U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended to
Commission File Number: 333-45241
- --------------------------------------------------------------------------------
ELITE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3542636
- ------------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
165 Ludlow Avenue, Northvale, New Jersey 07647
- ----------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(201)750-2646
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the exchange Act).
Yes [ ] No [x]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the common stock, $.01 par value,
as of January 31, 2003: 10,544,426.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2002 (unaudited) and
March 31, 2002 1 - 2
Consolidated Statements of Operations for the three and nine months
ended December 31, 2002 and December 31, 2001 (unaudited) 3
Consolidated Statements of Changes in Stockholders' Equity for the
nine months ended December 31, 2002 and December 31, 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended December 31, 2002 and December 31, 2001 (unaudited) 5
Notes to Form 10-Q 6 - 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14 - 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II OTHER INFORMATION 20 - 22
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
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 23 - 27
EXHIBITS
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, March 31,
2002 2002
------------------ -----------------
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $ 4,498,510 $ 6,852,434
Short-term investments --- 100,000
Accounts receivable --- 39,988
Restricted cash 115,848 213,664
Due from Joint Venture --- 525,259
Prepaid expenses and other current assets 51,323 106,082
------------------ -----------------
Total current assets 4,665,681 7,837,427
------------------ -----------------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 4,338,826 3,865,771
------------------ -----------------
INTANGIBLE ASSETS - net of accumulated amortization 75,432 54,669
------------------ -----------------
OTHER ASSETS:
Deposit on Equipment --- 123,396
Investment in Joint Venture --- 63,381
Amount receivable from sale of state tax losses --- 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 $43,751 and $34,076, respectively 154,102 163,777
------------------ -----------------
Total other assets 704,102 966,631
------------------ -----------------
Total assets $ 9,784,041 $ 12,724,498
================== =================
The accompanying notes are an integral part of
the consolidated financial statements.
-1-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31,
2002 2002
------------------ -----------------
(Unaudited) (Audited)
CURRENT LIABILITIES:
Current portion - Note payable $ 75,000 $ 75,000
Current portion of EDA bonds 140,000 130,000
Accounts payable and accrued expenses 112,093 141,712
Due to Joint Venture --- 435,754
------------------ -----------------
Total current liabilities 327,093 782,466
------------------ -----------------
LONG TERM LIABILITIES:
Dividends payable - Preferred Series A --- 853,148
Note payable - net of current portion 243,750 300,000
EDA bonds - net of current portion 2,495,000 2,635,000
------------------ -----------------
Total long-term liabilities 2,738,750 3,788,148
------------------ -----------------
Total liabilities 3,065,843 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 at March 31, 2002 --- 12,015,000
Preferred stock - $1.00 par value; 7,250,000 shares authorized;
Series B convertible preferred stock; 4,806,000 shares
designated, 200,000 shares issued and outstanding
at March 31, 2002 --- 200,000
Common stock - $.01 par value;
Authorized - 25,000,000 shares
Issued and outstanding - 10,544,426 and 9,710,840 shares,
Respectively 105,444 97,108
Additional paid-in capital 34,298,282 19,469,464
Accumulated deficit (27,415,673) (23,627,688)
------------------ -----------------
6,988,053 8,153,884
Cost of 82,600 shares of common stock held by the Company at
December 31, 2002 (269,855) ---
------------------ -----------------
Total stockholders' equity 6,718,198 8,153,884
------------------ -----------------
Total liabilities and stockholder's equity $ 9,784,041 $ 12,724,498
================== =================
The accompanying notes are an integral part of the consolidated
financial statements.
-2-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------- -------------
2002 2001 2002 2001
-------------- ------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES:
Research and Development $ 150,000 $ 228,000 $ 365,000 $ 478,000
Product Formulation Revenues --- 245,597 187,810 455,108
Testing Fees 2,500 --- 2,500 3,450
-------------- ------------- -------------- --------------
Total revenues 152,500 473,597 555,310 936,558
-------------- ------------- -------------- --------------
OPERATING EXPENSES:
Research and development 567,864 431,239 1,461,345 1,061,305
General and administrative 450,024 214,456 1,297,046 519,752
Depreciation and amortization 78,210 70,848 234,630 212,544
-------------- ------------- -------------- --------------
1,096,098 716,543 2,993,021 1,793,601
-------------- ------------- -------------- --------------
LOSS FROM OPERATIONS (943,598) (242,946) (2,437,711) (857,043)
-------------- ------------- -------------- --------------
OTHER INCOME (EXPENSES):
Interest income 18,616 39,867 81,334 215,902
Interest expense (55,896) (53,572) (172,281) (164,591)
Equity in loss of Joint Venture --- (221,202) (186,379) (389,021)
Charge relating to exchange of warrants (242,338) --- (242,338) ---
-------------- ------------- -------------- --------------
(279,618) (234,907) (519,664) (337,710)
-------------- ------------- -------------- --------------
LOSS BEFORE (BENEFIT FROM) INCOME TAXES (1,223,216) (477,853) (2,957,375) (1,194,753)
-------------- ------------- -------------- --------------
(BENEFIT FROM) INCOME TAXES (71,614) (137,643) (71,214) (135,388)
-------------- ------------- -------------- --------------
NET LOSS $ (1,151,602) $ (340,210) $ (2,886,161) $ (1,059,365)
============== ============= ============== ==============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.11) $ (.03) $ (.29) $ (.11)
============== ============= ============== ==============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 10,286,917 9,631,634 9,914,722 9,528,362
============== ============= ============== ==============
The accompanying notes are an integral part of the consolidated
financial statements.
