ELITE PHARMACEUTICALS INC /NV/ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations the three and nine months ended December 31, 2021 and 2020 should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended March 31, 2021. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Unless expressly indicated or the context requires otherwise, the terms “Elite”, the “Company”, “we”, “us”, and “our” refer to Elite Pharmaceuticals, Inc. and subsidiary. Background Elite Pharmaceuticals, Inc., a Nevada corporation (the “Company”, “Elite”, “Elite Pharmaceuticals”, the “registrant”, “we”, “us” or “our”) was incorporated on October 1, 1997 under the laws of the State of Delaware, and its wholly owned subsidiary, Elite Laboratories, Inc. (“Elite Labs”), was incorporated on August 23, 1990 under the laws of the State of Delaware. On January 5, 2012, Elite Pharmaceuticals was reincorporated under the laws of the State of Nevada. We are a specialty pharmaceutical company principally engaged in the development and manufacture of oral, controlled-release products, using proprietary know-how and technology for the manufacture of generic pharmaceuticals. Our strategy includes developing generic versions of controlled-release drug products with high barriers to entry. We occupy manufacturing, warehouse, laboratory and office space at 165 Ludlow Avenue and 135 Ludlow Avenue in Northvale, NJ (the “Northvale Facility”). The Northvale Facility operates under Current Good Manufacturing Practice (“cGMP”) and is a United States Drug Enforcement Agency (“DEA”) registered facility for research, development and manufacturing. Strategy We focus our efforts on the following areas: (i) manufacturing of a line of generic pharmaceutical products with approved Abbreviated New Drug Applications (“ANDAs”); (ii) development of additional generic pharmaceutical products; (iii) development of the other products in our pipeline including the products with our partners; (iv) commercial exploitation of our products either by license and the collection of royalties, or through the manufacture of our formulations; and (v) development of new products and the expansion of our licensing agreements with other pharmaceutical companies, including co-development projects, joint ventures and other collaborations. Our focus is on the development of various types of drug products, including generic drug products which require ANDAs as well as branded drug products which require New Drug Applications (“NDAs”) under Section 505(b)(1) or 505(b)(2) of the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Drug Price Competition Act”). We believe that our business strategy enables us to reduce its risk by having a diverse product portfolio that includes generic products in various therapeutic categories and to build collaborations and establish licensing agreements with companies with greater resources thereby allowing us to share costs of development and improve cash-flow. 1 Commercial Products We own, license, contract manufacture or have contractual rights to receive royalties from the following products currently approved for commercial sale: Product Branded Product Equivalent Therapeutic Category Launch Date Phentermine HCl 37.5mg tablets (“Phentermine 37.5mg”) Adipex-P® Bariatric April 2011 Phendimetrazine Tartrate 35mg tablets (“Phendimetrazine 35mg”) Bontril® Bariatric November 2012 Phentermine HCl 15mg and 30mg capsules (“Phentermine 15mg” and “Phentermine 30mg”) Adipex-P® Bariatric April 2013 Naltrexone HCl 50mg tablets (“Naltrexone 50mg”) Revia® Addiction Treatment September 2013 Isradipine 2.5mg and 5mg capsules (“Isradipine 2.5mg” and “Isradipine 5mg”) n/a Cardiovascular January 2015 Oxycodone HCl Immediate Release 5mg, 10mg, 15mg, 20mg and 30mg tablets (“OXY IR 5mg”, “Oxy IR 10mg”, “Oxy IR 15mg”, “OXY IR 20mg” and “Oxy IR 30mg”) Roxycodone® Pain March 2016 Trimipramine Maleate Immediate Release 25mg, 50mg and 100mg capsules (“Trimipramine 25mg”, “Trimipramine 50mg”, “Trimipramine 100mg”) Surmontil® Antidepressant May 2017 Dextroamphetamine Saccharate, Amphetamine Aspartate, Dextroamphetamine Sulfate, Amphetamine Sulfate Immediate Release 5mg, 7.5mg, 10mg, 12.5mg, 15mg, 20mg and 30mg tablets (“Amphetamine IR 5mg”, “Amphetamine IR 7.5mg”, “Amphetamine IR 10mg”, “Amphetamine IR 12.5mg”, “Amphetamine IR 15mg”, “Amphetamine IR 20mg” and “Amphetamine IR 30mg”) Adderall® Central Nervous System (“CNS”) Stimulant April 2019 Dantrolene Sodium Capsules 25mg, 50mg and 100mg (“Dantrolene 25mg”, “Dantrolene 50mg”, “Dantrolene 100mg”) Dantrium® Muscle Relaxant June 2019 Dextroamphetamine Saccharate, Amphetamine Aspartate, Dextroamphetamine Sulfate, Amphetamine Sulfate Extended Release 5mg, 10mg, 15mg, 20mg, 25mg, and 30mg capsules (“Amphetamine ER 5mg”, “Amphetamine ER 10mg”, “Amphetamine ER 15mg”, “Amphetamine ER 20mg”, “Amphetamine ER 25mg”, and “Amphetamine ER 30mg”) Adderall XR® Central