U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
-----------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended to
Commission File Number: 333-45241
- --------------------------------------------------------------------------------
ELITE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3542636
- -------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
165 Ludlow Avenue, Northvale, New Jersey 07647
- ------------------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
(201) 750-2646
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the issuer has filed all documents and reports required to be
filed by Sections 12, 13 or 15 (d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's common stock as of July 24,
2002 is 9,728,116.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2002 (unaudited) and
March 31, 2002 1 - 2
Consolidated Statements of Operations for the three months
ended June 30, 2002 and June 30, 2001 (unaudited) 3
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended June 30, 2002 and June 30, 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended June 30, 2002 and June 30, 2001 (unaudited) 5
Notes to Form 10-Q 6 - 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 - 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 15
PART II OTHER INFORMATION 15
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security-Holders Item 5
Other Information Item 6 Exhibits and Reports on Form 8-K
SIGNATURES 16
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, March 31,
2002 2002
------------- --------------
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $ 6,628,222 $ 6,852,434
Short-term investments --- 100,000
Accounts receivable 29,988 39,988
Restricted cash 181,692 213,664
Due from Joint Venture 250,961 525,259
Prepaid expenses and other current assets 70,906 106,082
------------- --------------
Total current assets 7,161,769 7,837,427
------------- --------------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 3,890,753 3,865,771
------------- -------------
INTANGIBLE ASSETS - net of accumulated amortization 66,375 54,669
------------- -------------
OTHER ASSETS:
Deposit on Equipment 123,396 123,396
Investment in Joint Venture 237 63,381
Amount receivable from sale of state tax losses 66,077 66,077
Restricted cash - Debt Service Reserve 300,000 300,000
Restricted cash - Note payable 250,000 250,000
EDA bond offering costs, net of accumulated amortization
of $37,301 and $34,076, respectively 160,552 163,777
------------- --------------
Total other assets 900,262 966,631
------------- --------------
Total assets 12,019,159 $ 12,724,498
============= ==============
The accompanying notes are an integral part of the
consolidated financial statements.
-1-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, March 31,
2002 2002
------------ ------------
(Unaudited) (Audited)
CURRENT LIABILITIES:
Current portion - Note payable $ 75,000 $ 75,000
Current portion of EDA bonds 130,000 130,000
Accounts payable and accrued expenses 100,451 141,712
Due to Joint Venture 237,559 435,754
------------ ------------
Total current liabilities 543,010 782,466
------------ ------------
LONG TERM LIABILITIES:
Dividends payable - Preferred Series A 853,148 853,148
Note payable - net of current portion 281,250 300,000
EDA bonds - net of current portion 2,635,000 2,635,000
------------ ------------
Total long-term liabilities 3,769,398 3,788,148
------------ ------------
Total liabilities 4,312,408 4,570,614
------------ ------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock at liquidating value of $1,000 per share - $1.00 par
value; 20,000 shares authorized; Series A convertible exchangeable
preferred stock; 12,015 issued
and outstanding in 2002 12,015,000 12,015,000
Preferred stock - $1.00 par value; 7,250,000 shares authorized;
Series B convertible preferred stock; 4,806,000 shares designated,
454,000 and 200,000 shares issued and
outstanding respectively 454,000 200,000
Common stock - $.01 par value;
Authorized - 25,000,000 shares
Issued and outstanding - 9,728,116 and 9,710,840 shares,
Respectively 97,281 97,108
Additional paid-in capital 19,535,134 19,469,464
Accumulated deficit (24,394,664) (23,627,688)
------------ ------------
Total stockholders' equity 7,706,751 8,153,884
------------ ------------
Total liabilities and stockholder's equity $12,019,159 $12,724,498
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
-2-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
June 30,
---------------------------------
2002 2001
---------------------------------
REVENUES:
Product formulation fees $ 105,011 $ 75,798
----------- ----------
Total revenues 105,011 75,798
----------- ----------
OPERATING EXPENSES:
Research and development 433,260 310,623
General and administrative 223,560 130,273
