ITEM 1 BUSINESS
General
Elite Pharmaceuticals,
Inc., a Nevada corporation (the “Company”, “Elite”, “Elite Pharmaceuticals”, the “registrant”,
“we”, “us” or “our”) was incorporated on October 1, 1997 under the laws of the State of Delaware,
and its wholly-owned subsidiary, Elite Laboratories, Inc. (“Elite Labs”), was incorporated on August 23, 1990 under
the laws of the State of Delaware. On January 5, 2012, Elite Pharmaceuticals was reincorporated under the laws of the State of
Nevada.
We are a specialty
pharmaceutical company principally engaged in the development and manufacture of oral, controlled-release products, using proprietary
know-how and technology, particularly as it relates to abuse resistant products and the manufacture of generic pharmaceuticals.
Our strategy includes improving off-patent drug products for life cycle management, developing generic versions of controlled-release
drug products with high barriers to entry and the development of branded and generic products that utilize our proprietary and
patented abuse resistance technologies.
We own and occupy
manufacturing, warehouse, laboratory and office space at 165 Ludlow Avenue and 135 Ludlow Avenue in Northvale, NJ (the “Northvale
Facility”). 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
We focus our efforts
on the following areas: (i) development of our pain management products; (ii) manufacturing of a line of generic pharmaceutical
products with approved Abbreviated New Drug Applications (“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.
Our focus is 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.
We believe that our
business strategy enables us 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
We own, license or
contract manufacture the following products current being sold commercially:
Product
|
|
Branded
Product
Equivalent
|
|
Therapeutic
Category
|
|
Launch
Date
|
Phentermine HCl 37.5mg tablets
(“Phentermine 37.5mg”)
|
|
Adipex-P®
|
|
Bariatric
|
|
April
2011
|
Lodrane D ® Immediate Release capsules
(“Lodrane D”)
|
|
n/a
|
|
OTC
Allergy
|
|
September
2011
|
Methadone HCl 10mg tablets
(“Methadone 10mg”)
|
|
Dolophine®
|
|
Pain
|
|
January
2012
|
Hydromorphone HCl 8mg tablets
(“Hydromorphone 8mg”)
|
|
Dilaudid®
|
|
Pain
|
|
March
2012
|
Phendimetrazine Tartrate 35mg tablets
(“Phendimetrazine 35mg”)
|
|
Bontril®
|
|
Bariatric
|
|
November
2012
|
Phentermine HCl 15mg and 30mg capsules
(“Phentermine 15mg” and “Phentermine
30mg”)
|
|
Adipex-P®
|
|
Bariatric
|
|
April
2013
|
Naltrexone HCl 50mg tablets
(“Naltrexone 50mg”)
|
|
Revia®
|
|
Pain
|
|
September
2013
|
Isradipine 2.5mg and 5mg capsules
(“Isradipine 2.5mg” and “Isradipine
5mg”)
|
|
n/a
|
|
Cardiovascular
|
|
January
2015
|
Hydroxyzine HCl 10mg, 25mg and 50mg tablets
(“Hydroxyzine 10mg” and “Hydroxyzine
25mg” and “Hydroxyzine 50mg”)
|
|
Atarax®,
Vistaril®
|
|
Antihistamine
|
|
April
2015
|
Oxycodone HCl Immediate Release 5mg, 10mg, 15mg,
20mg and 30mg tablets
(“OXY IR 5mg”, “Oxy IR 10mg”,
“Oxy IR 15mg”, “OXY IR 20mg” and “Oxy IR 30mg”)
|
|
Roxycodone®
|
|
Pain
|
|
March
2016
|
Trimipramine Maleate Immediate Release 25mg,
50mg and 100mg capsules (“Trimipramine 25mg”, “Trimipramine 50mg”, “Trimipramine 100mg”)
|
|
Surmontil®
|
|
Antidepressant
|
|
May
2017
|
Note: Phentermine 15mg and Phentermine
30mg are collectively and individually referred to as “Phentermine Capsules”. Isradipine 2.5mg and Isradipine 5mg
are collectively and individually referred to as “Isradipine Capsules”. Hydroxyzine 10mg, Hydroxyzine 25mg and Hydroxyzine
50mg are collectively and individually referred to as “Hydroxyzine”. Oxy IR 5mg, Oxy IR 10mg, Oxy IR 15mg Oxy IR 20mg
and Oxy IR 30mg are collectively and individually referred to as “Oxy IR”. Trimipramine 25mg, Trimipramine 50mg, and
Trimipramine 100mg are collectively and individually referred to as “Trimipramine”.
Phentermine
37.5mg
The approved 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”).
Sales and marketing
rights for Phentermine 37.5mg are included in the licensing agreement between the Company and Precision Dose Inc. (“Precision
Dose”) dated September 10, 2010 (the “Precision Dose License Agreement”). Please see the section below titled
“Precision Dose License Agreement” for further details of this agreement.
The first shipment
of Phentermine 37.5mg was made to Precision Dose’s wholly owned subsidiary, TAGI Pharmaceuticals Inc. (“TAGI”),
pursuant to the Precision Dose License Agreement, with such initial shipment triggering a milestone payment under this agreement.
Phentermine 37.5mg is currently being manufactured by Elite and distributed by TAGI under the Precision Dose License Agreement.
Lodrane D®
On September 27, 2011,
the Company, along with ECR Pharmaceuticals (“ECR”), 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
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 of the United States Food and Drug Administration (“FDA”).
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.
ECR products have
since been divested so that Lodrane D® is promoted and distributed in the United States of America (“U.S.”) now
by Valeant Pharmaceuticals International Inc. Lodrane D® is available over-the-counter but also has physician promotion. Lodrane
D® is one of the only adult brompheniramine containing products available to the consumer at this time.
There have been several
mergers relating to ECR and successor entities and transfer of brand name ownership since this product was originally launched.
Lodrane D® is accordingly currently promoted and distributed in the U.S. by Valeant Pharmaceuticals International Inc. (“Valeant”).
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.
Elite is manufacturing
the product for Valeant and will receive manufacturing revenues for this product.
Methadone 10mg
Methadone 10mg is
contract manufactured by Elite for Ascend Laboratories, LLC (“Ascend”), the owner of the approved ANDA.
On January 17, 2012,
Elite commenced shipping Methadone 10mg tablets to Ascend pursuant to a commercial manufacturing and supply agreement dated June
23, 2011, as amended on September 24, 2012, January 19, 2015, July 20, 2015 and as extended on August 9, 2016, 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
The approved ANDA
for Hydromorphone 8mg was acquired pursuant to an asset purchase agreement with Mikah Pharma LLC (“Mikah Pharma”)
dated May 18, 2010 (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.
Sales and marketing
rights for Hydromorphone 8mg are included in the Precision Dose License Agreement. Please see the section below titled “Precision
Dose License Agreement” for further details of this agreement.
The first shipment
of Hydromorphone 8mg was made to TAGI, pursuant to the Precision Dose License Agreement, in March 2012, with such initial shipment
triggering a milestone payment under this agreement. Hydromorphone 8mg is currently being manufactured by Elite and distributed
by TAGI under the Precision Dose License Agreement.
Phendimetrazine
Tartrate 35mg
The ANDA for Phendimetrazine
35mg was acquired by Elite as part of the asset purchase agreement between the Company and Mikah Pharma, dated August 1, 2013
(the “Mikah ANDA Purchase”). Please see “Thirteen Abbreviated New Drug Applications” below for more information
on this agreement. The Northvale Facility was already an approved manufacturing site for this product as of the date of the Mikah
ANDA Purchase. 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.
Phendimetrazine 35mg is currently a commercial product being manufactured by Elite and distributed by Epic
on a non-exclusive basis, and by Elite.
Phentermine
15mg and Phentermine 30mg
Phentermine 15mg capsules
and Phentermine 30mg capsules were developed by the Company, with Elite receiving approval of the related ANDA in September 2012.
Sales and marketing
rights for Phentermine 15mg and Phentermine 30mg are included in the Precision Dose License Agreement. Please see the section
below titled “Precision Dose License Agreement” for further details of this agreement.
The first shipments
of Phentermine 15mg and Phentermine 30mg were made to TAGI, pursuant to the Precision Dose License Agreement, in April 2013, with
such initial shipments triggering a milestone payment under this agreement. Phentermine 15mg and Phentermine 30mg are currently
being manufactured by Elite and distributed by TAGI under the Precision Dose License Agreement.
Naltrexone 50mg
The approved ANDA
for Naltrexone 50mg was acquired by the Company pursuant to an asset purchase agreement between the Company and Mikah Pharma dated
August 27, 2010 (the “Naltrexone Acquisition Agreement”) for aggregate consideration of $200,000.
Sales and marketing
rights for Naltrexone 50mg are included in the Precision Dose License Agreement. Please see the section below titled “Precision
Dose License Agreement” for further details of this agreement.
The first shipment
of Naltrexone 50mg was made to TAGI, pursuant to the Precision Dose License Agreement, in September 2013, with such initial shipment
triggering a milestone payment under this agreement. Naltrexone 50mg is currently being manufactured by Elite and distributed
by TAGI under the Precision Dose License Agreement.
Isradipine 2.5mg
and Isradipine 5mg
The approved ANDAs
for Isradipine 2.5mg and Isradipine 5mg were acquired by Elite as part of the Mikah ANDA Purchase.
Sales and marketing
rights for Isradipine 2.5mg and Isradipine 5mg are included in the Epic Manufacturing and License Agreement. Please see the section
below titled “Manufacturing and License Agreement with Epic Pharma LLC” for further details of this agreement.
The first shipment
of Isradipine 2.5mg and Isradipine 5mg were made to Epic, pursuant to the Epic Manufacturing and License Agreement, in January
2015. Isradipine 2.5mg and Isradipine 5mg are currently being manufactured by Elite and distributed by Epic under the Epic Manufacturing
and License Agreement.
Hydroxyzine
10mg, Hydroxyzine 25mg and Hydroxyzine 50mg
The approved ANDAs
for Hydroxyzine 10mg, Hydroxyzine 25mg and Hydroxyzine 50mg were acquired by Elite as part of the Mikah ANDA Purchase.
Sales and marketing
rights for Hydroxyzine 10mg, Hydroxyzine 25mg and Hydroxyzine 50mg are included in the Epic Manufacturing and License Agreement.
The first shipment
of Hydroxyzine 10mg, Hydroxyzine 25mg and Hydroxyzine 50mg were made by Epic, pursuant to the Epic Manufacturing and License Agreement,
in April 2015. Hydroxyzine 10mg, Hydroxyzine 25mg and Hydroxyzine 50mg are currently being manufactured and distributed by Epic
under the Epic Manufacturing and License Agreement.
Oxycodone 5mg,
Oxycodone 10mg, Oxycodone 15mg, Oxycodone 20mg and Oxycodone 30mg (“Oxy IR”)
We received notification
from Epic in October 2015 of the approval by the FDA of Epic’s ANDA for Oxy IR. This product was an Identified IR Product
in the Epic Strategic Alliance Agreement Dated March 18, 2009 (the “Epic Strategic Alliance”). Oxy IR was developed
at the Northvale Facility pursuant to the Epic Strategic Alliance, in which we are entitled to a Product Fee of 15% of Profits
as defined in the Epic Strategic Alliance. The first commercial sale of Oxy IR occurred in March 2016, and sales by Epic of this
product are ongoing.
Trimipramine
25mg, Trimipramine 50mg, and Trimipramine 100mg
Through Elite Labs,
Elite acquired an approved and currently marketed ANDA for Trimipramine Maleate Capsules ("Trimipramine") 25, 50 and
100 mg, from Mikah Pharma. Through agreements assigned to Elite in the acquisition, Dr. Reddy's Laboratories, Inc. will market
and sell the Trimipramine products and Epic Pharma will manufacture the products. The Epic Pharma agreement insures the uninterrupted
supply of generic Trimipramine. Trimipramine is a generic version of Surmontil®, a tricyclic antidepressant. Surmontil®
and generic Trimipramine have total US sales of approximately $2 million in 2016 according to IMS Health Data. The ANDA purchased
by Elite is currently the only marketed generic Trimipramine product.
Filed products under FDA review
SequestOx™
- Immediate Release Oxycodone with sequestered Naltrexone
SequestOx™ is
our lead abuse-deterrent candidate for the management of moderate to severe pain where the use of an opioid analgesic is appropriate.
SequestOx™ is an immediate-release Oxycodone Hydrochloride containing sequestered Naltrexone which incorporates 5mg, 10mg,
15mg, 20mg and 30mg doses of oxycodone into capsules.
In January 2016, the
Company submitted a 505(b)(2) New Drug Application for SequestOx™, after receiving a waiver of the $2.3 million filing fee
from the FDA. In March 2016, the Company received notification of the FDA’s acceptance of this filing and that such filing
has been granted priority review by the FDA with a target action under the Prescription Drug User Fee Act (“PDUFA”)
of July 14, 2016.
On July 15, 2016,
the FDA issued a Complete Response Letter, or CRL, regarding the NDA. The CRL stated that the review cycle for the SequestOx™
NDA is complete and the application is not ready for approval in its present form.
On December 21, 2016,
the Company met with the FDA for an end-of-review meeting to discuss steps that the Company could take to obtain approval of SequestOx™.
Based on the FDA response, the Company believes that there is a clear path forward to address the issues cited in the CRL. The
Company believes that the meeting minutes, received from the FDA on January 23, 2017, supported a plan to address the issues cited
by the FDA in the CRL by modifying the SequestOx™ formulation. Such plan includes, without limitation, conducting bioequivalence
and bioavailability fed and fasted studies, comparing the modified formulation to the original formulation. The fed study is in
progress. The Company plans on initiating the fasted study after successful completion of the fed study. Resubmission of the SequestOx™ application
requires successful completion of all required studies, including these fed and fasted studies.
Please note, however,
that there can be no assurances of successful completion of any required studies. Furthermore, in the event of such successful
completion of all required studies, there can be no assurances that the Company’s intended future resubmission of the NDA
product filing will be accepted by or receive marketing approval from the FDA. In addition, even if the Company receives marketing
approval, there can be no assurances of future revenues or profits relating to this product, or that any such future revenues
and profits would be in amounts that provide adequate return on the significant investments made to secure this marketing authorization.
Oxycodone hydrochloride
and acetaminophen USP CII (generic version of Percocet®)
On August 9, 2016,
the Company filed an ANDA with the FDA for a generic version of Percocet® (oxycodone hydrochloride and acetaminophen, USP
CII) 5mg, 7.5mg and 10mg tablets with 325mg of acetaminophen. Percocet® is a combination medication and is used to help relieve
moderate to severe pain. The Company has not received a response from the FDA regarding this ANDA filing.
Hydrocodone
bitartrate and acetaminophen tablets USP CII (generic version of Norco)
On December 12, 2016,
the Company filed an ANDA with the FDA for a generic version of Norco
®
(hydrocodone bitartrate and acetaminophen
tablets USP CII) 2.5mg/325mg, 5mg/325mg, 7.5mg/325mg and 10mg/325mg tablets. Norco is a combination medication and is used to
help relieve moderate to moderately severe pain. The combination products of hydrocodone and acetaminophen have total annual US
sales of approximately $700 million, according to IMS Health Data. The Company has not received a response from the FDA regarding
this ANDA filing.
There can be no assurances
that any of these products will receive marketing authorization and achieve commercialization within this time period, or at all.
In addition, even if marketing authorization is received, there can be no assurances that there will be future revenues of profits,
or that any such future revenues or profits would be in amounts that provide adequate return on the significant investments made
to secure these marketing authorizations.
Approved Products Not Yet Commercialized
We currently own seven
different approved ANDAs, all of which were acquired as part of the Mikah ANDA Purchase. Each approved ANDA requires manufacturing
site transfers as a prerequisite to commencement of commercial manufacturing and distribution. The products relating to each approved
ANDA are included in the Epic Manufacturing and License Agreement, with Elite granting ANDA specific, exclusive, or non-exclusive
market rights (depending on the ANDA) to Epic. Commercial manufacturing of these products is expected to be transferred to either
Epic or the Northvale Facility, with the required supplements to be filed with FDA in the manner and time frame that is economically
beneficial to us.
Asset Acquisition Agreements
Generic Phentermine
Capsules
On September 10, 2010,
together with our wholly owned subsidiary, Elite Laboratories, Inc., executed a purchase agreement (the “Phentermine Purchase
Agreement”) with Epic for the purpose of acquiring from Epic, an ANDA for a generic phentermine product (the “Phentermine
ANDA”), with such being filed with the FDA at the time the Phentermine Purchase Agreement was executed. On February 4, 2011,
the FDA approved the Phentermine ANDA. The acquisition of the Phentermine ANDA closed on March 31, 2011 and Elite paid the full
acquisition price of $450,000 from the purchase agreement with Epic Pharma.
This product is being
marketed and distributed by Precision Dose and its wholly owned subsidiary, TAGI, pursuant to the Precision Dose License Agreement,
a description of which is set forth below.
Generic Hydromorphone
HCl Product
On May 18, 2010, we
executed an asset purchase agreement with Mikah Pharma (the “Hydromorphone Purchase Agreement”). Pursuant to the Hydromorphone
Purchase Agreement, the Company acquired from Mikah Pharma an approved ANDA for Hydromorphone 8 mg for aggregate consideration
of $225,000, comprised of an initial payment of $150,000, which was made on May 18, 2010. A second payment of $75,000 was due
to be paid to Mikah Pharma on June 15, 2010, with the Company having the option to make this payment in cash or by issuing to
Mikah Pharma 937,500 shares of our common stock. We elected and did issue 937,500 shares of Common Stock during the quarter ended
December 31, 2010, in full payment of the $75,000 due to Mikah Pharma pursuant to the Hydromorphone Purchase Agreement dated May
18, 2010.
This product is currently
being marketed and distributed by Precision Dose and its wholly owned subsidiary, TAGI, pursuant to the Precision Dose License
Agreement, a description of which is set forth below.
Generic Naltrexone
Product
On August 27, 2010,
we executed an asset purchase with Mikah Pharma (the “Naltrexone Acquisition Agreement”). Pursuant to the Naltrexone
Acquisition Agreement, Elite acquired from Mikah Pharma the ANDA number 75-274 (Naltrexone Hydrochloride Tablets USP, 50 mg),
and all amendments thereto, that have to date been filed with the FDA seeking authorization and approval to manufacture, package,
ship and sell the products described in this ANDA within the United States and its territories (including Puerto Rico) for aggregate
consideration of $200,000. In lieu of cash, Mikah Pharma agreed to accept product development services to be performed by us.
This product is being
marketed and distributed by Precision Dose and its wholly owned subsidiary, TAGI, pursuant to the Precision Dose License Agreement,
a description of which is set forth below.
Thirteen Abbreviated
New Drug Applications
On August 1, 2013,
Elite executed the Mikah ANDA Purchase with Mikah Pharma and acquired a total of thirteen ANDAs, consisting of twelve ANDAs approved
by the FDA and one ANDA under active review with the FDA, and all amendments thereto (the “Mikah Thirteen ANDA Acquisition”)
for aggregate consideration of $10,000,000, payable pursuant to a secured convertible note due in August 2016.
Each of the products
referenced in the twelve approved ANDAs require manufacturing site approval with the FDA. We believe that the site transfers qualify
for Changes Being Effected in 30 Days (“CBE 30”) review, with one exception, which would allow for the product manufacturing
transfer on an expedited basis. However, we can give no assurances that all will qualify for CBE 30 review, or on the timing of
these transfers of manufacturing site, or on the approval by the FDA of the transfers of manufacturing site.
