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”) 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, licensing and 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 allergy, bariatric, attention deficit and infection.
Research and development activities are performed 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”). 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
items, which are, in the opinion of management, necessary for a fair presentation of such statements. The results of operations
for the three and nine months ended December 31, 2020 are not necessarily indicative of the results that may be expected for the
entire year.
Segment Information
Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification 280 (“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. Please see Note 15 for further details.
Revenue Recognition
The Company generates
revenue primarily from manufacturing and licensing fees. Manufacturing fees include the development of pain management products,
manufacturing of a line of generic pharmaceutical products with approved ANDA, through the manufacture of formulations and the
development of new products. Licensing fees include the commercialization of products either by license and the collection of royalties,
or the expansion of licensing agreements with other pharmaceutical companies, including co-development projects, joint ventures,
and other collaborations.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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 recognizes revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with
a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the
transaction price to the performance obligation(s) in the contract; and (v) recognize revenues when (or as) the Company satisfies
a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect
the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception,
once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each
contract and determines those that are performance obligations and assesses whether each promised good or service is distinct.
The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation
when (or as) the performance obligation is satisfied. Sales, value add, and other taxes collected on behalf of third parties are
excluded from revenue.
Nature of goods and services
The following is a
description of the Company’s goods and services from which the Company generates revenue, as well as the nature, timing of
satisfaction of performance obligations, and significant payment terms for each, as applicable:
a) Manufacturing Fees
The Company is equipped
to manufacture controlled-release products on a contract basis for third parties, if, and when, the products are approved. These
products include products using controlled-release drug technology. The Company also develops and markets (either on its own or
by license to other companies) generic and proprietary controlled-release 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.
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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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 recognize revenue from the milestone when there
is not a high probability of a reversal of revenue, which typically occurs near or upon achievement of the event.
Significant management
judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects
to complete its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance obligations
either are completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such
estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.
When determining the
transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly
after performance, resulting in a significant financing component. Applying the practical expedient in ASC 606-10-32-18, the Company
does not assess whether a significant financing component exists if the period between when the Company performs its obligations
under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant
financing component as of December 31, 2020.
In accordance with
ASC 606-10-55-65, royalties are recognized when the subsequent sale of the customer’s products occurs.
The Company entered
into a sales and distribution licensing agreement with Epic Pharma LLC, (“Epic”) dated June 4, 2015 (the “2015
Epic License Agreement”), which has been determined to satisfy the criteria for consideration as a collaborative agreement,
and is accounted for accordingly. The 2015 Epic License Agreement expired on June 4, 2020 without renewal.
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.
On April 3, 2020, Elite and SunGen mutually agreed to discontinue any further joint product development activities.
Disaggregation of revenue
In the following table,
revenue is disaggregated by type of revenue generated by the Company. The table also includes a reconciliation of the disaggregated
revenue with the reportable segments:
|
|
For the Three Months Ended
December 31,
|
|
|
For the Nine Months Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
NDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing fees
|
|
$
|
—
|
|
|
$
|
250,000
|
|
|
$
|
166,167
|
|
|
$
|
750,000
|
|
Total NDA revenue
|
|
|
—
|
|
|
|
250,000
|
|
|
|
166,167
|
|
|
|
750,000
|
|
ANDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing fees
|
|
$
|
4,849,871
|
|
|
$
|
3,754,721
|
|
|
$
|
17,659,834
|
|
|
$
|
10,851,425
|
|
Licensing fees
|
|
|
1,196,711
|
|
|
|
1,050,392
|
|
|
|
3,159,217
|
|
|
|
1,447,915
|
|
Total ANDA revenue
|
|
|
6,046,582
|
|
|
|
4,805,113
|
|
|
|
20,819,051
|
|
|
|
12,299,340
|
|
Total revenue
|
|
$
|
6,046,582
|
|
|
$
|
5,055,113
|
|
|
$
|
20,985,218
|
|
|
$
|
13,049,340
|
|
Selected information
on reportable segments and reconciliation of operating income by segment to income (loss) from operations before income taxes are
disclosed within Note 15.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Cash
The Company considers
all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents
consist of cash on deposit with banks and money market instruments. The Company places its cash and cash equivalents with high-quality,
U.S. financial institutions and, to date has not experienced losses on any of its balances.
Restricted Cash
As of December 31,
2020, and March 31, 2020, the Company had $405,005 and $404,802, of restricted cash, respectively, related to debt service
reserve in regard to the New Jersey Economic Development Authority (“NJEDA”) bonds (see Note 5).
Accounts Receivable
Accounts receivable
are comprised of balances due from customers, net of estimated allowances for uncollectible accounts. In determining collectability,
historical trends are evaluated, and specific customer issues are reviewed on a periodic basis to arrive at appropriate allowances.
Inventory
Inventory is recorded
at the lower of cost or market on specific identification by lot number basis.
Long-Lived Assets
The Company periodically
evaluates the fair value of long-lived assets, which include property and equipment and intangibles, whenever events or changes
in circumstances indicate that its carrying amounts may not be recoverable.
