NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
Elite
Pharmaceuticals, Inc. (the “Company” or “Elite”) was incorporated on October 1, 1997 under the laws of
the State of Delaware, and its wholly-owned subsidiary Elite Laboratories, Inc. (“Elite Labs”) which was incorporated
on August 23, 1990 under the laws of the State of Delaware. On January 5, 2012, Elite Pharmaceuticals was reincorporated under
the laws of the State of Nevada. Elite Labs engages primarily in researching, developing and licensing proprietary orally administered,
controlled-release drug delivery systems and products with abuse deterrent capabilities and the manufacture of generic, oral dose
pharmaceuticals. The Company is equipped to manufacture controlled-release products on a contract basis for third parties and
itself, if and when the products are approved. These products include drugs that cover therapeutic areas for pain, allergy, bariatric
and infection. Research and development activities are done so with an objective of developing products that will secure marketing
approvals from the United States Food and Drug Administration (“FDA”), and thereafter, commercially exploiting such
products.
Principles
of Consolidation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles in the United States (“GAAP”) and in conformity with the instructions on Form 10-Q and Rule 8-03 of Regulation
S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited condensed
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Elite Laboratories, Inc.
All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated
financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management,
necessary for a fair presentation of such statements. The results of operations for the three months ended June 30, 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 from the development of pain management products, manufacturing of a line of generic pharmaceutical
products with approved ANDA, commercialization of products either by license and the collection of royalties, or through the manufacture
of formulations and the development of new products and the expansion of licensing agreements with other pharmaceutical companies,
including co-development projects, joint ventures and other collaborations. The Company also generates revenue through its focus
on the development of various types of drug products, including branded drug products which require NDAs.
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 recognize revenues following the five-step model prescribed under ASC 606: (i)
identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenues when (or
as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable
that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services
promised within each contract and determines those that are performance obligations and assesses whether each promised good or
service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective
performance obligation when (or as) the performance obligation is satisfied. Sales, value add, and other taxes collected on behalf
of third parties are excluded from revenue.
Nature
of goods and services
The
following is a description of the Company’s goods and services from which the Company generates revenue, as well as the
nature, timing of satisfaction of performance obligations, and significant payment terms for each, as applicable:
a)
Manufacturing Fees
The
Company is equipped to manufacture controlled-release products on a contract basis for third parties, if, and when, the products
are approved. These products include products using controlled-release drug technology and products utilizing abuse deterrent
technologies. The Company also develops and markets (either on its own or by license to other companies) generic and proprietary
controlled-release and abuse deterrent pharmaceutical products.
The
Company recognizes revenue when the customer obtains control of the Company’s product based on the contractual shipping
terms of the contract. Revenue on product are presented gross because the Company is primarily responsible for fulfilling the
promise to provide the product, is responsible to ensure that the product is produced in accordance with the related supply agreement
and bears risk of loss while the inventory is in-transit to the commercial partner. Revenue is measured as the amount of consideration
the Company expects to receive in exchange for transferring products to a customer.
b)
License Fees
The
Company enters into licensing and development agreements, which may include multiple revenue generating activities, including
milestones payments, licensing fees, product sales and services. The Company analyzes each element of its licensing and development
agreements in accordance with ASC 606 to determine appropriate revenue recognition. The terms of the license agreement may include
payment to the Company of licensing fees, non-refundable upfront license fees, milestone payments if specified objectives are
achieved, and/or royalties on product sales.
If
the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated
relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines
standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling
price is not observable through past transactions, the Company estimates the standalone selling price taking into account available
information such as market conditions and internally approved pricing guidelines related to the performance obligations.
The
Company recognizes revenue from non-refundable upfront payments at a point in time, typically upon fulfilling the delivery of
the associated intellectual property to the customer. For those milestone payments which are contingent on the occurrence of particular
future events (for example, payments due upon a product receiving FDA approval), the Company determined that these need to be
considered for inclusion in the calculation of total consideration from the contract as a component of variable consideration
using the most-likely amount method. As such, the Company assesses each milestone to determine the probability and substance behind
achieving each milestone. Given the inherent uncertainty of the occurrence of future events, the Company will not recognize revenue
from the milestone until there is not a high probability of a reversal of revenue, which typically occurs near or upon achievement
of the event.
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 June 30, 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, in accordance with GAAP. 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, in accordance with GAAP. 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 and timing of revenue recognition. The
table also includes a reconciliation of the disaggregated revenue with the reportable segments:
|
|
For the Three Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
NDA:
|
|
|
|
|
|
|
Licensing fees
|
|
$
|
166,167
|
|
|
$
|
250,000
|
|
Total NDA revenue
|
|
|
166,167
|
|
|
|
250,000
|
|
ANDA:
|
|
|
|
|
|
|
|
|
Manufacturing fees
|
|
|
6,637,239
|
|
|
|
2,927,358
|
|
Licensing fees
|
|
|
735,338
|
|
|
|
181,882
|
|
Total ANDA revenue
|
|
|
7,372,577
|
|
|
|
3,109,240
|
|
Total revenue
|
|
$
|
7,538,744
|
|
|
$
|
3,359,240
|
|
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 June 30, 2020, and March 31, 2020, the Company had $404,993 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).
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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 June 30, 2020, the Company did not identify any indicators of impairment.
Please
also see Note 4 for further details on intangible assets.
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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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 June 30, 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 months ended June 30, 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 instruments including, without limitation, any rights relating to subsequent dilutive
issuances, dividend issuances, equity sales, rights offerings, forced conversions, optional redemptions, automatic monthly conversions,
dividends and exercise are assessed with determinations made regarding the proper classification in the Company’s financial
statements.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation. Under the fair
value recognition provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award
and is recognized as an expense on a straight-line basis over the requisite service period, based on the terms of the awards.
The cost of the stock-based payments to nonemployees that are fully vested and non-forfeitable as at the grant date is measured
and recognized at that date, unless there is a contractual term for services in which case such compensation would be amortized
over the contractual term.
In
accordance with the Company’s Director compensation policy and certain employment contracts, director’s fees and a
portion of employee’s salaries are to be paid via the issuance of shares of the Company’s common stock, in lieu of
cash, with the valuation of such share being calculated on a quarterly basis and equal to the average closing price of the Company’s
common stock.
