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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2021

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM _______________ TO _______________

 

COMMISSION FILE NUMBER: 001-15697

 

ELITE PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)

 

nevada   22-3542636

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

165 LUDLOW AVENUE

NORTHVALE, new jersey

  07647
(Address of principal executive offices)   (Zip Code)

 

(201) 750-2646
(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date: shares of 1,011,381,988 Common Stock were issued, and 1,011,281,988 shares of Common Stock were outstanding as of February11, 2022.

 

 

  

 

 

 

Table of Contents

 

    PAGE
PART I FINANCIAL INFORMATION F-1
     
ITEM 1. Financial Statements F-1
  Condensed Consolidated Balance Sheets as of December31, 2021 (Unaudited) and March 31, 2021 (Audited) F-1
  Condensed Consolidated Statement of Operations for the Three and Nine Months Ended December 31, 2021 and 2020 (Unaudited) F-2
  Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Three and Nine Months Ended December 31, 2021 and 2020 (Unaudited) F-3
  Condensed Consolidated Statement of Cash Flows for the Nine Months Ended December 31, 2021 and 2020 (Unaudited) F-5
  Notes to the Unaudited Condensed Consolidated Financial Statements F-6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 1
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 8
ITEM 4. Controls and Procedures 8
     
PART II OTHER INFORMATION 10
     
ITEM 1. Legal Proceedings 10
ITEM 1A. Risk Factors 10
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 10
ITEM 3. Defaults Upon Senior Securities 10
ITEM 4. Mine Safety Disclosures 10
ITEM 5. Other Information 10
ITEM 6. Exhibits 11
     
SIGNATURES 12

 

ii

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

    December 31, 2021     March 31, 2021  
    (Unaudited)     (Audited)  
ASSETS                
Current assets:                
Cash   $ 7,288,456     $ 3,192,768  
Accounts receivable, net of allowance for doubtful accounts of $-0-, respectively     2,661,413       3,496,376  
Inventory     6,694,070       5,012,902  
Prepaid expenses and other current assets     831,074       492,621  
Total current assets     17,475,013       12,194,667  
                 
Property and equipment, net of accumulated depreciation of $13,051,288 and $12,153,626, respectively     5,986,090       6,649,365  
                 
Intangible assets, net of accumulated amortization of $-0-, respectively     6,634,035       6,634,035  
                 
Operating lease - right-of-use asset     1,082,168       214,674  
                 
Other assets:                
Restricted cash - debt service for NJEDA bonds     405,027       405,013  
Security deposits     364,563       91,738  
Total other assets     769,590       496,751  
Total assets   $ 31,946,896     $ 26,189,492  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 1,284,334     $ 929,690  
Accrued expenses     4,026,300       4,270,600  
Deferred revenue, current portion     13,333       13,333  
Bonds payable, current portion, net of bond issuance costs     100,822       95,822  
Loans payable, current portion     299,601       314,996  
Lease obligation - operating lease, current portion     153,813       188,090  
Total current liabilities     5,878,203       5,812,531  
                 
Long-term liabilities:                
Deferred revenue, net of current portion     35,559       45,558  
Bonds payable, net of current portion and bond issuance costs     1,136,303       1,240,668  
Loans payable, net of current portion     296,696       500,066  
Lease obligation - operating lease, net of current portion     933,542       38,866  
Derivative financial instruments - warrants     838,852       2,362,246  
Other long-term liabilities     38,187       37,628  
Total long-term liabilities     3,279,139       4,225,032  
Total liabilities     9,157,342       10,037,563  
Shareholders’ equity:                
Series J convertible preferred stock; par value of $0.01; 50 shares authorized; 0 issued and outstanding as of December 31, 2021 and March 31, 2021            
Common Stock; par value $0.001; 1,445,000,000 shares authorized; 1,011,381,988 shares issued and 1,011,281,988 shares outstanding as of December 31, 2021; 1,009,276,752 shares issued and 1,009,176,752 shares outstanding as of March 31, 2021     1,011,385       1,009,279  
Additional paid-in capital     164,573,491       164,407,480  
Treasury stock; 100,000 shares as of December 31, 2021 and March 31, 2021; at cost     (306,841 )     (306,841 )
Accumulated deficit     (142,488,481 )     (148,957,989 )
Total shareholders’ equity     22,789,554       16,151,929  
Total liabilities and shareholders’ equity   $ 31,946,896     $ 26,189,492  

