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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED - MARCH 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO______
COMMISSION FILE NUMBER 333-45241
ELITE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3542636
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
165 Ludlow Avenue
Northvale, New Jersey 07647
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including (201) 750-2646
area code:
Securities registered pursuant Common Stock - $.01 par value
to Section 12(b) of the Act: The Common Stock is listed
on the American Stock Exchange
Securities registered pursuant to Section None
12(g) of the Act:
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 Registrant was required
to file such reports)
and (2) has been subject to such filing requirements for at least the past 90
days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [_] No [X]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of June 20, 2005 was approximately $51,126,066 based upon the
closing price of the registrant's Common Stock on the American Stock Exchange,
as of June 20, 2005. (For purposes of determining this amount, only directors,
executive officers, and 10% or greater stockholders and their respective
affiliates have been deemed affiliates).
Registrant had 18,178,167 shares of Common Stock, par value $0.01 per share,
outstanding as of June 20, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
There are no documents incorporated by reference into the Annual Report or any
part of the report.
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS ANNUAL REPORT, STATEMENTS THAT ARE
NOT STATEMENTS OF CURRENT OR HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE FOREGOING, THE WORDS "PLAN", "INTEND", "MAY,"
"WILL," "EXPECT," "BELIEVE", "COULD," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR
SIMILAR EXPRESSIONS OR OTHER VARIATIONS OR COMPARABLE TERMINOLOGY ARE INTENDED
TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF. EXCEPT AS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE.
TABLE OF CONTENTS
Form 10-K Index
PART I
PAGE
Item 1. Business......................................................... 2
Item 2. Properties....................................................... 23
Item 3. Legal Proceedings................................................ 23
Item 4. Submission of Matters to a Vote of Security Holders.............. 24
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters................................ 25
Item 6. Selected Financial Data.......................................... 28
Item 7. Management's Discussion and Analysis of Financial................ 28
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.......................................... 35
Item 8. Financial Statements and Supplementary Data...................... 35
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 35
Item 9A. Controls and Procedures.......................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant............... 37
Item 11. Executive Compensation........................................... 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters............. 48
Item 13. Certain Relationships and Related Transactions................... 49
Item 14. Principal Accountant Fees and Services........................... 50
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 50
Signatures .............................................................. 54
PART I
ITEM 1. BUSINESS
Elite Pharmaceuticals, Inc. ("Elite Pharmaceuticals") was incorporated
on October 1, 1997 under the laws of the State of Delaware, and our wholly-owned
subsidiaries, Elite Laboratories, Inc. ("Elite Labs") and Elite Research, Inc.
("Elite Research") were incorporated on August 23, 1990 and December 20, 2002,
respectively, under the laws of the State of Delaware. Elite Pharmaceuticals,
Elite Labs and Elite Research are referred to herein, collectively, as "Elite",
"we", "us", "our" or the "Company".
On October 24, 1997, Elite Pharmaceuticals merged with and into our
predecessor company, Prologica International, Inc. ("Prologica") an inactive
publicly held corporation formed under the laws of the State of Pennsylvania. At
the same time, Elite Labs merged with a wholly-owned subsidiary of Prologica.
Following these mergers, Elite Pharmaceuticals survived as the parent to its
wholly-owned subsidiary, Elite Labs.
On September 30, 2002, we 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 Elite and Elan in which
our initial interest was 80.1% of the outstanding capital stock (100% of the
outstanding Common Stock). As a result of the termination of the joint venture,
we owned 100% of ERL's capital stock. On December 31, 2002, ERL (a Bermuda
Corporation) was merged into Elite Research, our wholly-owned subsidiary.
The address of our principal executive offices and our telephone and
facsimile numbers at that address are:
Elite Pharmaceuticals, Inc., 165 Ludlow Avenue, Northvale, New Jersey
07647; Phone No.: (201) 750-2646; Facsimile No.: (201) 750-2755.
We file registration statements, periodic and current reports, proxy
statements and other materials with the Securities and Exchange Commission. You
may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains a web site at www.sec.gov that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC, including our filings.
2
BUSINESS OVERVIEW AND STRATEGY
Elite is a specialty pharmaceutical company principally engaged in the
development and manufacture of oral, controlled release products. Elite develops
controlled release products using proprietary technology and licenses these
products. The Company's strategy includes developing generic versions of
controlled release drug products with high barriers to entry and assisting
partner companies in the life cycle management of products to improve off-patent
drug products. Elite's technology is applicable to develop delayed, sustained or
targeted release pellets, capsules, tablets, granules and powders. Elite has one
product currently being sold commercially and a pipeline of six drug products
under development in the therapeutic areas that include cardiovascular, pain
management, allergy and infection. The addressable market for Elite's pipeline
of products exceeds $2 billion. Elite's current facility in Northvale, New
Jersey also is a Good Manufacturing Practice (GMP) and DEA registered facility
for research, development, and manufacturing.
We have concentrated on developing orally administered controlled
release drug products. These products include drugs that cover therapeutic areas
for pain, angina, hypertension, allergy and infection. One of our products,
24(R), has been commercially developed and is being marketed by ECR
Pharmaceuticals, our partner for this product. An additional controlled release
product is under development for marketing by the same company. A third product
is to be developed pursuant to a recent agreement with another pharmaceutical
company.
We are focusing our efforts on the following areas: (i) manufacturing
of Lodrane 24(R) and the development and manufacture of two of the other
products with partners referred to above; (ii) commercial exploitation of our
products either by license and the collection of royalties, or through the
manufacture of tablets and capsules using our formulations, and (iii)
development of new products and the expansion of our licensing agreements with
other pharmaceutical companies, including contract research and development
projects, joint ventures and other collaborations.
In an effort to reduce costs and improve focus and enhance efficiency,
we reduced the number of products that we are actively developing from fifteen
to seven. The seven products, one of which had been commercially developed and
six that are in development, were deemed by us to be the most suitable for
development given our limited resources.
We are focusing on the development of various types of drug products,
including, generic drug products (which require abbreviated new drug
applications ("ANDA")) as well as branded drug products (which require new drug
applications ("NDA") under Section 505(b)(1) or 505(b)(2) of the Drug Price
Competition and Patent Term Restoration Act of 1984 (the "Drug Price Act").
3
We intend to continue to collaborate in the development of additional
products with our current partners. We also plan to seek additional
collaborations to develop more drug products.
We believe that our business strategy enables us to reduce our risk by
having a diverse product portfolio that includes both branded and generic
products in various therapeutic categories; and building collaborations and
establishing licensing agreements with companies with greater resources thereby
allowing us to share costs of development and to improve cash-flow.
RESEARCH AND DEVELOPMENT
During each of the last three fiscal years, we have focused on research
and development activities. We spent $2,698,641 in the fiscal year ended March
31, 2005, $2,075,074 in the fiscal year ended March 31, 2004 and $2,013,579 in
the fiscal year ended March 31, 2003 on research and development activities.
Of our seven controlled release products, two are for pain (the
Oxycodone CR and a related abuse resistant product), one (diltiazem) is for
cardiovascular indications, two are for allergy indications, one is for an
anti-infective indication and one is for an undisclosed indication. One of the
allergy products has been developed and is being marketed by a pharmaceutical
company which has the responsibility for regulatory matters and is to market the
second drug for allergy indications upon completion of its commercial
development. The drug for the undisclosed indication is to be developed by us
pursuant to a March 30, 2005 agreement. See "Manufacturing and Development
Contracts".
It is our general policy not to disclose products in our development
pipeline or the status of such products until a product reaches a stage that we
determine, for competitive reasons, in our discretion, to be appropriate for
disclosure and because the disclosure of such information might suggest the
occurrence of future matters or events that may not occur. In this instance, we
believe that disclosure of the information in the following table is helpful for
the description of the general nature, orientation and activity of the Company,
and the disclosures are made for such purpose. No inference should be made as to
the occurrence of matters or events not specifically described. We may or may
not disclose such information in the future based on competitive reasons and/or
contractual obligations. We believe that the information is helpful on a
one-time basis for the purpose described above.
The following table provides information concerning the controlled
release products that we are developing and to which we are devoting substantial
resources and attention. None of these products has been approved by the FDA and
all are in development ("N/A" means not applicable because there is no branded
product on the market).
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- --------------------------------------------------------------------------------
PRODUCT BRANDED APPROX. U.S. NDA/ INDICATION
PRODUCT(A) SALES FOR BRANCD ANDA
AND/OR GENERIC
PRODUCTS
(2004)
$MM(B)
- --------------------------------------------------------------------------------
1 Oxycodone CR OxyContin(R) $2,000 NDA Pain
Once a day twice a day
- --------------------------------------------------------------------------------
2 Product using abuse N/A N/A NDA Pain
resistant technology
(ART) for use with
Oxycodone (or other
opioids)
Once a day
Twice a day(c)
- --------------------------------------------------------------------------------
3 Diltiazem Cardizem CD(R) $300 ANDA Cardiovascular
Once a day
- --------------------------------------------------------------------------------
4 Undisclosed product Undisclosed $80 ANDA Undisclosed
with a partner
- --------------------------------------------------------------------------------
5 Undisclosed product N/A N/A Undisclosed Allergy
with partner
- --------------------------------------------------------------------------------
6 Undisclosed Undisclosed $100 ANDA Infection
Twice a day
- --------------------------------------------------------------------------------
(a) The name of our competitor's branded product.
(b) Indicates the approximate amount of sales of our competitor's product and
not the sales of any of our products.
(c) An IND was filed and accepted by the FDA with respect to the Twice a day.
The table below presents information with respect to the development of
six of the products under development. For some of the products, we intend to
make NDA filings under Sections 505(b)(1) or 505(b)(2) of the Drug Price Act.
Accordingly, we anticipate, as to which there is no assurance, that the
development timetable for the products for which such NDA filings are made would
be shorter and less expensive. Completion of development of products by us
depends on a number of factors, however, and there can be no assurance that
specific time frames will be met during the development process or that the
development of any particular products will be continued.
5
In the table, Pilot Phase I studies for the NDA products are generally
preliminary studies done in healthy human subjects to assess the
tolerance/safety and pharmacokinetics of the product. Additional larger studies
in humans will be required prior to submission of the product to the FDA for
review. Pilot bioequivalence studies are initial studies done in humans for
generic products and are used to assess the likelihood of achieving
bioequivalence for generic products. Larger pivotal bioequivalence studies will
be required prior to submission of the product to the FDA for review.
- --------------------------------------------------------------------------------
DEVELOPMENT STAGE NUMBER OF PRODUCTS NDA/ANDA
- --------------------------------------------------------------------------------
Preclinical 1 ANDA
- --------------------------------------------------------------------------------
Pilot Phase I study 2 NDA
- --------------------------------------------------------------------------------
Pilot bioequivalence study 2 ANDA
- --------------------------------------------------------------------------------
Pre-Clinical 1 (1)
- --------------------------------------------------------------------------------
(1) The partner is handling the FDA and other regulatory filings in connection
with the product.
MANUFACTURING AND DEVELOPMENT CONTRACTS
In September 1999 Elite entered into an agreement with an undisclosed
partner to co-develop a chrono diltiazem product. A pilot pharmacokinetic study
has been conducted, but until we have additional resources to devote to this
product and locate a partner, we will not perform further clinical studies.
In June 2001, we entered into two development contracts pursuant to
which we agreed to commercially develop two products in exchange for development
fees, certain payments, royalties and manufacturing rights. One product, Lodrane
24(R), was first commercially offered in November 2004, and our revenues for
manufacturing the product and a royalty on sales for the year ended March 31,
2005 aggregated $150,030. Development of the second product continues.
The payments under the foregoing agreements for the years ended March
31, 2004 and 2005 were not material.
On March 30, 2005, we entered into a three party agreement with a
marketing company and a formulation development company pursuant to which we are
to commercially develop a drug with the marketing company to share in the
development costs. Upon its development and the securing of the required FDA
approval by the formulation development company, we are to manufacture and sell
the commercially developed drug to the marketing company for distribution. In
addition to the transfer price to the marketing company, we are to share the
profits, if any, realized upon sales.
6
JOINT VENTURE WITH ELAN
A joint research venture with Elan (ERL) was funded through capital
contributions from its partners based on the partners' respective ownership
percentage.
The joint venture was terminated on December 31, 2002 and ERL was
merged into a new Delaware corporation, Elite Research, our wholly-owned
subsidiary.
Under the Termination Agreement, we acquired all proprietary,
development and commercial rights for the worldwide markets for the products
developed by the joint venture. In exchange for this assignment, we agreed to
pay Elan a royalty on certain revenues that may be realized in the future from
the once-a-day Oxycodone product that was in development by the joint venture,
if and when FDA approval is obtained. In the future, we will be solely
responsible for funding product development, which funding we anticipate will be
derived from internal resources or through loans or investment by third parties.
The joint venture had completed the initial Phase I study for its first product,
the once-a-day Oxycodone formulation. Currently there is no once-a-day
formulation for this compound on the market. This compound is part of our
development pipeline.
The joint venture had also performed work on a second, related product
in the central nervous system therapeutic area. Initial formulation work on a
third product combining Oxycodone with a narcotic antagonist has been performed.
We have the exclusive rights to the proprietary, development and commercial
exploitation for the worldwide markets for these two products developed by ERL.
We will not have to pay Elan royalties on revenues that may be realized from
these products.
Under the joint venture, Elan had received 409,165 shares of our Common
Stock; warrants exercisable at $18.00 per share for 100,000 shares of our Common
Stock; and Series A and Series B preferred stock of Elite Labs, which were
convertible into 764,221 shares and 52,089 shares, respectively, of our Common
Stock. Under the Termination Agreement, Elan and its transferees retained the
securities, and the shares of Series A and Series B preferred stock were
converted into our Common Stock under the preexisting terms for conversion. We
did not pay, nor did Elan receive, any cash consideration under the Termination
Agreement.
PATENTS
Since our incorporation, we have secured five United States patents.
Two have been assigned for a fee to another pharmaceutical company. In addition
one patent has been allowed, but not yet issued and we have pending applications
for three United States patents and five foreign patents.
The pending patent applications relate to three different control
release pharmaceutical products on which we are working. Included among these
patent applications is an application for a U.S. patent for a narcotic agonist
and antagonist product that we are developing to be used with oxycodone and
other narcotics to
7
minimize the abuse potential for the narcotics. We intend to apply for patents
for other products in the future; however, there can be no assurance that any of
the pending applications or other applications which we may file will be
granted.
Prior to the enactment in the United States of new laws adopting
certain changes mandated by the General Agreement on Tariffs and Trade (GATT),
the exclusive rights afforded by a U.S. Patent were for a period of 17 years
measured from the date of grant. Under GAAT, the term of any U.S. Patent granted
on an application filed subsequent to June 8, 1995, terminates 20 years from the
date on which the patent application was filed in the United States or the first
priority date, whichever occurs first. Future patents granted on an application
filed before June 8, 1995, will have a term that terminates 20 years from such
date, or 17 years from the date of grant, whichever date is later.
Under the Drug Price Act, a U.S. Product patent or use patent may be
extended for up to five years under certain circumstances to compensate the
patent holder for the time required for FDA regulatory review of the product.
The benefits of this Act are available only to the first approved use of the
active ingredient in the drug product and may be applied only to one patent per
drug product. There can be no assurance that we will be able to take advantage
of this law.
Also, different countries have different procedures for obtaining
patents, and patents issued by different countries provide different degrees of
protection against the use of a patented invention by others. There can be no
assurance, therefore, that the issuance to us in one country of a patent
covering an invention will be followed by the issuance in other countries of
patents covering the same invention, or that any judicial interpretation of the
validity, enforceability, or scope of the claims in a patent issued in one
country will be similar to the judicial interpretation given to a corresponding
patent issued in another country. Furthermore, even if our patents are
determined to be valid, enforceable, and broad in scope, there can be no
assurance that competitors will not be able to design around such patents and
compete with us using the resulting alternative technology.
We also rely upon unpatented proprietary and trade secret technology
that we seek to protect, in part, by confidentiality agreements with our
collaborative partners, employees, consultants, outside scientific
collaborators, sponsored researchers, and other advisors. There can be no
assurance that these agreements provide meaningful protection or that they will
not be breached, that we will have adequate remedies for any such breach, or
that our trade secrets, proprietary know-how, and technological advances will
not otherwise become known to others. In addition, there can be no assurance
that, despite precautions taken by us, others have not and will not obtain
access to our proprietary technology.
8
TRADEMARKS
We have received Notices of Allowance from the U.S. Patent and
Trademark Office granting trademark protection for four trademarks. However,
since we currently plan to license our products to marketing partners and not to
sell under our brand name, we do not currently intend to register or maintain
any trademarks.
GOVERNMENT REGULATION AND APPROVAL
The design, development and marketing of pharmaceutical compounds, on
which our success depends, are intensely regulated by governmental regulatory
agencies, including the FDA. Non-compliance with applicable requirements can
result in fines and other judicially imposed sanctions, including product
seizures, injunction actions and criminal prosecution based on products or
manufacturing practices that violate statutory requirements. In addition,
administrative remedies can involve voluntary withdrawal of products, as well as
the refusal of the FDA to approve ANDAs and NDAs. The FDA also has the authority
to withdraw approval of drugs in accordance with statutory due process
procedures.
Before a drug may be marketed, it must be approved by the FDA. The FDA
approval procedure for an ANDA relies on bioequivalency tests which compare the
applicant's drug with an already approved reference drug, rather than with
clinical studies. Because we concentrated, during our first few years of
business operations, on developing products which are intended to be
bioequivalent to existing controlled-release formulations, we expect that such
drug products will require ANDA filings and not clinical efficacy and safety
studies, which are generally more expensive and time-consuming.
NDAS AND NDAS UNDER SECTION 505(B) OF THE DRUG PRICE ACT
The FDA approval procedure for an NDA is generally a two-step process.
During the Initial Product Development stage, an investigational new drug
application ("IND") for each product is filed with the FDA. A 30-day waiting
period after the filing of each IND is required by the FDA prior to the
commencement of initial clinical testing. If the FDA does not comment on or
question the IND within such 30-day period, initial clinical studies may begin.
If, however, the FDA has comments or questions, they must be answered to the
satisfaction of the FDA before initial clinical testing can begin. In some
instances this process could result in substantial delay and expense. These
initial clinical studies generally constitute Phase I of the NDA process and are
conducted to demonstrate the product tolerance/safety and pharmacokinetic in
healthy subjects. After Phase I testing, extensive efficacy and safety studies
in patients must be conducted. After completion of the required clinical
testing, an NDA is filed, and its approval, which is required for marketing in
the United States, involves an extensive review process by the FDA. The NDA
itself is a complicated and detailed application and must include the results of
extensive clinical and other testing, the cost of which is substantial. However,
the NDA filings contemplated by us on already marketed drugs
9
would be made under Sections 505 (b)(1) or 505 (b)(2) of the Drug Price Act,
which do not require certain studies that would otherwise be necessary;
accordingly, the development timetable should be shorter. While the FDA is
required to review applications within a certain timeframe in the review
process, the FDA frequently requests that additional information be submitted.
The effect of such request and subsequent submission can significantly extend
the time for the NDA review process. Until an NDA is actually approved, there
can be no assurance that the information requested and submitted will be
considered adequate by the FDA to justify approval. The packaging and labeling
of our developed products are also subject to FDA regulation. It is impossible
to anticipate the amount of time that will be needed to obtain FDA approval to
market any product.
Whether or not FDA approval has been obtained, approval of the product
by comparable regulatory authorities in any foreign country must be obtained
prior to the commencement of marketing of the product in that country. The
Company intends to conduct all marketing in territories other than the United
States through other pharmaceutical companies based in those countries. The
approval procedure varies from country to country, can involve additional
testing, and the time required may differ from that required for FDA approval.
Although there are some procedures for unified filings for certain European
countries, in general each country has its own procedures and requirements, many
of which are time consuming and expensive. Thus, there can be substantial delays
in obtaining required approvals from both the FDA and foreign regulatory
authorities after the relevant applications are filed. After such approvals are
obtained, further delays may be encountered before the products become
commercially available.
ANDAS
Under the Generic Drug Enforcement Act, ANDA applicants (including
officers, directors and employees) who are convicted of a crime involving
dishonest or fraudulent activity (even outside the FDA regulatory context) are
subject to debarment. Debarment is disqualification from submitting or
participating in the submission of future ANDAs for a period of years or
permanently. The Generic Drug Enforcement Act also authorizes the FDA to refuse
to accept ANDAs from any company which employs or uses the services of a
debarred individual. We do not believe that we receive any services from any
debarred person.
