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, 2007
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
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(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, 2007 was approximately $45,864,702 based upon the
closing price of the registrant's Common Stock on the American Stock Exchange,
as of September 29, 2006. (For purposes of determining this amount, only
directors, executive officers, and, based on Schedule 13(d) filings as of May
15, 2007 10% or greater stockholders and their respective affiliates have been
deemed affiliates).
Registrant had 20,820,048 shares of common stock, par value $0.01 per share,
outstanding as of June 26, 2007.
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........................................................15
Item 1B. Unresolved Staff Comments...........................................26
Item 2. Properties..........................................................26
Item 3. Legal Proceedings...................................................26
Item 4. Submission of Matters to a Vote of Security Holders.................27
PART II
Item 5. Market for Registrant's Common Equity Related Stockholder
Matters and Issuer Purchases of Equity Securities...................28
Item 6. Selected Financial Data.............................................32
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation................................................32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........38
Item 8. Financial Statements and Supplementary Data.........................38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................38
Item 9A. Controls and Procedures.............................................38
Item 9B. Other Information...................................................38
PART III
Item 10. Directors, Executive Officers and Corporate Governance..............40
Item 11. Executive Compensation..............................................46
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters..........................58
Item 13. Certain Relationships and Related Transactions, and
Director Independence...............................................61
Item 14. Principal Accounting Fees and Services..............................64
PART IV
Item 15. Exhibits, Financial Statements and Schedules........................65
Signatures..........................................................73
Consolidated Financial Statements..................................F-1
iii
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, Elite Research and Novel, a variable interest entity, 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 (the
"SEC"). You may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 100 F Street, N.W., 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
We are a specialty pharmaceutical company principally engaged in the
development and manufacture of oral, controlled release products. We develop
oral, controlled release products using proprietary technology. Our strategy
includes improving off-patent drug products for life cycle management and
developing generic versions of controlled release drug products with high
barriers to entry. Our technology is applicable to develop delayed, sustained or
targeted release pellets, capsules, tablets, granules and powders.
We have two products, Lodrane 24(R) and Lodrane 24D(R), currently being
sold commercially, and a pipeline of seven drug candidates under development in
the therapeutic areas that include pain
management, allergy and infection. Of the products under development, ELI-216,
an abuse deterrent oxycodone product, and ELI-154, a once daily oxycodone
product, are in clinical trials and we have completed pilot studies on two of
our generic product candidates. The addressable market for the pipeline of
products exceeds $6 billion. Our facility in Northvale, New Jersey also is a
Good Manufacturing Practice ("GMP") and DEA registered facility for research,
development and manufacturing.
At the end of 2006, we entered into a joint venture with VGS Pharma, LLC
and created Novel Laboratories, Inc. ("NOVEL"), a privately-held company
specializing in pharmaceutical research, development, manufacturing, licensing,
acquisition and marketing of specialty generic pharmaceuticals. Novel's business
strategy is to focus on its core strength in identifying and timely executing
niche business opportunities in the generic pharmaceutical area.
STRATEGY
We are focusing our efforts on the following areas: (i) development of our
pain management products, (ii) manufacturing of Lodrane 24(R) and Lodrane 24D(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 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, including Novel.
We are focusing on the development of various types of drug products,
including branded drug products (which require new drug applications ("NDA")
under Section 505(b)(1) or 505(b)(2) of the Drug Price Competition and Patent
Term Restoration Act of 1984 (the "DRUG PRICE ACT")) as well as generic drug
products (which require abbreviated new drug applications ("ANDA")).
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 build collaborations and
establish 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 $6,085,888 for the fiscal year ended March
31, 2007, $4,343,890 in the fiscal year ended March 31, 2006 and $2,698,641 in
the fiscal year ended March 31, 2005 on research and development activities. Our
research and development spending has increased as we prepare for Phase III
clinical trials for ELI-216 and ELI-154 and spend more on development costs
including scale up and clinical studies.
Of our seven products in the pipeline, three are for treatment or
management of pain (ELI 216 is an abuse resistant oxycodone and ELI 154 is a
once daily oxycodone and a third is for an analgesic indication), two are for
anti-infective indications, and one is for gastrointestinal disorders
2
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.
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 United
Stated Food and Drug Administration (the "FDA") and all are in development.
PRODUCT APPROX. U.S. SALES FOR NDA/ PARTNER INDICATION
BRAND AND/OR GENERIC ANDA (B)
PRODUCTS
(2006) $MM(A)
ELI 154 N/A(c) NDA None Pain Management
Once Daily Oxycodone
ELI 216 N/A(c) NDA None Pain Management
Once daily oxycodone with
abuse resistant technology
(ART(TM))
Generic $40 ANDA Pliva US, Inc. Infection
(East Hanover, NJ)
Generic $50 ANDA Orit Laboratories, Inc. (d) Anti-Anxiety
(East Hanover, NJ)
Generic $3,600 ANDA IntelliPharmacutics Gastrointestinal
Toronto, Canada) disorders(e)
Generic $100 ANDA Tish Technologies, Inc. (d) Infection
(East Hanover, NJ) and
Harris Pharmaceuticals (Ft.
Meyers, FL)
Generic $30 ANDA The PharmaNetwork, LLC Pain Management
(Montvale, NJ)
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(a) Indicates the approximate amount of sales of our competitor's product and
any generics (if there are any). It does not represent the sales of any of
our products.
(b) "NDA" represents a new drug application which is filed with the FDA for
new drug products and "ANDA" represents an abbreviated new drug
application which is filed with the FDA for generic drug products.
(c) N/A means not applicable because there is no branded product on the
market. There is neither a once-daily oxycodone or an abuse resistant
oxycodone on the market. The market for sustained release oxycodone was
approximately $1.3 billion in 2006.
3
(d) Orit Laboratories is an affiliate of Tish Technologies.
(e) This includes an agreement that grants to Elite a percentage of payments
paid to its Canadian partner for commercial sale of a generic of this
product.
The table below presents information with respect to the development of
our seven 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. The Phase II study listed
below was done in recreational drug users and a visual analog scale for euphoria
was measured in the study. 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 bioequivalence study 3 ANDA
Pilot Phase I study 1 NDA
Phase II 1 NDA
The above table does not include generic drug products currently under
development at Novel.
COMMERCIAL PRODUCTS
Elite manufactures two once daily allergy products, Lodrane 24(R) and
Lodrane 24D(R), that were co-developed with our partner, ECR Pharmaceuticals.
Elite entered into development agreements on these two products with ECR in June
2001 whereby Elite agreed to commercially develop two products in exchange for
development fees, certain payments, royalties and manufacturing rights. The
products are being marketed by ECR which also has the responsibility for
regulatory matters. In addition to receiving revenues for manufacture of these
products, Elite also receives a royalty on in-market sales.
Lodrane 24(R), was first commercially offered in November 2004, and
Elite's revenues for manufacturing the product and a royalty on sales for the
years ended March 31, 2005, 2006 and 2007 aggregated $150,030, $550,697 and
$588,620 respectively. Lodrane 24D(R) was first commercially offered in
December, 2006 and Elite's revenues for manufacturing the product and a royalty
on sales for the year ended March 31, 2007 aggregated $555,221.
4
PRODUCTS UNDER DEVELOPMENT
ELI-154 AND ELI-216
For ELI-154, Elite has developed a once-daily oxycodone formulation using
its proprietary technology. An investigational new drug application or IND has
been filed and Elite has completed two pharmacokinetic studies in healthy
subjects that compared blood levels of oxycodone from dosing ELI-154 and the
twice-a-day product that is on the market currently. ELI-154, when compared to
twice daily delivery, demonstrated an equivalent onset, more constant blood
levels of the drug over the 24 hours and equivalent blood levels to the
twice-a-day product at the end of 24 hours. We are now scaling up that product
using commercial size equipment for manufacture of batches. Elite has submitted
a proposed clinical plan to the FDA and is awaiting comments from the FDA. Upon
receiving their comments, we intend to request a special protocol assessment
("SPA") for the ELI-154 Phase III protocol and, shortly after receiving
agreement with the FDA on the SPA, we intend to begin the Phase III trial. Elite
will conduct Phase I studies including, but not limited to, a food effect,
ascending dose and multi-dose studies. Such Phase I studies are not expected to
affect the timetable of the Phase III trial.
ELI-216 utilizes our patent-pending abuse deterrent technology that is
based on a pharmacological intervention approach. ELI-216 is a combination of a
narcotic agonist, oxycodone hydrochloride, in a sustained release formulation
intended for use in patients with moderate to severe chronic pain, and an
antagonist, naltrexone hydrochloride, formulated to deter abuse of the drug.
Both of these compounds, oxycodone hydrochloride and naltrexone hydrochloride,
have been on the market for a number of years and sold separately in various
dose strengths. Elite has filed an IND for the product and has tested the
product in a series of pharmacokinetic studies. In single dose studies for
ELI-216, it was demonstrated that no quantifiable blood levels of naltrexone
hydrochloride were released at a limit of quantification ("LOQ") of 7.5 pg/ml.
When crushed, however, naltrexone hydrochloride was release at levels that would
be expected to eliminate the euphoria from the crushed oxycodone hydrochloride.
This data is consistent with the premise of Elite's abuse resistant technology
or ART, that essentially no naltrexone is released and absorbed when
administered as intended.
In further studies, ELI-216 demonstrated the euphoria-blocking effect of
ELI-216 when the product is crushed. This study was designed to determine the
optimal ratio of oxycodone hydrochloride and the opioid antagonist, naltrexone
hydrochloride, to significantly block the euphoric effect of the opioid if the
product is abused by physically altering it, (i.e., crushing). The study also
helped determine the appropriate levels of naltrexone hydrochloride required to
reduce or eliminate the euphoria experienced by subjects who might take crushed
product to achieve a "high". Elite intends to complete and submit to the FDA a
second stage of this study that will be a double blinded, cross-over pivotal
study.
Elite met with the FDA in October 2006 for a Type C clinical guidance
meeting regarding the NDA development program for ELI-216. Elite has
incorporated the FDA's guidance into its developmental plan. Elite has begun
scale up of ELI-216 to commercial size batches and Elite has submitted an SPA to
the FDA for the ELI-216 Phase III protocol. Elite intends to enter Phase III
shortly after receiving agreement with the FDA on the SPA. Elite will conduct
additional Phase I studies including, but not limited to, food effect, ascending
dose and a multi-dose studies.
Elite has developed ELI-154 and ELI-216 and retains the rights to these
products. Elite has currently chosen to develop these products itself but
expects to license these products at a later date to a third party for sales and
distribution. The drug delivery technology underlying ELI-154 was originally
developed under a joint venture with Elan which terminated in 2002.
5
According to the termination agreement, Elite acquired all proprietary,
development and commercial rights for the worldwide markets for the products
developed by the joint venture including ELI-154. Upon licensing or
commercialization of ELI-154, Elite will pay a royalty to Elan pursuant to the
termination agreement with Elan. If Elite were to sell the product itself, Elite
would pay a 1% royalty to Elan based on the product's net sales and if Elite
enters into an agreement with another party to sell the product, Elite will pay
a 9% royalty to Elan based on Elite net revenues from this product (Elite net
product revenues would include license fees, royalties, manufacturing profits
and milestones). Elite is allowed to recoup all development costs including
research, process development, analytical development, clinical development and
regulatory costs before payment of any royalties to Elan.
MANUFACTURING, CO-DEVELOPMENT AND LICENSE AGREEMENTS
On March 30, 2005, Elite 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 generic product. Upon its
development and the securing of the required FDA approval by the formulation
development company, Elite is to manufacture the product and Harris is to sell
and distribute the product. In addition to the transfer price for manufacturing
the product, Elite is to share the profits, if any, realized upon sales. The
innovator's reference product for this generic was originally a capsule. The
innovator has now received approval for an alternative dose form (a tablet
rather than capsule) and has discontinued the original dose form. While a
reference product remains for the capsule, the market opportunity has changed
and this affects how we might commercialize the capsule dosage form. 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. As the date hereof,
Elite has received $29,700 for this development work.
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 generic product. IntelliPharmaCeutics has taken a formulation for the
product into a pilot bioequivalence biostudy. Upon commercialization, Elite is
to share the profits, if any, realized upon sales. A successful pivotal biostudy
and an approved ANDA filing is required to commercialize this product.
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, inc., 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, inc. in Canada.
On June 22, 2005, Elite entered into a Product Development and License
Agreement with PLIVA, Inc. ("PLIVA"), now a subsidiary of Barr Pharmaceuticals
Inc., providing, for the development and license of a controlled released
generic product. Under the agreement, PLIVA is to make upfront and milestone
payments in the aggregate of $550,000 to Elite. Elite is 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. As of the date hereof,
Elite has not received any of the payments from PLIVA. Elite has developed a
formulation that matches the branded product and has
6
tested it in a pilot study. A successful pivotal biostudy and an approved ANDA
filing is required to commercialize this product. On June 28, 2007, Elite and
Pliva terminated the Product Development and License Agreement and entered into
a termination agreement according to which it was agreed that Elite owns all
intellectual property rights relating to the controlled released generic product
under development and Pliva agreed to pay Elite $100,000 in discharge of
outstanding payments under the Product Development and License Agreement.
On January 10, 2006, Elite entered into an agreement with Orit
Laboratories LLC ("ORIT"), 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. Orit has been providing formulation and analytical
resources for the development work. Elite's facility has been used for
manufacture of development batches. Elite is to share in the profits, if any
from the sales of the drug. A formulation has been developed that matches the
innovator's product using IN VITRO testing and next steps will be scale up and
pilot testing.