Earnings
(Loss) Per Share 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 shares does not include the conversion of securities that would have an
antidilutive effect.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The
following is the computation of earnings (loss) per share applicable to common shareholders for the periods indicated:
|
|
For the Three Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator
|
|
|
|
|
|
|
Net income attributable to common shareholders – basic
|
|
$
|
1,077,349
|
|
|
$
|
279,702
|
|
Effect of dilutive instrument on net income
|
|
|
—
|
|
|
|
(1,522,031
|
)
|
Net income (loss) attributable to common shareholders - diluted
|
|
$
|
1,077,349
|
|
|
$
|
(1,242,329
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding - basic
|
|
|
840,504,367
|
|
|
|
827,524,981
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options and convertible securities(1)
|
|
|
160,625,755
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding - diluted
|
|
|
1,001,130,122
|
|
|
|
827,524,981
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common shareholders
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
(1) Equivalent common shares
of 79,008,661 related to the conversion of warrants are excluded and 2,766,566 related to stock options from the calculation of
diluted net income per share for the three months ended June 30, 2020, since their effect is antidulitive. Equivalent common shares
of 158,017,321 related to the conversion of Series J Preferred Stock, 79,008,661 related to the conversion of warrants and 6,098,000
related to stock options are excluded from the calculation of diluted net loss per share for the three months ended June 30, 2019,
since their effect is antidilutive.
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).
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.
|
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Measured
on a Recurring Basis
The
following table presents information about our liabilities measured at fair value on a recurring basis, 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
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments – warrants
|
|
$
|
4,257,971
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,257,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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’ deficit.
Recently
Adopted Accounting Pronouncements
In
November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (ASC 808), Clarifying the Interaction between ASC 808 and
ASC 606 (“ASU 2018-18”). The ASU clarifies when transactions between collaborative participants are in the scope of
ASC 606. The ASU also provides some guidance on presentation of transactions not in the scope of ASC 606. ASU 2018-18 is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal
years, and interim periods within those years. The Company is not materially impacted by the implementation of this pronouncement.
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses”. 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE
2. INVENTORY
Inventory
consisted of the following:
|
|
June 30,
2020
|
|
|
March 31,
2020
|
|
Finished goods
|
|
$
|
141,338
|
|
|
$
|
138,981
|
|
Work-in-progress
|
|
|
119,375
|
|
|
|
677,824
|
|
Raw materials
|
|
|
5,305,690
|
|
|
|
3,325,667
|
|
|
|
|
5,566,403
|
|
|
|
4,142,472
|
|
Less: Inventory reserve
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
5,566,403
|
|
|
$
|
4,142,472
|
|
NOTE
3. PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following:
|
|
June 30,
2020
|
|
|
March 31,
2020
|
|
Land, building and improvements
|
|
$
|
5,277,073
|
|
|
$
|
5,260,524
|
|
Laboratory, manufacturing, warehouse and transportation equipment
|
|
|
12,333,373
|
|
|
|
12,167,754
|
|
Office equipment and software
|
|
|
373,601
|
|
|
|
373,601
|
|
Furniture and fixtures
|
|
|
383,103
|
|
|
|
383,103
|
|
|
|
|
18,367,150
|
|
|
|
18,184,982
|
|
Less: Accumulated depreciation
|
|
|
(11,224,823
|
)
|
|
|
(10,957,334
|
)
|
|
|
$
|
7,142,327
|
|
|
$
|
7,227,648
|
|
Depreciation expense was
$324,071 and $327,408 for the three months ended June 30, 2020 and 2019, respectively.
NOTE
4. INTANGIBLE ASSETS
The
following table summarizes the Company’s intangible assets:
|
|
June 30, 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
|
|
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
|
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.
The
following tables summarize the Company’s bonds payable liability:
|
|
June 30,
2020
|
|
|
March 31,
2020
|
|
Gross bonds payable
|
|
|
|
|
|
|
NJEDA Bonds - Series A Notes
|
|
$
|
1,575,000
|
|
|
$
|
1,575,000
|
|
Less: Current portion of bonds payable (prior to deduction of bond offering costs)
|
|
|
(105,000
|
)
|
|
|
(105,000
|
)
|
Long-term portion of bonds payable (prior to deduction of bond offering costs)
|
|
$
|
1,470,000
|
|
|
$
|
1,470,000
|
|
|
|
|
|
|
|
|
|
|
Bond offering costs
|
|
$
|
354,454
|
|
|
$
|
354,454
|
|
Less: Accumulated amortization
|
|
|
(210,310
|
)
|
|
|
(206,765
|
)
|
Bond offering costs, net
|
|
$
|
144,144
|
|
|
$
|
147,689
|
|
|
|
|
|
|
|
|
|
|
Current portion of bonds payable - net of bond offering costs
|
|
|
|
|
|
|
|
|
Current portions of bonds payable
|
|
$
|
105,000
|
|
|
$
|
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
|
|
$
|
90,822
|
|
|
$
|
90,822
|
|
|
|
|
|
|
|
|
|
|
Long term portion of bonds payable - net of bond offering costs
|
|
|
|
|
|
|
|
|
Long term portion of bonds payable
|
|
|
1,470,000
|
|
|
$
|
1,470,000
|
|
Less: Bond offering costs to be amortized subsequent to the next 12 months
|
|
|
(129,966
|
)
|
|
|
(133,511
|
)
|
Long term portion of bonds payable, net of bond offering costs
|
|
$
|
1,340,034
|
|
|
$
|
1,336,489
|
|
Amortization
expense was $3,545 for the three months ended June 30, 2020 and 2019.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE
6. LOANS PAYABLE
Loans
payable consisted of the following:
|
|
June 30,
2020
|
|
|
March 31, 2020
|
|
Equipment and insurance financing loans payable, between 3.5% and 12.73% interest and maturing between July 2020 and December 2023
|
|
$
|
1,062,389
|
|
|
$
|
1,025,452
|
|
Loans received
pursuant to the Payroll Protection Program Term Note
|
|
|
1,013,480
|
|
|
|
—
|
|
Less: Current portion of loans payable
|
|
|
(479,864
|
)
|
|
|
(561,550
|
)
|
Long-term portion of loans payable
|
|
$
|
1,596,005
|
|
|
$
|
463,902
|
|
The
interest expense associated with the loans payable was $17,880 and $24,087 for the three months ended June 30, 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. The PPP Note carries a maturity date of April 2022, at a
1% interest rate. No payments are required for six months from the date of issuance. The amount of the forgiveness shall be calculated
(and may be reduced) in accordance with the requirements of the Program, including the provisions of the CARES Act. No more than
25% of the amount forgiven can be attributable to non-payroll costs, as defined in the Program.
NOTE
7. RELATED PARTY SECURED PROMISSORY NOTE WITH MIKAH PHARMA LLC
For consideration of the
assets acquired on May 15, 2017, the Company issued a Secured Promissory Note (the “Note”) to Mikah for the principal
sum of $1,200,000. The Note matures on December 31, 2020 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 June 30, 2020 and 2019. Accrued interest due and owing on this note was $375,000 and $345,000 as of June 30,
2020 and March 31, 2020, respectively.
NOTE
8. DEFERRED REVENUE
Deferred
revenues in the aggregate amount of $68,891 as of June 30, 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 licensing agreement with a fifteen-year term beginning in September 2010 and ending in August 2025
and the $5,000,000 advance payment Epic Collaborative Agreement with a five-year term beginning in June 2015 and ending in May
2020. These advance payments were recorded as deferred revenue when received and are earned, on a straight-line basis over the
life of the licenses. The current component is equal to the amount of revenue to be earned during the 12-month period immediately
subsequent to the balance date and the long-term component is equal to the amount of revenue to be earned thereafter.
