The Registrant is focusing its efforts on the following areas: (i) development of the Registrant’s pain management products, (ii) manufacturing of Lodrane 24(R) and Lodrane 24D(R) products; (ii) the development of the other products in the Registrant’s pipeline; and (iii) commercial exploitation of the Registrant’s products either by license and the collection of royalties, or through the manufacture of the Registrant’s formulations, and (iv) development of new products and the expansion of the Registrant’s licensing agreements with other pharmaceutical companies, including co-development projects, joint ventures and other collaborations.
The Registrant is focusing on the development of various types of drug products, including branded drug products (which require new drug applications (“NDA”) under Section 505(b)(1) or 505(b)(2) of the Drug Price Competition and Patent Term Restoration Act of 1984 as well as generic drug products (which require abbreviated new drug applications (“ANDA”)).
The Registrant believes that its business strategy enables the Registrant to reduce the Registrant’s risk by having a diverse product portfolio that includes both branded and generic products in various therapeutic categories and build collaborations and establish licensing agreements with companies with greater resources thereby allowing the Registrant to share costs of development and to improve cash-flow.
Management’s discussion addresses the Registrant’s 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. The Registrant’s most critical accounting policies include the recognition of revenue upon completion of certain phases of projects under research and development contracts. The Registrant also assesses a need for an allowance to reduce the Registrant’s deferred tax assets to the amount that the Registrant believes are more likely than not to be realized. The Registrant 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 Registrant assesses its exposure to current commitments and contingencies. It should be noted that actual results might differ from these estimates under different assumptions or conditions.
The Registrant’s revenues for the three months ended December 31, 2008 were $236,780, an increase of $60,609 or approximately 34% over revenues for the comparable period of the prior year, and consisted of $162,558 in manufacturing fees and $74,222 in royalty fees. Revenues for the three months ended December 31, 2007, consisted of $116,366 in manufacturing fees and $59,805 in royalty fees. Manufacturing fees increased by approximately 40% due to fluctuations in the number of batches shipped each quarter because of seasonality of sales and inventory adjustments and due to growth of product sales. Royalties increased by approximately 24% due to growth of product sales.
Research and development costs for the three months ended December 31, 2008, were $600,680, a decrease of $959,573 or approximately 62% from $1,560,253 of such costs for the comparable period of the prior year. Decreases were attributed to decreases in salaries and wages, consulting fees associated with the development of products and lower active pharmaceutical ingredient (“API”) costs for product development. To conserve cash, the Registrant has reduced its number of employees from 43 employees in December 2007, to 16 employees in December 2008. The reduction in
force was implemented last quarter with cost savings beginning in this 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 for the three months ended December 31, 2008, were $467,487 and decrease of $164,646, or approximately 26% from $632,133 of general and administrative expenses for the comparable period of the prior year. The decrease was primarily attributable to decreases in salaries and fringe benefits offset by increases in legal and accounting fees.
Depreciation and amortization decreased by $40,009, or approximately 31%, from $170,266 for the comparable period of the prior year to $130,257. The decrease was due to the cessation of acquisition of new machinery in the current period.
Other expenses for the three months ended December 31, 2008 were $299,813, a decrease of $230,872 or approximately 44% from $530,685 for the comparable period of the prior year due to a decrease of $302,275 in charges related to the issuances of stock options and warrants and a decrease in interest expense 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 the Registrant’s operating activities.
As a result of the foregoing, the Registrant’s net loss for the three months ended December 31, 2008 was $1,421,108 compared to $2,858,103 for the three months ended December 31, 2007.
Nine Months Ended December 31, 2008 Compared to Nine Months Ended December 31, 2007
The Registrant’s revenues for the nine months ended December 31, 2008 were $1,488,650, an increase of $649,683 or approximately 77% over revenues for the comparable period of the prior year, and consisted of $1,255,850 in manufacturing fees and $232,800 in royalty fees. Revenues for the nine months ended December 31, 2007, consisted of $671,239 in manufacturing fees and $167,728 in royalty fees. Manufacturing fees increased by approximately 87% and royalties increased by approximately 39% due to growth of product sales.
Research and development costs for the nine months ended December 31, 2008, were $3,144,370, a decrease of $2,249,673 or approximately 42% from $5,394,043 of such costs for the comparable period of the prior year. Decreases were attributed to decreases in salaries and wages, consulting fees associated with the development of products and lower active pharmaceutical ingredient (“API”) costs for product development. To conserve cash, the Registrant has reduced its number of employees from 43 employees in December 2007, to 16 employees in December 2008. The reduction in force was implemented last quarter with cost savings beginning in this 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 for the nine months ended December 31, 2008, were $1,741,760, a decrease of $73,198, or approximately 4% from $1,814,958 of general and administrative expenses for the comparable period of the prior year. The decrease was primarily attributable to decreases in salaries and fringe benefits offset by increases in legal and accounting fees.
Depreciation and amortization decreased by $68,533, or approximately 15%, from $459,304 for the comparable period of the prior year to $390,771. The decrease was due to the cessation of acquisition of new machinery and equipment in the current period.