As of the date of
filing of this Annual Report on Form 10-K, the following products included in the Mikah Purchase Agreement have successfully achieved
manufacturing site transfers:
|
·
|
Isradipine 2.5mg
and Isradipine 5mg
|
|
·
|
Hydroxyzine 10mg,
Hydroxyzine 25mg and Hydroxyzine 50mg
|
We have executed the
Epic Pharma Manufacturing and License Agreement, relating to the manufacturing, marketing, and sale of these twelve ANDAs. Please
see below for further details on the Epic Pharma Manufacturing and License Agreement.
Trimipramine
In May 2017, through
Elite Labs, we acquired from Mikah Pharma an FDA approved ANDA for Trimipramine for aggregate consideration of $1,200,000. In
conjunction with this acquisition, we also acquired from Mikah Pharma all rights, interests, and obligations under a supply and
distribution agreement with Dr. Reddy’s Laboratories, Inc. relating to the supply, sale and distribution of generic Trimipramine,
and under a manufacturing and supply agreement with Epic Pharma relating to the manufacture and supply of Trimipramine.
Please
see Item 13: “Certain Relationships and Related Transactions and Director Independence; Certain Related Person Transactions;
Transactions with Nasrat Hakim and Mikah Pharma LLC” below.
Licensing, Manufacturing and Development
Agreements
Sales and Distribution
Licensing Agreement with Epic Pharma LLC for SequestOx™
On
June 4, 2015, we executed an exclusive License Agreement (the “2015 SequestOx™ License Agreement”) with Epic,
to market and sell in the U.S., SequestOx™, an immediate release oxycodone with sequestered naltrexone capsule, owned by
us. Epic will have the exclusive right to market ELI-200 and its various dosage forms as listed in Schedule A of the Agreement.
Epic is responsible for all regulatory and pharmacovigilance matters related to the products. Pursuant to the 2015 SequestOx™
License Agreement, Epic will pay us non-refundable payments totaling $15 million, with such amount representing the cost of an
exclusive license to SequestOx™, the cost of developing the product, the filing of a NDA with the FDA and the receipt of
the approval letter for the NDA from the FDA. As of the date of filing of this annual report on Form 10-K,
t
he
Company has received $7.5 million of the $15 million in non-refundable payments due pursuant to the 2015 SequestOx™ License
Agreement, with such amount consisting of $5 million being due and owing on the execution date of the 2015 SequestOx™ License
Agreement, and $2.5 million being earned as of January 14, 2016, the date of Elite’s filing of an NDA with the FDA for the
relevant product. Both of these non-refundable fees (i.e., the $5 million fee and the $2.5 million fee), have been paid by Epic.
The remaining $7.5
million in non-refundable payments due pursuant to the 2015 SequestOx™ License Agreement is due on the FDA’s approval
of SequestOx™ for commercial sale in the United States of America (please see the paragraph below for further details).
In addition, we will receive a license fee computed as a percentage (50%) of net sales of the products as defined in the 2015
SequestOx™ License Agreement and is entitled to multi-million-dollar minimum annual license fees we will manufacture the
product for sale by Epic on a cost-plus basis and both parties agree to execute a separate Manufacturing and Supply Agreement.
The license fee is payable quarterly for the term of the 2015 SequestOx™ License Agreement. The term of the 2015 SequestOx™
License Agreement is five years and may be extended for an additional five years upon mutual agreement of the parties. Elite can
terminate the 2015 SequestOx™ License Agreement on 90 days’ written notice in the event that Epic does not pay us
certain minimum annual license fees over the initial five-year term of the 2015 SequestOx™ License Agreement. Either party
may terminate this 2015 SequestOx™ License Agreement upon a material breach and failure to cure that breach by the other
party within a specified period. Please note that there was a change in management of Epic that occurred in May 2016, concurrent
with a change in ownership of Epic. The new management of Epic has advised us of their desire to renegotiate the 2015 SequestOx™
License Agreement. While the 2015 SequestOx™ License Agreement is still in effect, as a prudent business practice, we are
currently cooperating with Epic and are engaged in such negotiations with Epic, which are ongoing, as well as pursuing other options
relating to the license and/or distribution of SequestOx™. We believe that if agreement is reached with Epic on revised
terms and conditions and amendment is made to the 2015 SequestOx™ License Agreement, such amendment may materially differ
from the current 2015 SequestOx™ License Agreement.
In addition, on July
15, 2016, the FDA issued a Complete Response Letter, or CRL, regarding the NDA. The CRL stated that the review cycle for the SequestOx™
NDA is complete and the application is not ready for approval in its present form. On December 21, 2016, the Company met with
the FDA for an end-of-review meeting to discuss steps that the Company could take to obtain approval of SequestOx™. Based
on the FDA response, the Company believes that there is a clear path forward to address the issues cited in the CRL. The Company
believes that the meeting minutes, received from the FDA on January 23, 2017, supported a plan to address the issues cited by
the FDA in the CRL by modifying the SequestOx
™
formulation. Such plan includes, without limitation, conducting
bioequivalence and bioavailability fed and fasted studies, comparing the modified formulation to the original formulation. The
fed study is in progress. The Company plans on initiating the fasted study after successful completion of the fed study. Resubmission
of the SequestOx
™
application requires successful completion of all required studies, including these fed
and fasted studies.
There can be no assurances
of successful completion of any required studies. Furthermore, in the event of such successful completion of all required studies,
there can be no assurances that the Company’s intended future resubmission of the NDA product filing will be accepted by
or receive marketing approval from the FDA. In addition, even if the Company receives marketing approval, there can be no assurances
of future revenues or profits relating to this product, or that any such future revenues and profits would be in amounts that
provide adequate return on the significant investments made to secure this marketing authorization.
Manufacturing
and License Agreement with Epic Pharma LLC
On October 2, 2013,
we executed the Epic Pharma Manufacturing and License Agreement (the “Epic Manufacturing and License Agreement”).
This agreement granted Epic certain rights to manufacture, market and sell in the United States and Puerto Rico the twelve approved
ANDAs acquired by us pursuant to the Mikah Thirteen ANDA Acquisition. Of the twelve approved ANDAs, Epic will have the exclusive
right to market six products as listed in Schedule A of the Epic Manufacturing and License Agreement, and a non-exclusive right
to market six products as listed in Schedule D of the Epic Manufacturing and License Agreement. Epic will manufacture the products
and is responsible for all regulatory and pharmacovigilance matters related to the products and for all costs related to the site
transfer for all products. We have no further obligations or deliverables under the Epic Manufacturing and License Agreement.
Pursuant to the Epic Manufacturing and License Agreement, we 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 Manufacturing and License Agreement, earned by Epic
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 active pharmaceutical ingredient (“API”) and the sales cost for the calculation is predetermined
based on net sales.
If we manufacture
any product for sale by Epic, then Epic shall pay us the same predetermined manufacturing cost per unit plus the cost of the API.
The license fee is payable monthly for the term of the Epic Manufacturing and License Agreement. Epic shall pay to us certain
milestone payments as defined by the Epic Manufacturing and License Agreement. The term of the Epic Manufacturing and License
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 Manufacturing and License Agreement, we 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. We 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 forecast. The Epic Manufacturing and License Agreement may be terminated by mutual agreement,
as a result of a breach by either party that is not cured within 60 days’ notice of the breach, or by us as a result of
Epic Pharma becoming a party to a bankruptcy, reorganization or other insolvency proceeding that continues for a period of 30
days or more.
Trimipramine
Acquisition
On May 16,
2017, we executed an asset purchase agreement with Mikah Pharma, and acquired from Mikah Pharma (the
“Trimipramine Acquisition”) an FDA approved ANDA for Trimipramine for aggregate consideration of $1,200,000,
payable pursuant to a senior secured note due on December 31, 2020 (the “Trimipramine Note”). Mikah Pharma is
owned by Nasrat Hakim, the Chairman of the Board of Directors, President and Chief Executive Officer (CEO) of the Company.
The Trimipramine Note
bears interest at the rate of 10% per annum, payable quarterly. All principal and unpaid interest is due and payable on December
31, 2020. Pursuant to a security agreement, repayment of the Note is secured by the ANDA acquired in the Acquisition.
Trimipramine Distribution
Agreement with Dr. Reddy’s Laboratories, Inc. and Manufacturing Agreement with Epic
On May 17, 2017, in
conjunction with the Trimipramine Acquisition, the Company executed an assignment agreement with Mikah Pharma, pursuant to which
the Company acquired all rights, interests, and obligations under a supply and distribution agreement (the “Reddy’s
Trimipramine Distribution Agreement”) with Dr. Reddy’s Laboratories, Inc. (“Dr. Reddy’s”) originally
entered into by Mikah Pharma on May 7, 2017 and relating to the supply, sale and distribution of generic Trimipramine Maleate
Capsules 25mg, 50mg and 100mg.
On May 22, 2017, the
Company executed an assignment agreement with Mikah Pharma, pursuant to which the Company acquired all rights, interests and obligations
under a manufacturing and supply agreement with Epic originally entered into by Mikah in 2011 and amended on June 30, 2015 and
relating to the manufacture and supply of Trimipramine (the “Trimipramine Manufacturing Agreement”).
Under the Trimipramine
Manufacturing Agreement, Epic will manufacture Trimipramine under license from the Company pursuant to the FDA approved and currently
marketed Abbreviated New Drug Application that was acquired in conjunction with the Company’s entry into these agreements.
Under the Reddy’s
Trimipramine Distribution Agreement, the Company will supply Trimipramine on an exclusive basis to Dr. Reddy’s and Dr. Reddy’s
will be responsible for all marketing and distribution of Trimipramine in the United States, its territories, possessions, and
commonwealth. The Trimipramine will be manufactured by Epic and transferred to Dr. Reddy’s at cost, without markup.
Dr. Reddy’s
will pay to the Company a share of the profits, calculated without any deduction for cost of sales and marketing, derived from
the sale of Trimipramine. The Company’s share of these profits is in excess of 50%.
Methadone Manufacturing
and Supply Agreement
On June 23, 2011 and
as amended on September 24, 2012, January 19, 2015, July 20, 2015 and as extended on August 9, 2016, we entered into an agreement
to manufacture and supply Methadone 10mg to ThePharmaNetwork LLC (the “Methadone Manufacturing and Supply Agreement”).
ThePharmaNetwork LLC was subsequently acquired by Alkem Laboratories Ltd (“Alkem”) and now goes by the name Ascend
Laboratories LLC (“Ascend”) and is a wholly owned subsidiary of Alkem.
Ascend in the owner
of the approved ANDA for Methadone 10mg, and the Northvale Facility is an approved manufacturing site for this ANDA. The Methadone
Manufacturing and Supply Agreement provides for the manufacture and packaging by the Company of Ascend’s methadone hydrochloride
10mg tablets.
The initial shipment
of Methadone 10mg pursuant to the Methadone Manufacturing and Supply Agreement occurred in January 2012.
On August 26, 2016,
the Methadone Manufacturing and Supply Agreement was amended and extended through December 31, 2017.
Precision Dose
License Agreement
On September 10, 2010,
we executed a License Agreement with Precision Dose (the “Precision Dose License Agreement”) to market and distribute
Phentermine 37.5mg, Phentermine 15mg, Phentermine 30mg, Hydromorphone 8mg, Naltrexone 50mg, and certain additional products that
require approval from the FDA, through its wholly-owned subsidiary, TAGI, in the United States, Puerto Rico and Canada. Phentermine
37.5mg was 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. Precision Dose will have the exclusive right to market these products
in the United States and Puerto Rico and a non-exclusive right to market the products in Canada.
Pursuant to the Precision
Dose License 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 Precision Dose License Agreement, earned by Precision Dose as a result of sales of the
products. The license fee is payable monthly for the term of the Precision Dose License Agreement. The milestone payments will
be paid in six installments. The first installment was paid upon execution of the Precision Dose License Agreement. The remaining
installments are to be paid upon FDA approval and initial shipment of the products to Precision Dose. The term of the Precision
Dose License Agreement is 15 years and may be extended for 3 successive terms, each of 5 years.
Master Development
and License Agreement with SunGen Pharma LLC
On August 24, 2016,
we entered into an agreement with SunGen Pharma LLC (“SunGen”) (the “SunGen Agreement”) to undertake and
engage in the research, development, sales, and marketing of four generic pharmaceutical products. Two of the products are classified
as CNS stimulants (the “CNS Products”) and two of the products are classified as beta blockers (the “Beta Blocker
Products”).
Under the terms of
the SunGen Agreement, Elite and SunGen will share in the responsibilities and costs in the development of these products and will
share in the profits from sales. Upon approval, the know-how and intellectual property rights to the products will be owned jointly
by Elite and SunGen. SunGen shall have the exclusive right to market and sell the Beta Blocker Products using SunGen’s label
and Elite shall have the exclusive right to market and sell the CNS Products using Elite’s label. Elite will manufacture
and package all four products on a cost-plus basis.
Products Under Development
Elite’s research
and development activities are primarily focused on developing its proprietary abuse deterrent technology and the development
of a range of abuse deterrent opioid products that utilize this technology or other approaches to abuse deterrence.
Elite’s proprietary
abuse-deterrent technology, utilizes the pharmacological approach to abuse deterrence and consists of a multi-particulate capsule
which contains an opioid agonist in addition to naltrexone, an opioid antagonist used primarily in the management of alcohol dependence
and opioid dependence. When this product is taken as intended, the naltrexone is designed to pass through the body unreleased
while the opioid agonist releases over time providing therapeutic pain relief for which it is prescribed. If the multi-particulate
beads are crushed or dissolved, the opioid antagonist, naltrexone, is designed to release. The absorption of the naltrexone is
intended to block the euphoria by preferentially binding to same receptors in the brain as the opioid agonist and thereby reducing
the incentive for abuse or misuse by recreational drug abusers.
We filed an NDA for
the first product to utilize our abuse deterrent technology, Immediate Release Oxycodone 5mg, 10mg, 15mg, 20mg and 30mg with sequestered
Naltrexone (collectively and individually referred to as “SequestOx™”), on January 14, 2016. On July 15, 2016,
the FDA issued a Complete Response Letter, or CRL, regarding the NDA. The CRL stated that the review cycle for the SequestOx™
NDA is complete and the application is not ready for approval in its present form. On December 21, 2016, the Company met with
the FDA for an end-of-review meeting to discuss steps that the Company can take to obtain approval of SequestOx™. Based
on the FDA response, the Company believes there is a clear path forward to address the issues cited in the CRL. The meeting minutes,
received from the FDA on January 23, 2017, supported a plan to address the issues cited by the FDA in the CRL by modifying the
SequestOx
™
formulation. Such plan includes, without limitation, conducting bioequivalence and bioavailability
fed and fasted studies, comparing the modified formulation to the original formulation. The fed study is in progress. The Company
plans on initiating the fasted study after successful completion of the fed study. Resubmission of the SequestOx
™
application
requires successful completion of all required studies, including these fed and fasted studies. Please note that there can be
no assurances of the Company receiving marketing authorization for SequestOx™, and accordingly, there can be no assurances
that the Company will earn and receive the additional $7.5 million or future license fees. If the Company does not receive these
payments or fees, it will materially and adversely affect our financial condition.
On August 9, 2016,
the Company filed an ANDA with the FDA for a generic version of Percocet® (oxycodone hydrochloride and acetaminophen, USP
CII) 5mg, 7.5mg and 10mg tablets with 325mg of acetaminophen (“Generic Oxy/APAP”). Percocet® is a combination
medication, with abuse deterrence, and is used to help relieve moderate to severe pain. The Company has not received a response
from the FDA regarding this application. Please note that there can be no assurances of this product receiving marketing authorization,
or achieving commercialization. In addition, even if marketing authorization is received and the product is commercialized, there
can be no assurances of future revenues or profits in such amounts that would provide adequate return on the significant investments
made to secure marketing authorization for this product.
On December 12, 2016,
the Company filed an ANDA with the FDA for a generic version of Norco
®
(hydrocodone bitartrate and acetaminophen
tablets USP CII) 2.5mg/325mg, 5mg/325mg, 7.5mg/325mg and 10mg/325mg tablets (“Generic Hydrocodone/APAP”). Norco is
a combination medication and is used to help relieve moderate to moderately severe pain. The Company has not received a response
from the FDA regarding this application. Please note that there can be no assurances of this product receiving marketing authorization,
or achieving commercialization. In addition, even if marketing authorization is received and the product is commercialized, there
can be no assurances of future revenues or profits in such amounts that would provide adequate return on the significant investments
made to secure marketing authorization for this product.
The Company believes
that the abuse deterrent technology can be applied to and incorporated into a wide range of opioids used today for pain management
and has, to date, identified 10 additional products for potential development. All of these products are at early stages of development,
with research and development activities mainly consisting of in-house process development and laboratory studies. Extensive efficacy
and safety studies, similar to those conducted for SequestOx™, Generic Oxy/APAP and Generic Hydrocodone/APAP, have not yet
been conducted for these other products. As a result, costs incurred in relation to the development of these 10 products have
not been material.
Research and development
costs were $8.3 million, $12.4 million and $14.7 million for years ended March 31, 2017, 2016 and 2015, respectively. Costs incurred
during the prior fiscal years relate almost entirely to the development of the abuse deterrent opioid product, SequestOx
™
,
and costs incurred during the current fiscal year relate almost entirely the timing and composition of ongoing development of
our abuse deterrent opioid and other products in addition to a focus on clinical trials for generic products.
On June 4, 2015, the
Company entered into a sales and distribution licensing agreement which included a non-refundable payment of $5 million to Elite
for prior research and development activities, with such representing the first material net cash inflows being generated by ELI-200.
On January 14, 2016, the Company filed an NDA with the FDA for SequestOx™, thereby earning a non-refundable $2.5 million
milestone. An additional $7.5 million non-refundable milestone is due upon the FDA’s approval of Elite’s NDA. Please
note, as further detailed above, there can be no assurances of the Company receiving marketing authorization for SequestOx™,
and accordingly, there can be no assurances that the Company will earn and receive the additional $7.5 million or future license
fees. The non-receipt by the Company of these payments and or fees may materially and adversely affect our financial condition.
Please note that,
while the FDA is required to review applications within certain timeframes, during the review process, the FDA frequently requests
that additional information be submitted. The effect of such request and subsequent submission can significantly extend the time
for the NDA review process. Until an NDA is actually approved, there can be no assurances that the information requested and submitted
will be considered adequate by the FDA to justify approval. The packaging and labeling of our developed products are also subject
to FDA regulation. Based on the foregoing, it is impossible to anticipate the amount of time that will be needed to obtain FDA
approval to market any product. In addition, there can be no assurances of the Company filing the required application(s) with
the FDA or of the FDA approving such application(s) if filed, and the Company’s ability to successfully develop and commercialize
products incorporating its abuse deterrent technology is subject to a high level of risk as detailed in “Item 1A-Risk Factors-Risks
Related to our Business” of this Annual Report on Form 10-K.
Abuse-Deterrent and Sustained Release
Opioids
The
abuse-deterrent 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 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. We have filed INDs for two abuse resistant products under development
and have tested products in various pharmacokinetic and efficacy studies. We expect 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.
We have
developed, licensed to Epic the marketing rights to SequestOX™
, immediate release Oxycodone with
Naltrexone, and retain the rights to the remainder of these abuse resistant and sustained release opioid products. We 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.
We also developed
controlled release technology for oxycodone under a joint venture with Elan which terminated in 2002. According to the Elan Termination
Agreement, we 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 an oral controlled
release formulation of oxycodone for the treatment of pain, we will pay a royalty to Elan pursuant to the Elan Termination Agreement.
If we were to sell the product itself, we will pay a 1% royalty to Elan based on the product’s net sales, and if we enter
into an agreement with another party to sell the product, we will pay a 9% royalty to Elan based on our net revenues from this
product. We are allowed to recoup all development costs including research, process development, analytical development, clinical
development and regulatory costs before payment of any royalties to Elan.