-3-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
ADDITIONAL
SERIES A SERIES B ----------
PREFERRED STOCK PREFERRED STOCK COMMON STOCK PAID-IN TREASURY ACCUMULATED STOCKHOLDERS'
--------------- --------------- ------------- ------- -------- ----------- -------------
SHARES AMOUNT EQUITY SHARES SHARES AMOUNT CAPITAL STOCK 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 - - - - 224,429 2,244 1,116,744 - - 1,118,988
Issuance of shares
and warrants
through exercise
of placement
agent warrants - - - - 15,522 155 57,524 - - 57,679
Issuance of shares
and warrants
through exercise
of options - - - - 20,000 200 37,939 - - 38,139
Issuance of Series
B convertible
exchangeable
Preferred Stock - - 200,000 200,000 - - - - - 200,000
Dividends declared
- Preferred A - - - - - - - - (853,148) (853,148)
Net loss for nine
months ended
December 30,2001 - - - - - - - - (1,059,365) (1,059,365)
------ ------------ --------- --------- ---------- -------- ----------- ---------- ------------- ----------------
BALANCE AT
DECEMBER 30,2001 12,015 $12,015,000 200,000 $200,000 9,636,370 $ 96,363 19,283,709 $ - (22,912,526) $ 8,682,546
====== ============ ========= ========= ========== ======== =========== ========== ============= ================
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 - - 559,000 559,000 - - - - - 559,000
Dividends-declared
-Preferred B - - - - - - - - (14,000) (14,000)
Dividends-declared
-Preferred A - - - - - - - - (887,826) (887,826)
Dividends-issued
-Preferred A
and B 1,741 1,740,973 14,000 14,000 - - - - - 1,754,973
Conversion of
Series B and A
Convertible
exchangeable
Preferred stock
into common
stock (13,756)(13,755,973) (773,000) (773,000) 816,310 8,163 14,520,810 - - -
Purchase of
Treasury Stock - - - - - - - (269,855) - (269,855)
Charge relating to
exchange of
warrants - - - - - - 242,338 - - 242,338
Net loss for nine
months ended
December 31,2002 - - - - - - - - (2,886,161) (2,886,161)
------ ------------ --------- --------- ---------- -------- ----------- ---------- ------------- ----------------
BALANCE AT
DECEMBER 31,2002 --- $ - - $ - 10,544,426 $105,444 $34,298,282 $(269,855) $(27,415,673) $ 6,718,198
====== ============ ========= ========= ========== ======== =========== ========== ============= ================
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
DECEMBER 30,
------------
2002 2001
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,886,161) $ (1,059,365)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and Amortization 234,630 212,544
Equity in loss of Joint Venture 186,379 389,021
Deferred income --- 100,000
Charge relating to exchange of warrants 242,338 ---
Changes in assets and liabilities:
Contract revenue receivable 39,988 13,314
Prepaid expenses and other current assets 54,759 31,392
Amount receivable from Joint Venture 525,259 (298,378)
Accounts payable, accrued expenses and other current liabilities (29,619) (116,849)
Amount payable to Joint Venture --- (95)
----------------- -----------------
NET CASH (USED IN) OPERATING ACTIVITIES (1,632,427) (728,416)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of short-term investment 100,000 ---
Purchase of property and equipment (570,810) (69,763)
Purchase of patent (24,318) ---
Receivable from sale of New Jersey Tax Losses 66,077 80,055
Restricted cash 97,816 70,417
----------------- -----------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (331,235) 80,709
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants 65,843 1,214,805
Principal bank note payments (56,250) ---
Principal repayments of NJEDA Bonds (130,000) (120,000)
Purchase of Treasury Stock (269,855) ---
----------------- -----------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (390,262) 1,094,805
----------------- -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,353,924) 447,098
CASH AND CASH EQUIVALENTS - beginning of period 6,852,434 7,296,702
----------------- -----------------
CASH AND CASH EQUIVALENTS - end of period $ 4,498,510 $ 7,743,800
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 172,881 $ 111,794
Cash paid (received) for income taxes (71,214) 2,255
SUPPLEMENTAL SCHEDULE NON-CASH TRANSACTIONS
Issuance of Preferred Stock Series B (including stock dividend payable of
$14,000 and subscription receivable of $67,000) $ 573,000 $ 200,000
Conversion of Preferred Stock Series B to Common Stock (521) ---
Conversion of Preferred Stock to Additional Paid In Capital (14,520,810) ---
Reduction of Amounts Due to Joint Venture (622,133) (125,447)
Reduction in (Addition to) Investment in Joint Venture 63,381 (74,553)
Dividends accrued on Preferred Stock - Series A 899,923 853,148
Conversion of Series A to Common Stock (7,642) ---
Transfer of Deposit on Equipment 123,396 ---
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 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 and nine months ended December 31, 2002
and 2001. 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%. Proforma
results of operations are presented as part of Note 4. As of
December 31, 2002, the balance sheets of all entities are
consolidated and all significant intercompany accounts are
eliminated upon consolidation. The accompanying unaudited
consolidated financial statements have been prepared pursuant to
rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted
in the United States of America for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation of financial positions, results and
operations and cash flows for the periods presented have been
included. The financial results for the interim periods are not
necessarily indicative of the results to be expected for the
full year or future interim periods.
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.
The accounting policies utilized in the preparation of this Form
10-Q are the same as those set forth in the Company's annual
report on Form 10K for the fiscal year ended 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 nine months ended December 31, 2002. Only
the minimum corporation tax liability required for state
purposes is reflected.
