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 condensed consolidated financial statements. Our most critical accounting policies include the recognition of revenue upon completion of certain phases of projects under research and development contracts. We also assess a need for an allowance to reduce our deferred tax assets to the amount that we believe are more likely than not to be realized. We assess 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. We assess our exposure to current commitments and contingencies. It should be noted that actual results might differ from these estimates under different assumptions or conditions.
Our revenues for the three months ended December 31, 2007 were $176,171, a decrease of $55,263 or approximately 23.9%, under revenues for the comparable period of the prior year, and consisted of $116,366 in manufacturing fees and $59,805 in royalty fees. Revenues for the three months ended December 31, 2006, consisted of $209,139 in manufacturing fees and $22,295 in royalty fees. Manufacturing fees declined by 44% due to flucuatations in the number of batches shipped each quarter because of seasonality of sales and inventory adjustments. Royalties increased by 168 % due to the launch of our second product, Lodrane 24D® which was launched in December 2006 and due to growth of Lodrane 24 sales.
Research and development costs for the three months ended December 31, 2007, were $1,560,253, a decrease of $121,076 or approximately 7.2% from $1,681,329 of such costs for the comparable period of the prior year. Elite continues its spending on the development of the pain products, ELI-216 and ELI-154. We expect our research and development costs to increase in future periods primarily due to clinical costs for Phase III and other clinical trials for ELI-216 and ELI-154.
We are in the initial stages of breaking down the specific costs associated with the research and development of each product on which we devoted resources through the use of detailed time sheets and general ledger account classifications. In the past, we have not historically allocated these expenses to any particular product. We cannot estimate the additional costs and expenses that may be incurred in order to potentially complete the development of any product, nor can we estimate the amount of time that might be involved in such development because of the uncertainties associated with the development of controlled release drug delivery products as described in this report.
General and administrative expenses (“G&A”) for the three months ended December 31, 2007, were $632,133, an increase of $125,164, or approximately 24.7% from $506,969 of general and administrative expenses for the comparable period of the prior year. The increase was primarily attributable to increases in legal fees, timing of director fee payments and in salaries and fringe benefits as a result of yearly increments.
Depreciation and amortization increased by $43,231 from $127,035 for the comparable period of the prior year to $170,266. The increase was due to the acquisition of new machinery and equipment and the upgrading of Elite’s corporate and warehouse facilities.
Other expenses for the three months ended December 31, 2007 were $530,685, a decrease of $945,105, or approximately 64.0% from $1,475,790 for the comparable period of the prior year due to a decrease of $1,299,743 in charges related to the issuances of stock options and warrants and decreases in interest expense of $2,670 due to lower outstanding balances. These decreases were also the effect of additional interest income of $19,951, due to higher compensating balances as a result of the private placements of our Series C 8% Convertible Preferred Stock.
As a result of the foregoing, our net loss for the three months ended December 31, 2007 was $2,858,103 compared to $3,564,971 for the three months ended December 31, 2006.
Our revenues for the nine months ended December 31, 2007 were $838,967, an increase of $295,430 or approximately 54.3%, over revenues for the comparable period of the prior year, and consisted of $671,239 in
manufacturing fees and $167,728 in royalty fees. Revenues for the nine months ended December 31, 2006, consisted of $476,598 in manufacturing fees and $66,939 in royalty fees. The 41% increase in manufacturing fees and the 151% growth in royalties was primarily due to the launch of our second product, Lodrane 24D(R) and growth of the Lodrane 24® product.
Research and development costs for the nine months ended December 31, 2007, were $5,394,043, an increase of $1,087,424 or approximately 25.0% from $4,306,619 of such costs for the comparable period of the prior year, primarily due to the costs associated with increased spending on raw materials which are primarily for scale up of the pain products. We expect our research and development costs to continue to increase in future periods primarily due to the expenses associated with clinical costs for Phase III and other clinical trials for ELI-216 and ELI-154.
General and administrative expenses (“G&A”) for the nine months ended December 31, 2007, were $1,814,958, an increase of $218,271, or approximately 13.7% from $1,596,687 of G&A for the comparable period of the prior year. The increase was attributable to increases in salaries and fringe benefits as a result of increases in staff.
Depreciation and amortization increased by $93,199 from $366,105 for the comparable period of the prior year to $459,304. The increase was due to the acquisition of new machinery and equipment and the upgrading of Elite’s corporate and warehouse facilities.
