ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
June 30,
2014
(Unaudited)
|
|
|
March 31,
2014
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,172,966
|
|
|
$
|
6,941,777
|
|
Accounts receivable (net of allowance for doubtful accounts of $111,404 and $134,083, respectively)
|
|
|
1,166,749
|
|
|
|
732,076
|
|
Inventories
|
|
|
2,525,915
|
|
|
|
1,932,486
|
|
Prepaid expenses and other current assets
|
|
|
215,911
|
|
|
|
318,424
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
12,081,541
|
|
|
|
9,924,763
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
, net of accumulated depreciation of $5,713,939 and $5,508,377, respectively
|
|
|
4,945,290
|
|
|
|
4,199,602
|
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS
– net of accumulated amortization of $-0-
|
|
|
6,356,533
|
|
|
|
6,349,922
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Investment in Novel Laboratories, Inc.
|
|
|
—
|
|
|
|
3,329,322
|
|
Security deposits
|
|
|
16,314
|
|
|
|
16,314
|
|
Restricted cash – debt service for EDA bonds
|
|
|
339,402
|
|
|
|
265,043
|
|
EDA bond offering costs, net of accumulated amortization of $125,242 and $121,697, respectively
|
|
|
229,211
|
|
|
|
232,756
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
584,927
|
|
|
|
3,843,435
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
23,968,291
|
|
|
$
|
24,317,722
|
|
The accompanying notes are an integral
part of the condensed consolidated financial statements
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
June 30,
2014
(Unaudited)
|
|
|
March 31,
2014
(Audited)
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
EDA bonds payable
|
|
$
|
3,385,000
|
|
|
$
|
3,385,000
|
|
Short term loans and current portion of long-term debt
|
|
|
90,250
|
|
|
|
18,870
|
|
Related Party Line of Credit
|
|
|
617,064
|
|
|
|
528,750
|
|
Accounts payable and accrued expenses
|
|
|
3,206,314
|
|
|
|
2,214,871
|
|
Deferred revenues
|
|
|
13,333
|
|
|
|
13,333
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
7,311,961
|
|
|
|
6,160,824
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
|
135,556
|
|
|
|
138,890
|
|
Other long term liabilities
|
|
|
318,983
|
|
|
|
131,144
|
|
Derivative liability – preferred shares
|
|
|
63,289,786
|
|
|
|
60,981,570
|
|
Derivative liability – warrants
|
|
|
37,361,487
|
|
|
|
38,103,446
|
|
|
|
|
|
|
|
|
|
|
Total Long Term Liabilities
|
|
|
101,105,812
|
|
|
|
99,355,050
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
108,417,773
|
|
|
|
105,515,874
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Common stock – par value $0.001, Authorized 995,000,000 shares and 690,000,000 shares, respectively. Issued 568,042,073 shares and 560,242,430 shares, respectively. Outstanding 567,972,073 shares and 560,142,430 shares, respectively
|
|
|
568,043
|
|
|
|
560,244
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in-capital
|
|
|
144,697,772
|
|
|
|
143,555,091
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(229,408,456
|
)
|
|
|
(225,006,646
|
)
|
|
|
|
|
|
|
|
|
|
Treasury stock at cost (100,000 common shares)
|
|
|
(306,841
|
)
|
|
|
(306,841
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS’ DEFICIT
|
|
|
(84,449,482
|
)
|
|
|
(81,198,152
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
23,968,291
|
|
|
$
|
24,317,722
|
|
The accompanying notes are an integral
part of the condensed consolidated financial statements
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(Unaudited)
|
|
THREE MONTHS ENDED
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
REVENUES
|
|
|
|
|
|
|
|
|
Manufacturing Fees
|
|
$
|
949,037
|
|
|
$
|
543,434
|
|
Licensing Fees
|
|
|
207,645
|
|
|
|
173,255
|
|
Lab Fee Revenues
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
1,161,682
|
|
|
|
721,689
|
|
|
|
|
|
|
|
|
|
|
COSTS OF REVENUES
|
|
|
728,530
|
|
|
|
579,012
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
433,152
|
|
|
|
142,677
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
4,020,325
|
|
|
|
569,492
|
|
General and Administrative
|
|
|
626,554
|
|
|
|
376,456
|
|
Non-cash compensation through issuance of stock options
|
|
|
23,662
|
|
|
|
9,487
|
|
Depreciation and Amortization
|
|
|
193,885
|
|
|
|
162,833
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
4,864,426
|
|
|
|
1,118,268
|
|
|
|
|
|
|
|
|
|
|
(LOSS) FROM OPERATIONS
|
|
|
(4,431,274
|
)
|
|
|
(975,592
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME / (EXPENSES)
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(78,205
|
)
|
|
|
(74,778
|
)
|
Change in fair value of warrant derivatives
|
|
|
741,959
|
|
|
|
2,896,457
|
|
Change in fair value of preferred share derivatives
|
|
|
(2,308,216
|
)
|
|
|
(900,838
|
)
|
Interest expense attributable to preferred share derivatives
|
|
|
—
|
|
|
|
(23,584
|
)
|
Credit for Income Taxes
|
|
|
3,248
|
|
|
|
|
|
Gain on Sale on Investment
|
|
|
1,670,678
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Other Income / (Expense)
|
|
|
29,464
|
|
|
|
1,897,258
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
(4,401,810
|
)
|
|
|
921,666
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(4,401,810
|
)
|
|
$
|
921,666
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER SHARE
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
Basic
|
|
|
565,150,231
|
|
|
|
387,969,981
|
|
Diluted
|
|
|
733,912,128
|
|
|
|
580,388,867
|
|
The accompanying notes are an integral
part of the condensed consolidated financial statements
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS’ DEFICIT
(Unaudited)
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Treasury
Stock
|
|
|
Accumulated
|
|
|
Stockholder’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance at
March 31, 2014
|
|
|
560,242,430
|
|
|
$
|
560,244
|
|
|
$
|
143,555,092
|
|
|
|
100,000
|
|
|
$
|
(306,841
|
)
|
|
$
|
(225,006,646
|
)
|
|
$
|
(81,198,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,401,810
|
)
|
|
|
(4,401,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares sold pursuant to the Lincoln Park Capital purchase
agreement
|
|
|
2,407,014
|
|
|
|
2,407
|
|
|
|
894,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
896,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation through the issuance of stock options
|
|
|
|
|
|
|
|
|
|
|
23,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs associated with raising capital
|
|
|
|
|
|
|
|
|
|
|
(9,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued as commitment shares pursuant to the Lincoln
Park Capital purchase agreement
|
|
|
1,971,873
|
|
