ELITE PHARMACEUTICALS INC /NV/ 10-Q

ITEM 1. FINANCIAL STATEMENTS ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2023 March 31, 2023 ASSETS Current assets: Cash $ 9,076,659 $ 7,832,247 Accounts receivable, net of allowance for expected credit losses of $ 100,000 and $ 0 as of June 30, 2023 and March 31, 2023, respectively 6,201,448 3,094,549 Inventory 11,168,431 9,550,716 Prepaid expenses and other current assets 998,058 1,032,785 Total current assets 27,444,596 21,510,297 Property and equipment, net of accumulated depreciation of $ 14,914,617 and $ 14,586,335 , respectively 10,097,876 10,426,158 Intangible assets, net of accumulated amortization of $-0- 6,341,228 6,341,228 Operating lease - right-of-use asset 7,528 13,062 Deferred income tax asset 2,171,821 2,171,821 Other assets: Restricted cash - debt service for NJEDA bonds 415,430 412,434 Security deposits 21,018 21,018 Total other assets 436,448 433,452 Total assets $ 46,499,497 $ 40,896,018 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,874,925 $ 2,446,810 Accrued expenses 5,929,353 5,047,726 Deferred revenue, current portion 13,333 13,333 Bonds payable, current portion, net of bond issuance costs 110,822 110,822 Loans payable, current portion 140,454 200,032 Related party loans payable (Note 7) 4,000,000 — Lease obligation - operating lease, current portion 8,586 14,914 Total current liabilities 12,077,473 7,833,637 Long-term liabilities: Deferred revenue, net of current portion 15,556 18,890 Bonds payable, net of current portion and bond issuance costs 1,032,568 1,029,018 Loans payable, net of current portion and loan costs 2,545,753 2,532,502 Derivative financial instruments - warrants 711,078 521,711 Total long-term liabilities 4,304,955 4,102,121 Total liabilities 16,382,428 11,935,758 Shareholders’ equity: Common stock; par value $ 0.001 ; 1,445,000,000 shares authorized; 1,014,015,081 shares issued and 1,013,915,081 shares outstanding as of June 30, 2023; 1,014,015,081 shares issued and 1,013,915,081 shares outstanding as of March 31, 2023 1,014,019 1,014,019 Additional paid-in capital 164,765,980 164,750,980 Treasury stock; 100,000 shares as of June 30, 2023 and March 31, 2023, respectively, at cost ( 306,841 ) ( 306,841 ) Accumulated deficit ( 135,356,089 ) ( 136,497,898 ) Total shareholders’ equity 30,117,069 28,960,260 Total liabilities and shareholders’ equity $ 46,499,497 $ 40,896,018 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. F- 1 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 2023 2022 For the Three Months Ended June 30, 2023 2022 Revenue: Manufacturing fees $ 7,909,237 $ 6,327,141 Licensing fees 1,070,839 1,345,767 Total revenue 8,980,076 7,672,908 Cost of manufacturing 4,229,521 3,675,061 Gross profit 4,750,555 3,997,847 Operating expenses: Research and development 1,143,545 955,443 General and administrative 1,661,704 1,718,104 Non-cash compensation through issuance of stock options 15,000 5,322 Depreciation and amortization 328,282 296,294 Total operating expenses 3,148,531 2,975,163 Income from operations 1,602,024 1,022,684 Other income (expense): Change in fair value of derivative instruments ( 189,367 ) ( 500,143 ) Interest expense and amortization of debt issuance costs ( 119,412 ) ( 216,787 ) Interest income 3,516 129 Other expense, net ( 305,263 ) ( 716,801 ) Income before income taxes 1,296,761 305,883 Income tax expense ( 154,952 ) — Net income attributable to common shareholders $ 1,141,809 $ 305,883 Basic net income per share attributable to common shareholders $ 0.00 $ 0.00 Diluted net income per share attributable to common shareholders $ 0.00 $ 0.00 Basic weighted average Common Stock outstanding 1,013,915,081 1,011,381,988 Diluted weighted average Common Stock outstanding 1,014,572,821 1,011,381,988 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. F- 2 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED) Shares Amount Shares Amount Capital Shares Amount Deficit Equity Series J Preferred Stock Common Stock Additional Paid-In Treasury Stock Accumulated Total Shareholders’ Shares Amount Shares Amount Capital Shares Amount Deficit Equity Balance as of April 1, 2023 — $ — 1,013,915,081 $ 1,014,019 $ 164,750,980 100,000 $ ( 306,841 ) $ ( 136,497,898 ) $ 28,960,260 Net income — — — — — — — 1,141,809 1,141,809 Non-cash compensation through the issuance of employee stock options — — — — 15,000 — — — 15,000 Balance at June 30, 2023 — $ — 1,013,915,081 $ 1,014,019 $ 164,765,980 100,000 $ ( 306,841 ) $ ( 135,356,089 ) $ 30,117,069 Series J Preferred Stock Common Stock Additional Paid-In Treasury Stock Accumulated Total Shareholders’ Shares Amount Shares Amount Capital Shares Amount Deficit Equity Balance as of April 1, 2022 — — 1,011,381,988 $ 1,011,385 $ 164,577,227 100,000 $ ( 306,841 ) $ ( 140,059,744 ) $ 25,222,027 Net income — — — — — — — 305,883 305,883 Non-cash compensation through the issuance of employee stock options — — — — 5,322 — — — 5,322 Balance at June 30, 2022 — $ — 1,011,381,988 $ 1,011,385 $ 164,582,549 100,000 $ ( 306,841 ) $ ( 139,753,861 ) $ 25,533,232 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. F- 3 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 2023 2022 For the Three Months Ended June 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,141,809 $ 305,883 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 328,282 296,294 Bad debt expense 100,000 — Amortization of operating leases - right-of-use assets 5,534 51,013 Change in fair value of derivative financial instruments - warrants 189,367 500,143 Non-cash compensation through the issuance of employee stock options 15,000 5,322 Non-cash rent expense and lease accretion 192 602 Change in operating assets and liabilities: Accounts receivable ( 3,206,899 ) ( 907,196 ) Inventory ( 1,617,715 ) ( 875,993 ) Prepaid expenses and other current assets 34,727 ( 180,974 ) Accounts payable, accrued expenses and other current liabilities 309,550 299,968 Deferred revenue ( 3,334 ) ( 3,337 ) Lease obligations - operating leases ( 6,328 ) ( 49,241 ) Net cash used in operating activities ( 2,709,815 ) ( 557,516 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment — ( 94,597 ) Net cash used in investing activities — ( 94,597 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loans payable — 12,000,000 Proceeds from related party loans payable 4,000,000 — Loan payments ( 42,777 ) ( 103,536 ) Net cash provided by financing activities 3,957,223 11,896,464 Net change in cash and restricted cash 1,247,408 11,244,351 Cash and restricted cash, beginning of period 8,244,681 8,940,396 Cash and restricted cash, end of period $ 9,492,089 $ 20,184,747 Supplemental disclosure of cash and non-cash transactions: Cash paid for interest $ 119,412 $ 216,787 Cash paid for income taxes $ 127,522 $ — The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. F- 4 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Overview Elite Pharmaceuticals, Inc. (the “Company” or “Elite”) was incorporated on October 1, 1997 under the laws of the State of Delaware, and its wholly-owned subsidiary Elite Laboratories, Inc. (“Elite Labs”) was incorporated on August 23, 1990 under the laws of the State of Delaware. On January 5, 2012, Elite Pharmaceuticals was reincorporated under the laws of the State of Nevada. Elite Labs engages primarily in researching, developing, licensing, manufacturing, and sales 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 product candidates are approved. These products include drugs that cover therapeutic areas for allergy, bariatric, attention deficit and infection. Research and development activities are performed with an objective of developing product candidates that will secure marketing approvals from the United States Food and Drug Administration (“FDA”), and thereafter, commercially exploiting such products. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of the Company are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the SEC. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Elite Labs. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain information or footnote disclosures normally included in condensed financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Form 10-K as filed with the SEC on June 29, 2023. The interim results for the three months ended June 30, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending March 31, 2024 or for any future periods. 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 Application (“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. F- 5 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Revenue Recognition The Company generates revenue from manufacturing and licensing fees and direct sales to pharmaceutical distributors for pharmacies and institutions. Manufacturing fees include the development of pain management products, manufacturing of a line of generic pharmaceutical products with approved ANDA, through the manufacture of formulations and the development of new products. Licensing fees include the commercialization of products either by license and the collection of royalties, or the expansion of licensing agreements with other pharmaceutical companies, including co-development projects, joint ventures and other collaborations. Under ASC 606, Revenue from Contacts with Customers (“ASC 606”), the Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or services. The Company recognizes revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenues when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue. Nature of goods and services The following is a description of the Company’s goods and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each, as applicable: a) Manufacturing Fees The Company is equipped to manufacture controlled-release products on a contract basis for third parties, if, and when, the products are approved. These products include products using controlled-release drug technology. The Company also develops and markets (either on its own or by license to other companies) generic and proprietary controlled-release pharmaceutical products. The Company recognizes revenue when the customer obtains control of the Company’s product based on the contractual shipping terms of the contract, at which time the performance obligation is deemed to be completed. 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. F- 6 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company recognizes revenue from non-refundable upfront payments at a point in time, typically upon fulfilling the delivery of the associated intellectual property to the customer. For those milestone payments which are contingent on the occurrence of particular future events (for example, payments due upon a product receiving FDA approval), the Company determined that these need to be considered for inclusion in the calculation of total consideration from the contract as a component of variable consideration using the most-likely amount method. As such, the Company assesses each milestone to determine the probability and substance behind achieving each milestone. Given the inherent uncertainty of the occurrence of future events, the Company will recognize revenue from the milestone when there is not a high probability of a reversal of revenue, which typically occurs near or upon achievement of the event. Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance obligations either are completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method. When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in ASC 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of June 30, 2023. In accordance with ASC 606-10-55-65, royalties are recognized when the subsequent sale of the customer’s products occurs. c) Direct Sales The Company began direct sales of products under the Company’s own label on April 1, 2023. License agreements will remain in place for select products. With this transition, however, a large portion of the manufacturing and license fees now reported will be replaced with revenues from direct sales of pharmaceutical products to distributors for pharmacies and institutions. Disaggregation of revenue In the following table, revenue is disaggregated by type of revenue generated by the Company. The Company recognizes revenue at a point in time for all performance obligations. The table also includes a reconciliation of the disaggregated revenue with the reportable segments: SCHEDULE OF DISAGGREGATION OF REVENUE For the Three Months Ended June 30, 2023 2022 ANDA: Manufacturing fees $ 7,909,237 $ 6,327,141 Licensing