Property and equipment
are stated at cost. Depreciation is provided on the straight-line method based on the estimated useful lives of the respective
assets which range from three to forty years. Major repairs or improvements are capitalized. Minor replacements and maintenance
and repairs which do not improve or extend asset lives are expensed currently.
Upon retirement or
other disposition of assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain
or loss, if any, is recognized in income.
Intangible Assets
The Company capitalizes
certain costs to acquire intangible assets; if such assets are determined to have a finite useful life they are amortized on a
straight-line basis over the estimated useful life. Costs to acquire indefinite lived intangible assets, such as costs related
to ANDAs are capitalized accordingly.
The Company tests its
intangible assets for impairment at least annually (as of March 31st) and whenever events or circumstances change that indicate
impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred.
Such indicators may include, among others and without limitation: a significant decline in the Company’s expected future
cash flows; a sustained, significant decline in the Company’s stock price and market capitalization; a significant adverse
change in legal factors or in the business climate of the Company’s segments; unanticipated competition; and slower growth
rates.
As of December 31,
2020, the Company did not identify any indicators of impairment.
Please also see Note
4 for further details on intangible assets.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Research and Development
Research and development
expenditures are charged to expense as incurred.
Contingencies
Occasionally, the Company
may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision
for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably
estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s
condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve
a series of complex judgments about future events and can rely heavily on estimates and assumptions.
Income Taxes
Income taxes are accounted
for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Where applicable, the Company records a valuation allowance to reduce any
deferred tax assets that it determines will not be realizable in the future.
The Company recognizes
the benefit of an uncertain tax position that it has taken or expects to take on income tax returns it files if such tax position
is more likely than not to be sustained on examination by the taxing authorities, based on the technical merits of the position.
These tax benefits are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
resolution.
The Company operates
in multiple tax jurisdictions within the United States of America. The Company remains subject to examination in all tax jurisdiction
until the applicable statutes of limitation expire. As of December 31, 2020, a summary of the tax years that remain subject
to examination in our major tax jurisdictions are: United States – Federal, 2016 and forward, and State, 2012 and forward.
The Company did not record unrecognized tax positions for the three and nine months ended December 31, 2020 and 2019.
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 instrument 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 is assessed
with determinations made regarding the proper classification in the Company’s financial statements.
Stock-Based Compensation
The Company accounts
for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation. Under the fair value recognition
provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized
as an expense on a straight-line basis over the requisite service period, based on the terms of the awards. The cost of the stock-based
payments to nonemployees that are fully vested and non-forfeitable as at the grant date is measured and recognized at that date,
unless there is a contractual term for services in which case such compensation would be amortized over the contractual term.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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 (“Common Stock”), in lieu of
cash, with the valuation of such share being calculated on a quarterly basis and equal to the simple average closing price of the
Company’s Common Stock for each trading day of the quarter then ended.
Earnings (Loss) Per Share Attributable
to Common Shareholders’
The Company follows
ASC 260, Earnings Per Share, which requires presentation of basic and diluted earnings (loss) per share (“EPS”)
on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying
financial statements, basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number
of shares of Common Stock outstanding during the period. The computation of diluted net income (loss) per share does not include
the conversion of securities that would have an antidilutive effect.
The following is the
computation of earnings (loss) per share applicable to common shareholders for the periods indicated:
|
|
For the Three Months Ended
December 31,
|
|
|
For the Nine Months Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) - basic
|
|
$
|
2,012,133
|
|
|
$
|
(1,860,680
|
)
|
|
$
|
5,571,044
|
|
|
$
|
(3,176,719
|
)
|
Effect of dilutive instrument on net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss) - diluted
|
|
$
|
2,012,133
|
|
|
$
|
(1,860,680
|
)
|
|
$
|
5,571,044
|
|
|
$
|
(3,176,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of Common Stock outstanding - basic
|
|
|
1,009,176,752
|
|
|
|
829,394,203
|
|
|
|
921,339,333
|
|
|
|
828,466,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options and convertible securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of Common Stock outstanding - diluted
|
|
|
1,009,176,752
|
|
|
|
829,394,203
|
|
|
|
921,339,333
|
|
|
|
828,466,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.00
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.00
|
)
|
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
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments - warrants
|
|
$
|
1,954,336
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,954,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments - warrants
|
|
$
|
3,599,378
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,599,378
|
|
See Note 11, for specific
inputs used in determining fair value.
The carrying amounts
of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses and other current
assets, accounts payable and accrued expenses, approximate their fair values because of the short maturity of these instruments.
Based upon current borrowing rates with similar maturities the carrying value of long-term debt approximates fair value.
Non-Financial Assets
that are Measured at Fair Value on a Non-Recurring Basis
Non-financial assets
such as intangible assets, and property and equipment are measured at fair value only when an impairment loss is recognized. The
Company did not record an impairment charge related to these assets in the periods presented.
Treasury Stock
The Company records
treasury stock at the cost to acquire it and includes treasury stock as a component of shareholders’ equity.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Recently Issued Accounting
Pronouncements
In June 2016, the FASB
issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
This update requires immediate recognition of management’s estimates of current expected credit losses (“CECL”).
