U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended to
Commission File Number: 333-45241
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ELITE PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3542636
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
165 Ludlow Avenue, Northvale, New Jersey 07647
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(Address of principal executive offices) (Zip Code)
(201) 750-2646
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the common stock, $.01 par value,
as of August 7, 2007: 21,348,373 (exclusive of 100,000 shares held in treasury).
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2007 (unaudited)
and March 31, 2007 (audited) 2 - 3
Consolidated Statements of Operations for the three months
ended June 30, 2007 and June 30, 2006 (unaudited) 4
Consolidated Statement of Changes in Stockholders' Equity
for the three months ended June 30, 2007 (unaudited) 5
Consolidated Statements of Cash Flows for the three months
ended June 30, 2007 and June 30, 2006 (unaudited) 6
Notes to Consolidated Financial Statements 7 - 23
Item 2. Management's Discussion And Analysis of Financial
Condition And Results Of Operations 24 - 29
Item 3. Quantitative And Qualitative Disclosures
About Market Risk 29
Item 4. Controls and Procedures 29
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits 30
SIGNATURES 31
1
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, March 31,
2007 2007
-------- -- -----------
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $14,441,073 $ 2,045,390
Accounts receivable 212,522 215,837
Prepaid expenses and other current assets 1,479,795 1,149,185
----------- -----------
Total current assets 16,133,390 3,410,412
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 5,787,783 5,454,026
----------- -----------
INTANGIBLE ASSETS - net of accumulated amortization 40,919 42,809
----------- -----------
OTHER ASSETS:
Accrued interest receivable 949 949
Deposit on equipment 120,925 32,880
Security deposit 13,488 6,980
Restricted cash - debt service for EDA Bonds 420,050 414,999
EDA Bond offering costs, net of accumulated amortization
of $24,724 and $21,178, respectively 329,728 333,274
----------- -----------
Total other assets 885,140 789,082
----------- -----------
Total assets $22,847,232 $ 9,696,329
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
2
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, March 31,
2007 2007
------------ ----------
(Unaudited) (Audited)
CURRENT LIABILITIES:
Current portion of EDA Bonds $ 185,000 185,000
Loan payable to bank 3,000,000 --
Accounts payable, accrued expenses and other current liabilities 1,729,159 2,205,781
------------ ----------
Total current liabilities 4,914,159 2,390,781
------------ ----------
LONG TERM LIABILITIES:
EDA bonds - net of current portion 3,795,000 3,795,000
------------ ----------
Total long-term liabilities 3,795,000 3,795,000
------------ ----------
Total liabilities 8,709,159 6,185,781
------------ ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock -- $.01 par value;
Authorized 4,483,442 shares (originally 5,000,000 shares of
which 516,558 shares of Series A Convertible Preferred Stock were
retired) and 0 shares outstanding as of June 30, 2007 and
March 31, 2007
Authorized 10,000 Series B Convertible Preferred Stock -
issued and outstanding - 9,550 and 9,695 shares, respectively 95 97
Authorized 20,000 Series C Convertible Preferred Stock
issued and outstanding - 15,000 and 0 shares, respectively 150 --
Common Stock - $.01 par value;
Authorized - 65,000,000 shares
Issued and outstanding - 21,005,300 shares and 20,799,102
shares respectively 210,053 207,991
Subscription receivable (75,000) (75,000)
Additional paid-in capital 82,572,394 66,495,618
Accumulated deficit (68,262,778) (62,811,317)
------------ ----------
14,444,914 3,817,389
Treasury stock, at cost (100,000 shares) (306,841) (306,841)
------------ ----------
Total stockholders' equity 14,138,073 3,510,548
------------ ----------
Total liabilities and stockholders' equity $ 22,847,232 $9,696,329
============ ==========
The accompanying notes are an integral part of the
consolidated financial statements.
3
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
JUNE 30,
------------------
2007 2006
---- ----
(Unaudited) (Unaudited)
REVENUES
Manufacturing Fees $ 336,515 $ 131,900
Royalties 51,760 21,127
------------ ------------
Total Revenues 388,275 153,027
Cost of Revenues 291,206 --
------------ ------------
Gross Profit 97,069 153,027
------------ ------------
OPERATING EXPENSES:
Research and development 2,098,755 1,316,408
General and administrative 889,390 546,913
Depreciation and amortization 208,198 119,535
------------ ------------
3,196,343 1,982,856
------------ ------------
LOSS FROM OPERATIONS (3,099,274) (1,829,829)
------------ ------------
OTHER INCOME (EXPENSES):
Interest income 123,980 100,506
Interest expense (79,539) (70,631)
Non-cash compensation through issuance
of stock options and warrants (924,263) (300,000)
------------ ------------
(879,822) (270,125)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (3,979,096) (2,099,954)
------------ ------------
Provision for Income Taxes 3,120 1,000
------------ ------------
NET LOSS (3,982,216) (2,100,954)
=========== ============
Preferred Stock Dividends (416,455) (200,056)
------------ ------------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS (4,398,671) (2,301,010)
=========== ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.21) $ (.12)
=========== ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 20,908,289 19,239,331
=========== ============
The accompanying notes are an integral part of the
consolidated financial statements.
4
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Series B Series C
-------- --------
Preferred Stock Preferred Stock Common Stock Subscription
--------------- --------------- ------------ ------------
Shares Amount Shares Amount Shares Amount Receivable
------ ------ ------ ------ ------ ------ ----------
BALANCE AT MARCH 31, 2007 (AUDITED) 9,695 97 -- -- 20,799,102 207,991 (75,000)
Proceeds from Preferred Series C Offering -- -- 15,000 150 -- -- --
Conversion of Preferred to Common (145) (2) -- -- 64,490 645 --
Conversion of Warrants to Common -- -- -- -- 15,456 154 --
Exercise of Stock Options -- -- -- -- 41,000 410 --
Non-cash compensation through issuance
of stock options and warrants -- -- -- -- -- -- --
Beneficial Conversion -- -- -- -- -- -- --
Costs associated with Raising Capital -- -- -- -- -- -- --
Net loss for the three months ended
June 30, 2007 -- -- -- -- -- -- --
Dividends
-- -- -- -- 85,252 853 --
----- -- ------ --- ---------- ------- -------
BALANCE AT JUNE 30, 2007 9,550 95 15,000 150 21,005,300 210,053 (75,000)
===== == ====== === ========== ======= =======
Additional
----------
Paid-In Treasury Stock Accumulated Stockholders'
------- -------------- ----------- -------------
Capital Shares Amount Deficit Equity
------- ------ ------ ------- ------
BALANCE AT MARCH 31, 2007 (AUDITED) 66,495,618 (100,000) (306,841) (62,811,317) 3,510,548
Proceeds from Preferred Series C Offering 14,999,850 -- -- -- 15,000,000
Conversion of Preferred to Common (643) -- -- -- --
Conversion of Warrants to Common (154) -- -- -- --
Exercise of Stock Options 61,090 -- -- -- 61,500
Non-cash compensation through issuance
of stock options and warrants 924,263 -- -- -- 924,263
Beneficial Conversion 1,052,790 -- -- (1,052,790) --
Costs associated with Raising Capital (1,152,690) -- -- -- (1,152,690)
Net loss for the three months ended
June 30, 2007 -- -- -- (3,982,216) (3,982,216)
Dividends 192,270 -- -- (416,455) (223,332)
---------- -------- -------- ----------- ----------
BALANCE AT JUNE 30, 2007 82,572,394 (100,000) (306,841) (68,262,778) 14,138,073
========== ======== ======== =========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
5
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
JUNE 30,
--------
2007 2006
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,982,216) $ (2,100,954)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 208,198 122,535
Non-cash compensation satisfied by issuance of common stock, options and warrants 924,263 300,000
Changes in assets and liabilities:
Accounts receivable 3,315 --
Prepaid expenses and other current assets (330,610) (123,985)
Security deposit (6,508) --
Accounts payable, accrued expenses and other current liabilities (476,621) (588,677)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (3,660,179) (2,391,081)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (536,519) (28,811)
Payment of deposit for manufacturing equipment (88,045) --
Deposits to restricted cash (5,051) --
Release of restricted cash -- 234,244
------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (629,615) 205,433
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (223,333) (33,333)
Proceeds - bank loans 3,000,000 --
Proceeds from issuance of Series C 8% Convertible
Stock and warrants 15,000,000 --
Proceeds from exercise stock options 61,500 --
Costs associated with raising capital (1,152,690) --
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 16,685,477 (33,333)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 12,395,683 (2,218,981)
CASH AND CASH EQUIVALENTS - beginning of period 2,045,390 8,919,354
------------ ------------
CASH AND CASH EQUIVALENTS - end of period $ 14,441,073 $ 6,700,373
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 14 $ 18
Cash paid for income taxes 3,120 1,000
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred stock dividends of $193,122 and $200,056 paid by issuance of 85,252 and
91,266 shares of common stock in 2007 and 2006, respectively. $ -- $ --
Beneficial conversion Dividend 1,052,790 --
Conversion of 145 shares of Series B Preferred Stock into 64,490 shares of common stock -- --
Cashless Conversion of 39,630 warrants into 15,456 shares of common stock -- --
Accrued Dividends 102,480 --
The accompanying notes are an integral part of the
consolidated financial statements.
6
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The information in this Form 10-Q Report includes the results of
operations of Elite Pharmaceuticals, Inc. and its consolidated
subsidiaries (collectively the "Company") including its wholly-owned
subsidiaries, Elite Laboratories, Inc. ("Elite Labs") and Elite
Research, Inc. ("ERI") and its variable interest entity, Novel
Laboratories Inc. ("Novel"), for the three months ended June 30, 2007
and June 30, 2006 As of June 30, 2007, the financial statements of all
wholly-owned entities and its variable interest entity are consolidated
and all significant intercompany accounts are eliminated upon
consolidation. The accompanying unaudited consolidated financial
statements have been prepared pursuant to rules and regulations of the
Securities and Exchange Commission in accordance with accounting
principles generally accepted for interim financial statement
presentation. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in
the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the
consolidated financial position, results of operations and cash flows
of the Company for the periods presented have been included.