Depreciation and amortization 78,210 70,848
------------ ------------
735,030 511,744
------------ ------------
LOSS FROM OPERATIONS (630,019) (435,946)
------------ ------------
OTHER INCOME (EXPENSES):
Interest income 35,965 107,830
Interest expense (53,572) (55,897)
Equity in loss of Joint Venture (118,950) (60,714)
------------ ------------
136,557 (8,781)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (766,576) (444,727)
------------ ------------
PROVISION FOR INCOME TAXES 400 2,255
------------ ------------
NET LOSS $ (766,976) $ (446,982)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.08) $ (.05)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 9,726,521 9,408,593
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- --------------- ------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ ------ ------- ------- ---------- ------------ -----------
BALANCE AT MARCH 31, 2001
12,015 $ 12,015,000 - $ - 9,376,389 $93,764 $18,071,503 $(21,000,013)$9,180,254
Issuance of Shares through
exercise of warrants - - - - 41,286 413 85,159 - 85,572
Issuance of shares and warrants
through exercise of placement
agent warrants - - - - 14,772 147 53,032 - 53,179
Net loss for three months ended
June 30, 2001 - - - - - - - (446,982) (446,982)
------ ------------ ------- --------- --------- ------- ----------- ------------- ----------
BALANCE AT JUNE 30, 2001 12,015 $ 12,015,000 0 $ 0 9,432,447 $94,324 $18,209,694 $(21,446,995)$8,872,023
====== ============ ======= ========= ========= ======= =========== ============= ==========
BALANCE AT MARCH 31, 2002 12,015 $ 12,015,000 200,000 $ 200,000 9,710,840 $97,108 $19,469,464 $(23,627,688)$8,153,884
Issuance of shares through
exercise of warrants - - - - 2,606 26 13,004 - 13,030
Issuance of shares and warrants
through exercise of placement
agent warrants - - - - 14,670 147 52,666 - 52,813
Issuance of Series B
convertible exchangeable
Preferred Stock - - 254,000 254,000 - - - - 254,000
Net loss for three months ended
June 30, 2002 - - - - - - - (766,976) (766,976)
------ ------------ ------- --------- --------- ------- ----------- ------------- ----------
BALANCE AT JUNE 30, 2002 12,015 $ 12,015,000 454,000 $ 454,000 $9,728,116 $97,281 $19,535,134 $(24,394,664)$7,706,751
====== ============ ======= ========= ========= ======= =========== ============= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
JUNE 30,
------------------------------
2002 2001
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (766,976) $ (446,982)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation 73,800 66,450
Amortization of intangibles 4,410 4,398
Equity in loss of Joint Venture 118,950 60,714
Deferred income --- 250,000
Changes in assets and liabilities:
Accounts receivable 10,000 (236,686)
Prepaid expenses and other current assets 35,176 32,428
Due from Joint Venture 274,298 (75,798)
Accounts payable, accrued expenses and other current liabilities (41,262) (73,315)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (291,604) (418,791)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of Short-term investment 100,000 ---
Purchase of property and equipment (98,782) (12,715)
Purchases of patent (12,891) ---
Restricted cash 31,972 22,878
------------ -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 20,299 10,163
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal bank note payments (18,750) ---
------------ -----------
Proceeds from issuance of common stock and warrants 65,843 138,751
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 47,093 138,751
------------ -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (224,212) (269,877)
CASH AND CASH EQUIVALENTS - beginning of period 6,852,434 7,296,702
------------ -----------
CASH AND CASH EQUIVALENTS - end of period $ 6,628,222 $7,026,825
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,186 $ ---
Cash paid for income taxes 400 2,255
SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Preferred stock issuance in exchange for interest in joint venture $ 254,000 ---
Paydown of amounts Due to Joint Venture through the issuance
of Common Stock (317,144) ---
Reduction of Investment in Joint Venture 63,144 ---
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
---------------------
The information in this Form 10-Q includes the results of
operations of Elite Pharmaceuticals, Inc. ("the Company") and
its wholly-owned subsidiary, Elite Laboratories, Inc. ("Elite
Labs"), for the three months ended June 30, 2002 and 2001. All
significant intercompany accounts are eliminated upon
consolidation. The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
for interim financial statements. Accordingly, they do not
include all of the information and footnotes required by
accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included.
