeds of the original and refinanced bonds.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The following tables
summarize the Company’s bonds payable liability:
|
|
September 30, 2018
|
|
|
March 31, 2018
|
|
Gross bonds payable
|
|
|
|
|
|
|
|
|
NJEDA Bonds - Series A Notes
|
|
$
|
1,501,046
|
|
|
$
|
1,760,000
|
|
Less: Current portion of bonds payable (prior to deduction of bond offering costs)
|
|
|
(80,822
|
)
|
|
|
(90,000
|
)
|
Long-term portion of bonds payable (prior to deduction of bond offering costs)
|
|
$
|
1,420,224
|
|
|
$
|
1,670,000
|
|
|
|
|
|
|
|
|
|
|
Bond offering costs
|
|
$
|
354,453
|
|
|
$
|
354,453
|
|
Less: Accumulated amortization
|
|
|
(185,497
|
)
|
|
|
(178,409
|
)
|
Bond offering costs, net
|
|
$
|
168,956
|
|
|
$
|
176,044
|
|
|
|
|
|
|
|
|
|
|
Current portion of bonds payable - net of bond offering costs
|
|
|
|
|
|
|
|
|
Current portions of bonds payable
|
|
$
|
95,000
|
|
|
$
|
90,000
|
|
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
|
|
$
|
80,822
|
|
|
$
|
75,822
|
|
|
|
|
|
|
|
|
|
|
Long term portion of bonds payable - net of bond offering costs
|
|
|
|
|
|
|
|
|
Long term portion of bonds payable
|
|
$
|
1,575,000
|
|
|
$
|
1,670,000
|
|
Less: Bond offering costs to be amortized subsequent to the next 12 months
|
|
|
(154,776
|
)
|
|
|
(161,866
|
)
|
Long term portion of bonds payable, net of bond offering costs
|
|
$
|
1,420,224
|
|
|
$
|
1,508,134
|
|
Amortization expense
was $3,544 for the three months and $7,090 for the six months ended September 30, 2018 and 2017, respectively.
NOTE 6. LOANS PAYABLE
Loans payable consisted
of the following:
|
|
September 30, 2018
|
|
|
March 31, 2018
|
|
Equipment and insurance financing loans payable, between 3.5% and 12.73% interest and maturing between December 2018 and April 2023
|
|
$
|
1,098,288
|
|
|
$
|
1,201,861
|
|
Less: Current portion of loans payable
|
|
|
(466,778
|
)
|
|
|
(578,841
|
)
|
Long-term portion of loans payable
|
|
$
|
631,510
|
|
|
$
|
623,020
|
|
The interest expense
associated with the loans payable was $27,559 and $19,022 for the three months and $58,720 and $40,781 for the six months ended
September 30, 2018 and 2017, respectively.
NOTE 7. RELATED PARTY SECURED PROMISSORY
NOTE WITH MIKAH PHARMA LLC
For consideration of
the assets acquired on May 15, 2017, the Company issued a Secured Promissory Note (the “Note”) to Mikah for the principal
sum of $1,200,000. The Note matures on December 31, 2020 in which the Company shall pay the outstanding principal balance of the
Note. Interest shall be computed on the unpaid principal amount at the per annum rate of ten percent (10%); provided, upon the
occurrence of an Event of Default as defined within the Note, the principal balance shall bear interest from the date of such occurrence
until the date of actual payment at the per annum rate of fifteen percent (15%). All interest payable hereunder shall be computed
on the basis of actual days elapsed and a year of 360 days. Installment payments of interest on the outstanding principal shall
be paid as follows: quarterly commencing August 1, 2017 and on November 1, February 1, May 1 and August 1 of each year thereafter.
All unpaid principal and accrued but unpaid interest shall be due and payable in full on the Maturity Date. The interest expense
associated with the Note was $30,000 for the three months and $60,000 for the six months ended September 30, 2018. Accrued interest
due and owing on this note was $165,000 and $105,000 as of September 30, 2018 and March 31, 2018, respectively.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 8. DEFERRED REVENUE
Deferred revenues in
the aggregate amount of $1,758,890 as of September 30, 2018, were comprised of a current component of $1,013,333 and a long-term
component of $745,557. Deferred revenues in the aggregate amount of $2,265,556 as of March 31, 2018, were comprised of a current
component of $1,013,333 and a long-term component of $1,252,223. These line items represent the unamortized amounts of a $200,000
advance payment received for a TAGI licensing agreement with a fifteen-year term beginning in September 2010 and ending in August
2025 and the $5,000,000 advance payment Epic Collaborative Agreement with a five-year term beginning in June 2015 and ending in
May 2020. These advance payments were recorded as deferred revenue when received and are earned, on a straight-line basis over
the life of the licenses. The current component is equal to the amount of revenue to be earned during the 12-month period immediately
subsequent to the balance date and the long-term component is equal to the amount of revenue to be earned thereafter.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Occasionally, the Company
may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision
for a liability when it believes that is both probable that a liability has been incurred, and the amount can be reasonably estimated.
If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s condensed
consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series
of complex judgments about future events and can rely heavily on estimates and assumptions.
Operating Leases – 135
Ludlow Ave.
The
Company entered into an operating lease for a portion of a one-story warehouse, located at 135 Ludlow Avenue, Northvale, New Jersey
(the “135 Ludlow Ave. lease”). The 135 Ludlow Ave. lease is for approximately 15,000 square feet of floor space and
began on July 1, 2010. During July 2014, the Company modified the 135 Ludlow Ave. lease in which the Company was permitted to occupy
the entire 35,000 square feet of floor space in the building (“135 Ludlow Ave. modified lease”).
The
135 Ludlow Ave. modified lease includes an initial term, which expired on December 31, 2016 with two tenant renewal options of
five years each, at the sole discretion of the Company. On June 22, 2016, the Company exercised the first of these renewal options,
with such option including a term that begins on January 1, 2017 and expires on December 31, 2021.
