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 December 31, 2006
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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
----------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
165 Ludlow Avenue, Northvale, New Jersey 07647
--------------------------------------------- -------------------------------
(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 February 10, 2007: 20,706,443 (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 December 31, 2006 (unaudited) and
March 31, 2006 (audited) 2 - 3
Consolidated Statements of Operations for the three and nine months
ended December 31, 2006 and December 31, 2005 (unaudited) 4
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended December 31, 2006 (unaudited) 5
Consolidated Statements of Cash Flows for the nine months
ended December 31, 2006 and December 31, 2005 (unaudited) 6
Notes to Consolidated Financial Statements 7 - 17
Item 2. Management's Discussion And Analysis of Financial
Condition And Results Of Operations 18 - 23
Item 3. Quantitative And Qualitative Disclosures
About Market Risk 23
Item 4. Controls and Procedures 23
PART II OTHER INFORMATION
Item 5. Other Information 24 - 27
Item 6. Exhibits 28 - 29
SIGNATURES 30
1
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, MARCH 31,
2006 2006
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $ 5,085,002 $ 8,919,354
Accounts receivable, net of allowance for doubtful accounts of
$0 as of December 31, 2006 and $153,250 as March 31, 2006 120,000 --
Current portion of restricted cash - capital project fund 593,931 1,173,896
Prepaid expenses and other current assets
-----------
789,002 470,633
----------- -----------
Total current assets 6,587,935 10,563,883
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 4,646,976 4,308,969
----------- -----------
INTANGIBLE ASSETS - net of accumulated amortization 48,322 59,457
----------- -----------
OTHER ASSETS:
Security deposit 6,980 6,980
Restricted cash - debt service for EDA Bonds 415,500 415,500
EDA Bond offering costs, net of accumulated amortization
of $16,000 and $7,000, respectively 338,452 347,452
----------- -----------
Total other assets 760,932 769,932
----------- -----------
Total assets $12,044,165 $15,702,241
=========== ===========
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
DECEMBER 31, MARCH 31,
2006 2006
(Unaudited) (Audited)
CURRENT LIABILITIES:
Current portion of EDA Bonds $ 185,000 $ 175,000
Accounts payable and accrued expenses 1,510,112 1,740,263
Dividends payable -- 33,333
------------ ------------
Total current liabilities 1,695,112 1,948,596
------------ ------------
LONG TERM LIABILITIES:
EDA bonds - net of current portion 3,795,000 3,980,000
------------ ------------
Total liabilities 5,490,112 5,928,596
------------ ------------
Minority Interest 4,702 --
------------ ------------
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 December 31, 2006 and March 31, 2006
Authorized 10,000 Series B Convertible Preferred Stock -
issued and outstanding - 9,695 and 10,000 shares, respectively 97 100
Common Stock - $.01 par value;
Authorized - 65,000,000 shares
Issued and outstanding - 20,706,443 shares and 19,190,159
shares respectively 207,064 191,902
Additional paid-in capital 65,213,110 60,105,107
Accumulated deficit (58,564,079) (50,216,623)
------------ ------------
6,856,192 10,080,486
Treasury stock, at cost (100,000 shares) (306,841) (306,841)
------------ ------------
Total stockholders' equity 6,549,351 9,773,645
------------ ------------
Total liabilities and stockholders' equity $ 12,044,165 $ 15,702,241
============ ============
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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2006 2005 2006 2005
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
Manufacturing Fees $ 209,139 $ -- $ 476,598 $ 369,173
Royalties 22,295 15,635 66,939 33,405
------------ ------------ ------------ ------------
TOTAL REVENUES 231,434 15,635 543,537 402,578
------------ ------------ ------------ ------------
COST OF OPERATIONS:
Research and development 1,691,861 1,124,581 4,317,151 2,862,908
General and administrative 510,569 379,893 1,600,287 1,241,108
Depreciation and amortization 127,035 96,450 366,105 405,562
------------ ------------ ------------ ------------
2,329,465 1,600,924 6,283,543 4,509,578
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (2,098,031) (1,585,289) (5,740,006) (4,107,000)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 66,602 22,562 253,867 59,028
Sale of New Jersey tax losses 377,259 219,121 377,259 219,121
Interest expense (67,423) (70,612) (207,604) (200,118)
Non-cash compensation through issuance
of stock options and warrants (1,848,876) (287,303) (2,438,188) (618,580)
------------ ------------ ------------ ------------
(1, 472,438) (116,232) (2,014,666) (540,549)
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (3,570,469) (1,701,521) (7,754,672) (4,647,549)
------------ ------------ ------------ ------------
Provision for Income Taxes -- -- (1,000) (1,000)
Minority Interest in Loss of Novel Laboratories, Inc. 5,498 -- 5,498 --
------------ ------------ ------------ ------------
NET LOSS $ (3,564,971) $ (1,701,521) $ (7,750,174) $ (4,648,549)
Preferred Stock Dividends (198,209) -- (597,282) --
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ (3,763,180) $ (1,701,521) $ (8,347,456) $ (4,648,549)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.19) $ (.09) $ (.43) $ (.25)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,881,677 18,426,960 19,520,884 18,229,658
============ ============ ============ ============
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
ADDITIONAL
----------
PREFERRED STOCK COMMON STOCK PAID-IN
--------------- ------------ -------
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
BALANCE AT MARCH 31, 2006 (AUDITED) 10,000 $ 100 19,190,159 $ 191,902 $ 60,105,107