|
|
1,971
|
|
|
|
(1,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued pursuant to the exercise of cash warrants
|
|
|
3,420,756
|
|
|
|
3,421
|
|
|
|
236,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
June 30, 2014
|
|
|
568,042,073
|
|
|
$
|
568,043
|
|
|
$
|
144,697,773
|
|
|
|
100,000
|
|
|
$
|
(306,841
|
)
|
|
$
|
(229,408,456
|
)
|
|
$
|
(84,449,482
|
)
|
The accompanying notes are an integral
part of the condensed consolidated financial statements
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
|
|
THREE MONTHS ENDED JUNE 30
|
|
|
|
2014
|
|
|
2013
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Income Loss
|
|
$
|
(4,401,810
|
)
|
|
$
|
921,666
|
|
Adjustments to reconcile net loss to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
209,395
|
|
|
|
109,553
|
|
Change in fair value of warrant derivative liability
|
|
|
(741,959
|
)
|
|
|
(2,896,457
|
)
|
Change in fair value of preferred share derivative liability
|
|
|
2,308,216
|
|
|
|
900,838
|
|
Preferred share derivative interest satisfied by the issuance of common stock
|
|
|
—
|
|
|
|
27,500
|
|
Non-cash compensation accrued
|
|
|
451,271
|
|
|
|
—
|
|
Non-cash compensation from the issuance of options
|
|
|
23,662
|
|
|
|
9,487
|
|
Non-cash rent expense
|
|
|
(2,387
|
)
|
|
|
1,899
|
|
Non-cash lease accretion
|
|
|
373
|
|
|
|
351
|
|
Gain on Sale of Investment
|
|
|
(1,670,678
|
)
|
|
|
—
|
|
Changes in Assets and Liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(434,673
|
)
|
|
|
166,071
|
|
Inventories
|
|
|
(593,429
|
)
|
|
|
419,522
|
|
Prepaid and other current assets
|
|
|
102,513
|
|
|
|
34,833
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
|
540,177
|
|
|
|
(43,061
|
)
|
Deferred revenues and Customer deposits
|
|
|
(3,334
|
)
|
|
|
(3,333
|
)
|
Derivative interest payable
|
|
|
—
|
|
|
|
(3,916
|
)
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(4,212,663
|
)
|
|
|
(355,047
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(678,811
|
)
|
|
|
(35,561
|
)
|
Costs incurred for intellectual property assets
|
|
|
(6,611
|
)
|
|
|
(18,496
|
)
|
Deposits to / (withdrawals from) restricted cash, net
|
|
|
(74,359
|
)
|
|
|
(80,830
|
)
|
Proceeds from Sale of Investment in Novel
|
|
|
5,000,000
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
4,240,218
|
|
|
|
(134,887
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from sale of common shares to Lincoln Park Capital
|
|
|
896,613
|
|
|
|
400,000
|
|
Proceeds from exercise of cash warrants
|
|
|
239,564
|
|
|
|
—
|
|
Proceeds from draws against credit lines from related parties
|
|
|
88,314
|
|
|
|
—
|
|
Other loan payments
|
|
|
(11,498
|
)
|
|
|
—
|
|
Costs associated with raising capital
|
|
|
(9,360
|
)
|
|
|
(47,987
|
)
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
1,203,633
|
|
|
|
352,013
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
1,231,189
|
|
|
|
(137,921
|
)
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS – beginning of period
|
|
|
6,941,777
|
|
|
|
369,023
|
|
CASH AND CASH EQUIVALENTS – end of period
|
|
$
|
8,172,966
|
|
|
$
|
231,102
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
77,832
|
|
|
$
|
13,962
|
|
Cash paid for taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Financing Transactions
|
|
|
|
|
|
|
|
|
Financing of equipment purchases
|
|
|
272,727
|
|
|
|
|
|
Commitment shares issued to Lincoln Park Capital
|
|
|
653,264
|
|
|
|
219,296
|
|
Conversion of Preferred Shares to Common Shares
|
|
|
—
|
|
|
|
962,436
|
|
The accompanying notes are an integral
part of the condensed consolidated financial statements
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED JUNE 30, 2014 AND
2013
(
UNAUDITED
)
“Current Balance Sheet
Date”
means June 30, 2014
“Current Fiscal Year”
means the twelve months ended March 31, 2015
“Current Quarter”
means the three months ended June 30, 2014
“Current YTD”
means the three months ended June 30, 2014
“
FDA
” means
the U.S. Food and Drug Administration
“Hakim Credit Line Limit”
equals $1,000,000
“Hakim Credit Line Balance”
equals $617,064
“Hakim Credit Line Interest
Due”
equals $23,617
“
Outstanding Bond Principal
Payments”
means principal payments which were due and owing on the NJEDA Bonds on or before the Current Balance Sheet
Date and not made, consisting of the following:
Payment Date
|
|
Amount
|
|
September 1, 2010
|
|
|
225,000
|
|
September 1, 2011
|
|
|
470,000
|
|
September 1, 2012
|
|
|
730,000
|
|
September 1, 2013
|
|
|
915,000
|
|
“
Prior Year Balance Sheet
Date
” means June 30, 2013
“
Prior Fiscal Year
”
means the twelve months ended March 31, 2014
“
Prior Year Quarter
”
means the three months ended June 30, 2013
“
Restricted Cash Interest
Payments
” means the following withdrawal of funds from the debt service reserve, with such funds being used to make interest
payments due to holders of the NJEDA Bonds:
Payment Date
|
|
Amount
|
|
March 1, 2009
|
|
$
|
120,775
|
|
September 1, 2009
|
|
|
120,775
|
|
March 1, 2010
|
|
|
113,075
|
|
September 1, 2010
|
|
|
113,075
|
|
March 1, 2011
|
|
|
113,075
|
|
September 1, 2011
|
|
|
113,075
|
|
March 1, 2012
|
|
|
113,075
|
|
September 1, 2012
|
|
|
113,075
|
|
March 1, 2013
|
|
|
113,075
|
|
September 1, 2013
|
|
|
113,075
|
|
March 1, 2014
|
|
|
113,075
|
|
“
Restricted Cash Principal
Payments
” means the following withdrawal of funds from the debt service reserve, with such funds being used to make principal
payments due to holders of the NJEDA Bonds:
Payment Date
|
|
Amount
|
|
September 1, 2009
|
|
|
210,000
|
|
“SEC”
means the Securities and Exchange Commission
“Treppel Credit Line
Balance”
equals zero
“Treppel Credit Line
Interest Due”
equals zero
“Treppel Credit Line
Limit”
equals $1,000,000
|
NOTE 2
|
-
BASIS OF
PRESENTATION
|
The information in this quarterly
report on Form 10-Q includes the results of operations of Elite Pharmaceuticals, Inc. and its consolidated subsidiary (collectively
the “Company” or “Elite”) for the Current Quarter and Prior Year Quarter. The accompanying unaudited condensed
consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission
in accordance with accounting principles generally accepted for interim financial statement presentation. Accordingly, they do
not include all of the information and footnotes required by accounting principles generally accepted in the United States of America
(“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the condensed consolidated financial position, results of operations
and cash flows of the Company for the periods presented have been included.