NOTE
9. COMMITMENTS AND CONTINGENCIES
Occasionally,
the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records
a provision for a liability when it believes that is both probable that a liability has been incurred, and the amount can be reasonably
estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s
condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can
involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
Operating
Leases – 135 Ludlow Ave.
The
Company entered into an operating lease for a portion of a one-story warehouse, located at 135 Ludlow Avenue, Northvale, New Jersey
(the “135 Ludlow Ave. lease”). The 135 Ludlow Ave. lease is for approximately 15,000 square feet of floor space and
began on July 1, 2010. During July 2014, the Company modified the 135 Ludlow Ave. lease in which the Company was permitted to
occupy the entire 35,000 square feet of floor space in the building (“135 Ludlow Ave. modified lease”).
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.
The
135 Ludlow Ave. property required significant leasehold improvements and qualifications, as a prerequisite, for its intended future
use. Manufacturing, packaging, warehousing and regulatory activities are currently conducted at this location. Additional renovations
and construction to further expand the Company’s manufacturing resources are in progress.
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 our 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
June 30,
2020
|
|
Assets
|
|
|
|
|
|
Operating
|
|
Operating lease – right-of-use asset
|
|
$
|
313,750
|
|
Total leased assets
|
|
|
|
$
|
313,750
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating
|
|
Lease obligation – operating lease
|
|
$
|
212,447
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
Operating
|
|
Lease obligation – operating lease, net of current portion
|
|
|
112,237
|
|
Total lease liabilities
|
|
|
|
$
|
324,684
|
|
Rent
expense is recorded on the straight-line basis. Rent expense under the 135 Ludlow Ave. modified lease for the three months ended
June 30, 2020 and 2019 was $55,986 and $54,888, respectively. Rent expense is recorded in general and administrative expense in
the unaudited condensed consolidated statements of operations.
The
table below show 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
|
|
$
|
169,077
|
|
2022
|
|
|
171,315
|
|
Total future minimum lease payments
|
|
|
340,392
|
|
Less: interest
|
|
|
(15,708
|
)
|
Present value of lease payments
|
|
$
|
324,684
|
|
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
|
|
June 30,
2020
|
|
Remaining lease term (years)
|
|
|
|
Operating leases
|
|
|
1.5
|
|
|
|
|
|
|
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 June 30, 2020, and March 31, 2020, the Company had
a liability of $35,976 and $35,442, respectively and 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,
24.0344 shares are issued and outstanding, with a stated value of $1,000,000 per share and a par value of $0.01 as of June 30,
2020.
The
issued shares were pursuant to an Exchange Agreement with Nasrat Hakim, (“Hakim”) a related party and the Company’s
President, CEO and Chairman of the Board of Directors Pursuant to the Exchange Agreement the Company exchanged 158,017,321 shares
of Common Stock for 24.0344 shares of Series J Preferred and warrants to purchase 79,008,661 shares of common stock at $0.1521
per share. The aggregate stated value of the Series J Preferred issued was equal to the aggregate value of the shares of common
stock exchanged, with such value of each share of Common Stock exchanged being equal to the closing price of the Common Stock
on April 27, 2017. In connection with the Exchange Agreement, the Company also issued warrants to purchase 79,008,661 shares of
common stock at $0.1521 per share, and such warrants are classified as liabilities on the accompanying unaudited condensed consolidated
balance sheet as of June 30, 2020 (See Note 11).
Each
Series J Preferred is convertible at the option of the holder into shares of common stock. The number of common shares is calculated
by dividing the Stated Value of such share of Series J Preferred by the Conversion Price. The conversion price for the Series
J Preferred is $0.1521, subject to adjustment as discussed below.
Based
on the current conversion price, the Series J Preferred is convertible into 158,017,321 shares of common stock. The conversion
price is subject to the following adjustments: (i) stock dividends and splits, (ii) sale or grant of shares below the conversion
price, (iii) pro rata distributions; or (iv) fundamental changes (merger, consolidation, or sale of all or substantially all assets).
The
holders of the Series J Preferred shall have voting rights on any matter presented to the shareholders of the Company for their
action or consideration at any meeting of shareholders of the Company (or by written consent of shareholders in lieu of meeting).
Each holder shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares
of Series J Preferred held by the holder are convertible as of the record date for determining the shareholders entitled to vote
on such matter.
At
issuance the Company determined that the Series J Preferred host instrument was more akin to equity than debt and that the above
identified conversion feature, subject to adjustments, was clearly and closely related to the host instrument, and accordingly
bifurcation and classification of the conversion feature as a derivative liability was not required. The Company has accounted
for the Series J Preferred as contingently redeemable preferred stock for which redemption is not probable. The Series J Preferred
was initially measured at its fair value, $13,903,960 at April 28, 2017.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Increase
in Authorized Shares
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 has been reclassified from mezzanine
equity to permanent equity at its current carrying amount of $13,903,960 on the accompanying consolidated balance sheet.
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.
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:
|
|
June 30, 2020
|
|
|
March 31, 2020
|
|
|
|
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 (the “Exchange Agreement”) with Nasrat Hakim,
the Chairman of the Board, President, and Chief Executive Officer of the Company, pursuant to which the Company issued to Mr.
Hakim 23.0344 shares of its newly designated Series J Convertible Preferred Stock (“Series J Preferred”) and
Warrants to purchase an aggregate of 79,008,661 shares of its Common Stock (the “Series J Warrants” and, along with
the Series J Preferred issued to Mr. Hakim, the “Securities”) in exchange for 158,017,321 shares of Common
Stock owned by Mr. Hakim. The fair value of the Series J Warrants was determined to be $6,474,674 upon issuance at April 28, 2017.
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 warrants issued by the Company pursuant to the issuance of Series J convertible preferred shares (79,008,661
warrant shares) 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 warrants issued by the Company pursuant to the issuance of Series J convertible preferred shares (79,008,661
warrant shares):
|
|
June 30,
2020
|
|
|
March 31,
2020
|
|
Fair value of the Company’s common stock
|
|
$
|
0.0830
|
|
|
$
|
0.0720
|
|
Volatility
|
|
|
84.73
|
%
|
|
|
83.81
|
%
|
Initial exercise price
|
|
$
|
0.1521
|
|
|
$
|
0.1521
|
|
Warrant term (in years)
|
|
|
6.8
|
|
|
|
7.1
|
|
Risk free rate
|
|
|
0.49
|
%
|
|
|
0.55
|
%
|
The
changes in warrants (Level 3 financial instruments) measured at fair value on a recurring basis for the three months ended June
30, 2020 were as follows:
Balance at March 30, 2020
|
|
$
|
3,599,378
|
|
Change in fair value of derivative financial instruments - warrants
|
|
|
658,593
|
|
Balance at June 30, 2020
|
|
$
|
4,257,971
|
|
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 has the right to sell to and Lincoln Park
is obligated to purchase up to $40 million in shares of common stock, subject to certain limitations, from time to time, over
the 36-month period commencing on June 5, 2017. The Company may direct Lincoln Park, at its sole discretion and subject to certain
conditions, to purchase up to 500,000 shares of common stock on any business day, provided that at least one business day has
passed since the most recent purchase, increasing to up to 1,000,000 shares, depending upon the closing sale price of the common
stock (such purchases, “Regular Purchases”). However, in no event shall a Regular Purchase be more than $1,000,000.