fees 1,070,839 1,345,767 Total ANDA revenue 8,980,076 7,672,908 Total revenue $ 8,980,076 $ 7,672,908 Selected information on reportable segments and reconciliation of operating income by segment to income from operations before income taxes are disclosed within Note 15. F- 7 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Cash Cash consists of cash on deposit with banks and money market instruments. The Company places its cash 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, 2023, and March 31, 2023, the Company had $ 415,430 and $ 412,434 , of restricted cash, respectively, related to debt service reserve in regard to the New Jersey Economic Development Authority (“NJEDA”) bonds (see Note 5). Accounts Receivable and Allowance for Expected Credit Losses Accounts receivable are comprised of balances due from customers, net of estimated allowances for expected credit losses. In determining collectability, historical trends are evaluated, and specific customer issues are reviewed on a periodic basis to arrive at appropriate allowances. The allowance for expected credit losses is based on the probability of future collection under the current expected credited loss (“CECL”) impairment model under Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Assets, which was adopted by the Company on February 1, 2023, as discussed below within Recently Adopted Accounting Pronouncements. Under the CECL impairment model, the Company determines its allowance by applying a loss-rate method based on an aging schedule using the Company’s historical loss rate. The Company also considers reasonable and supportable current information in determining its estimated loss rates, such as external forecasts, macroeconomic trends or other factors including customers’ credit risk and historical loss experience. The adequacy of the allowance is evaluated on a regular basis. Account balances are written off after all means of collection are exhausted and the balance is deemed uncollectible. Subsequent recoveries are credited to the allowance. Changes in the allowance are recorded as adjustments to credit losses in the period incurred. Prior to April 1, 2023, trade receivables were presented net of allowance for expected credit losses based on the credit risk of specific clients, past collection history, and management’s evaluation of other risks. Expected credit losses stemming from unbilled receivables expected to be billed between March 31, 2024 and March 31, 2028 include additional risk premiums estimated based on factors such as projected inflation, projected decreases in GDP, and projected unemployment. Inventory Inventory is recorded at the lower of cost or net realizable value 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. F- 8 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. During the year ended March 31, 2023, the Company determined indicators of impairment occurred and recorded impairment expense of $ 292,807 on its ANDAs and patents. There were no such impairment recorded during the period ended June 30, 2023. The following table summarizes the Company’s intangible assets as of and for the periods ended June 30, 2023 and March 31, 2023: SCHEDULE OF INTANGIBLE ASSETS June 30, 2023 Estimated Gross Useful Carrying Impairment Accumulated Net Book Life Amount losses Amortization Value Patent application costs * $ 289,039 $ — $ — $ 289,039 ANDA acquisition costs Indefinite 6,052,189 — — 6,052,189 $ 6,341,228 $ — $ — $ 6,341,228 March 31, 2023 Estimated Gross Useful Carrying Impairment Accumulated Net Book Life Amount losses Amortization Value Patent application costs * $ 465,684 $ ( 176,645 ) $ — $ 289,039 ANDA acquisition costs Indefinite 6,168,351 ( 116,162 ) — 6,052,189 $ 6,634,035 $ ( 292,807 ) $ — $ 6,341,228 Research and Development Research and development expenditures are charged to expenses as incurred. Contingencies Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Where applicable, the Company records a valuation allowance to reduce any deferred tax assets that it determines will not be realizable in the future. The Company recognizes the benefit of an uncertain tax position that it has taken or expects to take on income tax returns it files if such tax position is more likely than not to be sustained on examination by the taxing authorities, based on the technical merits of the position. These tax benefits are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution . F- 9 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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, 2023, a summary of the tax years that remain subject to examination in our major tax jurisdictions are: United States – Federal, 2016 and forward. The Company did not record unrecognized tax positions for the three months ended June 30, 2023. Warrants and Preferred Shares The accounting treatment of warrants and preferred share series issued is determined pursuant to the guidance provided by ASC 470, Debt , ASC 480, Distinguishing Liabilities from Equity , and ASC 815, Derivatives and Hedging , as applicable. Each feature of a freestanding financial instrument including, without limitation, any rights relating to subsequent dilutive issuances, dividend issuances, equity sales, rights offerings, forced conversions, optional redemptions, automatic monthly conversions, dividends and exercise is assessed with determinations made regarding the proper classification in the Company’s financial statements. 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. 