The financial results for the interim periods are not necessarily
indicative of the results to be expected for the full year or future
interim periods.
The accompanying unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2007. There have been no changes in significant
accounting policies since March 31, 2007.
The Company does not anticipate being profitable for fiscal year 2008;
therefore a current provision for income tax was not established for
the three months ended June 30, 2007. Only the minimum corporation tax
liability required for state purposes is reflected.
NOTE 2 - NJEDA REFINANCING
On August 31, 2005, the Company successfully completed a refinancing
through the issuance of the tax-exempt bonds (the "Bonds") by the New
Jersey Economic Development Authority (the "Authority"). The
refinancing involved the borrowing of $4,155,000 evidenced by a 6.5%
Series A Note in the principal amount of $3,660,000 maturing on
September 1, 2030 and a 9% Series B Note in the principal amount of
$495,000 maturing on September 1, 2012. The net proceeds, after payment
of issuance costs, were or will be used (i) to redeem the outstanding
tax-exempt Bonds originally issued by the Authority on September 2,
1999, (ii) refinance other former equipment financing and (iii) for the
purchase of certain equipment to be used in the manufacture of
pharmaceutical products.
Interest is payable semiannually on March 1 and September 1 of each
year. The Bonds are collateralized by a first lien on the Company's
facility and equipment acquired with the proceeds of the original and
refinanced Bonds. The related Indenture requires the maintenance of a
$415,500 Debt Service Reserve Fund consisting of $366,000 from the
Series A Bonds proceeds and $49,500 from the Series B Note proceeds.
$1,274,311 of the proceeds had been deposited in a short-term
restricted cash account to fund the future purchase of manufacturing
equipment and development of the Company's facility. As of June 30,
2007, all of these funds have been expended to fund the above.
7
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STAT EMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 3 - BANK LOAN PAYABLE
On June 7, 2007, the Company borrowed $3,000,000 at prime minus 1/2%,
from a commercial bank to be used for working capital. Collateral was
an assignment of a cash collateral account, in the amount of
$3,000,000. The loan was prepaid on July 24, 2007. Interest expense was
$28,417.
NOTE 4 - STOCKHOLDERS' EQUITY
SERIES B 8% CONVERTIBLE PREFERRED STOCK
On March 15, 2006, the Company sold in a private placement 10,000
shares of Series B 8% Convertible Preferred Stock (the "Series B
Preferred Stock"), for gross proceeds of $10,000,000. The Series B
Preferred Stock is convertible at $2.25 per share, into 4,444,444
shares of common stock, par value $0.1 per share (the "Common Stock").
In connection with the issuance of the Series B Preferred Stock, the
Company also issued two classes of warrants which are exercisable for a
period of five years and represent the right to purchase an aggregate
of 1,111,111 shares of Common Stock at an exercise price of $2.75 per
share and the second class of warrants are exercisable for a period of
five years and represent the right to purchase an aggregate of
1,111,111 shares of Common Stock at an exercise price of $3.25 per
share. Based on the relative fair values, the Company has attributed
$2,033,029 of the total proceeds to the warrants and has recorded the
warrants as additional paid-in capital. The remaining portion of the
proceeds of $7,966,971 was used to determine the value of the 4,444,444
shares of the Company Common Stock underlying the Series B Preferred
Stock, or $1.7925 per share. Since the value was $0.4774 lower than the
fair market value of the Company's Common Stock on March 15, 2006, the
$2,121,917 intrinsic value of the conversion option resulted in the
recognition of a preferred stock dividend and an increase to additional
paid-in capital.
The Series B Preferred Stock accrues dividends at the rate of 8% per
annum on their purchase price of $1,000 per share (increasing to 15%
per annum after March 15, 2008) payable quarterly on January 1, April
1, July 1 and October 1, payable in cash or shares of Common Stock
(each valued at 95% of the average of the value weighted average price
(VWAP) as defined in the Certificate of Designations, Preferences and
Rights of the Series B Preferred Stock (the "Series B Preferred
Certificate").
Each share of Series B Preferred Stock is entitled to a preference
equal to the per share purchase price ($1,000 subject to adjustment)
plus any accrued but unpaid dividends thereon and any other fees or
liquidated damages owing thereon upon the liquidation, dissolution or
winding-up of the Company, which preference is senior to any other
capital stock ranked junior to the Series B Preferred Stock.
The holders of Series B Preferred Stock do not have any voting rights,
except as specifically provided in the Series B Preferred Certificate
or as required by law. The Company may not without the prior
affirmative vote of holders of at least 70% of the then outstanding
shares of Series B Preferred Stock: (i) alter or change adversely the
powers, preferences or rights given to the Series B Preferred Stock or
alter or amend the Series B Preferred Certificate, (ii) authorize or
create any class of stock ranking as to dividends, redemption or
distribution of assets upon a Liquidation senior to or otherwise pari
passu with the Series B Preferred Stock, (iii) amend its certificate of
incorporation, bylaws or other charter documents in any manner that
adversely affects any rights of the holders of the Series B Preferred
Stock, (iv) increase the authorized number of shares of Series B
Preferred Stock, (v) enter into any agreement with respect to any of
the foregoing, (vi) other than Permitted Indebtedness (as defined in
the Series B Preferred Certificate) until March 15, 2009, incur any
indebtedness for borrowed money of any kind, (vii) other than Permitted
Liens (as defined in the Series B Preferred Certificate) until March
15, 2009, incur any liens of any kind, (viii) repay or repurchase other
than more than a de minimis number of shares of Common Stock or
securities convertible or exchangeable into Common Stock, other than as
permitted by the Series B Preferred Certificate, (ix) pay cash
dividends or distributions on any securities of the Company junior to
the Series B Preferred Stock or (x) enter into any agreement or
understanding to effect the clauses (iii), (vi), (vii), or (viii).
Actions notwithstanding the above, the Company may issue
8
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STAT EMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY
SERIES B 8% CONVERTIBLE PREFERRED STOCK (Continued)
any security issued in connection with a Strategic Transaction (as
defined in the Series B Preferred Certificate) that ranks as to
dividends, redemption or distribution of assets upon a Liquidation pari
passu with or junior to the Series B Preferred Stock without the prior
affirmative vote of holders of at least 70% of the then outstanding
shares of Series B Preferred Stock.
If the Company does not meet its share delivery requirements with
respect to conversion set forth in the Series B Preferred Certificate,
the holders of Preferred Stock are entitled to (i) liquidated damages,
payable in cash, and (ii) cash equal to the amount by which such
holder's total purchase price for the shares of Common Stock exceeds
the product of (1) the aggregate number of shares of Common Stock that
such holder was entitled to receive from the conversion at issue
multiplied by (2) the actual sale price at which the sell order giving
rise to such purchase obligation was executed.
The Company may force conversion of the Series B Preferred Stock in the
event it provides written notice to the holders of the Series B
Preferred Stock that the VWAP for each 20 consecutive trading day
period during a Threshold Period (as defined in the Series B Preferred
Certificate) of Common Stock exceeded $5.38 (subject to adjustment) and
the volume for each trading day during such Threshold Period exceeded
50,000 shares (subject to adjustment for forward and reverse stock
splits, recapitalizations, stock dividends and the like).
Upon the occurrence of certain Triggering Events (as defined in the
Series B Preferred Certificate), the Company is required to redeem each
share of Series B Preferred Stock for cash in an amount equal to 130%
of the stated value, all accrued but unpaid dividends thereon and all
liquidated damages and other costs, expenses or amounts due in respect
of the Series B Preferred Stock (the "Triggering Redemption Amount").
Upon certain Triggering Events, the Company is required to redeem each
share of Series B Preferred Stock for shares of Common Stock equal to
the number of shares of Common Stock equal to the Triggering Redemption
Amount divided by 85% of the average of the VWAP for the 10 consecutive
trading days immediately prior to the date of the redemption.
The Company may redeem all of the Series B Preferred Stock outstanding,
at any time after March 15, 2008 for a redemption price, payable in
cash, for each share of Series B Preferred Stock equal to (i) 150% of
the stated value, (ii) accrued but unpaid dividends thereon and (iii)
all liquidated damages and other amounts due in respect of the Series B
Preferred Stock.
SERIES C 8% CONVERTIBLE PREFERRED STOCK
On April 24, 2007, the Company sold 15,000 shares of its Series C 8%
Convertible Preferred Stock, par value $0.01 (the "Series C Preferred
Stock"), and 1,939,655 warrants for gross proceeds of $15,000,000. The
15,000 shares of Series C Preferred Stock are convertible into
6,465,517 shares of Common Stock. The warrants are exercisable at $3.00
per share and are exercisable through April 27, 2012. The Company paid
$1,050,000 in commissions to the placement agent and others in
connection with the sale of the Series C Preferred Stock. In addition,
the Company granted the placement agent 193,965 warrants exercisable at
$3.00 per share which were valued at $129,627. The gross proceeds of
the private placement were $15,000,000 before payment of $1,050,000 in
commissions to the placement agent and selected dealers. In addition,
the Company agreed to reimburse the placement agent for all documented
out-of-pocket expenses incurred by the placement agent in connection
with the private placement, including reasonable fees and expenses of
its counsel, which the Company and placement agent agreed to be limited
to $25,000. Based on the relative fair values, the Company has
attributed $1,182,101 of the total proceeds to the warrants and has
9
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STAT EMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY
SERIES C 8% CONVERTIBLE PREFERRED STOCK (Continued)
recorded the warrants as additional paid-in capital. The remaining
portion of the proceeds of $13,817,899 was used to determine the value
of the 6,465,517 shares of the Company Common Stock underlying the
Series C Preferred Stock, or $2.1372 per share. Since the value was
$0.1628 lower than the fair market value of the Company's Common Stock
on April 24, 2007, the $1,052,790 intrinsic value of the conversion
option resulted in the recognition of a preferred stock dividend and an
increase to additional paid-in capital.
