U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2004
-----------------------------------------------
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
165 LUDLOW AVENUE, NORTHVALE, NEW JERSEY 07647
- ----------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
(201)750-2646
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the common stock, $.01 par value,
as of November 10, 2004: 12,130,926 (exclusive of 100,000 shares held in
treasury).
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2004
(unaudited) and March 31, 2004 1 - 2
Consolidated Statements of Operations for the
three and six months ended September 30, 2004 and
September 30, 2003 (unaudited) 3
Consolidated Statement of Changes in Stockholders' Equity
for the six months ended September 30, 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended September 30, 2004 and September 30, 2003 (unaudited) 5
Notes to Financial Statements 6 - 13
Item 2. Management's Discussion And Analysis of Financial
Condition And Results Of Operations 14 - 19
Item 3. Quantitative And Qualitative Disclosures
About Market Risk 20
PART II OTHER INFORMATION 20 - 21
Item 2. Unregistered Equity Securities and Use of Proceeds
Item 6. Exhibits
SIGNATURES 22
EXHIBITS
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, MARCH 31,
2004 2004
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 154,373 $ 2,104,869
Accounts receivable 153,250 153,250
Restricted cash 29,534 203,995
Prepaid expenses and other current assets 143,257 137,892
----------- -----------
Total current assets 480,414 2,600,006
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 4,283,056 4,090,250
----------- -----------
INTANGIBLE ASSETS - net of accumulated amortization 89,926 102,196
----------- -----------
OTHER ASSETS:
Deferred lease payments 41,013 --
Deposit on equipment -- 398,580
Restricted cash - debt service reserve 300,000 300,000
Restricted cash - note payable -- 225,000
EDA bond offering costs, net of
accumulated amortization of
$63,758 and $60,458, respectively 130,802 137,402
----------- -----------
Total other assets 471,815 1,060,982
----------- -----------
Total assets $ 5,325,211 $ 7,853,434
=========== ===========
The accompanying notes are an integral part of
the consolidated financial statements.
-1-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, MARCH 31,
2004 2004
(Unaudited)
CURRENT LIABILITIES:
Current portion - note payable $ 119,344 $ 75,000
Current portion of EDA bonds 165,000 150,000
Accounts payable and accrued expenses 946,142 1,085,242
------------ -----------
Total current liabilities 1,230,486 1,310,242
------------ -----------
LONG TERM LIABILITIES:
Note payable - net of current portion 253,326 150,000
EDA bonds - net of current portion 2,180,000 2,345,000
------------ -----------
Total long-term liabilities 2,433,326 2,495,000
------------ -----------
Total liabilities 3,663,812 3,805,242
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - 01 par value;
Authorized - 5,000,000 and 0 shares at
September 30, 2004 and March 31, 2004,
respectively Issued and outstanding - 0
shares at September 30, 2004 and March
31, 2004
Common stock - $.01 par value;
Authorized - 65,000,000 and 25,000,000
shares respectively at September 30,
2004 and March 31, 2004 Issued and
outstanding - 12,230,926 and 12,204,426
shares, respectively 122,309 122,044
Additional paid-in capital 40,315,493 39,338,140
Accumulated deficit (38,469,562) (35,105,151)
------------ -----------
1,968,240 4,355,033
Treasury stock, at cost (100,000 shares) (306,841) (306,841)
------------ -----------
Total stockholders' equity 1,661,399 4,048,192
------------ -----------
Total liabilities and stockholders'
equity $ 5,325,211 $ 7,853,434
============ ===========
The accompanying notes are an integral part of
the consolidated financial statements.
