UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED - March 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission File Number: 333-45241
ELITE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3542636
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
165 Ludlow Avenue, Northvale, New Jersey 07647
----------------------------------------------
(Address of principal executive offices)
(201) 750-2646
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Common Stock - $.01 par value
Section 12(b) of the Act: The Common Stock is listed on The
American Stock Exchange
Securities registered pursuant to None
Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter
period that registrant was required to file such reports) and (2) has been
subject to such filing requirements for at least the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
file and larger accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of June 26, 2006 was approximately $27,141,156 based upon the
closing price of the registrant's Common Stock on the American Stock Exchange,
as of June 26, 2006. (For purposes of determining this amount, only directors,
executive officers, and, based on Schedule 13(d) filings as of June 10, 2006 10%
or greater stockholders and their respective affiliates have been deemed
affiliates).
Registrant had 19,202,598 shares of common stock, par value $0.01 per share,
outstanding as of June 15, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980). N/A
ii
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN CONTAIN
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS
ANNUAL REPORT, STATEMENTS THAT ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT
MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE FOREGOING,
THE WORDS "PLAN", "INTEND", "MAY," "WILL," "EXPECT," "BELIEVE", "COULD,"
"ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR SIMILAR EXPRESSIONS OR OTHER
VARIATIONS OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. EXCEPT
AS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
ANY REFERENCE TO "ELITE", THE "COMPANY"," WE", "US", "OUR" OR THE "REGISTRANT"
MEANS ELITE PHARMACEUTICALS INC. AND ITS SUBSIDIARIES.
iii
TABLE OF CONTENTS
Form 10-K Index
PAGE
PART I
Item 1. Business.....................................................................................1
Item 1A. Risk Factors................................................................................11
Item 1B. Unresolved Staff Comments...................................................................18
Item 2. Properties..................................................................................19
Item 3. Legal Proceedings...........................................................................19
Item 4. Submission of Matters to a Vote of Security Holders.........................................19
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters..........................20
Item 6. Selected Financial Data.....................................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation........23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................28
Item 8. Financial Statements and Supplementary Data.................................................28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........29
Item 9A. Controls and Procedures.....................................................................29
Item 9B. Other Information...........................................................................29
PART III
Item 10. Directors and Executive Officers of the Company.............................................30
Item 11. Executive Compensation........................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.........................................................................40
Item 13. Certain Relationships and Related Transactions..............................................41
Item 14. Principal Accounting Fees and Services......................................................41
PART IV
Item 15. Exhibits, Financial Statements and Schedules................................................42
Signatures ............................................................................................48
Consolidated Financial Statements........................................................................F-1
iv
PART I
ITEM 1. BUSINESS
GENERAL
Elite Pharmaceuticals, Inc. ("Elite Pharmaceuticals") was incorporated
on October 1, 1997 under the laws of the State of Delaware, and our wholly-owned
subsidiaries, Elite Laboratories, Inc. ("Elite Labs") and Elite Research, Inc.
("Elite Research") were incorporated on August 23, 1990 and December 20, 2002,
respectively, under the laws of the State of Delaware. Elite Pharmaceuticals,
Elite Labs and Elite Research are referred to herein, collectively, as "Elite",
"we", "us", "our" or the "Company".
On October 24, 1997, Elite Pharmaceuticals merged with and into our
predecessor company, Prologica International, Inc. ("Prologica"), an inactive
publicly held Pennsylvania corporation. At the same time, Elite Labs merged with
a wholly-owned subsidiary of Prologica. Following these mergers, Elite
Pharmaceuticals survived as the parent to its wholly-owned subsidiary, Elite
Labs.
On September 30, 2002, we 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 Elite and Elan in which
our initial interest was 80.1% of the outstanding capital stock (100% of the
outstanding Common Stock). As a result of the termination of the joint venture,
we owned 100% of ERL's capital stock. On December 31, 2002, ERL (a Bermuda
Corporation) was merged into Elite Research, our wholly-owned subsidiary.
The address of our principal executive offices and our telephone and
facsimile numbers at that address are:
Elite Pharmaceuticals, Inc., 165 Ludlow Avenue, Northvale, New Jersey
07647; Phone No.: (201) 750-2646; Facsimile No.: (201) 750-2755.
We file registration statements, periodic and current reports, proxy
statements and other materials with the Securities and Exchange Commission. You
may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains a web site at www.sec.gov that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC, including our filings.
BUSINESS OVERVIEW AND STRATEGY
Elite is a specialty pharmaceutical company principally engaged in the
development and manufacture of oral, controlled release products. Elite develops
controlled release products using proprietary technology and licenses these
products. The Company's strategy includes developing generic versions of
controlled release drug products with high barriers to entry and assisting
partner companies in the life cycle management of products to improve off-patent
drug products. Elite's technology is applicable to develop delayed, sustained or
targeted release pellets, capsules, tablets, granules and powders. Elite has one
product in the allergy therapeutic area currently being sold commercially by our
marketing partner, ECR Pharmaceuticals. Elite also has a pipeline of eight
additional drug products under development in the therapeutic areas that include
pain management, allergy, cardiovascular, and infection. The addressable market
for Elite's pipeline of products exceeds $6 billion in the aggregate.
Elite's current facility in Northvale, New Jersey is a Good Manufacturing
Practice (GMP) and DEA registered facility for research, development, and
manufacturing.
STRATEGY
We are focusing our efforts on the following areas: (i) manufacturing
of Lodrane 24(R) product; (ii) the development of the other products in our
pipeline; and (iii) 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 (iv) development of new products and the
expansion of our licensing agreements with other pharmaceutical companies,
including co-development projects, joint ventures and other collaborations.
We are focusing on the development of various types of drug products,
including, generic drug products (which require abbreviated new drug
applications ("ANDA")) as well as branded drug products (which require new drug
applications ("NDA") under Section 505(b)(1) or 505(b)(2) of the Drug Price
Competition an Patent Term Restoration Act of 1984 (the "Drug Price Act").
We intend to continue to collaborate in the development of additional
products with our current partners. We also plan to seek additional
collaborations to develop more drug products.
We believe that our business strategy enables us to reduce our risk by
having a diverse product portfolio that includes both branded and generic
products in various therapeutic categories; and building collaborations and
establishing licensing agreements with companies with greater resources thereby
allowing us to share costs of development and to improve cash-flow.
RESEARCH AND DEVELOPMENT
During each of the last three fiscal years, we have focused on research
and development activities. We spent $4,343,980 in the fiscal year ended March
31, 2006, $2,698,641 in the fiscal year ended March 31, 2005 and $2,075,074 in
the fiscal year ended March 31, 2004 on research and development activities.
Of our eight controlled release products in the pipeline, two are for
pain (ELI 216 is an abuse resistant oxycodone and ELI 154 is a once daily
oxycodone), one is for an allergy indication (we already have one allergy
product on the market), two (doxycycline and nitrofurantoin) are for
anti-infective indications, one is for gastrointestinal disorders, one is for an
undisclosed indication and one (diltiazem) is for cardiovascular indications.
It is our general policy not to disclose products in our development
pipeline or the status of such products until a product reaches a stage that we
determine, for competitive reasons, in our discretion, to be appropriate for
disclosure and because the disclosure of such information might suggest the
occurrence of future matters or events that may not occur. In this instance, we
believe that disclosure of the information in the following table is helpful for
the description of the general nature, orientation and activity of the Company,
and the disclosures are made for such purpose. No inference should be made as to
the occurrence of matters or events not specifically described. We may or may
not disclose such information in the future based on competitive reasons and/or
contractual obligations. We believe that the information is helpful on a
one-time basis for the purpose described above.
2
The following table provides information concerning the controlled
release products that we are developing and to which we are devoting substantial
resources and attention. None of these products has been approved by the FDA and
all are in development.
PRODUCT BRANDED APPROX. U.S. SALES NDA/ PARTNER INDICATION
PRODUCT(a) FOR BRAND AND/OR ANDA
GENERIC PRODUCTS
(2005)
$MM(b)
ELI 154 OxyContin(R) $2,000 NDA None Pain Management
Once Daily Oxycodone
twice a day(c)
ELI 216 N/A(f) N/A(f) NDA None Pain Management
Twice daily
oxycodone with abuse
resistant technology
(ART(TM))
Undisclosed product N/A(f) N/A(f) Undisclosed ECR Pharmaceuticals Allergy
with partner (Richmond, VA)
Nitrofurantoin Macrobid(R) $48 ANDA Pliva US, Inc. (East Infection
Hanover, NJ)
Undisclosed Undisclosed $100 ANDA Orit Laboratories, Undisclosed
Inc.(e).
(East Hanover, NJ)
Lansoprazole Prevacid(R) $3,800 ANDA IntelliPharmacutics Gastrointestinal
(Toronto, Canada) disorders(d)
Diltiazem Cardizem CD(R) $230 ANDA None Cardiovascular
Once a day
Doxycycline Doryx(R) $110 ANDA Tish Technologies, Infection
Inc.(e) East Hanover,
NJ)
and Harris
Pharmaceuticals (Ft.
Meyers, FL)
---------------------
(a) The name of our competitor's branded product.
(b) Indicates the approximate amount of sales of our competitor's product
and any generics (if there are any). It is not the sales of any of our
products.
(c) An IND was filed and accepted by the FDA with respect to the Twice a
day.
(d) This includes an agreement that grants to Elite a percent of payments
paid to its Canadian partner for commercial sale of a generic of this
product.
(e) Orit Laboratories and Tish Technologies are affiliates
(f) N/A means not applicable because there is no branded product on the
market
3
The table below presents information with respect to the development of
eight of the 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 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 2 ANDA
Pilot Phase I study 2 NDA
Pilot bioequivalence study 3 ANDA
Pre-Launch 1 (1)
----------------
(1) The partner is handling the FDA and other regulatory filings
in connection with the product. Elite is working with its
partner and is targeting to launch this product prior to
December 31, 2006 before the end of this calendar year.
COMMERCIAL PRODUCT
Elite manufactures a once daily allergy product, Lodrane 24(R), that
was co-developed with our partner, ECR Pharmaceuticals. The product is being
marketed by ECR which also has the responsibility for regulatory matters. In
addition to receiving revenues for manufacture of the product, Elite also
receives a royalty on in-market sales.
MANUFACTURING, CO-DEVELOPMENT AND LICENSE AGREEMENTS
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, royalties and manufacturing rights. One product, Lodrane
24(R), was first commercially offered in November 2004, and our revenues for
manufacturing the product and a royalty on sales for the year ended March 31,
2005 aggregated $150,030 and for the year ended March 31, 2006 aggregated
$550,697. The payments under the foregoing agreements for the year ended March
31, 2004 were not material. Development of the second product continues and is
targeted for launch before December 31, 2006.
4
On March 30, 2005, we entered into a three party agreement with Tish
Technologies, Inc. and Harris Pharmaceuticals, Inc. ("Harris") for the
co-development and license of a controlled release product that is a generic
equivalent of a commercial product sold as Doryx(R). Upon its development and
the securing of the required FDA approval by the formulation development
company, Elite is to manufacture and sell the commercially developed drug to the
marketing company for distribution. In addition to the transfer price to the
marketing company, we are to share the profits, if any, realized upon sales. On
June 19, 2006, we received written notice from Harris of Harris' intent to
terminate the agreement in accordance with Section 9.3 of the agreement. Elite
is in discussions to continue the development of this product with Tish
Technologies with the intent to license the product to a third party for
distribution. As the date hereof, there have been no material revenues earned
under the Agreement.
On June 21, 2005, Elite entered into a product development and
commercialization agreement with IntelliPharmaCeutics Corp. ("IPC"), a privately
held, specialty pharmaceutical Canadian company that develops generic controlled
release drug products. It is affiliated with IntelliPharmaCeutics, Ltd. The
agreement provides for the co-development and commercialization of a controlled
released product that is the generic equivalent of a commercial product sold as
Prevacid(R). IntelliPharmaCeutics has taken a formulation for the product into a
pilot bioequivalence biostudy. Elite with IntelliPharmaCeutics intends to scale
up the product, complete additional biostudies and secure the required FDA
approval for commercialization of the product. Upon commercialization, Elite is
to share the profits, if any, realized upon sales.
On June 22, 2005, Elite entered into a Product Development and License
Agreement with Pliva, Inc., providing, for the development and license of a
controlled released product that is a generic equivalent to a commercial product
sold as Macrobid(R). Under the agreement, Pliva is to make upfront and milestone
payments in the aggregate of $550,000 to the Elite. We are to manufacture and
Pliva is to market and sell the product. The development costs will be paid by
Pliva and Elite and the profits will be shared equally.
On December 12, 2005, Elite and IPC amended their obligations to
suspend their obligations under the IPC Agreement with respect to the
development and commercialization of the controlled release drug product in
Canada. IPC, in turn, entered into an agreement with ratiopharm, a Canadian
company, for the development and commercialization for the product in Canada and
will pay Elite a certain percentage of any payments received by IPC with respect
to the commercial sale of this product by ratiopharm in Canada.
On January 10, 2006, Elite entered into an agreement with Orit
Laboratories LLC, an affiliate of Tish Technologies LLC, providing that Elite
and Orit will co-develop and commercialize an extended release drug product for
treatment of anxiety, and, upon completion of development, may license it for
manufacture and sale. The parties intend to develop all dose strengths of the
product. Elite is to share in the profits, if any from the sales of the drug.
JOINT VENTURE WITH ELAN
A joint research venture with Elan (ERL) was funded through capital
contributions from its partners based on the partners' respective ownership
percentage.
The joint venture was terminated on December 31, 2002 and ERL was
merged into a new Delaware corporation, Elite Research, our wholly-owned
subsidiary.
5
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, which funding we anticipate will be
derived from internal resources or through loans or investment by third parties.
The joint venture had completed the initial Phase I study for its first product,
the once-a-day Oxycodone formulation. Currently there is no once-a-day
formulation for this compound on the market. This compound is part of our
development pipeline.
The joint venture also performed work on a second, related product in
the central nervous system therapeutic area and initial formulation work on a
third product combining Oxycodone with a narcotic antagonist. 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 upon
termination of the joint venture converted into 764,221 shares and 52,089
shares, respectively, of our Common Stock. We did not pay, nor did Elan receive,
any cash consideration under the Termination Agreement.
PATENTS
Since our incorporation, we have secured six United States patents of
which two have been assigned for a fee to another pharmaceutical company. In
addition, we have pending applications for two United States patents and four
foreign patents.
The pending patent applications relate to two different controlled
release pharmaceutical products on which we are working. One is a U.S. patent
for an opioid agonist and antagonist product that we are developing to be used
with oxycodone and other opioids to minimize the abuse potential for theopioids.
A second is a U.S. patent for formulation of oral sustained release opioids
intended to improve the delivery of the opioids. 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 GAAT, 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.
6
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. 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 one trademark. 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
additional 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.
NDAS AND NDAS UNDER SECTION 505(b) OF THE DRUG PRICE ACT
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,
7
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 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.
ANDAs
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.
CONTROLLED SUBSTANCES
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
Drug Enforcement Agency (DEA) and New Jersey state agencies, pursuant to federal
and state legislation relating to drugs and narcotics. Certain drugs that we
currently develop or may develop in the future may be subject to regulations
under the Controlled Substances Act and related
8
statutes. As we manufacture such products, we may become subject to the
Prescription Drug Marketing Act, which regulates wholesale distributors of
prescription drugs.
GMP
All facilities and manufacturing techniques used for the manufacture of
products for clinical use or for sale must be operated in conformity with GMP
regulations issued by the FDA. The Company engages in manufacturing on a
commercial basis for distribution of products, and operates 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.
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 legally or in possession. We do not expect that compliance
with such environmental laws 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 have competition with respect to our two principal areas of
operation. We develop and manufacture products using controlled-release drug
technology for other pharmaceutical companies, and we 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, Mylan
Laboratories, Inc., Par Pharmaceuticals, Inc., Teva Pharmaceuticals Industries
Ltd., Biovail Corporation, Ethypharm S.A., Eurand, Impax Laboratories, Inc., K-V
Pharmaceutical Company and Penwest Pharmaceuticals Company. 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
9
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 for
manufacturing our products. We have registered our facilities with the FDA and
the DEA.
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
Each year we have had one or a few customers that have accounted for a
large percentage of our limited sales therefore the termination of a contract
with a customer may result in the loss of 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 or
material revenue.
EMPLOYEES
As of June 15, 2006, we had 26 full-time employees and no part-time
employees. Full-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.
10
ITEM 1A. RISK FACTORS
In addition to the other information contained in this report, the
following risk factors should be considered carefully in evaluating an
investment in the Company and in analyzing the Company's forward-looking
statements.
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
insignificant 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 $6,883,914, $5,906,890, $6,514,217, $4,061,422, and $1,774,527 for the
years ended March
11
31, 2006, 2005, 2004, 2003 and 2002, respectively. We expect to realize
significant losses for the current year of operation and to continue to incur
losses until we are able to generate sufficient revenues to support our
operations and offset operating costs.