NOTE 2 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In December 2002, the Financial Accounting Standards Board
issued Statement No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, (SFAS No. 148) which
amends SFAS No. 123, Accounting for Stock-Based Compensation to
provide alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based
employee compensation. This Statement does not permit the use of
the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years
beginning after December 15, 2003. The Company has elected to
apply the recognition provisions of SFAS No. 148 prospectively
to all employee awards granted, modified or settled after April
1, 2002. The effects of applying the prospective method of
transition allowed under SFAS No. 148 has not yet been
determined.
-6-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
NOTE 3 - 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 restricted accounts include accounts 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 4 - 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, 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 Elite Labs, Elan and others. It was
anticipated that Elite Labs would provide most of the
formulation and development work. Elite Labs has commenced work
for three products. For the nine months ended December 31, 2002
and 2001, Elite Labs charged $187,810 and $455,108,
respectively, to ERL which is reflected in product formulation
revenues. For the three months ending December 31, 2002 and
2001, Elite Labs charged $0 and $245,597, respectively, to ERL
which is reflected in product formulation fees.
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 nine months ended December 31, 2002 and 2001, ERL
recognized net losses of $232,742 and $485,669, respectively.
The net losses included $187,810 and $455,108 due to Elite Labs
for services rendered to ERL for the nine months ended December
31, 2002 and 2001, respectively. The Company recognized 80.1% of
ERL's losses, or $186,379 and $389,021, respectively, for the
nine months ended December 31, 2002 and 2001. For the three
months ended December 31, 2002 and 2001, Elite's share of ERL's
losses amounted to $60 and $221,202, respectively. To date, ERL
has not recognized any revenue.
In December 2000, ERL approved one product for development at
its first organizational meeting. 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 December 31, 2002, ERL completed in-vivo (pilot clinical
trial) on the first product and began formulation and
development of two additional products.
-7-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
NOTE 4 - JOINT VENTURE ACTIVITIES (Continued)
------------------------
As of December 31, 2001, the Company owed ERL $328,306,
representing its 80.1% of unfunded contributions to ERL to cover
ERL's expenses through December 31, 2001.
On September 30, 2002, the Company consummated a termination
agreement (the "Termination Agreement") with Elan to acquire all
of Elan's interest in ERL. As a result of the Termination
Agreement, the joint venture terminated and the Company now owns
100 percent of ERL's capital stock.
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. In the future,
the Company will be solely responsible to fund ERL's product
development, which it will do from internal resources or through
loans or investment by third parties.
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 will not have to pay Elan
royalties on revenues that may be realized from these 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 6, EIS converted 773,000 shares
of Elite Labs 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 6, the acquisition resulted in the
conversion of 13,756 shares of Elite Labs Series A Preferred
Stock into 764,221 shares of Elite Pharmaceuticals common stock
in accordance with their terms. The Company accounted for this
conversion by increasing common stock in the amount of $7,642
and 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 it had obtained in
connection with the joint venture and transferred other such
securities to a third-party. See Note 6.
The following are unaudited pro-forma consolidated results of
operations for the three and nine months ended December 31, 2002
and 2001, assuming the acquisition was completed on April 1,
2001.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue $ 152,500 $ 228,000 $ 367,500 $ 481,450
Net (loss) available to common
Shareholders $(1,151,602) $(395,166) $(2,932,524) $(1,156,013)
Net (loss) available to common
shareholders per share -
basic and diluted $ (.11) $ (.04) $ (.29) $ (.12)
-8-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
NOTE 4 - JOINT VENTURE ACTIVITIES (Continued)
------------------------
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.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
-----------------------------
As described in the Company's annual report on Form 10-K, 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, among other
things, for payments by Elite Labs based upon a formula, as
defined, for an unspecified term. On November 14, 2000, Elite
Labs amended the 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.
For the nine months ended December 31, 2002 and 2001, consulting
expense under this agreement amounted to $28,800 and $3,200,
respectively, and for the three months ended December 31, 2002
and 2001, consulting expense under this agreement was $9,600 and
$3,200, respectively.
Referral Agreement
As described in the Company's annual report on Form 10-K, 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
-9-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------
Collaborative Agreements
------------------------
As described in the Company's annual report on Form 10-K, 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. During the nine months ended December
31, 2002 Elite Labs earned revenues of $85,000 for additional
development and formulation for both products.
On September 13, 2002, Elite Labs, entered into a manufacturing
agreement with Ethypharm S.A. ("Ethypharm"). Under the terms of
this agreement, Elite Labs has initiated the manufacturing of a
new prescription drug product for Ethypharm. Elite Labs 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. Elite Labs is
entitled to receive additional fees in advance for the final
phase of the manufacturing. In addition, upon FDA approval and
if requested by Ethypharm, Elite Labs will manufacture
commercial batches of the product on terms to be agreed upon.
As of December 31, 2002, Elite Labs billed and earned revenues
of $280,000 under this agreement, in accordance with the
substantive milestone method of revenue recognition. Under this
method, the milestone payments are considered to be payments
received for the accomplishment of a discrete, substantive
earnings event. Accordingly, the non-refundable milestone
payments are recognized in full when the milestone is achieved.
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 perform properly and
complete certain pharmaceutical tests and studies for which
Elite Labs paid approximately $950,000.
The defendants 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, is not expected to 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.
-10-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY
---------------------
Treasury Stock Transactions
---------------------------
At a special meeting of the Company's Board of Directors held on
June 27, 2002, the Board authorized the Company to purchase up
to 100,000 shares of its common stock in the open market no
later than December 31, 2002. As of December 31, 2002, the
Company had purchased 82,600 shares of common stock for total
consideration of $269,855.
Joint Venture Subscription Offering
-----------------------------------
On October 16, 2000, Elite entered into an agreement (the "Joint
Venture Agreement") with Elan International Services, Ltd.
