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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, 2003
-----------------------------------------------
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 Identification No.)
incorporation or organization)
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 11, 2004: 12,104,423.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2003 (unaudited) and
March 31, 2003 1 - 2
Consolidated Statements of Operations for the three and nine months
ended December 31, 2003 and December 31, 2002 (unaudited) 3
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended December 31, 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended December 31, 2003 and December 31, 2002 (unaudited) 5 - 6
Notes 7 - 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15 - 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 21
PART II OTHER INFORMATION 21 - 22
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES 23
EXHIBITS
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, MARCH 31,
2003 2003
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 3,684,538 $ 3,264,081
Accrued interest receivable --- 4,681
Restricted cash 114,930 99,380
Prepaid expenses and other current assets 83,289 132,092
------------ -----------
Total current assets 3,882,757 3,500,234
------------ -----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 4,147,778 4,390,553
------------ -----------
INTANGIBLE ASSETS - net of accumulated amortization 109,187 104,842
------------ -----------
OTHER ASSETS:
Restricted cash - Debt Service Reserve 300,000 300,000
Restricted cash - Note payable 243,750 250,000
EDA bond offering costs, net of accumulated amortization
of $57,527 and $47,627, respectively 140,693 150,593
------------ -----------
Total other assets 684,443 700,593
------------ -----------
TOTAL ASSETS $ 8,824,165 $ 8,696,222
============ ===========
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,
2003 2003
(Unaudited)
CURRENT LIABILITIES:
Current portion - Note payable $ 75,000 $ 75,000
Current portion of EDA bonds 150,000 140,000
Accounts payable and accrued expenses 556,739 334,721
----------- -----------
Total current liabilities 781,739 549,721
----------- -----------
LONG TERM LIABILITIES:
Note payable - net of current portion 168,750 225,000
EDA bonds - net of current portion 2,345,000 2,495,000
----------- -----------
Total long-term liabilities 2,513,750 2,720,000
----------- -----------
Total liabilities 3,295,489 3,269,721
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value;
Authorized - 25,000,000 shares
Issued and outstanding -12,204,426 and 10,544,426 shares,
respectively 122,044 105,444
Additional paid-in capital 39,267,888 34,218,832
Accumulated deficit (33,554,415) (28,590,934)
----------- -----------
5,835,517 5,733,342
Treasury stock
(306,841) (306,841)
----------- -----------
Total stockholders' equity 5,528,676 5,426,501
----------- -----------
Total liabilities and stockholder's equity $ 8,824,165 $ 8,696,222
=========== ===========
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,
------------- ------------
2003 2002 2003 2002
----- ----- ----- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES:
Research and Development $ 30,000 $ 150,000 $ 30,000 $ 365,000
Product Formulation Revenues --- --- --- 187,810
Testing Fees --- 2,500 --- 2,500
------------ ------------ ------------ ------------
Total revenues 30,000 152,500 30,000 555,310
------------ ------------ ------------ ------------
COST OF OPERATIONS:
Research and development 536,723 567,864 1,480,788 1,461,345
General and administrative 394,867 450,024 1,543,926 1,297,046
Depreciation and amortization 89,610 78,210 268,830 234,630
------------ ------------ ------------ ------------
1,021,200 1,096,098 3,293,544 2,993,021
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (991,200) (943,598) (3,263,544) (2,437,711)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 6,284 18,616 16,469 81,334
Litigation Settlement 150,000 --- 150,000 ---
Sale of NJ Tax Losses 151,027 --- 151,027 ---
Interest expense (52,093) (55,896) (159,777) (172,281)
Equity in loss of Joint Venture --- --- --- (186,379)
Charge relating to issuance of stock options (45,184) --- (1,096,349) ---
Charge relating to issuance of warrants (587,983) --- (587,983) ---
Charge relating to warrant exchange offer --- (242,338) (172,324) (242,338)
------------ ------------ ------------ ------------
(377,949) (279,618) (1,698,937) (519,664)
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,369,149) (1,223,216) (4,962,481) (2,957,375)
------------ ------------ ------------ ------------
PROVISION FOR INCOME TAXES --- (71,614) (1,000) (71,214)
------------ ------------ ------------ ------------
NET LOSS $ (1,369,149) $ (1,151,602) $ (4,963,481) $ (2,886,161)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.12) $ (.11) $ (.46) $ (.29)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 11,381,926 10,286,917 10,829,626 9,914,772
============ ============ ============ ============
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, 2003 10,544,426 $ 105,444 $ 34,218,832 $ (306,841) $(28,590,934) $ 5,426,501
Nine months ended December 31, 2003 (unaudited)
Modification of Warrant Exchange Offer -- -- 172,324 -- -- 172,324
Issuance of stock options -- -- 1,096,349 -- -- 1,096,349
Issuance of stock warrants -- -- 587,983 -- -- 587,983
