MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2013
COMPARED TO THE
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2012
(UNAUDITED)
The following discussion and analysis should be read with the financial statements and accompanying notes included elsewhere in this Form 10-Q and in the Annual Report on Form 10-K for the year ended March 31, 2013. It is intended to assist the reader in understanding and evaluating our financial position.
This Quarterly Report on Form 10-Q and the documents incorporated herein contain “forward-looking statements”.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this Form 10-Q, statements that are not statements of current or historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words “plan”, “intend”, “may,” “will,” “expect,” “believe”, “could,” “anticipate,” “estimate,” or “continue” or similar expressions or other variations or comparable terminology are intended to identify such forward-looking statements. All statements other than statements of historical fact included in this Form 10-Q regarding our financial position, business strategy and plans or objectives for future operations are forward-looking statements.
Without limiting the broader description of forward-looking statements above, we specifically note, without limitation, that statements regarding the preliminary nature of the clinical program results and the potential for further product development, that involve known and unknown risks, delays, uncertainties and other factors not under our
control, the requirement of substantial future testing, clinical trials, regulatory reviews and approvals by the Food and Drug Administration and other regulatory authorities prior to the commercialization of products under development, and our ability to manufacture and sell any products, gain market acceptance,
earn a profit from sales or licenses of any drugs or our ability to discover new drugs in the future, are all forward-looking in nature.
These risks and other factors are discussed in our filings with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.
Except as required by law, the Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Any reference to “Elite”, the “Company”, “we”, “us”, “our” or the “Registrant” refers to Elite Pharmaceuticals Inc. and its subsidiaries.
Overview
We are a specialty pharmaceutical company principally engaged in the development and manufacture of oral, controlled-release products, using proprietary know-how and technology, particularly as it relates to abuse resistant products. Our strategy includes improving off-patent drug products for life cycle management and developing generic versions of controlled-release drug products with high barriers to entry.
We own, license or contract manufacture eight products currently being sold commercially, as follows:
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Phentermine 37.5mg tablets (“Phentermine 37.5mg”)
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Lodrane D® Immediate Release capsules (“Lodrane D”)
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Methadone 10mg tablets (“Methadone 10mg”)
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Hydromorphone Hydrochloride 8mg tablets (“Hydromorphone 8mg”)
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Phendimetrazine tartrate 35mg tablets (“Phendimetrazine 35mg”)
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Phentermine 15mg capsules (“Phentermine 15mg”)
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Phentermine 30mg capsules (“Phentermine 30mg”)
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Naltrexone HCl 50mg tablets (“Naltrexone 50mg”)
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We also recently acquired approved Abbreviated New Drug Applications (“ANDAs”) for 12 products (the “Mikah Approved ANDAs”) and one ANDA that is under active review with the FDA (the “Mikah ANDA Application Product”) that were acquired pursuant to the asset purchase agreement with Mikah Pharma dated August 1, 2013 (the “Mikah Asset Purchase Agreement”).
On October 2, 2013, we executed a Manufacturing and License Agreement (the “Epic Agreement”) with Epic Pharma LLC. (“Epic”), to manufacture, market and sell in the United States and Puerto Rico 12 generic products owned by Elite. Of the 12 products, Epic will have the exclusive right to market six products as listed in Schedule A of the Epic Agreement, and a non-exclusive right to market six products as listed in Schedule D of the Epic Agreement. Epic is responsible for all regulatory and pharmacovigilance matters related to the products and for all costs related to the site transfer for all products. Pursuant to the Epic Agreement, Elite will receive a license fee and milestone payments. The license fee will be computed as a percentage of the gross profit, as defined in the Epic Agreement, earned by Epic as a result of sales of the products. The manufacturing cost used for the calculation of the license fee is a predetermined amount per unit plus the cost of the drug substance (API) and the sales cost for the calculation is predetermined based on net sales. If Elite manufactures any product for sale by Epic, then Epic shall pay that same predetermined manufacturing cost per unit plus the cost of the API. The license fee is payable monthly for the term of the Epic Agreement. Epic shall pay to Elite certain milestone payments as defined by the Epic Agreement. The first milestone payment is due on or before November 15, 2013. Subsequent milestone payments are due upon the filing of each product’s supplement with the FDA and the FDA approval of site transfer for each product as specifically itemized in the Epic Agreement. The term of the Epic Agreement is five years and may be extended for an additional five years upon mutual agreement of the parties. Twelve months following the launch of a product covered by the Epic Agreement, Elite may terminate the marketing rights for any product if the license fee paid by Epic falls below a designated amount for a six month period of that product. Elite may also terminate the exclusive marketing rights if Epic is unable to meet the annual unit volume forecast for a designated Product group for any year, subject to the ability of Epic, during the succeeding six month period, to achieve at least one-half of the prior year’s minimum annual unit volume forecast. The Epic Agreement may be terminated by mutual agreement of Elite and Epic, as a result of a breach by either party that is not cured within 60 days notice of the breach or by Elite as a result of Epic becoming a party to a bankruptcy, reorganization or other insolvency proceeding that continues for a period of 30 days or more.
For further details on the Mikah Asset Purchase Agreement, Mikah Approved ANDAs and Mikah ANDA Application Product, please refer to the Current Report on Form 8-K filed with the SEC on August 5, 2013 and herein incorporated by reference.
For further details on the Epic Agreement, please refer to exhibit 10.17 of this Quarterly Report on Form 10-Q and the Current Report on Form 8-K filed with the SEC on October 8, 2013, both filings being herein incorporated by reference.
Elite has executed a license agreement with Precision Dose, Inc. (the “Precision Dose License Agreement”) and a manufacturing agreement with The PharmaNetwork LLC (the “TPN Agreement”).
The PharmaNetwork LLC was recently purchased by Alkem Laboratories Ltd (“Alkem”).
The PharmaNetwork now goes by the name Ascend Laboratories LLC (“Ascend”) and is a wholly owned subsidiary of Alkem.
The Precision Dose License Agreement provides for the marketing and distribution, in the United States, Puerto Rico and Canada, of Phentermine 37.5mg, Phentermine Capsules, Hydromorphone 8mg, Naltrexone Generic, and certain additional products that require approval from the FDA.
Phentermine 37.5mg tablets were launched in April 2011. Hydromorphone 8mg was launched in March 2012. Phentermine 15mg and Phentermine 30mg were launched in April 2013. Naltrexone 50mg was launched in September 2013.
The TPN Agreement, executed on June 23, 2011, and amended on September 24, 2012, provides for the manufacture and packaging by the Company of Ascend’s methadone hydrochloride, 10mg tablets (“Methadone 10mg”), with the Methadone 10mg to be marketed by Ascend.
The FDA has approved the manufacturing of Methadone 10mg at the Northvale Facility and the initial shipment of Methadone 10mg occurred during January 2012.
In addition, Elite also has an undisclosed generic product filed with the FDA that is awaiting review and for which Elite retains all rights.
The Company also has a pipeline of additional generic drug candidates under active development.
Additionally, the Company is developing abuse resistant opioid products, and once-daily opioid products.
On May 22, 2012, the United States Patent and Trademark Office (“USPTO”) issued U.S. Patent No. 8,182,836, entitled “Abuse-Resistant Oral Dosage Forms and Method of Use Thereof, with such patent providing further protection for the Company’s Abuse Resistant Technology.
