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 SEPTEMBER 30, 2006
-----------------------------------------------
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
incorporation or organization) Identification No.)
165 LUDLOW AVENUE, NORTHVALE, NEW JERSEY 07647
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(Address of principal executive offices) (Zip Code)
(201) 750-2646
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the common stock, $.01 par value,
as of November 10, 2006: 19,499,325 (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 September 30, 2006
(unaudited) and March 31, 2006 (audited) 1 - 2
Consolidated Statements of Operations for the three
and six months ended September 30, 2006 and
September 30, 2005 (unaudited) 3
Consolidated Statement of Changes in Stockholders' Equity
for the six months ended September 30, 2006 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended September 30, 2006 and September 30, 2005 (unaudited) 5
Notes to Consolidated Financial Statements 6 - 12
Item 2. Management's Discussion And Analysis of Financial
Condition And Results Of Operations 13-17
Item 3. Quantitative And Qualitative Disclosures
About Market Risk 18
Item 4. Controls and Procedures 18
PART II OTHER INFORMATION
Item 5. Other Information 19
Item 6. Exhibits 22
SIGNATURES 23
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, MARCH 31,
2006 2006
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $ 4,895,866 $ 8,919,354
Accounts receivable, net of allowance
for doubtful accounts of $0 and $153,250,
respectively 135,559 ---
Current portion of restricted cash -
capital project fund 745,001 1,173,896
Prepaid expenses and other current assets 648,873 470,633
----------- -----------
Total current assets 6,425,299 10,563,883
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 4,281,361 4,308,969
----------- -----------
INTANGIBLE ASSETS - net of accumulated
amortization 53,857 59,457
----------- -----------
OTHER ASSETS:
Security deposit 6,980 6,980
Restricted cash - debt service 415,500 415,500
EDA bond offering costs, net of
accumulated amortization of $13,000
and $7,000, respectively 341,452 347,452
----------- -----------
Total other assets 763,932 769,932
----------- -----------
Total assets $11,524,449 $15,702,241
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
1
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, MARCH 31,
2006 2006
(Unaudited) (Audited)
CURRENT LIABILITIES:
Current portion of EDA bonds $ 185,000 $ 175,000
Accounts payable and accrued expenses 1,367,503 1,740,263
Dividends payable
--- 33,333
----------- -----------
Total current liabilities 1,552,503 1,948,596
----------- -----------
LONG TERM LIABILITIES:
EDA bonds - net of current portion 3,795,000 3,980,000
----------- -----------
Total liabilities 5,347,503 5,928,596
----------- -----------
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
retired) and 0 shares outstanding as of
September 30, 2006 and March 31, 2006
respectively 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 - 19,599,325 shares
and 19,190,159 shares respectively 195,993 191,902
Additional paid-in capital 61,088,596 57,983,190
Accumulated deficit (54,800,899) (48,094,706)
----------- -----------
6,483,787 10,080,486
Treasury stock, at cost (100,000 shares)
Total stockholders' equity (306,841) (306,841)
----------- -----------
6,176,946 9,773,645
----------- -----------
Total liabilities and stockholders' equity $11,524,449 $15,702,241
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
2
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
Manufacturing Fees $ 135,559 $ 254,392 $ 267,459 $ 369,173
Royalties 23,517 17,770 44,644 17,770
------------ ------------ ------------ ------------
TOTAL REVENUES 159,076 272,162 312,103 386,943
------------ ------------ ------------ ------------
COST OF OPERATIONS:
Research and development 1,308,882 999,340 2,625,290 1,738,327
General and administrative 542,805 434,685 1,089,718 861,215
Depreciation and amortization 119,535 215,362 239,070 309,112
------------ ------------ ------------ ------------
1,971,222 1,649,387 3,954,078 2,908,654
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,812,146) (1,377,225) (3,641,975) (2,521,711)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 86,759 16,636 187,265 36,466
Interest expense (69,550) (73,381) (140,181) (129,506)
Non-cash compensation through issuance
of stock options and warrants (289,312) (286,727) (589,312) (331,277)
------------ ------------ ------------ ------------
(272,103) (343,472) (542,228) (424,317)
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,084,249) (1,720,697) (4,184,203) (2,946,028)
------------ ------------ ------------ ------------
PROVISION FOR INCOME TAXES -- -- (1,000) (1,000)
------------ ------------ ------------ ------------
NET LOSS $ (2,084,249) $ (1,720,697) $ (4,185,203) $ (2,947,028)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.11) $ (.09) $ (.22) $ (.16)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,437,516 18,179,080 19,339,501 18,130,468
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
3
