AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 2005
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ELITE PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 2834 22-3542636
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
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BERNARD BERK, CHIEF EXECUTIVE OFFICER
ELITE PHARMACEUTICALS, INC.
165 LUDLOW AVENUE
NORTHVALE, NEW JERSEY 07647
(201) 750-2646
(Name, address, including zip code, and
telephone number, including area code,
of registrant's principal executive offices
and agent for service)
With copies to:
SCOTT H. ROSENBLATT, ESQ.
REITLER BROWN & ROSENBLATT LLC
800 THIRD AVENUE, 21ST FLOOR
NEW YORK, NEW YORK 10022-4611
(212) 209-3050
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered pursuant
to dividend or reinvestment plans, please check the following box. |_|
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities pursuant to Rule 462(b)
under the Securities Act, please check the following box and list the Securities
Act Registration Statement number of the earlier effective Registration
Statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SHARE PRICE FEE
Common Stock, $.01 par value 2,402,181 $5.00 $12,010,905 $1,413.68
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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ELITE PHARMACEUTICALS, INC.
CROSS REFERENCE PAGE
Registration Statement Item
Number and Heading Location in Prospectus
------------------ ----------------------
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus..........................................Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................Inside Front and Outside Cover
3. Summary Information, Risk Factors and Ratio of Earnings to
Charges............Prospectus Summary; Risk Factors; Selected Financial Data
4. Use of Proceeds..............................................Use of Proceeds
5. Determination of Offering Price.....................Cover Page; Risk Factors
6. Dilution............................................................Dilution
7. Selling Security Holders................................................ N/A
8. Plan of Distribution................Risk Factors; Offer to Class B and Class
C Warrant holders
9. Description of Securities to be Registered......Description of Capital Stock
10. Interests of Named Experts and Counsel ..................Experts and Counsel
11. Information with Respect to the Registrant..........Prospectus Summary; Risk
Factors; Our Business
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.......................................Part II
PRELIMINARY PROSPECTUS DATED APRIL 27, 2005
PROSPECTUS
ELITE PHARMACEUTICALS, INC.
2,402,181 SHARES
COMMON STOCK
This Prospectus covers an aggregate of 2,402,181 shares of the common
stock of ("Common Stock"), $.01 par value, of Elite Pharmaceuticals, Inc.
("Elite" or the "Company"), a Delaware corporation, of which 1,721,179 shares
are issuable upon exercise of the Company's outstanding Class C Warrants and
681,002 shares are issuable upon exercise of the Company outstanding Class B
Warrants (collectively the "Warrants"). The Warrants are exercisable on or prior
to November 30, 2005 at a price of $5.00 per share.
The Common Stock is listed on the American Stock Exchange under the
symbol "ELI." On April ___, 2005, the closing sales price of our Common Stock on
the American Stock Exchange was [____] per share.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
INVESTORS SHOULD NOT INVEST ANY FUNDS IN THIS OFFERING UNLESS THEY CAN AFFORD TO
LOSE THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The securities are being offered for cash as follows:
Price to Underwriting discounts Proceeds to
public (1) and commissions issuer (1)
Per Share of Common Stock $5.00 None $12,010,905
(1) The exercise price of each Warrant.
Elite intends to furnish its stockholders and holders of Warrants with annual
reports containing audited financial statements, examined by an independent
accounting firm, and such interim reports as it may determine to furnish or as
may be required by law.
TABLE OF CONTENTS
WHERE YOU CAN FIND MORE INFORMATION ABOUT US................................ 3
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION................. 3
PROSPECTUS SUMMARY.......................................................... 4
RISK FACTORS................................................................ 6
OUR BUSINESS................................................................15
USE OF PROCEEDS.............................................................22
CAPITALIZATION..............................................................22
DILUTION....................................................................23
DESCRIPTION OF CAPITAL STOCK................................................33
PRICE RANGE OF OUR COMMON STOCK AND DIVIDEND POLICY.........................34
MANAGEMENT..................................................................35
SECURITY OWNERSHIP OF OUR DIRECTORS, EXECUTIVE OFFICERS AND
PRINCIPAL STOCKHOLDERS....................................................44
OFFERING TO CLASS B AND CLASS C WARRANTHOLDERS..............................45
LEGAL MATTERS...............................................................45
EXPERTS.....................................................................45
2
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file reports, proxy statements, information statements and other
information with the Securities and Exchange Commission (the "SEC"). You may
read and copy this information, for a copying fee, at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for more information in its public reference rooms about the
Company. Our SEC filings are also available to the public from commercial
document retrieval services, from the American Stock Exchange and at the web
site maintained by the SEC at http://www.sec.gov.
Elite has not authorized anyone to give any information or make any
representation about the offering that differs from, or adds to, the information
in this prospectus or in its documents that are publicly filed with the SEC.
Therefore, if anyone does give you different or additional information, you
should not rely on it. The delivery of this prospectus does not mean that there
have not been any changes in Elite's condition since the date of this
prospectus. If you are in a jurisdiction where it is unlawful to offer the
securities offered by this prospectus, or if you are a person to whom it is
unlawful to direct such activities, then the offer presented by this prospectus
does not extend to you. This prospectus speaks only as of its date except where
it indicates that another date applies.
THIS PROSPECTUS IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Certain information contained in this prospectus includes forward-looking
statements (as defined in Section 27A of the Securities Act and Section 21E of
the Securities Exchange Act) that reflect Elite's current views with respect to
future events and financial performance. Certain factors, such as 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 degree of success, if any, in concluding business partnerships
or licenses with viable pharmaceutical companies, instabilities arising from
terrorist actions and responses thereto, and other considerations described as
"Risk Factors" in this prospectus could cause actual results to differ
materially from those in the forward-looking statements. We assume no obligation
to update the matters discussed in this prospectus.
3
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS
PROSPECTUS MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO
UNDERSTAND OUR BUSINESS AND THIS OFFERING FULLY, YOU SHOULD READ THIS ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND THE
RELATED NOTES INCLUDED HEREIN. REFERENCES IN THIS PROSPECTUS TO THE "COMPANY,"
"ELITE," "WE," "OUR," AND "US" REFER TO ELITE PHARMACEUTICALS, INC., A DELAWARE
CORPORATION, TOGETHER WITH OUR SUBSIDIARIES.
THE COMPANY
Elite engages primarily in researching, developing and licensing
proprietary controlled release drug delivery systems and products. We are also
equipped to manufacture controlled release products on a contract basis for
third parties and for ourselves if, and when, our products are approved. We
believe that controlled release drug delivery of a pharmaceutical compound
offers a safer and more effective means of administering drugs through releasing
a drug into the bloodstream or delivering it to a certain site in the body at
predetermined rates or predetermined times. The goal is to provide more
effective drug therapy while reducing or eliminating many of the side effects
associated with conventional drug therapy and/or to reduce the frequency of
administration.
We have concentrated on developing orally administered controlled release
products. These products include drugs that cover therapeutic areas for pain,
angina, hypertension, allergy and infection.
In June 2001, we entered into agreements with a pharmaceutical company,
for the pharmaceutical company to market two drug products in the field of
allergy treatment. The pharmaceutical company agreed that upon our development
of each product it would secure the required regulatory approval, if any. We are
to receive royalties based on sales of the product and revenues based on our
manufacturing costs. We completed the commercial development of Lodrane 24(R),
and marketing by the partner commenced in November 2004. We are currently
engaged in the commercial development of the second product.
On March 30, 2005, we entered into an agreement with a marketing company
and a formulation development company for us to develop a designated controlled
release product, which is to be manufactured by us upon receipt of FDA approval
to be secured by the formulation development company and sold to the marketing
company for distribution.
Four of our other products are at different stages of development and
will require FDA approval.
We are focusing our efforts on the following areas: (i) the manufacture
of Lodrane 24(R) and the development and manufacturing of the second allergy
product; (ii) commercial exploitation of products either by license and the
collection of royalties, or through the manufacture of tablets and capsules
using our developed formulations, and (iii) development of new products and the
expansion of our licensing agreements with other pharmaceutical companies,
including contract research and development projects, joint ventures and other
collaborations.
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In an effort to reduce costs and improve focus and efficiency, we have
reduced the number of products that we are actively developing from fifteen to
seven, one of which has been developed and is currently being marketed. The
products that continue in development were deemed by us to be the most suitable
for continued development given our limited resources.
We are also focusing on the development of various types of drug products
including branded drug products (which require new drug applications ("NDAs"))
and generic drug products (which require abbreviated new drug applications
("ANDAs")).
We intend to continue to collaborate in the development of products with
our current partners and to seek additional collaborations to develop more
products.
We believe that our business strategy enables us to reduce our risk by:
o having a product portfolio that includes branded and generic
products in various therapeutic categories; and
o building collaborations and establishing licensing agreements with
companies with greater resources thereby allowing us to share costs of
development and to improve cash-flow.
Our common stock is traded on the American Stock Exchange under the
symbol "ELI". The market for our stock has historically been characterized
generally by low volume and broad price and volume volatility. We cannot give
any assurance that a stable trading market will develop for our stock.
Our executive offices are located at 165 Ludlow Avenue, Northvale, New
Jersey 07647. Phone No.: (201) 750-2646; Facsimile No.: (201) 750-2755.
SUMMARY OF FINANCIAL DATA
YEAR ENDED MARCH 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------- ------------------ ------------
STATEMENT OPERATIONS DATA: 2003 2004 2003 2004
------------ ------------ ------------ ------------
Net Revenues ....................... $ 630,310 $ 258,250 $ 30,000 $ 151,450
Loss from Operations ............... (3,552,214) (4,699,506) (3,263,544) (3,732,465)
Other Income (Expenses) ............ (508,808) (1,813,711) (1,698,937) (916,362)
Loss per share basic and diluted ... (0.40) (0.58) (.46) (.39)
Weighted average of shares ......... 10,069,991 11,168,618 10,829,626 12,231,405
MARCH 31, DECEMBER 31,
2004 2004
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BALANCE SHEET DATA:
Cash and cash equivalents ......... $2,104,869 $4,564,948
Working capital .................... 1,289,764 3,846,412
Total Assets ....................... 7,853,434 9,562,630
Long-Term obligations .............. 2,495,000 2,385,051
Shareholders' equity ............... 4,048,192 6,287,565
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RISK FACTORS
In addition to the other information contained in this prospectus, the
following risk factors should be considered carefully in evaluating an
investment in Elite and in analyzing our forward-looking statements.
OUR CONTINUING LOSSES ENDANGER OUR VIABILITY AS A GOING-CONCERN AND HAVE CAUSED
OUR AUDITORS TO ISSUE "GOING CONCERN" AUDIT REPORTS.
We reported net losses of $4,649,827, $6,514,217, $4,061,422, $1,774,527
and $13,964,981 for the nine months ended December 31, 2004 and fiscal years
ended March 31, 2004, 2003, 2002 and 2001, respectively. At December 31, 2004,
we had an accumulated deficit of approximately $39.83 million, consolidated
assets of approximately $9.56 million, stockholders' equity of approximately
$6.29 million, and a working capital of approximately $3.85 million. Our
products are in the development and early deployment stage and have not
generated any significant revenue to date. Our independent auditors have issued
a "going concern" audit report for our financial statements for the fiscal years
ended March 31, 2004 and March 31, 2003.
WE HAVE A RELATIVELY LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO
EVALUATE OUR FUTURE PROSPECTS.
Although we have been in operation since 1990, we have a relatively short
operating history and limited financial data upon which you may evaluate our
business and prospects. In addition, our business model is likely to continue to
evolve as we attempt to expand our product offerings and enter new markets. As a
result, our potential for future profitability must be considered in light of
the risks, uncertainties, expenses and difficulties frequently encountered by
companies that are attempting to move into new markets and continuing to
innovate with new and unproven technologies. Some of these risks relate to our
potential inability to:
o develop new products;
o obtain regulatory approval of our products;
o manage our growth, control expenditures and align costs with
revenues;
o attract, retain and motivate qualified personnel; and
o respond to competitive developments.
If we do not effectively address the risks we face, our business model may
become unworkable and we may not achieve or sustain profitability or
successfully develop any products.
WE HAVE NOT BEEN PROFITABLE AND EXPECT FUTURE LOSSES.
To date, we have not been profitable, and since our inception in 1990, we
have not generated any significant revenues. We may never be profitable or, if
we become profitable, we may be unable to sustain profitability. We have
sustained losses in each year since our incorporation in 1990. We incurred net
losses of $4,649,827, $6,514,217, $4,061,422, $1,774,527 and $13,964,981 for the
nine months ended December 31, 2004 and the years ended
6
March 31, 2004, 2003, 2002 and 2001, respectively. We expect to continue to
incur losses until we are able to generate sufficient revenues to support our
operations and offset operating costs.
OUR FOUNDER AND FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER RESIGNED IN JUNE
2003 ALL OF HIS POSITIONS WITH ELITE, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT
ON US.
On June 3, 2003, Dr. Atul M. Mehta, our founder and former President and
Chief Executive Officer resigned from all of his positions with Elite. In the
past, we relied on Dr. Mehta's scientific expertise in developing our products.
There can be no assurance that we will successfully replace Dr. Mehta's
expertise. In addition, the loss of Dr. Mehta's services may adversely affect
our relationships with our contract partners.
Pursuant to an agreement in April 2004 and a related agreement in October
2004, to settle a litigation initiated by Dr. Mehta in July 2003 for alleged
breach of his employment agreement, the Company extended the expiration dates to
November 30, 2007 of options to purchase 670,000 shares of Common Stock held by
Dr. Mehta and he relinquished any rights to the Company's intellectual property
and agreed to certain non-disclosure and non-competition covenants. The Company
also provided him with certain "piggyback" registration rights with respect to
the shares issuable upon exercise of the foregoing options granted by the
Company. Dr. Mehta and members of his family sold in October 2004 an aggregate
of 1,362,200 shares of Common Stock representing all of his and his affiliates
holdings of securities of the Company except for the foregoing options.
OUR RESEARCH ACTIVITIES ARE CHARACTERIZED BY INHERENT RISK AND WE MAY NOT BE
ABLE TO SUCCESSFULLY DEVELOP PRODUCTS FOR COMMERCIAL USE THAT ARE IN OUR
PIPELINE.
Our research activities are characterized by the inherent risk that the
research will not yield results that will receive FDA approval or otherwise be
suitable for commercial exploitation.
We have entered into agreements with respect to the marketing upon
development of three drugs. Each agreement provides that we are to commercially
develop the product and upon securing by a partner or the partners of FDA
approval or other regulatory approval, if required, we will manufacture the
product and sell it to a partner or marketing partner for distribution. The
commercial development of one drug has been completed, a second drug is under
development and a third is to be developed. No assurance can be given that the
marketing partner will not experience difficulty in selling the product, which
would result in little revenue or profit for Elite from the product.
Of the four other products currently under development and on which we
are devoting substantial attention, two products are in pilot Phase I studies
and two products are in the pilot bioequivalence stage. Additional studies
including either pivotal bioequivalence or efficacy studies will be required for
these products before commercialization.
In order for any of the four products to be commercialized, FDA approval
is required, successful completion of pivotal biostudies is required to file an
ANDA with the FDA, and successful completion of pivotal clinical trials is
required to file a NDA with the FDA, and successful completion of comparative
studies for drug listed products. ANDAs are filed with respect to generic
versions of existing FDA approved products while NDAs are filed with respect to
new products.
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WE COULD EXPERIENCE DIFFICULTY IN DEVELOPING AND INTEGRATING STRATEGIC
ALLIANCES, CO-DEVELOPMENT OPPORTUNITIES AND OTHER RELATIONSHIPS.
With respect to products that are developed and are available for
commercial sale, we intend to pursue product-specific licensing, marketing
agreements, co-development opportunities and other partnering arrangements in
connection with the distribution of the product. We have entered into
partnership arrangements as to three products but cannot be sure that we will be
able to locate other partners or that the arrangement will be suitable. In
addition, assuming we identify suitable partners, the process of effectively
entering into these arrangements involves risks such that our management's
attention may be diverted from other business concerns and that we may have
difficulty integrating the new arrangements into our existing business.
OUR LIMITED EXPERIENCE IN CONDUCTING CLINICAL TRIALS AND SUBMITTING NDAS AND THE
UNCERTAINTIES INHERENT IN CLINICAL TRIALS COULD RESULT IN DELAYS IN PRODUCT
DEVELOPMENT AND COMMERCIALIZATION.
Prior to seeking FDA approval for the commercial sale of any drug we
develop, which does not qualify for the FDA's abbreviated application
procedures, we or our partner must demonstrate through clinical trials that
these products are safe and effective for use. We have limited experience in
conducting and supervising clinical trials. The process of completing clinical
trials and preparing an NDA may take several years and requires substantial
resources. Our studies and filings may not result in FDA approval to market our
new drug products and, if the FDA grants approval, we cannot predict the timing
of any approval.
IF OUR CLINICAL TRIALS ARE NOT SUCCESSFUL OR TAKE LONGER TO COMPLETE THAN WE
EXPECT, WE MAY NOT BE ABLE TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS.
In order to obtain regulatory approvals for the commercial sale of our
potential products, we will be required to complete clinical trials in humans to
demonstrate the safety and efficacy of the products. We may not be able to
obtain authority from the FDA or other regulatory agencies to commence or
complete these clinical trials.
The results from preclinical testing of a product that is under
development may not be predictive of results that will be obtained in human
clinical trials. In addition, the results of early human clinical trials may not
be predictive of results that will be obtained in larger scale advanced stage
clinical trials. Furthermore, we or the FDA may suspend clinical trials at any
time if the subjects participating in such trials are being exposed to
unacceptable health risks, or for other reasons.
The rate of completion of clinical trials is dependent in part upon the
rate of enrollment of subjects. A favorable clinical trial result is a function
of many factors including the size of the subject population, the proximity of
subjects to clinical sites, the eligibility criteria for the study and the
existence of competitive clinical trials. Delays in planned subject enrollment
may result in increased costs and program delays.
We may not be able to successfully complete any clinical trial of a
potential product within any specified time period. In some cases, we may not be
able to complete the trial at all. Moreover, clinical trials may not show any
potential product to be safe or efficacious. Thus, the
8
FDA and other regulatory authorities may not approve any of our potential
products for any indication.
Our business, financial condition, or results of operations could be
materially adversely affected if:
o we are unable to complete a clinical trial of one of our potential
products;
o the results of any clinical trial are unfavorable; or
o the time or cost of completing the trial exceeds our expectations.
WE ARE DEPENDENT ON A SMALL NUMBER OF SUPPLIERS FOR OUR RAW MATERIALS, AND ANY
DELAY OR UNAVAILABILITY OF RAW MATERIALS CAN MATERIALLY ADVERSELY AFFECT OUR
ABILITY TO PRODUCE PRODUCTS.
The FDA requires identification of raw material suppliers in applications
for approval of drug products. If raw materials were unavailable from a
specified supplier, FDA approval of a new supplier could delay the manufacture
of the drug involved. In addition, some materials used in our products are
currently available from only one supplier or a limited number of suppliers.
Further, a significant portion of our raw materials may be available only from
foreign sources. Foreign sources can be subject to the special risks of doing
business abroad, including:
o greater possibility for disruption due to transportation or communication
problems;
o the relative instability of some foreign governments and economies;
o interim price volatility based on labor unrest, materials or equipment
shortages, export duties, restrictions on the transfer of funds, or
fluctuations in currency exchange rates; and
o uncertainty regarding recourse to a dependable legal system for the
enforcement of contracts and other rights.
In addition, recent changes in patent laws in certain foreign
jurisdictions (primarily in Europe) may make it increasingly difficult to obtain
raw materials for research and development prior to expiration of applicable
United States or foreign patents. Any inability to obtain raw materials on a
timely basis, or any significant price increases that cannot be passed on to
customers, could have a material adverse effect on us.
The delay or unavailability of raw materials can materially adversely
affect our ability to produce products. This can materially adversely affect our
business and operations.
IF WE NEED ADDITIONAL FINANCING IN ORDER TO SATISFY OUR SIGNIFICANT CAPITAL
REQUIREMENTS AND ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, IT WOULD IMPAIR OUR
ABILITY TO CONTINUE TO DO BUSINESS.
We completed a $6,600,000 private placement in October 2004 of (i)
516,558 shares of our Series A Preferred Stock convertible into shares of Common
Stock, (ii) warrants ("Short Term Warrants") expiring December 31, 2005 and
warrants ("Long Term Warrants") expiring December 27, 2009 to purchase at a
price ranging from $1.54 to $1.84 per share 5,165,580 shares of Common Stock,
and (iii) Long Term Warrants issued to the Placement Agent to purchase 494,931
shares of Common Stock at prices ranging from $1.23 to $1.47 per share. As of
March 7, 2005, all of the shares of the Series A Preferred Stock have been
converted into 5,200,120 shares of Common Stock. We anticipate, based on our
currently proposed plans and
9
assumptions relating to our operations, that we have sufficient capital to
satisfy our contemplated cash requirements through March 31, 2006. After that
time, we may require additional financing. In particular, we expect to make
substantial expenditures as we further develop and seek to commercialize our
products. As of December 31, 2004 we were depleting our cash which amounted to
approximately $4.56 million on that date at the rate of $300,000 per month. We
expect that our rate of spending will accelerate as the result of increased
costs and expenses associated with seeking regulatory approval and
commercialization of products now in development. We have no current
arrangements with respect to additional financings other than the potential
exercise of the Short Term and Long Term Warrants issued in the October 2004
private placement and the warrants issued to the Placement Agent, the Class B
and Class C Warrants and other warrants and options that are currently
outstanding. We have no way of knowing whether any of the options or warrants
will be exercised and if so the extent by which their exercise will be pursuant
to cashless exercise provisions. We do not currently have commitments for their
exercise or other financing, and so do not know whether additional financing
would be available to us on favorable terms, or at all. Our inability to obtain
additional financing when needed would impair our ability to continue our
business.
If any future financing involves the sale of our securities, our
then-existing stockholders' equity could be substantially diluted. On the other
hand, if we incurred debt, we would be subject to risks associated with
indebtedness, including the risk that interest rates might fluctuate and cash
flow would be insufficient to pay principal and interest on such indebtedness.
If our plans change, or our assumptions change or prove to be inaccurate, or our
cash flow proves to be insufficient to fund our operations due to unanticipated
expenses or problems, we would be required to seek additional financing sooner
than anticipated.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND AVOID CLAIMS
THAT WE INFRINGED ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, OUR ABILITY TO
CONDUCT BUSINESS MAY BE IMPAIRED.
Our success, competitive position and amount of royalty income, if any,
will depend in part on our ability to obtain patent protection in various
jurisdictions related to our technologies, processes and products. We intend to
file patent applications seeking such protection, but we cannot be certain that
these applications will result in the issuance of patents. If patents are
issued, third parties may sue us to challenge such patent protection, and
although we know of no reason why they should prevail, it is possible that they
could. It is likewise possible that our patents may not prevent third parties
from developing similar or competing products. In addition, although we are not
aware of any threatened or pending actions by third parties asserting that we
have infringed on their patents, and are not aware of any actions we have taken
that would lead to such a claim, it is possible that we might be sued for
infringement. The cost involved in bringing suits against others for
infringement of our patents, or in defending any suits brought against us, can
be substantial. We may not possess sufficient funds to prosecute or defend such
suits. If our products were found to infringe upon patents issued to others, we
would be prohibited from manufacturing or selling such products and we could be
required to pay substantial damages.
In addition, we may be required to obtain licenses to patents, or other
proprietary rights of third parties, in connection with the development and use
of our products and technologies as they relate to other persons' technologies.
At such time as we discover a need to obtain any such license, we will need to
establish whether we will be able to obtain such a license on favorable
10
terms. The failure to obtain the necessary licenses or other rights could
preclude the sale, manufacture or distribution of our products.
We also rely upon trade secrets and proprietary know-how. We seek to
protect this know-how in part by confidentiality agreements. We consistently
require our employees and potential business partners to execute confidentiality
agreements prior to doing business with us. However, it is possible that an
employee would disclose confidential information in violation of his or her
agreement, or that our trade secrets would otherwise become known or be
independently developed in such a manner that we will have no practical
recourse.
We are not engaged in any litigation, nor contemplating any, with regard
to a claim that someone has infringed one of our patents, revealed any of our
trade secrets, or otherwise misused our confidential information.
THE PHARMACEUTICAL INDUSTRY IS SUBJECT TO EXTENSIVE FDA REGULATION AND FOREIGN
REGULATION, WHICH PRESENTS NUMEROUS RISKS TO US.
The manufacturing and marketing of pharmaceutical products in the United
States and abroad are subject to stringent governmental regulation. The sale of
any of our products for use in humans in the United States will require the
approval of the FDA. Similar approvals by comparable agencies are required in
most foreign countries. The FDA has established mandatory procedures and safety
standards that apply to the clinical testing, manufacture and marketing of
pharmaceutical products. Obtaining FDA approval for a new therapeutic product
may take several years and involve substantial expenditures. None of our
products has been approved for sale or use in humans in the United States or
elsewhere.