Under the prior model, losses were recognized only as they were incurred. The new model is applicable to all financial instruments
that are not accounted for at fair value through net income. The standard is effective for fiscal years beginning after December
15, 2022 for public entities qualifying as smaller reporting companies. Early adoption is permitted. The Company is currently assessing
the impact of this update on the consolidated financial statements and does not expect a material impact on the consolidated financial
statements.
Management has evaluated
other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact
on our consolidated financial statements and related disclosures.
NOTE 2. INVENTORY
Inventory consisted
of the following:
|
|
December 31,
2020
|
|
|
March 31,
2020
|
|
Finished goods
|
|
$
|
33,315
|
|
|
$
|
138,981
|
|
Work-in-progress
|
|
|
43,946
|
|
|
|
677,824
|
|
Raw materials
|
|
|
4,724,746
|
|
|
|
3,325,667
|
|
|
|
$
|
4,802,007
|
|
|
$
|
4,142,472
|
|
NOTE 3. PROPERTY AND EQUIPMENT, NET
Property and equipment
consisted of the following:
|
|
December 31,
2020
|
|
|
March 31,
2020
|
|
Land, building and improvements
|
|
$
|
5,273,023
|
|
|
$
|
5,260,524
|
|
Laboratory, manufacturing, warehouse and transportation equipment
|
|
|
12,579,055
|
|
|
|
12,167,754
|
|
Office equipment and software
|
|
|
373,601
|
|
|
|
373,601
|
|
Furniture and fixtures
|
|
|
392,410
|
|
|
|
383,103
|
|
|
|
|
18,618,089
|
|
|
|
18,184,982
|
|
Less: Accumulated depreciation
|
|
|
(11,834,185
|
)
|
|
|
(10,957,334
|
)
|
|
|
$
|
6,783,904
|
|
|
$
|
7,227,648
|
|
Depreciation expense
was $505,987 and $326,908 for the three months ended, and $980,227 and $982,456 for the nine months ended December 31, 2020 and
2019, respectively.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 4. INTANGIBLE ASSETS
The following table summarizes the Company’s
intangible assets:
|
|
December 31, 2020
|
|
|
Estimated
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
Carrying
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Life
|
|
Amount
|
|
|
Additions
|
|
|
Reductions
|
|
|
Amortization
|
|
|
Value
|
|
Patent application costs
|
|
*
|
|
$
|
465,684
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
465,684
|
|
ANDA acquisition costs
|
|
Indefinite
|
|
|
6,168,351
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,168,351
|
|
|
|
|
|
$
|
6,634,035
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,634,035
|
|
|
|
March 31, 2020
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Life
|
|
|
Amount
|
|
|
Additions
|
|
|
Reductions
|
|
|
Amortization
|
|
|
Value
|
|
Patent application costs
|
|
|
*
|
|
|
$
|
465,684
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
465,684
|
|
ANDA acquisition costs
|
|
|
Indefinite
|
|
|
|
6,168,351
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,168,351
|
|
|
|
|
|
|
|
$
|
6,634,035
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,634,035
|
|
*
|
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 service reserve is classified as restricted
cash on the accompanying unaudited condensed consolidated balance sheets. The NJEDA Bonds require the Company to make an annual
principal payment on September 1st based on the amount specified in the loan documents and semi-annual interest payments on March
1st and September 1st, equal to interest due on the outstanding principal. The annual interest rate on the Series A Note is 6.5%.
The NJEDA Bonds are collateralized by a first lien on the Company’s facility and equipment acquired with the proceeds of
the original and refinanced bonds.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The following tables
summarize the Company’s bonds payable liability:
|
|
December 31,
2020
|
|
|
March 31,
2020
|
|
Gross bonds payable
|
|
|
|
|
|
|
NJEDA Bonds - Series A Notes
|
|
$
|
1,470,000
|
|
|
$
|
1,575,000
|
|
Less: Current portion of bonds payable (prior to deduction of bond offering costs)
|
|
|
(110,000
|
)
|
|
|
(105,000
|
)
|
Long-term portion of bonds payable (prior to deduction of bond offering costs)
|
|
$
|
1,360,000
|
|
|
$
|
1,470,000
|
|
|
|
|
|
|
|
|
|
|
Bond offering costs
|
|
$
|
354,454
|
|
|
$
|
354,454
|
|
Less: Accumulated amortization
|
|
|
(217,399
|
)
|
|
|
(206,765
|
)
|
Bond offering costs, net
|
|
$
|
137,055
|
|
|
$
|
147,689
|
|
|
|
|
|
|
|
|
|
|
Current portion of bonds payable - net of bond offering costs
|
|
|
|
|
|
|
|
|
Current portions of bonds payable
|
|
$
|
110,000
|
|
|
$
|
105,000
|
|
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
|
|
$
|
95,822
|
|
|
$
|
90,822
|
|
|
|
|
|
|
|
|
|
|
Long term portion of bonds payable - net of bond offering costs
|
|
|
|
|
|
|
|
|
Long term portion of bonds payable
|
|
|
1,360,000
|
|
|
$
|
1,470,000
|
|
Less: Bond offering costs to be amortized subsequent to the next 12 months
|
|
|
(122,877
|
)
|
|
|
(133,511
|
)
|
Long term portion of bonds payable, net of bond offering costs
|
|
$
|
1,237,123
|
|
|
$
|
1,336,489
|
|
Amortization expense
was $3,544 and $3,545 for the three months ended, and $10,634 and $10,630 for the nine months ended December 31, 2020 and 2019,
respectively.