The financial results for the
interim periods are not necessarily indicative of the results to be expected for the full year or future interim periods.
The accompanying unaudited
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes
included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2014 and filed with the SEC on June 30,
2014. There have been no changes in significant accounting policies since March 31, 2014.
The Company does not anticipate
being profitable for the Current Fiscal Year; therefore a current provision for income tax was not established for the Current
Quarter. Only the minimum liability required for state corporation taxes was considered.
Segment Reporting
FASB ASC 280-10-50, “Disclosure
about Segments of an Enterprise and Related Information” requires use of the “management approach” model for
segment reporting. The management approach is based on the way a company’s management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal
structure, management structure, or any other manner in which management disaggregates a company. The Company operates in one segment
for the three months ended June 30, 2014.
Cash consists of cash on deposit
with banks and money market instruments. The Company places its cash with high quality, U.S. financial institutions and, to date,
has not experienced losses on any of its balances.
Inventories consist of raw materials,
work in process and finished goods and are stated at the lower of cost (first-in, first-out basis) or market (net realizable value),
and summarized as follows:
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
Raw Materials
|
|
$
|
2,104,857
|
|
|
$
|
1,523,341
|
|
Work-in-Process
|
|
|
421,058
|
|
|
|
409,145
|
|
Finished Goods
|
|
|
—
|
|
|
|
—
|
|
Less: Inventory Reserve
|
|
|
—
|
|
|
|
—
|
|
Total Inventory
|
|
$
|
2,525,915
|
|
|
$
|
1,932,486
|
|
Bond financing consisting
of the following, as of June 30,
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Refinanced NJEDA Bonds
|
|
$
|
3,385,000
|
|
|
$
|
3,385,000
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
|
(3,385,000
|
)
|
|
|
(3,385,000
|
)
|
|
|
|
|
|
|
|
|
|
Long term portion, net of current maturities
|
|
$
|
—
|
|
|
$
|
—
|
|
Maturities of Bonds for the next five years are
as follows (please note that $915,000 of the $1,110,000 in bond maturities scheduled for the fiscal year ending March 31, 2015
were paid on July 23, 2014):
YEAR ENDING MARCH 31,
|
|
AMOUNT
|
|
2015
|
|
$
|
1,110,000
|
|
2016
|
|
|
210,000
|
|
2017
|
|
|
220,000
|
|
2018
|
|
|
85,000
|
|
2019
|
|
|
90,000
|
|
Thereafter
|
|
|
1,670,000
|
|
|
|
$
|
3,385,000
|
|
Classification of Bond Liability
as a Current Liability
Due to the issuance of a Notice
of Default being received from the Trustee previously, and as the event of default was not waived or rescinded as of June 30, 2014,
the Company has classified the entire principal balance due on the NJEDA Bonds as a current liability.
Subsequent to the Current Balance
Sheet Date, the Company has redeemed all bonds currently due, paid all interest amounts which were due and has also advised the
Trustee of its intention and ability to make the principal and interest payments due on September 1, 2014. The Company believes
it has cured all monetary defaults and has requested that the notices of default resulting from monetary defaults in the past be
rescinded.
Equipment loans consisted
of the following as of June 30
,
|
|
2014
|
|
|
2013
|
|
Total equipment loans
|
|
$
|
367,674
|
|
|
|
—
|
|
Current Portion
|
|
|
90,250
|
|
|
|
—
|
|
Long-term portion, net of current maturities
|
|
$
|
277,424
|
|
|
|
—
|
|
Principal payments on equipment
loans for each fiscal year are:
Fiscal year ending March 31, 2015
|
|
$
|
67,050
|
|
Fiscal year ending March 31, 2016
|
|
|
95,461
|
|
Fiscal year ending March 31, 2017
|
|
|
102,882
|
|
Fiscal year ending March 31, 2018
|
|
|
51,451
|
|
Fiscal year ending March 31, 2019
|
|
|
44,983
|
|
Thereafter
|
|
|
5,845
|
|
Total Principal Payments
|
|
$
|
367,672
|
|
|
NOTE 7
|
-
DERIVATIVE
LIABILITIES
|
Accounting Standard Codification
“ASC” 815 –
Derivatives and Hedging
, which provides guidance on determining what types of instruments
or embedded features in an instrument issued by a reporting entity can be considered indexed to its own stock for the purpose of
evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. These requirements can
affect the accounting for warrants and convertible preferred instruments issued by the Company. As the conversion features within,
and the detachable warrants issued with the Company’s Series I Preferred Stock, do not have fixed settlement provisions because
their conversion and exercise prices may be lowered if the Company issues securities at lower prices in the future, we have concluded
that the instruments are not indexed to the Company’s stock and are to be treated as derivative liabilities.
Preferred Stock Derivative
Liabilities
|
|
Series I
|
|
Preferred Shares Authorized
|
|
|
500
|
|
|
|
|
|
|
Preferred shares Outstanding
|
|
|
104.242
|
|
|
|
|
|
|
Underlying common shares into which Preferred may convert
|
|
|
148,917,143
|
|
|
|
|
|
|
Closing price on valuation date
|
|
$
|
0.425
|
|
|
|
|
|
|
Preferred stock derivative liability at Current Balance Sheet Date
|
|
$
|
63,289,786
|
|
|
|
|
|
|
Preferred stock derivative liability at March 31, 2014
|
|
$
|
60,981,570
|
|
CHANGE IN VALUE OF PREFERRED STOCK DERIVATIVE LIABILITY
|
|
|
Three months ended
June 30,
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
Change in Preferred Stock Derivative Liability
|
|
$
|
(2,308,216
|
)
|
|
$
|
(900,838
|
)
|
|
|
|
|
|
|
|
|
Warrant Derivative Liabilities
The portion of derivative liabilities
related to outstanding warrants was valued using the Black-Scholes option valuation model and the following assumptions on the
following dates:
FAIR VALUE OF WARRANT DERIVATIVE LIABILITY
|
|
|
March 31
2014
|
|
|
June 30
2014
|
|
|
|
|
|
|
|
Risk-Free interest rate
|
|
|
0.05% - 1.32%
|
|
|
|
0.02% - 1.25%
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
111% - 207%
|
|
|
|
86% - 113%
|
|
|
|
|
|
|
|
|
|
Expected life (in years)
|
|
|
0.3 – 4.1
|
|
|
|
0.3 – 3.8
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Number of warrants
|
|
|
102,143,091
|
|
|
|
98,439,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
Warrant Derivative Liability
|
|
$
|
38,103,446
|
|
|
$
|
37,361,487
|
|
|
|
|
|
|
|
|
|
CHANGE IN VALUE OF WARRANT DERIVATIVE LIABILITY
|
|
|
Three months ended
June 30
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
Change in Warrant Derivative Liability
|
|
$
|
741,959
|
|
|
$
|
2,896,457
|
|
|
|
|
|
|
|
|
|
The risk free interest rate was
based on rates established by the U.S. Treasury Department. The expected volatility was based on the historical volatility of the
Company’s share price for periods equal to the expected life of the outstanding warrants at each valuation date. The expected
dividend rate was based on the fact that the Company has not historically paid dividends on common stock and does not expect to
pay dividends on common stock in the future.