-2-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------
2004 2003 2004 2003
----- ----- ----- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES $ 151,450 $ -- $ 151,450 $ --
----------- ----------- ----------- -----------
COST OF OPERATIONS:
Research and development 565,390 456,583 1,211,619 944,065
General and administrative 641,146 735,503 1,049,718 1,149,059
Depreciation and amortization 120,360 89,610 225,720 179,220
----------- ----------- ----------- -----------
1,326,896 1,281,696 2,487,057 2,272,344
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,175,446) (1281,696) (2,335,607) (2,272,344)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest income 2,667 4,800 5,711 10,185
Interest expense (62,396) (54,176) (114,197) (107,684)
Charge relating to issuance of stock options (50,944) (48,682) (280,576) (1,051,165)
Charge relating to issuance of stock warrants (241,010) -- (241,010) --
Charge relating to repricing of stock options -- -- (397,732)
Charge relating to warrant exchange offer -- (172,324) -- (172,324)
----------- ----------- ----------- -----------
(351,683) (270,382) (1,027,804) (1,320,988)
----------- ----------- ----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,527,129) (1,552,078) (3,363,411) (3,593,332)
----------- ----------- ----------- -----------
PROVISION FOR INCOME TAXES -- 1,000 1,000 1,000
----------- ----------- ----------- -----------
NET LOSS $(1,527,129) $(1,553,078) $(3,364,411) $(3,594,332)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.13) $ (.15) $ (.28) $ (.34)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12,230,926 10,559,426 12,217,748 10,551,967
=========== =========== =========== ===========
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
FOR SIX MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN TREASURY ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK DEFICIT EQUITY
---------- ---------- ----------- --------- ------------ -------------
BALANCE AT
MARCH 31, 2004 (Audited) 12,204,426 $ 122,044 $39,338,140 $(306,841) $(35,105,151) $ 4,048,192
Six months ended
September 30, 2004 (unaudited) -- -- -- -- -- --
Shares issued in connection
with consulting agreement 26,500 265 58,035 -- -- 58,300
Charge related to issuance of
stock options -- -- 280,576 -- -- 280,576
Charge related to issuance of
stock warrants -- -- 241,010 -- -- 241,010
Charge related to repricing of
stock options -- -- 397,732 -- -- 397,732
Net loss for six months ended
September 30, 2004 -- -- -- -- (3,364,411) (3,364,411)
---------- ---------- ----------- --------- ------------ -----------
BALANCE AT
SEPTEMBER 30, 2004 (Unaudited) 12,230,926 $ 122,309 $40,315,493 $(306,841) $(38,469,562) $ 1,661,399
========== ========== =========== ========= ============ ===========
The accompanying notes are an integral part of
the consolidated financial statements.
-4-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2004 2003
---- ----
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,364,411) $ (3,594,332)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 225,720 179,220
Charge related to issuance of stock options 280,576 1,051,165
Charge related to issuance of stock warrants 241,010 --
Charge related to repricing of stock options 397,732 --
Charge related to modification of warrant exchange offer -- 172,324
Charges related to issuance of common stock 58,300 --
Changes in assets and liabilities:
Accounts and accrued interest receivable -- 4,681
Prepaid expenses and other current assets (5,365) 85,205
Accounts payable, accrued expenses and other current liabilities (139,100) 287,757
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (2,305,538) (1,813,980)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (399,656) --
Deposit on equipment 398,580 --
Restricted cash 399,461 (70,087)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 398,385 (70,087)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants -- 30,000
Proceeds from equipment loan 400,000 --
Principal bank note payments (252,330) (37,500)
Principal repayments of NJEDA Bonds (150,000) (140,000)
Deferred lease payments (41,013) --
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (43,334) (147,500)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,950,496) (1,891,393)
CASH AND CASH EQUIVALENTS - beginning of period 2,104,869 3,264,081
------------ ------------
CASH AND CASH EQUIVALENTS - end of period $ 154,373 $ 1,372,688
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 115,166 $ 108,000
Cash paid for income taxes 1,000 1,000
The accompanying notes are an integral part of
the consolidated financial statements.
-5-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(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"), Elite Research Ltd. ("ERL") and Elite Research, Inc.
("ERI"), for the three and six month periods ended September 30,
2004 and September 30, 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
September 30, 2004, 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, 2004. There have been no changes in significant accounting
policies since March 31, 2004.
The Company does not anticipate being profitable for fiscal year
2005; therefore a current provision for income tax was not
established for the six months ended September 30, 2004. Only
the minimum corporation tax liability required for state
purposes is reflected.
NOTE 2 - STOCKHOLDERS' EQUITY
At the adjourned Annual Meeting of Stockholders
held on July 21, 2004, the shareholders approved the adoption of
an amendment to the Certificate of Incorporation increasing the
number of authorized shares of capital stock from 25,000,000 of
Common Stock to 65,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock.