The purchase price of shares of common stock related to the future funding will be based on the prevailing market prices of such
shares at the time of sales. In addition, the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases
under certain circumstances. In the case of both Regular Purchases and accelerated purchases, the purchase price per share will
be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar
transaction occurring during the business days used to compute the purchase price. Sales of shares of common stock to Lincoln
Park under the 2017 LPC Purchase Agreement are limited to no more than the number of shares that would result in the beneficial
ownership by Lincoln Park and its affiliates, at any single point in time, of more than 4.99% of the then outstanding shares of
common stock.
In
connection with the 2017 LPC Purchase Agreement, the Company issued to Lincoln Park 5,540,551 shares of common stock and is required
to issue up to 5,540,551 additional shares of Common Stock pro rata as the Company requires Lincoln Park to purchase shares under
the 2017 LPC Purchase Agreement over the term of the agreement. Lincoln Park has represented to the Company, among other things,
that it is an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act
of 1933, as amended (the “Securities Act”)). The Company sold the securities in reliance upon an exemption from registration
contained in Section 4(a)(2) under the Securities Act. The securities sold may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements.
The
2017 LPC Purchase Agreement and the 2017 LPC Registration Rights Agreement contain customary representations, warranties, agreements
and conditions to completing future sale transactions, indemnification rights and obligations of the parties. The Company has
the right to terminate the 2017 LPC Purchase Agreement at any time, at no cost or penalty. Actual sales of shares of common stock
to Lincoln Park under the 2017 LPC Purchase Agreement will depend on a variety of factors to be determined by us from time to
time, including, among others, market conditions, the trading price of the Common Stock and determinations by us as to the appropriate
sources of funding for us and our operations. There are no trading volume requirements or, other than the limitation on beneficial
ownership discussed above, restrictions under the 2017 LPC Purchase Agreement. Lincoln Park has no right to require any sales
by the Company but is obligated to make purchases from the Company as directed in accordance with the 2017 LPC Purchase Agreement.
Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of
the Company’s shares.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The
net proceeds received by the Company under the 2017 LPC Purchase Agreement will depend on the frequency and prices at which the
Company sells shares of common stock to Lincoln Park. A registration statement on form S-3 was filed with the SEC on
May 10, 2017 and was declared effective on June 5, 2017.
The
Company, from time to time and at the Company’s sole discretion but no more frequently than every other business day, could
direct Lincoln Park to purchase (a “Regular Purchase”) up to 500,000 shares of common stock on any such business day,
increasing up to 1,000,000 shares, depending upon the closing sale price of the common stock, provided that in no event shall
Lincoln Park purchase more than $760,000 worth of common stock on any single business day. The purchase price of shares of common
stock related to the future Regular Purchase funding will be based on the prevailing market prices of such shares at the time
of sales (or over a period of up to ten business days leading up to such time), but in no event, will shares be sold to Lincoln
Park on a day the Common Stock closing price is less than the floor price of $0.10 per share, subject to adjustment.
In
addition to Regular Purchases, on any business day on which the Company has properly submitted a Regular Purchase notice and the
closing sale price is not below $0.15, the Company may purchase (an “Accelerated Purchase”) an additional “accelerated
amount” under certain circumstances. The amount of any Accelerated Purchase cannot exceed the lesser of three times the
number of purchase shares purchased pursuant to the corresponding Regular Purchase; and 30% of the aggregate shares of the Company’s
common stock traded during normal trading hours on the purchase date. The purchase price per share for each such Accelerated Purchase
will be equal to the lower of (i) 97% of the volume weighted average price during the purchase date; or (ii) the closing sale
price of the Company’s common stock on the purchase date.
In
the case of both Regular Purchases and Accelerated Purchases, the purchase price per share will be equitably adjusted for any
reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction occurring during
the business days used to compute the purchase price.
Other
than as set forth above, there are no trading volume requirements or restrictions under the Purchase Agreement, and the Company
will control the timing and amount of any sales of the Company’s common stock to Lincoln Park.
The
Company’s sales of shares of common stock to Lincoln Park under the Purchase Agreement are limited to no more than the number
of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more
than 9.99% of the then outstanding shares of common stock.
The
Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, agreements, and conditions
to completing future sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate
the Purchase Agreement at any time, at no cost or penalty. Actual sales of shares of common stock to Lincoln Park under the Purchase
Agreement will depend on a variety of factors to be determined by the Company from time to time, including, without limitation,
market conditions, the trading price of the Common Stock and determinations by the Company as to appropriate sources of funding
for the Company and its operations. There are no trading volume requirements or restrictions under the Purchase Agreement. Lincoln
Park has no right to require any sales by the Company but is obligated to make purchases from the Company as it directs in accordance
with the Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect
short selling or hedging of Company shares.
During
the three months ended June 30, 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 three
months ended June 30, 2019, a total of 4,000,000 shares were sold to Lincoln Park pursuant to the 2017 LPC Agreement for net proceeds
totaling $340,300. In addition, 47,136 shares were issued to Lincoln Park as additional commitment shares, pursuant to the 2017
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 was instituted in October 2009 and further revised in January 2016, includes provisions
that a portion of director’s fees are to be paid via the issuance of shares of the Company’s common stock, in lieu
of cash, with the valuation of such shares being calculated on quarterly basis and equal to the average closing price of the Company’s
common stock.
During
the three months ended June 30, 2020, the Company did not issue any shares of common stock to its Directors in payment of director’s
fees.
During
the three months ended June 30, 2020, the Company accrued director’s fees totaling $22,500, which will be paid via cash
payments totaling $7,500 and the issuance of 179,518 shares of Common Stock.
As
of June 30, 2020, the Company owed its Directors a total of $75,000 in cash payments and 1,729,860 shares of Common Stock
in payment of director fees totaling $150,000 due and owing. The Company anticipates that these shares of Common Stock will be
issued prior to the end of the current fiscal year.
Stock-based
Employee/Consultant Compensation
Employment
contracts with the Company’s President and Chief Executive Officer, Chief Financial Officer and certain other employees
and engagement contracts with certain consultants include provisions for a portion of each employee’s salaries or consultant’s
fees to be paid via the issuance of shares of the Company’s Common Stock, in lieu of cash, with the valuation of such shares
being calculated on a quarterly basis and equal to the average closing price of the Company’s Common Stock.