On April 24, 2007, pursuant to the authority of its Board of Directors,
Company filed with the Secretary of State of Delaware the Certificate
of Designations, Preferences and Rights of Series C Preferred Stock.
The Series C Preferred Stock accrues dividends at the rate of 8% per
annum on their purchase price of $1,000 per share (increasing to 15%
per annum after April 24, 2009) payable quarterly on January 1, April
1, July 1 and October 1, payable in cash or shares of Common Stock
(each valued at 95% of the average of the value weighted average price
(VWAP) as defined in the Certificate of Designations, Preferences and
Rights of the Series C Preferred Stock (the "Series C Preferred
Certificate").
Each share of Series C Preferred Stock is entitled to a preference
equal to the per share purchase price ($1,000 subject to adjustment)
plus any accrued but unpaid dividends thereon and any other fees or
liquidated damages owing thereon upon the liquidation, dissolution or
winding-up of the Company, which preference is senior to any other
capital stock ranked junior to the Series C Preferred Stock.
The holders of Series C Preferred Stock will not have any voting rights
except as specifically provided in the Series C Preferred Certificate
or as required by law. However, as long as any shares of Series C
Preferred Stock are outstanding, the Company will not without the prior
affirmative vote of holders of at least 70% of the then outstanding
shares of the Series C Preferred Stock and the Company's Series B
Preferred Stock (the Series B Preferred Stock and together with the
Series C Preferred Stock, the "Preferred Stock") collectively, (i)
alter or change adversely the powers, preferences or rights given to
the Preferred Stock or alter or amend the Series C Preferred
Certificate; (ii) authorize or create any class of stock ranking as to
dividends, redemption or distribution of assets upon a Liquidation
senior to or otherwise pari passu with the Preferred Stock; (iii) amend
its certificate of incorporation, bylaws or other charter documents in
any manner that adversely affects any rights of the holders of the
Preferred Stock; (iv) increase the authorized number of shares of
Preferred Stock; (v) other than Permitted Indebtedness (as defined in
the Series C Preferred Certificate) until April 24, 2010 incur any
indebtedness for borrowed money of any kind; (vi) other than Permitted
Liens (as defined in the Preferred Certificate) until April 24, 2010,
incur any liens of any kind; (vii) repay or repurchase other than more
than a de minimis number of shares of Common Stock or securities
convertible or exchangeable into Common Stock, other than as permitted
by the Preferred Certificate; (viii) pay cash dividends or
distributions on any securities of the Company junior to the Preferred
Stock; or (ix) enter into any agreement or understanding with respect
to the foregoing. Notwithstanding the above, the Company may issue any
security issued in connection with a Strategic Transaction (as defined
in the Series C Preferred Certificate) that ranks as to dividends,
redemption or distribution of assets upon a Liquidation pari passu with
or junior to the Preferred Stock without the prior affirmative vote of
holders of at least 70% of the then outstanding shares of Preferred
Stock.
If the Company does not meet its share delivery requirements with
respect to conversion set forth in the Series C Preferred Certificate,
the holders of Preferred Stock are entitled to (i) liquidated damages,
payable in cash, and (ii) cash equal to the amount by which such
holder's total purchase price for the shares of Common Stock exceeds
the product of (1) the aggregate number of shares of Common Stock that
such holder was entitled to receive from the conversion at issue
multiplied by (2) the actual sale price at which the sell order giving
rise to such purchase obligation was executed.
10
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STAT EMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY
SERIES C 8% CONVERTIBLE PREFERRED STOCK (Continued)
The Company may force conversion of the Series C Preferred Stock in the
event it provides written notice to the holders of the Series C
Preferred Stock that the VWAP for each 20 consecutive trading day
period during a Threshold Period (as defined in the Series C Preferred
Certificate) of Common Stock exceeded $5.38 (subject to adjustment) and
the volume for each trading day during such Threshold Period exceeded
50,000 shares (subject to adjustment for forward and reverse stock
splits, recapitalizations, stock dividends and the like).
Upon the occurrence of certain Triggering Events (as defined in the
Series C Preferred Certificate), the Company is required to redeem each
share of Series C Preferred Stock for cash in an amount equal to 130%
of the stated value, all accrued but unpaid dividends thereon and all
liquidated damages and other costs, expenses or amounts due in respect
of the Series C Preferred Stock (the "Triggering Redemption Amount").
Upon certain Triggering Events, the Company is required to redeem each
share of Series C Preferred Stock for shares of Common Stock equal to
the number of shares of Common Stock equal to the Triggering Redemption
Amount divided by 85% of the average of the VWAP for the 10 consecutive
trading days immediately prior to the date of the redemption.
The Company may redeem all of the Series C Preferred Stock outstanding,
at any time after April 24, 2009 for a redemption price, payable in
cash, for each share of Series C Preferred Stock equal to (i) 150% of
the stated value, (ii) accrued but unpaid dividends thereon and (iii)
all liquidated damages and other amounts due in respect of the Series C
Preferred Stock.
Pursuant to the Series B Certificate, filed with the Secretary of State
of the State of Delaware on March 15, 2006, so long as shares of the
Series B Preferred Stock are outstanding, the Company will not, without
the affirmative vote of the holders of at least 70% of the then
outstanding Series B Preferred Stock, (i) authorize or create any class
of stock ranking as to dividends, redemption or distribution of assets
upon a liquidation pari passu with the Series B Preferred Stock; (ii)
alter or change adversely the powers, preferences or rights given to
the Series B Preferred Stock or to alter or amend the Series B
Certificate; (iii) alter the Company's certificate of incorporation or
other charter documents in any manner that adversely affects the rights
of the holders of the Series B Preferred Stock; or (iv) enter into any
agreement or understanding with respect to the foregoing. The Company
sought and obtained the consent of 70% of the holders of its Series B
Preferred Stock (the "Series B Consent"), as a condition to the sale of
the Series C Preferred Stock, to modify to the Series B Certificate and
to the creation of the Series C Preferred Stock.
The holders of the Series B Preferred Stock consented to (i) the filing
of the Amended Certificate of Designations of Preferences, Rights and
Limitations of the Series B Preferred Stock (the "Amended Series B
Preferred Certificate") with the Secretary of State of the State of
Delaware, which, inter alia, (a) provides for group voting by and among
the holders of the Series B Preferred Stock and the holders of the
Series C Preferred Stock, and (b) extends the date on which the
cumulative dividend rate increases from 8% to 15% from March 16, 2008
to April 24, 2009; and (ii) the authorization, creation, offering and
issuance of the Series C Preferred Stock. On April 24, 2007, pursuant
to the authority of its Board of Directors, Company filed with the
Secretary of State of Delaware the Amended Series B Preferred
Certificate.
In consideration for the Series B Consent, (i) the Company agreed to
extend the expiration date of certain warrants issued to each holder of
Series B Preferred Stock at the time of the original issuance of the
Series B Preferred Stock from March 16, 2011 to March 16, 2012; and
(ii) each of Midsummer Investment, Ltd. and Bushido Capital Master
Fund, LP (each, a "Principal Holder"), as the holders of the largest
number of the currently outstanding shares of Series B Preferred Stock,
were granted a covenant by the Company pursuant to which, so long as
each Principal Holder continues to hold at least 20% of the then
outstanding Series B Preferred Stock, the Company will not take any
action which requires the consent of at least 70% of the holders of the
Preferred Stock, unless each Principal Holder consents to such action.
11
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STAT EMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY (Continued)
COMMON STOCK
On April 3, 2007, a holder of 145 shares of Series B 8% Preferred Stock
converted his shares and accrued dividends through the date of
conversion into 64,490 shares of Common Stock.
On April 17, there was a cashless exercise of 39,630 warrants issued in
our October, 2004 Private Placement, which resulted in the issuance of
15,456 shares of Common Stock.
On April 20, $61,500 was received from the exercise of stock options
previously granted to purchase 41,000 shares of Common Stock at $1.50
per share.
Dividends accrued on Series B Preferred Stock through June 30, 2007
were satisfied by the issuance of 85,252 shares of Common Stock.
Dividends accrued on Series C Preferred Stock through June 30, 2007,
amounting to $223,333, were paid in cash.
OPTIONS AND WARRANTS
At June 30, 2007, the Company had outstanding 6,581,500 options with
exercise prices ranging from $1.50 to $3.00 per share and 8,734,435
warrants with exercise prices ranging from $1.23 to $4.20 per share;
each option and warrant representing the right to purchase one share of
Common Stock.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
COLLABORATIVE AGREEMENTS
On March 30, 2005, the Company entered into a three party agreement
with Tish Technologies, Inc. and Harris Pharmaceuticals, Inc.
("Harris") for the co-development and license of a controlled release
generic product. Upon its development and the securing of the required
FDA approval by the formulation development company, the Company is to
manufacture the product and Harris is to sell and distribute the
product. In addition to the transfer price for manufacturing the
product, the Company is to share the profits, if any, realized upon
sales. The innovator's reference product for this generic was
originally a capsule. The innovator has now received approval for an
alternative dose form (a tablet rather than capsule) and has
discontinued the original dose form. While a reference product remains
for the capsule, the market opportunity has changes and this affects
how we might commercialize the capsule dosage form. On June 19, 2006,
the Company received written notice from Harris of Harris' intent to
terminate the agreement in accordance with Section 9.3 of the
agreement. As the date hereof, the Company has received $29,700 for
this development work.