The
135 Ludlow Ave. property required significant leasehold improvements and qualifications, as a prerequisite, for its intended future
use. Manufacturing, packaging, warehousing and regulatory activities are currently conducted at this location.
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 months ended September 30, 2018 and 2017 was $54,909, and $109,818 for the six months
ended September 30, 2018 and 2017. Rent expense is recorded in general and administrative expense in the unaudited condensed consolidated
statements of operations. Deferred rent as of September 30, 2018 and March 31, 2018 was $11,902 and $9,705, 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, 2018, and March 31, 2018, the Company had a liability of $32,398
and $31,443, respectively and recorded as a component of other long-term liabilities.
NOTE 10. MEZZANINE
EQUITY
Series J convertible preferred stock
On April 28, 2017,
the Company created the Series J Convertible Preferred Stock (“Series J Preferred”) in conjunction with the Certificate
of Designations (“Series J COD”). A total of 50 shares of Series J Preferred were authorized, 24.0344 shares are issued
and outstanding, with a stated value of $1,000,000 per share and a par value of $0.01 as of September 30, 2018.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The issued shares
were pursuant to an Exchange Agreement with Nasrat Hakim, (“Hakim”) a related party and the Company’s President,
CEO and Chairman of the Board of Directors Pursuant to the Exchange Agreement the Company exchanged 158,017,321 shares of Common
Stock for 24.0344 shares of Series J Preferred and warrants to purchase 79,008,661 shares of common stock at $0.1521 per share.
The aggregate stated value of the Series J Preferred issued was equal to the aggregate value of the shares of common stock exchanged,
with such value of each share of Common Stock exchanged being equal to the closing price of the Common Stock on April 27, 2017.
In connection with the Exchange Agreement, the Company also issued warrants to purchase 79,008,661 shares of common stock at $0.1521
per share, and such warrants are classified as liabilities on the accompanying unaudited condensed consolidated balance sheet
as of September 30, 2018 (See Note 11).
Each Series J Preferred
is convertible at the option of the holder into shares of common stock, that is the earlier of (i) the date that shareholder approval
is obtained, and the requisite corporate action has been effected regarding a Fundamental Transaction (as defined in the Series
J COD); or (ii) not less than three years subsequent to the Original Issue Date (the date of the first issuance of any shares of
the Series J Preferred Stock) (the “Conversion Date”). The number of common shares is calculated by dividing the Stated
Value of such share of Series J Preferred by the Conversion Price. The conversion price for the Series J Preferred shall equal
$0.1521, subject to adjustment as discussed below.
Based on the current
conversion price, the Series J Preferred is convertible into 158,017,321 shares of common stock. The conversion price is subject
to the following adjustments: (i) stock dividends and splits, (ii) sale or grant of shares below the conversion price, (iii) pro
rata distributions; or (iv) fundamental changes (merger, consolidation, or sale of all or substantially all assets).
If upon any Conversion
Date there is not a sufficient number of authorized shares of Common Stock (that are not issued, outstanding or reserved for issuance)
available to effect the entire conversion of the then outstanding shares of Series J Preferred Stock and the then outstanding common
stock purchase warrants issued in conjunction therewith (an “Authorized Share Deficiency”), such conversion shall not
exceed the Issuable Maximum (as defined in the Series J COD); however, the Company shall use its best efforts to obtain shareholder
approval within two (2) years of the date of first issuance of Series J Preferred Stock to permit the balance of the conversion.
If shareholder approval is not obtained due to an insufficient number of shareholder votes for passage, the Company shall continue
to solicit for shareholder approval annually thereafter. As of September 30, 2018, the Company does not have a sufficient number
of unreserved authorized shares to effect the entire conversion, notwithstanding that the earliest possible Conversion Date is
April 28, 2020.
Solely during any period
of time during which an Authorized Share Deficiency exists commencing on or after the fourth anniversary of the Original Issue
Date (“Dividend Commencement Date” and collectively the “Dividend Entitlement Period”), holders of Series
J Preferred shall be entitled to receive, and the Company shall pay, dividends at the rate per share (as a percentage of the Stated
Value per share) of 20% per annum, payable quarterly, in arrears, on January 1, April 1, July 1 and October 1, in cash or duly
authorized, validly issued, fully paid and non-assessable shares of Series J Preferred, or a combination thereof (the amount to
be paid in shares of Series J Preferred, the “Dividend Share Amount”). The form of dividend payments to each holder
shall be made, at the option of the Holders, (i) in cash, to the extent that funds are legally available for the payment of dividends
in cash, (ii) in shares of Series J Preferred Stock, or (iii) a combination thereof. The Series J Preferred shall rank senior to
the common stock with respect to payment of dividends and pari passu to the common stock with respect to liquidation, dissolution
or winding up of the Company.
The holders of the
Series J Preferred shall have voting rights on any matter presented to the shareholders of the Company for their action or consideration
at any meeting of shareholders of the Company (or by written consent of shareholders in lieu of meeting). Each holder shall be
entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series J Preferred
held by the holder are convertible as of the record date for determining the shareholders entitled to vote on such matter regardless
of whether an Authorized Share Deficiency Exists.