 

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

 

F- 1

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

 

    2021     2020     2021     2020  
    For the Three Months Ended December 31,     For the Nine Months Ended December 31,  
    2021     2020     2021     2020  
Revenue:                                
Manufacturing fees     7,667,674     $ 4,849,871     $ 20,639,421     $ 17,659,834  
Licensing fees     1,307,140       1,196,711       3,950,623       3,325,384  
Total revenue     8,974,814       6,046,582       24,590,044       20,985,218  
Cost of manufacturing     4,957,150       2,643,175       13,209,430       10,984,021  
Gross profit     4,017,664       3,403,407       11,380,614       10,001,197  
                                 
Operating expenses:                                
Research and development     956,628       1,245,669       3,312,540       3,337,287  
General and administrative     929,547       826,019       2,930,126       2,491,762  
Non-cash compensation through issuance of stock options     3,630       1,651       10,617       9,261  
Depreciation and amortization     296,559       328,899       908,297       990,861  
Total operating expenses     2,186,364       2,402,238       7,161,580       6,829,171  
                                 
Income from operations     1,831,300       1,001,169       4,219,034       3,172,026  
                                 
Other income, net:                                
Change in fair value of derivative instruments     489,500       1,083,566       1,523,394       1,645,042  
Interest expense and amortization of debt issuance costs     (37,400 )     (79,673 )     (126,376 )     (238,857 )
Gain on sale of fixed assets           6,973             48,463  
Interest income     13       98       77       463  
Other income, net     452,113       1,010,964       1,397,095       1,455,111  
                                 
Income from operations before income taxes     2,283,413       2,012,133       5,616,129       4,627,137  
                                 
Income tax expense                 (4,000 )     (2,500 )
                                 
Net benefit for sale of state net operating losses and credits                 857,379       946,407  
                                 
Net income attributable to common shareholders   $ 2,283,413     $ 2,012,133     $ 6,469,508     $ 5,571,044  
                                 
Basic net income per share attributable to common shareholders   $ 0.00     $ 0.00     $ 0.01     $ 0.01  
                                 
Diluted net income per share attributable to common shareholders   $ 0.00     $ 0.00     $ 0.00     $ 0.01  
                                 
Basic weighted average Common Stock outstanding     1,011,281,988       1,009,176,752       1,010,416,823       921,339,333  
                                 
Diluted weighted average Common Stock outstanding     1,011,281,988       1,009,176,752       1,010,416,823       921,339,333  

 

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

 

F- 2

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

    Shares     Amount     Shares     Amount     Capital     Shares     Amount     Deficit     Equity  
    Series J Preferred Stock     Common Stock    

Additional

Paid-In 

    Treasury Stock     Accumulated     Total Shareholders’  
    Shares     Amount     Shares     Amount     Capital     Shares     Amount     Deficit     Equity  
Balance as of March 31, 2021         $       1,009,276,752     $ 1,009,279     $ 164,407,480       100,000     $ (306,841 )   $ (148,957,989 )   $ 16,151,929  
                                                                         
Net income                                               2,389,118       2,389,118  
                                                                         
Non-cash compensation through the issuance of employee stock options                             2,811                         2,811  
                                                                         
Shares issued in payment of salaries                 2,105,236       2,106       155,394                         157,500  
                                                                         
