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 for the Six Months Ended September 30, 2024 and 2023 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, 2024. 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, and 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 135, 144 and 165 Ludlow Avenue in Northvale, NJ (the “Northvale Facility”). The Northvale Facility operates under Current Good Manufacturing Practice and is a United States Drug Enforcement Agency registered facility for research, development, and manufacturing. We are also party to an operating lease for office space at Pompano Beach, Florida (the “Pompano Office Lease”). 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 product candidates in our pipeline including products co-developed with partners; (iv) commercial exploitation of our products either by sales under our own label, license and the collection of royalties, or through the manufacture of our formulations; and (v) development of new products for sale under our own label, 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. 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. Recent Developments On May 20, 2024, the Company reported that it received approval from the FDA for a generic version of Methotrexate Sodium 2.5mg tablets (“Generic Methotrexate”). Methotrexate Sodium belongs to a class of drugs known as antimetabolites and will be sold under the Elite Laboratories Inc. label. Generic Methotrexate was launched commercially on August 27, 2024. On June 17, 2024, the Company entered into an asset purchase agreement with Nostrum Laboratories Inc. (the “Nostrum Asset Purchase Agreement”), pursuant to which the Company acquired all rights in and to the approved ANDAs as well as royalty free, non-exclusive perpetual licenses to use the manufacturing technology, proprietary information, processes, techniques, protocols, methods, know-how and improvements necessary to manufacture the following products: ● Hydrocodone Bitartrate and Acetaminophen tablets ● Oxycodone Hydrochloride and Acetaminophen tablets ● Methodone Hydrochloride tablets 1 As of the date of filing of this Quarterly report on Form 10-Q, these products have not yet been commercially launched. On October 7, 2024, the Company announced the commercial launch of Acetaminophen and Codeine Phosphate 300mg/15mg, 300mg/30mg and 300mg/60mg tablets (“APAP Codeine Tablets”). APAP Codeine Tablets are indicated for the management of mild to moderate pain, where treatment with and opioid is appropriate and for which alternate treatments are inadequate. APAP Codeine Tablets are marketed and sold under the Elite Laboratories label. On October 10, 2024, the Company announced the Israeli Ministry of Health approval of Elite’s generic version of Adderall ® , an immediate-release mixed salt of a single entity amphetamine product (Dextroamphetamine Saccharate, Amphetamine Asparate, Dextroamphetamine Sulfate, Amphetamine Sulfate) with strengths of 10mg, 20mg and 30mg tablets. The product is a central nervous system stimulant indicated for the treatment of attention deficit hyper activity disorder (ADHD) and narcolepsy. The Company will supply the product to Dexcel Pharma (Akiva, Israel), the Company’s exclusive distributor for the Israel market. As of the date of filing of this quarterly report on Form 10-Q, these products have not yet been commercially launched. 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® Pain September 2013 Isradipine 2.5mg and 5mg capsules (“Isradipine 2.5mg” and “Isradipine 5mg”) N/A Cardiovascular January 2015 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 Methotrexate Sodium 2.5mg tablets (“Methotrexate 2.5mg”) Otrexup PF® Antimetabolite August 2024 Acetaminophen and Codeine Phosphate 300mg/15mg, 300mg/30mg and 300mg/60mg tablets (“APAP Codeine Tablets”). Tylenol® with Codeine Pain October 2024 Products Under FDA Review SequestOx™ - Immediate Release Oxycodone with sequestered Naltrexone SequestOx™ is our abuse-deterrent candidate for the management of moderate to severe pain where the use of an opioid analgesic is appropriate. SequestOx™ is an immediate-release Oxycodone Hydrochloride containing sequestered Naltrexone which incorporates 5mg, 10mg, 15mg, 20mg and 30mg doses of oxycodone into capsules. In January 2016, the Company submitted a 505(b)(2) New Drug Application for SequestOx™, after receiving a waiver of the $2.3 million filing fee from the FDA. In March 2016, the Company received notification of the FDA’s acceptance of this filing and that such filing has been granted priority review by the FDA with a target action under the Prescription Drug User Fee Act of July 14, 2016. 