Nine Months ended December 31, 2006:
(Unaudited)
Sale of Common Shares -- -- 957,396 9,574 1,990,426
Conversion of Preferred to Common (305) (3) 135,555 1,356 (1,353)
Non-Cash Conversion of Common Stock -- -- 84,430 844 (844)
Warrants
Exercise of Stock Options -- -- 59,000 590 87,910
Non-cash compensation through issuance
of stock options and warrants -- -- -- -- 2,438,188
Net loss for nine months ended December -- -- -- -- --
31, 2006
Dividends -- -- 279,903 2,798 593,676
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2006
(UNAUDITED) 9,695 $ 97 20,706,443 $ 207,064 $ 65,213,110
============ ============ ============ ============ ============
TREASURY STOCK ACCUMULATED STOCKHOLDERS'
-------------- ----------- -------------
SHARES AMOUNT DEFICIT EQUITY
------ ------ ------- ------
BALANCE AT MARCH 31, 2006 (AUDITED) (100,000) $ (306,841) $(50,216,623) $ 9,773,645
Nine Months ended December 31, 2006:
(Unaudited)
Sale of Common Shares -- -- -- 2,000,000
Conversion of Preferred to Common -- -- -- --
Non-Cash Conversion of Common Stock -- -- -- --
Warrants
Exercise of Stock Options -- -- -- 88,500
Non-cash compensation through issuance
of stock options and warrants -- -- -- 2,438,188
Net loss for nine months ended December -- -- (7,750,174) (7,750,174)
31, 2006
Dividends -- -- (597,282) (808)
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2006
(UNAUDITED) (100,000) $ (306,841) $(58,564,079) $ 6,549,351
============ ============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
5
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
DECEMBER 31,
------------
2006 2005
---- ----
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,750,174) $(4,648,549)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 366,105 405,562
Minority Interest in loss of subsidiary 4,702 --
Non-cash compensation satisfied by issuance of common stock, options and warrants 2,438,188 618,580
Changes in assets and liabilities:
Accounts receivable (120,000) 142,113
Prepaid expenses and other current assets (318,369) (77,527)
Security deposit -- (6,980)
Accounts payable, accrued expenses and other current liabilities (230,151) 320,518
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (5,609,699) (3,246,283)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (678,507) (205,625)
(Increase) in restricted cash -- (1,689,811)
Release of restricted cash 579,965 413,425
Increase in intangible assets due to patent costs (5,470) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (104,012) (1,482,011)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (34,141) --
Proceeds - NJEDA tax exempt bonds -- 4,155,000
Payment - EDA bond offering costs -- (354,452)
Principal repayments NJEDA bonds (175,000) (2,345,000)
Principal equipment note payments -- (274,061)
Proceeds from exercise of stock options 88,500 40,000
Proceeds from exercise of stock warrants -- 1,252,995
Proceeds from sale of common stock 2,000,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,879,359 2,474,482
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,834,352) (2,253,812)
CASH AND CASH EQUIVALENTS - beginning of period 8,919,354 3,902,003
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 5,085,002 $ 1,648,191
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 207,605 $ 121,113
Cash paid for income taxes 1,000 1,000
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred stock dividends of $596,474 paid by issuance of 279,903
shares of common stock in 2006 $ -- $ --
The accompanying notes are an integral part of the
consolidated financial statements.
6
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(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 and nine months ended December 31, 2006 and December 31,
2005. As of December 31, 2006, 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, 2006. There have been no
changes in significant accounting policies since March 31, 2006.
The Company does not anticipate being profitable for fiscal year
2007; therefore a current provision for income tax was not
established for the three or nine months ended December 31,
2006. Only the minimum corporation tax liability required for
state purposes is reflected.
On August 16, 2006, the Company announced that the American
Stock Exchange ("AMEX") confirmed the Company has regained
compliance with continued listing standards of AMEX.
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 December 31,
2006, there is $593,931 remaining in the short-term restricted
cash account.
7
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STAT EMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY
WARRANTS AND OPTIONS
During the nine months ended December 31, 2006, 305 shares of
Series B Preferred Stock were converted into 135,555 shares of
Common Stock.
Dividends accrued on Series B Preferred Stock through conversion
date and December 31, 2006 were satisfied by the issuance of
1,318 and 278,585 shares of Common Stock, respectively.
During the nine months ended December 31, 2006, 3,750 options
expired, 65,500 were forfeited and 59,000 options were exercised
for gross proceeds of $88,500.
During the nine months ended December 31, 2006, there were
cashless exercises of 217,452 warrants issued in our October,
2004 Private Placement, which resulted in the issuance of 84,430
shares of Common Stock.
On December 6, 2006, the Company issued to VGS Pharma, LLC a
five year warrant to purchase 478,698 shares of Common Stock for
cash at a price of $3.00 per share, subject to adjustment upon
the occurrence of certain events. The per share weighted value
of the warrant to purchase 478,698 shares of Common Stock at
$3.00 per share is $0.77. The warrant was valued using the
Black-Scholes option pricing model with the following weighted
average assumptions: no dividend yield; expected volatility of
46.12%; risk free interest rate of 5%; and expected life of 5
years. As a result, a charge of $366,396 is reflected in the
consolidated statement of operations.