CONTROLLED SUBSTANCES
We are also subject to federal, state, and local laws of general
applicability, such as laws relating to working conditions. We are also licensed
by, registered with, and subject to periodic inspection and regulation by the
Drug Enforcement Agency (DEA) and New Jersey state agencies, pursuant to federal
and state legislation relating to drugs and narcotics. Certain drugs that we
currently develop or may develop in the future may be subject to regulations
under the Controlled Substances Act and related statutes. As we manufacture such
products, we may become subject to the
10
Prescription Drug Marketing Act, which regulates wholesale distributors of
prescription drugs.
GMP
All facilities and manufacturing techniques used for the manufacture of
products for clinical use or for sale must be operated in conformity with GMP
regulations issued by the FDA. The Company engages in manufacturing on a
commercial basis for distribution of products, and operates its facilities in
accordance with GMP regulations. If we hire another company to perform contract
manufacturing for us, we must ensure that our contractor's facilities conform to
GMP regulations.
COMPLIANCE WITH ENVIRONMENTAL LAWS
We are subject to comprehensive federal, state and local environmental
laws and regulations that govern, among other things, air polluting emissions,
waste water discharges, solid and hazardous waste disposal, and the remediation
of contamination associated with current or past generation handling and
disposal activities, including the past practices of corporations as to which we
are the successor legally or in possession. We do not expect that compliance
with such environmental laws will have a material effect on our capital
expenditures, earnings or competitive position in the foreseeable future. There
can be no assurance, however, that future changes in environmental laws or
regulations, administrative actions or enforcement actions, or remediation
obligations arising under environmental laws will not have a material adverse
effect on our capital expenditures, earnings or competitive position.
COMPETITION
We have competition with respect to our two principal areas of
operation. We develop and manufacture products using controlled-release drug
technology for other pharmaceutical companies, and we develop and market (either
on our own or by license to other companies) proprietary controlled-release
pharmaceutical products. In both areas, our competition consists of those
companies which develop controlled-release drugs and alternative drug delivery
systems.
In recent years, an increasing number of pharmaceutical companies have
become interested in the development and commercialization of products
incorporating advanced or novel drug delivery systems. We expect that
competition in the field of drug delivery will significantly increase in the
future since smaller specialized research and development companies are
beginning to concentrate on this aspect of the business. Some of the major
pharmaceutical companies have invested and are continuing to invest significant
resources in the development of their own drug delivery systems and technologies
and some have invested funds in such specialized drug delivery companies. Many
of these companies have greater financial and other resources as well as more
experience than we do in commercializing pharmaceutical products. Certain
companies have a track record of success in developing controlled-
11
release drugs. Significant among these are Alpharma, Inc., Andrx Corporation,
Mylan Laboratories, Inc., Par Pharmaceuticals, Inc., Teva Pharmaceuticals
Industries Ltd., Biovail Corporation, Ethypharm S.A., Eurand, Impax
Laboratories, Inc., K-V Pharmaceutical Company and Penwest Pharmaceuticals
Company. Each of these companies has developed expertise in certain types of
drug delivery systems, although such expertise does not carry over to developing
a controlled-release version of all drugs. Such companies may develop new drug
formulations and products or may improve existing drug formulations and products
more efficiently than we can. In addition, almost all of our competitors have
vastly greater resources than we do. While our product development capabilities
and, if obtained, patent protection may help us to maintain our market position
in the field of advanced drug delivery, there can be no assurance that others
will not be able to develop such capabilities or alternative technologies
outside the scope of our patents, if any, or that even if patent protection is
obtained, such patents will not be successfully challenged in the future.
SOURCES AND AVAILABILITY OF RAW MATERIALS; MANUFACTURING
We manufacture for commercial sale by our partner, ECR Pharmaceuticals,
one product, Lodrane 24(R) and for which to date we have obtained sufficient
amounts of the raw materials for its production. We are not currently in the
manufacturing phase for any other products and do not expect that significant
amounts of raw materials will be required for their production. We currently
obtain the raw materials that we need from over twenty suppliers.
We have acquired pharmaceutical manufacturing equipment for
manufacturing our products. We have registered our facilities with the FDA and
the DEA.
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
Each year we have had one or a few customers that have accounted for a
large percentage of our limited sales therefore the termination of a contract
with a customer may result in the loss of substantially all of our revenues. We
are constantly working to develop new relationships with existing or new
customers, but despite these efforts we may not, at the time that any of our
current contracts expire, have other contracts in place generating similar
revenue.
EMPLOYEES
As of June 20, 2005, we had 16 full-time employees and 2 part-time
employees. Both full-time and part-time employees are engaged in administration,
research and development. None of our employees is represented by a labor union
and we have never experienced a work stoppage. We believe our relationship with
our employees to be good. However, our ability to achieve our financial and
operational objectives depends in large part upon our continuing ability to
attract, integrate, retain and motivate highly qualified personnel, and upon the
continued service of our senior management and key personnel.
12
RISK FACTORS
In addition to the other information contained in this report, the
following risk factors should be considered carefully in evaluating an
investment in Elite and in analyzing our forward-looking statements.
OUR CONTINUING LOSSES ENDANGER OUR VIABILITY AS A GOING-CONCERN AND HAVE CAUSED
OUR AUDITORS TO ISSUE "GOING CONCERN" ANNUAL AUDIT REPORTS.
We reported net losses of $5,906,890, $6,514,217 and $4,061,422 for the
fiscal years ended March 31, 2005, 2004 and 2003, respectively. At March 31,
2005, we had an accumulated deficit of approximately $41.1 million, consolidated
assets of approximately $9.2 million, stockholders' equity of approximately $5.7
million, and working capital of approximately $3.3 million. Our products are in
the development and early deployment stage and have not generated any
significant revenue to date. Our independent auditors have issued a "going
concern" audit report for our financial statements for each of the fiscal years
ended March 31, 2005, March 31, 2004 and March 31, 2003.
WE HAVE A RELATIVELY LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO
EVALUATE OUR FUTURE PROSPECTS.
Although we have been in operation since 1990, we have a relatively
short operating history and limited financial data upon which you may evaluate
our business and prospects. In addition, our business model is likely to
continue to evolve as we attempt to expand our product offerings and enter new
markets. As a result, our potential for future profitability must be considered
in light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies that are attempting to move into new markets and
continuing to innovate with new and unproven technologies. Some of these risks
relate to our potential inability to:
o develop new products;
o obtain regulatory approval of our products;
o manage our growth, control expenditures and align costs with
revenues;
o attract, retain and motivate qualified personnel; and
o respond to competitive developments.
If we do not effectively address the risks we face, our business model may
become unworkable and we may not achieve or sustain profitability or
successfully develop any products.
13
WE HAVE NOT BEEN PROFITABLE AND EXPECT FUTURE LOSSES.
To date, we have not been profitable, and since our inception in 1990,
we have not generated any significant revenues. We may never be profitable or,
if we become profitable, we may be unable to sustain profitability. We have
sustained losses in each year since our incorporation in 1990. We incurred net
losses of $5,906,890, $6,514,217, $4,061,422, and $1,774,527 for the years ended
March 31, 2005, 2004, 2003 and 2002, respectively. We expect to realize
significant losses for the current year of operation. We expect to continue to
incur losses until we are able to generate sufficient revenues to support our
operations and offset operating costs.
OUR FOUNDER AND FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER RESIGNED IN JUNE
2003 ALL OF HIS POSITIONS WITH ELITE, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT
ON US.
On June 3, 2003, Dr. Atul M. Mehta, our founder and former President
and Chief Executive Officer resigned from all of his positions with Elite. In
the past, we relied on Dr. Mehta's scientific expertise in developing our
products. There can be no assurance that we will successfully replace Dr.
Mehta's expertise. In addition, the loss of Dr. Mehta's services may adversely
affect our relationships with our contract partners.
Pursuant to an agreement in April 2004 and a related agreement in
October 2004, to settle a litigation initiated by Dr. Mehta in July 2003 for
alleged breach of his employment agreement, the Company extended the expiration
dates to November 30, 2007 of options to purchase 670,000 shares of Common Stock
held by Dr. Mehta and reduced the exercise price of certain of the options and
he relinquished any rights to the Company's intellectual property and agreed to
certain non-disclosure and non-competition covenants. The Company also provided
him with certain "piggyback" registration rights with respect to the shares
issuable upon exercise of the foregoing options granted by the Company. Dr.
Mehta and members of his family sold in October 2004 an aggregate of 1,362,200
shares of Common Stock representing all of his and his affiliates holdings of
securities of the Company except for the foregoing options.
OUR RESEARCH ACTIVITIES ARE CHARACTERIZED BY INHERENT RISK AND WE MAY NOT BE
ABLE TO SUCCESSFULLY DEVELOP PRODUCTS FOR COMMERCIAL USE THAT ARE IN OUR
PIPELINE.
Our research activities are characterized by the inherent risk that the
research will not yield results that will receive FDA approval or otherwise be
suitable for commercial exploitation.
As of March 31, 2005, we have entered into agreements with respect to
the marketing upon development of three drugs. Each agreement provides that we
are to commercially develop the product and upon securing by a partner or
partners having FDA approval or other regulatory approval, if required, we will
manufacture the product and sell it to a partner or marketing partner for
distribution. The commercial development of one of the three drugs has been
completed and the two other drugs are
14
under development. No assurance can be given that sales, if any, by any
marketing partner will result in profit for Elite from the product.
Of the four additional products and on which we are devoting
substantial attention, two are in pilot Phase I studies and two are in the pilot
bioequivalence stage. Additional studies including either pivotal bioequivalence
or efficacy studies will be required for these products before
commercialization.
In order for any of these four products to be commercialized, the FDA
requires successful completion of pivotal biostudies to file an ANDA followed by
successful completion of pivotal clinical trials before filing a ND. The FDA
next requires successful completion of comparative studies for drug listed
products are required. ANDAs are filed with respect to generic versions of
existing FDA approved products while NDAs are filed with respect to new
products.
WE COULD EXPERIENCE DIFFICULTY IN DEVELOPING AND INTEGRATING STRATEGIC
ALLIANCES, CO-DEVELOPMENT OPPORTUNITIES AND OTHER RELATIONSHIPS.
With respect to products that are developed and are available for
commercial sale, we intend to pursue product-specific licensing, marketing
agreements, co-development opportunities and other partnering arrangements in
connection with the distribution of the product. We have entered into
partnership arrangements as to three products but no assurance can be given that
we will be able to locate other partners or that the arrangement will be
suitable. In addition, assuming we identify suitable partners, the process of
effectively entering into these arrangements involves risks such that our
management's attention may be diverted from other business concerns and that we
may have difficulty integrating the new arrangements into our existing business.
OUR LIMITED EXPERIENCE IN CONDUCTING CLINICAL TRIALS AND SUBMITTING NDAS AND THE
UNCERTAINTIES INHERENT IN CLINICAL TRIALS COULD RESULT IN DELAYS IN PRODUCT
DEVELOPMENT AND COMMERCIALIZATION.
Prior to seeking FDA approval for the commercial sale of any drug we
develop, which does not qualify for the FDA's abbreviated application
procedures, we or our partner must demonstrate through clinical trials that
these products are safe and effective for use. We have limited experience in
conducting and supervising clinical trials. The process of completing clinical
trials and preparing an NDA may take several years and requires substantial
resources. Our studies and filings may not result in FDA approval to market our
new drug products and, if the FDA grants approval, we cannot predict the timing
of any approval.
IF OUR CLINICAL TRIALS ARE NOT SUCCESSFUL OR TAKE LONGER TO COMPLETE THAN WE
EXPECT, WE MAY NOT BE ABLE TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS.
In order to obtain regulatory approvals for the commercial sale of our
potential products, we will be required to complete clinical trials in humans to
demonstrate the
15
safety and efficacy of the products. We may not be able to obtain authority from
the FDA or other regulatory agencies to commence or complete these clinical
trials.
The results from preclinical testing of a product that is under
development may not be predictive of results that will be obtained in human
clinical trials. In addition, the results of early human clinical trials may not
be predictive of results that will be obtained in larger scale advanced stage
clinical trials. Furthermore, we or the FDA may suspend clinical trials at any
time if the subjects participating in such trials are being exposed to
unacceptable health risks, or for other reasons.
The rate of completion of clinical trials is dependent in part upon the
rate of enrollment of subjects. A favorable clinical trial result is a function
of many factors including the size of the subject population, the proximity of
subjects to clinical sites, the eligibility criteria for the study and the
existence of competitive clinical trials. Delays in planned subject enrollment
may result in increased costs and program delays.
We may not be able to successfully complete any clinical trial of a
potential product within any specified time period. In some cases, we may not be
able to complete the trial at all. Moreover, clinical trials may not show any
potential product to be safe or efficacious. Thus, the FDA and other regulatory
authorities may not approve any of our potential products for any indication.
Our business, financial condition, or results of operations could be
materially adversely affected if:
o we are unable to complete a clinical trial of one of our potential
products;
o the results of any clinical trial are unfavorable; or
o the time or cost of completing the trial exceeds our expectations.
WE ARE DEPENDENT ON A SMALL NUMBER OF SUPPLIERS FOR OUR RAW MATERIALS, AND ANY
DELAY OR UNAVAILABILITY OF RAW MATERIALS CAN MATERIALLY ADVERSELY AFFECT OUR
ABILITY TO PRODUCE PRODUCTS.
The FDA requires identification of raw material suppliers in
applications for approval of drug products. If raw materials were unavailable
from a specified supplier, FDA approval of a new supplier could delay the
manufacture of the drug involved. In addition, some materials used in our
products are currently available from only one supplier or a limited number of
suppliers. Further, a significant portion of our raw materials may be available
only from foreign sources. Foreign sources can be subject to the special risks
of doing business abroad, including:
o greater possibility for disruption due to transportation or communication
problems;
o the relative instability of some foreign governments and economies;
16
o interim price volatility based on labor unrest, materials or equipment
shortages, export duties, restrictions on the transfer of funds, or
fluctuations in currency exchange rates; and
o uncertainty regarding recourse to a dependable legal system for the
enforcement of contracts and other rights.
In addition, recent changes in patent laws in certain foreign
jurisdictions (primarily in Europe) may make it increasingly difficult to obtain
raw materials for research and development prior to expiration of applicable
United States or foreign patents. Any inability to obtain raw materials on a
timely basis, or any significant price increases that cannot be passed on to
customers, could have a material adverse effect on us.
The delay or unavailability of raw materials can materially adversely
affect our ability to produce products. This can materially adversely affect our
business and operations.
IF WE NEED ADDITIONAL FINANCING IN ORDER TO SATISFY OUR SIGNIFICANT CAPITAL
REQUIREMENTS AND ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, IT WOULD IMPAIR OUR
ABILITY TO CONTINUE TO DO BUSINESS.
We completed a $6,600,000 private placement in October 2004 of (i)
516,558 shares of our Series A Preferred Stock convertible into shares of Common
Stock, (ii) warrants ("Short Term Warrants") expiring December 31, 2005 to
purchase an aggregate of 2,582,790 shares of Common Stock at prices ranging from
$1.54 to $1.84, (iii) warrants ("Long Term Warrants") expiring December 27, 2009
to purchase 2,582,790 shares of Common Stock at prices ranging from $1.54 to
$1.84 per share, and (iv) additional Long Term Warrants issued to the Placement
Agent to purchase 494,931 shares of Common Stock at prices ranging from $1.23 to
$1.47 per share. All of the shares of the Series A Preferred Stock have been
converted into an aggregate of 5,265,516 shares of Common Stock, including
26,961 shares of Common Stock issued as payment of the accrued dividend on
December 1, 2004. Based on our currently proposed plans and assumptions relating
to our operations, we anticipate that we will have sufficient capital to satisfy
our contemplated cash requirements through March 31, 2006. After that time, we
may require additional financing. In particular, we expect to make substantial
expenditures as we further develop and seek to commercialize our products. As of
March 31, 2005, our cash position was $3.9 million. Based on current
expenditures, we are depleting cash at the rate of $300,000 per month. We expect
that our rate of spending will accelerate as the result of increased costs and
expenses associated with seeking regulatory approval and commercialization of
products now in development. We have no current arrangements with respect to
additional financings other than the potential exercise of the Short Term and
Long Term Warrants issued in the October 2004 private placement, the Class B and
Class C Warrants and other warrants and options that are currently outstanding.
We have no way of knowing whether any of the options or warrants will be
exercised and if so the extent by which their exercise will be pursuant to
cashless exercise provisions. We do not currently
17
have commitments for their exercise or other financing, and so do not know
whether additional financing would be available to us on favorable terms, or at
all. Our inability to obtain additional financing when needed would impair our
ability to continue our business.
If any future financing involves the further sale of our securities,
our then-existing stockholders' equity could be substantially diluted. On the
other hand, if we incurred debt, we would be subject to risks associated with
indebtedness, including the risk that interest rates might fluctuate and cash
flow would be insufficient to pay principal and interest on such indebtedness.
If our plans change, or our assumptions change or prove to be inaccurate, or our
cash flow proves to be insufficient to fund our operations due to unanticipated
expenses or problems, we would be required to seek additional financing sooner
than anticipated.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND AVOID CLAIMS
THAT WE INFRINGED ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, OUR ABILITY TO
CONDUCT BUSINESS MAY BE IMPAIRED.
Our success, competitive position and amount of royalty income, if any,
will depend in part on our ability to obtain patent protection in various
jurisdictions related to our technologies, processes and products. We intend to
file patent applications seeking such protection, but we cannot be certain that
these applications will result in the issuance of patents. If patents are
issued, third parties may sue us to challenge such patent protection, and
although we know of no reason why they should prevail, it is possible that they
could. It is likewise possible that our patents may not prevent third parties
from developing similar or competing products. In addition, although we are not
aware of any threatened or pending actions by third parties asserting that we
have infringed on their patents, and are not aware of any actions we have taken
that would lead to such a claim, it is possible that we might be sued for
infringement. The cost involved in bringing suits against others for
infringement of our patents, or in defending any suits brought against us, can
be substantial. We may not possess sufficient funds to prosecute or defend such
suits. If our products were found to infringe upon patents issued to others, we
would be prohibited from manufacturing or selling such products and we could be
required to pay substantial damages.
In addition, we may be required to obtain licenses to patents, or other
proprietary rights of third parties, in connection with the development and use
of our products and technologies as they relate to other persons' technologies.
At such time as we discover a need to obtain any such license, we will need to
establish whether we will be able to obtain such a license on favorable terms.
The failure to obtain the necessary licenses or other rights could preclude the
sale, manufacture or distribution of our products.
We also rely upon trade secrets and proprietary know-how. We seek to protect
this know-how in part by confidentiality agreements. We consistently require our
employees and potential business partners to execute confidentiality agreements
prior to doing business with us. However, it is possible that an employee would
disclose confidential
18
information in violation of his or her agreement, or that our trade secrets
would otherwise become known or be independently developed in such a manner that
we will have no practical recourse.
We are not engaged in any litigation, nor contemplating any, with regard to a
claim that someone has infringed one of our patents, revealed any of our trade
secrets, or otherwise misused our confidential information.
THE PHARMACEUTICAL INDUSTRY IS SUBJECT TO EXTENSIVE FDA REGULATION AND FOREIGN
REGULATION, WHICH PRESENTS NUMEROUS RISKS TO US.
The manufacturing and marketing of pharmaceutical products in the
United States and abroad are subject to stringent governmental regulation. The
sale of any of our products for use in humans in the United States will require
the approval of the FDA. Similar approvals by comparable agencies are required
in most foreign countries. The FDA has established mandatory procedures and
safety standards that apply to the clinical testing, manufacture and marketing
of pharmaceutical products. Obtaining FDA approval for a new therapeutic product
may take several years and involve substantial expenditures. The six products
currently under development have not yet been approved for sale or use in humans
in the United States or elsewhere.
If we or our licensees fail to obtain or maintain requisite
governmental approvals or fail to obtain or maintain approvals of the scope
requested, it will delay or preclude us or our licensees or marketing partners
from marketing our products. It could also limit the commercial use of our
products.
THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND
SIGNIFICANT TECHNOLOGICAL CHANGE, WHICH COULD IMPAIR OUR ABILITY TO IMPLEMENT
OUR BUSINESS MODEL.
