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2/11/05
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, 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
165 Ludlow Avenue, Northvale, New Jersey 07647
- ---------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
(201) 750-2646
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the common stock, $.01 par value,
as of February 8, 2005: 15,775,517 (exclusive of 100,000 shares held in
treasury).
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2004
(unaudited) and March 31, 2004 1 - 2
Consolidated Statements of Operations for the three
and nine months ended December 31, 2004 and
December 31, 2003 (unaudited) 3
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended December 31, 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended December 31, 2004 and December 31, 2003 (unaudited) 5
Condensed Notes to Consolidated 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. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 22
EXHIBITS
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, MARCH 31,
2004 2004
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 4,564,948 $ 2,104,869
Accounts receivable, net -- 153,250
Restricted cash 116,645 203,995
Prepaid expenses and other current assets 54,833 137,892
------------ ------------
Total current assets 4,736,426 2,600,006
------------ ------------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 4,273,898 4,090,250
------------ ------------
INTANGIBLE ASSETS - net of accumulated amortization 83,791 102,196
------------ ------------
OTHER ASSETS:
Prepaid expenses 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 $67,058 and $60,458,
respectively 127,502 137,402
------------ ------------
Total other assets 468,515 1,060,982
------------ ------------
Total assets $ 9,562,630 $ 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
DECEMBER 31, MARCH 31,
2004 2004
(Unaudited)
CURRENT LIABILITIES:
Current portion - note payable $ 130,000 $ 75,000
Current portion of EDA bonds 165,000 150,000
Accounts payable and accrued expenses 595,014 1,085,242
------------ ------------
Total current liabilities 890,014 1,310,242
------------ ------------
LONG TERM LIABILITIES:
Note payable - net of current portion 205,051 150,000
EDA bonds - net of current portion 2,180,000 2,345,000
------------ ------------
Total long-term liabilities 2,385,051 2,495,000
------------ ------------
Total liabilities 3,275,065 3,805,242
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value;
Authorized - 5,000,000 and 0 shares at
December 31, 2004 and March 31, 2004,
respectively; Series A 8% Convertible
Preferred Stock Authorized 660,000
shares at December 31, 2004 aggregate
liquidation preference of $5,303,662
at December 31, 2004 4,312 --
Common stock - $.01 par value;
Authorized - 65,000,000 and 25,000,000
shares, respectively at December 31, 2004
and March 31, 2004
Issued and outstanding - 13,111,547
and 12,204,426 shares, respectively 131,115 122,044
Additional paid-in capital 46,289,033 39,338,140
Accumulated deficit (39,830,054) (35,105,151)
------------ ------------
6,594,406 4,355,033
Treasury stock, at cost (100,000 shares) (306,841) (306,841)
------------ ------------
Total stockholders' equity 6,287,565 4,048,192
------------ ------------
Total liabilities and stockholders' equity $ 9,562,630 $ 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
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES $ -- $ 30,000 $ 151,450 $ 30,000
------------ ------------ ------------ ------------
COST OF OPERATIONS:
Research and development 726,175 536,723 1,937,794 1,480,788
General and administrative 625,323 394,867 1,675,041 1,543,926
Depreciation and amortization 45,360 89,610 271,080 268,830
------------ ------------ ------------ ------------
1,396,858 1,021,200 3,883,915 3,293,544
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,396,858) (991,200) (3,732,465) (3,263,544)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 13,131 6,284 18,842 16,469
Litigation settlement -- 150,000 -- 150,000
Sale of New Jersey tax losses 205,792 151,027 205,792 151,027
Interest expense (62,499) (52,093) (176,696) (159,777)
Expenses relating to issuance of stock options (44,982) (45,184) (325,558) (1,096,349)
Expenses relating to issuance of stock warrants -- (587,983) (241,010) (587,983)
Expenses relating to repricing of stock options -- -- (397,732) --
Expenses relating to warrant exchange offer -- -- -- (172,324)
------------ ------------ ------------ ------------
111,442 (377,949) (916,362) (1,698,937)
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,285,416) (1,369,149) (4,648,827) (4,962,481)
PROVISION FOR INCOME TAXES -- -- 1,000 1,000
------------ ------------ ------------ ------------
NET LOSS (1,285,416) (1,369,149) (4,649,827) (4,963,481)
Preferred stock dividends (75,076) -- (75,076) --
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (1,360,492) $ (1,369,149) $ (4,724,903) $ (4,963,481)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.11) $ (.12) $ (.39) $ (.46)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12,258,569 11,381,926 12,231,405 10,829,626
============ ============ ============ ============
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 THE NINE MONTHS ENDED DECEMBER 31, 2004
(UNAUDITED)
SERIES A
8% CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK-