The Company has determined
that the Series J Preferred host instrument was more akin to equity than debt and that the above identified conversion feature,
subject to adjustments, was clearly and closely related to the host instrument, and accordingly bifurcation and classification
of the conversion feature as a derivative liability was not required. The Company has accounted for the Series J Preferred as contingently
redeemable preferred stock for which redemption is not probable. Accordingly, the Series J Preferred is presented in mezzanine
equity based on their initial measurement amount (fair value), as required by ASC 480-10-S99,
Distinguishing Liabilities from
Equity – SEC Materials
. No subsequent adjustment of the initial measurement amounts for these contingently redeemable
Series J Preferred is necessary unless the redemption of the Series J Preferred becomes probable. Accordingly, the amount presented
as temporary equity for the contingently redeemable Series J Preferred outstanding is its issuance-date fair value. The Series
J Preferred was initially measured at its fair value, $13,903,960 at April 28, 2017.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The fair value of the
Series J Preferred issued by the Company pursuant to the exchange agreement was calculated using a Monte Carlo Simulation of stock
price and expected future behaviors related to shareholder approval provisions. The following are the key assumptions used in the
Monte Carlo Simulation:
|
|
April 28, 2017
|
|
Fair value of the Company's common stock
|
|
$
|
0.1521
|
|
Conversion price
|
|
$
|
0.1521
|
|
Number of Series J Preferred issued
|
|
|
24.0344
|
|
Fully diluted shares outstanding as of measurement date
|
|
|
923,392,780
|
|
Risk-free rate
|
|
|
2.30
|
%
|
Volatility
|
|
|
90
|
%
|
Shareholder approval threshold
|
|
$
|
0.1521
|
|
Probability of approval is ending stock price is greater than threshold - midpoint
|
|
|
82.50
|
%
|
Probability of approval is ending stock price is less than threshold - midpoint
|
|
|
17.50
|
%
|
Trials
|
|
|
200,000
|
|
Authorized, issued
and outstanding shares, along with carrying value and change in value as of September 30, 2018 and March 31, 2018 are as follows:
Shares authorized
|
|
|
50.000
|
|
Shares outstanding
|
|
|
24.0344
|
|
Par value
|
|
$
|
0.01
|
|
Stated value
|
|
$
|
1,000,000
|
|
Conversion price
|
|
$
|
0.1521
|
|
Common Stock to be issued upon conversion
|
|
|
158,017,321
|
|
Carrying value of Series J convertible preferred stock
|
|
$
|
13,903,960
|
|
NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS – WARRANTS
The Company evaluates
and accounts for its freestanding instruments in accordance with ASC 815,
Accounting for Derivative Instruments and Hedging
Activities
.
The
Company issued warrants, with terms of five to seven years, to various corporations and individuals, in connection with the sale
of securities, loan agreements and consulting agreements.
A
summary of warrant activity is as follows:
|
|
September 30, 2018
|
|
|
March 31, 2018
|
|
|
|
Warrant Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Warrant Shares
|
|
|
Weighted Average
Exercise Price
|
|
Balance at beginning of period
|
|
|
79,008,661
|
|
|
$
|
0.1521
|
|
|
|
9,379,219
|
|
|
$
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,379,219
|
)
|
|
|
0.0625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
79,008,661
|
|
|
$
|
0.1521
|
|
|
|
79,008,661
|
|
|
$
|
0.1521
|
|
On April 28, 2017,
the Company entered into an exchange agreement (the “
Exchange Agreement
”) with Nasrat Hakim, the Chairman of
the Board, President, and Chief Executive Officer of the Company, pursuant to which the Company issued to Mr. Hakim 23.0344 shares
of its newly designated Series J Convertible Preferred Stock (“
Series J Preferred
”) and Warrants to purchase
an aggregate of 79,008,661 shares of its Common Stock (the “Series J Warrants” and, along with the Series J Preferred
issued to Mr. Hakim, the “
Securities
”) in exchange for 158,017,321 shares of Common Stock owned by Mr. Hakim.
The fair value of the Series J Warrants was determined to be $6,474,674 upon issuance at April 28, 2017.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The Series J Warrants
are exercisable for a period of 10 years from the date of issuance, commencing on the earlier of (i) the date that Shareholder
Approval is obtained, and the requisite corporate action has been effected; or (ii) April 28, 2020. The initial exercise price
is $0.1521 per share and the Series J Warrants can be exercised for cash or on a cashless basis. The exercise price is subject
to adjustment for any issuances or deemed issuances of common stock or common stock equivalents at an effective price below the
then exercise price. Such exercise price adjustment feature prohibits the Company from being able to conclude the warrants are
indexed to its own stock and thus such warrants are classified as liabilities and measured initially and subsequently at fair value.
The Series J Warrants also provide for other standard adjustments upon the happening of certain customary events. The Series J
Warrants are not exercisable during any period when an Authorized Share Deficiency exists and will expire on the expiry date, without
regards to the existence of an Authorized Shares Deficiency (see Note 10). As of September 30, 2018, 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.
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, 2018
|
|
|
March 31, 2018
|
|
Fair value of the Company's common stock
|
|
$
|
0.0900
|
|
|
$
|
0.1000
|
|
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
|
|
|
810,126,510
|
|
|
|
791,516,930
|
|
Warrant term (in years)
|
|
|
8.58
|
|
|
|
9.08
|
|
Risk-free rate
|
|
|
3.03
|
%
|
|
|
2.72
|
%
|
Volatility
|
|
|
90.00
|
%
|
|
|
90.00
|
%
|
Shareholder approval threshold
|
|
$
|
0.1580
|
|
|
$
|
0.1580
|
|
Probability of approval is ending stock price is greater than threshold - midpoint
|
|
|
82.50
|
%
|
|
|
82.50
|
%
|
Probability of approval is ending stock price is greater than threshold - midpoint
|
|
|
17.50
|
%
|
|
|
17.50
|
%
|
Trials
|
|
|
100,000
|
|
|
|
100,000
|
|
Fair value of derivative financial instruments - warrants
|
|
$
|
2,241,500
|
|
|
$
|
2,667,871
|
|
The changes in warrants
(Level 3 financial instruments) measured at fair value on a recurring basis for the six months ended September 30, 2018 were as
follows:
Balance as of March 31, 2018
|
|
$
|
2,667,871
|
|
Change in fair value of derivative financial instruments - warrants
|
|
|
(426,371
|
)
|
Balance as of September 30, 2018
|
|
$
|
2,241,500
|
|
NOTE 12. SHAREHOLDERS’ EQUITY
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
2014 LPC Purchase Agreement, the Company issued 1,928,641 shares of its common stock to Lincoln Park 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 CONDENSED 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 5,540,551 shares of common stock and are required to issue
up to 5,540,551 additional shares of Common Stock pro rata as the Company requires Lincoln Park to purchase shares under the 2017
LPC Purchase Agreement over the term of the agreement. Lincoln Park has represented to the Company, among other things, that it
is an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933,
as amended (the “Securities Act”)). The Company sold the securities in reliance upon an exemption from registration
contained in Section 4(a)(2) under the Securities Act. The securities sold may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements.