Patents
Since our incorporation,
we have secured the following patents, of which two have been assigned for a fee to another pharmaceutical company. Our patents
are:
PATENT
|
|
EXPIRATION
DATE
|
U.S. patent 5,837,284
(assigned to Celgene Corporation)
|
|
November 2018
|
U.S. patent 6,620,439
|
|
October 2020
|
U.S. patent 6,635,284
(assigned to Celgene Corporation)
|
|
March 2018
|
U.S. patent 6,926,909
|
|
April 2023
|
U.S. patent 8,182,836
|
|
April 2024
|
U.S. patent 8,425,933
|
|
April 2024
|
U.S. patent 8,703,186
|
|
April 2024
|
Canadian patent
2,521,655
|
|
April 2024
|
Canadian patent
2,541,371
|
|
September 2024
|
U.S. patent 9,056,054
|
|
June 2030
|
E.P. patent 1615623
|
|
April 2024
|
We also have pending applications for two additional U.S. patents and two foreign patents. We intend to apply
for patents for other products in the future; however, there can be no assurance that any of the pending applications or other
applications which we may file will be granted. We have also filed corresponding foreign applications for key patents.
Prior to the enactment
in the United States of new laws adopting certain changes mandated by the General Agreement on Tariffs and Trade (“GATT”),
the exclusive rights afforded by a U.S. Patent were for a period of 17 years measured from the date of grant. Under GATT, the
term of any U.S. Patent granted on an application filed subsequent to June 8, 1995 terminates 20 years from the date on which
the patent application was filed in the United States or the first priority date, whichever occurs first. Future patents granted
on an application filed before June 8, 1995, will have a term that terminates 20 years from such date, or 17 years from the date
of grant, whichever date is later.
Under the Drug Price
Competition Act, a U.S. product patent or use patent may be extended for up to five years under certain circumstances to compensate
the patent holder for the time required for FDA regulatory review of the product. Such benefits under the Drug Price Competition
Act are available only to the first approved use of the active ingredient in the drug product and may be applied only to one patent
per drug product. There can be no assurance that we will be able to take advantage of this law.
Also, different countries
have different procedures for obtaining patents, and patents issued by different countries provide different degrees of protection
against the use of a patented invention by others. There can be no assurance, therefore, that the issuance to us in one country
of a patent covering an invention will be followed by the issuance in other countries of patents covering the same invention,
or that any judicial interpretation of the validity, enforceability, or scope of the claims in a patent issued in one country
will be similar to the judicial interpretation given to a corresponding patent issued in another country. Furthermore, even if
our patents are determined to be valid, enforceable, and broad in scope, there can be no assurance that competitors will not be
able to design around such patents and compete with us using the resulting alternative technology.
Trademarks
SequestOx™ is
a trademark owned by Elite, which received a Notice of Allowance by the United States Patent and Trademark Office on December
22, 2015.
We currently plan
to license at least some of our products to other entities in the marketing of pharmaceuticals, but may also sell products under
our own brand name in which case we may register trademarks for those products.
Terminated Agreements
Terminated Agreement
– Mikah Development Agreement
On January 28, 2015,
The Development and License Agreement dated August 27, 2010 and between the Company and Mikah Pharma LLC (the “Mikah Development
Agreement”) was terminated by mutual agreement of the Company and Mikah Pharma LLC.
Pursuant to the
Mikah Development Agreement, Mikah Pharma LLC (“Mikah”) made advance consideration payments to the Company
totaling $200,000 in exchange for product development services to be provided at a future date. Subsequent to the execution
of the Mikah Development Agreement, and before any development milestones were achieved, the sole owner of Mikah, Mr. Nasrat
Hakim, became the President and CEO of the Company. Mikah has accordingly ceased operating and is in
the process of winding down and liquidating its assets.
Any further development
of the product related to this agreement will belong to the Company, although there can be no assurances that such development
will occur or be successful.
The Mikah Development
Agreement requires that the consideration paid in advance to the Company be refunded in the event of no milestones being achieved.
Mr. Hakim, as owner of Mikah, has directed that the $200,000 refund due to Mikah not be paid currently, but rather be added to
the amounts due under the Hakim Credit Line.
For further details
on the Mikah Development Agreement, please see Exhibit 10.6 of the Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission (the “SEC”) on November 14, 2010, with such filing being herein incorporated by reference.
For further details
on the termination of the Mikah Development Agreement, please see Exhibit 10.84 of the Quarterly Report on Form 10-Q, filed with
the SEC on February 17, 2015, with such filing being herein incorporated by reference.
Terminated Agreement
- Development and License Agreement with Hong Kong Based Company
On January 19, 2016
,
the Development and License Agreement (“D&L Agreement”) between the Company and a private Hong-Kong based
company dated March 16, 2012 was terminated. The D&L Agreement was 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 engaged Elite to develop and manufacture a prescription pharmaceutical product (the “Prescription
Product”), with such development not being successfully completed.
For further details
on the D&L Agreement, please refer to Exhibit 10.77 to the Annual Report on Form 10-K filed with the SEC on June 29, 2012.
Other Business Factors and Details
Government Regulation
and Approval
The design, development,
and marketing of pharmaceutical compounds, on which our success depends, are intensely regulated by governmental regulatory agencies,
in particular the FDA. Non-compliance with applicable requirements can result in fines and other judicially imposed sanctions,
including product seizures, injunction actions and criminal prosecution based on products or manufacturing practices that violate
statutory requirements. In addition, administrative remedies can involve voluntary withdrawal of products, as well as the refusal
of the FDA to approve ANDAs and NDAs. The FDA also has the authority to withdraw approval of drugs in accordance with statutory
due process procedures.
Before a drug may
be marketed, it must be approved by the FDA either by an NDA or an ANDA, each of which is discussed below.
Please note that,
as discussed in “Discontinued Products” above, in March 2011, the FDA announced its intention to remove approximately
500 cough/cold and allergy related products from the U.S. market, with such list of 500 products including the Lodrane Extended
Release Products. After this announcement by the FDA, the Company’s customer for the Lodrane Products cancelled all outstanding
orders and manufacturing of the Lodrane Products ceased. This cancellation of outstanding orders and the cessation of manufacturing
of Lodrane Products had a material adverse effect on revenues for periods beginning subsequent to March 31, 2011.
Lodrane D® which
is an immediate release product that is different from the Lodrane Products that were included in the list of products removed
from the market by the FDA, 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 U.S. 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.
NDAs and NDAs
under Section 505(b) of the Drug Price Competition Act
The FDA approval procedure
for an NDA is generally a two-step process. During the Initial Product Development stage, an investigational new drug application
(“IND”) for each product is filed with the FDA. A 30-day waiting period after the filing of each IND is required by
the FDA prior to the commencement of initial clinical testing. If the FDA does not comment on or question the IND within such
30-day period, initial clinical studies may begin. If, however, the FDA has comments or questions, they must be answered to the
satisfaction of the FDA before initial clinical testing may begin. In some instances, this process could result in substantial
delay and expense. Initial clinical studies generally constitute Phase I of the NDA process and are conducted to demonstrate the
product tolerance/safety and pharmacokinetic in healthy subjects.
After Phase I testing,
extensive efficacy and safety studies in patients must be conducted. After completion of the required clinical testing, an NDA
is filed, and its approval, which is required for marketing in the United States, involves an extensive review process by the
FDA. The NDA itself is a complicated and detailed application and must include the results of extensive clinical and other testing,
the cost of which is substantial. However, the NDA filings contemplated by us, which are already marketed drugs, would be made
under Sections 505 (b)(1) or 505 (b)(2) of the Drug Price Competition Act, which do not require certain studies that would otherwise
be necessary; accordingly, the development timetable should be shorter. While the FDA is required to review applications within
a certain timeframe, during the review process, the FDA frequently requests that additional information be submitted. The effect
of such request and subsequent submission can significantly extend the time for the NDA review process. Until an NDA is actually
approved, there can be no assurance that the information requested and submitted will be considered adequate by the FDA to justify
approval. The packaging and labeling of our developed products are also subject to FDA regulation. It is impossible to anticipate
the amount of time that will be needed to obtain FDA approval to market any product.
Whether or not FDA
approval has been obtained, approval of the product by comparable regulatory authorities in any foreign country must be obtained
prior to the commencement of marketing of the product in that country. We intend to conduct all marketing in territories other
than the United States through other pharmaceutical companies based in those countries. The approval procedure varies from country
to country, can involve additional testing, and the time required may differ from that required for FDA approval. Although there
are some procedures for unified filings for certain European countries, in general each country has its own procedures and requirements,
many of which are time consuming and expensive. Thus, there can be substantial delays in obtaining required approvals from both
the FDA and foreign regulatory authorities after the relevant applications are filed. After such approvals are obtained, further
delays may be encountered before the products become commercially available.
ANDAs
The FDA approval procedure
for an ANDA differs from the procedure for a NDA in that the FDA waives the requirement of conducting complete clinical studies,
although it normally requires bioavailability and/or bioequivalence studies. “Bioavailability” indicates the rate
and extent of absorption and levels of concentration of a drug product in the blood stream needed to produce a therapeutic effect.
“Bioequivalence” compares the bioavailability of one drug product with another, and when established, indicates that
the rate of absorption and levels of concentration of the active drug substance in the body are equivalent for the generic drug
and the previously approved drug. An ANDA may be submitted for a drug on the basis that it is the equivalent of a previously approved
drug or, in the case of a new dosage form, is suitable for use for the indications specified.
The timing of final
FDA approval of an ANDA depends on a variety of factors, including whether the applicant challenges any listed patents for the
drug and whether the brand-name manufacturer is entitled to one or more statutory exclusivity periods, during which the FDA may
be prohibited from accepting applications for, or approving, generic products. In certain circumstances, a regulatory exclusivity
period can extend beyond the life of a patent, and thus block ANDAs from being approved on the patent expiration date.
In May 1992, Congress
enacted the Generic Drug Enforcement Act of 1992, which allows the FDA to impose debarment and other penalties on individuals
and companies that commit certain illegal acts relating to the generic drug approval process. In some situations, the Generic
Drug Enforcement Act requires the FDA to not accept or review ANDAs for a period of time from a company or an individual that
has committed certain violations. It also provides for temporary denial of approval of applications during the investigation of
certain violations that could lead to debarment and also, in more limited circumstances, provides for the suspension of the marketing
of approved drugs by the affected company. Lastly, the Generic Drug Enforcement Act allows for civil penalties and withdrawal
of previously approved applications. Neither we nor any of our employees have ever been subject to debarment. We do not believe
that we receive any services from any debarred person.
Controlled Substances
We are also subject
to federal, state, and local laws of general applicability, such as laws relating to working conditions. We are also licensed
by, registered with, and subject to periodic inspection and regulation by the Drug Enforcement Agency (“DEA”) and
New Jersey state agencies, pursuant to federal and state legislation relating to drugs and narcotics. Certain drugs that we currently
develop or may develop in the future may be subject to regulations under the Controlled Substances Act and related statutes. As
we manufacture such products, we may become subject to the Prescription Drug Marketing Act, which regulates wholesale distributors
of prescription drugs.
cGMP
All facilities and
manufacturing techniques used for the manufacture of products for clinical use or for sale must be operated in conformity with
cGMP regulations issued by the FDA. We engage in manufacturing on a commercial basis for distribution of products, and operate
our facilities in accordance with cGMP regulations. If we hire another company to perform contract manufacturing for us, we must
ensure that our contractor’s facilities conform to cGMP regulations.
Compliance with
Environmental Laws
We are subject to
comprehensive federal, state and local environmental laws and regulations that govern, among other things, air polluting emissions,
waste water discharges, solid and hazardous waste disposal, and the remediation of contamination associated with current or past
generation handling and disposal activities, including the past practices of corporations as to which we are the legal successor
or in possession. We do not expect that compliance with such environmental laws will have a material effect on our capital expenditures,
earnings, or competitive position in the foreseeable future. There can be no assurance, however, that future changes in environmental
laws or regulations, administrative actions or enforcement actions, or remediation obligations arising under environmental laws
will not have a material adverse effect on our capital expenditures, earnings, or competitive position.
Competition
We have competition
with respect to our principal areas of operation. We develop and manufacture generic products, products using controlled-release
drug technology, products utilizing abuse deterrent technologies, and we develop and market (either on our own or by license to
other companies) generic and proprietary controlled-release and abuse deterrent pharmaceutical products. In both areas, our competition
consists of those companies which develop controlled-release, abuse deterrent drugs and alternative drug delivery systems. We
do not represent a significant presence in the pharmaceutical industry.
An increasing number
of pharmaceutical companies have become interested in the development and commercialization of products incorporating advanced
or novel drug delivery systems. Some of the major pharmaceutical companies have invested and are continuing to invest significant
resources in the development of their own drug delivery systems and technologies and some have invested funds in such specialized
drug delivery companies. Many of these companies have greater financial and other resources as well as more experience than we
do in commercializing pharmaceutical products. Certain companies have a track record of success in developing controlled-release
drugs. Significant among these are, without limitation, Pfizer, Sandoz (a Novartis company), Durect Corporation, Mylan Laboratories,
Inc., Par Pharmaceuticals, Inc., Alkermes, Inc., Teva Pharmaceuticals Industries Ltd., Impax Laboratories, Inc., and Allergen.
Each of these companies has developed expertise in certain types of drug delivery systems, although such expertise does not carry
over to developing a controlled-release version of all drugs. Such companies may develop new drug formulations and products or
may improve existing drug formulations and products more efficiently than we can. In addition, almost all of our competitors have
vastly greater resources than we do. While our product development capabilities and, if obtained, patent protection may help us
to maintain our market position in the field of advanced drug delivery, there can be no assurance that others will not be able
to develop such capabilities or alternative technologies outside the scope of our patents, if any, or that even if patent protection
is obtained, such patents will not be successfully challenged in the future.
In addition to competitors
that are developing products based on drug delivery technologies, there are also companies that have announced that they are developing
opioid abuse-deterrent products that might compete directly or indirectly with Elite’s products. These include, but are
not limited to Pfizer Inc., Pain Therapeutics (which has an agreement with Durect Corporation and Pfizer Inc.), Collegium Pharmaceuticals,
Inc., Purdue Pharma LP, and Acura Pharmaceuticals, Inc.
We also face competition
in the generic pharmaceutical market. The principal competitive factors in the generic pharmaceutical market include: (i) introduction
of other generic drug manufacturers’ products in direct competition with our products under development, (ii) introduction
of authorized generic products in direct competition with any of our products under development, particularly if such products
are approved and sold during exclusivity periods, (iii) consolidation among distribution outlets through mergers and acquisitions
and the formation of buying groups, (iv) ability of generic competitors to quickly enter the market after the expiration of patents
or exclusivity periods, diminishing the amount and duration of significant profits, (v) the willingness of generic drug customers,
including wholesale and retail customers, to switch among pharmaceutical manufacturers, (vi) pricing pressures and product deletions
by competitors, (vii) a company’s reputation as a manufacturer and distributor of quality products, (viii) a company’s
level of service (including maintaining sufficient inventory levels for timely deliveries), (ix) product appearance and labeling
and (x) a company’s breadth of product offerings.
Sources and Availability of Raw Materials;
Manufacturing
A significant portion
of our raw materials may be available only from foreign sources. Foreign sources can be subject to the special risks of doing
business abroad, including:
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greater possibility
for disruption due to transportation or communication problems;
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the relative instability
of some foreign governments and economies;
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interim price volatility
based on labor unrest, materials or equipment shortages, export duties, restrictions on the transfer of funds, or fluctuations
in currency exchange rates; and
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uncertainty regarding
recourse to a dependable legal system for the enforcement of contracts and other rights.
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While we currently
obtain the raw materials that we need from over 20 suppliers, some materials used in our products are currently available from
only one supplier or a limited number of suppliers. The FDA requires identification of raw material suppliers in applications
for approval of drug products. If raw materials were unavailable from a specified supplier, FDA approval of a new supplier could
delay the manufacture of the drug involved.
We have acquired pharmaceutical
manufacturing equipment for manufacturing our products. We have registered our facilities with the FDA and the DEA.
Please see the Risk
Factor in Part I, Item 1A entitled “We are dependent on a small number of suppliers for our raw materials and any delay
or unavailability of raw materials can materially adversely affect our ability to produce products”.
Dependence on One or a Few Major Customers
Each year we have
had one or a few customers that have accounted for a large percentage of our limited revenues, therefore the termination or restructuring
of a contract with a customer may result in the loss of material amount or substantially all of our revenues. We are constantly
working to develop new relationships with existing or new customers, but despite these efforts we may not, at the time that any
of our current contracts expire, have other contracts in place generating similar or material revenue. We have agreements with
Epic, Precision Dose and Ascend for the licensing, sales, and distribution of products that we manufacture. We are currently renegotiating
a licensing contract with Epic, which may result in the termination of an existing contract or an amended licensing contract that
is materially different from that already in place. We receive revenues to manufacture these products and also receive a profit
split or royalties based on in-market sales of the products. Please see the Risk Factor in Part I, Item 1A entitled “We
depend on a limited number of customers and any reduction, delay or cancellation of an order from these customers or the loss
of any of these customers could cause our revenue to decline.”
Our Reporting Segments
We currently operate in
two segments, which are products whose marketing approvals were secured via an ANDA and products whose marketing approvals were
secured via a NDA. ANDA products are referred to as generic pharmaceuticals and NDA products are referred to as branded pharmaceuticals.
In the years ended March 31, 2017, 2016 and 2015 revenue from our ANDA segment was $8.6 million, $9.2 million and $5.0 million,
respectively. In the years ended March 31, 2017, 2016 and 2015 revenue from our NDA segment was $1.0 million, $3.3 million and
$0, respectively.
Segment information
is consistent with the financial information regularly by our chief operating decision maker, who we have determined to be the
chief executive office, for the purposes of making decisions about allocating resources and assessing performance of the Company.
There are currently no intersegment revenues. Asset information by operating segment is not presented below since the chief operating
decision maker does not review this information by segment.
Employees
As of June 7, 2017,
we had 46 full time employees. Full-time employees are engaged in operations, administration, research, and development. None
of our employees is represented by a labor union and we have never experienced a work stoppage. We believe our relationship with
our employees to be good. However, our ability to achieve our financial and operational objectives depends in large part upon
our continuing ability to attract, integrate, retain, and motivate highly qualified personnel, and upon the continued service
of our senior management and key personnel.
Available Information
We file our annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the
Exchange Act electronically with the Securities and Exchange Commission, or SEC. The public may read or copy any materials we
file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The
address of that site is
http://www.sec.gov
.
You may obtain a free
copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those
reports on the day of filing with the SEC on our website at
http://www.Elitepharma.com
under the Investor Relations tab
for SEC Filings or by contacting the Investor Relations Department by calling (518) 398-6222 or sending an e-mail message to
dianne@elitepharma.com
.
ITEM 1A. RISK FACTORS
An investment in the
Company’s Common Stock involves a high degree of risk. You should carefully consider the risks described below as well as
other information provided to you in this report, including information in the section of this document entitled “Forward
Looking Statements.” The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties
not presently known to us or that we currently believe are immaterial may also impair our business operations. If any of the following
risks actually occur, our business, financial condition or results of operations could be materially adversely affected, the value
of our Common Stock could decline, and you may lose all or part of your investment.
In addition to the other information contained
in this report, the following risk factors should be considered carefully in evaluating an investment in us and in analyzing our
forward-looking statements.
