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| ELI > SEC Filings for ELI > Form 10-Q on 17-Feb-2009 | All Recent SEC Filings |
17-Feb-2009
Quarterly Report
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, the related Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2008, as amended (the "Form 10-K") and the accompanying Unaudited Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
The Registrant has included in this Quarterly Report certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the Registrant's business, operations and financial condition. "Forward-looking statements" consist of all non-historical information, and the analysis of historical information, including the references in this Quarterly Report to future revenue growth, future expense growth, future credit exposure, earnings before interest, taxes, depreciation and amortization, future profitability, anticipated cash resources, anticipated capital expenditures, capital requirements, and the Registrant's plans for future periods. In addition, the words "could", "expects", "anticipates", "objective", "plan", "may affect", "may depend", "believes", "estimates", "projects" and similar words and phrases are also intended to identify such forward-looking statements.
Actual results could differ materially from those projected in the Registrant's forward-looking statements due to numerous known and unknown risks and uncertainties, including, among other things, unanticipated technological difficulties, the volatile and competitive environment for drug delivery products, changes in domestic and foreign economic, market and regulatory conditions, the results of development agreements with pharmaceutical companies, the inherent uncertainty of financial estimates and projections, the uncertainties involved in certain legal proceedings, instabilities arising from terrorist actions and responses thereto, and other considerations described as "Risk Factors" in other filings by the Registrant with the SEC including, but not limited to, the Form 10-K. Such factors may also cause substantial volatility in the market price of the Registrant's Common Stock. All such forward-looking statements are current only as of the date on which such statements were made. The Registrant does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.
Overview
The Registrant is a specialty pharmaceutical company principally engaged in the development and manufacture of oral, controlled release products, using proprietary technology. The Registrant's strategy includes improving off-patent drug products for life cycle management and developing generic versions of controlled release drug products with high barriers to entry. The Registrant's technology is applicable to develop delayed, sustained or targeted release pellets, capsules, tablets, granules and powders.
The Registrant has two products, Lodrane 24(R) and Lodrane 24D(R), currently being sold commercially, and a pipeline of five additional drug candidates under active development in the therapeutic areas that include pain management, allergy and infection. Of the products under development, ELI-216, a once-a-day, abuse deterrent oxycodone product, and ELI-154, a once-a-day oxycodone product, are in clinical trials and the Registrant has completed pilot studies on two of the Registrant's other generic product candidates. The Registrant has also submitted an ANDA with the Registrant's co-development partner, The PharmaNetwork, for a pain management generic product. The addressable market for the pipeline of products is approximately $6 billion. The Registrant's facility in Northvale, New Jersey is a Good Manufacturing Practice ("GMP") and DEA registered facility for research, development and manufacturing.
In May 2005, the FDA accepted the Registrant's IND for ELI-216, the Registrant's once-a-day, abuse resistant oxycodone painkiller. After the acceptance of the IND, the Registrant completed two pharmacokinetic studies and a euphoria study in recreational drug users to assess the abuse deterrent properties of ELI-216. The Registrant met with the FDA in October 2006 and received guidance for the ELI-216 development program and in November 2007, the Registrant reached agreement with the FDA on a Special Protocol Assessment for the Phase III protocol for ELI-216. The Registrant is currently scaling up the product and preparing for additional studies including a multi-dose study in opioid dependent patients, a food effect study and the Phase III study for ELI-216, Currently there is no abuse deterrent oxycodone product available commercially. The Registrant estimate that the U.S. market for control release, twice-daily oxycodone was about $2.4 billion in 2007.