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.
As of March 31, 2006, we have entered into agreements with respect to
the marketing upon development of four drugs. Each agreement provides that we
are to commercially develop or co-develop the product with the partner and upon
securing by a partner or partners having FDA approval or other regulatory
approval, if required, we are to manufacture the product and sell it to a
partner or marketing partner for distribution. The commercial development of one
of the four drugs has been completed. No assurance can be given that sales, if
any, by any marketing partner will result in profit for Elite from the product.
We have also entered into two additional co-development agreements.
These products are currently in development. No assurance can be given that we
will be successful in developing these products, and, if successful, that an
agreement can be reached with a marketing partner for the sale of the products
or that any sales of the products will result in profit for Elite.
We are also developing three additional products on our own. Two are in
pilot Phase I studies and one is 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 these products to be commercialized, the FDA
requires successful completion of pivotal biostudies to file an ANDA and
successful completion of pivotal clinical trials before filing a NDA. The FDA
next requires 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.
WE COULD EXPERIENCE DIFFICULTY IN DEVELOPING AND INTEGRATING STRATEGIC
ALLIANCES, CO-DEVELOPMENT OPPORTUNITIES AND OTHER RELATIONSHIPS.
With respect to products that are being developed and are available for
partnering, we intend to pursue product-specific licensing, marketing
agreements, co-development opportunities and other partnering arrangements in
connection with the products. We have entered into partnership arrangements as
to six products but no assurance can be given that we will be able to locate
partners for our other products or that any arrangement is or 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
12
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 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;
13
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 THE COMPANY IS UNABLE TO OBTAIN ADDITIONAL FINANCING NEEDED FOR THE
EXPENDITURES FOR THE DEVELOPMENT AND COMMERCIALIZATION OF THE COMPANY'S DRUG
PRODUCTS, IT WOULD IMPAIR THE COMPANY'S ABILITY TO CONTINUE TO MEET ITS BUSINESS
OBJECTIVES.
On March 15, 2006, the Company completed a private placement, for
aggregate gross proceeds of $10,000,000, of 10,000 shares of its Series B
Preferred Stock convertible into 4,444,444 shares of Common Stock and five year
warrants to purchase an aggregate of 2,222,222 shares of Common Stock. 50% of
such warrants have an exercise price of $2.75 and 50% have an exercise price of
$3.25. Additionally, the placement agent received five year warrants to purchase
355,555 shares of Common Stock with an exercise price of $2.25.
As of March 31, 2006, the Company had aggregate cash and cash
equivalents of approximately $9,000,000, which the Company anticipates is
adequate to finance its operations through the next 12 to 18 months. Thereafter,
the Company will require additional financing to insure that the Company will be
able to meet the expenditures to develop and commercialize its products for
which requirement the Company has no current arrangements. Other possible
sources of the required financing are the cash exercise of the Long Term
Warrants issued in the October 2004 private placement, the Replacement Warrants
issued in the December 2005 private placement and other warrants and options
that are currently outstanding. No representation can be made that the Company
will be able to obtain additional financing or if obtained it will be on
favorable terms, or at all. No assurance can be given that any offering if
undertaken will be successfully concluded or that if concluded the proceeds will
be material. The Company's inability to obtain additional financing when needed
would impair its ability to continue its business.
Any further sale of the Company's equity could result in the
substantial dilution of the Company's then-existing stockholders' equity. On the
other hand, if the Company incurred debt, the Company would be subject to risks
associated with indebtedness, including the risk that interest rates might
fluctuate and cash flow would be insufficient to pay principal and interest on
such indebtedness.
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 revenues, principally
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
14
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 licenses or rights, we
will need to establish whether we will be able to obtain them on favorable
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. The eight products
currently under development have not yet 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.
15
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.
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 has
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 31, 2006.
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 March 31, 2006, the closing sale price on the American Stock Exchange of
our Common Stock fluctuated from a high of $4.42 per share to a low of $1.68 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;
16
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.
As of this date sales of substantial amounts of the Common Stock in the public
market are eligible for sale by these holders pursuant to exemption or
registration under the Securities Act. 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.
On January 4, 2006, the Company received a letter from the American
Stock Exchange ("AMEX") notifying it that, based on the Company's unaudited
financial statements as of September 30, 2005, the Company is not in compliance
with the continued listing standards set forth in the AMEX Company Guide in that
under one listing standard its shareholders' equity is less than $4,000,000 and
it had losses from continuing operations and/or net losses in three of its four
most recent fiscal years and under another listing standard its shareholders'
equity is less than $6,000,000 and it had losses from continuing operations
and/or net losses in its five most recent fiscal years. The Company, at the
request of AMEX, submitted a plan on February 3, 2006 advising AMEX of action,
it has taken, and will take, to bring it in compliance with the continued
listing standards within a maximum of 18 months from January 4, 2006. On March
15, 2006, the Company completed a private placement of its Series B Preferred
Stock and warrants to purchase Common Stock. The Company received $10,000,000 in
gross proceeds from the private placement. On March 21, 2006, the Company
submitted an update to the plan it had previously submitted on February 6, 2006.
Upon notice of the recent private placement and the acceptance of the updated
plan, AMEX provided the Company with an extension until July 3, 2007 to regain
compliance with the continued listing standards. AMEX will allow the Company to
maintain its AMEX listing through the plan period, subject to periodic review of
the Company's progress by the AMEX staff. If the Company is not in compliance
with the continued listing standards or does not make progress consistent with
such plan during the plan period, AMEX may then initiate delisting proceedings.
The failure to maintain listing of the Common Stock on AMEX 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
17
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 $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.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
18
ITEM 2. 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 contains certain
customary provisions including, without limitation, the right of NJEDA to
foreclose upon a default by Elite. See "Note 6. - Long Term Debt".
On July 15, 2005, we entered into a lease for two years commencing on
July 1, 2005 for a portion of a one-story warehouse for the storage of finished
and raw material of pharmaceutical products and equipment.
We are currently using our facilities as a laboratory, manufacturing,
storage and office space. 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.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business the Company may be subject to
litigation from time to time. There is no past, pending or, to the Company's
knowledge, threatened litigation or administrative action (including litigation
or action involving the Company's officers, directors or other key personnel)
which in the Company's opinion has or is expected to have, a material adverse
effect upon its business, prospects financial condition or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
three months ended March 31, 2006.
19
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
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.
COMMON STOCK
QUARTER ENDED HIGH LOW
FISCAL YEAR ENDING MARCH 31, 2006:
March 31, 2006.......................................$2.49 $1.85
December 31, 2005....................................$3.02 $1.69
September 30, 2005...................................$3.05 $2.62
June 30, 2005 .......................................$4.42 $2.67
FISCAL YEAR ENDING MARCH 31, 2005:
March 31, 2005.......................................$4.79 $1.15
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 30, 2003....................................$3.30 $2.70
September 30, 2003...................................$3.49 $2.05
June 30, 2003 .......................................$3.49 $1.25
On June 20, 2006, the last reported sale price of our Common Stock, as
reported by the American Stock Exchange, was $2.00 per share.
As of June 20, 2006, there were approximately 109 holders of record
and, we believe, approximately 2114 beneficial owners of our Common Stock. We
are informed and believe that as of June 20, 2006, Cede & Co. held 17,482,412
shares of our Common Stock as nominee for Depository Trust Company, 55 Water
Street, New York, New York 10004. It is our understanding that Cede & Co. and
Depository Trust Company both disclaim any beneficial ownership therein and that
such shares are held for the account of numerous other persons.
We have never paid cash dividends on our common stock. We paid on May
1, 2006 a dividend in the aggregate principal amount of $33,333.33 on our Series
B Convertible Preferred Stock. We currently anticipate that we will retain all
available funds for use in the operation and expansion of our business.
Please see our Quarterly Reports on Form 10-Q for the three month
periods ending June 30, 2005, September 30, 2005 and December 31, 2005 and our
Current Reports on Form 8-K dated September 2, 2005, December 14, 2005, December
31, 2005 and March 15, 2006 for information concerning our issuances of
unregistered securities during the 12 months ended March 31, 2006.
20
EQUITY COMPENSATION PLAN INFORMATION
As of March 31, 2006, we had authorized the issuance of 4,000,000
shares of Common Stock upon exercise of options pursuant to our Stock Option
Plan (the "Plan") approved by our stockholders on June 22, 2004 and amended by
our stockholders on June 28, 2006 to increase to 7,000,000 the number of shares
subject to the Plan. As of March 31, 2006, there was an aggregate of 2,397,500
shares of Common Stock issuable upon exercise of outstanding options under the
Plan having a weighted average exercise price of $2.38. In addition, there was
an aggregate of 573,750 shares of Common Stock issuable upon exercise of other
outstanding options granted to employees and directors having a weighted average
exercise price of $2.28.
If options granted under the Plan lapse without being exercised, other
options may be granted covering the shares not purchased under such lapsed
options. Options may be granted to employees, officers, Directors of and
consultants to Elite. 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").
Of the ISOs outstanding, options for 93,300 shares with an exercise
price of $2.34 per share were granted under the Plan on June 22, 2004 to
employee holders of outstanding options previously granted by the Company having
on the date of the grant a higher exercise price; such grants subject to the
cancellation of the previously granted options. Such grants are deemed repricing
of the outstanding options and resulted in charges to earnings of the Company
equal to the difference between (i) the fair value of the vested portion of the
new options granted, utilizing the Black-Scholes options pricing model on each
grant date and (ii) the charges to earnings previously made as a result of the
grants of the options being replaced, which will have a dilutive effect on the
earnings per share and, as a result, will likely have an adverse effect on the
market price of the Common Stock of the Company.
Options to purchase 30,000 shares of Common Stock exercisable at $2.34
per share were granted under the Plan on June 22, 2004 to each of Bernard Berk,
our Chief Executive Officer and a Director, and Mr. John A. Moore, Mr. Harmon
Aronson, and Dr. Eric L. Sichel, each of whom was then a Director of the
Company.
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 March 31, 2005, no Committee has been appointed.
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.
Optionees will have no voting, dividend or other rights as stockholders
with respect to shares of Common Stock covered by options prior to becoming the
holders of record of such shares. The purchase
21
price upon the exercise of options may be paid in cash, by certified bank or
cashier's check, by tendering stock held by the Optionee, as well as by cashless
exercise either through the surrender of other shares subject to the option or
through a broker. The total number of shares of Common Stock available under the
Plan, and the number of shares and per share exercise price under outstanding
options will be appropriately adjusted in the event of any stock dividend,
reorganization, merger or recapitalization of the Company or similar corporate
event.
The Board of Directors may at any time terminate the Plan or from time
to time make such modifications or amendments to the Plan as it may deem
advisable and the Board or Committee may adjust, reduce, cancel and regrant an
unexercised option if the fair market value declines below the exercise price
except as may be required by any national stock exchange or national market
association on which the Common Stock is then listed. In no event may the Board,
without the approval of stockholders, amend the Plan to increase the maximum
number of shares of Common Stock for which options may be granted under the Plan
or change the class of persons eligible to receive options under the Plan.
Subject to limitations set forth in the Plan, the terms of option
agreements will be determined by the Board or Committee, and need not be uniform
among Optionees.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data, at the end of and
for the last five fiscal years, should be read in conjunction with our
Consolidated Financial Statements and related Notes thereto appearing elsewhere
in this Annual Report on Form 10-K. The consolidated selected financial data are
derived from our consolidated financial statements that have been audited by
Miller, Ellin & Company, LLP, our independent auditors, as indicated in their
report included herein. The selected financial data provided below is not
necessarily indicative of our future results of operations or financial
performance.
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Net revenues $ 550,697 $ 301,480 $ 258,250 $ 630,310 $ 1,197,507
Net (loss) $(6,883,914) $(5,906,890) $(6,514,217) $(4,061,422) $(1,774,527)
Net (loss) per $ (0.49) $ (0.47) $ (0.58) $ (0.40) $ (0.19)
common share
Total assets $15,702,241 $ 9,245,292 $ 7,853,434 $ 8,696,222 $12,724,498
Long-term obligations $ 3,980,000 $ 2,367,128 $ 2,495,000 $ 2,720,000 $ 3,788,148
Weighted average 18,463,514 12,869,924 11,168,618 10,069,991 9,561,299
number of shares
outstanding
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
GENERAL
The following discussion and analysis should be read with the financial
statements and accompanying notes, included elsewhere in this Annual Report on
Form 10-K. It is intended to assist the reader in understanding and evaluating
our financial position.
OVERVIEW
Elite Pharmaceuticals is a specialty pharmaceutical company principally
engaged in the development and manufacturing of oral, controlled-release
products. The Company's strategy includes developing generic versions of
controlled release drug products with high barriers to entry and assisting
partner companies in the life cycle management of products to improve off-patent
drug products. Elite's technology is applicable to develop delayed, sustained or
targeted release, capsules or tablets. Elite has one product currently being
sold commercially and a pipeline of eight drug products under development in the
therapeutic areas that include pain management, allergy, cardiovascular and
infection. The addressable market for Elite's current products exceeds $6
billion in the aggregate. Elite also has a GMP and DEA registered facility for
research, development, and manufacturing located in Northvale, New Jersey.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion addresses our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgment, including those
related to bad debts, intangible assets, income taxes, workers compensation, and
contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. Our most critical
accounting policies include the recognition of revenue upon completion of
certain phases of projects under research and development contracts. The Company
also assesses a need for an allowance to reduce its deferred tax assets to the
amount that it believes is more likely than not to be realized. 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 asset
may not be recoverable. The Company assesses its exposure to current commitments
and contingencies. It should be noted that actual results may differ from these
estimates under different assumptions or conditions.
During the year ended March 31, 2003, we elected to prospectively
recognize the fair value of stock options granted to employees and members of
the Board of Directors, effective as of the beginning of the fiscal year, which
resulted in our taking charges of $1,166,601, $370,108 and $902,967 during the
23
years ended March 31, 2004, 2005 and 2006, respectively. The fair value of stock
options held by employees and members of the Board of Directors which have been
granted subsequent to March 31, 2003 is expected to continue to affect the
results of operations of future periods, as we continue to grant or reprice
stock options to reward our management team.
YEAR ENDED MARCH 31, 2006 VS. YEAR ENDED MARCH 31, 2005
Our revenues for the year ended March 31, 2006 were $550,697, an
increase of $249,217 or approximately 83%, over revenues for the comparable
prior year, and consisted of $494,231 in manufacturing fees and $56,466 in
royalty fees. Revenues for the year ended March 31, 2005, consisted of a
$150,000 non-refundable payment received from Purdue Pharma L.P. granting it the
right to evaluate certain abuse resistant drug formulation technology, $125,739
in manufacturing fees, $24,291 in royalty fees and $1,450 in testing fees.
Research and development costs for the year ended March 31, 2006, were
$4,343,890, an increase of $1,645,249, or approximately 61%, from $2,698,641 of
such costs for the comparable period of the prior year, primarily the result of
increased wages, raw materials, laboratory and manufacturing supplies and
consulting fees. We expect our research and development costs to continue to
increase in future periods as a result of the developing and testing of products
currently in our pipeline.
General and administrative expenses (G&A) for the year ended March 31,
2006, were $1,726,626, a decrease of $433,044, or approximately 20% from G&A for
the prior year. The decrease was attributable to a decrease in litigation costs,
bad debt expense, auditing and legal fees, somewhat offset by increases in
salaries and staff.
We are unable to provide a break-down of the specific costs associated
with the research and development of each product on which we devoted resources
because a significant portion of the costs are generally associated with
salaries, laboratory supplies, laboratory and manufacturing expenses, utilities
and similar expenses. We have not historically allocated these expenses to any
particular product. In addition, we cannot estimate the additional costs and
expenses that may be incurred in order to potentially complete the development
of any product, nor can we estimate the amount of time that might be involved in
such development because of the uncertainties associated with the development of
controlled release drug delivery products as described in this report.
Depreciation and amortization increased by $130,249 from $356,438 for
the prior year to $486,687. The increase was the result of writing off the
balance of the prior EDA Bond Offering costs as a result of the refinancing.
24
Other income (expenses) for the year ended March 31, 2006 were
($876,408), a decrease of $116,213, or approximately 12%, from ($992,621) for
the prior year due to (i) a reduction by $105,923 in charges related to the
issuances of stock options and warrants, (ii) an increase of $13,329 in sale of
New Jersey tax losses, and (iii) additional interest income of $50,930, due to
higher compensating balances as a result of the private placement, partially
offset by an increase of $53,969 in interest expense resulting from an increase
in NJEDA Bonds outstanding.
As a result of the foregoing, the Company's net loss for the year ended
March 31, 2006 was $6,883,914 compared to $5,906,890 for the year ended March
31, 2005.