The accounting policies utilized in the preparation of this Form
10-Q are the same as those set forth in the Company's Form 10K
at March 31, 2002 and should be read in conjunction with the
disclosures presented therein.
The Company does not anticipate being profitable for fiscal year
2003, therefore a current provision for income tax was not
established for the three months ended June 30, 2002. Only the
minimum corporation tax liability required for state purposes is
reflected.
This quarterly report may contain forward-looking statements
which involve certain risks and uncertainties. Important factors
could arise which could cause the Company's operating results to
differ materially from those contained in any forward looking
statement.
NOTE 2 - EARNINGS PER SHARE
-------------------
Earnings per share are based on the weighted average number of
shares outstanding during each period presented. Common stock
equivalents have not been included as their effect would be
antidilutive.
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB)
issued Statements No. 141, Business Combinations, No. 142,
Goodwill and Other Intangible Assets, and No. 143, Accounting
for Asset Retirement Obligations. In August 2001, the FASB
issued Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. FASB Statement No. 141 eliminated
the pooling method of accounting for business combinations after
June 30, 2001. FASB Statement No. 142 eliminated the
amortization of goodwill and requires periodic testing for
impairment of goodwill and other intangibles, effective for the
Company beginning April 1, 2002. FASB Statement No. 143 applies
to legal obligations associated with the retirement of a
tangible long-lived asset, and is effective for the Company
beginning April 1, 2003. FASB No. 144 describes the accounting
for the impairment or disposal of long-lived assets, and is
effective for the Company beginning April 1, 2002. These
standards do not have a material effect on the financial
position or results of operations of the Company.
-6-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
NOTE 4 - 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 proceeds, net of offering costs of $60,000,
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 totaled
$197,860, including the $60,000 mentioned above which were paid
from bond proceeds. Offering costs included underwriter fees
equal to $90,000 (three percent (3%) of the par amount of the
bonds).
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 payments 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 for the maintenance of a $300,000 Debt Service Reserve.
All restricted amounts other than the $300,000 Debt Service
Reserve are expected to be expended within twelve months and are
therefore categorized as current assets.
NOTE 5 - JOINT VENTURE ACTIVITIES
------------------------
In October 2000, the Company and Elite Labs 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, is initially owned 80.1% by the
Company and 19.9% by Elan. ERL will fund its research through
capital contributions from its partners based on the partners'
ownership percentage. ERL will subcontract research and
development efforts to Elite Labs, Elan and others. It is
anticipated that Elite Labs will likely provide most of the
formulation and development work. Elite Labs has commenced work
for two products. As of June 30, 2002 and 2001, Elite Labs
charged $105,011 and $75,798, respectively, to this joint
venture which is reflected in product formulation revenues.
While the Company owns 80.1% of the outstanding common stock of
ERL, Elan and its subsidiaries have retained significant
minority investor rights that are considered "participating
rights" as defined in the Emerging Issues Task Force Consensus
No. 96-16. Accordingly, the Company will not consolidate the
financial statements of ERL, but will instead account for its
investment in ERL under the equity method of accounting.
For the three months ended June 30, 2002 and 2001, ERL
recognized net losses of $148,502 and $75,798, respectively. The
net losses include $105,011 and $75,798 due to Elite Labs for
services rendered to ERL for the three months ended June 30,
2002 and 2001, respectively. The Company recognized 80.1% of
ERL's losses, or $118,950 and $60,714, respectively, for the
three months ended June 30, 2002 and 2001. To date, ERL has not
recognized any revenue.