Balance at June 30, 2021         $       1,011,381,988     $ 1,011,385     $ 164,565,685       100,000     $ (306,841 )   $ (146,568,871 )   $ 18,701,358  
                                                                         
Net income         $           $     $           $     $ 1,796,977       1,796,977  
                                                                         
Non-cash compensation through the issuance of employee stock options                             4,176                         4,176  
                                                                         
Balance at September 30, 2021         $       1,011,381,988     $ 1,011,385     $ 164,569,861       100,000     $ (306,841 )   $ (144,771,894 )   $ 20,502,511  
                                                                         
Net income         $           $     $           $     $ 2,283,413     $ 2,283,413  
                                                                         
Non-cash compensation through the issuance of employee stock options         $           $     $ 3,630           $     $     $ 3,630  
                                                                         
Balance at December 31, 2021         $       1,011,381,988     $ 1,011,385     $ 164,573,491       100,000     $ (306,841 )   $ (142,488,481 )   $ 22,789,554  

 

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

 

F- 3

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

(continued)  

Series J

Preferred Stock

    Common Stock     Additional Paid-In     Treasury Stock     Accumulated     Total Shareholders’  
    Shares     Amount     Shares     Amount     Capital     Shares     Amount     Deficit     Equity  
Balance as of March 31, 2020     24     $ 13,903,960       840,504,367     $ 840,507     $ 150,264,605       100,000     $ (306,841 )   $ (154,046,410 )   $ 10,655,821  
                                                                         
Net income                                               1,077,349       1,077,349  
                                                                         
Non-cash compensation through the issuance of employee stock options                             5,521                         5,521  
                                                                         
Shares issued in payment of salaries         $       574,597     $ 574     $ 49,426           $     $       50,000  
                                                                         
Balance at June 30, 2020     24     $ 13,903,960       841,078,964     $ 841,081     $ 150,319,552       100,000     $ (306,841 )   $ (152,969,061 )   $ 11,788,691  
                                                                         
Net income                                               2,481,562       2,481,562  
                                                                         
Conversion of Preferred Stock to Common Stock     (24 )     (13,903,960 )     158,017,321       158,017       13,745,943                          
                                                                         
Initial commitment shares issued pursuant to the 2020 Lincoln Park purchase agreement                 5,975,857       5,976       463,129                         469,105  
                                                                         
Common Stock sold pursuant to the 2020 Lincoln Park purchase agreement                 640,543       641       41,582                         42,223  
                                                                         
Common Stock issued as additional commitment shares pursuant to the 2020 Lincoln Park purchase agreement                 10,094       10       722                         732  
                                                                         
Costs associated with raising capital                             (469,837 )                       (469,837 )
                                                                         
Non-cash compensation through the issuance of employee stock options                             2,089                         2,089  
                                                                         
Shares issued in payment of Director fees                 1,550,343       1,551       133,449                         135,000  
                                                                         
Shares issued in payment of salaries                 71,739       71       6,179                         6,250  
                                                                         
Shares issued in payment of consulting expenses                 1,931,891       1,932       159,101                         161,033  
                                                                         
Balance at September 30, 2020         $       1,009,276,752     $ 1,009,279     $ 164,401,909       100,000     $ (306,841 )   $ (150,487,499 )   $ 14,616,848  
                                                                         
Net income         $           $     $           $     $ 2,012,133     $ 2,012,133  
                                                                         
Non-cash compensation through the issuance of employee stock options         $           $     $ 1,651           $     $     $ 1,651  
                                                                         
Balance at December 31, 2020         $       1,009,276,752     $ 1,009,279     $ 164,403,560       100,000     $ (306,841 )   $ (148,475,366 )   $ 16,630,632  

 

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

 