During
the three months ended June 30, 2020, the Company issued 574,597 shares of Common Stock in payment of salaries totaling $50,000
pursuant to the employment contract of the Company’s Executive Vice President of Operations. During the three months ended
June 30, 2020, the Company did not issue any shares pursuant to the engagement contracts with certain consultants.
During
the three months ended June 30, 2020, the Company accrued salaries totaling $201,250 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 2,407,767
shares of Common Stock.
As
of June 30, 2020, the Company owed its President and Chief Executive Officer, Chief Financial Officer and certain other employees’
salaries totaling $2,462,500 which will be paid via the issuance of 26,668,099 shares of Common Stock.
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.
|
|
Shares
Underlying
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining Contractual
Term
(in years)
|
|
|
Aggregate Intrinsic
Value
|
|
Outstanding at March 31, 2020
|
|
|
5,375,000
|
|
|
$
|
0.14
|
|
|
|
4.1
|
|
|
$
|
6,000
|
|
Forfeited and expired
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
5,375,000
|
|
|
$
|
0.14
|
|
|
|
3.8
|
|
|
$
|
6,000
|
|
Exercisable at June 30, 2020
|
|
|
4,953,334
|
|
|
$
|
0.14
|
|
|
|
3.8
|
|
|
$
|
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 common stock as of June 30, 2020 and March 31, 2020 of $0.06 and $0.07, respectively.
NOTE
14. CONCENTRATIONS AND CREDIT RISK
Revenues
Two
customers accounted for substantially all the Company’s revenues for the three months ended June 30, 2020. These two customers
accounted for approximately 73% and 19% of revenues each, respectively.
Four customers accounted
for substantially all the Company’s revenues for the three months ended June 30, 2019. These four customers accounted for
approximately 39%, 30%, 14% and 12% of revenues each, respectively.
Accounts
Receivable
Two customers accounted
for substantially all of the Company’s accounts receivable as of June 30, 2020. These two customers accounted for approximately
70% and 14% 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
Three
suppliers accounted for more than 81% of the Company’s purchases of raw materials for the three months ended June 30, 2020.
These three suppliers accounted for approximately 63%, 14% and 4% of purchases each, respectively.
Three suppliers accounted
for more than 83% of the Company’s purchases of raw materials for the three months ended June 30, 2019. These three suppliers
accounted for approximately 49%, 19%, and 15% of purchases each, respectively.
NOTE
15. SEGMENT RESULTS
FASB
ASC 280-10-50 requires use of the “management approach” model for segment reporting. The management approach is based
on the way a company’s management organized segments within the company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner
in which management disaggregates a company.
The
Company has determined that its reportable segments are Abbreviated New Drug Applications 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The
following represents selected information for the Company’s reportable segments:
|
|
For the Three Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Operating Income (Loss) by Segment
|
|
|
|
|
|
|
ANDA
|
|
$
|
1,869,491
|
|
|
$
|
(652,395
|
)
|
NDA
|
|
|
153,784
|
|
|
|
207,704
|
|
|
|
$
|
2,023,275
|
|
|
$
|
(444,691
|
)
|
The table below reconciles
the Company’s operating income (loss) by segment to income from operations before provision for income taxes as reported
in the Company’s unaudited condensed consolidated statements of operations.
|
|
For the Three Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Operating income (loss) by segment
|
|
$
|
2,023,275
|
|
|
$
|
(444,691
|
)
|
Corporate unallocated costs
|
|
|
(585,032
|
)
|
|
|
(207,117
|
)
|
Interest income
|
|
|
276
|
|
|
|
3,046
|
|
Interest expense and amortization of debt issuance costs
|
|
|
(79,431
|
)
|
|
|
(97,670
|
)
|
Depreciation and amortization expense
|
|
|
(327,617
|
)
|
|
|
(330,953
|
)
|
Significant non-cash items
|
|
|
(241,936
|
)
|
|
|
(164,944
|
)
|
Change in fair value of derivative instruments
|
|
|
(658,593
|
)
|
|
|
1,522,031
|
|
Income from operations
|
|
$
|
130,942
|
|
|
$
|
279,702
|
|
NOTE
16. COLLABORATIVE AGREEMENT WITH EPIC PHARMA LLC
On
June 4, 2015, the Company executed an exclusive License Agreement (the “2015 SequestOx™ License Agreement”)
with Epic Pharma LLC (“Epic”), to market and sell in the U.S., SequestOx™, an immediate release oxycodone with
sequestered naltrexone capsule, owned by us. Epic will have the exclusive right to market ELI-200 and its various dosage forms
as listed in Schedule A of the Agreement. Epic is responsible for all regulatory and pharmacovigilance matters related to the
products. Pursuant to the 2015 SequestOx™ License Agreement, Epic will pay us non-refundable milestone payments totaling
$15 million, with such amount representing the cost of an exclusive license to SequestOx™, the cost of developing the product,
the filing of an NDA with the FDA and the receipt of the approval letter for the NDA from the FDA. The 2015 SequestOx™ License
Agreement expired on June 4, 2020. During the term of this agreement, the Company received $7.5 million in non-refundable payments,
with such amount consisting of $5 million due and owing on the execution date of the 2015 SequestOx™ License Agreement and
$2.5 million being earned upon the Company’s filing of an NDA with the FDA for the relevant product in January 2016. The
remaining $7.5 million in non-refundable payments required FDA approval of the relevant product, a milestone that was not achieved
prior to the expiration of the agreement.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE
17. COLLABORATIVE AGREEMENT WITH SUNGEN PHARMA LLC
On
August 24, 2016, as amended we entered into an agreement with SunGen Pharma LLC (“SunGen”) (the “SunGen Agreement”)
to undertake and engage in the research, development, sales and marketing of eight generic pharmaceutical products. Two of the
products are classified as CNS stimulants (the “CNS Products”), two of the products are classified as beta blockers
and the remaining four products consist of antidepressants, antibiotics and antispasmodics. The Company has received approval
from the FDA for Amphetamine IR Tablets, Amphetamine ER Capsules and has filed an ANDA for an antibiotic product.
Under
the terms of the SunGen Agreement, Elite and SunGen will share in the responsibilities and costs in the development of these products
and will share in the profits from sales of the Products. Upon approval, the know-how and intellectual property rights to the
products will be owned jointly by Elite and SunGen. SunGen shall have the exclusive right to market and sell the Beta Blocker
Products using SunGen’s label and Elite shall have the exclusive right to market and sell the CNS Products using Elite’s
label. Elite will manufacture and package all four products on a cost-plus basis.
