U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
-----------------------------------------------
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
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ELITE PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3542636
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
165 Ludlow Avenue, Northvale, New Jersey 07647
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(Address of principal executive offices) (Zip Code)
(201) 750-2646
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(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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the common stock, $.01 par value,
as of August 5, 2005: 18,143,108 (exclusive of 100,000 shares held in treasury).
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2005 (unaudited) and March 31, 2005 1 - 2
Consolidated Statements of Operations for the three months
ended June 30, 2005 and June 30, 2004 (unaudited) 3
Consolidated Statement of Changes in Stockholders' Equity
for the three months ended June 30, 2005 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended June 30, 2005 and June 30, 2004 (unaudited) 5
Notes to Consolidated Financial Statements 6 - 11
Item 2. Management's Discussion And Analysis of Financial
Condition And Results Of Operations 12 - 15
Item 3. Quantitative And Qualitative Disclosures
About Market Risk 15
Item 4. Controls and Procedures 16
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, MARCH 31,
2005 2005
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,693,341 $ 3,902,003
Accounts receivable, net of allowance for
doubtful accounts of $153,250 and
$153,250, respectively -- 142,113
Current portion of restricted cash - debt service 201,337 113,425
Prepaid expenses and other current assets 307,841 346,905
----------- -----------
Total current assets 3,202,519 4,504,446
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 4,152,090 4,194,437
----------- -----------
INTANGIBLE ASSETS - net of accumulated amortization 75,754 81,184
----------- -----------
OTHER ASSETS:
Deferred charges 41,013 41,013
Security deposit 6,980 --
Restricted cash - debt service 300,000 300,000
EDA bond offering costs, net of accumulated
amortization of $76,948 and $73,648,
respectively 120,912 124,212
----------- -----------
Total other assets 468,905 465,225
----------- -----------
Total assets $ 7,899,268 $ 9,245,292
=========== ===========
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
JUNE 30, MARCH 31,
2005 2005
(Unaudited)
CURRENT LIABILITIES:
Current portion - note payable $ 132,476 $ 127,946
Current portion of EDA bonds 165,000 165,000
Accounts payable and accrued expenses 552,509 882,917
------------ ------------
Total current liabilities 849,985 1,175,863
------------ ------------
LONG TERM LIABILITIES:
Note payable - net of current portion 152,261 187,128
EDA bonds - net of current portion 2,180,000 2,180,000
------------ ------------
Total long-term liabilities 2,332,261 2,367,128
------------ ------------
Total liabilities 3,182,246 3,542,991
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock -- $.01 par value;
Authorized 4,483,442 shares
None issued and outstanding
Common Stock - $.01 par value;
Authorized - 65,000,000 shares
Issued and outstanding - 18,143,808 shares
and 18,022,183 shares at June 30, 2005
and March 31, 2005, respectively 181,438 180,222
Additional paid-in capital 47,246,215 47,006,379
Accumulated deficit (42,403,790) (41,177,459)
------------ ------------
5,023,863 6,009,142
Treasury stock, at cost (100,000 shares) (306,841) (306,841)
------------ ------------
Total stockholders' equity 4,717,022 5,702,301
------------ ------------
Total liabilities and stockholders' equity $ 7,899,268 $ 9,245,292
============ ============
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
JUNE 30,
2005 2004
(Unaudited) (Unaudited)
REVENUES $ 114,781 $ --
------------ ------------
COST OF OPERATIONS:
Research and development 738,987 646,229
General and administrative 426,530 408,572
Depreciation and amortization 93,750 105,360
------------ ------------
1,259,267 1,160,161
------------ ------------
LOSS FROM OPERATIONS (1,144,486) (1,160,161)
------------ ------------
OTHER INCOME (EXPENSES):
Interest income 19,830 3,044
Interest expense (56,125) (51,801)
Non-cash compensation through issuance
of stock options and warrants (44,550) (627,364)
------------ ------------
(80,845) (676,121)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,225,331) (1,836,282)
------------ ------------
PROVISION FOR INCOME TAXES 1,000 1,000
------------ ------------
NET LOSS $ (1,226,331) $ (1,837,282)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.07) $ (.15)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 18,058,934 12,204,426
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
3
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
--------------------- PAID-IN TREASURY ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK DEFICIT EQUITY
---------- -------- ----------- ----------- ------------ -----------
BALANCE AT MARCH 31, 2005 (Audited) 18,022,183 $180,222 $47,006,379 $ (306,841) $(41,177,459) $ 5,702,301
Three months ended June 30, 2005 (unaudited)
Exercise of stock options 20,000 200 39,800 -- -- 40,000
Exercise of stock warrants 101,625 1,016 155,486 -- -- 156,502
Non-cash compensation through the issuance of
stock options and warrants -- -- 44,550 -- -- 44,550
Net loss for three months ended June 30, 2005 -- -- -- -- (1,226,331) (1,226,331)
---------- -------- ----------- ----------- ------------ -----------
BALANCE AT JUNE 30, 2005 (Unaudited) 18,143,808 $181,438 $47,246,215 $ (306,841) $(42,403,790) $ 4,717,022
========== ======== =========== =========== ============ ===========
The accompanying notes are an integral part
of the consolidated financial statements.
