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, 2005
-----------------------------------------------
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
ELITE PHARMACEUTICALS, INC.
--------------------------------------------------------------------------------
(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
---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(201) 750-2646
--------------------------------------------------------------------------------
(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 [_]
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, 2006: 19,258,141 (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, 2005 (unaudited) and
March 31, 2005 1 - 2
Consolidated Statements of Operations for the three and nine months
ended December 31, 2005 and December 31, 2004 (unaudited) 3
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended December 31, 2005 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended December 31, 2005 and December 31, 2004 (unaudited) 5
Notes to Consolidated Financial Statements 6 - 12
Item 2. Management's Discussion And Analysis of Financial
Condition And Results Of Operations 13 - 18
Item 3. Quantitative And Qualitative Disclosures
About Market Risk 18
Item 4. Controls and Procedures 18
PART II OTHER INFORMATION
Item 1A. Risk Factors 19
Item 2. Unregistered Sales of Equity Securities. 19
Item 6. Exhibits 20
SIGNATURES 21
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, MARCH 31,
2005 2005
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $1,648,191 $3,902,003
Accounts receivable, net of allowance for doubtful accounts of
$153,250 and $153,250, respectively -- 142,113
Current portion of restricted cash - capital project fund 1,274,311 113,425
Prepaid expenses and other current assets 424,432 346,905
---------- ----------
Total current assets 3,346,934 4,504,446
---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 4,139,002 4,194,437
---------- ----------
INTANGIBLE ASSETS - net of accumulated amortization 64,894 81,184
---------- ----------
OTHER ASSETS:
Deferred charges -- 41,013
Security deposit 6,980 --
Restricted cash - debt service 415,500 300,000
EDA bond offering costs, net of accumulated amortization
of $4,000 and $73,648, respectively 350,452 124,212
---------- ----------
Total other assets 772,932 465,225
---------- ----------
Total assets $8,323,762 $9,245,292
========== ==========
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
DECEMBER 31, MARCH 31,
2005 2005
(Unaudited)
CURRENT LIABILITIES:
Current portion - note payable $ -- $ 127,946
Current portion of EDA bonds 175,000 165,000
Accounts payable and accrued expenses 1,203,435 882,917
----------- -----------
Total current liabilities 1,378,435 1,175,863
----------- -----------
LONG TERM LIABILITIES:
Note payable - net of current portion -- 187,128
EDA bonds - net of current portion 3,980,000 2,180,000
----------- -----------
Total long-term liabilities 3,980,000 2,367,128
----------- -----------
Total liabilities 5,358,435 3,542,991
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock -- $.01 par value;
Authorized 4,483,442 shares
None issued and outstanding -- --
Common Stock - $.01 par value;
Authorized - 65,000,000 shares
Issued and outstanding - 19,258,141 shares and 18,022,183
shares respectively 192,581 180,222
Additional paid-in capital 48,905,595 47,006,379
Accumulated deficit (45,826,008) (41,177,459)
----------- -----------
3,272,168 6,009,142
Treasury stock, at cost (100,000 shares) (306,841) (306,841)
----------- -----------
Total stockholders' equity 2,965,327 5,702,301
----------- -----------
Total liabilities and stockholders' equity $8,323,762 $9,245,292
=========== ===========
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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------- ------------
2005 2004 2005 2004
----- ----- ----- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES $ 15,635 $ -- $ 402,578 $ 151,450
------------ ------------ ------------ ------------
COST OF OPERATIONS:
Research and development 1,124,581 726,175 2,862,908 1,937,794
General and administrative 379,893 625,323 1,241,108 1,675,041
Depreciation and amortization 96,450 45,360 405,562 271,080
------------ ------------ ------------ ------------
1,600,924 1,396,858 4,509,578 3,883,915
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,585,289) (1,396,858) (4,107,000) (3,732,465)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 22,562 13,131 59,028 18,842
Sale of New Jersey tax losses 219,121 205,792 219,121 205,792
Interest expense (70,612) (62,499) (200,118) (176,696)
Non-cash compensation through issuance of stock
options and stock warrants (287,303) (44,982) (618,580) (963,300)
------------ ------------ ------------ ------------
(116,232) 111,442 (540,549) (916,362)
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,701,521) (1,285,416) (4,647,549) (4,648,827)
------------ ------------ ------------ ------------
PROVISION FOR INCOME TAXES -- -- 1,000 1,000
------------ ------------ ------------ ------------