At the end of 2006, the Registrant entered into a joint venture with VGS Pharma, LLC ("VGS") and created Novel Laboratories, Inc. ("Novel"), a privately-held company specializing in pharmaceutical research, development, manufacturing, licensing, acquisition and marketing of specialty generic pharmaceuticals. Novel's business strategy is to focus on its core strength in identifying and timely executing niche business opportunities in the generic pharmaceutical area. At the end of 2007, the Registrant elected not to fund the Registrant's remaining contributions to Novel upon the terms set forth in the Alliance Agreement because the Registrant recently reached agreement with the Food and Drug Administration under a Special Protocol Assessment on the Phase III clinical trial of ELI-216, the Registrant's Abuse Deterrent Oxycodone product and determined that the Registrant's funds would be better used to support the clinical trials for ELI-216. The Registrant and VGS negotiated alternative structures that would permit investments by the Registrant at valuations which differed from those set forth in the Alliance Agreement, however VGS and the Registrant were unable to agree upon an alternative acceptable to both parties. Accordingly, upon the Registrant's determination not to fund the Registrant's remaining contributions to Novel at the valuation set forth in the Alliance Agreement, VGS exercised its rights to purchase from the Registrant the Registrant's shares of Class A Voting Common Stock of Novel proportionate to the amount of remaining contributions which were not funded by the Registrant. As a result, the Registrant's remaining ownership interest in Class A Voting Common Stock of Novel is approximately 10% of the outstanding shares of Class A Voting Common Stock of Novel. Until VGS purchased the Registrant's shares of Class A Voting Common Stock of Novel, Novel was consolidated into the Registrant's financial statements as a "variable interest entity" because of the extent of its dependence on the Registrant. Since then, Novel is no longer considered a "variable interest entity" of the Registrant and therefore is not consolidated into the Registrant's financial statements. As of October 1, 2007, the Registrant deconsolidated its financial statements and as a result, for the nine months ended December 31, 2007, the Registrant reported a $3,030,606 loss from discontinued operations. The Registrant's investment in Novel at December 31, 2008 was decreased from $7,009,800 to $3,329,322 to recognize the cumulative losses of $3,672,638 from Novel from inception through September 30, 2007 and the return of 80% of the Registrant's initial investment of $9,800. In preparation of the filing of this Quarterly Report on Form 10-Q, the Registrant has made several requests to Novel for information relative to the Registrant's ability to evaluate the current value to the Registrant of its remaining ownership interest in Class A Voting Common Stock of Novel. As of the date hereof, the Registrant is yet to receive any responses from Novel to such requests.
As a result of the Registrant's continuing efforts to reorganize its workforce and decrease its operating expenses, the Registrant requested that Dr. Stuart Apfel, the Registrant's Chief Scientific Officer and Chief Medical Officer, and Dr. Charan Behl, the Registrant's Head of Technical Affairs, change the status of their respective relationships with the Registrant from employees to consultants.
As previously disclosed on the Form 8-K filed by the Registrant with the with the United States Securities and Exchange Commission (the "SEC") on October 21, 2008, Dr. Apfel agreed to such change in status and will continue to provide his services as the Registrant's Chief Scientific Officer and Chief Medical Officer on an hourly basis, thereby reducing the Registrant's expenses as they relate to Dr. Apfel. As previously disclosed on the Form 8-K filed by the Registrant with the with the SEC on November 3, 2008, Dr. Behl agreed to such change in status and will continue to provide his services as a consultant to the Registrant on an hourly basis, thereby reducing the Registrant's expenses as they relate Dr. Behl.
The Registrant is focusing its efforts on the following areas: (i) development of the Registrant's pain management products, (ii) manufacturing of Lodrane 24(R) and Lodrane 24D(R) products; (ii) the development of the other products in the Registrant's pipeline; and (iii) commercial exploitation of the Registrant's products either by license and the collection of royalties, or through the manufacture of the Registrant's formulations, and (iv) development of new products and the expansion of the Registrant's licensing agreements with other pharmaceutical companies, including co-development projects, joint ventures and other collaborations.
The Registrant is focusing on the development of various types of drug products, including branded drug products (which require new drug applications ("NDA") under Section 505(b)(1) or 505(b)(2) of the Drug Price Competition and Patent Term Restoration Act of 1984 as well as generic drug products (which require abbreviated new drug applications ("ANDA")).
The Registrant believes that its business strategy enables the Registrant to reduce the Registrant's risk by having a diverse product portfolio that includes both branded and generic products in various therapeutic categories and build collaborations and establish licensing agreements with companies with greater resources thereby allowing the Registrant to share costs of development and to improve cash-flow.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion addresses the Registrant's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgment, including those related to bad debts, intangible assets, income taxes, workers compensation, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its condensed consolidated financial statements. The Registrant's most critical accounting policies include the recognition of revenue upon completion of certain phases of projects under research and development contracts. The Registrant also assesses a need for an allowance to reduce the Registrant's deferred tax assets to the amount that the Registrant believes are more likely than not to be realized. The Registrant assesses the recoverability of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Registrant assesses its exposure to current commitments and contingencies. It should be noted that actual results might differ from these estimates under different assumptions or conditions.