------------------- -------------------- PAID-IN TREASURY ACCUMULATED HOLDERS'
SHARES AMOUNT 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
Series A 8% convertible preferred
shares and warrants issued in
connection with private placement 516,558 5,166 5,861,434 -- -- 5,866,600
Common shares issued in
connection with consulting
agreement -- -- 26,500 265 58,035 -- -- 58,300
Preferred shares converted to
common shares (85,366) (854) 853,660 8,537 (7,683) -- -- --
Expenses related to issuance of
stock options -- -- -- -- 325,558 -- -- 325,558
Expenses related to issuance of
stock warrants -- -- -- -- 241,010 -- -- 241,010
Expenses related to repricing of
stock options -- -- -- -- 397,732 -- -- 397,732
Common stock issued as dividend
on Series A 8% convertible
preferred stock
-- -- 26,961 269 74,807 -- (75,076) --
NET LOSS FOR NINE MONTHS ENDED
DECEMBER 31, 2004 -- -- -- -- -- -- (4,649,827) (4,649,827)
-------- -------- ---------- -------- ----------- --------- ------------ -----------
BALANCE AT DECEMBER 31, 2004
(Unaudited) 431,192 $ 4,312 13,111,547 $131,115 $46,289,033 $(306,841) $(39,830,054) $6,287,565
======== ======== ========== ======== =========== ========= ============ ==========
The accompanying notes are an integral part
of the consolidated financial statements.
-4-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
-----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,649,827) $ (4,963,481)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 271,080 268,830
Expenses related to issuance of stock options 325,558 1,096,349
Expenses related to issuance of stock warrants 241,010 587,983
Expenses related to repricing of stock options 397,732 --
Expenses related to modification of warrant exchange offer -- 172,324
Expenses related to issuance of common stock 58,300 --
Changes in assets and liabilities:
Accounts and accrued interest receivable 153,250 4,681
Prepaid expenses and other current assets 83,059 48,803
Accounts payable, accrued expenses and other current liabilities (490,228) 222,018
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (3,610,066) (2,562,493)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (27,843) --
Purchase of patent -- (20,500)
Restricted cash 312,350 (9,300)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 284,507 (29,800)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Series A 8% Convertible Preferred Stock
and warrants 5,866,600 3,209,000
Principal bank note payments (225,000) (56,250)
Proceeds from equipment loan 400,000 --
Principal equipment note payments (64,989) --
Principal repayments of NJEDA Bonds (150,000) (140,000)
Prepaid interest (41,013) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,785,638 3,012,750
------------ ------------
NET CHANGE IN OPERATING CASH AND CASH EQUIVALENTS 2,460,079 420,457
OPERATING CASH AND CASH EQUIVALENTS - beginning of period 2,104,869 3,264,081
------------ ------------
OPERATING CASH AND CASH EQUIVALENTS - end of period $ 4,564,948 $ 3,684,538
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 132,231 $ 112,341
Cash received for income taxes 204,792 150,027
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred Stock dividends of $75,076 paid by issuance of 26,961 shares
of Common Stock $ 75,076 --
The accompanying notes are an integral part
of the consolidated financial statements.
-5-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 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 nine
month periods ended December 31, 2004 and December 31, 2003. As of
December 31, 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 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 nine months ended December 31, 2004. Only the
minimum corporation tax liability required for state purposes is
reflected.
NOTE 2 - STOCKHOLDERS' EQUITY
---------------------
The shareholders at the Annual Meeting of Stockholders adjourned to
July 21, 2004, approved the 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, each with a par value
of $.01 per share.
SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION
In October 2004, the Company completed a private placement through
Indigo Securities LLC, the Placement Agent, for aggregate gross
proceeds of $6,600,000 of 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. The Company 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.
-6-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
---------------------
SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (Continued)
The holders of the Preferred Shares are entitled to dividends at the
rate of 8% of the original issue price of $12.30 per share payable on
December 1 and June 1 of each year in cash or shares of Common Stock.
Holders are entitled to elect one Director, are entitled to ten votes
per share, and vote with the Common Stockholders as one class on all
other matters. 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
December 28,2009 ("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 Long Term Warrants to purchase
357,495 shares of Common Stock at $1.23 per share, 119,286 shares of
Common Stock at a price of $1.40 per share, and 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 registered
under the Securities Act of 1933 (the "ACT") for resale the shares of
Common Stock issuable upon conversion of the Preferred Shares,
exercise of the warrants (including the Placement Agent's warrants)
and as payment of dividends on the Preferred Shares.