NET LOSS (1,701,521) (1,285,416) (4,648,549) (4,649,827)
============ ============ ============ ============
Preferred stock dividends -- (75,076) -- (75,076)
============ ============ ============ ============
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (1,701,521) $ (1,360,492) $ (4,648,549) $ (4,724,903)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.09) $ (.11) $ (.25) $ (.39)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 18,426,960 12,258,569 18,229,658 12,231,405
============ ============ ============ ============
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
COMMON STOCK PAID-IN TREASURY ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK DEFICIT EQUITY
----------- ------------ ------------ ------------ ------------ ------------
BALANCE AT MARCH 31, 2005
(Audited) 18,022,183 $ 180,222 $ 47,006,379 $ (306,841) $(41,177,459) $ 5,702,301
Nine Months ended
December 31, 2005: (unaudited)
Exercise of stock options 20,000 200 39,800 -- -- 40,000
Exercise of stock warrants 1,215,958 12,159 1,240,836 -- -- 1,252,995
Non-cash compensation through
the issuance of
stock options and warrants -- -- 618,580 -- -- 618,580
Net loss for nine months ended
December 31, 2005 -- -- -- -- (4,648,549) (4,648,549)
----------- ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2005
(Unaudited) 19,258,141 $ 192,581 $ 48,905,595 $ (306,841) $(45,826,008) $ 2,965,327
=========== ============ ============ ============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
4
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
DECEMBER 31,
---------------
2005 2004
(UNAUDITED) (UNAUDITED)
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,648,549) $(4,649,827)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 405,562 271,080
Charges related to issuance of common stock -- 58,300
Non-cash compensation 618,580 964,300
Changes in assets and liabilities:
Accounts receivable 142,113 153,250
Prepaid expenses and other current assets (77,527) 83,059
Security deposit (6,980) --
Accounts payable, accrued expenses and other current liabilities 320,518 (490,228)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (3,246,283) (3,610,066)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (205,625) (27,843)
Deposits to restricted cash (1,689,811) --
Release of restricted cash 413,425 312,350
---------- ----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,482,011) 284,507
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Series A 8% Convertible Preferred Stock
and Warrants -- 5,866,600
Principal equipment note payments (274,061) (64,989)
Principal bank note payments -- (225,000)
Proceeds from equipment loan -- 400,000
Principal repayments of NJEDA Bonds (2,345,000) (150,000)
Proceeds - NJEDA Tax Exempt Bonds 4,155,000 --
Payment - NJEDA Bond Offering Costs (354,452) --
Deferred lease payments -- (41,013)
Proceeds from exercise of stock options 40,000 --
Proceeds from exercise of stock warrants 1,252,995 --
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,474,482 5,785,638
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,253,812) 2,460,079
CASH AND CASH EQUIVALENTS - beginning of period 3,902,003 2,104,869
---------- ----------
CASH AND CASH EQUIVALENTS - end of period $1,648,191 $4,564,948
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 121,113 $ 132,231
Cash paid for income taxes 1,000 1,000
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred Stock dividends of $75,076 paid by issuance of 26,961
shares of Common Stock $ -- $ 75,076
The accompanying notes are an integral part of the
consolidated financial statements.
5
12
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(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 nine
months ended December 31, 2005 and December 31, 2004. As of
December 31, 2005, 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, 2005. There have been no changes in significant accounting
policies since March 31, 2005.
The Company does not anticipate being profitable for fiscal year
2006; therefore a current provision for income tax was not
established for the three or nine months ended December 31,
2005. Only the minimum corporation tax liability required for
state purposes is reflected.
NOTE 2 - NJEDA REFINANCING
-----------------
On August 31, 2005, the Company successfully completed a
refinancing through the issuance of the tax-exempt bonds (the
"Bonds") by the New Jersey Economic Development Authority (the "
Authority"). The refinancing involved the borrowing of
$4,155,000 evidenced by a 6.5% Series A Note in the principal
amount of $3,660,000 maturing on September 1, 2030 and a 9%
Series B Note in the principal amount of $495,000 maturing on
September 1, 2012. The net proceeds, after payment of issuance
costs, were or will be used (i) to redeem the outstanding
tax-exempt Bonds originally issued by the Authority on September
2, 1999, (ii) refinance other former equipment financing and
(iii) for the purchase of certain equipment to be used in the
manufacture of pharmaceutical products.