On November 10, 2006, Elite entered into a product collaboration agreement
with The PharmaNetwork, LLC ("TPN") for the development of the generic product
equivalent of a synthetic narcotic analgesic drug product. TPN is to perform
development services and prepare and file an ANDA in the name of TPN with the
FDA. Elite is to provide development support, including the purchase of active
pharmaceutical ingredients and materials and supplies to manufacture the batch,
provide adequate facilities to TPN for use in its development work and following
ANDA approval, Elite will manufacture the drug product developed. Elite is to
pay TPN for the development services rendered upon the attainment of certain
milestones. The out-of-pocket costs are to be shared by TPN and Elite, with
TPN's obligation to be payable from the royalty compensation. Formulation
development work is currently underway.
JOINT VENTURE WITH NOVEL
In December 2006, we entered into a joint venture with VGS Pharma, LLC
("VGS") and created Novel Laboratories, Inc ("Novel"), a separate privately-held
company specializing in pharmaceutical research, development, manufacturing,
licensing, acquisition and marketing of specialty generic pharmaceuticals.
We acquired 49% and VGS acquired 51% of Novel's Class A Voting Common
Stock for $9,800 and $10,200 respectively. We initially contributed $2,000,000
to Novel and have agreed to provide additional contributions upon the
achievement of certain performance milestones of Novel to be mutually agreed to
by Elite and VGS.
In March 2007, Dr. Veerappan Subramanian, Novel's CEO, provided Elite with
Novel's initial business plan which identified 22 generic drug products to be
developed by Novel and the proposed funding milestones for Elite's remaining
contributions to Novel. Pursuant to the agreed upon plan, Elite contributed
$2,000,000 on May 15, 2007 and $3,000,000 on June 15, 2007. The remaining
contributions to be made by Elite shall be funded in the amounts and upon the
occurrence of the following milestones: (i) $10,000,000 upon the submission to
the FDA of three ANDAs related to three different prospective products developed
by Novel and (ii) $10,000,000 upon the submission to the FDA of three ANDAs
related to at least three additional different prospective products developed by
Novel; provided that the aggregate contributions to be made by Elite shall not
exceed (i) $15,000,000 prior to November 1, 2007 or (ii) $25,000,000 prior to
May 1, 2008. The remaining contributions of Elite are not monetary
7
obligations but rather conditions that must be met in order for Elite to
maintain its current equity interest in Novel.
In the event that (i) Elite defers for more than 90 days the payment of a
contribution installment due to Novel's failure to achieve a performance
milestone, (ii) Elite fails to make a requisite contribution following Novel's
achieving a performance milestone or (iii) Novel requires additional financing
beyond amounts provided in the business plan or Elite's agreed upon additional
contributions, Novel may seek such financing through a subscription offering to
its Class A Stockholders and, to the extent not fully subscribed, from third
parties.
As long as each of Elite and VGS owns at least 10% of the shares of Class
A Voting Common Stock of Novel, each shall designate one of the two directors to
constitute the Novel Board of Directors, with the VGS designee to be Dr.
Subramanian, unless otherwise approved by Elite. Novel is prohibited from taking
of certain actions without approval of the two designees, including, but not
limited to, amendments of charter, by-laws and other governance agreements,
spin-offs or public offerings of equity securities, a liquidation or
dissolution, dividends, authorization or issuance of additional securities or
options, bankruptcy, a material change of the business or a business plan,
approval of a business plan and the yearly operating budget, creation of a
security interest, capital expenditures in excess of 110% of the amount provided
in the business plan, investments in excess of the amounts approved in the
Business Plan, an increase or decrease of the Board; and any investments by Dr.
Subramanian in any competitive company or its affiliate.
In the event Elite fails to make its remaining contributions after the
occurrence of the relevant milestones event, VGS has the right to purchase at
the original purchase price from Elite that proportion of its original shares of
Novel Class A Common Stock equal to the proportion of the required additional
contributions not made by Elite.
In the event of Dr. Subramanian's resignation from Novel for other than
good reason or his termination by Novel for cause or his death or disability as
defined in the employment agreement between Novel and Dr. Subramanian, Elite has
the corresponding right to acquire up to 75% of VGS's original shares of Class A
Common Stock of Novel at the original purchase price; such percentage to be
reduced to 50% and 25% and 0% upon the first, second and third anniversary of
the Stockholders' Agreement, with a pro rata portion of such reduction to be
effected upon the death or disability of Dr. Subramanian during the applicable
period. Each of Elite and VGS has a right to acquire at the then fair value,
Elite's or VGS's shares of Novel upon the bankruptcy, dissolution or
liquidation, a change of control of the other or, if as a result of the
purchases at the original purchase price, the percentage of Novel owned by such
party is less than 10% of Novel.
On June 5, 2007, the board of directors of Novel agreed to approve a stock
option plan (the "NOVEL PLAN") for Novel's key employees. The Novel Plan
reserves for granting under the Novel Plan 26,582 shares of Novel's Class B
non-voting common stock.
On June 5, 2007, Novel granted 8,861 options to purchase Class B
non-voting common shares to Veerappan Suramanian, its CEO, at an exercise price
of $22.50 per share. The options vest and become exercisable at the rate of (i)
1,266 option shares on the date of each submission to the FDA of an ANDA for the
first six new prospective products developed by Novel which is not the subject
of any prior ANDA submitted to the FDA by Novel and (ii) 1,265 option shares on
the date of approval by the FDA of a drug product that is the subject of an ANDA
related to a prospective product developed by Novel which has not been
previously approved by the FDA for Novel.
8
On June 5, 2007, Novel granted Muthusamy Shanmugam, its Head of Technical
Operations, 8,861 options to purchase Novel's Class B non-voting common shares
at an exercise price of $22.50. The options vest and become exercisable at the
rate of 2,953 on the first, 2,954 on each of the second and third anniversary of
the grant date. Novel also entered into an employment agreement with Mr.
Shanmugam on June 5, 2007 to act as Novel's Head of Technical Operations. The
employment agreement provides for an initial base salary of $170,000 per annum,
subject to annual increases at the discretion of Novel's Board of Directors. The
initial term of the agreement is three years. Novel shall have the right to
terminate the agreement for cause (as defined) or for disability. If Novel
elects to terminate the agreement without cause, Mr. Shanmugam shall be
entitled to receive, in full satisfaction of all remaining obligations of Novel
under the agreement, an aggregate amount equal to the lesser of (i) twelve
months of salary or (ii) the salary for the remainder of the actual term.
Novel's business strategy is to focus on its core strength in identifying
and timely executing niche business opportunities in the generic pharmaceutical
area. As of June 15, Novel has 30 employees.
As of June 15, 2007, Novel has identified 22 generic product opportunities
and is actively developing 11 generic products. It is Novel's general policy not
to disclose the specific products in its 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.
9
PATENTS
Since our incorporation, we have secured seven United States patents of
which two have been assigned for a fee to another pharmaceutical company.
Elite's patents are:
U.S. patent 5,871,776
U.S. patent 5,902,632
U.S. patent 6,620,439
U.S. patent 5,837,284 (assigned to Celgene Corporation)
U.S. patent 6,635,284 (assigned to Celgene Corporation)
U.S. patent 6,926,909
U.S. patent 6,984,402
We have pending applications for two United States 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 the opioids. 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.
We have also filed corresponding foreign applications for key patents.
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.
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
10
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 currently plan to license our products to marketing partners and not to
sell under our brand name and so we do not currently intend to register any
trademarks related to our products.
GOVERNMENT REGULATION AND APPROVAL
The design, development and marketing of pharmaceutical compounds, on
which our success depends, are intensely regulated by governmental regulatory
agencies, in particular 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 either by an
NDA or an ANDA, each of which is discussed below.
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, 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, which 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, during 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.
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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. We intend 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
The FDA approval procedure for an ANDA differs from that from the
procedure for a NDA in that the FDA waives the requirement of conducting
complete clinical studies, although it normally requires bioavailability and/or
bioequivalence studies. "Bioavailability" indicates the rate and extent of
absorption and levels of concentration of a drug product in the blood stream
needed to produce a therapeutic effect. "Bioequivalence" compares the
bioavailability of one drug product with another, and when established,
indicates that the rate of absorption and levels of concentration of the active
drug substance in the body are equivalent for the generic drug and the
previously approved drug. An ANDA may be submitted for a drug on the basis that
it is the equivalent of a previously approved drug or, in the case of a new
dosage form, is suitable for use for the indications specified.
The timing of final FDA approval of an ANDA depends on a variety of
factors, including whether the applicant challenges any listed patents for the
drug and whether the brand-name manufacturer is entitled to one or more
statutory exclusivity periods, during which the FDA may be prohibited from
accepting applications for, or approving, generic products. In certain
circumstances, a regulatory exclusivity period can extend beyond the life of a
patent, and thus block ANDAs from being approved on the patent expiration date.
In May 1992, Congress enacted the Generic Drug Enforcement Act of 1992,
which allows the FDA to impose debarment and other penalties on individuals and
companies that commit certain illegal acts relating to the generic drug approval
process. In some situations, the Generic Drug Enforcement Act requires the FDA
to not accept or review ANDAs for a period of time from a company or an
individual that has committed certain violations. It also provides for temporary
denial of approval of applications during the investigation of certain
violations that could lead to debarment and also, in more limited circumstances,
provides for the suspension of the marketing of approved drugs by the affected
company. Lastly, the Generic Drug Enforcement Act allows for civil penalties and
withdrawal of previously approved applications. Neither we nor any of our
employees have ever been subject to debarment. We do not believe that we receive
any services from any debarred person.
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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 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. We engage 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., Sandoz (a Novartis company), Durect
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
13
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 scope of our patents, if any, or that even
if patent protection is obtained, such patents will not be successfully
challenged in the future.
In addition to competitors that are developing products based on drug
delivery technologies, there are also companies who have announced that they are
developing opioid abuse deterrent products that might compete directly or
indirectly with Elite's products. These include, but are not limited to
Alpharma, Inc., Pain Therapeutics (who have an agreement with Durect
Corporation), Shire Pharmaceuticals Group plc (who purchased New River
Pharmaceuticals Inc.), Endo Pharmaceuticals, Inc. through an agreement with
Collegium Pharmaceuticals, Inc., Purdue Pharma LP, and Acura Pharmaceuticals,
Inc.
We also face competition in the generic pharmaceutical market and expect
this competition to become more significant to us as a result of our joint
venture with Novel. The principal competitive factors in the generic
pharmaceutical market include: (i) introduction of other generic drug
manufacturers' products in direct competition with our products under
development, (ii) introduction of authorized generic products in direct
competition with any of our products under development, particularly if such
products are approved and sold during exclusivity periods, (iii) consolidation
among distribution outlets through mergers and acquisitions and the formation of
buying groups, (iv) ability of generic competitors to quickly enter the market
after the expiration of patents or exclusivity periods, diminishing the amount
and duration of significant profits, (v) the willingness of generic drug
customers, including wholesale and retail customers, to switch among
pharmaceutical manufacturers, (vi) pricing pressures and product deletions by
competitors, (vii) a company's reputation as a manufacturer and distributor of
quality products, (viii) a company's level of service (including maintaining
sufficient inventory levels for timely deliveries), (ix) product appearance and
labeling and (x) a company's breadth of product offerings.
SOURCES AND AVAILABILITY OF RAW MATERIALS; MANUFACTURING
We manufacture for commercial sale by our partner, ECR Pharmaceuticals,
two products, Lodrane 24(R) and Lodrane 24D(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 revenues 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
14
expire, have other contracts in place generating similar or material revenue. We
have an agreement with ECR Pharmaceuticals which sells and distributes two
products that we manufactures: Lodrane 24(R) and Lodrane 24D(R). We receive
revenues to manufacture these products and also receives royalties based on
in-market sales of the products. These are our only products that are being sold
commercially now and are the primary source of our revenue currently. We receive
development fees or milestone payments under some of the co-development
agreements with partners, but these fees are currently small compared to the
Lodrane 24(R) and Lodrane 24D(R) revenues.
EMPLOYEES
As of June 15, 2007, we had 41 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.
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 us and in analyzing our forward-looking statements.
RISKS RELATED TO OUR BUSINESS
WE HAVE A RELATIVELY LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO
EVALUATE OUR FUTURE PROSPECTS.
Although we have been in operation since 1990, we have a relatively short
operating history and limited financial data upon which you may evaluate our
business and prospects. In addition, our business model is likely to continue to
evolve as we attempt to expand our product offerings and our presence in the
generic pharmaceutical market. 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.
15
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 $11,803,512, $6,883,914, $5,906,890, $6,514,217 and $4,061,422, for
the years ended March 31, 2007, 2006, 2005, 2004 and 2003, 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.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING NEEDED FOR THE EXPENDITURES FOR
THE DEVELOPMENT AND COMMERCIALIZATION OF OUR DRUG PRODUCTS, IT WOULD IMPAIR OUR
ABILITY TO CONTINUE TO MEET OUR BUSINESS OBJECTIVES.
We continue to require additional financing to ensure that we will be able
to meet our expenditures to develop and commercialize our products. In
particular, in order to maintain our investment in our joint venture in Novel,
we are required to make a substantial investment of up to an additional
$20,000,000. If we fail to meet this financing requirement, VGS, our co-venturer
in Novel, may exercise a purchase right that would result in significant
dilution of our interest in Novel.
We do not have committed external sources of funding and may not be able
to obtain any additional funding, especially if volatile market conditions
persist for biotechnology companies. We believe our existing cash resources,
including the $15 million raised in the private placement that closed on April
24, 2007, is sufficient to meet our cash requirements for the next 12 months.
Other possible sources of the required financing are income from product
sales or sales of market rights, distributions from Novel, income from
co-development or partnering arrangements and the cash exercise of warrants and
options that are currently outstanding. No representation can be made that we
will be able to obtain such revenue or 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. Our inability to obtain additional financing when
needed would impair our ability to continue our business.