In December 2000, the joint venture had its first organizational
meeting and approved one product for development. In March 2001,
the management committee of ERL met to finalize its budget and
business plan and to complete a preliminary formulation of the
drug product. As of June 30, 2002, ERL completed in-vivo (pilot
clinical trial) on the first product and began formulation and
development of two additional products.
As of June 30, 2002 and 2001, the Company owed ERL $237,559 and
$435,754, respectively, representing its 80.1% of unfunded
contributions to ERL to cover ERL's expenses through June 30,
2002 and 2001.
-7-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
NOTE 6 - SALE OF STATE TAX LOSSES
------------------------
In 2000 Elite Labs received approval for the sale of $4,872,267
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
receivable by Elite Labs was $368,343 of which $222,211 and
$146,132 was received in 2000 and in 2001, respectively.
During the fiscal year ended 2002, Elite Labs received approval
for the sale of an additional $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 receivable
by Elite Labs is $137,818, of which $71,741 was received. The
remaining balance of $66,077 will be received pending the
NJEDA's authorization. Such amounts are classified as non
current assets on the accompanying consolidated balance sheets.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
------------------------------
On August 1, 1998, Elite Labs entered into a consulting
agreement with a company for the purpose of providing
management, marketing and financial consulting services for an
unspecified term. Terms of the agreement provide for a
nonrefundable monthly fee of $2,000. This compensation will be
applied against amounts due pursuant to a business referral
agreement entered into on April 8, 1997.
Terms of the business referral agreement provide for payments by
Elite Labs based upon a formula, as defined, for an unspecified
term. On November 14, 2000, Elite Labs amended its referral
agreement to provide certain consulting services for the period
of November 1, 2000 through October 31, 2003. Elite Labs
previously advanced $20,000 under the April 8, 1997 agreement in
addition to a payment of $50,000 made during the year ended
March 31, 2001. The agreement calls for 25 monthly installments
of $3,200 beginning on December 1, 2001.
Consulting expense under this agreement amounted to $9,600 and
$0 for the three months ended June 30, 2002 and 2001,
respectively.
Referral Agreement
------------------
On January 29, 2002, the Company entered into a Referral
Agreement with an individual (Referring Party) whereby Elite
Labs will pay the Referring Party a fee based upon payments
received by Elite Labs from sales of products, development fees,
licensing fees and royalties generated as a direct result of the
Referring Party identifying customers for Elite Labs. These
amounts shall 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. Elite Labs
will pay Referring Party a referral fee each year equal to:
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
-8-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------
Collaborative Agreements
------------------------
On June 27, 2001, Elite Labs entered into two separate and
distinct development and license agreements with another
pharmaceutical company ("partner"). Elite Labs will develop two
drug compounds for the partner in exchange for certain payments
and royalties. Elite Labs also reserves the right to manufacture
the compounds. Elite Labs received $250,000 and $300,000,
respectively, on these two agreements. These amounts have been
earned as of March 31, 2002. Elite Labs is currently proceeding
with development and formulation for both products as specified
in the development agreements.
Contingency
-----------
Elite Labs is the plaintiff in a civil action brought in the
Superior Court of New Jersey on November 20, 2000 against three
parties to recover damages in an unspecified amount based on the
alleged failure of the defendants to properly perform and
complete certain pharmaceutical tests and studies for which
Elite Labs paid approximately $950,000.
The defendants have brought a counterclaim of approximately
$418,000 allegedly due for services rendered to Elite Labs by
the defendants. Elite Labs will vigorously contest the
counterclaim.
The action and counterclaim are proceeding in pretrial discovery
under a Case Management Order entered by the court. If such
action or counterclaim is in favor of the defendants, the
recovery, if any, would not have a material effect on the
Company's financial condition or results of operations. Legal
counsel is unable to predict the outcome of these actions.
Accordingly, no provision for liability, if any, has been
provided in the accompanying consolidated financial statements.