12
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES
COLLABORATIVE AGREEMENTS (Continued)
On June 21, 2005, Elite and IntelliPharmaCeutics Corp. ("IPC"), entered
into an agreement for the development and commercialization of a
controlled release generic drug for certain anti-infective diseases by
the parties. We estimate that the product had an addressable market in
the U.S. of approximately $4 billion in 2004. We are to share in the
profits, if any, from the sales of the drug. On December 12, 2005, the
agreement was amended with respect to the development and
commercialization of the controlled release drug product in Canada.
Since IPC intended to enter into an agreement with a Canadian company
with respect to the development, distribution and sale of the drug
product in Canada, the parties agreed to suspend their obligations
under the agreement with respect to the development and
commercialization of the controlled release drug product in Canada. IPC
agreed to pay us a certain percentage of any payments received by IPC
with respect to the commercialization of the controlled release drug
product by such Canadian company.
On June 22, 2005, Elite and PLIVA, Inc. ("PLIVA") entered into a
Product Development and License Agreement providing for the development
and license of a controlled released generic anti-infective drug
formulated by us. We are to manufacture and PLIVA will market and sell
the product. Under the agreement, the partner is to make milestone
payments to us and the development costs are to be paid both by PLIVA
and us, and the profits are to be shared equally. On June 28, 2007,
Elite and PLIVA terminated the Product Development and License
Agreement, effective January 31, 2007, and entered into a termination
agreement according to which it was agreed that Elite owns all
intellectual property rights relating to the controlled released
generic product under development and PLIVA agreed to pay Elite
$100,000 in discharge of outstanding payments under the Product
Development and License Agreement.
On January 10, 2006, Elite entered into a Product Development and
Commercialization Agreement with Orit Laboratories LLC ("ORIT")
providing that we and Orit will co-develop and commercialize an
extended release drug product for treatment of anxiety, and upon
completion of development, the possible licensing of the product for
manufacture and sale. The parties intend to develop all dose strengths
of the product. We are to share in the profits, if any from the sales
of the drug. The term of the agreement is for the longer of (i) 15
years from the date the product is first commercially sold to a third
party, or (ii) the life of the applicable patent(s), if any. The
agreement is automatically renewable for 3-year periods unless
terminated by either party by providing the other party with twelve
(12) months written notice prior to any renewal period.
On November 10, 2006, the Company entered into a product collaboration
agreement with The PharmaNetwork, LLC for the development of the
generic equivalent of a synthetic narcotic analgesic drug product. TPN
is to perform development services and prepare and file an ANDA in the
name of TPN with the FDA. The Company is to provide development support
including the purchase of active pharmaceutical ingredients and
materials and supplies to manufacture the batch, provide adequate
facilities to TPN for use in its development work and following ANDA
approval, The Company will manufacture the drug product developed. The
Company is to pay TPN for the development services rendered upon the
attainment of certain milestones. The out-of-pocket costs are to be
shared by TPN and the Company, with TPN's obligation to be payable from
its royalty compensation. Formulation development work is currently
underway.
In January 2006, the FDA accepted our IND for ELI-154, its once-a-day
oxycodone painkiller. Under the new drug application, we will begin our
development program with an early stage study to evaluate ELI-154's
sustained release formation. Currently there is no once-daily oxycodone
available;
13
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
COLLABORATIVE AGREEMENTS (Continued)
The aforementioned agreements are in their infancy stages.
The Company is a party to two separate and distinct development and
license agreements with ECR Pharmaceuticals ("ECR"). Pursuant to the
agreements, the Company agreed to commercially develop two products,
Lodrane 24(R) and Lodrane 24D(R) in exchange for development fees,
certain payments, royalties and manufacturing rights. The products are
currently being marketed by ECR which also has the responsibility for
regulatory matters. In addition to receiving revenues for manufacture
of these products, the Company also receives a royalty on in-market
sales.
CONSULTING AGREEMENTS
On June 1, 2006, the Company entered into a one year agreement with
David Filer, for him to provide financial advisory services to the
Company. In consideration, Dr. Filer received three year options to
purchase 10,000 shares of Common Stock, at a price of $3.00 per share.
ALLIANCE AGREEMENT
On December 6, 2006, the Company entered into a Strategic Alliance
Agreement (the "Alliance Agreement") with Dr. Veerappan S. Subramanian
("VS") and VGS Pharma, LLC, a Delaware limited liability company
("VGS"), under which (i) VS was appointed to the Company's Board of
Directors, (ii) VGS made a $2,000,000 equity investment in the Company,
(iii) VS was engaged to serve as strategic advisor on the research,
development and commercialization of the Company's existing pipeline,
(iv) the Company and VGS formed Novel Laboratories Inc., a Delaware
corporation ("Novel"), as a separate specialty pharmaceutical company
for the research, development, manufacturing, licensing and acquisition
of specialty generic pharmaceuticals, and (v) the Company contributed
$2,000,000 to Novel and agreed to make additional contributions.
Pursuant to the Alliance Agreement, Novel entered into an employment
agreement with VS and the Company entered into (i) an Advisory
Agreement with VS, (ii) a Registration Rights Agreement with VGS and
VS, and (iii) a Stockholders Agreement with VS, VGS and Novel.
14
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
ALLIANCE AGREEMENT (Continued)
The specialty pharmaceutical product initiative of the strategic
alliance between the Company and VS is to be conducted by Novel of
which the Company acquired 49% and VGS acquired 51% of its Class A
Voting Common Stock for $9,800 and $10,200 respectively. Pursuant to
the Alliance Agreement, VGS acquired for $2,000,000: (i) 957,396 shares
of Company's Common Stock (the "Acquired Company Shares") valued at
approximately $2.089 per share (the average closing price of the Common
Stock during the ten trading days on the American Stock Exchange
immediately preceding December 6, 2006) and (ii) a five year Warrant to
purchase 478,698 additional shares (the "Warrant Shares"), for cash, at
a price of $3.00 per share.
The Company initially contributed $2,000,000 to Novel and made
additional contributions of $5,000,000 through June 15, 2007. The
remaining contributions to be made by the Company shall be funded in
the amounts and upon the occurrence of the following milestones (i)
$10,000,000 upon the submission to the FDA of three ANDAs related to
three different prospective products developed by Novel and (ii)
$10,000,000 upon the submission to the FDA of three ANDAs related to at
least three additional different prospective products developed by
Novel; provided that the aggregate contributions to be made by the
Company shall not exceed (i) $15,000,000 prior to November 1, 2007 or
(ii) $25,000,000 prior to May 1, 2008. The remaining contributions of
the Company are not monetary obligations but rather conditions that
must be met in order for the Company to maintain its equity interest in
Novel.
In the event that (i) the Company defers for more than 90 days the
payment of a contribution installment due to Novel's failure to achieve
a Performance Milestone, (ii) the Company fails to make a requisite
contribution following Novel's achieving a Performance Milestone or
(iii) Novel requires additional financing beyond amounts provided in
the Business Plan or the additional contributions the Company has
agreed to provide, Novel may seek such financing through a subscription
offering to its Class A Stockholders and, to the extent not fully
subscribed, from third parties.
The Company agreed to use its best efforts to elect VS a member of its
Board of Directors as long as the Company and its "permitted
transferees" own at least 40% of Novel's outstanding capital stock and
VS is Chairman of the Board and Chief Executive Officer of Novel.
Pursuant to an employment agreement, Novel has agreed to employ VS to
perform his duties three full business days a week as its Chief
Executive Officer at a salary of $220,000 per annum, with bonuses and
options to purchase Novel's Common Stock to be granted at the
discretion of Novel's Board of Directors.
VS's employment may be terminated for "Cause" or by VS for "Good
Reason", with both such terms defined in the VS employment agreement.
Either party may terminate the employment upon 30-business days prior
written notice to the other.
15
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
ALLIANCE AGREEMENT (Continued)
The stockholders agreement provides that as long as each owns at least
10% of the shares of Class A Voting Common Stock of Novel, each shall
designate one of the two Directors to constitute the Novel Board of
Directors, with the VGS designee to be VS, unless otherwise approved by
the Company. It prohibits the taking of certain actions without
approval of the two designees, including, but not limited to,
amendments of charter, by-laws and other governance agreements,
spin-offs or public offerings of equity securities, a liquidation or
dissolution, dividends, authorization or issuance of additional
securities or options, bankruptcy, a material change of the business or
a Business Plan, approval of a Business Plan and the yearly operating
budget, creation of a security interest, capital expenditures in excess
of 110% of the amount provided in the Business Plan, investments in
excess of the amounts approved in the Business Plan, an increase or
decrease of the Board; and any investments by VS in any "Competitive
Company" or its affiliate.
It further provides that determination of "Cause" or the "Disability"
of VS under his employment agreement shall be made solely in the
reasonable discretion of the Company designee.
Except for certain enumerated permitted transfers, the stockholders
agreement provides that no transfer of Novel stock may be made without
the consent of the other stockholders.
In the event the Company fails to make required additional
contributions, VGS has the right to purchase from the Company at its
original purchase price that proportion of the shares of Novel Class A
Common Stock originally acquired by it equal to the proportion of the
required additional contributions not made by the Company.
In the event of VS's resignation from Novel for other than Good Reason,
his termination by Novel for Cause, or his death or disability as
defined in the Employment Agreement, the Company has the right to
acquire from VGS up to 75% of the shares of Class A Common Stock of
Novel originally acquired by it at the original purchase price; such
percentage to be reduced to 50% and 25% upon the first and second
anniversary of the agreement and no reduction on the third anniversary,
with a pro rata portion of such reduction to be effected upon the death
or disability of VS during the applicable period. Each of the Company
and VGS has a right to acquire from the other at the then fair value,
its shares of Novel upon the bankruptcy, dissolution or liquidation, a
change of control of the other or, if as a result of such purchases at
the original purchase price, the percentage of Novel owned by such
party is less than 10%.