If any future financing involves the further sale of our securities, our
then-existing stockholders' equity could be substantially diluted. On the other
hand, if we incurred debt, we would be subject to risks associated with
indebtedness, including the risk that interest rates might fluctuate and cash
flow would be insufficient to pay principal and interest on such indebtedness.
SUBSTANTIALLY ALL OF OUR PRODUCT CANDIDATES ARE AT AN EARLY STAGE OF DEVELOPMENT
AND ONLY A PORTION OF THESE ARE IN CLINICAL DEVELOPMENT.
Other than ELI-154 which is in Phase I clinical development and ELI-216
which is in Phase II clinical development, our five other product candidates are
still at an early stage of development. We do not have any products that are
commercially available other than Lodrane 24(R) and Lodrane 24D(R). We will need
to perform additional development work for all of our product candidates in our
pipeline before we can seek the regulatory approvals necessary to begin
commercial sales.
IF WE ARE UNABLE TO SATISFY REGULATORY REQUIREMENTS, WE MAY NOT BE ABLE TO
COMMERCIALIZE OUR PRODUCT CANDIDATES.
16
We need FDA approval prior to marketing our product candidates in the
United States of America. If we fail to obtain FDA approval to market our
product candidates, we will be unable to sell our product candidates in the
United States of America and we will not generate any revenue from the sale of
such products.
This regulatory review and approval process, which includes evaluation of
preclinical studies and clinical trials of our product candidates is lengthy,
expensive and uncertain. To receive approval, we must, among other things,
demonstrate with substantial evidence from well-controlled clinical trials that
our product candidates are both safe and effective for each indication where
approval is sought. Satisfaction of these requirements typically takes several
years and the time needed to satisfy them may vary substantially, based on the
type, complexity and novelty of the pharmaceutical product. We cannot predict if
or when we might submit for regulatory approval any of our product candidates
currently under development. Any approvals we may obtain may not cover all of
the clinical indications for which we are seeking approval. Also, an approval
might contain significant limitations in the form of narrow indications,
warnings, precautions, or contra-indications with respect to conditions of use.
The FDA has substantial discretion in the approval process and may either
refuse to file our application for substantive review or may form the opinion
after review of our data that our application is insufficient to allow approval
of our product candidates. If the FDA does not file or approve our application,
it may require that we conduct additional clinical, preclinical or manufacturing
validation studies and submit that data before it will reconsider our
application. Depending on the extent of these or any other studies, approval of
any applications that we submit may be delayed by several years, or may require
us to expend more resources than we have available. It is also possible that
additional studies, if performed and completed, may not be considered sufficient
by the FDA to make our applications approvable. If any of these outcomes occur,
we may be forced to abandon our applications for approval, which might cause us
to cease operations.
We will also be subject to a wide variety of foreign regulations governing
the development, manufacture and marketing of our products. Whether or not FDA
approval has been obtained, approval of a product by the comparable regulatory
authorities of foreign countries must still be obtained prior to manufacturing
or marketing the product in those countries. The approval process varies from
country to country and the time needed to secure approval may be longer or
shorter than that required for FDA approval. We cannot assure you that clinical
trials conducted in one country will be accepted by other countries or that
approval in one country will result in approval in any other country.
BEFORE WE CAN OBTAIN REGULATORY APPROVAL, WE NEED TO SUCCESSFULLY COMPLETE
CLINICAL TRIALS, OUTCOMES OF WHICH ARE UNCERTAIN.
In order to obtain FDA approval to market a new drug product, we must
demonstrate proof of safety and effectiveness in humans. To meet these
requirements, we must conduct extensive preclinical testing and "adequate and
well-controlled" clinical trials. Conducting clinical trials is a lengthy, time
consuming, and expensive process. Completion of necessary clinical trials may
take several years or more. Delays associated with products for which we are
directly conducting preclinical or clinical trials may cause us to incur
additional operating expenses. The commencement and rate of completion of
clinical trials may be delayed by many factors, including, for example:
o ineffectiveness of our product candidate or perceptions by
physicians that the product candidate is not safe or effective for a
particular indication;
17
o inability to manufacture sufficient quantities of the product
candidate for use in clinical trials;
o delay or failure in obtaining approval of our clinical trial
protocols from the FDA or institutional review boards;
o slower than expected rate of patient recruitment and enrollment;
o inability to adequately follow and monitor patients after treatment;
o difficulty in managing multiple clinical sites;
o unforeseen safety issues;
o government or regulatory delays; and
o clinical trial costs that are greater than we currently anticipate.
Even if we achieve positive interim results in clinical trials, these
results do not necessarily predict final results, and positive results in early
trials may not be indicative of success in later trials. A number of companies
in the pharmaceutical industry have suffered significant setbacks in advanced
clinical trials, even after promising results in earlier trials. Negative or
inconclusive results or adverse medical events during a clinical trial could
cause us to repeat or terminate a clinical trial or require us to conduct
additional trials. We do not know whether our existing or any future clinical
trials will demonstrate safety and efficacy sufficiently to result in marketable
products. Our clinical trials may be suspended at any time for a variety of
reasons, including if the FDA or we believe the patients participating in our
trials are exposed to unacceptable health risks or if the FDA finds deficiencies
in the conduct of these trials.
Failures or perceived failures in our clinical trials will directly delay
our product development and regulatory approval process, damage our business
prospects, make it difficult for us to establish collaboration and partnership
relationships, and negatively affect our reputation and competitive position in
the pharmaceutical community.
Because of these risks, our research and development efforts may not
result in any commercially viable products. Any delay in, or termination of, our
preclinical or clinical trials will delay the filing of our drug applications
with the FDA and, ultimately, our ability to commercialize our product
candidates and generate product revenues. If a significant portion of these
development efforts are not successfully completed, required regulatory
approvals are not obtained or any approved products are not commercially
successfully, our business, financial condition, and results of operations may
be materially harmed.
IF OUR COLLABORATION OR LICENSE ARRANGEMENTS ARE UNSUCCESSFUL, OUR REVENUES AND
PRODUCT DEVELOPMENT MAY BE LIMITED.
We have entered into several collaboration and licensing arrangements for
the development of generic products. However, there can be no assurance that any
of these agreements will result in FDA approvals, or that we will be able to
market any such finished products at a profit. Collaboration and licensing
arrangements pose the following risks:
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o collaborations and licensee arrangements may be terminated, in which
case we will experience increased operating expenses and capital
requirements if we elect to pursue further development of the
product candidate;
o collaborators and licensees may delay clinical trials and prolong
clinical development, under-fund a clinical trial program, stop a
clinical trial or abandon a product candidate;
o expected revenue might not be generated because milestones may not
be achieved and product candidates may not be developed;
o collaborators and licensees could independently develop, or develop
with third parties, products that could compete with our future
products;
o the terms of our contracts with current or future collaborators and
licensees may not be favorable to us in the future;
o a collaborator or licensee with marketing and distribution rights to
one or more of our products may not commit enough resources to the
marketing and distribution of our products, limiting our potential
revenues from the commercialization of a product;
o disputes may arise delaying or terminating the research, development
or commercialization of our product candidates, or result in
significant and costly litigation or arbitration; and
o one or more third party developers could obtain approval for a
similar product prior to the collaborator or licensee resulting in
unforeseen price competition in connection with the development
product.
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 depends on our ability to protect our current and future
products and to defend our intellectual property rights. If we fail to protect
our intellectual property adequately, competitors may manufacture and market
products similar to ours.
We currently hold five patents, have two patents pending and we intend to
file further patent applications in the future. With respect to our pending
patents, 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
patent rights may not prevent or limit our present and future competitors from
developing, using or commercializing products that are similar or functionally
equivalent to our products.
In addition, we may be required to obtain licenses to patents, or other
proprietary rights of third parties, in connection with the development and use
of our products and technologies as they relate to other persons' technologies.
At such time as we discover a need to obtain any such license, we will need to
establish whether we will be able to obtain such a license on favorable terms.
The failure to obtain the necessary licenses or other rights could preclude the
sale, manufacture or distribution of our products.
19
We rely particularly on trade secrets, unpatented proprietary expertise
and continuing innovation that we seek to protect, in part, by entering into
confidentiality agreements with licensees, suppliers, employees and consultants.
We cannot provide assurance that these agreements will not be breached or
circumvented. We also cannot be certain that there will be adequate remedies in
the event of a breach. Disputes may arise concerning the ownership of
intellectual property or the applicability of confidentiality agreements. We
cannot be sure that our trade secrets and proprietary technology will not
otherwise become known or be independently developed by our competitors or, if
patents are not issued with respect to products arising from research, that we
will be able to maintain the confidentiality of information relating to these
products. In addition, efforts to ensure our intellectual property rights can be
costly, time-consuming and/or ultimately unsuccessful.
LITIGATION IS COMMON IN OUR INDUSTRY, PARTICULARLY THE GENERIC PHARMACEUTICAL
INDUSTRY, AND CAN BE PROTRACTED AND EXPENSIVE AND COULD DELAY AND/OR PREVENT
ENTRY OF OUR PRODUCTS INTO THE MARKET, WHICH, IN TURN, COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
Litigation concerning patents and proprietary rights can be protracted and
expensive. Companies that produce brand pharmaceutical products routinely bring
litigation against applicants that seek FDA approval to manufacture and market
generic forms of their branded products. These companies allege patent
infringement or other violations of intellectual property rights as the basis
for filing suit against an applicant. Likewise, other patent holders may bring
patent infringement suits against us alleging that our products, product
candidates and technologies infringe upon intellectual property rights.
Litigation often involves significant expense and can delay or prevent
introduction or sale of our products.
There may also be situations where we use our business judgment and decide
to market and sell products, notwithstanding the fact that allegations of patent
infringement(s) have not been finally resolved by the courts. The risk involved
in doing so can be substantial because the remedies available to the owner of a
patent for infringement include, among other things, damages measured by the
profits lost by the patent owner and not by the profits earned by the infringer.
In the case of a willful infringement, the definition of which is subjective,
such damages may be trebled. Moreover, because of the discount pricing typically
involved with bioequivalent products, patented brand products generally realize
a substantially higher profit margin than bioequivalent products. An adverse
decision in a case such as this or in other similar litigation could have a
material adverse effect on our business, financial position and results of
operations and could cause the market value of our common stock to decline.
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
20
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.
As we expand our presence in the generic pharmaceuticals market through
our joint venture, Novel, its product candidates may face intense competition
from brand-name companies that have taken aggressive steps to thwart competition
from generic companies. In particular, brand-name companies continue to sell or
license their products directly or through licensing arrangements or strategic
alliances with generic pharmaceutical companies (so-called "authorized
generics"). No significant regulatory approvals are required for a brand-name
company to sell directly or through a third party to the generic market, and
brand-name companies do not face any other significant barriers to entry into
such market. In addition, such companies continually seek to delay generic
introductions and to decrease the impact of generic competition, using tactics
which include:
o obtaining new patents on drugs whose original patent protection is
about to expire;
o filing patent applications that are more complex and costly to
challenge;
o filing suits for patent infringement that automatically delay
approval of the FDA;
o filing citizens' petitions with the FDA contesting approval of the
generic versions of products due to alleged health and safety
issues;
o developing controlled-release or other "next-generation" products,
which often reduce demand for the generic version of the existing
product for which we may be seeking approval;
o changing product claims and product labeling;
o developing and marketing as over-the-counter products those branded
products which are about to face generic competition; and
o making arrangements with managed care companies and insurers to
reduce the economic incentives to purchase generic pharmaceuticals.
These strategies may increase the costs and risks associated with our
efforts to introduce our generic products under development and may delay or
prevent such introduction altogether.
IF OUR PRODUCT CANDIDATES DO NOT ACHIEVE MARKET ACCEPTANCE AMONG PHYSICIANS,
PATIENTS, HEALTH CARE PAYORS AND THE MEDICAL COMMUNITY, THEY WILL NOT BE
COMMERCIALLY SUCCESSFUL AND OUR BUSINESS WILL BE ADVERSELY AFFECTED.
The degree of market acceptance of any of our approved product candidates
among physicians, patients, health care payors and the medical community will
depend on a number of factors, including:
o acceptable evidence of safety and efficacy;
o relative convenience and ease of administration;
21
o the prevalence and severity of any adverse side effects;
o availability of alternative treatments;
o pricing and cost effectiveness;
o effectiveness of sales and marketing strategies; and
o ability to obtain sufficient third-party coverage or reimbursement.
If we are unable to achieve market acceptance for our product candidates,
then such product candidates will not be commercially successful and our
business will be adversely affected.
WE ARE DEPENDENT ON A SMALL NUMBER OF SUPPLIERS FOR OUR RAW MATERIALS AND ANY
DELAY OR UNAVAILABILITY OF RAW MATERIALS CAN MATERIALLY ADVERSELY AFFECT OUR
ABILITY TO PRODUCE PRODUCTS.
The FDA requires identification of raw material suppliers in applications
for approval of drug products. If raw materials were unavailable from a
specified supplier, FDA approval of a new supplier could delay the manufacture
of the drug involved. In addition, some materials used in our products are
currently available from only one supplier or a limited number of suppliers.
Further, a significant portion of our raw materials may be available only
from foreign sources. Foreign sources can be subject to the special risks of
doing business abroad, including:
o greater possibility for disruption due to transportation or
communication problems;
o the relative instability of some foreign governments and economies;
o interim price volatility based on labor unrest, materials or
equipment shortages, export duties, restrictions on the transfer of
funds, or fluctuations in currency exchange rates; and
o uncertainty regarding recourse to a dependable legal system for the
enforcement of contracts and other rights.