("EIS") and Elan Corporation, plc. (together with EIS, "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 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 EIS
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 Elite Lab's 80.1% share of ERL.
ERL was initially capitalized with $15,000,000 which included
the issuance of 6,000 Voting Common shares, of par value $1.00
per share and 6,000 Non-Voting convertible preferred shares, of
par value $1.00 per share. All of the voting shares were held by
Elite Labs, with the Non-Voting convertible preferred shares
held by both Elite Labs and Elan, being split 3,612 shares and
2,388 shares, respectively.
The Preferred shares were convertible at the option of the
holders on a one-for-one basis into common shares of ERL at any
time after two years from the date of issuance of the preferred
stock. The Preferred shares were Non-Voting, did not bear a
dividend and had a liquidation preference equal to their
original issue price.
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 December 31, 2002, Elite Labs had
accrued dividends of $1,740,973 on the Series A Preferred Stock.
On October 17, 2000, the Company authorized 7,250,000 shares of
newly created Elite Labs Series B Preferred Stock of which
4,806,000 was designated for issuance to EIS for a total
consideration of $4,806,000. These shares were issuable from
time to time upon demand by Elite Labs to fund Elite Lab'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 a dividend 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 December 31, 2002, Elite Labs had
accrued dividends of $14,000 on the Series B Preferred Stock.
During the nine months ended December 31, 2002, Elite Labs made
capital contributions to ERL in the amount of $573,000. These
contributions were financed by the proceeds from the issuance to
EIS of 573,000 shares of Series B Preferred Stock of Elite Labs.
These contributions were 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.
In additional to the issuance of shares as described above, on
October 17, 2000 the Company issued EIS 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.
-11-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY
--------------------
Joint Venture Subscription Offering (Continued)
-----------------------------------
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 Elite Labs 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. Elan retained 409,165 shares of Elite common
stock and 773,000 shares of Elite Labs Series B Preferred Stock
the latter of which was converted into 52,089 shares of Elite
common stock. Both of the Series A and Series B preferred stock
were converted to Elite Common stock in accordance with their
terms. The warrants remain unexercised at December 31, 2002.
For the period of one year after the issuance of the above
common stock, EIS 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 will be borne by the
requesting party. EIS 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 and Options
--------------------
At December 31, 2002, Elite had outstanding approximately
2,266,850 options with exercise prices ranging from $2.00 to
$10.00. At December 31, 2002, Elite had outstanding
approximately 2,561,103 warrants with exercise prices ranging
from $2.00 to $18.00.
During the quarter ended December 31, 2002, the Company issued
210,000 options to purchase common stock to an employee and to
members of the Board of the Directors. The options have exercise
prices of $5.00 per share and vest over three years. The options
expire 10 years from the date of their issuance.
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") to which
holders of the Company's Class A Warrants which expired on
November 30, 2002 (the "Old Warrants") will have the opportunity
to exchange those warrants for new warrants (The "New Warrants")
upon payment to the Company of $.10 per share of common stock
issuable upon the exercise of the old warrants.
The New Warrants will be exercisable for the same number of
shares of common stock as the Old Warrants, have an exercise
price of $5.00 per share, will expire on November 30, 2005 and
will not be transferable except pursuant to operation of law.
The Exchange Offer must be registered under applicable federal
and state securities laws and will only be made pursuant to an
effective registration statement meeting applicable legal
requirements. A registration statement was filed with the
Securities and Exchange Commission on December 6, 2002, with
respect to the Exchange Offer, but has not yet been declared
effective by the SEC.
During the quarter ending December 31, 2002, the Company has
taken a charge of $242,338 relating to the exchange offer, which
represents the fair value of the new warrants, net of
anticipated proceeds, assuming all Class A Warrants will be
exchanged.
-12-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
NOTE 7 - SUBSEQUENT EVENTS
------------------
Treasury Stock Transactions
---------------------------
As of January 31, 2003, the Company had purchased an additional
17,400 shares of its common stock pursuant to its stock
re-purchase program for total consideration of $36,986.
Change of Stock Designations
----------------------------
On January 28, 2003, the Board of Directors and stockholders of
Elite Labs authorized an amendment to the certificate of
incorporation for Elite Labs which changed the stock
designations eliminating the authorization of Series A and
Series B preferred stock and Class B common stock. The Board
further authorized a reverse split of 20,000 to 1 reducing the
number of shares of Class A voting common stock having a par
value of $.01 from 20,000,000 to 1,000.
Accordingly, this amendment's effect is to eliminate Class B
common stock and Series A preferred stock and Series B preferred
stock previously authorized by Elite Labs. No shares of any such
class of stock are currently outstanding.
This amendment also reduces the number of Class A common voting
shares having a par value of $.01 per share issued and
outstanding from Elite Labs to the Company from 20,000,000 to
200 resulting from the reverse split.
-13-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED DECEMBER 31, 2002 COMPARED TO
THE NINE MONTH PERIOD ENDED DECEMBER 31, 2001
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements, the related Notes to Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2002 (the "10-K") and the
Unaudited Consolidated Financial Statements and related Notes to Consolidated
Financial Statements included in Item 1 of Part I of this Quarterly Report on
Form 10-Q.
The Company has included in this Quarterly Report certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 concerning the Company's business, operations and
financial condition. "Forward-looking statements" consist of all non-historical
information, and the analysis of historical information, including the
references in this Quarterly Report to future revenue growth, future expense
growth, future credit exposure, EBITDA, future profitability, anticipated cash
resources, anticipated capital expenditures, capital requirements, and the
Company's plans for future periods. In addition, the words "could", "expects",
"anticipates", "objective", "plan", "may affect", "may depend", "believes",
"estimates", "projects" and similar words and phrases are also intended to
identify such forward-looking statements.