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.
Dr. Charan Behl, the Company's Chief Scientific Advisor, purchased at
$12.30 per share 20,000 Preferred Shares and received warrants to
purchase 200,000 shares of Common Stock. His 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 December 1, 2004 dividends in the amount of $75,076 were paid by
issuance of 26,961 shares of Common Stock. By December 31, 2004,
85,366 shares of Series A Preferred Stock were converted into 853,660
shares of Common Stock.
-7-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
---------------------
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 with respect to the
shares.
DECEMBER 2003 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, exempt from
registration pursuant to Section 4(2) and Regulation D under the Act.
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. Pursuant to its agreement with the purchasers, the
Company at its expense registered the shares issued and the shares
issuable upon exercise of the warrant under the Act
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. Pursuant to rules of the American Stock
Exchange, stockholders at the next Annual Meeting will be asked to
ratify the issuance of the warrants .
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.
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 under this subcaption 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.
-8-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
---------------------
WARRANTS AND OPTIONS (Continued)
On June 22, 2004, the Company granted under its 2004 Stock Option
Plan, 120,000 options to Directors 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. The 120,000 options granted under the 2004 Plan
to members of the Board of Directors expire ten years from the date
of issuance and are fully vested. The per share weighted-average fair
value of the 243,300 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 nine-months
ended December 31, 2004, which represents the fair value of the
vested options, utilizing the Black-Scholes options pricing model on
the grant date.
The 120,000 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 nine months
ended December 31, 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 nine months ended December 31, 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 nine months
ended December 31, 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 DECEMBER NINE MONTHS ENDED DECEMBER
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss as reported $ (1,285,416) $ (1,369,149) $ (4,649,827) $ (4,963,481)
Add: Stock-based compensation
expense included in reported net loss,
net of related tax effects 44,982 633,167 964,300 1,684,332
Deduct: Total stock-based
compensation expense determined
under fair value method for all awards
net of related tax effects (58,739) (853,370) (1,005,571) (2,344,940)
------------ ------------ ------------ ------------
Pro-forma net loss (1,299,173) (1,589,352) (4,691,098) (5,624,089)
Loss per share as reported (.10) (.12) (.38) (.46)
Pro-forma loss per share (.10) (.14) (.38) (.52)
-9-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
--------------------
WARRANTS AND OPTIONS (Continued)
At December 31, 2004, Elite had outstanding 2,377,050 options with
exercise prices ranging from $1.00 to $3.00 and 8,514,750 warrants
(exclusive of the Short Term Warrants and the Long Term 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.
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 legal actions 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 discontinued the Exchange offer and issued New
Warrants to the record holders as of November 30, 2002 of the Old
Warrants without requiring any cash payment.
New Warrants are 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 was charged to additional paid-in capital.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
-----------------------------
SETTLEMENT OF 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. The
Company has made certain counter claims against Mehta.
-10-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------
SETTLEMENT OF LITIGATION WITH ATUL M. MEHTA (Continued)
Under a settlement agreement dated April 21, 2004, 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, 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 at prices ranging from $1.00 to $10.00
per share held by Mehta and also provided him with certain
"piggyback" registration rights with respect to shares underlying his
options. The Company entered into an agreement dated October 7, 2004
with Mehta pursuant to which 100,000 of the $10.00 options were
terminated, the expiration dates of the other 670,000 options were
extended from June 13, 2005 to December 31, 2007 and the exercise
price of 170,000 options were reduced from $10.00 to $2.34 per share.
The agreement also obligates the Company to bear Mehta's legal and
other expenses for the two year period from the litigation settlement
will not exceed $50,000.
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 BASE
REFERRAL 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, 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 are
to 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 are to 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.
-11-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------
COLLABORATIVE AGREEMENTS (Continued)
Pivotal did not raise the capital required to move forward with the
development agreement and did not go forward under the terms of the
agreement. Elite is attempting to identify other partners for this
project.
In June 2001, the Company entered into two separate and distinct
development and license agreements with another pharmaceutical
company, ECR Pharmaceuticals, Inc. ("ECR"). 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. On November 15, 2004, ECR announced that it launched
LODRANE 24, utilizing Elite's exclusive extended release technology,
for once daily dosing. The Company is currently manufacturing
commercial batches for promotion by ECR for which Elite will receive
a royalty on product revenues. No amounts were earned under the
agreements in the nine months ended December 31, 2004 or the nine
months ended December 31, 2004.