The 2017 LPC Purchase
Agreement and the 2017 LPC Registration Rights Agreement contain customary representations, warranties, agreements and conditions
to completing future sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate
the 2017 LPC Purchase Agreement at any time, at no cost or penalty. Actual sales of shares of common stock to Lincoln Park under
the 2017 LPC Purchase Agreement will depend on a variety of factors to be determined by us from time to time, including, among
others, market conditions, the trading price of the Common Stock and determinations by us as to the appropriate sources of funding
for us and our operations. There are no trading volume requirements or, other than the limitation on beneficial ownership discussed
above, restrictions under the 2017 LPC Purchase Agreement. Lincoln Park has no right to require any sales by the Company but is
obligated to make purchases from the Company as directed in accordance with the 2017 LPC Purchase Agreement. Lincoln Park has covenanted
not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of 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.
The Company, from time
to time and at the Company’s sole discretion but no more frequently than every other business day, could direct Lincoln Park
to purchase (a “
Regular Purchase
”) up to 500,000 shares of common stock on any such business day, increasing
up to 800,000 shares, depending upon the closing sale price of the common stock, provided that in no event shall Lincoln Park purchase
more than $760,000 worth of common stock on any single business day. The purchase price of shares of common stock related to the
future Regular Purchase funding will be based on the prevailing market prices of such shares at the time of sales (or over a period
of up to ten business days leading up to such time), but in no event, will shares be sold to Lincoln Park on a day the Common Stock
closing price is less than the floor price of $0.10 per share, subject to adjustment.
In addition to Regular
Purchases, on any business day on which the Company has properly submitted a Regular Purchase notice and the closing sale price
is not below $0.15, the Company may purchase (an “
Accelerated Purchase
”) an additional “accelerated amount”
under certain circumstances. The amount of any Accelerated Purchase cannot exceed the lesser of three times the number of purchase
shares purchased pursuant to the corresponding Regular Purchase; and 30% of the aggregate shares of the Company’s common
stock traded during normal trading hours on the purchase date. The purchase price per share for each such Accelerated Purchase
will be equal to the lower of (i) 97% of the volume weighted average price during the purchase date; or (ii) the closing sale price
of the Company’s common stock on the purchase date.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
In the case of both
Regular Purchases and Accelerated Purchases, the purchase price per share will be equitably adjusted for any reorganization, recapitalization,
non-cash dividend, stock split, reverse stock split or other similar transaction occurring during the business days used to compute
the purchase price.
Other than as set forth
above, there are no trading volume requirements or restrictions under the Purchase Agreement, and the Company will control the
timing and amount of any sales of the Company’s common stock to Lincoln Park.
The Company’s
sales of shares of common stock to Lincoln Park under the Purchase Agreement are limited to no more than the number of shares that
would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than 9.99% of
the then outstanding shares of common stock.
The Purchase Agreement
and the Registration Rights Agreement contain customary representations, warranties, agreements, and conditions to completing future
sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate the Purchase Agreement
at any time, at no cost or penalty. Actual sales of shares of common stock to Lincoln Park under the Purchase Agreement will depend
on a variety of factors to be determined by the Company from time to time, including, without limitation, market conditions, the
trading price of the Common Stock and determinations by the Company as to appropriate sources of funding for the Company and its
operations. There are no trading volume requirements or restrictions under the Purchase Agreement. Lincoln Park has no right to
require any sales by the Company but is obligated to make purchases from the Company as it directs in accordance with the Purchase
Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or
hedging of Company shares.
The net proceeds under
the Purchase Agreement to the Company will depend on the frequency and prices at which the Company sells shares of its stock to
Lincoln Park. During the six months ended September 30, 2018, a total of 14,142,083 shares were sold to Lincoln Park pursuant to
the 2017 LPC Agreement for net proceeds totaling $14,142. In addition, 193,405 shares were issued to Lincoln Park as additional
commitment shares, pursuant to the 2017 LPC Agreement.
NOTE 13. STOCK-BASED COMPENSATION
Part of the compensation
paid by the Company to its Directors and employees consists of the issuance of common stock or via the granting of options to purchase
common stock.
Stock-based Director Compensation
The Company’s
Director compensation policy was instituted in October 2009 and further revised in January 2016, includes provisions that a portion
of director’s fees are to be paid via the issuance of shares of the Company’s common stock, in lieu of cash, with the
valuation of such shares being calculated on quarterly basis and equal to the average closing price of the Company’s common
stock.
During the six months
ended September 30, 2018, 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, 2018, the Company accrued director’s fees totaling $55,089, which will be paid via cash payments totaling
$18,363 and the issuance of 377,296 shares of Common Stock.
As of September 30,
2018, the Company owed its Directors a total of $28,363 in cash payments and 559,682 shares of Common Stock in payment of director
fees totaling $85,089 due and owing. The Company anticipates that these shares of Common Stock will be issued prior to the end
of the current fiscal year.
Stock-based Employee/Consultant Compensation
Employment contracts
with the Company’s President and Chief Executive Officer, Chief Financial Officer and certain other employees and engagement
contracts with certain consultants include provisions for a portion of each employee’s salaries or consultant’s fees
to be paid via the issuance of shares of the Company’s Common Stock, in lieu of cash, with the valuation of such shares being
calculated on a quarterly basis and equal to the average closing price of the Company’s Common Stock.