In addition, on December 6, 2006, the Company granted to
Veerappan Subramanian ("VS") an option to purchase up to
1,750,000 shares of the Common Stock at $2.13 a share. The
option vests as to 250,000 shares immediately and in subsequent
250,000 share installments, with one vesting on May 6, 2007,
another on December 6, 2007, a third upon acceptance of the
initial business plan of Novel, and the other installments
vesting on the accomplishment of certain milestones with respect
to the first or second drug product developed by the Company
(excluding drug products of Novel) on or after the 60th day
after December 6, 2006, under the advisory services provided to
the Company. The per share weighted-average fair value of the
option to purchase up to 1,750,000 shares of Common Stock
granted to VS is $1.36 a share for an actual charge of
$2,380,000 which will be recognized over the vesting period of
the instrument. The option was valued using the Black-Scholes
option pricing model with the following weighted average
assumptions: no dividend yield; expected volatility of 46.12%;
risk free interest rate of 5%; and expected life of 10 years.
VGS is a wholly owned subsidiary of Kali Capital, L.P., which is
controlled by Kali Management, LLC ("KALI"), its general
partner, and Kali is controlled by Anu Subramanian, its managing
member and daughter of VS. VS was subsequently appointed to the
Board of Directors of the Company and became the Company's Chief
Scientific Officer. See "Item 5. Other Information."
On July 12, 2006, the Company sold to Indigo Ventures, LLC
("Indigo") for $150,000 a warrant to purchase up to 600,000
shares of Common Stock at $3.00 per share pursuant to the
Financial Advisory Agreement with Indigo (the "Advisory
Agreement"), of which 100,000 shares of Common Stock have
vested. The Advisory Agreement has been amended and the warrant
reduced from 600,000 to 300,000 shares of Common Stock. See
"Note 5. Subsequent Events."
The following grants were made under the Company's 2004 Stock
Option Plan in the nine months ended December 31, 2006:
On November 21, 2006, the Company granted options to sixteen
employees to purchase an aggregate of 66,500 shares of Common
Stock with an exercise price of $2.26 to vest over a period of
three years from grant date.
8
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STAT EMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY (Continued)
WARRANTS AND OPTIONS (Continued)
On November 13, 2006, the Company granted to Bernard Berk, the
Company's Chief Executive Officer, according to terms of the
Second Amended and Restated Employment Agreement additional
stock options to purchase up to 300,000 shares of the Company's
Common Stock at $3.00 a share. See "Item 5, Other Information".
Additionally, under employment agreements with each of Dr.
Charan Behl, Executive Vice President and Chief Scientific
Officer, and Chris Dick, Executive Vice President of Corporate
Development, the Company granted to each, options to purchase up
to 750,000 shares of Common Stock at $2.25 a share. See "Item 5.
Other Information".
On June 1, 2006, the Company entered into a one year consulting
agreement with David Filer, whereby Dr. Filer is to provide
financial advisory services to the Company, in consideration of
the grant of three year options to purchase 10,000 shares of
Common Stock, at a price of $3.00 per share.
On May 3, 2006, the Company granted options to purchase 70,000
shares of Common Stock at a price of $2.26 per share to Mark
Gittelman, its Chief Financial Officer. One-third of the options
vest on each of May 3, 2007, May 3, 2008 and May 3, 2009.
Additionally, between February and October 2006, the Company
granted ten year options to twelve employees to purchase an
aggregate of 83,000 shares of Common Stock with exercise prices
ranging from $2.25 to $2.30 per share and to vest over a period
of three years from grant date.
The per share weighted average of the stock option grants made
under the Company's 2004 Stock Option Plan in the nine months
ended December 31, 2006, ranged from $1.36 to $1.69 using the
Black-Scholes options pricing model with the following weighted
average assumptions: no dividend yield; expected volatility
ranging from 46.12% to 57.95%; risk free interest rate of 5.00%
and expected lives of ten years.
The following grants were made under the Company's 2004 Stock
Option Plan in the nine months ended December 31, 2005.
On September 2, 2005, the Chief Executive Officer waived his
rights to 75,000 of 300,000 options granted to him on July 23,
2003 and the Company determined that the remaining 225,000
options are fully vested. In addition, the Company granted him
under its 2004 Stock Option Plan ten year options to purchase an
additional 600,000 shares of Common Stock at a price of $2.69
per share of which 100,000 vested on September 2, 2006, 100,000
are to vest on September 2, 2007 and up to 400,000 options to
vest as follows:
a) 50,000 options upon the closing of each product
license or product sales transaction in which
the Company receives an aggregate of at least
$5,000,000 in net cash
b) 10,000 options upon filing with the United
States Food and Drug Administration (the "FDA")
of each abbreviated new drug application (an
"ANDA") or new drug application (an "NDA"); and
c) 40,000 options upon approval by the FDA of any
ANDA or NDA for a product not previously
approved by the FDA.
9
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STAT EMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY (Continued)
WARRANTS AND OPTIONS (Continued)
The per share weighted value of the option to purchase 600,000
shares of Common Stock at $2.69 per share is $2.42. The option
was valued using the Black-Scholes option pricing model with the
following weighted average assumptions: no dividend yield;
expected volatility of 97.84%; risk free interest rate of 4.18%;
and expected lives of 10 years.
On August 30, 2005, the Company granted to the Directors ten
year options to purchase an aggregate of 120,000 shares of
Common Stock at a price of $2.75 per share to vest over a three
year period from date of grant. The per share weighted-average
fair value of the 120,000 options amounted to $2.48 using the
Black-Scholes options pricing model with the following weighted
average assumptions: no dividend yield; expected volatility of
97.84%; risk free interest rate of 4.18%; and expected lives of
ten years.