YEAR ENDED MARCH 31, 2005 VS. YEAR ENDED MARCH 31, 2004
Our revenues for the year ended March 31, 2005 were $301,480, an
increase of $43,230 or approximately 17%, over revenues of $258,250 for the
prior year. The year ended March 31, 2005 revenues consisted of a $150,000
non-refundable payment received from Purdue Pharma L.P. granting it the right to
evaluate certain abuse resistant drug formulation technology, $125,739 of
manufacturing fees, $24,291 of royalty fees and $1,450 of testing fees. Revenues
for the year ended March 31, 2004 consisted of research and development fees
earned in conjunction with our distinct development, license and manufacturing
agreements.
Research and development costs for the year ended March 31, 2005, were
$2,698,641, an increase of $623,567 (approximately 30%) from $2,075,074 of such
costs for the prior year, primarily the result of increased wages, raw
materials, laboratory and manufacturing supplies and consulting fees.
General and administrative expenses (G&A) for the year ended March 31,
2005, were $2,159,670, a decrease of $390,176, or approximately 15% from of G&A
for the prior year, attributable to a decrease in litigation costs partially
offset by increases in salaries and staff, consulting fees and the write-off of
a bad debt relating to accounts receivable.
We are unable to provide a break-down of the specific costs associated
with the research and development of each product on which we devoted resources
because a significant portion of the costs are generally associated with
salaries, laboratory supplies, laboratory and manufacturing expenses, utilities
and similar expenses. We have not historically allocated these expenses to any
particular product. In addition, we cannot estimate the additional costs and
expenses that may be incurred in order to potentially complete the development
of any product, nor can we estimate the amount of time that might be involved in
such development because of the uncertainties associated with the development of
controlled release drug delivery products as described in this report.
Depreciation and amortization increased by $23,602 from $332,836 for
the year ended March 31, 2004 to $356,438 for the year ended March 31, 2005.
Other income (expenses) for the year ended March 31, 2005 were
($992,621), a decrease of $821,090, or approximately 45%, from ($1,813,711) for
the prior year. The decrease was due to (i) a reduction of $1,143,466 in charges
related to the issuances of stock options and warrants, (ii) a charge of
$172,324 in the prior year related to the warrant exchange offer, offset
partially by a charge of $397,732 in the year ended March 31, 2005 relating to
the repricing of stock options, (iii) an increase of $54,765 in the sale of New
Jersey tax losses and (iv) the litigation settlement expense of $150,000 for the
prior year partially offset by a $16,167 increase in interest expenses.
25
As a result of the foregoing, the Company's net loss for the year ended
March 31, 2005 was $5,906,890 compared to $6,514,217 for the year ended March
31, 2004.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company's working capital (total current assets less total current
liabilities), increased from $3,328,583 as of March 31, 2005, to $8,615,287 as
of March 31, 2006, primarily due to net proceeds approximating $8,600,000
received from the sale of Series B 8% Preferred Stock partially offset by the
net loss of $5,494,300 from operations, exclusive of non-cash charges of
$1,389,614.
The Company experienced negative cash flows from operations of
($4,625,549) for the year ended March 31, 2006, primarily due to the Company's
net loss from operations of $6,883,914, less non-cash charges of $1,389,614,
which included $902,927 in connection with the issuance of stock options, and
$486,687 in depreciation and amortization expenses.
On November 15, 2004, Elite's partner, ECR, launched LODRANE 24(R) 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 manufacturing
margin and royalties on product revenues. Royalty income earned for the year
ended March 31, 2006 was $56,466. The Company expects future cash flows from
royalties to provide additional cash to help fund its operations.
The Company recently entered into a development agreement with Pivotal
Development, L.L.C. pursuant to which the Company is to receive an aggregate of
$750,000 upon attaining certain milestones. The Company hopes to achieve some of
the milestones by the end of the quarter ending June 30, 2007.
On March 30, 2005, the Company entered into a product, development,
manufacturing and distribution agreement with Harris Pharmaceutical, Inc.
("Harris") and Tish Technologies, LLC (Tish") with respect to a controlled
release generic anti-infective drug. The product is a generic equivalent to a
branded drug which the Company estimates has addressable market revenues of
approximately $80 million per year. The agreement provides for (1) the
development of the drug by Elite with costs of development to be shared by Elite
and the marketing company, (2) the manufacture of the product by Elite and its
sale to the marketing company for distribution and (3) the boutique development
company to be responsible for any requisite submissions to the FDA relating to
the product. Elite is to share in the profits generated from sales of the
product by the marketing company. On June 19, 2006, we received written notice
from Harris of Harris' intent to terminate the agreement in accordance with
Section 9.3 of the agreement. In the letter, Harris states that Tishtech did not
use commercially reasonable efforts to develop the product in accordance with
the development activities set forth in the Agreement. As the date hereof, there
have been no material revenues earned under the Agreement.
On June 21, 2005, the Company and IntelliPharmaCeutics Corp. ("IPC"),
entered into an agreement for the development and commercialization of a
controlled released generic drug for certain anti-infective diseases by the
parties. The Company estimates that the product had an addressable market in the
U.S. of approximately $4 billion in 2004. The Company is to share in the
profits, if any, from the sales of the drug. On December 12, 2005, the agreement
was amended with respect to the development and commercialization of the
controlled release drug product in Canada. Since IPC intended to enter into an
agreement with a Canadian company with respect to the development, distribution
and sale of the drug product in Canada, the parties agreed to suspend their
obligations under the agreement with respect to the development and
commercialization of the controlled release drug product in Canada. IPC agreed
to pay
26
the Company a certain percentage of any payments received by IPC with respect
the commercialization of the controlled release drug product by such Canadian
company.
On June 22, 2005, the Company and Pliva, Inc. ("Pliva") entered into a
Product Development and License Agreement providing for the development and
license of a controlled released generic anti-infective drug formulated by the
Company. The Company is to manufacture and Pliva will market and sell the
product. Under the agreement, the partner is to make milestone payments to the
Company. The development costs are to be paid both by Pliva and the Company, and
the profits are to be shared equally.
On January 10, 2006, the Company entered into a Product Development and
Commercialization Agreement with Orit Laboratories LLC ("ORIT") providing that
the Company and Orit will co-develop and commercialize an extended release drug
product for treatment of anxiety, and upon completion of development, the
possible licensing of the product for manufacture and sale. The parties intend
to develop all dose strengths of the product. The Company is to share in the
profits, if any from the sales of the drug. The term of the agreement is for the
longer of (i) 15 years from the date the product is first commercially sold to a
third party, or (ii) the life of the applicable patent(s), if any. The agreement
is automatically renewable for 3-year periods unless terminated by either party
by providing the other party with twelve (12) months written notice prior to any
renewal period.
In January 2006, the Food and Drug Administration accepted the
Company's investigational - new drug application for OxyQD(TM), its once-a-day
oxycodone painkiller. Under the new drug application, the Company will begin its
development program with an early stage study to evaluate OxyQD(TM)'s sustained
release formation. Currently there is no once-daily oxycodone available; the
Company estimates that the U.S. market for sustained release, twice-daily
oxycodone was about $2 billion as of September, 2005.
No assurance can be given that the Company will consummate any of the
transactions discussed above or that any material revenues will be generated for
Elite therefrom.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended March 31, 2006, the Company recorded positive cash
flow and financed its operations through utilization of its existing cash. In
March 2006, the Company raised net cash approximating $8,600,000 from its
private placement of its Series B 8% Preferred Stock. The Company's working
capital at March 31, 2006 was $8.6 million compared with working capital of $3.3
million at March 31, 2005. Cash and cash equivalents at March 31, 2006 were $8.9
million, an increase of $5.0 million from the $3.9 million at March 31, 2005.
The Company spent approximately $450,000 on improvements and machinery
and equipment during the year ended March 31, 2006. Proceeds generated from the
Company's refinancing, discussed below, were used to pay for these additions.
The Company's purchase of machinery and equipment of approximately
$426,000 during the year ending March 31, 2005 was fully financed except for
minor expenditures.
On August 31, 2005, the Company successfully completed a refinancing
through the issuance of the tax-exempt bonds (the "Bonds") by the New Jersey
Economic Development Authority (the "Authority"). The refinancing involved the
borrowing of $4,155,000, evidenced by a 6.5% Series A Note in the principal
amount of $3,660,000 maturing on September 1, 2030 and a 9% Series B Note in the
principal amount of $495,000 maturing on September 1, 2012. The net proceeds,
after payment of
27
issuance costs, were or will be used (i) to redeem the outstanding tax-exempt
Bonds originally issued by the Authority on September 2, 1999, (ii) refinance
other former equipment financing and (iii) for the purchase of certain equipment
to be used in the manufacture of pharmaceutical products.
Interest is payable semiannually on March 1 and September 1 of each
year. The Bonds are collateralized by a first lien on the Company's facility and
equipment acquired with the proceeds of the original and refinanced Bonds. The
related Indenture requires the maintenance of a $415,500 Debt Service Reserve
Fund consisting of $366,000 from the Series A Bonds proceeds and $49,500 from
the Series B proceeds. $1,274,311 of the proceeds has been deposited in a
short-term restricted cash account to fund the future purchase of manufacturing
equipment and development of the Company's facility.
On March 15, 2006, the Company completed a $10,000,000 private
placement of to a group of institutional and other private investors of its
Series B Preferred Stock at a price of $1,000 per share, each share initially
convertible at $2.25 into 4,444,444 shares of Common Stock, or an aggregate of
4,444,444 shares of Common Stock. The investors received two classes of
five-year common stock purchase warrants. One Class represents the right to
purchase an aggregate of 1,111,111 shares of Common Stock at an exercise price
of $2.75 per share and the other class represents the right to purchase an
aggregate of 1,111,111 shares of Common Stock at an exercise price of $3.25 per
share. The Company expects that the approximate $8,600,000 of net proceeds will
contribute materially to the Company's efforts to advance their portfolio of
pain products through the clinic as well as accelerate the development of other
Company controlled release products which utilize the Company's proprietary oral
drug delivery systems and abuse resistant technology.
The Company from time to time will consider potential strategic
transactions including acquisitions, strategic alliances, joint ventures and
licensing arrangements with other pharmaceutical companies. The Company retained
an investment banking firm to assist with its efforts. There can be no assurance
that any such transaction will be available or consummated in the future.
As of March 31, 2006, our principal source of liquidity was
approximately $8,900,000 of cash and cash equivalents. Additionally, we may have
access to funds through the exercise of outstanding stock options and warrants
in addition to funds that may be generated from the potential sale of New Jersey
tax losses. There can be no assurance that the sale of tax losses or that any
proceeds generated by the exercise of outstanding warrants or options will
provide sufficient cash.
The following table depicts our obligations and commitments to make
future payments under existing contracts or contingent commitments.
PAYMENTS DUE BY PERIOD
Contractual Obligations TOTAL LESS THAN 1YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
----- --------------- --------- --------- -------------
NJEDA Bonds payable $4,155,000 $175,000 $595,000 $470,000 $2,915,000
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest in or own any market risk sensitive instruments
entered into for trading purposes or for purposes other than trading purposes.
All loans to us have been made at fixed interest rates and; accordingly, the
market risk to us prior to maturity is minimal.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as a part of this Annual Report on Form 10-K
are our Consolidated Financial Statements, beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, based on an
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the
Chief Executive and Chief Financial Officer of the Company have concluded that
the Company's disclosure controls and procedures are effective for ensuring that
information required to be disclosed by the Company in its Exchange Act reports
is recorded, processed, summarized and reported within the applicable time
periods specified by the SEC's rules and forms. The Company also concluded that
information required to be disclosed in such reports is accumulated and
communicated to the Company's management, including its principal executive and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure. There was no change in the Company's internal controls over
financial reporting that occurred during the most recent fiscal quarter that
materially affected or is reasonably likely to materially affect the Company's
internal controls over financial reporting. The Company's management has not yet
completed, and is not yet required to have completed, its assessment of internal
controls over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers, as of March 31, 2006, and their
biographical information are set forth below:
---------------------- --- -----------------------------------------------------
NAME AGE POSITION
---------------------- --- -----------------------------------------------------
Bernard Berk 57 Chairman of the Board, Chief Executive Officer
---------------------- --- -----------------------------------------------------
Edward Neugeboren 37 Director
---------------------- --- -----------------------------------------------------
Barry Dash, PhD 74 Director
---------------------- --- -----------------------------------------------------
Dr. Melvin Van Woert 75 Director
---------------------- --- -----------------------------------------------------
Mark I. Gittelman 46 Chief Financial Officer, Secretary and Treasurer
---------------------- --- -----------------------------------------------------
Dr. Charan Behl 55 Executive Vice President and Chief Scientific Officer
---------------------- --- -----------------------------------------------------
Chris Dick 51 Executive Vice President of Corporate Development
---------------------- --- -----------------------------------------------------
The principal occupations and employment of each such person during at
least the past five years is set forth below. In each instance in which dates
are not provided in connection with the person's business experience, he has
held the position indicated for at least the past five years.
Mr. Bernard Berk was appointed the Chief Executive Officer of the
Company in June 2003 and a Director in February 2004. Mr. Berk has been the
President and Chief Executive Officer of Michael Andrews Corporation, a
pharmaceutical management consultant firm, since 1996. Mr. Berk was from 1994
until 1996, President and Chief Executive Officer of Nale Pharmaceutical
Corporation and from 1989 until 1994, 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, a then emerging Silicon
Alley based media software company, and from 1998 to 2000 the Chief
Administrative Officer and director of Equity Research Operations at Lehman
Brothers. He was from 1996 to 1998 deputy director of Equity Research at UBS
Warburg, formerly Warburg, Dillon Read, 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.
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
30
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 Van Woert, an internist, has been since 1974, a member of
the staff of Mount Sinai Medical Center where since 1978 he has also been a
Professor in the Department of Neurology and Pharmacology at Mount Sinai School
of Medicine. Dr. Van Woert had been a consultant for Neuropharmacological Drug
Products to the Food and Drug Administration from 1974 to 1980; Associate Editor
of Journal of the Neurological Sciences; 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.
Mark I. Gittelman, 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 State Societies of CPAs. Other
than Elite Labs, no company with which Mr. Gittelman had been affiliated was a
parent, subsidiary or other affiliate of the Company.
Chris Dick, who is employed on an "at-will" basis, was appointed
Executive Vice President of Corporate Development in March, 2006. Since November
2002, the Company has engaged Mr. Dick to direct its licensing and business
development activities. From 1999 to 2002, Mr. Dick served as Director of
Business Development for Elan Drug Delivery, Inc., responsible for licensing and
business development of Elan's portfolio of drug delivery technologies. From
1997 to 1999, he was Manager of Business Development and Marketing for EnTec, a
drug delivery business unit within FMC Corporation's Pharmaceutical Division.
Prior thereto he held various other business and technical positions at FMC
Corporation, including Manager of Marketing for its pharmaceutical functional
coatings product line. Mr. Dick holds an M.B.A from the Stern School of
Business, New York University, and a B.S. and a M.S. in Chemical Engineering
from Cornell University.
Dr. Charan Behl was appointed in March, 2006 Executive Vice President
and Chief Scientific Officer of the Company. Dr. Behl has provided the Company
since June 2003 consulting technological services as an independent contractor.
He was from January 1995 to July 1998 Vice President of R&D and from July 1988
to January 2001 Executive Vice President of R&D of Nastech Pharmaceutical
Corporation, Inc. From April 1981 to November 1994, Dr. Behl was employed by
Hoffman La Roche,
31
where he held a number of positions, including research leader of its
Pharmaceutical R&D Department. During his tenure at Roche and Nastech, Dr. Behl
created intellectual property in the area of drug delivery. His patent portfolio
includes over 40 patents issued, pending and in preparation. Dr. Behl holds a
B.S. in Pharmaceutical Sciences from BITS, Pilani, India, an M.S. in
Pharmaceutics from Duquesne University, under the mentorship of Dr. Alvin M.
Galinsky, and a Ph.D. in Pharmaceutical Sciences from the University of
Michigan, under the mentorship of Dr. William I. Higuchi. Dr. Behl was an
Assistant Research Scientist from 1978 to 1981 at the University of Michigan.
Dr. Behl is internationally known for his scientific and professional
activities. He has coauthored over 200 publications, including research
articles, book chapters, and abstracts, and has made numerous presentations at
national and international conferences and workshops. In conjunction with
associates from academia and industry and representatives of the FDA, Dr. Behl
has co-organized several workshops and symposia. He was the founding chair of
the Nasal Drug Delivery Focus Group formed in 1995 under the auspices of the
American Association of Pharmaceutical Scientists ("AAPS"), and served as its
Chairman from 1995 to 2001. Dr. Behl is a fellow of the AAPS.
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. Except for Mr. Berk who is employed pursuant to an
employment agreement, all of our executive officers are serving 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.