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
Six Months ended September 30,
2006: (Unaudited)
Conversion of Preferred to Common (305) (3) 135,555 1,356 (1,353)
Conversion of Warrants to Common -- -- 84,430 844 (844)
Non-cash compensation through issuance
of stock options and warrants -- -- -- -- 589,312
Net loss for six months ended -- -- -- -- --
September 30, 2006
Dividends
-- -- 189,181 1,891 396,374
------------ ------------ ------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 2006
(UNAUDITED) 9,695 $ (97) 19,599,325 $ 195,993 $ 61,088,596
============ ============ ============ ============ ============
TREASURY STOCK ACCUMULATED STOCKHOLDERS'
-------------- ----------- -------------
SHARES AMOUNT DEFICIT EQUITY
------ ------ ------- ------
BALANCE AT MARCH 31, 2006 (AUDITED) (100,000) $ (306,841) $(50,216,623) $ 9,773,645
Six Months ended September 30,
2006: (Unaudited)
Conversion Preferred to Common -- -- -- --
Conversion of Warrants to Common -- -- -- --
Non-cash compensation through issuance
of stock options and warrants -- -- -- 589,312
Net loss for six months ended -- -- (4,185,203) (4,185,203)
September 30, 2006
Dividends
-- -- (399,073) (808)
------------ ------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 2006
(UNAUDITED) (100,000) $ (306,841) $(54,800,899) $ 6,176,946
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
4
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
SEPTEMBER 30,
2006 2005
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,185,203) $(2,947,028)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 239,070 309,112
Non-cash compensation satisfied by issuance of common stock, options 589,312 331,277
and warrants
Changes in assets and liabilities:
Accounts receivable (135,559) 142,113
Prepaid expenses and other current assets (178,240) (33,687)
Security deposit -- (6,980)
Accounts payable, accrued expenses and other current liabilities (372,760) 160,386
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (4,043,380) (2,044,807)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (194,392) (117,613)
(Increase) in restricted cash -- (1,674,735)
Release of restricted cash 428,895
413,425
Increase in intangible assets due to patent costs (5,470) --
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 229,033 (1,378,923)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (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 -- 40,000
Proceeds from exercise of stock warrants -- 156,502
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (209,141) 1,377,989
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,023,488) (2,045,741)
CASH AND CASH EQUIVALENTS - beginning of period 8,919,354 3,902,003
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 4,895,866 $ 1,856,262
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest 141,243 92,937
Cash paid for income taxes 1,000 1,000
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred stock dividends of $398,265 paid by issuance of 189,181
shares of common stock
The accompanying notes are an integral part of the consolidated
financial statements.
5
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 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"), for the three and six months
ended September 30, 2006 and September 30, 2005. As of September
30, 2006, the financial statements of all entities 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. 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 consolidated financial statements of the Company
have been prepared in accordance with accounting principles
generally accepted for interim financial statement presentation and
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 six months ended September 30, 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 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 September 30, 2006, there is $745,001 remaining in the
short-term restricted cash account.
6
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STAT EMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY
--------------------
WARRANTS AND OPTIONS
--------------------
During the six months ended September 30, 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 or September 30, 2006 were satisfied by the issuance of 1,318
and 187,863 shares of Common Stock, respectively.
During the six months ended September 30, 2006, 3,750 options
expired and 65,500 were forfeited.
During the six months ended September 30, 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.
The following grants were made under the Company's 2004 Stock
Option Plan in the current fiscal year.
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 for
his services, Dr. Filer received options to purchase 10,000 shares
of Common Stock exercisable from June 1, 2006 to June 1, 2009, with
an exercise price of $3.00 per share.
On May 3, 2006, the Company granted options to purchase 70,000
shares of Common Stock with an exercise price of $2.26 per share to
its chief financial officer. One-third of the options vest on May
3, 2007, a second third vest on May 3, 2008 and the final third
vest on May 3, 2009.