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. There were no amounts earned in the nine month periods ended
December 31, 2004 and 2003.
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);
-12-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------
EMPLOYMENT AGREEMENT (Continued)
- 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, as defined.
- 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
(subsequently not effected) 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 nine month period ended
December 31, 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 include 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 pays each consultant $75,000 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. These agreements were extended for an additional
year until November 4, 2005 at a cash fee of $6,250 per month for
each.
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. Pursuant to the rules of the
American Stock Exchange, the issuance of the warrants is to be
presented for ratification by shareholders at the next Annual
Meeting.
For the three and nine month periods ended December 31, 2004,
consulting expenses under these agreements amounted to an aggregate
of $30,000 and $120,000, respectively. For the three months ended
December 31, 2003, consulting expenses under these agreements
amounted to $15,000 plus approximately $470,000 attributable to the
issuance of warrants.
-13-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 4 - SUBSEQUENT EVENTS
-----------------
Effective January 24, 2005, Mr. John Moore resigned as a director of
the Company and a member of its Audit and Nominating Committee and
was replaced by Mr. Edward Neugeboren who was appointed pursuant to
the Certificate of Designation of the Series A Preferred Stock by
the Placement Agent of the private placement in which the shares were
sold as the agent of the Preferred Shareholders. He was appointed by
the Board of Directors to the Audit and Nominating Committees.
The Company has announced March 22, 2005 as the date of its annual
shareholders meeting and the record date for such meeting is February
15, 2005.
During the period January 1, 2005 through February 9, 2005, 245,322
shares of Series A Preferred Stock had been converted into 2,453,220
shares of common stock.
During the period January 1, 2005 through February 9, 2005, the
Company received proceeds of $313,005 from the exercise of 203,250
short-term warrants resulting in the issuance of 203,250 shares of
Common Stock.
Subsequent to December 31, 2004, the Company received proceeds of
$15,000 from the exercise of 7,500 warrants resulting in the issuance
of 7,500 shares of Common Stock.
-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, 2004 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 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, collaborative
agreements, 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.
-15-
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, 2004 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 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 nine month periods
ended December 31, 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 nine month
periods ended December 31, 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 DECEMBER 31, 2004 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2003
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 revenues under its
existing customer contracts or to secure revenues from other sources during the
three months ended December 31, 2004. Revenues for the three months ended
December 31, 2003 were $30,000, which consisted of research and development fees
earned in conjunction with its distinct development, license and manufacturing
agreements.
-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, 2004 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2003
(CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2003 (continued)
General and administrative expenses for the three months ended December
31, 2004 were $625,323, an increase of $230,456 or 58.4% from $394,867 for the
comparable period of the prior year, substantially due to increased salaries and
staff, consulting fees and the write-off of a bad debt relating to accounts
receivable.
Research and development expenses for the three months ended December
31, 2004 were $726,175, an increase of $189,452 or 35.3% from $536,723 for the
comparable period of the prior year, substantially due to increases in
consulting fees, lab and manufacturing supplies and raw materials.
Other income for the three months ended December 31, 2004 was $111,442,
an increase of $489,391 as compared with other expenses of $(377,949) for the
three months ended December 31,2003. This increase was primarily the result of a
$104,665 increase in sales of New Jersey tax losses and the $587,983 decrease in
charges in the 2003 period related to the issuance of stock warrants.
As a result of the foregoing, the Company's net loss for the three
months ended December 31, 2004 was $1,285,416 compared to $1,369,149 for the
comparable period of the prior year.
NINE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 2003
Revenues for the nine months ended December 31, 2004 were $151,450, all
realized during the first six months of the period of which $150,000 was a
non-refundable payment received from Purdue Pharma L.P. granting it the right to
evaluate certain abuse resistance drug formulation technology of the Company.
The Company was unable to generate any significant additional revenues under its
existing customer contracts for the nine months ended December 31, 2004 and any
revenues, other than $30,000, during the year earlier nine month period 2003 due
to inadequate funds and the resignation of the Company's principal scientific
officers in 2003.
General and administrative expenses for the nine months ended December
31, 2004 were $1,675,041, an increase of $131,115 or (8.5%) from $1,543,926 for
the comparable period of the prior year, substantially due to the increases in
salaries and staff, consulting fees and the write-off of a bad debt relating to
accounts receivable.
Research and development expenses for the nine months ended December 31,
2004 were $1,937,794, an increase of $457,006 or approximately 30.9% from
$1,480,788 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 nine months ended December 31, 2004 were
$916,362, a decrease of $782,575, or approximately 46.1% from $1,698,937 for the
comparable period of the prior year, due to reductions of $1,117,764 in charges
related to the issuance of stock options and warrants and a charge of $172,324
in the 2003 period related to the warrant exchange offer, offset partially by
a charge relating to the repricing of stock options in the amount of $397,732.