On August 24, 2005, the Company granted ten year options to
purchase in the aggregate 2,000 shares at a price of $2.81 per
share to employees of the Company vesting over a three year
period from date of grant. The per share weighted-average fair
value of the 2000 options amounted to $2.53 using the
Black-Scholes options pricing model with the following weighted
average assumptions: no dividend yield; expected volatility of
97.84%; risk free interest rate of 4.18%; and expected lives of
ten years.
On July 14, 2005, the Company granted ten year options to
purchase at a price of $2.80 per share an aggregate of 152,200
shares of Common Stock to employees of the Company. The options
provided vesting periods ranging from immediate to a period of
five years from date to grant. The per share weighted-average
fair value of the 152,500 options amounted to $2.52 using the
Black-Scholes options pricing model with the following weighted
average assumptions: no dividend yield; expected volatility of
97.84%; risk free interest rate of 4.18%; and expected lives of
ten years.
Additionally, on July 14, 2005, the Company granted ten year
options to purchase 20,000 shares of Common stock at a price of
$2.80 per share to its Chief Financial Officer. The option vests
over a three-year period from date of grant. The per share
weighted-average fair value of the 20,000 options amounted to
$2.52 using the Black-Scholes options pricing model with the
following weighted average assumptions: no dividend yield;
expected volatility of 97.84%; risk free interest rate of 4.18%;
and expected lives of ten years.
The Company, in May 2005, revoked 180,000 of outstanding
unexercised options granted prior to the adoption of the 2004
Stock Option Plan originally earmarked to members of the
abandoned Scientific Advisory Board.
The Company took charges of $2,438,188 and $618,580 for the nine
months ended December 31, 2006 and 2005, respectively, and
$1,848,876 and $287,303 for the three months ended December 31,
2006 and 2005, respectively, which represents the fair value of
the vested options, utilizing the Black-Scholes options pricing
model on the grant date.
At December 31, 2006, the Company had outstanding 6,622,500
options with exercise prices ranging from $1.50 to $3.00 per
share and 6,940,445 warrants with exercise prices ranging from
$1.50 to $4.20 per share; each option and warrant representing
the right to purchase one share of Common Stock.
10
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES
COLLABORATIVE AGREEMENTS
On June 21, 2005, the Company and IntelliPharmaCeutics Corp.
("IPC"), entered into an agreement for the development and
commercialization of a controlled released generic drug for
certain gastric diseases by the parties. The Company is to share
in the profits, if any, from the sales of the drug. The
agreement was amended on December 12, 2005, whereby IPC and
another company with marketing and distribution capabilities in
Canada, have agreed to develop and commercialize the product for
Canada. The Company and IPC will share their proceeds of
commercialization in Canada on the same terms as in the June 21,
2005 Agreement.
On June 22, 2005, the Company 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 the Company. The Company is to
manufacture and Pliva is to market and sell the product. The
development costs are to be paid by Pliva and the Company and
the profits are to be shared equally. Pliva is to make milestone
payments to the Company. As of December 31, 2006 no revenues
have been generated under the agreement.
On November 10, 2006, the Company and ThePharmaNetwork, LLC
("TPN") entered into a Product Collaboration Agreement for the
development of a specific synthetic narcotic analgesic drug
product from which a generic equivalent is to be developed. TPN
is to perform development services and prepare and file an
Abbreviated New Drug Application (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 is to 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. As of December 31, 2006, no revenues have been
generated under the agreement.
The aforementioned agreements are in their early stages.
On June 19, 2006, the Company received written notice from
Harris Pharmaceutical, Inc. ("Harris") of Harris' intent to
terminate a Product Development, Manufacturing and Distribution
Agreement, dated as of March 30, 2005 with Harris and Tish
Technologies LLC ("Tish") with respect to a controlled release
generic anti-infective drug. The product is a generic equivalent
to a branded drug. The agreement provides for (i) the drug
development by the Company with costs of development to be
shared by the Company and Harris, (ii) the manufacture of the
product by the Company and its sale to Harris for distribution,
and (iii) Tish to be responsible for any requisite submissions
to the FDA relating to the product. The Company is to share in
the profits, if any, generated from the sale of the product. As
of December 31, 2006, no revenues had been earned under the
agreement and Harris owes the Company $394,637 for its share of
the development costs.
CONSULTING AGREEMENTS
On May 23, 2006, the Company entered into a consulting agreement
with Oppenheimer & Co., Inc. ("Oppenheimer") to render financial
advisory services to the Company in connection with potential
acquisitions by the Company, strategic alliances with other
pharmaceutical companies, advice with respect to future
financings to be undertaken by the Company and introductions to
key parties in the capital markets. In consideration the Company
paid Oppenheimer a cash fee of $60,000.
11
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
On November 8, 2005, the Company entered into an agreement with
an investor relations firm to provide investor relation services
including, but not limited to, overall management of the
Company's corporate communications program, securing group
appointments, assistance with mass targeted mailings, compiling
promotional materials, editing news releases and other corporate
functions. The agreement provided that consultant is to receive
$10,000 a month beginning November 1, 2005 and non-qualified
options to purchase 75,000 shares of the Company's Common Stock,
vesting pro-rata over a nine month period, at a price of $2.26
per share, the fair market value of a share of Common Stock on
the date of the grant. The per share weighted average fair value
of the above-mentioned options was $1.70 using the Black-Scholes
option pricing model.