During the six months
ended September 30, 2018, 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, 2018,
the Company did not issue any shares pursuant to the engagement contracts with certain consultants.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
During the six months
ended September 30, 2018, the Company accrued salaries totaling $402,500 owed to the Company’s President and Chief Executive
Officer, Chief Financial Officer and certain other employees which will be paid via the issuance of 4,130,412 shares of Common
Stock.
As of September 30,
2018, the Company owed its President and Chief Executive Officer, Chief Financial Officer and certain other employees’ salaries
totaling $902,500 which will be paid via the issuance of 8,460,073 shares of Common Stock. The Company anticipates that these shares
of Common Stock will be issued prior to the end of the current fiscal year.
Options
Under its 2014 Stock
Option Plan and prior options plans, the Company may grant stock options to officers, selected employees, as well as members of
the Board of Directors and advisory board members. All options have generally been granted at a price equal to or greater than
the fair market value of the Company’s Common Stock at the date of the grant. Generally, options are granted with a vesting
period of up to three years and expire ten years from the date of grant.
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
|
|
|
Shares
|
|
|
Average
|
|
|
Remaining Contractual
|
|
|
Aggregate Intrinsic
|
|
|
|
Underlying Options
|
|
|
Exercise Price
|
|
|
Term (in years)
|
|
|
Value
|
|
Outstanding at April 1, 2018
|
|
|
6,618,000
|
|
|
$
|
0.16
|
|
|
|
6.1
|
|
|
$
|
90,390
|
|
Forfeited and expired
|
|
|
403,000
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
6,215,000
|
|
|
$
|
0.15
|
|
|
|
5.5
|
|
|
$
|
60,000
|
|
Exercisable at September 30, 2018
|
|
|
5,628,334
|
|
|
$
|
0.15
|
|
|
|
5.2
|
|
|
$
|
60,000
|
|
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, 2018 and March 31, 2018 of $0.09 and $0.10, respectively.
NOTE 14. CONCENTRATIONS AND CREDIT RISK
Revenues
Two customers accounted
for substantially all the Company’s revenues for the six months ended September 30, 2018. These two customers accounted for
approximately 56% and 25% of revenues each, respectively. The same two customers accounted for approximately 58% and 32% of revenues
for the three months ended September 30, 2018.
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 10% of revenues each, respectively. The same three customers accounted for approximately 53%, 28%
and 9% of revenues for the three months ended September 30, 2017.
Accounts Receivable
Three customers accounted
for substantially all the Company’s accounts receivable as of September 30, 2018. These three customers accounted for approximately
39%, 20% and 17% of accounts receivable each, respectively.
Four customers accounted
for substantially all the Company’s accounts receivable as of March 31, 2018. These four customers accounted for approximately
52%, 14%, 12%, and 11% of accounts receivable each, respectively.
Purchasing
Seven suppliers accounted
for more than 85% of the Company’s purchases of raw materials for the six months ended September 30, 2018. Included in these
seven suppliers are two suppliers that accounted for approximately 43% and 13% of purchases each, respectively.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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.
NOTE 15. SEGMENT RESULTS
FASB ASC 280-10-50
requires use of the “management approach” model for segment reporting. The management approach is based on the way
a company’s management organized segments within the company for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure, management structure, or any other manner in which management
disaggregates a company.
The Company has determined
that its reportable segments are Abbreviated New Drug Applications (“ANDA”) for generic products and New Drug Applications
(“NDA”) for branded products. The Company identified its reporting segments based on the marketing authorization relating
to each and the financial information used by its chief operating decision maker to make decisions regarding the allocation of
resources to and the financial performance of the reporting segments.
Asset information by
operating segment is not presented below since the chief operating decision maker does not review this information by segment.
The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated
financial statements.
The following represents
selected information for the Company’s reportable segments:
|
|
For the Three Months Ended
September 30,
|
|
|
For the Six Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Operating Loss by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANDA
|
|
$
|
(410,581
|
)
|
|
$
|
(663,291
|
)
|
|
$
|
(546,502
|
)
|
|
$
|
(1,094,981
|
)
|
NDA
|
|
|
(268,665
|
)
|
|
|
(688,124
|
)
|
|
|
(506,027
|
)
|
|
|
(1,364,689
|
)
|
|
|
$
|
(679,246
|
)
|
|
$
|
(1,351,415
|
)
|
|
$
|
(1,052,529
|
)
|
|
$
|
(2,459,670
|
)
|
The table below reconciles
the Company’s operating loss by segment to (loss) income from operations before provision for income taxes as reported in
the Company’s unaudited condensed consolidated statements of operations.