Proceeds from exercising stock options 15,000 150 29,850 -- -- 30,000
Net proceeds from private placement 1,645,000 16,450 3,162,550 -- -- 3,179,000
Net loss for nine months ended December 31, 2003 -- -- -- -- (4,963,481) (4,963,481)
------------ --------- ------------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 2003
(Unaudited) 12,204,426 $ 122,044 $ 39,267,888 $ (306,841) $(33,554,415) $ 5,528,676
============ ========= ============ ========== ============ ===========
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,
2003 2002
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,963,481) $ (2,886,161)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and Amortization 268,830 234,630
Equity in loss of Joint Venture --- 186,379
Charge related to issuance of stock options 1,096,349 ---
Charge related to issuance of stock warrants 587,983 ---
Charge related to modification of warrant exchange offer 172,324 242,338
Changes in assets and liabilities:
Accounts and accrued interest receivable 4,681 39,988
Prepaid expenses and other current assets 48,803 54,759
Amount receivable from Joint Venture --- 525,259
Accounts payable, accrued expenses and other current liabilities 222,018 (29,619)
------------ -------------
NET CASH (USED IN) OPERATING ACTIVITIES (2,562,493) (1,632,427)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of short-term investment --- 100,000
Purchase of property and equipment --- (570,810)
Purchase of patent (20,500) (24,318)
Receivable from sale of New Jersey tax losses --- 66,077
Restricted cash (9,300) 97,816
------------ -------------
(29,800) (331,235)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock. 3,209,000 65,843
Principal bank note payments (56,250) (56,250)
Principal repayments of NJEDA Bonds (140,000) (130,000)
Purchase of Treasury Stock --- (269,855)
------------ -------------
The accompanying notes are an integral part of
the consolidated financial statements.
-5-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,012,750 (390,262)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 420,457 (2,353,924)
CASH AND CASH EQUIVALENTS - beginning of period 3,264,081 6,852,434
------------ ------------
CASH AND CASH EQUIVALENTS - end of period $ 3,684,538 $ 4,498,510
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 112,341 $ 172,881
Cash paid (received) for income taxes (150,027) (71,214)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Issuance of Preferred Stock Series B (including stock dividend payable of
$14,000 and subscription receivable of $67,000) $ --- $ 573,000
Conversion of Preferred Stock, Series B to Common Stock --- 521
Conversion of Preferred Stock to Additional Paid In Capital --- 14,520,810
Reduction of Amounts Due to Joint Venture --- 622,133
Reduction in Investments in Joint Venture --- 63,381
Dividends accrued on Preferred Stock - Series A --- 899,923
Conversion of Preferred Stock Series A to Common Stock --- 7,642
Transfer of Deposit on Equipment --- 123,396
The accompanying notes are an integral part of
the consolidated financial statements.
-6-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The information in this Form 10-Q includes the results of
operations of Elite Pharmaceuticals, Inc. and its consolidated
subsidiaries (collectively the "Company") including its
wholly-owned subsidiary, Elite Laboratories, Inc. ("Elite
Labs"), for the three and nine month periods ended December 31,
2003 and 2002 and its wholly-owned subsidiary, Elite Research,
Inc. ("ERI"), for the three and nine month periods ended
December 31, 2003. On September 30, 2002, the "Company" acquired
from Elan Corporation, plc and Elan International Services, Ltd.
(together "Elan"), Elan's 19.9% interest in Elite Research Ltd.
("ERL), a joint venture formed between the Company and Elan in
which the Company's interest originally was 80.1%. On December
31, 2002, the Company entered into an agreement of merger
whereby ERL (a Bermuda corporation) was merged into a new
Delaware Corporation, ERI, a wholly owned subsidiary of the
Company. As a result of the merger, ERI became the owner of all
of the assets and liabilities of ERL. The merger was accounted
for as a tax-free reorganization. As of December 31, 2003, 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, 2003. There have been no changes in significant accounting
policies since March 31, 2003.
The Company does not anticipate being profitable for fiscal year
2004, therefore a current provision for income tax was not
established for the three and nine months ended December 31,
2003. Only the minimum corporation tax liability required for
state purposes is reflected.
NOTE 2 - STOCKHOLDERS' EQUITY
PRIVATE PLACEMENT
The Company was successful in its completion in December 2003 of
a private placement of 1,645,000 shares of its common stock at
$2.00 per share, increasing the Company's outstanding shares to
12,204,426. The offering was exempt from registration pursuant
to Regulation D under the Securities Act of 1933, as amended. In
connection with the offering, the Company paid a cash commission
of $72,500 to First Montauk Securities Corp., as selling agent
and agreed to issue to the agent a five year warrant to purchase
50,000 shares of Company's common stock at a price of $2.00 per
share. Legal fees approximating $40,000 were also incurred in
connection with this private placement.