Other expenses for the nine months ended December 31, 2008 were $991,139, a decrease of $1,051,363 or approximately 52% from $2,042,502 for the comparable period of the prior year due to a decrease of $1,286,595 in charges related to the issuances of stock options and warrants and decreases in interest expense of $36,216 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 the Registrant’s operating activities.
The Registrant’s prior period comparable financial statements were restated as a result of the Registrant’s decision not to continue to fund Novel and therefore not include Novel’s expenses as part of the Registrant’s operating activities for three and nine months ending December 31, 2008 and 2007. Consequently, losses from discontinued operations of $-0- and $3,030,606, respectively, are reflected in the 2008 and 2007 financial statements.
As a result of the foregoing, the Registrant’s net loss for the nine months ended December 31, 2008 was $5,943,657 compared to $12,525,734 for the nine months ended December 31, 2007.
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Material Changes in Financial Condition
The Registrant’s working capital (total current assets less total current liabilities), decreased to $1,191,223 as of December 31, 2008 from $5,029,930 as of March 31, 2008, primarily due to the Registrant’s net loss from operations, exclusive of non-cash charges.
The Registrant experienced negative cash flows from operations of $4,389,995 for the nine months ended December 31, 2008, primarily due to the Registrant’s net loss from operations of $5,943,657, offset by decreases in prepaid expenses of $126,315, net reductions in inventories of $382,365 and by non-cash charges of $1,229,802, which included $839,031 in connection with the issuance of stock options and warrants and $390,771 in depreciation and amortization expenses.
On November 15, 2004 and on December 18, 2006, the Registrant’s partner, ECR, launched Lodrane 24(R) and Lodrane 24D(R), respectively. Under its agreement with ECR, the Registrant 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, 2008 and December 31, 2007 were $1,488,650 and $838,967, respectively. The Registrant expects future cash flows from manufacturing fees and royalties to provide additional cash to help fund its operations. However, no assurance can be given that the Registrant will generate any material revenues from the manufacturing fees and royalties of the Lodrane products.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2008, the Registrant had approximately two months of cash available based on the Registrant’s current operations. As of the date of this Quarterly Report on Form 10-Q, the Registrant is negotiating a strategic transaction with an unaffiliated third party, which such strategic transaction, if consummated in accordance with the current terms under negotiation, should allow the Registrant to maintain its current level of operations. If such strategic transaction is not closed in a timely basis, or if another financing or strategic alternative providing sufficient resources to the Registrant to continue its operations is not consummated in the near future, the Registrant will be required to cease operations and liquidate its assets. No assurance can be given that the Registrant will be able to close such strategic transaction on a timely basis, or consummate such other financing or strategic alternative in the time necessary to avoid the cessation of the Registrant’s operations and liquidation of its assets, on favorable terms, if at all. Moreover, even if the Registrant consummates such strategic transaction, or such other financing or strategic alternative, it may be required to seek additional capital in the future and there can be no assurances that the Registrant will be able to obtain such additional capital on favorable terms, if at all.
Based upon the Registrant’s current cash position, management has undertaken a review of the Registrant’s operations and implemented cost-cutting measures in an effort to eliminate any expenses which are not deemed critical to the Registrant’s current strategic objectives. The Registrant will continue this process without impeding its ability to proceed with its critical strategic goals.
For the nine months ended December 31, 2008, the Registrant expended $4,398,995 in operating activities which the Registrant funded through the $20,000,000 in gross proceeds raised through the Registrant’s private placement of its Series C Preferred Stock and $1,777,000 in gross proceeds of its Series D Preferred Stock. The Registrant’s working capital at December 31, 2008 was approximately $1.2 million compared with working capital of approximately $6.0 million at December 31, 2007. Cash and cash equivalents at December 31, 2008 were approximately $336,000, a decrease of approximately $5.6 million from the $5.9 million at December 31, 2007.
The Registrant spent approximately $48,000 on improvements and machinery and equipment during the nine months ended December 31, 2008.
As of December 31, 2008, the Registrant’s principal source of liquidity was approximately $336,000 of cash and cash equivalents. Additionally, the Registrant 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 Registrant had outstanding, as of December 31, 2008, bonds in the aggregate principal amount of $3,595,000 consisting of $3,280,000 of 6.5% tax exempt Bonds with an outside maturity of September 1, 2030 and $315,000 of 9.0% bonds with an outside maturity of September 1, 2012. The bonds are secured by a first lien on the Registrant’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 Registrant’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 Registrant is required to observe certain covenants,
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including covenants relating to the incurrence of additional indebtedness, the granting of liens and the maintenance of certain financial covenants. As of December 31, 2008, the Registrant was in compliance with the bond covenants.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant had no investments in marketable securities as of December 31, 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 previously disclosed on the Forms 8-K filed by the Registrant with the SEC on October 21, 2008 and November 6, 2008, and the Form 10-K/A filed by the Registrant with the SEC on January 16, 2009, the Audit committee of the Registrant’s Board of Directors (the “Audit Committee”) became aware of certain reimbursements of expenses that were made by the Registrant to Bernard J. Berk, the then-President, Chief Executive Officer and Chairman of the Registrant’s Board of Directors, without the prior receipt by the Registrant from Mr. Berk of adequate substantiation of such expenses. The Audit Committee took action to investigate such reimbursement and review the Registrant’s internal controls to determine how such reimbursements occurred. On November 6, 2008, Mr. Berk resigned as the Registrant’s President and Chief Executive Officer and also voluntarily resigned as the Chairman of the Board and as a member thereof, and the Registrant appointed Chris Dick as its Acting Chief Executive Officer and Jerry I. Treppel, a member of the Registrant’s Board of Directors, as the Chairman thereof.