Other expenses for the nine months ended December 31, 2007 were $2,042,502, an increase of $24,484, or approximately 1.2%, from $2,018,018 for the comparable period of the prior year due to increases in interest expense of $19,303 due to the borrowing of bank debt utilized to initially fund Novel and to finance purchased equipment and reductions of $377,259 in sale of New Jersey tax losses, offset somewhat by increases in interest income of $59,516 due to higher compensating balances as a result of the private placement of our Series C 8% Convertible Preferred Stock and reductions of $312,562 in charges related to the issuances of stock options and warrants.
As a result of the foregoing, our net loss for the nine months ended December 31, 2007 was $12,525,734 compared to $7,750,174 for the nine months ended December 31, 2006.
Material Changes in Financial Condition
Our working capital (total current assets less total current liabilities), increased to $5,991,312 as of December 31, 2007 from $244,288as of March 31, 2007, primarily due to net proceeds received as a result of our private placement of Series C 8% Convertible Preferred Stock, offset by net loss from operations, exclusive of non-cash charges.
We experienced negative cash flows from operations of $7,712,517 for the nine months ended December 31, 2007, primarily due to our net loss from operations of $12,525,734, an increase in prepaid expenses and security deposits of $47,267 and reductions of $919,251 in accounts payable, accrued expenses and other liabilities, offset by net reductions in accounts and interest receivable of $212,991 and by non-cash charges of $2,533,923, which included $2,125,625 in connection with the issuance of stock options and warrants, and $408,298 in depreciation and amortization expenses.
On November 15, 2004 and on December 18, 2006, Elite’s partner, ECR, launched Lodrane 24(R) and Lodrane 24D(R), respectively. Under its agreement with ECR, Elite is currently manufacturing commercial batches of Lodrane 24(R) and Lodrane 24D(R) in exchange for manufacturing margins and royalties on product revenues. Manufacturing revenues and royalty income earned for the nine months ended December 31, 2007 was $671,239 and $167,728, respectively. We expect future cash flows from manufacturing fees and royalties to provide additional cash to help fund our operations. However, no assurance can be given that we will generate any material revenues from the manufacturing fees and royalties of the Lodrane products.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2007, we had approximately six months of cash available based on our current operations. We are considering a number of different financing alternatives and we intend to seek additional capital in the first six months of 2008 through private financing or collaborative agreements. However, no assurance can be given that we will consummate a financing or that any material cash will be generated to us therefrom. If adequate funds are not available to us as we need them, we will be required to curtail significantly or delay or eliminate one or more product development programs. These matters raise substantial doubt over our ability to continue as a going concern. The accompanying financial statements do not provide for any adjustments should this occur.
For the nine months ended December 31, 2007, we expended $7,712,517 in operating activities which we funded through the $20,000,000 in gross proceeds raised through our private placement of Series C 8% Preferred Stock. Our working capital at December 31, 2007 was $6.0 million compared with working capital of $2.8 million at December
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31, 2007 was $6.0 million compared with working capital of $2.8 million at December 31, 2006. Cash and cash equivalents at December 31, 2007 were $5.9 million, an increase of $2.3 million from the $3.6 million at December 31, 2006.
We spent approximately $534,000 on improvements and machinery and equipment during the nine months ended December 31, 2007.
On April 24, 2007, we sold in a private placement through Oppenheimer & Company, Inc., the placement agent (the “placement agent”), 15,000 shares of our Series C 8% Preferred Stock, at a price of $1,000 per share, each share convertible (at $2.32 per share) into 431.0345 shares of Common Stock, or an aggregate of 6,465,517 shares of Common Stock. The investors also acquired warrants to purchase shares of Common Stock, exercisable on or prior to April 24, 2012. The warrants represent the right to purchase an aggregate of 1,939,655 shares of Common Stock at an exercise price of $3.00 per share. The gross proceeds of the sale were $15,000,000 before payment of $1,050,000 in commissions to the Placement Agent and selected dealers. We also paid certain legal fees and expenses of counsel to the Placement Agent. We issued to the Placement Agent and its designees five year warrants to purchase 193,965 shares of Common Stock with similar terms to the warrants issued to the Investors with an exercise price of $3.00 per share.