-7-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
TREASURY STOCK TRANSACTIONS
At a special meeting of the Company's Board of Directors held on
June 27, 2002, the Board authorized the Company to purchase up
to 100,000 shares of its common stock in the open market no
later than December 31, 2002. As of December 31, 2003, the
Company had purchased 100,000 shares of common stock for total
consideration of $306,841.
WARRANTS AND OPTIONS
At December 31, 2003, Elite had outstanding 2,810,550 options
with exercise prices ranging from $2.00 to $10.00 and 983,752
warrants with exercise prices ranging from $2.00 to $18.00; each
option and warrant representing the right to purchase one share
of common stock.
During the year ended March 31, 2003, the Company issued an
aggregate of 210,000 options to an employee and to members of
the Board of the Directors. The options issued to the employee
have an exercise price of $5.00 per share and the options issued
to the directors have an exercise price of $2.01. All of these
options vest one-third annually over three years. The options
expire 10 years from the date of their issuance.
During the nine months ended December 31, 2003, the Company
issued an aggregate of 1,005,000 options to purchase common
stock to employees and to a member of the Board of Directors (no
options were granted during the three months ended December 31,
2003). The options have exercise prices between $2.01 and $5.00
per share. 600,000 options vested immediately, 105,000 options
vest straight -line over three years and 300,000 options, which
were granted to the Company's Chief Executive Officer, will vest
solely upon consummation of a strategic transaction as defined
in his option agreement. The options expire ten years from date
of issuance. The per share weighted-average fair value of
options granted during the nine months ended December 31, 2003,
was $1.75 using the Black-Scholes options pricing model with the
following weighted-average assumptions: no dividend yield;
expected volatility of 75.47%; risk-free interest rate of 4.0%;
and expected lives of ten years. The Company has taken a charge
of $45,184 and $1,096,349, respectively, for the three and nine
months ended December 31, 2003 which represents the fair value
of the options vested, utilizing the Black-Scholes options
pricing model on each grant date.
During the three months ended December 31, 2003, the Company
issued an aggregate of 200,000 and 50,000 warrants, respectively
to financial consultants and the placement agent in the private
placement. The warrants have exercise prices of $2.00 per share.
The warrants vest immediately. The per share weighted-average
fair value of warrants granted during the three months ended
December 31, 2003 was $2.35, using the Black-Scholes option
pricing model with the following weighted average assumptions:
no dividend yield; expected volatility of 77.97%; risk free
interest rate of 4%; and expected lives of 5 years. The Company
has taken a charge of $587,983 for the three months ended
December 31, 2003, which represents the fair value of the
warrants, utilizing the Black-Scholes option pricing model on
the grant date.
-8-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
NOTE 2 - 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 DECEMBER NINE MONTHS ENDED DECEMBER
--------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss as reported $ (1,369,149) $ (1,151,602) $ (4,963,481) $ (2,886,161)
Add: Stock-based compensation
expense included in reported net loss,
net of related tax effects 633,167 --- 1,684,332 ---
Deduct: Total stock-based
compensation expense determined
under fair value method for all awards
net of related tax effects (853,370) (267,662) (2,344,940) (802,988)
------------- ----------- ------------- ------------
Pro-forma net loss (1,589,352) (1,419,264) (5,624,089) (3,689,149)
Loss per share as reported (.12) (.11) (.46) (.29)
Pro-forma loss per share (.14) (.14) (.52) (.37)
CLASS A WARRANT EXCHANGE OFFER
On October 23, 2002, the Company entered into a Settlement
Agreement with various parties in order to end a Consent
Solicitation contest and various litigation initiated by the
Company. The Settlement Agreement provided, among other things,
an agreement to commence an exchange offer (the "Exchange
Offer") to which holders of the Company's Class A Warrants which
expired on November 30, 2002 (the "Old Warrants") would have the
opportunity to exchange those warrants for Class C Warrants (the
"New Warrants") upon payment to the Company of $.10 per share of
common stock issuable upon the exercise of the old warrants. The
Company in September 2003 amended the exchange offer to
eliminate the $.10 per share exchange fee.
The New Warrants are exercisable for the same number of shares
of common stock as the Old Warrants, have an exercise price of
$5.00 per share, will expire on November 30, 2005 and will not
be transferable except by operation of law.
The Exchange Offer is exempt from registration under applicable
federal and state securities laws. The Company has agreed to
register under the Securities Act of 1933, as amended, at its
expense for resale the shares acquired upon exercise of the New
Warrants.
During the year ended March 31, 2003, the Company incurred a
charge of $242,338 relating to the Exchange Offer, which
represents the fair value of the New Warrants, net of
anticipated proceeds, assuming all Old Warrants will be
exchanged. The elimination of the $.10 per share exchange fee
resulted in a charge in the second quarter of $172,324.
-9-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES
LITIGATION WITH ATUL M. MEHTA
The Company had an employment agreement ("Employment Agreement")
with its former President/CEO, Dr. Atul M. Mehta ("Mehta").