AUDIT COMMITTEE
Our Board of Directors has an Audit Committee and, since June 22, 2004,
a Nominating Committee. The Board has no other standing committees. The current
Audit Committee, appointed on April 15, 2005, consists of Edward Neugeboren, Dr.
Melvin Van Woert and Barry Dash, Ph.D. The prior Audit Committee members were
John A. Moore, Harmon Aronson and Eric L. Sichel. The Audit Committee had one
meeting during the fiscal year ended March 31, 2006. 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.
Other than Mr. Moore, we deem the members of the prior and the current
Audit Committees 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. Sichel, an independent director, with
respect to the prior Committee qualified and Mr. Edward Neugeboren with respect
to the current Audit Committee qualifies as the Audit Committee Financial Expert
within the meaning of that term under the applicable regulations under the
Securities Exchange Act of 1934.
Audit Committee Report: The following is the Audit Committee Report
made by all its members.
The Audit Committee reviewed and discussed the audited financial
statements with management. The Audit Committee discussed with the independent
auditors of the Company the matters required to be discussed by SAS 61
(Codification of Statements on Auditing Standards, AU 380), as modified or
supplemented. The Audit Committee received the written disclosures and the
letter from the independent accountants required by Independence Standards Board
Standard No. 1 (Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committees), as modified or supplemented. The Audit
Committee discussed with the independent accountant the independent accountant's
independence. Based upon the foregoing review and discussions, the Audit
Committee recommended to the Board of
32
Directors of the Company that the audited financial statements of the Company be
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2006 as filed with the Commission.
Edward Neugeboren
Dr. Melvin Van Woert
Barry Dash, Ph.D.
NOMINATING COMMITTEE
The Nominating Committee, initially appointed on June 22, 2004, is
authorized to select the nominees of the Board of Directors for election as
directors. The members were initially John A. Moore, Harmon Aronson and Bernard
Berk with Barry Dash and Melvin Van Woert replacing Messrs. Aronson and Moore as
of April 15, 2005. In selecting nominees the Committee identifies and evaluates
the current Directors and their commitment to the policy of the Company and each
individual's qualifications and availability. The Committee believes that a
nominee for director of the Company should have an appropriate level of
sophistication, knowledge and understanding of the Company and the industry,
stockholder relations and finance and accounting for publicly held companies.
The Committee also considers the need to select at least one nominee who has the
appropriate experience and financial background who could qualify as an "audit
committee financial expert" within the meaning of the rules under the Securities
Exchange Act of 1934 and of the American Stock Exchange. The Company has not
engaged any third party to assist in the process of identifying or evaluating
candidates.
The Company currently does not have a process for considering
candidates put forward by stockholders other than those who are directors of the
Company. In view of the recent effectiveness of the requirements under the
Securities Exchange Act of 1934 as to a policy with respect to the consideration
of candidates put forward by stockholders other than those who are directors of
the Company, the adoption of such policy and the procedures for stockholders to
submit candidates is under consideration by the Board.
MEETINGS
During the fiscal year ended March 31, 2006, our Board of Directors
held three meetings and acted by unanimous written consent on other occasions.
Each director attended 75 percent or more of the aggregate number of meetings
and committees of which he was a member that were held during the period of his
service as a director.
The Company does not have a formal policy regarding attendance by
members of the Board of Directors at the Company's annual meeting of
stockholders, although it does encourage attendance by the directors.
Historically, more than a majority of the directors have attended the annual
meeting.
CODE OF CONDUCT
At the first meeting of the Board of Directors following the Annual
Meeting of Stockholders held on June 22, 2004 it adopted a Code of Business
Conduct and Ethics for its officers and employees which it believes complies
with the requirements for a company code of ethics for financial officers that
were promulgated by the SEC pursuant to the Sarbanes-Oxley Act of 2002 (the
"Sarbanes-Oxley Act") as well as for the members of our Board of Directors. The
directors will be surveyed annually regarding their compliance with the policies
as set forth in the Code of Conduct for Directors. A copy of the Code of
Business Conduct and Ethics is available on our website www.elitepharma.com. We
intend to disclose
33
any amendment to, or waiver of, a provision of the Business Conduct and Ethics
for Directors in a report filed under the Securities Exchange Act of 1934 within
five business days of the amendment or waiver.
STOCKHOLDER COMMUNICATIONS
Stockholders who wish to send communications to the Board of Directors
should address their communication to Elite Pharmaceuticals Inc., 165 Ludlow
Avenue, Northvale, New Jersey 07647, attention Mark I. Gittelman, Secretary. Mr.
Gittelman has been instructed to collect and organize stockholder communications
and forward copies to each of the Directors. If a communication relates to the
Secretary, such communication should be sent to the same address, attention
Bernard Berk, Chairman.
Typically, we do not forward to our directors communications from our
stockholders or other communications which are of a personal nature or not
related to the duties and responsibilities of the Board, including:
o Junk mail and mass mailings
o New product suggestions
o Resumes and other forms of job inquiries
o Opinion surveys and polls
o Business solicitations or advertisements
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our directors and executive officers and persons who own more than ten
percent of a registered class of our equity securities (collectively, "Reporting
Persons") to file with the SEC initial reports of ownership and reports of
changes in ownership of our Common Stock and other equity securities of Elite.
Reporting Persons are required by SEC regulation to furnish Elite with copies of
all Section 16(a) forms that they file. To our knowledge, based solely on a
review of the copies of such reports furnished to us, we believe that during
fiscal year ended March 31, 2006 all Reporting Persons complied with all
applicable filing requirements other than Mr. Neugeboren who did not timely file
a Form 4.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE OFFICER COMPENSATION
Mr. Berk is employed pursuant to an employment agreement, dated as of
June 23, 2003, as amended and restated on September 2, 2005 (the "RESTATED
EMPLOYMENT AGREEMENT"), providing for him to serve as the Company's Chief
Executive Officer through August 31, 2009. Mr. Berk's salary was increased to
$330,140 as a result of the occurrence of a Strategic Transaction pursuant to
the terms of the Restated Employment Agreement - the increase from $200,000 was
effective May 1, 2005 but not payable until November 1, 2005. Additionally, Mr.
Berk is entitled to an annual bonus as determined by the Compensation Committee.
34
Pursuant to the Restated Employment Agreement, Mr. Berk (i) waived his
rights to 75,000 of the 300,000 options granted to him under the agreement on
June 23, 2003 and the Company determined that the remaining 225,000 options
fully vested as a result of the occurrence of a Strategic Transaction and (ii)
was granted on September 2, 2005 under its 2004 Stock Option Plan (the "PLAN")
ten year options to purchase 600,000 shares of common stock at $2.69, the fair
market value of the Common Stock as of the time of the grant, of which 100,000
vest on September 2, 2006, 100,000 vest on September 2, 2007 and the remaining
400,000 vest as follows: (a) 50,000 shares upon the closing of each product
license or product sale transaction (on a product by product basis and only once
for each product) in which the Company receives an aggregate of at least
$5,000,000 in net cash proceeds (including royalties and signing, license and
milestone payments) in connection with such product transaction; (b) 10,000
shares upon the filing by the Company (in the Company's name) with the United
States Food and Drug Administration (the "FDA") of either an abbreviated new
drug application (an "ANDA") OR a new drug application (including an application
filed with the FDA under Section 505(b)(2) of the Federal Food, Drug, and
Cosmetic Act, 21 U.S.C. Section 301 et seq.) (collectively, a "NDA"), for a
product not covered by a previous FDA application; and (c) 40,000 shares upon
the approval by the FDA of any ANDA or NDA (filed in the Company's name) for a
product not previously approved by the FDA.
The Company also agreed that in the event that options to purchase the
above 400,000 shares have fully vested, it will grant him under the Plan fully
vested additional options to purchase shares at the fair market value on the
date of grant as follows: (a) 50,000 options upon the closing of each product
license or product sale transaction (on a product by product basis and only once
for each product) in which the Company receives an aggregate of at least
$5,000,000 in net cash proceeds (including royalties and signing, license and
milestone payments) in connection with such product transaction; (b) 10,000
options upon the filing by the Company (in the Company's name) with the FDA of
either an ANDA or NDA for a product not covered by a previous FDA application;
and (c) 40,000 options upon the approval by the FDA of any ANDA, NDA or
505(b)(2) application filed in the Company's name for a product not previously
approved by the FDA.
The Restated Employment Agreement provides that if the Company
terminates Mr. Berk's employment without cause or Mr. Berk terminates his
employment for good reason, Mr. Berk shall be entitled to the following
severance: (i) any earned but unpaid base salary plus any unpaid reimbursable
expenses as of the effective date of termination of his employment, (ii) the
then-current base salary and reimbursement of the cost to replace the life and
disability insurance coverages afforded to Mr. Berk under the Company's benefit
plans with substantially similar coverages, following the effective date of
termination of his employment, for a period equal to the greater of (x) the
remainder of the then-current term, or (y) two years following the effective
date of termination and (iii) payment by the Company of premiums for health
insurance for the period during which Mr. Berk is entitled to continued health
insurance coverage as specified in the Comprehensive Omnibus Budget
Reconciliation Act. In the event that the Company terminates Mr. Berk's
employment because of his permanent disability, Mr. Berk is to be entitled to
the severance specified above, less any amounts actually received by him under
any disability insurance coverage provided for and paid by the Company. In the
event that the Company terminates Mr. Berk's employment for cause or Mr. Berk
terminates his employment with the Company without good reason, Mr. Berk shall
be entitled to any earned but unpaid base salary plus any unpaid reimbursable
expenses as of the effective date of termination of his employment.
The Restated Employment Agreement provides that in the event of a
change of control in lieu of any severance that may otherwise be payable to Mr.
Berk if Mr. Berk elects to terminate his employment for any reason within 90
days thereof, or the Company elects to terminate his employment within 180 days
thereof, other than for cause, he is to be entitled to the following: (i) any
earned but unpaid base
35
salary plus any unpaid reimbursable expenses as of the effective date of
termination of his employment, (ii) $1,000,000, (iii) the then-current base
salary for a period of 12 months following the effective date of termination,
(iv) reimbursement of the cost, for a period equal to the 12 months following
the effective date of termination, of replacing the life and disability
insurance coverage afforded to Mr. Berk under the Company's benefit plans with
substantially similar coverage and (v) payment by the Company of premiums for
health insurance for the period during which Mr. Berk is entitled to continued
health insurance coverage as specified in the Comprehensive Omnibus Budget
Reconciliation Act.
The Restated Employment Agreement contains Mr. Berk's non-competition
covenant for a period of one year from termination.
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 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, Secretary
and Treasurer. For the fiscal years ended March 31, 2006, 2005, and 2004, the
fees paid by the Company under the agreement were $154,704, $111,312, and
$168,750 respectively. The services rendered by the firm to the Company averaged
103, 84, and 128 hours per month, respectively, of which an average of 25 hours
per month were services rendered by him in his capacity as an officer of the
Company.
The following table sets forth the annual and long-term compensation and fees
for services in all capacities to the Company for each of the years in the three
year period ended March 31, 2006, awarded or paid to, or earned by our President
and Chief Executive Officer during the year and those executive officers who
earned at least $100,000 during the year, including Mr. Chris Dick and Dr.
Charan Behl who were elected officers in March 2006. Dr. Behl's compensation for
the years ended March 31, 2004, 2005 and 2006 consisted of consulting fees at
the rate of $200 per hour.
Summary Compensation Table
--------------------------
Annual Compensation Long Term Compensation
------------------------------ ------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Restricted Securities
Principal Fiscal Other Annual Stock Underlying LTIP All Other
Position Year(1) Salary Bonus Compensation Awards Options Payouts Compensation
-------- ------- ------ ----- ------------ ------ ------- ------- ------------
Bernard Berk, 2005-06 $344,295 $150,000 -- -- -- --
President and 2004-05 $200,000 $50,000 -- -- 30,000 -- --
Chief Executive 2003-04 $166,667 -- -- -- 525,000 -- --
Officer
Atul M. Mehta, 2005-06 -- -- -- -- -- -- --
Ph.D. former 2004-05 -- -- -- -- -- -- --
President and 2003-04 $53,684 -- $3,040(3) -- -- -- --
Chief Executive
Officer (2)
Chris Dick 2005-06 $150,000 $25,000 -- -- -- --
Executive Vice 2004-05 $140,250 $25,000 -- -- -- --
President of 2003-04 $137,000 -- -- -- 30,000 -- --
Corporate
Development
Charan Behl 2005-06 $450,000 -- -- -- -- --
Executive Vice 2004-05 $392,455 -- -- -- -- --
President and 2003-04 (4) -- -- -- -- --
Chief Scientific $151,114
Officer
36
-------------------------
(1) The information is provided for each fiscal year which begins on April
1 and ends on March 31.
(2) Dr. Mehta resigned as an employee and as a director of the Company as
of June 3, 2003.
(3) Represents the value of the use of a company car and premiums paid by
the Company for life insurance on Dr. Mehta's life for the benefit of
his wife.
(4) Includes $229,325 of fees paid by the value of units issued to him by
the Company in the Series A Preferred private placement, each
consisting of (i) a share of Series A Preferred Stock convertible into
ten shares of Common Stock and (ii) ten common stock purchase warrants,
at the rate of $12.30 per unit.
OPTION GRANTS TO AND EXERCISED BY EXECUTIVE OFFICERS IN LAST FISCAL YEAR
Options granted during the fiscal year ended March 31, 2006 to the executive
officers named in the Summary Compensation Table were as follows:
OPTION GRANTS IN FISCAL YEAR ENDED MARCH 31, 2006
POTENTIAL REALIZED VALUE AT
NUMBER OF SHARES % OF TOTAL OPTIONS ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EMPLOYEES EXERCISE EXPIRATION STOCK PRICE APPRECIATION
NAME OPTIONS GRANTED IN FISCAL YEAR PRICE DATE FOR OPTION TERM
---- ---------------- -------------------- -------- ---------- ---------------------------
5% 10%
-- ---
Bernard Berk 30,000 3.1% $2.75 8/30/2015 $39,300 $111,200
600,000 61.9% $2.69 9/02/2015 $822,000 $2,262,000
Atul M. Mehta --- --- --- --- --- ---
Chris Dick 40,000 4.1% $2.80 7/14/2015 $50,400 $146,400
Charan Behl --- --- --- --- --- ---
Mark Gittelman 20,000 2.1% $2.80 7/14/2015 $25,200 $73,200
No options were exercised by executive officers during the fiscal years
ended March 31, 2005 and 2006.
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
NAME OPTIONS AT MARCH 31, 2006 OPTIONS AT MARCH 31, 2006 (1)
---- --------------------------------------- ---------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Atul M. Mehta (2) 170,000 -0- $25,500 -0-
100,000 -0- -0- -0-
100,000 -0- -0- -0-
100,000 -0- $49,000 -0-
100,000 -0- $99,000 -0-
37
Bernard Berk (3) 300,000 -0- $144,000 -0-
225,000 -0- $76,500 -0-
30,000 -0- $45,000 -0-
-0- 30,000 -0- -0-
-0- 600,000 -0- -0-
Chris Dick 30,000 -0- $4,500 -0-
30,000 10,000 $5,600 $2,800
30,000 -0- -0- -0-
Mark Gittelman 10,000 20,000 -0- -0-
Chran Behl -0- -0- -0- -0-
-------------------
(1) The dollar values are calculated by determining the difference between
$2.49 per share, the fair market value of the Common Stock at March 31,
2006, 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.
COMPENSATION OF DIRECTORS
Each non-affiliated director receives a fee of $2,000 for each meeting
attended.
Mr. John A. Moore for the period from January 1, 2004 through May 12,
2004, when he resigned, while he was Chairman of the Board received $46,875 as
compensation for the substantial duties the Board assigned to him, principally
to assist the Chief Executive Officer in the management of the Company's
operations, and the time required to perform such duties.
OPTIONS AND WARRANTS
In October 2003, the American Stock Exchange (the "Amex") amended its
Rules to require stockholder approval of material amendments to a stock option
plan or other equity compensation arrangements pursuant to which options or
stock may be acquired by officers, director or employees, subject to certain
limited exceptions.
Our stockholders approved at its meeting held on June 22, 2004 the
following amendments by our Board of Directors of the provisions of outstanding
options and warrants issued to officers, directors or employees of, or
consultants to, the Company.
On June 6, 2003 our Board of Directors reduced the exercise price of
options to purchase 30,000 shares of the Company's Common Stock granted on
January 31, 2003 to each of the following persons, each of whom was then a
Director: Messrs. Harmon Aronson, Richard A. Brown, John P. deNeufville, John A.