The pharmaceutical industry is highly competitive, and we may be unable
to compete effectively. In addition, it is undergoing rapid and significant
technological change, and we expect competition to intensify as technical
advances in each field are made and become more widely known. An increasing
number of pharmaceutical companies have been or are becoming interested in the
development and commercialization of products incorporating advanced or novel
drug delivery systems. We expect that competition in the field of drug delivery
will increase in the future as other specialized research and development
companies begin to concentrate on this aspect of the business. Some of the major
pharmaceutical companies have invested and are continuing to invest significant
resources in the development of their own drug delivery systems and technologies
and some have invested funds in such specialized drug delivery companies. Many
of our competitors have longer operating histories and greater financial,
research and development, marketing and other resources than we do. Such
companies may develop new formulations and products, or may improve existing
ones, more efficiently than we can. Our success, if any, will depend in part on
our ability to keep pace with the changing technology in the fields in which we
operate.
19
IF KEY PERSONNEL WERE TO LEAVE ELITE OR IF WE ARE UNSUCCESSFUL IN ATTRACTING
QUALIFIED PERSONNEL, OUR ABILITY TO DEVELOP PRODUCTS COULD BE MATERIALLY HARMED.
Our success depends in large part on our ability to attract and retain
highly qualified scientific, technical and business personnel experienced in the
development, manufacture and marketing of controlled release drug delivery
systems and products. Our business and financial results could be materially
harmed by the inability to attract or retain qualified personnel.
IF WE WERE SUED ON A PRODUCT LIABILITY CLAIM, AN AWARD COULD EXCEED OUR
INSURANCE COVERAGE AND COST US SIGNIFICANTLY.
The design, development and manufacture of our products involve an
inherent risk of product liability claims. We have procured product liability
insurance having a maximum limit of $5,000,000; however, a successful claim
against us in excess of the policy limits could be very expensive to us,
damaging our financial position. The amount of our insurance coverage, which has
been limited due to our limited financial resources, may be materially below the
coverage maintained by many of the other companies engaged in similar
activities. To the best of our knowledge, no product liability claim has been
made against us as of March 31, 2005.
OUR STOCK PRICE HAS BEEN VOLATILE AND MAY FLUCTUATE IN THE FUTURE.
There has been significant volatility in the market prices for publicly
traded shares of pharmaceutical companies, including ours. For the twelve months
ended March 31, 2005, the closing sale price on the American Stock Exchange of
our Common Stock fluctuated from a high of $4.79 per share to a low of $1.05 per
share. The per share price of our Common Stock may not remain at or exceed
current levels. The market price for our Common Stock, and for the stock of
pharmaceutical companies generally, has been highly volatile. The market price
of our Common Stock may be affected by:
o Results of our clinical trials;
o Approval or disapproval of abbreviated new drug applications or new
drug applications;
o Announcements of innovations, new products or new patents by us or by
our competitors;
o Governmental regulation;
o Patent or proprietary rights developments;
o Proxy contests or litigation;
20
o News regarding the efficacy of, safety of or demand for drugs or drug
technologies;
o Economic and market conditions, generally and related to the
pharmaceutical industry;
o Healthcare legislation;
o Changes in third-party reimbursement policies for drugs; and
o Fluctuations in our operating results.
All of the 516,558 shares of Series A Preferred Stock originally issued in the
private placement of October 2004 have been converted into an aggregate of
5,238,555 shares of Common Stock and have been registered under the Securities
Act of 1933 for resale. In addition, we have registered under the Securities Act
of 1933, as amended for reoffering 5,660,511 shares of Common Stock which may be
acquired upon exercise of the Short Term Warrants, Long Term Warrants and the
Placement Agent Warrants as well as 670,000 shares which may be acquired upon
exercise of options at prices ranging from $1.00 to $3.00 per share granted to
Dr. Atul Mehta. As of this date sales of substantial amounts of the Common Stock
in the public market are eligible for sale by these holders. Perceptions that
substantial sales may take place in the future may lower the Common Stock's
market price.
THE FAILURE TO MAINTAIN THE AMERICAN STOCK EXCHANGE LISTING OF THE COMMON STOCK
WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE MARKET FOR THE COMMON STOCK AND ITS
MARKET PRICE.
One of the requirements for the continued listing of Common Stock on
the American Stock Exchange for a company that has net losses for its five most
recent fiscal years is that it have a stockholders' equity of at least
$6,000,000. The Company has sustained a net loss for the year ending March 31,
2005, and as a result will have sustained net losses in its five most recent
fiscal years. As of March 31, 2005, the Company had stockholders equity of
approximately $5.7 million. The related provision of the American Stock Exchange
guide provides that the Exchange will not normally consider removing a stock
from listing if the total value of the Company's market capitalization as of the
end of its most recent fiscal year is at least $50,000,000 as well as satisfying
other conditions which the Company meets and expects to meet. The failure to
maintain listing of the Common Stock on the Exchange will have an adverse effect
on the market and the market price for the Common Stock.
21
THE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK OR OUR PREFERRED STOCK
COULD MAKE A CHANGE OF CONTROL MORE DIFFICULT TO ACHIEVE.
The issuance of additional shares of the Company's Common Stock or the
issuance of shares of an additional series of Preferred Stock could be used to
make a change of control of the Company more difficult and expensive. Under
certain circumstances, such shares could be used to create impediments to or
frustrate persons seeking to cause a takeover or to gain control of the Company.
Such shares could be sold to purchasers who might side with the Board in
opposing a takeover bid that the Board determines not to be in the best
interests of its stockholders. It might also have the effect of discouraging an
attempt by another person or entity through the acquisition of a substantial
number of shares of the Company's Common Stock to acquire control of the Company
with a view to consummating a merger, sale of all or part of the Company's
assets, or a similar transaction, since the issuance of new shares could be used
to dilute the stock ownership of such person or entity.
IF PENNY STOCK REGULATIONS BECOME APPLICABLE TO OUR COMMON STOCK THEY WILL
IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR COMMON STOCK AND THE ABILITY OF
OUR STOCKHOLDERS TO SELL SHARES OF OUR STOCK COULD BE IMPAIRED.
The SEC has adopted regulations that generally define a "penny stock"
to be an equity security that has a market price of less than $5.00 per share or
an exercise price of less than $5.00 per share subject to certain exceptions.
Exceptions include equity securities issued by an issuer that has (i) net
tangible assets of at least $2,000,000, if such issuer has been in continuous
operation for more than three years, or (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years, or (iii) average revenue of at least $6,000,000 for the preceding three
years. Unless an exception is available, the regulations require that prior to
any transaction involving a penny stock, a risk of disclosure schedule must be
delivered to the buyer explaining the penny stock market and its risks. Our
Common Stock is currently trading at under $5.00 per share. Although we
currently fall under one of the exceptions, if at a later time we fail to meet
one of the exceptions, our Common Stock will be considered a penny stock. As
such the market liquidity for our Common Stock will be limited to the ability of
broker-dealers to sell it in compliance with the above-mentioned disclosure
requirements.
You should be aware that, according to the SEC, the market for penny
stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include:
o Control of the market for the security by one or a few broker-dealers;
o "Boiler room" practices involving high-pressure sales tactics;
o Manipulation of prices through prearranged matching of purchases and
sales;
o The release of misleading information;
22
o Excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
o Dumping of securities by broker-dealers after prices have been
manipulated to a desired level, which hurts the price of the stock and
causes investors to suffer loss.
We are aware of the abuses that have occurred in the penny stock market.
Although we do not expect to be in a position to dictate the behavior of the
market or of broker-dealers who participate in the market, we will strive within
the confines of practical limitations to prevent such abuses with respect to our
Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW MAY DETER A THIRD PARTY FROM
ACQUIRING US.
Section 203 of the Delaware General Corporation Law prohibits a merger
with a 15% shareholder within three years of the date such shareholder acquired
15%, unless the merger meets one of several exceptions. The exceptions include,
for example, approval by the holders of two-thirds of the outstanding shares
(not counting the 15% shareholder), or approval by the Board prior to the 15%
shareholder acquiring its 15% ownership. This provision makes it difficult for a
potential acquirer to force a merger with or takeover of the Company, and could
thus limit the price that certain investors might be willing to pay in the
future for shares of our Common Stock.
ITEM 2. PROPERTIES
Our facility, which we own, is located at 165 Ludlow Avenue, Northvale,
New Jersey, and contains approximately 20,000 square feet of floor space. This
real property and the improvements thereon are encumbered by a mortgage in favor
of the New Jersey Economic Development Authority (NJEDA) as security for a loan
through tax-exempt bonds from the NJEDA to Elite. The mortgage document contains
certain customary provisions including, without limitation, the right of NJEDA
to foreclose upon a default by Elite.
We are currently using our facilities as a laboratory, manufacturing
and office space. Properties used in our operations are considered suitable for
the purposes for which they are used and are believed to be adequate to meet our
needs for the reasonably foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we may be party to litigation
from time to time.
23
The Company and Dr. Mehta, the Company's former President and Chief
Executive Officer entered into a settlement agreement in April 2004 and a
related agreement in October 2004, to settle a litigation initiated by Dr. Mehta
in July 2003 for alleged breach of his employment agreement. The agreements
provide for the extension of the expiration dates to December 31, 2007 of
options to purchase 670,000 shares of Common Stock held by Dr. Mehta, the
reduction of the exercise price of 170,000 options from $10.00 to $2.34 per
share and his relinquishment of any rights to the Company's intellectual
property and agreement to certain non-disclosure and non-competition covenants.
The Company also provided him with certain "piggyback" registration rights with
respect to the shares issuable upon exercise of the foregoing options granted by
the Company. Dr. Mehta and members of his family sold in October 2004 an
aggregate of 1,362,200 shares of Common Stock representing all of his and his
affiliates holdings of Common Stock of the Company and the Company has
registered for resale the 670,000 shares of Common Stock which may be issued
upon exercise of the options.
We are not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders during the fourth
quarter of our fiscal year ended March 31, 2005. However at the Annual Meeting
of Stockholders held on April 15, 2005 the stockholders (i) elected as its four
Directors Mr. Bernard Berk, Mr. Edward Neugeboren, Dr. Melvin Van Woert and Mr.
Barry Dash, Ph. D; (ii) approved an amendment to our 2004 Stock Option Plan
increasing the number of shares subject to the Plan to 4,000,000 shares; (iii)
ratified the actions of the Board of Director's amending an option granted to a
former officer and director and the issuance of warrants granted to a consultant
and (iv) ratified the engagement of Miller Ellin & Co., LLP as the Company's
independent auditors for the year ending March 31, 2005.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is quoted on the American Stock Exchange under the
symbol "ELI". The following table shows, for the periods indicated, the high and
low sales prices per share of our Common Stock as reported by the American Stock
Exchange.
COMMON STOCK
QUARTER ENDED HIGH LOW
FISCAL YEAR
ENDING MARCH 31, 2005:
March 31, 2005.............................................$4.79 $1.15
December 31, 2004..........................................$4.01 $1.20
September 30, 2004.........................................$2.35 $1.05
June 30, 2004 .............................................$4.31 $2.15
FISCAL YEAR
ENDING MARCH 31, 2004:
March 31, 2004.............................................$3.80 $2.40
December 30, 2003..........................................$3.30 $2.70
September 30, 2003.........................................$3.49 $2.05
June 30, 2003 .............................................$3.49 $1.25
FISCAL YEAR
ENDING MARCH 31, 2003:
March 31, 2003.............................................$2.20 $1.45
December 31, 2002..........................................$3.15 $1.80
September 30, 2002.........................................$5.25 $2.41
June 30, 2002..............................................$7.75 $4.50
FISCAL YEAR
ENDING MARCH 31, 2002:
March 31, 2002.............................................$8.30 $5.65
December 31, 2001..........................................$7.75 $5.90
September 30, 2001........................................$11.50 $5.10
June 30, 2001.............................................$11.45 $4.85
On June 20, 2005, the last reported sale price of our Common Stock, as
reported by the American Stock Exchange, was $2.84 per share.
25
As of June 20, 2005, there were approximately 122 holders of record and
approximately 1,650 beneficial owners of our Common Stock. We are informed and
believe that as of June 20, 2005, Cede & Co. held 15,846,250 shares of our
Common Stock as nominee for Depository Trust Company, 55 Water Street, New York,
New York 10004. It is our understanding that Cede & Co. and Depository Trust
Company both disclaim any beneficial ownership therein and that such shares are
held for the account of numerous other persons.
We have never paid cash dividends on our capital stock. We currently
anticipate that we will retain all available funds for use in the operation and
expansion of our business, and do not anticipate paying any cash dividends in
the foreseeable future.
Please see our Quarterly Report on Form 10-Q for the three month
periods ending June 30, 2004, September 30, 2004 and December 31, 2004 and our
Current Reports on Form 8-K dated October 6, 2004, October 12, 2004 and October
26, 2004 for information concerning our issuances of unregistered securities
during the 12 months ended March 31, 2005.
EQUITY COMPENSATION PLAN INFORMATION
As of March 31, 2005, we had authorized the issuance of 1,500,000
shares of Common Stock upon exercise of options pursuant to our Stock Option
Plan (which was approved by our stockholders on June 22, 2004 and amended by our
stockholders on April 15, 2005 to increase to 4,000,000 the number of shares
subject to our Stock Option Plan). As of March 31, 2005, under the 2004 Stock
Option Plan, there was an aggregate of 93,300 shares of Common Stock issuable
upon exercise of outstanding options having a weighted average exercise price of
$2.34. In addition, there was an aggregate of 2,005,000 shares of Common Stock
issuable upon exercise of other outstanding options granted to employees and
directors having a weighted average exercise price of $2.16.
If options granted under the Plan lapse without being exercised, other
options may be granted covering the shares not purchased under such lapsed
options. Options may be granted pursuant to the Plan to employees, officers,
Directors of and consultants to Elite. The Plan permits the Company to grant
both incentive stock options ("Incentive Stock Options" or "ISOs") within the
meaning of Section 422 of the Code, and other options which do not qualify as
Incentive Stock Options (the "Non-Qualified Options").
Of the incentive stock options outstanding, options for 93,300 shares
with an exercise price of $2.34 per share were granted on June 22, 2004 to
employee holders of outstanding options previously granted by the Company having
on the date of the grant a higher exercise price; such grants subject to the
cancellation of the previously granted options. To the extent that stock options
previously granted are not surrendered for cancellation then options exercisable
for that same number of shares of Common Stock will be available for grant under
the Plan. Such grants may be deemed
26
repricing of the outstanding options and will result in charges to earnings of
the Company equal to the difference between (i) the fair value of the vested
portion of the new options granted, utilizing the Black-Scholes options pricing
model on each grant date and (ii) the charges to earnings previously made as a
result of the grants of the options being replaced, which will have a dilutive
effect on the earnings per share and, as a result, will likely have an adverse
effect on the market price of the Common Stock of the Company.
Options to purchase 30,000 shares of Common Stock were granted under
the Plan on June 22, 2004 to each of Bernard Berk, our Chief Executive Officer
and a Director, and Mr. John A. Moore, Mr. Harmon Aronson, and Dr. Eric L.
Sichel, each of whom was then a Director of the Company, exercisable at $2.34
per share.
Unless earlier terminated by the Board of Directors, the Plan (but not
outstanding options) terminates on March 1, 2014, after which no further awards
may be granted under the Plan. The Plan is administered by the full Board of
Directors or, at the Board's discretion, by a committee of the Board consisting
of at least two persons who are "disinterested persons" defined under Rule
16b-2(c)(ii) under the Securities Exchange Act of 1934, as amended (the
"Committee"). As of March 31, 2005, the full Board of Directors administers the
Plan and no Committee has been appointed.
Recipients of options under the Plan ("Optionees") are selected by the
Board or the Committee. The Board or Committee determines the terms of each
option grant including (1) the purchase price of shares subject to options, (2)
the dates on which options become exercisable and (3) the expiration date of
each option (which may not exceed ten years from the date of grant). The minimum
per share purchase price of options granted under the Plan for Incentive Stock
Options is the fair market value (as defined in the Plan) or for Nonqualified
Options is 85% of Fair Market Value of one share of the Common Stock on the date
the option is granted.
Optionees will have no voting, dividend or other rights as stockholders
with respect to shares of Common Stock covered by options prior to becoming the
holders of record of such shares. The purchase price upon the exercise of
options may be paid in cash, by certified bank or cashier's check, by tendering
stock held by the Optionee, as well as by cashless exercise either through the
surrender of other shares subject to the option or through a broker. The total
number of shares of Common Stock available under the Plan, and the number of
shares and per share exercise price under outstanding options will be
appropriately adjusted in the event of any stock dividend, reorganization,
merger or recapitalization of the Company or similar corporate event.
The Board of Directors may at any time terminate the Plan or from time
to time make such modifications or amendments to the Plan as it may deem
advisable and the Board or Committee may adjust, reduce, cancel and regrant an
unexercised option if the fair market value declines below the exercise price
except as may be required by any national stock exchange or national market
association on which the Common Stock is then listed. In no event may the Board,
without the approval of stockholders,
27
amend the Plan to increase the maximum number of shares of Common Stock for
which options may be granted under the Plan or change the class of persons
eligible to receive options under the Plan.
Subject to limitations set forth in the Plan, the terms of option
agreements will be determined by the Board or Committee, and need not be uniform
among Optionees.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data, at the end of and
for the last five fiscal years, should be read in conjunction with our
Consolidated Financial Statements and related Notes thereto appearing elsewhere
in this Annual Report on Form 10-K. The consolidated selected financial data are
derived from our consolidated financial statements that have been audited by
Miller, Ellin & Company, LLP, our independent auditors, as indicated in their
report included herein. The selected financial data provided below is not
necessarily indicative of our future results of operations or financial
performance.
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Net Revenues $301,480 $ 258,250 $ 630,310 $ 1,197,507 $ 95,246
Net (loss) $(5,906,890) $(6,514,217) $(4,061,422) $(1,774,527) $(13,964,981)
Net (loss) per $(0.47) $(0.58) $(0.40) $(0.19) $(1.53)
common share
Total Assets $9,245,292 $7,853,434 $8,696,222 $12,724,498 $12,350,301
Long-term obligations $2,367,128 $2,495,000 $2,720,000 $3,788,148 $2,765,000
Weighted average 12,869,924 11,168,618 10,069,991 9,561,299 9,135,369
number of shares
outstanding
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
The following discussion and analysis should be read with the financial
statements and accompanying notes, included elsewhere in this Annual Report on
Form 10-K. It is intended to assist the reader in understanding and evaluating
our financial position.
OVERVIEW
Elite Pharmaceuticals is a specialty pharmaceutical company principally
engaged in the development and manufacture of oral, controlled release products.
Elite
28
develops controlled release products using proprietary technology and
licenses these products. The Company's strategy includes developing generic
versions of controlled release drug products with high barriers to entry and
assisting partner companies in the life cycle management of products to improve
off-patent drug products. Elite's technology is applicable to develop delayed,
sustained or targeted release pellets, capsules, tablets, granules and powders.
Elite has one product currently being sold commercially and a pipeline of six
drug products under development in the therapeutic areas that include
cardiovascular, pain management, allergy and infection. The addressable market
for Elite's pipeline of products exceeds $2 billion. Elite's current facility in
Northvale, New Jersey also is a GMP and DEA registered facility for research,
development, and manufacturing.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion addresses our 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 bad debts, intangible assets, income taxes, workers compensation, and
contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. Our most critical
accounting policies include the recognition of revenue upon completion of
certain phases of projects under research and development contracts. The Company
also assesses a need for an allowance to reduce its deferred tax assets to the
amount that it believes is more likely than not to be realized. The Company
assesses the recoverability of long-lived assets and intangible assets whenever
events or changes in circumstances indicate that the carrying value of the asset
may not be recoverable. The Company assesses its exposure to current commitments
and contingencies. It should be noted that actual results may differ from these
estimates under different assumptions or conditions.
During the year ended March 31, 2003, we 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, which
resulted in our taking a charge of $20,550, $1,166,601 and $370,108 during the
years ended March 31, 2003, 2004 and 2005, respectively. The fair value of stock
options held by employees and
29
members of the Board of Directors which have been granted or repriced subsequent
to March 31, 2005 is expected to continue to affect the results of operations of
future periods, as we continue to grant or reprice stock options to reward our
management team.
YEAR ENDED MARCH 31, 2005 VS. YEAR ENDED MARCH 31, 2004
Our Auditor's Report on the accompanying financial statements state
that such financial statements have been prepared assuming that we will continue
as a going concern. We have incurred significant losses during our fiscal years
ended March 31, 2005 and March 31, 2004. Although proceeds were raised during
our latest private placement, our Auditor's continued to state in their report
that conditions raise substantial doubt about our ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of the assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty. Management believes that cost reductions already
implemented will reduce losses in the future, and with our existing working
capital levels, anticipate that we will be able to continue our operations at
least through the end of our current fiscal year.