On June 3, 2003, Mehta resigned from all positions that he held
with the Company, while reserving his rights under his
Employment Agreement and under common law. On July 3, 2003,
Mehta instituted litigation against the Company and one of its
directors in the Superior Court of New Jersey, alleging, among
other things, the breach of his Employment Agreement and
defamation, and claiming that he is entitled to receive his
salary through June 6, 2006. His salary would total
approximately $1,000,000 through June 6, 2006.
The Company has filed counterclaims against Mehta and a motion
to dismiss Mehta's claims, and, as part of that motion, sought
to compel Mehta to assign and transfer to the Company any rights
Mehta may have in or to all patents which were developed during
his employment with the Company. Similarly, the director named
as a defendant in the action filed a motion to dismiss Mehta's
claim individually.
In November 2003, a settlement was entered into the record of
the Superior Court by counsel to the Company and Mehta but is
being contested by Mehta as having not been authorized by him. A
hearing of his claim is scheduled to be held in March, 2004. If
his claim to overturn the settlement is denied, the settlement
will include a payment to Mehta of $400,000, payment of certain
benefits for a two year period, a short term option in form of
the Company or its designee to acquire all of his shares of the
Company at $2.00 per share, a required $100,000 non-refundable
deposit payable by the Company on the exercise price of such
option, extension of expiration dates of certain options,
Mehta's relinquishment of any rights to the Company's
intellectual property, and Mehta's agreement to certain
non-disclosure and non-competition covenants. If the settlement
is not enforced by the Court and the Company fails to prevail in
this action, such failure would have a material adverse effect
on its financial condition and results of operations. As of
December 31, 2003, the Company's financial statements do not
reflect any accrued compensation owed under Mehta's employment
agreement.
REFERRAL AGREEMENT
The Company entered in January 2002 into a Referral Agreement
with one of its directors (Referring Party) whereby the Company
will pay the Referring Party a fee based upon payments received
by the Company from sales of products, development fees,
licensing fees and royalties generated as a direct result of the
Referring Party identifying customers for the Company. These
amounts are to be reduced by the cost of goods sold directly
incurred in the manufacturing or development of products as well
as any direct expenses associated with these efforts. The
Referral Agreement has no expiration date.
-10-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
REFERRAL AGREEMENT (Continued)
The Company committed to pay the Referring Party a referral fee
each year as follows:
PERCENTAGE OF REFERRAL REFERRAL BASE
BASE FROM TO
---- ---- --
5% $ 0 $ 1,000,000
4% 1,000,000 2,000,000
3% 2,000,000 3,000,000
2% 3,000,000 4,000,000
1% 4,000,000 5,000,000
As of December 31, 2003, no payments were required to be made
under this agreement.
COLLABORATIVE AGREEMENTS
On December 18, 2003, the Company and Pivotal Development,
L.L.C. entered into an agreement to develop a controlled release
product utilizing Elite's proprietary drug delivery technology.
The product is a generic equivalent to a drug losing patent
exclusivity with addressable market revenues of approximately
$150 million per year. The agreement will also provide an option
to develop a controlled release NDA product.
Under the collaboration agreement, Pivotal Development will be
responsible for taking the Elite formulation through clinical
development and the FDA regulatory approval process. The
partners will seek a license during the development cycle from a
pharmaceutical company which has the resources to effectively
market the product and share the cost of defending the product
against any lawsuits.
Elite and Pivotal will bear costs in their respective areas of
responsibility. In addition Pivotal shall pay Elite $750,000
upon attainment of certain milestones outlined in the agreement.
In June 2001, the Company entered into two separate and distinct
development and license agreements with another pharmaceutical
company ("partner"). The Company is developing two drug
compounds for the partner in exchange for certain payments and
royalties. The Company also reserves the right to manufacture
the compounds. The Company received $250,000 under one agreement
and $300,000 under the other agreement, all of which were earned
as of March 31, 2002. The Company is currently proceeding with
development and formulation for both products as specified in
the development agreements. $30,000 was earned during the three
months ended December 31, 2003. During the three and nine months
ended December 31, 2002 the Company earned $10,000 and $85,000,
respectively, for additional development and formulation for
both products.
On September 13, 2002, the Company, entered into a manufacturing
agreement with Ethypharm S.A. ("Ethypharm"). Under the terms of
this agreement, the Company initiated the manufacturing of a new
prescription drug product for Ethypharm. The Company received an
upfront manufacturing fee for the first phase of the technology
transfer and billed an additional amount upon the completion of
the first phase of manufacturing.
-11-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
COLLABORATIVE AGREEMENTS (Continued)
The Company is entitled to receive additional fees in advance
for the final phase of the manufacturing. In addition, if and
when FDA approval is obtained and if requested by Ethypharm, the
Company will manufacture commercial batches of the product on
terms to be agreed upon.