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 (“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. The Company records earned but unissued stock-based compensation in accrued expenses. Sale of ANDA During the quarter ended December 31, 2022, the Company entered into an agreement with Pyros Pharmaceuticals, Inc. (“Pyros”) pursuant to which the Company sold to Pyros its rights in and to the Company’s approved abbreviated new drug applications (ANDAs) for its generic Sabril drug. The Company sold its rights to Pyros for $ 1,000,000 , which was recorded as gain on sale of ANDA during the year ended March 31, 2023. There is no further action required by the Company regarding the rights which would affect future periods. In conjunction with the sale of its Product to Pyros, the Company executed a Manufacturing and Supply agreement (the “Pyros Agreement”) with Pyros. Under the terms of the Pyros Agreement, the Company will receive an agreed-upon price per drug for the manufacturing and packaging of Sabril over a term of three years. Revenue per the Pyros Agreement will be recognized as control of the manufactured and supplied drugs is transferred to Pyros (at the time of delivery). Earnings Per Share Attributable to Common Shareholders’ The Company follows ASC 260, Earnings Per Share , which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying financial statements, basic earnings per share is computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the period. The computation of diluted net income per share does not include the conversion of securities that would have an antidilutive effect. F- 10 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following is the computation of earnings per share applicable to common shareholders for the periods indicated: SCHEDULE OF EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS 2023 2022 For the Three Months Ended June 30, 2023 2022 Numerator Net income - basic 1 $ 1,141,809 $ 305,883 Effect of dilutive instrument on net income — — Net income - basic and diluted $ 1,141,809 $ 305,883 Denominator Weighted average shares of Common Stock outstanding - basic 1,013,915,081 1,011,381,988 Dilutive effect of stock options and convertible securities 657,740 — Weighted average shares of Common Stock outstanding - diluted 1,014,572,821 1,011,381,988 Net income per share Basic $ 0.00 $ 0.00 Diluted $ 0.00 $ 0.00 Fair Value of Financial Instruments ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) provides a framework for measuring fair value in accordance with generally accepted accounting principles. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820 are described as follows: ● Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. ● Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. ● Level 3 – Inputs that are unobservable for the asset or liability. Measured on a Recurring Basis The following table presents information about our liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fell: SCHEDULE OF LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS Fair Value Measurement Amount at Fair Value Level 1 Level 2 Level 3 Balance as of April 1, 2023 $ 521,711 $ — $ — $ 521,711 Change in fair value of derivative instruments 189,367 — — 189,367 Balance as of June 30, 2023 $ 711,078 $ — $ — $ 711,078 Fair Value Measurement Amount at Fair Value Level 1 Level 2 Level 3 Balance as of April 1, 2022 $ 936,837 $ — $ — $ 936,837 Change in fair value of derivative instruments 500,143 — — 500,143 Balance as of June 30, 2022 $ 1,436,980 $ — $ — $ 1,436,980 1 No amounts are included in the calculation because their effects are anti-dilutive F- 11 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. Financial Instruments — Credit Losses (ASU 2016-13) In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“CECL”). The amendments in this update introduce a new accounting model to measure credit losses for financial assets measured at amortized cost. The FASB has also issued additional ASUs to clarify the scope and provide additional guidance for ASU 2016-13. Credit losses for financial assets measured at amortized cost should be determined based on the total current expected credit losses over the life of the financial asset or group of financial assets. In effect, the financial asset or group of financial assets should be presented at the net amount expected to be collected. Credit losses will no longer be recorded under the current incurred loss model for financial assets measured at amortized cost. The amendments also modify the accounting for available-for-sale debt securities whereby credit losses will be recorded through an allowance for credit losses rather than a write-down to the security’s cost basis, which allows for reversals of credit losses when estimated credit losses decline. Credit losses for available-for-sale debt securities should be measured in a manner similar to current GAAP. The amendments were effective on April 1, 2023 for the Company, and must be applied using a modified retrospective approach with a cumulative-effect adjustment through retained earnings as of the beginning of the fiscal year upon adoption as required. While the standard modifies the measurement of the allowance for credit losses, it does not alter the credit risk of our trade or unbilled receivables. The impact of applying the CECL methodology upon adoption effective on April 1, 2023 was immaterial to the Company’s consolidated financial statements. The Company’s quantitative allowance for credit loss estimates under CECL was determined using the loss rate method, which is impacted by certain forecasted economic factors. In addition to the Company’s quantitative allowance for credit losses, the Company also incorporates qualitative adjustments that may relate to unique risks, changes in current economic conditions that may not be reflected in quantitatively derived results, or other relevant factors to further inform the Company’s estimate of the allowance for credit losses. Additionally, due to the expansion of the time horizon over which the Company is required to estimate future credit losses, the Company may experience increased volatility in its future provisions for credit losses. Factors that could contribute to such volatility include, but are not limited to, changes in the composition and credit quality of customer base, economic conditions and forecasts, the allowance for credit loss models that are used, the data that is included in the models, the associated qualitative allowance framework, and the Company’s estimation techniques. The Company has historical collections of customer payments averaging approximately 99.96 % as of June 30, 2023. The Company recorded revenue during the three months ended June 30, 2023 of approximately $ 9.0 million and recorded an estimated allowance of $ 100,000 , which is approximately 1.2 % of total revenues during the three months ended June 30, 2023. The Company estimated the allowance using considerations such as customer collections, and estimated credit losses. The Company believes the 1.2 % credit allowance is appropriate given its historical customer collections. F- 12 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Treasury Stock The Company records treasury stock at the cost to acquire it and includes treasury stock as a component of shareholders’ equity. Recently Issued Accounting Pronouncements Management has evaluated recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures. NOTE 2. INVENTORY Inventory consisted of the following: SCHEDULE OF INVENTORY June 30, 2023 March 31, 2023 Finished goods $ 7,808,657 $ 2,352,330 Work-in-progress 90,922 1,791,311 Raw materials 3,268,852 5,407,075 Inventory $ 11,168,431 $ 9,550,716 NOTE 3. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: SCHEDULE OF PROPERTY AND EQUIPMENT June 30, 2023 March 31, 2023 Land, building and improvements $ 10,771,997 $ 10,768,181 Laboratory, manufacturing, warehouse and transportation equipment 13,354,863 13,364,512 Office equipment and software 373,601 395,563 Furniture and fixtures 512,032 484,237 Property and equipment, gross 25,012,493 25,012,493 Less: Accumulated depreciation ( 14,914,617 ) ( 14,586,335 ) Property and equipment, net $ 10,097,876 $ 10,426,158 Depreciation expense was $ 328,282 and $ 292,748 for the three months ended June 30, 2023 and 2022, respectively. F- 13 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4. ACCRUED EXPENSES As of June 30, 2023 and March 31, 2023, the Company’s accrued expenses consisted of the following: SUMMARY OF ACCRUED EXPENSES June 30, 2023 March 31, 2023 Salaries and fees payable in common stock 4,470,001 4,125,000 Income tax 564,985 414,989 Consultant contract fees 193,333 193,333 Audit fees 125,000 125,000 Director dues 107,500 70,000 Legal and professional expense 90,000 — Employee bonuses 30,000 — Other accrued expenses 348,534 119,404 Total accrued expenses $ 5,929,353 $ 5,047,726 NOTE 5. NJEDA BONDS 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 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: SCHEDULE OF BONDS PAYABLE LIABILITY June 30, 2023 March 31, 2023 Gross bonds payable NJEDA Bonds - Series A Notes $ 1,245,000 $ 1,245,000 Less: Current portion of bonds payable (prior to deduction of bond offering costs) ( 125,000 ) ( 125,000 ) Long-term portion of bonds payable (prior to deduction of bond offering costs) $ 1,120,000 $ 1,120,000 Bond offering costs $ 354,454 $ 354,454 Less: Accumulated amortization ( 252,842 ) ( 249,294 ) Bond offering costs, net $ 101,612 $ 105,160 Current portion of bonds payable - net of bond offering costs Current portions of bonds payable $ 125,000 $ 125,000 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 $ 110,822 $ 110,822 Long term portion of bonds payable - net of bond offering costs Long term portion of bonds payable $ 1,120,000 $ 1,120,000 Less: Bond offering costs to be amortized subsequent to the next 12 months ( 87,432 ) ( 90,982 ) Long term portion of bonds payable, net of bond offering costs $ 1,032,568 $ 1,029,018 Amortization expense was $ 3,548 and $ 3,546 for the three months ended June 30, 2023 and 2022, respectively. Interest payable was $ 6,744 as of June 30, 2023 and March 31, 2023. Interest expense was $ 20,232 and $ 22,101 for the three months ended June 30, 2023 and 2022, respectively. F- 14 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Maturities of bonds for the next five years are as follows: SCHEDULE OF MATURITIES OF BONDS Years ending March 31, Amount 2024 $ 125,000 2025 130,000 2026 140,000 2027 150,000 Thereafter 700,000 Total $ 1,245,000 NOTE 6. LOANS PAYABLE On April 2, 2022, the Company and Elite Labs entered into a Loan and Security Agreement (the “EWB Loan Agreement”) with East West Bank (“EWB”). Pursuant to the EWB Loan Agreement, the Company and Elite Labs received one term loan for a principal amount of $ 12,000,000 (the “EWB Term Loan”) and a revolving line of credit up to $ 2,000,000 (the “EWB Revolver,” together with the “EWB Term Loan,” the EWB Loans”), each of which shall be used for working capital. The EWB Term Loan bears interest at a rate of 9.73 % ( 1.73 % plus the prime rate (“Prime”)) and is repayable over five years , maturing on May 1, 2027 . The EWB Revolver bears interest at a rate of ( 8.87 % ( 0.87 % plus Prime)) and matures on May 1, 2027 . The total transaction costs associated with the EWB Term Loan incurred as of March 31, 2023, were $ 40,120 , which are being amortized on a monthly basis over five years, beginning in April 2022. The EWB Loans are secured by a security interest in the personal property of the Company and Elite Labs. The EWB Loan Agreement contains customary representations, warranties and covenants. These covenants include, but are not limited to, maintaining maximum leverage ratios of 3.50 to 1.00, minimum liquidity of $5,000,000, minimum cash of $1,000,000, a fixed charge coverage ratio of 1.25 to 1.00 and restrictions on mergers or sales of assets and debt borrowings. As of March 31, 2023, the principal and interest on the EWB Term Loan has been paid in full by the Company and the EWB Loan Agreement is terminated. In place of the EWB Term Loan, the Company has entered into a collateralized promissory note with individual lenders with rates comparable to the EWB Term Loan but with less restrictive covenants (a "Promissory Note”). As of June 2, 2023, a Promissory Note was placed with Nasrat Hakim, CEO and Chairman of the Board of Directors, for $ 3,000,000 . The Promissory Note has an interest rate of 9 % for the first year and 10 % for an optional second year and the proceeds will be used for working capital and other business purposes. Loans payable consisted of the following: SCHEDULE OF LOANS PAYABLE June 30, 2023 March 31, 2023 Mortgage loan payable 4.75% interest and maturing June 2032 $ 2,471,304 $ 2,472,923 Equipment and insurance financing loans payable, between 7.10 % and 12.02 % interest and maturing between September 2023 and October 2025 214,903 259,611 Less: Current portion of loans payable ( 140,454 ) ( 200,032 ) Long-term portion of loans payable $ 2,545,753 $ 2,532,502 The interest expense associated with the loans and mortgage payable was $ 77,238 and $ 177,579 for the three months ended June 30, 2023 and 2022, respectively. Loan and mortgage principal