4
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
JUNE 30,
2005 2004
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,226,331) $(1,837,282)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 93,750 105,360
Non-cash compensation 44,550 627,364
Changes in assets and liabilities:
Accounts receivable 142,113 --
Prepaid expenses and other current assets 39,064 40,145
(Increase) in security deposit (6,980) --
Accounts payable, accrued expenses and
other current liabilities (330,408) (299,352)
Deferred revenue -- 150,000
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,244,242) (1,213,765)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (42,673) --
Payment of deposit for manufacturing equipment -- (1,067)
(Increase) in restricted cash (87,912) (67,073)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (130,585) (68,140)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal equipment note payments (30,337) (18,750)
Proceeds from exercise of stock options 40,000 --
Proceeds from exercise of stock warrants 156,502 --
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 166,165 (18,750)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,208,662) (1,300,655)
CASH AND CASH EQUIVALENTS - beginning of period 3,902,003 2,104,869
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 2,693,341 $ 804,214
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 11,591 $ 3,461
Cash paid for income taxes 1,000 1,000
The accompanying notes are an integral part
of the consolidated financial statements.
5
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The information in this Form 10-Q Report includes the results of
operations of Elite Pharmaceuticals, Inc. and its consolidated
subsidiaries (collectively the "Company") including its wholly-owned
subsidiaries, Elite Laboratories, Inc. ("Elite Labs") and Elite
Research, Inc. ("ERI"), for the three months ended June 30, 2005 and
June 30, 2004. As of June 30, 2005, the financial statements 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 the consolidated
financial position, results of operations and cash flows of the Company
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.
The accompanying consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally
accepted for interim financial statement presentation and should be
read in conjunction with the consolidated financial statements and
notes included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2005. There have been no changes in significant
accounting policies since March 31, 2005.
The Company does not anticipate being profitable for fiscal year 2006;
therefore a current provision for income tax was not established for
the three months ended June 30, 2005. Only the minimum corporation tax
liability required for state purposes is reflected.
NOTE 2 - STOCKHOLDERS' EQUITY
The shareholders at the Annual Meeting of Stockholders adjourned to
July 21, 2004, approved the amendment to the Certificate of
Incorporation increasing the number of authorized shares of capital
stock from 25,000,000 shares of common stock to 65,000,000 shares of
common stock and 5,000,000 shares of Preferred Stock, each with a par
value of $.01 per share. 516,558 shares of the Preferred Stock (issued
as Series A Convertible Preferred Stock during fiscal year 2005) were
converted into shares of common stock and were retired on March 2,
2005.
PUBLIC OFFERINGS
A registration statement on Form SB-2, declared effective on July 6,
2004 under the Securities Act of 1933, as amended, registered the
following shares of common stock:
1) 1,530,000 shares sold in a private placement and 50,000 shares
to be offered upon exercise of warrants issued to the Placement
Agent and its associates.
2) 100,000 shares to be offered upon exercise of stock options
held by a former Chief Executive Officer at the exercise price
of $1.00 per share.
6
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
PUBLIC OFFERINGS (continued)
A registration statement on Form SB-2, declared effective December 28,
2004, under the Securities Act of 1933, as amended, registered the
following shares of common stock:
1) 5,165,580 shares which may be offered upon conversion of the
outstanding 516,558 shares of Series A Preferred Stock (a
conversion rate of 10 shares of Common Stock for each Series A
Preferred share) plus 26,961 shares issued as the December 1,
2004 dividend and up to an additional 765,455 shares which may
be issued as subsequent dividends or pursuant to the conversion
rate on outstanding shares of Series A Preferred Stock;
2) 2,582,790 shares which may be offered upon exercise of Common
Stock Purchase Warrants expiring December 31, 2005 issued in a
private placement by the Company.