As a result of the foregoing the Company's net loss for the nine months
ended December 31, 2004 was $4,649,827 compared to $4,963,481 for the comparable
period of the prior year.
-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, 2004 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 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, increased to $3,864,412
as of December 31, 2004, primarily due to net proceeds received from the sale of
Series A Preferred Stock ($5,866,600) partially offset by the $3,356,146 net
cash loss from operations, exclusive of non-cash charges of $1,293,680.
The Company experienced negative cash flows from operations of
$3,610,066 for the nine months ended December 31, 2004, primarily due to the
Company's net loss from operations of $4,649,827, less non-cash charges of
$1,293,680, which included the charges of $397,732 in connection with the
repricing of stock options, $325,558 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 fourth quarter of its fiscal year ending March
31, 2005 and 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 the last quarter of the current fiscal year.
No assurance can be given that the Company will consummate any of the
transactions discussed above.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended December 31, 2004, the Company recorded
positive cash flow and financed its operations through utilization of its
existing cash. In October 2004, the Company raised net cash of $5,866,600 from
its private placement of its Series A Preferred Stock. The Company's working
capital at December 31, 2004 was $3.8 million compared with working capital of
$1.3 million at March 31, 2004. Cash and cash equivalents at December 31, 2004
were $4.6 million, an increase of $2.5 million from the $2.1 million at March
31, 2004.
-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, 2004 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2003
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
In order to conserve cash for the twelve months ending December 31,
2005, the Company intends to reduce costs by continuing the reduction of the
number of products under active development to nine.
The Company purchased machinery and equipment amounting to approximately
$426,000 in the nine months ending December 31, 2004. This equipment was fully
financed except for minor expenditures. No capital expenditures were made during
the nine months ended December 31, 2003.
The Company had bonds of $2,345,000 outstanding, as of December 31,
2004. 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, 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 December 31, 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 nine 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 nine month period ended December 31, 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.
-19-
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, 2004 COMPARED TO
THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 2003
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
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 Series A Preferred
Shareholders are entitled to a preferential dividend of 8% per annum of the
original issue price of $12.30 per share payable on December 1 and June 1 of
each year. Dividends are payable in cash or shares of common stock valued at
their fair market value as defined. The December 1, 2004 dividend of $75,076 was
paid by the issuance of 26,961 shares of Common Stock. The Company believes that
the net proceeds of the placement have provided sufficient cash to fund the
Company's operations and capital requirements through at least September 30,
2005.
On November 15, 2004, Elite's partner, ECR, launched LODRANE 24, a once
a day allergy product, utilizing Elite's extended release technology to provide
for once daily dosing. Under its agreement with ECR, Elite is currently
manufacturing commercial batches of LODRANE 24 in exchange for royalties on
product revenues. The Company expects to generate cash flows from these
royalties commencing in its fiscal quarter ended March 31, 2005. The Company
expects these royalties to provide additional cash flows to help fund its
continuing operations.
-20-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had no investments in marketable securities as of
December 31, 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. CHANGES IN SECURITIES AND USE OF PROCEEDS
In addition to the sales in October 2004 of the shares of Series A
Preferred Stock and the Short Term and Long Terms Warrants, which were described
in the Company's Current Reports on Form 8-K (see Item 6(b)), 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 nine-month period
investor relation consulting services and agreed to provide the holder with
"piggy-back" registration rights.
On July 8, 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 nine
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 Mr. 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.
Ratification of the issuance of the warrants will be sought at the Company's
next Annual Meeting of Stockholders.
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
was exempt from registration under the Act by virtue of Section 4(2) of the Act.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(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.
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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.
The following Reports on Form 8-K were filed during the
three months ended December 31, 2004:
Report on Form 8-K filed October 12, 2004 relating to
items 3.02, 3.03, 5.03 and 9.01.
Report on Form 8-K filed October 19, 2004 relating to
items 3.02 and 9.01
Report on Form 8-K filed November 1, 2004 relating to
items 3.02 and 9.01
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELITE PHARMACEUTICALS, INC.
Date: February 11, 2005 By: /s/Bernard Berk
----------------------------
Bernard Berk
Chief Executive Officer
(Principal Executive Officer)
Date: February 11, 2005 By: /s/Mark I. Gittelman
----------------------------
Mark I. Gittelman
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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