2 On July 15, 2016, the FDA issued a Complete Response Letter, or CRL, regarding the NDA. The CRL stated that the review cycle for the SequestOx™ NDA is complete and the application is not ready for approval in its present form. On July 7, 2017, the Company reported topline results from a pivotal bioequivalence fed study for or SequestOx™. The mean Tmax (the amount of time that a drug is present at the maximum concentration in serum) of SequestOx™ was 4.6 hr. with a range of 0.5 hr. to 12 hr. and the mean Tmax of the comparator, Roxicodone®, was 3.4 hr. with a range of 0.5 hr. to 12 hr. A key objective for the study was to determine if the reformulated SequestOx™ had a similar Tmax to the comparator when taken with a high fat meal. Based on these results, the Company paused clinical trials for this formulation of SequestOx™. On January 30, 2018, the Company reported positive topline results from a pilot study conducted for a modified SequestOx™ wherein, based on the results of this pilot study, the modified SequestOx™ formulation is expected to achieve bioequivalence with a Tmax range equivalent to the reference product when conducted in a pivotal trial under fed conditions. The Company has provided the pilot data to the FDA, requesting clarification as to the requirements for resubmission of the NDA. The FDA has provided guidance for repeated bio-equivalence studies in order to bridge the new formulation to the original SequestOx™ studies and also extended our filing fee waiver until July 2023. Due to the prohibitive cost of such repeated bio-equivalence studies and the uncertain commercial viability given the regulatory and competitive landscape, the Company has paused development of this product candidate. There can be no assurances of the Company conducting future clinical trials, or if such trials are conducted, there can be no assurances of the success of any future clinical trials, or if such trials are successful, there can be no assurances that an intended future resubmission of the NDA product filing, if made, will be accepted by or receive marketing approval from the FDA. In addition, even if marketing authorization is received, there can be no assurances that there will be future revenues or profits, or that any such future revenues or profits would be in amounts that provide adequate return on the significant investments made to secure this marketing authorization. Generic Products Filed Currently the Company has filed the following ANDA’s which have been accepted for review by the FDA: ● Generic dopamine agonist accepted for review in December 2022 ● Generic opiate analgesic for pain management accepted for review in September 2023 ● Generic central nervous system stimulant accepted for review in December 2023 Approved Products Not Yet Commercialized Doxycycline Hyclate Tablets The Company received approval in April 2022 from the FDA of an ANDA for a generic version of an antibiotic product. The product is jointly owned by Elite and Praxgen Pharmaceuticals LLC, formerly SunGen Pharma LLC, (“Praxgen”). Hydrocodone Bitartrate and Acetaminophen Tablets On June 17, 2024, the Company entered into an asset purchase agreement with Nostrum Laboratories Inc. (the “Nostrum Asset Purchase Agreement”), pursuant to which the Company acquired all rights in and to the approved ANDA to this product and a royalty-free, non-exclusive perpetual license to use the manufacturing technology, proprietary information, processes, techniques, protocols, methods, know-how and improvements necessary or used to manufacture this product. Oxycodone Hydrochloride and Acetaminophen Tablets Pursuant to the Nostrum Asset Purchase Agreement, the Company acquired all rights in and to the approved ANDA to this product and a royalty-free, non-exclusive perpetual license to use the manufacturing technology, proprietary information, processes, techniques, protocols, methods, know-how and improvements necessary or used to manufacture this product. Methadone Hydrochloride Tablets Pursuant to the Nostrum Asset Purchase Agreement, the Company acquired all rights in and to the approved ANDA to this product and a royalty-free, non-exclusive perpetual license to use the manufacturing technology, proprietary information, processes, techniques, protocols, methods, know-how and improvements necessary or used to manufacture this product. There can be no assurances in relation to any of the above approved products not yet commercialized, that there will be future revenues or profits, or that any such future revenues or profits would be in amounts that provide adequate return on the significant investments made to secure these marketing authorizations. 3 Discontinued and Transferred Products As part of standard operating practices, the Company, from time to time, as relevant, conducts evaluations of all ANDAs owned, consisting, without limitation, of ANDAs acquired or approved prior to the fiscal year ended March 31, 2024 (“Fiscal 2024”) and ANDAs acquired or approved during the quarterly period ending September 30, 2024. Such evaluations include, without limitation, costs and benefits relating to each ANDA owned, with such costs including those fees required under the FDA’s Generic Drug User Fee Amendment which is significantly influenced by the number of ANDAs owned, and other costs and benefits taking into consideration various specific market factors for each ANDA. Those ANDAs with a cost/benefit profile not consistent with management criteria for continuation are identified for disposition and effort is made to determine the optimal course of action to achieve disposition of the ANDA. The Company did not transfer or discontinue any ANDAs during the quarterly period ending September 30, 2024 