Results of Consolidated Operations
Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007
The Registrant's revenues for the three months ended December 31, 2008 were $236,780, an increase of $60,609 or approximately 34% over revenues for the comparable period of the prior year, and consisted of $162,558 in manufacturing fees and $74,222 in royalty fees. Revenues for the three months ended December 31, 2007, consisted of $116,366 in manufacturing fees and $59,805 in royalty fees. Manufacturing fees increased by approximately 40% due to fluctuations in the number of batches shipped each quarter because of seasonality of sales and inventory adjustments and due to growth of product sales. Royalties increased by approximately 24% due to growth of product sales.
Research and development costs for the three months ended December 31, 2008, were $600,680, a decrease of $959,573 or approximately 62% from $1,560,253 of such costs for the comparable period of the prior year. Decreases were attributed to decreases in salaries and wages, consulting fees associated with the development of products and lower active pharmaceutical ingredient ("API") costs for product development. To conserve cash, the Registrant has reduced its number of employees from 43 employees in December 2007, to 16 employees in December 2008. The reduction in
General and administrative expenses for the three months ended December 31, 2008, were $467,487 and decrease of $164,646, or approximately 26% from $632,133 of general and administrative expenses for the comparable period of the prior year. The decrease was primarily attributable to decreases in salaries and fringe benefits offset by increases in legal and accounting fees.
Depreciation and amortization decreased by $40,009, or approximately 31%, from $170,266 for the comparable period of the prior year to $130,257. The decrease was due to the cessation of acquisition of new machinery in the current period.
Other expenses for the three months ended December 31, 2008 were $299,813, a decrease of $230,872 or approximately 44% from $530,685 for the comparable period of the prior year due to a decrease of $302,275 in charges related to the issuances of stock options and warrants and a decrease in interest expense due to lower outstanding balances. These decreases were somewhat offset by decreases in interest income due to lower compensating balances as a result of the use of cash to sustain the Registrant's operating activities.
As a result of the foregoing, the Registrant's net loss for the three months ended December 31, 2008 was $1,421,108 compared to $2,858,103 for the three months ended December 31, 2007.
Nine Months Ended December 31, 2008 Compared to Nine Months Ended December 31, 2007
The Registrant's revenues for the nine months ended December 31, 2008 were $1,488,650, an increase of $649,683 or approximately 77% over revenues for the comparable period of the prior year, and consisted of $1,255,850 in manufacturing fees and $232,800 in royalty fees. Revenues for the nine months ended December 31, 2007, consisted of $671,239 in manufacturing fees and $167,728 in royalty fees. Manufacturing fees increased by approximately 87% and royalties increased by approximately 39% due to growth of product sales.
Research and development costs for the nine months ended December 31, 2008, were $3,144,370, a decrease of $2,249,673 or approximately 42% from $5,394,043 of such costs for the comparable period of the prior year. Decreases were attributed to decreases in salaries and wages, consulting fees associated with the development of products and lower active pharmaceutical ingredient ("API") costs for product development. To conserve cash, the Registrant has reduced its number of employees from 43 employees in December 2007, to 16 employees in December 2008. The reduction in force was implemented last quarter with cost savings beginning in this quarter. Research and development costs are expected to increase, however, in future periods, once Phase III and other clinical trials for ELI-216 are initiated.
General and administrative expenses for the nine months ended December 31, 2008, were $1,741,760, a decrease of $73,198, or approximately 4% from $1,814,958 of general and administrative expenses for the comparable period of the prior year. The decrease was primarily attributable to decreases in salaries and fringe benefits offset by increases in legal and accounting fees.
Depreciation and amortization decreased by $68,533, or approximately 15%, from $459,304 for the comparable period of the prior year to $390,771. The decrease was due to the cessation of acquisition of new machinery and equipment in the current period.
Other expenses for the nine months ended December 31, 2008 were $991,139, a decrease of $1,051,363 or approximately 52% from $2,042,502 for the comparable period of the prior year due to a decrease of $1,286,595 in charges related to the issuances of stock options and warrants and decreases in interest expense of $36,216 due to lower outstanding balances. These decreases were somewhat offset by decreases in interest income due to lower compensating balances as a result of the use of cash to sustain the Registrant's operating activities.
The Registrant's prior period comparable financial statements were restated as a result of the Registrant's decision not to continue to fund Novel and therefore not include Novel's expenses as part of the Registrant's operating activities for three and nine months ending December 31, 2008 and 2007. Consequently, losses from discontinued operations of $-0- and $3,030,606, respectively, are reflected in the 2008 and 2007 financial statements.
As a result of the foregoing, the Registrant's net loss for the nine months ended December 31, 2008 was $5,943,657 compared to $12,525,734 for the nine months ended December 31, 2007.