On July 17, 2007 we sold, in a private placement, the remaining 5,000 authorized shares of its Series C 8% Preferred Stock at a price of $1,000 per share, each share convertible (at $2.32 per share) into 431.0345 shares of Common Stock, or an aggregate 2,155,172 shares of Common Stock. The investors also acquired warrants to purchase shares of Common Stock, exercisable on or prior to July 17, 2012. The warrants represent the right to purchase 646,554 shares of Common Stock, at an exercise price of $3.00 per share. The gross proceeds of the sale were $5,000,000 before payment of 350,000 in commissions to Placement Agent and selected dealers and $18,000 in expenses incurred by Placement Agent and selected dealers. We issued to the Placement Agent and its designees five year warrants to purchase 64,655 shares of Common Stock with similar terms to the warrants issued to the Investors with exercise price of $3.00 per share. The approximate $18,531,500 of net proceeds generated from these private placements will contribute materially to our efforts to advance our part of pain products through the clinic as well as accelerate the development of our other controlled release products, which utilize our proprietary oral drug delivery systems and abuse resistant technology.
From time to time we will consider potential strategic transactions including acquisitions, strategic alliances, joint ventures and licensing arrangements with other pharmaceutical companies. We retained an investment-banking firm to assist with our efforts. There can be no assurance that any such transaction will be available or consummated in the future.
As of December 31, 2007, after the closing of the sale of the additional Series C 8% Preferred Stock, our principal source of liquidity was approximately $5,943,000 of cash and cash equivalents. Additionally, we may have access to funds through the exercise of outstanding stock options and warrants in addition to funds that may be generated from the potential sale of New Jersey tax losses. There can be no assurance that the sale of tax losses or by the exercise of outstanding warrants or options will generate or provide sufficient cash.
The Company had outstanding, as of December 31, 2007, bonds in the aggregate principal amount of $3,795,000, consisting of $3,415,000 of 6.5% tax exempt Bonds with an outside maturity of September 1, 2030 and $380,000 of 9.0% Bonds with an outside maturity of September 1, 2012. 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 redemption of previously issued tax exempt bonds issued by the Authority in September 1999 and to refinance equipment financing, as well as provide approximately $1,000,000 of capital for the purchase of additional equipment for the manufacture and development at the Company’s facility of pharmaceutical products and the maintenance of a $415,500 debt service reserve. All of the restricted cash, other than the debt service was expended within the year ended March 31, 2007. Pursuant to the terms of the related bond indenture agreement, the Company is required to observe certain covenants, including covenants relating to the incurrence of additional indebtedness, the granting of liens and the maintenance of certain financial covenants. As of December 31, 2007, the Company was in compliance with the bond covenants.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had no investments in marketable securities as of December 31, 2007 or assets and liabilities, which are denominated in a currency other than U.S. dollars or involve commodity price risks.
ITEM 4T. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, based on an evaluation of the Company’s disclosure controls
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and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the Chief Executive and Chief Financial Officer of the Company concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its Exchange Act reports is recorded, processed, summarized and reported within the applicable time periods specified by the SEC’s rules and forms.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.,
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the period ended March 31, 2007 or Form 10-Q for the quarters ended June 30, 2007 and September 30, 2007, except for the following:
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING NEEDED FOR THE EXPENDITURES FOR THE DEVELOPMENT AND COMMERCIALIZATION OF OUR DRUG PRODUCTS, IT WOULD IMPAIR OUR ABILITY TO CONTINUE TO MEET OUR BUSINESS OBJECTIVES.
We continue to require additional financing to ensure that we will be able to meet our expenditures to develop and commercialize our products. As of December 31, 2007, we had cash and cash equivalents $5.9 million. We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operating expenses and capital requirements until June 30, 2008. We will require additional funding to continue our research and development programs, including clinical testing of our product candidates, for operating expenses and to pursue regulatory approvals for our product candidates. We are considering a number of different financing alternatives and we intend to seek additional capital in the first six months of 2008 through private financing or collaborative agreements. However, no assurance can be given that we will consummate a financing or that any material cash will be generated to us therefrom. Other possible sources of the required financing are income from product sales or sales of market rights, income from co-development or partnering arrangements and the cash exercise of warrants and options that are currently outstanding. No representation can be made that we will be able to obtain such revenue or additional financing or if obtained it will be on favorable terms, or at all. No assurance can be given that any offering if undertaken will be successfully concluded or that if concluded the proceeds will be material. If adequate funds are not available to us as we need them, we will be required to curtail significantly or delay or eliminate one or more product development programs which would impair our ability to meet our business objectives.