COMMON STOCK TRANSACTION
On July 6, 2004, the Company issued 26,500 shares of Common
Stock and agreed to pay $10,000 per month to a corporation in
consideration for the rendering for a six-month period of
investor relation consulting services, including the
distribution of the Company's press releases, the provision of
related strategic advice and the inclusion of the Company on the
consultant's website. The Company agreed to provide the holder
with "piggy-back" registration rights.
-6-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
PRIVATE PLACEMENT
The Company completed in December 2003 a private placement of
1,645,000 shares of its common stock at $2.00 per share,
increasing the Company's outstanding shares to 12,104,426,
exclusive of 100,000 treasury shares. The offering was exempt
from registration pursuant to Section 4(2) and Regulation D
under the Securities Act of 1933, as amended. In connection with
the offering, the Company paid a cash commission of $75,000 to
First Montauk Group Inc., as Placement Agent and issued 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 $36,000 were also incurred in connection with this
private placement.
TREASURY STOCK TRANSACTIONS
The Company purchased prior to March 31, 2003, in the open
market, 100,000 shares of common stock for a total consideration
of $306,841 pursuant to the authorization by the Board of
Directors on June 27, 2002.
WARRANTS AND OPTIONS
On July 20, 2004, the Company issued five-year warrants to
purchase 50,000 shares of Common Stock at a price of $3.00 per
share to an individual in consideration of his agreement to
render financial consulting services.
On July 8, 2004, Elite Labs, to finance the purchase of certain
machinery and equipment, borrowed $400,000 and designees of the
lender received 50,000 warrants which vested immediately, to
purchase an aggregate of 50,000 shares of the Company's common
stock at $4.20 per share. If the loan is repaid within six
months, the 15,000 warrants will be forfeited and the lender
will be entitled to a $10,000 prepayment penalty.
On June 3, 2004, the Company granted five-year warrants to
purchase 100,000 shares of Common Stock at a price of $2.50 per
share to a Company as consideration for financial consulting
services.
The per share weighted-average fair value of the above mentioned
warrants ranged from $.83 - $1.50 using the Black-Scholes
warrant pricing model with the following weighted-average
assumptions: no dividend yield; expected volatility of 80.34;
risk free interest rate of 3.0% and expected lives of 10 years.
In June 2004, the stockholders of the Company approved the
adoption by the Board of Directors of the Company's 2004 Stock
Option Plan (the "2004 Plan"). The Plan reserves 1,500,000
shares of Common Stock for grant by the Board of Directors of
incentive or nonqualified stock options to officers, employees,
or directors of and consultants to the Company.
-7-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
WARRANTS AND OPTIONS (Continued)
On June 22, 2004, the Company granted 120,000 options to
Directors (all fully vested) and 123,300 options to employees to
purchase an aggregate of 243,300 shares of Common Stock at a
price of $2.34 per share under its 2004 Stock Option Plan, which
was approved on that date by the stockholders. The 120,000
options granted under the 2004 Plan to members of the Board of
Directors expire ten years from the date of issuance; have an
exercise price of $2.34 per share and are fully vested. The per
share weighted-average fair value of the options amounted to
$1.91 using the Black-Scholes options pricing model with the
following weighted-average assumptions: no dividend yield;
expected volatility of 76.69%; risk free interest rate of 4.0%;
and expected lives of ten years. The Company has taken a charge
of $229,632 for the six-months ended September 30, 2004, which
represents the fair value of the vested options, utilizing the
Black-Scholes options pricing model on the grant date.
The options granted to employees were in replacement of
previously granted options containing exercise prices greater
than $2.34 per share. On the same date the stockholders approved
amendments made previously by the Board of Directors to
outstanding warrants and options including the repricing of
options to purchase 420,000 shares of which options to purchase
330,000 shares were held by Directors of the Company.