Interest is payable semiannually on March 1 and September 1 of
each year. The Bonds are collateralized by a first lien on the
Company's facility and equipment acquired with the proceeds of
the original and refinanced Bonds. The related Indenture
requires the maintenance of a $415,500 Debt Service Reserve Fund
consisting of $366,000 from the Series A Bonds proceeds and
$49,500 from the Series B proceeds. $1,274,311 of the proceeds
has been deposited in a short-term restricted cash account to
fund the future purchase of manufacturing equipment and
development of the Company's facility.
6
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY
--------------------
WARRANTS AND OPTIONS
--------------------
On November 8, 2005 the Company granted pursuant to a six month
service agreement, to an investor relations firm non-qualified
options to purchase 75,000 shares of the Company's Common Stock
with an exercise price equal to $2.26 per share, the fair market
value of a share of Common Stock at the date of the grant,
vesting pro-rata daily over a six month period. If the agreement
should be extended beyond six months, the Company is to grant
another 75,000 non-qualified options with an exercise price
equal to the then fair market value of a share of Common Stock,
which would vest over the service period.
The per share weighted-average fair value of the above mentioned
options was $1.70 using the Black-Scholes options pricing model.
Pursuant to the terms of an Exchange Offer, the Company sold on
or before the expiration date of December 31, 2005, an aggregate
of 735,674 shares of common stock upon the exercise for cash of
Short Term Warrants for aggregate gross proceeds of $1,172,912
and issued five year Replacement Warrants to purchase at a price
of $3.00 per share an aggregate 220,705 shares of the Company's
Common Stock. The Placement Agent received cash commissions
aggregating $76,418 and five-year placement warrants to purchase
an aggregate of 25,473 shares of common stock at a price of
$3.00 per share. The remaining unexercised Short Term Warrants,
issued as part of the Private Placement in October 2004, expired
on December 31, 2005.
The per share weighted average of the above mentioned warrants
was $1.48 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 5 years.
The value of $364,343 on above warrants has no effect on
Retained Earnings or Additional Paid in Capital because it is
reflected as a cost associated with raising capital.
The Company's Series B and Series C Stock Purchase Warrants to
purchase 2,402,181shares of Common Stock expired November 30,
2005.
The following grants were made under the Company's 2004 Stock
Option Plan:
On July 14, 2005 ten (10) year options to purchase at an
exercise price of $2.80 per share (i) to employees an
aggregate of 152,200 shares of Common Stock with vesting
ranging from immediate to a period of five years from date
of grant; and (ii) to the Chief Financial Officer 20,000
shares of Common Stock vesting over a three-year period.
On August 24, 2005 to employees ten (10) year options to
purchase in the aggregate 2,000 shares at an exercise
price of $2.81 vesting over a three year period.
The stock options to purchase an aggregate of 174,200
shares of Common Stock at prices ranging from $2.80 to
$2.81 vest over periods from immediate to five years. The
per share weighted-average value of the options ranged
from $2.52 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 of 4.18% and expected lives of
ten years.
7
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY (Continued)
--------------------
WARRANTS AND OPTIONS (continued)
--------------------
On August 30, 2005 to the Directors, options to purchase
an aggregate of 120,000 shares at an exercise price of
$2.75 per share vesting 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 Company granted to the Chief
Executive Officer ten (10) year options to purchase
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 subject tot the
following contingencies:
(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.
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.
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 $618,580 for the nine months ended
December 31, 2005 ($287,303 for the three months ended December
31, 2005), which represents the fair value of the vested
options, utilizing the Black-Scholes options pricing model on
the grant date.