Additionally, in May, 2006, 54,000 ten (10) year options were
granted to six (6) employees which vest over a period of three (3)
years from grant date.
The per share weighted average of the above mentioned stock options
ranged from $1.55 to $1.69 using the Black-Scholes options pricing
model with the following weighted average assumptions: no dividend
yield; expected volatility of 59.52%; risk free interest rate of
5.00% and expected lives of ten (10) years.
The following grants were made under the Company's 2004 Stock
Option Plan in the previous fiscal year.
On July 14, 2005, the Company granted under its 2004 Stock Option
Plan, ten (10) 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. Vesting periods range from immediate to a period of
five years from date to grant.
On the same, date, the Company granted ten (10) 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 will vest over a
three-year period.
On August 24, 2005, the Company granted ten (10) year options to
purchase in the aggregate 2,000 shares at a price of $2.81 per
share to employees of the Company under the 2004 Stock Option Plan
vesting over a three year period.
7
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STAT EMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY (Continued)
--------------------
On August 30, 2005, the Company granted under its 2004 Stock Option
Plan options to purchase an aggregate of 120,000 shares of Common
Stock to the Directors. The 120,000 options granted under the 2004
Plan to the Directors expire ten years from the issuance have an
exercise price of $2,75 per share and vest over a three year
period. 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 September 2, 2005, the Chief Executive Officer 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.
On September 2, 2005, the Company granted under its 2004 Stock
Option Plan to the Chief Executive Officer ten (10) year options to
purchase an additional 600,000 shares of Common Stock at a price of
$2.69 per share with 100,000 options to vest on September 2, 2006,
100,000 options to vest on September 2, 2007 and the remaining
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 FDA of either an 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.
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 a charge of $589,312 and $331,277 for the six
months ended September 30, 2006 and 2005, respectively, which
represents the fair value of the vested options, utilizing the
Black-Scholes options pricing model on the grant date. For the
three months ended September 30, 2006 and 2005, charges of $289,312
and $286,727, respectively were taken by the Company.
At September 30, 2006, Elite had outstanding 3,036,000 options
with exercise prices ranging from $1.50 to $3.00 and 6,461,747
warrants with exercise prices ranging from $1.50 to $4.20; each
option and warrant representing the right to purchase one share of
Common Stock.
8
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 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. This 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. Elite and IPC
will share their proceeds of commercialization in Canada on 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.
The aforementioned agreements are in their infancy stages.
On March 30, 2005, the Company entered into a product development,
manufacturing and distribution agreement with Harris
Pharmaceutical, Inc. ("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 Elite with costs
of development to be shared by Elite and Harris, (ii) the
manufacture of the product by Elite and its sale to Harris for
distribution, and (iii) Tish to be responsible for any requisite
submissions to the FDA relating to the product. Elite is to share
in the profits, if any, generated from the sale of the product.
On June 19, 2006, the Company received written notice from Harris
of Harris' intent to terminate the Product Development,
Manufacturing and Distribution Agreement, dated as of March 30,
2005. As the date hereof, there have been no material revenues
earned under the Agreement.
CONSULTING AGREEMENTS
---------------------
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 for
his services, Dr. Filer received options to purchase 10,000 shares
of Common Stock exercisable from June 1, 2006 to June 1, 2009, with
an exercise price of $3.00 per share.
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 for its services, Oppenheimer
received from the Company a cash fee of $60,000.
9
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 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
consultant is to receive $10,000 a month beginning November 1, 2005
and was granted 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 July 12, 2006, the Company entered into a Financial Advisory
Agreement (the "Agreement") with Indigo Ventures, L.L.C.
("Indigo"), of which one of the Company's nonemployee Directors is
an officer . The term of the Agreement is for three years effective
as of July 1, 2006; provided, that either party can terminate the
Agreement, for any reason, at any time upon 30 days written notice.
Pursuant to the Agreement, Indigo, on a non-exclusive basis, agrees
to advise, consult with, and assist the Company in various matters
as requested (and only to the extent requested) by the Company
which may include, without limitation (i) a review of the Company's
business, operations and financial condition, including advising on
capitalization structures; (ii) advice relating to general capital
raising matters; (iii) recommendations relating to specific
business operations, strategic transactions and joint ventures (iv)
advice regarding future financings involving debt or equity
securities of the Company or any affiliate of the Company and (v)
assistance with interaction between the Company and its current and
future investors. The Company initially paid Indigo $45,000 and
will pay Indigo $15,000 per month on an ongoing basis.