Moore, Donald S. Pearson and Eric L. Sichel from $6.50 to $2.21 per share, which
was 110% of the closing per share sale price of the Common Stock on the American
Stock Exchange on the date of the amendment. The options vested in equal 10,000
share installments on December 12, 2003, December 12, 2004 and December 12, 2005
and expire at the earlier of: (1) January 31, 2013; or (2) the date one year
after the optionee ceases to be a director of or a consultant or advisor of the
Company. On February 6, 2004, the Board of Directors authorized a further
amendment to all the options held by Messrs. Brown
38
(30,000 shares), deNeufville (55,000 shares) and Pearson (90,000 shares) to
extend their expiration date to a date two years following the June 22, 2004
Annual Meeting.
On March 8, 2004 our Board of Directors amended those options held by
then Directors which contained an exercise price greater than $2.21 to reduce
their exercise price to $2.21 per share as follows:
Shares Subject Date of Original Expiration
Name To Amended Options Grant Exercise Price Date
---- ------------------ ------- -------------- ----------
Donald Pearson 30,000 7/1/99 $6.00 6/22/06
30,000 1/2/01 $6.50 6/22/06
Harmon Aronson 30,000 7/1/99 $6.00 9/1/09
30,000 1/2/01 $6.50 1/1/11
Eric Sichel 30,000 8/2/01 $10.00 8/2/11
On May 12, 2004 our Board of Directors also authorized an amendment to
the expiration dates of options to purchase 330,000 shares held by Mr. Moore, of
which 30,000 options granted in January 2003 and exercisable at $2.21 have an
expiration date of January 13, 2003 and 300,000 options granted in June 2003 and
exercisable at $2.01 per share have an expiration date of June 13, 2013. Similar
to the above amendment of the options held by Messrs Pearson, Aronson and
Sichel, the options terminate on the earlier of their current expiration date or
a date two years after Mr. Moore ceased to be a director of the Company (January
24, 2007).
On March 8, 2004, the Board of Directors confirmed the reduction to
$2.21 per share of the $3.31 per share exercise price of options of purchase
30,000 shares granted on June 13, 2003 to each of three employees. Such options
vest in three equal annual installments commencing with the date of grant.
The Board of Directors authorized the foregoing amendments for the
purposes of hopefully generating additional funds through the exercise of the
options or warrants, and restoring a principal purpose or purposes of the
original grants of the options or warrants to officers, directors and employees,
namely a reasonable opportunity for the holder to acquire or increase a
proprietary interest in the Company and to restore a meaningful form of noncash
compensation.
The outstanding Class B Warrants and C Warrants to purchase an
aggregate of 2,404,239 shares of our Common Stock at a price of $5.00 per share
expired on November 30, 2005. Included among the holders of the Class B Warrants
were Richard A. Brown, a Director at the time, who held, along with his son and
an affiliated trust, an aggregate of 156,250 Class B Warrants and Bridge
Ventures Inc., a consultant to the Company since December 2003, which held
25,000 Class B Warrants.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding
beneficial ownership of our Common Stock as of the March 31, 2006 by (i) each
director and executive officer named under the Summary Compensation Table, (ii)
all executive officers and current directors as a group and (iii) the persons
known to us to own beneficially more than 5% of the outstanding shares of our
Common Stock. On such date, we had 19,190,159 shares of Common Stock
outstanding. (The 10,000 shares of Series B Preferred Stock outstanding are
nonvoting and none of the individuals listed below beneficially owns any shares
of Series B Preferred Stock). Shares not outstanding but deemed beneficially
owned by virtue of
39
the right of any individual to acquire shares within 60 days of the foregoing
date are treated as outstanding only in determining the amount and percentage of
Common Stock 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.
Name and Address Common Stock
Amount %
Bernard Berk 1,352,300(1) 7.04
Director and Chief Executive Officer
Edward Neugeboren 221,063(2) 1.15
Director
Barry Dash, Ph.D 30,000(3) **
Director
Dr. Melvin Van Woert 30,000(3) **
Director
Dr. Charan Behl 546,000(4) 2.77
Executive Vice President and Chief Scientific
Officer
Chris Dick 135,377(5) **
Executive Vice President of Corporate
Development
Mark I. Gittelman 100,000(3) **
Chief Financial Officer, Treasurer and
Secretary
Dr. Atul Mehta 570,000(3) 2.89
c/o Katten Muchin Zavis Rosenman
575 Madison Avenue
New York, NY 10022
Trellus Management Company, LLC 996,400(6) 5.5%
Adam Usdan
350 Madison Avenue, 9th Floor
New York, New York 10017
Mark Fain 1,145,333(7) 5.9%
237 Park Avenue, Suite 900
New York, NY 10017
Chad Comiteau 1,151,765(8) 5.9%
237 Park Avenue, Suite 900
New York, NY 10017
All Directors and Officers as a group (12) 2,984,740(9) 13.07
-------------------------
* See "Election of Directors - Board of Directors Nominees" for his
address.
40
** Less than 1%
(1) Includes options to purchase 1,185,000 shares. See "Executive Officers"
(2) Includes options and warrants to purchase an aggregate of 190,571
shares.
(3) Represents options.
(4) Includes warrants to purchase 130,000 shares.
(5) Includes options to purchase 100,000 shares of Common Stock and
warrants held by Mr. Dick and Hedy Rogers as joint tenants to purchase
10,569 shares of Common Stock.
(6) Based on information in the Schedule 13G filed February 15, 2006 of
Trellus Management Company and Adam Usdan who share voting and
dispositve power.
(7) Based on information provided by Mark Fain and Chad Comiteau in their
Schedule 13G filed May 17, 2006. Includes (i) 33,333 convertible shares
beneficially owned by Mr. Fain over which he has sole voting power and
sole dispositive power, (ii) 33,000 shares beneficially owned by
Stratford Management Money Purchase Pension Plan over which Messrs.
Fain and Comiteau have shared voting power and shared dispositive
power, and (iii) 750,000 shares and 150,000 convertible shares
beneficially owned by Stratford Partners, L.P. of which Messrs. Fain
and Comiteau are Managing Members, and over which they have shared
voting power and shared dispositive power.
(8) Based on information provided by Mark Fain and Chad Comiteau in their
Schedule 13G filed May 17, 2006. Includes (i) 32,655 convertible shares
beneficially owned by Mr. Comiteau over which he has sole voting power
and sole dispositive power, and (ii) the shares and convertible shares
described in footnote 7 which are beneficially owned by Stratford
Management Money Purchase Pension Plan and Stratford Partners, L.P.
over which Messrs. Fain and Comiteau have shared voting power and
shared dispositive power.
(9) Includes options and warrants to purchase an aggregate of 2,246,140
shares.
Except as otherwise set forth, information on the stock ownership of
each person was provided to the Company by such person.
Other than our 2004 Stock Option Plan, we do 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We entered into a placement agent agreement with Indigo Securities LLC
in March 2006 for Indigo to provide financial advisory services and act as a
placement agent in to us in connection with the Company's private placement
transactions which occurred during the fiscal year ended March 31, 2006. This
agreement superceded all prior agreements with us. In December 2005, Indigo
received $76,418 cash compensation and placement agent warrants to purchase
25,473 shares of common stock in connection with acting as the placement agent
for the warrant exchange offer. In March 2006, Indigo received $800,000 cash
compensation and placement agent warrants to purchase 355,555 shares of common
stock in connection with acting as placement agent for the offering of our
Series B Preferred Stock. Edward Neugeboren, one of our directors, is an
employee of Indigo Securities, LLC.
See "Item 10 - Directors and Executive Officers of Registrant" for
information as to employment or engagement agreements with Bernard Berk, Chris
Dick, Charan Behl and an affiliate of Mark I. Gittelman.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table presents fees, including reimbursements for
expenses, for professional audit services rendered by Miller Ellin & Company,
LP. ("Miller Ellin") for the audits of our annual financial
41
statements and interim reviews of our quarterly financial statements for the
years ended March 31, 2006 and March 31, 2005 and fees billed for other services
rendered by Miller Ellin during those periods.
FISCAL 2006 FISCAL 2005
Audit fees (1) $ 69,923 $ 127,561
Audit-Related fees (2) $ -- $ --
Tax fees (3) $ -- $ --
All other fees (4) $ -- $ --
Total $ 69,923 $ 127,561
====== =======
-------------------
(1) Audit fees consist of fees billed for professional services rendered
for the audit of the Company's consolidated annual financial statements
and review of the interim consolidated financial statements included in
quarterly reports and services that are normally provided by Miller
Ellin. in connection with statutory and regulatory filings or
engagements.
(2) Audit-Related fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or
review of the Company's consolidated financial statements and are not
reported under "Audit Fees."
(3) Tax fees consist of fees billed for professional services rendered for
tax compliance, tax advice and tax planning.
(4) All other fees consist of fees for services other than the services
reported above.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES.
(a) Documents filed as part of this Report
(1) The financial statements listed in the Index to Consolidated
Financial Statements are filed as part of this report
(2) The financial statements listed in the Index are filed a part
of this report.
(3) List of Exhibits
See Index to Exhibits in paragraph (b) below.
The Exhibits are filed with or incorporated by reference in this
report.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K.
42
EXHIBIT NO. DESCRIPTION
3.1(a) Certificate of incorporation of the Company, together with all
other amendments thereto, as filed with the Secretary of State of
the State of Delaware, incorporated by reference to (a) Exhibit
4.1 to the Registration Statement on Form S-4 (Reg. No.
333-101686), filed with the SEC on December 6, 2002 (the "Form
S-4") and (b) Exhibit 4.1 to the Company's Report on Form 8-K
dated July 28, 2004.
3.1(b) Certificate of Designations, Preferences and Rights of Series A
Preferred Stock, as filed with the Secretary of the State of
Delaware, incorporated by reference to Exhibit 4.5 to the Form 8-K
dated October 6, 2004, and filed with the SEC on October 12, 2004.
3.1(c) Certificate of Retirement with the Secretary of the State of the
Delaware to retire 516,558 shares of the Series A Preferred Stock,
as filed with the Secretary of State of Delaware, incorporated by
reference to Exhibit 3.1 to the Form 8-K dated March 10, 2006, and
filed with the SEC on March 14, 2006.
3.1(d) Certificate of Designations, Preferences and Rights of Series B 8%
Convertible Preferred Stock, as filed with the Secretary of the
State of Delaware, incorporated by reference to Exhibit 3.1 to the
Form 8-K dated March 15, 2006, and filed with the SEC on March 16,
2006.
3.2 By-Laws of the Company, as amended, incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form SB-2
(Reg. No. 333-90633) made effective on February 28, 2000 (the
"Form SB-2").
4.1 Form of specimen certificate for Common Stock of the Company,
incorporated by reference to Exhibit 4.1 to the Form SB-2.
4.2 Form of specimen certificate for Series A 8% Convertible Preferred
Stock of the Company, incorporated by reference to Exhibit 4.5 to
the Form 8-K, dated October 6, 2004, and filed with the SEC on
October 12, 2004.
4.3 Form of specimen certificate for Series B 8% Convertible Preferred
Stock of the Company, incorporated by reference to Exhibit 4.1 to
the Form 8-K, dated March 15, 2006 and filed with the SEC on March
16, 2006
4.4 Warrant to purchase 100,000 shares of Common Stock issued to DH
Blair Investment Banking Corp., incorporated by reference to
Exhibit 10.2 to the Form 10-Q for the period ended September 30,
2004.
4.5 Warrant to purchase 50,000 shares of Common Stock issued to Jason
Lyons incorporated by reference to Exhibit 10.3 to the Form 10-Q
for the period ended June 30, 2004.
4.6 Form of Warrant to purchase shares of Common Stock issued to
designees of lender with respect to financing of an equipment loan
incorporated by reference to Exhibit 10.2 to the Form 10-Q for the
period ended June 30, 2004.
4.7 Form of Short Term Warrant to purchase shares of Common Stock
issued to purchasers in the private placement which initially
closed on October 6, 2004 (the "Series A Financing"), incorporated
by reference to Exhibit 4.6 to the Form 8-K, dated October 6,
2004, and filed with the SEC on October 12, 2004.
43
4.8 Form of Long Term Warrant to purchase shares of Common Stock
issued to purchasers in the Series A Financing, incorporated by
reference to Exhibit 4.7 to the Form 8-K, dated October 6, 2004,
and filed with the SEC on October 12, 2004.
4.9 Form of Warrant to purchase shares of Common Stock issued to the
Placement Agent, in connection with the Series A Financing,
incorporated by reference to Exhibit 4.8 to the Form 8-K, dated
October 6, 2004, and filed with the SEC on October 12, 2004.
4.10 Form of Replacement Warrant to purchase shares of Common Stock in
connection with the offer to holders of Warrants in the Series A
Financing (the "Warrant Exchange"), incorporated by reference as
Exhibit 4.1 to the Form 8-K, dated December 14, 2005, and filed
with the SEC on December 20, 2005.
4.11 Form of Warrant to purchase shares of Common Stock to the
Placement Agent, in connection with the Warrant Exchange, "),
incorporated by reference as Exhibit 4.2 to the Form 8-K, dated
December 14, 2005, and filed with the SEC on December 20, 2005.
4.12 Form of Warrant to purchase shares of Common Stock issued to
purchasers in the private placement which closed on March 15, 2006
(the "Series B Financing"), incorporated by reference to Exhibit
4.2 to the Form 8-K, dated March 15, 2006 and filed with the SEC
on March 16, 2006.
4.13 Form of Warrant to purchase shares of Common Stock issued to
purchasers in the Series B Financing, incorporated by reference to
Exhibit 4.3 to the Form 8-K, dated March 15, 2006 and filed with
the SEC on March 16, 2006.
4.14 Form of Warrant to purchase shares of Common Stock issued to the
Placement Agent, in connection with the Series B Financing,
incorporated by reference to Exhibit 4.4 to the Form 8-K, dated
March 15, 2006 and filed with the SEC on March 16, 2006
10.1 2004 Employee Stock Option Plan approved by stockholders on June
22, 2004, incorporated by reference to Exhibit A to the Proxy
Statement filed on Schedule 14A with respect to the Annual Meeting
of Stockholders held on June 22, 2004.
10.2 Form of Confidentiality Agreement (corporate), incorporated by
reference to Exhibit 10.7 to the Form SB-2.
10.3 Form of Confidentiality Agreement (employee), incorporated by
reference to Exhibit 10.8 to the Form SB-2.
10.4 Amended and Restated Employment Agreement dated as of September 2,
2005 between Bernard Berk and the Company, incorporated by
reference to Exhibit 10.1 to Form 8-K, dated September 2, 2005,
and filed with the SEC on September 9, 2005.
10.5 Option Agreement between Bernard Berk and the Company dated as of
July 23, 2003 incorporated by reference to Exhibit 10.7 to the
Report on Form 10-Q for three months ended June 30, 2003 (the
"June 30, 2003 10Q Report").
44
10.6 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.
10.7 Amendment, dated as of September 2, 2005, by and between, the
Company and Bernard Berk, to the Stock Option Agreement, dated as
of July 23, 2003, incorporated by reference to Exhibit 10.2 to
Form 8-K, dated September 2, 2005, and filed with the SEC on
September 9, 2005.
10.8 Stock Option Agreement, dated as of September 2, 2005, by and
between the Company and Bernard Berk, incorporated by reference to
Exhibit 10.3 to Form 8-K, dated September 2, 2005, and filed with
the SEC on September 9, 2005.
10.9 Stock Option Agreement, dated as of September 2, 2005, by and
between the Company and Bernard Berk, incorporated by reference to
Exhibit 10.4 to Form 8-K, dated September 2, 2005, and filed with
the SEC on September 9, 2005.
10.10 Engagement letter dated February 26, 1998, between Gittelman & Co.
P.C. and the Company incorporated by reference to Exhibit 10.10 to
the Form 10-K for the period ended March 31, 2004 filed with the
SEC on June 29, 2004.
10.11 Product Development Manufacturing and Distribution Agreement,
dated as of March 30, 2005, by and among Elite Laboratories, Inc.,
a Delaware corporation and wholly-owned subsidiary of the Company
("Elite Labs"), Harris Pharmaceuticals, Inc. and Tish Technologies
LLC, incorporated by reference as Exhibit 10.1 to the Form 8-K,
dated March 30, 2005, originally filed with the SEC on April 5,
2005, as amended on the Form 8-K/A filed May 10, 2005, as further
amended by the Form 8-K/A filed June 13, 2005, as further amended
by the Form 8-K/A filed July 20, 2005, as further amended by the
Form 8-K/A filed August 23, 2005, as further amended by the Form
8-K/A filed September 27, 2005, as further amended by the Form
8-K/A filed December 7, 2005 (Confidential Treatment granted with
respect to portions of the Agreement).
10.12 Product Development and Commercialization Agreement, dated as of
June 21, 2005, between the Company and IntelliPharmaceutics,
Corp., incorporated by reference as Exhibit 10.1 to the Form 8-K,
dated June 21, 2005 and originally filed with the SEC on June 27,
2005, as amended on the Form 8-K/A filed September 7, 2005, as
further amended by the Form 8-K/A filed December 7, 2005
(Confidential Treatment granted with respect to portions of the
Agreement).