or Fiscal 2024. Critical Accounting Estimates The preparation of the unaudited condensed consolidated financial statements and related disclosures in conformity with GAAP, and our discussion and analysis of the Company’s financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in the Company’s 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. We have identified below the critical accounting policies, which are assumptions made by management about matters that are highly uncertain and that are of critical importance in the presentation of our financial position, results of operations and cash flows. Due to the need to make estimates about the effect of matters that are inherently uncertain, materially different amounts could be reported under different conditions or using different assumptions. On a regular basis, we review our critical accounting policies and how they are applied in the preparation our financial statements. Revenue Recognition - The Company generates revenue from manufacturing and sales of generic pharmaceuticals bearing either the Elite label, which are sold to pharmaceutical distributors or the label of a licensing partner, which Elite sells directly to such licensing partner, and licensing fees. Revenues earned from the sale of Elite label products are recorded at their net realizable value which consists of gross amounts invoiced reduced by contractual reductions, including, without limitation, chargebacks, discounts and program rebates, as applicable. 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. 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 immediate and controlled-release products marketed under the Elite label, or manufactured on a contract basis for third parties. 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. 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. 4 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. 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, and other contractual deductions, including, without limitation, chargebacks, discounts and program rebates. 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 credit 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 April 1, 2023. 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 rate, 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 to be uncollectible. Subsequent recoveries are credited to the allowance. Changes in the allowance are recorded as adjustments to credit losses in the period incurred. Expected credit losses stemming from unbilled receivables expected to billed between September 30, 2024 and September 30, 2028 included additional risk premiums estimated based on factors such as projected inflation, projected decreases in GDP, and projected unemployment. 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 the enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Where applicable, the Company records a valuation allowance to reduce any deferred tax assets that it determines will not be realizable in the future. The Company recognizes the benefit of an uncertain tax position that it has taken or expects to take on income tax returns it files if such tax position is more likely than not to be sustained on examination by the taxing authorities, based on the technical merits of the position. These tax benefits are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company operates in multiple tax jurisdictions within the United States of America. The Company remains subject to examination in all tax jurisdictions until the applicable statutes of limitation expire. As of September 30, 2024, a summary of the tax years that remain subject to examination in our major tax jurisdictions are: United States of America – Federal, 2020 and forward, and State, 2019 and forward. The Company did not record unrecognized tax positions for the six months ended September 30, 2024. New Accounting Pronouncements For a description of recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our financial statements, see “Note 1. Summary of Significant Accounting Polices: Recently Issued Accounting Pronouncements” in Part II, Item 1 of this Form 10-Q. 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 September 30, 2024 compared to the three months ended September 30, 2023 Revenue, Cost of revenue and Gross profit: For the Three Months Ended September 30, Change 2024 2023 Dollars Percentage Manufacturing fees $ 18,225,190 $ 13,507,870 $ 4,717,320 35 % Licensing fees 655,155 649,315 5,840 1 % Total revenue 18,880,345 14,157,185 4,723,160 33 % Cost of manufacturing 10,682,917 7,710,106 2,972,811 39 % Gross profit $ 8,197,428 $ 6,447,079 $ 1,750,349 27 % Gross profit - percentage 43 % 46 % Total revenues for the three months ended September 30, 2024 increased by $4.7 million or 33%, to $18.9 million, as compared to $14.2 million, for the corresponding period of the prior year, , primarily due to increased sales of the Elite label products during the current quarter in comparison to the comparable quarter of the prior fiscal year. The Elite label products were launched during the prior fiscal year and the current fiscal year represents their second year in the market. The additional twelve months of