|
|
For the Three Months Ended
September 30,
|
|
|
For the Six Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Operating loss by segment
|
|
$
|
(679,246
|
)
|
|
$
|
(1,351,415
|
)
|
|
$
|
(1,052,529
|
)
|
|
$
|
(2,459,670
|
)
|
Corporate unallocated costs
|
|
|
(1,421,985
|
)
|
|
|
(423,782
|
)
|
|
|
(2,444,344
|
)
|
|
|
(950,518
|
)
|
Interest income
|
|
|
1,582
|
|
|
|
4,419
|
|
|
|
2,837
|
|
|
|
8,401
|
|
Interest expense and amortization of debt issuance costs
|
|
|
(106,002
|
)
|
|
|
(82,541
|
)
|
|
|
(189,140
|
)
|
|
|
(153,272
|
)
|
Depreciation and amortization expense
|
|
|
(366,522
|
)
|
|
|
(184,527
|
)
|
|
|
(570,226
|
)
|
|
|
(335,196
|
)
|
Significant non-cash items
|
|
|
(185,219
|
)
|
|
|
(170,147
|
)
|
|
|
(444,267
|
)
|
|
|
(625,758
|
)
|
Change in fair value of derivative instruments
|
|
|
173,860
|
|
|
|
4,023,176
|
|
|
|
426,371
|
|
|
|
4,162,436
|
|
(Loss) income from operations
|
|
$
|
(2,583,532
|
)
|
|
$
|
1,815,183
|
|
|
$
|
(4,271,298
|
)
|
|
$
|
(353,577
|
)
|
NOTE 16. COLLABORATIVE AGREEMENT WITH
EPIC PHARMA LLC
On June 4, 2015, the
Company entered into the 2015 Epic License Agreement, which provides for the exclusive right to market, sell and distribute, by
Epic Pharma LLC (“Epic”) of SequestOx™, an abuse deterrent opioid which employs the Company’s proprietary
pharmacological abuse-deterrent technology. Epic will be responsible for payment of product development and pharmacovigilance costs,
sales, and marketing of SequestOx™, and Elite will be responsible for the manufacture of the product. Under the 2015 Epic
License Agreement, Epic will pay Elite non-refundable payments totaling $15 million, with such amount representing the cost of
an exclusive license to ELI-200, the cost of developing the product and certain filings and a royalty based on an amount equal
to 50% of profits derived from net product sales as defined in the 2015 Epic License Agreement. The initial term of the exclusive
right to product development sales and distribution is five years (“Epic Exclusivity Period”); the license is renewable
upon mutual agreement at the end of the initial term.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED 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. These nonrefundable payments represent consideration for certain exclusive
rights to ELI-200 and will be recognized ratably over the Epic Exclusivity Period. The Company determined that the performance
obligations within the 2015 Epic License Agreement included the transfer of the license and the performance of the research and
development services; the license is not distinct because the customer cannot obtain value from the license without the research
and development services that the Company is uniquely able to perform.
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. 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. Based on subsequent meetings
and communications with the FDA, the Company believes that there is a clear path forward to address the issues cited in the CRL.
The Company believes that the meeting minutes, received from the FDA on January 23, 2017, supported a plan to address the issues
cited by the FDA in the CRL by modifying the SequestOx™ formulation. Such plan includes, without limitation, conducting bioequivalence
and bioavailability fed and fasted studies, comparing the modified formulation to the original formulation. the Company modified
the SequestOx™ formulation and, on January 30, 2018 reported positive topline results from a pilot study indicating the likelihood
of achieving the required bioequivalence in a pivotal trial under fed conditions. The Company is reviewing these results with the
FDA and discussing pharmacokinetic study requirements for a re-submission of the NDA.
The 2015 Epic License
Agreement expires on June 4, 2020, and Epic has previously advised the Company of their desire to extend this agreement. While
discussions are ongoing, they are directly correlated to the regulatory status of SequestOx™. Furthermore, there can be no
assurances that the parties will reach mutual agreement to extend the term of this agreement and no assurances that the terms and
conditions of the agreement will be similar in all material aspects in the event that the agreement is extended by mutual consent
of the parties. Non-receipt by the Company of the remaining $7.5 million milestone will have a material adverse effect on the Company’s
financial condition.
NOTE 17. COLLABORATIVE AGREEMENT WITH
SUNGEN PHARMA LLC
On August 24, 2016,
the Company entered into the SunGen Agreement. The SunGen Agreement, as amended, 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.
Under the terms of
the Amended Agreement, Elite and SunGen will share in the responsibilities and costs in the development of these products and will
share substantially in the profits from sales of the products. Upon approval, the know-how and intellectual property rights to
the products will be owned jointly by Elite and SunGen. Three products will be owned jointly by Elite and SunGen; three shall be
owned by SunGen while Elite shall have the marketing rights once the products are approved by the FDA; and two shall be owned by
Elite while SunGen shall have the marketing rights once the products are approved by the FDA. Elite will manufacture and package
all eight products on a cost-plus basis.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
On February 8, 2018,
the Company filed an ANDA with the FDA for a generic version of an immediate release central nervous system (“
CNS
”)
stimulant. The ANDA represents the first filing for a product co-developed with SunGen under the SunGen Agreement.
On May 24, 2018, the
Company filed an ANDA with the FDA for a generic version of an extended release CNS stimulant. The ANDA represents the second filing
for a product co-developed with SunGen under the SunGen Agreement.
There can be no assurances
that any of these products, including the two products for which ANDAs have already been filed, will receive marketing authorization
and achieve commercialization within a reasonable time period, or at all. In addition, even if marketing authorization is received,
there can be no assurances that there will be future revenues of profits, or that any such future revenues or profits would be
in amounts that provide adequate return on the significant investments made to secure these marketing authorizations.
NOTE 18. RELATED PARTY TRANSACTION AGREEMENTS WITH EPIC PHARMA
LLC
The Company has entered
into two agreements with Epic which constitute agreements with a related party due to the management of Epic including a member
on our Board of Directors at the time such agreements were executed.
On June 4, 2015, the
Company entered into the 2015 Epic License Agreement (please see Note 16 above). The 2015 Epic License Agreement includes milestone
payments totaling $10 million upon the filing with and approval of an NDA with the FDA. The Company has determined these milestones
to be substantive, with such assessment being made at the inception of the 2015 Epic License Agreement, and based on the following:
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·
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The Company’s performance is required to achieve each milestone; and
|
|
·
|
The milestones will relate to past performance, when achieved; and
|
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·
|
The milestones are reasonable relative to all of the deliverables and payment terms within the 2015 Epic License Agreement
|
After marketing authorization
is received from the FDA, Elite will receive a license fee which is based on profits achieved from the commercial sales of ELI-200.