F- 4

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

    2021     2020  
    For the Nine Months Ended December 31,  
    2021     2020  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net income   $ 6,469,508     $ 5,571,044  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization     908,297       990,861  
Amortization of operating leases - right-of-use assets     175,306       150,897  
Gain on the disposal of property and equipment           (48,463 )
Change in fair value of derivative financial instruments - warrants     (1,523,394 )     (1,645,042 )
Non-cash compensation accrued     641,664       676,740  
Non-cash compensation through the issuance of employee stock options     10,617       9,261  
Non-cash rent expense and lease accretion     559       1,626  
Change in operating assets and liabilities:                
Accounts receivable     834,963       810,639  
Inventory     (1,681,168 )     (659,535 )
Prepaid expenses and other current assets     (367,154 )     (173,142 )
Accounts payable, accrued expenses and other current liabilities     (373,820 )     (1,417,530 )
Deferred revenue and customer deposits     (9,999 )     (170,000 )
Lease obligations - operating leases     (182,401 )     (154,127 )
Net cash provided by operating activities     4,902,978       3,943,229  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of property and equipment     (234,387 )     (145,079 )
Proceeds from disposal of property and equipment           67,200  
Net cash used in investing activities     (234,387 )     (77,879 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Payment of bond principal     (110,000 )     (105,000 )
Other loan payments     (462,889 )     (534,793 )
Proceeds from the issuance of Common Stock           42,223  
Other loan proceeds           1,013,480  
Net cash (used in) provided by financing activities     (572,889 )     415,910  
                 
Net change in cash and restricted cash     4,095,702       4,281,260  
                 
Cash and restricted cash, beginning of period     3,597,781       1,536,530  
                 
Cash and restricted cash, end of period   $ 7,693,483     $ 5,817,790  
                 
Supplemental disclosure of cash and non-cash transactions:                
Cash paid for interest   $ 126,376     $ 239,940  
Financing of equipment purchases and insurance renewal   $ 244,124     $ 410,141  
Stock issued in payment of Directors fees, salaries and consulting expenses   $ 157,500     $ 352,283  
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets   $ 1,042,800     $  
Commitment shares issued to Lincoln Park Capital   $     $ 469,837  
Conversion of preferred stock to Common Stock   $     $ 13,903,960  

 

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

 

F- 5

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Overview

 

Elite Pharmaceuticals, Inc. (the “Company” or “Elite”) was incorporated on October 1, 1997 under the laws of the State of Delaware, and its wholly owned subsidiary Elite Laboratories, Inc. (“Elite Labs”) 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 Labs. 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, 2021 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.

 

F- 6

 

 

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.

 

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.

 

F- 7

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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, 2021.

 

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,  
    2021     2020     2021     2020  
NDA:                                
Manufacturing fees   $ 7,667,674     $ 4,849,871     $ 20,639,421     $ 17,659,834  
Licensing fees   $     $     $     $ 166,167  
Total NDA revenue                       166,167  
ANDA:                                
Manufacturing fees   $ 7,667,674     $ 4,849,871     $ 20,639,421     $ 17,659,834  
Licensing fees     1,307,140       1,196,711       3,950,623       3,159,217  
Total ANDA revenue     8,974,814       6,046,582       24,590,044       20,819,051  
Total revenue   $ 8,974,814     $ 6,046,582     $ 24,590,044     $ 20,985,218  

 

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.

 

F- 8

 

 

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, 2021, and March 31, 2021, the Company had $405,027 and $405,013 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, 2021, the Company did not identify any indicators of impairment.

 

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

 

F- 9

 

 

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, 2021, 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, 2013 and forward. The Company did not record unrecognized tax positions for the three and nine months ended December 31, 2021 and 2020.

 

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.

 

F- 10

 

 

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 average closing price of the Company’s Common Stock.

 

Earnings Per Share Attributable to Common Shareholders

 

The Company follows ASC 260, Earnings Per Share, which requires presentation of basic and diluted earnings 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 per share is computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the period. The computation of diluted net income per share does not include the conversion of securities that would have an antidilutive effect.