3) 3,077,721 shares which may be offered upon exercise of Common
Stock Purchase Warrants expiring December 27, 2009 issued in
the foregoing private placement;
4) 1,362,200 shares acquired from Dr. Atul Mehta and his family
which may be offered by holders.
5) 670,000 shares which may be offered by Dr. Mehta upon exercise
of outstanding options and 50,000 shares which may be offered
by Mr. Jason Lyons upon exercise of Common Stock Purchase
Warrants;
6) 26,500 outstanding shares of which were issued to and may be
offered by CEOcast, Inc.
WARRANTS AND OPTIONS
On July 20, 2004, the Company issued five-year warrants to purchase
50,000 shares of common stock at a price of $3.00 per share to an
individual in consideration of his agreement to render financial
consulting services. Stockholders at the Annual Meeting held on April
15, 2005 ratified the issuance of the warrants.
On July 8, 2004, Elite Labs, to finance the purchase of certain
machinery and equipment, borrowed $400,000 and designees of the lender
received 50,000 warrants, which vested immediately, to purchase an
aggregate of 50,000 shares of the Company's common stock at $4.20 per
share.
On June 3, 2004, the Company granted five-year warrants to purchase
100,000 shares of common stock at a price of $2.50 per share to a
financial consultant.
7
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
WARRANTS AND OPTIONS (continued
The per share weighted-average fair value of the above mentioned
warrants under this subcaption ranged from $.83 - $1.50 using the
Black-Scholes warrant pricing model with the following weighted-average
assumptions: no dividend yield; expected volatility of 80.34; risk free
interest rate of 3.0% and expected lives of 10 years.
The stockholders of the Company approved the adoption by the Board of
Directors of the Company's 2004 Stock Option Plan (the "2004 Plan") in
June 2004 and an amendment to the Plan on April 15, 2005. The Plan, as
amended, reserves 4,000,000 shares of Common Stock for grant by the
Board of Directors of incentive or nonqualified stock options to
officers, employees, or directors of and consultants to the Company.
On June 22, 2004, the Company granted under the 2004 Plan 120,000
options to Directors and 123,300 options to employees to purchase an
aggregate of 243,300 shares of Common Stock at a price of $2.34 per
share. The options granted to employees were in replacement of options
containing exercise prices greater than $2.34 per share granted prior
to the adoption of the 2004 Plan. On the same date the stockholders
approved amendments made previously by the Board of Directors to
outstanding warrants and options including the repricing of options to
purchase 420,000 shares, of which options to purchase 330,000 shares
were held by Directors of the Company.
Accordingly, during the three months ended June 30, 2004 options with
respect to an aggregate of 543,300 options were repriced (treating the
options granted in lieu of outstanding options as repriced options).
The options as repriced have exercise prices between $2.21 and $2.34
per share. 162,300 options are vested and 381,000 options are in
various stages of three year vesting periods. The options expire ten
years from date of issuance. The per share weighted-average fair value
of options repriced during the three months ended June 30, 2004, ranged
from $1.51 - $1.91 using the Black-Scholes options pricing model with
the following weighted-average assumptions: no dividend yield; expected
volatility of 76.69%; risk-free interest rate of 4.0%; and expected
lives of ten years. The Company took a charge of $397,732 for the three
months ended June 30, 2004, which represents the fair value of the
options vested, utilizing the Black-Scholes options pricing model on
each grant date.
The 120,000 options granted under the 2004 Plan to members of the Board
of Directors expire ten years from the date of issuance; have an
exercise price of $2.34 per share and are fully vested. The per share
weighted-average fair value of the options amounted to $1.91 using the
Black-Scholes options pricing model with the following weighted-average
assumptions: no dividend yield; expected volatility of 76.69%; risk
free interest rate of 4.0%; and expected lives of ten years. The
Company took a charge of $229,632 for the three-months ended June 30,
2004, which represents the fair value of the vested options, utilizing
the Black-Scholes options pricing model on the grant date.