The agreement subjects VS to a confidentiality covenant, a
non-competition covenant terminating one year following the end of the
term and a non-solicitation covenant terminating two years following
the end of the term, provided his termination by Novel was not without
"Cause" or by VS was with "Good Reason".
ADVISORY AGREEMENT - VS
The Advisory Agreement obligates VS to provide advisory services to the
Company, including but not limited, to assist in the implementation of
current and new drug product development projects of the Company and
assisting in the Company's recruitment of additional R&D staff members.
As an inducement to enter into the agreement, the Company granted VS a
non-qualified stock option to purchase up to 1,750,000 shares of Common
Stock (the "Option Shares") at a price of $2.13 per share. The option
vests in 250,000 share installments, the first immediately, the second
on May 6, 2007, the third on December 6, 2007, the fourth upon the
Company's acceptance of the Initial Business Plan of Novel, and the
other installments vesting on the accomplishment of certain milestones
with respect to the
16
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
ADVISORY AGREEMENT (Continued)
first or second drug product developed by the Company (excluding drug
products of Novel) on or after February 4, 2007, under the advisory
services provided to the Company. The option terminates on December 6,
2016, or 90 days following a termination of his advisory services to
the Company or his employment by Novel other than a termination without
Cause or by VS for Good Reason or 48 months after the termination of
his advisory services under the Advisory Agreement or his employment
under the employment agreement as a result of: (i) a termination by the
Company of the Advisory Agreement or by Novel of the employment
agreement without Cause or by VS without Good Reason or (ii) the
post-December 6, 2007, termination of the term of the Advisory
Agreement or of the Novel employment agreement.
All unvested options terminate upon the termination of the Advisory
Agreement (other than a termination by the Company without Cause or by
VS for Good Reason) or at such time as the Company and its permitted
transferees own in the aggregate less than 20% of the outstanding
capital stock of Novel, except to the extent the Company at its sole
discretion has determined that VS has provided substantial contribution
to the development of any drug product which would otherwise trigger
the vesting of options notwithstanding the failure to satisfy the
foregoing 20% threshold.
The Company has granted certain rights to have the Acquired Company
Shares, the Option Shares and Warrant Shares registered for reoffering
under the Securities Act of 1933, as amended (the "Act"), including the
provision of one Registration Statement upon the demand of holders of
75% of the Acquired Company Shares, Warrant Shares and Option Shares
and the rights to have registered as part of a registration statement
related to an offering of Common Stock by the Company or other security
holders. The Company is to bear all reasonable expenses other than
underwriting discounts and commissions in connection with the
registration and qualification under applicable state securities law.
AMENDMENT OF FINANCIAL ADVISORY AGREEMENT - INDIGO VENTURES, LLC
On February 13, 2007, the Financial Advisory Agreement (the "Advisory
Agreement") between the Company and Indigo Ventures, LLC, of which one
of the Company's non-employee Directors is an officer, was amended.
Under the Advisory Agreement, the Company paid Indigo $45,000 initially
and $15,000 per month during the term through the date of the
amendment. Additionally, Indigo acquired a warrant to purchase up to
600,000 shares of Common Stock of the Company at $3.00 per share, of
which the warrant had previously vested as to 100,000 shares of Common
Stock. Indigo purchased the warrant from the Company for $150,000,
payment of which was made by a promissory note. As a result of the
amendment of the Advisory Agreement, the warrant was reduced from
600,000 to 300,000 shares, the warrant remains exercisable as to the
remaining 300,000 shares of Common Stock (200,000 of which remain
subject to vesting), the monthly cash fees payable to Indigo terminated
as of February 13, 2007 and the outstanding amount of the promissory
note was reduced to $75,000.
CHIEF SCIENTIFIC OFFICER
On February 9, 2007, VS, a recently appointed director of the Company,
agreed to become the acting Chief Scientific Officer of the Company
and, as such, will oversee all scientific activities and employees. On
the same date, the Company and Dr. Charan Behl entered into an Amended
and Restated Employment Agreement under which Dr. Behl's position was
changed from Chief Scientific Officer to Head of Technical Affairs and
Dr. Behl reports to the Chief Executive Officer, the Chief Scientific
Officer and any additional executive officer designated by the Board.
In addition, the definition of "cause" has been amended to include a
determination by the Board, in its sole discretion, that the employment
of Dr. Behl should terminate, provided that such termination will be
effective on the 30th day after the written notice to Dr. Behl of such
determination.
17
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENTS
On September 2, 2005, the Company entered into an amended and restated
employment agreement with Bernard J. Berk, providing for Mr. Berk to
continue to serve as the Company's Chief Executive Officer through
August 31, 2009. The Employment Agreement also provides for an annual
bonus as determined by the Compensation Committee of the Company's
Board of Directors. Pursuant to the agreement:
- Mr. Berk waived his rights to 75,000 of 300,000 options granted
to him on July 23, 2003. The Company determined that the
remaining 225,000 options are fully vested.
- Mr. Berk's salary was increased to $330,140, effective May 1,
2005.
- Mr. Berk was granted under the Company's 2004 Stock Option Plan,
ten-year options to purchase 600,000 shares of Common Stock at
$2.69, the fair market value of Common Stock as of the time of
grant.
- Mr. Berk will be entitled to receive severance in accordance with
the employment agreement if he is terminated without cause or
because of his death or permanent disability or if he terminates
his employment for good reason or as a result of a "change of
control" (as defined in the employment agreement).
On November 13, 2006, the Company entered into (i) the Second Amended
and Restated Employment Agreement with Mr. Berk ("Berk"), its Chief
Executive Officer and Chairman of the Board of Directors (the "Berk
Agreement"); (ii) an employment agreement with Dr. Behl ("Behl") as
Executive Vice President and Chief Scientific Officer; and (iii) an
employment agreement with Mr. Chris Dick ("Dick") as Executive Vice
President of Corporate Development.
The employment agreement with Dr. Behl was subsequently amended and
restated on February 9, 2007, under which Dr. Behl's position was
changed from Chief Scientific Officer to Head of Technical Affairs. Dr.
Behl is to report to the Company's Chief Executive Officer, Chief
Scientific Officer and any additional executive officer designated by
the Board of Directors.
The Berk Agreement provides for a base annual salary of $330,140 (his
current salary) which may at the discretion of the Board of Directors
be increased in light of factors including the existing financial
condition of the Company and his success in implementing the Company's
business plan and achieving its strategic alternatives. He is to
continue to receive an automobile allowance of $800 per month. The Behl
and Dick Agreements provide for an initial base annual salary of
$250,000 and $200,000, respectively, a guaranteed bonus of $25,000
payable on January 1, 2007 and within 30 calendar days of the end of
each fiscal year during the term and a $700 per month automobile
allowance.
Each of the three agreements provides for payment of a discretionary
bonus following the end of each fiscal year of up to 50% of the
executive's then annual base salary. The amount, if any, of the
discretionary bonus will be determined by the Compensation Committee as
to Berk and by the Board of Directors or a Compensation Committee as to
Behl and Dick. Berk's bonus is to be based on any commercialization of
products, merger or acquisition, business combination or
collaborations, growth in revenues and earnings, additional financings
or other strategic business transaction that inure to the benefit of
the Company's stockholders. The bonus, if any, may be paid in cash or
shares of Common Stock, valued at the closing price of the Common Stock
on the immediately preceding trading day. The discretionary bonus which
may be paid to Behl or Dick is to be based on the achievement of goals
18
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENTS (Continued)
discussed with the executive in good faith and within a reasonable time
following the commencement of each fiscal year and may be paid in cash
or shares of the Company's Common Stock valued at the average of the
closing price per share during the five trading days immediately
preceding the date of issuance of the shares.
Each of Behl's and Dick's agreement provides for the grant under the
2004 Stock Option Plan (the "2004 Plan") to the executive at an
exercise price of $2.25 of options to purchase 250,000 shares. The
Berk, Behl and Dick Agreements each provide for the grant to the
executive of options at the foregoing exercise price to purchase up to
300,000 additional shares (the "Opioid Product Options") which are to
vest in two 150,000 share tranches upon the closing of an exclusive
product license for the United States national market, the entire
European Union Market or the Japan market or a product sale transaction
of all the Company's ownership rights in the United States (only once
for each product) for the Company's first drug developed by the Company
for which the United States Food and Drug Administration (the "FDA")
approval will be sought under a NDA (including a 505(b)(2) application)
for oxycodone, hydrocone, hydromorphone, oxymorphone, or morphine
("Non-Generic Opioid Product") as to the first tranche and as to the
Company's second Non-Generic Opioid Drug for the second tranche. The
Berk Agreement provides for the amendment of the vesting of options as
to 400,000 shares which had been granted on September 2, 2005 to Berk
at an exercise price of $2.69 per share ("Berk's Previous Milestone
Options") and the Behl and Dick Agreements provides for the grant of
options at the exercise price of $2.25 per share for each of Behl and
Dick as to 200,000 shares (collectively along with Berk's Previous
Milestone Options, the "Milestone Options") with the Milestone Options
of each of the three executives to vest (A) as to not more than 125,000
shares and 75,000 shares, respectively, upon the commencement of the
first Phase III clinical trial relating to the first and then the
second Non-Generic Opioid Drug developed by the Company; (B) 50,000
shares upon the closing of each product license or product sale
transaction (on a product by product basis and only once for each
product) other than Non-Generic Opioid Drugs for which options were
granted above; (C) 10,000 shares upon the filing by the Company (in the
Company's name) with the FDA of either an ANDA or an NDA (including an
application filed with the FDA under Section 505(b)(2) of the Federal,
Food, Drug, and Cosmetic Act, 21U.S.C. Section 301 et seq.)