NOTE 6. LOANS PAYABLE
Loans payable consisted
of the following:
|
|
December 31,
2020
|
|
|
March 31,
2020
|
|
Equipment and insurance financing loans payable, between 3.5% and 12.73% interest and maturing between January 2021 and October 2025
|
|
$
|
900,800
|
|
|
$
|
1,025,452
|
|
Loan received pursuant to the Payroll Protection Program Term Note
|
|
|
1,013,480
|
|
|
|
—
|
|
Less: Current portion of loans payable
|
|
|
(406,110
|
)
|
|
|
(561,550
|
)
|
Long-term portion of loans payable
|
|
$
|
1,508,170
|
|
|
$
|
463,902
|
|
The interest expense
associated with the loans payable was $19,422 and $18,291 for the three months ended, and $58,062 and $63,170 for the nine months
ended December 31, 2020 and 2019, respectively.
2020 Paycheck Protection
Program Term Note
In April 2020, the
Company entered into a Paycheck Protection Program Term Note (the “PPP Note”) with TD Bank, NA in the amount of $1,013,480.
The PPP Note was issued to the Company pursuant to the Coronavirus, Aid, Relief, and Economic Security Act’s (the “CARES
Act”) (P.L. 116-136) Paycheck Protection Program (the “Program”). Under the Program, all or a portion of the
PPP Note may be forgiven in accordance with the Program requirements. In January 2021, the Company’s application for forgiveness
of amounts due under the PPP Note was approved, in full, in accordance with the CARES Act and the Program.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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 Pharma, LLC
(“Mikah”) for the principal sum of $1,200,000. Mikah was founded in 2009 by Nasrat Hakim (“Hakim”), a related
party and, the Company’s President, Chief Executive Officer and Chairman of the Board. The Note matures on December 31, 2020 at
which time the Company shall pay the outstanding principal balance of the Note. Interest shall be computed on the unpaid principal
amount at the per annum rate of ten percent (10%); provided, upon the occurrence of an Event of Default as defined within the Note,
the principal balance shall bear interest from the date of such occurrence until the date of actual payment at the per annum rate
of fifteen percent (15%). All interest payable hereunder shall be computed on the basis of actual days elapsed and a year of 360
days. Installment payments of interest on the outstanding principal shall be paid as follows: quarterly commencing August 1, 2017
and on November 1, February 1, May 1, and August 1 of each year thereafter. No principal or interest payments have been made on
the Note since its issuance. All unpaid principal and accrued but unpaid interest shall be due and payable in full on the Maturity
Date. The interest expense associated with the Note was $30,000 for the three months ended and $90,000 for the nine months ended
December 31, 2020 and 2019, respectively. Accrued interest due and owing on this note was $435,000 and $345,000 as of December 31,
2020 and March 31, 2020, respectively.
The Note matured on
December 31, 2020 without repayment. Subsequent to December 31, 2020, amounts due pursuant to the note, consisting of unpaid principal
of $1,200,000 plus unpaid accrued interest through December 31, 2020 of $435,000 remain as a general, non-interest bearing liability
of the Company.
NOTE 8. DEFERRED REVENUE
Deferred revenues in
the aggregate amount of $68,891 as of December 31, 2020, were comprised of a current component of $13,333 and a long-term
component of $55,558. Deferred revenues in the aggregate amount of $238,891 as of March 31, 2020, were comprised of a current
component of $180,000 and a long-term component of $58,891. These line items represent the unamortized amounts of a $200,000 advance
payment received for a TAGI Pharma (“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 sheet 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The 135 Ludlow Ave.
modified lease property required significant leasehold improvements and qualifications, as a prerequisite, for its intended future
use. Manufacturing, packaging, warehousing, and regulatory activities are currently conducted at this location. Additional renovations
and construction to further expand the Company’s manufacturing resources are in progress.
The Company assesses
whether an arrangement is a lease or contains a lease at inception. For arrangements considered leases or that contain a lease
that is accounted for separately, the Company determines the classification and initial measurement of the right-of-use asset and
lease liability at the lease commencement date, which is the date that the underlying asset becomes available for use. The Company
has elected to account for non-lease components associated with its leases and lease components as a single lease component.
The Company recognizes
a right-of-use asset, which represents the Company’s right to use the underlying asset for the lease term, and a lease liability,
which represents the present value of the Company’s obligation to make payments arising over the lease term. The present
value of the lease payments is calculated using either the implicit interest rate in the lease or an incremental borrowing rate.