Accordingly, during the six months ended September 30, 2004
options with respect to an aggregate of 543,300 options were
repriced (treating the options granted in lieu of outstanding
options as repriced options). The new options have exercise
prices between $2.21 and $2.34 per share. 162,300 options are
vested and 381,000 options are in various stages of three year
vesting periods. The options expire ten years from date of
issuance. The per share weighted-average fair value of options
repriced during the six months ended September 30, 2004, ranged
from $1.51 - $1.91 using the Black-Scholes options pricing model
with the following weighted-average assumptions: no dividend
yield; expected volatility of 76.69%; risk-free interest rate of
4.0%; and expected lives of ten years. The Company has taken a
charge of $397,732 for the six months ended September 30, 2004
which represents the fair value of the options vested, utilizing
the Black-Scholes options pricing model on each grant date.
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 SEPTEMBER SIX MONTHS ENDED SEPTEMBER
---------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss as reported $ (1,527,129) $ (1,553,078) $(3,364,411) $(3,594,332)
Add: Stock-based compensation
expense included in reported net loss,
net of related tax effects 291,954 48,682 919,318 1,051,165
Deduct: Total stock-based
compensation expense determined
under fair value method for all awards
net of related tax effects (305,711) (268,884) (946,832) (1,491,570)
------------ ------------- ----------- -----------
Pro-forma net loss (1,540,886) (1,773,280) (3,391,925) (4,034,737)
Loss per share as reported (.13) (0.15) (.28) (0.34)
Pro-forma loss per share (.13) (0.17) (.28) (0.38)
-8-
At September 30, 2004, Elite had outstanding 2,477,050 options
with exercise prices ranging from $1.00 to $10.00 and 2,854,239
warrants with exercise prices ranging from $2.00 to $5.00; 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 SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES
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 Agreement provided, among other things, an
agreement to commence an exchange offer (the "Exchange Offer")
whereby holders of the Company's Class A Warrants which expired
on November 30, 2002 (the "Old Warrants") had the opportunity to
exchange those warrants for New Warrants (the "New Warrants")
upon payment to the Company of $.10 per share of common stock
issuable upon the exercise of the old warrants. In September
2003 the Company issued New Warrants to the record holders as of
November 30, 2002 of the Old Warrants without requiring any cash
payment.
Each New Warrants is exercisable for the same number of shares
of common stock as the Old Warrants at an exercise price of
$5.00 per share, and expires on November 30, 2005. The New
Warrants are not transferable except pursuant to operation of
law.
During the year ended March 31, 2003, the Company expensed
$242,338 relating to the Exchange Offer, which represents the
fair value of the New Warrants,. The per share weighted-average
fair value of each warrant on the date of grant was $1.10 using
the Black-Scholes option pricing model with the following
weighted-average assumptions: no dividend yield; expected
volatility of 73.77%; risk-free interest rate of 2.88%; and
expected lives of 3 years. The elimination of the $0.10 per
share fee resulted in an additional charge of $172,324 during
the year ended March 31, 2004.
For the year ended March 31, 2003 the Company incurred legal
fees and other costs amounting to approximately $100,000, in
connection with the Exchange Offer, which has been charged to
additional paid-in capital.
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.
On April 21, 2004, the Company settled the litigation. Under the
settlement agreement, Mehta relinquished any rights to the
Company's patents and intellectual properties and agreed to
certain non-disclosure and certain limited non-competition
covenants. The Company paid Mehta $400,000 and certain expense
reimbursements in accordance with the settlement agreement, and
received a short-term option for the Company or its designees to
acquire all of the shares of the common stock of the Company
held by Mehta and his affiliates at $2.00 per share. The Company
paid $100,000 into escrow which was released to Mehta because
the option was not exercised in full. As part of the settlement,
the Company extended expiration dates of certain options to
purchase 770,000 shares of common stock held by Mehta and also
provided him with certain "piggyback" registration rights with
respect to shares underlying his options. Subject to an
agreement dated October 7, 2004, the 770,000 options were
modified (see Note 4) and the Company's obligation to reimburse
or pay benefits and expenses to be incurred by Mehta during the
two year period from April 21, 2004 was capped at $50,000.
-10-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
REFERRAL AGREEMENT
In January 2002, the Company entered 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.
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 September 30, 2004, 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 also provides 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 is to 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. There were no amounts earned under
the agreements in the six months ended September 30, 2003 or the
six months ended September 30, 2004.
-11-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
COLLABORATIVE AGREEMENTS (Continued)
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.
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.