Additionally, Indigo acquired a warrant to purchase up to 600,000
shares of Common Stock, par value $0.01 per share, of the Company
(the "Common Stock") for an aggregate purchase price of $150,000.
The warrant (i) shall vest as follows: 50,000 shares shall vest
quarterly beginning on the three (3) month anniversary of July 1,
2006, (ii) shall expire on July 1, 2011, and (iii) shall terminate,
to the extent unvested, as of the date of termination of the
Agreement, (iv) shall fully vest upon a change of control and (v)
shall have an exercise price of $3.00 per shares of the Common
Stock.
For the three and six months ended September 30, 2006, consulting
expenses under these agreements amounted to an aggregate of $68,500
and $203,500, respectively.
EMPLOYMENT AGREEMENT
--------------------
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.
10
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------
EMPLOYMENT AGREEMENT (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. Such increase
became effective May 1, 2005 and accrued but was 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 as to the vesting of these 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).
The severance will be payable in accordance with the terms of
his employment agreement.
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 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 periods ending September 30,
are:
2007 $26,526
NOTE 5 - SUBSEQUENT EVENTS
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 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 agreement provides for an annual base salary
of $250,000 and $200,000 respectively, plus an annual bonus 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 without cause, due to disability or by
the executive for good reason.
11
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
NOTE 5 - SUBSEQUENT EVENTS (continued)
------------------
Dr. Behl and Mr. Dick are each granted under the Company's 2004
Stock Option Plan (the "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
700,000 options including 400,000 previously granted to Berk will
vest, and up to 500,000 incentive stock options granted to each of
Dr. Behl and Mr. Dick will vest. As to each executive and subject
to the full vesting during the initial term of his agreement of the
foregoing options, each executive will be granted additional
incentive stock options under the Plan at the end of the first
fiscal year in which the event or transaction occurs at the market
price on the date of grant.
See "Item 5. Other Information" for a more detailed description of
the agreements and options.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2006 COMPARED TO
THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 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. Elite's
technology is applicable to develop delayed, sustained or targeted release
capsules or tablets. Elite 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. Elite also has a GMP and DEA registered facility for research,
development, and manufacturing located in Northvale, New Jersey.
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
13
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 SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2005
Revenues of $159,076 consisted of manufacturing fees and royalties of
$135,559 and $23,517, respectively, for the three months ended September 30,
2006. Revenues of $272,162 consisted of $254,392 in manufacturing fees and
$17,770 in royalties for the three months ended September 30, 2005.
General and administrative expenses (G&A) for the three months ended
September 30, 2006 were $542,805, an increase of $108,120, or approximately
24.9%, from G&A for the comparable period of the prior year. The increase was
substantially due to increases in consulting fees, partially offset by a
decrease in legal and accounting fees.
Research and development costs for the three months ended September 30,
2006 were $1,308,882, an increase of $309,542, or approximately 31.0% from
$999,340 for the comparable period of the prior year, primarily the result of
increases in wages and related payroll taxes and fringe benefits, raw materials,
and laboratory and manufacturing supplies. Contributing to this increase also
includes the 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.
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. 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 September 30,
2006 decreased by $95,827
14
to $119,535 from $215,362 for the year earlier comparable period. A reduction in
amortization of financing costs was partially offset by increases in
depreciation and amortization on acquired new machinery and equipment and
upgrading of the corporate and warehouse facilities.
Other expenses, net for the three months ended September 30, 2006 were
$272,103, a decrease of $71,369, or approximately 20.7%, from the comparable
period of the prior year. The decrease was primarily due to an increase of
$70,123 in interest income due to higher compensating balances as a result of
the private placement and NJEDA refinancing.
As a result of the foregoing, the Company's net loss for the three
months ended September 30, 2006 increased to $2,084,429 from the net loss of
$1,720,697 for the comparable period of the prior year.
SIX MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2005
The Company's revenues for the six months ended September 30, 2006 were
$312,103, consisting of manufacturing fees of $267,459 and royalties of $44,644.
Revenues for the six months ended September 30, 2005 were $386,943, consisting
of manufacturing fees of 369,173 and royalties of $17,770.