As a result of the matters involving Mr. Berk described above, the Registrant disclosed on the Form 10-Q for the quarterly period ending September 30, 2008 filed with the SEC on November 14, 2008 (the “Form 10-Q”), that its disclosure controls and procedures as of September 30, 2008 had deficiencies with respect to its expense reimbursement procedures that caused the Registrant’s controls and procedures to be ineffective.
The Registrant has taken various remedial measures to correct deficiencies in its internal controls and prevent the Registrant’s reimbursement of unsubstantiated expenses in the future, including the following:
The Audit Committee directed Mr. Berk to promptly deliver to the Registrant expense reports that substantiate the basis for each expense that was reimbursed to Mr. Berk, including the valid business purpose therefor. The Audit Committee received expense reports for the reimbursed expenses and reviewed such reports to determine which of the expenses had a valid business purpose.
At the direction of the Audit Committee, the Registrant’s Chief Financial Officer implemented check writing restrictions to the Registrant’s bank accounts that require the signatures of each of the Registrant’s Acting Chief Executive Officer and its Chief Financial Officer for all payments (including expense reimbursements) over $5,000.
The Registrant commenced a review of its internal control and compliance policies and procedures, including (1) reviewing, expanding, and formalizing its policies related to all potential advances and/or extensions of credit to employees, executive officers and directors, including, without limitation, with respect to the use of the Registrant’s credit cards, and advances of any other kind; and (2) enhancing its training of employees, executive officers and directors regarding compliance with the letter and the spirit of the Registrant’s Code of Ethics.
The Registrant engaged Rosen Seymour Shapss Martin & Company, LLP (“RSSM”), the Registrant’s registered public accounting firm, to evaluate the accounting procedures and related internal controls over expenditures.
RSSM’s evaluation of the Registrant’s accounting procedures and related internal controls over expenditures was completed on or about January 23, 2009. As a result of such evaluation, RSSM has concluded that the Registrant’s revised accounting procedures and related internal controls over expenditures are effective.
The Registrant’s management, with the participation of its Acting Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Registrant’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Registrant’s Acting Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Registrant’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Registrant in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the
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time periods specified in the SEC's rules and forms; and (ii) accumulated and communicated to management, including the Registrant’s Acting Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
During the period covered by this Quarterly Report on Form 10-Q, there has been no change in the Registrant’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. Risk Factors
In addition to the Risk Factors set forth in the Registrant’s the Form 10-K, stockholder and potential investors should consider the following in evaluating an investment in the Registrant and in analyzing the Registrant’s forward-looking statements:
If the Registrant is unable to obtain additional financing needed for the expenditures for the development and commercialization of the Registrant’s drug products, it would impair the Registrant’s ability to continue to meet its business objectives.
As of December 31, 2008, the Registrant had cash and cash equivalents aggregate approximately $336,000. The Registrant anticipates that such amount is adequate to finance its operations through February 28, 2009 but thereafter, the Registrant will require additional financing to insure that the Registrant will be able to meet the expenditures to develop and commercialize its products for which the Registrant has no current arrangements. The Registrant intends to seek additional funds through the sale of additional equity and/or a licensing transaction with respect to certain of its products. No representation can be made that the Registrant 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 Registrant’s inability to obtain additional financing when needed would impair its ability to continue its business. Other possible 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 Registrant’s securities, the Registrant’s then-existing stockholders' equity could be substantially diluted.
AMEX may consider suspending dealing in, or removing from the list, the securities of the Registrant based upon the Registrant’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 Registrant 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 Registrant if it determines that the Registrant’s financial condition has become so impaired that it appears questionable as to whether the Registrant will be able to continue operations and/or meet its obligations as they mature.
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ITEM 5. OTHER INFORMATION
None.
The exhibits listed in the index 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 17, 2009 | | By: | | /s/ Chris Dick |
| | | | | Chris Dick |
| | | | | Chief Operating Officer and Acting Chief Executive Officer |
| | | | | (Principal Executive Officer) |
| | | | | |
| | | | | |
| | | | | |
| Date: | February 17, 2009 | | By: | | /s/ Mark I. Gittelman |
| | | | | Mark I. Gittelman |
| | | | | Chief Financial Officer and Treasurer |
| | | | | (Principal Financial and Accounting Officer) |
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