On April 23, 2013, the USPTO issued U.S. Patent No. 8,425,933, entitled “Abuse-Resistant Oral Dosage Forms and Method of User Thereof”, with such patent providing further protection for the Company’s Abuse Resistant Technology.
On December 16, 2013, the USPTO issued a Notice of Allowance for Elite’s application number 13/863,764 entitled “Abuse-Resistant Oral Dosage Forms and Method of Use Thereof”.
As of the date of filing of this Quarterly Report on Form 10-Q, Elite has not been notified of the issuance of a patent in relation to this allowance.
The Northvale Facility operates under Current Good Manufacturing Practice (“cGMP”) and is a United States Drug Enforcement Agency (“DEA”) registered facility for research, development and manufacturing.
Strategy
Elite is focusing its efforts on the following areas: (i) development of Elite’s pain management products; (ii) manufacturing of a line of generic pharmaceutical products with
approved ANDAs; (iii) development of additional generic pharmaceutical products; (iv) development of the other products in our pipeline including the products with our partners; (v) commercial exploitation
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Elite is focusing on the development of various types of drug products, including branded drug products which require new drug applications (“NDAs”) under Section 505(b)(1) or 505(b)(2) of the Drug Price Competition and Patent Term Restoration Act of 1984
(the “ Drug Price Competition Act ”) as well as generic drug products which require ANDAs.
Elite believes that its business strategy enables it to reduce its risk by having a diverse product portfolio that includes both branded and 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.
Commercial Products
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Lodrane D® Immediate Release capsules
On September 27, 2011, the Company, along with ECR Pharmaceuticals (“ECR”), a wholly owned subsidiary of Hi-Tech Pharmacal (“Hi-Tech”) launched Lodrane D®, an immediate release formulation of brompheniramine maleate and pseudoephedrine HCl, an effective, low-sedating antihistamine combined with a decongestant.
Lodrane D® is promoted and distributed in the U.S. by ECR, Hi-Tech’s branded division.
Lodrane D® is available over-the-counter but also has physician promotion.
Lodrane D® is the one of the only adult brompheniramine containing products available to the consumer at this time.
Lodrane D® is marketed under the Over-the-Counter Monograph (the “OTC Monograph”) and accordingly, under the Code of Federal Regulations can be lawfully marketed in the US without prior approval. Under the Federal Food Drug and Cosmetic Act (“FDCA”), FDA regulations and statements of FDA policy, certain drug products are permitted to be marketed in the U.S. without prior approval.
Within the past few years, the FDA has revised its enforcement policies, significantly limiting the circumstances under which these unapproved products may be marketed.
If the FDA determines that a company is distributing an unapproved product that requires approval, the FDA may take enforcement action in a variety of ways, including, without limitation, product seizures and seeking a judicial injunction against distribution.
Elite is manufacturing the product for ECR and will receive revenues for the manufacturing, packaging and laboratory stability study services for the product, as well as royalties on sales.
The current U.S. allergy market exceeds $3.5 billion.
Methadone 10mg tablets
On January 17, 2012, Elite commenced shipping Methadone 10mg tablets to Ascend Laboratories, LLC. (“Ascend”) pursuant to a commercial manufacturing and supply agreement dated June 23, 2011 between Elite and Ascend (the “Methadone Manufacturing and Supply Agreement”).
Under the terms of the Methadone Manufacturing and Supply Agreement, Elite performs manufacturing and packaging of Methadone 10mg for Ascend.
Hydromorphone 8mg tablets
On March 13, 2012, Elite commenced shipping Hydromorphone 8mg to TAGI Pharma.
This triggered a milestone payment under the License Agreement with Precision Dose.
Hydromorphone 8mg is now a commercial product being distributed by our partner, TAGI Pharma.
Phendimetrazine Tartrate 35 mg tablets
On November 13, 2012, the Company made the initial shipment of Phendimetrazine Tartrate 35mg tablets, the generic equivalent of Bontril PDM® 35mg tablets under a previously announced manufacturing and supply agreement with Mikah Pharma (“Mikah”).
As part of the Mikah Asset Purchase Agreement, the ANDA for Phendimetrazine Tartrate 35mg tablets was acquired by the Company.
The Company is currently assessing various options with regards to the commercial marketing and distribution of this product.
Bontril PDM® and its generic equivalents had total U.S. sales of approximately $3.5 million for the twelve months ended September 2012, based on IMS Health Data.
The Company will be compensated at an agreed upon price for the manufacturing and packaging of this product.
Naltrexone HCl 50mg tablets
On September 18, 2013, the Company made the initial shipment of naltrexone hydrochloride 50 mg tablets under the License, Manufacturing and Supply Agreement with its sales and marketing partner, triggering a milestone payment. Elite’s sales and marketing partner will distribute the product as part of a multi-product distribution agreement.
Naltrexone is an opioid receptor antagonist used primarily in the management of alcohol dependence and opioid dependence. For the calendar year 2012, Revia (naltrexone hydrochloride tablets) and its generic equivalents had total U.S. sales of approximately $16 million according to IMS Health Data.
A current report on Form 8-K was filed with the SEC on September 18, 2013, such filing being herein incorporated by reference.
Approved Products
Elite is the owner of the following approved Abbreviated New Drug Applications (“ANDA’s”):
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Phentermine HCl 37.5mg tablets (“Phentermine 37.5mg”)
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Hydromorphone HCl 8mg tablets (“Hydromorphone 8mg”)
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Naltrexone HCl 50mg tablets (“Naltrexone 50mg”)
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Phentermine HCl 15mg capsules (“Phentermine 15mg”)
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Phentermine HCl 30mg capsules (“Phentermine 30mg”)
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Phendimetrazine Tartrate 35mg tablets (“Phendimetrazine 35mg”)
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In addition, in August 2013, Elite acquired approved Abbreviated New Drug Applications (“ANDAs”) for 12 products (the “Mikah Approved ANDAs”) and one ANDA that is under active review with the FDA (the “Mikah ANDA Application Product”) that were acquired pursuant to the asset purchase agreement with Mikah Pharma dated August 1, 2013 (the “Mikah Asset Purchase Agreement”).
On October 2, 2013, Elite executed a Manufacturing and License Agreement (the “Epic Agreement”) with Epic Pharma LLC. (“Epic”), to manufacture, market and sell in the United States and Puerto Rico 12 generic products owned by Elite. Of the 12 products, Epic will have the exclusive right to market six products, and a non-exclusive right to market six other products. Epic is responsible for all regulatory and pharmacovigilance matters related to the products and for all costs related to the site transfer for all products. Pursuant to the Epic Agreement, Elite will receive a license fee and milestone payments. The license fee will be computed as a percentage of the gross profit, as defined in the Epic Agreement, earned by Epic as a result of sales of the products. The manufacturing cost used for the calculation of the license fee is a predetermined amount per unit plus the cost of the drug substance (API) and the sales cost for the calculation is predetermined based on net sales. If Elite manufactures any product for sale by Epic, then Epic shall pay that same predetermined manufacturing cost per unit plus the cost of the API. The license fee is payable monthly for the term of the Epic Agreement. Epic shall pay to Elite certain milestone payments as defined by the Epic Agreement. The first milestone payment has been paid. Subsequent milestone payments are due upon the filing of each product’s supplement with the FDA and the FDA approval of site transfer for each product as specifically itemized in the Epic Agreement. The term of the Epic Agreement is five years and may be extended for an additional five years upon mutual agreement of the parties. Twelve months following the launch of a product covered by the Epic Agreement, Elite may terminate the marketing rights for any product if the license fee paid by Epic falls below a designated amount for a six month period of that product. Elite may also terminate the exclusive marketing rights if Epic is unable to meet the annual unit volume forecast for a designated Product group for any year, subject to the ability of Epic, during the succeeding six month period, to achieve at least one-half of the prior year’s minimum annual unit volume forecast. The Epic Agreement may be terminated by mutual agreement of Elite and Epic, as a result of a breach by either party that is not cured within 60 days notice of the breach or by Elite as a result of Epic becoming a party to a bankruptcy, reorganization or other insolvency proceeding that continues for a period of 30 days or more.