Our revenues for the year ended March 31, 2005 were $301,480, an
increase of $43,230 or approximately 17%, over the comparable prior year. For
the year ended March 31, 2005, revenues consisted of a $150,000 non-refundable
payment received from Purdue Pharma L.P. granting it the right to evaluate
certain abuse resistant drug formulation technology, $125,739 in manufacturing
fees, $24,291 in royalty fees and $1,450 in testing fees. Revenues for the year
ended March 31, 2004 consisted of research and development fees earned in
conjunction with our distinct development, license and manufacturing agreements.
Research and development costs for the year ended March 31, 2005, were
$2,698,641 an increase of $623,567 or approximately 30% from $2,075,074 for the
comparable period of the prior year, primarily the result of an increase
relating to wages, raw materials, laboratory and manufacturing supplies and
consulting fees. We expect our research and development costs to continue to
increase in future periods as a result of the ERL joint venture termination as
we will be solely responsible to fund product development, which we will do from
the internal resources or through loans or investment by third parties.
General and administrative expenses for the year ended March 31, 2005,
were $2,159,670, a decrease of $390,176, or approximately 18% from the prior
year. The decrease was attributable to a decrease in litigation costs offset
somewhat by increases in salaries and staff, consulting fees and the write-off
of a bad debt relating to accounts receivable.
We are unable to provide a break-down of the specific costs associated
with the research and development of each product on which we devoted resources
because a
30
significant portion of the costs are generally associated with salaries,
laboratory supplies, laboratory and manufacturing expenses, utilities and
similar expenses. We have not historically allocated these expenses to any
particular product. In addition, we cannot estimate the additional costs and
expenses that may be incurred in order to potentially complete the development
of any product, nor can we estimate the amount of time that might be involved in
such development because of the uncertainties associated with the development of
controlled release drug delivery products as described in this report.
Depreciation and amortization increased by $23,602 from $332,836 to
$356,438.
Other expenses for the year ended March 31, 2005 were $992,621, a
decrease of $821,090, or approximately 45% from $1,813,711 for the prior year.
The decrease was due to a reduction by $1,143,466 in charges related to the
issuances of stock options and warrants and a charge of $172,324 in the prior
year related to the warrant exchange offer, offset partially by a charge in the
year ended March 31, 2005 relating to the repricing of stock options in the
amount of $397,732. Additional interest income, due to higher compensating
balances as a result of the private placement, was offset by increases in
interest expense resulting from the equipment financing.
As a result of the foregoing, the Company's net loss for the year ended
March 31, 2005 was $5,906,890 compared to $6,514,217 for the year ended March
31, 2004. Increases in operating expenses of $256,993, were more than offset by
decreases in other expenses of $821,090.
YEAR ENDED MARCH 31, 2004 VS. YEAR ENDED MARCH 31, 2003
Our Auditor's Report on the accompanying financial statements for the
years ended March 31, 2005 and 2004 and a prior Report for the year ended March
2003 states that such financial statements have been prepared assuming that we
will continue as a going concern. We incurred a significant loss and negative
cash flow during our fiscal year ended March 31, 2004 which significantly
decreased our working capital and increased our accumulated deficit.
Our revenues for the year ended March 31, 2004 were $258,250, a
decrease of $372,060 or approximately 59% from the comparable prior year. For
the year ended March 31, 2004 our revenues consisted of research and development
fees earned in conjunction with our distinct development, license and
manufacturing agreements. For the year ended March 31, 2003, revenues consisted
of product formulation fees of $187,810 earned in conjunction with our joint
venture in ERL which terminated on September 30, 2002. Of our revenues for the
years ended March 31, 2004 and March 31, 2003, $108,500 and $442,500,
respectively, were research and development and testing fees earned in
conjunction with our distinct development, license and manufacturing agreements.
31
General and administrative expenses for the year ended March 31, 2004
were $2,549,846, an increase of $691,777, or approximately 37% from the prior
year. The increase was substantially due to increases in legal and consulting
fees as well as approximately $550,000 in expenses, including $400,000 as
compensation, resulting from a settlement of litigation instituted by our former
President with respect to the termination of his employment agreement.
Research and development costs for the year ended March 31, 2004, were
$2,075,074, an increase of $61,495 or approximately 3% from the prior year,
primarily due to increased research and development wages, laboratory supplies
and raw materials used in our research and development processes and additional
biostudies.
We are unable to provide a break-down of the specific costs associated
with the research and development of each product on which we devoted resources
because a significant portion of the costs are generally associated with
salaries, laboratory supplies, laboratory and manufacturing expenses, utilities
and similar expenses. We have not historically allocated these expenses to any
particular product. In addition, we cannot estimate the additional costs and
expenses that may be incurred in order to potentially complete the development
of any product, nor can we estimate the amount of time that might be involved in
such development because of the uncertainties associated with the development of
controlled release drug delivery products as described in this report.
Other expenses for the year ended March 31, 2004 were $1,813,711, an
increase of $1,304,903, or approximately 256% from the prior year. The increase
was primarily due to charges related to the modification of the warrant exchange
offer, the issuance of stock options and warrants valued at $1,926,908 (an
increase of $1,664,020) and the reduction in interest income due to lower rates
and compensating balances in the amount of $72,927, partially offset by
increases in sale of New Jersey, tax losses of $79,353 and the settlement of
vendor litigation for $150,000.
Our net loss for the year ended March 31, 2004 was $6,514,217 as
compared to $4,061,422 in the prior year, or an increase of approximately 60%
from the prior year, primarily due to the decrease in net revenues, and
increases in research and development and administrative expenses, including
increased charges of $1,664,020 due to the issuance of stock options, warrants
and the modification of warrant exchange offer.
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 $3,328,583
as of March 31, 2005, primarily due to net proceeds of $5,791,600 received from
the sale of Series A Preferred Stock partially offset by the net loss of
$4,883,302 from operations, exclusive of non-cash charges of $1,423,588.
32
The Company experienced negative cash flows from operations of
($4,883,503) for the year ended March 31, 2005, primarily due to the Company's
net loss from operations of $5,906,890, less non-cash charges of $1,423,588,
which included, but were not limited to, the charges of $397,732 in connection
with the repricing of stock options, $370,108 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 s
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. On November 15, 2004, Elite's partner, ECR, launched LODRANE 24, 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 these royalties to provide additional cash
to help fund its operations.
The Company recently entered into a development 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 first quarter of the year March 2006.
The Company in April 2005 announced the entry into an agreement with a
specialty marketing company and a boutique formulation development company, for
the manufacture and distribution of a controlled release drug product. The
product is a generic equivalent to a branded drug which has addressable market
revenues of approximately $80 million per year. The agreement provides for (1)
the development of the drug by Elite with costs of development to be shared by
Elite and the marketing company, (2) the manufacture by Elite and its sale to
the marketing company for distribution and (3) the boutique development company
to be responsible for any requisite submissions to the FDA relating to the
product. Elite is to share in the profits generated from the sale of the
product.
No assurance can be given that the Company will consummate any of the
transactions discussed above or that any material revenues will be generated for
Elite therefrom.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended March 31, 2005, 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 $5,791,000 from its private
placement of its Series A Preferred Stock. The Company's working capital at
March 31, 2005 was $3.3 million compared with working capital of $1.3 million at
March 31, 2004. Cash and cash
33
equivalents at March 31, 2005 were $3.9 million, an increase of $1.8 million
from the $2.1 million at March 31, 2004.
The Company's purchase of machinery and equipment of approximately
$426,000 during the year ending March 31, 2005 was fully financed except for
minor expenditures. No capital expenditures were made during the year ended
March 31, 2004.
The Company had bonds of $2,345,000 outstanding as of March 31, 2005.
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. Bonds proceeds were utilized for the refinancing of the
land and building the Company currently own, 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 March 31, 2005. Pursuant to the terms of the related bond indenture
agreement, the Company is required to observe certain covenants, including
covenants relating to the incurrence of additional indebtedness, the granting of
liens and the maintenance of certain financial covenants. As of March 31, 2005
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 each of $13,671, 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 are to be
applied to the principal balance when due. The loan is secured by two pieces of
equipment and the guaranty of the Company. In addition, the Company issued to
designees of the lender 50,000 warrants, which vest immediately, to purchase
50,000 shares of the Company's Common Stock at $4.20 per share. A charge of
$41,252 for the cost of these warrants is reflected in the year ended March 31,
2005.
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 Convertible Preferred Stock and the short and long term
warrants for gross proceeds of $6,600,000, before payment of commission of
$623,520 and other expenses. The Series A Preferred Shareholders were entitled
to a preferential dividend
34
of 8% per annum of the original issue price of $12.30 per share payable on
December 1 and June 1 of each year and at the time of conversion. 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. As of March 7, 2005, all of the shares have been
converted at the holder's option or by mandatory conversion pursuant to their
terms. An aggregate of 5,265,516 shares of Common Stock have been issued,
including 26,961 shares of Common Stock issued to satisfy payment of $75,076
accrued dividend on December 1, 2004. 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 March 31, 2006.
As of March 31, 2005, our principal source of liquidity was
approximately $3,900,000 of cash and cash equivalents. Additionally, we may have
access to funds through the exercise of outstanding stock options and warrants
in addition to funds that may be generated from the potential sale of New Jersey
tax losses. There can be no assurance that the sale of tax losses or that any
proceeds generated by the exercise of outstanding warrants or options will
provide sufficient cash.
The following table depicts our obligations and commitments to make
future payments under existing contracts or contingent commitments.
PAYMENTS DUE BY PERIOD
LESS THAN 1 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 4-5 YEARS YEARS
-----
Equipment note payable 315,074 127,946 187,128 - -
EDA Bonds payable 2,345,000 165,000 570,000 460,000 1,150,000
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest in or own any market risk sensitive instruments
entered into for trading purposes or for purposes other than trading purposes.
All loans to us have been made at fixed interest rates and; accordingly, the
market risk to us prior to maturity is minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as a part of this Annual Report on Form 10-K
are our Consolidated Financial Statements, beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
35
ITEM 9A. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, based on an
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the
Chief Executive and Chief Financial Officer of the Company have concluded that
the Company's disclosure controls and procedures are effective for ensuring that
information required to be disclosed by the Company in its Exchange Act reports
is recorded, processed, summarized and reported within the applicable time
periods specified by the SEC's rules and forms. The Company also concluded that
information required to be disclosed in such reports is accumulated and
communicated to the Company's management, including its principal executive and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure. There was no change in the Company's internal controls over
financial reporting that occurred during the most recent fiscal quarter that
materially affected or is reasonably likely to materially affect the Company's
internal controls over financial reporting. The Company's management has not yet
completed, and is not yet required to have have completed, its assessment of
internal control over financial reporting.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers, as of June 22, 2005, and their
biographical information are set forth below:
- -------------------------------------- --------- -------------------------------
NAME AGE POSITION
- -------------------------------------- --------- -------------------------------
Bernard Berk 56 Chairman of the Board, Chief
Executive Officer
- -------------------------------------- --------- -------------------------------
Edward Neugeboren 36 Director
- -------------------------------------- --------- -------------------------------
Barry Dash, Ph.D 73 Director
- -------------------------------------- --------- -------------------------------
Dr. Melvin Van Woert 74 Director
- -------------------------------------- --------- -------------------------------
Mark I. Gittelman 44 Chief Financial Officer,
Secretary and Treasurer
- -------------------------------------- --------- -------------------------------
The principal occupations and employment of each such person during at
least the past five years is set forth below. In each instance in which dates
are not provided in connection with the person's business experience, he has
held the position indicated for at least the past five years.
Bernard Berk was appointed the Chief Executive Officer of the Company
in June 2003, a Director in February 2004 and Chairman of the Board on May 12,
2004. Mr. Berk has been the President and Chief Executive Officer of Michael
Andrews Corporation, a pharmaceutical management consultant firm, since 1996.
Mr. Berk devotes and is to devote during his employment substantially all of his
time to the operations of the Company. From 1994 until 1996, Mr. Berk was
President and Chief Executive Officer of Nale Pharmaceutical Corporation. From
1989 until 1994, he was Senior Vice President of Sales, Marketing and Business
Development of Par Pharmaceuticals, Inc. Mr. Berk holds a B.S. from New York
University.
Mr. Edward Neugeboren has been a Managing Partner of IndiGo Ventures
LLC, a boutique investment-banking firm based in New York since January 2003.
From April 2001 to January 2004, he was a Managing Partner of Third Ridge
Capital Management, LLC, a U.S. equity hedge fund. From October 2000 to April
2001, he was Chief Administrative Officer of Soceron, an emerging Silicon Alley
based media software company, responsible for managing corporate operations. He
aided in capital raising, business development and strategic planning and
tactical operations. Mr. Neugeboren as Chief Administrative Officer and Director
of Equity Research Operations at Lehman Brothers from 1998 to 2000 was a senior
member of the management team responsible for department operations, including
technology, finance, editorial and production, human resources, and compliance.
He managed the equity research business of Lehman's strategic alliance with
Fidelity Investments. He also managed the hard dollar broker-dealer research
business with P&L responsibility. Additionally, he was the investment-banking
liaison. He was from 1996 to 1998 Deputy Director of
37
Equity Research and from 1995 to 1996 Director of Equity Research Operations at
UBS Warburg, formerly Warburg, Dillon Read. He was a senior member of the
management team as well as the Investment Policy & Equity Commitment Committees.
Mr. Neugeboren began his career in 1992 as an equity research analyst covering
the Specialty Pharmaceuticals industry, including generic drugs and drug
delivery, at Dillon Read & Co., Kidder, Peabody & Co. and Furman Selz, Inc. He
was a member of top ranked Greenwich Associates Mid-Cap Pharmaceuticals Team. He
graduated with a B. S. in Economics from Union College in 1992. Mr. Neugeboren
serves on the Board of Directors of KineMed, Inc. a platform based drug
development and advanced medical diagnostics company based in Emeryville,
California.
Barry Dash Ph.D. has been since 1995 President and Managing Member
of Dash Associates, L.L.C., an independent consultant to the pharmaceutical and
health and beauty aid industries. From 1983 to 1996 he was employed by American
Home Products Corporation, its Whitehall-Robins Healthcare Division, initially
as Vice President of Scientific Affairs, then Senior Vice President of
Scientific Affairs and then Senior Vice President of Advanced Technologies
during which time he personally supervised six separate departments: Medical and
Clinical Affairs, Regulatory Affairs, Technical Affairs, Research and
Development, Analytical R&D and Quality Management/Q.C. He had previously been
employed by the Whitehall Robins Healthcare Division from 1960 to 1976, during
which time he served as Director of Product Development Research, Assistant Vice
President of Product Development and Vice President of Scientific Affairs. Dr.
Dash had been employed by J.B. Williams Company (Nabisco Brands, Inc.) from 1978
to1982, during which time he helped introduce more than 14 national and test
market brands. From 1976 to1978 he was Vice President, Director of Laboratories
of the Consumer Products Division of American Can Company. He is a director of
GeoPharma, Inc. He holds a Ph.D. from the University of Florida and M.S. and
B.S. degrees from Columbia University at which he was Assistant Professor at the
College of Pharmaceutical Sciences from 1956 to 1960. Dr. Dash is a member of
the American Pharmaceutical Association, The American Association for the
Advancement of Science and the Society of Cosmetic Chemist.
Dr. Melvin Van Woert, a neurologist, has been since 1974, a member
of the staff of Mount Sinai Medical Center where he has been a Professor of the
Department of Neurology and Pharmacology at Mount Sinai School of Medicine since
1978. Dr. Van Woert had been a consultant for Neuropharmacological Drug Products
to the Food and Drug Administration from 1974 to 1980; Associate Editor for
Journal of the Neurological Sciences; Member of the Editorial Board of Journal
of Clinical Neurphamacology; and Medical Director of National Organization for
Rare Disorders for which he received in 1993 the Humanitarian Award. His other
awards include the U.S. Public Health Service Award for Exceptional Achievement
in Orphan Products Development and the National Myoclonus Foundation Award. He
has authored and co-authored more than 150 articles appearing in
pharmacological, medical and other professional journals or publications.
38
Mark I. Gittelman, CPA, our Chief Financial Officer, Secretary and
Treasurer, is the President of Gittelman & Co., P.C., an accounting firm. Prior
to forming Gittelman & Co., P.C. in 1984, he worked as a certified public
accountant with the international accounting firm of KPMG Peat Marwick, LLP. Mr.
Gittelman holds a B.S. in accounting from New York University and a Masters of
Science in Taxation from Farleigh Dickinson University. He is a Certified Public
Accountant licensed in New Jersey and New York, and is a member of the American
Institute of Certified Public Accountants ("AICPA") and the New Jersey and New
York States Societies of CPAs.
Each director holds office (subject to our By-Laws) until the next
annual meeting of shareholders and until such director's successor has been
elected and qualified. All of our executive officers are serving until the next
annual meeting of directors and until their successors have been duly elected
and qualified. There are no family relationships between any of our directors
and executive officers.
AUDIT COMMITTEE
Our Board of Directors has an Audit Committee and, since March 2004, a
Nominating Committee. The Board has no other standing committees. The current
Audit Committee, appointed on April 15, 2005, consists of Edward Neugeboren, Dr.
Melvin Van Woert and Barry Dash, Ph.D. The prior Audit Committee members were
John A. Moore, Harmon Aronson and Eric L. Sichel. The Audit Committee had one
meeting during the fiscal year ended March 31, 2005. The Company's Board of
Directors has adopted a written charter for the Audit Committee, a copy of which
was included as an appendix to the Company's proxy statement sent to
stockholders in connection with the annual meeting of stockholders held October
11, 2001.
Other than Mr. Moore, and each of the current members of the Audit
Committee, we deem the members of the prior and the current Audit Committees to
be independent as independence is defined in Section 121(A) of the American
Stock Exchange Listing Standards, as amended effective December 1, 2003. The
Board determined that Mr. Sichel, an independent director, with respect to the
prior Committee and Mr. Edward Neugeboren with respect to the current Audit
Committee qualified as the Audit Committee Financial Expert within the meaning
of that term under the applicable regulations under the Securities Exchange Act
of 1934.
Audit Committee Report: The following is the Audit Committee Report
made by all its members.
The Audit Committee reviewed and discussed the audited financial
statements with management. The Audit Committee discussed with the independent
auditors of the Company the matters required to be discussed by SAS 61
(Codification of Statements on Auditing Standards, AU 380), as modified or
supplemented. The Audit Committee received the written disclosures and the
letter from the independent accountants required by Independence Standards Board
Standard No. 1 (Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committees), as modified or supplemented. The Audit
Committee discussed with the independent accountant the
39
independent accountant's independence. Based upon the foregoing review and
discussions, the Audit Committee recommended to the Board of Directors of the
Company that the audited financial statements of the Company be included in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2005 as
filed with the Commission.
Edward Neugeboren
Dr. Melvin Van Woert
Barry Dash, Ph.D.
NOMINATING COMMITTEE
The Nominating Committee, initially appointed on June 22, 2004, is
authorized to select the nominees of the Board of Directors for election as
directors. The members were John A. Moore, Harmon Aronson and Bernard Berk with
Barry Dash and Melvin Van Woert replacing Messrs. Aronson and Moore as of April
15, 2005. In selecting nominees the Committee identifies and evaluates the
current Directors and their commitment to the policy of the Company and each
individual's qualifications and availability. The Committee believes that a
nominee for director of the Company should have an appropriate level of
sophistication, knowledge and understanding of the Company and the industry,
stockholder relations and finance and accounting for publicly held companies.
The Committee also considers the need to select a nominee who has the
appropriate experience and financial background who could qualify as an "audit
committee financial expert" within the meaning of the rules under the Securities
Exchange Act of 1934 and of the American Stock Exchange. The Company has not
engaged any third party to assist in the process of identifying or evaluating
candidates.
The Company currently does not have a process for considering
candidates put forward by stockholders other than those who are directors of the
Company. In view of the recent effectiveness of the requirements under the
Securities Exchange Act of 1934 as to a policy with respect to the consideration
of candidates put forward by stockholders other than those who are directors of
the Company, the adoption of such policy and the procedures for stockholders to
submit candidates is under consideration by the recently elected Board.
MEETINGS
During the fiscal year ended March 31, 2005, our Board of Directors
held four meetings and acted by unanimous written consent on other occasions.
Each director attended 75 percent or more of the aggregate number of meetings
and committees of which he was a member that were held during the period of his
service as a director.
The Company does not have a formal policy regarding attendance by
members of the Board of Directors at the Company's annual meeting of
stockholders, although it does encourage attendance by the directors.
Historically, more than a majority of the directors have attended the annual
meeting.