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.
For the three and nine months ended December 31, 2006,
consulting expenses under these agreements amounted to an
aggregate of $75,000 and $225,000, respectively.
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.
12
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
NOTE 4 - 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 contributed $2,000,000 to Novel and agreed to
provide additional contributions within 30 days of the
achievement of certain performance milestones (e.g. the
initiation of development programs for prospective products,
commencement and/or completion of clinical and/or bioequivalence
studies for prospective products, filings with the FDA of new
drug or abbreviated new drug applications related to prospective
products) which are mutually agreed to by the Company and VS,
who is employed as Chief Executive Officer of Novel, in Novel's
Initial Business Plan, which may be modified in a subsequent
Business Plan, to occur during the initial 30 months following
December 6, 2006 (collectively, the "Performance Milestones").
The agreement provides contributions, subject to acceleration
with unanimous approval of the Board of Directors of Novel, are
to be in amounts mutually agreed to by the Company and VS as
provided in the Initial Business Plan and each subsequent annual
Business Plan during the initial 30 month period and are not to
exceed $25,000,000 in the aggregate, without the prior consent
of the Company. The Company has agreed to provide Novel
personnel staff, facility, supplies and equipment pending
Novel's becoming fully operational with its own staff, facility,
equipment and supplies.
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.
13
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
NOTE 4 - 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".
14
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
ADVISORY AGREEMENT
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 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.
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.
15
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENTS (Continued)
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 and accrued but not payable until November
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. See "Note 3 -
Warrants and Options".
- 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 a second amended
and restated employment agreement with Bernard Berk as Chief
Executive Officer and employment agreements with each of Dr.
Charan Behl as Executive Vice President and Chief Scientific
Officer and Chris Dick as Executive Vice President of Corporate
Development. Each agreement is for an additional or initial term
of three years subject to annual extensions, unless terminated
by notice by either the Company or the executive at least 60
days before the period of extension.
Mr. Berk's agreement continues his annual salary of $330,140.
Dr. Behl's and Mr. Dick's agreements provide for annual base
salaries of $250,000 and $200,000 respectively, plus an annual
bonus for each of $25,000. The Compensation Committee as to Mr.
Berk and the Board of Directors or Compensation Committee as to
Dr. Behl and Mr. Dick may authorize the payment to the executive
of a discretionary bonus of up to 50% of his then annual base
salary, based on various factors. Each agreement provides for
severance pay in the event of termination by the Company due to
disability, or without cause, or by the executive for good
reason.
The agreements provide for the grant to each of Dr. Behl and Mr.
Dick under the Company's 2004 Stock Option Plan incentive stock
options to purchase 250,000 shares of the Company's Common Stock
at $2.25 per share, the market price on the date of grant. Based
on the occurrence within the initial term of employment of a
specified transaction or event (including a market product
license or product sale or completion of the first Phase III
clinical trial of a specified drug under development or the
filing or granting of an ANDA or NDA or U.S. patent application
not previously filed or granted) up to 500,000 incentive stock
options granted to each of Dr. Behl and Mr. Dick will vest.
Subject to the full vesting of his foregoing options during the
initial term of his agreement, each executive will be granted
additional incentive stock options at the market price on the
date of grant at the end of the first fiscal year in which the
event or transaction occurs. See "Item 5. Other Information".
16
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
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 has a renewal
option for a five-year period.
Future minimum lease payments for the twelve months ending
December 31, 2007 are $17,682.
NOTE 5 - SUBSEQUENT EVENTS
The Company entered into the following material definitive
agreements subsequent to December 31, 2006:
AMENDMENT OF FINANCIAL ADVISORY AGREEMENT
On February 13, 2007, the Financial Advisory Agreement (the
"Advisory Agreement") between the Company and Indigo Ventures,
LLC, ("Indigo") 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 right to exercise the warrant was reduced from 600,000 to
300,000 shares of common stock 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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2006 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2005 (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, 2006 (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
The Company is a specialty pharmaceutical company principally engaged
in the development and manufacturing of oral controlled-release products. The
Company's strategy includes developing generic versions of controlled release
drug products with high barriers to entry and assisting partner companies in the
life cycle management of products to improve off-patent drug products. The
Company's technology is applicable to develop delayed, sustained or targeted
release capsules or tablets. The Company has one product currently being sold
commercially and a pipeline of eight drug products under development in the
therapeutic areas that include pain management, cardiovascular, allergy and
infection. The addressable market for the Elite's current products exceeds $6
billion in the aggregate. The Company also has a GMP and DEA registered facility
for research, development, and manufacturing located in Northvale, New Jersey.
In December, 2006, the Company contributed $2,000,000 to a newly formed
corporation to carry out the initiatives of an Alliance Agreement between the
Company and Dr. Veerappan S. Subramanian including but not limited, to the
commercialization of the Company's existing pipeline and the research,
development
18
manufacturing licensing and acquisition of specialty generic pharmaceuticals.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion addresses the Company's 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 long-lived assets, intangible assets, income taxes, equity-based
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.
The Company's most critical accounting policies include the recognition
of revenue upon completion of certain phases of projects under research and
development contracts. Revenues from these contracts are recognized when
management determines the Company has completed its obligation under each phase.
The Company also assesses a need for an allowance to reduce its deferred tax
assets to the amount that it believes are more likely than not to be realized.