The Registrant's working capital (total current assets less total current liabilities), decreased to $1,191,223 as of December 31, 2008 from $5,029,930 as of March 31, 2008, primarily due to the Registrant's net loss from operations, exclusive of non-cash charges.
The Registrant experienced negative cash flows from operations of $4,389,995 for the nine months ended December 31, 2008, primarily due to the Registrant's net loss from operations of $5,943,657, offset by decreases in prepaid expenses of $126,315, net reductions in inventories of $382,365 and by non-cash charges of $1,229,802, which included $839,031 in connection with the issuance of stock options and warrants and $390,771 in depreciation and amortization expenses.
On November 15, 2004 and on December 18, 2006, the Registrant's partner, ECR, launched Lodrane 24(R) and Lodrane 24D(R), respectively. Under its agreement with ECR, the Registrant is currently manufacturing commercial batches of Lodrane 24(R) and Lodrane 24D(R) in exchange for manufacturing margins and royalties on product revenues. Manufacturing revenues and royalty income earned for the nine months ended December 31, 2008 and December 31, 2007 were $1,488,650 and $838,967, respectively. The Registrant expects future cash flows from manufacturing fees and royalties to provide additional cash to help fund its operations. However, no assurance can be given that the Registrant will generate any material revenues from the manufacturing fees and royalties of the Lodrane products.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2008, the Registrant had approximately two months of cash available based on the Registrant's current operations. As of the date of this Quarterly Report on Form 10-Q, the Registrant is negotiating a strategic transaction with an unaffiliated third party, which such strategic transaction, if consummated in accordance with the current terms under negotiation, should allow the Registrant to maintain its current level of operations. If such strategic transaction is not closed in a timely basis, or if another financing or strategic alternative providing sufficient resources to the Registrant to continue its operations is not consummated in the near future, the Registrant will be required to cease operations and liquidate its assets. No assurance can be given that the Registrant will be able to close such strategic transaction on a timely basis, or consummate such other financing or strategic alternative in the time necessary to avoid the cessation of the Registrant's operations and liquidation of its assets, on favorable terms, if at all. Moreover, even if the Registrant consummates such strategic transaction, or such other financing or strategic alternative, it may be required to seek additional capital in the future and there can be no assurances that the Registrant will be able to obtain such additional capital on favorable terms, if at all.
Based upon the Registrant's current cash position, management has undertaken a review of the Registrant's operations and implemented cost-cutting measures in an effort to eliminate any expenses which are not deemed critical to the Registrant's current strategic objectives. The Registrant will continue this process without impeding its ability to proceed with its critical strategic goals.
For the nine months ended December 31, 2008, the Registrant expended $4,398,995 in operating activities which the Registrant funded through the $20,000,000 in gross proceeds raised through the Registrant's private placement of its Series C Preferred Stock and $1,777,000 in gross proceeds of its Series D Preferred Stock. The Registrant's working capital at December 31, 2008 was approximately $1.2 million compared with working capital of approximately $6.0 million at December 31, 2007. Cash and cash equivalents at December 31, 2008 were approximately $336,000, a decrease of approximately $5.6 million from the $5.9 million at December 31, 2007.
The Registrant spent approximately $48,000 on improvements and machinery and equipment during the nine months ended December 31, 2008.
As of December 31, 2008, the Registrant's principal source of liquidity was approximately $336,000 of cash and cash equivalents. Additionally, the Registrant may have access to funds through the exercise of outstanding stock options and warrants. There can be no assurance that the exercise of outstanding warrants or options will generate or provide sufficient cash.
The Registrant had outstanding, as of December 31, 2008, bonds in the aggregate principal amount of $3,595,000 consisting of $3,280,000 of 6.5% tax exempt Bonds with an outside maturity of September 1, 2030 and $315,000 of 9.0% bonds with an outside maturity of September 1, 2012. The bonds are secured by a first lien on the Registrant's facility in Northvale, New Jersey. Pursuant to the terms of the bonds, several restricted cash accounts have been established for the payment of bond principal and interest. Bond proceeds were utilized for the redemption of previously issued tax exempt bonds issued by the Authority in September 1999 and to refinance equipment financing, as well as provide approximately $1,000,000 of capital for the purchase of additional equipment for the manufacture and development at the Registrant's facility of pharmaceutical products and the maintenance of a $415,500 debt service reserve. All of the restricted cash, other than the debt service was expended within the year ended March 31, 2008. Pursuant to the terms of the related bond indenture agreement, the Registrant is required to observe certain covenants,
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