10.13 Product Development and License Agreement, dated as of June 22,
2005, between the Company and Pliva, Inc., incorporated by
reference as Exhibit 10.1 to the Form 8-K, dated June 22, 2005 and
originally filed with the SEC on June 28, 2005, as amended on the
Form 8-K/A filed September 6, 2005, as further amended by the Form
8-K/A filed December 7, 2005 (Confidential Treatment granted with
respect to portions of the Agreement).
10.14 Agreement, dated December 12, 2005, by and among the Company,
Elite Labs, and IntelliPharmaCeutics Corp., incorporated by
reference as Exhibit 10.1 to the Form 8-K, dated
45
December 12, 2005, and originally filed with the SEC on December
16, 2005, as amended by the Form 8-K/A filed March 7, 2006
(Confidential Treatment granted with respect to portions of the
Agreement).
10.15 Product Development and Commercialization Agreement, dated January
10, 2006, by and among the Company, Elite Laboratories, Inc., its
wholly-owned subsidiary and Orit Laboratories LLC, incorporated by
reference as Exhibit 10.1 to the Form 8-K, dated January 10, 2006,
and filed with the SEC on January 17, 2006. (Confidential
Treatment granted with respect to portions of the Agreement).
10.16 Loan Agreement, dated as of August 15, 2005, between New Jersey
Economic Development Authority ("NJEDA") and the Company,
incorporated by reference to Exhibit 10.1 to the Form 8-K, dated
August 31, 2005 and filed with the SEC on September 6, 2005.
10.17 Series A Note in the aggregate principal amount of $3,660,000.00
payable to the order of the NJEDA, incorporated by reference to
Exhibit 10.2 to the Form 8-K, dated August 31, 2005 and filed with
the SEC on September 6, 2005.
10.18 Series B Note in the aggregate principal amount of $495,000.00
payable to the order of the NJEDA, incorporated by reference to
Exhibit 10.3 to the Form 8-K, dated August 31, 2005 and filed with
the SEC on September 6, 2005.
10.19 Mortgage from the Company to the NJEDA, incorporated by reference
to Exhibit 10.4 to the Form 8-K, dated August 31, 2005 and filed
with the SEC on September 6, 2005.
10.20 Indenture between NJEDA and the Bank of New York as Trustee, dated
as of August 15,2005, incorporated by reference to Exhibit 10.5 to
the Form 8-K, dated August 31, 2005 and filed with the SEC on
September 6, 2005.
10.21 Form of Warrant Exercise Agreement, between the Registrant and the
signatories thereto, incorporated by reference to Exhibit 10.1 to
the Form 8-K, dated December 14, 2005 and filed with the SEC on
December 20, 2005
10.22 Form of Registration Rights Agreement, between the Registrant and
signatories thereto, incorporated by reference to Exhibit 10.2 to
the Form 8-K, dated December 14, 2005 and filed with the SEC on
December 20, 2005.
10.23 Form of Securities Purchase Agreement, between the Registrant and
the signatories thereto, incorporated by reference to Exhibit 10.1
to the Form 8-K, dated March 15, 2006 and filed with the SEC on
March 16, 2006.
10.24 Form of Registration Rights Agreement, between the Registrant and
the signatories thereto, incorporated by reference to Exhibit 10.1
to the Form 8-K, dated March 15, 2006 and filed with the SEC on
March 16, 2006.
10.21 Form of Placement Agent Agreement, the Company and Indigo
Securities, LLC, incorporated by reference as Exhibit 10.3 to the
Form 8-K dated March 15, 2006, and filed with the SEC on March 16,
2006.
46
21 Subsidiaries of the Company.*
31.1* Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002*
31.2* Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002*
32.1** Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
32.2** Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
----------------------
* Filed herewith
** As contemplated by SEC Release No. 33-8212, these exhibits are furnished
with this Annual Report on Form 10-K and are not deemed filed with the
Securities and Exchange Commission and are not incorporated by reference in any
filing of Elite Pharmaceuticals, Inc. under the Securities Act of 1933 or the
Securities Exchange Act of 1934, whether made before or after the date hereof
and irrespective of any general incorporation language in any such filings.
(c) Financial statements required by Regulation S-X which are excluded from
the annual report to shareholders by Rule 14a-3(b).
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ELITE PHARMACEUTICALS, INC.
By: /s/ Bernard Berk
-------------------------------
Bernard Berk
Chief Executive Officer
Dated: June 29, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Bernard Berk Chief Executive Officer June 29, 2006
-------------------------- (Principal Executive
Bernard Berk Officer)
/s/ Mark Gittelman Chief Financial Officer June 29, 2006
-------------------------- and Treasurer (Principal
Mark I. Gittelman Financial and Accounting
Officer)
/s/ Edward Neugeboren Director June 29, 2006
--------------------------
Edward Neugeboren
/s/ Barry Dash Director June 29, 2006
--------------------------
Barry Dash
/s/ Melvin Van Woert Director June 29, 2006
--------------------------
Melvin Van Woert
48
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2006, 2005 AND 2004
CONTENTS
PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 2
CONSOLIDATED BALANCE SHEETS F - 3
CONSOLIDATED STATEMENTS OF OPERATIONS F - 5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F - 6
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 10
F-1
REPORT OF INDEPENDENT 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, 2006 and
2005, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended March 31, 2006, 2005 and 2004. 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, 2006 and 2005, and the
results of their operations and their cash flows for each of the three years
ended March 31, 2006, 2005 and 2004 in conformity with accounting principles
generally accepted in the United States of America.
/s/ MILLER, ELLIN & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
June 5, 2006
F-2
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND 2005
ASSETS
2006 2005
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 8,919,354 $ 3,902,003
Accounts receivable, net of allowance for doubtful accounts of
$153,250 as of March 31, 2006 and 2005 --- 142,113
Current portion of restricted cash - capital project fund 1,173,896 113,425
Prepaid expenses and other current assets 470,633 346,905
------------ ------------
Total current assets 10,563,883 4,504,446
PROPERTY AND EQUIPMENT- net of accumulated
depreciation and amortization 4,308,969 4,194,437
INTANGIBLE ASSETS - net of accumulated amortization 59,457 81,184
OTHER ASSETS:
Deferred charges --- 41,013
Security deposit 6,980 ---
Restricted cash - debt service 415,500 300,000
EDA bond offering costs, net of accumulated
amortization of $7,000 and $73,468, respectively. 347,452 124,212
------------ ------------
Total other assets 769,932 465,225
------------ ------------
TOTAL ASSETS $ 15,702,241 $ 9,245,292
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND 2005
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
2006 2005
---- ----
CURRENT LIABILITIES:
Current portion - note payable $ --- $ 127,946
Current portion of EDA bonds 175,000 165,000
Accounts payable and accrued expenses 1,740,263
882,917
Dividends payable 33,333 ---
------------ ------------
Total current liabilities 1,948,596 1,175,863
------------ ------------
LONG TERM DEBT:
Note payable - net of current portion --- 187,128
EDA bonds - net of current portion 3,980,000 2,180,000
------------ ------------
Total long-term liabilities 3,980,000 2,367,128
------------ ------------
Total liabilities 5,928,596 3,542,991
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value;
Authorized - 4,483,442 (originally 5,000,000 shares of which 516,558
shares of Series A Preferred retired) and 0 shares at March 31, 2006
and 2005, respectively Authorized - 10,000 Convertible Series B
Preferred Stock - issued and outstanding - 10,000 shares and 0
shares, respectively 100 ---
Common Stock - $.01 par value;
Authorized - 65,000,000 and 25,000,000
shares, respectively
Issued and outstanding - 19,190,159 and 18,022,183
shares in 2006 and 2005, respectively 191,902 180,222
Additional paid-in capital 60,105,107 47,006,379
Accumulated deficit (50,216,623) (41,177,459)
----------- ------------
10,080,486 6,009,142
Treasury stock, at cost (100,000 shares) (306,841) (306,841)
------------ ------------
Total stockholders' equity 9,773,645 5,702,301
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,702,241 $ 9,245,292
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31,
-------------------------------------------------
2006 2005 2004
---- ---- ----
REVENUES:
Licensing fees $ --- $ 150,000 $ ---
Manufacturing fees 494,231 125,739 ---
Royalties 56,466 24,291 ---
Research and development --- --- 258,250
Consulting and test fees --- 1,450 ---
----------- ----------- -----------
Total revenues 550,697 301,480 258,250
----------- ----------- -----------
COST OF OPERATIONS:
Research and development 4,343,890 2,698,641 2,075,074
General and administrative 1,726,626 2,159,670 2,549,846
Depreciation and amortization 486,687 356,438 332,836
----------- ----------- -----------
6,557,203 5,214,749 4,957,756
----------- ----------- -----------
LOSS FROM OPERATIONS (6,006,506) (4,913,269) (4,699,506)
----------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest income 90,862 39,932 23,765
Litigation settlement --- --- 150,000
Sale of New Jersey tax losses 219,121 205,792 151,027
Interest expense (283,464) (229,495) (211,595)
Compensation satisfied by issuance of
stock options and warrants (902,927) (1,008,850) (1,754,584)
Expenses relating to warrant exchange offer --- --- (172,324)
----------- ----------- -----------
(876,408) (992,621) (1,813,711)
----------- ----------- -----------
LOSS BEFORE PROVISION FOR INCOME
TAXES (6,882,914) (5,905,890) (6,513,217)
PROVISION FOR INCOME TAXES
1,000 1,000 1,000
----------- ----------- -----------
NET LOSS (6,883,914) (5,906,890) (6,514,217)
Preferred Stock Dividends (2,155,250) (165,418) ---
----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $(9,039,164) $(6,072,308) $(6,514,217)
=========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (.49) $ (0.47) $ (0.58)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 18,463,514 12,869,924 11,168,618
=========== =========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
--------------- ------------ PAID-IN -------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY
------ ------ ------ ------ ---------- ------ ------ ------- ------
BALANCES AT
APRIL 1, 2003 --- $ --- 10,544,423 $ 105,444 $ 34,218,832 (100,000) $(306,841) $(28,590,934) $5,426,501
Expenses relating
to modification
of warrant
exchange offer --- --- --- --- 172,324 --- --- --- 172,324
Non-cash compensation
satisfied by the
issuance of stock,
options and warrants --- --- --- --- 1,754,584 --- --- --- 1,754,584
Exercise of 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 --- --- --- --- --- --- --- (6,514,217) (6,514,217)
----- ------ ---------- ---------- ------------ --------- ---------- ------------- ----------
BALANCES AT MARCH 31, 2004 --- $ --- 12,204,423 $ 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-6
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
--------------- ------------ PAID-IN -------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY
------ ------ ------ ------ ---------- ------ ------ ------- ------
BALANCES AT
APRIL 1, 2004 --- $ --- 12,204,423 $ 122,044 $ 39,338,140 (100,000) $(306,841) $ (35,105,151) $4,048,192
Net proceeds from
issuance of Series A
8% Convertible
Preferred Stock
and warrants 516,558 5,166 --- --- 5,786,436 --- --- --- 5,791,602
Issuance of Common
Stock for
consulting services --- --- 26,500 265 58,035 --- --- --- 58,300
Issuance of Common
Stock upon conversion
of Series A 8%
Convertible Preferred
Stock (516,558) (5,166) 5,165,580 51,656 (46,490) --- --- --- ---
Non-cash compensation
satisfied by
the issuance of
stock, options
and warrants 1,008,850 1,008,850
Common Stock issued as
dividend on
Series A 8%
Convertible Preferred
Stock --- --- 99,936 1,000 164,418 --- --- (165,418) ---
Exercise of stock
options and
warrants --- --- 525,744 5,257 579,250 --- --- --- 584,507
Proceeds - Short
swing profits --- --- --- --- 117,740 --- --- --- 117,740
Net loss --- --- --- --- --- --- --- (5,906,890) (5,906,890)
----- -------- ---------- --------- ------------ --------- ---------- ------------- ----------
BALANCES AT
MARCH 31, 2005 --- $ --- 18,022,183 $ 180,222 $ 47,006,379 (100,000) $(306,841) $(41,177,459) $5,702,301
===== ======== ========== ========= ============ ========= ========== ============= ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
--------------- ------------ PAID-IN -------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY
------ ------ ------ ------ ---------- ------ ------ ------- ------
BALANCES AT
APRIL 1, 2005 --- $ --- 18,022,183 $ 180,222 $ 47,006,379 (100,000) $(306,841) $(41,177,459) $5,702,301
Net proceeds from
issuance of
Series B 8%
Convertible
Preferred Stock
and warrants 10,000 $ 100 --- --- 8,792,569 --- --- --- 8,792,669
Non-cash compensation
satisfied by
the issuance of
stock, options
and warrants --- --- --- --- 902,927 902,927
Exercise of stock
options --- --- 20,000 200 39,800 --- --- --- 40,000
Exercise of stock
warrants --- --- 1,147,976 11,480 1,241,515 --- --- --- 1,252,995
Net loss --- --- --- --- --- --- --- (6,883,914) (6,883,914)
Dividends --- --- --- --- 2,121,917 --- --- (2,155,250) (33,333)
------ ------- ---------- ----------- ------------ --------- ---------- ------------- ----------
BALANCES AT
MARCH 31, 2006 10,000 $ 100 19,190,159 $ 191,902 $ 60,105,107 (100,000) $(306,841) $(50,216,623) $9,773,645
====== ======= ========== =========== ============ ========= ========== ============= ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F-8
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
---------------------------------------------
2006 2005 2004
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,883,914) $(5,906,890) $(6,514,217)
Adjustments to reconcile net loss to cash
used in operating activities:
Provision for doubtful accounts --- 153,250 ---
Depreciation and amortization 486,687 356,438 332,836
Non-cash compensation satisfied by issuance of stock,
options and warrants 902,927 1,067,150 1,926,908
Changes in assets and liabilities:
Accounts receivable 142,113 (142,113) (148,569)
Prepaid expenses and other current assets (123,728) (209,013) (5,800)
Security Deposit (6,980) --- ---
Accounts payable, accrued expenses and other current 857,346 (202,325) 750,521
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (4,625,549) (4,883,503) (3,658,321)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of patent --- --- (16,696)
Deposits to restricted cash (1,175,971) --- (79,615)
Release of restricted cash --- 315,570 ---
Payment of deposit for manufacturing equipment --- --- (398,580)
Purchases of property and equipment (448,280) (27,843) ---
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,624,251) 287,727 (494,891)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal bank note payments --- (225,000) (75,000)
Proceeds from issuance of Common Stock and warrants --- --- 3,209,000
Principal repayments of NJEDA bonds (2,345,000) (150,000) (140,000)
Proceeds from issuance of Series A 8% Convertible Preferred
stock and warrants --- 5,791,602 ---
Proceeds from equipment loan --- 400,000 ---
Proceeds - NJEDA Tax Exempt Bonds 4,155,000 --- ---
Payment - NJEDA Bond Offering Costs (354,452) --- ---
Proceeds from issuance of Series B 8% Convertible Preferred
stock and warrants 8,792,669 --- ---
Principal equipment note payments (315,074) (84,926) ---
Prepaid interest 41,013 (41,013) ---
Proceeds from exercise of stock options 40,000 100,000 ---
Proceeds from exercise of stock warrants 1,252,995 484,507 ---
Proceeds from short swing profits --- 117,740 ---
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,267,151 6,392,910 2,994,000
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,017,351 1,797,134 (1,159,212)
CASH AND CASH EQUIVALENTS - beginning of period 3,902,003 2,104,869 3,264,081
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 8,919,354 $ 3,902,003 $ 2,104,869
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 275,071 $ 230,464 $ 214,199
Cash received for income taxes (218,121) (204,792) (150,027)
SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Preferred Stock dividends of $120,675 paid by issuance of
64,033 shares of Common Stock $ --- $ 165,418 $ ---
Utilization of equipment deposit towards purchase of equipment --- 398,580 ---
Dividends accrued on preferred stock 33,333 --- ---
Beneficial conversion 2,121,917 --- ---
The accompanying notes are an integral part of the
consolidated financial statements.
F-9
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
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.
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. Elite Labs engages primarily in researching,
developing and licensing proprietary controlled release drug
delivery systems and products. The Company is also equipped to
manufacture controlled release products on a contract basis for
third parties and itself if and when the products are approved;
however the Company has recently concentrated on developing
orally administered controlled release products. These products
include drugs that cover therapeutic areas for pain, angina,
hypertension, allergy and infection. The Company also engages 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.
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.
LONG-LIVED ASSETS
The Company periodically evaluates the fair value of long-lived
assets, which include property and equipment and intangibles,
whenever events or changes in circumstances indicate that its
carrying amounts may not be recoverable. Such conditions may
include an economic downturn or a change in the assessment of
future operations. A charge for impairment is recognized whenever
the carrying amount of a long-lived asset exceeds its fair value.