As of December 31, 2003, the Company billed and earned revenues
of $280,000, under the Ethypharm agreement, all of which was
billed and earned during the nine months ended December 31,
2002, in accordance with the substantive milestone method of
revenue recognition. Under this method, the milestone payments
are considered to be payments received for the accomplishment of
a discrete, substantive earnings event. Accordingly, the
non-refundable milestone payments are recognized in full when
the milestone is achieved.
CONTINGENCIES
Elite Labs was the plaintiff in a civil action brought in the
Superior Court of New Jersey on November 20, 2000 against three
parties to recover damages in an unspecified amount based on the
alleged failure of the defendants to perform properly and
complete certain pharmaceutical tests and studies for which
Elite Labs paid approximately $950,000.
The defendants brought a counterclaim of approximately $250,000
allegedly due for services rendered to Elite Labs by the
defendants for the completion of bioequivalency studies and for
the storage of laboratory samples. Elite Labs vigorously
contested the counterclaim.
The above referenced matter was settled during the three months
ended December 31, 2003 for $150,000 to Elite Labs. Proceeds
from the settlement are reflected in the income statement as
litigation settlement.
EMPLOYMENT AGREEMENT
On July 23, 2003, the Company entered into an employment
agreement with its new Chief Executive Officer, Bernard Berk.
The initial term of this agreement is three years. Pursuant to
this agreement:
- Mr. Berk is entitled to receive a base salary of $200,000 per
annum, subject to increase to $330,140 if and when the Company
consummates a Strategic Transaction (as defined in the
employment agreement);
- The Company confirmed its grant to Mr. Berk on June 3, 2003 of
options to purchase 300,000 shares of the Company's common stock
at $2.01 per share. All of these options are vested.
- The Company granted Mr. Berk options to purchase an additional
300,000 shares of its common stock, with an exercise price equal
to $2.15, the closing price of the Company's common stock on the
date of grant. These options will vest solely upon consummation
of a Strategic Transaction.
- Mr. Berk will be appointed as a director of the Company if he
is serving as its Chief Executive Officer following the
consummation of a Strategic Transaction.
-12-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENT (Continued)
- 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. The severance will be
payable in accordance with the terms of his employment
agreement.
CONSULTING AGREEMENTS
The Company entered into consulting agreements with each of
Saggi Capital Corp. and Bridge Ventures Inc. on November 4,
2003. The consultant's services will include, but not be limited
to, advice with respect to overall strategic planning, financing
opportunities, acquisition policy, commercial and investment
banking relationships and stockholder matters.
In consideration of the consultant's agreement to provide
services, the Company agrees to pay each consultant $75,000
payable in monthly installments of $6,250 and to issue to the
consultant a warrant to purchase 100,000 shares of the Company's
common stock.
For the three months ended December 31, 2003, consulting
expenses under those agreements amounted to $15,000 plus
approximately $470,000 attributable to the issuance of warrants.
NOTE 4 - INCOME TAXES
During the nine and three months ended December 31, 2003 the
Company received approval for the sale of an additional
$1,928,817 of New Jersey net-operating losses under the
Technology Tax Certificate Transfer Program sponsored by the New
Jersey Economic Development Authority (NJEDA). The total tax
benefit received was $151,027 and is recorded as other income in
the accompanying financial statements.
NOTE 5 - POSSIBLE MERGER
On August 6, 2003, the Board of Directors authorized the
Company's management to negotiate a merger agreement with
Nostrum Pharmaceuticals, Inc. ("Nostrum"), a privately-held
company engaged in the development of drug delivery products,
whereby Nostrum would be merged into a new subsidiary of the
Company in exchange for three times the number of shares of the
Company's common stock outstanding immediately prior to the
merger and options to acquire substantial additional shares of
the Company's common stock on terms to be agreed upon by the
parties.
The proposed merger agreement is subject to the approval of the
Board of Directors of the Company and will include, as
conditions to the merger, that the merger be approved by the
Company's shareholders, that the Company's Board of Directors be
expanded with certain members designated by former Nostrum
shareholders, and that the Company maintain a designated amount
of working capital as of the effective date and other customary
closing conditions.
No assurance can be given that a definitive merger agreement
will be executed or that, if executed, the conditions to the
merger will be satisfied. The actual number of shares of the
Company's common stock, and options exercisable for the
Company's common stock, issuable upon closing of the proposed
transaction will be determined in the definitive merger
agreement, as may be approved, and may vary materially from the
amounts set forth above.
-13-
ELITE PHARMACEUTICALS, INC.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2003 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2002
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, 2003 (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 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 the 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 involved in the development of controlled drug delivery
systems and products. Its products are in varying stages of development and
testing. In addition, from time to time, the Company has also conducted research
and development projects on behalf of other pharmaceutical companies although
these activities have generated only limited revenue to date, all prior to the
current fiscal year.
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.