40
CODE OF CONDUCT
At the first meeting of the Board of Directors following the Annual
Meeting of Stockholders held on June 22, 2004 it adopted a Code of Business
Conduct and Ethics for its directors, officers and employees which it believes
complies with the requirements for a company code of ethics for financial
officers that were promulgated by the SEC pursuant to the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act") as well as for the members of our Board of
Directors. The directors will be surveyed annually regarding their compliance
with the policies as set forth in the Code of Conduct for Directors. A copy of
the Code of Business Conduct and Ethics is available on our website
www.elitepharma.com. We intend to disclose any amendment to, or waiver of, a
provision of the Business Conduct and Ethics for Directors in a report filed
under the Securities Exchange Act of 1934 within five business days of the
amendment or waiver.
STOCKHOLDER COMMUNICATIONS
Stockholders who wish to send communications to the Board of Directors
should address their communication to Elite Pharmaceuticals Inc., 165 Ludlow
Avenue, Northvale, New Jersey 07647, attention Mark I. Gittelman, Secretary. Mr.
Gittelman has been instructed to collect and organize stockholder communications
and forward copies to each of the Directors. If a communication relates to the
Secretary, such communication should be sent to the same address, attention
Bernard Berk, Chairman.
Typically, we do not forward to our directors communications from our
stockholders or other communications which are of a personal nature or not
related to the duties and responsibilities of the Board, including:
o Junk mail and mass mailings
o New product suggestions
o Resumes and other forms of job inquiries
o Opinion surveys and polls
o Business solicitations or advertisements
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our directors and executive officers and persons who own more than ten
percent of a registered class of our equity securities (collectively, "Reporting
Persons") to file with the SEC initial reports of ownership and reports of
changes in ownership of our Common Stock and other equity securities of Elite.
Reporting Persons are required by SEC regulation to furnish Elite with copies of
all Section 16(a) forms that they file. To our knowledge, based solely on a
review of the copies of such reports furnished to us,
41
we believe that during fiscal year ended March 31, 2005 all Reporting Persons
complied with all applicable filing requirements other than Mr. Neugeboren who
did not timely file his Form 3.
Section 16(b) of the Securities Exchange Act of 1934, as amended, requires an
insider, as defined, to disgorge any gain on the purchase and sale, or sale and
purchase of an issuer's equity securities within any six month period. During
fiscal 2005, the former Chairman of our Board of Directors remitted $117,740 to
Elite to return his gain based on the applicable provisions of law.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE OFFICER COMPENSATION
The Company entered into a three-year employment agreement effective
July 23, 2003 with Mr. Berk providing for (i) his full time employment as Chief
Executive Officer at an annual base salary of $200,000, (ii) the grant to him of
options which vest immediately to purchase 300,000 shares of Common Stock at a
price of $2.01 per share price, the closing share price on the American Stock
Exchange on the date of grant and (iii) the grant of options to purchase an
additional 300,000 shares at the $2.01 per share to vest on consummation of a
"strategic transaction" while he is employed as Chief Executive Officer. The
consummation of such transaction will result in the increase of his base annual
salary to $310,140 effective with the consummation. A strategic transaction is
defined as any one of the following transactions provided that the net value of
the consideration to the Company or its stockholders determined in good faith by
the Board of Directors is at least $10,000,000: (i) the sale of all or
substantially all of the assets of the Company, (ii) a merger or consolidation
or business combination, or (iii) the sale by the Company of debt or equity
securities.
Either party upon notice may terminate Mr. Berk's employment except
that a termination by the Company without cause or because of his permanent
disability or a termination by him for cause will result in severance pay in the
form of the continuation of his base salary for the balance of the term or two
years, whichever is longer, less in the event of termination for permanent
disability the amount of payments under a disability insurance policy maintained
by the Company. The Company is also to continue to pay during the foregoing
period the premiums for life and disability insurance policies. Furthermore, in
the event that Mr. Berk terminates his employment following a "change of
control" event he is to receive, payable in 24 monthly installments, an amount
which will depend on the fair value of the consideration determined in good
faith by the Board of Directors received by the Company or stockholders from the
"change of control" event less related expenses ("Net Fair Value") -- $500,000
if the Net Fair Value is $10 million or less; the greater of $500,000 or twice
his then base annual salary, if the Net Fair Value is greater than $10 million
but not more than $20 million, or $1,000,000 if the Net Fair Value is greater
than $20 million. A "change of control" event is (i) a merger or consolidation
in which securities possessing more than 50% of the voting power is issued to
persons other than the holders of voting securities of the Company immediately
prior to the event, (ii) the sale, transfer or
42
disposition of all or substantially all the assets of the Company, or (iii) the
sale by the Company of securities to a third party.
The agreement contains Mr. Berk's non-competition covenant for a period
of one year from termination.
The Company is a party to an agreement dated February 26, 1998 whereby
fees are paid to Gittelman & Co., P.C., a firm wholly-owned by Mark I.
Gittelman, the Company's Chief Financial Officer, Secretary and Treasurer, in
consideration for services rendered by the firm as internal accountant and
financial and management consultant. The firm's services include the services
rendered by Mr. Gittelman in his capacity as Chief Financial Officer, Secretary
and Treasurer. For the fiscal years ended March 31, 2005, 2004 and 2003, the
fees paid by the Company under the agreement were $111,312, $168,750 and
$167,544 respectively. The services rendered by the firm to the Company averaged
84, 128 and 127 hours per month, respectively, of which an average of 30 hours
per month were services rendered by him in his capacity as an officer of the
Company.
The following table sets forth the annual and long-term compensation
for services in all capacities to the Company for the three years ended March
31, 2005, awarded or paid to, or earned by Bernard Berk, our President and Chief
Executive Officer since June 2003 and our former President and Chief Executive
Officer, Dr. Atul M. Mehta. Dr. Mehta resigned as an employee and as a director
of Elite as of June 3, 2003. No other executive officer of the Company received
compensation exceeding $100,000 during those periods.
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------- ---------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
- ----------------------------------------------------------------------- ---------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Fiscal SALARY BONUS Other Restricted Securities LTIP All Other
Principal YEAR(1) Annual Stock Underlying PAYOUTS COMPENSATION
POSITION COMPENSATION(3) AWARDS OPTIONS
- ----------------- ------------ ------------ ----------- --------------- ------------ -------------- ---------- ---------------
Bernard Berk, 2004-05 $200,000 $50,000 -- -- 30,000 -- --
President and 2003-04 $166,667 -- -- -- 300,000(4) -- --
Chief Executive
Officer
- ----------------- ------------ ------------ ----------- ------------ --------------- -------------- ---------- ---------------
Atul M. Mehta, 2004-05 -- -- -- -- --(5) -- --
Ph.D. former 2003-04 $ 53,684 -- $ 3,040 -- -- -- --
President and 2002-03 $330,140 -- $ 3,040 -- -- -- --
Chief executive
Officer(2)
- ----------------- ------------ ------------ ----------- ------------ --------------- -------------- ---------- ---------------
43
(1) The Company's fiscal year begins on April 1 and ends on March 31. The
information is provided for each fiscal year beginning April 1.
(2) Dr. Mehta resigned as an employee and as a director of Elite as of June 3,
2003.
(3) Other Annual Compensation represents use of a company car, premiums paid by
the Company for life insurance on Dr. Mehta's life for the benefit of his wife
and the purchase price of $80,856 for options acquired from Dr. Mehta.
(4) Does not include 300,000 options which are exercisable only upon occurrence
of a "strategic transaction".
(5) See "Item 3 - Legal Proceedings" for settlement of a litigation providing
for extension of expiration dates of options granted prior to April 1, 2001 to
him to purchase 670,000 shares and a reduction of the exercise prices of certain
of the options..
OPTION GRANTS TO AND EXERCISED BY EXECUTIVE OFFICERS IN LAST FISCAL YEAR
OPTION GRANTS IN LAST FISCAL YEAR
Options granted to Executive Officers of the Company named in the
Summary Compensation Table during the fiscal year ended March 31, 2005 were as
follows:
POTENTIAL REALIZED VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SHARES OPTIONS GRANTED EXERCISE EXPIRATION STOCK PRICE APPRECIATION
UNDERLYING TO EMPLOYEES IN PRICE DATE FOR OPTION TERM
NAME OPTIONS FISCAL YEAR -------- --------- ----------------------------
---- GRANTED ---------------
----------
5% 10%
-- ---
Bernard Berk 30,000 50% $2.34 6/22/14 $45,966.96 $121,721.58
No options were exercised by executive officers during the fiscal year
ended March 31, 2005.
SHARES VALUE NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
NAME EXERCISED REALIZED UNEXERCISED OPTIONS AT YEAR-END OPTIONS AT YEAR-END (1)
---- --------- -------- ------------------------------- ---------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Atul M. Mehta -0- -0- 170,000 -0- $350,200 --
(2) -0- -0- 100,000 -0- $340,000 --
-0- -0- 100,000 -0- $290,000 --
-0- -0- 100,000 -0- $240,000 --
-0- -0- 100,000 -0- $190,000 --
-0- -0- 100,000 -0- $140,000 --
Bernard -0- -0- 30,000 -0- $ 61,800 --
Berk (3) -0- -0- 300,000 300,000 $717,000 $717,000
44
(1) The dollar values are calculated by determining the difference between $4.40
per share, the fair market value of the Common Stock at March 31, 2005, and the
exercise price of the respective options.
(2) Dr. Mehta resigned as an officer/employee and director as of June 3, 2003.
(3) Mr. Berk entered the employ of the Company in June 2003.
COMPENSATION OF DIRECTORS
Each non-affiliated director receives $2,000 as compensation for each
meeting attended.
On February 6, 2004, the Board of Directors authorized the payment of a
fee of $125,000 per annum retroactive to January 1, 2004 to Mr. Moore who was
then a Director, as compensation for his services as Chairman of the Board. The
fee is based on the substantial duties the Board assigned to him, principally to
assist the Chief Executive Officer in the management of the Company's
operations, and the time required to perform such duties. Mr. Moore earned
$46,875 under the authorization for the period through May 12, 2004, the date of
his resignation as Chairman.
OPTIONS AND WARRANTS
In October 2003, the American Stock Exchange (the "Amex") amended its
Rules to require stockholder approval of material amendments to a stock option
plan or other equity compensation arrangements pursuant to which options or
stock may be acquired by officers, director or employees, subject to certain
limited exceptions.
Our stockholders approved at its meeting held on June 22, 2004 the
following amendments by our Board of Directors of the provisions of outstanding
options and warrants issued to officers, directors or employees of, or
consultants to, the Company.
On June 6, 2003 our Board of Directors reduced the exercise price of
options to purchase 30,000 shares of the Company's Common Stock granted on
January 31, 2003 to each of the following persons, each of whom was then a
Director: Messrs. Harmon Aronson, Richard A. Brown, John P. deNeufville, John A.
Moore, Donald S. Pearson and Eric L. Sichel from $6.50 to $2.21 per share, which
was 110% of the closing per share sale price of the Common Stock on the American
Stock Exchange on the date of the amendment. These options vest as follows:
10,000 shares on December 12, 2003, 10,000 shares on December 12, 2004 and
10,000 shares on December 12, 2005. The options expire at the earlier to occur
of: (1) January 31, 2013; or (2) the date one year after the optionee ceases to
be a director of or a consultant or advisor of the Company. On February 6, 2004,
the Board of Directors authorized a further amendment to all the options held by
Messrs. Brown (30,000 shares), deNeufville (55,000 shares) and Pearson (90,000
shares) to extend their expiration date to a date two years following the June
22, 2004 Annual Meeting. On March 8, 2004 our Board of Directors amended those
options held by then Directors
45
which contained an exercise price greater than $2.21 to reduce their exercise
price to $2.21 per share.
NAME Shares Subject Date of Original Expiration
---- TO AMENDED OPTIONS GRANT EXERCISE PRICE DATE
------------------ ------- -------------- ----------
Donald Pearson 30,000 7/1/99 $6.00 6/22/06
30,000 1/2/01 $6.50 6/22/06
Harmon Aronson 30,000 7/1/99 $6.00 9/1/09
30,000 1/2/01 $6.50 1/1/11
Eric Sichel 30,000 8/2/01 $10.00 8/2/11
On May 12, 2004 our Board of Directors also authorized an amendment to
the expiration dates of options to purchase 330,000 shares held by Mr. Moore, of
which 30,000 options granted in January 2003 and exercisable at $2.21 have an
expiration date of January 13, 2003 and 300,000 options granted in June 2003 and
exercisable at $2.01 per share have an expiration date of June 13, 2013. Similar
to the above amendment of the options held by Messrs Pearson, Aronson and
Sichel, the options will terminate on the earlier of their current expiration
date or a date two years after Mr. Moore ceases to be a director of the Company.
On March 8, 2004, the Board of Directors confirmed the reduction to
$2.21 per share of the $3.31 per share exercise price of options of purchase
30,000 shares granted on June 13, 2003 to each of three employees. Such options
vest in three equal annual installments commencing with the date of grant.
On February 6, 2004 the Board of Directors authorized the extension of
the expiration date from June 30, 2004 to November 30, 2005 of the outstanding
Class B Warrants to purchase an aggregate of 681,002 shares of our Common Stock
at a price of $5.00 per share. The Class B Warrants were originally issued as
part of units of shares of Common Stock and Class B Warrants in a private
placement to a group of investors. Included among the holders of the Class B
Warrants are Richard A. Brown, a Director at the time, who holds, along with his
son and an affiliated trust, an aggregate of 156,250 Class B Warrants and Bridge
Ventures Inc., a consultant to the Company since December, 2003, which holds
25,000 Class B Warrants.
The Board of Directors authorized the foregoing amendments for the
purposes of hopefully generating additional funds through the exercise of the
options or warrants, and restoring a principal purpose or purposes of the
original grants of the options or warrants to officers, directors and employees,
namely a reasonable opportunity for the holder to acquire or increase a
proprietary interest in the Company and to restore a meaningful form of noncash
compensation.
As described under "Item 3 - Legal Proceedings" a settlement of a
litigation with Dr. Atul Mehta, includes provisions for the extension of the
expiration dates to December 31, 2007 of options previously issued to Dr. Mehta
to purchase 670,000 shares of Common Stock, including options with respect to
70,000 shares which had previously expired. The number and exercise prices are
as follows:
46
NUMBER OF OPTIONS EXERCISE PRICE
----------------- --------------
100,000 $3.00
100,000 $2.50
170,000* $2.34
100,000 $2.00
100,000 $1.50
100,000 $1.00
- -------------------------------------
* Includes the 70,000 which had expired
47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of March 31 2005 by (i) each director and named
executive officer, (ii) all executive officers and current directors as a group
and (iii) the persons known to us to own beneficially more than 5% of the
outstanding shares of our Common Stock. On such date, we had 18,022,183 shares
of Common Stock outstanding. Shares not outstanding but deemed beneficially
owned by virtue of the right of any individual to acquire shares within 60 days
are treated as outstanding only when determining the amount and percentage of
Common Stock owned by such individual. Each person has sole voting and
investment power with respect to the shares shown, except as noted. Unless
otherwise indicated, the address of the person named is c/o Elite
Pharmaceuticals, Inc., 165 Ludlow Avenue, Northvale, New Jersey 07647.
NAME AND ADDRESS COMMON STOCK
---------------- ------------
AMOUNT % *
------ ----
Bernard Berk, Director and Chief Executive Officer 765,300 (1) 4.2
c/o Elite Pharmaceuticals Inc.
165 Ludlow Avenue
Northvale, NJ 07647
Edward Neugeboren 188,094 (2) 1.0
282 New Norwalk Road,
New Canaan, CT 06840
Barry Dash -- --
168 Wood Road
Englewood Cliffs, NJ 07632
Melvin Van Woert -- --
Mount Sinai Medical Center, P.O. Box 1137
One Gustave L. Levy Place
New York, NY 10029-6576
SAC Capital Associates LLC 1,152,838 (3) 6.1%
P.O. Box 58
Victoria House, The Valley
Antigua, BVI
Jerome Belson 969,000 (4) 5.4%
495 Broadway
New York, New York 10012
All Directors and Officers as a group (5) 1,105,625 (5) 5.9
(1) Includes options to purchase 630,000 shares of Common Stock of which options
to purchase 300,000 shares are not exercisable until occurrence of a "strategic
event". See "Executive Officers"
(2) Includes 147,363 shares issuable upon exercise of outstanding warrants; but
does not include 40,650 shares issuable upon exercise of warrants owned by his
father.
48
(3) Includes 813,010 shares issuable upon exercise of warrants.
(4) Based on information provided by Mr. Belson for inclusion in the Company's
Prospectus dated December 28, 2004. Includes (i) 281,000 shares issuable upon
exercise of warrants, (ii) 53,900 shares held by Maxine Belson, wife of Jerome
Belson, (iii) 63,300 shares held by other members of his family, and (iv) 50,000
shares held by the Jerome Belson Foundation. (5) Represents shares of Common
Stock issuable upon exercise of options.
(5) Includes options and warrants to purchase an aggregate of 940,000 shares.
Except as otherwise set forth, information on the stock ownership of
each person was provided to the Company by such person.
Other than our 2004 Stock Option Plan, we do not have any compensation
plans or arrangements benefiting employees or non-employees under which equity
securities of the Company are authorized for issuance in exchange for
consideration in the form of goods or services.
The Company is informed and believes that as of June 20, 2005, Cede &
Co. held 15,846,250 shares of the Company's Common Stock as nominee for
Depository Trust Company, 55 Water Street, New York, New York 10004. It is our
understanding that Cede & Co. and Depository Trust Company both disclaim any
beneficial ownership therein and that such shares are held for the account of
numerous other persons, no one of whom is believed to beneficially own five
percent or more of the Common Stock of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We had a contractual relationship with Donald Pearson, a former
Director, which expired on November 30, 2003, providing for Mr. Pearson to (i)
refer potential customers who will license or collaborate in the development or
purchase of the technology of the Company and (ii) render financial consulting
services to the Company. Under the arrangement, Mr. Pearson received consulting
fees aggregating $28,800 and $38,400 for fiscal years ended March 31, 2004 and
2003, respectively. The referral fees were to be a percentage ranging from 5% to
1% of the first $5,000,000 of revenues generated by his referrals after
deducting expenses and a credit for the consulting fees. No revenues were
generated under the arrangement. The Company also has a similar customer
referral arrangement with Mr. Harmon Aronson, a former Director, to pay him a
percentage of net revenues generated by customers referred by him. No fees have
been earned under his arrangement.
See "Item 10 - Directors and Executive Officers of Registrant" for
information as to employment or engagement agreements with Bernard Berk and an
affiliate of Mark I. Gittelman.
49
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a description of the fees paid by the Company to
Miller, Ellin & Company, LLP ("Miller Ellin") during the fiscal years ended
March 31, 2005, March 31, 2004 and March 31, 2003:
Audit Fees: The Company paid fees of approximately $123,000, $150,000
and $119,000 to Miller Ellin in connection with its audit of the Company's
financial statements for the fiscal years ended March 31, 2005, March 31, 2004
and March 31, 2003, respectively, and its review of the Company's interim
financial statements included in the Company's Quarterly Reports on Form 10-Q
during each of the fiscal years ended March 31, 2005, March 31, 2004 and March
31, 2003.
Financial Information Systems Design and Implementation Fees: The
Company did not engage Miller Ellin during any of the years ended March 31,
2005, 2004 and 2003 to provide advice to the Company regarding financial
information systems design and implementation.
Other fees: The Company did not pay any fee to Miller Ellin to perform
non-audit services during either of the years ended March 31, 2005, March 31,
2004 and March 31, 2003.
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) Financial Statements - See Financial Statements included after the
signature page beginning at page F-1.
(2) Financial statement schedules - All schedules are omitted because
they are not applicable or the required information is shown in the consolidated
financial statements or the notes thereto.
(3) List of Exhibits - See Index to Exhibits in paragraph (c) below.
(b) REPORTS ON FORM 8-K. We filed the following Current Reports on Form 8-K with
the Securities and Exchange Commission during the period from January 1, 2005
through the date of the filing of this Annual Report on Form 10-K.
Form 8-K filed January 26, 2005 relating to items 5.02 and 9.01
Form 8-K filed March 10, 2005 relating to items 3.03 and 9.01
Form 8-K filed April 5, 2005, Form 8-K/A filed May 10, 2005 and Form
8-K/A filed June 13, 2005 relating to items 1.01 and 9.01
50
Form 8-K filed April 29, 2005 relating to item 7.01 and 8.01
Form 8-K filed May 31, 2005 relating to items 8.01 and 9.01
Form 8-K filed June 27, 2005 relating to items 1.01 and 9.01
Form 8-K filed June 28, 2005 relating to items 1.01 and 9.01
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K. We will furnish to our
stockholders a copy of any of the exhibits listed below upon payment of $.25 per
page to cover the costs of the Company of furnishing the exhibits.