NOTE 8 - STOCKHOLDERS' EQUITY
---------------------
Private Placement Offering
--------------------------
In a private placement offering dated May 17, 1999, the Company
raised $4,462,500 from the sale of 12.75 units of its
securities; each unit consisting of 100,000 shares of common
stock of the Company and 50,000 warrants, each warrant entitling
the holder to purchase one share of common stock at an exercise
price of $5.00 per share during the five year period commencing
with the date of closing of the private placement memorandum
(June 16,1999). The price per unit was $350,000. The Company
issued 1,275,000 shares of common stock and 637,500 warrants to
purchase common stock, at an exercise price of $5.00 per share.
The Company raised net proceeds of $4,452,500 from the private
placement after legal fees of $10,000
Joint Venture Subscription Offering
-----------------------------------
On September 21, 2000, 409,165 shares of the Company's common
stock and 12,015 shares of a newly created Elite Labs Series A
convertible exchangeable preferred stock ("Series A Preferred
Stock") were issued to Elan International Services, Ltd. ("EIS")
for consideration of $5,000,000 and $12,015,000, respectively,
during the month of October. Proceeds from the sale of the
Series A Preferred Stock were used to fund Elite Labs 80.1%
share of Elite Research, Ltd. ("ERL"), a joint venture with EIS.
-9-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
NOTE 8 - STOCKHOLDERS' EQUITY (Continued)
----------------------------------
Joint Venture Subscription Offering (Continued)
-----------------------------------------------
The Series A Preferred Stock accrues a dividend of 7% per annum,
compounded annually and payable in shares of Series A Preferred
Stock. Dividends shall be accrued and compounded annually
beginning on October 16, 2001. The Series A Preferred Stock is
convertible at anytime after two years, at EIS's option, into
the Company's common stock at a price of $18.00 per share and
has a term of six years. At the end of the sixth year, at the
option of the Company, the Series A Preferred Stock shall either
be redeemed in cash or in shares of the Company's common stock
at a fair market value equal to the aggregate outstanding Series
A liquidation preference and accrued dividends. As of June 30,
2002, Elite Labs has accrued dividends on the Series A Preferred
Stock, totaling $853,148.
The Series A Preferred Stock is exchangeable at the option of
EIS at any time during the term of the agreement for that amount
of the preferred shares of ERL which will allow EIS to own a
total of 50% of the issued and outstanding common and preferred
shares of ERL.
For a period of one year after the issuance of the above
securities, EIS shall have the right to require registration
under the Securities Act of all or part of these securities. All
registration expenses will be borne by EIS. EIS also has the
right to piggyback registration if at any time the Company shall
propose to register shares of common stock under the Securities
Act.
On October 17, 2000, the Company also authorized 7,250,000
shares of newly created Elite Labs Series B Preferred Stock of
which 4,806,000 has been designated for issuance to EIS for a
total consideration of $4,806,000. These shares can be issued
upon demand by Elite Labs in increments of $100,000 and shall be
used to fund Elite Labs 80.10% portion of the future capital
contributions to ERL and for subsequent funding of the research
and development activities for ERL.
Series B Preferred Stock shall be entitled to receive a
mandatory dividend equal to 7% per year of the original issue
price. Such dividend shall be accrued and compounded on each
succeeding twelve month anniversary of the first issuance and is
payable solely by the issuance of additional Series B Preferred
Stock, at a price per share equal to the original issue price
and not in cash. Dividends shall be compounded commencing one
year after issuance. Additionally, Class B Preferred Stock shall
have a senior liquidation preference of $1 per share (original
issue price) plus any accrued and unpaid dividends. As of June
30, 2002, Elite Labs has accrued no dividends on the Series B
Preferred Stock.
Additionally, Series B Stock shall be exchangeable, at the
option of EIS, at any time after two years from the date of
issuance, into shares of the Company's common stock using an
exchange price of $14.84 per share and has a term of six years
from the date of first issuance.
At the end of the sixth year, at the option of the Company,
Series B Stock can be redeemed in cash or by the issuance of
shares of the Company's common stock at a fair market value
equal to the Series B liquidation preference and accrued
dividends.