Management has determined that no impairment of long-lived assets
has occurred.
F-10
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS (CONTINUED)
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 recognized in income.
Costs incurred to acquire intangible assets such as 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. Such costs are charged to
expense if the patent or trademark is unsuccessful.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to expense as
incurred.
CONCENTRATION OF CREDIT RISK
The Company derives substantially all of its revenues from
licensing and research and development agreements with other
pharmaceutical companies.
The Company maintains cash balances, which, at times, may exceed
the amounts insured by the Federal Deposit Insurance Corp.
Management does not believe that there is any significant risk of
losses.
The Company in the normal course of business extends credit to
its customers based on contract terms and performs ongoing credit
evaluations. An allowance for doubtful accounts was established
based on historical collection experience and current credit
evaluations at March 31, 2006 and 2005, due to uncertainty of
collectibility. Amounts are written off when payment is not
received after exhaustive collection efforts.
F-11
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, the amount of the
allowance for doubtful accounts receivable and the fair value of
intangible assets and stock-based awards.
INCOME TAXES
The Company uses the liability method for reporting income taxes,
under which current and deferred tax liabilities and assets are
recorded in accordance with enacted tax laws and rates. Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Under the liability method, the amounts of deferred tax
liabilities and assets at the end of each period are determined
using the tax rate expected to be in effect when taxes are
actually paid or recovered. Further tax benefits are recognized
when it is more likely than not that such benefits will be
realized. Valuation allowances are provided to reduce deferred
tax assets to the amount considered likely to be realized.
EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net
earnings by the weighted average number of shares outstanding
during each period presented. Diluted earnings per share is
calculated by dividing earnings by the weighted average number of
shares and common stock equivalents. The Company's common stock
equivalents, consist of options, warrants and convertible
securities.
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 have 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.
F-12
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
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.
Revenues derived from royalties to the extent that they cannot be
reasonably estimated are recognized when the payment is received.
Revenues earned under manufacturing agreements with other
pharmaceutical companies are recognized when product is shipped.
TREASURY STOCK
The Company records common shares purchased and held in treasury
at cost.
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 2004 and 2005 financial
statements have been reclassified in order to conform with the
2006 presentation. These reclassifications have no effect on net
income.
F-13
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS
The Company reported net losses of $6,883,914, $5,906,890 and
$6,514,217 for the fiscal years ended March 31, 2006, 2005 and
2004, respectively. At March 31, 2006, the Company had an
accumulated deficit of approximately $48.1 million, consolidated
assets of approximately $15.7 million, stockholders' equity of
approximately $9.8 million, and working capital of approximately
$8.6 million. The Company has not generated any significant
revenue to date. During 2006, the Company raised $8,792,669 of
net proceeds from the sale of Series B Preferred Stock.
Management plans to use these net proceeds over the next twelve
to twenty-four months to fund its research and development
activities.
The Company's strategy is to continue to be engaged in the
development and manufacturing of oral controlled-release
products. It will continue to develop generic versions of
controlled release drug products with high barriers to entry and
assist partner companies in the life cycle management of
products to improve off patent drug products. The Company has
one product currently being sold commercially and a pipeline of
eight products under development.
The Company retained an investment banking firm to 2006 to
assist the Company in connection with potential acquisitions,
strategic alliances with other pharmaceutical companies, advice
to future financings and introductions to key parties in capital
markets.
As of March 31, 2006, the Company's principal source of
liquidity was approximately $8,900,000 of cash and cash
equivalents. The Company may also receive funds through the
exercise of outstanding stock options and warrants in addition
to funds that may be generated from the potential sale of New
Jersey tax losses. There can be no assurance that proceeds from
the sale of the tax losses and from the exercise, if any, of
outstanding warrants or options will be material.
There is no assurance that the Company's business strategy will
be successfully implemented, however with the Company's existing
working capital levels, it will be able to continue operations
at least through the end of fiscal 2007.
See "Note 8 - Stockholders Equity (Deficit)" for description of
Series B Convertible Preferred Stock.
F-14
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 3- PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2006 and 2005 consists of the
following:
2006 2005
---- ----
Laboratory manufacturing, and warehouse equipment $3,763,163 $3,566,674
Office equipment 32,981 32,981
Furniture and fixtures 51,781 51,781
Land, building and improvements 2,349,459 2,097,668
Equipment under capital lease 168,179 168,179
---------- ----------
6,365,563 5,917,283
Less: Accumulated depreciation and amortization 2,056,594 1,722,846
---------- ----------
$4,308,969 $4,194,437
========== ==========
Depreciation and amortization expense amounted to $333,748,
$300,303 and $278,348 for the years ended March 31, 2006, 2005
and 2004, respectively.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at March 31, 2006 and 2005, consist of the
following:
2006 2005
---- ----
Patents $ 145,830 $ 145,830
Trademarks 8,120 8,120
---------- ----------
153,950 153,950
Less: Accumulated amortization 94,493 72,766
---------- ----------
$ 59,457 $ 81,184
========== ==========
Amortization of intangible assets amounted to $21,727, $21,012
and $19,342 for the years ended March 31, 2006, 2005 and 2004,
respectively.
F-15
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 5 - LONG TERM DEBT
On September 2, 1999, the Company completed the issuance of tax
exempt bonds by the New Jersey Economic Development Authority
("NJEDA" or the "Authority"). The aggregate proceeds from the
issuance of the fifteen year term bonds was $3,000,000. Interest
on the bonds accrues at 7.75% per annum. A portion of the
proceeds were used by the Company to refinance its land and
building, and the remaining proceeds were intended to be used for
the purchase of manufacturing equipment and building
improvements.
On August 31, 2005, the Company successfully completed a
refinancing of the 1999 bond issue through the issuance of new
tax-exempt bonds (the "Bonds"). The refinancing involved
borrowing $4,155,000, evidenced by a 6.5% Series A Note in the
principal amount of $3,660,000 maturing on September 1, 2030 and
a 9% Series B Note in the principal amount of $495,000 maturing
on September 1, 2012. The net proceeds, after payment of issuance
costs, were or will be used (i) to redeem the outstanding
tax-exempt Bonds originally issued by the Authority on September
2, 1999, (ii) refinance other equipment financing and (iii) for
the purchase of certain equipment to be used in the manufacture
of pharmaceutical products.
Interest is payable semiannually on March 1 and September 1 of
each year. The Bonds are collateralized by a first lien on the
Company's facility and equipment acquired with the proceeds of
the original and refinanced Bonds. The related Indenture requires
the maintenance of a $415,500 Debt Service Reserve Fund
consisting of $366,000 from the Series A Notes proceeds and
$49,500 from the Series B Notes proceeds. The Debt Service
Reserve is maintained in restricted cash accounts that are
classified in Other Assets. $1,274,311 of the proceeds has been
deposited in a short-term restricted cash account to fund the
future purchase of manufacturing equipment and development of the
Company's facility.
Bond issue costs of $354,000 were paid from the bond proceeds and
are being amortized over the life of the bonds. Amortization of
bond financing costs amounted to $7,000 for the year ended March
31, 2006.
Bond issue costs of the 1999 bonds were being amortized over the
term of those bonds. Such amortization amounted to $5,500,
$13,190 and $13,190 in the years ending March 31, 2006, 2005 and
2004, respectively. Upon the refinancing the remaining
unamortized issue costs of $118,712 were charged to expenses.
F-16
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 5 - LONG TERM DEBT (CONTINUED)
As of March 31, 2006, $115,772 has been requisitioned and been
deposited into operating accounts to fund the purchase of
equipment and to upgrade and manufacturing facility.
Bond financings consisted of the following at March 31:
2006 2005
---- ----
Refinanced NJEDA Bonds $4,155,000 $ ---
EDA Bonds --- 2,345,000
---------- ----------
4,155,000 2,345,000
Current portion (175,000) (165,000)
---------- ----------
Long term portion, net of current maturities $3,980,000 $2,180,000
========== ==========
Maturities of Bonds for the next five years follow:
YEAR ENDING MARCH 31, AMOUNT
--------------------- ------
2007 $ 175,000
2008 185,000
2009 200,000
2010 210,000
2011 225,000
Thereafter 3,160,000
----------
$4,155,000
==========
In 2004, the Company entered into a loan and financing agreement
to purchase machinery and equipment. The $400,000 loan was
payable in 36 monthly installments of $13,671, each, including
principal and interest at 14% annum. As part of the agreement,
the Company issued to the lender's designees warrants to purchase
50,000 shares of the Company's Common Stock at $4.20 per share.
The warrants vested immediately and their cost of $41,252 was
charged to expense in the year ended March 31, 2005. Proceeds
from the refinancing of the Company's EDA Bonds were used to pay
off the unpaid portion of the loan.
F-17
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 6 - INCOME TAXES
The components of the provision for income taxes are as follows:
YEAR ENDED MARCH 31,
--------------------------------------
2006 2005 2004
---- ---- ----
Federal:
Current $ --- $ --- $ ---
Deferred --- --- ---
------ ------ ------
--- --- ---
------ ------ ------
State:
Current 1,000 1,000 1,000
Deferred --- --- ---
------ ------ ------
1,000 1,000 1,000
------ ------ ------
$1,000 $1,000 $1,000
====== ====== ======
During the years ended March 31, 2006, 2005 and 2004 the Company
received approval for the sale of an additional $2,798,478,
$2,628,257 and $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 benefits received during the year ended March 31, 2006,
2005 and 2004 were $219,121, $205,792 and $151,027, respectively
and are recorded as other income in the statements of operations.
The major components of deferred tax assets at March 31, 2006 and
2005 are as follows:
2006 2005
---- ----
Net operating loss carry forwards $ 10,785,800 $ 8,422,225
Valuation allowance (10,785,800) (8,422,225)
------------ -----------
$ --- $ ---
============ ===========
At March 31, 2006 and 2005, a 100% valuation allowance is
provided, as it is uncertain if the deferred tax assets will
provide any future benefits because of the uncertainty about the
Company's ability to generate the future taxable income necessary
to use the net operating loss carryforwards. The valuation
allowance increased during 2006, 2005 and 2004 by $2,363,575,
$1,685,889 and $2,250,169, respectively.
At March 31, 2006, for federal income tax purposes, the Company
has unused net operating loss carryforwards of approximately
$29,150,810 expiring in 2007 through 2025. For state tax
purposes, the Company has $11,018,094 of unused net operating
losses, which are net of the $14,966,238 of the New Jersey
net-operating losses sold, as discussed above.
F-18
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 7 - 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, the alleged breach of his Employment Agreement and for
defamation. He also claimed that he was entitled to receive his
salary through June 6, 2006. The Company made certain counter
claims against Mehta.
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 in return
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 the expiration dates of certain options held by
Mehta to purchase 770,000 shares of Common Stock at prices
ranging from $1.00 to $10.00 per share. The Company also provided
him with certain "piggyback" registration rights with respect to
shares underlying his options and 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 obligated the
Company to bear Mehta's legal and other expenses not to exceed
$50,000 for the two year period from the litigation settlement.
On July 23, 2003, the Company entered into an agreement with its
new Chief Executive Officer, Bernard Berk. The initial term of
this agreement was 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 June 3, 2003 grant to Mr. Berk of
options to purchase 300,000 shares of the Company's Common
Stock at $2.01 per share. All of these options are vested.
F-19
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED)
- 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 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.
On September 2, 2005, the Company entered into an amended and
restated Employment Agreement ("Restated Agreement") with Mr.
Berk, providing for him to continue to serve as the Company's
Chief Executive Officer through August 31, 2009. The Restated
Agreement provides for an annual bonus as determined by the
Compensation Committee of the Company's Board of Directors.
Pursuant to the Restated Agreement:
- Mr. Berk waived his rights to 75,000 of 300,000 options
granted to him on July 23, 2003. The Company determined that
the remaining 225,000 options are fully vested.
- Mr. Berk's salary was increased to $330,140 effective May 1,
2005 but not payable until November 1, 2005.
- Under the Company's 2004 Stock Option Plan, Mr. Berk was
granted ten-year options to purchase 600,000 shares of
Common Stock at $2.69, the fair market value of Common Stock
as of the time of grant.
- 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 in the employment
agreement).
F-20
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONSULTING AGREEMENTS
The Company has two one year renewable consulting agreements for
consulting services that include advice with respect to overall
strategic planning, financing opportunities, acquisition policy,
commercial and investment banking relationships and stockholders
matters. In consideration for the services, the Company paid
$75,000 and issued a warrant to purchase 100,000 shares of the
Company's Common Stock to each of the two consultants. Consulting
expenses under both agreements aggregated $75,000 and $165,000
for the years ended March 31, 2006 and 2005 respectively and
$30,000 plus approximately $470,000 attributable to the issuance
of the warrants for the year ended March 31, 2004. These
agreements were extended as to the consultants' services for an
additional year to November 2005 at $75,000 each.
REFERRAL AGREEMENTS
On January 29, 2002, the Company entered into a Referral
Agreement with a Director whereby Elite will pay referral fees
based upon payments net of direct costs received by Elite from
sales of products, development fees, licensing fees and royalties
generated as a direct result of this Director identifying
customers for Elite. The referral fee each year is roughly based
on the percentages of from 1% to 5% applied inversely to the
total amount gross margins attributable to the referrals. No
amounts had been earned through March 31, 2006.
COLLABORATIVE AGREEMENTS
On January 10, 2006, the Company entered into a Product
Development and Commercialization Agreement with Orit
Laboratories LLC ("ORIT") providing that the Company and Orit
will co-develop an extended release drug product for the
treatment of anxiety, and upon completion of development,
commercialize the possibility of licensing the product for
manufacture and sale. The parties intend to develop all dose
strengths of the product. The Company is to share in the profits,
if any from the sales of the drug. The initial term of the
agreement is for the longer of (i) 15 years from the date the
product is first commercially sold to a third party, or (ii) the
life of the applicable patent(s), if any. After the initial term,
the agreement is automatically renewable for 3-year periods
unless terminated by either party by providing the other party
with twelve (12) months written notice prior to any renewal
period.
F-21
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COLLABORATIVE AGREEMENTS (CONTINUED)
On June 21, 2005, the Company and IntelliPharmaCeutics Corp.
("IPC"), entered into an agreement for the development and
commercialization of a controlled released generic drug for
certain gastric diseases. The Company is to share in the profits,
if any, from the sales of the drug. This agreement was amended on
December 12, 2005, whereby IPC and a Canadian company with
marketing and distribution capabilities in Canada, have agreed to
develop and commercialize the product for Canada. Elite and IPC
will share their proceeds of commercialization in Canada on the
same terms as in the June 21, 2005 Agreement.
On June 22, 2005, the Company and Pliva, Inc. ("Pliva") entered
into a Product Development and License Agreement, providing for
the development and license of a controlled released generic
anti-infective drug formulated by the Company. The Company is to
manufacture and Pliva is to market and sell the product. The
development costs are to be paid by Pliva and the Company and the
profits are to be shared equally. Pliva is to make milestone
payments to the Company.
On March 30, 2005, the Company entered into a product,
development, manufacturing and distribution agreement with Harris
Pharmaceutical, Inc. ("Harris") and Tish Technologies LLC
("Tish") with respect to a controlled release generic
anti-infective drug. The product is a generic equivalent to a
branded drug. The agreement provides for (i) the drug development
by Elite with costs of development to be shared by Elite and
Harris, (ii) the manufacture of the product by Elite and its sale
to Harris for distribution, and (iii) Tish to be responsible for
any requisite submissions to the FDA relating to the product.
Elite is to share in the profits, if any, generated from the sale
of the product.
The aforementioned agreements are in their infancy stages.
The Company is a party to two separate and distinct development
and license agreements with ECR, another pharmaceutical company.
The Company developed Lodrante 24(R) which is now being sold by
ECR. The Company is also developing a second drug compound for
ECR in exchange for certain payments and royalties. The Company
is manufacturing Lodrane 24(R) and also, per the agreement,
reserves the right to manufacture the second product. The Company
received an aggregate of $550,000 under these two agreements,
which were earned during the year ended March 31, 2002.
F-22
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 8 - STOCKHOLDERS' EQUITY
During 2005, the Certificate of Incorporation was amended to
increase the number of authorized shares of capital stock from
25,000,000 shares of Common Stock to 65,000,000 shares of Common
Stock and 5,000,000 shares of Preferred Stock, each with a par
value of $.01 per share.