The Company billed and earned revenues of $280,000, under the
Ethypharm agreement, all of which was billed and earned during
the year ended March 31, 2003, 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.
There were no amounts earned in the three and six month periods
ended September 30, 2004 and 2003.
In addition to milestone payments, the Company billed and
recognized $75,000 in additional revenues as a result of the
manufacturing and delivery of additional batches during the year
ended March 31, 2003. No such revenues were earned in the three
and six month periods ended September 30,2003 or the three and
six month periods ended September 30, 2004.
EMPLOYMENT AGREEMENT
On July 23, 2003, the Company appointed Bernard Berk as its
Chief Executive Officer and President and entered into an
employment agreement with him. The initial term of this
agreement is three years. Pursuant to the 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.
-12-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(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 or as a result of a
"change of control" as defined. The severance will be payable in
accordance with the terms of his employment agreement.
On May 14, 2004, the Company's Board of Directors appointed
Bernard Berk to the position of Chairman of the Board of
Directors.
CONSULTING AGREEMENTS
On July 3, 2003, the Company entered into an agreement with
Leerink Swann & Company to provide a Valuation and a Fairness
Opinion in order for the Company to complete a proposed
acquisition for which the Company paid a non-refundable retainer
fee of $50,000. If and when the Board of Directors requests a
Fairness Opinion, Leerink's compensation is to be $50,000. No
amounts were expensed in the three and six month periods ended
September 30, 2004 and 2003
The Company entered into one year 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 issued to each consultant a
warrant to purchase 100,000 shares of the Company's common stock
at a price of $2.00 per share.
On June 3, 2004, the Company agreed to engage a company to
provide consulting services and issued in connection therewith a
five-year warrant to purchase 100,000 shares of Common Stock at
a price of $2.50 per share.
On July 20, 2004, the Company agreed to engage an individual to
provide financial consulting services and issued in connection
therewith a three-year warrant to purchase 50,000 shares of
common stock at a price of $3.00 per share.
For the three and six month periods ended September 30, 2004,
consulting expenses under these agreements amounted to an
aggregate of $45,000 and $90,000, respectively. No consulting
expense was incurred for the three and six month periods ended
September 30, 2003.
-13-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NOTE 4 - SUBSEQUENT EVENTS
In October 2004, the Company completed a private placement
through Indigo Securities LLC, the Placement Agent. The Company
sold for aggregate gross proceeds of $6,600,000 in the private
placement 516,558 shares of series A Preferred Stock, par value
$0.01 per share ("Preferred Shares") convertible into 5,165,580
shares of Common Stock. The Preferred Shares were accompanied by
warrants to purchase an aggregate of 5,165,580 shares of Common
Stock at exercise prices ranging from $1.54 to $1.84 per share.
It paid commissions aggregating $633,510 and issued five year
warrants to purchase 494,931 shares of Common Stock to the
Placement Agent. The Company also paid legal fees and expenses
of the Agent's counsel of $75,000 and legal fees and expenses of
one counsel for the Investors in the private placement of
$25,000.
Each Preferred Share is convertible into ten shares of Common
Stock. The purchaser of the Preferred Shares (the "INVESTORS")
received for each Preferred Share acquired two Common Stock
Purchase Warrants, one exercisable on or prior to December 31,
2005 ("SHORT-TERM WARRANTS") and the other exercisable on or
prior to the fifth anniversary of the date upon which the
registration statement described below is declared effective
("LONG-TERM WARRANTS"). Each warrant represents the right to
purchase five shares of Common Stock.
The private placement was effected in three tranches. The first
tranche involved the sale on October 6, 2004 of 379,122
Preferred Shares at a price of $12.30 per share convertible into
an aggregate of 3,791,220 shares of Common Stock accompanied by
Short-Term Warrants and Long-Term Warrants to purchase at $1.54
per share an aggregate of 3,791,220 shares of Common Stock. The
second tranche involved the sale on October 12, 2004 of 119,286
Preferred Shares at a price of $14.00 per share convertible into
1,192,860 shares of Common Stock accompanied by Short-Term and
Long-Term Warrants to purchase an aggregate of 1,192,860 shares
of Common Stock at a price of $1.75 per share. The third tranche
involved the sale on October 26, 2004 of 18,150 Preferred Shares
at a price of $14.70 per share convertible in to 181, 500 shares
of Common Stock accompanied by Short Term and Long Term Warrants
to purchase at a price of $1.84 per share an aggregate of
181,500 shares of Common Stock.