If we or our licensees fail to obtain or maintain requisite governmental
approvals or fail to obtain or maintain approvals of the scope requested, it
will delay or preclude us or our licensees or marketing partners from marketing
our products. It could also limit the commercial use of our products.
THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND
SIGNIFICANT TECHNOLOGICAL CHANGE, WHICH COULD IMPAIR OUR ABILITY TO IMPLEMENT
OUR BUSINESS MODEL.
The pharmaceutical industry is highly competitive, and we may be unable
to compete effectively. In addition, it is undergoing rapid and significant
technological change, and we expect competition to intensify as technical
advances in each field are made and become more widely known. An increasing
number of pharmaceutical companies have been or are becoming interested in the
development and commercialization of products incorporating advanced or novel
drug delivery systems. We expect that competition in the field of drug delivery
will increase in the future as other specialized research and development
companies begin to concentrate on this aspect of the business. Some of the major
pharmaceutical companies have invested and are continuing to invest significant
resources in the development of their own drug delivery systems and technologies
and some have invested funds in such specialized drug delivery companies. Many
of our competitors have longer operating histories and greater financial,
research and development, marketing and other resources than we do. Such
companies may develop new formulations and products, or may improve existing
ones, more efficiently than we can. Our success, if any, will depend in part on
our ability to keep pace with the changing technology in the fields in which we
operate.
11
IF KEY PERSONNEL WERE TO LEAVE ELITE OR IF WE ARE UNSUCCESSFUL IN ATTRACTING
QUALIFIED PERSONNEL, OUR ABILITY TO DEVELOP PRODUCTS COULD BE MATERIALLY HARMED.
Our success depends in large part on our ability to attract and retain
highly qualified scientific, technical and business personnel experienced in the
development, manufacture and marketing of controlled release drug delivery
systems and products. Our business and financial results could be materially
harmed by the inability to attract or retain qualified personnel.
IF WE WERE SUED ON A PRODUCT LIABILITY CLAIM, AN AWARD COULD EXCEED OUR
INSURANCE COVERAGE AND COST US SIGNIFICANTLY.
The design, development and manufacture of our products involve an
inherent risk of product liability claims. We have procured product liability
insurance having a maximum limit of $5,000,000; however, a successful claim
against us in excess of the policy limits could be very expensive to us,
damaging our financial position. The amount of our insurance coverage, which had
been limited due to our limited financial resources, may be materially below the
coverage maintained by many of the other companies engaged in similar
activities. To the best of our knowledge, no product liability claim has been
made against us as of March 15, 2005.
OUR STOCK PRICE HAS BEEN VOLATILE AND MAY FLUCTUATE IN THE FUTURE.
There has been significant volatility in the market prices for publicly
traded shares of pharmaceutical companies, including ours. For the twelve months
ended February 28, 2005, the closing sale price on the American Stock Exchange
of our Common Stock fluctuated from a high of $4.79 per share to a low of $1.05
per share. The per share price of our Common Stock may not remain at or exceed
current levels. The market price for our Common Stock, and for the stock of
pharmaceutical companies generally, has been highly volatile. The market price
of our Common Stock may be affected by:
o Results of our clinical trials;
o Approval or disapproval of abbreviated new drug applications or new drug
applications;
o Announcements of innovations, new products or new patents by us or by our
competitors;
o Governmental regulation;
o Patent or proprietary rights developments;
o Proxy contests or litigation;
o News regarding the efficacy of, safety of or demand for drugs or drug
technologies;
o Economic and market conditions, generally and related to the
pharmaceutical industry;
o Healthcare legislation;
o Changes in third-party reimbursement policies for drugs; and
o Fluctuations in our operating results.
12
As of March 7, 2005, all of the issued 516,558 shares of Series A
Preferred Stock have been converted into an aggregate of 5,200,120 shares of
Common Stock. All of the shares issued upon conversion have been registered
under the Securities Act of 1933 for resale. In addition, we have registered
under the Securities Act of 1933, as amended for reoffering the shares of Common
Stock which may be acquired upon exercise of the Short Term Warrants, Long Term
Warrants and the Placement Agent Warrants as well as 670,000 shares which may be
acquired upon exercise of options at prices ranging from $1.00 to $3.00 per
share granted to Dr. Atul Mehta. As of this date sales of substantial amounts of
the Common Stock in the public market are eligible for sale by these holders.
Perceptions that substantial sales may take place in the future may lower the
Common Stock's market price.
THE FAILURE TO MAINTAIN THE AMERICAN STOCK EXCHANGE LISTING OF THE COMMON STOCK
WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE MARKET FOR THE COMMON STOCK AND ITS
MARKET PRICE.
One of the requirements for the continued listing of Common Stock on the
American Stock Exchange for a company that has net losses for its five most
recent fiscal years is that it have a stockholders' equity of at least
$6,000,000. The Company is expected to sustain a net loss for the year ending
March 31, 2005, and as a result will have sustained net losses in its five most
recent fiscal years. As of December 31, 2004, based on unaudited information,
the Company had stockholders equity of approximately $6.29 million. The related
provision of the American Stock Exchange guide provides that the Exchange will
not normally consider removing a stock from listing if the total value of the
Company's market capitalization is at least $50,000,000 as well as satisfying
other conditions which the Company meets and expects to meet. As of March 31,
2005 the Company's stockholder's equity exceeded $6,000,000. The failure to
maintain listing of the Common Stock on the Exchange will have an adverse effect
on the market and the market price for the Common Stock.
THE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK OR OUR PREFERRED STOCK
COULD MAKE A CHANGE OF CONTROL MORE DIFFICULT TO ACHIEVE.
The issuance of additional shares of the Company's Common Stock or the
issuance of shares of an additional series of Preferred Stock could be used to
make a change of control of the Company more difficult and expensive. Under
certain circumstances, such shares could be used to create impediments to or
frustrate persons seeking to cause a takeover or to gain control of the Company.
Such shares could be sold to purchasers who might side with the Board in
opposing a takeover bid that the Board determines not to be in the best
interests of its stockholders. It might also have the effect of discouraging an
attempt by another person or entity through the acquisition of a substantial
number of shares of the Company's Common Stock to acquire control of the Company
with a view to consummating a merger, sale of all or part of the Company's
assets, or a similar transaction, since the issuance of new shares could be used
to dilute the stock ownership of such person or entity.
IF PENNY STOCK REGULATIONS BECOME APPLICABLE TO OUR COMMON STOCK THEY WILL
IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR COMMON STOCK AND THE ABILITY OF
OUR STOCKHOLDERS TO SELL SHARES OF OUR STOCK COULD BE IMPAIRED.
The SEC has adopted regulations that generally define a "penny stock" to
be an equity security that has a market price of less than $5.00 per share or an
exercise price of less than
13
$5.00 per share subject to certain exceptions. Exceptions include equity
securities issued by an issuer that has (i) net tangible assets of at least
$2,000,000, if such issuer has been in continuous operation for more than three
years, or (ii) net tangible assets of at least $5,000,000, if such issuer has
been in continuous operation for less than three years, or (iii) average revenue
of at least $6,000,000 for the preceding three years. Unless an exception is
available, the regulations require that prior to any transaction involving a
penny stock, a risk of disclosure schedule must be delivered to the buyer
explaining the penny stock market and its risks. Our Common Stock is currently
trading at under $5.00 per share. Although we currently fall under one of the
exceptions, if at a later time we fail to meet one of the exceptions, our Common
Stock will be considered a penny stock. As such the market liquidity for our
Common Stock will be limited to the ability of broker-dealers to sell it in
compliance with the above-mentioned disclosure requirements.
You should be aware that, according to the SEC, the market for penny
stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include:
o Control of the market for the security by one or a few broker-dealers;
o "Boiler room" practices involving high-pressure sales tactics;
o Manipulation of prices through prearranged matching of purchases and
sales;
o The release of misleading information;
o Excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
o Dumping of securities by broker-dealers after prices have been
manipulated to a desired level, which hurts the price of the stock and
causes investors to suffer loss.
We are aware of the abuses that have occurred in the penny stock market.
Although we do not expect to be in a position to dictate the behavior of the
market or of broker-dealers who participate in the market, we will strive within
the confines of practical limitations to prevent such abuses with respect to our
Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW MAY DETER A THIRD PARTY FROM
ACQUIRING US.
Section 203 of the Delaware General Corporation Law prohibits a merger
with a 15% shareholder within three years of the date such shareholder acquired
15%, unless the merger meets one of several exceptions. The exceptions include,
for example, approval by the holders of two-thirds of the outstanding shares
(not counting the 15% shareholder), or approval by the Board prior to the 15%
shareholder acquiring its 15% ownership. This provision makes it difficult for a
potential acquirer to force a merger with or takeover of the Company, and could
thus limit the price that certain investors might be willing to pay in the
future for shares of our Common Stock.
14
OUR BUSINESS
Elite engages primarily in researching, developing and licensing
proprietary controlled release drug delivery systems and products. We are also
equipped to manufacture controlled release products on a contract basis for
third parties and for ourselves if, and when, our products are approved.
Controlled release drug delivery of a pharmaceutical compound offers a safer and
more effective means of administering drugs through releasing a drug into the
bloodstream or delivering it to a certain site in the body at predetermined
rates or predetermined times. The goal is to provide more effective drug therapy
while reducing or eliminating many of the side effects associated with
conventional drug therapy and/or to reduce the frequency of administration.
We have concentrated on developing orally administered controlled release
products. These products include drugs that cover therapeutic areas for pain,
angina, hypertension, allergy and infection. The Food and Drug Administration
(FDA) has not yet approved any of our products, each of which is at a different
stage of development. One of our products has been commercially developed and is
being marketed by a pharmaceutical company partner. One is under development for
marketing by the same company. A third product is to be developed pursuant to a
recent agreement with another pharmaceutical company.
We are focusing our efforts on the following areas: (i) manufacturing of
Lodrane 24(R) and the development and manufacture of the two other products
referred to above; (ii) commercial exploitation of our products either by
license and the collection of royalties, or through the manufacture of tablets
and capsules using our formulations, and (iii) development of new products and
the expansion of our licensing agreements with other pharmaceutical companies,
including contract research and development projects, joint ventures and other
collaborations.
In an effort to reduce costs and improve focus and enhance efficiency, we
reduced the number of products that we are actively developing from fifteen to
seven. The seven products, one of which have been commercially developed, five
that are in development and one to be developed, were deemed by us to be the
most suitable for development given our limited resources.
We are focusing on the development of various types of drug products,
including both branded drug products (which require new drug applications
("NDA")) and generic drug products (which require abbreviated new drug
applications ("ANDA")).
We intend to continue to collaborate in the development of products with
our current partners. We also plan to seek additional collaborations to develop
more products.
We believe that our business strategy enables us to reduce our risk by
o having a diverse product portfolio that includes both branded and
generic products in various therapeutic categories; and
o building collaborations and establishing licensing agreements with
companies with greater resources thereby allowing us to share costs of
development and to improve cash-flow.
15
RESEARCH AND DEVELOPMENT
During the nine months ended December 31, 2004 and each of the last three
fiscal years, we have focused on research and development activities. We spent
$1,937,794 in the nine months ended December 31, 2004, $2,075,074 in the fiscal
year ended March 31, 2004, $2,013,579 in the fiscal year ended March 31, 2003
and $1,609,108 in the fiscal year ended March 31, 2002 on research and
development activities.
Of our seven controlled release products, two are for pain (the Oxycodone
CR and a related abuse resistant product), one (diltiazem) is for cardiovascular
indications, two are for allergy indications, one is for an anti-infective
indication and one is for an undisclosed indication. One of the allergy products
has been developed and is being marketed by a pharmaceutical company which has
the responsibility for regulatory matters and is to market the second drug for
allergy indications upon completion of its commercial development. The drug for
the undisclosed indication is to be developed by us pursuant to a March 30, 2005
agreement. See "Manufacturing and Development Contracts".
The table below presents information with respect to the development of
the five products under development. For some of the products, we intend to make
NDA filings under Sections 505(b)(1) or 505(b)(2) of the Drug Price Competition
and Patent Term Restoration Act of 1984 (the "Drug Price Act"). Accordingly, we
anticipate, as to which there is no assurance, that the development timetable
for the products for which such NDA filings are made would be shorter and less
expensive. Completion of development of products by us depends on a number of
factors, however, and there can be no assurance that specific time frames will
be met during the development process or that the development of any particular
products will be continued.
In the table, Pilot Phase I studies for the NDA products are generally
preliminary studies done in healthy human subjects to assess the
tolerance/safety and pharmacokinetics of the product. Additional larger studies
in humans will be required prior to submission of the product to the FDA for
review. Pilot bioequivalence studies are initial studies done in humans for
generic products and are used to assess the likelihood of achieving
bioequivalence for generic products. Larger pivotal bioequivalence studies will
be required prior to submission of the product to the FDA for review.
--------------------------------------------------------------------------------
DEVELOPMENT STAGE NUMBER OF PRODUCTS NDA/ANDA
--------------------------------------------------------------------------------
Preclinical 1 ANDA
--------------------------------------------------------------------------------
Pilot Phase I study 2 NDA
--------------------------------------------------------------------------------
Pilot bioequivalence study 2 ANDA
--------------------------------------------------------------------------------
MANUFACTURING AND DEVELOPMENT CONTRACTS
In September 1999 Elite entered into an agreement with an undisclosed
partner to co-develop a chrono diltiazem product. A pilot pharmacokinetic study
has been conducted, but until we have additional resources to devote to this
product and locate a partner, we will not perform further clinical studies.
In June 2001, we entered into two development contracts pursuant to which
we agreed to commercially develop two products in exchange for development fees,
certain payments,
16
royalties and manufacturing rights. The product, Lodrane 24(R), was first
commercially offered in November 2004, and we are to receive revenues for
manufacturing the product and a royalty on sales. Development of the second
product continues.
The payments under the foregoing agreements for the year ended March 31,
2004 and the nine months ended December 31, 2004 were not material.
On March 30, 2005, we entered into an agreement with a dermatological
marketing company and a formulation development company pursuant to which we are
to commercially develop a drug with the marketing company to share in the
development costs. Upon its development and the securing of the required FDA
approval by the formulation development company, we are to manufacture and sell
the commercially developed drug to the marketing company for distribution. In
addition to the sales price to the marketing company, we are to share the
profits, if any, realized upon sales.
JOINT VENTURE WITH ELAN
In October 2000, we entered into a joint venture, ERL, with Elan to
develop products using drug delivery technologies and expertise of both
companies. ERL was initially owned 80.1% by us and 19.9% by Elan. ERL funded its
research through capital contributions from its partners based on the partners'
respective ownership percentage.
On September 30, 2002, we entered into an agreement with Elan to
terminate the joint venture (the "Termination Agreement"). Pursuant to the
Termination Agreement, we terminated the joint venture and acquired from Elan
its entire interest in ERL. As a result of the Termination Agreement, we owned
100 percent of ERL's capital stock. On December 31, 2002, ERL was merged into a
new Delaware corporation, Elite Research, our wholly-owned subsidiary.
Under the Termination Agreement, we acquired all proprietary, development
and commercial rights for the worldwide markets for the products developed by
the joint venture. In exchange for this assignment, we agreed to pay Elan a
royalty on certain revenues that may be realized in the future from the
once-a-day Oxycodone product that was in development by the joint venture, if
and when FDA approval is obtained. In the future, we will be solely responsible
for funding product development. The joint venture had completed the initial
Phase I study for its first product, the once-a-day Oxycodone formulation.
The joint venture had also performed work on a second, related product in
the central nervous system therapeutic area. Initial formulation work on a third
product combining Oxycodone with a narcotic antagonist has been performed. We
have the exclusive rights to the proprietary, development and commercial
exploitation for the worldwide markets for these two products developed by ERL.
We will not have to pay Elan royalties on revenues that may be realized from
these products.
Under the joint venture, Elan had received 409,165 shares of our common
stock, warrants exercisable at $18.00 per share for 100,000 shares of our common
stock, and Series A and Series B preferred stock of Elite Labs, which were
convertible into 764,221 shares and 52,089 shares, respectively, of our common
stock. Under the Termination Agreement, Elan and its transferees retained the
securities, and the shares of Series A and Series B preferred stock were
converted
17
into our common stock under the preexisting terms for conversion. We did not
pay, nor did Elan receive, any cash consideration under the Termination
Agreement.
PATENTS
We have secured five United States patents of which two have been
assigned for a fee. In addition one patent has been allowed, but not yet issued
and we have pending applications for three United States patents and five
foreign patents.
The pending patent applications relate to three different control release
pharmaceutical products on which we are working. Included among these patent
applications is an application for a U.S. patent for a narcotic agonist and
antagonist product that we are developing to be used with oxycodone and other
narcotics to minimize the abuse potential for the narcotics was filed. We intend
to apply for patents for other products in the future; however, there can be no
assurance that any of the pending applications or other applications which we
may file will be granted.
Prior to the enactment in the United States of new laws adopting certain
changes mandated by the General Agreement on Tariffs and Trade (GATT), the
exclusive rights afforded by a U.S. Patent were for a period of 17 years
measured from the date of grant. Under these new laws, the term of any U.S.
Patent granted on an application filed subsequent to June 8, 1995, terminates 20
years from the date on which the patent application was filed in the United
States or the first priority date, whichever occurs first. Future patents
granted on an application filed before June 8, 1995, will have a term that
terminates 20 years from such date, or 17 years from the date of grant,
whichever date is later.
Under the Drug Price Act, a U.S. Product patent or use patent may be
extended for up to five years under certain circumstances to compensate the
patent holder for the time required for FDA regulatory review of the product.
The benefits of this Act are available only to the first approved use of the
active ingredient in the drug product and may be applied only to one patent per
drug product. There can be no assurance that we will be able to take advantage
of this law.
Also, different countries have different procedures for obtaining
patents, and patents issued by different countries provide different degrees of
protection against the use of a patented invention by others. There can be no
assurance, therefore, that the issuance to us in one country of a patent
covering an invention will be followed by the issuance in other countries of
patents covering the same invention, or that any judicial interpretation of the
validity, enforceability, or scope of the claims in a patent issued in one
country will be similar to the judicial interpretation given to a corresponding
patent issued in another country. Furthermore, even if our patents are
determined to be valid, enforceable, and broad in scope, there can be no
assurance that competitors will not be able to design around such patents and
compete with us using the resulting alternative technology.
We also rely upon unpatented proprietary and trade secret technology that
we seek to protect, in part, by confidentiality agreements with our
collaborative partners, employees, consultants, outside scientific
collaborators, sponsored researchers, and other advisors. There can be no
assurance that these agreements provide meaningful protection or that they will
not be breached, that we will have adequate remedies for any such breach, or
that our trade secrets, proprietary know-how, and technological advances will
not otherwise become known to others.
18
In addition, there can be no assurance that, despite precautions taken by us,
others have not and will not obtain access to our proprietary technology.
TRADEMARKS
We have received Notices of Allowance from the U.S. Patent and Trademark
Office granting trademark protection for the following trademarks: Albulite CR,
Nifelite CR, Diltilite CD, Ketolite CR, Verelite CR and Glucolite CR. However,
since we currently plan to license our products to marketing partners and not to
sell under our brand name, we do not currently intend to register or maintain
any trademarks.
GOVERNMENT REGULATION AND APPROVAL
The design, development and marketing of pharmaceutical compounds, on
which our success depends, are intensely regulated by governmental regulatory
agencies, including the FDA. Non-compliance with applicable requirements can
result in fines and other judicially imposed sanctions, including product
seizures, injunction actions and criminal prosecution based on products or
manufacturing practices that violate statutory requirements. In addition,
administrative remedies can involve voluntary withdrawal of products, as well as
the refusal of the FDA to approve ANDAs and NDAs. The FDA also has the authority
to withdraw approval of drugs in accordance with statutory due process
procedures.
Before a drug may be marketed, it must be approved by the FDA. The FDA
approval procedure for an ANDA relies on bioequivalency tests which compare the
applicant's drug with an already approved reference drug, rather than with
clinical studies. Because we concentrated, during our first few years of
business operations, on developing products which are intended to be
bioequivalent to existing controlled-release formulations, we expect that such
drug products will require ANDA filings and not clinical efficacy and safety
studies, which are generally more expensive and time-consuming.
The FDA approval procedure for an NDA is generally a two-step process.
During the Initial Product Development stage, an investigational new drug
application ("IND") for each product is filed with the FDA. A 30-day waiting
period after the filing of each IND is required by the FDA prior to the
commencement of initial clinical testing. If the FDA does not comment on or
question the IND within such 30-day period, initial clinical studies may begin.
If, however, the FDA has comments or questions, they must be answered to the
satisfaction of the FDA before initial clinical testing can begin. In some
instances this process could result in substantial delay and expense. These
initial clinical studies generally constitute Phase I of the NDA process and are
conducted to demonstrate the product tolerance/safety and pharmacokinetic in
healthy subjects.
After Phase I testing, extensive efficacy and safety studies in patients
must be conducted. After completion of the required clinical testing, an NDA is
filed, and its approval, which is required for marketing in the United States,
involves an extensive review process by the FDA. The NDA itself is a complicated
and detailed application and must include the results of extensive clinical and
other testing, the cost of which is substantial. However, the NDA filings
contemplated by us on already marketed drugs would be made under Sections 505
(b)(1) or 505 (b)(2) of the Drug Price Act, which do not require certain studies
that would otherwise be necessary; accordingly, the development timetable should
be shorter. While the FDA is required to review applications within a certain
timeframe in the review process, the FDA frequently
19
requests that additional information be submitted. The effect of such request
and subsequent submission can significantly extend the time for the NDA review
process. Until an NDA is actually approved, there can be no assurance that the
information requested and submitted will be considered adequate by the FDA to
justify approval. The packaging and labeling of our developed products are also
subject to FDA regulation. It is impossible to anticipate the amount of time
that will be needed to obtain FDA approval to market any product.
Whether or not FDA approval has been obtained, approval of the product by
comparable regulatory authorities in any foreign country must be obtained prior
to the commencement of marketing of the product in that country. The Company
intends to conduct all marketing in territories other than the United States
through other pharmaceutical companies based in those countries. The approval
procedure varies from country to country, can involve additional testing, and
the time required may differ from that required for FDA approval. Although there
are some procedures for unified filings for certain European countries, in
general each country has its own procedures and requirements, many of which are
time consuming and expensive. Thus, there can be substantial delays in obtaining
required approvals from both the FDA and foreign regulatory authorities after
the relevant applications are filed. After such approvals are obtained, further
delays may be encountered before the products become commercially available.
All facilities and manufacturing techniques used for the manufacture of
products for clinical use or for sale must be operated in conformity with Good
Manufacturing Practice ("GMP") regulations issued by the FDA. In the event the
Company engages in manufacturing on a commercial basis for distribution of
products, it will be required to operate its facilities in accordance with GMP
regulations. If we hire another company to perform contract manufacturing for
us, we must ensure that our contractor's facilities conform to GMP regulations.
Under the Generic Drug Enforcement Act, ANDA applicants (including
officers, directors and employees) who are convicted of a crime involving
dishonest or fraudulent activity (even outside the FDA regulatory context) are
subject to debarment. Debarment is disqualification from submitting or
participating in the submission of future ANDAs for a period of years or
permanently. The Generic Drug Enforcement Act also authorizes the FDA to refuse
to accept ANDAs from any company which employs or uses the services of a
debarred individual. We do not believe that we receive any services from any
debarred person.
We are also subject to federal, state, and local laws of general
applicability, such as laws relating to working conditions. We are also licensed
by, registered with, and subject to periodic inspection and regulation by the
DEA and New Jersey state agencies, pursuant to federal and state legislation
relating to drugs and narcotics. Certain drugs that we may develop in the future
may be subject to regulations under the Controlled Substances Act and related
statutes. At such time as we are able to manufacture products, we may become
subject to the Prescription Drug Marketing Act, which regulates wholesale
distributors of prescription drugs.
COMPLIANCE WITH ENVIRONMENTAL LAWS
We are subject to comprehensive federal, state and local environmental
laws and regulations that govern, among other things, air polluting emissions,
waste water discharges, solid and hazardous waste disposal, and the remediation
of contamination associated with current or past generation handling and
disposal activities, including the past practices of corporations as to which we
are the successor. We do not expect that compliance with such environmental laws
20
will have a material effect on our capital expenditures, earnings or competitive
position in the foreseeable future. There can be no assurance, however, that
future changes in environmental laws or regulations, administrative actions or
enforcement actions, or remediation obligations arising under environmental laws
will not have a material adverse effect on our capital expenditures, earnings or
competitive position.
COMPETITION
We compete in two related but distinct areas: we seek to perform contract
research and development work regarding controlled-release drug technology for
other pharmaceutical companies, and to develop and market (either on our own or
by license to other companies) proprietary controlled-release pharmaceutical
products. In both areas, our competition consists of those companies which
develop controlled-release drugs and alternative drug delivery systems.