marketing the Elite label products has had a positive impact on sales, when compared to the sales achieved in the comparable period of the prior year. Manufacturing fees for the three months ended September 30, 2024 revenue increased by $4.7 million, or 35%, primarily due to increased sales of the Elite label products during the current fiscal year in comparison to the comparable quarter of the prior fiscal year. The Elite label products were launched during the prior fiscal year and the current fiscal year represents their second year in the market. The additional twelve months of marketing the Elite label products has had a positive impact on sales, when compared to the sales achieved in the comparable period of the prior year. Licensing fees revenue for the three months ended September 30, 2024 was relatively unchanged, increasing by less than 1% as compared to licensing fees earned during the comparable period of the prior fiscal year. Cost of manufacturing consists of manufacturing and assembly costs. Our cost of revenue increased by $3.0 million or 39%, to $10.7 million as compared to $7.7 million for the corresponding period in the prior fiscal year. This increase was due to an increased volume of products sold during the three months ended September 30, 2024, as compared to the comparable period of the prior fiscal year, as noted above. Our gross profit margin was 43% during the three months ended September 30, 2024 as compared to 46% during the comparable period of the prior fiscal year. The decrease is due to increased labor costs resulting from manufacturing personnel overtime hours incurred to ensure production and supply of our products in response to increased demand. In addition, during the three months ended September 30, 2024, manufacturing fees represented a higher proportion of total revenue, as compared to licensing fees. Manufacturing fees generate lower gross profit margins as compared to licensing fees, due to it having a related cost of manufacturing, which is not associated with licensing fees. The Company is in the process of expanding its manufacturing facilities and capacity to achieve utilization rates that will yield higher volumes at standard labor rates. 5 Operating expenses: For the Three Months Ended September 30, Change 2024 2023 Dollars Percentage Operating expenses: Research and development $ 1,966,094 $ 2,618,349 $ (652,255 ) (25 )% General and administrative 2,273,744 1,533,208 740,536 48 % Non-cash compensation 52,329 42,777 9,552 22 % Depreciation and amortization 420,318 327,240 93,078 28 % Total operating expenses $ 4,712,485 $ 4,521,574 $ 190,911 4 % Operating expenses for the three months ended September 30, 2024 increased by $0.2 million, or 4%, to $4.7 million as compared to $4.5 million for the corresponding period in the prior fiscal year, largely due to an increase in general and administrative costs of $0.7 million. Research and development costs during the three months ended September 30, 2024 were $2.0 million, a decrease of $0.65 million, or 25%, from approximately $2.6 million of such costs for the comparable period of the prior year. The decrease was the result of laboratory resources being allocated more to supporting commercial operations as well as the number, timing and nature of product development activities during the three months ended September 30, 2024, as compared to the comparable period of the prior fiscal year. General and administrative expenses for the three months ended September 30, 2024 were $2.3 million, an increase of $0.7 million or approximately 48% from the comparable period of the prior fiscal year, largely due to increased human resource costs resulting from increased headcounts as well as increased costs of financial and tax reporting compliance as compared to the comparable period of the prior year. Non-cash compensation expense for the three months ended September 30, 2024 and 2023 was less than $0.1 million. Depreciation and amortization expenses from the three months ended September 30, 2024 were $0.4 million, which increased slightly as a result of additional capital expenditures and ASC 842 finance assets acquired, from $0.3 million in such costs for the comparable period of the prior fiscal year. As a result of the foregoing, our income from operations during the three months ended September 30, 2024 was $3.5 million, compared to income from operations of $1.9 million for the comparable period of the prior fiscal year. Other income (expense): For the Three Months Ended September 30, Change 2024 2023 Dollars Percentage Other income (expenses): Change in fair value of derivative financial instruments - warrants $ (12,754,735 ) $ (2,468,350 ) $ (10,286,385 ) 417 % Change in fair value of stock-based liabilities — (2,066,820 ) 2,066,820 (100 )% Interest expense and amortization of debt issuance costs (255,136 ) (130,438 ) (124,698 ) 96 % Interest income 5,902 7,320 (1,418 ) (19 )% Other expenses, net $ (13,003,969 ) $ (4,658,288 ) $ (8,345,681 ) 179 % Other income (expenses) for the three months ended September 30, 2024 was a net other (expense) $13.0 million, an increase of $8.3 million from a net other (expense) of $4.7 million for the comparable