In addition, recent changes in patent laws in certain foreign
jurisdictions (primarily in Europe) may make it increasingly difficult to obtain
raw materials for research and development prior to expiration of applicable
United States or foreign patents. Any delay or inability to obtain raw materials
on a timely basis, or any significant price increases that cannot be passed on
to customers, can materially adversely affect our ability to produce products.
This can materially adversely affect our business and operations.
EVEN AFTER REGULATORY APPROVAL, WE WILL BE SUBJECT TO ONGOING SIGNIFICANT
REGULATORY OBLIGATIONS AND OVERSIGHT.
Even if regulatory approval is obtained for a particular product
candidate, the FDA and foreign regulatory authorities may, nevertheless, impose
significant restrictions on the indicated uses or marketing of such products, or
impose ongoing requirements for post-approval studies. Following any regulatory
approval of our product candidates, we will be subject to continuing regulatory
obligations, such as safety reporting requirements, and additional
post-marketing obligations, including regulatory
22
oversight of the promotion and marketing of our products. If we become aware of
previously unknown problems with any of our product candidates here or overseas
or our contract manufacturers' facilities, a regulatory agency may impose
restrictions on our products, our contract manufacturers or on us, including
requiring us to reformulate our products, conduct additional clinical trials,
make changes in the labeling of our products, implement changes to or obtain
re-approvals of our contract manufacturers' facilities or withdraw the product
from the market. In addition, we may experience a significant drop in the sales
of the affected products, our reputation in the marketplace may suffer and we
may become the target of lawsuits, including class action suits. Moreover, if we
fail to comply with applicable regulatory requirements, we may be subject to
fines, suspension or withdrawal of regulatory approvals, product recalls,
seizure of products, operating restrictions and criminal prosecution. Any of
these events could harm or prevent sales of the affected products or could
substantially increase the costs and expenses of commercializing and marketing
these products.
IF KEY PERSONNEL WERE TO LEAVE US 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 oral, controlled release drug delivery
systems and generic 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; 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, 2007.
RISKS RELATED TO OUR COMMON STOCK
FUTURE SALES OF OUR COMMON STOCK COULD LOWER THE MARKET PRICE OF OUR COMMON
STOCK.
Sales of substantial amounts of our shares in the public market could harm
the market price of our common stock, even if our business is doing well. A
significant number of shares of our common stock are eligible for sale in the
public market under SEC Rule 144 subject in some cases to volume and other
limitations. In addition, we have recently filed a registration statement for
the resale of 6,465,504 shares of common stock issuable upon conversion of
outstanding shares of our Series C Preferred Stock issued in the private
placement that closed on April 24, 2007, 4,187,643 shares of common stock
issuable in satisfaction of certain Series C Preferred Stock dividend
obligations and 2,133,606 shares of common stock issuable upon exercise of
warrants issued in the private placement and a registration statement for the
resale of 957,396 shares of Common Stock and 478,698 shares of Common Stock
issuable upon the exercise of warrants issued to VGS Pharma, an affiliate of
Veerappan Subramanian, one of our directors and acting Chief Scientific Officer
and 1,750,000 shares of Common Stock issuable upon the exercise of options
granted to Dr. Subramanian.
Due to the foregoing factors sales of a substantial number of shares of
our common stock in the
23
public market could occur at any time. These sales, or the perception in the
market that the holders of a large number of shares intend to sell shares, could
reduce the market price of our common stock.
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, 2007, the closing sale price on the American Stock Exchange
("AMEX") of our common stock fluctuated from a high of $2.54 per share to a low
of $1.94 per share. The per share price of our common stock may not remain at or
exceed current levels. The market price for our common stock, and for the stock
of pharmaceutical companies generally, has been highly volatile. The market
price of our common stock may be affected by:
o Results of our clinical trials;
o Approval or disapproval of abbreviated new drug applications or new
drug applications;
o Announcements of innovations, new products or new patents by us or
by our competitors;
o Governmental regulation;
o Patent or proprietary rights developments;
o Proxy contests or litigation;
o News regarding the efficacy of, safety of or demand for drugs or
drug technologies;
o Economic and market conditions, generally and related to the
pharmaceutical industry;
o Healthcare legislation;
o Changes in third-party reimbursement policies for drugs; and
o Fluctuations in our operating results.
THE FAILURE TO MAINTAIN THE AMERICAN STOCK EXCHANGE LISTING OF THE COMMON STOCK
WOULD HAVE A MATERIAL ADVERSE AFFECT ON THE MARKET FOR OUR COMMON STOCK AND OUR
MARKET PRICE.
On January 4, 2006, we received a letter from the AMEX notifying us that,
based on our unaudited financial statements as of September 30, 2005, we were
not in compliance with the continued listing standards set forth in the AMEX
Company Guide in that under one listing standard our shareholders' equity is
less than $4,000,000 and we had losses from continuing operations and/or net
losses in three of our four most recent fiscal years and under another listing
standard our shareholders' equity is less than $6,000,000 and we had losses from
continuing operations and/or net losses in our five most recent fiscal years. At
the request of AMEX, we submitted a plan on February 3, 2006 advising AMEX of
action, we had taken, and will take, to bring ourselves in compliance with the
continued listing standards within a maximum of 18 months from January 4, 2006.
On March 15, 2006,
24
we completed a private placement of our Series B Preferred Stock and warrants to
purchase common stock. We received $10,000,000 in gross proceeds from the
private placement. On March 21, 2006, we submitted an update to the plan we had
previously submitted on February 6, 2006. Upon notice of the March 2006 private
placement and the acceptance of the updated plan, AMEX allowed us to maintain
our AMEX listing, subject to periodic review of the our progress by the AMEX
staff. If we are not in compliance with the continued listing standards, AMEX
may then initiate delisting proceedings. The failure to maintain listing of our
common stock on AMEX will have an adverse effect on the market and the market
price for our 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 our common stock or the issuance of
shares of an additional series of preferred stock could be used to make a change
of control of us 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 us. Such shares could be sold to
purchasers who might side with the Board of Directors in opposing a takeover bid
that the Board of Directors determines not to be in the best interests of our
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 our common stock to acquire control of us with a view to consummating
a merger, sale of all or part of our 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;
25
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 of Directors 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 us, 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.
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 5. - 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 have exercised an
option to rent the property through July 1, 2008.
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 we may be subject to litigation from
time to time. There is no past, pending or, to our knowledge, threatened
litigation or
26
administrative action (including litigation or action involving our officers,
directors or other key personnel) which in our opinion has or is expected to
have, a material adverse effect upon our 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, 2007.
27
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, 2007:
March 31, 2007..........................................$2.40 $1.94
December 31, 2006.......................................$2.49 $2.02
September 30, 2006......................................$2.46 $2.03
June 30, 2006 ..........................................$2.54 $2.02
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
On June 26, 2007, the last reported sale price of our Common Stock, as
reported by the American Stock Exchange, was $2.33 per share.
As of June 26, 2007, there were approximately 101 holders of record and,
we believe, approximately 2,081 are beneficial owners of our Common Stock. We
are informed and believe that as of June 26, 2007, Cede & Co. held 18,391,573
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. During the fiscal
year ended March 31, 2007, we have paid dividends in the aggregate principal
amount of $791,182 payable in cash of $808 and in 372,562 shares of our common
stock, 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, 2006, September 30, 2006 and December 31, 2006 and our Current
Reports on Form 8-K dated July 12, 2006 and December 6, 2006, for information
concerning our issuances of unregistered securities during the 12 months ended
March 31, 2007.
28
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information regarding Elite's
equity compensation plans as of March 31, 2007.
Number of
Number of securities remaining
securities available for future
to be issued upon Weighted-average issuance under
exercise of exercise price per equity compensation
outstanding options, share of outstanding plans (excluding
warrants and options, warrants and securities reflected
Plan Category rights rights in column (a))
------------------------- -------------------- -------------------- --------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders 3,776,500 (1) $2.34 3,223,500
Equity compensation plans
not approved by
security holders 2,846,000 (2) $2.20 --
-------------------- -------------------- --------------------
Total: 6,622,500 $2.28 3,223,500
==================== ==================== ====================
(1) Stock options issued under the 2004 Stock Option Plan
(2) Represents 1,750,000 options granted to Veerappan Subramanian, 511,000 to
Atul Mehta and 585,000 to directors and outside consultants
2004 STOCK OPTION PLAN
If options granted under our 2004 Stock Option Plan (the "STOCK OPTION
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 Stock Option
Plan permits us to grant both incentive stock options ("INCENTIVE STOCK OPTIONS"
or "ISOs") within the meaning of Section 422 of the Code, and other options
which do not qualify as Incentive Stock Options (the "NON-QUALIFIED OPTIONs").
Unless earlier terminated by the Board of Directors, the Stock Option Plan
(but not outstanding options) terminates on March 1, 2014, after which no
further awards may be granted under the Stock Option Plan. The Stock Option Plan
is administered by the full Board of Directors or, at the Board's discretion, by
a committee of the Board of Direcotrs 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").
Recipients of options under the Stock Option Plan ("OPTIONEES") are
selected by the Board of Directors or the Committee. The Board of Directors 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 Stock Option Plan for Incentive Stock Options is the fair
market value (as defined in the Stock Option Plan) or for Nonqualified
29
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 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 Stock Option 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 or similar corporate event.
The Board of Directors may at any time terminate the Stock Option Plan or
from time to time make such modifications or amendments to the Stock Option Plan
as it may deem advisable and the Board of Directors 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, of Directors without the approval of
stockholders, amend the Stock Option Plan to increase the maximum number of
shares of Common Stock for which options may be granted under the Stock Option
Plan or change the class of persons eligible to receive options under the Stock
Option Plan.
Subject to limitations set forth in the Stock Option Plan, the terms of
option agreements will be determined by the Board of Directors or Committee, and
need not be uniform among Optionees.
30
COMPARATIVE STOCKHOLDER RETURN
The table which follows compares the yearly percentage change in Elite's
cumulative total stockholder return on its Common Stock for the five year period
ended March 31, 2007 with the cumulative total stockholder return of (1) all
United States companies traded on the American Stock Exchange (where Elite's
Common Stock is now traded) and (2) all companies traded on the American Stock
Exchange which carry the Standard Industrial Classification (SIC) code 283
(Pharmaceuticals). The table was prepared by the Center for Research in Security
Prices at the University of Chicago Graduate School of Business, Chicago, IL.
Elite's Common Stock was traded on the NASDAQ over-the-counter bulletin
board from July 23, 1998 until February 24, 2000. Elite's Common began trading
on the American Stock Exchange on February 24, 2000. Elite's fiscal year ends on
March 31.
Date Company Index Market Index Peer Index
03/28/2002 100.000 100.000 100.000
04/30/2002 86.693 97.347 96.087
05/31/2002 78.811 95.605 86.976
06/28/2002 67.183 88.383 75.591
07/31/2002 46.512 81.026 62.297
08/30/2002 43.411 81.828 60.093
09/30/2002 36.434 75.663 53.021
10/31/2002 32.558 79.874 56.438
11/29/2002 32.300 84.076 65.716
12/31/2002 24.419 80.060 57.688
01/31/2003 24.031 78.857 62.242
02/28/2003 24.419 78.427 57.846
03/31/2003 19.767 78.951 55.731
04/30/2003 19.509 84.721 66.126
05/30/2003 27.132 91.181 83.673
06/30/2003 36.822 93.029 95.607
07/31/2003 31.654 94.467 92.797
08/29/2003 36.047 97.407 100.728
09/30/2003 37.468 97.005 101.800
10/31/2003 41.473 101.839 102.890
11/28/2003 41.344 103.655 101.302
12/31/2003 38.760 108.359 97.216
01/30/2004 47.804 111.270 111.627
02/27/2004 32.300 112.539 107.594
03/31/2004 38.372 112.543 110.856
04/30/2004 41.990 108.546 111.142
05/28/2004 38.760 109.949 102.725
06/30/2004 29.845 112.815 97.931
07/30/2004 28.424 109.428 84.188
08/31/2004 16.925 109.359 81.726
09/30/2004 15.504 112.389 84.974
10/29/2004 22.610 114.757 85.243
11/30/2004 41.990 120.844 90.257
12/31/2004 47.416 125.203 94.370
01/31/2005 53.618 122.619 88.354
02/28/2005 61.886 125.684 85.399
03/31/2005 56.848 122.277 75.909
04/29/2005 45.866 119.122 74.968
05/31/2005 38.760 123.099 70.965
06/30/2005 39.793 125.726 71.889
07/29/2005 37.468 131.539 80.278
08/31/2005 35.530 131.118 79.906
09/30/2005 38.501 132.917 77.509
10/31/2005 31.654 128.688 77.854
11/30/2005 23.385 133.155 79.966
12/30/2005 23.773 135.492 81.308
01/31/2006 26.227 142.254 99.788
02/28/2006 30.103 141.492 104.850
03/31/2006 32.171 145.067 112.032
04/28/2006 29.457 147.470 108.789
05/31/2006 28.424 141.110 100.703
06/30/2006 29.716 140.732 96.451
07/31/2006 28.424 140.684 88.769
08/31/2006 31.008 143.690 93.201
09/29/2006 30.879 144.108 89.657
10/31/2006 26.357 149.850 97.365
11/30/2006 27.519 154.640 101.799
12/29/2006 28.165 157.186 108.331
01/31/2007 25.840 159.233 109.553
02/28/2007 25.969 158.279 107.426
03/30/2007 30.362 160.585 109.236
The index level for all series was set to 100.0 on 03/28/2002
Legend
SYMBOL CRSP TOTAL RETURNS INDEX FOR: 03/2002 03/2003 03/2004 03/2005 03/2006 03/2007
------ ----------------------------- ------- ------- ------- ------- ------- -------
[CLIP ART] Elite Pharmaceuticals, Inc. 100.0 19.8 38.4 56.8 32.2 30.4
[CLIP ART] AMEX Stock Market (US Companies) 100.0 79.0 ll2.5 122.3 145.1 160.6
[CLIP ART] AMEX Stocks (SIC 2830-2839 US Companies) 100.0 55.7 l10.9 75.9 l12.0 109.2
Drugs
NOTES:
A The lines represent monthly index levels derived from compounded
daily returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalizatian on
the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a
trading day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 03/28/2002.