Management estimates its net operating losses will probably not be utilized in
the near future, and has not recognized a tax benefit from this deferred tax
asset. If management anticipated being profitable, a deferred tax benefit would
be recognized and such estimate would reduce net loss and net loss per share
accordingly. The Company assesses the recoverability of long-lived assets and
intangible assets whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. Management estimates the
Company's patents and property and equipment are not impaired. If these assets
were considered impaired, the Company would recognize an impairment loss which
would increase the Company's net loss and net loss per share accordingly. It
should be noted that actual results may differ from these estimates under
different assumptions or conditions.
RESULTS OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2006 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2005
The $231,434 of revenues consisted of manufacturing fees of $209,139
and royalties of $22,295 for the three months ended December 31, 2006. The
manufacturing fees arose from the manufacture of commercial batches or Lodrane
24(R) and Lodrane 24D(R). All of the $15,635 of revenues for the three months
ended December 31, 2005 were royalties.
Research and development costs for the three months ended December 31,
2006 were $1,691,861, an increase of $567,280, or approximately 50.4%, from
$1,124,581 for the comparable period of the prior year. The increase was
primarily the result of increases in wages and related payroll taxes and fringe
benefits, raw materials, and laboratory and manufacturing supplies, including
costs associated with the manufacturing of batches of Lodrane 24(R) and Lodrane
24D(R), the work completed on newly signed development agreements, the advance
of our abuse resistant oxycodone into Phase II and completion of a Phase I study
as to the ELI 154 once daily oxycodone drug.
General and administrative expenses (G&A) for the three months ended
December 31, 2006 were $510,569, an increase of $130,676, or approximately
34.4%, from G&A for the comparable period of the prior year. The increase was
substantially due to higher consulting fees and wages and salaries partially
offset by a
19
decrease in legal and accounting fees.
We are in the process of implementing a cost accounting system to allow
for the capturing and reporting of costs of goods sold and research and
development costs by product. However since the cost accounting system has not
been fully implemented, we are unable to provide a break-down of the specific
costs associated with the research and development of each product on which we
devoted resources because a significant portion of the costs are generally
associated with salaries, laboratory supplies, laboratory and manufacturing
expenses, utilities and similar expenses. We have not historically allocated
these expenses to any particular product. In addition, 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.
Depreciation and amortization for the three months ended December 31,
2006 increased by $30,585, or 31.7%, to $127,035 from $96,450 for the year
earlier comparable period; the result of increases in depreciation and
amortization on acquired new machinery and equipment and upgrading of the
corporate and warehouse facilities, partially offset by a reduction in
amortization of financing costs.
Other expenses, net for the three months ended December 31, 2006 were
$1,472,438, an increase of $1,356,206, or approximately 1166.8%, from the
comparable period of the prior year. The increase was primarily due to an
increase in non-cash compensation of $1,561,573 of options granted under new
employment agreements, slightly offset by an increase of $44,040 in interest
income due to higher compensating balances arising from the private placement
and NJEDA refinancing.
As a result of the foregoing, the Company's net loss for the three
months ended December 31, 2006 increased to $3,564,971 from the net loss of
$1,701,521 for the comparable period of the prior year.
NINE MONTHS ENDED DECEMBER 31, 2006 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
2005
The $543,537 of revenues for the nine months ended December 31, 2006
consisted of manufacturing fees of $476,598 and royalties of $66,939. The
manufacturing fees arose from the manufacture of commercial batches or Lodrane
24(R) and Lodrane 24D(R). The $402,578 of revenues for the nine months ended
December 31, 2005 consisted of manufacturing fees of $369,173 and royalties of
$33,405.
Research and development costs for the nine months ended December 31,
2006 were $4,317,151, an increase of $1,454,243, or approximately 50.8%, from
$2,862,908 for the comparable period of the prior year, primarily the result of
increased wages and related payroll taxes and fringe benefits, testing fees, lab
and manufacturing supplies and raw materials due largely to manufacture of
commercial batches of Lodrane 24(R) and Lodrane 24D(R) and work completed on
newly signed development agreements, largely associated with advance of our
abuse resistant oxycodone into Phase II and completion of a Phase I study as to
the ELI 154 once daily oxycodone drug.
For the nine months ended December 31, 2006, general and administrative
expenses were $1,600,287, an increase of $359,179, or 28.9%, from $1,241,108 for
the comparable period of the prior year, substantially due to increases in wages
and related payroll taxes, consulting fees, hiring expenses and temporary help
resulting in part from the expansion of staff and employee salaries.
Depreciation and amortization for the nine months ended December 31,
2006 was $366,105, a decrease of $39,457, or approximately 9.7%, from $405,562
for the comparable period of the prior year. This was the result of the Company
taking in 2005 the full write-off of financing costs associated with the
redemption of tax exempt bonds, originally issued by the Authority on September
2, 1999, partially offset by increases in depreciation in 2006 due to acquired
new machinery and equipment and upgrading of the corporate and warehouse
facilities.
20
Other expenses, net for the nine months ended December 31, 2006 were
$2,014,666, an increase of $1,474,117, or approximately 272.7%, from $540,549
for the comparable period of the prior year, primarily due to an increase of
$1,819,608 arising from grants and vesting of stock options partially offset by
additional interest income due to higher compensating balances as a result of
the private placement and NJEDA refinancing and higher sale proceeds of New
Jersey tax losses.