Nervous System (“CNS”) Stimulant March 2020 Loxapine Succinate 5mg, 10mg, 25mg and 50gm capsules (“Loxapine 5mg”, “Loxapine 10mg”, “Loxapine 25mg”, and Loxapine 50mg”) Loxapine® Antipsychotic May 2021 Approved Products Not Yet Commercialized Acetaminophen and Codeine Phosphate The Company received approval from the FDA of an ANDA for a generic version of Tylenol® with Codeine (acetaminophen and codeine phosphate). Acetaminophen with codeine is a combination medication indicated for the management of mild to moderate pain, where treatment with an opioid is appropriate and for which alternative treatments are inadequate. The Company is not pursuing licensing deals for any opioids at this time and, in light of the current market and litigation around opioid products, the Company has no plans to commercialize this product at this time. Critical Accounting Policies and Estimates The preparation of the unaudited condensed consolidated financial statements and related disclosures in conformity with GAAP, and our discussion and analysis of its financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in its unaudited condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material. 2 There were no significant changes during the three months ended December 31, 2021 to the items that we disclosed as our significant accounting policies and estimates described in “Note 1, Summary of Significant Accounting Policies” to the Company’s financial statements as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021. Results of Operations The following set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results. Three months ended December 31, 2021 compared to December 31, 2020 Revenue, Cost of revenue and Gross profit: For the Three Months Ended December 31, Change 2021 2020 Dollars Percentage Manufacturing fees $ 7,667,674 $ 4,849,871 $ 2,817,803 58 % Licensing fees 1,307,140 1,196,711 110,429 9 % Total revenue 8,974,814 6,046,582 2,928,232 48 % Cost of manufacturing 4,957,150 2,643,175 2,313,975 88 % Gross profit $ 4,017,664 $ 3,403,407 $ 614,257 18 % Gross profit - percentage 45 % 56 % Total revenues for the three-month period ended December 31, 2021 increased by $3 million or 48%, to $9.0 million, as compared to $6.0 million, for the corresponding period of the prior year, primarily due to strong sales of Amphetamine IR and ER tablets during the three-month period ended December 31, 2021 as compared to the comparable period of the prior fiscal year. Manufacturing fees increased by $2.8 million, or 58%, primarily due to strong sales of Amphetamine IR and ER tablets during the three-month period ended December 31, 2021 as compared to the comparable period of the prior fiscal year. Licensing fees increased by $0.1 million, or 9%. This increase is primarily due to strong sales of Amphetamine IR and ER tablets during the three months ended December 31, 2021 as compared to the comparable period of the prior fiscal year. Costs of revenue consists of manufacturing and assembly costs. Our costs of revenue increased by $2.3 million or 88%, to $4.9 million as compared to $2.6 million for the corresponding period in the prior fiscal year. This increase was due to higher revenues during the three months ended December 31, 2021, as compared to the comparable period of the prior fiscal year. Our gross profit margin was 45% during the three months ended December 31, 2021 as compared to 56% during the comparable period of the prior fiscal year. 3 Operating expenses: For the Three Months Ended December 31, Change 2021 2020 Dollars Percentage Operating expenses: Research and development $ 956,628 $ 1,245,669 $ (289,041 ) (23 )% General and administrative 929,547 826,019 103,528 13 % Non-cash compensation 3,630 1,651 1,979 120 % Depreciation and amortization 296,559 328,899 (32,340 ) (10 )% Total operating expenses $ 2,186,364 $ 2,402,238 $ (215,874 ) (9 )% Operating expenses consist of research and development costs, general and administrative, non-cash compensation and depreciation and amortization expenses. Operating expenses for the three months ended December 31, 2021 decreased by $0.2 million, or 9%, to $2.2 million as compared to $2.4 million for the corresponding period in the prior fiscal year. Research and development costs for the three months ended December 31, 2021 were $0.9 million, a decrease of $0.3 million, or 23%, from $1.2 million of such costs for the comparable period of the prior year. General and administrative expenses for the three months ended December 31, 2021 were $0.9 million, an increase of $0.1 million or 13% from $0.8 million of such costs for the comparable period of the prior year. Non-cash compensation expense for the three months ended December 31, 2021 and 2020 was less than $0.1 million. Depreciation and amortization expenses for the three months ended December 31, 2021 were $0.3 million, which remained consistent from $0.3 