THERE IS DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Our condensed consolidated unaudited financial statements were prepared on the assumption that we will continue as a going concern. We estimate that our cash reserves will be sufficient to permit us to continue at our anticipated level of operations for approximately six months from December 31, 2007. During 2008, we will require additional funding to continue our research and development programs, including clinical testing of our product candidates, for operating expenses and to pursue regulatory approvals for our product candidates. We intend to use our cash reserves, as well as other funds in the event that they shall be available on commercially reasonable terms, to finance these activities and other activities described herein, although we can provide no assurance that these additional funds will be available in the amounts or at the times we may require. If sufficient capital is not available, we would likely be required to scale back or terminate our research and development efforts. See “Risk Factors – If we are unable to obtain additional financing needed for the expenditures for the development and commercialization of our drug products, it would impair our ability to continue to meet our business objectives.”
IF WE RAISE ADDITIONAL FUNDING THROUGH SALES OF OUR SECURITIES, OUR EXISTING STOCKHOLDERS WILL LIKELY EXPERIENCE SUBSTANTIAL DILUTION.
If any future financing involves the further sale of our securities, our then-existing stockholders' equity could be substantially diluted. On the other hand, if we incurred debt, we would be subject to risks associated with indebtedness, including the risk that interest rates might fluctuate and cash flow would be insufficient to pay principal and interest on such indebtedness.
IF NOVEL LABORATORIES ISSUES ADDITIONAL EQUITY IN THE FUTURE, OUR EQUITY INTEREST IN NOVEL MAY BE DILUTED, RESULTING IN A DECREASE IN OUR SHARE OF REVENUE AND CASH FLOW GENERATED BY NOVEL.
As a result of our determination not to fund our remaining contributions to Novel at the valuation set forth in the Alliance Agreement and the resulting purchase from us of a portion of our shares of Class A Voting Common Stock of Novel by VGS Pharma, LLC, our remaining ownership interest in the equity of Novel was reduced to approximately 10% of the outstanding shares of Novel. Novel may seek to raise additional operating capital in the future and may do so by the issuance of equity. In the case of such issuance, we may determine not to exercise our subscription rights to maintain our percentage interest in Novel or, by the time of such issuance, our subscription rights may have terminated under the terms of the Stockholders Agreement granting such rights. In either case, our future equity interest in Novel will decrease and we will be entitled to a decreased portion of any revenue and cash flow which Novel may generate in the future.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 24, 2008, the Company's Board of Directors granted an aggregate of 148,800 options to purchase Common Stock to its employees which vest over 3 years from the date of grant. The options are exercisable at $1.08 per option. The options are subject to the Company’s customary stock option agreements and the Company’s Stock Option Plan. The issuance of the options are exempt from the registration provision of the Securities Act of 1933, as amended (the “Act” ) pursuant to Section 4(2) thereunder.
On January 24, 2008, the Board granted 90,000 options to each of its three non-executive independent Board members under the Company's stock option plan. The options vest over three years, on June 26, 2008, 2009 and 2010, assuming each Director continues to serve on the Company's Board; provided, however that, the options shall fully vest upon such Director’s death, disability, retirement as a director on the Board or such Director’s removal as a director, without cause, at the request of the Board. The options are exercisable at $1.08 per option. The options are subject to the Company’s customary stock option agreements and the Company’s Stock Option Plan. The issuance of the options are exempt from the registration provision of the Act pursuant to Section 4(2) thereunder.
ITEM 6. EXHIBITS
The exhibits listed in the accompanying below are filed as part of this report.
| Exhibit | Number Description |
| | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.2 | Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | ELITE PHARMACEUTICALS, INC. |
| |
| |
| |
| Date: February 14, 2008 | | By: /s/ Bernard Berk | |
| | | Bernard Berk |
| | | Chief Executive Officer |
| | | (Principal Executive Officer) |
| |
| |
| |
| Date: February 14, 2008 | | By: /s/ Mark I. Gittelman | |
| | | Mark I. Gittelman |
| | | Chief Financial Officer and Treasurer |
| | | (Principal Financial and Accounting Officer) |
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