payments for the next five years are as follows: SCHEDULE OF LOAN PRINCIPAL PAYMENTS Years ending March 31, Amount 2024 (excluding the three months ended June 30, 2023) $ 140,454 2025 380,210 2026 317,537 2027 292,652 2028 297,245 2029 and thereafter 1,258,109 Total remaining principal balance $ 2,686,207 NOTE 7. RELATED PARTY LOANS The Company has entered into a collateralized promissory note with individual lenders with rates comparable to the EWB Term Loan but with less covenants (the “Hakim Promissory Note”). These covenants include filing timely tax returns and financial statements, and an agreement not to sell, lease, or transfer a substantial portion of the Company’s assets during the term of the Hakim Promissory Note. On June 2, 2023, the Company entered into a Promissory Note with Nasrat Hakim, CEO and Chairman of the Board of Directors, pursuant to which the Company borrowed funds in the aggregate principal amount of $ 3,000,000 . The Hakim Promissory Note has an interest rate of 9 % for the first year and 10 % for an optional second year and the proceeds will be used for working capital and other business purposes. The original maturity date of the Hakim Promissory Note is June 2, 2024, with an optional second year extension. The second year extension must be exercised by both parties 60 days prior to the original maturity date. As of the date of this filing, the Company does not expect to exercise the second year extension. F- 15 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On July 1, 2022, the EWB provided a mortgage loan (“EWB Mortgage Loan”) in the amount of $ 2.55 million for the purchase of the property at 135-137 Ludlow Avenue, which was formerly a lease held by the Company. The EWB Mortgage Loan matures in 10 years and bears interest at a rate of 4.75% fixed for 5 years then adjustable at the Wall Street Journal Prime Rate (“WSJP”) plus 0.5% with floor rate of 4.5%. The total transaction costs associated with the EWB Mortgage Loan incurred as of June 30, 2023, were $ 13,251 , which are being amortized on a monthly basis over ten years, beginning in July 2022. The EWB Mortgage Loan contains customary representations, warranties and covenants. These covenants include maintaining a minimum debt coverage ratio of 1.50 to 1.00 tested annually and a minimum trailing 12-month debt coverage ratio of 1.50 to 1.00. As of the date of this filing, the Company was in compliance with each financial covenant. On June 30, 2023, the Company entered into a collateralized promissory note with Davis Caskey (the “Caskey Promissory Note”). The Caskey Promissory Note has a principal balance of $ 1,000,000 and an interest rate of 9 % for the first year and 10 % for an optional second year. The Caskey Promissory Note is subject to the same covenants as are contained in the Hakim Promissory Note. The proceeds will be used for working capital and other business purposes. The original maturity date of the Caskey Promissory Note is June 30, 2024, with an optional second year extension. The second year extension must be exercised by both parties 60 days prior to the original maturity date. As of the date of this filing, the Company does not expect to exercise the second year extension. NOTE 8. DEFERRED REVENUE Deferred revenues in the aggregate amount of $ 28,889 as of June 30, 2023, were comprised of a current component of $ 13,333 and a long-term component of $ 15,556 . Deferred revenues in the aggregate amount of $ 32,223 as of March 31, 2023, were comprised of a current component of $ 13,333 and a long-term component of $ 18,890 . These line items represent the unamortized amounts of a $ 200,000 advance payment received for a TAGI Pharma licensing agreement with a fifteen-year term beginning in September 2010 and ending in August 2025 . These advance payments were recorded as deferred revenue when received and are earned, on a straight-line basis over the life of the licenses. The current component is equal to the amount of revenue to be earned during the 12-month period immediately subsequent to the balance sheet date and the long-term component is equal to the amount of revenue to be earned thereafter. NOTE 9. COMMITMENTS AND CONTINGENCIES Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. Operating Leases The Company entered into an operating lease for a portion of a one-story warehouse, located at 135 Ludlow Avenue, Northvale, New Jersey (the “Ludlow Ave. lease”) which began in 2010. On June 30, 2021, the Company exercised a renewal option, with such option including a term that begins on January 1, 2022 and expires on December 31, 2026. The Ludlow Ave. lease was terminated on July 1, 2022, when the Company purchased the underlying property. F- 16 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) In October 2020, the Company entered into an operating lease for office space in Pompano Beach, Florida (the “Pompano Office Lease”). The Pompano Office Lease is for approximately 1,275 square feet of office space, with Elite taking occupancy on November 1, 2020. The Pompano Office has a term of three years, ending on October 31, 2023. The Company assesses whether an arrangement is a lease or contains a lease at inception. For arrangements considered leases or that contain a lease that is accounted for separately, the Company determines the classification and initial measurement of the right-of-use asset and lease liability at the lease commencement date, which is the date that the underlying asset becomes available for use. The Company has elected to account for non-lease components associated with its leases and lease components as a single lease component. The Company recognizes a right-of-use asset, which represents the Company’s right to use the underlying asset for the lease term, and a lease liability, which represents the present value of the Company’s obligation to make payments arising over the lease term. The present value of the lease payments is calculated using either the implicit interest rate in the lease or an incremental borrowing rate. Lease assets and liabilities are classified as follows on the condensed consolidated balance sheet: SCHEDULE OF LEASE ASSETS AND LIABILITIES Lease Classification As of June 30, 2022 Assets Operating Operating lease – right-of-use asset $ 