For further details on the Mikah Asset Purchase Agreement, Mikah Approved ANDAs and Mikah ANDA Application Product, please refer to the Current Report on Form 8-K filed with the SEC on August 5, 2013 and herein incorporated by reference.
For further details on the Epic Agreement, please refer to exhibit 10.17 of the Quarterly Report on Form 10-Q
filed with the SEC on November 14, 2013 and the Current Report on Form 8-K filed with the SEC on October 8, 2013, both filings being herein incorporated by reference.
Phentermine HCl 37.5mg tablets
The ANDA for Phentermine 37.5mg was acquired pursuant to an asset purchase agreement with Epic Pharma LLC (“Epic”) dated September 10, 2010 (the “Phentermine Purchase Agreement”).
Hydromorphone HCl 8mg tablets
The ANDA for Hydromorphone 8mg was acquired pursuant to an asset purchase agreement with Mikah Pharma LLC (the “Hydromorphone Purchase Agreement”).
Transfer of the manufacturing process of Hydromorphone 8mg to the Northvale Facility, a prerequisite of the Company’s commercial launch of the product, was approved by the FDA on January 23, 2012.
However, please note that the completion of such transfer had been significantly delayed as a result of the FDA’s reclassification of the Company’s CBE-30 supplement filing to a prior approval supplement filing.
As a result of the delays caused by this reclassification, the Company recorded an impairment of the Hydromorphone 8mg ANDA in an amount equal to the entire purchase price of the acquisition.
This impairment was recorded and is included in the Company’s audited financial statements as of March 31, 2011.
Naltrexone HCl 50mg tablets
The ANDA for Naltrexone 50mg was acquired pursuant to an asset purchase agreement with Mikah Pharma LLC (the “Naltrexone Purchase Agreement”).
Transfer of the manufacturing process of Naltrexone 50mg to the Northvale Facility is a prerequisite of the Company’s commercial launch of the product.
The completion of such transfer had been significantly delayed as a result of the FDA’s reclassification of the Company’s CBE-30 supplement filing to a prior approval supplement filing.
However, on January 31, 2013, the FDA approved the Company’s supplemental application for the manufacturing and packaging of naltrexone hydrochloride 50mg tablets.
This approval will allow the Company to commence the commercial manufacturing and packaging of this product for its sales and marketing partner, which will distribute the product as part of a multi-product distribution agreement.
As a result of the prior delays caused by this reclassification, the Company has recorded an impairment of the Naltrexone 50mg ANDA in an amount equal to the entire purchase price of the acquisition.
This impairment was recorded and is included in the Company’s audited financial statements as of March 31, 2011.
Phentermine 15mg and Phentermine 30mg
Elite received approval as of September 28, 2012 from the US-FDA for Phentermine 15mg and Phentermine 30mg.
These products were developed by Elite.
The commercial launch of Phentermine 15mg and Phentermine 30mg had been delayed due to the sole supplier of the API approved for these products restricting the amount of such API available to Elite.
We resolved this issue and the Phentermine 15mg and Phentermine 30mg products were launched in April 2013.
The resolution of this issue related to the supply of API, however, required us to pay substantially higher prices than previously paid for the Phentermine API while seeking approval from the FDA of an alternate supplier of the API. Such approval has recently been received, resulting in lower prices and a sufficient supply of materials.
Please note that the results reported on this Quarterly Report on Form 10-Q do not reflect the positive effects resulting from the approval of the alternate API supplier, due to such approval being received at the end of the period covered by this Current Report on Form 10-Q.
Phendimetrazine 35mg
The ANDA for Phendimetrazine 35mg was included as one of the 13 products acquired pursuant to the Mikah Asset Purchase Agreement.
The Northvale Facility had previously been approved as a manufacturing site for this product, with commercial production commencing in 2012 and initial shipment of this product being made in November 2012, pursuant to a manufacturing and supply agreement between the Company and Mikah dated June 1, 2011.
The Company is now the owner of this ANDA and is assessing various marketing and distribution options.
Contract Manufacturing of Isradapine and Phendimetrazine
On June 1, 2011, Elite executed a Manufacturing and Supply Agreement (the “Phendimetrazine Agreement”) with Mikah Pharma, LLC (“Mikah”) to undertake and perform certain services relating to two generic products: Isradapine Capsules USP, 2.5 mg and 5 mg (“Isradapine”) and Phendimetrazine Tartrate Tablets USP, 35 mg (“Phendimetrazine”).
On September 21, 2012, the Phendimetrazine Agreement was amended to remove Isradapine from the agreement, due to the discontinuance of development activities related to Isradapine.
On August 9, 2013, the Isradapine/Phendimetrazine Agreement was terminated by the written agreement of both parties, as a result of the Mikah Asset Purchase Agreement making the Phendimetrazine Agreement not relevant.
Development and License Agreement with Hong Kong based company
On March 16, 2012, Elite executed a Development and License Agreement (“D&L Agreement”) with a private Hong Kong-based company (the “Hong Kong-based Customer”) for Elite to develop for the Hong Kong-based Customer a branded prescription pharmaceutical product in the United States.
The Hong Kong-based Customer has informed us that it has been in business for more than five years and it has multiple FDA approved manufacturing sites outside of the United States.
Pursuant to the D&L Agreement, the Hong Kong-based Customer has engaged Elite to develop and manufacture a prescription pharmaceutical product (the “Prescription Product”).
Elite agrees to be the Preferred Manufacturer and supplier of the Prescription Product pursuant to the D&L Agreement and perform maintenance activities such as stability or annual report filings for the Prescription Product.
The Hong Kong-based Customer, or its designees, shall prepare all applications necessary to obtain any Prescription Product registration and permits required to file the Prescription Product in the Territories required to market the Prescription Product.
All Registrations shall be solely owned by the Hong Kong-based Customer including any NDA filed with the FDA for the Prescription Product.
Elite shall provide the Hong Kong-based Customer with all pharmaceutical, technical, and clinical data and information in support of the NDA application by the Hong Kong-based Customer for the approval of the Prescription Product.
In consideration of Elite’s performance in accordance with the terms and conditions of the D&L Agreement, the Hong Kong-based Customer shall pay Elite milestone for the Development Program and shall pay Elite for the manufacturing of the Prescription Product.
Maintenance activities will be paid separately on a quarterly basis.
The Hong Kong-based Customer shall own and market the Prescription Product under its own Trademark.
The term of this D&L Agreement shall be effective from the date consummated and shall continue for a five (5) year term after the commercial launch of the Prescription Product. Upon the expiration of the initial term or any renewal term, this D&L Agreement will automatically renew for an additional one (1) year term, unless one Party gives at least six (6) months notice in writing in advance of its intent not to renew.
