ELITE PHARMACEUTICALS INC /NV/ 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is intended to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial data included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review Item 1A of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Results of Operations: For the Years Ended March 31, 2025 and 2024 Revenue, Cost of revenue and Gross profit: For the Years Ended March 31, Change 2025 2024 Dollars Percentage Manufacturing fees $ 81,986,079 $ 54,120,731 $ 27,865,348 51 % Licensing fees 2,057,850 2,504,397 (446,547 ) (18 )% Total revenue 84,043,929 56,625,128 27,418,801 48 % Cost of manufacturing 43,957,274 30,268,025 13,689,249 45 % Gross profit $ 40,086,655 $ 26,357,103 $ 13,729,552 52 % Gross profit - percentage 48 % 47 % Total revenues for the year ended March 31, 2025 increased by $27.4 million or 48%, to $84.0 million, as compared to $56.6 million, for the comparable period of the prior year. This increase is primarily due to four product launches during the current fiscal year combined with increased sales from the rest of the Elite Label product line, as compared to the comparable period of the prior year. Manufacturing fees revenue increased by $27.9 million, or 51%, as compared to the comparable period of the prior year. This increase is primarily due to four product launches during the current fiscal year, combined with increased sales from the rest of the Elite Label product line, as compared to the comparable period of the prior year. Licensing fees revenue decreased by $0.4 million, or 18% as compared to the comparable period of the prior year. This decrease is primarily due to the Company’s transitioning away from licensing product to third parties to marketing of the Elite label, which does not result in revenues earned from licensing fees. Cost of manufacturing consists of manufacturing and assembly costs. Our cost of manufacturing increased by $13.7 million or 45%, to $44.0 million as compared to $30.3 million for the comparable period of the prior year. This increase was due to an increased volume of products sold during the year ended March 31, 2025, as compared to the prior fiscal year, as noted above. Our gross profit margin was 48% during the year ended March 31, 2025 as compared to 47% during the prior fiscal year. The increase is due to increased manufacturing volumes resulting in decreased unit costs due to efficiencies of scale being achieved on the increased manufacturing volume as well as the products launched during the current fiscal year having a higher proportion of direct sales as compared to product sales during the comparable period of the prior year, resulting in lower transaction costs being charged to revenue (please note that transaction costs are higher with indirect sales as compared to those of direct sales). 47 Operating expenses: For the Years Ended March 31, Change 2025 2024 Dollars Percentage Operating expenses: Research and development $ 7,964,837 $ 6,883,351 $ 1,081,486 16 % General and administrative 9,001,930 7,145,114 1,856,816 26 % Non-cash compensation 227,565 159,921 67,644 42 % Depreciation and amortization 1,688,429 1,379,948 308,481 22 % Impairment of intangible assets 1,603,426 — 1,603,426 100 % Total operating expenses $ 20,486,187 $ 15,568,334 $ 4,917,853 32 % Operating expenses for the year ended March 31, 2025 increased by $4.9 million, or 32%, to $20.5 million as compared to $15.6 million for the prior fiscal year, largely due to increases in research and development expenses of $1.1 million, general and administrative expenses of $1.9 million, and impairment of intangible asset expense of $1.6 million. Research and development costs during the year ended March 31, 2025 were $8.0 million, an increase of $1.1 million, or 16%, from approximately $6.9 million of such costs for the prior year. The increase was a result of the timing and nature of product development activities, which consist primarily of material consumption, internal and external lab costs, human resource costs and analytical studies, during the year ended March 31, 2025 as compared to the prior fiscal year. General and administrative expenses the year ended March 31, 2025 were $9.0 million as compared to $7.1 million for the prior fiscal year, an increase of $1.9 million or approximately 26%, largely due to increased employee headcounts and compensation rates as compared to the prior fiscal year as well higher operational support and infrastructure costs related to the four commercial launches during the current fiscal year and expansion of product line distribution activities achieved during the current fiscal as compared to the comparable period of the prior year. Non-cash compensation expense for the year ended March 31, 2025 was $0.2 million as compared to $0.2 million for the prior fiscal year, an increase of $0.1 million or approximately 42%, with such increase being attributed to the current year including full year amortization of non-cash compensation from employee stock options issued during the prior year, as compared to the comparable period of the prior which included partial year periods amortization of non-cash compensation encompassing only that part of the year subsequent to the grant date of each employee option. Depreciation and amortization expenses from the year ended March 31, 2025 were $1.7 million as compared to $1.4 million for the prior fiscal year, an increase of $0.3 million or approximately 22%. This increase is due to depreciation expense being recorded on an increased fixed asset base which resulted from additional investments in capital manufacturing facilities. Impairment of intangible assets for the year ended March 31, 2025 was $1.6 million related to the impairment of the Dantrolene intangible