|
NOTE 8
|
-
OPERATING LEASES
|
The Company entered into a lease for a portion of a one-story
warehouse, located at 135 Ludlow Avenue, Northvale, New Jersey, consisting of approximately 15,000 square feet of floor space.
The lease term began on July 1, 2010 and is classified as an operating lease. The lease includes an initial term of 5 years and
6 months and the Company has the option to renew the lease for two additional terms, each of 5 years. The property related to this
lease will be used for the storage of pharmaceutical finished goods, raw materials, equipment and documents as well as engaging
in manufacturing, packaging and distribution activities.
This property required significant
leasehold improvements and qualification as a prerequisite to achieving suitability for such intended future use and in January
2013, the Company began using the facility at 135 Ludlow Avenue for commercial production and commenced shipping packaged products
from the facility.
Minimum 5 year payments* for
the leasing of 15,000 square feet at 135 Ludlow are as follows:
Fiscal year ended March 31, 2015
|
|
|
85,344
|
|
Fiscal year ended March 31, 2016
|
|
|
65,196
|
|
Fiscal year ended March 31, 2017
|
|
|
—
|
|
Fiscal year ended March 31, 2018
|
|
|
—
|
|
Fiscal year ended March 31, 2019
|
|
|
—
|
|
Total Minimum 5 year lease payments
|
|
$
|
150,540
|
|
* Minimum lease payments are
exclusive of additional expenses related to certain expenses incurred in the operation and maintenance of the premises, including,
without limitation, real estate taxes and common area charges which may be due under the terms and conditions of the lease, but
which are not quantifiable at the time of filing of this quarterly report on Form 10-Q.
Rent expense relating to the
operating lease is recorded using the straight line method, and is summarized as follows:
RENT EXPENSE
|
|
|
Three months ended
June 30,
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
Rent Expense
|
|
$
|
18,817
|
|
|
$
|
22,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in deferred rent liability
|
|
$
|
(2,387
|
)
|
|
$
|
1,899
|
|
|
|
|
|
|
|
|
|
DEFERRED RENT LIABILITY (LONG-TERM LIABILITY)
|
|
|
March 31
2014
|
|
|
June 30
2014
|
|
|
|
|
|
|
|
Balance of Deferred Rent Liability
|
|
$
|
18,824
|
|
|
$
|
16,437
|
|
|
|
|
|
|
|
|
|
During the Current YTD, the Company
issued shares of Common Stock, as follows:
Description
|
|
Shares
Of
Common Stock
|
|
|
|
|
|
|
Common shares sold pursuant to the LPC-40 Purchase Agreement
|
|
|
2,407,014
|
|
|
|
|
|
|
Common shares issued as commitment shares pursuant to the LPC-40 Purchase Agreement
|
|
|
1,971,873
|
|
|
|
|
|
|
Common shares issued pursuant to the exercise of cash warrants
|
|
|
3,420,756
|
|
|
|
|
|
|
Total Common Shares issued during the Current YTD
|
|
|
7,799,643
|
|
Options
Options issued and outstanding
as of the Current Balance Sheet Date are summarized as follows:
|
|
Number of Options
|
|
|
Range of Exercise Prices
|
Vested Options
|
|
|
2,165,666
|
|
|
$0.10 to $2.75
|
Non-Vested Options
|
|
|
3,870,001
|
|
|
$0.07 to $0.33
|
Each option represents the right
to purchase one share of common stock. The non-vested options are scheduled to vest in various increments during dates that are
within the period beginning on January 18, 2013 and through April 10, 2017, or upon the occurrence of certain defined events and
require that employees awarded such options be employed by the Company on the vesting date.
|
NOTE 10
|
- PER SHARE INFORMATION
|
Basic earnings per share of common
stock (“Basic EPS”) is computed by dividing the net (loss) income by the weighted-average number of shares of common
stock outstanding. Diluted earnings per share of common stock (“Diluted EPS”) are computed by dividing the net (loss)
income by the weighted-average number of shares of common stock, and dilutive common stock equivalents and convertible securities
then outstanding. GAAP requires the presentation of both Basic and Diluted EPS, if such Diluted EPS is not anti-dilutive, on the
face of Company’s Condensed Statements of Operations.
The calculation of Basic EPS
and Diluted EPS is summarized as follows:
|
|
For the Three Months
Ended June 30,
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) attributable to common shareholders - Basic
|
|
$
|
(4,401,810
|
)
|
|
$
|
921,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to common shareholders - Diluted
|
|
|
(4,401,810
|
)
|
|
|
(1,223,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding
|
|
|
565,150,231
|
|
|
|
387,969,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options, warrants and convertible securities
|
|
|
n/a
|
|
|
|
192,418,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
NOTE 11
-
|
RELATED PARTY TRANSACTION -
BORROWING
AGAINST THE TREPPEL AND HAKIM CREDIT LINES
|
As of the Current Balance Sheet
Date, Elite owed the Treppel Credit Line Balance and the Treppel Credit Line Interest Due in relation to the Treppel Credit Line.
Both amounts were recorded as current liabilities on Elite’s balance and included in the line item titled “Short term
loans and current portion of long-term debt”.
As of the Current Balance Sheet
Date, Elite owed the Hakim Credit Line Balance and the Hakim Credit Line Interest Due in relation to the Hakim Credit Line. Both
amounts were recorded as current liabilities on Elite’s balance and included in the line item titled “Short term loans
and current portion of long-term debt”.