In recent years, an increasing number of pharmaceutical companies have
become interested in the development and commercialization of products
incorporating advanced or novel drug delivery systems. We expect that
competition in the field of drug delivery will significantly increase in the
future since smaller specialized research and development companies are
beginning to concentrate on this aspect of the business. Some of the major
pharmaceutical companies have invested and are continuing to invest significant
resources in the development of their own drug delivery systems and technologies
and some have invested funds in such specialized drug delivery companies. Many
of these companies have greater financial and other resources as well as more
experience than we do in commercializing pharmaceutical products. Certain
companies have a track record of success in developing controlled-release drugs.
Significant among these are Alpharma, Inc., Andrx Corporation, Elan Corporation
Plc, Biovail Corporation, Ethypharm S.A., Eurand, Impax Laboratories, Inc., K-V
Pharmaceutical Company, Penwest Pharmaceuticals Company and Skyepharma Plc. Each
of these companies has developed expertise in certain types of drug delivery
systems, although such expertise does not carry over to developing a
controlled-release version of all drugs. Such companies may develop new drug
formulations and products or may improve existing drug formulations and products
more efficiently than we can. In addition, almost all of our competitors have
vastly greater resources than we do. While our product development capabilities
and, if obtained, patent protection may help us to maintain our market position
in the field of advanced drug delivery, there can be no assurance that others
will not be able to develop such capabilities or alternative technologies
outside the scope of our patents, if any, or that even if patent protection is
obtained, such patents will not be successfully challenged in the future.
SOURCES AND AVAILABILITY OF RAW MATERIALS; MANUFACTURING
We manufacture for commercial sale by our partner, ECR Pharmaceuticals,
one product, Lodrane 24(R) and for which to date we have obtained sufficient
amounts of the raw materials for its production. We are not currently in the
manufacturing phase for any other products and do not expect that significant
amounts of raw materials will be required for their production. We currently
obtain the raw materials that we need from over twenty suppliers.
We have acquired pharmaceutical manufacturing equipment with the
intention of manufacturing products that we develop and, on a contract basis,
products developed by other pharmaceutical companies. In anticipation of this
manufacturing and for the manufacture of the Lodrane 24(R), we have registered
our facilities with the FDA and the DEA.
21
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
Each year we have had some customers that have accounted for a large
percentage of our limited sales. If our contracts with any of these customers
terminate or expire, we will lose substantially all of our revenues. We are
constantly working to develop new relationships with existing or new customers,
but despite these efforts we may not, at the time that any of our current
contracts expire, have other contracts in place generating similar revenue.
EMPLOYEES
As of February 28, 2005, we had 15 full-time employees and 2 part-time
employees. Both full-time and part-time employees are engaged in administration,
research and development. None of our employees is represented by a labor union
and we have never experienced a work stoppage. We believe our relationship with
our employees to be good. However, our ability to achieve our financial and
operational objectives depends in large part upon our continuing ability to
attract, integrate, retain and motivate highly qualified personnel, and upon the
continued service of our senior management and key personnel.
PROPERTIES
Our facility, which we own, is located at 165 Ludlow Avenue, Northvale,
New Jersey, and contains approximately 20,000 square feet of floor space. This
real property and the improvements thereon are encumbered by a mortgage in favor
of the New Jersey Economic Development Authority (NJEDA) as security for a loan
through tax-exempt bonds from the NJEDA to Elite. The mortgage document contains
certain customary provisions including, without limitation, the right of NJEDA
to foreclose upon a default by Elite.
We are currently using our facilities as a laboratory and office space
and intend to use it in the future also for manufacturing. Properties used in
our operations are considered suitable for the purposes for which they are used
and are believed to be adequate to meet our needs for the reasonably foreseeable
future.
USE OF PROCEEDS
If all the Company's B Warrants and C Warrants are exercised, the
proceeds will be $12,010,905, before deducting expenses of this offering
estimated at approximately $ [_______]; such proceeds will be used for working
capital.
CAPITALIZATION
The following table sets forth the outstanding indebtedness and capital
stock as of December 31, 2004 giving retroactive affect to the subsequent
conversion of the balance of Series A Preferred Shares outstanding on December
31, 2004 and to be outstanding assuming the exercise of the outstanding
2,402,181 Class B and Class C Warrants without giving effect to the expenses of
this offering
22
OUTSTANDING TO BE OUTSTANDING
LONG TERM INDEBTEDNESS
7% Mortgage Bonds, net of current $2,180,000 $2,180,000
portion of $165,000
Notes Payable, net of current portion
of $130,000 $205,000 $205,000
CAPITAL STOCK
Preferred Stock, authorized
5,000,000 shares, par value
$.01 - none outstanding -- --
Common Stock, authorized
65,000,000 shares, par value $.01 -
17,443,467 Shares outstanding, and
19,848,648 shares to be outstanding (1) $174,435 $198,456
Additional paid in capital $46,289,033 $58,275,916
(1) In addition to the shares to be outstanding, 5,660,511 shares are
reserved for issuance upon exercise of the Short Term Warrants, Long Term
Warrants and Placement Agent Warrants and 2,377,050 shares are reserved for
issuance upon exercise of outstanding options granted to officers, directors,
employees and consultants.
DILUTION
As of December 31, 2004 the net tangible book value per share of Common Stock
based on the Company's unaudited balance sheet as of December 31, 2004 was
$0.47. Assuming exercise of all the outstanding Class B and Class C Warrants the
pro forma net tangible book value as of December 31, 2004 would be $1.175. As
indicated in the following table purchasers of shares of Common Stock pursuant
to the exercise of a Class B Warrant or a Class C Warrant, based on the
unaudited December 31, 2004 Balance Sheet, will suffer an immediate dilution of
$3.825 per share.
Per share exercise price............................... $5.00
Tangible book value per share as of 12/31/04........... $0.47
Pro forma tangible book value as of 12/31/04 $1.175
------
Dilution per share..................................... $3.825
======
SELECTED FINANCIAL DATA
The selected statement of operations data set forth below with respect
to the years ended, March 31, 2002, 2003 and 2004 and the balance sheet data at
March 31, 2003 and 2004, are derived from, and are qualified by reference to,
the financial statements of the Company included elsewhere in this Prospectus,
which financial statements have been audited by Miller, Ellin & Co. LLP,
independent accountants, as indicated in their report included elsewhere and
which contains an explanatory paragraph which indicates that there is
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are described in Note 2 to the
financial statements. The selected statement of operations data for the years
ended March 31, 2000 and 2001 and the balance sheet data as of March 2000, 2001,
and 2002 have been derived from the financial statements of the Company not
included in this
23
Prospectus. The selected balance sheet data as of December 31, 2004 and the
statement of operations data for the nine months ended December 31, 2003 and
2004 are derived from the Company's unaudited financial statements included in
this Prospectus and include, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of such data. Results of operations for the nine month period ended December 31,
2004 are not necessarily an indication of the results to be expected for the
entire year ending March 31, 2005.
24
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-----------------------------------------------------------------------------------------------
(UNAUDITED)
------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: ... 2000 2001 2002 2003 2004 2003 2004
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Revenues ................... $ 10,315 $ 95,246 $ 1,197,507 $ 630,310 $ 258,250 $ 30,000 $ 151,450
OPERATING EXPENSES:
Research and development ....... 1,988,649 1,475,487 1,609,108 2,013,579 2,075,074 1,480,788 1,937,794
General and administrative ..... 984,736 777,118 763,687 1,858,069 2,549,846 1,543,926 1,675,041
Depreciation and amortization .. 86,290 194,038 266,919 310,876 332,836 268,830 271,080
----------- ----------- ----------- ----------- ----------- ----------- -----------
3,059,675 2,446,643 2,639,714 4,182,524 4,957,756 3,293,544 3,883,915
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from Operations ............ (3,049,360) (2,351,397) (1,442,207) (3,552,214) (4,699,506) (3,263,544) (3,732,465)
OTHER INCOME (EXPENSES):
Interest Income ............... 210,877 329,583 260,055 96,692 23,765 16,469 18,842
Litigation settlement ......... -- -- -- -- 150,000 150,000 --
Sale of New Jersey tax losses . -- -- 137,818 71,674 151,027 151,027 205,792
Interest expense .............. (137,709) (227,301) (220,123) (227,907) (211,595) (159,777) (176,696)
Expense relating to issuance
of stock options ............ -- -- -- (20,550) (1,166,601) (1,096,349) (325,558)
Equity in Loss of Joint Venture -- (12,079,827) -- (186,379) -- -- --
Expense relating to issuance
of stock warrants ........... -- -- -- -- (587,983) (587,983) (241,010)
Expense relating to repricing
of stock options ............ -- -- -- -- -- -- (397,732)
Expense relating to warrant
exchange offer .............. -- -- -- (242,338) (172,324) (172,324) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
73,168 (11,977,545) (508,808) (1,813,711) (1,698,937) (916,362)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss Before Provision for
Income Taxes .................. $(2,976,192) $(14,328,942) $(1,772,097) $(4,061,022) $(6,513,217) $(4,962,481) $(4,648,827)
Net Loss ........................ $(2,976,392) $(13,964,981) $(1,774,527) $(4,061,422) $(6,514,217) $(4,963,481) $(4,649,827)
Net Loss Attributable to
Common Shareholders ........... $(2,976,392) $(13,564,981) $(1,774,527) $(4,061,422) $(6,514,217) $(4,963,481) $(4,724,903)
Net (loss) per common share ..... $ (0.35) $ (1.53) $ (0.19) $ (0.40) $ (0.58) $ (0.46) $ (0.39)
Basic and Diluted Loss per
Common Share .................. $ (0.35) $ (1.53) $ (0.19) $ (0.40) $ (0.58) $ (0.46) $ (0.39)
Weighted average number
shares outstanding ............ 8,287,648 9,135,369 9,561,299 10,069,991 11,168,618 10,829,626 12,231,405
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
------------------------------------------------------------------- -------------------------
2000 2001 2002 2003 2004 2003 2004
----------- - ---------- ----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
Cash and cash equivalents .... $ 3,937,217 $ 7,296,702 $ 6,852,434 $ 3,264,081 $ 2,104,869 $ 3,684,538 $ 4,564,948
Working capital .............. $ 4,134,837 $ 7,773,673 $ 7,054,961 $ 2,950,513 $ 1,289,764 $ 3,101,018 $ 3,846,412
Total assets ................. $ 9,162,383 $ 12,350,301 $12,724,498 $ 8,696,222 $ 7,853,434 $ 8,824,165 $ 9,562,630
Long-Term obligations,
excluding current portion .. $ 2,885,000 $ 2,765,000 $ 3,788,148 $ 2,720,000 $ 2,495,000 $ 2,513,750 $ 2,385,051
Shareholders' equity ......... 5,564,603 9,180,254 8,153,884 5,426,501 4,048,192 5,528,676 6,287,565
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENT
The Company has included in this Prospectus 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 to future revenue
growth, collaborative agreements, 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". 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 involved in the development of controlled drug delivery
systems and products. Its products are in varying stages of development and
testing. In addition, from time to time, the Company has also conducted research
and development projects on behalf of other pharmaceutical companies although
these activities have generated only limited revenue to date.
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 the
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 the 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
26
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 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 the Company being profitable, a deferred tax
benefit would be recognized and such estimate would increase net income and
earnings 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. The Company assesses its exposure
to current commitments and contingencies by advice of counsel. It should be
noted that actual results may differ from these estimates under different
assumptions or conditions.
RESULTS OF CONSOLIDATED OPERATIONS
With respect to the following discussion and analyses and comparison of
the results for the nine months ended December 31, 2004 vs. the nine months
ended December 31, 2003, the year ended March 31, 2004 vs. the year ended March
31, 2003 and the year ended March 31, 2003 vs. the year ended March 31, 2002,
please note that 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 Prospectus.
NINE MONTHS ENDED DECEMBER 31, 2004 VS. NINE MONTHS ENDED DECEMBER 31,
2003
Revenues for the nine months ended December 31, 2004 were $151,450, all
realized during the first six months of the period, of which $150,000 was a
non-refundable payment received from Purdue Pharma L.P. granting it the right to
evaluate certain abuse resistance drug formulation technology of the Company.
The Company was unable to generate any significant additional revenues under its
existing customer contracts for the nine months ended December 31, 2004 or any
revenues, other than $30,000, during the year earlier nine month period 2003 due
to inadequate funds and the resignation of the Company's principal scientific
officers in 2003.
27
General and administrative expenses for the nine months ended December
31, 2004 were $1,675,041, an increase of $131,115 or (8.5%) from $1,543,926 for
the comparable period of the prior year, substantially due to the increases in
salaries and staff, consulting fees and the write-off of a bad debt relating to
accounts receivable.
Research and development expenses for the nine months ended December 31,
2004 were $1,937,794, an increase of $457,006, or approximately 30.9%, from
$1,480,788 for the comparable period of the prior year, primarily the result of
increased research and development wages, consulting fees, lab and manufacturing
supplies and raw materials.
Other expenses for the nine months ended December 31, 2004 were $916,362,
a decrease of $782,575, or approximately 46.1%, from $1,698,937 for the
comparable period of the prior year, due to reductions of $1,117,764 in charges
related to the issuance of stock options and warrants and a charge of $172,324
in the 2003 period related to the warrant exchange offer, offset partially by a
charge relating to the repricing in the nine months ended December 31, 2004 of
stock options in the amount of $397,732.
As a result of the foregoing the Company's net loss for the nine months
ended December 31, 2004 was $4,649,827 compared to $4,963,481 for the comparable
period of the prior year.
YEAR ENDED MARCH 31, 2004 VS. YEAR ENDED MARCH 31, 2003
Our auditor's report on the financial statements for these periods states
that such financial statements have been prepared assuming that we will continue
as a going concern. We have incurred a significant loss and negative cash flows
during our fiscal year ended March 31, 2004 which have significantly decreased
our working capital and increased our accumulated deficit. Our auditors have
stated in their report that these conditions raise substantial doubt about our
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of the assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
Our revenues for the year ended March 31, 2004 were $258,250, a decrease
of $372,060, or approximately 59%, from the prior year. For the year ended March
31, 2003, revenues consisted of product formulation fees of $187,810 earned in
conjunction with our joint venture in ERL which terminated on September 30,
2002. Of our revenues for the years ended March 31, 2004 and March 31, 2003,
$108,500 and $442,500, respectively, were research and development and testing
fees earned in conjunction with our distinct development, license and
manufacturing agreements.
General and administrative expenses for the year ended March 31, 2004
were $2,549,846, an increase of $691,777, or approximately 37% from the prior
year. The increase was substantially due to increases in legal and consulting
fees as well as approximately $550,000 in expenses, including $400,000 as
compensation, resulting from a settlement of litigation instituted by our former
President with respect to the termination of his employment agreement.
Research and development costs for the year ended March 31, 2004, were
$2,075,074, an increase of $61,495 or approximately 3% from the prior year,
primarily due to increased research and development wages, additional
biostudies, laboratory supplies and raw materials used in our
28
research and development processes. We expect our research and development costs
to continue to increase in future periods as a result of the ERL joint venture
termination as we will be solely responsible to fund product development, which
we will do from internal resources or through loans or investment by third
parties.
Other expenses for the year ended March 31, 2004 were $1,813,711, an
increase of $1,304,903, or approximately 256%, from the prior year. The increase
was primarily due to charges related to the modification of a warrant exchange
offer, the issuance of stock options and warrants valued at $1,926,908 (an
increase of $1,664,020) and the reduction in interest income due to lower rates
and compensating balances in the amount of $72,927, partially offset by
increases in sale of New Jersey tax losses of $79,353 and the related settlement
of a vendor litigation for $150,000.
Our net loss for the year ended March 31, 2004 was $6,514,217 as compared
to $4,061,422 in the prior year, an increase of approximately 60%, primarily due
to the decrease in net revenues, and increases in research and development and
administrative expenses, including increased charges of $1,664,020 due to the
issuance of stock options, warrants and the modification of warrant exchange
offer.
YEAR ENDED MARCH 31, 2003 VS. YEAR ENDED MARCH 31, 2002
Revenues for the year ended March 31, 2003 were $630,310, a decrease of
$567,197 or approximately 47.4%, from the comparable prior year. For the years
ended March 31, 2003 and 2002, revenues consisted of product formulation fees of
$187,810 and $601,057, respectively, earned in conjunction with our joint
venture in ERL, and research and development and testing fees of $442,500 and
$593,000, respectively, earned in conjunction with our distinct development,
license and manufacturing agreements. ERL had no revenue after our acquisition
of Elan's interest in it on September 30, 2002. Elan's obligation to make
payments to us or to ERL terminated upon the termination of the joint venture
with Elan. The absence of payments from Elan will affect revenues for periods
subsequent to September 30, 2002.
General and administrative expenses for the year ended March 31, 2003
were $1,858,069, an increase of $1,094,382, or approximately 143%, from the
prior year, substantially due to increases in legal and consulting fees as well
as approximately $600,000 in expenses resulting from a consent solicitation and
a proxy solicitation with regard to the election of our directors.
Research and development costs for the year ended March 31, 2003, were
$2,013,579, an increase of $404,471, or approximately 25%, from the prior year,
primarily the result of increased research and development wages, additional
biostudies, laboratory supplies and raw materials used in our research and
development processes. We expect our research and development costs to continue
to increase as a result of the ERL joint venture termination as we will be
solely responsible to fund product development, which we will do from internal
resources or through loans or investment by third parties.
Other expenses for the year ended March 31, 2003 were $580,482, an
increase of $112,774, or approximately 24%, from the prior year. A decrease of
$321,261 in equity loss in joint venture due to its termination was more than
offset by charges related to the exchange of warrants and the expense of
$262,888 related to the issuance of stock options and the reduction of $163,363
in interest income due to lower rates and compensating balances.
29
Our net loss for the year ended March 31, 2003 was $4,061,422 as compared
to $1,774,527 in the prior year, an increase of 129%, primarily due to the
decrease in net revenues, and an increase in research and development and
administrative expenses associated with the consent solicitation and proxy
solicitation with regard to the election of our directors. Our net loss included
our 80.1% equity loss in ERL, which was $186,379 and $507,640, respectively, for
the years ended March 31, 2003 and 2002. ERL's net loss for the years ended
March 31, 2003 and 2002 was $232,682 and $633,642, respectively.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company's working capital (total current assets less total current
liabilities), which was $1,289,764 as of March 31, 2004, increased to $3,864,412
as of December 31, 2004, primarily due to net proceeds received from the sale of
shares of Series A Preferred Stock ($5,866,600) partially offset by the
$3,356,146 net cash loss from operations, exclusive of non-cash charges of
$1,293,680.
The Company experienced negative cash flows from operations of
($3,610,066) for the nine months ended December 31, 2004, primarily due to the
Company's net loss from operations of $4,649,827, less non-cash charges of
$1,293,680, which included the charges of $397,732 in connection with the
repricing of stock options, $325,558 in connection with the issuance of stock
options, and $241,010 in connection with the issuance of stock warrants.
Our working capital (total current assets less total current
liabilities), which was $2,950,513 as of March 31, 2003, decreased to
$1,289,764, approximately 56%, as of March 31, 2004, primarily due to our net
loss from operations and deposits on equipment, partially offset by net proceeds
of $3,179,000 from the sale of Common Stock through a private placement and the
receipt of $30,000 from the exercise of stock options.
We experienced negative cash flow from operations of $3,658,321 for the
year ended March 31, 2004, primarily due to our net loss from operations of
$6,514,217 offset by non-cash charges of $2,259,744. Non-cash charges included
$1,166,601 in connection with the issuance of stock options, a charge of
$587,983 in connection with the issuance of warrants, and a charge of $172,324
related to the modification of a warrant exchange offer.
The Company 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 received $30,000 in
November 2003 under the Agreement and expects to complete two additional GMP
batches in the near future under the terms of the licensing agreement. The
Company expects to manufacture the product with revenues projected to be
generated in the quarter of ending March 31, 2005 or shortly thereafter and
anticipates the earning of additional milestone payments under the Agreement
subject to completion of the GMP batches.
The Company recently entered into an agreement with Pivotal Development,
L.L.C. pursuant to which the Company is to receive an aggregate of $750,000 upon
attaining certain milestones. Some of the milestones were achieved during the
quarter ending March 31, 2004. No material revenues have resulted to date.
30
No assurance can be given that the Company will consummate any of the
transactions discussed above.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended December 31, 2004, the Company recorded
positive cash flow and financed its operations through utilization of its
existing cash. In October 2004, the Company raised net cash of $5,866,600 from
its private placement of its Series A Preferred Stock. The Company's working
capital (current assets less current liabilities) at December 31, 2004 was $3.8
million compared with working capital of $1.3 million at March 31, 2004. Cash
and cash equivalents at December 31, 2004 were $4.6 million, an increase of $2.5
million from the $2.1 million at March 31, 2004.
For our fiscal year ended March 31, 2004 our operations did not generate
positive cash flow. We have financed our operations primarily through the
private sale of our equity securities. We had working capital of $1.3 million at
March 31, 2004 compared with $3.0 million at March 31, 2003. Cash and cash
equivalents at March 31, 2004 were $2.1 million, a decrease of $1.2 million from
the $3.3 million at March 31, 2003.
Net cash used in operating activities was $3,658,000 during the year
ended March 31, 2004, compared to $2,573,000 for the year ended March 31, 2003.
Net cash used in operating activities during the year ended March 31, 2004
resulted primarily from our net loss of $6.5 million, offset in part by an
increase in accounts payable and certain non-cash expenses. Net cash used in
operating activities during the year ended March 31, 2003 resulted primarily
from a net loss of $4.1 million, offset in part by a reduction in accounts
receivable from a joint venture and certain non-cash expenses.
Investing activities utilized net cash of $495,000 and of $469,000 during
the years ended March 31, 2004 and March 31, 2003, respectively. Net cash used
in investing activities during the year ended March 31, 2004 resulted primarily
from equipment deposits, patent filings and an increase in restricted cash. Net
cash used in investing activities during the year ended March 31, 2003 resulted
primarily from the acquisition of property and equipment, offset in part by a
decrease in restricted cash and the maturity of short term investments.
Financing activities provided net cash of $2,994,000 during the year
ended March 31, 2004 and utilized net cash of $546,000 during the year ended
March 31, 2003. Net cash provided by financing activities during the year ended
March 31, 2004 resulted primarily from the issuance of common stock through a
private placement offset by the repayment of indebtedness. Net cash used in
financing activities during the year ended March 31, 2003 resulted from the
repurchase of stock and the repayment of indebtedness, offset in part by the
sale of common stock and warrants.
In order to conserve cash for the twelve months ending December 31, 2005,
the Company intends to reduce costs by continuing the reduction of the number of
products under active development to nine.
The Company purchased machinery and equipment amounting to approximately
$426,000 in the nine months ending December 31, 2004. This equipment was fully
financed except for minor expenditures. No capital expenditures were made during
the nine months ended December 31, 2003.
31
Our capital expenditures aggregated $398,580 and $679,000 for the years
ended March 31, 2004 and 2003, respectively. Such expenditures consisted
primarily of the acquisition of property and equipment.
The Company had bonds of $2,345,000 outstanding, as of December 31, 2004.
The bonds bear interest at a rate of 7.75% per annum and are due on various
dates between 2005 and thereafter. The bonds are secured by a first lien on the
Company's facility in Northvale, New Jersey. Pursuant to the terms of the bonds,
several restricted cash accounts have been established for the payment of bond
principal and interest. Bond proceeds were utilized for the refinancing of the
land and building the Company currently owns, the purchase of certain
manufacturing equipment and related building improvements and the maintenance of
a $300,000 debt service reserve. All of the restricted cash, other than the debt
service reserve, is expected to be expended within twelve months and is
therefore categorized as a current asset on the Company's consolidated balance
sheet as of December 31, 2004. 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 December 31, 2004 the Company was in compliance with
the covenants contained in the bond indenture agreement.
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 were 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 vest immediately, to purchase
50,000 shares of the Company's common stock at $4.20 per share. If the loan is
repaid within nine months, 15,000 warrants will be forfeited, but the lender
will be entitled to a $10,000 prepayment penalty. A charge for the cost of these
warrants is reflected in the nine month period ended December 31, 2004.
The Company from time to time will consider potential strategic
transactions including acquisitions, strategic alliances, joint ventures and
licensing arrangements with other pharmaceutical companies. There can be no
assurance that any such transaction will be available or consummated in the
future.
In October 2004, the Company effected a private placement of 516,558
shares of its Series A Preferred Stock for gross proceeds of $6,600,000, before
payment of commission of $623,520 and other expenses. All of the Series A
Preferred Stock have been converted into an aggregate of 5,200,120 shares of
Common Stock with 141,888 shares of the originally issued share mandatorily
converted on March 7, 2005, pursuant to the Certificate of Incorporation as a
result of the "market price" of the Common Stock, as defined for 30 consecutive
trading days exceeding 300% of the per share conversion price. The Series A
Preferred Shareholders were entitled to a preferential dividend of 8% per annum
of the original issue price of $12.30 per share payable on December 1 and June 1
of each year. The December 1, 2004 dividend of $75,076 was paid by the issuance
of 26,961 shares of Common Stock. The Company believes that the net proceeds of
the placement will provide sufficient cash to fund the Company's operations and
capital requirements through at least September 30, 2005.