Discontinued Products - Lodrane 24® and Lodrane 24D®
On March 3, 2011, the FDA announced its intention to remove approximately 500 cough/cold and allergy related products from the U.S. market. The once daily allergy products manufactured by Elite, Lodrane 24® and Lodrane 24D® (the “Lodrane® Extended Release Products”), were included in the FDA list of 500 products.
After this announcement by the FDA, the Company’s customer for the Lodrane® Extended Release Products cancelled all outstanding orders and manufacturing of the Lodrane® Extended Release Products has ceased.
The shipments made during the quarter ended June 30, 2011 consisted solely of quantities that were in production at the time ECR cancelled all outstanding orders.
There were no shipments of the Lodrane Extended Release Products subsequent to those that were made during the quarter ended June 30, 2011.
ECR (the owner and marketer of the Lodrane® Extended Release Products) initiated a formal approval process with the FDA in 2010 regarding the Lodrane® Extended Release Products and issued a press release on March 3, 2011 stating that they will continue to actively pursue approval for the Lodrane® Extended Release Products.
In addition, on April 29, 2011, ECR filed a Petition for Review with the United States Court of Appeals for the District of Columbia, petitioning such court to review and set aside the final order of the FDA with relation to the Lodrane® Extended Release Products.
The Company has received no further information from ECR with regards to the status of the Petition filed.
The Lodrane® Extended Release Products were co-developed with our partner, ECR, and the Company was receiving revenues from the manufacture of the Lodrane® Products and laboratory stability study services, as well as royalties on in-market sales.
Contracts relating to the manufacture and sale of the Lodrane® Extended Release Products were formally terminated on April 26, 2013.
During the three months ended June 30, 2011, Elite made its final shipments of the Lodrane® Extended Release Products.
In addition, the Company sold to ECR, at cost without markup, all raw materials related to the manufacture of the Lodrane® Extended Release Products which remained in stock subsequent to the final shipment of the Lodrane® Extended Release Products.
As manufacturing of the Lodrane® Extended Release Products has ceased, there will be no further manufacturing revenues derived from the Lodrane® Extended Release Products unless and until such products receive the necessary approvals from the FDA.
Please note that there can be no assurances that such approvals will be granted or that future manufacturing revenues will be earned by the Company from the manufacture of the Lodrane® Extended Release Products, should such approvals be granted by the FDA.
Furthermore, the Company has been advised that ECR has decided not to proceed with the development of the extended release formulations marketed under the Lodrane® brand.
The company has received FDA feedback on clinical protocols for the extended release brompheniramine product. The Company may proceed with the development of these formulations and may seek partners in conjunction with such activities, but there can be no assurances that the Company will pursue the development of these formulations, or that such development activities, if pursued, will result in approvals from the FDA.
Please also note that the Company does not have ownership of the Lodrane® brand name, and that if any products containing the formulations associated with the Lodrane® brand name are approved and marketed, such would be done under a different brand name.
While Elite’s manufacturing of the Lodrane® Extended Release Products has ceased, the sale of such products in the US market was still permitted by the FDA until August 30, 2011.
The Company earned royalties on any in-market sales that occurred up to that date.
Contract laboratory services for the Lodrane® Extended Products will continue, on a residual basis, as such services consist of stability studies that must be performed over certain defined time periods.
These revenues are expected to be significantly less than laboratory service revenues earned in periods prior to the removal of the Extended Release Lodrane products from the market.
Products Under Development
It is our general policy not to disclose products in our development pipeline or the status of such products until a product reaches a stage that we determine, for competitive reasons, in our discretion, to be appropriate for disclosure and because the disclosure of such information might suggest the occurrence of future matters or events that may not occur.
Abuse Resistant and Sustained Release Opioids
A once-daily oxycodone formulation was developed by Elite, using its proprietary technology. An investigational new drug application, or IND, has been filed. Elite has completed two pharmacokinetic studies in healthy subjects and has scaled up the product. We are looking for a partner for this product.
The abuse resistant opioid products utilize our patented abuse-deterrent technology that is based on a pharmacological approach. These products are combinations of a narcotic agonist, in a sustained-release formulation intended for use in patients with moderate to severe chronic pain, and an antagonist, formulated to deter abuse of the drug. Both, agonist and antagonist have been on the market for a number of years and sold separately in various dose strengths. Products utilizing the pharmacological approach to deter abuse such as Suboxone®, a product marketed in the United States by Reckitt Benckiser Pharmaceuticals, Inc., and Embeda®, a product marketed in the United States by Pfizer, Inc., has been approved by the FDA and is being marketed in the United States.
Elite has filed an IND for the product and has tested the product in a series of pharmacokinetic studies.
On December 5, 2013, Elite initiated the first dosing of a pilot bioequivalence study in healthy volunteers for the Company’s twice daily abuse deterrent oxycodone/naltrexone product, meeting the Company’s goal of initiating human pilot studies of a commercially scaled-up, abuse-resistant opioid product before the end of the year.
On January 14, 2014, Elite initiated the first dosing of a pivotal bioequivalence study in healthy volunteers for an undisclosed abuse deterrent product utilizing Elite’s proprietary pharmacological abuse deterrent technology.
This study, which is on a different product than the product related to the pilot bioequivalence study initiated on December 5, 2013, is a single-dose, open-label, partially randomized, three-way crossover study in which 52 healthy adult subjects will receive treatment in a partially randomized sequence.
The primary objective of this study is to compare the bioavailability of the Company’s abuse deterrent product to that from the reference listed drug under fasted and fed conditions.
The secondary objectives are: (i) determine whether or not subjects receiving the Company’s formulation are exposed to naltrexone; and (ii) evaluate the safety and tolerability of the Company’s product.
Elite has developed, and retains the rights to these abuse resistant and sustained release opioid products. Elite may license these products at a later date to a third party who could provide funding for the remaining clinical studies and who could provide sales and distribution for the product. The drug delivery technology development underlying the sustained release products was initiated under a joint venture with Elan which terminated in 2002.
According to the Elan Termination Agreement, Elite acquired all proprietary, development and commercial rights for the worldwide markets for the products developed by the joint venture, including the sustained release opioid products. Upon licensing or commercialization of a once daily oxycodone product, Elite will pay a royalty to Elan pursuant to the Termination Agreement. If Elite were to sell the product itself, Elite will pay a 1% royalty to Elan based on the product’s net sales, and if Elite enters into an agreement with another party to sell the product, Elite will pay a 9% royalty to Elan based on Elite’s net revenues from this product. (Elite’s net product revenues would include license fees, royalties, manufacturing profits and milestones) Elite is allowed to recoup all development costs including research, process development, analytical development, clinical development and regulatory costs before payment of any royalties to Elan.
Epic Strategic Alliance Agreement
On March 18, 2009, Elite and Epic Pharma, LLC and Epic Investments, LLC, a subsidiary of Epic Pharma LLC (collectively, “Epic”) entered into the Epic Strategic Alliance Agreement (amended on April 30, 2009, June 1, 2009 and July 28, 2009). The Epic Strategic Alliance Agreement expired on June 4, 2012.
Epic is a pharmaceutical company that operates a business synergistic to that of Elite in the research and development, manufacturing and sales and marketing of oral immediate release and controlled-release drug products.
Product Development Agreements
Elite is currently performing services pursuant to product development agreements with the following:
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Hi-Tech Pharmacal Co. (the “Hi-Tech Development Agreement”)
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A Private Hong Kong based company (the “Hong Kong D&L Agreement”)
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For further details on the Hi-Tech Development Agreement, please refer to the current report on Form 8-K filed with the SEC on January 4, 2011 and exhibit 10.68 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2011, such filings being herein incorporated by reference.