8
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY (Continued)
--------------------
WARRANTS AND OPTIONS (continued)
-------------------
The following table illustrates the effect on net loss and loss
per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to all outstanding and
unvested awards in each period presented:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2005 2004 2005 2004
---- ---- ------ ----
Net loss as reported $ (1,701,521) $ (1,285,416) $ (4,648,549) $ (4,649,827)
Add: Stock-based compensation
expense included in reported net loss,
net of related tax effects 287,303 44,982 618,580 964,300
Deduct: Total stock-based
compensation expense determined
under fair value method for all awards
net of related tax effects (296,639) (58,739) (646,587) (1,005,571)
------------ ------------ ------------ ------------
Pro-forma net loss $ (1,710,857) $ (1,299,173) $ (4,676,556) $ (4,691,098)
============ ============ ============ ============
Loss per share as reported (.09) (.10) (.25) (.38)
Pro-forma loss per share (.09) (.10) (.25) (.38)
At December 31, 2005, Elite had outstanding 2,896,250 options
with exercise prices ranging from $1.50 to $2.81 and 3,424,797
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.
9
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(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 a
Canadian 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.
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.
The aforementioned agreements are in their infancy stages.
CONSULTING AGREEMENTS
---------------------
The Company entered into one year consulting agreements with
each of Saggi Capital Corp. and Bridge Ventures Inc. on November
4, 2003 which were extended through November 4, 2005. Each of
the consultant's services included advice with respect to
overall strategic planning, financing opportunities, acquisition
policy, commercial and investment banking relationships and
stockholder matters. The Company paid each consultant a fee of
$75,000 per annum in monthly installments of $6,250 and issued
to each consultant a five (5) year warrant to purchase 100,000
shares of the Company's Common Stock at a price of $2.00 per
share.
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 six 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
10
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------
CONSULTING AGREEMENTS (Continued)
---------------------
For the three and nine months ended December 31, 2005,
consulting expenses under these agreements amounted to an
aggregate of $25,000 and $85,000, respectively. For the three
and nine months ended December 31, 2004, consulting expenses
under these agreements amounted to an aggregate of $30,000 and
$120,000, 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.
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 will accrue but not be
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 December
31, are:
2006 $27,923
2007 $20,942
11
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(UNAUDITED)
NOTE 5 - SUBSEQUENT EVENTS
-----------------
On January 4, 2006, the Company received a letter from the
American Stock Exchange ("AMEX") notifying the Company that
based on the Company's unaudited financial statements as of
September 30, 2005, the Company was not in compliance with the
continued listing standards set forth in the AMEX Company Guide
in that under one standard its shareholders' equity was less
than $4,000,000, it had losses from continuing operations and/or
net losses in three of its four most recent fiscal years, and
under another standard its shareholders' equity was less than
$6,000,0000 and it had losses from continuing operations and/or
net losses in its five most recent fiscal years.
The Company submitted at AMEX's request, a plan advising of
action it plans to take to bring the Company in compliance with
the above continued listing standards within a maximum of 18
months from January 4, 2006. If the plan is not accepted, the
Company may be subject to delisting proceedings. Additionally,
if the plan is accepted but the Company is not in compliance
with the continued listing standards or does not make progress
consistent with such plan during the plan period, AMEX may
initiate delisting proceedings.
On January 10, 2006, the Company entered into a Product
Development and Commercialization Agreement with Orit
Laboratories LLC ("ORIT") providing that the Company and Orit
will co-develop and commercialize an extended release drug
product for treatment of anxiety, and upon completion of
development, the possibility of licensing the product for
manufacture and sale. The parties intend to develop all dose
strengths of the product. The Company is to share in the
profits, if any from the sales of the drug. The term of the
agreement is for the longer of (i) 15 years from the date the
product is first commercially sold to a third party, or (ii) the
life of the applicable patent(s), if any. The agreement is
automatically renewable for 3-year periods unless terminated by
either party by providing the other party with twelve (12)
months written notice prior to any renewal period.
In January 2006, the Food and Drug Administration accepted the
Company's investigational - new drug application for OxyQD(TM),
its once-a-day oxycodone painkiller. Under the new drug
application, the Company will begin its development program with
an early stage study to evaluate OxyQD(TM)'s sustained release
formation. Currently there is no once-daily oxycodone available,
however the U.S. market for sustained release, twice-daily was
about $2 billion as of September, 2005.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2005 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2004 (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, 2005 (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 manufacture of oral controlled-release products. The
Company develops controlled release products using proprietary technology and
licenses these 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 pellets, capsules, tablets, granules and
powders. The Company has one product currently being sold commercially and a
pipeline of eight drug products under development in the therapeutic areas that
include cardiovascular, pain management, allergy and infection. The addressable
market for the Company's pipeline of products exceeds $4.25 billion. The
Company's current facility in Northvale, New Jersey also is a GMP and DEA
registered facility for research, development, and manufacturing.