Exhibit No. Description
3.2 By-Laws of the Company, as amended, incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form SB-2
(Reg. No. 333-90633) made effective on February 28, 2000 (the
"Form SB-2").
4.1 Certificate of incorporation of the Company, together with all
other amendments thereto, as filed with the Secretary of State of
the State of Delaware, incorporated by reference to (a) Exhibit
4.1 to the Registration Statement on Form S-4 (Reg. No.
333-101686), filed with the SEC on December 6, 2002 (the "Form
S-4") and (b) Exhibit 4.1 to the Company's Report on Form 8-K
dated July 28, 2004.
4.1(a) Form of specimen certificate for Common Stock of the Company,
incorporated by reference to Exhibit 4.1 to the Form SB-2.
4.2 Form of Class C Common Stock Purchase Warrant Certificate,
incorporated by reference as Exhibit 4.2 to the Form 10-K for the
period ended March 31, 2004, filed with the SEC on June 29, 2004.
4.3 Form of Class B Common Stock Purchase Warrant Certificate,
incorporated by reference as Exhibit 4.3 to the Form 10-K for the
period ended March 31, 2004, filed with the SEC on June 29, 2004.
4.4 Warrant to purchase 100,000 shares of Common Stock issued to DH
Blair Investment Banking Corp., incorporated by reference to
Exhibit 10.2 to the Form 10-Q for the period ended September 30,
2004.
4.5 Warrant to purchase 50,000 shares of Common Stock issued to Jason
Lyons incorporated by reference to Exhibit 10.3 to the Form 10-Q
for the period ended June 30, 2004.
4.6 Form of Warrant issued to designees of lender with respect to
financing of an equipment loan incorporated by reference to
Exhibit 10.2 to the Form 10-Q for the period ended June 30, 2004.
51
10.2 Commercial Lease made between Serex, Inc. and Elite executed
September 7, 1993, incorporated by reference to Exhibit 10.4 to
the Form SB-2.
10.3 2004 Employee Stock Option Plan approved by stockholders on June
22, 2004, incorporated by reference to Exhibit A to the Proxy
Statement filed on Schedule 14A with respect to the Annual Meeting
of Stockholders held on June 22, 2004.
10.3 (a) Amendment to 2004 Stock Option Plan approved by the
stockholders on April 15, 2005 incorporated by reference to the
Proxy Statement filed on Schedule 14A with respect to the Annual
Meeting of the Stockholders held on April 15, 2005.
10.4 Form of Confidentiality Agreement (corporate), incorporated by
reference to Exhibit 10.7 to the Form SB-2.
10.5 Form of Confidentiality Agreement (employee), incorporated by
reference to Exhibit 10.8 to the Form SB-2.
10.6 Employment Agreement dated as of July 23, 2003 between Bernard
Berk and the Company incorporated by reference to Exhibit 10.6 to
Report on Form 10-Q for three months ended June 30, 2003 (the
"June 30, 2003 10Q Report")
10.7 Option Agreement between Bernard Berk and the Company dated as of
July 23, 2003 incorporated by reference to Exhibit 10.7 to the
June 30, 2003 10Q Report.
10.8 Option Agreement between Bernard Berk and the Company dated as of
July 23, 2003 incorporated by reference to Exhibit 10.8 to the
June 30, 2003 10Q Report.
10.9 Engagement letter dated February 26, 1998, between Gittelman & Co.
P.C. and the Company incorporated by reference to Exhibit 10.10 to
the Form 10-K for the period ended March 31, 2004 filed with the
SEC on June 29, 2004.
10.11 Product Development Manufacturing and Distribution Agreement,
dated as of March 30, 2005, incorporated by reference as Exhibit
10.1 to the Form 8-K originally filed April 5, 2005, as amended on
the Form 8-K/A filed May 10, 2005, as further amended by the Form
8-K/A filed June 13, 2005 (Confidential Treatment Sought with
respect to portions of the Agreement)
10.12 Product Development and Commercialization Agreement, dated as of
June 21, 2005, incorporated by reference as Exhibit 10.1 to the
Form 8-K filed June 27, 2005 (Confidential Treatment Sought with
respect to portions of the
52
Agreement)
10.13 Product Development and License Agreement, dated as of June 22,
2005, incorporated by reference as Exhibit 10.1 to the Form 8-K
filed June 28, 2005 (Confidential Treatment Sought with respect to
portions of the Agreement)
21 Subsidiaries of the Company.*
31.1* Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002*
31.2* Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002*
32.1** Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
32.2** Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
- ----------------------
* Filed herewith
** As contemplated by SEC Release No. 33-8212, these exhibits are furnished with
this Annual Report on Form 10-K and are not deemed filed with the Securities and
Exchange Commission and are not incorporated by reference in any filing of Elite
Pharmaceuticals, Inc. under the Securities Act of 1933 or the Securities
Exchange Act of 1934, whether made before or after the date hereof and
irrespective of any general incorporation language in any such filings.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Bernard Berk
-------------------------------
Bernard Berk
Chief Executive Officer
Dated: June 28, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Bernard Berk Chief Executive Officer June 28, 2005
- -------------------------- (Principal Executive
Bernard Berk Officer)
/s/ Mark Gittelman Chief Financial Officer June 28, 2005
- -------------------------- and Treasurer (Principal
Mark I. Gittelman Financial and Accounting
Officer)
/s/ Edward Neugeboren Director June 28, 2005
- --------------------------
Edward Neugeboren
/s/ Barry Dash Director June 28, 2005
- --------------------------
Barry Dash
/s/ Melvin Van Woert Director June 28, 2005
- --------------------------
Melvin Van Woert
54
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003
CONTENTS
PAGE
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 2
CONSOLIDATED BALANCE SHEETS F - 3
CONSOLIDATED STATEMENTS OF OPERATIONS F - 5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F - 6
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Elite Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Elite
Pharmaceuticals, Inc. and Subsidiaries (the "Company") as of March 31, 2005 and
2004, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years ended March 31, 2005, 2004 and
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Elite
Pharmaceuticals, Inc. and Subsidiaries as of March 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the three years
ended March 31, 2005, 2004 and 2003 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements, the Company has experienced significant losses and negative cash
flows, resulting in decreased working capital and accumulated deficits. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters are described in Note 2.
/s/ MILLER, ELLIN & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
May 19, 2005
F-2
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND 2004
ASSETS
2005 2004
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 3,902,003 $ 2,104,869
Accounts receivable, net of allowance for doubtful accounts of
$153,250 and $0, respectively 142,113 153,250
Current portion of restricted cash - debt service 113,425 203,995
Prepaid expenses and other current assets 346,905 137,89
------------ ------------
Total current assets 4,504,446 2,600,006
PROPERTY AND EQUIPMENT- net of accumulated
depreciation and amortization 4,194,437 4,090,250
INTANGIBLE ASSETS - net of accumulated amortization 81,184 102,196
OTHER ASSETS:
Deferred charges 41,013 --
Deposit on equipment -- 398,580
Restricted cash - debt service 300,000 300,000
Restricted cash - note payable -- 225,000
EDA bond offering costs, net of accumulated
amortization of $73,648 and $60,458, respectively.
124,212 137,402
------------ ------------
Total other assets
465,225 1,060,982
------------ ------------
TOTAL ASSETS $ 9,245,292 $ 7,853,434
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND 2004
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
2005 2004
---- ----
CURRENT LIABILITIES:
Current portion - note payable
$ 127,946 $ 75,000
Current portion of EDA bonds 165,000 150,000
Accounts payable and accrued expenses 882,917 1,085,242
------------ ------------
Total current liabilities 1,175,863 1,310,242
------------ ------------
LONG TERM LIABILITIES:
Note payable - net of current portion 187,128 150,000
EDA bonds - net of current portion
2,180,000 2,345,000
------------ ------------
Total long-term liabilities 2,367,128 2,495,000
------------ ------------
Total liabilities 3,542,991 3,805,242
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value;
Authorized - 5,000,000 and 0 shares at
March 31, 2005 and 2004, respectively -- --
Common Stock - $.01 par value;
Authorized - 65,000,000 and 25,000,000
shares, respectively
Issued and outstanding - 18,022,183 and 12,204,423 in
2005 and 2004, respectively. 180,222 122,044
Additional paid-in capital 47,006,379 39,338,140
Accumulated deficit (41,177,459) (35,105,151)
------------ ------------
6,009,142 4,355,033
Treasury stock, at cost (100,000 shares) (306,841) (306,841)
------------ ------------
Total stockholders' equity 5,702,301 4,048,192
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,245,292 $ 7,853,434
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31,
---------------------
2005 2004 2003
----- ----- ----
REVENUES:
Licensing fees $ 150,000 $ -- $ --
Manufacturing fees 125,739 -- --
Royalties 24,291 -- --
Research and development -- 258,250 442,500
Product formulation fees -- -- 187,810
Consulting and test fees 1,450 -- --
----------- ----------- -----------
Total revenues 301,480 258,250 630,310
----------- ----------- -----------
COST OF OPERATIONS:
Research and development 2,698,641 2,075,074 2,013,579
General and administrative 2,159,670 2,549,846 1,858,069
Depreciation and amortization 356,438 332,836 310,876
----------- ----------- -----------
5,214,749 4,957,756 4,182,524
----------- ----------- -----------
LOSS FROM OPERATIONS (4,913,269) (4,699,506) (3,552,214)
----------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest income 39,932 23,765 96,692
Litigation settlement -- 150,000 --
Sale of New Jersey tax losses 205,792 151,027 71,674
Interest expense (229,495) (211,595) (227,907)
Equity in loss of joint venture -- -- (186,379)
Compensation satisfied by issuance of
stock, options and warrants (1,008,850) (1,754,584) (20,550)
Expenses relating to warrant exchange offer -- (172,324) (242,338)
----------- ----------- -----------
(992,621) (1,813,711) (508,808)
----------- ----------- -----------
LOSS BEFORE PROVISION FOR INCOME
TAXES (5,905,890) (6,513,217) (4,061,022)
PROVISION FOR INCOME TAXES
1,000 1,000 400
----------- ----------- -----------
NET LOSS (5,906,890) (6,514,217) (4,061,422)
Preferred Stock Dividends (165,418) -- --
----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $(6,072,308) $(6,514,217) $(4,061,422)
=========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (0.47) $ (0.58) $ (0.40)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12,869,924 11,168,618 10,069,991
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK
--------------- ------------
ADDITIONAL
PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
BALANCES AT APRIL 1, 2002 200,000 $ 200,000 9,710,840 $ 97,108 $19,469,464
Issuance of shares through
exercise of warrants -- -- 2,603 26 13,004
Issuance of shares and warrants
through exercise of placement
agent warrants -- -- 14,670 147 52,666
Issuance of convertible
exchangeable preferred stock 559,000 559,000 - - -
Dividends - declared - Series B
preferred stock
- - - - -
Dividends - declared - Series A
preferred stock - - - - -
Preferred stock issued to satisfy
accrued dividends 14,000 14,000 - - -
Conversion of convertible
exchangeable preferred stock into
Common Stock (773,000) (773,000) 816,310 8,163 14,520,810
Purchase of treasury stock - - - - -
Expenses relating to exchange of
warrants - - - - 242,338
Expenses relating to issuance of
stock options - - - - 20,550
Expenses relating to Warrant
Exchange Offer - - - - (100,000)
Net loss - - - - -
-------- ---------- ---------- ---------- -----------
BALANCES AT MARCH 31, 2003 - $ - 10,544,423 $ 105,444 $34,218,832
======== ========== ========== ========== ===========
TREASURY STOCK
-------------- STOCKHOLDERS'
ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
------ ------ ------- ---------
BALANCES AT APRIL 1, 2002 - $ - $ (23,627,688) $ (3,861,116)
Issuance of shares through
exercise of warrants - 13,030
Issuance of shares and warrants
through exercise of placement
agent warrants - 52,813
Issuance of convertible
exchangeable preferred stock - 559,000
Dividends - declared - Series B
preferred stock (14,000) (14,000)
Dividends - declared - Series A
preferred stock - - (887,824) (887,824)
Preferred stock issued to satisfy
accrued dividends
- 14,000
Conversion of convertible
exchangeable preferred stock into
Common Stock - - - 13,755,973
Purchase of treasury stock (100,000) (306,841) - (306,841)
Expenses relating to exchange of
warrants - - - 242,338
Expenses relating to issuance of
stock options - - - 20,550
Expenses relating to Warrant
Exchange Offer - - - (100,000)
Net loss - - (4,061,422) (4,061,422)
-------- ---------- ------------- ------------
BALANCES AT MARCH 31, 2003 (100,000) $ (306,841) $ (28,590,934) $ 5,426,501
======== ========== ============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK
--------------- ------------
ADDITIONAL
PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
BALANCES AT APRIL 1, 2003
- $ - 10,544,423 $ 105,444 $34,218,832
Expenses relating to modification
of warrant exchange offer - - - - 172,324
Expenses relating to issuance of
stock options - - - - 1,166,601
Expenses relating to issuance of
stock warrants - - - - 587,983
Proceeds from exercising stock
options - - 15,000 150 29,850
Net proceeds from private placement - - 1,645,000 16,450 3,162,550
Net loss - - - - -
-------- ---------- ---------- ---------- -----------
BALANCES AT MARCH 31, 2004 - $ - 12,204,423 $ 122,044 $39,338,140
======== ========== ========== ========== ===========
TREASURY STOCK
-------------- STOCKHOLDERS'
ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
------ ------ ------- ---------
BALANCES AT APRIL 1, 2003 (100,000) $ (306,841) $ (28,590,934) $ 5,426,501
Expenses relating to modification
of warrant exchange offer - - - 172,324
Expenses relating to issuance of
stock options - - - 1,166,601
Expenses relating to issuance of
stock warrants - - - 587,983
Proceeds from exercising stock
options - - - 30,000
Net proceeds from private placement - - - 3,179,000
Net loss - - (6,514,217) (6,514,217)
-------- ---------- ------------- ------------
BALANCES AT MARCH 31, 2004 (100,000) $ (306,841) $ (35,105,151) $ 4,048,192
======== ========== ============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK
--------------- ------------
ADDITIONAL
PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
BALANCES AT APRIL 1, 2004 - $ - 12,204,423 $ 122,044 $39,338,140
Net proceeds from issuance of
Series A 8% Convertible
Preferred Stock and warrants 516,558 5,166 --- --- 5,786,436
Issuance of Common Stock for
consulting services --- --- 26,500 265 58,035
Issuance of Common Stock upon
conversion of Series A 8%
Convertible Preferred Stock (516,558) (5,166) 5,165,580 51,656 (46,490)
Compensation satisfied by the
issuance of stock, options
and warrants 1,008,850
Common Stock issued as dividend on
Series A 8% Convertible
Preferred Stock --- --- 99,936 1,000 164,418
Exercise of stock options and
warrants --- --- 525,744 5,257 579,250
Proceeds - Short swing profits --- --- --- --- 117,740
Net loss
--- --- --- --- ---
-------- ---------- ---------- ---------- -----------
BALANCES AT MARCH 31, 2005 --- $ - 18,022,183 $ 180,222 47,006,379
======== ========== ========== ========== ===========
TREASURY STOCK
-------------- STOCKHOLDERS'
ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
------ ------ ------- ---------
BALANCES AT APRIL 1, 2004 (100,000) $ (306,841) $ (35,105,151) $ 4,048,192
Net proceeds from issuance of
Series A 8% Convertible
Preferred Stock and warrants --- --- --- ---
Issuance of Common Stock for
consulting services --- --- --- 58,300
Issuance of Common Stock upon
conversion of Series A 8%
Convertible Preferred Stock --- --- --- ---
Compensation satisfied by the
issuance of stock, options
and warrants 1,008,850
Common Stock issued as dividend on
Series A 8% Convertible
Preferred Stock --- --- (165,418) ---
Exercise of stock options and
warrants --- --- --- 584,507
Proceeds - Short swing profits --- --- --- 117,740
Net loss
--- --- (5,906,890) (5,906,890)
-------- ---------- ------------- ------------
BALANCES AT MARCH 31, 2005 (100,000) $ (306,841) $ (41,177,459) $ 5,702,301
======== ========== ============= ============
F-8
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
---------------------
2005 2004 2003
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,906,890) $ (6,514,217) $ (4,061,422)
Adjustments to reconcile net loss to cash used in operating activities:
Provision for doubtful accounts 153,250 --- ---
Depreciation and amortization 356,438 332,836 310,876
Non-cash compensation satisfied by issuance of stock,
options and warrants 1,067,150 1,926,908 262,888
Equity in loss of joint venture --- --- 186,379
Changes in assets and liabilities:
Accounts receivable (142,113) (148,569) 35,307
Prepaid expenses and other current assets (209,013) (5,800) (26,010)
Amount receivable from Joint Venture --- --- 525,259
Accounts payable, accrued expenses and other current (202,325) 750,521 193,009
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (4,883,503) (3,658,321) (2,573,714)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemptions of short-term investments --- --- 100,000
Purchase of patent --- (16,696) (69,517)
Released from restrictions 315,570 (79,615) 114,284
Receivable from sale of New Jersey tax losses --- --- 66,077
Payment of deposit for manufacturing equipment --- (398,580) ---
Purchases of equipment (27,843) --- (679,485)
------------ ------------ -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 287,727 (494,891) (486,641)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Fees relating to Warrant Exchange Offer --- --- (100,000)
Principal bank note payments (225,000) (75,000) (75,000)
Purchase of treasury stock --- --- (306,841)
Proceeds from issuance of Common Stock and warrants --- 3,209,000 65,843
Principal repayments of EDA bonds (150,000) (140,000) (130,000)
Net proceeds from issuance of Series A 8% Convertible Preferred
stock and warrants 5,791,602 --- ---
Proceeds from equipment loan 400,000 --- ---
Principal equipment note payments (84,926) --- ---
Prepaid interest (41,013) --- ---
Proceeds from exercise of stock options 100,000 --- ---
Proceeds from exercise of stock warrants
484,507 --- ---
Proceeds from short swing profits 117,740 --- ---
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 6,392,910 2,994,000 (545,998)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,797,134 (1,159,212) (3,588,353)
CASH AND CASH EQUIVALENTS - beginning of period
2,104,869 3,264,081 6,852,434
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - end of period $ 3,902,003 $ 2,104,869 $ 3,264,081
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 230,464 $ 214,199 $ 228,938
Cash received for income taxes (204,792) (150,027) (71,274)
SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Preferred Stock dividends of $120,675 paid by issuance of
64,033 shares of Common Stock $ 165,418 $ --- $ ---
Utilization of equipment deposit towards purchase of equipment 398,580 --- 123,396
Issuance of Preferred Stock (including stock dividend payable of $14,000
and subscription receivable of $67,000) for interest in
joint venture --- --- 573,000
Conversion of preferred stock to Common Stock --- --- 14,528,973
Satisfaction of amounts due to joint venture --- --- 622,133
Reduction in investment in joint venture --- --- 63,381
Dividends accrued on preferred stock --- --- 899,923
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Elite
Pharmaceuticals, Inc. and its wholly-owned subsidiaries, (the
"Company"). All significant intercompany accounts and transactions
have been eliminated in consolidation.
The Company consolidates all entities that it controls. The Company
did not consolidate companies it did not control. The Company used the
equity method to account for its investments in companies in which it
did not have the ability to exercise significant influence over
operating and financial policies.
NATURE OF BUSINESS
Elite Pharmaceuticals, Inc. ("Elite") was incorporated on October 1,
1997 under the laws of the State of Delaware, and its wholly-owned
subsidiary Elite Laboratories, Inc. ("Elite Labs") was incorporated on
August 23, 1990 under the laws of the State of Delaware. Elite Labs
engages primarily in researching, developing and licensing proprietary
controlled release drug delivery systems and products. The Company is
also equipped to manufacture controlled release products on a contract
basis for third parties and itself if and when the products are
approved, however the Company has recently concentrated on developing
orally administered controlled release products. These products
include drugs that cover therapeutic areas for pain, angina,
hypertension, allergy and infection. The Company also engages in
research and development activities for the purpose of obtaining Food
and Drug Administration approval, and, thereafter, commercially
exploiting generic and new controlled-release pharmaceutical products.
The Company also engages in contract research and development on
behalf of other pharmaceutical companies.
On October 24, 1997, Elite merged with Prologica International, Inc.