For further details on the Hong Kong D&L Agreement, please refer to the current report on Form 8-K filed with the SEC on March 22, 2012, our amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2012 (filed with the SEC on September 14, 2012), and exhibit 10.77 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2012, such filings being herein incorporated by reference.
Novel Labs Investment
At the end of 2006, Elite entered into a joint venture with VGS Pharma, LLC (“VGS”) and created Novel Laboratories, Inc. (“Novel”), a privately-held company specializing in pharmaceutical research, development, manufacturing, licensing, acquisition and marketing of specialty generic pharmaceuticals.
Novel's
business
strategy
is
to
focus
on
its
core
strength
in
identifying
and
timely
executing
niche
business opportunities in the generic pharmaceutical area. Elite owns less than 10% of the outstanding shares of Class A Voting Common Stock of Novel.
To date, Elite has received no distributions or dividends from this investment.
Critical Accounting Policies and Estimates
Management’s discussion addresses our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgment, including those related to bad debts, intangible assets, income taxes, workers compensation, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements. Our most critical accounting policies include the recognition of revenue upon completion of certain phases of projects under research and development contracts. We also assess a need for an allowance to reduce our deferred tax assets to the amount that we believe are more likely than not to be realized. We assess a need for allowances relating to the valuation of inventories.
We assess the recoverability of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We assess our exposure to current commitments and contingencies. It should be noted that actual results may differ from these estimates under different assumptions or conditions.
Results of Consolidated Operations
Three Months Ended December 31, 2013 Compared to Three Months Ended December 31, 2012
Our revenues for the three months ended December 31, 2013 were $1,693k an increase of $1,026k or approximately 154% over revenues for the comparable period of the prior year, and consisted of $892k in manufacturing fees, $58k in lab and product development fees and $743k in royalties and license fees. Revenues for the three months ended December 31, 2012, consisted of $400k in manufacturing fees, $111k in lab and product development fees, and $156k in royalties and license fees.
Manufacturing fees increased by approximately 123% as a result of the launch in September 2013 of Naltrexone 50mg tablets, growth in the two products launched in April 2013, Phentermine 15mg and 30mg capsules and the strong year-on-year growth of Elite’s Phentermine 37.5mg tablets, Hydromorphone 8mg tablets and contract manufactured Methadone 10mg product lines.
Please note that the profit margins earned on the Phentermine 37.5mg tablets, and the Phentermine 15mg and 30mg capsules have been adversely effected by significant increases in the price of raw materials required for the manufacture of these products. Lab and product development fees decreased by approximately 47% due to the decreased lab stability study revenues relating to the discontinuance of the Lodrane® Extended Release Products and also development fees being earned in the prior year in relation to the Hi-Tech Development Agreement.
Royalties and license fees increased by approximately 375% due to milestones earned pursuant to the Epic Agreement, the strong growth in sales from the Phentermine and Hydromorphone product lines and the launch in September 2013 of Naltrexone 50mg.
Please see the discussion above in “Overview; Approved Products” concerning certain delays related to Phentermine due to issues with the sole supplier that have been resolved.
Research and development costs for the three months ended December 31, 2013 were $1,291k, an increase of $1,053k or approximately 442% from $238k of such costs for the comparable period of the prior year.
The increase was primarily due to increased activities related to the development of Elite’s abuse resistant opioid products, for which a second patent was issued in May 2013 and a notice of allowance for a third patent was issued by the USPTO in December 2013,
General and administrative expenses for the three months ended December 31, 2013, were $494k, an increase of $113k, or approximately 30% from $381k of general and administrative expenses for the comparable period of the prior year.
The increase was primarily due to significant increases in regulatory costs, including, without limitation, increased fees paid to the US-FDA and the hiring of additional staff to support regulatory compliance activities, significant increases in legal fees, insurance and employee benefits.
Please note that these higher levels of overhead costs are expected to continue.
Depreciation and amortization for the three months ended December 31, 2013 was $127k, an increase of $86k, or approximately 211%, from $41k for the comparable period of the prior year. The increase was primarily due to the commissioning, for commercial operations, of the new facility at 135 Ludlow in January of 2013, with the cost related assets and capital investments being placed in service and absorbed into manufacturing operations through depreciation expenses.
Non-cash compensation through the issuance of stock options and warrants for the three months ended December 31, 2013 was $24k, an increase of $9k, or approximately 56% from $15k for the comparable period of the prior year.
The increase is due to the issuance of employee stock options in June of 2012 and August 2013.
For further details on such employee stock options, please see Note 11 of the financial statements on the Current Report on Form 10-Q filed with SEC on November 14, 2013.
As a result of the foregoing, our loss from operations for the three months ended December 31, 2013 was $1,237k, compared to a loss from operations of $274k for the three months ended December 31, 2012.
Other income/expenses for the three months ended December 31, 2013 were a net income of $0.2 million, a decrease in other income of $9.4 million from the net other income of $9.6 million for the comparable period of the prior year.
The decrease in other income/expense was due to derivative income relating to changes in the fair value of our preferred shares and outstanding warrants during the quarter ended December 31, 2013 totaling an income of $0.7 million, as compared to a net derivative income of $9.7 million for the comparable period of the prior year.
Please note that derivative income/(expenses) are most significantly determined by the number of preferred shares and warrants outstanding and 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 correlation between derivative revenues and increases in the closing price of the Company’s Common Stock.
As of December 31, 2013, there were an aggregate of 24 shares of Preferred Series C, Preferred Series E and Preferred Series G outstanding, as compared to an aggregate of 3,562.5 shares of Preferred Series B, Preferred Series C and Preferred Series E outstanding as of December 31, 2012.
As of December 31, 2013, there were approximately 118 million warrants outstanding as compared to approximately 145 million warrants outstanding as of December 31, 2012.
As a result of the foregoing, our net loss for the three months ended December 31, 2013 was $1.1 million, compared to a net income of $9.4 million for the three months ended December 31, 2012.
Nine Months Ended December 31, 2013 Compared to the Nine Months Ended December 31, 2012
Our revenues for the nine months ended December 31, 2013 were $3.6 million an increase of $1.7 million or approximately 90% over revenues for the comparable period of the prior year, and consisted of $2.4 million in manufacturing fees, $0.1 million in lab and product development fees and $1.1 million in royalties and license fees. Revenues for the nine months ended December 31, 2012, consisted of $1.2 million in manufacturing fees, $0.2 million in lab and product development fees, and $0.4 million in royalties and license fees.
Manufacturing fees increased by approximately 89% as a result of the launch of new products in April 2013 (Phentermine 15mg and 30mg capsules) and in September 2013 (Naltrexone 50mg tablets) and the strong year-on-year growth of Elite’s Phentermine 37.5mg tablets, Hydromorphone 8mg tablets and contract manufactured Methadone 10mg product lines.
Please note that the profit margins earned on the Phentermine 37.5mg tablets, and the Phentermine 15mg and 30mg capsules have been adversely effected by significant increases in the price of raw materials required for the manufacture of these products.
Lab and product development fees decreased by approximately 65% due to the decreased lab stability study revenues relating to the discontinuance of the Lodrane® Extended Release Products and also development fees being earned in the prior year in relation to the Hi-Tech Development Agreement.