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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2005 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2004 (UNAUDITED)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (Continued)
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.
During the fiscal year ended March 31, 2003, the Company elected to
prospectively recognize the fair value of stock options granted to employees and
members of the Board of Directors, effective as of the beginning of the fiscal
year. The prospective method allowed by the Financial Accounting Standards Board
affects the Company's results of operations for the three and nine month periods
ended December 31, 2005 and 2004 as options were granted or repriced during
these periods which either vested immediately or vest over three to five years.
The Company does not know the future effect of options and warrants which may be
granted to employees and members of the Board of Directors. The Financial
Accounting Standards Board provided three transition alternatives for
recognizing stock-based compensation cost using the fair value method. If
management did not elect the prospective method during the three and nine-month
periods ended December 31, 2005 and 2004, net loss and net loss per share would
have been reduced. However, the two other methods would have required either
greater compensation cost to be recognized as an expense or retroactive
restatement of previously reported net loss.
RESULTS OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2004
Revenues consisted of royalties of $15,635, for the three months ended
December 31, 2005. There were no reported revenues for the three months ended
December 31, 2004.
General and administrative expenses for the three months ended December
31, 2005 were $379,893, a decrease of $245,430, or approximately 39.2%, from
$625,323 for the comparable period of the prior year. The decrease was
substantially due to reductions in bad debt expense of $153,250 and consulting
and legal fees approximating $90,000, partially offset by an increase of
allocated salaries of $10,000.
Research and development costs for the three months ended December 31,
2005 were $1,124,581, an increase of $398,406, or approximately 54.9%, from
$726,175 for the comparable period of the prior year, primarily the result of
increases in wages, raw materials, laboratory and manufacturing supplies. The
costs associated with the manufacturing of batches of Lodrane 24(R) and the work
completed on newly signed development agreements have contributed to this
increase.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2005 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2004 (UNAUDITED)
RESULTS OF CONSOLIDATED OPERATIONS (Continued)
THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THREE MONTHS
ENDED DECEMBER 31, 2004 (Continued)
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 as described in this report.
Depreciation and amortization for the three months ended December 31,
2005 increased by $51,090 to $96,450 from $45,360 for the year earlier
comparable period due to the full write-off of financing costs of $124,212
associated with the redemption of the tax exempt Bonds (the "Bonds") originally
issued by the Authority on September 2, 1999, offset by the reduction in
amortization and depreciation of certain assets which had been fully depreciated
and amortized.
Other expenses, net for the three months ended December 31, 2005 were
$116,232, an increase of $227,674, or approximately 20.5%, from the comparable
period of the prior year. The increase was primarily due to an increase of
$242,321 in charges related to issuance of stock options. Additional interest
income, due to higher compensating balances as a result of the private placement
and EDA refinancing, was somewhat offset by increased interest expense resulting
from the equipment financing.
As a result of the foregoing, the Company's net loss for the three
months ended December 31, 2005 increased 32.4% to $1,701,521 from the net loss
of $1,285,416 for the comparable period of the prior year.
NINE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 2004
The Company's revenues for the nine months ended December 31, 2005 were
$402,578, consisting of manufacturing fees of $369,173 and royalties of $33,405.
Revenues for the nine months ended December 31, 2004 were $151,450, of which
$150,000 was a non-refundable payment received from Purdue Pharma L.P. granting
it the right to evaluate certain abuse resistance drug formulation technology of
the Company.
General and administrative expenses for the nine months ended December
31, 2005 were $1,241,108, a decrease of $433,933 or 25.9% as compared with
$1,675,041 for the same period of the prior year, substantially due to
reductions in amounts paid and accrued in settlements of litigation, bad debt
write-offs and legal fees partially offset by modest increases in salaries and
accounting fees.
Research and development costs for the nine months ended December 31,
2005 were $2,862,908, an increase of $925,114, or 47.7% as compared to
$1,937,794 for the same period of the prior year, primarily the result of
increased wages, laboratory and manufacturing supplies and raw materials,
largely due to the manufacture of commercial batches of Lodrane 24(R).