-14-
ELITE PHARMACEUTICALS, INC.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2003 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2002
(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 is
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
increase net income and earnings 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 asset 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. The Company assesses its exposure
to current commitments and contingencies by advice of counsel. If accruals for
possible compensation payments to Dr. Atul Mehta had been made with respect to
the Company's litigation outstanding with Dr. Mehta, the Company's net loss and
loss per share would be increased 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
effects the Company's results of operations for the three and nine-month periods
ended December 31, 2003 since 600,000 options were granted which vested
immediately and other options were granted that vest over three and 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 year ended March 31,
2003, the Company's operating loss and net loss would have been decreased.
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, 2003 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2002
The Company's revenues for the three months ended December 31, 2003
were $30,000 as compared with $152,500 for the comparable period of the prior
year. As a result of inadequate funds to conduct research and development and
the resignations in June 2003 of the Company's principal scientific officers,
the Company was unable to generate revenues under its existing customer
contracts during the current period. For the three months ended December 31,
2003 and December 31, 2002 revenues consisted of research and development fees
earned in conjunction with its distinct development, license and manufacturing
agreements. Elan's obligation to make payments to the Company or to ERL
terminated upon the termination of the joint venture on September 30, 2002. The
absence of payments from Elan has effected and will affect revenues for periods
subsequent to September 30, 2002.
-15-
ELITE PHARMACEUTICALS, INC.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIOD ENDED DECEMBER 31, 2003 COMPARED TO
THE THREE AND NINE MONTH PERIOD ENDED DECEMBER 31, 2002
(CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THREE MONTHS ENDED
DECEMBER 30, 2002 (continued)
General and administrative expenses for the three months ended December
31, 2003 were $394,867, a decrease of $55,157 or 12% from the comparable period
of the prior year. The decrease in general and administrative expenses was
substantially due to the tightening of all general and administrative expense
categories offset by increases in legal fees and consulting fees, and increases
in administrative salaries partly due to business development efforts including
the employment in June 2003 of a new Chief Executive Officer.
Research and development costs for the three months ended December 31,
2003 were $536,723, a decrease of $31,141 or 5% from the comparable period of
the prior year.
Increases in other income for the three months ended December 31, 2003
were primarily the result of a litigation settlement of $150,000 and the sale of
NJ Tax losses of $151,027. Increases in other expense for the three months ended
December 31, 2003 were primarily the result of non-cash charges from issuing
warrants.
The Company's net loss for the three months ended December 31, 2003 was
$1,369,149 compared to $1,151,602 for the comparable period of the prior year.
The increase in the net loss was primarily due to charges relating to the
issuance of stock options and warrants, as well as the decline in revenue.
NINE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 2002
The Company had $30,000 of revenues for the nine months ended December
31, 2003 as compared with $555,310 over the comparable period of the prior year.
As a result of inadequate funds to conduct research and development and the
resignations in June 2003 of the Company's principal scientific officers, the
Company was unable to generate revenues under its existing customer contracts
during the current period. The revenues for the nine months ended December 31,
2003 were research and development fees earned in conjunction with the Company's
distinct development, license and manufacturing agreements. For the nine months
ended December 31, 2002, revenues consisted of product formulation fees of
$187,810 earned in conjunction with the Company's joint venture with Elan in ERL
and research and development fees of $367,500 earned in conjunction with
distinct development, license and manufacturing agreements. Elan's obligation to
make payments to the Company or to ERL terminated upon the termination of the
joint venture on September 30, 2002. The absence of payments from Elan has
effected and will affect revenues for the future.
General and administrative expenses for the nine months ended December
31, 2003 were $1,543,926, an increase of $246,880 or 19% from the comparable
period of the prior year. The increase was substantially due to increases in
legal fees and consulting fees, and increases in administrative salaries partly
due to business development efforts including the employment of a Chief
Executive Officer in June 2003.
-16-
ELITE PHARMACEUTICALS, INC.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2003 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2002
(CONTINUED)
NINE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 2002 (Continued)
Research and development costs for the nine months ended December 31,
2003 were $1,480,788, an increase of $19,443 or approximately 1% from the
comparable period of the prior year.
Other expenses, net of other income, for the nine months ended December
31, 2003 were $1,698,937, an increase of $1,179,273, or 227% from the comparable
period of the prior year. The increase is due to charges of $1,096,349 related
to the issuance of stock options, charges of $587,983 related to the issuance of
warrants, and the reduction of $64,865 in interest income due to lower rates and
compensating balances, partially offset by a decrease of $186,379 in equity loss
of joint venture due to its termination, a litigation settlement of $150,000 and
the sale of N.J. Tax losses totaling $151, 027.
The Company's net loss for the nine months ended December 31, 2003 was
$4,963,481 compared to $2,886,161 for the comparable period of the prior year.