Royalties and license fees increased by approximately 161% due to milestones earned pursuant to the Epic Agreement, the strong growth in sales from the Phentermine and Hydromorphone product lines and the launch in September 2013 of Naltrexone 50mg, for which a milestone was also earned.
Please see the discussion above in “Overview; Approved Products” concerning certain delays related to Phentermine due to issues with the sole supplier that have been resolved.
Research and development costs for the nine months ended December 31, 2013 were $2.7 million an increase of $2.1 million or approximately 309% from $0.7 million of such costs for the comparable period of the prior year.
The increase was primarily due to increased activities related to the development of Elite’s abuse resistant opioid products, for which a second patent was issued in May 2013 and a notice of allowance for a third patent was issued by the USPTO in December 2013.
General and administrative expenses for the nine months ended December 31, 2013, were $1.1 million, a decrease of approximately 0.3% from $1.1 million of general and administrative expenses for the comparable period of the prior year.
While general and administrative expenses are almost unchanged on a year to year basis for the nine months ended December 31
st
, please note that significant increases in regulatory costs, including, without limitation, increased fees paid to the FDA, and the hiring of additional staff to support regulatory compliance activities have been incurred for approximately the last six months of the nine month period ended December 31, 2013.
In addition, there have also been significant increases in legal fees, insurance and employee benefits that have occurred during the same six month period.
These significantly higher overhead costs are expected to continue.
Depreciation and amortization for the nine months ended December 31, 2013 was $0.4 million, an increase of $0.1 million, or approximately 244%, from $0.1 million for the comparable period of the prior year. The increase was primarily due to the commissioning, for commercial operations, of the new facility at 135 Ludlow in January of 2013, with the cost related assets and capital investments being placed in service and absorbed into manufacturing operations through depreciation expenses.
Non-cash compensation through the issuance of stock options and warrants for the nine months ended December 31, 2013 was $52k, an increase of $16k, or approximately 43% from $36k for the comparable period of the prior year.
The increase is due to the issuance of employee stock options in June of 2012 and August 2013.
For further details on such employee stock options, please see Note 11 of the financial statements in the Current Report on Form 10-Q filed with the SEC on November 14, 2013.
As a result of the foregoing, our loss from operations for the nine months ended December 31, 2013 was $2.9 million, compared to a loss from operations of $1.3 million for the nine months ended December 31, 2012.
Other income/expenses for the nine months ended December 31, 2013 were a net expense of $6.9 million, a decrease in other income of $8.1 million from the net other income of $1.2 million for the comparable period of the prior year.
The increase in other income/expense was due to derivative income relating to changes in the fair value of our preferred shares and outstanding warrants during the nine months ended December 31, 2013 totaling an expense of $6.2 million, as compared to a net derivative income of $1.9 million for the comparable period of the prior year.
Please note that derivative income/(expenses) are most significantly determined by the number of preferred shares and warrants outstanding and 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 correlation between derivative revenues and increases in the closing price of the Company’s Common Stock.
As of December 31, 2013, there were an aggregate of 24 shares of Preferred Series C, Preferred Series E and Preferred Series G outstanding, as compared to an aggregate of 3,562.5 shares of Preferred Series B, Preferred Series C and Preferred Series E outstanding as of December 31, 2012.
As of December 31, 2013, there were approximately 118 million warrants outstanding as compared to approximately 145 million warrants outstanding as of December 31, 2012.
As a result of the foregoing, our net loss for the nine months ended December 31, 2013 was $9.7 million, compared to a net loss of $0.1 million for the nine months ended December 31, 2012.
Material Changes in Financial Condition
Our working capital (total current assets less total current liabilities), decreased to a deficit of $8.6 million as of December 31, 2013 from a working capital deficit of $2.8 million as of March 31, 2013, primarily due to our net loss from operations, exclusive of non-cash charges.
In addition, it should be noted that current liabilities includes the entire principal amount due on the Company’s NJEDA Bonds Payable (“NJEDA Bonds”) and the liability recorded for the note payable the Mikah Note (as defined below) to Mikah Pharma LLC issued in conjunction with the Mikah Asset Purchase Agreement (see “Liquidity and Capital Resources; Convertible Note Payable to Mikah Pharma LLC” below) and the Treppel Note (as defined below) to Jerry Treppel issued in lieu of cash in payment of principal amounts due and owing on the Treppel Credit Line (as defined below) (see “Liquidity and Capital Resources: Convertible Note Payable to Jerry Treppel”, below).
The NJEDA Bonds, totaling $3.4 million, have been classified as a current liability as a result of the Company receiving a notice of default from the Trustee of the NJ-EDA Bonds.
Please refer to Note 6 to our financial statements and Item 3 of this quarterly report on Form 10-Q for further details.
The Mikah Note, with a net liability of $5.8 million, is classified as a current liability because the note includes an option to convert into shares of Common Stock after the first anniversary of the issue date.
The foregoing descriptions of the Mikah Note is qualified in its entirety by reference to the full text of the Purchase Agreement, Note and Security Agreement, copies of which are attached as Exhibit 10.1 10.2 and 10.3, respectively, to the Current Report on Form 8-K filed with the SEC on August 5, 2013, with the exhibits and current report being herein incorporated by reference.
The representations, warranties and covenants contained in such agreements were made only for purposes of such agreements and as of specific dates, were solely for the benefit of the parties to such agreements, and may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures exchanged between the parties in connection with execution of the agreements.
Net cash used by operations was $2.7 million for the nine months ended December 31, 2013, primarily due to our net loss from continuing operations of $9.7 million, offset by non-cash charges totaling $7.3 million, which included, without limitation, depreciation and amortization of $0.3 million and net income from the change in fair value of derivative liabilities of $6.2 million.
In addition, net cash used by operations was effected by changes in the balances of assets and liabilities, including, without limitation, increases in inventories of $0.1, increases in accounts receivable of $0.4 million and increases in prepaid expenses of $0.2 million, all of which result in a net outflow of cash.
LIQUIDITY AND CAPITAL RESOURCES
Going concern considerations
As of December 31, 2013, the Company had a working capital deficit of $8.6 million, losses from operations totaling $2.9 million for the nine months then ended, net other expenses totaling $6.9 million for the nine months then ended and a net loss of $9.7 million for the nine months ended December 31, 2013.
Please note that the Company’s other income/(expenses) are significantly influenced by the fluctuations in the fair value of outstanding preferred share and warrant derivatives, and that such fair values strongly correlate to and vary inversely with the market share price of the Company’s Common Stock.
The Company does not anticipate being profitable for the fiscal year ending March 31, 2014.
In addition, the Company has received Notice 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.
See “NJEDA Bonds” below.
Lincoln Park
Capital Purchase Agreement
On April 19, 2013, the Company entered into a purchase agreement (the “LPC Purchase Agreement”), together with a registration rights agreement (the “LPC Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“LPC”).
Under the terms and subject to the conditions of the LPC Agreement, the Company has the right to sell to and LPC is obligated to purchase up to $10 million in shares of the Company’s Common Stock, subject to certain limitations, from time to time, over the 36 month period commencing on May 9, 2013, the date that the registration statement, which the Company agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the LPC Registration Rights Agreement, was declared effective by the SEC.
The Company may direct LPC, at its sole discretion and subject to certain conditions, to purchase stock in amounts of up to $80,000 on any single business day, so long as at least two business days have passed since the most recent purchase, increasing to up to $500,000 per purchase, depending upon the closing sale price of the Common Stock.