32
On November 15, 2004, Elite's partner, ECR, launched LODRANE 24(R), a
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(R) in exchange for royalties on
product revenues. No assurance can be given that any material royalties will be
generated under this agreement.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 65,000,000 shares of Common
Stock, par value $.01 per share, and 5,000,000 shares of Preferred Stock, par
value $.01 per share.
PREFERRED STOCK
The Company's Board of Directors has authority to issue up to 5,000,000
shares of Preferred Stock in one or more series and to fix the powers,
designations, rights, preferences and restrictions thereof, including dividend
rights, conversion rights, voting rights, redemption terms, liquidation
preferences and the number of shares constituting each such series, without any
further vote or action by the Company's stockholders.
On October 6, 2004, pursuant to the authority of its Board of Directors,
Elite filed with the Secretary of State of Delaware the Certificate of
Designations, Preferences and Rights of Series A Preferred Stock (the "Series A
Preferred Certificate") providing for 660,000 authorized shares (the Series A
Preferred Shares).
In October 2004, the Company in a private placement issued in three
traunches an aggregate of 516,558 Series A Convertible Preferred Shares and
warrants expiring December 31, 2005 to purchase 2,592,792 shares of Common Stock
and warrants expiring December 27, 2009 to purchase 2,950,588 shares of Common
Stock. We issued 26,961 shares of Common Stock in payment of the $75,076
dividend payable as of December 1, 2004. As of March 7, 2005 all of the 516,558
Series A Convertible Preferred Shares had been converted into an aggregate of
5,200,120 shares of Common Stock. The Series A Preferred Shares accrued
dividends at the annual rate of $0.984 per share (a rate of 8% per annum on the
$12.30 per share paid for the first tranche of the Series A Preferred Shares
sold) payable at the Company's option, in cash or shares of Common Stock.
The Series A Preferred Shares as a class pursuant to its rights on
February 15, 2005, the record date for the Annual Meeting of Stockholders held
on April 15, 2005, elected one Director.
COMMON STOCK
SUBJECT TO THE RIGHTS OF THE HOLDERS OF ANY SERIES OF PREFERRED STOCK,
WHICH MAY BE ISSUED:
The holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available therefore at such times and in such
amounts as our Board of Directors may from time to time determine.
Each stockholder is entitled to one vote for each share of Common Stock
held on all matters submitted to a vote of stockholders.
33
The Common Stock is not entitled to preemptive rights and is not subject
to conversion or redemption. Upon liquidation, dissolution or winding up of
Elite, the remaining assets legally available for distribution to stockholders,
after payment of claims or creditors, are distributable ratably among the
holders of the Common Stock outstanding at that time. Each outstanding share of
Common Stock is fully paid and nonassessable.
ANTI-TAKEOVER PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Section 203 of the Delaware Law provides, subject to a number
of exceptions, that a Delaware corporation may not engage in any of a broad
range of business combinations with a person or an affiliate, or an associate of
an affiliate, who is an "interested stockholder" for a period of three years
from the date that person became an interested stockholder unless:
o the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the board
of directors of the corporation before the person becomes an
interested stockholder,
o the interested stockholder acquired 85% or more of the outstanding
voting stock of the corporation in the same transaction that makes
this person an interested stockholder, excluding shares owned by
persons who are both officers and directors of the corporation,
and the shares held by certain employee stock ownership plans, or
o on or after the date the person becomes an interested stockholder,
the business combination is approved by the corporation's board of
directors and by the holders of at least 66-2/3% of the
corporations outstanding voting stock at an annual or special
meeting, excluding the shares owned by the interested stockholder.
Under Section 203 of the Delaware Law, an "interested stockholder" is
defined as any person who is either the owner of 15% or more of the outstanding
voting stock of the corporation or an affiliate or associate of the corporation
and who was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately prior to the
date on which it is sought to be determined whether such person is an interested
stockholder.
A corporation may, at its option, exclude itself from coverage of Section
203 of the Delaware Law by amending its certificate of incorporation or by-laws,
by action of its stockholders, to exempt itself from coverage, provided that the
amendment to the certificate of incorporation or by-laws does not become
effective until 12 months after the date it is adopted.
PRICE RANGE OF OUR COMMON STOCK AND DIVIDEND POLICY
Our Common Stock is quoted on the American Stock Exchange under the
symbol "ELI." The following table shows, for the periods indicated, the high and
low sales prices per share of our Common Stock as reported by the American Stock
Exchange.
34
COMMON STOCK
QUARTER ENDED: HIGH LOW
FISCAL YEAR
ENDING MARCH 31, 2005:
March 31, 2005 (through March 23, 2005).............. $4.79 $3.20
December 31, 2004.................................... $4.01 $1.20
September 30, 2004................................... $2.35 $1.05
June 30, 2004........................................ $4.31 $2.15
FISCAL YEAR
ENDING MARCH 31, 2004:
March 31, 2004....................................... $3.80 $2.40
December 31, 2003.................................... $3.30 $2.70
September 30, 2003................................... $3.49 $2.05
June 30, 2003 ....................................... $3.45 $1.34
FISCAL YEAR
ENDING MARCH 31, 2003:
March 31, 2003....................................... $2.20 $1.45
December 31, 2002.................................... $3.15 $1.80
September 30, 2002................................... $5.25 $2.41
June 30, 2002........................................ $7.75 $4.50
FISCAL YEAR
ENDING MARCH 31, 2002:
March 31, 2002....................................... $8.30 $5.65
December 31, 2001.................................... $7.75 $5.90
September 30, 2001................................... $11.50 $5.10
June 30, 2001........................................ $11.45 $4.85
On April [___], 2005, the last sale price of our Common Stock, as
reported by the American Stock Exchange, was $[___] per share.
We have never paid cash dividends on our capital stock. On December 1,
2004, the Company issued 26,961 shares of Common Stock in payment of the $75,076
dividend payable on its Series A Preferred Shares. [We currently anticipate that
we will retain all available funds for use in the operation and expansion of our
business, and do not anticipate paying any cash dividends in the foreseeable
future.
MANAGEMENT
BOARD OF DIRECTORS
The table below sets forth the names and ages, as of February 28, 2005,
of each of the Directors and the period during which each such person has served
on the Board of Directors of the Company.
35
NAME AND BUSINESS ADDRESS AGE DIRECTOR SINCE
Bernard Berk 55 2004
c/o Elite Pharmaceuticals Inc.
165 Ludlow Avenue,
Northvale, NJ 07647
Edward Neugeboren* 35 2005
36 New Norwalk Road
New Canaan, CT 06840
Dr. Barry Dash 73 2005
168 Wood Road
Englewood Cliffs, NJ 07632
Dr. Melvin H. Van Woert 74 2005
752 Ridgewood Road
Millburn, NJ 07061
* Mr. Neugeboren was designated by a representative of
the Series A Preferred Shares
The principal occupation and employment of each such person during the
past five years is set forth below. In each instance in which dates are not
provided in connection with a nominee's business experience, such nominee has
held the position indicated for at least the past five years.
Bernard Berk was appointed the Chief Executive Officer of the Company in
June 2003, a Director in February 2004 and Chairman of the Board on May 12,
2004. Mr. Berk has been the President and Chief Executive Officer of Michael
Andrews Corporation, a pharmaceutical management consultant firm, since 1996.
Mr. Berk devotes and is to devote during his employment under his employment
agreement substantially all of his time to the operations of the Company. From
1994 until 1996, Mr. Berk was President and Chief Executive Officer of Nale
Pharmaceutical Corporation. From 1989 until 1994, Mr. Berk was Senior Vice
President of Sales, Marketing and Business Development of Par Pharmaceuticals,
Inc. Mr. Berk holds a B.S. from New York University.
Mr. Edward Neugeboren has been a managing partner of IndiGo Ventures LLC,
an investment-banking firm based in New York since January 2003. From May 2001
to January 2004, Mr. Neugeboren was a managing partner of Third Ridge Capital
Management, LLC, a U.S. equity hedge fund. He was from October 2000 to April
2001 the Chief Administrative Officer of Soceron, an emerging Silicon Alley
based media software company and from 1988 to 2000 the Chief Administrative
Officer and director of Equity Research Operations at Lehman Brothers. He was
deputy director of Equity Research at UBS Warburg, formerly Warburg, Dillon
Read, from 1996 to 1998 and director of Equity Research Operations from 1995 to
1996. Mr. Neugeboren began his career in 1992 as an equity research analyst
covering the specialty pharmaceuticals industry, constituting generic drugs and
drug delivery, at Dillon Read & Co., Kidder, Peabody & Co. and Furman Selz, Inc.
Mr. Neugeboren is a Director of KineMed, Inc. a platform based drug development
and advanced medical diagnostics company based in San Francisco, California.
36
Dr. Barry Dash has been since 1995 President and Managing Member of Dash
Associates, L.L.C., an independent consultant to the pharmaceutical and health
and beauty aid industries. From 1983 to 1996 he was employed by American Home
Products Corporation, its Whitehall-Robins Healthcare Division, initially as
Vice President of Scientific Affairs, then Senior Vice President of Scientific
Affairs and then Senior Vice President of Advanced Technologies during which
time he personally supervised six separate departments: Medical and Clinical
Affairs, Regulatory Affairs, Technical Affairs, Research and Development,
Analytical R&D and Quality Management/Q.C. He had previously been employed by
the Whitehall Robins Healthcare Division from 1960 to 1976, during which time he
served as Director of Product Development Research, Assistant Vice President of
Product Development and Vice President of Scientific Affairs. Dr. Dash had been
employed by J.B. Williams Company (Nabisco Brands, Inc.) from 1978 to1982,
during which time he helped introduce more than 14 national and test market
brands. From 1976 to1978 he was Vice President, Director of Laboratories of the
Consumer Products Division of American Can Company. He is a director of
GeoPharma, Inc. Dr. Dash holds a Ph.D. from the University of Florida and M.S.
and B.S. degrees from Columbia University at which he was Assistant Professor at
the College of Pharmaceutical Sciences from 1956 to 1960. He is a member of the
American Pharmaceutical Association, The American Association for the
Advancement of Science and the Society of Cosmetic Chemist.
Dr. Melvin H. Van Woert, a neurologist has been since 1974, a member of
the staff of Mount Sinai Medical Center where he has been a Professor of the
Department of Neurology and Pharmacology at Mount Sinai School of Medicine since
1978. Dr. Van Woert had been a consultant for Neuropharmacological Drug Products
to the Food and Drug Administration from 1974 to 1980; Associate Editor for the
Journal of the Neurological Sciences; a Member of the Editorial Board of Journal
of Clinical Neurphamacology; and Medical Director of National Organization for
Rare Disorders for which he received in 1993 the Humanitarian Award. His other
awards include the U.S. Public Health Service Award for Exceptional Achievement
in Orphan Products Development and the National Myoclonus Foundation Award. He
has authored and co-authored more than 150 articles appearing in
pharmacological, medical and other professional journals or publications.
Each director holds office (subject to our By-Laws) until the next annual
meeting of stockholders and until such director's successor has been elected and
qualified.
COMMITTEES
The Board of Directors has an Audit Committee and, since March 2004, a
Nominating Committee. The Board has no other standing committees. The Audit
Committee members commencing April 15, 2005 are Edward Neugeboren, Dr. Barry
Dash and Dr. Melvin H. Van Woert, with Drs. Dash and Van Woert replacing former
Directors, Harmon Aronson and Eric L. Sichel. The Company's Board of Directors
has adopted a written charter for the Audit Committee, a copy of which was
included as an appendix to the Company's proxy statement sent to stockholders in
connection with the annual meeting of stockholders held October 11, 2001.
The Company deems the members of its Audit Committee to be independent as
independence is defined in Section 121(A) of the American Stock Exchange Listing
Standards, as amended effective December 1, 2003. The Board determined that Mr.
Neugeboren and Dr. Sichel, independent directors, qualify as audit committee
financial experts within the meaning of that term under the applicable
regulations under the Securities Exchange Act of 1934.
37
The Nominating Committee is authorized to select the nominees of the
Board of Directors for election as directors. The members are Bernard Berk, Dr.
Barry Dash and Dr. Melvin H. Van Woert.
COMPENSATION OF DIRECTORS
Each non-affiliated director receives $2,000 as compensation for each
meeting of the Board of Directors attended.
Pursuant to an authorization by the Board of Directors, Mr. John A.
Moore, a Director until January 24, 2005, received $46,875 as compensation for
the period from January 1, 2004 through May 12, 2004, the date of his
resignation as Chairman of the Board, for his services as Chairman in assisting
the Chief Executive Officer in the management of the Company's operations.
EXECUTIVE OFFICERS
Our executive officers are Bernard Berk and Mark I. Gittelman. Executive
officers, except for Mr. Berk who has a long term employment agreement, serve
until the next annual meeting of directors and until their successors have been
duly elected and qualified. There are no family relationships between any of our
directors and executive officers.
Bernard Berk, age 55, was appointed Chief Executive Officer in June 2003
and a director in February 2004 and Chairman of the Board on May 12, 2004. See
"Management - Board of Directors" for his business background.
Mark I. Gittelman, age 45, CPA, the Chief Financial Officer, Secretary
and Treasurer of the Company, is the President of Gittelman & Co., P.C., an
accounting firm in Clifton, New Jersey. Prior to forming Gittelman & Co., P.C.
in 1984, he worked as a certified public accountant with the international
accounting firm of KPMG Peat Marwick, LLP. Mr. Gittelman holds a B.S. in
accounting from New York University and a Masters of Science in Taxation from
Farleigh Dickinson University. He is a Certified Public Accountant licensed in
New Jersey and New York, and is a member of the American Institute of Certified
Public Accountants ("AICPA"), and the New Jersey State and New York States
Societies of CPAs. Other than Elite Labs, no company with which Mr. Gittelman
was affiliated in the past was a parent, subsidiary or other affiliate of the
Company.
The Company entered into a three-year employment agreement effective July
23, 2003 with Mr. Berk providing for (i) his full time employment as Chief
Executive Officer at an annual base salary of $200,000, (ii) the grant to him of
options which vest immediately to purchase 300,000 shares of Common Stock at a
price of $2.01 per share, the closing share price on the American Stock Exchange
on the date of grant and (iii) the grant of options to purchase an additional
300,000 shares at the $2.01 per share to vest on consummation of a "strategic
transaction" while he is employed as Chief Executive Officer. The consummation
of such transaction will result in the increase of his base annual salary to
$310,140 effective with the consummation. A strategic transaction is defined as
any one of the following transactions provided that the net value of the
consideration to the Company or its stockholders determined in good faith by the
Board of Directors is at least $10,000,000: (i) the sale of all or substantially
all
38
of the assets of the Company, (ii) a merger or consolidation or business
combination, or (iii) the sale by the Company of debt or equity securities.
Either party upon notice may terminate Mr. Berk's employment except that
a termination by the Company without cause or because of his permanent
disability or a termination by him for cause will result in severance pay in the
form of the continuation of his base salary for the balance of the term or two
years, whichever is longer, less in the event of termination for permanent
disability the amount of payments under a disability insurance policy maintained
by the Company. The Company is also to continue to pay during the foregoing
period the premiums for life and disability insurance policies. Furthermore, in
the event that Mr. Berk terminates his employment following a "change of
control" event he is to receive, payable in 24 monthly installments, an amount
which will depend on the fair value of the consideration determined in good
faith by the Board of Directors received by the Company or stockholders from the
"change of control" event less related expenses ("Net Fair Value") -- $500,000
if the Net Fair Value is $10 million or less; the greater of $500,000 or twice
his then base annual salary, if the Net Fair Value is greater than $10,000,000
but not more than $20 million, or $1,000,000 if the Net Fair Value is greater
than $20,000,000. A "change of control" event is (i) a merger or consolidation
in which securities possessing more than 50% of the voting power is issued to
persons other than the holders of voting securities of the Company immediately
prior to the event, (ii) the sale, transfer or disposition of all or
substantially all the assets of the Company, or (iii) the sale by the Company of
securities to a third party.
The agreement contains Mr. Berk's non-competition covenant for a period
of one year from termination.
EXECUTIVE OFFICER COMPENSATION
The following table sets forth the annual and long term compensation for
services in all capacities to the Company for the three years ended March 31,
2004, awarded or paid to, or earned by Bernard Berk, the Company's President and
Chief Executive Officer since June 2003 and Dr. Atul M. Mehta, our former
President and Chief Executive Officer. No other executive officer of the Company
received compensation exceeding $100,000 during those periods. See "Certain
Relationships and Related Transactions" for fees paid to an affiliate of Mark I.
Gittelman, the Company's Chief Financial Officer, Treasurer and Secretary.
SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------- ---------------------------------------------------------
Annual Compensation Long Term Compensation
-------------------------------------------------------------------------- ---------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Principal Fiscal Salary Bonus Other Annual Restricted Securities LTIP All Other
Position Year(1) Compensa- Stock Awards Underlying Payouts Compensation
tion(5) Options
--------------------- ------------ ------------- ---------- -------------- -------------- --------------- ------------ -------------
Bernard Berk, 2003-04 $ 166,667 -- -- -- 300,000(6) -- --
President and Chief
Executive Officer
--------------------- ------------ ------------- ---------- -------------- -------------- --------------- ------------ -------------
Atul M. Mehta, 2003-04 $ 53,684 -- $ 3,040 -- --(3) -- --
Ph.D., former
President and 2002-03 $ 330,140 -- $ 3,040 -- -- -- --
Chief Executive
Officer(2) 2001-02 $ 272,855 -- $ 83,856 -- 50,000(4) -- --
--------------------- ------------ ------------- ---------- -------------- -------------- --------------- ------------ -------------
39
(1) The Company's fiscal year begins on April 1 and ends on March 31. The
information is provided for each fiscal year beginning April 1.
(2) Dr. Mehta resigned as an employee and as a director of Elite as of June 3,
2003.
(3) As part of a settlement of a litigation between Dr. Mehta and the Company
the expiration dates of options granted to him prior to April 1, 2001 to
purchase 770,000 shares were extended in April 2004 to June 30, 2005
(subsequently by agreement reduced to 670,000 options with the expiration date
extended to December 31, 2007).
(4) By action on February 21, 2002, our Board of Directors corrected a clerical
error in options for 425,000 shares of our Common Stock granted to Dr. Mehta.
This correction did not result in any additional shares being subject to options
held by Dr. Mehta, any change in the exercise price or a change in any other
material terms.
(5) Other Annual Compensation represents use of a Company car, premiums paid by
the Company for life insurance on Dr. Mehta's life for the benefit of his wife
and the purchase price of $80,856 for options acquired from Dr. Mehta.
(6) Does not include 300,000 options which are exercisable only upon occurrence
of a "strategic event".
The Board of Directors in January 2005 adopted, and the stockholders of
the Company approved on April 15, 2005, an amendment to the Company's Stock
Option Plan (the "Plan") to increase the number of shares subject to the Plan
from 1,500,000 to 4,000,000 shares. The Plan authorizes the grant of options to
employees and directors of the Company or its subsidiaries and individuals
performing consulting services to the Company or a subsidiary.
As of March 15, 2005, options to purchase 402,000 shares of Common Stock
were granted under the Plan; no options granted under the Plan have been
exercised.
Pursuant to the Plan, the Board on June 22, 2004 granted options to
purchase 220,900 shares of Common Stock at $2.34 per share under the Plan to
current employees who held options with exercise prices higher than the options
to be granted; with the optionees surrendering the options containing the higher
exercise price. No options granted prior to the stockholder approval in
substitution of previously granted options were made to any officer or director
of the Company.
To the extent any of the options granted or to be granted under the Plan
expire or terminate without being exercised they may be subject to future grants
under the Plan.
The following table sets forth information regarding options previously
granted by the Company (exclusive of warrants previously sold along with shares
of Common Stock in private placements by the Company) and options, included in
the foregoing, granted under the Plan to each of the Company's executive
officers named under the Executive Officer Compensation Table under "Executive
Compensation", all current executive officers as a group, all current directors
who are not executive officers as a group and all employees other than executive
officers as a group:
40
NUMBER OF NUMBER OF
STOCK OPTIONS OPTIONS GRANTED
NAME AND POSITION PREVIOUSLY GRANTED* UNDER THE PLAN*
Atul Mehta, former President and
Chief Executive Officer (1)............... 670,000 --
Bernard Berk ............................... 630,000(1) 30,000
Executive Officer Group (2 persons)......... 640,000 30,000
Non-Executive Directors Group (4 persons)... 270,000 90,000
Non-Executive Officer Employee Group
(13 persons).............................. 403,050 282,000
----------
* Given effect to the cancellation of options upon the grant of a like
number of options granted under the Plan.
(1) The options include 300,000 options which may not be exercised prior to
the occurrence of a "strategic event". See "Executive Officers".
The Plan may not be amended to increase the maximum number of shares
which may be granted under the Plan (except under the anti-dilution provisions
contained therein) or to change the class of persons to whom options may be
granted without the affirmative vote of holders of the Company's Common Stock.
The Plan permits the Company to grant both incentive stock options
("Incentive Stock Options" or "ISOs") within the meaning of Section 422 of the
Code, and other options which do not qualify as Incentive Stock Options (the
"Non-Qualified Options").
Unless earlier terminated by the Board of Directors, the Plan (but not
outstanding options) terminates on March 1, 2014, after which no further awards
may be granted under the Plan. The Plan is administered by the full Board of
Directors or, at the Board's discretion, by a committee of the Board consisting
of at least two persons who are "disinterested persons" defined under Rule
16b-2(c)(ii) under the Securities Exchange Act of 1934, as amended (the
"Committee"). As of February 15, 2005, the Board has not appointed a Committee.
Recipients of options under the Plan ("Optionees") are selected by the
Board or the Committee. The Board or Committee determines the terms of each
option grant including (1) the purchase price of shares subject to options, (2)
the dates on which options become exercisable and (3) the expiration date of
each option (which may not exceed ten years from the date of grant). The minimum
per share purchase price of options granted under the Plan for Incentive Stock
Options is the fair market value (as defined in the Plan) or for Nonqualified
Options is 85% of Fair Market Value of one share of the Common Stock on the date
the option is granted.
OPTION GRANTS TO AND EXERCISED BY EXECUTIVE OFFICERS IN LAST FISCAL YEAR
Options granted to executive officers of the Company named in the Summary
Compensation Table during the fiscal year ended March 31, 2004 were as follows:
41
POTENTIAL REALIZED
NUMBER OF % OF TOTAL VALUE AT
SHARES OPTIONS ASSUMED ANNUAL
UNDERLYING GRANTED TO RATES OF STOCK PRICE
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION APPRECIATION FOR
NAME GRANTED FISCAL YEAR PRICE DATE OPTION TERM
5% 10%
-- ---
Bernard Berk 300,000(1) 41.4% $2.01 6/2/13 $982,223 $1,564,027
Atul M. Mehta(2) -- -- -- -- -- --
(1) Does not include grant of options to purchase 300,000 shares at $2.01 per
share, which are exercisable only upon occurrence of a "strategic event". See
"Executive Officers".
(2) Pursuant to a settlement, which closed in April 2004 of a litigation with
the Company and a subsequent agreement, the expiration dates of options to
purchase 670,000 shares granted prior to year ended March 31, 2002 while he was
an executive officer were extended to December 31, 2007.
No options were exercised by executive officers during the fiscal year
ended March 31, 2004.
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME OPTIONS AT YEAR-END* AT YEAR-END (1)
---- -------------------------- --------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Atul M. Mehta (2) 270,000* -- $0 --
100,000 -- $0 --
100,000 -- $48,000 --
100,000 -- $98,000 --
100,000 -- $148,000 --
100,000 -- $198,000 --
Bernard Berk (3) 300,000 300,000 $291,000 $291,000
----------
*Giving retroactive effect to a litigation settlement which became effective in
April 2004. An October 21, 2004 agreement reduced by 100,000 the 270,000 options
and reduced their exercise price from $10.00 to $2.34 per share.
(1) The dollar values are calculated by determining the difference between
$2.98 per share, the closing sale share price of the Common Stock on March 31,
2004 on the American Stock Exchange and the exercise price of the respective
options.
(2) Dr. Mehta resigned as an officer/employee and director as of June 3,
2003.
(3) Mr. Berk entered the employ of the Company in June 2003
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is a party to an agreement dated February 26, 1998 whereby
fees are paid to Gittelman & Co., P.C., a firm wholly owned by Mark I.
Gittelman, the Company's Chief Financial Officer, Secretary and Treasurer, in
consideration for services rendered by the firm as
42
internal accountant and financial and management consultant. The firm's services
include the services rendered by Mr. Gittelman in his capacity as Chief
Financial Officer, Treasurer and Secretary. For the fiscal years ended March 31,
2004, 2003 and 2002, the fees paid by the Company under the agreement were
$168,750, $167,544 and $91,260, respectively. The services rendered by the firm
to the Company averaged 128, 127 and 69 hours per month, respectively, of which
an average of 30 hours per month were services rendered by him in his capacity
as an officer of the Company.