Risks Related to Our Business
Our revenues and operating results
could fluctuate significantly
Our revenues and operating
results may vary significantly from year-to-year and quarter-to-quarter as well as in comparison to the corresponding quarter
of the preceding year. Variations my result from one or more factors, including, without limitation:
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Timing
of approval of applications filed with the FDA;
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Timing
of process validation, product launches and market acceptance of products launched;
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Changes
in the amounts spent to research, develop, acquire, license or promote new and existing
products;
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Results
of clinical trial programs;
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Serious
or unexpected health or safety concerns with our products, brand products which we have
genericized, products currently under development or any other product candidates;
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Introduction
of new products by others that render our products obsolete or noncompetitive;
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The
ability to maintain selling prices and gross margin on our products;
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The
cost and outcome of litigation, in the event that such occurs in relation to, without
limitation, intellectual property issues, regulatory or other matters;
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The
ability to comply with complex and numerous governmental regulations and regulatory authorities
which oversee and regulate many aspects of our business and operations;
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Changes
in coverage and reimbursement policies of health plans and other health insurers, including
changes to Medicare, Medicaid, and similar state programs, especially in relation to
those products that are currently manufactured, under development or identified for future
development by the Company;
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Increases
in the cost of raw materials contained within our products;
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Manufacturing
and supply interruptions, including product rejections or recalls due to failure to comply
with manufacturing specifications;
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Timing
of revenue recognition relating to our licensing and other agreements;
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The
ability to protect our intellectual property from being acquired by other entities;
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The
ability to avoid infringing the intellectual property of others;
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Our
ability to manage growth and integrate acquired products and assets successfully; and
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The
addition or loss of customers.
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We have a relatively limited operating
history, which makes it difficult to evaluate our future prospects.
Although we have been
in operation since 1990, we have a relatively short operating history and limited financial data upon which you may evaluate our
business and prospects. In addition, our business model is likely to continue to evolve as we attempt to expand our product offerings
and our presence in the generic pharmaceutical market. As a result, our potential for future profitability must be considered
in view of the risks, uncertainties, expenses, and difficulties frequently encountered by companies that are attempting to move
into new markets and continuing to innovate with new and unproven technologies. Some of these risks relate to our potential inability
to:
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obtain
regulatory approval of our products;
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manage
our growth, control expenditures and align costs with revenues;
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attract,
retain, and motivate qualified personnel; and respond to competitive developments.
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If we do not effectively
address the risks we face, our business model may become unworkable and we may not achieve or sustain profitability or successfully
develop any products.
We have not been profitable and expect
future losses.
To date, we
have not been profitable and we may never be profitable or, if we become profitable, we may be unable to sustain
profitability. We have sustained losses from operations in each year since our incorporation in 1990. During the years ended
March 31, 2017, 2016 and 2015, we incurred net losses from operations of approximately $7.4 million, $8.3 million, and $16.5
million, respectively. We expect to continue to incur losses until we are able to generate sufficient revenues to support our
operations and offset operating costs.
We may require additional financing
to meet our business objectives
Although we believe
that we have adequate financial resources on hand as of March 31, 2017 to support the anticipated commercial launch of SequestOx™
and also ensure operations through March 31, 2018, we cannot assure that we will not need additional funding to accomplish our
plans to conduct the clinical development and commercialization of a range of multiple abuse resistant opioids on an accelerated
pace.
As of March 31, 2017,
we had cash on hand of approximately $10.6 million and a working capital surplus of $15.1 million, and, for the fiscal year ended
March 31, 2017, we had losses from operations totaling $7.4 million, net other income totaling $9.3 million and net income of
$3.8 million.
On May 1, 2017, we
entered into another purchase agreement (the “2017 LPC Purchase Agreement”), together with a registration rights agreement
(the “2017 LPC Registration Rights Agreement”), with Lincoln Park. Under the terms and subject to the conditions of
the 2017 LPC Purchase Agreement, we have the right to sell to and Lincoln Park is obligated to purchase up to $40 million in shares
of our common stock, subject to certain limitations, from time to time, over the 36-month period commencing on June 5, 2017.
The
extent we rely on Lincoln Park as a source of funding will depend on a number of factors including, the prevailing market price
of our common stock and the extent to which we are able to secure working capital from other sources. If obtaining sufficient
funding from Lincoln Park were to prove unavailable or prohibitively dilutive, we will need to secure another source of funding
in order to satisfy our working capital needs. Even if we sell all shares under the 2017 LPC Purchase Agreement, we may still
need additional capital to fully implement our business, operating and development plans.
For
more information on the Lincoln Park Capital transaction, see Part II, Item 7 “Management’s Discussion and Analysis
of Financial Condition and Results of Operations; Liquidity and Capital Resources; Lincoln Park Capital”.
We are anticipating
that, with the growth of the current generic product line consisting of generic phentermine tablets and capsules, hydromorphone,
naltrexone, methadone, phendimetrazine, isradipine, hydroxyzine and immediate release Lodrane D®, combined with the successful
transfer of manufacturing site and commercial launch of the six remaining approved generic products licensed to Epic Pharma LLC
which have not yet been commercialized, profit splits earned from the commercial sale of Oxy-IR by Epic, pursuant to the Epic
Strategic Alliance Agreement, profit splits earned from the commercial sale of products under the Epic Manufacturing and License
Agreement, milestones, revenues and profit splits pursuant to the 2015 SequestOX™ License Agreement, profit splits earned
from the commercial sale of Trimipramine pursuant to the Reddy’s Trimipramine Distribution Agreement, revenues and profits
earned pursuant to the SunGen Agreement and other opportunities in our pipeline, Elite eventually could be profitable. However,
there can be no assurances that we will be able to timely raise additional funds, if needed, on acceptable terms through the 2017
LPC Purchase Agreement or otherwise, that the sales of the current generic product line will continue, that the 12 approved generic
products licensed to Epic Pharma LLC will be successfully commercialization and generate future revenues or that the other opportunities
in our pipeline will be successfully commercialized. There can also be no assurances of Elite becoming profitable.
To sustain operations
and meet our business objectives we must be able to commercialize our products and other products or pipeline opportunities. If
we are unable to timely obtain additional financing, if necessary, and/or we are unable to timely generate greater revenues from
our operations, we will be required to reduce and, possibly, cease operations and liquidate our assets. No assurance can be given
that we will be able to commercialize the new opportunities, or consummate such other financing or strategic alternative in the
time necessary to avoid the cessation of our operations and liquidation of our assets.
Furthermore, the capital
and credit markets have experienced extreme volatility. Disruptions in the credit markets make it harder and more expensive to
obtain funding. In the event current resources do not satisfy our needs, we may have to seek additional financing. The availability
of additional financing will depend on a variety of factors such as market conditions and the general availability of credit.
Future debt financing may not be available to us when required or may not be available on acceptable terms, and as a result we
may be unable to grow our business, take advantage of business opportunities, or respond to competitive pressures
.
We depend on a limited number of customers and any reduction,
delay or cancellation of an order from these customers or the loss of any of these customers could cause our revenue to decline.
Each year we have
had one or a few customers that have accounted for a large percentage of our limited revenues therefore the termination of a contract
with a customer may result in the loss of substantially all of our revenues. We are constantly working to develop new relationships
with existing or new customers, but despite these efforts we may not, at the time that any of our current contracts expire, have
other contracts in place generating similar or material revenue. We have agreements with Epic, Ascend and Precision Dose for the
sales and distribution of products that we manufacture. We receive revenues to manufacture these products and also receive a profit
split or royalties based on in-market sales of the products.
In addition, since
a significant portion of our revenues is derived from a relatively few customers, any financial difficulties experienced by any
one of these customers, or any delay in receiving payments from any one of these customers, could have a material adverse effect
on our business, results of operations, financial condition, and cash flows.
A notice of default was issued by the
New Jersey Economic Development Authority in relation to prior obligations of our tax-exempt bonds. Although we are current in
our payments under these bonds, if the principal balances due under these bonds are accelerated pursuant to the notice of default,
our ability to operate in the future will be materially and adversely affected.
Although we are current
in our payments under the NJEDA Bonds, we previously were in default and a notice of default was issued in March 2009. Should
the principal balances due under the NJEDA Bonds be accelerated pursuant to such notice of default, our ability to operate in
the future will be materially and adversely affected.
For more information
on the NJEDA Bonds, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of
Operations; Liquidity and Capital Resources; NJEDA Bonds”.
Elite’s pipeline consists of
products in various stages of development, including products in early development.
Elite’s product
pipeline, including its abuse deterrent opioid products, are in various stages of development. Prior to commercialization, product
development must be completed that could include scale-up, clinical studies, regulatory filing, regulatory review, approval by
the FDA, and/or other development steps. Additionally, Elite has 6 approved generic products for which a site transfer must be
completed prior to product launches. For these generic products, Elite must complete site transfer studies, file change being
effective in 30 days (“CBE 30”) and await FDA review and approval. Development is subject to risks. We cannot assure
you that development will be successful, or that during development unexpected delays might occur or additional costs might be
incurred.
The pharmaceutical
industry is heavily regulated, which creates uncertainty about our ability to bring new products to market and imposes substantial
compliance costs on our business in relation to product development as well as commercial operations.
Governmental authorities
such as the FDA impose substantial requirements on the development, manufacture, holding, labeling, marketing, advertising, promotion,
distribution and sale of therapeutic pharmaceutical products through lengthy and detailed laboratory and clinical testing and
other costly and time-consuming procedures. In addition, before obtaining regulatory approvals for certain generic products, we
must conduct limited bioequivalence studies and other research to show comparability to the branded products. A failure to obtain
satisfactory results in required pre-marketing trials may prevent us from obtaining required regulatory approvals. The FDA may
also require companies to conduct post-approval studies and post-approval surveillance regarding their drug products and to report
adverse events.
Before obtaining regulatory
approvals for the sale of any of our new product candidates, we must demonstrate through preclinical studies and clinical trials
that the product is safe and effective for each intended use. Preclinical and clinical studies may fail to demonstrate the safety
and effectiveness of a product. Likewise, we may not be able to demonstrate through clinical trials that a product candidate’s
therapeutic benefits outweigh its risks. Even promising results from preclinical and early clinical studies do not always accurately
predict results in later, large scale trials. A failure to demonstrate safety and efficacy could or would result in our failure
to obtain regulatory approvals. Clinical trials can be delayed for reasons outside of our control, which can lead to increased
development costs and delays in regulatory approval. For example, due to competition to enroll patients in clinical trials, there
have been instances of delays in clinical development of our products in the past, as a result of patients not enrolling in clinical
trials at the rate expected, or patients dropping out of trials after enrolling, at rates that were higher than expected. In addition,
we rely on collaboration partners and third party subject matter experts that may recommend changes in trial protocol and design
enhancements that are put into effect, or encounter clinical trial compliance-related issues, which may also delay clinical trials.
Product supplies may be delayed or be insufficient to treat the patients participating in the clinical trials, or manufacturers
or suppliers may not meet the requirements of the FDA or foreign regulatory authorities, such as those relating to Current Good
Manufacturing Practices. We also may experience delays in obtaining, or we may not obtain, required initial and continuing approval
of our clinical trials from institutional review boards. We cannot confirm to you that we will not experience delays or undesired
results in these or any other of our clinical trials.
We cannot confirm
to you that the FDA will approve, clear for marketing or certify any products developed by us or that such approval will not subject
the marketing of our products to certain limits on indicated use. The FDA may not agree with our assessment of the clinical data
or they may interpret it differently. Such regulatory authorities may require additional or expanded clinical trials. Any limitation
on use imposed by the FDA or delay in or failure to obtain FDA approvals or clearances of products developed by us would adversely
affect the marketing of these products and our ability to generate product revenue, which would adversely affect our financial
condition and results of operations.
In addition, with
respect specifically to pharmaceutical products, the submission of a New Drug Application (NDA), such as SequestOx™, or
ANDA to the FDA with supporting clinical safety and efficacy data, for example, does not guarantee that the FDA will grant approval
to market the product. Meeting the FDA’s regulatory requirements to obtain approval to market a drug product, which varies
substantially based on the type, complexity and novelty of the pharmaceutical product, typically takes years and is subject to
uncertainty.
Additional delays
may result if an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval. Although
the FDA is not required to follow the recommendations of its Advisory Committees, it usually does. A negative Advisory Committee
meeting could signal a lower likelihood of approval, although the FDA may still end up approving our application. Regardless of
an Advisory Committee meeting outcome or the FDA’s final approval decision, public presentation of our data may shed positive
or negative light on our application.
Some drugs are available
in the United States that are not the subject of an FDA-approved NDA. In 2011, the FDA’s Center for Drug Evaluation and
Research (“CDER”) Office of Compliance modified its enforcement policy with regard to the marketing of such “unapproved”
marketed drugs. Under CDER’s revised guidance, the FDA encourages manufacturers to obtain NDA approvals for such drugs by
requiring unapproved versions to be removed from the market after an approved version has been introduced, subject to a grace
period at the FDA’s discretion. This grace period is intended to allow an orderly transition of supply to the market and
to mitigate any potential related drug shortage. Depending on the length of the grace period and the time it takes for subsequent
applications to be approved, this may result in a period of de facto market exclusivity to the first manufacturer that has obtained
an approved NDA for the previously unapproved marketed drug. We may seek FDA approval for certain unapproved marketed drug products
through the 505(b)(2) regulatory pathway. Even if we receive approval for an NDA under Section 505(b)(2), the FDA may not take
timely enforcement action against companies marketing unapproved versions of the drug; therefore, we cannot be sure that that
we will receive the benefit of any de facto exclusive marketing period or that we will fully recoup the expenses incurred to obtain
an approval. In addition, certain competitors and others have objected to the FDA’s interpretation of Section 505(b)(2).
If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, this could delay or even prevent the FDA from
approving any NDA that we submit under Section 505(b)(2).
Moreover, even if
our product candidates are approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses
for which the products may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing
testing and surveillance to monitor the safety or efficacy of the products.
The ANDA approval
process for a new product varies in time, is difficult to estimate and can vary significantly, from as little as 10 months from
the date of application, to several years or more. Furthermore, ANDA approvals, if granted, may not include all indications for
which the Company may seek to market each product.
Further, once a product
is approved or cleared for marketing, failure to comply with applicable regulatory requirements can result in, among other things,
suspensions or withdrawals of approvals or clearances, seizures or recalls of products, injunctions against the manufacture, holding,
distribution, marketing and sale of a product, and civil and criminal sanctions. Furthermore, changes in existing regulations
or the adoption of new regulations could prevent us from obtaining, or affect the timing of, future regulatory approvals or clearances.
Meeting regulatory requirements and evolving government standards may delay marketing of our new products for a considerable period
of time, impose costly procedures upon our activities and result in a competitive advantage to larger companies that compete against
us.
Based on scientific
developments, post-market experience, or other legislative or regulatory changes, the current FDA standards of review for approving
new pharmaceutical products, or new indications or uses for approved or cleared products, are sometimes more stringent than those
that were applied in the past.
Some new or evolving
FDA review standards or conditions for approval or clearance were not applied to many established products currently on the market,
including certain opioid products. As a result, the FDA does not have as extensive safety databases on these products as on some
products developed more recently. Accordingly, we believe the FDA has expressed an intention to develop such databases for certain
of these products, including many opioids. In particular, the FDA has expressed interest in specific chemical structures that
may be present as impurities in a number of opioid narcotic active pharmaceutical ingredients, such as oxycodone, which based
on certain structural characteristics and laboratory tests may indicate the potential for having mutagenic effects. FDA has required,
and may continue to require, more stringent controls of the levels of these impurities in drug products for approval.
Also, the FDA may
require labeling revisions, formulation, or manufacturing changes and/or product modifications for new or existing products containing
such impurities. The FDA’s more stringent requirements, together with any additional testing or remedial measures that may
be necessary, could result in increased costs for, or delays in, obtaining approval for certain of our products in development.
Although we do not believe that the FDA would seek to remove a currently marketed product from the market unless such mutagenic
effects are believed to indicate a significant risk to patient health, we cannot make any such assurance.
In May of 2016, an
FDA advisory panel recommended mandatory training of all physicians who prescribe opioids on the risks of prescription opioids.
In 2016, the CDC also issued a guideline for prescribing opioids for chronic pain that provides recommendations for primary care
clinicians who are prescribing opioids for chronic pain outside of active cancer treatment, palliative care, and end-of-life care.
In addition, state health departments and boards of pharmacy have authority to regulate distribution and may modify their regulations
with respect to prescription narcotics in an attempt to curb abuse. In either case, any such new regulations or requirements may
be difficult and expensive for us to comply with, may delay our introduction of new products, may adversely affect our total revenues,
and may have a material adverse effect on our business, results of operations, financial condition and cash flows.
The FDA has the authority
to require companies to undertake additional post-approval studies to assess known or signaled safety risks and to make any labeling
changes to address those risks. The FDA also can require companies to formulate approved Risk Evaluation and Mitigation Strategies
(REMS) to confirm a drug’s benefits outweigh its risks.
The FDA’s exercise
of its authority under the FFDCA could result in delays or increased costs during product development, clinical trials and regulatory
review, increased costs to comply with additional post-approval regulatory requirements and potential restrictions on sales of
approved products. Foreign regulatory agencies often have similar authority and may impose comparable requirements and costs.
Post-marketing studies and other emerging data about marketed products, such as adverse event reports, may also adversely affect
sales of our products. Furthermore, the discovery of significant safety or efficacy concerns or problems with a product in the
same therapeutic class as one of our products that implicate or appear to implicate the entire class of products could have an
adverse effect on sales of our product or, in some cases, result in product withdrawals. The FDA has continuing authority over
the approval of an NDA or ANDA and may withdraw approval if, among other reasons, post-marketing clinical or other experience,
tests, or data show that a drug is unsafe for use under the conditions upon which it was approved, or if FDA determines that there
is a lack of substantial evidence of the drug’s efficacy under the conditions described in its labeling. Furthermore, new
data and information, including information about product misuse or abuse at the user level, may lead government agencies, professional
societies, practice management groups or patient or trade organizations to recommend or publish guidance or guidelines related
to the use of our products, which may lead to reduced sales of our products.
The FDA and the DEA
have important and complementary responsibilities with respect to our business. The FDA administers an application and post-approval
monitoring process to confirm that products that are available in the market are safe, effective, and consistently of uniform,
high quality. The DEA administers registration, drug allotment and accountability systems to satisfy against loss and diversion
of controlled substances. Both agencies have trained investigators that routinely, or for cause, conduct inspections, and both
have authority to seek to enforce their statutory authority and regulations through administrative remedies as well as civil and
criminal enforcement actions. The FDA regulates and monitors the quality of drug clinical trials to provide human subject protection
and to support marketing applications. The FDA may place a hold on a clinical trial and may cause a suspension or withdrawal of
product approvals if regulatory standards are not maintained. The FDA also regulates the facilities, processes, and procedures
used to manufacture and market pharmaceutical products in the U.S. Manufacturing facilities must be registered with the FDA and
all products made in such facilities must be manufactured in accordance with the latest cGMP regulations, which are enforced by
the FDA. Compliance with clinical trial requirements and cGMP regulations requires the dedication of substantial resources and
requires significant expenditures. In the event an approved manufacturing facility for a particular drug is required by the FDA
to curtail or cease operations, or otherwise becomes inoperable, or a third-party contract manufacturing facility faces manufacturing
problems, obtaining the required FDA authorization to manufacture at the same or a different manufacturing site could result in
production delays, which could adversely affect our business, results of operations, financial condition, and cash flow.