Actual results could differ materially from those projected in the
Company's forward-looking statements due to numerous known and unknown risks and
uncertainties, including, among other things, unanticipated technological
difficulties, the volatile and competitive environment for drug delivery
products, changes in domestic and foreign economic, market and regulatory
conditions, the inherent uncertainty of financial estimates and projections, the
difficulties of integrating businesses which were previously operated as
stand-alone units, the creditworthiness of the Company's customers, the
uncertainties involved in certain legal proceedings, instabilities arising from
terrorist actions and responses thereto, and other considerations described as
"Risk Factors" in other filings by the Company's with the SEC including the Form
10-K. Such factors may also cause substantial volatility in the market price of
the Company's common stock. All such forward-looking statements are current only
as of the date on which such statements were made. The Company does not
undertake any obligation to publicly update any forward-looking statement to
reflect events or circumstances after the date on which any such statement is
made or to reflect the occurrence of unanticipated events.
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.
-14-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED DECEMBER 31, 2002 COMPARED TO
THE NINE MONTH PERIOD ENDED DECEMBER 30, 2001
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 contingencies. It should be noted that actual results may differ
from these estimates under different assumptions or conditions.
During the third quarter of fiscal year 2003, the Company elected to
prospectively recognize the fair value of stock options granted to employees and
members of the Board of Directors, effective as of the beginning of the fiscal
year. The prospective method allowed by the Financial Accounting Standards Board
does not materially effect the Company's results of operations for the
three-month and nine-month periods ended December 31, 2002. The fair value of
stock options granted to employees and member of the Board of Directors at the
end of the current quarter is expected to significantly effect the results of
operations of future periods, as these awards vest.
Overview
The Company is involved in the development of drug delivery products.
It is engaged in developing over fifteen oral controlled release pharmaceutical
products which are at varying stages of the development and testing process. In
addition, Elite Labs has also conducted several research and development
projects on behalf of several large pharmaceutical companies although these
activities have generated only limited revenue for Elite Labs to date.
The Company operates out of its manufacturing facility in Northvale,
N.J. which is both Federal Drug Administration ("FDA") and Drug Enforcement
Agency ("DEA") registered and will allow the Company to manufacture
pharmaceutical products in 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, was initially owned 80.1% by the Company and 19.9% by Elan.
ERL funded its research through capital contributions from its partners based on
the partners' respective ownership percentage. ERL subcontracted research and
development efforts to Elite Labs, Elan and others. The in-vivo (pilot
bioavailability) was completed on the first product formulated by Elite Labs.
Elite Labs had begun to develop formulation for the two additional products.
On September 30, 2002, the Company consummated a termination agreement
with Elan to acquire all of Elan's interest in ERL. As a result of the
agreement, the joint venture terminated and the Company now owns 100 percent of
ERL. Accordingly, ERL became a wholly owned subsidiary of the Company as of
September 30, 2002.
Under the termination agreement, the Company acquired all proprietary,
development and commercial rights for the worldwide markets for the products
developed by ERL. In exchange for this assignment, ERL has agreed to pay Elan a
royalty on certain revenues that may be realized from the once-a-day Oxycodone
product only that has been developed by ERL. In the future, the Company will be
solely responsible to fund product development, which it will do from internal
resources or through loans or investment by third parties.
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 will not
have to pay Elan royalties on revenues that may be realized from these products.
-15-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED DECEMBER 31, 2002 COMPARED TO
THE NINE MONTH PERIOD ENDED DECEMBER 31, 2001
(CONTINUED)
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. Elite Labs received the remaining
balance of $66,077 during the quarter ended December 31, 2002.
In November 2002, Elite Labs received approval of its application to
sell additional $915,430 in New Jersey Net Operation Tax Losses Under the New
Jersey Economic Development Agency's Technology Business Tax Certificate
Program. Elite Labs received $71,674 during the quarter ended December 31, 2002.
In June 2001, the Company entered into two development contracts with a
U.S. pharmaceutical company pursuant to which it agreed to develop two products
in exchange for development fees, certain payments, royalties and manufacturing
rights. Also, in September 2002, the Company entered into a manufacturing
agreement with Ethypharm S.A. ("Ethypharm"). Under the terms of this agreement,
the Company has 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, upon FDA approval and if requested by Ethypharm, the Company will
manufacture commercial batches of the product on terms to be agreed upon. During
the three- and nine month periods ended December 31, 2002, the Company
recognized total revenues of $365,000, pursuant to these agreements. While the
Company believes that these arrangements will generate significant additional
revenues in future periods, payments under these arrangements are dependent on a
number of factors, including the successful development and commercialization of
new products, which are uncertain and over which the Company has little or no
control. Accordingly, stockholders are encouraged not to place undue reliance on
these arrangements in evaluating the Company's business and prospects.
The Company plans to focus its efforts on the following areas: (i) to
receive FDA approval for one or more of its fifteen oral controlled release
pharmaceutical products already developed, either directly or through other
companies; (ii) to commercially exploit these products either by licensure and
the collection of royalties, or through the manufacture 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 was assigned to Celgene which has now licensed it to Novartis.
Results of Consolidated Operations
Three Months Ended December 31, 2002 Compared to Three Months Ended
December 30, 2001
The Company's revenues for the three months ended December 31, 2002
were $152,500, a decrease of $321,097 over the comparable period of the prior
year. For the three months ended December 31, 2002 and 2001, revenues consisted
of product formulation fees of $0 and $245,597, respectively, earned in
conjunction with the Company's joint venture in ERL. Revenues also consisted of
research, development, and testing fees of $152,500 and $228,000, respectively,
earned in conjunction with its distinct development, license, and manufacturing
agreements. Elan's obligation to make payments to the Company or to ERL
terminated upon the termination of the joint venture. The absence of payments
from Elan will impact revenues for periods subsequent to September 30, 2002.