On January 14, 2016, the Company filed an NDA with the FDA for SequestOx™, thereby earning a $2.5 million milestone pursuant
to the 2015 Epic License Agreement. The Company has received payment of this amount from Epic. An additional $7.5 million is due
upon approval by the FDA of the NDA filed for SequestOx™. Please note that on July 15, 2016, the FDA issued a Complete Response
Letter, or CRL, regarding the NDA. The CRL stated that the review cycle for the SequestOx™ NDA is complete and the application
is not ready for approval in its present form. On December 21, 2016, the Company met with the FDA for an end-of-review meeting
to discuss steps that it could take to obtain approval of SequestOx™. Based on this and the meeting minutes received from
the FDA on January 23, 2017, the Company formulated a plan to address the issues cited by the FDA in the CRL, with such plan including,
without limitation, modifying the SequestOx™ formulation, conducting bioequivalence and bioavailability fed and fasted studies,
comparing the modified formulation to the original formulation. On July 7, 2017, the Company reported topline results from a pivotal
bioequivalence fed study for SequestOx™. This study resulted in a mean Tmax of 4.6 hours, with a range of 0.5 hour to 12
hours and a mean Tmax of the comparator, Roxicodone
®
of 3.4 hours with a range of 0.5 hour to 12 hours. A key objective
of this study was to determine if the reformulated SequestOx™ had a similar Tmax to the comparator when taken with a high
fat meal. Based on these results, the Company will pause, not proceed, with the rest of the clinical trials, and seek clarity from
the FDA before deciding on the next steps for immediate release SequestOx™. There can be no assurances of the success of
any future clinical trials, or if such trials are successful, there can be no assurances that an intended future resubmission of
the NDA product filing, if made, will be accepted by or receive marketing approval from the FDA, and accordingly, there can be
no assurances that the Company will earn and receive the additional $7.5 million or future license fees. If the Company does not
receive these payments or fees, it will materially and adversely affect our financial condition. In addition, even if marketing
authorization is received, there can be no assurances that there will be future revenues of profits, or that any such future revenues
or profits would be in amounts that provide adequate return on the significant investments made to secure this marketing authorization.
On October 2, 2013,
Elite executed the Epic Pharma Manufacturing and License Agreement (the “Epic Generic Agreement”), 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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. The Epic Generic
Agreement expired on October 2, 2018 with Epic launching four of the six exclusive products and Elite collecting $1.0 million of
the total $1.8 million fee.
Both the 2015 Epic
License Agreement and the Epic Generic Agreement contain license fees that will be earned and payable to the Company, after the
FDA has issued marketing authorization(s) for the related product(s). License fees are based on commercial sales of the products
achieved by Epic and calculated as a percentage of net sales dollars realized from such commercial sales. Net sales dollars consist
of gross invoiced sales less those costs and deductions directly attributable to each invoiced sale, including, without limitation,
cost of goods sold, cash discounts, Medicaid rebates, state program rebates, price adjustments, returns, short date adjustments,
charge backs, promotions, and marketing costs. The rate applied to the net sales dollars to determine license fees due to the Company
is equal to an amount negotiated and agreed to by the parties to each agreement, with the following significant factors, inputs,
assumptions, and methods, without limitation, being considered by either or both parties:
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·
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Assessment of the opportunity for each product in the market, including consideration of the following, without limitation: market size, number of competitors, the current and estimated future regulatory, legislative, and social environment for abuse deterrent opioids and the other generic products to which the underlying contracts are relevant;
|
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Assessment of various avenues for monetizing SequestOx™ and the twelve ANDA’s owned by the Company, including the various combinations of sites of manufacture and marketing options;
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·
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Elite’s resources and capabilities with regards to the concurrent development of abuse deterrent opioids and expansion of its generic business segment, including financial and operational resources required to achieve manufacturing site transfers for twelve approved ANDA’s;
|
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·
|
Capabilities of each party with regards to various factors, including, one or more of the following: manufacturing, marketing, regulatory and financial resources, distribution capabilities, ownership structure, personnel, assessments of operational efficiencies and entity stability, company culture and image;
|
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·
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Stage of development of SequestOx™ and manufacturing site transfer and regulatory requirements relating to the commercialization of the generic products at the time of the discussions/negotiations, and an assessment of the risks, probability, and time frames for achieving marketing authorizations from the FDA for each product.
|
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·
|
Assessment of consideration offered; and
|
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·
|
Comparison of the above factors among the various entities with whom the Company was engaged in discussions relating to the commercialization of SequestOx™ and the manufacture/marketing of the twelve generics related to the Epic Generic Agreement.
|
This transaction is
not to be considered as an arms-length transaction.
Please also note that,
effective April 7, 2016, all Directors on the Company’s Board of Directors that were also owners/managers of Epic had resigned
as Directors of the Company and all current members of the Company’s Board of Directors have no relationship to Epic. Accordingly,
Epic no longer qualifies as a party that is related to the Company.
NOTE 19. MANUFACTURING, LICENSE AND DEVELOPMENT AGREEMENTS
The Company has entered into the following
active agreements:
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·
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License agreement with Precision Dose, dated September 10, 2010 (the “Precision Dose License Agreement”)
|
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·
|
Master Development and License Agreement with SunGen Pharma LLC, dated August 24, 2016, as amended (the “SunGen Agreement”) and,
|
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·
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Strategic Marketing Alliance with Glenmark Pharmaceuticals, Inc. USA dated May 29, 2018 (the “Glenmark Alliance”)
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ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The Precision Dose
Agreement provides for the marketing and distribution, by Precision Dose and its wholly owned subsidiary, TAGI Pharma, of Phentermine
37.5mg tablets (launched in April 2011), Phentermine 15mg capsules (launched in April 2013), Phentermine 30mg capsules (launched
in April 2013), Hydromorphone 8mg tablets (launched in March 2012), Naltrexone 50mg tablets (launched in September 2013) and certain
additional products that require approval from the FDA which has not been received. Precision Dose will have the exclusive right
to market these products in the United States and Puerto Rico and a non-exclusive right to market the products in Canada. Pursuant
to the Precision Dose License Agreement, Elite received $200k at signing, and is receiving milestone payments and a license fee
which is based on profits achieved from the commercial sale of the products included in the agreement.
Revenue
from the $200k payment made upon signing of the Precision Dose Agreement is being recognized over the life of the Precision Dose
Agreement.