We also had a contractual relationship with Donald Pearson, then a
Director of the Company, which expired on November 30, 2003, providing for Mr.
Pearson to: (i) refer potential customers who will license or collaborate in the
development or purchase of the technology of the Company and (ii) render
financial consulting services to the Company. Under the arrangement, Mr. Pearson
received consulting fees aggregating $25,600, $38,400 and $12,800 for fiscal
years ended March 31, 2004, 2003 and 2002, respectively. The referral fees were
to be a percentage ranging from 5% to 1% of the first $5,000,000 of revenues
generated by his referrals after deducting expenses and a credit for the
consulting fees. No revenues were generated under the arrangement. The Company
also has a similar customer referral arrangement with Mr. Harmon Aronson, a
Director, to pay him a percentage of net revenues generated by customers
referred by him. No fees have been earned under his arrangement.
See "Executive Officers" for information as to an employment agreement
with Bernard Berk.
43
SECURITY OWNERSHIP OF OUR DIRECTORS,
EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of April 15, 2005 by (i) each director and
named executive officer, (ii) each beneficial holder of at least 5% of the
outstanding shares of Common Stock, and (iii) all executive officers and
directors as a group. On April 15, 2005 there were outstanding17,957,345 shares
of Common Stock.
Shares not outstanding but deemed beneficially owned by virtue of the
right of any individual to acquire shares within 60 days are treated as
outstanding only when determining the amount and percentage of the class owned
by such individual. Each person has sole voting and investment power with
respect to the shares shown, except as noted. Unless otherwise indicated, the
address of the person named is c/o Elite Pharmaceuticals, Inc., 165 Ludlow
Avenue, Northvale, New Jersey 07647.
NUMBER PERCENTAGE
NAME AND ADDRESS OF SHARES OF CLASS
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Bernard Berk, Chairman of the Board 756,000 (1) 4.1%
and Chief Executive Officer*
Edward Neugeboren, Director* 188,094 (2) 1.0%
Dr. Barry Dash, Director -- --
Dr. Melvin H. Van Woert -- --
Mark I. Gittelman, Chief Financial Officer, 10,000 (3) **
Treasurer and Secretary
300 Colfax Avenue
Clifton, New Jersey 07013
All Directors and Officers as a group 954,094 (4) 5.1%
5% BENEFICIAL OWNERS
SAC Capital Associates LLC 1,147,418 (5) 6.1%
P.O. Box 58
Victoria House, The Valley
Antigua, BVI
Jerome Belson 969,000 (6) 5.3%
495 Broadway
New York, New York 10012
* See "Management - Board of Directors" for his address
** Less than 1% of outstanding shares
(1) Includes options to purchase 630,000 shares, of which options to purchase
300,000 shares are not exercisable until occurrence of a "strategic event" as
defined in his employment agreement.
(2) Includes 147,263 shares issuable upon exercise of warrants but does not
include 20,325 shares issuable upon exercise of warrants held by his father.
44
(3) Comprised of options to purchase 10,000 shares
(4) Includes options and warrants to purchase an aggregate of 787,263 shares.
(5) Includes 813,010 shares issuable upon exercise of warrants.
(6) Includes (i) warrants to purchase 281,000 shares of Common Stock, (ii)
53,900 shares held by Maxine Belson, wife of Jerome Belson, (iii) 63,300 held by
other members of his family, and (iv) 50,000 shares held by the Jerome Belson
Foundation.
Except as otherwise set forth, information as to the stock ownership of
each person was provided to the Company by such person.
Other than the Stock Option Plan, the Company does not have any
compensation plans or arrangements benefiting employees or non-employees under
which equity securities of the Company are authorized for issuance in exchange
for consideration in the form of goods or services.
OFFER TO CLASS B AND CLASS C WARRANTHOLDERS
Each of the Class B and the Class C Warrants is nontransferable except by
operation of law and entitles the holder to purchase one share of Common Stock
on or before November 30, 2005 at a price of $5.00 per share. The exercise price
is subject to adjustment for stock dividends, stock splits or combination of the
Common Stock.
The Class C Warrants were issued by the Company in exchange for all the
outstanding Class A Warrants. To the extent a Class A Warrant Holder did not
submit the holder's Class A Warrants for exchange such Class A Warrants are
deemed to be Class C Warrants.
The shares issuable upon exercise of the Class B Warrants and Class C
Warrants are offered by the Company pursuant to this Prospectus. Exercise of the
Warrants may be effected by delivering the Warrants with the exercise portion of
the Warrant fully executed to the Company's Warrant Agent, Jersey Transfer &
Trust Company, 201 Bloomfield Avenue, P.O. Box 36, Verona, New Jersey 07044 with
cash or a check in the amount of the full exercise price.
LEGAL MATTERS
Reitler Brown & Rosenblatt LLC, New York, New York, as counsel to the
Company will pass upon whether the shares of Common Stock when issued upon
exercise of the Class B and Class C Warrants will be fully paid, nonassessable
and legally issued.
EXPERTS
Our consolidated financial statements as of March 31, 2004 and March 31,
2003 and for the years ended March 31, 2004, March 31, 2003 and March 31, 2002,
incorporated by reference in this prospectus, have been audited by Miller, Ellin
& Company, LLP, New York, New York, independent certified public accountants, as
indicated in its report with respect thereto, and is incorporated by reference
in this prospectus in reliance upon its report given upon the authority of said
firm as experts in accounting and auditing.
45
ELITE PHARMACEUTICALS INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004 (UNAUDITED).......... F - 2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED
DECEMBER 31, 2004 AND 2003 (UNAUDITED)................................... F - 4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED).................. F - 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
DECEMBER 31, 2004 AND DECEMBER 31, 2003 (UNAUDITED)...................... F - 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND NINE MONTHS ENDED
DECEMBER 31, 2004 AND 2003 (UNAUDITED)................................... F - 7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................. F - 16
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2004 AND MARCH 31, 2003
(AUDITED)................................................................ F - 17
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
MARCH 31, 2004, 2003 AND 2002 (AUDITED).................................. F - 19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR YEARS ENDED MARCH 31, 2004, 2003 AND 2002 (AUDITED).................. F - 20
CONSOLIDATED STATEMENTS OF CASH FLOWS OR THE YEARS ENDED
MARCH 31, 2004, 2003 AND 2002 (AUDITED).................................. F - 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AUDITED)..................... F - 24
F-1
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
DECEMBER 31, 2004
-----------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,564,948
Accounts receivable, net --
Restricted cash 116,645
Prepaid expenses and other current assets 54,833
--------------
Total current assets 4,736,426
--------------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 4,273,898
--------------
INTANGIBLE ASSETS - net of accumulated amortization 83,791
--------------
OTHER ASSETS:
Prepaid expenses 41,013
Deposit on equipment --
Restricted cash - debt service reserve 300,000
Restricted cash - note payable --
EDA bond offering costs, net of accumulated amortization
of $67,058 127,502
--------------
Total other assets 468,515
--------------
Total assets $ 9,562,630
==============
The accompanying notes are an integral part
of the consolidated financial statements.
F-2
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, 2004
-----------------
CURRENT LIABILITIES:
Current portion - note payable $ 130,000
Current portion of EDA bonds 165,000
Accounts payable and accrued expenses 595,014
--------------
Total current liabilities 890,014
--------------
LONG TERM LIABILITIES:
Note payable - net of current portion 205,051
EDA bonds - net of current portion 2,180,000
--------------
Total long-term liabilities 2,385,051
--------------
Total liabilities 3,275,065
--------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $. 01 par value;
Series A 8% Convertible Preferred Stock
Authorized 660,000 shares,
aggregate liquidation preference of $5,303,662 4,312
Common stock - $.01 par value;
Authorized - 65,000,000 shares
Issued and outstanding - 13,111,547 shares, 131,115
Additional paid-in capital 46,289,033
Accumulated deficit (39,830,054)
--------------
6,594,406
Treasury stock, at cost (100,000 shares) (306,841)
--------------
Total stockholders' equity 6,287,565
--------------
Total liabilities and stockholders' equity $ 9,562,630
==============
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
----------------------------
2004 2003
------------ ------------
REVENUES $ 151,450 $ 30,000
------------ ------------
COST OF OPERATIONS:
Research and development 1,937,794 1,480,788
General and administrative 1,675,041 1,543,926
Depreciation and amortization 271,080 268,830
------------ ------------
3,883,915 3,293,544
------------ ------------
LOSS FROM OPERATIONS (3,732,465) (3,263,544)
------------ ------------
OTHER INCOME (EXPENSES):
Interest income 18,842 16,469
Litigation settlement -- 150,000
Sale of New Jersey tax losses 205,792 151,027
Interest expense (176,696) (159,777)
Expenses relating to issuance of stock options (325,558) (1,096,349)
Expenses relating to issuance of stock warrants (241,010) (587,983)
Expenses relating to repricing of stock options (397,732) --
Expenses relating to warrant exchange offer -- (172,324)
------------ ------------
(916,362) (1,698,937)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (4,648,827) (4,962,481)
PROVISION FOR INCOME TAXES 1,000 1,000
------------ ------------
NET LOSS (4,649,827) (4,963,481)
Preferred stock dividends (75,076) --
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (4,724,903) $ (4,963,481)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.39) $ (.46)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12,231,405 10,829,626
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 2004
(UNAUDITED)
SERIES A 8%
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- --------------------- PAID-IN TREASURY ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT EQUITY
-------- ------ ---------- -------- ----------- --------- ------------ ----------
BALANCE AT MARCH 31, 2004 (AUDITED) -- $ -- 12,204,426 $122,044 $39,338,140 $(306,841) $(35,105,151) $4,048,192
Series A 8% convertible
preferred shares and warrants
issued in connection with
private placement 516,558 5,166 5,861,434 -- -- 5,866,600
Common shares issued in
connection with consulting
agreement -- -- 26,500 265 58,035 -- -- 58,300
Preferred shares converted to
common shares (85,366) (854) 853,660 8,537 (7,683) -- -- --
Expenses related to issuance of
stock options -- -- -- -- 325,558 -- -- 325,558
Expenses related to issuance of
stock warrants -- -- -- -- 241,010 -- -- 241,010
Expenses related to repricing
of stock options -- -- -- -- 397,732 -- -- 397,732
Common stock issued as dividend
on Series A 8% convertible
preferred stock -- -- 26,961 269 74,807 -- (75,076) --
NET LOSS FOR NINE MONTHS
ENDED DECEMBER 31, 2004 -- -- -- -- -- -- (4,649,827) (4,649,827)
-------- ------ ---------- -------- ----------- --------- ------------ -----------
BALANCE AT DECEMBER 31, 2004
(Unaudited) 431,192 $4,312 13,111,547 $131,115 $46,289,033 $(306,841) $(39,830,054) $6,287,565
======== ====== ========== ======== =========== ========= ============ ==========
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
--------------------------------
2004 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,649,827) $ (4,963,481)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 271,080 268,830
Expenses related to issuance of stock options 325,558 1,096,349
Expenses related to issuance of stock warrants 241,010 587,983
Expenses related to repricing of stock options 397,732 --
Expenses related to modification of warrant exchange offer -- 172,324
Expenses related to issuance of common stock 58,300 --
Changes in assets and liabilities:
Accounts and accrued interest receivable 153,250 4,681
Prepaid expenses and other current assets 83,059 48,803
Accounts payable, accrued expenses and other current liabilities (490,228) 222,018
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (3,610,066) (2,562,493)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (27,843) --
Purchase of patent -- (20,500)
Restricted cash 312,350 (9,300)
-------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 284,507 (29,800)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Securities 5,866,600 3,209,000
Principal bank note payments (225,000) (56,250)
Proceeds from equipment loan 400,000 --
Principal equipment note payments (64,989) --
Principal repayments of NJEDA Bonds (150,000) (140,000)
Prepaid interest (41,013) --
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,785,638 3,012,750
-------------- --------------
NET CHANGE IN OPERATING CASH AND CASH EQUIVALENTS 2,460,079 420,457
OPERATING CASH AND CASH EQUIVALENTS - beginning of period 2,104,869 3,264,081
-------------- --------------
OPERATING CASH AND CASH EQUIVALENTS - end of period $ 4,564,948 $ 3,684,538
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 132,231 $ 112,341
Cash received for income taxes 204,792 150,027
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred Stock dividends of $75,076 paid by issuance of 26,961
shares of Common Stock $ 75,076 --
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The information 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"), Elite Research Ltd. ("ERL") and
Elite Research, Inc. ("ERI"), for the periods ended December 31, 2004
and December 31, 2003. As of December 31, 2004, 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 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 elsewhere for the year ended March 31, 2004. There have
been no changes in significant accounting policies since March 31,
2004.
The Company does not anticipate being profitable for fiscal year 2005;
therefore a current provision for income tax was not established for
the nine months ended December 31, 2004. 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 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.
SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION
In October 2004, the Company completed a private placement through
Indigo Securities LLC, the Placement Agent, for aggregate gross
proceeds of $6,600,000 of 516,558 shares of Series A Preferred Stock,
par value $0.01 per share ("Preferred Shares") convertible into
5,165,580 shares of Common Stock. The Preferred Shares were
accompanied by warrants to purchase an aggregate of 5,165,580 shares
of Common Stock at exercise prices ranging from $1.54 to $1.84 per
share. See Note 4 - Subsequent Events" for the conversion of all the
originally issued 516,558 shares into shares of Common Stock.
F-7
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (Continued)
The holders of the Preferred Shares were entitled to dividends at the
rate of 8% of the original issue price of $12.30 per share payable on
December 1 and June 1 of each year in cash or shares of Common Stock.
Holders were entitled to elect one Director, and ten votes per share,
and vote with the Common Stockholders as one class on all other
matters. Each Preferred Share was convertible into ten shares of
Common Stock at a rate of $1.23 into $12.30 plus dividends to the date
of conversion. The purchaser of the Preferred Shares (the "INVESTORS")
received for each Preferred Share acquired two Common Stock Purchase
Warrants, one exercisable on or prior to December 31, 2005
("SHORT-TERM WARRANTS") and the other exercisable on or prior to
December 28, 2009 ("LONG-TERM WARRANTS"). Each warrant represents the
right to purchase five shares of Common Stock.
The private placement was effected in three tranches. The first
tranche involved the sale on October 6, 2004 of 379,122 Preferred
Shares at a price of $12.30 per share convertible into an aggregate of
3,791,220 shares of Common Stock accompanied by Short-Term Warrants
and Long-Term Warrants to purchase at $1.54 per share an aggregate of
3,791,220 shares of Common Stock. The second tranche involved the sale
on October 12, 2004 of 119,286 Preferred Shares at a price of $14.00
per share convertible into 1,192,860 shares of Common Stock
accompanied by Short-Term and Long-Term Warrants to purchase an
aggregate of 1,192,860 shares of Common Stock at a price of $1.75 per
share. The third tranche involved the sale on October 26, 2004 of
18,150 Preferred Shares at a price of $14.70 per share convertible in
to 181,500 shares of Common Stock accompanied by Short Term and Long
Term Warrants to purchase at a price of $1.84 per share an aggregate
of 181,500 shares of Common Stock.
Pursuant to the Placement Agent Agreement, the Company issued to the
Placement Agent and its designees Long Term Warrants to purchase
357,495 shares of Common Stock at $1.23 per share, 119,286 shares of
Common Stock at a price of $1.40 per share, and 18,150 shares of
Common Stock at a price of $1.47 per share, respectively. The Company
paid commissions aggregating $633,510 and also paid legal fees and
expenses of the Agent's counsel of $75,000 and legal fees and expenses
of one counsel for the investors in the private placement of $25,000.
The Company at its expense registered under the Securities Act of 1933
(the "ACT") for resale the shares of Common Stock issuable upon
conversion of the Preferred Shares, exercise of the warrants
(including the Placement Agent's warrants) and as payment of dividends
on the Preferred Shares.
The Preferred Shares and warrants were sold by Registrant pursuant to
the exemption from registration afforded by Section 4(2) of the Act
and Registration D thereunder.
In the private placement Dr. Charan Behl, the Company's Chief
Scientific Advisor, purchased at $12.30 per share 20,000 Preferred
Shares and received warrants to purchase 200,000 shares of Common
Stock. His payment consisted of $16,675 in cash and the release of the
Company's obligation of $229,325 due to Dr. Behl for consulting fees
for services rendered through September 30, 2004.
The December 1, 2004 dividends in the amount of $75,076 were paid by
issuance of 26,961 shares of Common Stock. By December 31, 2004,
85,366 shares of Series A Preferred Stock were converted into 853,660
shares of Common Stock.
F-8
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
COMMON STOCK TRANSACTION
On July 6, 2004, the Company issued 26,500 shares of Common Stock and
agreed to pay $10,000 per month to a corporation in consideration for
the rendering for a six-month period of investor relation consulting
services, including the distribution of the Company's press releases,
the provision of related strategic advice and the inclusion of the
Company on the consultant's website. The Company agreed to provide the
holder with "piggy-back" registration rights with respect to the
shares.
DECEMBER 2003 PRIVATE PLACEMENT
The Company completed in December 2003 a private placement of
1,645,000 shares of its common stock at $2.00 per share, exempt from
registration pursuant to Section 4(2) and Regulation D under the Act.
In connection with the offering, the Company paid a cash commission of
$75,000 to First Montauk Group Inc., as Placement Agent and issued to
the agent a five year warrant to purchase 50,000 shares of Company's
common stock at a price of $2.00 per share. Legal fees approximating
$36,000 were also incurred in connection with this private placement.
Pursuant to its agreement with the purchasers, the Company at its
expense registered 1,580,000 of the shares issued and the shares
issuable upon exercise of the warrant under the Act
TREASURY STOCK TRANSACTIONS
The Company purchased prior to March 31, 2003, in the open market,
100,000 shares of common stock for a total consideration of $306,841
pursuant to the authorization by the Board of Directors on June 27,
2002.
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. See Note 4 - "Subsequent Events".
On July 8, 2004, Elite Labs, to finance the purchase of certain
machinery and equipment, borrowed $400,000 and designees of the lender
received 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
corporation as consideration for financial consulting services.
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.
In June 2004, the stockholders of the Company approved the adoption by
the Board of Directors of the Company's 2004 Stock Option Plan (the
"2004 Plan"). The Plan reserves 1,500,000 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.
F-9
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
WARRANTS AND OPTIONS (Continued)
On June 22, 2004, the Company granted under its 2004 Stock Option
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 120,000 options granted under the 2004 Plan to
members of the Board of Directors expire ten years from the date of
issuance and are fully vested. The per share weighted-average fair
value of the 243,300 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 has taken a
charge of $229,632 for the nine-months ended December 31, 2004, which
represents the fair value of the vested options, utilizing the
Black-Scholes options pricing model on the grant date.
The 120,000 options granted to employees were in replacement of
previously granted options containing exercise prices greater than
$2.34 per share. 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 nine months ended December 31,
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 new options 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 nine months
ended December 31, 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 has taken a charge of $397,732 for the nine months
ended December 31, 2004 which represents the fair value of the options
vested, utilizing the Black-Scholes options pricing model on each
grant date.
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:
NINE MONTHS ENDED DECEMBER
----------------------------
2004 2003
----------- -----------
Net loss as reported $(4,649,827) $(4,963,481)
Add: Stock-based compensation
expense included in reported net loss,
net of related tax effects 964,300 1,684,332
Deduct: Total stock-based
compensation expense determined
under fair value method for all awards
net of related tax effects (1,005,571) (2,344,940)
----------- -----------
Pro-forma net loss (4,691,098) (5,624,089)
Loss per share as reported (.38) (.46)
Pro-forma loss per share (.38) (.52)
F-10
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 2 - STOCKHOLDERS' EQUITY (Continued)
WARRANTS AND OPTIONS (Continued)
At December 31, 2004, Elite had outstanding 2,377,050 options with
exercise prices ranging from $1.00 to $3.00 and 8,514,750 warrants
(exclusive of the Short Term Warrants and the Long Term 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.
CLASS A WARRANT EXCHANGE OFFER
On October 23, 2002, the Company entered into a Settlement Agreement
with various parties in order to end a Consent Solicitation contest
and various legal actions initiated by the Company. The agreement
provided, among other things, an agreement to commence an exchange
offer (the "Exchange Offer") whereby holders of the Company's Class A
Warrants which expired on November 30, 2002 (the "Old Warrants") had
the opportunity to exchange those warrants for new warrants (the
"Class C Warrants") upon payment to the Company of $.10 per share of
common stock issuable upon the exercise of the old warrants. In
September 2003 the Company discontinued the Exchange offer and issued
the Class C Warrants to the record holders as of November 30, 2002 of
the Class A Warrants without requiring any cash payment.
Class C Warrants are exercisable for the same number of shares of
common stock as the Class A Warrants at an exercise price of $5.00 per
share, and expire on November 30, 2005. They are not transferable
except pursuant to operation of law.
During the year ended March 31, 2003, the Company expensed $242,338
relating to the Exchange Offer, which represents the fair value of the
Class C Warrants,. The per share weighted-average fair value of each
warrant on the date of grant was $1.10 using the Black-Scholes option
pricing model with the following weighted-average assumptions: no
dividend yield; expected volatility of 73.77%; risk-free interest rate
of 2.88%; and expected lives of 3 years. The elimination of the $0.10
per share fee resulted in an additional charge of $172,324 during the
year ended March 31, 2004.
For the year ended March 31, 2003 the Company incurred legal fees and
other costs amounting to approximately $100,000, in connection with
the Exchange Offer, which was charged to additional paid-in capital.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
SETTLEMENT OF LITIGATION WITH ATUL M. MEHTA
The Company had an employment agreement ("Employment Agreement") with
its former President/CEO, Dr. Atul M. Mehta ("Mehta").
On June 3, 2003, Mehta resigned from all positions that he held with
the Company, while reserving his rights under his Employment Agreement
and under common law. On July 3, 2003, Mehta instituted litigation
against the Company and one of its directors in the Superior Court of
New Jersey, alleging, among other things, the breach of his Employment
Agreement and defamation, and claiming that he is entitled to receive
his salary through June 6, 2006. The Company made certain counter
claims against Mehta.
F-11
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
SETTLEMENT OF LITIGATION WITH ATUL M. MEHTA (Continued)
Under a settlement agreement, dated April 21, 2004, Mehta relinquished
any rights to the Company's patents and intellectual properties and
agreed to certain non-disclosure and certain limited non-competition
covenants. The Company paid Mehta $400,000 and certain expense
reimbursements, and received a short-term option for the Company or
its designees to acquire all of the shares of the common stock of the
Company held by Mehta and his affiliates at $2.00 per share. The
Company paid $100,000 into escrow which was released to Mehta because
the option was not exercised in full. As part of the settlement, the
Company extended expiration dates of certain options to purchase
770,000 shares of common stock at prices ranging from $1.00 to $10.00
per share held by Mehta and also provided him with certain "piggyback"
registration rights with respect to shares underlying his options. The
Company entered into an agreement dated October 7, 2004 with Mehta
pursuant to which 100,000 of the $10.00 options were terminated, the
expiration dates of the other 670,000 options were extended from June
13, 2005 to December 31, 2007 and the exercise price of 170,000
options were reduced from $10.00 to $2.34 per share. The agreement
also obligates the Company to bear Mehta's legal and other expenses
for the two year period from the litigation settlement will not exceed
$50,000.
REFERRAL AGREEMENT WITH RELATED PARTY
In January 2002, the Company entered into a Referral Agreement with
one of its directors (Referring Party) whereby the Company is to pay
the Referring Party a fee based upon payments received by the Company
from sales of products, development fees, licensing fees and royalties
generated as a direct result of the Referring Party identifying
customers for the Company. These amounts are to be reduced by the cost
of goods sold directly incurred in the manufacturing or development of
products as well as any direct expenses associated with these efforts.
The Referral Agreement has no expiration date.
The Company committed to pay the Referring Party a referral fee each
year as follows:
PERCENTAGE OF REFERRAL BASE
REFERRAL BASE FROM TO
------------------- ---------- ----------
5% $ 0 $1,000,000
4% 1,000,000 2,000,000
3% 2,000,000 3,000,000
2% 3,000,000 4,000,000
1% 4,000,000 5,000,000
As of December 31, 2004, no referral fee payments were required to be
made under this agreement.
COLLABORATIVE AGREEMENTS
On December 18, 2003, the Company and Pivotal Development, L.L.C.
entered into an agreement to develop a controlled release product
utilizing Elite's proprietary drug delivery technology. The product is
a generic equivalent to a drug losing patent exclusivity with
addressable market revenues of approximately $150 million per year.
The agreement also provides an option to develop a controlled release
NDA product.
Under the collaboration agreement, Pivotal Development will be
responsible for taking the Elite formulation through clinical
development and the FDA regulatory approval process. The partners are
to seek a license during the development cycle from a pharmaceutical
company, which has the resources to effectively market the product and
share the cost of defending the product against any lawsuits.