LOSS PER COMMON SHARE
Basic net loss per common share has been calculated by dividing
the net loss by the weighted average number of shares outstanding
during the periods presented. Diluted earnings per share is not
presented because the effect of the Company's common stock
equivalents is antidilutive. For the three years ended March 31,
the following potentially dilutive securities were not included
in the computation of diluted loss per share:
2006 2005 2004
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Stock options 2,971,250 $ 2.36 2,277,050 $ 2.16 2,417,060 $ 3.70
Convertible 4,444,444
Preferred Stock $ 2.25
------------ ------------- ------------
Warrants 6,079,199 $ 2.26 8,035,875 $ 2.69 2,654,239 $ 4.72
------------ ------------- ------------
13,494,893 10,312,925 5,071,289
============ ============= ============
F-23
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
SERIES B 8% CONVERTIBLE PREFERRED STOCK
On March 15, 2006, the Company sold in a private placement 10,000
shares of Series B 8% Convertible Preferred Stock (the "Series B
Preferred Stock"), for gross proceeds of $10,000,000. The Series
B Preferred Stock is convertible at $2.25 per share, into
4,444,444 shares of Common stock. In connection with the issuance
of the Series B Preferred Stock, the Company also issued two
class of warrants are exercisable for a period of five years and
represent the right to purchase an aggregate of 1,111,111 shares
of Common Stock at an exercise price of $2.75 per share and the
second class of warrants are exercisable for a period of five
years and represent the right to purchase an aggregate of
1,111,111 shares of Common stock at an exercise price of $3.25
per share. Based on the relative fair values, the Company has
attributed $2,033,029 of the total proceeds to the warrants and
has recorded the warrants as additional paid-in capital. The
remaining portion of the proceeds of $7,966,971 was used to
determine the value of the 4,444,444 shares of the Company Common
Stock underlying the Series B Preferred Stock, or $1.7925 per
share. Since the value was $0.4774 lower than the fair market
value of the Company's Common Stock on March 15, 2006, the
$2,121,917 instrinsic value of the conversion option resulted in
the recognition of a preferred stock dividend and an increase to
additional paid-in capital.
The Series B Preferred Stock accrues dividends at the rate of 8%
per annum on their purchase price of $1,000 per share (increasing
to 15% per annum after March 15, 2008) payable quarterly on
January 1, April 1, July 1 and October 1, payable in cash or
shares of Common Stock (each valued at 95% of the average of the
value weighted average price (VWAP) as defined in the Certificate
of Designations, Preferences and Rights of the Series B Preferred
Stock (the "Preferred Certificate").
Each share of Series B Preferred Stock is entitled to a
preference equal to the per share purchase price ($1,000 subject
to adjustment) plus any accrued but unpaid dividends thereon and
any other fees or liquidated damages owing thereon upon the
liquidation, dissolution or winding-up of the Company, which
preference is senior to any other capital stock ranked junior to
the Series B Preferred Stock.
F-24
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
SERIES B 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (CONTINUED)
The holders of Series B Preferred Stock do not have any voting
rights except as specifically provided in the Preferred
Certificate or as required by law. The Company may not without
the prior affirmative vote of holders of at least 70% of the then
outstanding shares of Series B Preferred Stock: (i) alter or
change adversely the powers, preferences or rights given to the
Series B Preferred Stock or alter or amend the Preferred
Certificate, (ii) authorize or create any class of stock ranking
as to dividends, redemption or distribution of assets upon a
Liquidation senior to or otherwise PARI PASSU with the Series B
Preferred Stock, (iii) amend its certificate of incorporation,
bylaws or other charter documents in any manner that adversely
affects any rights of the holders of the Series B Preferred
Stock, (iv) increase the authorized number of shares of Series B
Preferred Stock, (v) enter into any agreement with respect to any
of the foregoing, (vi) other than Permitted Indebtedness (as
defined in the Preferred Certificate) until March 15, 2009, incur
any indebtedness for borrowed money of any kind, (vii) other than
Permitted Liens (as defined in the Preferred Certificate) until
March 15, 2009, incur any liens of any kind, (viii) repay or
repurchase other than more than a de minimis number of shares of
Common Stock or securities convertible or exchangeable into
Common Stock, other than as permitted by the Preferred
Certificate, (ix) pay cash dividends or distributions on any
securities of the Registrant junior to the Series B Preferred
Stock or (x) enter into any agreement or understanding to effect
the clauses (iii), (vi), (vii), or (viii). Actions
notwithstanding the above, the Company may issue any security
issued in connection with a Strategic Transaction (as defined in
the Preferred Certificate) that ranks as to dividends, redemption
or distribution of assets upon a Liquidation PARI PASSU with or
junior to the Series B Preferred Stock without the prior
affirmative vote of holders of at least 70% of the then
outstanding shares of Series B Preferred Stock.
If the Company does not meet its share delivery requirements with
respect to conversion set forth in the Preferred Certificate, the
holders of Preferred Stock are entitled to (i) liquidated
damages, payable in cash, and (ii) cash equal to the amount by
which such holder's total purchase price for the shares of Common
Stock exceeds the product of (1) the aggregate number of shares
of Common Stock that such holder was entitled to receive from the
conversion at issue multiplied by (2) the actual sale price at
which the sell order giving rise to such purchase obligation was
executed.
F-25
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
SERIES B 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (CONTINUED)
The Company may force conversion of the Series B Preferred Stock
in the event it provides written notice to the holders of the
Series B Preferred Stock that the VWAP for each 20 consecutive
trading day period during a Threshold Period (as defined in the
Preferred Certificate) of Common Stock exceeded $5.38 (subject to
adjustment) and the volume for each trading day during such
Threshold Period exceed 50,000 shares (subject to adjustment for
forward and reverse stock splits, recapitalizations, stock
dividends and the like).
Upon the occurrence of certain Triggering Events (as defined in
the Preferred Certificate), the Company is required to redeem
each share of Series B Preferred Stock for cash in an amount
equal to 130% of the stated value, all accrued but unpaid
dividends thereon and all liquidated damages and other costs,
expenses or amounts due in respect of the Series B Preferred
Stock (the "TRIGGERING REDEMPTION AMOUNT"). Upon certain
Triggering Events, the Company is required to redeem each share
of Series B Preferred Stock for shares of Common Stock equal to
the number of shares of Common Stock equal to the Triggering
Redemption Amount divided by 85% of the average of the VWAP for
the 10 consecutive trading days immediately prior to the date of
the redemption.
The Registrant may redeem all of the Series B Preferred Stock
outstanding, at any time after March 15, 2008 for a redemption
price, payable in cash, for each share of Series B Preferred
Stock equal to (i) 150% of the stated value, (ii) accrued but
unpaid dividends thereon and (iii) all liquidated damages and
other amounts due in respect of the Series B Preferred Stock.
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. The Company paid commissions
aggregating $633,510 and issued five year warrants to purchase
494,931 shares of Common Stock to the Placement Agent. The
Company 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 holders of the Preferred Shares (the "INVESTORS") 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
F-26
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (CONTINUED)
cash or shares of Common Stock. Holders were entitled to elect
one Director, were entitled to ten votes per share, and vote with
the Common Stockholders as one class on all other matters. Each
Preferred Share is convertible into ten shares of Common Stock.
The purchaser of the Preferred Shares 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 has registered at its expense under the Securities
Act of 1933 (the "ACT") for resale by the Investors of 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.
Each Investor has represented that the Investor is an "accredited
investor" and has agreed that the securities issued in the
private placement are to bear a restrictive legend against resale
without registration under the Act. 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.
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 to pay him $229,325 for consulting fees for
services rendered through September 30, 2004.
F-27
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
COMMON STOCK TRANSACTIONS
Pursuant to the Certificate of Designation of the Series A
Preferred Stock of the Corporation, all outstanding 21,922 shares
of Preferred Stock were automatically converted on March 7, 2005
into 219,200 shares of Common Stock, par value $0.01 upon the
Corporation as a result of the Company's written notice to
holders of Preferred Stock certifying that the Current Market
Price of the Common Stock for 30 consecutive Trading Days from
January 18, 2005 through and including March 1, 2005 exceeded
$3.69 (300% of the Initial Conversion Price of $1.23 per share)
and the average daily trading volume of the Common Stock for such
30 consecutive Trading Days equaled or exceeded 50,000 shares per
day.
Accordingly, the Corporation has issued an aggregate of 5,265,516
shares of Common Stock with respect to the issuance of conversion
shares and dividend shares. Pursuant to the terms of an Exchange
Offer, the Company sold on or before the expiration date of
December 31, 2005, an aggregate of 735,674 shares of common stock
upon the exercise for cash of Short Term Warrants for aggregate
gross proceeds of $1,172,912 and issued five year Replacement
Warrants to purchase at a price of $3.00 per share an aggregate
220,705 shares of the Company's Common Stock. The Exchange Agent
received cash commissions aggregating $76,418 and five-year
placement warrants to purchase an aggregate of 25,473 shares of
Common Stock at a price of $3.00 per share. The remaining
unexercised Short Term Warrants, issued as part of the Private
Placement in October 2004, expired on December 31, 2005.
During the year ended March 31, 2006, there were cashless
exercises of 1,066,612 warrants resulting in the issuance of
310,678 shares of Common Stock.
On May 18, 2005, $40,000 were received from the exercise of stock
options previously granted to purchase 20,000 shares of Common
Stock at $2.00 per share.
On May 24, 2005 $156,503 were received and 101,625 shares of
Common Stock were issued upon the exercise of 101,625 Long-Term
Warrants granted at an exercise price of $1.54, as part of the
Company's private placement in October, 2004.
On July 6, 2004, the Company issued 26,500 shares of Common Stock
valued at $58,300 and agreed to pay $10,000 per month to a
corporation in consideration for its 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.
F-28
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
INSIDER TRADING
During fiscal 2005, the former Chairman of the Board remitted
$117,740 to the Company to return his gain under Section 16(b) of
the Securities Exchange Act of 1934, from the purchase and sale,
of the Company's equity securities within a period of six months.
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 it 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 the shares
issued and the shares issuable upon exercise of the warrant under
the Act.
TREASURY STOCK TRANSACTIONS
During fiscal 2003, the Company purchased 100,000 shares of
Common Stock in the open market for a total consideration of
$306,841 pursuant to the authorization by the Board of Directors
on June 27, 2002.
F-29
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
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 $4.20 per warrant. The warrants expire
at various times through March 15, 2011.
A summary of warrant activity for the fiscal years indicated
below were as follows:
2006 2005 2004
---- ---- ----
Balance at beginning of year: 8,035,875 2,654,239 733,752
Warrants issued 220,705 200,000 200,000
Warrants issued pursuant to Placement Agent
Agreements 381,028 519,931 50,000
Warrants issued pursuant to Private Placement 2,222,222 5,165,580 ---
Placement Agent Warrants Exercised --- (7,500) ---
Class C Warrants --- --- 1,723,237
Warrants exercised or expired (4,780,631) (496,375) (52,750)
---------- --------- ---------
Ending balance 6,079,199 8,035,875 2,654,239
========== ========= =========
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 "New 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 the New Warrants to the record holders as of November 30,
2002 of the Old Warrants without requiring any cash payment.
F-30
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
CLASS A WARRANT EXCHANGE OFFER (CONTINUED)
The New Warrants expired on November 30, 2005.
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.
CLASS B WARRANTS
The Company's Class B Warrants originally issued in a private
placement in September 1998 expired on November 30, 2005, their
amended expiration date.
NOTE 9 - STOCK OPTION PLANS
STOCK-BASED COMPENSATION
During the years ended March 31, 2004, 2005 and 2006 the Company
issued 1,024,000, 120,000 and 969,200, respectively options to
purchase Common Stock to employees and to members of the board of
directors. The options have an exercise price ranging from $2.69
to $3.00 per share and all vest over three years except 610,000
options issued in 2004 and 120,000 issued for year ended March
31, 2005 which vested upon grant date and 75,000 issued for the
year ending March 31, 2006 which vest pro-rata over a 6 month
period. The options expire between five and ten years from the
date of grant. The Company has recorded compensation expense of
$1,166,601, $370,108 and $902,927 for the years ended March 31,
2004, 2005 and 2006, respectively, which represents the fair
value of the options vested computed using 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 amendments of the terms of
outstanding options and warrants, including the repricing of
options to certain Directors and employees. The Company will
record a significant compensation expense in the future periods
in which the options vest based on the fair value of the options
after reflecting the repricing and amendments to the terms of the
options.
F-31
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 9 - STOCK OPTION PLANS (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
Under its 2004 Stock Option Plan and prior option 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 plans for the years
indicated were as follows:
2006 2005 2004
AVERAGE AVERAGE AVERAGE
WEIGHTED WEIGHTED WEIGHTED
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
Outstanding at
beginning of year 2,277,050 $ 2.16 2,417,050 $ 3.70 2,266,850 $ 5.74
Granted 969,200 2.74 120,000 2.34 1,024,000 2.23
Exercised (20,000) 2.00 (100,000) 1.00 (15,000) 2.00
Expired (255,000) 2.04 (160,000) 7.13 (858,800) 7.38
--------- -------- --------- -------- --------- -------
Outstanding at
end of year 2,971,250 2.36 2,277,050 $ 2.16 2,217,050 3.70
========= ======== ========= ======== ========= =======
The following table summarizes information about stock options
outstanding at March 31, 2006:
WEIGHTED AVERAGE WEIGHTED- WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISABLE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
$1.00 -- $2.00 203,750 1.75 $1.75 203,750 $ 1.75
$2.01 - $3.00 2,767,500 7.30 2.40 1,835,800 2.27
-------------- --------- ---- ----- --------- ------
$1.00 - 3.00 2,971,250 6.23 $2.34 2,039,550 $ 2.22
-------------- --------- ---- ----- --------- ------
F-32
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 9 - STOCK OPTION PLANS (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
The per share weighted-average fair value of each option granted
during fiscal 2006, 2005 and 2004 ranged from $1.48 to $1.70
during fiscal 2006, $1.91 during fiscal 2005 and from $1.03 to
$2.68 during fiscal 2004, on the date of grant using the
Black-Scholes options pricing model with the following
weighted-average assumptions; no dividend yield; expected
volatility of 97.84% for fiscal year 2006, 76.69% for fiscal year
2005 and 75.47% to 77.97% for fiscal year 2004; risk-free
interest rates of 4.18% in 2006, 4.00% in 2005, 4.0% in 2004 and
expected lives ranging from five to ten years.
There are 1,602,520 options available for future grant under our
Stock Option Plan.
NOTE 10 - MAJOR CUSTOMERS
For the years ended March 31, revenues from its three major
customers are as follows:
2006 2005 2004
---- ---- ----
Customer A - 100% 49.80% 40.70%
Customer B - --- --- 59.30%
Customer C - --- 49.80% ---
NOTE 11 - SUBSEQUENT EVENTS
In April 2006, the Company's registration statement on Form S-3
registering under the Securities Act of 1933, as amended for
reoffering up to 9,876,022 shares of Common Stock which may be
acquired upon conversion of the outstanding shares of Series B
Preferred Stock, upon payment of Preferred Stock dividends and
upon exercise of the Common Stock Purchase Warrants issued in the
March 2006 private placement was declared effective by the
Commission.
In April 2006, the Company's registration statement on Form S-3
registering under the Securities Act of 1933, as amended for
reoffering up to 246,175 shares of Common Stock which may be
acquired upon exercise of the Common Stock Purchase Warrants
issued in the December 2005 private placement was declared
effective by the Commission.
F-33
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005 AND 2004
NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)
On May 3, 2006, the Company granted options to purchase 70,000
shares of common stock with and exercise price of $2.26 per share
to its chief financial officer, one-third of the options vests on
May 3, 2007, a second third which vests on May 3, 2008 and the
final third vests on May 3, 2009.
On May 22, 2006, a holder of 250 shares of Series B 8% Preferred
Stock converted his shares and accrued dividends through the date
of conversion into 112,429 shares of Common Stock.
On May 23, 2006, the Company signed an agreement ("the
"Agreement") with Oppenheimer & Co., Inc. ("Oppenheimer") to
render financial advisory services to the Company in connection
with potential acquisitions by the Company, strategic alliances
with other pharmaceutical companies, advice with respect to
future financings to be undertaken by the Company and
introductions to key parties in the capital markets. In
consideration for its services, Oppenheimer received from the
Company a cash fee of $60,000.
On June 1, 2006, the Registrant entered into a one year
consulting agreement with David Filer, whereby Dr. Filer is to
provide financial advisory services to the Company. In
consideration for his services, Dr. Filer received options to
purchase 10,000 shares of common stock exercisable from June 1,
2006 to June 1, 2009, with an exercise price of $3.00 per share.
On June 19, 2006, the Company received written notice from Harris
Pharmaceuticals, Inc. ("HARRIS") of Harris' intent to terminate
the Product Development, Manufacturing and Distribution
Agreement, dated as of March 30, 2005 (the "Agreement"), among
Elite Laboratories, Inc., Harris and Tish Technologies LLC
("TISH") in accordance with Section 9.3 of the Agreement. As the
date hereof, there have been no material revenues earned under
the Agreement.
F-34
Exhibit 21
Subsidiaries of the Company
Elite Laboratories, Inc., a Delaware corporation
Elite Research, Inc., a Delaware corporation