The FDA is authorized
to perform inspections of U.S. and foreign facilities under the FFDCA. At the end of such an inspection, FDA could issue a Form
483 Notice of Inspectional Observations, which could cause us to modify certain activities identified during the inspection. Following
such inspections, the FDA may issue an untitled letter as an initial correspondence that cites violations that do not meet the
threshold of regulatory significance of a Warning Letter. FDA guidelines also provide for the issuance of Warning Letters for
violations of “regulatory significance” for which the failure to adequately and promptly achieve correction may be
expected to result in an enforcement action. FDA also may issue Warning Letters and untitled letters in connection with events
or circumstances unrelated to an FDA inspection.
Similar to other pharmaceutical
companies, during Fiscal 2017, our facilities were subject to routine and new-product related inspections by the FDA. These inspections
resulted in FDA Form 483 observations and a warning letter regarding postmarketing adverse drug experience reporting. We have
responded to all inspection observations within the required time frame and have implemented, or are continuing to implement,
the corrective action plans as agreed with the relevant regulatory agencies. Please also see the risk factor titled “We
received a Warning Letter from the U.S. Food and Drug Administration regarding Postmarketing Adverse Drug Experience reporting.
The Warning Letter does not restrict the production or shipment of any of the Company’s products, or the sale or marketing
of the Company’s products, however, unless and until the Company is able to correct the outstanding issues identified, to
the FDA’s satisfaction, the FDA may withhold approval of pending drug applications or take other actions that would have
a material adverse impact on the Company”
.
Many of our products
contain controlled substances. The stringent DEA regulations on our use of controlled substances include restrictions on their
use in research, manufacture, distribution, and storage. A breach of these regulations could result in imposition of civil penalties,
refusal to renew or action to revoke necessary registrations, or other restrictions on operations involving controlled substances.
In addition, failure to comply with applicable legal requirements subjects the manufacturing facilities of our subsidiaries and
manufacturing partners to possible legal or regulatory action, including shutdown. Any such shutdown may adversely affect their
ability to supply us with product and thus, our ability to market affected products. This could have a negative impact on our
business, results of operations, financial condition, cash flows and competitive position. See also the risk described under the
caption “The DEA limits the availability of the active ingredients used in many of our current products and products in
development, as well as the production of these products, and, as a result, our procurement and production quotas may not be sufficient
to meet commercial demand or complete clinical trials.” In addition, we are subject to the Federal Drug Supply Chain Security
Act (DSCSA). The U.S. government has enacted DSCSA which requires development of an electronic pedigree to track and trace each
prescription drug at the salable unit level through the distribution system, which will be effective incrementally over a 10-year
period. Compliance with DSCSA and future U.S. federal or state electronic pedigree requirements may increase our operational expenses
and impose significant administrative burdens.
We cannot determine
what effect changes in regulations or legal interpretations or requirements by the FDA or the courts, when and if promulgated
or issued, may have on our business in the future. Changes could, among other things, require different labeling, monitoring of
patients, interaction with physicians, education programs for patients or physicians, curtailment of necessary supplies, or limitations
on product distribution. These changes, or others required by the FDA or DEA could have an adverse effect on the sales of these
products. The evolving and complex nature of regulatory science and regulatory requirements, the broad authority and discretion
of the FDA and the generally high level of regulatory oversight results in a continuing possibility that, from time to time, we
will be adversely affected by regulatory actions despite our ongoing efforts and commitment to achieve and maintain full compliance
with all regulatory requirements.
Furthermore, once
a product receives marketing approval, the manufacturing, distribution, processing, formulation, packaging, labeling, promotion
and sale of our products are subject to extensive regulation by federal agencies, including, without limitation, the FDA, DEA,
FTC, Consumer Product Safety Commission, and Environmental Protection Agency, among others. We are also subject to state and local
laws, regulations, and agencies in New Jersey and elsewhere. Such regulations are also subject to change by the relevant federal,
state and local agencies. For instance, beginning from January 1, 2015, manufacturers, wholesale distributors, and repackagers
of certain prescription drugs are required to provide and capture certain product tracing information under the Drug Quality and
Security Act (“DQSA”). Title II of the DQSA, referred to as the Drug Supply Chain Security Act, requires companies
in certain prescription drugs’ chain of distribution to build electronic, interoperable systems to identify and trace the
products as they are distributed in the United States. Compliance with the DQSA or any future federal or state electronic pedigree
requirements may increase the Company's operational expenses and impose significant administrative burdens.
Regulatory agencies
such as the FDA regularly inspect our manufacturing facilities and the facilities of our third-party suppliers. The failure of
the Northvale Facility, or a facility of one of our third-party suppliers, to comply with applicable laws and regulations may
lead to breach of representations made to our customers or to regulatory or government action against us related to products made
in that facility. We have in the past received and successfully resolved Form 483 observations from the FDA regarding certain
operations within our manufacturing network. Although we remain committed to continuing to improve our quality control and manufacturing
practices, we cannot be assured that the FDA will continue to be satisfied with our quality control and manufacturing systems
and standards. If we receive any future FDA observations, we may be subject to regulatory action including, among others, monetary
sanctions or penalties, product recalls or seizure, injunctions, total or partial suspension of production and/or distribution,
and suspension or withdrawal of regulatory approvals. Further, other federal agencies, our customers and partners in our alliance,
development, collaboration, and other partnership agreements with respect to our products and services may take any such Form
483 observations into account when considering the award of contracts or the continuation or extension of such partnership agreements.
If we receive any future Form 483 observations or warning letters from the FDA, our business, consolidated results of operations
and consolidated financial condition could be materially and adversely affected.
With respect to environmental,
safety and health laws and regulations, we cannot accurately predict the outcome or timing of future expenditures that we may
be required to make in order to comply with such laws as they apply to our operations and facilities. We are also subject to potential
liability for the remediation of contamination associated with both present and past hazardous waste generation, handling, and
disposal activities. We are subject periodically to environmental compliance reviews by environmental, safety, and health regulatory
agencies. Environmental laws are subject to change and we may become subject to stricter environmental standards in the future
and face larger capital expenditures in order to comply with environmental laws.
Compliance with federal
and state and local law regulations, including compliance with any newly enacted regulations, requires substantial expenditures
of time, money, and effort to ensure full technical compliance. Failure to comply with the FDA, DEA, EPA and other governmental
regulations can result in fines, disgorgement, unanticipated compliance expenditures, recall or seizure of products, exposure
to product liability claims, total or partial suspension of production or distribution, suspension of the FDA’s review of
NDAs or ANDAs, enforcement actions, injunctions and civil or criminal prosecution, any of which could have a material and adverse
effect on our business, results of operations and financial condition.
Legislative or regulatory reform of
the healthcare system in the United States may harm our future business.
The Patient Protection
and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively commonly referred to as
the “Affordable Care Act” may affect the operational results of companies in the pharmaceutical industry such as ours
by imposing additional costs. Effective January 1, 2010, the Affordable Care Act, amongst other changes, increased the minimum
Medicaid drug rebates for pharmaceutical companies and revised the definition of “average manufacturer price” for
reporting purposes, which may affect the amount of Medicaid drug rebates to states related to the sales of our products, whether
such sales are made directly by Company or by one of the Company’s licensees. Beginning in 2011, the law also imposed a
significant annual fee on companies that manufacture or import branded prescription drug products.
The Affordable Care
Act contemplates the promulgation of significant future regulatory action which may also further affect our business. The Affordable
Care Act and any further changes to health care laws or regulatory framework that reduce our revenues or increase our costs could
also have a material adverse effect on our business, results of operations and financial condition.
If we are unable to satisfy FDA regulatory
requirements, we may not be able to commercialize our product candidates.
We need FDA approval
prior to marketing our product candidates in the United States of America. If we fail to obtain FDA approval to market our product
candidates, we will be unable to sell our product candidates in the United States of America and we will not generate any revenue
from the sale of such products.
This regulatory review
and approval process, which includes evaluation of preclinical studies and clinical trials of our product candidates, is lengthy,
expensive, and uncertain. To receive approval, we must, among other things, demonstrate with substantial evidence from well-controlled
clinical trials that our product candidates are both safe and effective for each indication where approval is sought. Satisfaction
of these requirements typically takes several years and the time needed to satisfy them may vary substantially, based on the type,
complexity, and novelty of the pharmaceutical product. We cannot predict if or when we might submit for regulatory approval any
of our product candidates currently under development. Any approvals we may obtain may not cover all of the clinical indications
for which we are seeking approval. Also, an approval might contain significant limitations in the form of narrow indications,
warnings, precautions, or contra-indications with respect to conditions of use.
The FDA has substantial
discretion in the approval process and may either refuse to accept an application for substantive review or may form the opinion
after review of an application that the application is insufficient to allow approval of a product candidate. If the FDA does
not accept our application for review or approve our application, it may require that we conduct additional clinical, preclinical
or manufacturing validation studies and submit the data before it will reconsider our application. Depending on the extent of
these or any other studies that might be required, approval of any applications that we submit may be delayed by several years,
or we may be required to expend more resources than we have available. It is also possible that any such additional studies, if
performed and completed, may not be considered sufficient by the FDA to make our applications approvable. If any of these outcomes
occur, we may be forced to abandon our applications for approval.
We will also be subject
to a wide variety of foreign regulations governing the development, manufacture and marketing of our products. Whether or not
an FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must still
be obtained prior to manufacturing or marketing the product in those countries. The approval process varies from country to country
and the time needed to secure approval may be longer or shorter than that required for FDA approval. We cannot assure you that
clinical trials conducted in one country will be accepted by other countries or that approval of our product in one country will
result in approval in any other country.
Before we can obtain regulatory approval,
we need to successfully complete clinical trials, outcomes of which are uncertain.
In order to obtain
FDA approval to market a new drug product, we must demonstrate proof of safety and effectiveness in humans. To meet these requirements,
we must conduct extensive preclinical testing and “adequate and well-controlled” clinical trials. Conducting clinical
trials is a lengthy, time-consuming, and expensive process. Completion of necessary clinical trials may take several years or
more. Delays associated with products for which we are directly conducting preclinical or clinical trials may cause us to incur
additional operating expenses. The commencement and rate of completion of clinical trials may be delayed by many factors, including,
without limitation, for example:
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ineffectiveness
of our product candidate or perceptions by physicians that the product candidate is not
safe or effective for a particular indication;
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inability
to manufacture sufficient quantities of the product candidate for use in clinical trials;
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delay
or failure in obtaining approval of our clinical trial protocols from the FDA or institutional
review boards;
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slower
than expected rate of patient recruitment and enrollment;
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inability
to adequately follow and monitor patients after treatment;
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difficulty
in managing multiple clinical sites;
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unforeseen
safety issues;
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government
or regulatory delays; and
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clinical
trial costs that are greater than we currently anticipate.
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Even if we achieve
positive interim results in clinical trials, these results do not necessarily predict final results, and positive results in early
trials may not be indicative of success in later trials. A number of companies in the pharmaceutical industry have suffered significant
setbacks in advanced clinical trials, even after achieving promising results in earlier trials. Negative or inconclusive results
or adverse medical events during a clinical trial could cause us to repeat or terminate a clinical trial or require us to conduct
additional trials. We do not know whether our existing or any future clinical trials will demonstrate safety and efficacy sufficiently
to result in marketable products. Our clinical trials may be suspended at any time for a variety of reasons, including if the
FDA or we believe the patients participating in our trials are exposed to unacceptable health risks or if the FDA finds deficiencies
in the conduct of these trials.
Failures or perceived
failures in our clinical trials will directly delay our product development and regulatory approval process, damage our business
prospects, make it difficult for us to establish collaboration and partnership relationships, and negatively affect our reputation
and competitive position in the pharmaceutical community.
Because of these risks,
our research and development efforts may not result in any commercially viable products. Any delay in, or termination of, our
preclinical or clinical trials will delay the filing of our drug applications with the FDA and, ultimately, our ability to commercialize
our product candidates and generate product revenues. If a significant portion of these development efforts are not successfully
completed, required regulatory approvals are not obtained, or any approved products are not commercially successful, our business,
financial condition, and results of operations may be materially harmed.
If our collaboration or licensing arrangements
are unsuccessful, our revenues and product development may be limited.
We have entered into
several collaborations and licensing arrangements for the development of products. However, there can be no assurance that any
of these agreements will result in FDA approvals, or that we will be able to market any such finished products at a profit. Collaboration
and licensing arrangements pose the following risks:
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collaborations
and licensing arrangements may be terminated, in which case we will experience increased
operating expenses and capital requirements if we elect to pursue further development
of the related product candidate;
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collaborators
and licensees may delay clinical trials and prolong clinical development, under-fund
a clinical trial program, stop a clinical trial, or abandon a product candidate;
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expected
revenue might not be generated because milestones may not be achieved and product candidates
may not be developed;
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collaborators
and licensees could independently develop, or develop with third parties, products that
could compete with our future products;
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the
terms of our contracts with current or future collaborators and licensees may not be
favorable to us in the future;
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a
collaborator or licensee with marketing and distribution rights to one or more of our
products may not commit enough resources to the marketing and distribution of our products,
limiting our potential revenues from the commercialization of a product;
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disputes
may arise delaying or terminating the research, development, or commercialization of
our product candidates, or result in significant and costly litigation or arbitration;
and
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one
or more third-party developers could obtain approval for a similar product prior to the
collaborator or licensee resulting in unforeseen price competition in connection with
the development product.
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If we are unable to protect our intellectual
property rights or avoid claims that we infringed on the intellectual property rights of others, our ability to conduct business
may be impaired.
Our success depends
on our ability to protect our current and future products and to defend our intellectual property rights. If we fail to protect
our intellectual property adequately, competitors may manufacture and market products similar to ours.
We currently hold eleven
patents and we have four patent applications. We intend to file further patent applications in the future. We cannot be certain
that our pending patent applications will result in the issuance of patents. If patents are issued, third parties may sue us to
challenge our patent protection, and although we know of no reason why they should prevail, it is possible that they could. In
addition to modification or revocation of patents in legal proceedings, issued patents may later be modified or revoked by the
U.S. Patent and Trademark Office or by analogous foreign offices. It is likewise possible that our patent rights may not prevent
or limit our present and future competitors from developing, using or commercializing products that are similar or functionally
equivalent to our products.
In addition, we may
be required to obtain licenses to patents, or other proprietary rights of third parties, in connection with the development and
use of our products and technologies as they relate to other persons’ technologies. At such time as we discover a need to
obtain any such license, we will need to establish whether we will be able to obtain such a license on favorable terms, if at
all. The failure to obtain the necessary licenses or other rights could preclude the sale, manufacture or distribution of our
products.
We rely particularly
on trade secrets, unpatented proprietary expertise and continuing innovation that we seek to protect, in part, by entering into
confidentiality agreements with licensees, suppliers, employees, and consultants. We cannot provide assurance that these agreements
will not be breached or circumvented. We also cannot be certain that there will be adequate remedies in the event of a breach.
Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. We cannot
be sure that our trade secrets and proprietary technology will not otherwise be obtained by other entities or become known, obtained,
or independently developed by our competitors or by other entities. We also cannot be sure that, if patents are not issued with
respect to products arising from research, we will be able to maintain the confidentiality of information relating to these products.
In addition, efforts to ensure our intellectual property rights can be costly, time-consuming, and/or ultimately unsuccessful.
Litigation is common in the pharmaceutical
industry, and can be protracted and expensive and could delay and/or prevent entry of our products into the market, which, in
turn, could have a material adverse effect on our business.
Litigation concerning
patents and proprietary rights can be protracted and expensive. Companies routinely bring litigation against applicants and allege
patent infringement or other violations of intellectual property rights as the basis for filing suit against an applicant. Elite
develops, owns, and/or manufactures generic and branded pharmaceutical products and such drug products may be subject to such
litigation. Litigation often involves significant expense and can delay or prevent introduction or sale of our products.
There may also be
situations where we use our business judgment and decide to market and sell products, notwithstanding the fact that allegations
of patent infringement(s) have not been finally resolved by the courts. The risk involved in doing so can be substantial because
the remedies available to the owner of a patent for infringement include, among other things, damages measured by the profits
lost by the patent owner and not by the profits earned by the infringer. In the case of a willful infringement, the definition
of which is subjective, such damages may be trebled. Moreover, because of the discount pricing typically involved with bioequivalent
products, patented brand products generally realize a substantially higher profit margin than bioequivalent products. An adverse
decision in a case such as this or in other similar litigation could have a material adverse effect on our business, financial
position and results of operations and could cause the market value of our Common Stock to decline.
Please also see “Item
3. Legal Proceedings” below for further details.
The pharmaceutical industry is highly
competitive and subject to rapid and significant technological change, which could impair our ability to implement our business
model.
The pharmaceutical
industry is highly competitive, and we may be unable to compete effectively. In addition, the pharmaceutical industry is undergoing
rapid and significant technological change, and we expect competition to intensify as technical advances in each field are made
and become more widely known. An increasing number of pharmaceutical companies have been or are becoming interested in the development
and commercialization of products incorporating advanced or novel drug delivery systems. We expect that competition in the field
of drug delivery will increase in the future as other specialized research and development companies begin to concentrate on this
aspect of the business. Some of the major pharmaceutical companies have invested and are continuing to invest significant resources
in the development of their own drug delivery systems and technologies and some have invested funds in specialized drug delivery
companies. Many of our competitors have longer operating histories and greater financial, research and development, marketing,
and other resources than we do. Such companies may develop new formulations and products, or may improve existing ones, more efficiently
than we can. Our success, if any, will depend in part on our ability to keep pace with the changing technology in the fields in
which we operate.
As we expand our presence
in the generic pharmaceuticals market our product candidates may face intense competition from brand-name companies that have
taken aggressive steps to thwart competition from generic companies. In particular, brand-name companies continue to sell or license
their products directly or through licensing arrangements or strategic alliances with generic pharmaceutical companies (so-called
“authorized generics”). No significant regulatory approvals are required for a brand-name company to sell directly
or through a third party to the generic market, and brand-name companies do not face any other significant barriers to entry into
such market. In addition, such companies continually seek to delay generic introductions and to decrease the impact of generic
competition, using tactics which include, without limitation:
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obtaining
new patents on drugs whose original patent protection is about to expire;
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filing
patent applications that are more complex and costly to challenge;
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filing
suits for patent infringement that automatically delay approval from the FDA;
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filing
citizens’ petitions with the FDA contesting approval of the generic versions of
products due to alleged health and safety issues;
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developing
controlled-release or other “next-generation” products, which often reduce
demand for the generic version of the existing product for which we may be seeking approval;
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changing
product claims and product labeling;
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developing
and marketing as over-the-counter products those branded products which are about to
face generic competition; and
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making
arrangements with managed care companies and insurers to reduce the economic incentives
to purchase generic pharmaceuticals.
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These strategies may
increase the costs and risks associated with our efforts to introduce our generic products under development and may delay or
prevent such introduction altogether.
If our product candidates do not achieve
market acceptance among physicians, patients, health care payors and the medical community, they will not be commercially successful
and our business will be adversely affected.
The degree of market
acceptance of any of our approved product candidates among physicians, patients, health care payors and the medical community
will depend on a number of factors, including, without limitation:
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acceptable
evidence of safety and efficacy;
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relative
convenience and ease of administration;
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the
prevalence and severity of any adverse side effects;
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availability
of alternative treatments;
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pricing
and cost effectiveness;
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effectiveness
of sales and marketing strategies; and
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ability
to obtain sufficient third-party coverage or reimbursement.
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If we are unable to
achieve market acceptance for our product candidates, then such product candidates will not be commercially successful and our
business will be adversely affected.