8
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
WARRANTS AND OPTIONS (continued)
The following table illustrates the effect on net loss and loss per
share as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to all outstanding and unvested awards in
each period presented:
THREE MONTHS ENDED JUNE
--------------------------
2005 2004
----------- -----------
Net loss as reported $(1,226,331) $(1,837,282)
Add: Stock-based compensation
expense included in reported net loss,
net of related tax effects 44,550 627,364
Deduct: Total stock-based
compensation expense determined
under fair value method for all awards
net of related tax effects (53,786) (641,121)
----------- -----------
Pro-forma net loss $(1,235,567) $(1,851,039)
Loss per share as reported $ (.07) $ (0.15)
Pro-forma loss per share $ (.07) $ (0.15)
At June 30, 2005, Elite had outstanding 2,257,050 options with exercise
prices ranging from $1.00 to $2.34 and 7,934,250 warrants with exercise
prices ranging from $2.00 to $5.00; each option and warrant
representing the right to purchase one share of common stock.
9
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES
COLLABORATIVE AGREEMENTS
On June 21, 2005, the Company and IntelliPharmaCeutics Corp., a
specialty pharmaceutical company, entered into an agreement for the
development and commercialization of a controlled released generic drug
by the parties. The Company is to share in the profits, if any, from
the sales of the drug.
On June 22, 2005, the Company and Pliva, Inc. ("Pliva") entered into a
Product Development and License Agreement, providing for the
development and license of a controlled released generic drug
formulated by the Company. The Company is to manufacture and Pliva is
to market and sell the product. The development costs are to be paid by
Pliva and the Company and the profits are to be shared equally. Pliva
is to make upfront and milestone payments to the Company
On March 30, 2005, the Company entered into a product, development,
manufacturing and distribution agreement with Harris Pharmaceutical,
Inc. ("Harris") and Tish Technologies LLC ("Tish") with respect to a
generic controlled release drug delivery system in an undisclosed area.
The product is a generic equivalent to a branded drug. The agreement
provides for (i) the drug development by Elite with costs of
development to be shared by Elite and Harris, (ii) the manufacture of
the product by Elite and its sale to Harris for distribution, and (iii)
Tish to be responsible for any requisite submissions to the FDA
relating to the product. Elite is to share in the profits, if any,
generated from the sale of the product.
In May, 2004, Elite granted Purdue Pharma, L.P. ("Purdue") the right to
evaluate certain abuse resistance drug formulation technology of the
Company and an option to negotiate an exclusive license to develop and
commercialize Oxycodone products under the Company's technology
pursuant to which the Company received $150,000, which was recognized
as revenue during the year ended March 31, 2005.
10
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS
The Company entered into one year consulting agreements with each of
Saggi Capital Corp. and Bridge Ventures Inc. on November 4, 2003 which
have been extended through the period ending November 4, 2005. Each of
the consultant's services include advice with respect to overall
strategic planning, financing opportunities, acquisition policy,
commercial and investment banking relationships and stockholder
matters. The Company pays each consultant a fee of $75,000 per annum in
monthly installments of $6,250. In addition, the Company issued to each
consultant a five (5) year warrant to purchase 100,000 shares of the
Company's common stock at a price of $2.00 per share.
On June 3, 2004, the Company agreed to issue a five-year warrant to
purchase 100,000 shares of Common Stock at a price of $2.50 per share
to a company in consideration of its agreement to provide consulting
services.
On July 20, 2004, the Company issued to an individual, in consideration
of his agreement to provide financial consulting services, a three-year
warrant to purchase 50,000 shares of common stock at a price of $3.00
per share. The issuance was ratified by stockholders on April 15, 2005.
For the three months ended June 30, 2005 and 2004, consulting expenses
under these agreements amounted to an aggregate of $45,000 and $30,000,
respectively.
LEASE
On July 15, 2005, the Company entered into a lease for two years
commencing on July 1, 2005 for part of a one-story warehouse for the
storage of finished and raw material of pharmaceutical products and
equipment. The lease has a renewal option for a five-year period.
Future minimum lease payments for the periods ending June 30 are:
2006 27,923
2007 27,923
NOTE 4 - SUBSEQUENT EVENTS
On July 14, 2005, the Company granted under its 2004 Stock Option Plan,
ten (10) year options to purchase at a price of $2.80 per share an
aggregate of 152,200 shares of common stock to employees of the
Company. Vesting periods range from immediate to a period of five years
from date of grant.