Lease assets and liabilities
are classified as follows on the condensed consolidated balance sheet:
Lease
|
|
Classification
|
|
As of
December 31,
2020
|
|
Assets
|
|
|
|
|
|
|
Operating
|
|
Operating lease – right-of-use asset
|
|
$
|
212,385
|
|
Total leased assets
|
|
|
|
$
|
212,385
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating
|
|
Lease obligation – operating lease
|
|
$
|
221,166
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
Operating
|
|
Lease obligation – operating lease, net of current portion
|
|
|
—
|
|
Total lease liabilities
|
|
|
|
$
|
221,166
|
|
Rent expense is recorded
on the straight-line basis. Rent expense under the 135 Ludlow Ave. modified lease for the three months ended December 31, 2020
and 2019 was $55,986 and $18,296, respectively, and $167,958 and $128,072 for the nine months ended December 31, 2020 and 2019,
respectively. Rent expense is recorded in general and administrative expense in the unaudited condensed consolidated statements
of operations.
The table below shows
the future minimum rental payments, exclusive of taxes, insurance, and other costs, under the 135 Ludlow Ave. modified lease:
Years ending March 31,
|
|
Amount
|
|
2021
|
|
$
|
57,105
|
|
2022
|
|
|
171,315
|
|
Total future minimum lease payments
|
|
|
228,420
|
|
Less: interest
|
|
|
(7,254
|
)
|
Present value of lease payments
|
|
$
|
221,166
|
|
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The weighted-average
remaining lease term and the weighted-average discount rate of our lease was as follows:
Lease Term and Discount Rate
|
|
December 31,
2020
|
|
Remaining lease term (years)
|
|
|
|
|
Operating leases
|
|
|
1
|
|
|
|
|
|
|
Discount rate
|
|
|
|
|
Operating leases
|
|
|
6
|
%
|
The Company has an
obligation for the restoration of its leased facility and the removal or dismantlement of certain property and equipment as a result
of its business operation in accordance with ASC 410, Asset Retirement and Environmental Obligations – Asset Retirement
Obligation . The Company records the fair value of the asset retirement obligation in the period in which it is incurred. The
Company increases, annually, the liability related to this obligation. The liability is accreted to its present value each period
and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the Company
records either a gain or loss. As of December 31, 2020, and March 31, 2020, the Company had a liability of $37,069 and
$35,442, respectively, recorded as a component of other long-term liabilities.
NOTE 10. PREFERRED STOCK
Series J convertible preferred stock
On April 28, 2017,
the Company created the Series J Convertible Preferred Stock (“Series J Preferred”) in conjunction with the Certificate
of Designations (“Series J COD”). A total of 50 shares of Series J Preferred were authorized, zero shares are issued
and outstanding, with a stated value of $1,000,000 per share and a par value of $0.01 as of December 31, 2020.
On April 27, 2017,
a total of 24.0344 shares of Series J Preferred were issued pursuant to an exchange agreement (the “Exchange Agreement”)
with Hakim, a related party and the Company’s President, Chief Executive Officer and Chairman of the Board of Directors.
The Exchange Agreement provided for Hakim to exchange 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 December 31, 2020 (See Note 11).
An amendment to the
Company’s Articles of Incorporation to increase the number of shares of Common Stock the Company is authorized to issue from
995,000,000 shares to 1,445,000,000 shares was approved at the Company’s Annual Meeting of Shareholders held on December
4, 2019. Prior to the approval of the increase in the number of authorized shares, there were insufficient authorized shares if
the Series J Preferred Stock were converted. As a result, the shares were classified in mezzanine equity. After the approval of
the increase in the number of authorized shares, there are now sufficient authorized shares in the event of a full conversion of
Series J Preferred Stock. With the approval of the increase in the number of authorized shares, there is no longer the presumption
that a cash settlement will be required. Therefore, the Series J Preferred was reclassified from mezzanine equity to permanent
equity at its carrying amount of $13,903,960 on the consolidated balance sheet as of March 31, 2020.
On June 23, 2020, the
Company held a Special Meeting of Shareholders, with such including a proposal for shareholders to again vote on the above referenced
amendment to the Company’s Articles of Incorporation. This proposal was also passed by shareholder vote.
On August 24, 2020,
Hakim converted the 24.0344 shares of Series J Preferred into 158,017,321 shares of Common Stock at a conversion price of $0.1521
per share.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS
– WARRANTS
The Company evaluates
and accounts for its freestanding instruments in accordance with ASC 815, Accounting for Derivative Instruments and Hedging
Activities.
The Company issued
warrants, with a term of ten years, to affiliates in connection with an exchange agreement dated April 28, 2017, as further described
in this note below.