In addition, even
if we are able to obtain regulatory approvals for our new products, the success of those products as well as the success of our
previously approved products, is dependent upon market acceptance. Levels of market acceptance for our new products could be affected
by several factors, including, without limitation:
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the
availability of alternative products from our competitors;
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the
prices of our products relative to those of our competitors;
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the
timing of our market entry;
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the
ability to market our products effectively at the retail level;
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the
perception of patients and the healthcare community, including third-party payers, regarding
the safety, efficacy and benefits of our drug products compared to those of competing
products; and
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the
acceptance of our products by government and private formularies.
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Some of these factors
are not within our control, and our products may not achieve expected levels of market acceptance. Additionally, continuing and
increasingly sophisticated studies of the proper utilization, safety and efficacy of pharmaceutical products are being conducted
by the industry, government agencies and others which can call into question the utilization, safety, and efficacy of previously
marketed products. In some cases, studies have resulted, and may in the future result, in the discontinuance of product marketing
or other risk management programs such as the need for a patient registry.
Legislative or regulatory programs
that may influence prices of prescription drugs could have a material adverse effect on our business.
Current or future
federal or state laws and regulations may influence the prices of drugs and, therefore, could adversely affect the prices that
we receive for our products. Programs in existence in certain states seek to set prices of all drugs sold within those states
through the regulation and administration of the sale of prescription drugs. Expansion of these programs, in particular, state
Medicaid programs, or changes required in the way in which Medicaid rebates are calculated under such programs, could adversely
affect the price we receive for our products and could have a material adverse effect on our business, results of operations and
financial condition. Further, prescription drug prices have been the focus of increased scrutiny by the government, including
certain state attorneys general, members of congress and the U.S. Department of Justice. Decreases in health care reimbursements
or prices of our prescription drugs could limit our ability to sell our products or decrease our revenues, which could have a
material adverse effect on our business, results of operations and financial condition.
We may experience pricing pressure
on the price of our products due to social or political pressure to lower the cost of drugs, which would reduce our revenue and
future profitability.
We may experience
downward pricing pressure on the price of our products due to social or political pressure to lower the cost of drugs, which would
reduce our revenue and future profitability. Recent events have resulted in increased public and governmental scrutiny of the
cost of drugs, especially in connection with price increases following companies’ acquisition of the rights to certain drug
products. In particular, U.S. federal prosecutors have issued subpoenas to pharmaceutical companies seeking information about
drug pricing practices. In addition, the U.S. Senate is publicly investigating a number of pharmaceutical companies relating to
drug-price increases and pricing practices. Our revenue and future profitability could be negatively affected if these inquiries
were to result in legislative or regulatory proposals that limit our ability to increase the prices of our products.
In addition, in September
2016, a group of U.S. Senators introduced legislation that would require pharmaceutical manufacturers to justify price increases
of more than 10% in a 12-month period, and a large number of individual States have introduced legislation aimed at drug pricing
regulation, transparency or both. Our revenue and future profitability could be negatively affected by the passage of these laws
or similar federal or state legislation. Pressure from social activist groups and future government regulations may also put downward
pressure on the price of drugs, which could result in downward pressure on the prices of our products in the future.
We are dependent on a small number
of suppliers for our raw materials and any delay or unavailability of raw materials can materially adversely affect our ability
to produce products.
The FDA requires identification
of raw material suppliers in applications for approval of drug products. If raw materials were unavailable from a specified supplier,
FDA approval of a new supplier could delay the manufacture of the drug involved.
In addition, some
materials used in our products are currently available from only one supplier or a limited number of suppliers and there is a
risk of a sole approved supplier significantly raising prices. Please note that such an occurrence has taken place recently, wherein
significant price increases from a sole supplier greatly reduced profit margins, sales, and delayed product launches. These occurrences
were ultimately resolved by the successful FDA approval of an alternate supplier, with such approval process being lengthy and
costly.
Further, a significant
portion of our raw materials may be available only from foreign sources. Foreign sources can be subject to the special risks of
doing business abroad, including, without limitation:
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greater
possibility for disruption due to transportation or communication problems;
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the
relative instability of some foreign governments and economies;
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interim
price volatility based on labor unrest, materials or equipment shortages, export duties,
restrictions on the transfer of funds, or fluctuations in currency exchange rates; and
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uncertainty
regarding recourse to a dependable legal system for the enforcement of contracts and
other rights.
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In addition, patent
laws in certain foreign jurisdictions (primarily, but not necessarily, in Europe) may make it increasingly difficult to obtain
raw materials for research and development prior to expiration of applicable United States or foreign patents. Any delay or inability
to obtain raw materials on a timely basis, or any significant price increases that cannot be passed on to customers, can materially
adversely affect our ability to produce products. This can materially adversely affect our business and operations.
Even after regulatory approval, we
will be subject to ongoing significant regulatory obligations and oversight as evidenced by the FDA’s removal from the market
of our Lodrane® extended release product line. In addition, although Lodrane D® is marketed under the Over-the-Counter
Monograph and, accordingly, can be lawfully marketed in the US without prior regulatory approval, the FDA has revised its enforcement
policies during the past few years, significantly limiting the circumstances under which unapproved products may be marketed.
Even if regulatory
approval is obtained for a particular product candidate, the FDA and foreign regulatory authorities may, nevertheless, impose
significant restrictions on the indicated uses or marketing of such products, or impose ongoing requirements for post-approval
studies. Following any regulatory approval of our product candidates, we will be subject to continuing regulatory obligations,
such as safety reporting requirements, and additional post-marketing obligations, including regulatory oversight of the promotion
and marketing of our products. If we become aware of previously unknown problems with any of our product candidates here or overseas
or at our contract manufacturers’ facilities, a regulatory agency may impose restrictions on our products, our contract
manufacturers or on us, including requiring us to reformulate our products, conduct additional clinical trials, make changes in
the labeling of our products, implement changes to or obtain re-approvals of our contract manufacturers’ facilities or withdraw
the product from the market. In addition, we may experience a significant drop in the sales of the affected products, our reputation
in the marketplace may suffer and we may become the target of lawsuits, including class action suits. Moreover, if we fail to
comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals,
product recalls, seizure of products, operating restrictions, and criminal prosecution. Any of these events could harm or prevent
sales of the affected products or could substantially increase the costs and expenses of commercializing and marketing these products.
On March 4, 2011,
the FDA issued a directive removing from the market approximately 500 cough/cold and allergy products, including our Lodrane®
extended release product line. The Lodrane® extended release products constituted approximately 97% of our revenues at the
time of FDA’s directive.
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.
We depend on qualified scientific and
technical employees and are increasingly dependent on our direct sales force, if key personnel were to leave us or if we are unsuccessful
in attracting qualified personnel, our ability to develop products and grow our business could be materially harmed.
Because of the specialized
scientific nature of our business, we are highly dependent upon our ability to continue to attract and retain qualified scientific
and technical personnel. We are not aware of any pending, significant losses of scientific or technical personnel. Loss of the
services of, or failure to recruit, key scientific and technical personnel, however, would be significantly detrimental to our
product-development programs. As a result of our small size and limited financial and other resources, it may be difficult for
us to attract and retain qualified officers and qualified scientific and technical personnel.
In addition, marketing
of our branded product, SequestOx™ requires much greater use of a direct sales force compared to marketing of our generic
products. Our ability to realize significant revenues from marketing and sales activities depends on our ability or the ability
of our partners to attract and retain qualified sales personnel. Competition for qualified sales personnel is intense. Any failure
to attract or retain qualified sales personnel could negatively impact our sales revenue and have a material adverse effect on
our business, results of operations and financial condition.
We have entered into
employment agreements with our executive officers and certain other key employees. We do not maintain “Key Man” life
insurance on any executives.
If we were sued on a product liability
claim, an award could exceed our insurance coverage and cost us significantly.
The design, development
and manufacture of our products involve an inherent risk of product liability claims. We have procured product liability insurance;
however, a successful claim against us in excess of the policy limits could be very expensive to us, damaging our financial position.
The amount of our insurance coverage, which has been limited due to our limited financial resources, may be materially below the
coverage maintained by many of the other companies engaged in similar activities. To the best of our knowledge, no product liability
claim has been made against us as of the date hereof.
Our pipeline of products under development
include products that would be filed as branded pharmaceuticals and if generic manufacturers use litigation and regulatory means
to obtain approval for generic versions of one or more of such branded drugs, our sales may be adversely affected.
Under the Hatch-Waxman
Act, the FDA can approve an ANDA for a generic bioequivalent version of a previously approved drug, without undertaking the full
clinical testing necessary to obtain approval to market a new drug. In place of such clinical studies, an ANDA applicant usually
needs only to submit data demonstrating that its generic product is bioequivalent to the branded product.
Our product development
pipeline includes a range of abuse resistant opioid products, with full clinical testing activity being currently planned, in
progress or successfully completed. In recent years, various generic manufacturers have filed ANDAs seeking FDA approval for generic
versions of opioids and opioids with abuse resistant characteristics. In connection with our filings, these manufacturers may
challenge the validity and/or enforceability of one or more of the underlying patents protecting our products. While it is the
Company’s intention to vigorously defend, and pursue all available legal and regulatory avenues in defense of the intellectual
property rights protecting our products, it must also be stressed that litigation is inherently uncertain and we cannot predict
the timing or outcome of our efforts. There can also be no assurance that our efforts in defense of the intellectual property
rights protecting our products will be successful.
If we are not successful
in defending our intellectual property rights, or opt to settle, or if a product’s marketing exclusivity rights expire or
become otherwise unenforceable, our competitors could ultimately launch generic versions of one or more of our branded products,
after such products have been approved by the FDA, which could significantly decrease our revenues and could have a material adverse
effect on our business, financial conditions, results of operations and cash flow. Furthermore, such a material adverse effect
may result in a material adverse effect on our share price.
Agreements between branded pharmaceutical
companies and generic pharmaceutical companies are facing increased government scrutiny in the United States and Internationally.
There are numerous
and continuing litigation in which generic companies challenge the validity or enforceability of an innovator products patents
and/or the applicability of such patents to a generic applicant’s products. Settlement of such litigation is a common outcome,
with review of such agreements by the U.S. Federal Trade Commission (the “FTC”) and the Antitrust Division of the
Department of Justice (the “DOJ”) being required by law. The FTC has stated publicly its view that some of these settlement
agreements violate antitrust laws and has commenced actions against the branded and generic companies that are parties to these
agreements. Accordingly, in the event of the Company being party to a settlement agreement, either as the branded, innovator product
owner, or as the generic applicant, we may receive formal or informal requests from the FTC for information about a settlement
agreement and there is a risk of the FTC alleging a violation of antitrust laws and commencing an action against us.
In addition, the United
States Congress has proposed legislation that would limit the types of settlement agreements generic manufacturers can enter into
with brand companies. In 2013, the Supreme Court, in
FTC v. Actavis
, determined that reverse payment patent settlements
between generic and brand companies should be evaluated under the rule of reason, and provided limited guidance beyond the selection
of this standard. Due to the court’s non-articulation of a precise rule of lawfulness for such settlements, there may be
extensive litigation over what constitutes a reasonable and lawful patent settlement between and brand and generic company.
The impact of such
future litigation, if any, legislative proposals, and potential future court decisions is uncertain, and there can be no assurances
that such impact will not have an adverse effect on the Company’s business, its financial condition, results of operations,
cash flows and its stock price.
We may incur significant liability
if it is determined that we are promoting or have in the past promoted the “off-label” use of drugs.
In jurisdictions including,
without limitation, the United States, a company is not permitted to promote drugs for uses that are not described in the product’s
labeling and that differ from those that were approved or cleared by the FDA. Such users are commonly referred to as “off-label
uses”. Under what is known as the “practice of medicine”, physicians and other healthcare practitioners may
prescribe drug products for off-label or unapproved uses. While the FDA does not regulate a physician’s choice of medications,
treatments, or product uses, the Federal Food Drug and Cosmetic Act (“FFDC”) and FDA regulations significantly restrict
permissible communications on the subject of off-label uses of drug products by pharmaceutical companies. The FDA, FTC, the Office
of the Inspector General of the Department of Health and Human Services (“HHS”), the DOJ and various state Attorneys
General actively enforce laws and regulations that prohibit the promotion of off-label uses. A company that is found to have improperly
promoted off-label uses may be subject to significant liability, including civil fines, criminal fines and penalties, civil damages,
exclusion from federal funded healthcare programs and potential liability under the federal False Claims Act and any applicable
state false claims act. Conduct giving rise to such liability could also form the basis for private civil litigation by third-party
payers or other persons claiming to be harmed by such conduct.
Notwithstanding the
regulatory restrictions on off-label promotion, the FDA’s regulations and judicial case law allows companies to engage in
some forms of truthful, non-misleading and non-promotional speech concerning the off-label use of products. Elite believes it
and its marketing partners comply with these restrictions.
Nonetheless, the FDA,
HHS, DOJ, and/or state Attorneys General, and
qui tam
relators may take the position that the Company is not in compliance
with such requirements, and if such non-compliance is proven, the consequences of such may have an adverse material effect on
our business, financial condition, results of operations, cash flows and stock price.
We have significant intangible assets
on our balance sheet. Consequently, potential impairment of intangible assets may have an adverse material effect on our profitability.
Intangible assets
represent a significant portion of our assets. As of March 31, 2017, intangible assets were approximately $6.4 million, or approximately
19% of our assets.
Generally accepted
accounting principles in the United States (“GAAP”) requires that intangible assets be subject to regular impairment
analysis to determine if changes in circumstances indicate that the value of the asset as recorded may not be recoverable. Such
events or changes in circumstances are an inherent risk in the pharmaceutical industry and often cannot be predicted. However,
should a change in circumstance occur, requiring the impairment of an intangible asset, the result of such an impairment may have
an adverse material effect on our business, financial condition, results of operations, cash flows and stock price.
Our products contain narcotic ingredients.
As a result of reports of misuse or abuse of prescription narcotics, the sale of such drugs may be subject to increased litigation
risk and new regulation, including the development of Risk Evaluation and Mitigation Strategy (“REMS”), which may
prove difficult or expensive to comply with.
Many of our current products
and products under development contain narcotics. Misuse or abuse of such drugs can lead to physical or other hard. The FDA and/or
the DEA may impose new regulations concerning the manufacture, storage, transportation, distribution, and sale of prescription
narcotics. Such regulations may include new labeling requirements, the development and implementation of a formal REMS, restrictions
on prescription and sale of such products and mandatory reformulation in order to make abuse of such products more difficult. In
2007, Congress passed legislation authorizing the FDA to require companies to undertake post-approval studies in order to assess
known or signaled potential serious safety risks and to make any labeling changes necessary to address safety risks. Congress also
empowered the FDA to require companies to formulate REMS to confirm a drug’s benefits exceed its risks. In 2011, the FDA
issued letters to manufacturers of long-acting and extended-release opioids requiring them to develop and submit to the FDA a post-market
REMS plan to require that training is provided to prescribers of these products and that information is provided to prescribers
that they can use in counseling patients on the risks and benefits of opioid drug use. Elite does not currently own a product that
requires a REMS plan, but some of the products in our pipeline may require a REMS plan. The Obama administration has also released
a comprehensive action plan to reduce prescription drug abuse, which may include proposed legislation to amended existing controlled
substances laws to require healthcare practitioners who request DEA registration to prescribe controlled substances to receive
training on opioid prescribing practices as a condition of registration. In addition, state health departments and boards of pharmacy
have authority to regulate distribution and may modify their regulations with respect to prescription narcotics in an attempt to
curb abuse.
Such new regulations
or requirements may be difficult or cost prohibitive for us to comply with, resulting in delays in the commercialization of new
products, and decreased profitability of existing and new products. Such occurrences may have material adverse effects on our
business, financial condition, results of operations, cash flows and stock price.
The growth of Elite will depend on
developing, commercializing and marketing new products.
Our future revenues
and profitability is significantly dependent on our ability to successfully commercialize new branded and generic pharmaceutical
products in a timely manner. Accordingly, we must continually develop, test, file, receive marketing authorization and manufacture
new products. While we are currently developing products, and have plans in place for future products beyond those currently in
development, there can be no assurances that any of these products will receive marketing authorization and achieve commercialization.
In addition, even if a product receives marketing authorization, there can be no assurances that there will be future revenues
or profits, or that any such future revenues or profits would be in amounts that provide adequate return on the significant investments
made to secure the marketing authorization and create/support the infrastructure required for the commercial manufacture of such
product.
We are engaged in
the research and development of pharmaceutical products with the objective of achieving marketing authorizations that enable us
to manufacture and sell pharmaceuticals in accordance with specific government regulations. Due to the inherent risk associated
with pharmaceutical product research and development, particularly with respect to new/innovative drugs, our research and development
expenditures and efforts may not result in a successful regulatory approval and commercialization of new products. Furthermore,
after we submit a regulatory application, the relevant government authority may require that we conduct additional studies, resulting
in an inability for us to reasonably predict the total research and development costs for a new product.
Circumstances in which
the Company is unable to successfully commercialize new products in a timely manner, or circumstances in which the profitability
of a new product is not sufficient with respect to the costs and investments required to develop such product may have a material
adverse effect on our business, financial condition, results of operations, cash flows and stock price.
If our manufacturing facilities are
unable to manufacture our products or the manufacturing process is interrupted due to failure to comply with regulations or for
other reasons, it could have a material adverse impact on our business.
If any of our manufacturing
facilities, quality and regulatory operations and other business and commercial functions fail to comply with complex and numerous
regulatory requirements or encounter other manufacturing difficulties, it could adversely affect our ability to supply products.
All facilities and manufacturing processes used for the manufacture of pharmaceutical products must be operated in conformity
with cGMP and, in the case of controlled substances, DEA regulations. Compliance with the FDA’s cGMP and DEA requirements
applies to both drug products seeking regulatory approval and to approved drug products. In complying with cGMP requirements,
pharmaceutical manufacturing facilities must continually expend significant time, money and effort in production, record-keeping
and quality assurance and control so that their products meet applicable specifications and other requirements product safety,
efficacy, and quality. Failure to comply with applicable legal requirements subjects our manufacturing facilities to possible
legal or regulatory action, including, without limitation, shutdown, which may adversely affect our ability to manufacture product.
Were we not able to manufacture products at our manufacturing facilities because of regulatory, business or any other reason,
the manufacture and marketing of these products would be interrupted. This could have a material adverse impact on our business,
results of operations, financial condition, cash flows, competitive position, and stock price.
The DEA limits the availability of
the active ingredients used in many of our current products and products in development, as well as the production and distribution
of these products, and, as a result, our procurement, production, and distribution quotas may not be sufficient to meet commercial
demand or complete clinical trials.
The DEA regulates
chemical compounds as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk
of substance abuse and Schedule V substances the lowest risk. The active ingredients in some of our current products and products
in development, including, without limitation, hydromorphone, methadone, phentermine, phendimetrazine and oxycodone, are listed
by the DEA as Scheduled substances under the Controlled Substances Act of 1970. Consequently, their manufacture, shipment, storage,
sale, and use are subject to a high degree of regulation. Furthermore, the DEA limits the availability of the active ingredients
used in many of our current products and products in development and we and/or our contract customers and suppliers, must annually
apply to the DEA for procurement quotas in order to obtain and distribute these substances. As a result, our procurement and production
quotas may not be sufficient to meet commercial demand or to complete clinical trials. Moreover, the DEA may adjust these quotas
from time to time during the year, although the DEA has substantial discretion in whether or not to make such adjustments. Any
delay or refusal by the DEA in establishing our quotas, or modification of our quotas, for controlled substances could delay or
result in the stoppage of our clinical trials or product launches, or could cause trade inventory disruptions for those products
that already been launched, which could have a material adverse effect on our business, financial position, cash flows and stock
price.
Sales of our products may be adversely
affected by the continuing consolidation within the retail and wholesale pharmaceutical markets.