7,528 Total leased assets $ 7,528 Liabilities Current Operating Lease obligation – operating lease $ 8,586 Long-term Operating Lease obligation – operating lease, net of current portion — Total lease liabilities $ 8,586 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, 2023 and 2022 was $0 and $ 58,248 , respectively. Rent expense under the Pompano Office Lease for the three months ended June 30, 2023 and 2022 was $ 6,519 and $ 6,330 , respectively. Rent expense is recorded in general and administrative expense in the unaudited condensed consolidated statements of operations. The table below shows the future minimum rental payments, exclusive of taxes, insurance and other costs, under the Pompano Office Lease: SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS Years ending March 31, Amount 2024 (excluding the three months ended June 30, 2023) $ 8,694 Total future minimum lease payments 8,694 Less: interest ( 108 ) Present value of lease payments $ 8,586 F- 17 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: SCHEDULE OF WEIGHTED -AVERAGE REMAINING TERM AND THE WEIGHTED-AVERAGE DISCOUNT RATE Lease Term and Discount Rate June 30, 2023 Remaining lease term (years) Operating leases 0.3 Discount rate Operating leases 6 % 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. A total of 50 shares of Series J Preferred were authorized, zero shares are issued and outstanding, with a stated value of $ 1,000,000 per share and a par value of $ 0.01 . F- 18 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS – WARRANTS The Company evaluates and accounts for its freestanding instruments in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities . The Company issued warrants, with a term of ten years, to affiliates in connection with an exchange agreement dated April 28, 2017, as further described in this note below. The Company has 79,008,661 total warrants to purchase shares of common stock outstanding with a weighted average exercise price of $ 0.1521 as of June 30, 2023 and March 31, 2023. On April 28, 2017, the Company entered into an Exchange Agreement with Hakim, the Chairman of the Board, President, and Chief Executive Officer of the Company, pursuant to which the Company issued to Hakim 24.0344 shares of its Series J Preferred and warrants to purchase an aggregate of 79,008,661 shares of its Common Stock (the “Series J Warrants” and, along with the Series J Preferred issued to Hakim, the “Securities”) in exchange for 158,017,321 shares of Common Stock owned by Hakim. The fair value of the Series J Warrants was determined to be $ 6,474,674 upon issuance at April 28, 2017. The Series J Warrants are exercisable for a period of 10 years from the date of issuance, commencing April 28, 2020. The initial exercise price is $ 0.1521 per share and the Series J Warrants can be exercised for cash or on a cashless basis. The exercise price is subject to adjustment for any issuances or deemed issuances of Common Stock or Common Stock equivalents at an effective price below the then exercise price. Such exercise price adjustment feature prohibits the Company from being able to conclude the warrants are indexed to its own stock and thus such warrants are classified as liabilities and measured initially and subsequently at fair value. The Series J Warrants also provide for other standard adjustments upon the happening of certain customary events. The fair value of the Series J Warrants was calculated using a Black-Scholes model instead of a Monte Carlo Simulation because the probability with the shareholder approval provisions was no longer a factor. The following assumptions were used in the Black-Scholes model to calculate the fair value of the Series J Warrants: SCHEDULE OF FAIR VALUE OF WARRANTS ISSUED June 30, 2023 March 31, 2023 Fair value of the Company’s Common Stock $ 0.0383 $ 0.0290 Volatility 72.21 % 74.37 % Initial exercise price $ 0.1521 $ 0.1521 Warrant term (in years) 3.8 4.1 Risk free rate 4.01 % 3.55 % The changes in warrants (Level 3 financial instruments) measured at fair value on a recurring basis for the three months ended June 30, 2023 were as follows: SCHEDULE OF CHANGES IN WARRANTS MEASURED AT FAIR VALUE ON A RECURRING BASIS Balance at March 31, 2023 $ 521,711 Change in fair value of derivative financial instruments - warrants 189,367 Balance at June 30, 2023 $ 711,078 NOTE 12. SHAREHOLDERS’ EQUITY Lincoln Park Capital Transaction - July 8, 2020 Purchase Agreement On July 8, 2020, the Company entered into a purchase agreement (the “2020 LPC Purchase Agreement”), and a registration rights agreement, 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. F- 19 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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, 2023 and 2022. In addition, there were no shares issued to Lincoln Park as additional commitment shares, pursuant to the 2020 LPC Agreement. The 2020 LPC Purchase Agreement will expire on August 1, 2023. Summary of Common Stock Activity During the three months ended June 30, 2023 and 2022, the Company did not issue any shares of Common Stock. NOTE 13. STOCK-BASED COMPENSATION Part of the compensation paid by the Company to its Directors and employees consists of the issuance of Common Stock or via the granting of options to purchase Common Stock. Stock-based Director Compensation The Company’s Director compensation policy, instituted in October 2009 and further revised in January 2016, includes provisions that a portion of director’s fees are to be paid via the issuance of shares of the Company’s Common Stock, in lieu of cash, with the valuation of such shares being calculated on quarterly basis and equal to the average closing price of the Company’s Common Stock. During the three months ended June 30, 2023, the Company accrued director’s fees totaling $ 37,500 , which will be paid via cash payments totaling $ 7,500 and the issuance of shares of Common Stock. Stock-based Employee/Consultant Compensation Employment contracts with the Company’s President and Chief Executive Officer and certain other employees and engagement contracts with certain consultants include provisions for a portion of each employee’s salaries or consultant’s fees to be paid via the issuance of shares of the Company’s Common Stock, in lieu