A summary of warrant
activity is as follows:
|
|
December 31, 2020
|
|
|
March 31, 2020
|
|
|
|
Warrant Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Warrant Shares
|
|
|
Weighted Average Exercise Price
|
|
Balance at beginning of period – April 1, 2020 and 2019,
respectively
|
|
|
79,008,661
|
|
|
$
|
0.1521
|
|
|
|
79,008,661
|
|
|
$
|
0.1521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants granted pursuant to the issuance of Series J convertible preferred shares
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercised, forfeited and/or expired, net
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
79,008,661
|
|
|
$
|
0.1521
|
|
|
|
79,008,661
|
|
|
$
|
0.1521
|
|
On April 28, 2017,
the Company entered into an Exchange Agreement with Hakim, the Chairman of the Board, President, and Chief Executive Officer of
the Company, pursuant to which the Company issued to Hakim 24.0344 shares of its 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 Hakim, the “Securities”) in exchange for 158,017,321 shares of Common Stock owned by Hakim. The fair value
of the Series J Warrants was determined to be $6,474,674 upon issuance at April 28, 2017.
The Series J Warrants
are exercisable for a period of 10 years from the date of issuance, commencing 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The fair value of the
Series J Warrants was calculated using a Black-Scholes model instead of a Monte Carlo Simulation because the probability with the
shareholder approval provisions was no longer a factor. The following assumptions were used in the Black-Scholes model to calculate
the fair value of the Series J Warrants:
|
|
December 31,
2020
|
|
|
March 31,
2020
|
|
Fair value of the Company’s Common Stock
|
|
$
|
0.0521
|
|
|
$
|
0.0720
|
|
Volatility
|
|
|
76.28
|
%
|
|
|
83.81
|
%
|
Initial exercise price
|
|
$
|
0.1521
|
|
|
$
|
0.1521
|
|
Warrant term (in years)
|
|
|
6.3
|
|
|
|
7.1
|
|
Risk free rate
|
|
|
0.65
|
%
|
|
|
0.55
|
%
|
The changes in warrants
(Level 3 financial instruments) measured at fair value on a recurring basis for the nine months ended December 31, 2020 were as
follows:
Balance at March 31, 2020
|
|
$
|
3,599,378
|
|
Change in fair value of derivative financial instruments - warrants
|
|
|
(1,645,042
|
)
|
Balance at December 31, 2020
|
|
$
|
1,954,336
|
|
NOTE 12. SHAREHOLDERS’ EQUITY
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 had the right to sell to and Lincoln Park was 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
that commenced on June 5, 2017.
The 2017 LPC Agreement expired on July 1,
2020.
During the nine months
ended December 31, 2020, there were no shares sold to Lincoln Park pursuant to the 2017 LPC Agreement. In addition, there were
no shares issued to Lincoln Park as additional commitment shares, pursuant to the 2017 LPC Agreement. During the nine months ended
December 31, 2019, a total of 8,895,233 shares were sold to Lincoln Park pursuant to the 2017 LPC Agreement for net proceeds totaling
$806,987. In addition, 111,778 shares were issued to Lincoln Park as additional commitment shares, pursuant to the 2017 LPC Agreement.
Lincoln Park Capital Transaction
- July 8, 2020 Purchase Agreement
On July 8, 2020, the
Company entered into a purchase agreement (the “2020 LPC Purchase Agreement”), and a registration rights agreement
(the “2020 LPC Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant
to which Lincoln Park has committed to purchase up to $25.0 million of the Company’s Common Stock, $0.001 par value per share,
from time to time over the term of the 2020 LPC Purchase Agreement, at the Company’s direction.
During the nine months ended December 31, 2020 the Company issued
an aggregate of 5,975,857 shares of Common Stock in the amount of $469,105 to Lincoln Park as initial commitment shares. The Company
sold 640,543 shares of its Common Stock pursuant to the 2020 LPC Purchase Agreement during the nine months ended December 31, 2020
for net proceeds totaling $42,223. In addition, 10,094 shares were issued to Lincoln Park as additional commitment shares, pursuant
to the 2020 LPC Agreement.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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, 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 a quarterly basis and equal to the simple average of the closing price of the Company’s
Common Stock for each trading day of the quarter then ended.
During the nine months
ended December 31, 2020, the Company issued 1,550,343 shares of Common Stock to its Directors in payment of director’s fees totaling
an aggregate of $135,000 and with such aggregate director’s fees being earned and accrued over the twenty-seven month period beginning
on January 1, 2018 and ending on March 31, 2020. In addition, the Company made cash payments totaling an aggregate of $67,500 in
payment of director’s fees earned over the same twenty-seven month period.
During the nine months ended December 31,
2020, the Company accrued director’s fees totaling $67,500, which will be paid via cash payments totaling $22,500 and the
issuance of 638,393 shares of Common Stock.
As of December 31,
2020, the Company owed its Directors a total of $22,500 in cash payments and 638,393 shares of Common Stock in payment of director
fees totaling $67,500 due and owing. The Company anticipates that these shares of Common Stock will be issued prior to the end
of the current fiscal year.
Stock-based Employee/Consultant Compensation
Employment contracts
with the Company’s President and Chief Executive Officer, Chief Financial Officer and certain other employees and engagement
contracts with certain consultants include provisions for a portion of each employee’s salaries or consultant’s fees
to be paid via the issuance of shares of the Company’s Common Stock, in lieu of cash, with the valuation of such shares being
calculated on a quarterly basis and equal to the simple average of the closing price of the Company’s Common Stock for the
quarter then ended.