General and administrative expenses for the six months ended September
30, 2006 were $1,089,718, an increase of $228,503 or 26.5% from $861,215 for the
comparable period of the prior year, substantially due to increases in
consulting fees, hiring expenses and temporary help.
Research and development costs for the six months ended September 30,
2006 were $2,625,290, an increase of $886,963, or approximately 51.0% from
$1,738,327 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, largely due to the manufacture of
commercial batches of Lodrane 24(R) and Lodrane 24D(R) and work completed on
newly signed development agreements. Contributing to this increase is also 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.
Depreciation and amortization for the six months ended September 30,
2006 was $239,070, a decrease of $70,042 or approximately 22.7% from $309,112
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.
Other expenses, net for the six months ended September 30, 2006 were
$542,228, an increase of $117,911 or approximately 27.8% from $424,317 for the
comparable period of the prior year. The increase was primarily due to an
increase of $258,035 in charges related to issuance of stock options partially
offset by additional interest income due to higher compensating balances as a
result of the private placement and NJEDA refinancing.
As a result of the foregoing, the Company's net loss for the six months
ended September 30, 2006 increased to $4,185,203 from the net loss of $2,947,028
for the comparable period of the prior year.
15
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company's working capital (total current assets less total current
liabilities), decreased to $4,872,796 as of September 30, 2006 from $8,615,287
as of March 31, 2006, primarily due to the use of cash in funding net loss of
$3,641,975 from operations.
The Company experienced negative cash flow from operations of $4,043,380
for the six months ended September 30, 2006, primarily the result of the
Company's net loss from operations due to an increase in research and
development activities for the drug products in its pipeline.
On November 15, 2004, Elite's partner, ECR, launched Lodrane 24(R), once
a day allergy product, utilizing Elite'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
margin and royalties on product revenues. Royalty income earned for the six
months ended September 30, 2006 was $44,644. The Company expects future cash
flows from 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 estimates 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. Elite and IPC are to share 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 will market and sell the
product. Under the agreement, the partner 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 six months ended September 30, 2006, the Company experienced
negative cash flow and financed its operations primarily through utilization of
its existing cash. As of September 30, 2006, the Company had approximately $4.9
million of cash and cash equivalents, a decrease of approximately $4.0 million
from $8.9 million at March 31, 2006 and had working capital of approximately
$4.9 million.
Net cash used in operating activities was $4,043,380 during the six
months ended September 30, 2006, compared to $2,044,807 for the six months ended
September 30, 2005. Net cash used in operating activities during the six months
ended September 30, 2006 included the Company's net loss of $4,185,203 and
increases in prepaid expenses and other current assets, offset in part by
non-cash charges of $589,312 in stock option charges and $239,070 in
depreciation and amortization expense. Net cash used in operating activities
during the six months ended September 30, 2005 included the Company's net loss
of $2,947,028 offset in part by non-cash charges of $331,277 in stock option and
warrant charges and $309,112 in depreciation and amortization expense.
Investing activities provided net cash of $229,033 during the six months
ended September 30, 2006, which resulted primarily from the release of
restricted cash of $428,395, offset in part by $194,392 in property and
equipment purchases.
16
During the six months ended September 30, 2006, financing activities
used net cash of $34,141 to pay dividends and $175,000 to make principal
payments on the NJEDA Bonds. During the six months ended September 30, 2005,
financing activities provided net cash of $1,377,989 derived from the exercise
of stock options and warrants totaling $196,502 and net proceeds derived from
refinancing NJEDA Bonds totaling $3,800,548, partially offset by $2,619,061 in
principal note payments.
The Company anticipates that such cash and cash equivalents of
approximately $4.9 million as of September 30, 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 sale of additional debt or equity; 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 cash exercises of the Long Term Warrants issued in the
October 2004 private placement, the Replacement Warrants issued in the December
2005 private placement, a warrant issued in the March 2006 private placement and
other warrants and options that are currently outstanding.
The Company had outstanding, as of September 30, 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 six months ended March 31, 2007 and is therefore categorized as a
current asset on the Company's consolidated balance sheet as of September 30,
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 September 30, 2006, the Company was in
compliance with the bond covenants.