(collectively, a "NDA"), for a product not covered by a previous FDA
application; (D) 40,000 shares upon the approval by the FDA of any ANDA
or NDA (filed in the Company's name) for a product not previously
approved by the FDA; (E) 25,000 shares upon the filing of an
application for a U.S. patent by the Company (in the Company's name);
and (F) 25,000 shares upon the granting by the U.S. Patent and
Trademark Office (the "PTO") of a patent to the Company filed in the
Company's name or an approval of an ANDA or NDA; provided, however the
foregoing options terminate upon the executive's termination of
employment except that options under (D) and (F) nevertheless vest if
the filing was made during the initial term but prior to termination of
the executive's employment by the Company without cause and the
approval was made within 540 days of the filing of the ANDA, NDA or
patent application.
The Company also agreed that in the event that as to Berk all of the
options to purchase the full 400,000 Berk's Previous Milestone Options
has fully vested during the initial term of the agreement and as to
each of Behl and Dick all 200,000 Milestone Options have fully vested
during the initial term of his agreement, the Company will grant under
the Plan to the executive at the end of the first current fiscal year
in which the following event occurs fully vested additional options to
purchase the following shares at the fair market value on the date of
grant (the "Additional Milestone Options"): (a) to the extent not
previously vested with respect to his comparable Milestone Options: (i)
up to 125,000 shares upon the commencement of the first Phase III
clinical trial relating to the first Non-Generic Opioid Drug
19
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENTS (Continued)
developed by the Company and (ii) up to an additional 125,000 shares as
to such trial relating to the second Non-Generic Opiod Drug developed
by the Company, (b) 50,000 shares upon the closing of each p product
license for the United States national market or product sale
transaction of all ownership rights (on a product by product basis and
only once for each product); (c) 10,000 shares upon the filing by the
Company (in the Company's name) with the FDA of either an ANDA or NDA
for a product not covered by a previous FDA application for each drug
product of the Company, other than the Non-Generic Opioid Drugs for
which any Opioid Option was granted under the Agreement; (d) 40,000
shares upon the approval by the FDA of any ANDA, NDA or 505(b)(2)
application filed in the Company's name for a product not previously
approved by the FDA; (e) 25,000 shares in the event of the filing of an
application of an additional U.S. patent by the Company (filed in the
Company's name); and (f) 25,000 shares in the event of the granting by
the PTO of the foregoing additional patent applications to the Company
(filed in the Company's name).
The Berk Agreement acknowledges that Berk holds previously granted
fully vested incentive stock options to purchase 725,000 shares, of
which 300,000 vested options are exercisable at $2.01 per share,
225,000 vested options are exercisable at $2.15 per share and 100,000
vested options are exercisable at $2.69 per share, and the remaining
100,000 options, which vest on September 2, 2007, are exercisable at
$2.69 per share.
Each employment agreement allows the Company at its discretion to grant
to the executive additional options under the 2004 Plan and provides
each executive the right to register at the Company's expense for
reoffering shares issued upon exercise of the options under the
Securities Act of 1933, as amended, in certain registration statements
filed by the Company with respect to offerings of securities by the
Company.
Berk's Agreement, as did his Amended and Restated Employment Agreement,
provides that if the Company terminates his employment due to his
permanent disability, without cause or he terminates his employment for
good reason, Berk shall be entitled to the following severance: (i) any
earned but unpaid base salary plus any unpaid reimbursable expenses as
of the effective date of termination of his employment, (ii) the
then-current base salary and reimbursement of the cost to replace the
life and disability insurance coverages afforded to Berk under the
Company's benefit plans with substantially similar coverages, following
the effective date of termination of his employment, for a period equal
to the greater of (x) the remainder of the then-current term, or (y)
two years following the effective date of termination and (iii) payment
by the Company of premiums for health insurance for the period during
which Berk is entitled to continued health insurance coverage as
specified in the Comprehensive Omnibus Budget Reconciliation Act. In
the event that the Company terminates Berk's employment because of his
permanent disability, Berk is to be entitled to the severance specified
above, less any amounts actually received by him under any disability
insurance coverage provided for and paid by the Company. In the event
that the Company terminates Berk's employment for cause or Berk
terminates his employment with the Company without good reason, Berk
shall be entitled to any earned but unpaid base salary plus any unpaid
reimbursable expenses as of the effective date of termination of his
employment.
Berk's Agreement, as did his prior agreement, provides that in the
event of a change of control in lieu of any severance that may
otherwise be payable to him if Berk elects to terminate his employment
for any reason within 90 days thereof, or the Company elects to
terminate his employment within 180 days thereof, other than for cause,
he is to be entitled to the following: (i) any earned but unpaid base
salary plus any unpaid reimbursable expenses as of the effective date
of termination of his employment, (ii) $1,000,000, (iii) the
then-current base salary for a period of 12 months
20
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENTS (Continued)
following the effective date of termination, (iv) reimbursement of the
cost, for a period equal to 12 months following the effective date of
termination, of replacing the life and disability insurance coverage
afforded to Berk under the Company's benefit plans with substantially
similar coverage and (v) payment by the Company of premiums for health
insurance for the period during which Berk is entitled to continued
health insurance coverage as specified in the Comprehensive Omnibus
Budget Reconciliation Act.
Each of Behl's and Dick's Agreements provide that in the event the
Company terminates his employment for "Cause" as defined in the
agreement or the executive terminates employment without good reason,
he is to receive salary through date of termination, reimbursement for
expenses incurred prior to termination, all unvested options will
terminate as of the date of termination and vested options will be
governed by the terms of the 2004 Plan and the related option
agreement. In the event of a termination due to death, disability or by
the Company without cause or by Behl or Dick for good reason, the
Company is to pay him or his estate subject to his compliance with
certain covenants, including non-competition, non-solicitation,
confidentiality and assignment of intellectual property, his base
salary for the longer of the balance of the initial term or one year
from date of termination, continue health insurance coverage for 12
months from termination and his vested options are to be exercisable
for 90 days from date of termination. Dr. Behl's amended agreement
provides that the definition of "cause" has been amended to include a
determination by the Board of Directors, in its sole discretion, that
the employment of Dr. Behl should terminate, provided that such
termination will be effective on the 30th day after the written notice
to Dr. Behl of such determination. In the event the employment of Behl
or Dick is terminated by the Company following a "Change of Control" of
the Company, he will be entitled to the amounts payable as a result of
termination by the Company without cause plus a lump sum payment of
$500,000 and all unvested options shall immediately vest and along with
unexercised vested options be exercisable within 90 days from the date
of termination. "Change of control" is defined in each of their
agreements as the acquisition of the Company pursuant to a merger or
consolidation which results in the reduction to less than 50% of the
shares outstanding upon consummation of the holders of its outstanding
shares immediately prior thereto or sale of substantially all the
assets or capital stock of the Company to another person, or the
acquisition by a person or a related group in a single transaction or a
series of related transaction of more than 50% of the combined voting
power of the Company's outstanding voting securities.
Berk's Agreement contains his non-solicitation covenant for a period of
one year from termination. Each of Behl and Dick has agreed to a
one-year following termination non-competition covenant and a two year
following termination non-solicitation covenant.
The executives are to be reimbursed for expenses (including business,
travel and entertainment) reasonably incurred in the performance of his
duties, with Behl's and Dick's agreements providing that reimbursement
of expenses in excess of $2,000 per month are subject to the approval
of the Company's Chief Executive Officer. Each of the executives is
entitled to participate in such employee benefit and welfare plans and
programs, which may be offered to senior executives of the Company
including life, health and accident insurance, medical plans and
programs and profit sharing and retirement plans.
Each employment agreement is for an initial term ending November 13,
2009, subject to automatic one-year renewals unless terminated by the
executive or the Company upon at least 60 days notice prior to the end
of the then scheduled expiration date. The Company has the right to
terminate Berk's employment in the event of his inability to perform
work due to physical or mental illness or injury for
21
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENTS (Continued)
nine full calendar months during any eight consecutive calendar months.
It has the right to terminate Behl's or Dick's employment due to
disability as defined in a long-term disability insurance policy
reasonably satisfactory to him or, in the absence of such policy, due
to his inability for 120 days in any 12 month period to substantially
perform his duties as a result of a physical or mental illness.
LEASE
On July 15, 2005, the Company entered into a lease for two years
commencing on July 1, 2005 for part of a one-story warehouse to be used
for the storage of finished and raw material of pharmaceutical products
and equipment. The lease had a renewal option which was exercised to
rent the property through July 1, 2008.
NOTE 6 - SUBSEQUENT EVENTS
On July 2, 2007, a holder of 168 shares of Series B 8% Preferred Stock
converted his shares and accrued dividends though the date of
conversion into 74,700 shares of Common Stock.
On July 6, 2007, 50,000 warrants issued in 2004 expired.
On July 8, 2007, a holder of 100 shares of Series B 8% Preferred Stock
converted his shares and accrued dividends through the date of
conversion into 44,521 shares of Common Stock.
On July 9, 2007, a holder of 250 shares of Series B 8% Preferred Stock
converted his shares and accrued dividends through the date of
conversion into 111,325 shares of Common Stock.
On July 10, 2007, a holder of 232 shares of Series C 8% Preferred Stock
converted his shares into 100,000 shares of Common Stock. Accrued cash
dividends were paid through date of conversion.
On July 11, 2007, a holder of 100 shares of Series C 8% Preferred Stock
converted his shares into 43,103 shares of Common Stock. Accrued cash
dividends were paid through the date of conversion.
On July 17, 2007, Novel purchased substantially all of the assets of
Jayson Pharma, Inc. for $270,000. Jayson Pharma, Inc. is wholly owned
by Muthusamy Shanmugam, an employee of Novel.