The increase in the net loss was primarily due to the reduction of revenue as a
result of the Company's inability to generate revenues under its existing
customer contracts during the current period due to inadequate funds to conduct
research and development and the resignations in June 2003 of the Company's
principal scientific officers, increases in general and administrative expenses
due primarily to increases in legal and consulting fees and non-cash charges of
$1,096,349 and $587,983, relating to the issuance of stock options and warrants.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company's working capital (total current assets less total current
liabilities), which was $2,950,513 as of March 31, 2003, increased to $3,101,018
as of December 31, 2003. The increase in working capital is primarily due to
proceeds received from sale of common stock in a private placement partially
offset by the Company's net loss from operations.
The Company experienced negative cash flow from operations of
$2,562,493 for the nine months ended December 31, 2003, primarily due to the
Company's net loss from operations of $4,963,481, offset by non-cash charges of
$2,125,486. Non-cash charges included, but were not limited to, $1,096,349 in
connection with the issuance of stock options, a charge of $587,983 in
connection with the issuance of warrants, and a charge related to modification
of warrant exchange offer of $172,324.
The Company recently completed a Good Manufacturing Practices ("GMP")
batch for a product currently licensed with a pharmaceutical company under a
development and license agreement entered into June 2001. The Company received
$30,000 under the Agreement and expects to complete two additional GMP batches
in the near future under the terms of the licensing agreement. The Company
expects to manufacture the product with revenues projected to be generated in
the second quarter of its fiscal year ended March 31, 2005. The Company also
projects as to which no assurance can be given the earning of additional
milestone payments under the Agreement subject to completion of the GMP batches.
-17-
ELITE PHARMACEUTICALS, INC.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2003 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2002
(CONTINUED)
MATERIAL CHANGES IN FINANCIAL CONDITION (Continued)
The Company recently entered into an Agreement with Pivotal
Development, L.L.C. Under the Agreement, the Company will be entitled to
milestone payments totaling $750,000. The Company projects, as to which no
assurance can be given earning and receiving some of the milestone payments
starting in the first quarter of fiscal year ending March 31, 2005.
The Company is currently in discussions with two pharmaceutical
companies with respect to product and licensing agreements on its controlled
release Oxycodone compound with an abuse resistant feature. If an agreement can
be consummated, its partner will provide funding for the development of the
product as well as significant milestone payments. The Company estimates that
the sales market for Oxycodone exceeds approximately $2 billion dollars
annually. No assurance can be given that an agreement will be made or if made
that it will result in material revenues for the Company.
No assurance can be given that the Company will consummate any of the
transactions discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, the Company's principal source of liquidity
was approximately $3,684,538 of cash and cash equivalents.
For the nine months ended December 31, 2003, the Company recorded
positive cash flow and financed its operations primarily through the private
sale of its equity and debt securities. The Company completed a successful
private placement for net proceeds of approximately $3,200,000. The Company had
working capital of $3.1 million at December 31, 2003 compared with $4.3 million
at December 31, 2002. Cash and cash equivalents at December 31, 2003 were $3.7
million, a decrease of $.8 million from the $4.5 million at December 31, 2002.
Net cash used in operating activities was $2,562,493 during the nine
months ended December 31, 2003, compared to $1,632,427 for the nine months ended
December 31, 2002. Net cash used in operating activities during the nine months
ended December 31, 2003 resulted primarily from the Company's net loss of
$4,963,481, offset in part by non-cash charges of $2,125,486 consisting of
$1,096,349 in stock option charges, $587,983 in warrant issuance charges and,
$172,324 in costs associated with modification of warrant exchange offer and
$268,830 in depreciation expense. An increase in accrued expenses, the result of
increased accruals for legal and consulting fees also offset the Company's net
loss of $4,963,481 for the nine months ended December 31, 2003. Net cash used in
operating activities during the nine months ended December 31, 2002 resulted
primarily from a net loss of $2,886,161, offset in part by certain non-cash
expenses consisting of, but not limited to depreciation expense of $234,630 and
warrant exchange offer of $242,338.
Investing activities used net cash of $29,800 during the nine months
ended December 31, 2003 which resulted from a decrease in restricted cash. Net
cash utilized by investing activities of $331,235 during the nine months ended
December 31, 2002 resulted from the acquisition of property and equipment,
payment of a deposit thereon and the purchase of a patent, partially offset by
the maturity of short-term investments.
-18-
ELITE PHARMACEUTICALS, INC.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2003 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2002
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Financing activities provided net cash of $3,012,750 during the nine
months ended December 31, 2003 which resulted from the sale of stock through the
private placement and sale of common stock through exercise of options offset by
the repayment of $196,250 of indebtedness. Financing activities utilized net
cash of $390,262 during the nine months ended December 31, 2002 primarily from
the repayment of indebtedness and the purchase of the Company's stock, offset in
part by the sale of common stock and warrants.
As a result of expenditures associated with operating the Company's
business and the joint venture termination, the Company's cash expenses have
exceeded its generated revenues for the nine months ended December 31, 2003. In
order to conserve cash for the next twelve months, the Company intends to reduce
costs by reducing the number of products under active development to six.