Other expenses, net for the nine months ended December 31, 2005 were
$540,549, a decrease of $375,813, or 41.0% as compared to $916,362 for the same
period of the prior year, due primarily to a reduction during the current year
of $344,720 in non-cash compensation through issuance of stock options and
warrants, and a charge of $397,732 during the nine months ended December 31,
2004 related to repricing of stock options. Additional interest income was due
to higher compensating balances as a result of a private placement and EDA
refinancing, somewhat offset by an increase in interest expense resulting from
the equipment financing.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2005 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2004 (UNAUDITED)
RESULTS OF CONSOLIDATED OPERATIONS (Continued)
NINE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 2004 (Continued)
The Company's net loss for the nine months ended December 31, 2005 was
$4,648,549 compared to $4,649,827 for the comparable period of the prior year.
Increases in revenues and decreases in general, administrative and other
expenses net for the nine months ended December 31, 2005 were offset by
increases in research and development.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company's working capital (total current assets less total current
liabilities), decreased to $1,968,499 December 31, 2005 from $3,328,583 as of
March 31, 2005, primarily due to the use of cash in funding net loss of
$4,107,000 from operations.
The Company experienced negative cash flow from operations of
$3,246,283 for the nine months ended December 31, 2005, primarily due to the
Company's net loss from operations due to an increase in research and
development activities as to 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 nine
months ended December 31, 2005 was $33,405. The Company expects future cash
flows from royalties to provide additional cash to help fund its operations.
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 which the Company estimates has addressable market revenues of
approximately $80 million per year. The agreement provides for (1) the
development of the drug by Elite with costs of development to be shared by Elite
and Harris, (2) the manufacture by Elite and its sale to Harris for distribution
and (3) Tish to be responsible for any requisite submissions to the FDA relating
to the product. Elite is to share in the profits generated from the sale of the
product.
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. On December 12, 2005, the agreement
was amended with respect to the development and commercialization of the
controlled release drug product in Canada. Since IPC intended to enter into an
agreement with a Canadian company with respect to the development, distribution
and sale of the drug product in Canada, the parties agreed to suspend their
obligations under the agreement with respect to the development and
commercialization of the controlled release drug product in Canada. IPC agreed
to pay the Company a certain percentage of any payments received by IPC with
respect the commercialization of the controlled release drug product by such
Canadian company.
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,
they have agreed to share the profits equally.
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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2005 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2004 (UNAUDITED)
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended December 31, 2005, the Company experienced
negative cash flow and financed its operations primarily through utilization of
its existing cash. As of December 31, 2005, the Company had approximately $1.6
million of cash and cash equivalents, a decrease of approximately $3.0 million
from the $4.6 million at December 31, 2004 and had working capital of
approximately $2.0 million. At December 31, 2004, the Company had recently
consummated its private placement of Series A Preferred Stock, raising net cash
of $5,866,000.
Net cash used in operating activities was $3,246,283 during the nine
months ended December 31, 2005, compared to $3,610,066 for the nine months ended
December 31, 2004. Net cash used in operating activities during the nine months
ended December 31, 2005 included the Company's net loss of $4,648,549 and
increases in prepaid expenses and other current assets, offset in part by
non-cash charges of $618,580 in stock option charges and $405,562 in
depreciation and amortization expense. Net cash used in operating activities
during the nine months ended December 31, 2004 included the Company's net loss
of $4,649,827 offset in part by non-cash charges of $964,300 in stock option and
warrant charges and $271,080 in depreciation and amortization expense.
Investing activities used net cash of $1,482,011 during the nine months
ended December 31, 2005, which resulted primarily from an increase in restricted
cash requirements as a result of the EDA refinancing.
During the nine months ended December 31, 2005, financing activities
provided net cash of $2,474,482 derived from net proceeds of $1,292,995 from the
exercise of stock options and warrants and $1,455,548 from the refinancing of
Bonds , offset by $274,061 used to repay indebtedness. During the nine months
ended December 31, 2004, financing activities provided net cash of $5,866,000
derived from private placement of Series A Preferred Stock. For the nine months
ended December 31, 2004, $439,989 was used to repay indebtedness.
The Company's capital expenditures were $205,625 in the nine months
ended December 31, 2005 as compared to $427,499 in the nine months ended
December 31, 2004, the latter financed through an equipment loan.