("Prologica") a Pennsylvania Corporation, a publicly traded inactive
corporation, with Elite surviving the merger. In addition, Elite Labs
merged with a wholly-owned subsidiary of Prologica, with the Company's
subsidiary surviving this merger. The former shareholders of the
Company's subsidiary exchanged all of their shares of Class A voting
Common Stock for shares of the Company's voting Common Stock in a tax
free reorganization under Internal Revenue Code Section 368. The
result of the merger activity qualified as a reverse acquisition. In
connection with the reverse acquisition, options exercisable for
shares of Class A voting and Class B nonvoting Common Stock of the
Company's subsidiary were exchanged for options exercisable for shares
of the Company's voting Common Stock.
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 where 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, Elite Research, Inc. ("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.
F-10
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist of cash on deposit with banks and money market
instruments. The Company places its cash and cash equivalents with
high-quality, U.S. financial institutions and, to date, has not
experienced losses on any of its balances.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on
the straight-line method based on the estimated useful lives of the
respective assets which range from five to forty years. Major repairs
or improvements are capitalized. Minor replacements and maintenance
and repairs which do not improve or extend asset lives are expensed
currently.
Upon retirement or other disposition of assets, the cost and related
accumulated depreciation are removed from the accounts and the
resulting gain or loss, if any, is recorded.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the fair value of long-lived assets
whenever events or changes in circumstances indicate that its carrying
amounts may not be recoverable. Accordingly, any impairment of value
will be recognized when the carrying amount of a long-lived asset
exceeds its fair value in accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Management has determined that no
impairment of long-lived assets has occurred.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to expense as
incurred.
PATENTS AND TRADEMARKS
Effective April 1, 2002, the Company adopted the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets." The adoption of SFAS
No. 142 required an initial impairment assessment involving a
comparison of the fair value of patents and trademarks to current
carrying value. No impairment was determined to exist. The Company
reviews such trademarks and patents with definite lives for impairment
to ensure they are appropriately valued if conditions exist that may
indicate the carrying value may not be recoverable. Such conditions
may include an economic downturn or a change in the assessment of
future operations.
Costs incurred for the application of patents and trademarks are
capitalized and amortized on the straight-line method, based on their
estimated useful lives ranging from five to fifteen years, commencing
upon approval of the patent and trademarks. These costs are charged to
expense if the patent or trademark is unsuccessful.
F-11
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company derives substantially all of its revenues from contracts
with other pharmaceutical companies, subject to licensing and research
and development agreements.
The Company maintains cash balances in its bank, which, at times, may
exceed the limits of the Federal Deposit Insurance Corp.
The Company extends credit to its customers pursuant to contract terms
in the normal course of business and performs ongoing credit
evaluations. An allowance for doubtful accounts was considered
necessary at March 31, 2005, due to uncertainty of collectibility.
Amounts are written off when they are deemed uncollectible.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates made by management
include, but are not limited to, the recognition of revenue, allowance
for doubtful accounts receivable, the fair value of intangible assets
and stock-based awards.
INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for income
taxes. The liability method measures deferred income taxes by applying
enacted statutory rates in effect at the balance sheet date to the
differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements. The resulting deferred
tax assets or liabilities are adjusted to reflect changes in tax laws
as they occur. Valuation allowances are used to reduce deferred tax
assets to the amount considered likely to be realized.
LOSS PER COMMON SHARE
Net loss per common share is calculated by dividing net loss by the
weighted average number of shares outstanding during each period
presented. Common Stock equivalents, consisting of options, warrants
and convertible securities, have not been included, as their effect
would be antidilutive. For the three years ended March 31, the
following potentially dilutive securities were not included in the
computation of diluted loss per share:
2005 2004 2003
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Stock options 2,277,050 $ 2.16 2,417,050 $ 3.70 2,266,850 $ 5.74
Warrants 8,035,875 $ 2.69 2,654,239 $ 4.72 733,752 $ 12.33
---------- ---------- ----------
10,312,925 5,071,289 3,000,602
========== ========== ==========
F-12
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues derived from providing research and development services
under contracts with other pharmaceutical companies are recognized
when earned. These contracts provide for non-refundable upfront and
milestone payments. Because no discrete earnings event has occurred
when the upfront payment is received, that amount is deferred until
the achievement of a defined milestone. Each nonrefundable milestone
payment is recognized as revenue when the performance criteria for
that milestone has been met. Under each contract, the milestones are
defined, substantive effort is required to achieve the milestone, the
amount of the non-refundable milestone payment is reasonable,
commensurate with the effort expended, and achievement of the
milestone is reasonably assured.
Revenues earned by licensing certain pharmaceutical products developed
by Elite are recognized at the beginning of a license term when
Elite's customer has legal right to the use of the product. To date,
no revenues have been earned by licensing products and there are no
continuing obligations under any licensing agreements.
Revenues derived from royalties to the extent that they cannot be
reasonably estimated are recognized when the cash is received.
Revenues earned under manufacturing agreements with other
pharmaceutical companies are recognized when product is shipped.
INVESTMENT IN JOINT VENTURE
The equity method of accounting was used to account for the Company's
investment in its joint venture with Elan. Under the equity method,
the Company recognized its share in the net earnings or losses of the
joint venture as they occurred. While Elite owned 100% of the
outstanding Common Stock of ERL, Elite's equity in the loss of ERL was
based on 100% of ERL's losses, less the amounts funded by Elan. Elan
funded 19.9% of ERL's losses. Once Elite's investment was reduced to
zero, further losses were recognized to the extent of Elite's
commitment to fund the losses. The joint venture was terminated
effective September 30, 2002, as further discussed in Note 7.
F-13
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TREASURY STOCK
The Company records common shares purchased and held in treasury at
cost.
STOCK-BASED COMPENSATION
Under various qualified and non-qualified plans, the Company may grant
stock options to officers, selected employees, as well as members of
the board of directors, as further described in Note 11. Effective
April 1, 2002, the Company adopted the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
and selected the prospective method of adoption described in SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS No. 123." Prior to April 1, 2002,
the Company measured stock-based compensation for its employee
compensation plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25 (APB25), "Accounting for
Stock Issued to Employees" and related interpretations.
During the years ended March 31, 2003, 2004 and 2005 the Company
issued 210,000 1,024,000 and 120,000, respectively options to purchase
Common Stock to employees and to members of the board of directors.
The options have an exercise price ranging from $2.01 to $5.00 per
share and all vest over three years except 610,000 options issued in
2004 and 120,000 issued for year ended March 31, 2005 which vested
upon grant date. The options expire between five and ten years from
the date of grant. The Company has recorded compensation expense of
$20,550, $1,166,601 and $370,108 for the years ended March 31, 2003,
2004 and 2005 which represents the fair value of the options vested
computed using the Black-Scholes options pricing model on each grant
date.
On June 22, 2004 the Company's stockholders approved the 2004 Stock
Option Plan and ratified amendments of the terms of outstanding
options and warrants, including the repricing of options to certain
Directors and employees. The Company will record a significant
compensation expense in the future periods in which the options vest
based on the fair value of the options after reflecting the repricing
and amendments to the terms of the options.
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 year presented:
2005 2004 2003
---- ---- ----
Net loss as reported $ (5,906,890) $(6,514,217) $ (4,061,422
Add: Stock-based compensation expense
included in reported net loss, net of related
tax effects 1,008,850 1,754,584 20,550
Deduct: Total stock-based compensation
expense determined under fair value method
for all awards, net of related tax effect (68,880) (865,255) (1,070,651)
------------ ----------- ------------
Pro forma net loss (4,966,920) (5,624,888) (5,111,523)
============ =========== ============
Loss per share as reported (0.46) (0.58) (0.40)
Pro-forma loss per share (0.39) (0.50) (0.51)
F-14
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of current assets and liabilities approximate
fair value due to the short-term nature of these instruments. The
carrying amounts of noncurrent assets are reasonable estimates of
their fair values based on management's evaluation of future cash
flows. The long-term liabilities are carried at amounts that
approximate fair value based on borrowing rates available to the
Company for obligations with similar terms, degrees of risk and
remaining maturities.
RECLASSIFICATIONS
Certain accounts and amounts in the 2003 financial statements have
been reclassified in order to conform with the 2005 presentation.
These reclassifications have no effect on net income.
NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS
The Company reported net losses of $5,906,890, $6,514,217 and
$4,061,422 for the fiscal years ended March 31, 2005, 2004 and 2003,
respectively. At March 31, 2005, the Company had an accumulated
deficit of approximately $41.1 million, consolidated assets of
approximately $9.2 million, stockholders' equity of approximately $5.7
million, and working capital of approximately $3.3 million. The
Company has not generated any significant revenue to date.
In an effort to reduce costs in fiscal 2003, the Company has reduced
the number of products being actively developed from approximately
fifteen to six. The six products that continue in development were
deemed by management to be the most suitable for continued development
given the Company's limited resources. The Company has also settled
certain litigation with its former CEO which will significantly reduce
its legal fees.
The primary strategy remains to develop the Company's oral control
release pharmaceutical products, with emphasis in the area of pain
management, for FDA approval, and once developed, to commercially
exploit these products either by licensing or through the development
of collaborations with strategic partners.
The Company also retained an investment banking firm in fiscal 2003 to
assist the Company in connection with potential strategic
transactions, including acquisitions. The Company may receive
additional cash proceeds from the exercise of outstanding options and
warrants, as well as through the continued sale of its New Jersey
State tax losses. However, there is no assurance that any options or
warrants will be exercised, that any sale of tax losses will be
completed or that the Company will be able to raise additional
capital.
There is also no assurance that the Company's current business
strategies will be successfully implemented or that it will raise the
necessary funds to allow it to continue its operations. Management
believes that cost reductions already implemented will reduce losses
in the future, and with the Company's existing working capital levels,
anticipates that the Company will be able to continue its operations
at least through the end of fiscal year 2006, assuming it is
successful in consummating the transactions discussed above.
F-15
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2005 and 2004 consists of the
following:
2005 2004
---- ----
Laboratory manufacturing, and warehouse equipment $ 3,566,674 $ 3,140,250
Office equipment 32,981 32,981
Furniture and fixtures 51,781 51,781
Land, building and improvements 2,097,668 2,097,668
Equipment under capital lease 168,179 168,179
------------ ------------
5,917,283 5,490,859
Less: Accumulated depreciation and amortization 1,722,846 1,400,609
------------ ------------
$ 4,194,437 $ 4,090,250
============ ============
Depreciation and amortization expense amounted to $322,237, $300,303
and $278,348 for the years ended March 31, 2005, 2004 and 2003,
respectively. The Company's obligations under capital leases were
satisfied prior to March 31, 2004.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at March 31, 2005 and 2004, consist of the
following:
2005 2004
---- ----
Patents $ 145,830 $ 145,830
Trademarks 8,120 8,120
153,950 153,950
Less: Accumulated amortization
72,766 51,754
------------ ------------
$ 81,184 $ 102,196
============ ============
Amortization of intangible assets amounted to $21,012, $19,342 and
$19,344 for the years ended March 31, 2005, 2004 and 2003,
respectively.
Aggregate amortization expense of intangible assets for the next five
fiscal years is estimated to be as follows:
YEARS ENDING MARCH 31,
----------------------
2006 $ 21,012
2007 21,012
2008 21,012
2009 8,140
2010 8,140
F-16
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 5 - NOTE PAYABLE
During the year ended March 31, 2005, the unpaid portion of a $375,000
5.90% bank note was satisfied by the proceeds of a $225,000 maturing
certificate of deposit.
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%
annum. The loan is secured by two pieces of equipment and the guaranty
of the Company.
The notes payable consisted of the following at March 31:
2005 2004
---- ----
Note payable $ 315,074 $ 225,000
Current portion (127,946) (75,000)
------------ ------------
Long-term portion, net of current maturities $187,128 $ 150,000
============ ============
Future principal maturities under this loan are as follows:
YEARS ENDING MARCH 31,
----------------------
2005 $ 127,946
2006 147,054
2007
40,074
-----------
$ 315,074
===========
NOTE 6 - BOND FINANCING OFFERING
On September 2, 1999, the Company completed the issuance of tax exempt
bonds by the New Jersey Economic Development Authority. The aggregate
principal proceeds of the fifteen year term bonds were $3,000,000.
Interest on the bonds accrues at 7.75% per annum. The net proceeds are
being used by the Company to refinance the land and building it
currently owns, and for the purchase of certain manufacturing
equipment and related building improvements.
Offering costs in connection with the bond issuance totaling $197,860
were paid from bond proceeds and underwriter fees equal to $90,000
(three percent (3%) of the par amount of the bonds) are being
amortized over the term of the bonds. Amortization expense was $13,190
in each of the three years ended March 31, 2005.
The bonds are collateralized by a first lien on the building, which
includes property and equipment.
Several restricted cash accounts are maintained in connection with the
issuance of these bonds. These include amounts restricted for payment
of bond principal and interest, for the refinancing of the land and
building the Company currently owns, for the purchase of certain
manufacturing equipment and related building improvements as well as
the maintenance of a $300,000 Debt Service Reserve.
F-17
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 6 - BOND FINANCING OFFERING (CONTINUED)
All restricted accounts other than the $300,000 Debt Service Reserve
are expected to be expended within twelve months and are therefore
categorized as current assets. Bond financing consisted of the
following at March 31:
2005 2004
---- ----
EDA Bonds $ 2,345,000 $ 2,495,000
Current portion
(165,000) (150,000)
------------ ------------
Long term portion, net of current maturities 2,180,000 2,345,000
============ ============
Future principal maturities required under the bond agreement are
as follows:
YEARS ENDING MARCH 31,
----------------------
2006 $ 165,000
2007 175,000
2008 190,000
2009 205,000
2010 220,000
Thereafter 1,390,000
------------
$ 2,345,000
============
F-18
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 7 - JOINT VENTURE ACTIVITIES
In October 2000, the Company entered into a joint development and
operating agreement with Elan Corporation, plc, and Elan International
Services, Ltd. (together "Elan") to develop products using drug
delivery technologies and expertise of both companies. This joint
venture, Elite Research, Ltd. ("ERL"), a Bermuda corporation, was
initially owned 80.1% by the Company and 19.9% by Elan. ERL was to
fund its research through capital contributions from its partners
based on the partners' respective ownership percentage. ERL
subcontracted research and development efforts to the Company, Elan
and others. It was anticipated that the Company would provide most of
the formulation and development work. The Company had commenced work
for three products. The joint venture terminated on September 30,2002.
For the years ended March 31, 2003 and 2002, the Company charged
$187,810 and $601,057, respectively, to ERL which was reflected in
product formulation fees. Intercompany profits and losses were
eliminated.
ERL was initially capitalized with $15,000,000 which included the
issuance of 6,000 voting common shares, par value $1.00 per share, and
6,000 non-voting convertible preferred shares, par value $1.00 per
share. All of the voting shares were held by the Company, with the
non-voting convertible preferred shares held by both the Company and
Elan, being split 3,612 shares and 2,388 shares, respectively. Elite's
and Elan's respective ownership in ERL did not change during the term
of the joint venture.
While the Company initially owned 80.1% of the outstanding capital
stock (100% of the outstanding Common Stock) of ERL until September
30, 2002, Elan and its subsidiaries retained significant minority
investor rights that were considered "participating rights" as defined
in the Emerging Issues Task Force Consensus No. 96-16. Accordingly,
the Company did not consolidate the financial statements of ERL until
September 30, 2002 but instead accounted for its investment in ERL
under the equity method of accounting until the Joint Venture was
terminated, effective September 30, 2002.
For the year ended March 31, 2002 and the period beginning April 1,
2002 through September 30, 2002, ERL recognized net losses of $633,642
and $232,742, respectively, and the Company recognized 80.1% of these
losses, or $507,640 and $186,379, respectively. The product
formulation fees of $187,810 and $601,057 earned by the Company for
services rendered to ERL for the years ended March 31, 2003 and 2002,
respectively, are included in ERL's expenses. During fiscal year 2001,
ERL paid $15,000,000 to Elan for a license providing ERL non-exclusive
rights to use certain Elan in-process drug delivery technologies. The
Elan technology rights acquired relate to very early stage technology
that, in the opinion of management, have not reached technological
feasibility and have no future alternative uses. Through the date of
its termination, ERL completed in-vivo (pilot clinical trial) on the
first product and began formulation and development of two additional
products.
During fiscal year 2003, the Company consummated a termination
agreement (the "Termination Agreement") with Elan to acquire all of
Elan's interest in ERL. As further discussed in Note 10, the joint
venture was terminated effective September 30, 2002.
F-19
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 7 - JOINT VENTURE ACTIVITIES (CONTINUED)
Under the Termination Agreement, among other things, the Company
acquired all proprietary, development and commercial rights for the
worldwide markets for the products developed by ERL. In exchange for
the assignment, ERL agreed to pay Elan a royalty on certain revenues
that may be realized from the once-a-day Oxycodone product that has
been developed by ERL. Effective October 1, 2002, the Company is
solely responsible to fund ERL's product development.
The Company did not pay, nor did Elan receive any cash consideration
under the Termination Agreement. Furthermore, the Company has the
exclusive rights to the proprietary, development and commercial rights
for the worldwide markets for two other products developed by ERL. The
Company is not required to pay Elan royalties on revenues that may be
realized from these two other products.
The Company accounted for this acquisition by consolidating ERL as a
wholly-owned subsidiary as of September 30, 2002. As more specifically
described in Note 10, Elan converted 773,000 shares of Series B
Preferred Stock, according to their terms, into 52,089 shares of the
Company's Common Stock. This resulted in an increase in Common Stock
of $521 and an increase in additional paid in capital of $772,479. As
a result, the Series B Preferred Stock was eliminated.
As further disclosed in Note 10, the acquisition resulted in the
conversion of 13,756 shares of Series A Preferred Stock into 764,221
shares of Elite's Common Stock in accordance with their terms. The
Company accounted for this conversion by increasing Common Stock in
the amount of $7,642 and by a corresponding increase in additional
paid in capital of $13,748,332. As a result, the Series A Preferred
Stock was eliminated.
As a result of the Termination Agreement, ERL became a wholly-owned
subsidiary of the Company as of September 30, 2002. Elan retained
certain securities of Elite that it had obtained in connection with
the joint venture and transferred other such securities to a
third-party, as further discussed in Note 10.
The following is unaudited pro-forma consolidated results of
operations for the year ended March 31, 2003, assuming the acquisition
was completed on April 1, 2002.
2003
----
(Unaudited)
Revenue $ 442,500
Proforma net (loss) available to common
shareholders $ (4,107,785)
Proforma net (loss) available to common
shareholders per share -
basic and diluted $ (0.40)
Unaudited pro-forma data may not be indicative of the results that
would have been obtained had these events actually occurred at the
beginning of the periods presented, nor does it intend to be a
projection of future results.
F-20
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 8 - INCOME TAXES
The components of the provision for income taxes are as follows:
YEAR ENDED MARCH 31,
2005 2004 2003
---- ---- ----
Federal:
Current $ -- $ -- $ --
Deferred -- -- --
----------- ---------- ----------
-- -- --
----------- ---------- ----------
State:
Current 1,000 1,000 400
Deferred -- -- --
----------- ---------- ----------
1,000 1,000 400
----------- ---------- ----------
$ 1,000 $ 1,000 $ 400
=========== ========== ==========
During the year ended March 31, 2003, the Company received approval
for the sale of $1,822,989 of New Jersey net-operating losses under
the Technology Tax Certificate Transfer Program sponsored by the New
Jersey Economic Development Authority (NJEDA). The total tax benefit
approved for receipt by the Company during the year ended March 31,
2003 was $137,818, of which $71,741 was received in November 2002. The
remaining balance of $66,077 was received in 2003.
During the year ended March 31, 2004, the Company received approval
for the sale of an additional $1,928,817 of New Jersey net-operating
losses under the Technology Tax Certificate Transfer Program sponsored
by the New Jersey Economic Development Authority (NJEDA). The total
tax benefit received during the year ended March 31, 2004 was $151,027
and is recorded as other income in the accompanying financial
statements.
During the year ended March 31, 2005, the Company received approval
for the sale of an additional $2,628,257 of New Jersey net-operating
losses under the Technology Tax Certificate Transfer Program sponsored
by the New Jersey Economic Development Authority (NJEDA). The total
tax benefit received during the year ended March 31, 2005 was $205,792
and is recorded as other income in the accompanying financial
statements.