On the same date, the Company granted ten (10) year options to purchase
20,000 shares of common stock at a price of $2.80 per share to its
Chief Financial Officer. The option will vest over a three year period.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED JUNE 30, 2005 COMPARED TO
THE THREE MONTH PERIOD ENDED JUNE 30, 2004 (UNAUDITED)
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, 2005 (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, earnings before interest, taxes, depreciation
and amortization, 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
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 with the SEC including its Annual
Report on 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.
OVERVIEW
The Company is a specialty pharmaceutical company principally engaged
in the development and manfacture of oral, controlled release products. The
Company develops controlled release products using proprietary technology and
licenses these products. The Company's strategy includes developing generic
versions of controlled release drug products with high barriers to entry and
assisting partner companies in the life cycle management of products to improve
off-patent drug products. The Company's technology is applicable to develop
delayed, sustained or targeted release pellets, capsules, tablets, granules and
powders. The Company has one product currently being sold commercially and a
pipeline of six drug products under development in the therapeutic areas that
include cardiovascular, pain management, allergy and infection. The addressable
market for the Company's pipeline of products exceeds $4 billion. The Company's
current facility in Northvale, New Jersey also is a GMP and DEA registered
facility for research, development and manufacturing.
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 long-lived assets, intangible assets, income taxes, equity-based
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.
12
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. Revenues from these contracts are recognized when
management determines the Company has completed its obligation under each phase.
The Company also assesses a need for an allowance to reduce its deferred tax
assets to the amount that it believes are more likely than not to be realized.
Management estimates its net operating losses will probably not be utilized in
the near future, and has not recognized a tax benefit from this deferred tax
asset. If management anticipated being profitable, a deferred tax benefit would
be recognized and such estimate would reduce net loss and net loss per share
accordingly. 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 assets may not be recoverable. Management estimates the
Company's patents and property and equipment are not impaired. If these assets
were considered impaired, the Company would recognize an impairment loss which
would increase the Company's net loss and net loss per share accordingly. It
should be noted that actual results may differ from these estimates under
different assumptions or conditions.
During the fiscal year ended March 31, 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
affects the Company's results of operations for the three month periods ended
June 30, 2005 and 2004 as options were granted or repriced during these periods
which either vested immediately or vest over three to five years. The Company
does not know the future effect of options and warrants which may be granted to
employees and members of the Board of Directors. The Financial Accounting
Standards Board provided three transition alternatives for recognizing
stock-based compensation cost using the fair value method. If management did not
elect the prospective method during the three month periods ended June 30, 2005
and 2004, net loss and net loss per share would have been decreased. However,
the two other methods would have required either greater compensation cost to be
recognized as an expense or retroactive restatement of previously reported net
loss.
RESULTS OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004
Revenues, consisting solely of manufacturing fees, for the three months
ended June 30, 2005 were $114,781 as compared with none over the comparable
period of the prior year.
General and administrative expenses for the three months ended June 30,
2005 were $426,530, an increase of $17,958, or approximately 4.4%, from the
comparable period of the prior year. The increase in general and administrative
expenses was substantially due to increased salaries and staff.
Research and development costs for the three months ended June 30, 2005
were $739,987, an increase of $92,758, or approximately 14.4%, from $646,229 for
the comparable period of the prior year, primarily the result of increases in
wages, raw materials, laboratory and manufacturing supplies.
We are unable to provide a break-down of the specific costs associated
with the research and development of each product on which we devoted resources
because a significant portion of the costs are generally associated with
salaries, laboratory supplies, laboratory and manufacturing expenses, utilities
and similar expenses. We have not historically allocated these expenses to any
particular product. In addition, 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.
Depreciation and amortization for the three months ended June 30, 2005
decreased by $11,610 to $93,750 from $105,360 for the year earlier comparable
period due to the full amortization and depreciation of certain assets.
Other expenses for the three months ended June 30, 2005 were $80,845, a
decrease of $595,276, or approximately 88%, from the comparable period of the
prior year. The decrease was due to a reduction of $185,082 in charges related
to issuance of stock options, and a charge of $397,732 during the three months
ended June 30, 2004
13
related to the repricing of stock options. Additional interest income, due to
higher compensating balances as a result of the private placement, was offset by
increases in interest expense resulting from the equipment financing.
As a result of the foregoing, the Company's net loss for the three
months ended June 30, 2005 decreased to $1,225,331 from $1,837,282 for the
comparable period of the prior year.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company's working capital (total current assets less total current
liabilities), decreased to $2,352,534 as of June 30, 2005 from $3,328,583 as of
March 31, 2005, primarily due to the net loss of $1,144,486 from operations.