[PERFORMANCE CHART OMITTED]
31
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.
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
Net revenues $ 1,143,841 $ 550,697 $ 301,480 $ 258,250 $ 630,310
Net (loss) $(11,803,512) $ (6,883,914) $ (5,906,890) $ (6,514,217) $ (4,061,422)
Net (loss) per common share $ (.64) $ (0.49) $ (0.47) $ (0.58) $ (0.40)
Total assets $ 9,696,329 $ 15,702,241 $ 9,245,292 $ 7,853,434 $ 8,696,222
Long-term obligations $ 3,795,000 $ 3,980,000 $ 2,367,128 $ 2,495,000 $ 2,720,000
Weighted average number 19,815,780 18,463,514 12,869,924 11,168,618 10,069,991
of shares outstanding
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
We are a specialty pharmaceutical company principally engaged in the
development and manufacture of oral, controlled release products. We develop
oral, controlled release products using proprietary technology and licenses
these products. Our strategy includes improving off-patent drug products for
life cycle management and developing generic versions of controlled release drug
products with high barriers to entry. Our technology is applicable to develop
delayed, sustained or targeted release pellets, capsules, tablets, granules and
powders.
We have two products, Lodrane 24(R) and Lodrane 24D(R), for treating
allergies, currently being sold commercially, and a pipeline of seven drug
candidates under development in the therapeutic areas that include pain
management, infection and gastrointestinal disorder. Of the products under
32
development, ELI-216, an abuse deterrent oxycodone product, and ELI-154, a once
daily oxycodone product, are in clinical trials and we have two generic product
candidates that are undergoing pivotal studies. The addressable market for the
pipeline of products exceeds $6 billion. Our facility in Northvale, New Jersey
also is a GMP and DEA registered facility for research, development and
manufacturing.
At the end of 2006, we entered into a joint venture with VGS Pharma, LLC
and created Novel Novel, a privately-held company specializing in pharmaceutical
research, development, manufacturing, licensing, acquisition and marketing of
specialty generic pharmaceuticals.
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 build collaborations and
establish licensing agreements with companies with greater resources thereby
allowing us to share costs of development and to improve cash-flow.
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. We also
assess a need for an allowance to reduce our deferred tax assets to the amount
that we believe is more likely than not to be realized. We assess the
recoverability of long-lived assets and intangible assets whenever events or
changes in circumstances indicate that the carrying value of the asset may not
be recoverable. We assess our exposure to current commitments and contingencies.
It should be noted that actual results 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 $1,008,850, $902,967 and $3,479,070 during the
years ended March 31, 2005, 2006 and 2007, 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.
33
YEAR ENDED MARCH 31, 2007 VS. YEAR ENDED MARCH 31, 2006
Our revenues for the year ended March 31, 2007 were $1,143,841, an
increase of $593,144 or approximately 108%, over revenues for the comparable
prior year, and consisted of $1,038,916 in manufacturing fees and $104,925 in
royalty fees. Revenues for the year ended March 31, 2006, consisted $494,231 in
manufacturing fees and $56,466 in royalty fees. The increase in manufacturing
fees and royalties was primarily due to the launch of our second product,
Lodrane 24D(R).
Research and development costs for the year ended March 31, 2007, were
$6,085,888, an increase of $1,741,998 or approximately 40% from $4,343,890 of
such costs for the prior year, primarily the result of increased wages, raw
materials, laboratory and manufacturing supplies and consulting fees. Elite now
has 41 employees, an increase of 58% from 26 employees one year ago. The
increase in employees is primarily for the scale up work for the pain products
and includes manufacturing, analytical and quality assurance people. Elite has
also increased its spending on raw materials, primarily API, by 100% from
$300,000 to $600,000. The raw materials are also primarily for scale up of the
pain products. Spending on biostudies has increased to $1,000,000 from $100,000
a year ago due to spending on the Phase II study for ELI-216. Research and
development costs associated with Novel's activities also contribute to the
increase. We expect our research and development costs to continue to increase
in future periods primarily due to clinical costs for Phase III and other
clinical trials for ELI-216 and ELI-154.
General and administrative expenses (G&A) for the year ended March 31,
2007, were $2,534,507, an increase of $807,881, or approximately 47% from
$1,726,626 of G&A for the prior year. The increase was attributable to increases
in salaries and fringe benefits as a result of increases in staff, consulting
fees associated with seeking potential strategic transitions in addition to
costs associated with our Novel activities.
We are in the initial stages of breaking down the specific costs
associated with the research and development of each product on which we devoted
resources through the use of detailed time sheets and general ledger account
classifications. In the past, we have not historically allocated these expenses
to any particular product. 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 decreased by $46,693 from $486,687 for the
prior year to $439,994. The decrease was the result of our taking in 2006 the
full write-off of financing costs associated with the redemption of tax exempt
NJEDA Bonds, partially offset by an increase in depreciation in 2007 due to
acquired new machinery and equipment and upgrading of the corporate and
warehouse facilities.
Other income (expenses) for the year ended March 31, 2007 were
$(3,064,144), an increase of $2,187,736, or approximately 250%, from $(876,408)
for the prior year due to an increase of $2,576,143 in charges related to the
issuances of stock options and warrants, offset by (i) an increase of $158,138
in sale of New Jersey tax losses, (ii) additional interest income of $221,836,
due to higher compensating balances as a result of the private placement and,
(iii) a decrease of $8,433 in interest expense resulting from a decrease in
NJEDA Bonds outstanding.
As a result of the foregoing, our net loss for the year ended March 31,
2007 was $11,803,512 compared to $6,883,914 for the year ended March 31, 2006.
34
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 us 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.
For the years ended March 31, 2006 and 2005, we were 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 NJEDA Bond Offering costs as a result of the refinancing.
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, our 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.
MATERIAL CHANGES IN FINANCIAL CONDITION
Our working capital (total current assets less total current liabilities),
decreased from $8,615,287 as of March 31, 2006 to $1,019,631, primarily due to
the net loss of $7,884,448 from operations, exclusive of non-cash charges of
$3,919,064.
35
We experienced negative cash flows from operations of ($8,314,268) for the
year ended March 31, 2007, primarily due to our net loss from operations of
$11,803,512, less non-cash charges of $3,919,064, which included $3,479,070 in
connection with the issuance of stock options and warrants, and $439,994 in
depreciation and amortization expenses.
On November 15, 2004 and on December 18, 2006, Elite's partner, ECR,
launched Lodrane 24(R) and Lodrane 24D(R), respectively. Under its agreement
with ECR, Elite is currently manufacturing commercial batches of Lodrane 24(R)
and Lodrane 24D(R) in exchange for manufacturing margins and royalties on
product revenues. Royalty income earned for the year ended March 31, 2007 was
$104,925. We expect future cash flows from royalties to provide additional cash
to help fund our operations.
On June 21, 2005, Elite 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. We
estimate that the product had an addressable market in the U.S. of approximately
$4 billion in 2004. We are 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 us a certain percentage of any payments
received by IPC with respect to the commercialization of the controlled release
drug product by such Canadian company.
On June 22, 2005, Elite 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 us. We are to
manufacture and PLIVA will market and sell the product. Under the agreement, the
partner is to make milestone payments to us and the development costs are to be
paid both by PLIVA and us, and the profits are to be shared equally. On June 28,
2007, Elite and PLIVA terminated the Product Development and License Agreement,
effective January 31, 2007, and entered into a termination agreement according
to which it was agreed that Elite owns all intellectual property rights relating
to the controlled released generic product under development and PLIVA agreed to
pay Elite $100,000 in discharge of outstanding payments under the Product
Development and License Agreement.
On January 10, 2006, Elite entered into a Product Development and
Commercialization Agreement with Orit Laboratories LLC ("ORIT") providing that
we 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. We are 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 FDA accepted our IND for ELI-154, its once-a-day
oxycodone painkiller. Under the new drug application, we will begin our
development program with an early stage study to evaluate ELI-154's sustained
release formation. Currently there is no once-daily oxycodone available;
36
we estimate 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 we will consummate any of the transactions
discussed above or that any material revenues will be generated for us
therefrom.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended March 31, 2007, we recorded negative cash flow and
financed our operations through utilization of our existing cash. Our working
capital at March 31, 2007 was $1.0 million compared with working capital of $8.6
million at March 31, 2006. Cash and cash equivalents at March 31, 2007 were $2
million, a decrease of $6.9 million from the $8.9 million at March 31, 2006.
We spent approximately $1,548,000 on improvements and machinery and
equipment during the year ended March 31, 2007.
On April 24, 2007, we sold in a private placement through Oppenheimer &
Company, Inc., the placement agent (the "PLACEMENT AGENT"), 15,000 shares of our
Series C Preferred Stock, at a price of $1,000 per share, each share convertible
(at $2.32 per share) into 431.0345 shares of Common Stock, or an aggregate of
6,465,504 shares of Common Stock. The investors also acquired warrants to
purchase shares of Common Stock, exercisable on or prior to April 24, 2012. The
warrants represent the right to purchase an aggregate of 1,939,641 shares of
Common Stock at an exercise price of $3.00 per share. The gross proceeds of the
sale were $15,000,000 before payment of $1,050,000 in commissions to the
Placement Agent and selected dealers. We also paid certain legal fees and
expenses of counsel to the Placement Agent. We issued to the Placement Agent and
its designees five year warrants to purchase 193,965 shares of Common Stock with
similar terms to the warrants issued to the Investors with an exercise price of
$3.00 per share. We expect that the approximate $13,900,000 of net proceeds will
contribute materially to our efforts to advance our portfolio of pain products
through the clinic as well as accelerate the development of our other controlled
release products which utilize our proprietary oral drug delivery systems and
abuse resistant technology.
From time to time we will consider potential strategic transactions
including acquisitions, strategic alliances, joint ventures and licensing
arrangements with other pharmaceutical companies. We retained an investment
banking firm to assist with our efforts. There can be no assurance that any such
transaction will be available or consummated in the future.
As of March 31, 2007, our principal source of liquidity was approximately
$2,045,390 of cash and cash equivalents. After the closing of the private
placement in April 2007, our principal source of liquidity was approximately
$15,750,000 of cash and cash equivalents. We intend to sell the remaining 5,000
shares of such Series C Preferred Stock, together with warrants to purchase
shares of our Common Stock, which should result in gross proceeds of up to
$5,000,000. 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 from any
potential future sale of Series C Preferred Stock or by the exercise of
outstanding warrants or options will be generated or provide sufficient cash.
37
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 1 Year 1-3 Years 4-5 Years After 5 Years
----- ---------------- --------- --------- -------------
NJEDA Bonds payable $3,980,000 $ 185,000 $ 635,000 $ 505,000 $2,655,000
OFF-BALANCE SHEET ARRANGEMENTS
None.
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.
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 our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended),
our Chief Executive and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective for ensuring that information
required to be disclosed by us in our Exchange Act reports is recorded,
processed, summarized and reported within the applicable time periods specified
by the SEC's rules and forms. We also concluded that information required to be
disclosed in such reports is accumulated and communicated to our management,
including our principal executive and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure. There was
no change in our internal controls over financial reporting that occurred during
the most recent fiscal quarter that materially affected or is reasonably likely
to materially affect our internal controls over financial reporting. Our
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.
The following disclosure would have otherwise been filed on Form 8-K under
the heading "Item 1.02 - Termination of Material Agreement":
On June 28, 2007, Elite and Pliva, now a subsidiary of Barr
Pharmaceuticals, Inc., terminated the Product Development and License Agreement
entered into on June 22, 2005. The Product Development and License Agreement
provided for the development and license of a controlled release generic
product. According to the termination agreement between Elite and Pliva, which
is effective as of January 31, 2007, it was agreed that Elite owns all
intellectual property rights relating to the controlled released generic product
in
38
development under the Product Development and License Agreement and Pliva agreed
to pay Elite $100,000 in discharge of outstanding payments under the Product
Development and License Agreement.
The following disclosure would have otherwise been filed on Form 8-K under
the heading "Item 3.01 - Notice of Delisting or Failure to Satisfy a Continued
Listing Rule or Standard":
On June 22, 2007, we received notice from the American Stock Exchange
("AMEX") stating that we were not in compliance with Section 301 of the Amex
Company Guide pertaining to the issuance of securities prior to filing an
application for the listing of such additional securities and receiving
notification from AMEX that the securities have been approved for listing.
Specifically, on December 6, 2006, we issued 957,396 shares of its common
stock to VGS Pharma, LLC ("VGS SHARES") and prior to submitting an Additional
Listing Application and receiving AMEX approval of such application.
We submitted an Additional Listing Application covering, among other
things, the VGS Shares, as well as the shares underlying the securities issued
in our April 24, 2007 Series C financing, to AMEX on June 6, 2007, which
application was subsequently amended and restated on June 21, 2007. Upon
approval of such application, we will regain compliance with all applicable
continued listing standards of AMEX.