The purchase price of the shares of Common Stock related to the future funding will be based on the prevailing market prices of such shares at the time of sales (or over a period of up to 12 business days leading up to such time), but in no event will shares be sold to LPC on a day the Common Stock closing price is less than the floor price of $0.07 per share, subject to adjustment.
The Company’s sales of shares of Common Stock to LPC under the LPC Purchase Agreement are limited to no more than the number of shares that would result in the beneficial ownership by LPC and its affiliates, at any single point in time, of more than 9.99% of the then outstanding shares of Common Stock.
As of February 5, 2013 (the latest practicable date), a total of 54,863,884 shares have been sold pursuant to the LPC Purchase Agreement, inclusive of purchase and commitment shares, with proceeds totaling $5,110,000.
A Current Report on Form 8-K was filed with the SEC on April 22, 2013 with regards to the LPC Purchase Agreement and LPC Registration Rights Agreement with such filing being herein incorporated by reference.
A Securities Registration Statement on Form S-1 was filed with the SEC on April 25, 2013 and declared effective by the SEC on May 9, 2013.
A post-effective amendment to the Registration Statement was filed with the SEC and declared effective on June 26, 2013.
Treppel $1,000,000 Bridge Revolving Credit Line
On June 12, 2012 (the “Effective Date”), we entered into a bridge loan agreement (the “Treppel Loan Agreement”) with Jerry Treppel, our Chairman and CEO.
Under the terms of the Treppel Loan Agreement, we have the right, in our sole discretion, to a line of credit (the “Treppel Credit Line”) in the maximum principal amount of up to $500,000 at any one time.
By amendments, the maximum principal amount was increased to $1,000,000 and the maturity date was amended and extended
Mr. Treppel provided the Treppel Credit Line for the purpose of supporting the acceleration of our product development activities.
The current term of the Treppel Loan Agreement ends on July 31, 2014, at which time the entire unpaid principal balance plus accrued interest thereon shall
be due and payable in full.
We may prepay any amounts owed without penalty.
Any such prepayments shall first be attributable to interest due and owing and then to principal.
Interest only shall be payable quarterly on July 1, October 1, January 1 and April 1 of each year. Prior to maturity or the occurrence of an Event of Default as defined in the Loan Agreement, we may borrow, repay, and reborrow under the Treppel Credit Line through maturity. Amounts borrowed under the Treppel Credit Line will bear interest at the rate of ten percent (10%) per annum.
As of December 31, 2013, the principal balance owed under the Treppel Credit Line was zero with an additional $8,384 in accrued interest being also owed, in accordance with the terms and conditions of the Credit Line.
For more detailed information, please see the Treppel Loan Agreement filed as an exhibit to our Current Report on Form 8-K filed with the SEC on June 13, 2012, and the amendments thereto filed as an exhibit to our Current Reports on Form 8-K filed with the SEC on December 10, 2012 and August 6, 2013 which forms 8-K and exhibits are incorporated by reference herein.
Hakim $1,000,000 Bridge Revolving Credit Line
On October 15, 2013 (the “Hakim Credit Line Effective Date”), we entered into a bridge loan agreement (the “Hakim Loan Agreement”) with Nasrat Hakim, our President and CEO. Under the terms of the Hakim Loan Agreement, we have the right, in our sole discretion, to a line of credit (“Hakim Credit Line”) in the maximum principal amount of up to $1,000,000 at any one time. Mr. Hakim provided the Credit Line for the purpose of supporting the acceleration of our product development activities. The outstanding amount will be evidenced by a promissory note which shall mature on June 30, 2015, at which time the entire unpaid principal balance plus accrued interest thereon shall be due and payable in full. We may prepay any amounts owed without penalty. Any such prepayments shall first be attributable to interest due and owing and then to principal. Interest only shall be payable quarterly on January 1, April 1, July 1 and October 1 of each year. Prior to maturity or the occurrence of an Event of Default as defined in the Hakim Loan Agreement, we may borrow, repay, and reborrow under the Hakim Credit Line through maturity. Amounts borrowed under the Hakim Credit Line will bear interest at the rate of ten percent (10%) per annum. As of December 31, 2013, the principal balance owed under the Credit Line was $320,150 with an additional $8,384 in accrued interest being also owed, in accordance with the terms and conditions of the Credit Line.
For further details, please refer to exhibit 10.16 of the Quarterly Report on Form 10-Q filed with SEC on November 14, 2013, and the Current Report on Form 8-K filed with the SEC on October 16, 2013, both filings being herein incorporated by this reference.
Convertible Note Payable to Mikah Pharma LLC
On August 1, 2013, Elite Laboratories Inc. (“Elite Labs”), a wholly owned subsidiary of the Company, executed an asset purchase agreement (the “Mikah Purchase Agreement”) with Mikah Pharma LLC (“Mikah”), an entity that is wholly owned by Mr. Nasrat Hakim, who, in conjunction with this transaction, was appointed as Elite’s CEO, President and a Director on August 2, 2012, and acquired from Mikah a total of 13 Abbreviated New Drug Applications (“ANDAs”) consisting of 12 ANDAs approved by the FDA and one ANDA under active review with the FDA, and all amendments thereto (the “Acquisition”) for aggregate consideration of $10,000,000, inclusive of imputed interest payable pursuant to a non-interest bearing, secured convertible note due in August 2016 (the “Mikah Note”).
Please see “Overview; Commercial Products; Approved Products” above for more information on the Acquisition.
The Mikah Note was amended on February 7, 2014 to make it convertible into shares of the Company’s Series I Convertible Preferred Stock.
The Mikah Note, as amended, was interest free and due and payable on the third anniversary of its issuance.
Subject to certain limitations, the principal amount of the Mikah Note was convertible at the option of Mikah into shares of Common Stock at a rate of $0.07 (approximately 14,286 shares per $1,000 in principal amount), the closing market price of the Company’s Common Stock on the date that the asset purchase agreement and Note were executed and/or into shares of the Company’s Series I Convertible Preferred Stock at the rate of 1 share of Series I Preferred Stock for each $100,000 of principal owed on the Mikah Note.
The conversion rate was adjustable for customary corporate actions such as stock splits and, subject to certain exclusions, includes weighted average anti-dilution for common stock transactions at prices below the then applicable conversion rate.
Pursuant to a security agreement (the “Security Agreement”), repayment of the Mikah Note was secured by the ANDAs acquired in the Acquisition.
The foregoing descriptions of the Purchase Agreement, Mikah Note (as amended) and Security Agreement are qualified in their entirety by reference to the full text of the Purchase Agreement, Note and Security Agreement, copies of which are attached as Exhibit 10.1 10.2 and 10.3, respectively, to the Current Report on Form 8-K filed with the SEC on August 5, 2013, and
the full text of the Amendment to the Mikah Note, a copy of which is attached as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on February 7, 2014, with the exhibits and current reports being herein incorporated by reference.
The representations, warranties and covenants contained in such agreements were made only for purposes of such agreements and as of specific dates, were solely for the benefit of the parties to such agreements, and may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures exchanged between the parties in connection with execution of the agreements.
Please also refer to Note 14 of the accompanying financial statements of this Quarterly Report on Form 10-Q for further details.
On February 7, 2014, Mikah converted the principal amount of $10,000,000, representing the entire principal balance due under the Mikah Note, into 100 shares of the Company’s Series I Preferred Stock.