The milestones, totaling
$500k (with $405k already received), consist of amounts due upon the first shipment of each identified product, as follows: Phentermine
37.5mg tablets ($145k), Phentermine 15 & 30mg capsules ($45k), Hydromorphone 8mg ($125k), Naltrexone 50mg ($95k) and the balance
of $95k due in relation to the first shipment of generic products which still require marketing authorizations from the FDA, and
to which there can be no assurances of such marketing authorizations being granted and accordingly there can be no assurances that
the Company will earn and receive these milestone amounts. These milestones have been determined to be substantive, with such determination
being made by the Company after assessments based on the following:
|
·
|
The Company’s performance is required to achieve each milestone; and
|
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·
|
The milestones will relate to past performance, when achieved; and
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·
|
The milestones are reasonable relative to all of the deliverables and payment terms within the Precision Dose License Agreement.
|
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;
|
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·
|
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;
|
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·
|
Stage of development of each generic product, all of which did not have FDA approval at the time of the discussions/negotiations and an assessment of the risks, probability, and time frame for achieving marketing authorizations from the FDA for the products;
|
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·
|
Assessment of consideration offered by Precision and other entities with whom discussions were conducted; and
|
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·
|
Comparison of the above factors among the various entities with whom the Company was engaged in discussions relating to the commercialization of the generic products.
|
The SunGen Agreement
provides for the research, development, sales and marketing of eight generic pharmaceutical products. Two of the products are classified
as CNS stimulants (the “CNS Products”), two of the products are classified as beta blockers and the remaining four
products consist of antidepressants, antibiotics and antispasmodics. To date, the Company has filed ANDAs with the FDA for the
two CNS Products identified in the SunGen Agreement.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Under the terms of
the SunGen Agreement, Elite and SunGen will share in the responsibilities and costs in the development of these products and will
share substantially in the profits from sales. Upon approval, the know-how and intellectual property rights to the products will
be owned jointly by Elite and SunGen. Three of the eight products will be jointly owned, three products will be owned by SunGen,
with Elite having exclusive marketing rights and the remaining two products will be owned by Elite, with SunGen having exclusive
marketing rights. Elite will manufacture and package all eight products on a cost-plus basis.
The Glenmark Alliance,
provides for the manufacture by Elite and marketing by Glenmark of identified generic products under license from Elite. In addition
to the purchase prices for the products, Elite will receive license fees well in excess of 50% of gross profits. Gross profit is
defined as net sales less the price paid to Elite for the products, distribution fees (less than 10%) and shipping costs. Glenmark
will have semi-exclusive marketing rights to the ANDA approved generic product, phendimetrazine 35mg tablets, and exclusive marketing
rights to generic Methadone HCl. Collectively, the brand products and their generic equivalents had total annual sales of approximately
$33.6 million in 2017, according to Quintiles IMS Health data. The Agreement has an initial term of three years and automatically
renews for one-year periods absent prior written notice of non-renewal. In addition to customary termination provisions, the Agreement
permits Glenmark to terminate with regard to a product on at least three months’ prior written notice if it determines to
stop marketing and selling such product, and it permits Elite to terminate with regard to a product if at any time after the first
twelvemonths from the first commercial sale, the average license fee paid by Glenmark for such product is less than $100,000 for
a six-month sales period.
NOTE 20. RELATED PARTY AGREEMENTS WITH MIKAH PHARMA LLC
Pursuant to an asset
acquisition
,
on May 17, 2017, Elite Labs, executed an assignment agreement with Mikah, pursuant to which the Company acquired
all rights, interests, and obligations under a supply and distribution agreement (the “Reddy’s Distribution Agreement”)
with Dr. Reddy’s Laboratories, Inc. (“Dr. Reddy’s”) originally entered into by Mikah on May 7, 2017 and
relating to the supply, sale and distribution of generic Trimipramine Maleate Capsules 25mg, 50mg and 100mg (“Trimipramine”).
On May 22, 2017, the
Company executed an assignment agreement with Mikah, pursuant to which the Company acquired all rights, interests and obligations
under a manufacturing and supply agreement with Epic Pharma LLC (“Epic”) originally entered into by Mikah on June 30,
2015 and relating to the manufacture and supply of Trimipramine (the “Epic Trimipramine Manufacturing Agreement”).
Pursuant to this agreement, Epic manufactured Trimipramine under license from Elite. In September 2018, Elite successfully transferred
manufacturing of Trimipramine to the Northvale Facility, resulting in the irrelevance of the Epic Trimipramine Manufacturing Agreement.
Trimipramine is currently manufactured by Elite.
Mikah is owned by Nasrat
Hakim, the CEO, President and Chairman of the Board of the Company.
The Reddy’s Distribution
Agreement was concluded by mutual consent in August 2018.
Trimipramine is one
of the products included in the Glenmark Strategic Alliance and is currently marketed and distributed by Glenmark.
NOTE 21. SUBSEQUENT EVENTS
The Company has evaluated
subsequent events from the balance sheet date through November 9, 2018, the date the accompanying financial statements were issued.
The following are material subsequent events.
Common Stock
issued and sold pursuant to the Lincoln Park Purchase Agreement
Subsequent to September
30, 2018 and up to November 5, 2018 (the latest practicable date), a total of 2,527,502 shares of Common Stock were issued to Lincoln
Park, with such shares consisting of 2,500,000 purchase shares and 27,502 additional commitment shares. Total proceeds from these
transactions was $198,550.
Commercial launch
of generic Methadone HCl 5mg and 10mg
On November 5, 2018,
the Company announced the commercial launch of generic Methadone Hydrochloride 5mg and 10mg tablets by Glenmark Pharmaceuticals,
Inc., USA (“Glenmark”), Elite’s marketing alliance partner. Through this alliance, Glenmark will sell and distribute
Elite’s Methadone, for which Elite receives manufacturing and licensing fees.