asset, an ANDA product, as a result of the Company choosing to abandon the Dantrolene capsules based on reassessments of the expected future cash flows for these products and its withdrawal of the ANDA for Phentermine 37.5 mg capsules. No impairment of intangible assets were recorded for the prior fiscal year. As a result of the foregoing, our income from operations during the year ended March 31, 2025 was $19.6 million, compared to income from operations of $10.8 million for the comparable period of the prior year. 48 Other income (expense): For the Years Ended March 31, Change 2025 2024 Dollars Percentage Other income (expense): Change in fair value of derivative financial instruments - warrants $ (18,901,185 ) $ (5,776,297 ) $ (13,124,888 ) 227 % Change in fair value of stock-based liabilities — (5,743,468 ) 5,743,468 (100 )% Interest expense and amortization of debt issuance costs (772,367 ) (588,622 ) (183,745 ) 31 % Gain from settlement agreements — 1,761,792 (1,761,792 ) (100 )% Interest income 20,944 20,918 26 — % Other (expense) income, net $ (19,652,608 ) $ (10,325,677 ) $ (9,326,931 ) 90 % Other income (expense) for the year ended March 31, 2025 was an other expense of $19.7 million, an increase in net other (expense) of $9.3 million from other (expense) of $10.3 million for the comparable period of the prior year. The increase was primarily due to increases in other expenses of $13.1 million relating to the change in fair value of warrant derivative instruments, $1.8 million relating to gain from settlement agreements that were recorded in the prior year, but not the current year, offset by a net decrease in other income (expense) of $5.7 million relating to a change in fair value of stock based liabilities that was recorded as an other expense in the prior year and not in the current 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 fair value of the Company’s derivative instruments and stock-based liabilities and decreases in the closing price of the Company’s Common Stock. The increase in interest expense associated with the loans payable is due in large part to the current year including additional loan principal amounts in the current year, as compared to the comparable period of the prior year and relating to financing of facility expansion as well as the current year results of operations including full year interest expense on financings executed during the prior year, with the prior year incurring partial year interest expense on such financings. As a result of the foregoing, our net loss before income taxes for the year ended March 31, 2025 was $0.1 million, compared to net income before income taxes of $0.5 million for the comparable period of the prior year. Income Taxes: The Company recorded tax (expense)/benefit of approximately 8,175% and 4,242% of (loss) income before income tax expense, for the years ended March 31, 2025 and 2024, respectively. The decrease of the effective tax rate for the current period as compared to the prior period is primarily due to the release of the valuation allowance on the Company’s deferred tax assets as of March 31, 2024 and the nondeductible fair market value change in the Company’s warrant derivative liabilities. Liquidity and Capital Resources Capital Resources March 31, 2025 March 31, 2024 Change Current assets $ 57,739,147 $ 40,014,189 $ 17,724,958 Current liabilities $ 11,840,435 $ 13,049,764 $ (1,209,329 ) Working capital $ 45,898,712 $ 26,964,425 $ 18,934,287 The Company considers cash and working capital balances as several of the factors the Company uses in evaluating its performance. As of March 31, 2025, the Company had cash on hand of $11.3 million and accounts receivable to be collected within expected operating cycles of $29.2 million. The Company believes that the working capital surplus of $45.9 million, which includes these cash and accounts receivable resources, and the continuation of ongoing operations, are sufficient to fund operations through the next twelve months. For the year ended March 31, 2025, the Company had income from operations totaling $19.6 million, net other expense totaling $19.7 million and a net loss attributable to common shareholders of $4.3 million. The Company’s other income (expense) and net loss attributable to common shareholders are significantly influenced by the fluctuations in the fair value of warrant derivatives with such fair value bearing a strong inverse correlation to the market share price of the Company’s Common Stock. Our working capital (total current assets less total current liabilities) increased by $18.9 million from $27.0 million as of March 31, 2024 to $45.9 million as of March 31, 2025, with such increase being primarily related to the increase in finished goods inventory and accounts receivable, associated with increased customer orders during the year ended March 31, 2025 and a decrease of $1.2 million in total current liabilities over the same period, due to decreases in accrued expenses, primarily driven by a decrease in the accrual of the co-development profit split as of March 31, 2025 compared to the prior year. 49 Summary of Cash Flows: For the Years Ended March 31, 2025 2024 Net cash provided by (used in) operating activities $ 7,455,639 $ (3,235,115 ) Net cash used in investing activities $ (2,399,832 ) $ (809,653 ) Net cash (used in) provided by financing activities $ (825,740 ) $ 3,339,181 Net cash provided by operating activities for the year ended March 31, 2025 was $7.5 million, which included a net loss of $4.3 million, offset by depreciation and other non-cash expenses totaling $26.9 million and reduced by the change in operating assets and liabilities totaling $15.2 million, Net cash used in operating activities for the year ended March 31, 2024 was $3.2 million, which