As of December 31, 2005 the Company had cash and cash equivalents of
approximately $1.6 million. The Company anticipates that such position is
adequate to finance its operations through June 30, 2006 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 meet its business objectives. Other
possible sources for such additional financings are the cash exercises of the
Long Term Warrants issued in the October 2004 private placement, the Replacement
Warrants issued in the December 2005 private placement and other warrants and
options that are currently outstanding.
The Company had outstanding, as of December 31, 2005, bonds in the
aggregate amount of $4,155,000, consisting of $3,660,000 of 6.5% tax exempt
Bonds with an outside maturing of September 1, 2030 and $495,000 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 twelve months ended December 31, 2006 and is therefore categorized as a
current asset on the Company's consolidated balance sheet as of December 31,
2005. 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
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2005 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2004 (UNAUDITED)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
and the maintenance of certain financial covenants. As of December 31, 2005, the
Company was in compliance with the bond covenants.
On July 8, 2004, Elite Labs entered into a loan and financing agreement
to finance the purchase of certain machinery and equipment. Elite Labs borrowed
$400,000 payable in 36 monthly installments of $13,671 each, including principal
and interest at 14% per annum. The first four and the last three months of
scheduled payments are held by the lender to be applied to the principal balance
when due. The loan is secured by two pieces of equipment and the guaranty of the
Company. In addition, the Company issued to designees of the lender 50,000
warrants, which vested immediately, to purchase 50,000 shares of the Company's
Common Stock at $4.20 per share. The cost of $41,252 for these warrants was
charged in the nine months ended December 31, 2004. Proceeds from the
refinancing of the Company's EDA Bonds were used to pay-off this loan.
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 December 31, 2005, the Company's principal source of liquidity
was approximately $1,648,191 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had no investments in marketable securities as of December
31, 2005 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, 2005 that
materially affected or is reasonably likely to materially affect the Company's
internal controls over financial reporting.
18
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the Risk Factors set forth in the Company's Annual Report on Form
10-K for the year ended March 31, 2005, stockholder and potential investors
should consider the following in evaluating an investment in the Company and in
analyzing the Company's forward looking statements:
THE FAILURE TO MAINTAIN THE AMERICAN STOCK EXCHANGE LISTING OF THE COMMON STOCK
WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE MARKET FOR THE COMMON STOCK AND ITS
MARKET PRICE.
On January 4, 2006, the Company received a letter from the American
Stock Exchange ("AMEX") notifying it that based on the Company's unaudited
financial statements as of September 30, 2005, the Company is not in compliance
with the continued listing standards set forth in the AMEX Company Guide in that
under one listing standard its shareholders' equity is less than $4,000,000 and
it had losses from continuing operations and/or net losses in three of its four
most recent fiscal years and under another listing standard its shareholders'
equity is less than $6,000,000 and it had losses from continuing operations
and/or net losses in its five most recent fiscal years. The Company, at the
request of AMEX, submitted a plan on February 3, 2006 advising AMEX of action it
has taken, and will take, to bring it in compliance with the continued listing
standards within a maximum of 18 months from January 4, 2006. However, if AMEX
does not accept the plan, the Company may be subject to delisting proceedings.
Additionally, if a plan is accepted but the Company is not in compliance with
the continued listing standards or does not make progress consistent with such
plan during the plan period, AMEX may then initiate delisting proceedings. The
failure to maintain listing of the Common Stock on AMEX will have an adverse
effect on the market and the market price for the Common Stock.
IF THE COMPANY IS UNABLE TO OBTAIN ADDITIONAL FINANCING NEEDED FOR THE
EXPENDITURES FOR THE DEVELOPMENT AND COMMERCIALIZATION OF THE COMPANY'S DRUG
PRODUCTS, IT WOULD IMPAIR THE COMPANY'S ABILITY TO MEET ITS BUSINESS OBJECTIVES.
As of December 31, 2005, the Company had cash and cash equivalents
aggregate approximately $1.6 million. The Company anticipates that such position
as of December 31, 2005 is adequate to finance its operations through June 30,
2006 but thereafter, the Company will require additional financing to insure
that the Company will be able to meet the expenditures to develop and
commercialize its products for which the Company has no current arrangements.