Pursuant to the Placement Agent Agreement, the Company issued to
the Placement Agent and its designees in the first, second and
third tranches warrants to purchase 357,495 shares of Common
Stock at $1.23 per share, warrants to purchase 119,286 shares of
Common Stock at a price of $1.40 per share, and warrants to
purchase 18,150 shares of Common Stock at a price of $1.47 per
share, respectively.
Holders of the Preferred Shares are provided demand and
piggy-back registration rights at the Company's expense. The
Company also has agreed to register under the Securities Act of
1933 (the "ACT") for resale the shares of Common Stock issuable
upon conversion of the Preferred Shares, upon exercise of the
warrants (including the Placement Agent's warrants) and as
payment of dividends on the Preferred Shares within 90 days of
the closing of each tranche of the private placement, with a
penalty of 2% of the purchase price for each 30 day period
during which the registration statement has not been declared
effective after such 90 day period (PRO RATA for a partial
month), but not to exceed an aggregate of 16% of the purchase
price.
Each of the purchasers of the Preferred Shares has represented
that the purchaser is an "accredited investor" and has agreed
that the securities issued in the private placement are to bear
a restrictive legend against resale without registration under
the Act. The Preferred Shares and warrants were sold by
Registrant pursuant to the exemption from registration afforded
by Section 4(2) of the Act and Registration D thereunder.
-14-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NOTE 4 - SUBSEQUENT EVENTS (Continued)
One of the purchasers of the Preferred Shares at a price of
$12.30 per share was Dr. Charan Behl, the Company's Chief
Scientific Advisor, who purchased 20,000 Preferred Shares and
received warrants to purchase 200,000 shares of Common Stock.
Payment consisted of $16,675 in cash and the release of the
Company's obligation of $229,325 due to Dr. Charan Behl for
consulting fees for services rendered through September 30,
2004.
The Company entered into an agreement dated October 7, 2004 with
Dr. Atul Mehta ("Mehta") pursuant to which outstanding options
to purchase 770,000 shares of Common Stock granted in connection
with the litigation settlement were amended to terminate 100,000
options, and extend the expiration dates of the other options
from June 13, 2005 to December 31, 2007 and reduce the exercise
price of 170,000 options from $10.00 to $2.34 per share. The
agreement also provided that the Company's obligation to bear
Mehta's legal and other expenses for the two year period from
the litigation settlement will not exceed $50,000.
-15-
ELITE PHARMACEUTICALS, INC.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2004 COMPARED TO
THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2003
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, 2004 (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 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 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.
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.
-16-
ELITE PHARMACEUTICALS, INC.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2004 COMPARED TO
THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2003
(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 the Company 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 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. The Company assesses its exposure
to current commitments and contingencies by advice of counsel. 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 six month periods
ended September 30, 2004 and 2003 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 six month
periods ended September 30, 2004 and 2003, net loss and net loss per share 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 SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
No revenues were generated during the three months ended September 30,
2003. Revenues for the three months ended September 30, 2004 were $151,450,
which consisted of a non-refundable $150,000 payment received from Purdue Pharma
granting it the right to evaluate certain abuse resistance drug formulation
technology of the Company. As a result of inadequate funds to conduct
significant research and development and the resignations in June 2003 of the
Company's principal scientific officers the Company was unable to generate
additional revenues under its existing customer contracts or to secure revenues
from other sources during the three months ended September 30, 2004.
-17-
ELITE PHARMACEUTICALS, INC.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2004 COMPARED TO
THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2003
(CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003 (continued)
General and administrative expenses for the three months ended
September 30, 2004 were $641,146, a decrease of $94,357 or 12.8% from $735,503
for the comparable period of the prior year, substantially due to the reduction
in operating economics.
Research and development costs for the three months ended September 30,
2004 were $565,390, an increase of $108,107 or 23.8% from $456,583 for the
comparable period of the prior year, substantially due to increases in
consulting fees, lab and manufacturing supplies and raw materials.