period of the prior fiscal year. The increase was primarily due to an increase of $10.3 million relating to the change in fair value of derivative financial instruments, offset by a decrease of other expenses of $2.1 million relating to the change in fair value of stock-based liabilities and by a slight increase in other expenses of $0.1 million relating to the interest expense and amortization of debt issuance costs in the current fiscal year as compared to the comparable period of the prior fiscal year. The change in the fair value of derivative instruments and stock-based liabilities 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 other income expense recorded from changes in the fair value of our derivatives instruments and stock-based liabilities and changes in the closing price of the Company’s Common Stock. The increase in interest expense associated with the loans payable is due to the Company servicing a larger principal amount of loans payable during the three months ended September 30, 2024 as compared to the comparable period of the prior fiscal year 6 As a result of the foregoing, our net loss before income taxes for the three months ended September 30, 2024 was $9.5 million, compared to net loss before income taxes of $2.7 million for the comparable period of the prior fiscal year. Six months ended September 30, 2024 compared to the six months ended September 30, 2023 Revenue, Cost of revenue and Gross profit: For the Six Months Ended September 30, Change 2024 2023 Dollars Percentage Manufacturing fees $ 36,669,108 $ 21,417,107 $ 15,252,001 71 % Licensing fees 1,014,300 1,720,154 (705,854 ) (41 )% Total revenue 37,683,408 23,137,261 14,546,147 63 % Cost of manufacturing 21,011,202 11,939,627 9,071,575 76 % Gross profit $ 16,672,206 $ 11,197,634 $ 5,474,572 49 % Gross profit - percentage 44 % 48 % Total revenues for the six months ended September 30, 2024 increased by $14.5 million or 63%, to $37.7 million, as compared to $23.1 million, for the corresponding period of the prior year due to increased sales of the Elite label products during the current fiscal year in comparison to the comparable quarter of the prior fiscal year. The Elite label products were launched during the prior fiscal year and the current fiscal year represents their second year in the market. The additional twelve months of marketing the Elite label products has had a positive impact on sales, when compared to the sales achieved in the comparable period of the prior year. Manufacturing fees revenue increased by $15.3 million, or 71%, primarily due to increased sales of the Elite label products during the current fiscal year in comparison to the comparable quarter of the prior fiscal year. The Elite label products were launched during the prior fiscal year and the current fiscal year represents their second year in the market. The additional twelve months of marketing the Elite label products has had a positive impact on sales, when compared to the sales achieved in the comparable period of the prior year. Licensing fees revenue decreased by $0.7 million, or 41%. This decrease is primarily due to the expiration of the marketing alliance agreements between the Company and Lannett Company, Inc. dated March 6, 2019 and April 9, 2019 (the “Lannett Agreements”) on March 31, 2023. License fees earned during the six months ended September 30, 2023 included residual amounts earned in relation to the expired Lannett Agreements. License fees earned during the six months ended September 30, 2024 did not include such residual amounts. Cost of manufacturing consists of manufacturing and assembly costs. Our cost of revenue increased by $9.1 million or 76%, to $21.0 million as compared to $11.9 million for the corresponding period in the prior fiscal year. This increase was due to an increased volume of products sold during the six months ended September 30, 2024, as compared to the comparable period of the prior fiscal year, as noted above. Our gross profit margin was 44% during the six months ended September 30, 2024 as compared to 48% during the comparable period of the prior fiscal year. The decrease is due to increased labor costs resulting from manufacturing personnel overtime hours incurred to ensure production and supply of our products in response to increased demand. In addition, during the six months ended September 30, 2024, manufacturing fees represented a higher proportion of total revenue, as compared to licensing fees. Manufacturing fees generate lower gross profit margins as compared to licensing fees, due to it having a related cost of manufacturing, which is not associated with licensing fees. The Company is in the process of expanding its manufacturing facilities and capacity to achieve utilization rates that will yield higher volumes at standard labor rates. 