Elite and Pivotal are to bear costs in their respective areas of
responsibility. In addition Pivotal is to pay Elite $750,000 upon
attainment of certain milestones outlined in the agreement.
F-12
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
COLLABORATIVE AGREEMENTS (Continued)
Pivotal did not raise the capital required to move forward with the
development agreement and did not go forward under the terms of the
agreement. Elite is attempting to identify other partners for this
project.
In June 2001, the Company entered into two separate and distinct
development and license agreements with another pharmaceutical
company, ECR Pharmaceuticals, Inc. ("ECR"). The Company is developing
two drug compounds for the partner in exchange for certain payments
and royalties. The Company also reserves the right to manufacture the
compounds. On November 15, 2004, ECR announced that it launched
LODRANE 24, utilizing Elite's exclusive extended release technology,
for once daily dosing. The Company is currently manufacturing
commercial batches for promotion by ECR for which Elite will receive a
royalty on product revenues. No amounts were earned under the
agreements during the nine month period ended December 31, 2004 or
2003 respectively.
On September 13, 2002, the Company, entered into a manufacturing
agreement with Ethypharm S.A. ("Ethypharm"). Under the terms of this
agreement, the Company initiated the manufacturing of a new
prescription drug product for Ethypharm. The Company received an
upfront manufacturing fee for the first phase of the technology
transfer and billed an additional amount upon the completion of the
first phase of manufacturing.
The Company is entitled to receive additional fees in advance for the
final phase of the manufacturing. In addition, if and when FDA
approval is obtained and if requested by Ethypharm, the Company will
manufacture commercial batches of the product on terms to be agreed
upon. There were no amounts earned in the nine month periods ended
December 31, 2004 and 2003.
EMPLOYMENT AGREEMENT
On July 23, 2003, the Company appointed Bernard Berk as its Chief
Executive Officer and President and entered into an employment
agreement with him. The initial term of this agreement is three years.
Pursuant to the agreement:
- Mr. Berk is entitled to receive a base salary of $200,000 per annum,
subject to increase to $330,140 if and when the Company consummates a
Strategic Transaction (as defined in the employment agreement).
- The Company confirmed its grant to Mr. Berk on June 3, 2003 of
options to purchase 300,000 shares of the Company's common stock at
$2.01 per share. All of these options are vested.
- The Company granted Mr. Berk options to purchase an additional
300,000 shares of its common stock, with an exercise price equal to
$2.15, the closing price of the Company's common stock on the date of
grant. These options will vest solely upon consummation of a Strategic
Transaction, as defined.
F-13
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENT (Continued)
- Mr. Berk will be entitled to receive severance in accordance with
the employment agreement if he is terminated without cause or because
of his death or permanent disability or if he terminates his
employment for good reason or as a result of a "change of control" as
defined. The severance will be payable in accordance with the terms of
his employment agreement.
On May 14, 2004, the Company's Board of Directors appointed Bernard
Berk to the position of Chairman of the Board of Directors.
CONSULTING AGREEMENTS
On July 3, 2003, the Company entered into an agreement with Leerink
Swann & Company to provide a Valuation and a Fairness Opinion in order
for the Company to complete a proposed acquisition (subsequently not
effected) for which the Company paid a non-refundable retainer fee of
$50,000. If and when the Board of Directors requests a Fairness
Opinion, Leerink's compensation is to be $50,000. No amounts were
expensed in the nine month period ended December 31, 2004 and 2003.
The Company entered into one year consulting agreements with each of
Saggi Capital Corp. and Bridge Ventures Inc. on November 4, 2003. The
consultant's services include advice with respect to overall strategic
planning, financing opportunities, acquisition policy, commercial and
investment banking relationships and stockholder matters. In
consideration of the consultant's agreement to provide services, the
Company pays each consultant $75,000 in monthly installments of $6,250
and issued to each consultant a warrant to purchase 100,000 shares of
the Company's common stock at a price of $2.00 per share. Each
agreement was extended for an additional year until November 4, 2005
at a cash fee of $6,250 per month.
On June 3, 2004, the Company agreed to engage a company to provide
consulting services and issued in connection therewith a five-year
warrant to purchase 100,000 shares of common stock at a price of $2.50
per share.
On July 20, 2004, the Company agreed to engage an individual to
provide financial consulting services and issued in connection
therewith a three-year warrant to purchase 50,000 shares of common
stock at a price of $3.00 per share. Pursuant to the rules of the
American Stock Exchange, the issuance of the warrants is to be
presented for ratification by shareholders at the next Annual Meeting.
For the nine month periods ended December 31, 2004 and 2003,
consulting expenses under these agreements amounted to an aggregate of
$30,000 and $120,000, respectively.
F-14
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
NOTE 4 - SUBSEQUENT EVENTS
Effective January 24, 2005, Mr. John Moore resigned as a director of
the Company and a member of its Audit and Nominating Committee and was
replaced by Mr. Edward Neugeboren who was appointed pursuant to the
Certificate of Designation of the Series A Preferred Stock by the
Placement Agent of the private placement in which the shares were sold
as the agent of the Preferred Shareholders. He was appointed by the
Board of Directors to the Audit and Nominating Committees.
As of March 7, 2005, all of the originally issued 516,558 shares of
Series A Convertible Preferred Stock had been converted (431,192
shares subsequent to December 31, 2004) into 5,200,120 shares of
common stock.
During the period January 1, 2005 through March 7, 2005, the Company
issued 203,050 shares of common stock upon exercise of short-term
warrants.
F-15
REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM
To Elite Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Elite
Pharmaceuticals, Inc. and Subsidiaries (the "Company") as of March 31, 2004 and
2003, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years ended March 31, 2004, 2003 and
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Elite
Pharmaceuticals, Inc. and Subsidiaries as of March 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 2004, 2003 and 2002 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements, the Company has experienced significant losses and negative cash
flows, resulting in decreased working capital and accumulated deficits. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters are described in Note 2.
/s/ Miller, Ellin & Company, LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
June 8, 2004, except for
the fourth and fifth paragraphs of
Note 13, as to which
the date is June 24, 2004
F-16
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
ASSETS
2004 2003
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $2,104,869 $3,264,081
Accounts and accrued interest receivable 153,250 4,681
Restricted cash 203,995 99,380
Prepaid expenses and other current assets 137,892 132,092
---------- ----------
Total current assets 2,600,006 3,500,234
---------- ----------
PROPERTY AND EQUIPMENT- net of accumulated
depreciation and amortization 4,090,250 4,390,553
---------- ----------
INTANGIBLE ASSETS - net of accumulated amortization 102,196 104,842
---------- ----------
OTHER ASSETS:
Deposit on equipment 398,580 --
Restricted cash - debt service 300,000 300,000
Restricted cash - note payable 225,000 250,000
EDA bond offering costs, net of accumulated
amortization of $60,458 and $47,267,
respectively 137,402 150,593
---------- ----------
Total other assets 1,060,982 700,593
---------- ----------
$7,853,434 $8,696,222
========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
F-17
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2003
------------ ------------
CURRENT LIABILITIES:
Current portion - Note payable $ 75,000 $ 75,000
Current portion of EDA bonds 150,000 140,000
Accounts payable and accrued expenses 1,085,242 334,721
------------ ------------
Total current liabilities 1,310,242 549,721
------------ ------------
LONG TERM LIABILITIES:
Note payable - net of current portion
EDA bonds - net of current portion 150,000 225,000
2,345,000 2,495,000
------------ ------------
Total long-term liabilities 2,495,000 2,720,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value;
Authorized - 25,000,000 shares
Issued and outstanding - 12,204,423
and 10,544,423 in 2004 and 2003,
respectively 122,044 105,444
Additional paid-in capital 39,338,140 34,218,832
Accumulated deficit (35,105,151) (28,590,934)
------------ ------------
4,355,033 5,733,342
Treasury stock (306,841) (306,841)
------------ ------------
Total stockholders' equity 4,048,192 5,426,501
------------ ------------
Total liabilities and stockholders' equity $ 7,853,434 $ 8,696,222
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
F-18
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31,
-------------------------------------------
2004 2003 2002
------------ ------------ -----------
REVENUES:
Research and development $ 258,250 $ 442,500 $ 593,000
Product formulation fees -- 187,810 601,057
Consulting and test fees -- -- 3,450
------------ ------------ -----------
Total revenues 258,250 630,310 1,197,507
------------ ------------ -----------
OPERATING EXPENSES:
Research and development 2,075,074 2,013,579 1,609,108
General and administrative 2,549,846 1,858,069 763,687
Depreciation and amortization 332,836 310,876 266,919
------------ ------------ -----------
4,957,756 4,182,524 2,639,714
------------ ------------ -----------
LOSS FROM OPERATIONS (4,699,506) (3,552,214) (1,442,207)
------------ ------------ -----------
OTHER INCOME (EXPENSES):
Interest income 23,765 96,692 260,055
Litigation Settlement 150,000 -- --
Sale of NJ Tax Losses 151,027 71,674 137,818
Interest expense (211,595) (227,907) (220,123)
Equity in loss of joint venture -- (186,379) (507,640)
Charge relating to issuance of stock options (1,166,601) (20,550) --
Charge relating of issuance of stock warrants (587,983) -- --
Charge relating to warrant exchange offer (172,324) (242,338) --
------------ ------------ -----------
(1,813,711) (508,808) (329,890)
------------ ------------ -----------
LOSS BEFORE PROVISION FOR INCOME
TAXES (6,513,217) (4,061,022) (1,772,097)
PROVISION FOR INCOME TAXES 1,000 400 2,430
------------ ------------ -----------
NET LOSS $ (6,514,217) $ (4,061,422) $(1,774,527)
============ ============ ===========
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (0.58) $ (0.40) $ (0.19)
============ ============ ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 11,168,618 10,069,991 9,561,299
============ ============ ===========
The accompanying notes are an integral part
of the consolidated financial statements.
F-19
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK STOCKHOLDERS'
------------------ ------------------- PAID-IN ---------------- ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT (DEFICIT)
------- -------- --------- ------- ----------- ------- ------ ------------ -----------
BALANCE AT APRIL 1, 2001 -- $ -- 9,376,389 $93,764 $18,071,503 $(21,000,013) $(2,834,746)
Issuance of shares through
exercise of warrants -- -- 298,179 2,981 1,301,606 -- 1,304,587
Issuance of shares and
warrants through exercise
of placement agent warrants -- -- 16,272 163 58,416 -- 58,579
Issuance of shares and
warrants through exercise
of options -- -- 20,000 200 37,939 -- 38,139
Issuance of Series B
convertible exchangeable
preferred stock 200,000 200,000 -- -- -- -- 200,000
Dividends declared -
Series A preferred stock -- -- -- -- -- (853,148) (853,148)
Net loss for year ended
March 31, 2002 -- -- -- -- -- -- -- (1,774,527) (1,774,527)
------- -------- --------- ------- ----------- ------- ------ ------------ -----------
BALANCE AT MARCH 31, 2002 200,000 $200,000 9,710,840 $97,108 $19,469,464 -- $ -- $(23,627,688) $(3,861,116)
------- -------- --------- ------- ----------- ------- ------ ------------ -----------
The accompanying notes are an integral
part of the consolidated financial statements.
F-20
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK STOCKHOLDERS'
------------------ ------------------- PAID-IN ---------------- ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT (DEFICIT)
------- -------- --------- ------- ----------- ------- ------- ------------ -----------
BALANCE AT APRIL 1, 2002 200,000 $ 200,000 9,710,840 $ 97,108 $19,469,464 -- $ -- $(23,627,688) $(3,861,116)
Issuance of shares
through exercise of
warrants -- -- 2,603 26 13,004 -- 13,030
Issuance of shares and
warrants through
exercise of placement
agent warrants -- -- 14,670 147 52,666 -- 52,813
Issuance of convertible
exchangeable preferred
stock 559,000 559,000 -- -- -- -- 559,000
Dividends - declared -
Series B preferred stock -- -- -- -- -- (14,000) (14,000)
Dividends - declared -
Series A preferred stock -- -- -- -- -- -- -- (887,824) (887,824)
Preferred stock issued to
satisfy accrued dividends 14,000 14,000 -- -- -- -- 14,000
Conversion of convertible
exchangeable preferred
stock into common stock (773,000) (773,000) 816,310 8,163 14,520,810 -- -- -- 13,755,973
Purchase of treasury stock -- -- (100,000) -- -- 100,000 (306,841) -- (306,841)
Charge relating to
exchange of warrants -- -- -- -- 242,338 -- -- 242,338
Charge relating to issuance
of stock options -- -- -- -- 20,550 -- -- 20,550
Fees relating to Warrant
Exchange Offer -- -- -- -- (100,000) -- -- (100,000)
Net loss for the year ended
March 31, 2003 -- -- -- -- -- -- -- (4,061,422) (4,061,422)
-------- --------- ---------- -------- ----------- ------- --------- ------------ -----------
BALANCE AT MARCH 31, 2003 -- $ -- 10,444,423 $105,444 $34,218,832 100,000 $(306,841) $(28,590,934) $ 5,426,501
======== ========= ========== ======== =========== ======= ========= ============ ===========
The accompanying notes are an integral part
of the consolidated financial statements.
F-21
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK STOCKHOLDERS'
------------------ ------------------- PAID-IN ------------------ ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT (DEFICIT)
------- -------- --------- ------- ----------- ------- --------- ------------ ------------
BALANCE AT APRIL 1, 2003 -- $ -- 10,444,423 $105,444 $34,218,832 100,000 $(306,841) $(28,590,934) $5,426,501
Modification of warrant
exchange offer -- -- -- -- 172,324 -- -- -- 172,324
Issuance of stock options -- -- -- -- 1,166,601 -- -- -- 1,166,601
Issuance of stock warrants -- -- -- -- 587,983 -- -- -- 587,983
Proceeds from exercising
stock options -- -- 15,000 150 29,850 -- -- -- 30,000
Net proceeds from private
placement -- -- 1,645,000 16,450 3,162,550 -- -- -- 3,179,000
Net loss for the year
ended March 31, 2004 -- -- -- -- -- -- -- (6,514,217) (6,514,217)
------ ------ ---------- -------- ----------- ------- --------- ------------ -----------
BALANCE AT MARCH 31, 2004 -- $ -- 12,104,423 $122,044 $39,338,140 100,000 $(306,841) $(35,105,151) $4,048,192
====== ====== ========== ======== =========== ======= ========= ============ ==========
The accompanying notes are an integral part
of the consolidated financial statements.
F-22
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
2004 2003 2002
----------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,514,217) $ (4,061,422) $(1,774,527)
Adjustments to reconcile net loss to cash used in operating activities:
Write off of accounts receivable and patents -- -- 5,057
Depreciation and amortization 332,836 310,876 266,919
Charge relating to Warrant Exchange Offer 172,324 242,338 --
Charge relating to issuance of stock options 1,166,601 20,550 --
Charge relating to issuance of stock warrants 587,983 -- --
Equity in loss of joint venture -- 186,379 507,640
Changes in assets and liabilities:
Contract revenue receivable (148,569) 35,307 (26,674)
Prepaid expenses and other current assets (5,800) (26,010) (24,350)
Amount receivable from Joint Venture -- 525,259 (444,444)
Accounts payable and accrued expenses and other current Liabilities 750,521 193,009 (78,508)
----------- ------------ -----------
NET CASH (USED IN) OPERATING ACTIVITIES (3,658,321) (2,573,714) (1,568,887)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases) redemptions of short-term investments -- 100,000 (100,000)
Payments for patent and trademark filings (16,696) (69,517) (6,920)
Restricted cash (79,615) 114,284 (157,624)
Receivable from sale of New Jersey tax losses -- 66,077 80,055
Payment of deposit for manufacturing equipment (398,580) -- (123,396)
Purchases of property and equipment -- (679,485) (223,801)
----------- ------------ -----------
NET CASH (USED IN) INVESTING ACTIVITIES (494,891) (468,641) (531,686)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Fees relating to Warrant Exchange Offer -- (100,000) --
Proceeds under bank note -- -- 375,000
Principal repayments of bank note (75,000) (75,000) --
Purchase of treasury stock -- (306,841) --
Proceeds from issuance of common stock and warrants 3,209,000 65,843 1,401,305
Principal repayments of EDA bonds (140,000) (130,000) (120,000)
----------- ------------ -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,994,000 (545,998) 1,656,305
----------- ------------ -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,159,212) (3,588,353) (444,268)
CASH AND CASH EQUIVALENTS - beginning of period 3,264,081 6,852,434 7,296,702
----------- ------------ -----------
CASH AND CASH EQUIVALENTS - end of period $ 2,104,869 $ 3,264,081 $ 6,852,434
=========== ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 214,199 $ 228,938 $ 218,938
Cash paid (received) for income taxes (150,027) (71,274) 2,430
SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Utilization of equipment deposit towards purchase of equipment $ -- $ 123,396 $ --
Issuance of Preferred Stock (including stock dividend payable
of $14,000 and subscription receivable of $67,000) for
interest in joint venture -- 573,000 200,000
Conversion of preferred stock to common stock -- 8,163 --
Conversion of preferred stock to additional paid in capital -- 14,520,810 --
Satisfaction of amounts due to joint venture -- 622,133 136,619
Reduction in (addition to) investment in joint venture -- 63,381 (63,381)
Dividends accrued on preferred stock -- 899,923 853,148
The accompanying notes are an integral part
of the consolidated financial statements.
F-23
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Elite
Pharmaceuticals, Inc. and its wholly-owned subsidiaries, (the
"Company"). All significant intercompany accounts and transactions
have been eliminated in consolidation.
The Company consolidates all entities that it controls. The Company
did not consolidate companies it did not control. The Company used the
equity method to account for its investments in companies in which it
did not have the ability to exercise significant influence over
operating and financial policies.
NATURE OF BUSINESS
Elite Pharmaceuticals, Inc. ("Elite") was incorporated on October 1,
1997 under the laws of the State of Delaware, and its wholly-owned
subsidiary Elite Laboratories, Inc. ("Elite Labs") was incorporated on
August 23, 1990 under the laws of the State of Delaware, in order to
engage in research and development activities for the purpose of
obtaining Food and Drug Administration approval, and, thereafter,
commercially exploiting generic and new controlled-release
pharmaceutical products. The Company also engages in contract research
and development on behalf of other pharmaceutical companies.
On October 24, 1997, Elite merged with Prologica International, Inc.
("Prologica") a Pennsylvania corporation, a publicly traded inactive
corporation, with Elite surviving the merger. In addition, Elite Labs
merged with a wholly-owned subsidiary of Prologica, with the Company's
subsidiary surviving this merger. The former shareholders of the
Company's subsidiary exchanged all of their shares of Class A voting
common stock for shares of the Company's voting common stock in a tax
free reorganization under Internal Revenue Code Section 368. The
result of the merger activity qualified as a reverse acquisition. In
connection with the reverse acquisition, options exercisable for
shares of Class A voting and Class B nonvoting common stock of the
Company's subsidiary were exchanged for options exercisable for shares
of the Company's voting common stock.
On September 30, 2002, the Company acquired from Elan Corporation, plc
and Elan International Services, Ltd. (together "Elan") Elan's 19.9%
interest in Elite Research, Ltd. ("ERL"), a joint venture formed
between the Company and Elan where the Company's interest originally
was 80.1%.
On December 31, 2002, the Company entered into an agreement of merger
whereby ERL (a Bermuda Corporation) was merged into a new Delaware
Corporation, Elite Research, Inc. ("ERI"), a wholly-owned subsidiary
of the Company. As a result of the merger, ERI became the owner of all
of the assets and liabilities of ERL. The merger was accounted for as
a tax free reorganization.
F-24
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist of cash on deposit with banks and money market
instruments. The Company places its cash and cash equivalents with
high-quality, U.S. financial institutions and, to date, has not
experienced losses on any of its balances.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on
the straight-line method based on the estimated useful lives of the
respective assets which range from five to forty years. Major repairs
or improvements are capitalized. Minor replacements and maintenance
and repairs which do not improve or extend asset lives are expensed
currently.
Upon retirement or other disposition of assets, the cost and related
accumulated depreciation are removed from the accounts and the
resulting gain or loss, if any, is recorded.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the fair value of long-lived assets
whenever events or changes in circumstances indicate that its carrying
amounts may not be recoverable. Accordingly, any impairment of value
will be recognized when the carrying amount of a long-lived asset
exceeds its fair value in accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Management has determined that no
impairment of long-lived assets has occurred.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to expense as
incurred.
PATENTS AND TRADEMARKS
Effective April 1, 2002, the Company adopted the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets." The adoption of SFAS
No. 142 required an initial impairment assessment involving a
comparison of the fair value of patents and trademarks to current
carrying value. No impairment was determined to exist. The Company
reviews such trademarks and patents with definite lives for impairment
to ensure they are appropriately valued if conditions exist that may
indicate the carrying value may not be recoverable. Such conditions
may include an economic downturn or a change in the assessment of
future operations.
Costs incurred for the application of patents and trademarks are
capitalized and amortized on the straight-line method, based on their
estimated useful lives ranging from five to fifteen years, commencing
upon approval of the patent and trademarks. These costs are charged to
expense if the patent or trademark is unsuccessful.
F-25
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company derives substantially all of its revenues from contracts
with other pharmaceutical companies, subject to licensing and research
and development agreements.
The Company maintains cash balances in its bank, which, at times, may
exceed the limits of the Federal Deposit Insurance Corp.
The Company extends credit to its customers pursuant to contract terms
in the normal course of business and performs ongoing credit
evaluations. As of March 31, 2004 and 2003, no allowance for doubtful
accounts was considered necessary, based on historical trends,
economic conditions and the credit worthiness of customers. Amounts
are written off when they are deemed uncollectible. The Company has
not experienced significant write-offs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates made by management
include, but are not limited to, the recognition of revenue and the
fair value of intangible assets and stock-based awards.
INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for income
taxes. The liability method measures deferred income taxes by applying
enacted statutory rates in effect at the balance sheet date to the
differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements. The resulting deferred
tax assets or liabilities are adjusted to reflect changes in tax laws
as they occur.
LOSS PER COMMON SHARE
Net loss per common share is calculated by dividing net loss by the
weighted average number of shares outstanding during each period
presented. Common stock equivalents, consisting of options, warrants
and convertible securities, have not been included, as their effect
would be antidilutive. For the three years ended March 31, 2004, 2003
and 2002 the following potentially dilutive securities were not
included in the computation of diluted loss per share:
2004 2003 2002
--------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------- --------- ------- --------- -------
Stock options 2,417,050 $ 3.70 2,266,850 $ 5.74 2,056,850 $ 5.82
Warrants 2,654,239 $ 4.72 733,752 $ 12.33 2,669,477 $ 5.47
Convertible preferred shares -- -- -- -- 816,310 --
--------- --------- ---------
5,071,289 3,000,602 5,542,637
F-26
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues derived from providing research and development services
under contracts with other pharmaceutical companies are recognized
when earned. These contracts provide for non-refundable upfront and
milestone payments. Because no discrete earnings event has occurred
when the upfront payment is received, that amount is deferred until
the achievement of a defined milestone. Each nonrefundable milestone
payment is recognized as revenue when the performance criteria for
that milestone has been met. Under each contract, the milestones are
defined, substantive effort is required to achieve the milestone, the
amount of the non-refundable milestone payment is reasonable
commensurate with the effort expended, and achievement of the
milestone is reasonably assured.
Revenues earned by licensing certain pharmaceutical products developed
by Elite are recognized at the beginning of a license term when
Elite's customer has legal right to the use of the product. To date,
no revenues have been earned by licensing products and there are no
continuing obligations under any licensing agreements.
INVESTMENT IN JOINT VENTURE
The equity method of accounting was used to account for the Company's
investment in its joint venture with Elan. Under the equity method,
the Company recognized its share in the net earnings or losses of the
joint venture as they occurred. While Elite owned 100% of the
outstanding common stock of ERL, Elite's equity in the loss of ERL was
based on 100% of ERL's losses, less the amounts funded by Elan. Elan
funded 19.9% of ERL's losses. Once Elite's investment was reduced to
zero, further losses were recognized to the extent of Elite's
commitment to fund the losses. The joint venture was terminated
effective September 30, 2002, as further discussed in Note 7.
F-27
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TREASURY STOCK
The Company records common shares purchased and held in treasury at
cost.
STOCK-BASED COMPENSATION
Under various qualified and non-qualified plans, the Company may grant
stock options to officers, selected employees, as well as members of
the board of directors and advisory board members, as further
described in Note 11. Effective April 1, 2002, the Company adopted the
fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and selected the prospective method of
adoption described in SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No.
123." Prior to April 1, 2002, the Company measured stock-based
compensation for its employee compensation plans using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related
interpretations. No stock-based employee compensation expense for
stock options was reflected in net loss for the year ended March 31,
2002 as all stock options granted under those plans had an exercise
price equal to the fair market value of the underlying common stock on
the date of grant.