For further details on the Treppel
Credit Line, please refer to the Current Reports on Form 8-K filed with the SEC on June 13, 2012 and December 10, 2012, with such
filings being herein incorporated by reference.
For further details on the Hakim
Credit Line, please refer to exhibit 10.16 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 16, 2013 with filings being herein incorporated by reference.
|
NOTE 12 -
|
RELATED PARTY TRANSACTION – MANUFACTURING
AND LICENSE AGREEMENT WITH EPIC PHARMA LLC
|
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 to Elite 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. We received the first milestone payment in November 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 filing of the supplement with the FDA for Isradipine 2.5mg
and Isradipine 5mg was made on March 24, 2014 and accordingly a milestone of $200,000 has been earned and is due and owing from
Epic Pharma to Elite. 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.
No revenues were earned pursuant
to the Epic Agreement during the three months ended June 30, 2014.
|
NOTE 13 -
|
SALE OF INVESTMENT IN NOVEL LABORATORIES
|
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’s ownership interest in Novel consists of 9,800 shares
of Novel’s Class A Voting Common Stock. As of October 1, 2007, Elite deconsolidated its financial statements from Novel and
the investment in Novel is accounted for under the cost method of accounting.
On June 10, 2014, the Company
received $5 million in exchange for the 9,800 shares of Novel’s Class A Voting Common Stock owned by the Company.
Revenue Concentrations
Three customers accounted for
substantially all of the Company’s revenues for the quarter ended June 30, 2014.
Three customers accounted for
substantially all of the Company’s revenues for the quarter ended June 30, 2013.
Accounts Receivable Concentrations
Three customers accounted for
substantially all of the Company’s accounts receivable as of June 30, 2014.
Three customers accounted for
substantially all of the Company’s accounts receivable as of June 30, 2013.
Purchasing Concentrations
Five suppliers accounted for
more than 80% of the Company’s purchases of raw materials for the quarter ended June 30, 2014. Included in these five suppliers
are one supplier that accounted for approximately 44% of raw material purchases for this period.
Three suppliers accounted for
more than 80% of the Company’s purchases of raw materials for the quarter ended June 30, 2013. Included in these three suppliers
are one supplier that accounted for approximately 58% of raw material purchases for this period.
|
NOTE 15 -
|
LEGAL PROCEEDINGS
|
In the ordinary course of business
we may be subject to litigation from time to time. Except as discussed below, there is no current, pending or, to our knowledge,
threatened litigation or administrative action to which we are a party or of which our property is the subject (including litigation
or actions involving our officers, directors, affiliates, or other key personnel, or holders of record or beneficially of more
than 5% of any class of our voting securities, or any associate of any such party) which in our opinion has, or is expected to
have, a material adverse effect upon our business, prospects financial condition or operations.
Arbitration with Precision
Dose, Inc.
On May 9, 2014, Precision Dose
Inc, the parent company of TAGI Pharmaceuticals, Inc., commenced an arbitration against the Company alleging that the Company failed
to properly supply, price and satisfy gross profit minimums regarding Phentermine 37.5mg tablets, as required by the parties’
agreements. Elite denies Precision Dose’s allegations and has counterclaimed that Precision Dose is no longer entitled to
exclusivity rights with respect to Phentermine 37.5mg tablets, and is responsible for certain costs, expenses, price increases
and lost profits relating to Phentermine 37.5mg tablets and the parties’ agreements. As of the date of filing of this current
report on Form 10-Q this arbitration proceeding was ongoing.
GAAP requires that a contingency
loss may only be recognized if the event is (1) probable and (2) the amount of the loss can be reasonably estimated. There were
no liabilities of this type at June 30, 2014.
|
NOTE 16 -
|
EQUITY LINE WITH LINCOLN PARK CAPITAL FUND LLC
|
On April 10, 2014, we entered
into a purchase agreement (the “LPC-40 Purchase Agreement”), together with a registration rights agreement (the “Registration
Rights Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”).
Under the terms and subject to
the conditions of the LPC-40 Purchase Agreement, the Company has the right to sell to and Lincoln Park is obligated to purchase
up to $40 million in shares of the Company’s common stock (“Common Stock”), subject to certain limitations, from
time to time, over the 36-month period commencing on the date that a registration statement, which the Company agreed to file with
the Securities and Exchange Commission (the “SEC”) pursuant to the Registration Rights Agreement, is declared effective
by the SEC and a final prospectus in connection therewith is filed. The Company may direct Lincoln Park, at its sole discretion
and subject to certain conditions, to purchase up to 500,000 shares of Common Stock on any business day, provided that at least
one business day has passed since the most recent purchase, increasing to up to 800,000 shares, depending upon the closing sale
price of the Common Stock (such purchases, “Regular Purchases”). However, in no event shall a Regular Purchase be more
than $760,000. The purchase price of 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, but in no event will shares be sold to Lincoln Park on a day the Common Stock closing
price is less than the floor price as set forth in the LPC-40 Purchase Agreement. In addition, the Company may direct Lincoln Park
to purchase additional amounts as accelerated purchases if on the date of a Regular Purchase the closing sale price of the Common
Stock is not below the threshold price as set forth in the LPC-40 Purchase Agreement. The Company’s sales of shares of Common
Stock to Lincoln Park under the Purchase Agreement are limited to no more than the number of shares that would result in the beneficial
ownership by Lincoln Park and its affiliates, at any single point in time, of more than 9.99% of the then outstanding shares of
the Common Stock.
In connection with the LPC-40
Purchase Agreement, the Company issued to Lincoln Park 1,928,641 shares of Common Stock and is required to issue up to 1,928,641
additional shares of Common Stock pro rata as the Company requires Lincoln Park to purchase the Company’s shares under the
Purchase Agreement over the term of the agreement. Lincoln Park represented to the Company, among other things, that it was an
“accredited investor” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as
amended (the “Securities Act”)), and the Company sold the securities in reliance upon an exemption from registration
contained in Section 4(2) under the Securities Act. The securities sold may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements.
The LPC-40 Purchase Agreement
and the Registration Rights Agreement contain customary representations, warranties, agreements and conditions to completing future
sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate the LPC-40 Purchase
Agreement at any time, at no cost or penalty. Actual sales of shares of Common Stock to Lincoln Park under the LPC-40 Purchase
Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, market
conditions, the trading price of the Common Stock and determinations by the Company as to the appropriate sources of funding for
the Company and its operations. There are no trading volume requirements or restrictions under the LPC-40 Purchase Agreement. Lincoln
Park has no right to require any sales by the Company, but is obligated to make purchases from the Company as it directs in accordance
with the LPC-40 Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or
indirect short selling or hedging of our shares.