 

The following is the computation of earnings per share applicable to common shareholders for the periods indicated:

    2021     2020     2021     2020  
    For the Three Months Ended December 31,     For the Nine Months Ended December 31,  
    2021     2020     2021     2020  
Numerator                                
Net income - basic   $ 2,283,413     $ 2,012,133     $ 6,469,508     $ 5,571,044  
Effect of dilutive instrument on net income     (489,500 )           (1,523,394 )      
Net income - diluted   $ 1,793,913     $ 2,012,133     $ 4,946,114     $ 5,571,044  
                                 
Denominator                                
Weighted average shares of Common Stock outstanding - basic     1,011,281,988       1,009,176,752       1,010,416,823       921,339,333  
                                 
Dilutive effect of stock options and convertible securities                        
                                 
Weighted average shares of Common Stock outstanding - diluted     1,011,281,988       1,009,176,752       1,010,416,823       921,339,333  
                                 
Net income per share                                
Basic   $ 0.00     $ 0.00     $ 0.01     $ 0.01  
Diluted   $ 0.00     $ 0.00     $ 0.00     $ 0.01  

 

Fair Value of Financial Instruments

 

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) provides a framework for measuring fair value in accordance with generally accepted accounting principles.

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).

 

F- 11

 

 

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:

          Fair Value Measurement Using  
    Amount at Fair Value     Level 1     Level 2     Level 3  
December 31, 2021                                
Liabilities                                
Derivative financial instruments - warrants   $ 838,852     $     $     $ 838,852  
                                 
March 31, 2021                                
Liabilities                                
Derivative financial instruments - warrants   $ 2,362,246     $     $     $ 2,362,246  

 

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.

 

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.

 

F- 12

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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, 2021     March 31, 2021  
Finished goods   $ 579,336     $ 274,603  
Work-in-progress     966       781,350  
Raw materials     6,113,768       3,956,949  
  Inventory, net   $ 6,694,070     $ 5,012,902  

 

NOTE 3. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

    December 31, 2021     March 31, 2021  
Land, building and improvements   $ 5,456,523     $ 5,456,523  
Laboratory, manufacturing, warehouse and transportation equipment     12,753,553       12,580,457  
Office equipment and software     373,601       373,601  
Furniture and fixtures     453,701       392,410  
      19,037,378       18,802,991  
Less: Accumulated depreciation     (13,051,288 )     (12,153,626 )
    $ 5,986,090     $ 6,649,365  

 

Depreciation expense was $293,014 and $505,987 for the three months ended, and $897,662 and $980,227 for the nine months ended December 31, 2021 and 2020, respectively.

 

NOTE 4. INTANGIBLE ASSETS

 

The following table summarizes the Company’s intangible assets:

    December 31, 2021
    Estimated Useful Life   Gross Carrying Amount     Additions     Reductions     Accumulated Amortization     Net Book 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, 2021
    Estimated Useful Life   Gross Carrying Amount     Additions     Reductions     Accumulated Amortization     Net Book Value  
Patent application costs   *   $ 465,684     $     $     $     $ 465,684  
ANDA acquisition costs   Indefinite     6,168,351                         6,168,351  
        $ 6,634,035     $     $     $     $ 6,634,035  

 

F- 13

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

* 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.

 

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

    December 31, 2021     March 31, 2021  
Gross bonds payable                
NJEDA Bonds - Series A Notes   $ 1,360,000     $ 1,470,000  
Less: Current portion of bonds payable (prior to deduction of bond offering costs)     (115,000 )     (110,000 )
Long-term portion of bonds payable (prior to deduction of bond offering costs)   $ 1,245,000     $ 1,360,000  
                 
Bond offering costs   $ 354,454     $ 354,454  
Less: Accumulated amortization     (231,579 )     (220,944 )
Bond offering costs, net   $ 122,875     $ 133,510  
                 
Current portion of bonds payable - net of bond offering costs                
Current portions of bonds payable   $ 115,000     $ 110,000  
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   $ 100,822     $ 95,822  
                 
