Management’s discussion addresses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgment, including those related to bad debts, intangible assets, income taxes, workers compensation, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its 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 June 30, 2008 were $776,678, an increase of $388,403 or approximately 100.0%, over revenues for the comparable period of the prior year, and consisted of $688,287 in manufacturing fees and $88,391 in royalty fees. Revenues for the three months ended June 30, 2007, consisted of $336,515 in manufacturing fees and $51,760 in royalty fees. Manufacturing fees increased by 105% due to flucuatations in the number of batches shipped each quarter because of seasonality of sales and inventory adjustments. Royalties increased by 70% 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 June 30, 2008, were $1,346,979, an increase of $302,519 or approximately 29.0% from $1,044,460 of such costs for the comparable period of the prior year. Increases were attributed to increases in salaries and wages, consulting fees associated with the development of products and API costs associated with scale up of ELI-216 and ELI-154. To conserve cash, Elite has reduced its number of employees from 41 in June 2007 to 34 in June 2008. The reduction in force was implemented this quarter with cost savings expected to begin next quarter. Research and development costs are expected to increase, however, in future periods, once Phase III and other clinical trials for ELI-216 are initiated.
General and administrative expenses (“G&A”) for the three months ended June 30, 2008, were $629,167, an increase of $72,598, or approximately 13.0% from $556,569 of general and administrative expenses for the comparable period of the prior year. The increase was primarily attributable to increases in legal and accounting fees, salaries and fringe benefits as a result of yearly increments.
Depreciation and amortization increased by $19,491 from $110,766 for the comparable period of the prior year to $130,257. 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 June 30, 2008 were $349,966, a decrease of $552,851 or approximately 61.2% from $902,817 for the comparable period of the prior year due to a decrease of $617,714 in charges related to the issuances of stock options and warrants and decreases in interest expense of $14,339 due to lower outstanding balances. These decreases were somewhat offset by decreases in interest income due to lower compensating balances as a result of the use of cash to sustain our operating activities.
Our prior period comparable financial statements were restated as a result of the Company’s decision not to continue to fund Novel and therefore not include Novel’s expenses as part of the Company’s operating activities for three months ending June 30, 2008 and 2007. Consequently, losses from discontinued operations of $0 and $1,461,553, respectively, are reflected in the 2008 and 2007 financial statements.
As a result of the foregoing, our net loss for the three months ended June 30, 2008 was $2,284,736 compared to $3,982,216 for the three months ended June 30, 2007.
Material Changes in Financial Condition
Our working capital (total current assets less total current liabilities), decreased to $3,153,754 as of June 30, 2008 from $5,029,930 as of March 31, 2008, primarily due to the Company’s net loss from operations, exclusive of non-cash charges.
We experienced negative cash flows from operations of $1,887,701 for the three months ended June 30, 2008, primarily due to our net loss from operations of $2,284,736, an increase in accounts receivable, prepaid expenses and accrued interest receivable of $160,631 and reductions of $100,620 in accounts payable, accrued expenses and other liabilities, offset by net reductions in inventories of $221,480 and by non-cash charges of $436,806, which included $306,549 in connection with the issuance of stock options and warrants, and $130,527 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 three months ended June 30, 2008 was $776,678 and $388,275, 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 June 30, 2008, we had approximately three 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 next three months 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.
Based upon the Company’s current cash position, management has undertaken a review of the Company’s operations in an effort to eliminate any expenses which are not deemed critical to the Company’s current strategic objectives. The Company is in the process of implementing such cost-cutting measures and will continue to undertake this process without impeding its ability proceed with its critical strategic goals.
For the three months ended June 30, 2008, we expended $1,887,701 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 June 30, 2008 was $3.0 million compared with working capital of $11.2 million at June 30, 2007. Cash and cash equivalents at June 30, 2008 were $1.7 million, a decrease of $12.7 million from the $14.4 million at June 30, 2007.