During the years ended March 31, 2003 and 2004 the Company issued
210,000 and 1,024,000, respectively options to purchase common stock
to employees and to members of the board of directors. The options
have an exercise price ranging from $2.01 to $5.00 per share and all
vest over three years except 610,000 shares issued in 2004 which
vested upon grant date. The options expire between five and ten years
from the date of grant. The Company has recorded compensation expense
of $20,550 and $1,166,601 for the years ended March 31, 2003 and 2004
which represents the fair value of the options vested, utilizing the
Black-Scholes options pricing model on each grant date.
On June 22, 2004 the Company's Stockholders approved the 2004 Stock
Option Plan and ratified the amendments of the terms of outstanding
options and warrants, including the repricing of options to certain
Directors and employees (See Note 13). The Company will record a
significant compensation expense in future periods, based on the fair
value of the options after reflecting the repricing and amendments to
the terms of the options.
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 year presented:
2004 2003 2002
----------- ----------- -----------
Net loss as reported $(6,514,217) $(4,061,422) $(1,774,527)
Add: Stock-based compensation expense
included in reported net loss, net of related
tax effects 1,166,601 20,550 --
Deduct: Total stock-based compensation
expense determined under fair value method
for all awards, net of related tax effects (865,255) (1,070,651) (1,779,338)
----------- ----------- -----------
Pro forma net loss (6,212,871) (5,111,523) (3,553,865)
Loss per share as reported (0.58) (0.40) (0.19)
Pro-forma loss per share (0.56) (0.51) (0.38)
F-28
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of current assets and liabilities approximate
fair value due to the short-term nature of these instruments. The
carrying amounts of noncurrent assets are reasonable estimates of
their fair values based on management's evaluation of future cash
flows. The long-term liabilities are carried at amounts that
approximate fair value based on borrowing rates available to the
Company for obligations with similar terms, degrees of risk and
remaining maturities.
RECLASSIFICATIONS
Certain accounts and amounts in the 2003 and 2002 financial statements
have been reclassified in order to conform with the 2004 presentation.
These reclassifications have no effect on net income.
NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS
The Company reported net losses of $6,514,217, $4,061,422 and
$1,774,527 for the fiscal years ended March 31, 2004, 2003 and 2002,
respectively. At March 31, 2004, the Company had an accumulated
deficit of approximately $35.1 million, consolidated assets of
approximately $7.9 million, stockholders' equity of approximately $4.0
million, and working capital of approximately $1.3 million. The
Company has not generated any significant revenue to date.
In an effort to reduce costs in fiscal 2003, the Company has reduced
the number of products being actively developed from approximately
fifteen to six. The six products that continue in development were
deemed by management to be the most suitable for continued development
given the Company's limited resources. The Company has also settled
certain litigation with its former CEO which will significantly reduce
its legal fees.
The primary strategy remains to develop the Company's oral control
release pharmaceutical products, with emphasis in the area of pain
management, for FDA approval, and once developed, to commercially
exploit these products either by licensing or through the development
of collaborations with strategic partners.
The Company also retained an investment banking firm in fiscal 2003 to
assist the Company in connection with potential strategic
transactions, including acquisitions. The Company may receive
additional cash proceeds from the exercise of outstanding options and
warrants, as well as through the continued sale of its New Jersey
State tax losses. However, there is no assurance that any options or
warrants will be exercised, that any sale of tax losses will be
completed or that the Company will be able to raise additional
capital.
In the event Purdue Pharma L.P. proceeds with its option to license
the Company's Oxycodone product pursuant to the option agreement
entered into on May 14, 2004 (See Note 13), the terms of the licensing
agreement provide for the Company to receive significant milestone
payments on or before March 31, 2005.
See Note 13 for information as to the Company's efforts to effect a
financing of equipment purchases and a private placement of shares of
its Common Stock. No representation can be made that the efforts will
be successful or that if successful that the resulting proceeds will
be material.
There is also no assurance that the Company's current business
strategies will be successfully implemented or that it will raise the
necessary funds to allow it to continue its operations. Management
believes that cost reductions already implemented will reduce losses
in the future, and with the Company's existing working capital levels,
anticipates that the Company will be able to continue its operations
at least through the end of fiscal year 2005, assuming it is
successful in consummating the transactions discussed above.
F-29
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2004 and 2003 consists of the
following:
2004 2003
---------- ----------
Laboratory manufacturing, and
warehouse equipment $3,140,250 $3,140,250
Office equipment 32,981 32,981
Furniture and fixtures 51,781 51,781
Land, building and improvements 2,097,668 2,097,668
Equipment under capital lease 168,179 168,179
---------- ----------
5,490,859 5,490,859
Less: Accumulated depreciation
and amortization 1,400,609 1,100,306
---------- ----------
$4,090,250 $4,390,553
========== ==========
Depreciation and amortization expense amounted to $300,303, $278,348
and $249,338 for the years ended March 31, 2004, 2003 and 2002,
respectively. The Company's obligations under capital leases were
satisfied prior to March 31, 2003.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at March 31, 2004 and 2003, consist of the
following:
2004 2003
---------- ----------
Patents $ 145,830 $ 129,134
Trademarks 8,120 8,120
---------- ----------
153,950 137,254
Less: Accumulated amortization 51,754 32,412
---------- ----------
$ 102,196 $ 104,842
========== ==========
Amortization of intangible assets amounted to $19,342, $19,344 and
$4,390 for the years ended March 31, 2004, 2003 and 2002,
respectively.
Aggregate amortization expense of intangible assets for the next five
fiscal years is estimated to be as follows:
YEARS ENDING MARCH 31,
2005 $ 19,340
2006 19,340
2007 19,340
2008 19,340
2009 8,140
F-30
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 5 - NOTE PAYABLE
On February 26, 2002, the Company closed a bank loan totaling $375,000
to finance the purchase and installation of machinery and equipment.
Interest is fixed at 5.70% per annum calculated on a 360-day year. The
loan is due in 60 equal monthly installments of $6,250 plus interest,
with the first payment commencing on April 1, 2002, and is secured by
the machinery and equipment purchased under this facility and a
certificate of deposit in the amount of $225,000 held as collateral.
This certificate of deposit has been classified as noncurrent
restricted cash. The note payable consists of the following at March
31:
2004 2003
---------- ----------
Bank note payable $ 225,000 $ 300,000
Current portion (75,000) (75,000)
---------- ----------
Long-term portion, net of
current maturities $ 150,000 $ 225,000
========== ==========
Future principal maturities under this loan are as follows:
YEARS ENDING MARCH 31,
2005 $ 75,000
2006 75,000
2007 75,000
----------
$ 225,000
NOTE 6 - BOND FINANCING OFFERING
On September 2, 1999, the Company completed the issuance of tax exempt
bonds by the New Jersey Economic Development Authority. The aggregate
principal proceeds of the fifteen year term bonds were $3,000.000.
Interest on the bonds accrues at 7.75% per annum. The proceeds, net of
offering costs of $60,000, are being used by the Company to refinance
the land and building it currently owns, and for the purchase of
certain manufacturing equipment and related building improvements.
Offering costs in connection with the bond issuance totaled $197,860,
including the $60,000 mentioned above which were paid from bond
proceeds. Offering costs included underwriter fees equal to $90,000
(three percent (3%) of the par amount of the bonds).
The bonds are collateralized by a first lien on the building, which
includes property and equipment.
Several restricted cash accounts are maintained in connection with the
issuance of these bonds. These include amounts restricted for payment
of bond principal and interest, for the refinancing of the land and
building the Company currently owns, for the purchase of certain
manufacturing equipment and related building improvements as well as
the maintenance of a $300,000 Debt Service Reserve.
F-31
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 6 - BOND FINANCING OFFERING (CONTINUED)
All restricted accounts other than the $300,000 Debt Service Reserve
are expected to be expended within twelve months and are therefore
categorized as current assets. Bond financing consisted of the
following at March 31:
2004 2003
---------- ----------
EDA Bonds $2,495,000 $2,635,000
Current portion (150,000) (140,000)
---------- ----------
Long term portion, net of
current maturities $2,345,000 $2,495,000
========== ==========
FUTURE PRINCIPAL MATURITIES REQUIRED UNDER THE BOND AGREEMENT ARE AS
FOLLOWS:
YEARS ENDING MARCH 31,
2005 $ 150,000
2006 165,000
2007 175,000
2008 190,000
2009 205,000
Thereafter 1,610,000
------------
$ 2,495,000
============
F-32
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 7 - JOINT VENTURE ACTIVITIES
In October 2000, the Company entered into a joint development and
operating agreement with Elan Corporation, plc, and Elan International
Services, Ltd. (together "Elan") to develop products using drug
delivery technologies and expertise of both companies. This joint
venture, Elite Research, Ltd. ("ERL"), a Bermuda corporation, was
initially owned 80.1% by the Company and 19.9% by Elan. ERL was to
fund its research through capital contributions from its partners
based on the partners' respective ownership percentage. ERL
subcontracted research and development efforts to the Company, Elan
and others. It was anticipated that the Company would provide most of
the formulation and development work. The Company had commenced work
for three products. The joint venture terminated on September 30,
2002. For the years ended March 31, 2003 and 2002, the Company charged
$187,810 and $601,057, respectively, to ERL which was reflected in
product formulation fees. Intercompany profits and losses were
eliminated.
ERL was initially capitalized with $15,000,000 which included the
issuance of 6,000 voting common shares, par value $1.00 per share, and
6,000 non-voting convertible preferred shares, par value $1.00 per
share. All of the voting shares were held by the Company, with the
non-voting convertible preferred shares held by both the Company and
Elan, being split 3,612 shares and 2,388 shares, respectively. Elite's
and Elan's respective ownership in ERL did not change during the term
of the joint venture.
While the Company initially owned 80.1% of the outstanding capital
stock (100% of the outstanding common stock) of ERL until September
30, 2002, Elan and its subsidiaries retained significant minority
investor rights that were considered "participating rights" as defined
in the Emerging Issues Task Force Consensus No. 96-16. Accordingly,
the Company did not consolidate the financial statements of ERL until
September 30, 2002 but instead accounted for its investment in ERL
under the equity method of accounting until the Joint Venture was
terminated, effective September 30, 2002.
For the year ended March 31, 2002 and the period beginning April 1,
2002 through September 30, 2002, ERL recognized net losses of $633,642
and $232,742, respectively, and the Company recognized 80.1% of these
losses, or $507,640 and $186,379, respectively. The product
formulation fees $187,810 and $601,057 earned by the Company for
services rendered to ERL for the years ended March 31, 2003 and 2002,
respectively, are included in ERL's expenses. During fiscal year 2001,
ERL paid $15,000,000 to Elan for a license providing ERL non-exclusive
rights to use certain Elan in-process drug delivery technologies. The
Elan technology rights acquired relate to very early stage technology
that, in the opinion of management, have not reached technological
feasibility and have no future alternative uses. Through the date of
its termination, ERL completed in-vivo (pilot clinical trial) on the
first product and began formulation and development of two additional
products.
During fiscal year 2003, the Company consummated a termination
agreement (the "Termination Agreement") with Elan to acquire all of
Elan's interest in ERL. As further discussed in Note 10, the joint
venture was terminated effective September 30, 2002.
F-33
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 7 - JOINT VENTURE ACTIVITIES (CONTINUED)
Under the Termination Agreement, among other things, the Company
acquired all proprietary, development and commercial rights for the
worldwide markets for the products developed by ERL. In exchange for
the assignment, ERL agreed to pay Elan a royalty on certain revenues
that may be realized from the once-a-day Oxycodone product that has
been developed by ERL. Effective October 1, 2002, the Company is
solely responsible to fund ERL's product development.
The Company did not pay, nor did Elan receive any cash consideration
under the Termination Agreement. Furthermore, the Company has the
exclusive rights to the proprietary, development and commercial rights
for the worldwide markets for two other products developed by ERL. The
Company is not required to pay Elan royalties on revenues that may be
realized from these products.
The Company accounted for this acquisition by consolidating ERL as a
wholly-owned subsidiary as of September 30, 2002. As more specifically
described in Note 10, Elan converted 773,000 shares of Series B
Preferred Stock, according to their terms, into 52,089 shares of the
Company's common stock. This resulted in an increase in common stock
of $521 and an increase in additional paid in capital of $772,479. As
a result, the Series B Preferred Stock was eliminated.
As further disclosed in Note 10, the acquisition resulted in the
conversion of 13,756 shares of Series A Preferred Stock into 764,221
shares of Elite's common stock in accordance with their terms. The
Company accounted for this conversion by increasing common stock in
the amount of $7,642 and by a corresponding increase in additional
paid in capital of $13,748,332. As a result, the Series A Preferred
Stock was eliminated.
As a result of the Termination Agreement, ERL became a wholly-owned
subsidiary of the Company as of September 30, 2002. Elan retained
certain securities of Elite it had obtained in connection with the
joint venture and transferred other such securities to a third-party,
as further discussed in Note 10.
The following is a condensed balance sheet of ERL on September 30,
2002 (the date of acquisition):
CURRENT ASSETS
Cash $ 1,084
------------
Total assets $ 1,084
============
CURRENT LIABILITIES
Accounts payable $ 84,597
------------
Total liabilities 84,597
Shareholders' deficit (83,513)
------------
$ 1,084
============
F-34
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 7 - JOINT VENTURE ACTIVITIES (CONTINUED)
The following are unaudited pro-forma consolidated results of
operations for the years ended March 31, 2003 and 2002, assuming the
acquisition was completed on April 1, 2001.
YEAR ENDED MARCH 31,
----------------------------
2003 2002
----------- -----------
(Unaudited) (Unaudited)
Revenue $ 442,500 $ 596,450
Proforma net (loss) available to
common shareholders $(4,107,785) $(1,900,529)
Proforma net (loss) available to
common shareholders per
share -- basic and diluted $ (0.40) $ (0.19)
Unaudited pro-forma data may not be indicative of the results that
would have been obtained had these events actually occurred at the
beginning of the periods presented, nor does it intend to be a
projection of future results.
NOTE 8 - INCOME TAXES
The components of the provision for income taxes are as follows:
YEAR ENDED MARCH 31,
------------------------------------
2004 2003 2002
-------- -------- --------
Federal:
Current $ -- $ -- $ --
Deferred -- -- --
-------- -------- --------
-- -- --
-------- -------- --------
State:
Current 1,000 400 2,430
Deferred -- -- --
-------- -------- --------
1,000 400 2,430
-------- -------- --------
$ 1,000 $ 400 $ 2,430
======== ======== ========
In the year ended March 31, 2001, the Company received approval for
the sale of $4,872,267 of New Jersey net operating losses under the
Technology Tax Certificate Transfer Program sponsored by the New
Jersey Economic Development Authority (NJEDA). The total tax benefit
approved for receipt by the Company during the year ended March 31,
2002 was $368,343 of which $222,211 and $146,132 was received in 2002
and in 2003, respectively.
F-35
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 8 - INCOME TAXES (CONTINUED)
During the year ended March 31, 2003, the Company received approval
for the sale of an additional $1,822,989 of New Jersey net-operating
losses under the Technology Tax Certificate Transfer Program sponsored
by the New Jersey Economic Development Authority (NJEDA). The total
tax benefit approved for receipt by the Company during the year ended
March 31, 2003 was $137,818, of which $71,741 was received in November
2002. The remaining balance of $66,077 was received in 2003.
During the year ended March 31, 2004, the Company received approval
for the sale of an additional $1,928,817 of New Jersey net-operating
losses under the Technology Tax Certificate Transfer Program sponsored
by the New Jersey Economic Development Authority (NJEDA). The total
tax benefit received during the year ended March 31, 2004 was $151,027
and is recorded as other income in the accompanying financial
statements.
The major components of deferred tax assets at March 31, 2004 and 2003
are as follows:
2004 2003
------------ ------------
Net operating loss carry forwards $ 6,736,336 $ 4,486,167
Valuation allowance (6,736,336) (4,486,167)
------------ ------------
$ -- $ --
============ ============
At March 31, 2004, a 100% valuation allowance is provided, as it is
uncertain if the deferred tax assets will be utilized. The valuation
allowance increased during 2004, 2003 and 2002 by $2,250,169,
$1,357,792 and $304,375, respectively.
At March 31, 2004, for federal income tax purposes, the Company has
unused net operating loss carry forwards of approximately $20,518,995
expiring in 2007 through 2015. For state tax purposes, the Company has
$11,011,302 of unused net operating losses, which are net of the
$9,539,503 of New Jersey net-operating losses sold, as discussed
above.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company had an employment agreement ("Employment Agreement") with
its former President/CEO, Atul M. Mehta.
On June 3, 2003, Dr. Mehta resigned from all positions that he held
with the Company, while reserving his rights under his Employment
Agreement and under common law. On July 3, 2003, Dr. Mehta instituted
litigation against Elite and one of its directors, in the Superior
Court of New Jersey, for, among other things, allegedly breaching his
Employment Agreement and for defamation, and claims that he is
entitled to receive his salary through June 6, 2006.
F-36
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Agreements
The Company and Dr. Mehta settled their litigation subsequent to March
31, 2004 (See Note 13). The Company accrued $400,000 for compensation
owed to Dr. Mehta as of March 31, 2004, in accordance with the
settlement agreement.
On July 23, 2003, the Company entered into an agreement with its new
Chief Executive Officer, Bernard Berk. The initial terms of this
agreement is three years. Pursuant to this agreement:
- Mr. Berk is entitled to receive a base salary of $200,000 per
annum, subject to increase to $330,140 if and when the Company
consummates a Strategic Transaction (as defined in the employment
agreement);
- The Company confirmed its grant to Mr. Berk on June 3, 2003 of
options to purchase 300,000 shares of the Company's common stock
at $2.01 per share. All of these options are vested.
- The Company granted Mr. Berk options to purchase an additional
300,000 shares of its common stock, with an exercise price equal
to $2.15, the closing price of the Company's common stock on the
date of grant. These options will vest solely upon consummation of
a Strategic Transaction.
- Mr. Berk will be appointed as a director of the Company if he is
serving as its Chief Executive Officer following the consummation
of a Strategic Transaction.
- Mr. Berk will be entitled to receive severance in accordance with
the employment agreement if he is terminated without cause or
because of his death or permanent disability or if he terminates
his employment for good reason or following a "change-of-control".
The severance will be payable in accordance with the terms of his
employment agreement.
CONSULTING AGREEMENTS
The Company entered into one year consulting agreements with each of
Saggi Capital Corp. and Bridge Ventures Inc. on November 4, 2003. The
consultants' services will include, but not be limited to, advice with
respect to overall strategic planning, financing opportunities,
acquisition policy, commercial and investment banking relationships
and stockholders matters. In consideration of each consultant's
services, the Company agrees to pay it $75,000 payable in monthly
installments of $6,250 and to issue to the consultant a warrant to
purchase 100,000 shares of the Company's common stock. For the year
ended March 31, 2004, consulting expenses under both agreements
aggregated $30,000 plus approximately $470,000 attributable to the
issuance of warrants.
On July 3, 2003, the Company entered into an agreement with Leerink
Swann & Company to provide a Valuation and a Fairness Opinion in order
for the Company to complete a proposed acquisition for which it
received a non-refundable retainer fee of $50,000. If and when the
Board of Directors requests a Fairness Opinion, Leerink's compensation
shall be $50,000. For the year ended March 31, 2004, consulting
expenses under this agreement amounted to the $50,000 non-refundable
retainer fee.
F-37
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
REFERRAL AGREEMENTS
On January 29, 2002, the Company entered into a Referral Agreement
with a Director (Referring Party) whereby Elite will pay the Referring
Party a fee based upon payments received by Elite from sales of
products, development fees, licensing fees and royalties generated as
a direct result of the Referring Party identifying customers for
Elite. These amounts shall be reduced by the cost of goods sold
directly incurred in the manufacturing or development of products as
well as any direct expenses associated with these efforts. Elite will
pay Referring Party a referral fee each year equal to:
PERCENTAGE OF REFERRAL
BASE FROM TO
---- ---- --
5% $ 0 $ 1,000,000
4% 1,000,000 2,000,000
3% 2,000,000 3,000,000
2% 3,000,000 4,000,000
1% 4,000,000 5,000,000
No amounts had been earned through March 31, 2004.
On August 1, 1998, the Company entered into a consulting agreement
(the "1998 Agreement") with a company owned by a Director for the
purpose of providing management, marketing and financial consulting
services for an unspecified term. Terms of the agreement provided for
a nonrefundable monthly fee of $2,000. This compensation was applied
against amounts due pursuant to a business referral agreement entered
into on April 8, 1997 (the "1997 Agreement") with the same party.
Terms of the 1997 Agreement provided for payments by the Company based
upon a formula, as defined, for an unspecified term. On November 14,
2000, the Company amended its 1997 Agreement to provide certain
consulting services for the period beginning November 1, 2000 through
October 31, 2003. The Company previously advanced $20,000 under the
1997 Agreement in addition to a payment of $50,000 made during the
year ended March 31, 2001. The 1997 Agreement called for 25 monthly
installments of $3,200 beginning on December 1, 2001.
Consulting expense under the 1997 and 1998 Agreements amounted to
$28,800, $38,400 and $12,800 for the years ended March 31, 2004, 2003
and 2002, respectively. The agreement terminated on November 30, 2003.
F-38
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COLLABORATIVE AGREEMENTS
On December 18, 2003, the Company and Pivotal Development, L.L.C.
entered into an agreement to develop a controlled release product
utilizing Elite's proprietary drug delivery technology. The product is
a generic equivalent to a drug losing patent exclusivity with
addressable market revenues of approximately $150 million per year.
The agreement will also provide an option to develop a controlled
release NDA product.
Under the collaboration agreement, Pivotal Development will be
responsible for taking the Elite formulation through clinical
development and the FDA regulatory approval process. The partners will
seek a license during the development cycle from a pharmaceutical
company which has the resources to effectively market the product and
share the cost of defining the product against any lawsuits.
Elite and Pivotal will bear costs in their respective areas of
responsibility. In addition, Pivotal shall pay Elite $750,000 upon
attainment of certain milestones outlined in the agreement.
In June 2001, the Company entered into two separate and distinct
development and license agreements with another pharmaceutical company
("partner"). The Company is developing two drug compounds for the
partner in exchange for certain payments and royalties. The Company
also reserves the right to manufacture the compounds. The Company
received $250,000 and $300,000, respectively, on these two agreements,
which were earned during the year ended March 31, 2002. The Company is
currently proceeding with the development and formulation for both
products as specified in the development agreements. During the years
ended March 31, 2004 and 2003, the Company earned revenues of $105,000
and $85,000, respectively, for additional development and formulation
for both products.
On September 13, 2002, the Company, entered into a manufacturing
agreement with Ethypharm S.A. ("Ethypharm"). Under the terms of this
agreement, the Company has initiated the manufacturing of a new
prescription drug product for Ethypharm. The Company received an
upfront manufacturing fee for the first phase of the technology
transfer and billed an additional amount upon the completion of the
first phase of manufacturing. The Company is entitled to receive
additional fees in advance for the final phase of the manufacturing.
In addition, if and when FDA approval is obtained and if requested by
Ethypharm, the Company will manufacture commercial batches of the
product on terms to be agreed upon. As of March 31, 2004, the Company
billed and earned revenues of $280,000 under this agreement, all of
which was billed and earned during the year ended March 31, 2003, in
accordance with the substantive milestone method of revenue
recognition. Under this method, the milestone payments are considered
to be payments received for the accomplishment of a discrete,
substantive earnings event. Accordingly, the non-refundable milestone
payments are recognized in full when the milestone is achieved. In
addition to milestone payments, the Company billed and recognized
$75,000 in additional revenues as a result of the manufacturing and
delivery of additional batches during the year ended March 31, 2003.
F-39
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)
TREASURY STOCK TRANSACTIONS
At a special meeting of the Company's Board of Directors held on June
27, 2002, the Board authorized the Company to purchase up to 100,000
shares of its common stock in the open market no later than December
31, 2002. As of March 31, 2003, the Company had purchased 100,000
shares of common stock for total consideration of $306,841.
PUBLIC OFFERINGS
In July 1998 the Company filed a registration statement on Form SB-2
under the Securities Act of 1933, as amended, for the purpose of
registering securities previously sold to and held by various
corporations and individuals. The Company did not receive any proceeds
upon filing of this Form SB-2. The securities registered consisted of
3,725,000 shares of the Company's $.01 par value common stock,
including 1,525,000 redeemable common stock purchase warrants.
In March 2000, the Company filed a registration statement on Form SB-2
under the Securities Act of 1933, as amended, for the purpose of
registering securities previously sold to and held by various
corporations and individuals. The Company did not receive any proceeds
upon filing of this Form SB-2. The securities registered consisted of
3,297,539 shares of the Company's $.01 par value common stock,
2,022,537 underlying Class A and Class B common stock purchase
warrants, and 317,250 Class A common stock purchase warrants.