million of such costs for the comparable period of the prior fiscal year. As a result of the foregoing, our income from operations for the three months ended December 31, 2021 was $1.8 million, compared to income from operations of $1.0 million for the comparable period of the prior fiscal year. Other income, net: For the Three Months Ended December 31, Change 2021 2020 Dollars Percentage Other income, net: Change in fair value of derivative instruments $ 489,500 $ 1,083,566 $ (594,066 ) (55 )% Interest expense and amortization of debt issuance costs (37,400 ) (79,673 ) 42,273 (53 )% Gain on sale of fixed assets — 6,973 (6,973 ) (100 )% Interest income 13 98 (85 ) (87 )% Other income, net $ 452,113 $ 1,010,964 $ (558,851 ) (55 )% Other income, net for the three months ended December 31, 2021 was $0.5 million, a decrease of $0.6 million from the other income, net of $1.0 million for the comparable period of the prior fiscal year. The decrease in other income was due to income relating to changes in the fair value of our outstanding derivative warrants during the three months ended December 31, 2021. Please note that the change in the fair value of derivative instruments is determined in large part by the change in the closing price of the Company’s Common Stock as of the end of the period, as compared to the closing price at the beginning of the period, with a strong inverse relationship between the fair value of our derivatives instruments and decreases in the closing price of the Company’s Common Stock. Please see Note 11 to the Unaudited Condensed Consolidated Financial Statements above. 4 As a result of the foregoing, our net income before the net benefit from sale of net operating loss credits for the three months ended December 31, 2021 was $2.3 million, compared to net income of $2.0 million for the comparable period of the prior fiscal year. Nine months ended December 31, 2021 compared to December 31, 2020 Revenue, Cost of revenue and Gross profit: For the Nine Months Ended December 31, Change 2021 2020 Dollars Percentage Manufacturing fees $ 20,639,421 $ 17,659,834 $ 2,979,587 17 % Licensing fees 3,950,623 3,325,384 625,239 19 % Total revenue 24,590,044 20,985,218 3,604,826 17 % Cost of manufacturing 13,209,430 10,984,021 2,225,409 20 % Gross profit $ 11,380,614 $ 10,001,197 $ 1,379,417 14 % Gross profit - percentage 46 % 48 % Total revenues for the nine-month period ended December 31, 2021 increased by $3.6 million or 17%, to $24.6 million, as compared to $21.0 million, for the corresponding period of the prior year, primarily due strong sales of Amphetamine IR and ER tablets during the nine-month period ended December 31, 2021 as compared to the comparable period of the prior fiscal year. Manufacturing fees for the nine-month period ended December 31, 2021 were $20.6 million, an increase of $2.9 million, or 17%, from $17.7 million primarily due to strong sales of Amphetamine IR and ER tablets during the nine months ended December 31, 2021 as compared to the comparable period of the prior year. Licensing fees increased by $0.6 million, or 19%. This increase is primarily due to strong sales of Amphetamine IR and ER tablets during the nine months ended December 31, 2021 as compared to the comparable period of the prior fiscal year. Costs of revenue consists of manufacturing and assembly costs. Our costs of revenue for the nine-month period ended December 31, 2021 were $13.2 million, an increase of $2.2 million, or 20%, from $11.0 million of such fees for the comparable period of the prior year. Our gross profit margin was 46% during the nine months ended December 31, 2021 as compared to 48% during the comparable period of the prior fiscal year. 5 Operating expenses: For the Nine Months Ended December 31, Change 2021 2020 Dollars Percentage Operating expenses: Research and development $ 3,312,540 $ 3,337,287 $ (24,747 ) (1 )% General and administrative 2,930,126 2,491,762 438,364 18 % Non-cash compensation 10,617 9,261 1,356 15 % Depreciation and amortization 908,297 990,861 (82,564 ) (8 )% Total operating expenses $ 7,161,580 $ 6,829,171 $ 332,409 5 % Operating expenses consist of research and development costs, general and administrative, non-cash compensation and depreciation and amortization expenses. Operating expenses for the nine months ended December 31, 2021 increased by $0.3 million, or 5%, to $7.1 million as compared to $6.8 million for the corresponding period in the prior fiscal year. Research and development costs for the nine months ended December 31, 2021 were $3.3 million, which was virtually unchanged from approximately $3.3 million of such costs for the comparable period of the prior year. General and administrative expenses for the nine months ended December 31, 2021 were $2.9 million, an increase of $0.4 million, or 18% from $2.5 million of such costs for the comparable period of the prior year due to increased