of cash, with the valuation of such shares being calculated on a quarterly basis and equal to the average closing price of the Company’s Common Stock. During the three months ended June 30, 2023, the Company accrued salaries totaling $ 170,000 owed to the Company’s President, Chief Executive Officer and certain other employees which will be paid via the issuance of shares of Common Stock. As of June 30, 2023, the total obligation of $ 4,725,000 is outstanding. Options Under its 2014 Stock Option Plan and prior options plans, the Company may grant stock options to officers, selected employees, as well as members of the Board of Directors and advisory board members. All options have generally been granted at a price equal to or greater than the fair market value of the Company’s Common Stock at the date of the grant. Generally, options are granted with a vesting period of up to three years and expire ten years from the date of grant. A summary of the activity of Company’s 2014 Stock Option Plan for the three months ended June 30, 2023 is as follows: SCHEDULE OF STOCK OPTION PLAN Shares Underlying Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Outstanding at March 31, 2023 15,370,000 $ 0.07 7.4 $ — Outstanding at June 30, 2023 15,370,000 $ 0.05 7.2 $ — Exercisable at June 30, 2023 4,182,000 $ 0.08 2.0 $ — F- 20 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The aggregate intrinsic value for outstanding options is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s Common Stock as of June 30, 2023 and March 31, 2023 of $ 0.04 and $ 0.03 , respectively. As of June 30, 2023, there was $ 184,722 in unrecognized stock based compensation expense that will be recognized over a 1.3 year period. NOTE 14. CONCENTRATIONS AND CREDIT RISK Revenues Five customers accounted for approximately 76 % of the Company’s revenues for the three months ended June 30, 2023. These five customers accounted for approximately 21 %, 16 %, 15 %, 14 %, and 10 % of revenues each, respectively. One customer accounted for approximately 85 % of the Company’s revenues for the three months ended June 30, 2022. Accounts Receivable Three customers accounted for approximately 56 % of the Company’s accounts receivable as of June 30, 2023. These three customers accounted for approximately 22 %, 21 %, and 13 % of accounts receivable each, respectively. One customer accounted for approximately 96 % the Company’s accounts receivable as of March 31, 2023. Purchasing One supplier accounted for approximately 39 % of the Company’s purchases of raw materials for the three months ended June 30, 2023. Two suppliers accounted for approximately 66 % of the Company’s purchases of raw materials for the three months ended June 30, 2022. These two suppliers accounted for approximately 56 % and 10 % 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 ANDAs for generic products and NDAs for branded products. The Company identified its reporting segments based on the marketing authorization relating to each and the financial information used by its chief operating decision maker to make decisions regarding the allocation of resources to and the financial performance of the reporting segments. Asset information by operating segment is not presented below since the chief operating decision maker does not review this information by segment. The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements. The following represents selected information for the Company’s reportable segments: SCHEDULE OF SELECTED INFORMATION FOR REPORTABLE SEGMENTS 2023 2022 For the Three Months Ended June 30, 2023 2022 Operating Income by Segment ANDA $ 7,725,635 $ 8,068,073 Operating income by Segment $ 7,725,635 $ 8,068,073 F- 21 ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The table below reconciles the Company’s operating income by segment to income before income taxes as reported in the Company’s unaudited condensed consolidated statements of operations. SCHEDULE OF OPERATING INCOME BY SEGMENT TO INCOME FROM OPERATIONS 2023 2022 For the Three Months Ended June 30, 2023 2022 Operating income by segment $ 7,725,635 $ 8,068,073 Corporate unallocated costs ( 2,606,661 ) ( 2,288,461 ) Interest income 3,516 129 Interest expense and amortization of debt issuance costs ( 119,412 ) ( 126,376 ) Depreciation and amortization expense ( 328,282 ) ( 908,297 ) Significant non-cash items ( 469,021 ) ( 652,281 ) Change in fair value of derivative instruments ( 189,367 ) 1,523,394 Income before income taxes $ 4,016,408 $ 5,616,181 NOTE 16. RELATED PARTY AGREEMENTS WITH MIKAH PHARMA, LLC In May 2020, Praxgen (formerly known as SunGen Pharma LLC), pursuant to an asset purchase agreement, assigned its rights and obligations under the Praxgen Agreement for Amphetamine IR and Amphetamine ER to Mikah Pharma LLC (“Mikah”). 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 Praxgen. Mikah was founded in 2009 by Nasrat Hakim, a related party and the Company’s President, Chief Executive Officer and Chairman of the Board. In June 2021, the Company entered into a development and license agreement with Mikah, pursuant to which Mikah will engage in the research, development, sales and licensing of generic pharmaceutical products. In addition, Mikah will collaborate to develop and commercialize generic products including formulation development, analytical method development, manufacturing, sales and marketing of generic products. Initially two generic products were identified for the parties to develop. NOTE 17. INCOME TAXES The Company’s effective tax rate was 11.5 % and income tax expense for the three months ended June 30, 2023 was $ 154,952 . The Company’s effective tax rate was 0.00 % and income tax expense was $— for the three months ended June 30, 2022. The Company has evaluated its deferred tax assets, specifically its net operating loss carryovers, for realizability and has provided a valuation allowance on the majority of its deferred tax assets. The change in valuation allowance is the reason that the effective tax rate and income tax expense are different than the statutory rate of 21 %. NOTE 18. SUBSEQUENT EVENTS The Company has evaluated subsequent events from the balance sheet date through August 14, 2023 and note no material subsequent events were identified. F- 22