The net proceeds under the LPC-40
Purchase Agreement to the Company will depend on the frequency and prices at which the Company sells shares of its stock to Lincoln
Park. The Company expects that any proceeds received by the Company from such sales to Lincoln Park under the Purchase Agreement
will be used for general corporate purposes and working capital requirements.
The foregoing descriptions of
the LPC-40 Purchase Agreements and the Registration Rights Agreement are qualified in their entirety by reference to the full text
of the LPC-40 Purchase Agreement and the Registration Rights Agreement, copies of which are attached to the Current Report on Form
8-K filed with the SEC on April 14, 2014 as Exhibit 10.1 and 10.2, respectively, and each of which is incorporated herein in its
entirety 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.
A Registration
Statement on Form S-1 was filed with the SEC in relation to this transaction with Lincoln Park and it was declared effective by
the SEC as of May 1, 2014. A post-effective amendment to the Registration Statement was subsequently filed with the SEC and declared
effective on July 1, 2014.
During the three months ended
June 30, 2014, a total of 2,407,014 shares of Common Stock were sold to Lincoln Park pursuant to the Purchase Agreement, with the
proceeds of such sales of Common Stock totaling $896,613. An additional 43,232 shares of Common Stock were issued to Lincoln Park
during this same period with such shares constituting additional commitment shares issued pursuant to the Purchase Agreement.
|
NOTE 17 -
|
SUBSEQUENT EVENTS
|
Common Stock sold pursuant
to the LPC-40 Purchase Agreement
Subsequent to
the Current Balance Sheet Date and up to August 6, 2014 (the latest practicable date), a total of 6,527,216 shares of Common Stock
were sold pursuant to the LPC-40 Purchase Agreement inclusive of purchase and commitment shares, with proceeds received from such
transactions totaling $2,136,941.
For further
details on the LPC-40 Purchase Agreement and LPC Registration Rights Agreement, please refer to the Current Report on Form 8-K
filed with the SEC on April 14, 2014, with such filing being herein incorporated by reference. A Registration Statement on Form
S-3 was filed with the SEC on April 15, 2014, with amendments on Form S-1 being filed on April 28, 2014 and May 1, 2014. The Registration
Statement was declared effective by the SEC on May 1, 2014. A post-effective amendment to the Registration Statement was filed
with the SEC and declared effective on July 1, 2014.
Common shares issued pursuant
to the exercise of cash warrants and options
Subsequent to the Current Balance
Sheet Date, and up to August 6, 2014 (the latest practicable date), a total of 80,000 shares of Common Stock were issued pursuant
to the exercise of cash warrants, with proceeds received from such transactions totaling $5,000.
Modification of Lease Agreement
for Facility Expansion
On July 29, 2014, the Company
agreed to a modification of the operating lease relating to the manufacturing facility and warehouse located at 135 Ludlow Avenue,
Northvale, New Jersey (the “Modified 135 Ludlow Lease”).
Pursuant to the terms and conditions
of the Modified 135 Ludlow Lease, the Company is permitted to use the entire 35,000 square feet in the building located at 135-137
Ludlow Avenue for the storage of pharmaceutical finished goods, raw materials, equipment and documents as well as engaging in manufacturing,
packaging and distribution activities.
Prior to the Modified 135 Ludlow
Lease, the Company occupied only 15,000 square feet at the 135 Ludlow location. The Modified 135 Ludlow Lease accordingly represents
a significant expansion in the size of the Northvale Facility.
The expanded
property requires significant leasehold improvements and qualification as prerequisite to achieving suitability for such intended
future use, and there can be no assurances that the construction and qualification necessary for each and all intended future uses
will be achieved.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2014
COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2013
(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, 2014. 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:
|
·
|
Phentermine
37.5mg tablets (“Phentermine 37.5mg”)
|
|
·
|
Lodrane
D
®
Immediate Release capsules (“Lodrane D”)
|
|
·
|
Methadone
10mg tablets (“Methadone 10mg”)
|
|
·
|
Hydromorphone
Hydrochloride 8mg tablets (“Hydromorphone 8mg”)
|
|
·
|
Phendimetrazine
tartrate 35mg tablets (“Phendimetrazine 35mg”)
|
|
·
|
Phentermine
15mg capsules (“Phentermine 15mg”)
|
|
·
|
Phentermine
30mg capsules (“Phentermine 30mg”)
|
|
·
|
Naltrexone
HCl 50mg tablets (“Naltrexone 50mg”)
|
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. We received the first milestone payment in November 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.
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.
On May 9, 2014 Precision Dose Inc, the
parent company of TAGI Pharmaceuticals, Inc., commenced an arbitration proceeding alleging that the Company failed to properly
supply, price and satisfy gross profit minimums regarding Phentermine 37.5mg tablets, as required by the parties’ agreements.
Elite denies Precision Dose’s allegations and has counterclaimed that Precision Dose is no longer entitled to exclusivity
rights with respect to Phentermine 37.5mg tablets, and is responsible for certain costs, expenses, price increases and lost profits
relating to Phentermine 37.5mg tablets and the parties’ agreements.
As of the date of filing of this quarterly
report on Form 10-Q, this arbitration proceeding was ongoing.
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 April 22, 2014, the USPTO issued U.S.
Patent No. 8,703,186, entitled “Abuse-Resistant Oral Dosage Forms and Method of Use Thereof”, with such patent providing
further protection for the Company’s Abuse Resistant Technology.
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 of our products either by license and the collection
of royalties, or through the manufacture of our formulations; and (vi) development of new products and the expansion of our licensing
agreements with other pharmaceutical companies, including co-development projects, joint ventures and other collaborations.
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
Phentermine 37.5mg, Phentermine 15mg
and Phentermine 30mg
The first shipment of Phentermine 37.5
mg to TAGI was made in April 2011, with such initial shipment triggering a milestone payment under the Precision Dose License Agreement.
The first shipments of Phentermine 15mg and Phentermine 30mg were made in April 2013, with such initial shipments triggering a
milestone payment under the Precision Dose License Agreement, with such milestone payments being made. All three products are now
commercial products being manufactured by Elite and distributed by TAGI under the Precision Dose License Agreement.
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.
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
The first shipment of Hydromorphone 8mg
to TAGI was made in March 2012, with such initial shipment triggering a milestone payment under the Precision Dose License Agreement.
This product is now a commercial product being manufactured by Elite and distributed by TAGI under the Precision Dose License Agreement.
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”). Subsequently, Elite acquired the
ANDA for Phendimetrazine 35mg as part of the Mikah 13 ANDA Acquisition. This product is now a commercial product being manufactured
by Elite and distributed by Epic on a non-exclusive basis, and by Elite.