Long term portion of bonds payable - net of bond offering costs                
Long term portion of bonds payable     1,245,000     $ 1,360,000  
Less: Bond offering costs to be amortized subsequent to the next 12 months     (108,697 )     (119,332 )
Long term portion of bonds payable, net of bond offering costs   $ 1,136,303     $ 1,240,668  

 

Amortization expense was $3,545 and $3,544 for the three months ended, and $10,635 and $10,634 for the nine months ended December 31, 2021 and 2020, respectively. As of December 31, 2021 and March 31, 2021, interest payable was $29,467 and $7,963, respectively.

 

F- 14

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 6. LOANS PAYABLE

 

Loans payable consisted of the following:

    December 31, 2021     March 31, 2021  
Equipment and insurance financing loans payable, between 3.5% and 12.73% interest and maturing between December 2021 and October 2025   $ 596,297     $ 815,062  
Less: Current portion of loans payable     (299,601 )     (314,996 )
Long-term portion of loans payable   $ 296,696     $ 500,066  

 

The interest expense associated with the loans payable was $14,692 and $19,422 for the three months ended, and $50,290 and $58,062 for the nine months ended December 31, 2021 and 2020, 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 “Mikah 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 Mikah Note matured on December 31, 2020 and was retired at par in March 2021. The principal amount of $1,200,000 was repaid by the Company at maturity.

 

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. A total of $435,000 in accrued interest expense, representing interest expense accrued during the life of the Mikah Note, was due and owing as of the maturity date of the Mikah Note. Of the $435,000 accrued interest due at maturity, $435,000 of accrued interest was satisfied by offset against amounts due from Mikah pursuant to the development agreement between the Company and Mikah, dated December 3, 2018 (see Note 16).

 

NOTE 8. DEFERRED REVENUE

 

Deferred revenues in the aggregate amount of $48,892 as of December 31, 2021, were comprised of a current component of $13,333 and a long-term component of $35,559. Deferred revenues in the aggregate amount of $58,891 as of March 31, 2021, were comprised of a current component of $13,333 and a long-term component of $45,558. 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 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.

 

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”).

 

F- 15

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The 135 Ludlow Ave. modified lease includes an initial term, which expired on December 31, 2016 with two tenant renewal options of five years each, at the sole discretion of the Company. On June 22, 2016, the Company exercised the first of these renewal options, with such option including a term that begins on January 1, 2017 and expires on December 31, 2021. On June 30, 2021, the Company exercised the second of the renewal options, with such option including a term that begins on January 1, 2022 and expires on December 31, 2026.

 

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.

 

In October 2020, the Company entered into an operating lease for office space in Pompano Beach, Florida (the “Pompano Office Lease”). The Pompano Office Lease is for approximately 1,275 square feet of office space, with Elite taking occupancy on November 1, 2020. The Pompano Office includes a 3-month abatement from November 2020 through February 2021 and has a term of three years, ending on October 31, 2023.

 

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, 2021  
Assets            
Operating   Operating lease – right-of-use asset   $ 1,082,168  
Total leased assets       $ 1,082,168  
             
Liabilities            
Current            
Operating   Lease obligation – operating lease   $ 153,813  
             
Long-term            
Operating   Lease obligation – operating lease, net of current portion     933,542  
Total lease liabilities       $ 1,087,355  

 

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, 2021 and 2020 was $57,105 and $55,986, respectively, and $171,315 and $167,958 for the nine months ended December 31, 2021 and 2020, respectively. Rent expense under the Pompano Office Lease for the three and nine months ended December 31, 2021 was $6,144 and $17,688, respectively. There was no rent expense under the Pompano Office lease for the three and nine months ended December 31, 2020 as there was a rent abatement period from November 2020 through February 2021. Rent expense is recorded in general and administrative expense in the unaudited condensed consolidated statements of operations.