The increase in net expense of $81,301 to $351,683 for the three months
ended September 30, 2004 from $270,382 for the three months ended September
30,2003 was primarily the result of increases in charges related to the issuance
of stock warrants in 2004 of $241,010, partially offset by the $172,324 charge
related to warrant exchange offer in 2003.
The Company's net loss for the three months ended September 30, 2004
was $1,527,129 compared to $1,553,078 for the comparable period of the prior
year. The decrease in the net loss was primarily due to the revenues in the
current year.
SIX MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2003
The Company had no revenues for the six months ended September 30,
2003. Revenues for the six months ended September 30, 2004 were $151,450, which
consisted of a non-refundable $150,000 payment received from Purdue Pharma L.P.
granting it the right to evaluate certain abuse resistance drug formulation
technology of the Company. The Company was unable to generate any additional
revenues under its existing customer contracts for the six months ended
September 30, 2004 and 2003 due to inadequate funds and the resignation of the
Company's principal scientific officers in 2003.
General and administrative expenses for the six months ended September
30, 2004 were $1,049,178, a decrease of $99,341 or 8.6% from $1,149,059 for the
comparable period of the prior year, substantially due to the reduction in
operating economies.
Research and development costs for the six months ended September 30,
2004 were $1,211,619, an increase of $267,554 or approximately 28.3% from
$944,065 for the comparable period of the prior year, primarily the result of
increased research and development wages, consulting fees, lab and manufacturing
supplies and raw materials.
Other expenses for the six months ended September 30, 2004 were
$1,027,804, a decrease of $293,184, or approximately 22.2% from $1,320,988 for
the comparable period of the prior year, due to reductions of $770,589 in
charges related to the issuance of stock options and a charge related to warrant
exchange offer of $172,324 in 2003, offset partially by increased charges
relating to issuance of stock warrants and charges relating to the repricing of
stock options in the amounts of $241,010 and $397,732, respectively.
The Company's net loss for the six months ended September 30, 2004 was
$3,364,411 compared to $3,594,332 for the comparable period of the prior year,
primarily due to the revenues generated in the current year.
-18-
ELITE PHARMACEUTICALS, INC.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2004 COMPARED TO
THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2003
(CONTINUED)
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company's working capital (total current assets less total current
liabilities), which was $1,289,764 as of March 31, 2004, decreased to a negative
of ($750,072) as of September 30, 2004. The decrease in working capital is
primarily due to the $3,364,411 net loss from operations.
The Company experienced negative cash flow from operations of
($2,305,538) for the six months ended September 30, 2004, primarily due to the
Company's net loss from operations, partially offset by non-cash charges of
$977,618, which included, but were not limited to, the charges of $397,732 in
connection with the repricing of stock options, $280,576 in connection with the
issuance of stock options, and $241,010 in connection with the issuance of stock
warrants.
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 in November 2003 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 third quarter of its fiscal year ending March
31, 2005. The Company also anticipates the earning of additional milestone
payments under the Agreement subject to completion of the GMP batches.
The Company recently entered into an agreement with Pivotal
Development, L.L.C. pursuant to which the Company is to receive an aggregate of
$750,000 upon attaining certain milestones. The Company anticipates that some of
the milestones will be achieved commencing in the quarter ending December 31,
2004.
No assurance can be given that the Company will consummate any of the
transactions discussed above.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended September 30, 2004, the Company recorded
negative cash flow and financed its operations primarily through utilization of
its existing cash. The Company had negative working capital of approximately
($.75) million at September 30, 2004 compared with positive working capital of
$1.3million at March 31, 2004. Cash and cash equivalents at September 30, 2004
were $.2 million, a decrease of $1.9 million from the $2.1 million at March 31,
2004.
Net cash used in operating activities was $2,305,538 during the six
months ended September 30, 2004, compared to $1,813,980 for the six months ended
September 30, 2003. Net cash used in operating activities during the six months
ended September 30, 2004 included the net loss of $3,364,411 offset in part by
non-cash charges of $1,203,338 consisting of $977,618 in stock option and
warrant charges, and $225,720 in depreciation expense. Net cash used in
operating activities during the six months ended September 30, 2003 resulted
primarily from a net loss of $3,594,332, offset in part by certain non-cash
expenses consisting of, but not limited to depreciation expense of $179,220 and
charges related to issuance of stock options of $1,051,165.