On
December 10, 2018, the Company received approval from the FDA for Amphetamine IR Tablets, a generic version of Adderall®,
an immediate-release mixed salt of a single entity Amphetamine product (Dextroamphetamine Saccharate, Amphetamine Aspartate, Dextroamphetamine
Sulfate, Amphetamine Sulfate) with strengths of 5 mg, 7.5 mg, 10 mg, 12.5 mg, 15 mg, 20 mg, and 30 mg tablets. The product is
a central nervous system stimulant and is indicated for the treatment of Attention Deficit Hyperactivity Disorder (ADHD) and Narcolepsy.
The product is jointly owned by Elite and SunGen. Elite manufactures and packages this product, at the Northvale Facility, on
a cost-plus basis, and it is currently sold pursuant to the Lannett Alliance, with the first commercial shipment of this product
occurring in April 2019. Please see the section below titled “Strategic Marketing Alliance with Lannett Company Inc.”
for further details on the Lannett Alliance.
On
January 3, 2019, the Company filed an ANDA with the FDA for a generic version of an antibiotic product. According to QVIA (formerly
QuintilesIMS Health) data, the branded product for this antibiotic and its equivalents had total annual U.S. sales of approximately
$94 million for the twelve months ending September 30, 2018. The product is jointly owned by Elite and SunGen. Upon approval by
the FDA of this ANDA, Elite will manufacture and package the product on a cost-plus basis. The ANDA is currently under review
by the FDA.
On
December 12, 2019, the Company received approval from the FDA for Amphetamine ER Capsules, a generic version of Adderall XR®,
an extended-release mixed salt of a single entity Amphetamine product (Dextroamphetamine Saccharate, Amphetamine Aspartate, Dextroamphetamine
Sulfate, Amphetamine Sulfate) with strengths of 5mg, 10mg, 15mg, 20mg, 25mg and 30mg capsules. The product is a central nervous
system stimulant and is indicated for the treatment of Attention Deficit Hyperactivity Disorder (ADHD). The product is jointly
owned by Elite and SunGen. Elite manufactures and packages this product, at the Northvale Facility, on a cost-plus basis and it
is currently sold pursuant to the Lannett Alliance, with the first commercial shipment of this product occurring in March 2020.
Please see the section below titled “Strategic Marketing Alliance with Lannett Company Inc.” for further details on
the Lannett Alliance.
On
April 3, 2020, the Company and SunGen mutually agreed to discontinue any further joint product development activities.
In
May 2020, SunGen, under an asset purchase agreement, assigned its rights and obligations under the Master Development and License
Agreement for Amphetamine IR and Amphetamine ER to Mikah Pharmaceuticals. The ANDAs for Amphetamine IR and Amphetamine ER are
now registered under Elite’s name. Mikah will now be Elite’s partner with respect to Amphetamine IR and ER and will
assume all the rights and obligations for these products from SunGen.
NOTE
18. RELATED PARTY TRANSACTION AGREEMENTS WITH EPIC PHARMA LLC
The
Company has entered into two agreements with Epic which constitute agreements with a related party due to the management of Epic
including a member on our Board of Directors at the time such agreements were executed.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
On
June 4, 2015, the Company entered into the 2015 Epic License Agreement (please see Note 16 above). The 2015 Epic License Agreement
includes milestone payments totaling $10 million upon the filing with and approval of an NDA with the FDA. The Company has determined
these milestones to be substantive, with such assessment being made at the inception of the 2015 Epic License Agreement, and based
on the following:
|
●
|
The
Company’s performance is required to achieve each milestone; and
|
|
●
|
The
milestones will relate to past performance, when achieved; and
|
|
●
|
The
milestones are reasonable relative to all of the deliverables and payment terms within
the 2015 Epic License Agreement
|
The
2015 SequestOx™ License Agreement expired on June 4, 2020. During the term of this agreement, the Company received $7.5
million in non-refundable payments, with such amount consisting of $5 million due and owing on the execution date of the 2015
SequestOx™ License Agreement and $2.5 million being earned upon the Company’s filing of an NDA with the FDA for the
relevant product in January 2016. The remaining $7.5 million in non-refundable payments required FDA approval of the relevant
product, a milestone that was not achieved prior to the expiration of the agreement.
This
transaction is not to be considered as an arms-length transaction.
Please
also note that, effective April 7, 2016, all Directors on the Company’s Board of Directors that were also owners/managers
of Epic had resigned as Directors of the Company and all current members of the Company’s Board of Directors have no relationship
to Epic. Accordingly, Epic no longer qualifies as a party that is related to the Company.
NOTE
19. MANUFACTURING, LICENSE AND DEVELOPMENT AGREEMENTS
The
Company has entered into the following active agreements:
|
●
|
License
agreement with Precision Dose, dated September 10, 2010 (the “Precision Dose License
Agreement”);
|
|
●
|
Development
and License Agreement with SunGen (the “SunGen Agreement”);
|
|
●
|
Strategic
Marketing Alliance with Glenmark Pharmaceuticals, Inc. USA dated May 29, 2018 (the “Glenmark
Alliance”)
|
|
●
|
Strategic
Marketing Alliance with Lannett Company. Inc. dated March 11, 2019 (the “Lannett-SunGen
Product Alliance”); and
|
|
●
|
Strategic
Marketing Alliance with Lannett Company. Inc. dated April 9, 2019 (the “Lannett-Elite
Product Alliance”).
|
The
Precision Dose Agreement provides for the marketing and distribution, by Precision Dose and its wholly owned subsidiary, TAGI
Pharma, of Phentermine 37.5mg tablets (launched in April 2011), Phentermine 15mg capsules (launched in April 2013), Phentermine
30mg capsules (launched in April 2013), Hydromorphone 8mg tablets (launched in March 2012), Naltrexone 50mg tablets (launched
in September 2013) and certain additional products that require approval from the FDA which has not been received. Precision Dose
will have the exclusive right to market these products in the United States and Puerto Rico and a non-exclusive right to market
the products in Canada. Pursuant to the Precision Dose License Agreement, Elite received $200k at signing, and is receiving milestone
payments and a license fee which is based on profits achieved from the commercial sale of the products included in the agreement.
Revenue
from the $200k payment made upon signing of the Precision Dose Agreement is being recognized over the life of the Precision Dose
Agreement.