-16-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED DECEMBER 31, 2002 COMPARED TO
THE NINE MONTH PERIOD ENDED DECEMBER 31, 2001
(CONTINUED)
General and administrative expenses for the three months ended December
31, 2002 were $450,024, an increase of $235,568 or 110% 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 as well as
$145,785 in expenses resulting from a consent solicitation and a proxy
solicitation with regard to the election of the Company's directors.
Research and development costs for the three months ended December 31,
2002 were $567,864, an increase of $136,625 or approximately 32% from the
comparable period of the prior year. Research and development costs have
increased primarily from the result of increased research and development wages,
additional biostudies, laboratory supplies and raw materials used in the
manufacturing and testing processes. The Company expects its research and
development costs to increase in future periods as a result of the joint venture
termination as the Company will be solely responsible to fund product
development, which it will do from internal resources or through loans or
investment by third parties.
The Company's net loss for the three months ended December 31, 2002 was
$1,151,602 as compared to $340,210 for the comparable period of the prior year.
The increase in the net loss was primarily due to the increase in research and
development, administrative expenses associated with a consent solicitation and
a proxy solicitation with regard to the election of the Company's directors, and
the charge of $242,338 relating to the exchange of warrants.
Nine months Ended December 31, 2002 vs. Nine months Ended December 30, 2001
The Company's revenues for the nine months ended December 31, 2002 were
$555,310, a decrease of $381,248 over the comparable period of the prior year.
For the nine months ended December 31, 2002 and 2001, revenues consisted of
product formulation fees of $187,810 and $455,108, respectively, earned in
conjunction with the Company's joint venture in ERL. Revenues also consisted of
research and development, and testing fees of $367,500 and $481,450,
respectively, earned in conjunction with its distinct development, license and
manufacturing agreements. Elan's obligation to make payments to the Company or
to ERL terminated upon the termination of the joint venture. The absence of
payments from Elan will impact revenues for periods subsequent to September 30,
2002.
General and administrative expenses for the nine months ended December
31, 2002 were $1,297,046, an increase of $777,294, or approximately 150% 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 as well as $418,659 in expenses resulting from a consent
solicitation and a proxy solicitation with regard to the election of the
Company's directors.
Research and development costs for the nine months ended December 31,
2002, were $1,461,345, an increase of $400,040 or approximately 38% from the
comparable period of the prior year. Research and development costs have
increased primarily from the result of increased research and development wages,
additional biostudies, laboratory supplies and raw materials used in the
manufacturing and testing processes. The Company expects its research and
development costs to increase in future periods as a result of the joint venture
termination as the Company will be solely responsible to fund product
development, which it will do from internal resources or through loans or
investment by third parties.
The Company's net loss for the nine months ended December 31, 2002 was
$2,886,161 as compared to $1,059,365 for the comparable period of the prior
year. The increase in the net loss was primarily due to the increase in research
and development, administrative expenses associated with a consent solicitation
and a proxy solicitation with regard to the election of the Company's directors
and the charge of $242,338 relating to the exchange of warrants.
-17-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED DECEMBER 31, 2002 COMPARED TO
THE NINE MONTH PERIOD ENDED DECEMBER 31, 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 $4,338,588
as of December 31, 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 in connection with the exercise
of certain of the Company's Class A Warrants, and certain placement agent
warrants issued in connection with the Company's 1997 private placement.
The Company experienced negative cash flow from operations of
$1,632,427 for the nine months ended December 31, 2002, primarily due to the
Company's net loss from operations of $2,437,711.
Liquidity and Capital Resources
To date, the Company's operations have not generated sufficient cash
flow to satisfy the Company's capital needs. The Company has financed its
operations primarily through the private sale of its equity and debt securities.
The Company had working capital [current assets less current liabilities] of
$4.3 million at December 31, 2002 compared with $7.7 million at December 31,
2001. Cash and cash equivalents at December 31, 2002 were $4.5 million, a
decrease of $3.2 million from the $7.7 million reported at December 31, 2001.
Net cash used in operating activities was $1,632,000 during the nine
months ended December 31, 2002, compared to $728,000 for the nine months ended
December 30, 2001. Net cash used in operating activities during the nine months
ended December 31, 2002 resulted primarily from the Company's net loss of $2.9
million, offset in part by a reduction in accounts receivable, and certain
non-cash expenses. Net cash used in operating activities during the nine months
ended December 31, 2001 resulted primarily from a net loss of $1.1 million and
lower accounts payable, offset in part by certain non-cash expenses.
Investing activities utilized net cash of $331,000 during the nine
months ended December 31, 2002 and provided net cash of $81,000 during the nine
months ended December 31, 2001. Net cash used in investing activities during the
nine months ended December 31, 2002 resulted primarily from the acquisition of
property and equipment to support the Company's growth, offset in part by an
increase in restricted cash and the maturity of short-term investments. Net cash
provided by investing activities during the nine months ended December 31, 2001
resulted primarily from an increase in restricted cash, partially offset by the
acquisition of property and equipment.
Financing activities utilized net cash of $390,000 during the nine
months ended December 31, 2002 and provided net cash of $1.1 million during the
nine months ended December 31, 2001. Net cash used in financing activities
during the nine months ended December 31, 2002 resulted primarily from the
repurchase of treasury stock and the repayment of indebtedness, offset in part
by the sale of common stock and warrants. Net cash provided by financing
activities during the nine months ended December 31, 2001 resulted primarily
from the sale of common stock and warrants, offset in part by the repayment of
indebtedness.