Our products, whether
sold directly by the Company or through third parties that are licensed to market and distribute our products are sold in large
part to a market that is comprised of a relatively few retail drug chains, wholesalers, and managed care organizations, with such
entities continuing to undergo consolidation. Such consolidation may provide these customers or our products with additional purchasing
leverage, and consequently, may increase the pricing pressures faced by us. Additionally, the emergence of large buying groups
representing independent retail pharmacies, and the prevalence and influence of managed care organizations and similar institutions,
enable those groups to extract price discounts on our products.
In addition, our revenues
and quarterly results comparisons may also be affected by fluctuations in the buying patterns of retail chains, major distributors,
and other trade buyers.
Any delays or unanticipated expenses
in connection with the operation of our limited number of facilities could have a material adverse effect on our business.
All of our manufacturing
operations are conducted at the Northvale Facility. A significant disruption at this facility, even on a short-term basis, whether
due to, without limitation, an adverse quality or compliance observation, including a total or partial suspension of production
and/or distribution by regulatory authorities, an act of God, civil or political unrest, force majeure situation or other events
could impair our ability to produce and ship products on a timely basis, and could, among other consequences, subject us to exposure
to claims from customers. Any of these events could have a material adverse effect on our business, results of operations, financial
condition, and cash flows.
Our business is dependent on market
perceptions of us and the safety and efficacy or our products. Negative publicity relating to us or our products could have a
material adverse effect on our business, results of operations, financial condition, and cash flows.
Market perceptions
or our business are important to us, especially market perceptions of the safety and quality of our products. If any of our products
or similar products that other companies distribute are subject to market withdrawal, recall, or are proven to be, or are claimed
to be, harmful to consumers, then this could have a material adverse effect on our business, results of operations, financial
condition, and cash flows. Furthermore, due to the importance of market perceptions, negative publicity associated with product
quality, illness or other adverse effects resulting from, or perceived to be resulting from, our products, or similar products
made by other companies, could have a material adverse effect on our business, results of operations, financial condition, and
cash flows.
We may discontinue the manufacture
and distribution of certain existing products, which may adversely affect our business, results of operations, financial condition,
and cash flows.
As part of regular
evaluations of product performance, we may determine that it is in our best interest to discontinue the manufacture and distribution
of certain of our products. We cannot guarantee that we have correctly forecasted, or will correctly forecast in the future, the
appropriate products to discontinue or that a decision to discontinue various products is prudent if market conditions change.
In addition, there can be no assurances that the discontinuance of products will reduce operating expense or no cause the incurrence
of material charges associated with such a decision. Furthermore, the discontinuance of existing products, entails various risks,
including, without limitation, the ability to find a purchaser for such products, if there is a decision to sell the product,
as well as the risk that the purchase price obtained will not be equal to at least the book value of the net assets relating to
such products. Other risks associated with a product discontinuance, include, without limitation, managing the expectations of
and maintaining good relations with our customers who previously purchased a discontinued product from us, and the effects such
would have on future sales to these customers. We may also incur significant liabilities and costs associated with our product
discontinuance. All of the foregoing could have a material adverse effect on our business, results of operations, financial condition,
and cash flows.
The time necessary to develop generic
drugs may adversely affect whether, and the extent to which, we receive a return on our capital.
The development process
for branded and generic products, including, without limitation, drug formulation, testing, and FDA review and approval, often
takes three or more years. This process requires that we expend considerable capital to pursue activities that do not yield an
immediate or near-term return. Also, because of the significant time necessary to develop a product, the actual market for a product
at the time it is available for sale may be significantly less than the originally projected market for the product. If this were
to occur, our potential return on our investment in developing the product, if approved for marketing by the FDA, would be adversely
affected and we may never receive a return on our investment in the product. It is also possible for the manufacturer of the brand-name
product for which we are developing a generic drug to obtain approvals from the FDA to switch the brand-name drug from the prescription
market to the OTC market. If this were to occur, we would be prohibited from marketing our product other than as an OTC drug,
in which case revenues could be substantially less than we anticipated.
Research and development efforts invested
in our branded pharmaceutical products may not achieve expected results.
The development of
branded products requires significant resources from the Company, as well as the potential for resources being acquired through
collaborations, in-licensing, or third party product acquisitions. The development of proprietary branded drugs involves processes
and expertise that is different from that required by the development of generic products, resulting in an increased risk profile
for branded development. For example, the time frame from discovery to commercial launch of a branded product can be more than
10 years, involving multiple stages which may consist of intensive preclinical and clinical testing and a highly complex, lengthy,
and expensive approval process. The longer time frames and increased costs adds increasing risk of achieving product approvals,
and if approved, our ability to recover development costs and generate profits.
During each development
stage, we may encounter obstacles that delay the process or approval and increase expenses, leading to significant risks that
we will not achieve our goals and may be forced to abandon a potential product in which we have invested substantial amounts of
time and money. These obstacles may include: preclinical failures; difficulty enrolling patients in clinical trials; delays in
completing formulation and other work needed to support an application for approval; adverse reactions or other safety concerns
arising during clinical testing; insufficient clinical trial data to support the safety or efficacy of the product candidate;
and failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate or the facilities in
which it is manufactured. As a result of the obstacles noted above, our investment in research and development of branded products
can involve significant costs with no assurances of future revenues or profits.
Approvals for our new generic drug
products may be delayed or become more difficult to obtain if the FDA institutes changes to its approval requirements.
The FDA may institute
changes to its ANDA approval requirements, which may make it more difficult or expensive for us to obtain approval for our new
generic products. For instance, in July 2012, the Generic Drug Fee User Amendments of 2012 (“GDUFA”) was enacted into
law. The GDUFA legislation implemented fees for new ANDAs, Drug Master Files, product and establishment fees and a one-time fee
for back-logged ANDAs pending approval as of October 1, 2012. In return, the program is intended to provide faster and more predictable
ANDA reviews by the FDA and increased inspections of drug facilities. Under GDUFA, generic product companies face significant
penalties for failure to pay the new user fees, including rendering an ANDA not “substantially complete” until the
fee is paid. Any failure by us or our suppliers to pay the fees or to comply with the other provisions of GDFUA may impact or
delay our ability to file ANDAs, obtain approvals for new generic products, generate revenues and thus may have a material adverse
effect on our business, results of operations and financial condition.
In addition to the
implementation of new fees and review procedures by the FDA, the FDA may also implement other changes that may directly affect
some of our ANDA filings pending approval from the FDA, such as changes to guidance from the FDA regarding bioequivalency requirements
for particular drugs. Such changes may cause our development of such generic drugs to be significantly more difficult or result
in delays in FDA approval or result in our decision to abandon or terminate certain projects. Any changes in FDA requirements
may make it more difficult for us to file ANDAs or obtain approval of our ANDAs and generate revenues and thus have a material
adverse effect on our business, results of operations and financial condition.
The risks and uncertainties inherent
in conducting clinical trials could delay or prevent the development and commercialization of our own branded products, which
could have a material adverse effect on our business, results of operations and financial condition.
With respect to our
branded products which do not qualify for the FDA’s abbreviated application procedures, we must demonstrate through clinical
trials that these products are safe and effective for use. We have only limited experience in conducting and supervising clinical
trials. The process of completing clinical trials and preparing an NDA may take several years and requires substantial resources.
Our studies and filings may not result in FDA approval to market our new drug products and, if the FDA grants approval, we cannot
predict the timing of any approval. There are substantial filing fees for NDAs, often in excess of $1 million in addition to the
cost of product development and clinical trials, that are not refundable if FDA approval is not obtained.
There are a number
of risks and uncertainties associated with clinical trials. The results of clinical trials may not be indicative of results that
would be obtained from large scale testing. Clinical trials are often conducted with patients having advanced stages of disease
and, as a result, during the course of treatment these patients can die or suffer adverse medical effects for reasons that may
not be related to the pharmaceutical agents being tested, but which nevertheless affect the clinical trial results. In addition,
side effects experienced by the patients may cause delay of approval or limit the profile of an approved product. Moreover, our
clinical trials may not demonstrate sufficient safety and efficacy to obtain approval from the FDA or foreign regulatory authorities.
The FDA or foreign regulatory authorities may not agree with our assessment of the clinical data or they may interpret it differently.
Such regulatory authorities may require additional or expanded clinical trials. Even if the FDA or foreign regulatory authorities
approve certain products developed by us, there is no assurance that such regulatory authorities will not subject marketing of
such products to certain limits on indicated use.
Failure can occur
at any time during the clinical trial process and, in addition, the results from early clinical trials may not be predictive of
results obtained in later and larger clinical trials, and product candidates in later clinical trials may fail to show the desired
safety or efficacy despite having progressed successfully through earlier clinical testing.
Completion of clinical
trials for our product candidates may be delayed or halted for the reasons noted above in addition to many other reasons, including,
without limitation:
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Delays
in patient enrollment, and variability in the number and types of patients available
for clinical trials;
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Regulators
or institutional review boards may not allow us to commence or continue a clinical trial;
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Our
inability, or the inability of our partners, if any, to manufacture or obtain from third
parties those materials required to complete clinical trials;
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Delays
or failure in reaching agreement on acceptable clinical trial contracts or clinical trial
protocols with prospective clinical trial sites;
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Risks
associated with trial design, which may result in a failure of the trial to show statistically
significant results even if the product candidate is effective;
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Difficulty
in maintaining contact with patients after treatment commences, resulting in incomplete
data
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Poor
effectiveness of product candidates during clinical trials;
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Safety
issues, including adverse events associated with product candidates;
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Failure
of patients to complete clinical trials due to adverse side effects, dissatisfaction
with the product candidate, or other reasons;
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Governmental
or regulatory delays or changes in regulatory requirements, policy, and guidelines; and
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Varying
interpretation of data by the FDA or other relevant regulatory authorities.
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In addition, our product
candidates could be subject to competition for clinical study sites and patients from other therapies under development which
may delay the enrollment in or initiation of our clinical trials.
The FDA or other relevant
regulatory authorities may require us to conduct unanticipated additional clinical trials, which could result in additional expense
and delays in bringing our product candidates to market. Any failure or delay in completing clinical trials for our product candidates
would prevent or delay the commercialization of our product candidates. We cannot assure that our expenses related to clinical
trials will lead to the development of brand-name drugs that will generate revenues in the near future. Delays or failure in the
development and commercialization of our own branded products could have a material adverse effect on our business, results of
operations and financial condition.
We rely on third parties to conduct
clinical trials and testing for our product candidates, and if they do not properly and successfully perform their legal and regulatory
obligations, as well as their contractual obligations to us, we may not be able to obtain regulatory approvals for our product
candidates.
We design the clinical
trials for our product candidates, but rely on contract research organizations and other third parties to assist us in managing,
monitoring and otherwise carrying out these trials, including, without limitation, with respect to site selection, contract negotiation,
analytical testing, and data management. We do not control these third parties and, as a result, delays may occur as a result
of the priorities and operations of these third parties differing from those which we may feel would be most optimal to the completion
of such activities in the most efficient manner possible.
Although we rely on
third parties to conduct our clinical trials and related activities, we are responsible for confirming that each of our clinical
trials is conducted in accordance with our general investigational plan and protocol. Moreover, the FDA and other relevant regulatory
agencies require us to comply with regulations and standards, commonly referred to as good clinical practices and good laboratory
practices, for conducting, recording, and reporting the results of clinical trials to ensure that the data and results are credible
and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these
responsibilities and requirements. The FDA enforces good clinical practices and good laboratory practices through periodic inspections
of trial sponsors, principal investigators, and trial sites. If we, our contract research organizations, or our study sites fail
to comply with applicable good clinical practices and good laboratory practices, the clinical data generated in our clinical trials
may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications.
We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with good clinical practices
and good laboratory practices. In addition, our clinical trials must be conducted with product manufactured under the FDA’s
current Good Manufacturing Practices, or cGMP, regulations. Our failure or the failure of our contract manufacturers if any are
involved in the process, to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory
approval process.
If third parties do
not successfully carry out their duties under their agreements with us, if the quality or accuracy of the data they obtain is
compromised due to failure to adhere to our clinical protocols or regulatory requirements, or if they otherwise fail to comply
with clinical trial protocols or meet expected deadlines, our clinical trials may not meet regulatory requirements. If our clinical
trials do not meet regulatory requirements or if these third parties need to be replaced, our clinical trials may be extended,
delayed, suspended, or terminated. If any of these events occur, we may not be able to obtain regulatory approval of our product
candidates, which could have a material adverse effect on our business, results of operations and financial condition.
The illegal distribution and sale by
third parties of counterfeit versions of our products or of stolen products could have a negative impact on our reputation and
a material adverse effect on our business, results of operations and financial condition.
Third parties could
illegally distribute and sell counterfeit versions of our products, which do not meet the rigorous manufacturing and testing standards
that our products undergo. Counterfeit products are frequently unsafe or ineffective, and can be life-threatening. Counterfeit
medicines may contain harmful substances, the wrong dose of the active pharmaceutical ingredient or no active pharmaceutical ingredients
at all. However, to distributors and users, counterfeit products may be visually indistinguishable from the authentic version.
Reports of adverse
reactions to counterfeit drugs or increased levels of counterfeiting could materially affect patient confidence in the authentic
product. It is possible that adverse events caused by unsafe counterfeit products will mistakenly be attributed to the authentic
product. In addition, thefts of inventory at warehouses, plants or while in-transit, which are not properly stored and which are
sold through unauthorized channels could adversely impact patient safety, our reputation, and our business.
Public loss of confidence
in the integrity of pharmaceutical products as a result of counterfeiting or theft could have a material adverse effect on our
business, results of operations and financial condition.
Policies regarding returns, rebates,
allowances and chargebacks, and marketing programs adopted by wholesalers may reduce our revenues in future fiscal periods.
Based on industry
practice, generic drug manufacturers have liberal return policies and have been willing to give customers post-sale inventory
allowances. Such industry practices apply to the current sales of our products by our marketing partners, which in turn effect
profit splits and license fees received, and they will also effect prospective future sales made directly by Company.
Under these arrangements,
from time to time, customers are given credits on our generic products that are held by them in inventory after there is a decrease
in the market prices of the same generic products due to competitive pricing. Therefore, if new competitors enter the marketplace
and significantly lower the prices of any of their competing products, the price of our products would also likely be reduced.
As a result, we, or are marketing partners, would be obligated to provide credits to our customers who are then holding inventories
of such products, which could reduce sales revenue, profit splits, license fees and gross margin for the period the credit is
provided. Like most competitors in this market, our marketing partners, or us in the case of prospective direct sales made by
the Company, also give credits for chargebacks to wholesalers that have contracts with our marketing partners, or us, prospectively,
for their sales to hospitals, group purchasing organizations, pharmacies, or other customers. A chargeback is the difference between
the price the wholesaler pays and the price that the wholesaler’s end-customer pays for a product. Although, our marketing
partners establish, and prospectively we would also establish reserves based on prior experience and best estimates of the impact
that these policies may have in subsequent periods, we cannot ensure that such reserves established are adequate or that actual
product returns, rebates, allowances, and chargebacks will not exceed estimates.
Unstable economic conditions may adversely
affect our industry, business, results of operations and financial condition.
The global economy
has undergone a period of significant volatility which has led to diminished credit availability, declines in consumer confidence,
and increases in unemployment rates. There remains caution about the stability of the U.S. economy, and we cannot assure that
further deterioration in the financial markets will not occur. These economic conditions have resulted in, and could lead to further,
reduced consumer spending related to healthcare in general and pharmaceutical products in particular.
In addition, we have
exposure to many different industries and counterparties, including our partners under our alliance and collaboration agreements,
suppliers of raw chemical materials, drug wholesalers and other customers that may be affected by an unstable economic environment.
Any economic instability may affect these parties’ ability to fulfill their respective contractual obligations to us, cause
them to limit or place burdensome conditions upon future transactions with us or drive us and our competitors to decrease prices,
each of which could materially and adversely affect our business, results of operations and financial condition.
We received a Complete Response Letter
from the FDA that indicated that our SequestOx™ NDA is not ready for approval in its present form. While we plan on proceeding
with our application for SequestOx™, we cannot assure if or whether our efforts will be successful. If we are unable to
obtain approval for SequestOx™ or if we incur significant costs or delays in obtaining such approval, our ability to commercialize
SequestOx™ may be materially adversely affected.
In July 2016, the
FDA issued a Complete Response Letter, or CRL, regarding the NDA. The CRL stated that the review cycle for the SequestOx NDA is
complete and the application is not ready for approval in its present form. On December 21, 2016, we met with the FDA for an end-of-review
meeting to discuss steps that we could take to obtain approval of SequestOx. Based on the FDA response, we believe there is a
path forward to address the issues cited in the CRL, with such path forward including modification of the SequestOx formulation,
and the successful completion of in vitro and in vivo studies. If we are unable to modify the formulation or if we are unable
to successfully complete the required studies, we will not meet the requirements specified by the FDA for resubmission of the
NDA. Furthermore, there can be no assurances given that the FDA will eventually approve our NDA. If we are unable to obtain approval
for SequestOx, or if we incur significant costs or delays in obtaining such approval, our ability to commercialize SequestOx may
be materially adversely affected. Furthermore, in the event that the Company does receive marketing approval for SequestOx™,
there can be no assurances of the Company realizing future revenues or profits related to this product, or that any such future
revenues and profits would be in amounts that provide adequate return on the significant investments made to secure this marketing
authorization.
We received a Warning Letter from the
U.S. Food and Drug Administration (“FDA”) regarding Postmarketing Adverse Drug Experience reporting. The Warning Letter
does not restrict the production or shipment of any of the Company’s products, or the sale or marketing of the Company’s
products, however, unless and until the Company is able to correct the outstanding issues identified, to the FDA’s satisfaction,
the FDA may withhold approval of pending drug applications or take other actions that would have a material adverse impact on
the Company.
On
August 26, 2016, Elite received a Warning Letter from the FDA regarding Postmarketing Adverse Drug Experience (PADE) reporting.
The Warning Letter relates to certain observations that the FDA believes were inadequately addressed by the Company’s response
to a Form 483 issued by the FDA from a recent inspection at its facility. The Warning Letter cites that Elite’s Standard
Operating Procedures (SOPs) do not adequately address how to monitor and receive adverse drug experiences (ADEs). While Elite
has a contract with an external service provider for follow-up to ADEs, Elite remains responsible for ensuring the ADEs are
appropriately investigated and that follow-up information is submitted in a timely manner to the FDA. The FDA believes that Elite
does not have adequate SOPS for ADEs, and failed to investigate, evaluate, and timely report ADEs.
Elite
takes the matters identified in the Warning Letter seriously and is currently addressing the deficiencies cited in the letter.
The Company has been cooperating with the FDA to resolve any outstanding issues. The Warning Letter does not restrict the production
or shipment of any of the Elite’s products, or the sale or marketing of the Company’s products, however unless and
until the Company is able to correct outstanding issues to the FDA’s satisfaction, the FDA may withhold approval of pending
drug applications or take other actions that would have a material adverse impact on the Company. Please note that there can be
no assurances that the Company will correct outstanding issues to the FDA’s satisfaction, nor can there be any assurances
of the FDA granting approval of pending drug applications in the event of the Company’s successful resolution, to the satisfaction
of the FDA of the issues identified in the Warning Letter.
Our
operations could be disrupted if our information systems fail, if we are unsuccessful in implementing necessary upgrades or if
we are subject to cyber-attacks.