The Company from time to time will consider potential strategic
transactions including acquisitions, strategic alliances, joint ventures and
licensing arrangements with other pharmaceutical companies. The Company retained
an investment banking firm to assist with its efforts. There can be no assurance
that any such transaction will be available or consummated.
As of September 30, 2006, the Company's principal source of liquidity
was approximately $4,895,866 of cash and cash equivalents. The Company also may
receive funds through the exercise of outstanding stock 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.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had no investments in marketable securities as of September
30, 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 September 30, 2006 that
materially affected or is reasonably likely to materially affect the Company's
internal controls over financial reporting.
18
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
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 within 30 calendar days of the end of each fiscal year during
the term and commencing January 1, 2007 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 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 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 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 are granted above; (C) 10,000
shares upon the filing by the Company (in the Company's name) with the United
Sates Food and Drug Administration (the "FDA") of either an abbreviated new drug
application (an "ANDA") or a new drug application (including an application
filed
19
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, the
approval was made within 540 days of the filing of the ANDA, NDD or patent
application.
The Company also agreed that in the event that all of the options to
purchase the full 400,000 Berk's Previous Milestone Options as to Berk 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 each 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 company drug product, 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 options are
exercisable at $2.15 per share, 100,000 options are exercisable at $2.69 per
share, and 100,000 options 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 his Amended and Restated Employment Agreement,
provide that if the Company terminates his employment due to his permanent
disability, without cause or he terminates his employment for good reason, Berk
shall be entitled to the following severance: (i) any earned but unpaid base
salary plus any unpaid reimbursable expenses as of the effective date of
termination of his employment, (ii) the then-current base salary and
reimbursement of the cost to replace the life and disability insurance coverages
afforded to Berk under the Company's benefit plans with substantially similar
coverages, following the effective date of termination of his employment, for a
period equal to the greater of (x) the remainder of the then-current term, or
(y) two years following the effective date of termination and (iii) payment by
the Company of premiums for health insurance for the period during which Berk is
entitled to continued health insurance coverage as specified in the
Comprehensive Omnibus Budget Reconciliation Act. In the event that the Company
terminates Berk's employment because of his permanent disability, Berk is to be
entitled to the severance specified above, less any amounts actually received by
him under any disability insurance coverage provided for and paid by the
Company. In the event that the Company terminates Berk's employment for cause or
Berk terminates his employment with the Company without good reason, Berk shall
be entitled to any earned but unpaid base salary plus any unpaid reimbursable
expenses as of the effective date of termination of his employment.
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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.
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 outstanding stock 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 Berk's non-solicitation covenant for a period
of one year from termination. Each of Behl and Dick have agreed to a one-year
from termination non-competition covenant and two years from termination
non-solicitation covenant.
The executives are to be reimbursed for expenses (including business,
travel and entertainment) reasonably incurred in the performance of the 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.
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 six 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.
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ITEM 6. EXHIBITS
(a) Exhibits:
10.1 Seconded Amended and Restated Employment Agreement with
Bernard Berk, dated November 13, 2006.
10.2 Employment Agreement with Charan Behl, dated November 13,
2006.
10.3 Employment Agreement with Chris Dick, dated November 13,
2006.
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.
(b) Reports on Form 8-K:
(1) Form 8-K filed on September 12, 2006 regarding the
Company's announcement of the progress it has made.
(2) Form 8-K filed on September 8, 2006 regarding the Company's
announcement that it has received approval from an
Independent Review Board (IRB) to initiate a Phase II
clinical trial of its abuse resistant drug product,
ELI-216. An IRB approval is necessary before a clinical
trial can commence.
(3) Form 8-K filed on August 21, 2006 regarding the
announcement of the American Stock Exchange ("AMEX")
confirming that the Company has regained compliance with
the continued listing standards of AMEX.
(4) Form 8-K filed on July 18, 2006 regarding the entering into
by the Company of the Financial Advisory Agreement with
Indigo Ventures LLC ("Indigo") on July 12, 2006 and the
acquisition by Indigo of a warrant to purchase up to
600,000 shares of common stock, par value $0.01 per share,
of the Company for an aggregate purchase price of $150,000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELITE PHARMACEUTICALS, INC.
Date: November 14, 2006 By: /s/ Bernard Berk
----------------------------
Bernard Berk
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2006 By: /s/ Mark I. Gittelman
----------------------------
Mark I. Gittelman
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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