The Company's capital expenditures aggregated $571,000 and $70,000 for
the nine-month periods ended December 31, 2002 and 2001, respectively. Such
expenditures consisted primarily of the acquisition of property and equipment
necessary to support the Company's existing operations and expected growth. The
Company anticipates that its capital expenditures will be approximately $650,000
for all of fiscal 2002, substantially all of which will relate to the
acquisition of property and equipment to support the Company's operations.
-18-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED DECEMBER 31, 2002 COMPARED TO
THE NINE MONTH PERIOD ENDED DECEMBER 31, 2001
(CONTINUED)
As described in Note 3 to the Company's consolidated financial
statements, the Company has outstanding $2,635,000 in aggregate amount of bonds.
The bonds bear interest at a rate of 7.75% per annum and are due on various
dates between 2005 and thereafter. The bonds are secured by a first lien on the
Company's facility in Northvale, New Jersey. Pursuant to the terms of the bonds,
several restricted cash accounts have been established for the payment of bond
principal and interest. Bond proceeds were utilized for the refinancing of the
land and building the Company currently owns, for the purchase of certain
manufacturing equipment and related building improvements and the maintenance of
a $300,000 debt service reserve. All of the restricted cash, other than the debt
service reserve, is expected to be expended within twelve months and is
therefore categorized as a current asset on the Company's consolidated balance
sheet as of December 31, 2002. Pursuant to terms of the bond indenture agreement
pursuant to which the bonds were issued, the Company is required to observe
certain covenants, including covenants relating to the incurrence of additional
indebtedness, the granting of liens and the maintenance of certain financial
covenants. As of December 31, 2002, the Company was in compliance with the
covenants contained in the bond indenture agreement.
The Company believes that its cash and cash equivalents will be
sufficient to fund its operations for at least the next twelve months.
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PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no investments in marketable securities as of
December 31, 2002 or assets and liabilities which are
denominated in a currency other than U.S. dollars or involve
commodity price risks.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the
Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-14. Based upon that
evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them
to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the
Company's periodic SEC filings. There have been no significant
changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 5, 2002, Harris Freedman, Sharon Will, Michael H.
Freedman and certain of their respective affiliates (the
"Freedman Group") commenced a consent solicitation (the
"Consent Solicitation") to solicit consents in favor of the
removal of Harmon Aronson, Donald S. Pearson and Eric L.
Sichel as directors of the Company and in favor of the
election of Harris Freedman, Sharon Will and Michael H.
Freedman as directors. The Company opposed the Consent
Solicitation as not being in the Company's best interests. The
Consent Solicitation ended on October 4, 2002 with the
Freedman Group failing to obtain the approval of the Company's
stockholders who held a majority of the Company's common
stock. In a consent solicitation, unless the consents received
by the participants in the solicitation are actually submitted
to an inspector for tabulation, it is not possible to know the
actual number of stockholders who consented. In the Consent
Solicitation, the Freedman Group did not submit the written
consents that it received to the firm retained by the Company
to tabulate the consents received. Thus, the Company does not
know how many consents were obtained by the Freedman Group.
The Freedman Group publicly acknowledged that it did not
obtain consents from stockholders holding a majority of the
Company's outstanding stock.
Following the Consent Solicitation, the Freedman Group filed a
preliminary proxy statement with the Securities and Exchange
Commission and expressed an intention to solicit proxies in
favor of its nominees for director and to contest the election
of directors at the Company's annual meeting of stockholders.
The Freedman Group terminated its proxy solicitation on
October 23, 2002 pursuant to the terms of a settlement
agreement among the Company and the members of the Freedman
Group (the "Settlement Agreement").
On August 27, 2002 in connection with the Consent
Solicitation, the Company commenced an action in the United
States District Court for the District of New Jersey (the
"Action") against (i) the individual members of the Freedman
Group, (ii) additional individuals whose identities, we
contended, the Freedman Group was required to disclose but who
were not listed in any of the Freedman Group's SEC filings and
(iii) other unnamed defendants who were acting in concert with
the disclosed and undisclosed members of the Freedman Group
(collectively, the "Defendants"). The complaint sought
injunctive relief against the Defendants on the basis that the
Defendants violated the federal securities laws and the rules
promulgated by the SEC there under by, among other things,
filing a Schedule 13D more than ten days after the Defendants
formed a "group" for purposes of Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), by
failing to disclose all persons acting in concert with the
Freedman Group and by acquiring additional shares of our stock
during a period that is prohibited by the Act.
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PART II. OTHER INFORMATION (CONTINUED)
The Company also alleged that the Defendants violated Section
14(a) of the Exchange Act by filing a false and misleading
proxy solicitation which failed to identify all the
participants of the Freedman Group's consent solicitation. The
complaint also alleged that the Defendants violated the SEC's
proxy rules in conducting their consent solicitation by
representing to the Company's stockholders the outcome of the
consent solicitation process. The Company contended that the
Freedman Group violated these stockholder-protection
provisions of the federal securities laws in order to advance
its efforts to take control of the Company.
On August 27, 2002, the Company applied to the Court for a
temporary restraining order barring Defendants from any
further contacts with the Company's stockholders, barring
Defendants from any further violation of the federal
securities laws, and compelling corrective disclosures to
remedy the Section 13(d) and Section 14(a) violations. On
September 6, 2002, the Court denied the Company's application
for a temporary restraining order and granted the Company's
motion for expedited discovery. On October 1, 2002, the Court
denied the Company's request for a preliminary restraining
order. The Action was dismissed with prejudice by the Company
on October 24, 2002 pursuant to the terms of the Settlement
Agreement.