 

F- 16

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The table below shows the future minimum rental payments, exclusive of taxes, insurance and other costs, under the 135 Ludlow Ave. modified lease and the Pompano Office Lease:

Years ending March 31,   Amount  
2022     64,578  
2023     259,794  
2024     254,050  
2025     243,612  
2026     248,484  
Thereafter     189,144  
Total future minimum lease payments     1,259,662  
Less: interest     (172,307 )
Present value of lease payments   $ 1,087,355  

 

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, 2021  
Remaining lease term (years)        
Operating leases     7  
         
Discount rate        
Operating leases     6 %

 

The Company has an obligation for the restoration of its leased facility and the removal or dismantlement of certain property and equipment as a result of its business operation in accordance with ASC 410, Asset Retirement and Environmental Obligations – Asset Retirement Obligations. The Company records the fair value of the asset retirement obligation in the period in which it is incurred. The Company increases, annually, the liability related to this obligation. The liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the Company records either a gain or loss. As of December 31, 2021, and March 31, 2021, the Company had a liability of $38,187 and $37,628, 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, 2021.

 

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, 2021 (See Note 11).

 

F- 17

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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.

 

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, 2021     March 31, 2021  
    Warrant Shares     Weighted Average Exercise Price     Warrant Shares     Weighted Average Exercise Price  
Balance at beginning of period     79,008,661     $ 0.1521       79,008,661     $ 0.1521  
                                 
Warrants granted pursuant to the issuance of Series J convertible preferred shares                        
                                 
Warrants exercised, forfeited and/or expired, net                        
                                 
Balance at end of period     79,008,661     $ 0.1521       79,008,661     $ 0.1521  

 

On April 28, 2017, the Company entered into an Exchange Agreement 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.

 

F- 18

 

 

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 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 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, 2021     March 31, 2021  
Fair value of the Company’s Common Stock   $ 0.0331     $ 0.0610  
Volatility     74.89 %     75.18 %
Initial exercise price   $ 0.1521     $ 0.1521  
Warrant term (in years)     5.3       6.1  
Risk free rate     1.44 %     1.40 %

 

The changes in warrants (Level 3 financial instruments) measured at fair value on a recurring basis for the nine months ended December 31, 2021 were as follows:

 

Balance at March 31, 2021   $ 2,362,246  
Change in fair value of derivative financial instruments - warrants     (1,523,394 )
Balance at December 31, 2021   $ 838,852  

 

NOTE 12. SHAREHOLDERS’ EQUITY

 

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.

 

The Company did not issue any shares of its Common Stock pursuant to the 2020 LPC Purchase Agreement during the nine months ended December 31, 2021. In addition, there were no shares issued to Lincoln Park as additional commitment shares, pursuant to the 2020 LPC Agreement.

 

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.

 

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 quarterly basis and equal to the average closing price of the Company’s Common Stock.

 

F- 19

 

 

ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

During the nine months ended December 31, 2021, the Company issued 886,710 shares of Common Stock to its Directors in payment of director’s fees totaling an aggregate of $60,000 and with such aggregate director’s fees being earned and accrued over the twelve-month period beginning on April 1, 2020 and ending on March 31, 2021. In addition, the Company made cash payments totaling an aggregate of $30,000 in payment of director’s fees earned over the same twelve-month period.

 

During the nine months ended December 31, 2021, the Company accrued director’s fees totaling $67,500, which will be paid via cash payments totaling $22,500 and the issuance of 969,319 shares of Common Stock.

 

As of December 31, 2021, the Company owed its Directors a total of $22,500 in cash payments and 969,319 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 and certain other employees and engagement contracts with certain consultants include provisions for a portion of each employee’s salaries or consultant’s fees to be paid via the issuance of shares of the Company’s Common Stock, in lieu of cash, with the valuation of such shares being calculated on a quarterly basis and equal to the average closing price of the Company’s Common Stock.

 

During the nine months ended December 31, 2021, the Company issued