The Company intends to seek additional funds through the sale of additional debt
or equity. No representation can be made that the Company will be able to obtain
additional financing or if obtained it will be on favorable terms, or at all. No
assurance can be given that any offering if undertaken will be successfully
concluded or that if concluded the proceeds will be material. The Company's
inability to obtain additional financing when needed would impair its ability to
meet its business objectives. Other possible sources of the additional financing
are the cash exercises of the Long Term Warrants issued in the October 2004
private placement, the Replacement Warrants issued in the December 2005 private
placement and other warrants and options that are currently outstanding.
If any future financing involves the further sale of the Company's
securities, the Company's then-existing stockholders' equity could be
substantially diluted. On the other hand, if the Company incurred debt, the
Company would be subject to risks associated with indebtedness, including the
risk that interest rates might fluctuate and cash flow would be insufficient to
pay principal and interest on such indebtedness.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On November 8, 2005, the Company entered into a six month 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. As part of the compensation, the Company granted the consultant
non-qualified options to purchase 75,000 shares of the Company's Common Stock,
vesting pro-rata over a six month period at an exercise price of $2.26 per
share, equal to the fair market value of a share of Common Stock on the date of
the grant. If the agreement should be extended beyond six months, the Company is
to grant another 75,000 non-qualified options with an exercise price equal to
the then fair market value of a share of Common Stock, which would vest over the
service period.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.1 Form of Replacement Warrant to purchase shares of Common
Stock, incorporated by reference to exhibit 4.1 to the
Form 8-K filed December 20, 2005.
4.2 Form of Placement Agent Warrant to purchase shares of
Common Stock, incorporated by reference to exhibit 4.2
to the Form 8-K filed December 20, 2005.
10.1 Product Development, Manufacturing and Distribution
Agreement, dated as of March 30, 2005, by and among
Harris Pharmaceutical, Inc., Tish Technologies, LLC and
Elite Labs, incorporated by reference to exhibit 10.1 to
the Form 8-K filed April 5, 2005 as amended by Form
8-K/A filed July 20, 2005, as amended by Form 8-K/A
filed August 23, 2005, as amended by Form 8-K/A filed
September 27, 2005, as amended by the Form 8-K/A filed
December 7, 2005.
10.2 Product Development and Commercialization Agreement,
dated as of June 21, 2005, by and among
Intellepharmaceutics Corp., Elite Labs and the Company,
incorporate by reference to exhibit 10.1 to the Form 8-K
filed June 27, 2005, as amended by Form 8-K/A filed
September 7, 2005, as amended by the Form 8-K/A filed
December 7, 2005.
10.3 Product Development and License Agreement, dated as of
June 22, 2005, between Pliva, Inc. and Elite Labs,
incorporated by reference to exhibit 10.1 to the Form
8-K filed June 28, 2005, as amended by Form 8-K/A filed
September 6, 2005, as amended by the Form 8-K/A filed
December 7, 2005.
10.4 Agreement, dated December 12, 2005, by and among the
Registrant, Elite Laboratories, Inc., and
IntelliPharmaCeutics Corp., incorporated by reference to
exhibit 10.1 to the Form 8-K filed December 16, 2005.*
10.5 Form of Warrant Exercise Agreement between the
Registrant and holders of Existing Warrants,
incorporated by reference to exhibit 10.1 to the Form
8-K filed December 20, 2005.
10.6 Form of Registration Rights Agreement between the
Registrant and holders of Replacement Warrants,
incorporated by reference to exhibit 10.2 to the Form
8-K filed December 20, 2005.
10.7 Placement Agent Agreement between Indigo Securities LLC
and the Registrant, incorporated by reference to exhibit
10.3 to the Form 8-K filed December 20, 2005.
10.8 Product Development and Commercialization Agreement, as
of January 10, 2006, by and among Orit Laboratories LLC,
Elite Laboratories, Inc. and Elite Pharmaceuticals, Inc.
incorporated by reference to the Form 8-K filed January
17, 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..
99.1 Letter from Listing Qualifications, AMEX, dated January
4, 2006, incorporated by reference to exhibit 99.1 to
the Form 8-K filed January 10, 2006.
* The Registrant has requested confidential treatment with respect to the
referenced exhibit. In the event that the Securities and Exchange Commission
should deny such request in whole or in part, such exhibit thereof shall be
filed by amendment to this Current Report on Form 8-K.
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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: February 14, 2006 By: /s/ Bernard Berk
----------------------------
Bernard Berk
Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2006 By: /s/ Mark I. Gittelman
----------------------------
Mark I. Gittelman
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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