The Settlement Agreement provides that:
(i) the Freedman Group agreed to terminate its proxy
solicitation immediately and to support the election of
the seven nominees for director recommended by the
Company's Board of Directors for election at the
Company's annual meeting of stockholders scheduled for
December 12, 2002.
(ii) the Company agreed to commence an exchange offer
pursuant to which holders of the Company's Class A Warrants
which expire on November 30, 2002 (the "Old Warrants") will
have 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. The New Warrants will (a) be
exercisable for the same number of shares of common stock as
the Old Warrants, (b) have an exercise price of $5.00 per
share (subject to adjustment in certain circumstances), (c)
expire on November 30, 2005, and (d) except as set forth
herein will have substantially all of the same other terms
and conditions as the Old Warrants. The Exchange Offer will
be made to eligible warrant holders irrespective of whether
the Old Warrants have expired by their terms when the
Exchange Offer is consummated. The New Warrants will not be
transferable except pursuant to operation of law. The
Exchange Offer must be registered under applicable federal
and state securities laws and will only be made pursuant to
an effective registration statement meeting applicable legal
requirements.
(iii) The Company agreed not to withdraw the nomination for
directors for election at the Annual Meeting of Richard
A. Brown, John A. Moore or John P. de Neufville unless
any of such nominees dies, resigns or refuses to stand
for election.
(iv) The Company and the Freedman Group exchanged releases
regarding the Consent Solicitation, the Action and
other matters related thereto.
The Company estimates that the cost of fulfilling its
obligations pursuant to the Settlement Agreement will
be approximately $100,000. In connection with the
Company's opposition to the Consent Solicitation and
the preparation of the Company's preliminary proxy
statement to oppose the Freedman Group's proxy
solicitation, the Company incurred approximately
$336,000 in expenses associated with advertising,
printing, fees of attorneys, financial advisors, proxy
solicitors, accountants, public relations,
transportation, litigation and related expenses and
filing fees. All of these expenses were borne by the
Company. Such costs do not include the amount
represented by salaries and wages of regular employees
and officers.
Because this section is a summary, it does not describe
every aspect of the Settlement Agreement. This summary
is subject to and qualified in its entirety by
reference to all of the provisions of the Settlement
Agreement which is attached as Exhibit 10.1 to our
Current Report on Form 8-K filed with the SEC on
November 1, 2002.
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PART II. OTHER INFORMATION (CONTINUED)
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
See Item 1 of Part II-Legal Proceedings
The Annual Meeting of Elite's stockholders was held on
December 12, 2002, at which time the stockholders elected the
following slate of nominees to the Board of Directors: Atul M.
Mehta, Harmon Aronson, Donald S. Pearson, Eric L. Sichel, John
P. de Neufville, John A. Moore and Richard A. Brown. Election
of the Board of Directors was the only matter submitted for
stockholder vote. There were 10,494,427 shares of outstanding
capital stock of Elite entitled to vote at the record date for
this meeting and there were present at such meeting, in
persons or by proxy, stockholders holding 9,615,136 shares of
Elite's common stock, which represented 91.6% of the total
capital stock outstanding and entitled to vote. There
9,615,136 shares voted on the matter of the election of
directors. The result of the votes cast regarding each nominee
for office was:
Nominee for Director Votes For Votes Withheld
Atul M. Mehta 9,563,136 52,000
Harmon Aronson 9,565,136 50,000
Donald S. Pearson 9,565,136 50,000
Eric L. Sichel 9,565,136 50,000
John P. de Neufville 9,510,236 104,900
John A. Moore 9,510,236 104,900
Richard A. Brown 9,510,236 104,900
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 99.1 Certification by Atul M. Mehta pursuant to
Section 1350, Chapter 63 of Title 18, United States
Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification by Mark I. Gittelman
pursuant to Section 1350, Chapter 63 of Title 18,
United States Code, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On October 10, 2002, the Company announced that the
consent solicitation of Harris Freedman, Sharon Will
and Michael H. Freedman, and their affiliates ended
without sufficient consents being obtained to replace
independent directors of Elite Pharmaceuticals, Inc.
On October 11, 2002 the Company announced that it had
entered into an agreement with Elan Corporation, plc
("Elan"), to acquire all of Elan's interest in a joint
venture company Elite Research Ltd, which had been
formed between the Company and Elan, effective
September 30, 2002.
On November 1, 2002 the Company announced that it had
entered into a Settlement Agreement with Harris
Freedman, Sharon Will, Michael H. Freedman and their
affiliates regarding a proxy solicitation, a lawsuit
brought by the Company and related matters.
On January 31, 2003 the Company announced current
business developments as well as an update as to the
Company's pending S-4 Registration Statement filed with
the Securities and Exchange Commission in connection
with its Class A warrant exchange offer.
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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.
ELITE PHARMACEUTICALS, INC.
Date: 2/13/2003 By: /s/ Atul M. Mehta
----------------- ----------------------------
Atul M. Mehta
President and Chief Executive Officer
(Principal Executive Officer)
Date: 2/13/2003 By: /s/ Mark I. Gittelman
----------------- ----------------------------
Mark I. Gittelman
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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CERTIFICATION
I, Atul M. Mehta, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elite
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
2/13/2003 /s/ Atul M. Mehta
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Date Atul M. Mehta
President and Chief Executive Officer
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CERTIFICATION
I, Mark I. Gittelman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elite
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
2/13/2003 /s/ Mark I. Gittelman
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Date Mark I. Gittelman
Chief Financial Officer and Treasurer
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