As a result of the foregoing, the Company's net loss for the nine
months ended December 31, 2006 increased to $7,750,174 from the net loss of
$4,648,549 for the comparable period of the prior year.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company's working capital (total current assets less total current
liabilities), decreased to $4,892,823 as of December 31, 2006 from $8,615,287 as
of March 31, 2006, primarily due to the use of cash in funding the net loss of
$5,740,006 from operations.
The Company experienced negative cash flow from operations of
$5,609,699 for the nine months ended December 31, 2006, primarily the result of
the Company's net loss from operations caused by small revenues and increased
research and development activities for the drug products in its pipeline.
On November 15, 2004, the Company's partner, ECR, launched Lodrane
24(R), once a day allergy product, utilizing the Company's extended release
technology to provide for once daily dosing. Under its agreement with ECR, Elite
is currently manufacturing commercial batches of Lodrane 24(R) in exchange for
manufacturing fees and royalties on product revenues. Manufacturing fees and
royalty income earned for the nine months ended December 31, 2006 was $476,598
and $66,939, respectively. The Company expects future cash flows from
manufacturing fees and royalties to provide additional cash to help to fund its
operations.
On June 21, 2005, the Company and IntelliPharmaCeutics Corp. ("IPC"),
entered into an agreement for the development and commercialization of a
controlled released generic drug for certain anti-infective diseases by the
parties. The Company estimated that the product had an addressable market in the
U.S. of approximately $4 billion in 2004. The Company is to share in the
profits, if any, from the sales of the drug. The agreement was amended on
December 12, 2005, whereby IPC and another company with marketing and
distribution capabilities in Canada, have agreed to the development and
commercialization of the product for Canada with Elite and IPC to share in the
proceeds of commercialization in Canada.
On June 22, 2005, the Company 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 the
Company. The Company is to manufacture and Pliva is to market and sell the
product. Under the agreement, Pliva is to make milestone payments to the
Company. The development costs are to be paid both by Pliva and the Company and
the profits are to be shared.
No assurance can be given that any of the above products will be
successfully developed or that individually or in the aggregate they will
generate any material revenues for the Company.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended December 31, 2006, the Company experienced
negative cash flow and financed its operations primarily through utilization of
its existing cash. As of December 31, 2006, the Company had approximately $5.1
million of cash and cash equivalents, a decrease of approximately $3.8 million
from $8.9 million at March 31, 2006 and had working capital of approximately
$4.9 million.
Net cash used in operating activities for the nine months ended
December 31, 2006, was $5,609,699
21
compared to $3,246,283 for the nine months ended December 31, 2005. The increase
was the result of the Company's net loss of $7,750,174 and increases in prepaid
expenses and other current assets, offset in part by non-cash charges of
$2,438,188 with respect to stock option grants and vesting and $366,105 in
depreciation and amortization expense. The net cash used in operating activities
during the nine months ended December 31, 2005 arose from the Company's net loss
of $4,648,549 offset in part by non-cash charges of $618,580 of stock option and
warrant charges and $405,562 of depreciation and amortization expense.
Investing activities used net cash of $104,012 during the nine months
ended December 31, 2006, which resulted primarily from $678,507 of property and
equipment purchases partially offset by the release of restricted cash of
$579,965.
During the nine months ended December 31, 2006, net cash of $1,879,359
provided by financing activities was primarily the result of a $2,000,000 equity
infusion and $88,500 generated from the exercise of stock options offset in part
by $34,141 in dividends and $175,000 in principal payments on the NJEDA Bonds.
During the nine months ended December 31, 2005, financing activities provided
net cash of $2,474,482 derived from the exercise of stock options and warrants
for $1,292,995 and net proceeds of $3,800,548 derived from refinancing NJEDA
Bonds, partially offset by $2,619,061 in principal note payments.
The Company anticipates that the cash and cash equivalents of
approximately $5 million as of December 31, 2006, are adequate to finance its
operations through June 30, 2007 but thereafter additional financing may be
required, particularly in view of the Company's expenditures required for the
further development and commercialization of its products. The Company has no
current arrangements with respect to additional financings. The Company intends
to seek additional funds through the additional debt or equity funding; however
no assurance can be given that the Company will be able to obtain the required
additional financing or if obtained it will be on favorable terms. The Company's
inability to obtain additional financing when needed would impair its ability to
continue to meet its business objectives. Other possible sources for such
additional financings are revenue derived from product licensing, cash exercises
of the long term warrants issued in the October 2004 private placement, the
replacement warrants issued in the December 2005 private placement, warrants
issued in the March 2006 private placement and other warrants and options that
are currently outstanding.
The Company had outstanding, as of December 31, 2006, 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%
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 reserve, is expected to be expended
within the year ended March 31, 2007 and is therefore categorized as a current
asset on the Company's consolidated balance sheet as of December 31, 2006.
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 December 31, 2006, the Company was in
compliance with the bond covenants.
The Company from time to time may consider potential strategic
transactions including acquisitions, strategic alliances, joint ventures and
licensing arrangements with other pharmaceutical companies. There can be no
assurance that any such transaction will be available or consummated.
As of December 31, 2006, the Company's principal source of liquidity
was cash and cash equivalents of approximately $5 million. The Company also may
receive funds through the exercise of outstanding stock
22
options and warrants in addition to funds that may be generated from the
potential sale of New Jersey tax losses. There can be no assurance that proceeds
from the sale of tax losses and from the exercise, if any, of outstanding
warrants or options will be material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had no investments in marketable securities as of December
31, 2006 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 December 31, 2006 that
materially affected or is reasonably likely to materially affect the Company's
internal controls over financial reporting.