-19-
ELITE PHARMACEUTICALS, INC.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2004 COMPARED TO
THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2003
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Revenues generated for the six months ended September 30, 2004 were
$151,450. In order to conserve cash for the next twelve months, the Company
intends to reduce costs by continuing the reduction of the number of products
under active development to six.
The Company purchased machinery and equipment amounting to
approximately $400,000 in the six months ending September 30, 2004. This
equipment was fully financed. No capital expenditures were made in the six
months ended September 30, 2003.
-20-
ELITE PHARMACEUTICALS, INC.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2004 COMPARED TO
THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2003
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company had outstanding, as of September 30, 2004, $2,345,000 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 September 30, 2004. 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 September 30, 2004 the Company
was in compliance with the covenants contained in the bond indenture agreement.
On July 8, 2004, Elite Labs entered into a loan and financing agreement
in order 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 being held by the lender and were and will 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 vest immediately, to purchase
50,000 shares of the Company's common stock at $4.20 per share. If the loan is
repaid within six months, 15,000 warrants will be forfeited, but the lender will
be entitled to a $10,000 prepayment penalty. A charge for the cost of these
warrants is reflected in the quarter ending September 30, 2004.
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 in the future.
In October 2004, the Company effected a private placement of 516,558
shares of its Series A Preferred Stock for gross proceeds of $6,600,000, before
payment of commission of $623,520 and other expenses The Company believes that
the net proceeds will provide sufficient cash to fund the Company's operations
and capital requirements through at least September 30, 2005.
-21-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had no investments in marketable securities as of
September 30, 2004 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 2. UNREGISTERED EQUITY SECURITIES AND USE OF PROCEEDS
Since March 31, 2004, the Company issued or granted the following
warrants or options:
On June 3, 2004, the Company granted five year warrants to purchase
100,000 shares of Common Stock at a price of $2.50 per share to D. H. Blair
Investment Banking Corp. as consideration for financial consulting services.
On July 6, 2004, the Company issued 26,500 shares of Common Stock to
CEOcast, Inc. in partial consideration for rendering during a six-month period
investor relation consulting services and agreed to provide the holder with
"piggy-back" registration rights.
On July 7, 2004, the Company issued three year warrants to purchase an
aggregate of 50,000 shares of Common Stock at a price of $4.20 per share to
designees of a lender in connection with the refinancing of the outstanding
equipment loan, with the provision that warrants to purchase 15,000 shares will
be cancelled in the event of the repayment in full of the new loan within six
months, in which event the Company is to pay $10,000 to the lender as a
prepayment penalty.
On July 20, 2004, the Company issued to Jason Lyons five-year warrants
to purchase 50,000 shares of Common Stock at a price of $3.00 per share in
consideration of his agreement to render financial consulting services.
CEOcast, Inc. and each of the warrant holders has agreed that no
transfer of the shares, warrants or any shares acquired upon exercise of the
warrants will be made unless such transfer is registered under the Act or exempt
from registration under the Act.
In the opinion of the Company, the issuance of the foregoing securities
were exempt from registration under the Act by virtue of Section 4(2) of the
Act.
Item 6. EXHIBITS
(a) Exhibits:
10.1 Form of Warrant issued to D. H. Blair Investment
Banking Corp.
10.2 Form of Warrant issued to designees of lender with
respect to financing of equipment loan filed as
Exhibit 10.2 to Registrant's quarterly report on Form
10-Q for the three months ended June 30, 2004 and
incorporated herein by reference thereto.
10.3 Form of Warrant issued to Jason Lyons filed as
Exhibit 10.3 to Registrant's quarterly report on Form
10-Q for the three months ended June 30, 2004 and
incorporated herein by reference thereto.
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.
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32.2 Certification by Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELITE PHARMACEUTICALS, INC.
Date: November 11, 2004 By: /s/Bernard Berk
----------------------------
Bernard Berk
Chief Executive Officer
(Principal Executive Officer)
Date: November 11, 2004 By: /s/Mark I. Gittelman
----------------------------
Mark I. Gittelman
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)