included net income of $20.1 million, increased by depreciation and other non-cash expenses totaling $11.4 million and reduced by the change in operating assets and liabilities totaling $11.9 million and tax benefit of $20.0 million. Net cash used in investing activities for the year ended March 31, 2025 was comprised of purchases of property and equipment of approximately $1.6 million and purchases of intangible assets consisting of ANDA products of approximately $0.9 million. Net cash used in investing activities for the year ended March 31, 2024 was comprised of purchases of property and equipment of approximately $0.8 million. Net cash used in financing activities was $0.8 million for the year ended March 31, 2025 which consisted primarily of payments of bond, loan, and finance lease principal. Net cash provided by financing activities was $3.3 million for the year ended March 31, 2024 which consisted primarily of proceeds from related party loans payable totaling $4.0 million offset by payments of bond, loan, and finance lease principal totaling $0.7 million. 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 is 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. The Hakim Promissory Note was paid in full on June 2, 2025, in accordance with its terms and conditions. Caskey Promissory Note On June 30, 2023, the Company entered into a collateralized promissory note with Davis Caskey, a member of the Board of Directors (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 is June 30, 2024, with an optional second year extension. The second year extension of the Caskey Promissory Note was agreed to by both parties, with the maturity date being extended to June 30, 2025. The Caskey Promissory Note was paid in full on June 26, 2025, in accordance with its terms and conditions. East West Bank 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 March 31, 2025, 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 March 31, 2025, and through the date of filing of this Annual Report on Form 10-K, the Company was not aware of the existence of any violations of financial covenants included in the EWB Mortgage Loan. 50 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 proceeds of the Bonds and are being amortized over the life of the Bonds. Amortization of Bond issuance costs amounted to $14,178 for the fiscal year ended March 31, 2025. 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. See the Risk Factor in Part I, Item 1A entitled “ We have substantial indebtedness which may adversely affect our financial condition NJEDA Bonds ”. As of the date of filing of this Annual Report on Form 10-K, there are no interest or principal amounts in arrears. The Series B Notes were retired at par in July 2014. Recent Developments On April 30, 2025, the Company announced the commercial launch of its generic version of Percocet ® (Oxy APAP Tablets). Oxy APAP Tablets are indicated for the relief of moderate to moderately severe pain. Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources that would be considered material to investors. Effects of Inflation We are subject to price risks arising from price fluctuations in the market prices of the products that we sell. Management does not believe that inflation risk is material to our business or our consolidated financial position, results of operations, or cash flows. Critical Accounting Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, costs and expenses and related disclosures. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in them have had or are reasonably likely to have a material effect on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. The following discussion addresses our most critical accounting estimates, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates. Revenue Recognition - Manufacturing Fees The Company’s revenues are offset by variable consideration, which may include, without limitation, chargebacks, distribution fees, rebates, group purchasing organization fees, prompt payment cash discounts, consideration payable to the customer, billbacks, Medicaid and other government pricing programs, price protection and shelf stock adjustments, sales returns and profit shares. The Company’s estimates for variable consideration are adjusted as required at each reporting period for specific known developments that may result in a change in the amount of total consideration it expects to receive as well as updating estimate assumptions to reflect current and/or historical trends. Like most competitors in this market, our marketing partners, or us in the case of prospective direct sales made by the Company, also give credits for chargebacks to wholesalers that have contracts with our marketing partners, or us, prospectively, for their sales to hospitals, group purchasing organizations, pharmacies, or other customers. A chargeback is the difference between the price the wholesaler pays and the price that the wholesaler’s end-customer pays for a product. Although, our marketing partners establish, and prospectively we would also establish reserves based on prior experience and best estimates of the impact that these policies may have in subsequent periods, we cannot ensure that such reserves established are adequate or that actual product returns, rebates, allowances, and chargebacks will not exceed estimates. Differences between established reserves and actual amounts of such credits and charges, could result in a material adverse effect on our business, financial condition, results of operations, cash flow and stock price. 51 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached hereto and filed as a part of this Annual Report on Form 10-K are our Consolidated Financial Statements, beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.