The Company did not make any capital expenditures during the nine
months ended December 31, 2003. The Company's capital expenditures aggregated
$570,810 for the nine-month period ended December 31, 2002. Such expenditures
consisted primarily of the acquisition of property and equipment necessary to
support the Company's existing operations and expected growth.
The Company anticipates that its capital expenditures for the 12
months ending December 31, 2004 will be limited to expenditures that can be
funded entirely by development contracts that include provisions for such
funding. Management estimates the Company has sufficient cash to allow it to
continue for at least the next 12 months. The Company may seek additional funds
through additional debt or equity. No assurance can be given that any offering
will be concluded or that if concluded the proceeds will be material.
The Company had outstanding, as of December 31, 2003, $2,495,000 in
aggregate amount of bonds. The bonds bear interest at a rate of 7.75% per annum
and are due on various dates between 2005 and thereafter. 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 refinancing of the land and building the Company currently owns, the
purchase of certain manufacturing equipment and related building improvements
and the maintenance of a $300,000 debt service reserve. All of the restricted
cash, other than the debt service reserve, is expected to be expended within
twelve months and is therefore categorized as a current asset on the Company's
consolidated balance sheet as of December 31, 2003. Pursuant to the terms of the
bond indenture agreement pursuant to which the bonds were issued, the Company is
required to observe certain covenants, including covenants relating to the
incurrence of additional indebtedness, the granting of liens and the maintenance
of certain financial covenants. As of December 31, 2003 the Company was in
compliance with the covenants contained in the bond indenture agreement.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2003 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2002
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company is currently in negotiations to enter into an agreement and
plan of merger with Nostrum Pharmaceuticals, Inc., a private drug development
company, which would provide for Nostrum to become a wholly-owned subsidiary of
the Company and for the shareholders of Nostrum to be issued three times as many
shares of Common Stock as are outstanding immediately prior to the effectiveness
of the merger, together with options to acquire a substantial number of
additional shares of Common Stock exercisable on satisfaction of certain
conditions. The merger proposal contemplates that as one of the conditions to
its consummation, the Company's working capital be increased to a designated
amount. No assurance can be given that any agreement will be concluded, that if
concluded the terms will not be materially different or that the conditions to
the merger, including stockholder approval, will be satisfied.
-20-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had no investments in marketable securities as of
December 31, 2003 or assets and liabilities which are
denominated in a currency other than U.S. dollars or involve
commodity price risks.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See "NOTE 3 - COMMITMENTS AND CONTINGENCIES; Litigation with Atul M.
Mehta" set forth in the Notes to the Consolidated Financial Statements in this
Report with regard to a possible settlement of the litigation with Dr. Atul
Mehta.
Item 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
Pursuant to consulting agreements, dated November 4, 2003, between the
Company and each of Bridge Ventures, Inc. ("Bridge Ventures") and Saggi Capital
Corp. ("Saggi "), the Company issued as partial consideration to each of Bridge
Ventures and Saggi for their respective agreements to provide advice as to
overall strategic planning, financing opportunities, acquisition policy,
commercial and investment banking relationships and stockholder matters and such
other related services as may be mutually agreed upon by the parties five year
warrants to purchase 100,000 shares of its common stock exercisable at $2.00 per
share.
In December 2003, the Company completed a private placement of
1,645,000 shares of its common stock to a group of accredited investors at a
price of $2.00 per share. Purchases in the private placement by an affiliate of
John A. Moore, the Company's Chairman of the Board of 50,000 shares, and by a
co-tenancy of Eric L. Sichel, a Director and another individual of 25,000
shares, are subject to stockholder approval. The offer and sale was exempt from
registration under the Securities Act of 1933, as amended , pursuant to the
exemption provided by Regulation D thereunder. In connection with the sale, the
Company paid to the placement agent a commission of $72,500 and issued to the
placement agent and its associates five year warrants to purchase an aggregate
of 50,000 shares of its common stock exercisable at $2.00 per share.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Consulting Agreement, dated November 4, 2003,
between the Company and Saggi Capital Corp.
10.2 Consulting Agreement, dated November 4, 2003,
between the Company and Bridge Ventures, Inc.
10.3 Form of Warrant issued to each of Saggi Capital
Corp., Bridge Ventures, Inc. and the placement
agent and its associates
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
-21-
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.
No Reports on Form 8-K were filed during the three months
ended December 31, 2003 except that a Report on Form 8-K
was filed on December 5, 2003 containing responses to
Items 5 and 7 with respect to the Company's press release
advising of its completion of a private placement of
1,645,000 shares of its common stock at $2.00 per share.
-22-
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 13, 2004 By: /s/ Bernard Berk
-----------------------------------
Bernard Berk
Chief Executive Officer
(Principal Executive Officer)
Date: February 13, 2004 By: /s/ Mark I. Gittelman
-----------------------------------
Mark I. Gittelman
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
-23-