Naltrexone 50mg tablets
The first shipment of Naltrexone 50mg to
TAGI was made in September 2013, with such initial shipment triggering a milestone payment under the Precision Dose License Agreement.
This product is now a commercial product being manufactured by Elite and distributed by TAGI under the Precision Dose License Agreement.
Approved Products
Elite is the owner of the following approved
Abbreviated New Drug Applications:
|
·
|
Isradipine
2.5mg tablets and Isradipine 5mg tablets (“Isradipine tablets”)
|
|
·
|
10
undisclosed ANDAs acquired as part of the Mikah 13 ANDA Acquisition
|
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, a prerequisite of the Company’s commercial launch of the product, was approved
and initial shipment of Naltrexone 50mg was made in September 2013. 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 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 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 in order to launch the products in April 2013, while seeking approval from the FDA
of an alternate supplier of the API. Approval by the FDA of the alternate supplier was received in January 2014, resulting in lower
prices and a sufficient supply of materials.
Phendimetrazine 35mg
The ANDA for Phendimetrazine 35mg was acquired
by Elite as part of the Mikah 13 ANDA Acquisition. The Northvale Facility was already an approved manufacturing site for this product
as of the date of the Mikah Purchase Agreement. Prior to the acquisition of this ANDA, Elite had been manufacturing this product
on a contract basis pursuant to a manufacturing and supply agreement with Mikah Pharma, dated June 1, 2011 (please see below for
details).
Isradipine 2.5mg tablets and Isradipine
5mg tablets
The ANDAs for the Isradipine Tablets were
acquired by Elite as part of the Mikah 13 ANDA Acquisition. The Company is currently in the process of transferring the manufacturing
process of these products to the Northvale Facility.
The Isradipine Tablets are included as
products in the Epic Agreement for which certain licenses and rights are granted to Epic in relation to the distribution and sale
of these products.
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.
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
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 formulation intended for use in patients with moderate to severe 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. Elite has filed INDs for the first two abuse resistant products under development and has tested products
in various pharmacokinetic studies. Elite expects to continue to develop multiple abuse resistant products. 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., have been approved by the FDA
and are being marketed in the United States.
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.
Product Development Agreements
Elite is currently performing services
pursuant to product development agreements with the following:
|
·
|
Hi-Tech Pharmacal Co. (the “Hi-Tech
Development Agreement”)
|
|
·
|
A Private Hong Kong based company (the
“Hong Kong D&L Agreement”)
|
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.
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 June 30, 2014 Compared
to Three Months Ended June 30, 2014
Our revenues for the
three months ended June 30, 2014 were $1,162k an increase of $440k or approximately 61% over revenues for the comparable period
of the prior year, and consisted of $949k in manufacturing fees, $207k in licensing fees and $5k in lab fees. Revenues for the
three months ended June 30, 2013, consisted of $543k in manufacturing fees, $173k in licensing fees and $5k in lab fees.
Manufacturing fees increased
by approximately 75% as a result of the continued growth in the markets of Phentermine tablets and capsules, Hydromorphone tablets
and Methadone tablets, which are manufactured on a contract basis. In addition, the September 2013 launch results in the product
line this year including an additional product when compared to Elite’s product line during the comparable period of the
prior year. Licensing fees increased by approximately 20% due to the growth in sales from the Phentermine and Hydromorphone product
lines and the launch in September 2013 of Naltrexone 50mg.
Research and development
costs for the three months ended June 30, 2014 were $4,020k, an increase of $3,451k or approximately 607% 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.
General and administrative
expenses for the three months ended June 30, 2014, were $627k, an increase of $251k, or approximately 67% from $376k 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 June 30, 2014 was $194k, an increase of $31k, or approximately 19%, from $163 for the comparable period
of the prior year. The increase was primarily due to the expansion and upgrade of the Northvale facility, which has required significant
investments in property, plant and equipment, which, when commissioned and placed in service result in increased depreciation.
Non-cash compensation
through the issuance of stock options and warrants for the three months ended June 30, 2014 was $24k, an increase of $15k, or approximately
167% from $9k 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 June 30, 2014 was $4,431k, compared to a loss from operations of $976k for
the three months ended June 30, 2013.
Other income/expenses
for the three months ended June 30, 2014 were a net income of $29k, a decrease in other income of $1,868k from the net other income
of $1,897k 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 June 30, 2014 totaling an
expense of $1,566k, as compared to a net derivative income of $1,995k for the comparable period of the prior year, offset by a
gain on sale of investment totaling $1,671k during the current year, without a corresponding gain in 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 a result of the foregoing,
our net loss for the three months ended June 30, 2014 was $4,402k, compared to a net income of $922k million for the comparable
period of the prior year.
Material Changes in
Financial Condition
Our working capital (total
current assets less total current liabilities), increased to a surplus of $4.8 million as of June 30, 2014 from a working capital
surplus of $3.8 million as of March 31, 2014, primarily due to the loss from operations sustained during the three months ended
June 30, 2014 being financed by $0.9 million in proceeds from the sale of Common Stock pursuant to the Purchase Agreement with
Lincoln Park and $5.0 million in proceeds from the sale of our investment in Novel Laboratories. Capital financings, such as those
occurring pursuant to the Purchase Agreement with Lincoln Park provide cash to the Company without a corresponding current liability
and accordingly have an accretive effect on working capital.
Net cash used by operations
was $4.2 million for the three months ended June 30, 2014, primarily due to our net loss from continuing operations of $4.4 million,
offset by non-cash charges totaling $0.6 million, which included, without limitation, depreciation and amortization of $0.2 million,
net income from the change in fair value of derivative liabilities of $1.6 million and gain from the sale of investment of $1.7
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 $0.6 and increases in accounts receivable of $0.4 million, all of which result
in a net outflow of cash.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Working Capital
As of June 30, 2014, the Company had cash
on hand of $8.2 million and a working capital surplus of $4.8 million. The Company believes that such resources, combined with
the Company’s access to the $40 million equity line with Lincoln Park Capital, and approximately $0.4 million available under
the Hakim Credit Line are sufficient to fund operations through the current operating cycle. For the three months ended June 30,
2014, it had losses from operations totaling $4.4 million, net other income totaling $0.03 million and a net loss of $4.4 million.
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, 2015, due in large part to its plans to conduct clinical development
and commercialization activities on a range of abuse resistant opioid products, on an accelerated and simultaneous basis. Such
activities require the investment of significant amounts in clinical trials, safety and efficacy studies, bioequivalence studies,
product manufacturing, regulatory expertise and filings, as well as investments in manufacturing and lab equipment and software.