39
PART III
ITEM 10. DIRECTORS , EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
DIRECTORS AND EXECUTIVE OFFICERS
Our current directors, executive officers and key employees, and their
biographical information are set forth below:
NAME AGE TITLE
---- --- -----
Bernard Berk 58 Director, Chairman, Chief Executive Officer and President
Barry Dash, Ph. D 75 Director
Melvin M. Van Woert, M.D. 76 Director
Veerappan Subramanian, Ph. D. 57 Director, Acting Chief Scientific Officer
Robert J. Levenson 66 Director*
Edward Neugeboren Former Director**
Mark I. Gittelman 47 Chief Financial Officer, Secretary and Treasurer
Chris Dick 52 Executive Vice President of Corporate Development
Charan Behl 55 Head of Technical Affairs
*Robert Levenson became a director on June 26, 2007.
** Edward Neugeboren ceased being a director on June 26, 2007.
The principal occupations and employment of each such person during the
past five years is set forth below. In each instance in which dates are not
provided in connection with a nominee's business experience, such nominee has
held the position indicated for at least the past five years.
MR. BERNARD BERK, President and Chief Executive Officer since June 2003,
Chairman of the Board and Director since February 2004 and Member of the
Nominating Committee since June 2004. Prior to joining Elite, Mr. Berk was the
President and Chief Executive Officer of Michael Andrews Corporation, a
pharmaceutical management consultant firm, from 1996 to 2003. Prior to that, Mr.
Berk was from 1994 until 1996, President and Chief Executive Officer of Nale
Pharmaceutical Corporation. From 1989 until 1994, he was Senior Vice President
of Sales, Marketing and Business Development of Par Pharmaceuticals, Inc. Mr.
Berk holds a B.S. from New York University.
DR. BARRY DASH, Director since April 2005, Member of Audit Committee since
April 2005, Member of Nominating Committee since April 2005 and Member of
Compensation Committee since June 2007, has been since 1995 President and
Managing Member of Dash Associates, L.L.C., an independent consultant to the
pharmaceutical and healthcare industries. From 1983 to 1996 he was employed by
American Home Products Corporation (now known as Wyeth), its Whitehall-Robins
Healthcare Division, initially as Vice President of Scientific Affairs, then
Senior Vice President of Scientific Affairs and then Senior Vice President of
Advanced Technologies during which time he personally supervised six separate
departments: Medical and Clinical Affairs, Regulatory Affairs, Technical
Affairs, Research and Development, Analytical R&D and Quality Management/Q.C. He
had previously been employed by the Whitehall Robins Healthcare Division from
1960 to 1976, during which
40
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
to 1982. From 1976 to 1978 he was Vice President, Director of Laboratories of
the Consumer Products Division of American Can Company. He currently serves on
the board of GeoPharma, Inc. (NASDQ: GORX) 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, American Association of Pharmaceutical Scientists, Drug Information
Association, American Foundation for Pharmaceutical Education, and Diplomate
American Board of Forensic Examiners. He is the author of scientific
publications and patents in the pharmaceutical field.
DR. MELVIN VAN WOERT, Director since April 2005, Member of Audit Committee
since April 2005, Member of Nominating Committee since April 2005 and Member of
Compensation Committee since June 2007, 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 United States Food and Drug Administration from 1974 to 1980;
Associate Editor for 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.
DR. VEERAPPAN SUBRAMANIAN, Acting Chief Scientific Officer since February
2007 and Director since December 2006. Since December 2006, Dr. Subramanian
serves as Chief Executive Officer and Chairman of the Board of Novel
Laboratories, Inc. Dr. Subramanian has been a pharmaceutical executive since
1981 and a pharmaceutical entrepreneur since 1997, when he formed Kali
Laboratories, Inc. ("KALI LABS"). Kali Labs was acquired by Par Pharmaceuticals,
Inc. in 2004 and Dr. Subramanian continued to work as an executive vice
president at Par Pharmaceuticals after the acquisition. Dr. Subramanian ended
his relationship with Par Pharmaceuticals in January 2006. Prior to organizing
Kali Labs, Dr. Subramanian served for 6 years as vice president of scientific
affairs for Zenith Laboratories, Inc. Prior to working with Zenith Laboratories,
he was (i) the Director of New Product Development and Technical Services for
Kali Pharma, Inc., (ii) a Senior Scientist, Commercial Products with Vicks
Research Center, (iii) a Research Pharmacist, Dermatological with Johnson &
Johnson and (iv) a Research Pharmacist in Product Development with E.R. Squibb &
Sons. Between 2001 and 2005, Dr. Subramanian served on the board of Generic
Pharmaceutical Industry Association. Dr. Subramanian has a Ph.D. in Pharmacy
(1981) from Rutgers University, a M.S. in Phamaceutics (1973) from Birla
Institute of Technology & Science, and a B.S. in Pharmacy (1971) from Madurai
Medical College.
ROBERT J. LEVENSON, Director since June 2007 and Member of the Audit
Committee and Compensation Committee since June 2007, is currently Managing
Member of the Lenox Capital Group, L.L.C. since 2000. Mr. Levenson was
previously an Executive Vice President of First Data Corporation from 1993 to
2000 and a member of its Board of Directors from 1992 to 2003. He was Senior
Executive Vice President, Chief Operating Officer, and Member of the Office of
the President and Director of Medco Containment Services, Inc., a provider of
managed care prescription benefits, from October 1990 to December 1992. From
1985 until October 1990, he was a Group President and Director of Automatic Data
Processing, Inc. (ADP-NYSE). Mr. Levenson has been a director of several other
companies, public and private. Mr. Levenson is currently nominated to be a
director of Ceridian Corporation (NYSE: CEN).
41
Mr. Levenson is a trustee of the Washington Institute, the Jewish Community
Federation, and the Jewish Community Foundation of Metrowest New Jersey.
MR. EDWARD NEUGEBOREN, Director from January 2005 to June 2007 and Member
of Audit Committee from January 2005 to June 2007, has been a Managing Partner
of Ledgemont Capital Group LLC, an investment banking firm based in New York
from January 2005 to May 2007, Mr. Neugeboren was a consultant with Indigo
Ventures LLC, an investment banking firm based in New York. 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 1988 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.
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 Fairleigh 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 was affiliated in the past
was a parent, subsidiary or other affiliate of the Company.
CHRIS DICK 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 M.S. in
Chemical Engineering from Cornell University.
DR. CHARAN BEHL was appointed Head of Technical Affairs in February 2007
and was previously Executive Vice President and Chief Scientific Officer of the
Company from March 2006 to February 2007. 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, 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,
42
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 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.
There is no family relationship among our directors and executive
officers.
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, Mr. Dick and Dr. Behl, each of which 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.
BOARD MEETINGS
During the fiscal year ended March 31, 2007, our Board of Directors held 7
meetings. No director who served during the fiscal year ended March 31, 2007
attended fewer than 75% of the meetings of the Board of Directors during that
year other than Veerappan Subramanian who joined the Board in December 2006.
We do not have a formal policy regarding attendance by members of the
Board of Directors at our 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.
COMMITTEES OF THE BOARD
The Board of Directors has an Audit Committee, a Nominating Committee and
a Compensation Committee. For the fiscal year ended March 31, 2007, the members
of the Nominating Committee were Bernard Berk, Barry Dash and Melvin Van Woert
and of the Audit Committee are Edward Neugeboren, Barry Dash and Melvin Van
Woert. Robert J. Levenson replaced Edward Neugeboren as a member of the audit
committee on June 26, 2007. On June 26, 2007, we constituted a Compensation
Committee, the members of which are Robert J. Levenson, Barry Dash and Melvin
Van Woert.
AUDIT COMMITTEE
The Audit Committee held one meeting during the fiscal year ended March
31, 2007. A copy of its written charter (adopted by the Board of Directors) was
included as an appendix to our proxy statement sent to stockholders in
connection with the annual meeting of stockholders held October 11, 2001.
We deem the members of our Audit Committee to be independent. Mr.
Neugeboren, a member of our audit committee during the fiscal year ended March
31, 2007 qualified as an audit committee financial expert. Mr. Levenson, who
replaced Mr. Neugeboren on the audit committee on June 26, 2007 also qualifies
as an audit committee financial expert.
The audit committee's primary responsibilities are to monitor the
integrity of our financial statements and reporting process and systems of
internal controls regarding finance and accounting and to monitor our compliance
with legal and regulatory requirements, including disclosures and procedures.
The committee also has the responsibility to evaluate our independent auditor's
qualifications, independence and performance as well as to evaluate the
performance of the internal audit function.
NOMINATING COMMITTEE
The Nominating Committee held one meeting during the fiscal year ended
March 31, 2007. This committee does not have a charter. This committee assists
the Board of Directors in identifying and
43
recommending qualified Board candidates. The committee identifies Board
candidates through numerous sources, including recommendations from Directors,
executive officers and our stockholders. The committee seeks to have available
to it qualified candidates from a broad pool of individuals with a range of
talents, experience, backgrounds and perspectives. The committee seeks to
identify those individuals most qualified to serve as Board members and
considers many factors with regard to each candidate, including judgment,
integrity, diversity, prior experience, the interplay of the candidate's
experience with the experience of other Board members, the extent to which the
candidate would be desirable as a member of any committees of the Board of
Directors, and the candidate's willingness to devote substantial time and effort
to Board responsibilities. The Nominating Committee makes recommendations to the
Board of Directors with respect to Director nominees.
COMPENSATION COMMITTEE
On June 26, 2007, we constituted a Compensation Committee. The role of the
Compensation Committee will be to determine executive compensation and make
recommendations with respect to incentive compensation and executive
compensation.
Prior to the establishment of the Compensation Committee, the full Board
of Directors, which includes two Directors employed by us, participated in
deliberations concerning executive compensation and established the compensation
and benefit plans and programs of Elite. For more information on the
compensation of directors and officers of the Company, see the "Compensation
Discussion and Analysis" and "Compensation" sections below.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, until June 26, 2007, the Board of Directors as a whole
performed the functions normally associated with the compensation committee.
However, while Bernard Berk, our President and Chief Executive Officer and
Veerappan Subramanian, our Chief Scientific Officer, served as members of the
Board of Directors, at no time did Mr. Berk or Dr. Subramanian participate in
deliberations of the Board of Directors concerning either of their own
compensation.
The newly constituted Compensation Committee is currently composed of
members who are neither currently nor ever have been an employee or officer of
the Company and no executive officer of the Company served in the last fiscal
year as a director or member of the compensation committee of another entity one
of whose executive officers served as a member of our Board of Directors.
CODE OF CONDUCT
At the first meeting of the Board of Directors following the Annual
Meeting of Stockholders held on June 22, 2004, the Board of Directors 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. To receive a copy of our Code of Business Conduct
and Ethics, at no cost, requests should be directed to the Secretary, Elite
Pharmaceuticals, Inc., 165 Ludlow Avenue, Northvale, New Jersey 07647. We intend
to disclose any amendment to, or waiver of, a provision of the Business
44
Conduct and Ethics for Directors in a report filed under the Securities Exchange
Act of 1934, as amended, within five business days of the amendment or waiver.
STOCKHOLDER COMMUNICATIONS
Stockholders and other interested parties may contact the Board of
Directors or the non-management directors as a group at the following address:
Board of Directors or Outside Directors Elite Pharmaceuticals, Inc., 165 Ludlow
Avenue, Northvale, NJ 07647. All communications received at the above address
will be relayed to the Board of Directors or the non-management directors,
respectively. Communications regarding accounting, internal accounting controls
or auditing matters may also be reported to the Board of Directors using the
above address
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, 2007 all Reporting Persons complied with all
applicable filing requirements other than Dr. Dash and Dr. Subramanian who did
not timely file a Form 4 and Form 3, respectively.
45
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION DISCUSSION AND ANALYSIS
SUMMARY
Our approach to executive compensation, one of the most important and also
most complex aspects of corporate governance, is influenced by our belief in
rewarding people for consistently strong execution and performance. We believe
that the ability to attract and retain qualified executive officers and other
key employees is essential to our long term success.
Our plan to obtain and retain highly skilled employees is to provide
significant incentive compensation opportunities and market competitive
salaries. The plan was intended to link individual employee objectives with
overall company strategies and results, and to reward executive officers and
significant employees for their individual contributions to those strategies and
results. We use compensation and performance data from comparable companies in
the pharmaceutical industry to establish market competitive compensation and
performance standards for our employees. Furthermore, we believe that equity
awards serve to align the interests of our executives with those of our
stockholders. As such, equity is a key component of our compensation program.
NAMED EXECUTIVE OFFICERS
The named executive officers for fiscal year ended March 31, 2007 are
Bernard Berk, President and Chief Executive Officer; Mark I. Gittelman, Chief
Financial Officer; Chris Dick, Executive Vice President of Corporate
Development; Charan Behl, Chief Scientific Officer until February 9, 2007, Head
of Technical Affairs since February 9, 2007; and Veerappan Subramanian, Chief
Scientific Officer since February 9, 2007. These individuals are referred to
collectively in this Annual Report on Form 10-K as the "NAMED EXECUTIVE
OFFICERS."
OUR EXECUTIVE COMPENSATION PROGRAM
OVERVIEW
The primary elements of our executive compensation program are base
salary, incentive cash and stock bonus opportunities and equity incentives
typically in the form of stock option grants. Although we provide other types of
compensation, these three elements are the principal means by which we provide
the Named Executive Officers with compensation opportunities.
The emphasis on the annual bonus opportunity and equity compensation
components of the executive compensation program reflect our belief that a large
portion of an executive's compensation should be performance-based. This
compensation is performance-based because payment is tied to the achievement of
corporate performance goals. To the extent that performance goals are not
achieved, executives will receive a lesser amount of total compensation. We have
entered into employment agreements with three of our Named Executive Officers.
Such employment agreements set forth base salaries, bonuses and stock option
grants. Such stock option grants are predicated on our achievement of corporate
performance goals as set forth in such agreements.