In addition to the offering above, on October 17, 2000 the
Company issued EIS 100,000 warrants to purchase common stock of
Elite Pharmaceuticals at the exercise price of $18 per share.
The warrants are exercisable at any time on or before October
17, 2005.
During the period ended June 30, 2002, Elite Labs made a capital
contribution to ERL in the amount of $254,000. This contribution
was financed by the proceeds from the issuance to EIS of 254,000
share of Series B Preferred Stock of Elite Labs. This
contribution was in addition to a capital contribution in the
amount of $200,000 made by Elite Labs to ERL in fiscal year
ended March 31, 2002.
-10-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
NOTE 9 - SUBSEQUENT EVENTS
-----------------
At a special Board of Directors meeting held on June 27, 2002, it
was resolved that the Company purchase up to 100,000 shares of
its common stock in the open market no later than December 31,
2002. As of August 1, 2002, the Company has purchased 23,700
shares for total consideration of $94,814.
The consulting agreement originally entered into on August 1,
1997 and previously extended through June 30, 2002 has expired.
The Board of Directors of the Registrant met on July 18, 2002,
to consider a request by certain holders of Class A Warrants of
the Registrant (traded on the OTC:BB under ticker symbol ELIPZ)
("the Warrants") that the exercise period of the Warrants be
extended. The Warrants will expire on November 30, 2002. The
Board of Directors determined that an extension of the exercise
period of the Warrants was not in the best interests of the
Registrant.
-11-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED JUNE 30, 2002 COMPARED TO
THE THREE MONTH PERIOD ENDED JUNE 30, 2001
Introduction
The Company has been developing over fifteen oral controlled release
pharmaceutical products which are at the varying stages of the development
process and testing.
Elite Labs has also conducted several research and development projects
on behalf of several large pharmaceutical companies. These activities have
generated only limited revenue for Elite Labs to date.
The Company has established a manufacturing facility in Northvale, N.J.
which is both Federal Drug Administration ("FDA") and Drug Enforcement Agency
("DEA") registered. This facility will allow the Company to make batches in
sizes sufficient to file for FDA approval.
In October 2000, Elite Labs 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, is initially owned 80.1% by the Company and 19.9% by Elan.
ERL will fund its research through capital contributions from its partners based
on the partners' ownership percentage. ERL will subcontract research and
development efforts to Elite Labs, Elan and others. The in-vivo (pilot
bioavailability) has been completed on the first product formulated by Elite
Labs. Elite Labs has begun to develop formulation for the two additional
products.
In September 2000, Elite Labs received approval of its application to
sell $4,872,267 in New Jersey Net Operating Tax Losses under the New Jersey
Economic Development Agency's Technology Business Tax Certificate Program. Elite
Labs received $368,343 of proceeds from this sale.
In November 2001, Elite Labs received approval of its application to
sell an additional $1,822,929 in New Jersey Net Operating Tax Losses under the
New Jersey Economic Development Agency's Technology Business Tax Certificate
Program. Elite Labs expects to receive $137,818 of which $71,741 was received
during the quarter ended December 31, 2001.
In June 2001, Elite Labs entered into two separate and distinct
development and license agreements with another U.S. pharmaceutical company to
develop two products in exchange for development fees, certain payments,
royalties and manufacturing rights. Elite Labs has undertaken formulation
development for these two products and has earned the development fees paid to
date.
The Company plans to focus its efforts on the following areas: (i) to
receive FDA approval for one or fifteen of the oral controlled release
pharmaceutical products already developed, either directly or through other
companies; (ii) to commercially exploit these drugs either by licensure and the
collection of royalties, or through the manufacturing of tablets and capsules
using the formulations developed by the Company, and (iii) to continue the
development of new products and the expansion of its licensing agreements with
other large multinational pharmaceutical companies including contract research
and development projects, joint ventures and other collaborations. The Company
has been issued three patents to date and has filed for two more patents. One of
the patents has been assigned to Celgene who has now licensed it to Novartis.