7 Operating expenses: For the Six Months Ended September 30, Change 2024 2023 Dollars Percentage Operating expenses: Research and development $ 4,129,621 $ 3,761,894 $ 367,727 10 % General and administrative 4,242,898 3,194,912 1,047,986 33 % Non-cash compensation 104,658 57,777 46,881 81 % Depreciation and amortization 846,030 655,522 190,508 29 % Total operating expenses $ 9,323,207 $ 7,670,105 $ 1,653,102 22 % Operating expenses for the six months ended September 30, 2024 increased by $1.7 million, or 22%, to $9.3 million as compared to $7.7 million for the corresponding period in the prior fiscal year, largely due to an increase in research and development of $0.4 million and general and administrative expenses of $1.0 million. Research and development costs during the six months ended September 30, 2024 were $4.1 million, an increase of $0.4 million, or 10%, from approximately $3.8 million of such costs for the comparable period of the prior year. The increase was a result of the timing and nature of product development activities during the six months ended September 30, 2024 as compared to the comparable period of the prior fiscal year. General and administrative expenses for the six months ended September 30, 2024 were $4.2 million as compared to $3.2 million for the corresponding period in the prior fiscal year, an increase of $1.0 million or approximately 33%, largely due to increased human resource costs resulting from increased headcounts as well as increased costs of financial and tax reporting compliance as compared to the comparable period of the prior year. Non-cash compensation expense for the six months ended September 30, 2024 was $0.1 million as compared to $0.06 million for the comparable period of the prior fiscal year, an increase of $0.05 million or approximately 81%, with such increase being attributed to the issuance to employees of options to purchase Common Stock during the current fiscal year. Depreciation and amortization expenses from the six months ended September 30, 2024 were $0.8 million, which increased slightly as a result of additional capital expenditures and ASC 842 finance assets acquired, from $0.7 million in such costs for the comparable period of the prior fiscal year. As a result of the foregoing, our income from operations during the six months ended September 30, 2024 was $7.3 million, compared to income from operations of $3.5 million for the comparable period of the prior fiscal year. Other income (expense): For the Six Months Ended September 30, Change 2024 2023 Dollars Percentage Other expense (income): Change in fair value of derivative financial instruments - warrants $ (15,537,648 ) $ (2,657,717 ) $ (12,879,931 ) 485 % Change in fair value of stock-based liabilities — (2,066,820 ) 2,066,820 (100 )% Interest expense and amortization of debt issuance costs (505,917 ) (249,850 ) (256,067 ) 102 % Interest income 11,292 10,836 456 4 % Other income 12,000 — 12,000 100 % Other (expense) income, net $ (16,020,273 ) $ (4,963,551 ) $ (11,056,722 ) 223 % Other (expense) income for the six months ended September 30, 2024 was a net other expense of $16.0 million, an increase of $11.1 million from a net other expense of $5.0 million for the comparable period of the prior fiscal year. The increase was primarily due to an increase in other expenses of $12.9 million relating to the change in fair value of derivative instruments, offset by a decrease of $2.1 million in change in fair value of stock-based liabilities, which were all settled during the prior fiscal year. The change in the fair value of derivative instruments and stock-based liabilities 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 other income expense recorded in relation to the changes in fair value of our derivatives instruments and stock-based liabilities and changes in the closing price of the Company’s Common Stock. The increase in interest expense associated with the loans payable is due to the Company servicing a larger principal amount of loans payable during the six months ended September 30, 2024 as compared to the comparable period of the prior fiscal year. 8 As a result of the foregoing, our net loss before income taxes for the six months ended September 30, 2024 was $8.7 million, compared to net loss before income taxes of $1.4 million for the comparable period of the prior fiscal year. Liquidity and Capital Resources Capital Resources September 30, 2024 March 31, 2024 Change Current assets $ 45,293,849 $ 40,014,189 $ 5,279,660 Current liabilities $ 12,853,720 $ 13,049,764 $ (196,044 ) Working capital $ 32,440,129 $ 26,964,425 $ 5,475,704 Our working capital (total current assets less total current liabilities) increased by $5.5 million from $27.0 million as of March 31, 2024 to $32.4 million as of September 30, 2024, with such increase being primarily related to the increase in finished goods inventory and accounts receivable, associated with increased customer orders during the six months ended September 30, 2024. Summary of Cash Flows: For the Six Months Ended September 30, 2024 2023 Net cash provided by (used in) operating activities $ 4,601,306 $ (2,945,753 ) Net cash used in investing activities $ (1,645,722 ) $ — Net cash (used in) provided by financing activities $ (495,592 ) $ 3,777,725 Net cash provided by operating activities for the six months ended September 30, 2024 was $4.6 million, which included, without limitation, net loss of $10.4 million, increased by the change in the change in fair value of derivative financial instruments - warrants of $15.5 million, deferred tax