The
milestones, totaling $500k (with $405k already received), consist of amounts due upon the first shipment of each identified product,
as follows: Phentermine 37.5mg tablets ($145k), Phentermine 15 & 30mg capsules ($45k), Hydromorphone 8mg ($125k), Naltrexone
50mg ($95k) and the balance of $95k due in relation to the first shipment of generic products which still require marketing authorizations
from the FDA, and to which there can be no assurances of such marketing authorizations being granted and accordingly there can
be no assurances that the Company will earn and receive these milestone amounts. These milestones have been determined to be substantive,
with such determination being made by the Company after assessments based on the following:
|
●
|
The
Company’s performance is required to achieve each milestone; and
|
|
●
|
The
milestones will relate to past performance, when achieved; and
|
|
●
|
The
milestones are reasonable relative to all of the deliverables and payment terms within
the Precision Dose License Agreement.
|
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The
license fees provided for in the Precision Dose Agreement are calculated as a percentage of net sales dollars realized from commercial
sales of the related products. Net sales dollars consist of gross invoiced sales less those costs and deductions directly attributable
to each invoiced sale, including, without limitation, cost of goods sold, cash discounts, Medicaid rebates, state program rebates,
price adjustments, returns, short date adjustments, charge backs, promotions, and marketing costs. The rate applied to the net
sales dollars to determine license fees due to the Company is equal to an amount negotiated and agreed to by the parties to the
Precision Dose License Agreement, with the following significant factors, inputs, assumptions, and methods, without limitation,
being considered by either or both parties:
|
●
|
Assessment
of the opportunity for each generic product in the market, including consideration of
the following, without limitation: market size, number of competitors, the current and
estimated future regulatory, legislative, and social environment for each generic product,
and the maturity of the market;
|
|
●
|
Assessment
of various avenues for monetizing the generic products, including the various combinations
of sites of manufacture and marketing options;
|
|
●
|
Capabilities
of each party with regards to various factors, including, one or more of the following:
manufacturing resources, marketing resources, financial resources, distribution capabilities,
ownership structure, personnel, assessment of operational efficiencies and stability,
company culture and image;
|
|
●
|
Stage
of development of each generic product, all of which did not have FDA approval at the
time of the discussions/negotiations and an assessment of the risks, probability, and
time frame for achieving marketing authorizations from the FDA for the products;
|
|
●
|
Assessment
of consideration offered by Precision and other entities with whom discussions were conducted;
and
|
|
●
|
Comparison
of the above factors among the various entities with whom the Company was engaged in
discussions relating to the commercialization of the generic products.
|
The
SunGen Agreement provides for the research, development, sales and marketing of eight generic pharmaceutical products. Two of
the products are classified as CNS stimulants (the “CNS Products”), two of the products are classified as beta blockers
and the remaining four products consist of antidepressants, antibiotics and antispasmodics. To date, the Company has filed ANDAs
with the FDA for the two CNS Products and one antibiotic identified in the SunGen Agreement. The Company received FDA approval
of the ANDA filed for the first CNS Product in December 2018 and achieved commercial launch in April 2019, with such product being
marketed pursuant to the Lannett Alliance. The Company received FDA approval of the ANDA filed for the second CNS Product in December
2019 and achieved commercial launch in March 2020, with such product being marketed pursuant to the Lannett Alliance.
Under
the terms of the SunGen Agreement, Elite and SunGen will share in the responsibilities and costs in the development of these products
and will share substantially in the profits from sales. Upon approval, the know-how and intellectual property rights to the products
will be owned jointly by Elite and SunGen. Three of the eight products will be jointly owned, three products will be owned by
SunGen, with Elite having exclusive marketing rights and the remaining two products will be owned by Elite, with SunGen having
exclusive marketing rights. Elite will manufacture and package all eight products on a cost-plus basis.
On
April 3, 2020, Elite and SunGen mutually agreed to discontinue any further joint product development activities under the SunGen
Agreement, with joint development of the remaining generic pharmaceutical products identified in the SunGen Agreement being discontinued.
In
May 2020, SunGen, under an asset purchase agreement, assigned its rights and obligations under the Master Development and License
Agreement for Amphetamine IR and Amphetamine ER to Mikah Pharmaceuticals. The ANDAs for Amphetamine IR and Amphetamine ER are
now registered under Elite’s name. Mikah will now be Elite’s partner with respect to Amphetamine IR and ER and will
assume all the rights and obligations for these products from SunGen.
The
Glenmark Alliance, provides for the manufacture by Elite and exclusive marketing by Glenmark of Isradipine capsules, Trimipramine
capsules and Methadone Tablets, and semi-exclusive marketing rights for Phendimetrazine tablets. All marketing rights relating
to Methadone Tablets were terminated by mutual agreement in January 2020 and all marketing rights relating to Phendimetrazine
Tablets were terminated by mutual agreement in February 2020. In addition to the purchase prices for the products, Elite will
receive license fees well in excess of 50% of gross profits. Gross profit is defined as net sales less the price paid to Elite
for the products, distribution fees (less than 10%) and shipping costs. The Agreement has an initial term of three years and automatically
renews for one-year periods absent prior written notice of non-renewal. In addition to customary termination provisions, the Agreement
permits Glenmark to terminate with regard to a product on at least three months’ prior written notice if it determines to
stop marketing and selling such product, and it permits Elite to terminate with regard to a product if at any time after the first
twelvemonths from the first commercial sale, the average license fee paid by Glenmark for such product is less than $100,000 for
a six-month sales period.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Pursuant
to Lannett-SunGen Product Alliance with Lannett Company Inc. (“Lannett”), Lannett will be the exclusive U.S. marketer
and distributor for Amphetamine IR Tablets and Amphetamine ER Capsules. Elite will manufacture and Lannett will purchase the products
from Elite and then sell and distribute them. In addition to the purchase prices for the products, Elite will receive license
fees in excess of 50% of net profits, which will be shared equally with SunGen, pursuant to the SunGen Agreement. The Lannett-SunGen
Product Alliance has an initial term of three years and automatically renews for one-year periods absent prior written notice
of non-renewal. In addition to customary termination provisions, the Agreement permits Lannett to terminate with regard to a product
on at least six months’ prior written notice, and it permits Elite or Lannett to terminate with regard to a product if at
any time after the first twelve months from the first commercial sale, the average license fee paid by Lannett for such product
is less than $300,000 for a six month sales period. In addition to manufacturing fees and license fees, Lannett also paid a milestone,
of $750,000 upon the March 2020 commercial launch of Amphetamine ER Capsules. This milestone payment was shared equally by Elite
and SunGen, pursuant to the SunGen Agreement.
The
first commercial shipment of Amphetamine IR Tablets, a generic version of Adderall®, with strengths of 5mg, 7.5mg, 10mg, 12.5mg,
15mg, 20mg and 30mg, pursuant to the Lannett-SunGen Product Alliance occurred in April 2019. The first commercial shipment of
Amphetamine ER Capsules, a generic version of Adderall XR®, with strengths of 5mg, 10mg, 15mg, 20mg, 25mg and 30mg, pursuant
to the Lannett-SunGen Product Alliance occurred in March 2020.
Pursuant
to the Lannett-Elite Product Alliance, Lannett is the exclusive U.S. marketer and distributor for Dantrolene Capsules. Elite manufactures
and Lannett purchases, markets and distributes this product. In addition to the purchase prices for the products, Elite receives
license fees in excess of 50% of net profits. Net profits are defined as net sales less the price paid to Elite for the products,
distribution fees (less than 10%) and shipping costs. The Lannett-Elite Product Alliance has an initial term of three years and
automatically renews for one-year periods absent prior written notice of non-renewal. In addition to customary termination provisions,
the Agreement permits Lannett to terminate with regard to a product on at least six months’ prior written notice and it
permits Elite or Lannett to terminate with regard to a product if at any time after the first twelve months from the first commercial
sale, the average license fee paid by Lannett for such product is less than $300,000 for a six month sales period. The first commercial
shipment of Dantrolene Capsules occurred in June 2019.