costs and headcounts relating to regulatory compliance and laboratory activities. Non-cash compensation expense for the nine months ended December 31, 2021 and 2020 was less than $0.1 million. Depreciation and amortization expenses for the nine months ended December 31, 2021 were $0.9 million, which was virtually unchanged from $1.0 million in such costs for the comparable period of the prior fiscal year. As a result of the foregoing, our income from operations for the nine months ended December 31, 2021 was $4.2 million, compared to income from operations of $3.2 million for the comparable period of the prior fiscal year. 6 Other income, net: For the Nine Months Ended December 31, Change 2021 2020 Dollars Percentage Other income, net: Change in fair value of derivative instruments $ 1,523,394 $ 1,645,042 $ (121,648 ) (7 )% Interest expense and amortization of debt issuance costs (126,376 ) (238,857 ) 112,481 47 % Gain on sale of fixed assets — 48,463 (48,463 ) (100 )% Interest income 77 463 (386 ) (83 )% Other income, net $ 1,397,095 $ 1,455,111 $ (58,016 ) (4 )% Other income, net for the nine months ended December 31, 2021 was $1.4 million, a decrease of $0.1 million from the other income, net of $1.5 million for the comparable period of the prior fiscal year. The decrease in other income was due to income relating to changes in the fair value of our outstanding derivative warrants during the nine-month period ended December 31, 2021. Please note that the change in the fair value of derivative instruments is determined in large part by the change in the closing price of the Company’s Common Stock as of the end of the period, as compared to the closing price at the beginning of the period, with a strong inverse relationship between the fair value of our derivatives instruments and decreases in the closing price of the Company’s Common Stock. Please see Note 11 to the Unaudited Condensed Consolidated Financial Statements above. As a result of the foregoing, our net income before the net benefit from sale of net operating loss credits for the nine months ended December 31, 2021 was $5.6 million, compared to net income $4.6 million for the comparable period of the prior fiscal year. Liquidity and Capital Resources Capital Resources December 31, 2021 March 31, 2021 Change Current assets $ 17,475,013 $ 12,194,667 $ 5,280,346 Current liabilities $ 5,878,203 $ 5,812,531 $ 65,672 Working capital $ 11,596,810 $ 6,382,136 $ 5,214,674 Our working capital (total current assets less total current liabilities) increased by $5.2 million from $6.4 million as of March 31, 2021 to $11.6 million as of December 31, 2021, with such increase being primarily related to the net income of $6.5 million and a net positive cash flow of $4.1 million achieved during the nine months ended December 31, 2021. Summary of Cash Flows: For the Nine Months Ended December 31, 2021 2020 Net cash provided by operating activities $ 4,902,978 $ 3,943,229 Net cash used in investing activities $ (234,387 ) $ (77,879 ) Net cash (used in) provided by financing activities $ (572,889 ) $ 415,910 Net cash provided by operating activities for the nine months ended December 31, 2021 was $4.9 million, which included net income of $6.5 million and increases in non-cash expenses totaling $0.2 million, offset by net increases in assets and decreases in liabilities totaling $(1.8) million. Net cash used in investing activities for the nine months ended December 31, 2021 was comprised of purchases of property and equipment of $0.2 million. 7 Net cash used in financing activities was $0.6 million for the nine months ended December 31, 2021 which consisted of loan and bond payments. Lincoln Park Capital – 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, with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park has committed to purchase up to $25.0 million of the Company’s Common Stock, $0.001 par value per share, from time to time over the term of the 2020 LPC Purchase Agreement, at the Company’s direction. The Company did not issue any shares of its Common Stock pursuant to the 2020 LPC Purchase Agreement during the nine months ended December 31, 2021. In addition, there were no shares issued to Lincoln Park as additional commitment shares, pursuant to the 2020 LPC Agreement. During the nine months ended December 31, 2020 the Company issued an aggregate of 5,975,857 shares of Common Stock in the amount of $469,105 to Lincoln Park as initial commitment shares. The Company sold 640,543 shares of its Common Stock pursuant to the 2020 LPC Purchase Agreement during the nine months ended December 31, 2020 for net proceeds totaling $42,223. In addition, 10,094 shares were issued to Lincoln Park as additional commitment shares, pursuant to the 2020 LPC Agreement for net proceeds totaling $732. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide the information required by this Item.