During the nine months
ended December 31, 2020, the Company issued 646,336 shares of Common Stock in payment of salaries totaling $56,250 pursuant to
the employment contract of the Company’s Executive Vice President of Operations and with such salaries being earned and accrued
over the thirty-month period beginning on January 1, 2018 and ending on June 30, 2020.
During the nine months
ended December 31, 2020, the Company accrued salaries totaling $597,500 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 8,492,964 shares of Common
Stock.
As of December 31,
2020, the Company owed its President and Chief Executive Officer, Chief Financial Officer and certain other employees’ salaries
totaling $2,858,750 which will be paid via the issuance of 32,753,296 shares of Common Stock.
During the nine months
ended December 31, 2020, the Company issued 1,931,891 shares of Common Stock in payment of consulting fees totaling $161,033, pursuant
to engagement contracts with a certain consultant, and with such consulting expenses being earned and accrued over the twenty seven
month period beginning on January 1, 2018 and ending March 31, 2020.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Options
Under its 2014 Stock
Option Plan and prior options plans, the Company may grant stock options to officers, selected employees, as well as members of
the Board of Directors and advisory board members. All options have generally been granted at a price equal to or greater than
the fair market value of the Company’s Common Stock at the date of the grant. Generally, options are granted with a vesting
period of up to three years and expire ten years from the date of grant. A summary of the activity of Company’s 2014 Stock
Option Plan for the nine months ended December 31, 2020 is as follows:
|
|
Shares
Underlying
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual
Term
(in years)
|
|
|
Aggregate Intrinsic
Value
|
|
Outstanding at April 1, 2020
|
|
|
5,375,000
|
|
|
$
|
0.14
|
|
|
|
4.1
|
|
|
$
|
6,000
|
|
Forfeited and expired
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
5,300,000
|
|
|
$
|
0.14
|
|
|
|
3.6
|
|
|
$
|
6,000
|
|
Exercisable at December 31, 2020
|
|
|
5,220,001
|
|
|
$
|
0.14
|
|
|
|
3.6
|
|
|
$
|
6,000
|
|
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’s Common Stock as of December 31, 2020 and March 31, 2020 of $0.09 and $0.07, respectively.
NOTE 14. CONCENTRATIONS AND CREDIT RISK
Revenues
Two customers accounted
for approximately 93% of the Company’s revenues for the nine months ended December 31, 2020. These two customers accounted
for approximately 79% and 14% of revenues each, respectively. The same two customers accounted for 82% and 12% of revenues each,
respectively, for the three months ended December 31, 2020.
Three customers accounted
for approximately 94% of the Company’s revenues for the nine months ended December 31, 2019. These three customers accounted
for approximately 57%, 24%, and 13% of revenues each, respectively. The same three customers accounted for approximately 69%, 12%
and 13% of revenues each for three months ended December 31, 2019.
Accounts Receivable
Two customers accounted
for approximately 94% of the Company’s accounts receivable as of December 31, 2020. These two customers accounted for
approximately 88% and 6% of accounts receivable each, respectively.
Four customers accounted
for substantially all the Company’s accounts receivable as of March 31, 2020. These four customers accounted for approximately
73%, 13%, 8%, and 5% of accounts receivable each, respectively.
Purchasing
Four suppliers accounted
for more than 81% of the Company’s purchases of raw materials for the nine months ended December 31, 2020. These four suppliers
accounted for approximately 59%, 12%, 5% and 5% of purchases each, respectively.
Eight suppliers accounted
for more than 85% of the Company’s purchases of raw materials for the nine months ended December 31, 2019. Included in these
seven suppliers were three suppliers accounting for approximately 34%, 25%, and 11% of purchases each, respectively.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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 ANDAs for generic products and NDAs for branded products. The Company identified its reporting
segments based on the marketing authorization relating to each and the financial information used by its chief operating decision
maker to make decisions regarding the allocation of resources to and the financial performance of the reporting segments.
Asset information by
operating segment is not presented below since the chief operating decision maker does not review this information by segment.
The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated
financial statements. Disaggregated revenue by reportable segments is included within Note 1.
The following represents
selected information for the Company’s reportable segments:
|
|
For the Three Months Ended
December 31,
|
|
|
For the Nine Months Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating Income by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
ANDA
|
|
$
|
2,395,955
|
|
|
$
|
2,431,906
|
|
|
$
|
6,446,116
|
|
|
$
|
2,538,560
|
|
NDA
|
|
|
(10,972
|
)
|
|
|
135,500
|
|
|
|
142,812
|
|
|
|
407,245
|
|
|
|
$
|
2,384,983
|
|
|
$
|
2,567,406
|
|
|
$
|
6,588,928
|
|
|
$
|
2,945,805
|
|
The table below reconciles
the Company’s operating income by segment to income (loss) from operations before income taxes as reported in the Company’s
unaudited condensed consolidated statements of operations.