PRIVATE PLACEMENT OFFERINGS
In a private placement offering dated May 17, 1999, the Company raised
$4,462,500 from the sale of 12.75 units of its securities; each unit
consisting of 100,000 shares of common stock of the Company and 50,000
warrants, each warrant entitling the holder to purchase one share of
common stock at an exercise price of $5.00 per share during the five
year period commencing with the date of closing of the private
placement (June 16, 1999). The price per unit was $350,000. This
resulted in the issuance of 1,275,000 shares of common stock and
637,500 warrants to purchase common stock, at an exercise price of
$5.00 per share.
In a private placement offering concluded in December 2003 the Company
sold 1,645,000 shares of Common Stock for aggregate proceeds of
$3,290,000. It paid a cash commission of $75,000 to the Placement
Agent and issued to the agent and its associates five year warrants to
purchase 50,000 shares of Common Stock at a price of $2.00 per share.
The Company granted to the purchasers and the Placement Agent
piggyback registration rights.
PREFERRED STOCK
As further discussed in Note 7, on October 16, 2000, Elite entered
into an agreement (the "Joint Venture Agreement") with Elan
International Services, Ltd. and Elan Corporation, plc. (together
"Elan"), under which the parties formed a joint venture, Elite
Research, Ltd. ("ERL"). Under the terms of the Joint Venture
Agreement, 409,165 shares of the Company's common stock and 12,015
shares of a newly created Series A Convertible Exchangeable Preferred
Stock ("Series A Preferred Stock") were issued to Elan for
consideration of $5,000,000 and $12,015,000, respectively. Proceeds
from the sale of the Series A Preferred Stock were used to fund the
Company's 80.1% share of ERL, as further discussed in Note 7.
F-40
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
PREFERRED STOCK (CONTINUED)
The Series A Preferred Stock accrued a dividend of 7% per annum,
compounded annually and payable in shares of Series A Preferred Stock.
Dividends accrued and compounded annually beginning on October 16,
2001. As of September 30, 2002 (the termination date of the Joint
Venture), the Company had accrued dividends of $1,740,973 on the
Series A Preferred Stock. During the year ended March 31, 2003, the
Company issued preferred stock to satisfy accrued dividends.
On October 17, 2000, the Company authorized 7,250,000 shares of newly
created Series B Preferred Stock of which 4,806,000 was designated for
issuance to Elan for a total consideration of $4,806,000. These shares
were issuable from time to time to fund the Company's 80.1% portion of
capital contributions to ERL and for funding of the research and
development activities for ERL.
The Series B Preferred Stock accrued a dividend of 7% per annum of the
original issue price, compounded on each succeeding twelve month
anniversary of the first issuance and payable solely by the issuance
of additional shares of Series B Preferred Stock, at a price per share
equal to the original issue price. Dividends were accrued and
compounded commencing one year after issuance. As of September 30,
2002 (the termination date of the joint venture), the Company had
accrued dividends of $14,000 on the Series B Preferred Stock. During
the year ended March 31, 2003, the Company issued preferred stock to
satisfy accrued dividends.
During the fiscal year ended March 31, 2003, the Company made capital
contributions to ERL in the amount of $573,000. These contributions
were financed by the proceeds from the issuance to Elan of 573,000
shares of Series B Preferred Stock. These contributions were in
addition to a capital contribution in the amount of $200,000 made by
the Company to ERL during the fiscal year ended March 31, 2002.
JOINT-VENTURE TERMINATION
In addition to the issuance of shares as described above, on October
17, 2000 the Company issued to Elan 100,000 warrants to purchase the
Company's common stock at an exercise price of $18 per share. The
warrants are exercisable at any time on or before October 17, 2005.
Subject to a Termination Agreement between the Company and Elan dated
September 30, 2002, the Company acquired Elan's 19.9% interest in ERL,
and Elan transferred its warrants and its 12,015 shares of Series A
Preferred Stock to a third party along with accrued dividends of 1,741
shares. On November 6, 2002, under a transfer and assignment among the
Company, Elan and a third party purchaser, all 13,756 shares of Series
A Preferred Stock have been converted, according to their terms, into
764,221 shares of the Company's common stock using the $18 per share
price. Elan retained 409,165 shares of the Company's common stock and
773,000 shares of Series B Preferred Stock, the latter of which was
converted into 52,089 shares of the Company's common stock. Both of
the Series A and Series B preferred stock were converted into the
Company's common stock in accordance with their terms. The warrants
remain unexercised at March 31, 2004.
F-41
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
JOINT-VENTURE TERMINATION (CONTINUED)
For the period of one year after the issuance of the above shares of
common stock, Elan and the third party purchaser have the right to
require registration under the Securities Act of 1933, as amended
("the Securities Act") of all or part of these securities. All
registration expenses would be borne by the requesting party. Elan and
the third party purchaser also have the right to piggyback
registration if at any time the Company proposes to register shares of
its common stock under the Securities Act.
WARRANTS
To date, the Company has authorized the issuance of common stock
purchase warrants, with terms of five to six years, to various
corporations and individuals, in connection with the sale of
securities, loan agreements and consulting agreements. Exercise prices
range from $2.00 to $18.00 per warrant. The warrants expire at various
times through October 17, 2005.
A summary of warrant activity for the fiscal years indicated below
were as follows:
2004 2003 2002
---------- ---------- ----------
Beginning balance 733,752 2,669,477 2,983,928
Warrants issued 200,000 -- --
Warrants issued pursuant to
Placement Agent Agreement 50,000 8,136 2,260
Placement Agent Warrants Exercised -- (158,652) (24,408)
Class C Warrants 1,723,237 -- --
Warrants exercised or expired (52,750) (1,829,957) (298,179)
---------- ---------- ----------
Ending balance 2,654,239 733,752 2,669,477
========== ========== ==========
CLASS A WARRANT EXCHANGE OFFER
On October 23, 2002, the Company entered into a Settlement Agreement
with various parties in order to end a Consent Solicitation and
various litigation initiated by the Company. The Agreement provided,
among other things, an agreement to commence an exchange offer (the
"Exchange Offer") whereby holders of the Company's Class A Warrants
which expired on November 30, 2002 (the "Old Warrants") had the
opportunity to exchange those warrants for new warrants (the "Class C
Warrants") upon payment to the Company of $0.10 per share of common
stock issuable upon the exercise of the old warrants. In September
2003 the Company issued Class C Warrants to the record holders as of
November 30, 2002 of the Old Warrants without requiring any cash
payment.
Each Class C Warrant is exercisable for the same number of shares of
common stock as the Old Warrants at an exercise price of $5.00 per
share, and expires on November 30, 2005. The Class C Warrants are not
transferable except pursuant to operation of law.
F-42
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
CLASS A WARRANT EXCHANGE OFFER (CONTINUED)
During the year ending March 31, 2003, the Company expensed $242,338
relating to the Exchange Offer, which represents the fair value of the
Class C Warrants,. The per share weighted-average fair value of each
warrant on the date of grant was $1.10 using the Black-Scholes option
pricing model with the following weighted-average assumptions: no
dividend yield; expected volatility of 73.77%; risk-free interest rate
of 2.88%; and expected lives of 3 years. The elimination of the $0.10
per share fee resulted in an additional charge of $172,324 during the
year ended March 31, 2004.
For the year ended March 31, 2003 the Company incurred legal fees and
other costs amounting to approximately $100,000, in connection with
the Exchange Offer, which has been charged to additional paid-in
capital.
NOTE 11 - STOCK OPTION PLANS
Under various plans, the Company may grant stock options to officers,
selected employees, as well as members of the board of directors and
advisory board members. All options have generally been granted at a
price equal to or greater than the fair market value of the Company's
common stock at the date of grant. Generally, options are granted with
a vesting period of up to three years and expire ten years from the
date of grant. Transactions under the various stock option and
incentive plans for the years indicated were as follows:
2004 2003 2002
AVERAGE AVERAGE AVERAGE
WEIGHTED WEIGHTED WEIGHTED
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ----- --------- ----- ---------- -----
Outstanding at
beginning of year 2,266,850 $5.74 2,056,850 $5.82 2,009,064 $5.64
Granted 1,024,000 2.23 210,000 5.00 113,000 9.22
Exercised (15,000) 2.00 -- -- (20,000) 6.00
Expired (858,800) 7.38 -- -- (25,000) 7.80
Purchased for
retirement -- -- -- -- (20,214) 4.00
---------- ----- --------- ----- ---------- -----
Outstanding at
end of year 2,417,050 $3.70 2,266,850 $5.74 2,056,850 $5.82
========== ===== ========= ===== ========== =====
F-43
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 11 - STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options
outstanding at March 31, 2004:
WEIGHTED WEIGHTED
AVERAGE WEIGHTED- AVERAGE
REMAINING AVERAGE EXER-
RANGE OF Options CONTRACTUAL EXERCISE OPTIONS CISABLE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------------- ----------- ----------- -------- ----------- -------
$1.00 - $2.00 503,750 1.40 $ 1.70 503,750 $ 1.70
2.01 - 4.00 1,209,000 5.47 2.20 810,000 2.20
4.01 - 6.00 311,000 8.15 5.55 156,000 5.55
6.01 - 8.00 60,300 6.75 6.50 60,300 6.50
8.01 - 10.00 333,000 6.27 10.00 122,000 10.00
-------------- --------- ----------- ------ --------- ------
$1.00 - 10.00 2,417,050 5.11 $ 3.10 1,652,080 $ 3.10
-------------- --------- ----------- ------ --------- ------
The per share weighted-average fair value of each option granted
during fiscal 2004, 2003 and 2002 ranged from $1.03 to $2.68, $1.28,
and $8.38, respectively, on the date of grant using the Black-Scholes
options pricing model with the following weighted-average assumptions;
no dividend yield; expected volatility ranging from 75.47% to 77.97%,
75.40%, and 76.69% for fiscal years 2004, 2003, and 2002,
respectively; risk-free interest rate of 4.0% in 2004, 4.0% in 2003
and rates ranging from 4.55% to 4.875% in 2002, and expected lives
ranging from five to ten years.
NOTE 12 - MAJOR CUSTOMERS
For the years ended March 31, 2004, 2003, 2002 revenues from major
customers are as follows:
2004 2003 2002
------- ------- -------
Customer A -- 29.79% 50.19%
Customer B -- 56.32% --
Customer C 40.70% 13.49% --
Customer D 59.30% -- --
Customer A represents ERL, a joint-venture until September 30, 2002,
when it became a wholly-owned subsidiary of the Company, as further
discussed in Note 7. Its revenues after September 30, 2002, are
eliminated in consolidation.
F-44
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 13 - SUBSEQUENT EVENTS
On April 21, 2004, the Company settled the litigation between Dr. Atul
Mehta, its former president and chief executive officer of the
Company. Under the settlement agreement, Dr. Mehta relinquished any
rights to the Company's patents and intellectual properties and agreed
to certain non-disclosure and certain limited non-competition
covenants. The Company agreed to pay Dr. Mehta $400,000 and certain
expense reimbursements in accordance with the settlement agreement,
and received a short term option for the Company or its designees to
acquire all of the shares of the common stock of the Company held by
Dr. Mehta and his affiliates at $2.00 per share. The Company paid
$100,000 into escrow which will be released to Dr. Mehta if the
Company option is not exercised within 90 days. As part of the
settlement, the Company extended expiration dates of certain options
to purchase 770,000 shares of Common Stock held by Dr. Mehta and also
provided him with certain "piggyback" registration rights with respect
to shares underlying his options.
On May 10, 2004, Elite Labs entered into an agreement with Purdue
Pharma L.P. ("Purdue") through which Purdue was granted the exclusive
right to evaluate certain abuse resistance drug formulation technology
of the Company and an exclusive option to negotiate a license to
develop and commercialize oxycodone products under the Company's
technology. The Company's proprietary abuse resistance technology is
designed to discourage and reduce abuse of narcotic analgesic
medications by making the products more difficult to abuse when
crushed, damaged or otherwise manipulated.
On May 14, 2004, the Company's Board of Directors appointed Bernard
Berk, its Chief Executive Officer and President, to the additional
position of Chairman of the Board of Directors.
On June 22, 2004 the Company's stockholders approved the 2004 Stock
Option Plan providing for grants of incentive and nonqualified stock
options with respect to 1,500,000 shares including shares which are to
be subject to options to be granted to employees in replacement of
outstanding options held by them. The stockholders also ratified the
amendments of terms of outstanding options and warrants including the
repricing of options with respect to 420,000 shares which will result
in a significant charge to earnings. A proposal to amend the
Certificate of Incorporation of the Company to increase the authorized
25,000,000 shares of Common Stock to 65,000,000 shares of Common Stock
and 5,000,000 shares of Preferred stock is to be considered at the
adjourned meeting scheduled to be held on July 19, 2004.
Elite Labs is currently negotiating an agreement with a financial
institution to finance the purchase of certain machinery and equipment
and to recast the outstanding balance due to a bank in the approximate
amount of $212,000. Under the terms of the proposed agreement, Elite
Labs is to borrow $612,000 payable in 36 monthly installments of
$20,917, including principal plus interest at 14% per annum. The
proposed agreement is to provide that (i) the loan will be secured by
two pieces of equipment and the guaranty of the Company, (ii)
restricted cash currently held as collateral under the note payable in
the amount of $225,000 is to be released to the lender, of which
$125,500 is to be utilized to prepay the first six monthly payments
under the loan and (iii) the balance is to be held as a security
deposit which is to be released if the Company raises certain proceeds
from the sale of its securities or other licensing fees. No assurance
can be given that the proposed agreement will be executed or if the
agreement is executed that the agreement will provide the foregoing
terms.
F-45
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The following is a statement of the estimated expenses incurred by Elite
Pharmaceuticals, Inc. in connection with the distribution of the securities
registered under this registration statement:
AMOUNT
TO BE PAID*
-----------
SEC Registration Fee .................................... $ 1,413.68
Legal Fees and Expenses ................................. $ *
Accounting Fees and Expenses ............................ $ *
Printing Expenses ....................................... $ *
Miscellaneous ........................................... $ *
Total ................................................... $ *
* To be provided by amendment
ITEM 14. Indemnification of Directors and Officers
Pursuant to authority conferred by Section 102 of the Delaware General
Corporation Law (the "DGCL"), Elite's Certificate of Incorporation, as amended,
contains a provision providing that the personal liability of a director is
eliminated to the fullest extent provided by the DGCL. The effect of this
provision is that no director of Elite is personally liable to Elite or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability for (i) any breach of the director's duty of loyalty to
Elite or its stockholders, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) unlawful
payment of dividends as provided in Section 174 of the DGCL and (iv) any
transaction from which the director derived an improper personal benefit. This
provision is intended to eliminate the risk that a director might incur personal
liability to Elite or its stockholders for breach of duty of care. The
Certificate of Incorporation, as amended, also provides that if the Delaware Law
is amended to eliminate or limit further the liability of directors, then the
liability of a director of Elite shall be correspondingly eliminated or limited,
without further stockholder action.
Section 145 of the DGCL contains provisions permitting and, in some
situations, requiring Delaware corporations, such as Elite, to provide
indemnification to their officers and directors for losses and litigation
expenses incurred in connection with their service to the corporation in those
capacities. The by-laws of Elite contain such a provision requiring that we
indemnify our directors and officers to the fullest extent permitted by law, as
the law may be amended from time to time.
II-1
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Elite
pursuant to the foregoing provisions or otherwise, it has been advised that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
ITEM 15. Recent Sales Of Unregistered Securities
In December 2002 the Company issued its Class C Warrants in exchange for
all the outstanding Class A Warrants. The Class C Warrants were the same as the
Class A Warrants except they are nontransferable except by law, contain an
exercise price of $5.00 per share and expire November 30, 2005. The Company also
agreed to the amendment of its outstanding Class B Warrants to provide the same
terms as the Class C Warrants
The Company completed in December 2003 a private placement of 1,645,000
shares of its Common Stock at $2.00 per share. In connection with the offering,
the Company paid a cash commission of $75,000 to First Montauk Group Inc., as
Placement Agent and issued to the agent a five year warrant to purchase 50,000
shares of Company's common stock at a price of $2.00 per share. Legal fees
approximating $36,000 were also incurred in connection with this private
placement. Pursuant to its agreement with the purchasers, the Company at its
expense registered under the Act for reoffering the shares issued and shares
which may be acquired upon exercise of the warrants.
The Company in October 2004 issued its Series A Preferred Shares and the
Short Term and Long Term Warrants in a private placement effected in three
tranches, the first involving the sale of 379,122 Series A Preferred Shares at a
price of $12.30 per share convertible into 3,791,220 shares of Common Stock and
the issuance of Short Term and Long Term Warrants to purchase an aggregate of
3,791,220 shares at a price of $1.54 per share, the second tranche involving the
sale of 119,286 Series A Preferred Shares at a price of $14.00 per share
convertible into 1,192,860 shares of Common Stock and the issuance of Short Term
and Long Term Warrants to purchase an aggregate of 1,192,860 shares of Common
Stock at a price of $1.75 per share, and the third involving the sale of 18,150
Series A Preferred Shares at a price of $14.70 per share convertible into
181,500 shares of Common Stock and the issuance of Short Term and Long Term
Warrants to purchase an aggregate of 181,500 shares of Common Stock at a price
of $1.84 per share. The Company paid Indigo Securities Inc., the Placement
Agent, and selected dealers cash commissions aggregating $633,510.70 and issued
to them Long Term Warrants to purchase 357,495 shares of Common Stock at a price
of $1.23 per share, 119,286 shares of Common Stock at a price of $1.40 per share
and 18,150 shares of Common Stock at a price of $1.47 per share. Pursuant to its
agreement with the purchasers in the private placement the Company registered at
its expense under the Securities Act of 1933, as amended, for reoffering the
shares of Common Stock acquired upon conversion of the Series A Preferred Shares
and shares of Common Stock which may be acquired upon exercise of the Long Term
Warrants and Short Term Warrants.
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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 D. H. Blair
Investment Banking Corp. as consideration for financial consulting services.
On July 6, 2004, the Company issued 26,500 shares of Common Stock to
CEOcast, Inc. in partial consideration for rendering during a nine-month period
investor relation consulting services and agreed to provide the holder with
"piggy-back" registration rights.
On July 8, 2004, the Company issued three year warrants to purchase an
aggregate of 50,000 shares of Common Stock at a price of $4.20 per share to
designees of a lender in connection with the refinancing of the outstanding
equipment loan, with the provision that warrants to purchase 15,000 shares will
be cancelled in the event of the repayment in full of the new loan within nine
months, in which event the Company is to pay $10,000 to the lender as a
prepayment penalty.
On July 20, 2004, the Company issued to Mr. Jason Lyons five-year
warrants to purchase 50,000 shares of Common Stock at a price of $3.00 per share
in consideration of his agreement to render financial consulting services.
Ratification of the issuance of the warrants will be sought at the Company's
next Annual Meeting of Stockholders.
CEOcast, Inc. and each of the warrant holders has agreed that no transfer
of the shares, warrants or any shares acquired upon exercise of the warrants
will be made unless such transfer is registered under the Act or exempt from
registration under the Act.
In the opinion of the Company, the issuance of the foregoing securities
were exempt from registration under the Act by virtue of Section 4(2) of the
Act, except for the exchange of Class C Warrants for Class A Warrants which was
exempt from registration under the Act by virtue of Section 3(a)(9) of the Act.
ITEM 16. Exhibits and Financial Statement Schedule
(a) Exhibits
4.1 Certificate of Incorporation, together with all amendments thereto,
incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-4, Registration No. 333-101686 filed with the Commission on
December 6, 2002 and Exhibit 3.1 to Registrant's Current Report on
Form 8-K*.
4.1(a) Certificate of Designation of Series A Preferred Stock, incorporated
by reference to Exhibit 3.1to the Company's Current Report on Form
8-K*
4.2 By-laws of Elite, as amended. Incorporated by reference to Exhibit 3.1
to Elite's Registration Statement on Form SB-2, Registration No.
333-90633, made effective on February 28, 2000.
4.3 Form of Common Stock certificate, incorporated by reference to Exhibit
4.1 to Elite's Registration Statement on Form SB-2, Registration No.
333-90633, made effective on February 28, 2000.
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4.4 Form of Class B Warrant, incorporated by reference to Exhibit 4.3 to
Registrant's Annual Report on Form 10-K for the year ended March 31,
2004.
4.5 Form of Class C Warrant, incorporated by reference to Exhibit 4.2 to
Registrant's Annual Report on Form 10-K for the year ended March 31,
2004.
4.6 2004 Stock Option Plan, incorporated by reference to Schedule 14A with
respect to Annual Meeting of Stockholders held on June 22, 2004.
4.7 Amendment to Stock Option Plan approved by Stockholders on April 15,
2005.
5.1 Opinion of Reitler Brown & Rosenblatt LLC.***
6.1 Employment Agreement dated as of July 23, 2003 between Bernard Berk
and the Registrant incorporated by reference to Exhibit 10.6 to Report
on Form 10-Q for three months ended June 30, 2003 (the "June 30, 2003
10Q Report")
6.2(a) Option Agreement between Bernard Berk and the Company dated as of July
23, 2003 incorporated by reference to Exhibit 10.7 to the June 30,
2003 10Q Report.
6.2(b) Option Agreement between Bernard Berk and the Company dated as of July
23, 2003 incorporated by reference to Exhibit 10.8 to the June 30,
2003 10Q Report.
6.3 Product Development, Manufacturing and Distribution Agreement dated
March 30, 2005.**
6.4 Engagement letter dated February 26, 1998 between Gittelman $ Co. P.C.
and the Company incorporated by reference to Exhibit 6.4 to
Registrant's Annual Report on Form 10-K for the year ended March 31,
2004.
21.0 Subsidiaries of the Registrant.
23.1 Consent of Miller, Ellin & Company LLP.
23.2 Consent of KPMG.***
23.3 Consent of Reitler Brown & Rosenblatt LLC (included in Exhibit 5.1
above)
24.1 Power of Attorney (included on Signature page).
----------
* Dated October 6, 2004 and filed with the Commission on October 12, 2004.
** Registrant has requested confidential treatment with respect to this
Exhibit. In the event that the Securities and Exchange Commission should deny
such request in whole or in part, such exhibit or the relevant portions thereof
shall be filed by amendment.
*** To be filed by amendment
(b) Schedules to Financial Statements None
ITEM 17. Undertakings
The undersigned Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
II-4
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement; notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) may be reflected in the form of prospectus
filed with the Securities and Exchange Commission pursuant to Rule 424(b) if the
change in volume represents no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Securities and Exchange Commission by the Registrant pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 that are incorporated by reference
in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in this registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(B) INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS AND CONTROLLING
PERSONS OF THE REGISTRANT PURSUANT TO THE FOREGOING PROVISIONS, OR OTHERWISE,
THE REGISTRANT HAS BEEN ADVISED THAT IN THE OPINION OF THE SECURITIES AND
EXCHANGE COMMISSION SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED
IN THE SECURITIES ACT OF 1933 AND IS, THEREFORE, UNENFORCEABLE. IN THE EVENT
THAT A CLAIM FOR INDEMNIFICATION AGAINST SUCH LIABILITIES (OTHER THAN THE
PAYMENT BY THE REGISTRANT OF EXPENSES INCURRED OR PAID BY A DIRECTOR, OFFICER OR
CONTROLLING PERSON OF THE REGISTRANT IN THE SUCCESSFUL DEFENSE OF ANY ACTION,
SUIT OR PROCEEDING) IS ASSERTED AGAINST THE REGISTRANT BY SUCH DIRECTOR, OFFICER
OR CONTROLLING PERSON IN CONNECTION WITH THE
II-5
SECURITIES BEING REGISTERED, THE REGISTRANT WILL, UNLESS IN THE OPINION OF ITS
COUNSEL THE MATTER HAS BEEN SETTLED BY CONTROLLING PRECEDENT, SUBMIT TO A COURT
OF APPROPRIATE JURISDICTION THE QUESTION WHETHER SUCH INDEMNIFICATION BY IT IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT OF 1933 AND WILL BE
GOVERNED BY THE FINAL ADJUDICATION OF SUCH ISSUE.
(c)(1)
For purposes of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(b)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed, in the Borough of
Northvale, State of New Jersey, on April 26, 2005.
ELITE PHARMACEUTICALS, INC.
/s/ BERNARD BERK
-------------------------------------
Bernard Berk
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Bernard Berk and Mark I. Gittelman as his
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place, and stead, in any and all capacities, to sign
and file Registration Statement(s) and any and all pre- or post-effective
amendments to such Registration Statement(s), with all exhibits thereto and
hereto, and other documents with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitutes, may
lawfully do or cause to be done by virtue hereof.
II-7
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Dated: April 26, 2005 /s/ Bernard Berk
-----------------------------------------------
Bernard Berk
Chief Executive Officer and
Chairman of the Board of Directors
Dated: April 26, 2005 /s/ Mark I. Gittleman
-----------------------------------------------
Mark I. Gittelman
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: April , 2005
-----------------------------------------------
Edward Neugeboren
Director
Dated: April 26, 2005 /s/ Barry Dash
-----------------------------------------------
Barry Dash
Director
Dated: April 26, 2005 /s/ Melvin Van Woert
-----------------------------------------------
Director