The Company experienced negative cash flow from operations of
$1,237,262 for the three months ended June 30, 2005, primarily due to the
Company's net loss from operations offset by non-cash charges of $138,300, which
included $44,550 in connection with the issuance of stock options and
depreciation and amortization of $93,750.
The Company recently completed a Good Manufacturing Practices ("GMP")
batch for a product currently licensed with a pharmaceutical company under a
development and license agreement entered into June 2001. The Company expects to
complete two additional GMP batches in the near future under the terms of the
licensing agreement.
On November 15, 2004, Elite's partner, ECR, launched LODRANE 24, once a
day allergy product, utilizing Elite's extended release technology to provide
for once daily dosing. Under its agreement with ECR, Elite is currently
manufacturing commercial batches of LODRANE 24 in exchange for a manufacturing
margin and royalties on product revenues. No royalty was earned as of June 30,
2005, but the Company expects the royalties to provide additional cash to help
fund its operations.
On March 30, 2005, the Company entered into a product, development,
manufacturing and distribution agreement with Harris Pharmaceutical, Inc.
("Harris") and Tish Technologies LLC ("Tish") with respect to a generic
controlled release drug delivery system in an undisclosed area. The product is a
generic equivalent to a branded drug which has estimated addressable market
revenues of approximately $80 million per year. The agreement provides for (1)
the development of the drug by Elite with costs of development to be shared by
Elite and the marketing company, (2) the manufacture by Elite and its sale to
the marketing company for distribution and (3) the boutique development company
to be responsible for any requisite submissions to the FDA relating to the
product. Elite is to share in the profits generated from the sale of the
product.
On June 21, 2005, the Company and IntelliPharmaCeutics Corp., a specialty
pharmaceutical company, entered into an agreement for the development and
commercialization of a controlled released generic drug by the parties. The
product had an addressable market in the U.S. of approximately $4 billion in
2004. The Company is to share in the profits, if any, from the sales of the
drug.
On June 22, 2005, the Company and Pliva, Inc. ("Pliva") entered into a
Product Development and License Agreement providing for the development and
license of a controlled released generic drug formulated by the Company. The
product had an estimated U.S. generic market size of approximately $90 million
in 2004. The Company is to manufacture and Pliva will market and sell the
product. Under the agreement, the partner is to make upfront and milestone
payments to the Company. The development costs are to be paid by Pliva and the
Company and the profits are to be shared equally.
No assurance can be given that the Company will consummate any of the
transactions contemplated above or that they will generate any material revenues
for Elite.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended June 30, 2005, the Company recorded negative
cash flow and financed its operations primarily through utilization of its
existing cash. As of June 30, 2005, the Company's had approximately $2,693,000
of cash and cash equivalents and working capital of approximately $2.4 million,
an increase of approximately $1.9 million from the $.8 million at June 30, 2004.
Net cash used in operating activities was $1,237,262 during the three
months ended June 30, 2005, compared to $1,213,765 for the three months ended
June 30, 2004. Net cash used in operating activities during the three months
ended June 30, 2005 included the Company's net loss of $1,226,331 and decreases
in accounts payable and accrued expenses, offset in part by non-cash charges of
$138,300 consisting of 44,550 in stock option charges and $93,750 in
14
depreciation expense. Net cash used in operating activities during the three
months ended June 30, 2004 included the Company's net loss of $1,837,282 offset
in part by non-cash charges of $732,724 consisting of $627,364 in stock option
charges, and $105,360 in depreciation expense.
Investing activities used net cash of $137,565 and $68,140,
respectively, during the three month periods ended June 30, 2005 and June 30,
2004, which resulted primarily from an increase in restricted cash.
During the three months ended June 30, 2005, financing activities
provided net cash of $166,165 from proceeds of $196,502 from the exercise of
stock options and warrants, offset by $30,337 used to repay indebtedness. For
the three months ended June 30, 2004, $18,750 was used to repay indebtedness.
The Company's capital expenditures in the three month period ended June
30, 2005 were $42,673. No capital expenditures were made in the three months
ended June 30, 2004.