Our business depends
on the efficient and uninterrupted operation of our computer and communications systems and networks, hardware and software systems
and our other information technology. We collect and maintain information, which includes confidential and proprietary information
as well as personal information regarding our customers and employees, in digital form. Data maintained in digital form is subject
to risk of cyber-attacks, which are increasing in frequency and sophistication. Cyber-attacks could include the deployment of
harmful malware, viruses, worms, and other means to affect service reliability and threaten data confidentiality, integrity and
availability. Despite our efforts to monitor and safeguard our systems to prevent data compromise, the possibility of a future
data compromise cannot be eliminated entirely, and risks associated with intrusion, tampering, and theft remain. In addition,
we do not have insurance coverage with respect to system failures or cyber- attacks. A failure of our systems, or an inability
to successfully expand the capacity of these systems, or an inability to successfully integrate new technologies into our existing
systems could have a material adverse effect on our business, results of operations, financial condition, and cash flows.
We
also have outsourced significant elements of our information technology infrastructure to third parties, some of which may be
outside the U.S. Accordingly, significant elements of our information technology infrastructure, require our management of multiple
independent vendor relationships with third parties who may or could have access to our confidential information. The size and
complexity of our information technology systems, and those of our third-party vendors with whom we contract, make such systems
potentially vulnerable to service interruptions. The size and complexity of our and our vendors’ systems and the large amounts
of confidential information that is present on them also makes them potentially vulnerable to security breaches from inadvertent
or intentional actions by our employees, partners, or vendors, or from attacks by malicious third parties.
The
Company and its vendors’ sophisticated information technology operations are spread across multiple, sometimes inconsistent,
platforms, which pose difficulties in maintaining data integrity across systems. The ever-increasing use and evolution of technology,
including cloud-based computing, creates opportunities for the unintentional or improper dissemination or destruction of confidential
information stored in the Company’s systems.
Risk Related to Our Common Stock
Our stock price has been volatile and
may fluctuate in the future.
The market price
for the publicly traded stock of pharmaceutical companies is generally characterized by high volatility. There has been significant
volatility in the market prices for our Common Stock. For the twelve months ended March 31, 2017, the closing sale price on the
OTC Bulletin Board (“OTC-BB”) of our Common Stock fluctuated from a high of $0.38 per share to a low of $0.13 per
share. The price per share of our Common Stock may not exceed or even remain at current levels in the future. The market price
of our Common Stock may be affected by a number of factors, including, without limitation:
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Results
of our clinical trials;
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Approval
or disapproval of our ANDAs or NDAs;
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Announcements
of innovations, new products, or new patents by us or by our competitors;
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Announcements
of other material events;
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Governmental
regulation;
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Patent
or proprietary rights developments;
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Proxy
contests or litigation;
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News
regarding the efficacy of, safety of or demand for drugs or drug technologies;
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Economic
and market conditions, generally and related to the pharmaceutical industry;
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Healthcare
legislation;
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Changes
in third-party reimbursement policies for drugs; and
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Fluctuations
in our operating results.
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The sale or issuance of our common
stock to Lincoln Park or upon conversion of outstanding preferred stock or exercise of outstanding warrants and options may cause
dilution and the sale of the shares of common stock acquired by Lincoln Park or the issuance of shares upon conversion or exercise
of outstanding preferred stock and warrants, or the perception that such sales and issuances may occur, could cause the price
of our common stock to fall.
On May 1, 2017, we
entered into the Purchase Agreement with Lincoln Park, pursuant to which Lincoln Park has committed to purchase up to $40,000,000
of our common stock. Concurrently with the execution of the Purchase Agreement, we issued 5,540,550 shares of our common stock
to Lincoln Park as an initial fee for its commitment to purchase shares of our common stock under the Purchase Agreement. Furthermore,
for each additional purchase by Lincoln Park, additional commitment shares in commensurate amounts up to a total of 5,540,550
shares will be issued based upon the relative proportion of the aggregate amount of $40,000,000 purchased by Lincoln Park. The
purchase shares that may be sold pursuant to the Purchase Agreement may be sold by us to Lincoln Park at our discretion from time
to time over a 36-month period commencing after June 5, 2017. The purchase price for the shares that we may sell to Lincoln Park
under the Purchase Agreement will fluctuate based on the price of our common stock. Depending on market liquidity at the time,
sales of such shares may cause the trading price of our common stock to fall.
We generally have
the right to control the timing and amount of any sales of our shares to Lincoln Park. Additional sales of our common stock, if
any, to Lincoln Park will depend upon market conditions and other factors to be determined by us. Lincoln Park may ultimately
purchase all, some, or none of the shares of our common stock that may be sold pursuant to the Purchase Agreement and, after it
has acquired shares, Lincoln Park may sell all, some or none of those shares.
In addition, as of
June 7, 2017, there were outstanding shares of preferred stock convertible into approximately 158 million shares of Common Stock
and warrants to purchase an aggregate of approximately 88.4 million shares of Common Stock at exercise prices of $0.0625 to $0.1521
per share, vested options to purchase an aggregate of approximately 4.9 million shares at a weighted average exercise price of
$0.19. Additional shares of Common Stock may be issuable as a result of anti-dilution provisions in the outstanding preferred
stock and warrants.
As a result of the
above discussed potential issuance of securities, such issuances by us could result in substantial dilution to the interests of
other holders of our common stock. Additionally, the sale of a substantial number of shares of our common stock to Lincoln Park
or pursuant to the conversion or exercise of outstanding shares of preferred stock and warrants, or the anticipation of such issuances,
could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we
might otherwise wish to effect sales.
The issuance of our common stock to
Directors, Employees, and Consultants in payment of fees and salaries cause dilution and the sale of these shares of common stock
so issued, or the perception that sales of these shares so issued may occur, could cause the price of our common stock to fall.
Pursuant to the Company’s
policies relating to the compensation of Directors, all director fees are paid via the issuance of shares of Common Stock, with
such shares being valued at the simple average of the closing price of the Company’s Common Stock for each day in the period
for which the director fees were incurred. In addition, members of the Company’s management, certain employees and consultants
receive a portion of their salaries or compensation via the issuance of shares Common Stock, with such shares being valued by
the same method as that used for the shares issued in payment of director fees.
The issuance of these
shares is dilutive to holders of our Common Stock, and the subsequent sale of these shares, or the perception that the sale of
these shares may occur, could cause the price of our common stock to fall.
Raising of additional funding through
sales of our securities could cause existing holders of our Common Stock to experience substantial dilution.
Any additional financing
that involves the further sale of our securities could cause existing holders of our Common Stock to experience substantial dilution.
On the other hand, if we incurred debt, we would be subject to risks associated with indebtedness, including the risk that interest
rates might fluctuate and cash flow would be insufficient to pay principal and interest on such indebtedness.
The issuance of additional shares of
our Common Stock or our preferred stock could make a change of control more difficult to achieve.
The issuance of additional
shares of our Common Stock, including those shares issued pursuant to conversion of convertible preferred shares, or the issuance
of shares of an additional series of preferred stock could be used to make a change of control of us more difficult and expensive.
Under certain circumstances, such shares could be used to create impediments to, or frustrate persons seeking to cause, a takeover
or to gain control of us. Such shares could be sold to purchasers who might side with our Board of Directors in opposing a takeover
bid that the Board of Directors determines not to be in the best interests of our shareholders. It might also have the effect
of discouraging an attempt by another person or entity through the acquisition of a substantial number of shares of our Common
Stock to acquire control of us with a view to consummating a merger, sale of all or part of our assets, or a similar transaction,
since the issuance of new shares could be used to dilute the stock ownership of such person or entity.
Provisions of our Articles of Incorporation
and By-Laws could defer a change of our Management which could discourage or delay offers to acquire us.
Provisions of our
Articles of Incorporation and By-Laws law may make it more difficult for someone to acquire control of us or for our shareholders
to remove existing management, and might discourage a third party from offering to acquire us, even if a change in control or
in Management would be beneficial to our shareholders. For example, as discussed above, our Articles of Incorporation allows us
to issue shares of preferred stock without any vote or further action by our shareholders. Our Board of Directors has the authority
to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors also has the authority to
issue preferred stock without further shareholder approval. As a result, our Board of Directors could authorize the issuance of
a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive
dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares,
together with a premium, prior to the redemption of our common stock. In this regard, on November 15, 2013, we entered into a
Shareholder Rights Plan and, under the Rights Plan, our Board of Directors declared a dividend distribution of one Right for each
outstanding share of our common stock and one right for each share of Common Stock into which any of our outstanding Preferred
Stock is convertible, to shareholders of record at the close of business on that date. Each Right entitles the registered holder
to purchase from us one “Unit” consisting of one one-millionth (1/1,000,000) of a share of Series H Junior Participating
preferred stock, at a purchase price of $2.10 per Unit, subject to adjustment, and may be redeemed prior to November 15, 2023,
the expiration date, at $0.000001 per Right, unless earlier redeemed by the Company. The Rights generally are not transferable
apart from the common stock and will not be exercisable unless and until a person or group acquires or commences a tender or exchange
offer to acquire, beneficial ownership of 15% or more of our common stock. However, for Mr. Hakim, our Chief Executive Officer,
the Rights Plan’s the 15% threshold excludes shares beneficially owned by him as of November 15, 2013 and all shares issuable
to him pursuant to his employment agreement and the Mikah Note. Our By-Laws provide for the classification of our Board of Directors
into three classes.
There are inherent uncertainties involved
in estimates, judgments and assumptions used in the preparation of financial statements in accordance with GAAP. Any future changes
in estimates, judgments and assumptions used or necessary revisions to prior estimates, judgments or assumptions could lead to
a restatement of our results.
The consolidated financial
statements included in this Annual Report on Form 10-K are prepared in accordance with GAAP. This involves making estimates, judgments
and assumptions that affect reported amounts of assets (including intangible assets), liabilities, mezzanine equity, stockholders’
equity, operating revenues, costs of sales, operating expenses, other income, and other expenses. Estimates, judgments, and assumptions
are inherently subject to change in the future and any necessary revisions to prior estimates, judgments or assumptions could
lead to a restatement. Any such changes could result in corresponding changes to the amounts of assets (including goodwill and
other intangible assets), liabilities, mezzanine equity, stockholders’ equity, operating revenues, costs of sales, operating
expenses, other income and other expenses.
The restatement of our previously issued
unaudited quarterly financial statements has been time-consuming and expensive and could expose us to additional risks that could
have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the
market value of our common shares to decline.
We have restated our
previously issued unaudited financial statements for the three months ended June 30, 2015 included in the Quarterly Report on
Form 10-Q for the quarter ended June 30, 2015 and the unaudited financial statements for the three and six months ended September
30, 2015 included in the Quarterly Report on Form 10-Q for the quarter ended September 30, 2015. In addition, these restated financial
statements include corrections of errors in accounting that were made in previously issued audited annual and unaudited interim
periods, that we did not consider material pursuant to guidance provided by SEC Staff Accounting Bulletin 99, Materiality (“SAB
99”) and SEC Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements (“SAB 108”), and accordingly reflected on the restated financial statements on
a prospective basis.
This restatement (including
the review of the errors in accounting that made such restatement necessary) has been time consuming and expensive, requiring
the incurrence of substantial and unanticipated expenses and costs, including, without limitation, audit, legal, consulting, research
and other professional fees in connection to the identification and correction of errors in accounting, restatement of previously
issued financial statements and the remediation of material weaknesses in our system of internal controls over financial reporting.
In an event of and to the extent that the actions taken to remediate the weaknesses in our system controls over financial reporting
are not successful, we could be forced to incur additional time and expense. Furthermore, there is generally an increased risk
of shareholder, governmental, or other actions in connection with the restatement of financial statements, with any such proceedings,
regardless of outcome, usually consuming a significant amount of management’s time and attention as well as related legal,
accounting and other costs. In situations of a company not prevailing in any such proceedings, there is the possibility of substantial
damages or settlement costs being required of the company that did not prevail.
We have previously identified material
weaknesses in our internal control over financial reporting which could adversely affect our ability to report our financial condition,
cash flows and results of operations in a timely and accurate manner and/or increase the risk of future misstatements, which could
have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the
market value of our common shares and/or debt securities to decline.
Our management is
responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f)
under the Exchange Act. Based on reviews conducted by management, our Independent Auditors and specific guidance from subject
matter experts engaged by us, we have concluded that material weaknesses in our internal controls over financial reporting existed
that contributed to the errors in accounting that necessitated the restatement of previously issued financial statements. A material
weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting such that there is a
reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected
on a timely basis.
Management determined
that we did not maintain effective internal controls over financial reporting as of the fiscal year ended March 31, 2016 due to
the existence of the following material weaknesses identified by management: We did not maintain adequate segregation of duties
in our accounting and financial reporting process. We have not appropriately restricted access to our accounting applications
to appropriate users and we do not have processes in place that ensure that appropriate segregation of duties is maintained. Certain
personnel have access to financial applications, programs, and data beyond that needed to perform their individual job responsibilities
and without independent monitoring. This allows for the creation, review and processing of certain financial data without independent
review and authorization. There are also certain financial personnel that have incompatible duties, including in the areas of
cash disbursements, payroll, and journal entry reviews. We have not yet completed the process of assigning different people the
responsibilities of authorizing transactions, recording transactions, and maintaining custody of assets to sufficiently reduce
the opportunities to allow any person to be in a position to both perpetrate and conceal errors or fraud in the normal course
of the person’s duties. Particularly in the areas of purchases, cash disbursements, journal entry review and payroll, certain
individuals have incompatible duties that limit our ability to identify and detect errors or fraud that may occur.
We identified and
implemented remediation actions. The Company’s management assessed the effectiveness of the Company’s internal control
over financial reporting as of March 31, 2017, with such assessment being pursuant to the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control-Integrated Framework (2013)
.
Based on our assessment, we determined that, based on those criteria, as of March 31, 2017, the Company’s internal control
over financial reporting is effective.
We regularly review
and evaluate internal controls systems to allow management to report on the effectiveness of our internal controls over financial
reporting, and there can be no assurances of Management’s continued assertion of effective internal controls over financial
reporting. We may discover additional weaknesses in our internal controls over financial reporting or disclosure controls and
procedures, or may determine that existing controls are no longer effective. The next time we evaluate our internal controls over
financial reporting and disclosure controls and procedures, if we identify one or more new material weaknesses or have been unable
to timely remediate our existing material weaknesses, we would be unable to conclude that our internal controls over financial
reporting or disclosure controls and procedures are effective. If we are unable to conclude that our internal controls over financial
reporting or our disclosure controls and procedures are effective, or if our independent registered public accounting firm expresses
an opinion that our internal controls over financial reporting is ineffective, we may not be able to report our financial condition
and results of operations in a timely and accurate manner, which could have a material adverse effect on our business, financial
condition, cash flows and results of operations and could cause the market value of our common shares to decline. In addition,
any potential future restatements could subject us to additional adverse consequences, including sanctions by the SEC, shareholder
litigation and other adverse actions. Moreover, we may be the subject of further negative publicity focusing on such financial
statement adjustments and resulting restatement and negative reactions from our shareholders, creditors, or others with whom we
do business. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition,
cash flows and results of operations and could cause the market value of our common shares to decline.
Our Common Stock is considered a “penny
stock”. The application of the “penny stock” rules to our Common Stock could limit the trading and liquidity
of our Common Stock, adversely affect the market price of our Common Stock, and increase the transaction costs to sell shares
of our Common Stock.
Our common stock is
a “low-priced” security or “penny stock” under rules promulgated under the Securities Exchange Act of
1934, as amended. In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first
deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealer’s duties in
selling the stock, the customer’s rights and remedies and certain market and other information. Furthermore, the broker-dealer
must make a suitability determination approving the customer for low-priced stock transactions based on the customer’s financial
situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer,
obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these
restrictions will likely decrease the willingness of broker-dealers to make a market in our Common Stock, will decrease liquidity
of our Common Stock and will increase transaction costs for sales and purchases of our Common Stock as compared to other securities.
Our Common Stock is quoted on the Over-the-Counter
Bulletin Board. The Over-the-Counter Bulletin Board is a quotation system, not an issuer listing service, market, or exchange,
therefore, buying and selling stock on the Over-the-Counter Bulletin Board is not as efficient as buying and selling stock through
an exchange. As a result, it may be difficult to sell our Common Stock for an optimum trading price or at all.
The Over-the-Counter
Bulletin Board (the “OTCBB”) is a regulated quotation service that displays real-time quotes, last sale prices and
volume limitations in over-the-counter securities. Because trades and quotations on the OTCBB involve a manual process, the market
information for such securities cannot be guaranteed. In addition, quote information, or even firm quotes, may not be available.
The manual execution process may delay order processing and intervening price fluctuations may result in the failure of a limit
order to execute or the execution of a market order at a significantly different price. Execution of trades, execution reporting
and the delivery of legal trade confirmations may be delayed significantly. Consequently, one may not be able to sell shares of
our Common Stock at the optimum trading prices.
When fewer shares
of a security are being traded on the OTCBB, volatility of prices may increase and price movement may outpace the ability to deliver
accurate quote information. Lower trading volumes in a security may result in a lower likelihood of an individual’s orders
being executed, and current prices may differ significantly from the price one was quoted by the OTCBB at the time of the order
entry. Orders for OTCBB securities may be canceled or edited like orders for other securities. All requests to change or cancel
an order must be submitted to, received, and processed by the OTCBB. Due to the manual order processing involved in handling OTCBB
trades, order processing and reporting may be delayed, and an individual may not be able to cancel or edit his order. Consequently,
one may not be able to sell shares of Common Stock at the optimum trading prices.
The dealer’s
spread (the difference between the bid and ask prices) may be large and may result in substantial losses to the seller of securities
on the OTCBB if the Common Stock or other security must be sold immediately. Further, purchasers of securities may incur an immediate
“paper” loss due to the price spread. Moreover, dealers trading on the OTCBB may not have a bid price for securities
bought and sold through the OTCBB. Due to the foregoing, demand for securities that are traded through the OTCBB may be decreased
or eliminated.
The Series J Convertible Preferred
Stock includes a provision for the payment of an annual dividend equal to twenty percent of the stated value of outstanding shares,
beginning four years subsequent to the date of issuance of share of Series J Convertible Preferred if the Company is unable to
obtain shareholder approval of an increase in authorized shares of Common Stock. These dividends may require expenditure of Company
resources in the future, and they may make it difficult to sell our Common Stock for an optimum trading price or at all.
The Company issued
23.0344 shares of Series J Convertible Preferred Stock (“Series J Preferred”) in April 2017, with such shares having
an aggregate stated value of $23.0 million and are convertible, four years subsequent to their date of issue, into 158.0 million
shares of Common Stock. The Company does not have sufficient unissued and unreserved shares in its currently authorized share
capital, and would require shareholder approval to increase the number of authorized shares to an amount that is sufficient to
allow the issuance of Common Stock pursuant to a future conversion of Series J Preferred (the “Shareholder Approval”).
In the event that such an increase in authorized shares is not approved by the shareholders on or before four years of the issuance
of the Series J Preferred shares, holders of Series J Preferred shares are entitled to an annual dividend equal to twenty percent
of the stated value of Series J Preferred shares held, with such dividends accruing from the date that is 4 years subsequent to
the date of issuance of each share of Series J Preferred. This dividend is payable in cash, if such is legally available for the
payment of this dividend, or payable by the issuance of additional shares of Series J Preferred. Accordingly, in the event that
dividends become payable on Series J Preferred because the Company did not timely obtain Shareholder Approval, the Company will
be required to use its cash resources to pay these dividends, if such cash is legally available for the payment of dividends,
or will issue additional shares of Series J Preferred, which are convertible into additional shares of Common Stock, which in
turn would require shareholder approval of a further increase in authorized shares. Both potential scenarios could result in the
expenditure of Company resources, or a difficulty in the ability to sell our Common Stock for an optimum trading price or at all,
or both, in the event that dividends become due and owing on shares of Series J Preferred.