NOTE
20. 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 $53,214 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.
NOTE
21. INCOME TAXES
Sale
of New Jersey Net Operating Loss
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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE
22. 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. 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 our 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 our already thorough cleaning protocols throughout our facilities and have prohibited visits
from non-essential visitors. Certain of these measures have resulted in increased costs.
Manufacturing
and Supply Chain
During
the three months ended June 30, 2020, and as of the date of this Quarterly Report on Form 10-Q, the Company has not experience
material, detrimental issues related to COVID-19 in our manufacturing, supply chain, quality assurance and regulatory compliance
activities, and have been able to operate without interruption. The Company has taken, and plan to continue to take, commercially
practical measures to keep our facility open. Our supply chains remain intact and operational, and the Company is in regular communications
with our suppliers and third-party partners. Please note, however, that a prolonging of the current situation relating to COVID-19
may result in an increased risk of interruption in our supply chain in the future, with no assurances given as the materiality
of such future interruption on our business, financial condition, results of operations and cash flows.
NOTE
23. SUBSEQUENT EVENTS
The
Company has evaluated subsequent events from the condensed consolidated balance sheet date through August 14, 2020 and identified
the following material subsequent events:
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.
Under
the terms and subject to the conditions of the 2020 LPC Purchase Agreement, the Company has the right, but not the obligation,
to sell to Lincoln Park, and Lincoln Park is obligated to purchase, up to $25.0 million of the Company’s Common Stock. Sales
of Common Stock by the Company, if any, will be subject to certain limitations set forth in the 2020 LPC Purchase Agreement, and
may occur from time to time, at the Company’s sole discretion, over the 36-month period commencing on July 27, 2020, the
date that the registration statement covering the resale of the shares of Common Stock that have been and may be issued under
the 2020 LPC Purchase Agreement was declared effective by the Securities and Exchange Commission (the “SEC”) and the
other conditions to Lincoln Park’s obligation to purchase such shares set forth in the Purchase Agreement, all of which
are outside of Lincoln Park’s control, were satisfied.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Under
the 2020 LPC Purchase Agreement, the Company may direct Lincoln Park to purchase up to 500,000 shares of Common Stock on such
business day (each, a “Regular Purchase”), provided, however, that (i) the Regular Purchase may be increased to up
to 600,000 shares, provided that the closing sale price of the Common Stock is not below $0.15 on the purchase date; (ii) the
Regular Purchase may be increased to up to 700,000 shares, provided that the closing sale price of the Common Stock is not below
$0.20 on the purchase date; (iii) the Regular Purchase may be increased to up to 800,000 shares, provided that the closing sale
price of the Common Stock is not below $0.25 on the purchase date; and (iv) the Regular Purchase may be increased to up to 900,000
shares, provided that the closing sale price of the Common Stock is not below $0.30 on the purchase date. In each case, Lincoln
Park’s maximum dollar commitment in any single Regular Purchase may not exceed $1,000,000. The purchase price per share
for each such Regular Purchase will be based on an agreed upon fixed discount to the prevailing market prices of the Company’s
Common Stock immediately preceding the time of sale. In addition to Regular Purchases, the Company may also direct Lincoln Park
to purchase other amounts as accelerated purchases and as additional accelerated purchases if the closing sale price of the Common
Stock is not less than $0.03 per share at such times as set forth in the 2020 LPC Purchase Agreement. There are no upper limits
on the price per share that Lincoln Park must pay for shares of Common Stock. The above-referenced share amount limitations and
closing sale price thresholds are subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split,
reverse stock split or other similar transaction as provided in the 2020 LPC Purchase Agreement.
Lincoln
Park has no right to require the Company to sell any shares of Common Stock to Lincoln Park, but Lincoln Park is obligated to
make purchases as the Company directs, subject to satisfaction of the conditions set forth in the 2020 LPC Purchase Agreement.
Actual sales of shares of Common Stock to Lincoln Park will depend on a variety of factors to be determined by the Company from
time to time, including, among others, market conditions, the trading price of the Common Stock and determinations by the Company
as to the appropriate sources of funding for the Company and its operations. In all instances, the Company may not sell shares
of its Common Stock to Lincoln Park under the 2020 LPC Purchase Agreement if it would result in Lincoln Park beneficially owning
more than 4.99% of its Common Stock.
The
net proceeds under the 2020 LPC Purchase Agreement to the Company will depend on the frequency and prices at which the Company
sells shares of its stock to Lincoln Park. The Company expects that any proceeds received by the Company from such sales to Lincoln
Park will be used for research and product development, general corporate purposes and working capital requirements.
As
consideration for Lincoln Park’s irrevocable commitment to purchase Common Stock upon the terms of and subject to satisfaction
of the conditions set forth in the 2020 LPC Purchase Agreement, upon execution of the 2020 LPC Purchase Agreement, the Company
issued to Lincoln Park 5,975,857 shares of Common Stock as commitment shares, and the Company has agreed to issue up to 5,975,857
additional shares of Common Stock as additional commitment shares, on a pro rata basis at such times during the term of the 2020
LPC Purchase Agreement as the Company may direct Lincoln Park to purchase shares of Common Stock under the 2020 LPC Purchase Agreement.
The
Company has agreed with Lincoln Park that it will not enter into any “variable rate” transactions as defined in the
2020 LPC Purchase Agreement with any third party for a period set forth in the 2020 LPC Purchase Agreement. Lincoln Park has covenanted
not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s Common
Stock.
The
2020 LPC Purchase Agreement and the 2020 LPC Registration Rights Agreement contain customary representations, warranties, agreements
and conditions to completing future sale transactions, indemnification rights and obligations of the parties. The Company has
the right to terminate the 2020 LPC Purchase Agreement at any time, at no cost or penalty. During any “event of default”
under the 2020 LPC Purchase Agreement, all of which are outside of Lincoln Park’s control, Lincoln Park does not have the
right to terminate the 2020 LPC Purchase Agreement; however, the Company may not deliver a notice directing Lincoln Park to make
purchases of Common Stock, until such event of default is cured. In addition, in the event of bankruptcy proceedings by the Company,
the 2020 LPC Purchase Agreement will automatically terminate. In addition, in the event of bankruptcy proceedings against the
Company, the 2020 LPC Purchase Agreement will terminate if the proceedings are not discharged within 90 days.
The
Company did not issue any shares of its common stock pursuant to the 2020 LPC Purchase Agreement during the three months ended
June 30, 2020. As noted above subsequent to June 30, 2020, the Company issued an aggregate of 5,975,857 shares of Common Stock
to Lincoln Park as initial commitment shares.