The Company anticipates that its capital expenditures for the 12 months
ending June 30, 2006 will be limited to expenditures that can be funded entirely
by development contracts that include provisions for such funding. The Company
is currently seeking refinancing of its current EDA Bonds to enable it to expand
its manufacturing facility with the net proceeds. While the Company's cash as of
June 30, 2005 may prove adequate to finance its operations through June 30,
2006, no assurance can be given that additional funds will not be required.
Accordingly, the Company may seek additional funds through the sale of
additional debt or equity. 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 had outstanding, as of June 30, 2005, bonds in the
aggregate amount of $2,345,000. The bonds bear interest at a rate of 7.75% per
annum and are due on various dates between 2006 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, 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 June 30, 2005. Pursuant to the 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 June 30, 2005, the Company was
in compliance with the bond covenants.
On July 8, 2004, Elite Labs entered into a loan and financing agreement
in order to finance the purchase of certain machinery and equipment. Elite Labs
borrowed $400,000 payable in 36 monthly installments of $13,671,each, including
principal and interest at 14% per annum. The first four and the last three
months of scheduled payments are being held by the lender and will be applied to
the principal balance when due. The loan is secured by two pieces of equipment
and the guaranty of the Company. In addition, the Company issued to designees of
the lender 50,000 warrants, which vested immediately, to purchase 50,000 shares
of the Company's common stock at $4.20 per share. A charge of $41,252 for the
cost of these warrants was reflected in the year ending March 31, 2005.
The Company from time to time will consider potential strategic
transactions including acquisitions, strategic alliances, joint ventures and
licensing arrangements with other pharmaceutical companies. The Company retained
an investment banking firm to assist with its efforts. There can be no assurance
that any such transaction will be available or consummated in the future.
As of June 30, 2005, our principal source of liquidity was
approximately $2,693,000 of cash and cash equivalents. We also 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 proceeds from the sale of tax losses
or from the exercise, if any, of outstanding warrants or options will be
material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had no investments in marketable securities as of June 30,
2005 or assets and liabilities which are denominated in a currency other than
U.S. dollars or involve commodity price risks.
15
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 was no change in the Company's internal controls over financial
reporting that occurred during the fiscal quarter ended June 30, 2005 that
materially affected or is reasonably likely to materially affect the Company's
internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Stockholders at Registrant's Annual Meeting of Stockholders held on
April 15, 2005 took the following actions:
1. Elected its four Directors.
FOR WITHHELD
COMMON PREFERRED COMMON PREFERRED
---------- ------- ------- ---------
Bernard Berk 11,874,465 317,870 511,092 0
Edward Neugeboren* 317,870 0
Barry Dash 12,355,621 317,870 29,936 0
Melvin Van Woert 12,357,621 317,870 27,936 0
* Mr. Neugeboren was elected by the Series A Convertible
Preferred Stockholders.
2. Approved the adoption of the amendment to the Company's 2004
Stock Option Plan to increase to 4,000,000 the shares subject
to the Plan by a vote of 3,335,914 shares for, 648,421 shares
against, and 3,851 shares abstaining.
3. Approved the proposal to ratify amendments of options to a
former officer by a vote of 3,856,770 for, 128,665 shares
against and 2,751 shares abstaining and the issuance of
warrants to a consultant by a vote of 3,853,270 shares for,
131,865 shares against and 3,051 shares abstaining.
4. Approved the engagement of Miller, Ellin & Company LLP as the
Company's independent auditors for the year ended March 31,
2005 by a vote of 12,680,043 shares for, 33,101 shares against
and 1,751 shares abstaining.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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.
(b) Reports on Form 8-K.
Since March 31, 2005 Registrant filed current reports on Form 8-K with
the Securities and Exchange Commission:
Form 8-K filed April 5, 2005, Form 8-K/A filed May 10, 2005, Form 8-K/A
filed June 13, 2005 and Form 8-K/A filed July 20, 2005 relating to
items 1.01 and 9.01.
Form 8-K filed April 29, 2005 relating to item 7.01 and 8.01.
Form 8-K filed May 31, 2005 relating to items 8.01 and 9.01.
Form 8-K filed June 27, 2005 relating to items 1.01 and 9.01.
Form 8-K filed June 28, 2005 relating to items 1.01 and 9.01.
17
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 15, 2005 By: /s/Bernard Berk
----------------------------
Bernard Berk
Chief Executive Officer
(Principal Executive Officer)
Date: August 15, 2005 By: /s/Mark I. Gittelman
----------------------------
Mark I. Gittelman
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
18