On July 17, 2007, the Company sold the remaining 5,000 authorized
shares of its Series C Preferred Stock. Each share of Series C
Preferred Stock was sold at a price of $1,000 per share and is
initially convertible at $2.32 into 431.0345 shares of the Company's
Common Stock, or an aggregate of 2,155,172 shares of Common Stock. Each
purchaser of Series C Preferred Stock also received a warrant to
purchase shares of the Company's Common Stock in an amount equal to 30%
of the aggregate number of shares of Common Stock into which the shares
of Series C Preferred Stock purchased by such purchaser may be
converted. The warrants are exercisable on or before July 17, 2012 and
represent the right to purchase an aggregate of 646,554 shares of
Common Stock, at an exercise price of $3.00 per share. The lead
placement agent for the offering was Oppenheimer & Company, Inc. The
gross proceeds of the private placement were $5,000,000 before payment
of $350,000 in commissions to the placement agent and its selected
dealers and $18,000 in expenses incurred by the placement agent and its
selected dealers. Pursuant to the placement agent agreement, the
Company issued to the placement agent and its
22
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 6 - Subsequent Events (Continued)
designees warrants (the "Placement Warrants") to purchase 64,655 shares
of Common Stock. Such Placement Warrants are at an exercise price of
$3.00 per share, exercisable on or prior to July 17, 2012. The Company
received net proceeds from the sale of the Series C 8% Preferred Stock
of $4,631,500. Based on the relative fair values, the Company has
attributed $534,407 of the total proceeds to the warrants and has
recorded the warrants as additional paid-in capital. The remaining
portion of the proceeds of $4,465,593 was used to determine the value
of the 2,155,172 shares of the Company Common Stock underlying the
Series C Preferred Stock, or $2.0720 per share. Since the value was
$0.6180 lower than the fair market value of the Company's Common Stock
on July 17, 2007, the $1,331,819 intrinsic value of the conversion
option resulted in the recognition of a preferred stock dividend and
an increase to additional paid-in capital.
On July 24, 2007, the $3,000,000 bank loan, including all accrued
interest, was paid off.
On July 26, 2007, a holder of 13 shares of Series C 8% Preferred Stock
converted his shares into 5,603 shares of Common Stock. Accrued cash
dividends were paid through the date of conversion.
On July 31, 2007, the Board of Directors approved a discretionary cash
bonus of $165,070 to Bernard Berk for fiscal year ended March 31, 2007.
Such bonus was paid in full by the Company.
On August 1, 2007, a holder of 100 shares of Series C 8% Preferred
Stock converted his shares into 43,103 shares of Common Stock. Accrued
cash dividends were paid through the date of conversion.
On August 8, 2007, Bernard Berk paid the Company $79,995.47 for expense
reimbursements originally requested by Mr. Berk for which documentation
was not received by the Company.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED JUNE 30, 2007 COMPARED TO
THE THREE MONTH PERIODS ENDED JUNE 30, 2006 (UNAUDITED)
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 Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2007 (the "10-K") and the
Unaudited Consolidated Financial Statements and related Notes to Consolidated
Financial Statements included in Item 1 of Part I of this Quarterly Report on
Form 10-Q.
The Company has included in this Quarterly Report certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 concerning the Company'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 Company'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
Company'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 Company with the SEC including its Annual
Report on Form 10-K. Such factors may also cause substantial volatility in the
market price of the Company's Common Stock. All such forward-looking statements
are current only as of the date on which such statements were made. The Company
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
We are a specialty pharmaceutical company principally engaged in the
development and manufacture of oral, controlled release products. We develop
oral, controlled release products using proprietary technology. Our strategy
includes improving off-patent drug products for life cycle management and
developing generic versions of controlled release drug products with high
barriers to entry. Our technology is applicable to develop delayed, sustained or
targeted release pellets, capsules, tablets, granules and powders.
We have two products, Lodrane 24(R) and Lodrane 24D(R), currently being
sold commercially, and a pipeline of seven drug candidates under development in
the therapeutic areas that include pain management, allergy and infection. Of
the products under development, ELI-216, an abuse deterrent oxycodone product,
and ELI-154, a once daily oxycodone product, are in clinical trials and we have
completed pilot studies on two of our generic product candidates. The
addressable market for the pipeline of products exceeds $6 billion. Our facility
in Northvale, New Jersey also is a Good Manufacturing Practice ("GMP") and DEA
registered facility for research, development and manufacturing.
24
At the end of 2006, we entered into a joint venture with VGS Pharma,
LLC 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.
STRATEGY
We are focusing our efforts on the following areas: (i) development of
our pain management products, (ii) manufacturing of Lodrane 24(R) and Lodrane
24D(R) products; (ii) the development of the other products in our pipeline; and
(iii) commercial exploitation of our products either by license and the
collection of royalties, or through the manufacture of our formulations, and
(iv) development of new products and the expansion of our licensing agreements
with other pharmaceutical companies, including co-development projects, joint
ventures and other collaborations, including Novel.
We are 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")).
We intend to continue to collaborate in the development of additional
products with our current partners. We also plan to seek additional
collaborations to develop more drug products.
We believe that our business strategy enables us to reduce our 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 us to share costs of development and to improve cash-flow.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion addresses our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgment, including those
related to bad debts, intangible assets, income taxes, workers' compensation,
and contingencies and litigation. Management bases its estimates and judgments
on historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. Our most critical
accounting policies include the recognition of revenue upon completion of
certain phases of projects under research and development contracts. We also
assess a need for an allowance to reduce our deferred tax assets to the amount
that we believe is more likely than not to be realized. We assess the
recoverability of long-lived assets and intangible assets whenever events or
changes in circumstances indicate that the carrying value of the asset may not
be recoverable. We assess our exposure to current commitments and contingencies.
It should be noted that actual results may differ from these estimates under
different assumptions or conditions.
25
RESULTS OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30, 2006
Our revenues for the three months ended June 30, 2007 were $388,275, an
increase of $235,248 or approximately 154%, over revenues for the comparable
period of the prior year, and consisted of $336,515 in manufacturing fees and
$51,760 in royalty fees. Revenues for the three months ended June 30, 2006,
consisted of $131,900 in manufacturing fees and $21,127 in royalty fees. The
increase in manufacturing fees and royalties was primarily due to the launch of
our second product, Lodrane 24D(R).
Research and development costs for the three months ended June 30,
2007, were $2,098,755, an increase of $782,347 or approximately 59.4% from
$1,316,408 of such costs for the comparable period of the prior year, primarily
the result of increased wages, raw materials, laboratory and manufacturing
supplies. Elite now has 41 employees, an increase of 58% from 26 employees one
year ago. The increase in employees is primarily for the scale up work for the
pain products and includes manufacturing, analytical and quality assurance
people. Elite has also increased its spending on raw materials which are also
primarily for scale up of the pain products. Research and development costs
associated with Novel's activities also contributed to the increase. We expect
our research and development costs to continue to increase in future periods
primarily due to clinical costs for Phase III and other clinical trials for
ELI-216 and ELI-154.
General and administrative expenses (G&A) for the three months ended
June 30, 2007, were $899,390, an increase of $342,477, or approximately 62.6%
from $546,913 of G&A for the comparable period of the prior year. The increase
was attributable to increases in salaries and fringe benefits as a result of
increases in staff and costs associated with our Novel activities.
We are in the initial stages of breaking down the specific costs
associated with the research and development of each product on which we devoted
resources through the use of detailed time sheets and general ledger account
classifications. In the past, we have not historically allocated these expenses
to any particular product. We cannot estimate the additional costs and expenses
that may be incurred in order to potentially complete the development of any
product, nor can we estimate the amount of time that might be involved in such
development because of the uncertainties associated with the development of
controlled release drug delivery products as described in this report.
Depreciation and amortization increased by $88,663 from $119,535 for
the comparable period of the prior year to $208,198. The increase was due to the
acquisition of new machinery and equipment by Novel and the upgrading of the
corporate and warehouse facilities.
Other income (expenses) for the three months ended June 30, 2007 were
$(879,822), an increase of $609,697, or approximately 225%, from $(270,125) for
the comparable period of the prior year due to an increase of $624,263 in
charges related to the issuances of stock options and warrants and increases in
interest expense of $8,908 due to the borrowing of bank debt. These increases
were somewhat offset by additional interest income of $23,474, due to higher
compensating balances as a result of the private placement of our Series C 8%
Convertible Preferred Stock.
As a result of the foregoing, our net loss for the three months ended
June 30, 2007 was $3,982,216 compared to $2,100,954 for the three months ended
June 30, 2006.
MATERIAL CHANGES IN FINANCIAL CONDITION
Our working capital (total current assets less total current
liabilities), increased to $11,219,231 as of June 30, 2007 from $1,019,631 as of
March 31, 2007, primarily due to net proceeds received as a result of our
private placement of Series C 8% Convertible Preferred Stock, offset by the net
loss of $2,849,755 from operations, exclusive of non-cash charges of $1,132,461.
We experienced negative cash flows from operations of $(3,660,179) for
the three months ended June 30, 2007, primarily due to our net loss from
operations of $3,982,216, an increase in prepaid expenses of $330,610 and
reductions of $476,621 in accounts payable, accrued expenses and other
liabilities, offset by
26
non-cash charges of $1,142,461, which included $924,263 in connection with the
issuance of stock options and warrants, and $208,198 in depreciation and
amortization expenses.
On November 15, 2004 and on December 18, 2006, Elite's partner, ECR,
launched Lodrane 24(R) and Lodrane 24D(R), respectively. Under its agreement
with ECR, Elite 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
three months ended June 30, 2007 was $336,515 and $51,760, respectively. We
expect future cash flows from manufacturing fees and royalties to provide
additional cash to help fund our operations.