We spent approximately $61,000 on improvements and machinery and equipment during the three months ended June 30, 2008.
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
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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 June 30, 2008, our principal source of liquidity was approximately $1,686,591 of cash and cash equivalents. Additionally, we may have access to funds through the exercise of outstanding stock options and warrants. There can be no assurance that the exercise of outstanding warrants or options will generate or provide sufficient cash.
The Company had outstanding, as of June 30, 2008, 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, 2008. 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 June 30, 2008, 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 June 30, 2008 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 |
As of the end of the period covered by this report, based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the Chief Executive and Chief Financial Officer of the Company 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 June 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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| PART II. | | OTHER INFORMATION |
In addition to the Risk Factors set forth in the Company’s Annual Report on Form 10-K for the year ended March 31, 2008, stockholder and potential investors should consider the following in evaluating an investment in the Company and in analyzing the Company’s forward-looking statements:
If the Company is unable to obtain additional financing needed for the expenditures for the development and commercialization of the Company’s drug products, it would impair the Company’s ability to continue to meet its business objectives.
As of June 30, 2008, the Company had cash and cash equivalents aggregate approximately $1.7 million. The Company anticipates that such position as of June 30, 2008 is adequate to finance its operations through September 30, 2008 but thereafter, the Company will require additional financing to insure that the Company will be able to meet the expenditures to develop and commercialize its products for which the Company has no current arrangements. The Company intends to seek additional funds through the sale of additional debt or equity. No representation can be made that the Company will be able to obtain 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. The Company’s inability to obtain additional financing when needed would impair its ability to continue its business. Other poss ible sources of the required financing are the cash exercise of warrants and options that are currently outstanding.
If any future financing involves the further sale of the Company’s securities, the Company’s then-existing stockholders' equity could be substantially diluted. On the other hand, if the Company incurred debt, the Company 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.
AMEX may consider suspending dealing in, or removing from the list, the securities of the Company based upon the Company’s ability to continue operation and/or meet its obligations as they mature.
Section 1003(a)(iv) of the AMEX Company Guide (Application of Policies) provides that the AMEX will normally consider suspending dealing in, or removing from the list, the securities of an issuer which has sustained losses which are so substantial in relation to its overall operations or its existing financial resources, or its financial condition has become so impaired that it appears questionable, in the opinion of the AMEX, as to whether such issuer will be able to continue operations and/or meet its obligations as they mature. In the event the Company is unable to increase its revenue, obtain additional financing or otherwise obtain funding for its ongoing operations, the AMEX may seek to suspend or delist the securities of the Company if it determines that the Company’s financial condition has become so impaired that it appears questionable as to whether the Company will be able to continue operations and/or meet its obligations as they mature.
| ITEM 4. | | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
All information required by this item has been disclosed in Item 4 of the Annual Report for the period ended March 31, 2008 on Form 10-K as filed with the Securities Exchange Commission on June 27, 2008.
The exhibits listed in the index below are filed as part of this report.
| Exhibit | | |
| Number | | Description |
| | | |
| 3.01 | | Certificate of Amendment of the Certificate of Incorporation of Elite Pharmaceuticals, Inc., as filed on June 26, 2008, with the Secretary of State of the State of Delaware, incorporated by reference as Item |
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| | | 3.01 on the Report on Form 8-K dated June 26, 2008 and filed with Securities and Exchange Commission on July 2, 2008. |
| | | |
| 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: August 12, 2008 | By: | /s/ Bernard Berk | |
| | | Bernard Berk | |
| | | Chief Executive Officer | |
| | | (Principal Executive Officer) | |
| | | | |
| | | | |
| | | | |
| Date: August 12, 2008 | By: | /s/ Mark I. Gittelman | |
| | | Mark I. Gittelman | |
| | | Chief Financial Officer and Treasurer | |
| | | (Principal Financial and Accounting Officer) | |
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