23
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
EXECUTIVE EMPLOYMENT AGREEMENTS.
The Company on November 13, 2006 entered into (i) the Second Amended
and Restated Employment Agreement with Mr. Bernard Berk ("Berk"), its Chief
Executive Officer and Chairman of the Board of Directors (the "Berk Agreement");
(ii) an employment agreement with Dr. Charan 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 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 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
24
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, 21 U.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 developed by the Company and (ii)
up to an additional 125,000 shares as to such trial relating to the second
Non-Generic Opioid Drug developed by the Company, (b) 50,000 shares upon the
closing of each 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
25
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 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.
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 insurance, health and accident, medical
plans and programs and profit sharing and retirement plans.
26
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 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.
STRATEGIC ALLIANCE
See "Note 4. Alliance Agreement" of the Company's Consolidated
Financial Statements for information concerning the 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) the Company engaged VS to serve as
strategic advisor to the Company 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 contributes $2,000,000 to Novel and agreed to make additional
contributions.
VS is a highly accomplished formulator and experienced business
executive in the generic pharmaceutical industry. VS has been responsible for
the development and FDA approval of over 150 specialty and generic drug
products. VGS is a wholly-owned subsidiary of Kali Capital, L.P., which is
controlled by Kali Management, LLC ("Kali"), its general partner, and Kali is
controlled by Anu Subramanian, its managing member and daughter of VS.
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. 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 who is to report to
the Chief Executive Officer, the Chief Scientific Officer and any additional
executive officer designated by the Board of Directors of the Company (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.
In July 2006, Dr. Charan Behl, its then Chief Scientific Officer,
consented to an injunction entered by the United States District Court for the
District of Columbia and agreed to pay penalties for alleged violations of
Section 17(a) of the Securities Act of 1933, as amended, and Section 10(b) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule
10b-5 promulgated under the Exchange Act. The United States Securities and
Exchange Commission (the "SEC") alleged that, in May 2004, Dr. Behl sold shares
of another public company subject to the reporting requirements of the Exchange
Act, based on information received from a then employee of such company relating
to a FDA notification regarding a New Drug Application filed by such company. In
August 2006, a final judgment was entered against Dr. Behl based upon his
consent (the "Final Judgment"). The events described above did not involve the
Company nor any securities of the Company. Prior to December 2006, the Company
had no knowledge of the alleged events, the SEC complaint or the related Final
Judgment.
27
ITEM 6. EXHIBITS
The exhibits listed in the accompanying below are filed as part of this
report.
Exhibit
Number Description
--------------------------------------------------------------------------------
10.1 Product Collaboration Agreement with ThePharmaNetwork, LLC dated as
of November 10, 2006 filed as an exhibit to Company's Current Report
on Form 8-K dated November 15, 2006 and incorporated by reference
thereto.
10.2 Second Amended and Restated Employment Agreement with Bernard Berk,
dated November 13, 2006, filed as an exhibit to Company's Quarterly
Report on Form 10-Q dated November 14, 2006 and incorporated by
reference thereto.
10.3 Employment Agreement with Chris Dick, dated November 13, 2006, filed
as an exhibit to Company's Current Report on Company's Quarterly
Report on Form 10-Q dated November 14, 2006 and incorporated by
reference thereto.
10.4 Employment Agreement with Charan Behl, dated November 13, 2006, filed
as an exhibit to Company's Current Report on Company's Quarterly
Report on Form 10-Q dated November 14, 2006 and incorporated by
reference thereto.
10.5 Strategic Alliance Agreement between Company, VGS Pharma, LLC ("VGS")
and Veerappan Subramainian ("VS") dated as of December 6, 2006 filed
as an exhibit to Company's Current Report on Form 8K dated December
12, 2006 and incorporated by reference thereto.
10.6 Advisory Agreement between Company and VS filed as an exhibit to
Company's Current Report on Form 8K dated December 12, 2006 and
incorporated by reference thereto.
10.7 Registration Rights Agreement between Company, VGS and VS filed as an
exhibit to Company's Current Report on Form 8K dated December 12,
2006 and incorporated by reference thereto.
10.8 Employment Agreement between Novel Laboratories, Inc. and VS filed as
an exhibit to Company's Current Report on Form 8K dated December 12,
2006 and incorporated by reference thereto.
10.9 Stockholders' Agreement between Company, VGS, VS and Novel filed as
an exhibit to Company's Current Report on Form 8K dated December 12,
2006 and incorporated by reference thereto.
10.10 Warrant issued to VGS filed as an exhibit to Company's Current Report
on Form 8K dated December 12, 2006 and incorporated by reference
thereto.
10.11 Nonqualified Stock Option granted to VS filed as an exhibit to
Company's Current Report on Form 8K dated December 12, 2006 and
incorporated by reference thereto.
10.12 Amended and Restated Employment Agreement with Charan Behl, dated
February 9, 2007, filed as an exhibit to Company's Current Report on
Form 8-K dated February 14, 2007 and incorporated by reference
thereto.
28
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.
29
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: February 14, 2007 By: /s/ Bernard Berk
----------------------------
Bernard Berk
Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2007 By: /s/ Mark I. Gittelman
----------------------------
Mark I. Gittelman
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
30