On March 30, 2005, Elite entered into a three party agreement with Tish
Technologies, Inc. and Harris Pharmaceuticals, Inc. ("Harris") for the
co-development and license of a controlled release generic product. Upon its
development and the securing of the required Food and Drug Adminisatration
("FDA") approval by the formulation development company, Elite is to manufacture
the product and Harris is to sell and distribute the product. In addition to the
transfer price for manufacturing the product, Elite is to share the profits, if
any, realized upon sales. The innovator's reference product for this generic was
originally a capsule. The innovator has now received approval for an alternative
dose form (a tablet rather than capsule) and has discontinued the original dose
form. While a reference product remains for the capsule, the market opportunity
has changed and this affects how we might commercialize the capsule dosage form.
On June 19, 2006, we received written notice from Harris of Harris's intent to
terminate the agreement in accordance with Section 9.3 of the agreement. As the
date hereof, Elite has received $29,700 for this development work.
On June 21, 2005, Elite entered into a product development and
commercialization agreement with IntelliPharmaCeutics Corp. ("IPC"), a privately
held, specialty pharmaceutical Canadian company that develops generic controlled
release drug products. It is affiliated with IntelliPharmaCeutics, Ltd. The
agreement provides for the co-development and commercialization of a controlled
released generic product. IntelliPharmaCeutics has taken a formulation for the
product into a pilot bioequivalence biostudy. Upon commercialization, Elite is
to share the profits, if any, realized upon sales. A successful pivotal biostudy
and an approved ANDA filing is required to commercialize this product. On
December 12, 2005, Elite and IPC amended their obligations to suspend their
obligations under the IPC Agreement with respect to the development and
commercialization of the controlled release drug product in Canada. IPC, in
turn, entered into an agreement with ratiopharm, inc., a Canadian company, for
the development and commercialization for the product in Canada and will pay
Elite a certain percentage of any payments received by IPC with respect to the
commercial sale of this product by ratiopharm, inc. in Canada.
On June 22, 2005, Elite entered into a Product Development and License
Agreement with PLIVA, Inc. ("PLIVA"), now a subsidiary of Barr Pharmaceuticals
Inc., providing, for the development and license of a controlled released
generic product. Under the agreement, PLIVA is to make upfront and milestone
payments in the aggregate of $550,000 to Elite. Elite is to manufacture and
PLIVA is to market and sell the product. The development costs will be paid by
PLIVA and Elite and the profits will be shared equally. As of the date hereof,
Elite has not received any of the payments from PLIVA. Elite has developed a
formulation that matches the branded product and has tested it in a pilot study.
A successful pivotal biostudy and an approved ANDA filing is required to
commercialize this product. On June 28, 2007, Elite and Pliva terminated the
Product Development and License Agreement and entered into a termination
agreement according to which it was agreed that Elite owns all intellectual
property rights relating to the controlled released generic product under
development and Pliva agreed to pay Elite $100,000 in discharge of outstanding
payments under the Product Development and License Agreement.
On January 10, 2006, Elite entered into an agreement with Orit
Laboratories LLC ("Orit"), an affiliate of Tish Technologies LLC, providing that
Elite and Orit will co-develop and commercialize an extended release drug
product for treatment of anxiety, and, upon completion of development, may
license it for manufacture and sale. The parties intend to develop all dose
strengths of the product. Orit has been providing formulation and analytical
resources for the development work. Elite's facility has been used for
manufacture of development batches. Elite is to share in the profits, if any
from the sales of the drug. A
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formulation has been developed that matches the innovator's product using IN
VITRO testing and next steps will be scale up and pilot testing.
On November 10, 2006, Elite entered into a product collaboration
agreement with The PharmaNetwork, LLC ("TPN") for the development of the generic
product equivalent of a synthetic narcotic analgesic drug product. TPN is to
perform development services and prepare and file an ANDA in the name of TPN
with the FDA. Elite is to provide development support, including the purchase of
active pharmaceutical ingredients and materials and supplies to manufacture the
batch, provide adequate facilities to TPN for use in its development work and
following ANDA approval, Elite will manufacture the drug product developed.
Elite is to pay TPN for the development services rendered upon the attainment of
certain milestones. The out-of-pocket costs are to be shared by TPN and Elite,
with TPN's obligation to be payable from the royalty compensation. Formulation
development work is currently underway.
In January 2006, the FDA accepted our IND for ELI-154, its once-a-day
oxycodone painkiller. Under the new drug application, we will begin our
development program with an early stage study to evaluate ELI-154's sustained
release formation. Currently there is no once-daily oxycodone available; we
estimate that the U.S. market for sustained release, twice-daily oxycodone was
about $2 billion as of September, 2005.
No assurance can be given that we will consummate any of the
transactions discussed above or that any material revenues will be generated for
us therefrom.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended June 30, 2007, we recorded positive cash
flow and financed our operations through utilization of our existing cash and
cash raised through our private placement of Series C 8% Preferred Stock. Our
working capital at June 30, 2007 was $11.2 million compared with working capital
of $6.9 million at June 30, 2006. Cash and cash equivalents at June 30, 2007
were $14.4 million, an increase of $7.7 million from the $6.7 million at June
30, 2006.
We spent approximately $536,519 on improvements and machinery and
equipment during the three months ended June 30, 2007.
On April 24, 2007, we sold in a private placement through Oppenheimer &
Company, Inc., the placement agent (the "placement agent"), 15,000 shares of our
Series C 8% Preferred Stock, at a price of $1,000 per share, each share
convertible (at $2.32 per share) into 431.0345 shares of Common Stock, or an
aggregate of 6,465,504 shares of Common Stock. The investors also acquired
warrants to purchase shares of Common Stock, exercisable on or prior to April
24, 2012. The warrants represent the right to purchase an aggregate of 1,939,641
shares of Common Stock at an exercise price of $3.00 per share. The gross
proceeds of the sale were $15,000,000 before payment of $1,050,000 in
commissions to the Placement Agent and selected dealers. We also paid certain
legal fees and expenses of counsel to the Placement Agent. We issued to the
Placement Agent and its designees five year warrants to purchase 193,965 shares
of Common Stock with similar terms to the warrants issued to the Investors with
an exercise price of $3.00 per share. The approximate $13,900,000 of net
proceeds will contribute materially to our efforts to advance our portfolio of
pain products through the clinic as well as accelerate the development of our
other controlled release products which utilize our proprietary oral drug
delivery systems and abuse resistant technology.
From time to time we will consider potential strategic transactions
including acquisitions, strategic alliances, joint ventures and licensing
arrangements with other pharmaceutical companies. We retained an investment
banking firm to assist with our efforts. There can be no assurance that any such
transaction will be available or consummated in the future.
As of June 30, 2007, our principal source of liquidity was
approximately $14,441,000 of cash and cash equivalents. In July 2007 we sold the
remaining 5,000 authorized shares of Series C 8% Preferred Stock, together with
warrants to purchase shares of our Common Stock, which resulted in net proceeds
of approximately $4,600,000. After the closing of the sale of the additional
Series C 8% Preferred Stock our principal source of liquidity was approximately
$18,541,000 of cash and cash equivalents. Additionally, we may have access to
funds through the exercise of outstanding stock options and warrants in addition
to funds
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that may be generated from the potential sale of New Jersey tax losses. There
can be no assurance that the sale of tax losses or by the exercise of
outstanding warrants or options will generate or provide sufficient cash.
The Company had outstanding, as of June 30, 2007, bonds in the
aggregate principal amount of $3,980,000, consisting of $3,540,000 of 6.5% tax
exempt Bonds with an outside maturity of September 1, 2030 and $440,000 of 9.0%
Bonds with an outside maturity of September 1, 2012. The bonds are secured by a
first lien on the Company'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 Company'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, 2007. Pursuant to the terms of the related bond indenture agreement,
the Company is required to observe certain covenants, including covenants
relating to the incurrence of additional indebtedness, the granting of liens and
the maintenance of certain financial covenants. As of June 30, 2007, the Company
was in compliance with the bond covenants.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had no investments in marketable securities as of June 30,
2007 or assets and liabilities which are denominated in a currency other than
U.S. dollars or involve commodity price risks.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, based on an
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the
Chief Executive and Chief Financial Officer of the Company concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in its Exchange Act reports
is recorded, processed, summarized and reported within the applicable time
periods specified by the SEC's rules and forms.
There was no change in the Company's internal controls over financial
reporting that occurred during the fiscal quarter ended June 30, 2007 that
materially affected or is reasonably likely to materially affect the Company's
internal controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Stockholders at the Company's Annual Meeting of Stockholders held on June 26,
2007 took the following actions:
1. Elected its four Directors.
No. of Votes For No. of Votes Against
Bernard Berk 16,410,451 851,436
Barry Dash 17,099,533 162,354
Robert Levensen 17,099,533 162,354
Veerappan Subramanian 17,071,661 190,226
Melvin Van Woert 17,099,533 162,354
2. Approved the proposal to ratify the Company's Series C Financing,
which involved the sale of the Company's Series C Preferred Stock
and common stock purchase warrants pursuant to a Securities
Purchase Agreement, dated as of April 24, 2007 by a vote of
3,467,954 for, 237,152 shares against and 15,712 shares
abstaining.
3. Approved the engagement of Miller, Ellin & Company LLP as the
Company's independent auditors for the year ended March 31, 2007
by a vote of 16,421,486 shares for, 67,383 shares against and
7,208 shares abstaining.
ITEM 6. EXHIBITS
The exhibits listed in the accompanying below are filed as part of this
report.
Exhibit
Number Description
--------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELITE PHARMACEUTICALS, INC.
Date: August 10, 2007 By: /s/ Bernard Berk
--------------------------------------------
Bernard Berk
Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 2007 By: /s/ Mark I. Gittelman
--------------------------------------------
Mark I. Gittelman
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
31