expenses of $1.3 million, and other non-cash expenses of $1.4 million, and reduced by increases in operating assets and liabilities totaling $3.2 million. Net cash used in investing activities for the six months ended September 30, 2024 was comprised of purchases of property and equipment of approximately $0.9 million and purchases of intangible assets consisting of ANDA products of approximately $0.9 million. Net cash used in financing activities was $0.5 million for the six months ended September 30, 2024 compared to net cash provided by financing activities of $3.8 million for the corresponding period of the prior year. Net cash used in financing activities consisted primarily of payments of bond and loan principal totaling $0.3 million and payments on principal on finance lease obligations of $0.2 million. Net cash provided by financing activities of $3.8 million during the prior fiscal year was due to $4.0 million in proceeds from related party loan, offset by $0.2 million in other debt repayments. Hakim Promissory Note The Company has entered into a collateralized promissory note with individual lenders with rates comparable to the EWB Term Loan but with fewer restrictive covenants. 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 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”). The Hakim Promissory Note has an interest rate of 9% for the first year and 10% for an optional second year and the proceeds were used for working capital and other business purposes. The original maturity date of the Hakim Promissory Note was June 2, 2024, with an optional second year extension. The second year extension of the Hakim Promissory Note was agreed to by both parties, with the maturity date being extended to June 2, 2025. Caskey Promissory Note 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 were used for working capital and other business purposes. The original maturity date of the Caskey Promissory Note was June 30, 2024, with both parties agreeing to the optional second year extension, as provided in the Caskey Promissory Note. The Caskey Promissory Note has a current maturity date of June 30, 2025. 9 East West Bank 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. 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. On July 1, 2022, 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 WSJP plus 0.5% with floor rate of 4.5%. The total transaction costs associated with the EWB Mortgage Loan incurred as of September 30, 2024, 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 September 30, 2024, and through the date of filing of this quarterly report on Form 10-Q, the Company is not aware of the existence of any violations of financial covenants included in the EWB Mortgage Loan. 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 2020 LPC Purchase Agreement expired on August 1, 2023. During the three and six months ended September 30, 2024 and 2023, the Company did not issue any shares of Common Stock to Lincoln Park. NJEDA Bonds On August 31, 2005, the Company successfully completed a refinancing of a prior 1999 bond issue through the issuance of new tax-exempt bonds (the “Bonds”). The refinancing involved borrowing $4,155,000, evidenced by a 6.5% Series A Note in the principal amount of $3,660,000 maturing on September 1, 2030 and a 9% Series B Note in the principal amount of $495,000 maturing on September 1, 2012. The net proceeds, after payment of issuance costs, were used (i) to redeem the outstanding tax-exempt Bonds originally issued by the Authority on September 2, 1999, (ii) refinance other equipment financing and (iii) for the purchase of certain equipment to be used in the manufacture of pharmaceutical products. As of March 31, 2016, all of the proceeds were utilized by the Company for such stated purposes. Interest is payable semi-annually on March 1 and September 1 of each year. The 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 related Indenture requires the maintenance of a Debt Service Reserve Fund of $366,000 in relation to the Series A Notes. Bond issue costs of $354,454 were paid from the bond proceeds and are being amortized over the life of the bonds. Amortization of bond issuance costs amounted to $7,089 for the six months ended September 30, 2024. The NJEDA Bonds require the Company to make an annual principal payment on September 1st of varying amounts as specified in the loan documents and semi-annual interest payments on March 1st and September 1st, equal to interest due on the outstanding principal at the applicable rate for the semi-annual period just ended. In addition, the Company had previously received Notices of Default from the Trustee of the NJEDA Bonds as a result of the utilization of the debt service reserve being used to pay interest payments as well as the company’s failure to make scheduled principal payments. All monetary defaults were cured during Fiscal 2015 and the Company is current on all NJEDA Bond interest and principal payments. As of the date of filing of this Quarterly Report on Form 10-Q, there are no interest or principal amounts in arrears. The Series B Notes were retired, at par in July 2014. 10 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.