-12-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED JUNE 30, 2002 COMPARED TO
THE THREE MONTH PERIOD ENDED JUNE 30, 2001
(CONTINUED)
Critical Accounting Policies and Estimates
Management's discussion addresses the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgment, including those
related to 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. The Company's 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 contingences. It should be noted that actual results may differ
from these estimates under different assumptions or conditions.
Results of Consolidated Operations
Period Ended June 30, 2002 vs. Period Ended June 30, 2001
The Company's revenues for the period ended June 30, 2002 were
$105,011, an increase of $29,213 over the comparable period of the prior year.
For the periods ended June 30, 2002 and 2001, revenues consisted of product
formulation fees of $105,011 and $75,798, respectively, earned in conjunction
with the Company's joint venture in ERL.
General and administrative expenses for the period ended June 30, 2002
were $223,560, an increase of $93,287, or approximately 72% from the comparable
period of the prior year. The increase in general and administrative expenses
was substantially due to increases in legal and consulting fees.
Research and development costs for the period ended June 30, 2002, were
$433,260, an increase of $122,637 or approximately 39% from the comparable
period of the prior year. Research and development costs have increased
primarily from the result of increased research and development salaries,
laboratory supplies and raw materials used in the manufacturing and testing
processes.
The Company's net loss for period ended June 30, 2002 was $766,976 as
compared to $446,982 for the comparable period of the prior year. The increase
in the net loss was primarily due to the increase in research and development
and administrative expenses, offset by smaller increases in revenues.
-13-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED JUNE 30, 2002 COMPARED TO
THE THREE MONTH PERIOD ENDED JUNE 30, 2001
(CONTINUED)
Material Changes in Financial Condition
The Company's working capital (total current assets less total current
liabilities), which was $7,054,961 as of March 31, 2002, decreased to $6,618,759
as of June 30, 2002. The decrease in working capital is primarily due to the
Company's net loss from operations partially offset by the receipt of $65,843
from the issuance of common stock and warrants.
The Company experienced negative cash flow from operations of $291,604
for the period ended June 30, 2002 primarily due to the Company's net loss from
operations of $766,976.
Forward Looking Statements
This report contains forward-looking statements that describe the
Company's business prospects. These statements involve risks and uncertainties
including, but not limited to, rapid technology changes, regulatory uncertainty,
level of demand for the Company's products and services, product acceptance,
industry wide competitive factors, and political, economic or other conditions.
Furthermore, market trends are subject to changes which could adversely affect
future results. Reference should be made to the Company's Prospectus for its
initial public offering declared effective on August 14, 1998, and the
supplement to the Prospectus dated August 19, 1998, for additional discussion
concerning such risk factors.
-14-
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No Report Required
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No Report Required
ITEM 2. CHANGES IN SECURITIES
No Report Required
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No Report Required
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No Report Required
ITEM 5. OTHER INFORMATION
No Report Required
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
No Exhibits Required
(b) Reports on Form 8-K. No report on Form 8-K has been
filed during quarter ending June 30, 2002. A report was
filed on Form 8-K on July 18, 2002 to announce that the
Class A warrants expiring on November 30, 2002 will not
be extended.
-15-
CERTIFICATION AND SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
We, the undersigned chief executive officer and chief financial officer of the
registrant, hereby certify that this report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that
information contained in this periodic report fairly presents, in all material
respects, the financial condition and results of operations of the issuer.
ELITE PHARMACEUTICALS, INC.
Date: August 8, 2002 By: /s/Atul M. Mehta
---------------------------------------------------
Atul M. Mehta
President & Chief Executive Officer
(Principal Executive Officer)
Date: August 6, 2002 By: /s/Mark I. Gittelman
---------------------------------------------------
Mark I. Gittelman
Chief Financial Officer and Treasurer
(Principal Financial & Accounting Officer)
-16-