Convertible Note Payable to Jerry Treppel
On November 21, 2013, Elite entered into an unsecured convertible note (the “Treppel Note”) with Jerry Treppel (“Treppel”), Elite’s Chairman of the Board, in the amount of $600,000 for the unpaid current principal amount owed pursuant to the Treppel Bridge Loan Agreement (“Treppel Credit Line”). The original Treppel Credit Line agreement was executed on June 12, 2012 and amended on December 5, 2012 and August 2, 2013.
The Treppel Note was amended on February 7, 2014 to make it convertible into shares of the Company’s Series I Preferred Stock.
The Treppel Note, as amended, was interest free and due and payable on the third anniversary of its issuance. Subject to certain limitations, the principal amount of the Note was convertible at the option of Treppel on and after the first anniversary of the date of the Note into shares of the Company’s Common Stock at a rate of $0.099 (approximately 10,101 shares per $1,000 in principal amount), the closing market price of the Company’s Common Stock on the date that the Note was executed, and/or into shares of the Company’s Series I Preferred Stock at a rate of 1 share of Series I Preferred Stock for each $141,442.7157 of principal owed on the Treppel Note.
The conversion rate was adjustable for customary corporate actions such as stock splits and, subject to certain exclusions, includes weighted average anti-dilution for common stock transactions at prices below the then applicable conversion rate.
The foregoing description of the Note and the amendment thereto is qualified in its entirety by reference to the full text of the Note, a copy of which is attached as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on November 26, 2013, and
the full text of the Amendment to the Note, a copy of which is attached as Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on February 7, 2014, with such exhibits and filings being incorporated herein in their entirety by reference. The representations, warranties and covenants contained in such Note and Amendment were made only for purposes of such Note and as of a specific date, were solely for the benefit of the parties to such Note, and may be subject to limitations agreed upon by the contracting parties.
On February 7, 2014, Treppel converted the principal amount of $600,000, representing the entire principal balance due under the Treppel Note into 4.242 shares of the Company’s Series I Preferred Stock.
Completion of Epic Strategic Alliance Payments
We have successfully completed the initial, second and third closings of the Epic Strategic Alliance Agreement and the twelve quarterly payments, with each such quarterly payment being equal to the Epic Quarterly Payment Amount and have accordingly received the full investment from Epic, exclusive of warrant exercise, as provided for in the Epic Strategic Alliance Agreement.
For additional information regarding the Epic Strategic Alliance Agreement, please see our disclosures under “Epic Strategic Alliance Agreement” in Item 7 of Part II of our Annual Report on Form 10-K, and in our Current Reports on Form 8-K, filed with the SEC on March 23, 2009, May 6, 2009, June 5, 2009, July 1, 2010 and June 29, 2011, such disclosures being herein incorporated by reference.
Despite having received the full investment from Epic Investments LLC, exclusive of warrant exercise, as provided for in the Epic Strategic Alliance Agreement, entered into the Treppel Credit Line Agreement, entered into the Hakim Credit Line Agreement and entered into the LPC Purchase Agreement we still may be required to seek additional capital in the future and there can be no assurances that Elite will be able to obtain such additional capital on favorable terms, if at all.
Based upon our current cash position, management has undertaken a review of our operations and implemented cost-cutting measures in an effort to eliminate any expenses which are not deemed critical to our current strategic objectives.
We will continue this process without impeding our ability to proceed with our critical strategic goals, which, as noted above, include developing our pain management and other products and manufacturing our current products.
Cash at December 31, 2013 was approximately $1.1 million, an increase of approximately $1.0 million from the approximately $0.1 million balance of cash at December 31, 2012.
As of December 31, 2013, our principal source of liquidity was approximately $1.1 million of cash.
Additionally, we may have access to funds through the exercise of outstanding stock options and warrants and, as mentioned above, from the LPC Purchase Agreement, the Treppel Credit Line and the Hakim Credit Line. There can be no assurance that any of these sources will generate or provide sufficient cash.
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, 2013, all of the proceeds were utilized by the Company for such stated purposes.
Interest is payable semiannually 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 $415,500 Debt Service Reserve Fund consisting of $366,000 from the Series A Notes proceeds and $49,500 from the Series B Notes proceeds. The Debt Service Reserve is maintained in restricted cash accounts that are classified in Other Assets. $1,274,311 of the proceeds had been deposited in a short-term restricted cash account to fund the purchase of manufacturing equipment and development of the Company’s facility.
Bond issue costs of $354,000 were paid from the bond proceeds and are being amortized over the life of the bonds. Amortization of bond issuance costs amounted to $10,634 for the nine months ended December 31, 2013.
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.
The interest payments due on March 1st and September 1st of 2009, 2010 2011, 2012 and 2013, totaling $1,146,150 for all ten payments, were paid from the debt service reserved held in the restricted cash account, due to the Company not having sufficient funds to make such payments when they were due.
The principal payment due on September 1, 2009, totaling $210,000 was paid from the debt service reserve held in the restricted cash account, due to the Company not having sufficient funds to make the payment when due.
The Company did not have sufficient funds available to make the principal payments due on September 1, 2010, totaling $225,000 and requested that the Trustee withdraw such funds from the debt service reserve.
The Company’s request was denied and accordingly the principal payment due on September 1, 2010, totaling $225,000 was not made.
The Company did not have sufficient funds available to make the principal payments due on September 1, 2011, totaling $470,000, with such amount including the principal payments due on September 1, 2010 and not paid.
There were not sufficient funds available in the debt service reserve and accordingly, the principal payment totaling $470,000 was not made.
The Company did not have sufficient funds available to make the principal payments due on September 1, 2012, totaling $730,000, with such amount including the principal payments due on September 1, 2011 and not paid.
There were not sufficient funds available in the debt service reserve and accordingly, the principal payment totaling $730,000 was not made.
The Company did not have sufficient funds available to make the principal payments due on September 1, 2013, totaling $915,000, with such amount including the principal payments due on September 1, 2012 and not paid.
There were not sufficient funds available in the debt service reserve and accordingly, the principal payment totaling $915,000 was not made.
Pursuant to the terms of the NJEDA Bonds, the Company is required to replenish any amounts withdrawn from the debt service reserve and used to make principal or interest payments in six monthly installments, each being equal to one-sixth of the amount withdrawn and with the first installment due on the 15th of the month in which the withdrawal from debt service reserve occurred and the remaining five monthly payments being due on the 15th of the five immediately subsequent months. The Company has, to date, made all payments required in relation to the withdrawals made from the debt service reserve on March 1, 2009, September 1, 2009, March 1, 2010, September 1, 2010, March 1, 2011, September 1, 2011, March 1, 2012, September 1, 2012, March 1, 2013 and September 1, 2013.
The Company does not expect to have sufficient available funds as of September 1, 2014, to make principal payments, totaling $1,110,000, and consisting of $195,000 due on September 1, 2014, plus scheduled principal payments totaling $915,000, consisting of $185,000 due on September 1, 2013, and not paid, plus $260,000 due on September 1, 2012, and not paid, plus $245,000 due on September 1, 2011 and not paid plus $225,000 due on September 1, 2010 and not paid.
The Company has received Notice of Default from the Trustee of the NJEDA Bonds in relation to the withdrawals from the debt service reserve, and no payment of scheduled principal amounts.
Resolution of the Company’s default under the NJED Bonds will have a significant effect on our ability to operate in the future.
Due to issuance of a Notice of Default being received from the Trustee of the NJEDA Bonds, and until the event of default is waived or rescinded, the Company has classified the entire principal due, an amount aggregating $3.385 million, as a current liability.
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.