|
|
For the Three Months Ended
December 31,
|
|
|
For the Nine Months Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating income by segment
|
|
$
|
2,384,983
|
|
|
$
|
2,567,406
|
|
|
$
|
6,588,928
|
|
|
$
|
2,945,805
|
|
Corporate unallocated costs
|
|
|
(830,042
|
)
|
|
|
(739,790
|
)
|
|
|
(1,691,578
|
)
|
|
|
(1,738,579
|
)
|
Interest income
|
|
|
98
|
|
|
|
2,334
|
|
|
|
463
|
|
|
|
10,667
|
|
Interest expense and amortization of debt issuance costs
|
|
|
(79,673
|
)
|
|
|
(94,515
|
)
|
|
|
(238,857
|
)
|
|
|
(283,649
|
)
|
Depreciation and amortization expense
|
|
|
(328,899
|
)
|
|
|
(323,368
|
)
|
|
|
(990,861
|
)
|
|
|
(986,001
|
)
|
Significant non-cash items
|
|
|
(217,901
|
)
|
|
|
(213,052
|
)
|
|
|
(686,000
|
)
|
|
|
(532,267
|
)
|
Change in fair value of derivative instruments
|
|
|
1,083,566
|
|
|
|
(3,059,695
|
)
|
|
|
1,645,042
|
|
|
|
(2,590,695
|
)
|
Income (loss) from operations before income taxes
|
|
$
|
2,012,132
|
|
|
$
|
(1,860,680
|
)
|
|
$
|
4,627,137
|
|
|
$
|
(3,174,719
|
)
|
NOTE 16. RELATED PARTY AGREEMENTS WITH MIKAH PHARMA, LLC
On December 3, 2018,
the Company executed a development agreement with Mikah pursuant to which Mikah and the Company will collaborate to develop and
commercialize generic products including formulation development, analytical method development, bioequivalence studies and manufacture
of development batches of generic products. As of the date of this report, the Company has incurred costs which are $229,451 in
excess of advanced payments received to date from Mikah. This balance due from Mikah is included in the financial statement line
of prepaid expenses and other current assets on the accompanying consolidated balance sheet.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 17. INCOME TAXES
Sale of New Jersey Net Operating
Loss and R&D Tax Credits
In April 2020, Elite
Laboratories Inc., a wholly owned subsidiary of Elite Pharmaceuticals Inc., received final approval from the New Jersey Economic
Development Authority for the sale of net tax benefits of $607,635 relating to New Jersey net operating losses and net tax benefits
of $338,772, relating to R&D tax credits. The Company sold the net tax benefits approved for sale for total proceeds of $946,407,
which is captured within the Income tax benefit (expense) line item on the Company’s Condensed Consolidated Statement of
Operations.
NOTE 18. COVID-19 UPDATE
In December 2019, the
Novel Corona Virus, COVID-19 was reported to have emerged in Wuhan, China. In March 2020, the World Health Organization (“WHO”)
declared the COVID-19 outbreak a global pandemic. Governments at the national, state and local level in the United States, and
globally, have implemented aggressive actions to reduce the spread of the virus, with such actions including, without limitation,
lockdown and shelter in place orders, limitations on non-essential gatherings of people, suspension of all non-essential travel,
and ordering certain businesses and governmental agencies to cease non-essential operations at physical locations. Under current
and applicable laws and regulations, the Company’s business is deemed essential and it has continued to operate in all aspects
of its pharmaceutical manufacturing, distribution, product development, regulatory compliance, and other activities. The Company’s
management has developed and implemented a range of measures to address the risks, uncertainties, and operational challenges associated
with operating in a COVID-19 environment. The Company is closely monitoring the rapidly evolving and changing situation and are
implementing plans intended to limit the impact of COVID-19 on our business so that the Company can continue to manufacture those
medicines used by end user patients. Actions the Company has taken to date are, without limitation, further described below.
Workforce
The Company has taken
and will continue to take, proactive measures to provide for the well-being of its workforce while continuing to safely produce
pharmaceutical products. The Company has implemented alternative working practices, which include, without limitation, modified
schedules, shift rotation and work at home abilities for appropriate employees to best ensure adequate social distancing. In addition,
the Company increased its already thorough cleaning protocols throughout its facilities and has prohibited visits from non-essential
visitors. Certain of these measures have resulted in increased costs.
Manufacturing and Supply Chain
During the three and
nine months ended December 31, 2020, and as of the date of this Quarterly Report on Form 10-Q, the Company has not experienced
material, detrimental issues related to COVID-19 in its manufacturing, supply chain, quality assurance and regulatory compliance
activities, and has been able to operate without interruption. The Company has taken, and plans to continue to take, commercially
practical measures to keep its facilities open. The Company’s supply chains remain intact and operational, and the Company
is in regular communications with its suppliers and third-party partners. A prolonging of the current situation relating to COVID-19
may result in an increased risk of interruption in the Company supply chain in the future, with no assurances given as the materiality
of such future interruption on the Company’s business, financial condition, results of operations and cash flows.
NOTE 19. SUBSEQUENT EVENTS
Forgiveness of Payroll Protection
Program Loan
On January 12, 2021,
the Company received notification that the United States Small Business Administration (“SBA”), had approved, in full,
the Company’s application for forgiveness of amounts received pursuant to the CARES Act and the Program.