F-21
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 8 - INCOME TAXES (CONTINUED)
The major components of deferred tax assets at March 31, 2005 and 2004
are as follows:
2005 2004
---- ----
Net operating loss carry forwards $ 8,422,225 $ 6,736,336
Valuation allowance (8,422,225) (6,736,336)
------------ -----------
$ -- $ --
============ ===========
At March 31, 2005 and 2004, a 100% valuation allowance is provided, as
it is uncertain if the deferred tax assets will provide any benefits
because of the uncertainty of generating the future taxable income
necessary to use the net operating loss carryforwards. The valuation
allowance increased during 2005, 2004 and 2003 by $1,685,889,
$2,250,169, and $1,357,792, respectively.
At March 31, 2005, for federal income tax purposes, the Company has
unused net operating loss carryforwards of approximately $23,192,444
expiring in 2007 through 2025. For state tax purposes, the Company has
$10,360,986 of unused net operating losses, which are net of the
$12,167,760 of the New Jersey net-operating losses sold, as discussed
above.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company had an employment agreement ("Employment Agreement") with
its former President/CEO, Atul M. Mehta.
On June 3, 2003, Dr. 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, Dr. Mehta instituted
litigation against Elite and one of its directors, in the Superior
Court of New Jersey, for, among other things, the alleged breach of
his Employment Agreement and for defamation. He also claimed that he
was entitled to receive his salary through June 6, 2006. The Company
made certain counter claims against Mehta.
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
not to exceed $50,000 for the two year period from the litigation
settlement.
F-22
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
On July 23, 2003, the Company entered into an agreement with its new
Chief Executive Officer, Bernard Berk. The initial terms of this
agreement is three years. Pursuant to this agreement:
- Mr. Berk is entitled to receive a base salary of $200,000 per
annum, subject to increase to $330,140 if and when the Company
consummates a Strategic Transaction (as defined in the employment
agreement);
- The Company confirmed its grant to Mr. Berk on June 3, 2003 of
options to purchase 300,000 shares of the Company's Common Stock at
$2.01 per share. All of these options are vested.
- The Company granted Mr. Berk options to purchase an additional
300,000 shares of its Common Stock, with an exercise price equal to
$2.15, the closing price of the Company's Common Stock on the date
of grant. These options will vest solely upon consummation of a
Strategic Transaction.
- Mr. Berk will be 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 following a "change-of-control".
The severance will be payable in accordance with the terms of his
employment agreement.
CONSULTING AGREEMENTS
The Company entered into one year consulting agreements with each of
Saggi Capital Corp. and Bridge Ventures Inc. on November 4, 2003. The
consultants' services include, but are not limited to, advice with
respect to overall strategic planning, financing opportunities,
acquisition policy, commercial and investment banking relationships
and stockholders matters. In consideration of each consultant's
services, the Company agreed to pay each consultant $75,000 payable in
monthly installments of $6,250 and to issue to each consultant a
warrant to purchase 100,000 shares of the Company's Common Stock.
Consulting expenses under both agreements aggregated $165,000 for year
ended March 31, 2005 and $30,000 plus approximately $470,000
attributable to the issuance of the warrants for the year ended March
31, 2004. These agreements were extended as to the consultants'
services for an additional year at $75,000 each.
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 it
received a non-refundable retainer fee of $50,000. If and when the
Board of Directors requests a Fairness Opinion, Leerink's compensation
shall be $50,000. For the year ended March 31, 2005 and 2004,
consulting expenses under this agreement amounted to the $50,000
non-refundable retainer fee.
F-23
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
REFERRAL AGREEMENTS
On January 29, 2002, the Company entered into a Referral Agreement
with a Director (Referring Party) whereby Elite will pay the Referring
Party a fee based upon payments received by Elite from sales of
products, development fees, licensing fees and royalties generated as
a direct result of the Referring Party identifying customers for
Elite. 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 fee each year is to equal:
PERCENTAGE OF 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
No amounts had been earned through March 31, 2005.
On August 1, 1998, the Company entered into a consulting agreement
(the "1998 Agreement") with a company owned by a then Director for the
purpose of providing management, marketing and financial consulting
services for an unspecified term. Terms of the agreement provided for
a nonrefundable monthly fee of $2,000. This compensation was applied
against amounts due pursuant to a business referral agreement entered
into on April 8, 1997 (the "1997 Agreement") with the same party.
Terms of the 1997 Agreement provided for payments by the Company based
upon a formula, as defined, for an unspecified term. On November 14,
2000, the Company amended its 1997 Agreement to provide certain
consulting services for the period beginning November 1, 2000 through
October 31, 2003. The Company previously advanced $20,000 under the
1997 Agreement in addition to a payment of $50,000 made during the
year ended March 31, 2001. The 1997 Agreement provided for 25 monthly
installments of $3,200 beginning on December 1, 2001.
Consulting expense under the 1997 and 1998 Agreements amounted to
$28,800 for the year ended March 31, 2004 and no expense incurred for
the year ended March 31, 2003. The agreement terminated on November
30, 2003.
F-24
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COLLABORATIVE AGREEMENTS
On March 30, 2005, the Company entered into a product, development,
manufacturing and distribution agreement with Harris Pharmaceutical,
Inc. and Tish Technologies LLC with respect to a generic controlled
release drug delivery system in an undisclosed area. The product is a
generic equivalent to a branded drug with addressable market revenues
of approximately $80 million per year. The agreement provides for (i)
the drug development by Elite with costs of development to be shared
by Elite and the marketing company, (ii) the manufacture by Elite and
its sale to the marketing company for distribution, and (iii) Tish
Technologies LLC to be responsible for any requisite submissions to
the FDA relating to the product. Elite is to share in the profits, if
any, generated from the sale of the product.
On 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 a future option to develop a controlled
release NDA product.
Under the collaboration agreement, Pivotal Development is 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
defining 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.
Pivotal has not raised 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 ECR, another pharmaceutical
company. The Company is developing two drug compounds for ECR in
exchange for certain payments and royalties. The Company also reserves
the right to manufacture the compounds. The Company received $250,000
and $300,000, respectively, on these two agreements, which were earned
during the year ended March 31, 2002. The Company is currently
proceeding with the development and formulation for both products as
specified in the development agreements. The Company is currently
manufacturing commercial batches for promotion by ECR for which Elite
will receive a royalty on product revenues. Manufacturing fees and
royalties amounted to $125,739 and $24,291, respectively, for the year
ended March 31, 2005.
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 is to manufacture commercial batches of the
product on terms to be agreed upon. There were no amounts earned for
years ended March 31, 2005 and 2004.
F-25
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)
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.
The holders of the Preferred Shares were 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 were entitled to elect one Director, were 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.
F-26
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (Continued)
Holders of the Preferred Shares were 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.
Under the Certificate of Designation of the Series A Preferred Stock
of the Corporation, all outstanding shares of Preferred Stock
automatically convert into shares of Common Stock, par value $0.01
upon the Corporation providing written notice to holders of Preferred
Stock certifying that the Current Market Price of the Common Stock for
30 consecutive Trading Days exceeded $3.69 and the average daily
trading volume of the Common Stock for such 30 consecutive Trading
Days equaled or exceeded 50,000 shares per day.
On March 3, 2005, the Corporation certified that the Current Market
Price of the Common Stock for each Trading Day during the 30
consecutive Trading Days from January 18, 2005 through and including
March 1, 2005 exceeded $3.69, which represented 300% of the Initial
Conversion Price of $1.23 per share, and the average daily volume of
the Common Stock during the 30 Day Trading Period exceeded 50,000
shares.
As a result of the above, the remaining outstanding shares of
convertible Series A Preferred Stock (21,922 shares), par value $0.01
per share were converted into 219,220 shares of Common of the
Corporation as of March 7, 2005. Accordingly, the Corporation has
issued an aggregate of 5,265,516 shares of Common Stock with respect
to the issuance of conversion shares and dividend shares.
COMMON STOCK TRANSACTION
On July 6, 2004, the Company issued 26,500 shares of Common Stock
valued at $58,300 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.
F-27
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
INSIDER TRADING
Under Section 16(b) of the Securities Exchange Act of 1934, an
insider, as defined, is required to disgorge any gain on the purchase
and sale, or sale and purchase of an issuer's equity securities within
any period of six months. During fiscal 2005, the former Chairman of
the Board remitted $117,740 to the Company to return his gain based on
the applicable provisions of law.
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
During fiscal 2003, the Company purchased 100,000 shares of Common
Stock in the open market for a total consideration of $306,841
pursuant to the authorization by the Board of Directors on June 27,
2002.
PUBLIC OFFERINGS
A registration statement on Form SB-2, declared effective on July 6,
2004 under the Securities Act of 1933, as amended, registered the
following:
1) 1,530,000 shares acquired in a private placement and 50,000
shares to be offered upon exercise of warrants issued to the
Placement Agent and its associates.
2) Shares to be offered upon exercise of stock options held by a
former Chief Executive Officer at the exercise price of $1.00 per
share.
A registration statement on Form SB-2, declared effective December 28,
2004, under the Securities Act of 1933, as amended, registered the
following securities:
F-28
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
PUBLIC OFFERINGS (Continued)
1) 5,165,580 Shares of Common Stock which may be offered upon
conversion of the outstanding 516,558 shares of Series A
Preferred Stock (a current conversion rate of 10 shares of Common
Stock for each Series A Preferred share) plus 26,961 shares of
Common Stock issued as the December 1, 2004 dividend and up to an
additional 765,455 shares of Common Stock, which may be issued as
subsequent dividends or pursuant to the conversion rate on
outstanding shares of Series A Preferred Stock;
2) 2,582,790 shares of Common Stock which may be offered upon
exercise of Common Stock Purchase Warrants expiring December 31,
2005 issued in a private placement by the Company.
3) 3,077,721 shares of Common Stock which may be offered upon
exercise of Common Stock Purchase Warrants expiring December 27,
2009 issued in the foregoing private placement;
4) 1,362,200 shares of Common Stock which have been acquired from
Dr. Atul Mehta and his family by the stockholders.
5) 670,000 shares of Common Stock which may be issued upon an
exercise of outstanding options held by Dr. Mehta and 50,000
shares of Common Stock which may be issued upon exercise of
Common Stock Purchase Warrants held by Mr. Jason Lyons;
6) 26,500 outstanding shares of Common Stock which had been issued
to CEOcast, Inc.
F-29
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
PREFERRED STOCK
As further discussed in Note 7, on October 16, 2000, Elite entered
into an agreement (the "Joint Venture Agreement") with Elan
International Services, Ltd. and Elan Corporation, plc. (together
"Elan"), under which the parties formed a joint venture, Elite
Research, Ltd. ("ERL"). Under the terms of the Joint Venture
Agreement, 409,165 shares of the Company's Common Stock and 12,015
shares of a newly created Series A Convertible Exchangeable Preferred
Stock ("Series A Preferred Stock") were issued to Elan for
consideration of $5,000,000 and $12,015,000, respectively. Proceeds
from the sale of the Series A Preferred Stock were used to fund the
Company's 80.1% share of ERL, as further discussed in Note 7.
The Series A Preferred Stock accrued a dividend of 7% per annum,
compounded annually and payable in shares of Series A Preferred Stock.
Dividends accrued and compounded annually beginning on October 16,
2001. As of September 30, 2002 (the termination date of the Joint
Venture), dividends of $1,740,973 on the Series A Preferred Stock had
accrued. During the year ended March 31, 2003, the Company issued
Series A Preferred Stock to satisfy the accrued dividends.
On October 17, 2000, the Company authorized 7,250,000 shares of newly
created Series B Preferred Stock of which 4,806,000 was designated for
issuance to Elan for a total consideration of $4,806,000. These shares
were issuable from time to time to fund the Company's 80.1% portion of
capital contributions to ERL and for funding of the research and
development activities for ERL.
The Series B Preferred Stock accrued dividends of 7% per annum of the
original issue price, compounded on each succeeding twelve month
anniversary of the first issuance and payable solely by the issuance
of additional shares of Series B Preferred Stock, at a price per share
equal to the original issue price. Dividends were accrued and
compounded commencing one year after issuance. As of September 30,
2002 (the termination date of the joint venture), dividends of $14,000
on the Series B Preferred Stock had accrued. During the year ended
March 31, 2003, the Company issued Series B Preferred Stock to satisfy
accrued dividends.
During the fiscal year ended March 31, 2003, the Company made capital
contributions to ERL in the amount of $573,000. These contributions
were financed by the proceeds from the issuance to Elan of 573,000
shares of Series B Preferred Stock. These contributions were in
addition to a capital contribution in the amount of $200,000 made by
the Company to ERL during the fiscal year ended March 31, 2002.
JOINT-VENTURE TERMINATION
In addition to the issuance of shares as described above, on October
17, 2000 the Company issued to Elan 100,000 warrants to purchase the
Company's Common Stock at an exercise price of $18 per share. The
warrants are exercisable at any time on or before October 17, 2005.
Subject to a Termination Agreement between the Company and Elan dated
September 30, 2002, the Company acquired Elan's 19.9% interest in ERL,
and Elan transferred its warrants and its 12,015 shares of Series A
Preferred Stock to a third party along with accrued dividends of 1,741
shares. On November 6, 2002, under a transfer and assignment among the
Company, Elan and a third party purchaser, all 13,756 shares of Series
A Preferred Stock have been converted, according to their terms, into
764,221 shares of the Company's Common Stock using the $18 per share
price.
F-30
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
JOINT-VENTURE TERMINATION (CONTINUED)
Elan retained 409,165 shares of the Company's Common Stock and 773,000
shares of Series B Preferred Stock, the latter of which was converted
into 52,089 shares of the Company's Common Stock. Both of the Series A
and Series B Preferred Stock were converted into the Company's Common
Stock in accordance with their terms. The warrants remain unexercised
at March 31, 2004 and 2005.
For the period of one year after the issuance of the above shares of
Common Stock, Elan and the third party purchaser have the right to
require registration under the Securities Act of 1933, as amended
("the Securities Act") of all or part of these securities. All
registration expenses would be borne by the requesting party. Elan and
the third party purchaser also have the right to piggyback
registration if at any time the Company proposes to register shares of
its Common Stock under the Securities Act.
WARRANTS
To date, the Company has authorized the issuance of Common Stock
purchase warrants, with terms of five to six years, to various
corporations and individuals, in connection with the sale of
securities, loan agreements and consulting agreements. Exercise prices
range from $2.00 to $18.00 per warrant. The warrants expire at various
times through November 30, 2005.
A summary of warrant activity for the fiscal years indicated below
were as follows:
2005 2004 2003
---- ---- ----
Beginning balance 2,654,239 733,752 2,669,477
Warrants issued 200,000 200,000 ---
Warrants issued pursuant to Placement Agent
Agreement 519,931 50,000 8,136
Warrants issued pursuant to Private Placement 5,165,580 -- ---
Placement Agent Warrants Exercised (7,500) -- (158,652)
Class C Warrants -- 1,723,237 ---
Warrants exercised or expired (496,375) (52,750) (1,829,957)
--------- --------- ----------
Ending balance 8,035,875 2,654,239 733,752
========= ========= ==========
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 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 $0.10 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.
F-31
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
CLASS A WARRANT EXCHANGE OFFER (CONTINUED)
Each New Warrant 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 ending 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.
CLASS B WARRANTS
In September 2003, the Company amended the expiration date of the
Class B Warrants to November 30, 2005.
NOTE 11 - STOCK OPTION PLANS
Under various plans, the Company may grant stock options to officers,
selected employees, as well as members of the board of directors and
advisory board members. All options have generally been granted at a
price equal to or greater than the fair market value of the Company's
Common Stock at the date of grant. Generally, options are granted with
a vesting period of up to three years and expire ten years from the
date of grant. Transactions under the various stock option and
incentive plans for the years indicated were as follows:
2005 2004 2003
AVERAGE AVERAGE AVERAGE
WEIGHTED WEIGHTED WEIGHTED
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
Outstanding at
beginning of year
2,417,050 $ 3.70 2,266,850 $ 5.74 2,056,850 $ 5.82
Granted 120,000 2.34 1,024,000 2.23 210,000 5.00
Exercised (100,000) 1.00 (15,000) 2.00 -- --
Expired (160,000) 7.13 (858,800) 7.38 -- --
--------- -------- --------- ----------- --------- --------
Outstanding at
end of year 2,277,050 $ 2.16 2,417,050 $ 3.70 2,266,850 $ 5.74
========= ======== ========= =========== ========= ========
F-32
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 11 - STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options
outstanding at March 31, 2005:
WEIGHTED AVERAGE WEIGHTED- WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISABLE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------------- ----------- ------------ ----- ----------- -----
$1.00 -- $2.00 403,750 0.45 $ 1.88 403,750 $ 1.88
$2.01 - $4.00 1,873,000 5.24 2.22 1,344,300 2.23
------------- --------- ----- ------- --------- ------
$1.00 - 4.00 2,277,050 $4.39 $ 2.16 1,748,050 $ 2.14
------------- --------- ----- ------- --------- ------
The per share weighted-average fair value of each option granted
during fiscal 2005, 2004 and 2003 ranged from $1.91, $1.03 to $2.68
and $1.28, respectively, on the date of grant using the Black-Scholes
options pricing model with the following weighted-average assumptions;
no dividend yield; expected volatility ranging from 76.69%, 75.47% to
77.97% and 75.40%, for fiscal years 2005, 2004 and 2003, respectively;
risk-free interest rate of 4.0% in 2005, 4.0% in 2004, 4.0% in 2003
and expected lives ranging from five to ten years.
There are 1,722,950 options available for future grant under our Stock
Option Plan.
NOTE 12 - MAJOR CUSTOMERS
For the years ended March 31, revenues from major customers are as
follows:
2005 2004 2003
---- ---- ----
Customer A -- -- 29.79%
Customer B -- -- 56.32%
Customer C 49.80% 40.70% 13.49%
Customer D -- 59.30% --
Customer E 49.80% -- --
Customer A represents ERL, a joint-venture until September 30, 2002,
when it became a wholly-owned subsidiary of the Company, as further
discussed in Note 7. Revenues after September 30, 2002, are eliminated
in consolidation.
F-33
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE 13 - SUBSEQUENT EVENTS
The Board of Directors in January 2005 adopted, and the stockholders
of the Company approved on April 15, 2005, an amendment to the
Company's Stock Option Plan ("the Plan") to increase the number of
shares subject to the Plan from 1,500,000 to 4,000,000 shares. The
Plan authorizes the grant of options to employees and directors of the
Company or its subsidiaries and individuals performing consulting
services to the Company or a subsidiary.
On May 26, 2005, the Company announced that the FDA has approved the
Company's investigational new drug ("IND") application for its abuse -
resistant technology ("ART (TM)"), incorporating an opioid antagonist
designed to discourage and reduce abuse of narcotic analgesic
medications by making the product more difficult to abuse when
crushed, damaged or otherwise manipulated.
Elite's ART(TM) can be applied not only to the $2 billion addressable
market of oxycodone, but also to many other opiods, thereby
potentially addressing a greater overall market. The technology is
protected by a patent pending.
On May 18, 2005, proceeds of $40,000 were received from the exercise
of stock options previously granted to purchase 20,000 shares of
Common Stock at $2.00 per share.
On May 24, 2005 proceeds of $156,503 were received and 101,625 shares
of Common Stock were issued from the exercise of 101,625 Long-Term
Warrants granted at an exercise price of $1.54, as part of the
Company's private placement in October, 2004.
On April 22, 2005, the Company retained the investment banking firm
Ryan Beck & Co., as its placement agent with respect to Elite's
refinancing of the 1999 A tax exempt bond issuance with the New Jersey
Economic Development Authority ("NJEDA").
The Company intends to refund and refinance its current bonds in the
aggregate amount of approximately $4,200,000 and intends to use net
proceeds, after refunding and issuance costs, to purchase machinery
and equipment needed to expand its manufacturing facility. Under the
terms of the agreement with the Placement Agent, it is on a best
efforts basis, to undertake to structure and place a new bond with the
NJEDA.
The Placement Agent's fee for these services will be $30 per $1,000 of
principal amount of refunding bonds issued, payable upon the
successful closing of the refunding bond issue. Furthermore, the
Placement Agent will pay the fees and expenses of any counsel retained
by it.
There can be no assurance that Elite will be successful in closing
this bond refunding program.
On June 21, 2005, the Company and Intelli PharmaCeutics Corp., a
specialty pharmaceutical company, entered into an agreement for the
development and commercialization of a controlled released generic
drug by the parties. The Company is to share in the profits, if any
from the sales of the drug.
On June 22, 2005, the Company and Pliva, Inc. entered into a Product
Development and License Agreement. The agreement provides for the
development and license of a controlled released
F-34
generic drug formulated by the Company. Under the agreement, Pliva
will make upfront and milestone payments to the Company. The Company
will manufacture the product and Pliva will market and sell the
product. The development costs will be paid by Pliva and the Company
and the profits will be shared equally.
F-36