46
ELEMENTS OF OUR EXECUTIVE COMPENSATION PROGRAM
BASE SALARY
We pay a base salary to certain of the Named Executive Officers. In
general, base salaries for the Named Executive Officers are determined by
evaluating the responsibilities of the executive's position, the executive's
experience and the competitive marketplace. Base salary adjustments are
considered and take into account changes in the executive's responsibilities,
the executive's performance and changes in the competitive marketplace. We
believe that the base salaries of the Named Executive Officers are appropriate
within the context of the compensation elements provided to the executives and
because they are at a level which remains competitive in the marketplace.
BONUSES
The Board of Directors may authorize us to give discretionary bonuses,
payable in cash or shares of common stock, to the Named Executive Officers and
other key employees. Such bonuses are designed to motivate the Named Executive
Officers and other employees to achieve specified corporate, business unit
and/or individual, strategic, operational and other performance objectives.
During the fiscal year ended March 31, 2007, the Company awarded bonuses of
$25,000 each to Charan Behl and Chris Dick in accordance with the terms of their
employment agreements.
STOCK OPTIONS
Stock options constitute performance-based compensation because they have
value to the recipient only if the price of our common stock increases. Stock
options for each of the Named Executive Officers generally vest over time,
obtainment of a corporate goal or a combination.
The grant of stock options at Elite is the centerpiece of our compensation
program and is designed to motivate our Named Executive Officers to achieve our
short term and long term corporate goals.
As the pharmaceutical industry is characterized by a long product
development cycle, including a lengthy research and product-testing period and a
rigorous approval phase involving human testing and governmental regulatory
approval, many of the traditional benchmarking metrics for vesting, such as
product sales, revenues and profits are inappropriate for an early-stage
pharmaceutical company such as Elite. We consider when determining vesting
benchmarks the following which are aligned with our short term and long term
corporate goals:
o clinical trial progress;
o achievement of regulatory milestones; and
o establishment of key strategic relationships.
RETIREMENT AND DEFERRED COMPENSATION BENEFITS
We do not presently provide the Named Executive Officers with a defined
benefit pension plan or any supplemental executive retirement plans, nor do we
provide the Named Executive Officers with retiree health benefits. We have
adopted a deferred compensation plan under Code Section 401(k) of the
47
Internal Revenue Service Code. The Stock Option Plan provides for employees to
defer compensation on a pretax basis subject to certain limits, however, Elite
does not provide a matching contribution to its participants.
The retirement and deferred compensation benefits provided to the Named
Executive Officers are not material factors considered in making other
compensation determinations with respect to Named Executive Officers.
PERQUISITES
As described in more detail below, the perquisites provided to certain of
the Named Executive Officers consists of car and parking allowances and life
insurance premiums. These perquisites represent a small fraction of the total
compensation of each such Named Executive Officer. The value of the perquisites
we provide are taxable to the Named Executive Officers and the incremental cost
to us of providing these perquisites is reflected in the Summary Compensation
Table. The Board of Directors believes that the perquisites provided are
reasonable and appropriate. For more information on perquisites provided to the
Named Executive Officers, please see the All Other Compensation column of the
Summary Compensation Table and "Agreements with Named Executive Officers" below.
POST-TERMINATION/ CHANGE OF CONTROL COMPENSATION
In addition to retirement and deferred compensation benefits described
above, we have arrangements with certain of the Named Executive Officers that
may provide them with compensation following termination of employment. These
arrangements are discussed below under "Agreements with Named Executive
Officers".
TAX IMPLICATIONS OF EXECUTIVE COMPENSATION
Our aggregate deductions for each Named Executive Officer compensation are
potentially limited by Section 162(m) of the Internal Revenue Code to the extent
the aggregate amount paid to an executive officer exceeds $1 million, unless it
is paid under a predetermined objective performance plan meeting certain
requirements, or satisfies one of various other exceptions specified in the
Internal Revenue Code. At our 2006 Named Executive Officer compensation levels,
we did not believe that Section 162(m) of the Internal Revenue Code would be
applicable, and accordingly, we did not consider its impact in determining
compensation levels for our Named Executive Officers in 2006.
AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
MESSRS BERK, DICK AND DR. BEHL
On November 13, 2006, we entered into (i) the Second Amended and Restated
Employment Agreement with Mr. Berk, our President, Chief Executive Officer and
Chairman of the Board of Directors (the "BERK AGREEMENT"); (ii) an employment
agreement with Dr. Behl as Executive Vice President and Chief Scientific Officer
(the "BEHL AGREEMENT"); and (iii) an employment agreement with Mr. Dick as
Executive Vice President of Corporate Development (the "DICK AGREEMENT"). The
employment agreement with Dr. Behl was subsequently amended and restated on
February 9, 2007, under which Dr. Behl's position was changed from Chief
Scientific Officer to Head of Technical Affairs and he is to report to our Chief
Executive Officer, Chief Scientific Officer and any additional executive officer
designated by the Board of Directors.
48
The Berk Agreement provides for a base annual salary of $330,140 (his
current salary) which may at the discretion of the Board of Directors be
increased in light of factors including our existing financial condition and Mr.
Berk's success in implementing our business plan and achieving our strategic
alternatives. Mr. Berk is to continue to receive an automobile allowance of $800
per month. The Behl and Dick Agreements provide for an initial base annual
salary of $250,000 and $200,000, respectively, a guaranteed bonus of $25,000
payable on January 1, 2007 and within 30 calendar days of the end of each fiscal
year during the term and a $700 per month automobile allowance.
Each of the three agreements provides for payment of a discretionary bonus
following the end of each fiscal year of up to 50% of the executive's then
annual base salary. The amount, if any, of the discretionary bonus will be
determined by the Compensation Committee as to Mr. Berk and by the Board of
Directors or a Compensation Committee as to Dr. Behl and Mr. Dick. Mr. Berk's
bonus is to be based on any commercialization of products, merger or
acquisition, business combination or collaborations, growth in revenues and
earnings, additional financings or other strategic business transaction that
inure to the benefit of our stockholders. The bonus, if any, may be paid in cash
or shares of common stock, valued at the closing price of the common stock on
the immediately preceding trading day. The discretionary bonus which may be paid
to Dr. Behl or Mr. Dick is to be based on the achievement of goals discussed
with the executive in good faith and within a reasonable time following the
commencement of each fiscal year and may be paid in cash or shares of our common
stock valued at the average of the closing price per share during the five
trading days immediately preceding the date of issuance of the shares.
Each of Dr. Behl's and Mr. Dick's agreement provides for the grant under
the Company's Stock Option Plan to the executive at an exercise price of $2.25
of options to purchase 250,000 shares. The Berk, Behl and Dick Agreements each
provide for the grant to the executive of options at the foregoing exercise
price to purchase up to 300,000 additional shares (the "OPIOID PRODUCT OPTIONS")
which are to vest in two 150,000 share tranches upon the closing of an exclusive
product license for the United States national market, the entire European Union
Market or the Japan market or a product sale transaction of all our ownership
rights in the United States (only once for each product) for our first drug
developed by us for which the FDA approval will be sought under a NDA (including
a 505(b) (2) application) for oxycodone, hydrocone, hydromorphone, oxymorphone,
or morphine ("NON-GENERIC OPIOID PRODUCT") as to the first tranche and as to our
second Non-Generic Opioid Drug for the second tranche.
The Berk Agreement provides for the amendment of the vesting of options as
to 400,000 shares which had been granted on September 2, 2005 to Mr. Berk at an
exercise price of $2.69 per share ("BERK'S PREVIOUS MILESTONE OPTIONS") and the
Behl and Dick Agreements provides for the grant of options at the exercise price
of $2.25 per share for each of Behl and Dick as to 200,000 shares (collectively
along with Mr. Berk's Previous Milestone Options, the "MILESTONE OPTIONS") with
the Milestone Options of each of the three executives to vest (A) as to not more
than 125,000 shares and 75,000 shares, respectively, upon the commencement of
the first Phase III clinical trial relating to the first and then the second
Non-Generic Opioid Drug developed by us; (B) 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) other than Non-Generic Opioid Drugs for which
options were granted above; (C) 10,000 shares upon the filing by us (in our
name) with the FDA of either an ANDA or an NDA (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; (D) 40,000 shares upon the approval by
the FDA of any ANDA or NDA (filed in our name) for a product not previously
approved by the FDA; (E) 25,000 shares upon the filing of an application for a
U.S. patent by us (in our name); and (F) 25,000 shares upon the granting by the
U.S. Patent and Trademark Office (the "PTO") of a patent to us filed in our name
or an approval of an ANDA or NDA;
49
provided, however the foregoing options terminate upon the executive's
termination of employment except that options under (D) and (F) nevertheless
vest if the filing was made during the initial term but prior to termination of
the executive's employment by us without cause and the approval was made within
540 days of the filing of the ANDA, NDA or patent application.
We also agreed that in the event that, as to Mr. Berk, all of the options
to purchase the full 400,000 Mr. Berk's Previous Milestone Options have fully
vested during the initial term of the agreement and as to each of Dr. Behl and
Mr. Dick all 200,000 Milestone Options have fully vested during the initial term
of his agreement, we will grant under the Stock Option Plan to the executive at
the end of the first current fiscal year in which the following event occurs
fully vested additional options to purchase the following shares at the fair
market value on the date of grant (the "ADDITIONAL MILESTONE OPTIONS"): (a) to
the extent not previously vested with respect to his comparable Milestone
Options: (i) up to 125,000 shares upon the commencement of the first Phase III
clinical trial relating to the first Non-Generic Opioid Drug developed by us and
(ii) up to an additional 125,000 shares as to such trial relating to the second
Non-Generic Opioid Drug developed by us, (b) 50,000 shares upon the closing of
each product license for the United States national market or product sale
transaction of all ownership rights (on a product by product basis and only once
for each product); (c) 10,000 shares upon the filing by us (in our name) with
the FDA of either an ANDA or NDA for a product not covered by a previous FDA
application for each drug product of us, other than the Non-Generic Opioid Drugs
for which any Opioid Option was granted under the Agreement; (d) 40,000 shares
upon the approval by the FDA of any ANDA, NDA or 505(b)(2) application filed in
our name for a product not previously approved by the FDA; (e) 25,000 shares in
the event of the filing of an application of an additional U.S. patent by us
(filed in our name); and (f) 25,000 shares in the event of the granting by the
PTO of the foregoing additional patent applications to us (filed in our name).
The Berk Agreement acknowledges that Mr. Berk holds previously granted
incentive stock options to purchase 725,000 shares, of which 300,000 vested
options are exercisable at $2.01 per share, 225,000 vested options are
exercisable at $2.15 per share and 100,000 vested options are exercisable at
$2.69 per share, and the remaining 100,000 options, which vest on September 2,
2007, are exercisable at $2.69 per share.
Each employment agreement allows us at our discretion to grant to the
executive additional options under the Stock Option Plan and provides each
executive the right to register at our expense for reoffering shares issued upon
exercise of the options under the Securities Act of 1933, as amended, in certain
registration statements filed by us with respect to offerings of securities by
us.
Berk's Agreement provides that if we terminate his employment due to his
permanent disability, without cause or he 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 our 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
us 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 we terminate
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 us. In the
event that we terminate Mr. Berk's employment for cause or Mr. Berk terminates
50
his employment with us 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.
Berk's Agreement provides that in the event of a change of control in lieu
of any severance that may otherwise be payable to him if Mr. Berk elects to
terminate his employment for any reason within 90 days thereof, or we elect 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 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 of 12 months following the effective date of termination, of
replacing the life and disability insurance coverage afforded to Mr. Berk under
our benefit plans with substantially similar coverage and (v) payment by us 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.
Each of Behl's and Dick's Agreements provide that in the event we
terminate his employment for "CAUSE" as defined in the agreement or the
executive terminates employment without good reason, he is to receive salary
through date of termination, reimbursement for expenses incurred prior to
termination, all unvested options will terminate as of the date of termination
and vested options will be governed by the terms of the Stock Option Plan and
the related option agreement. In the event of a termination due to death,
disability or by us without cause or by Dr. Behl or Mr. Dick for good reason, we
are to pay him or his estate subject to his compliance with certain covenants,
including non-competition, non-solicitation, confidentiality and assignment of
intellectual property, his base salary for the longer of the balance of the
initial term or one year from date of termination, continue health insurance
coverage for 12 months from termination and his vested options are to be
exercisable for 90 days from date of termination. Dr. Behl's amended agreement
provides that the definition of "cause" has been amended to include a
determination by the Board of Directors, in its sole discretion, that the
employment of Dr. Behl should terminate, provided that such termination will be
effective on the 30th day after the written notice to Dr. Behl of such
determination.
In the event the employment of Dr. Behl or Mr. Dick is terminated by us
following a "CHANGE OF CONTROL" of Elite, each will be entitled to the amounts
payable as a result of termination by us without cause plus a lump sum payment
of $500,000 and all unvested options shall immediately vest and along with
unexercised vested options be exercisable within 90 days from the date of
termination. "Change of control" is defined in each of their agreements as the
acquisition of Elite pursuant to a merger or consolidation which results in the
reduction to less than 50% of the shares outstanding upon consummation of the
holders of its outstanding shares immediately prior thereto or sale of
substantially all our assets or capital stock to another person, or the
acquisition by a person or a related group in a single transaction or a series
of related transaction of more than 50% of the combined voting power of Elite's
outstanding voting securities.
Berk's Agreement contains his non-solicitation covenant for a period of
one year from termination. Each of Dr. Behl and Mr. Dick has agreed to a
one-year following termination non-competition covenant and a two year following
termination non-solicitation covenant.