In order to finance these significant expenditures, the Company entered into two purchase agreements with Lincoln Park Capital
Fund, LLC (“Lincoln Park”), with such agreements providing the company with equity lines totaling $50 million. We believe
this amount of financing, if received, is sufficient to fund the commercialization of the abuse resistant opioid products identified.
Please see below for further details on the financing transactions with Lincoln Park.
Lincoln Park Capital
Pursuant to an April
19, 2013 purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”) we had the right to sell to and Lincoln
Park was 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. We raised the entire $10 million from the sale of shares
to Lincoln Park pursuant to that agreement. That agreement terminated in March 2014 with the sale of all shares covered by that
agreement.
On April 10, 2014, we
entered into another Purchase Agreement and a Registration Rights Agreement with Lincoln Park. Pursuant to the terms of the Purchase
Agreement, Lincoln Park has agreed to purchase from us up to $40 million of our common stock (subject to certain limitations) from
time to time over a 36-month period. Pursuant to the terms of the Registration Rights Agreement, we have filed with the SEC a registration
statement to register for resale under the Securities Act the shares that have been or may be issued to Lincoln Park under the
Purchase Agreement. That registration statement was declared effective by the SEC on May 1, 2014. A post-effective amendment to
that Registration Statement was subsequently filed with the SEC and declared effective on July 1, 2014.
Upon execution of the
Purchase Agreement, we have issued 1,928,641 shares of our common stock to Lincoln Park pursuant to the Purchase Agreement as consideration
for its commitment to purchase additional shares of our common stock under that agreement and we are obligated to issue up to an
additional 1,928,641 commitment shares to Lincoln Park pro rata as up to $40 million of our common stock is purchased by Lincoln
Park. Through August 6, 2014, we have sold to Lincoln Park an aggregate of 8,831,194 shares under the Purchase Agreement for aggregate
gross proceeds of approximately $3.0 million. In addition, we have issued an additional 146,268 Commitment Shares.
We may, from time to
time and at our sole discretion but no more frequently than every other business day, direct Lincoln Park to purchase (a “Regular
Purchase”) up to 500,000 shares of our common stock on any such business day, increasing up to 800,000 shares, depending
upon the closing sale price of the common stock, provided that in no event shall Lincoln Park purchase more than $760,000 worth
of our common stock on any single business day. The purchase price of shares of Common Stock related to the future Regular Purchase
funding will be based on the prevailing market prices of such shares at the time of sales (or over a period of up to 10 business
days leading up to such time), but in no event will shares be sold to Lincoln Park on a day the Common Stock closing price is less
than the floor price of $0.10 per share, subject to adjustment.
In addition to Regular
Purchases, on any business day on which we have properly submitted a Regular Purchase notice and the closing sale price is not
below $0.15, we may purchase (an “Accelerated Purchase”) an additional “accelerated amount” under certain
circumstances. The amount of any Accelerated Purchase cannot exceed the lesser of three times the number of purchase shares purchased
pursuant to the corresponding Regular Purchase; and 30% of the aggregate shares of our common stock traded during normal trading
hours on the purchase date. The purchase price per share for each such Accelerated Purchase will be equal to the lower of (i) 97%
of the volume weighted average price during the purchase date; or (ii) the closing sale price of our common stock on the purchase
date.
In the case of both Regular
Purchases and Accelerated Purchases, the purchase price per share will be equitably adjusted for any reorganization, recapitalization,
non-cash dividend, stock split, reverse stock split or other similar transaction occurring during the business days used to compute
the purchase price.
Other than as set forth
above, there are no trading volume requirements or restrictions under the Purchase Agreement, and we will control the timing and
amount of any sales of our common stock to Lincoln Park.
Our sales of shares of
Common Stock to Lincoln Park under the Lincoln Park Purchase Agreement are limited to no more than the number of shares that would
result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than 9.99% of the then
outstanding shares of Common Stock.
The Lincoln Park Purchase
Agreement and the Lincoln Park Registration Rights Agreement contain customary representations, warranties, agreements and conditions
to completing future sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate
the Lincoln Park Purchase Agreement at any time, at no cost or penalty. Actual sales of shares of Common Stock to Lincoln Park
under the Lincoln Park Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time,
including, without limitation, market conditions, the trading price of the Common Stock and determinations by the Company as to
appropriate sources of funding for the Company and its operations. There are no trading volume requirements or restrictions under
the Lincoln Park Purchase Agreement. Lincoln Park has no right to require any sales by the Company, but is obligated to make purchases
from the Company as it directs in accordance with the Lincoln Park Purchase Agreement. Lincoln Park has covenanted not to cause
or engage in any manner whatsoever, any direct or indirect short selling or hedging of our shares.
The net proceeds under
the Purchase Agreement to the Company will depend on the frequency and prices at which the Company sells shares of its stock to
Lincoln Park. The Company expects that any proceeds received by the Company from such sales to Lincoln Park under the Lincoln Park
Purchase Agreement will be used for general corporate purposes and working capital requirements.
Treppel $1,000,000 Bridge Revolving
Credit Line
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.
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. As of June 30, 2014, the principal balance owed under the Treppel Credit Line was zero
with no accrued interest being owed, in accordance with the terms and conditions of the Credit Line. The Treppel Credit Line expired
on July 31, 2014.
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 June 30, 2014, the principal balance owed under the Credit Line was $617,064
with an additional $23,617 in accrued interest being also owed, in accordance with the terms and conditions of the Credit Line.
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 June 30 2014, 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 $3,545
for the three months ended June 30, 2014.
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, September 1, 2013 and March 1, 2014.
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.
On July 23, 2014, all amounts in arrears,
consisting of principal payments totaling $915,000 plus interest accrued on such principal payments from March 1, 2014 through
July 23, 2014, and totaling $25,876 was paid to the holders of the applicable bonds. By making these payments, the Company retired
all outstanding Series B Notes at par and paid all amounts related to monetary defaults in the past, as detailed above.
The Company has also notified the Trustee
of its intention and ability to make the payments due on September 1, 2014, consisting of $195,000 in principal and $80,275 interest.
The Company believes it has cured all monetary
defaults and has requested that the notices of default resulting from monetary defaults in the past be rescinded.
The Company believes that the successful
resolution of the monetary bond defaults will have a significant and positive effect on the Company’s operations.
Due to the issuance of a Notice of Default
being previously received from the Trustee, and as the monetary defaults were paid subsequent to June 30, 2014, the Company has
classified the entire principal balance due on the NJEDA Bonds, amounting to $3.385 million, as a current liability, in accordance
with generally accepted accounting principles.
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.