The executives are to be reimbursed for expenses (including business,
travel and entertainment) reasonably incurred in the performance of their
duties, with Dr. Behl's and Mr. Dick's agreements providing that reimbursement
of expenses in excess of $2,000 per month are subject to the approval of our
Chief Executive Officer. Each of the executives is entitled to participate in
such employee benefit and welfare plans and programs, which may be offered to
our senior executives including life insurance, health and accident, medical
plans and programs and profit sharing and retirement plans.
51
Each employment agreement is for an initial term ending November 13, 2009,
subject to automatic one-year renewals unless terminated by the executive or us
upon at least 60 days notice prior to the end of the then scheduled expiration
date. We have the right to terminate Mr. Berk's employment in the event of his
inability to perform work due to physical or mental illness or injury for nine
full calendar months during any eight consecutive calendar months. We have the
right to terminate Dr. Behl's or Mr. Dick's employment due to disability as
defined in a long-term disability insurance policy reasonably satisfactory to
him or, in the absence of such policy, due to Dr. Behl's or Mr. Dick's, as the
case may be, inability for 120 days in any 12 month period to substantially
perform his duties as a result of a physical or mental illness.
MR. GITTELMAN
On February 26, 1998, we entered into an agreement with Gittelman & Co.,
P.C., whereby fees are paid to Gittelman & Co., P.C., a firm wholly-owned by
Mark I. Gittelman, our 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, 2007, 2006 and 2005, the
fees paid by us under the agreement were $151,214, $154,704, and $111,312. The
services rendered by the firm to us averaged 98, 103 and 84 hours per month,
respectively, of which an average of 25 hours per month were services rendered
by him in his capacity as an officer of Elite.
DR. SUBRAMANIAN
Dr. Subramanian entered into an Advisory Services Agreement with us on
December 6, 2006, the terms of which are summarized under Item 13. - Certain
Relationships and Related Transactions, and Director Independence."
HEDGING POLICY
We do not permit the Named Executive Officers, to "hedge" ownership by
engaging in short sales or trading in any options contracts involving our
securities.
52
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The table below summarizes the compensation information in respect of the
Named Executive Officers for the fiscal years ended March 31, 2007, 2006 and
2005.
CHANGE IN
PENSION VALUE
AND
NONQUALIFIED
NON-EQUITY DEFERRED
NAME STOCK OPTION INCENTIVE COMPENSATION ALL OTHER
AND YEAR SALARY BONUS AWARDS AWARDS PLAN EARNINGS COMPENSATION TOTAL
PRINCIPAL (1) (2) (3) (4) COMPENSATION
POSITION ($) ($) ($) ($) ($) ($) ($) ($)
----------------- ------- ------- ------- ------ ------- ------------ ------------ ------------ -----
Bernard Berk 2006-07 393,203 -- -- 574,422 -- -- 21,260(7) 988,885
President and
Chief Executive 2005-06 344,295 150,000 -- 379,439 -- -- -- 873,734
Officer
2004-05 200,000 50,000 -- 488,782 -- -- -- 738,782
Mark. Gittelman 2006-07 -- -- -- 83,293 -- -- -- 83,293
Chief
Financial Officer 2005-06 -- -- -- 23,100 -- -- -- 23,100
2004-05 -- -- -- 19,109 -- -- -- 19,109
Chris Dick 2006-07 168,750 25,000 -- 482,037 -- -- 678,937
Executive
Vice President 2005-06 150,000 25,000 -- -- -- -- 3,150(8) 175,000
of Corporate
Development 2004-05 140,250 25,000 -- 76,687 -- -- -- 241,937
Charan Behl(5) 2006-07 344,135 25,000 -- 482,037 -- -- 851,172
Head of
Technical Affairs 2005-06 450,000 -- -- -- -- -- -- 450,000
2004-05 392,455(6) -- -- -- -- -- -- 392,455
Veerappan 2006-07 -- -- -- 1,114,445 -- -- -- 1,114,445
Subramanian
Chief Scientific 2005-06 -- -- -- -- -- -- -- --
Officer
2004-05 -- -- -- -- -- -- -- --
53
----------
1 The information is provided for each fiscal year which begins on April 1
and ends on March 31.
2 Bonuses paid to Mr. Berk represent discretionary bonuses and bonuses paid
to Mr. Dick and Dr. Behl represents guaranteed bonuses.
3 No stock awards were granted to the Named Executive Officers in the fiscal
years ended March 31, 2007, 2006 and 2005.
4 The amounts reflect the compensation expense in accordance with FAS 123(R)
of these option awards. The assumptions used to determine the fair value
of the option awards for fiscal years ended March 31, 2007, 2006 and 2005
are set forth in note 9 of our financial statements for the year ended
March 31, 2007. Our Named Executive Officers will not realize the value of
these awards in cash unless and until these awards are exercised and the
underlying shares subsequently sold.
5 Dr. Behl was Executive Vice President and Chief Scientific Officer from
March 9, 2006 to February 9, 2007 and has been Head of Technical Affairs
since February 9, 2007.
6 Includes $229,325 of fees paid by the issuance to Dr. Behl of units, 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.
7 Represents $16,345 for auto and parking allowance and $4,915 for life
insurance premiums.
8 Represents $3,150 for auto and parking allowance.
GRANTS OF PLAN-BASED AWARDS
The following table sets forth information regarding grants of plan based
awards to the Named Executive Officers during the fiscal year ended March 31,
2007.
ESTIMATED FUTURE PAYOUTS
ESTIMATED POSSIBLE PAYOUTS UNDER
UNDER NON-EQUITY INCENTIVE EQUITY INCENTIVE PLAN
PLAN AWARDS AWARDS
------------------------------------ -------------------------------------------
GRANT THRESHOLD TARGET MAXIMUM THRESHOLD TARGET MAXIMUM
NAME DATE ($) ($) ($) (#) (#) 7(#)
---- ----- --------- ------ ------- --------- ------ -------
Bernard Berk 11.13.06 -- -- -- -- 300,000(3)(4) --
President and
Chief Executive
Officer
Mark. Gittelman 05.3.06 -- -- -- -- 70,000(2) --
Chief
Financial
Officer
Chris Dick 11.13.06 -- -- -- -- 750,000(3)(4)(5)(6) --
Executive
Vice
President of
Corporate
Development
Charan Behl 11.13.06 -- -- -- -- 750,000(3)(4)(5)(6) --
Head of
Technical Affairs
Veerappan 12.06.06 -- -- -- -- 1,750,000(7) --
Subramanian
Chief
Scientific
Officer
ALL OTHER ALL OTHER GRANT
STOCK OPTION DATE FAIR
AWARDS: AWARDS: EXERCISE OR VALUE OF
NUMBER OF NUMBER OF BASE PRICE STOCK AND
SHARES OF SECURITIES OF OPTION OPTION
STOCK OR UNDERLYING AWARDS AWARDS
NAME UNITS (#) OPTIONS (#) ($/SH) (1)
---- --------- ----------- ---------- ---------
Bernard Berk -- -- $ 3.00(8) $ 411,000
President and
Chief Executive
Officer
Mark. Gittelman -- -- $ 2.26 $ 116,200
Chief
Financial
Officer
Chris Dick -- -- $ 2.25(9) $1,027,500
Executive
Vice
President of
Corporate
Development
Charan Behl -- -- $ 2.25(9) $1,027,500
Head of
Technical Affairs
Veerappan -- -- $ 2.13(10) $2,380,000
Subramanian
Chief
Scientific
Officer
54
1 The amounts reflect the compensation expense in accordance with FAS 123(R)
of these option awards. The assumptions used to determine the fair value
of the option awards for fiscal years ended March 31, 2007, 2006 and 2005
are set forth in note 9 of our financial statements for the year ended
March 31, 2007. Our Named Executive Officers will not realize the value of
these awards in cash unless and until these awards are exercised and the
underlying shares subsequently sold.
2 Represents options that vest in annual increments over a three year period
on May 3, 2007, May 3, 2008 and May 3, 2009, respectively.
3 The options were granted under our 2004 Stock Option Plan.
4 Represents (i) 150,000 options that vest upon the closing of an exclusive
product license for the first of the United States national market, the
entire European Union market or the Japan market or product sale
transaction of all of our ownership rights in the United States (only once
for each individual product) for our first Non-Generic Opioid Drug; and
(ii) 150,000 options that vest upon the closing of an exclusive product
license for the United States national market, the entire European Union
market or the Japan market or product sale transaction of all of our
ownership rights in the United States (only once for each individual
product) for our second Non-Generic Opioid Drug.
5 Represents 250,000 options that vested on November 13, 2006.
6 Represents 200,000 options that vest as follows: (i) upon the commencement
of the first Phase III clinical trial relating to the first "Non-Generic
Opioid Drug" developed by us as to 125,000 options and relating to the
second "Non-Generic Opioid Drug" developed by the company as to 75,000
options; (ii) 50,000 shares of Common Stock shall vest and become
immediately exercisable in full only upon the closing of an exclusive
product license for the United States national market or product sale
transaction of all of our ownership rights (on a product by product basis
and only once for each individual product) for each Company drug product,
other than the "Non-Generic Opioid Drugs" for which the "Non-Generic
Opioid Drug" options were granted; (iii) 10,000 options upon the filing by
us (in our name) with the FDA of either an ANDA or a NDA (including a NDA
filed with the FDA, for a product not covered by a previous FDA
application; (iv) 40,000 options upon the approval by the FDA of any ANDA
or NDA (filed in our name) for a product not previously approved by the
FDA; (v) 25,000 options upon filing of an application for U.S. patent by
us (filed in our name); and (vi) 25,000 options upon the granting by U.S.
Patent and Trademark Office of a patent to us (filed in our name).
7 Represents options that vest as follows: (i) 250,000 on December 6, 2006,
(ii) 250,000 on May 6, 2007, (iii) 250,000 on December 6, 2007, (iv)
250,000 on our acceptance of the initial business plan of Novel, (v)
250,000 on the earliest to occur of the (x) dosing of a human patient in
the first clinical trial, (y) dosing of a human subject in the first
bioequivalence study, or (z) in the event that neither a clinical trial
nor a bioequivalence study is required under applicable law as a condition
of marketing a Product Candidate (as defined below), the completion of
stability testing of an exhibit batch of such Product Candidate, in each
case, with respect to any drug product by us (excluding any drug products
of Novel), developed under the advisory services to be provided by Dr.
Subramanian to us under the Strategic Advisory Agreement (the "Advisory
Services") that occurs on or after the sixtieth (60th) day after December
6, 2006 (such drug product, a "Product Candidate"), (vi) 250,000 on
earliest to occur of (x) the completion of the first successful clinical
trial for such Product Candidate as determined by the clinical research
organization (the "CRO") performing such trial, (y) the completion of the
first successful bioequivalence study for such Product Candidate as
determined by the CRO performing such study that occurs on or after the
sixtieth (60th) day after the date hereof, or (z) in the event that
neither a clinical trial nor a bioequivalence study is required under
applicable law as a condition of marketing such Product Candidate, the
submission of an ANDA with the FDA, and (vii) 250,000 on earliest to occur
of the (x) dosing of a human patient in the first clinical trial, (y)
dosing of a human subject in the first bioequivalence study, (z) in the
event that neither a clinical trial nor a bioequivalence study is required
under applicable law as a condition of marketing a Product Candidate, the
completion of stability testing of an exhibit batch of such Product
Candidate, in each case, with respect to a second Product Candidate
developed under the Advisory Services that occurs on or after the sixtieth
(60th) day after the date hereof.
55
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth information concerning stock options and
stock awards held by the Named Executive Officers as of March 31, 2007.
OPTION AWARDS STOCK AWARDS
------------------------------------------------------------------ -------------------------------------
EQUITY
EQUITY INCENTIVE
MARKET INCENTIVE PLAN
NUMBER VALUE PLAN AWARDS:
OF OF AWARDS: MARKET OR
EQUITY SHARES SHARES NUMBER PAYOUT
INCENTIVE OR OR OF VALUE OF
PLAN UNITS UNITS UNEARNED UNEARNED
AWARDS OF OF SHARES, SHARES,
NUMBER OF NUMBER OF NUMBER OF STOCK STOCK UNITS UNITS
SECURITIES SECURITIES SECURITIES HELD HELD OR OTHER OR OTHER
UNDERLYING UNDERLYING UNDERLYING THAT THAT RIGHTS RIGHTS
UNEXERCISED UNEXERCISED UNEXERCISED OPTION HAVE HAVE THAT THAT
OPTIONS OPTIONS UNEARNED EXERCISE OPTION NOT NOT HAVE NOT HAVE NOT
(#) (#) OPTIONS PRICE EXPIRATION VESTED VESTED VESTED VESTED
NAME EXERCISABLE UNEXERCISABLE (#) ($) DATE (#) ($) (#) ($)
-------------------- ----------- ------------- ----------- -------- ---------- ------- ------ --------- ---------
Bernard Berk 300,000(1) -- -- $2.01 06/03/13 -- -- -- --
President and 225,000(2) -- -- $2.15 07/22/13 -- -- -- --
Chief Executive 30,000(3) -- -- $2.34 06/22/14 -- -- -- --
Officer 10,000(4) -- -- $2.75 08/30/15 -- -- -- --
-- 10,000(4) -- $2.75 08/30/15 -- -- -- --
-- 10,000(4) -- $2.75 08/30/15 -- -- -- --
100,000(5) -- -- $2.69 09/02/15 -- -- -- --
-- 100,000(5) -- $2.69 09/02/15 -- -- -- --
-- -- 400,000(6) $2.69 09/02/15 -- -- -- --
-- -- 150,000(7) $3.00 11/13/16 -- -- -- --
-- -- 150,000(8) $3.00 11/13/16 -- -- -- --
Mark.
Gittelman
Chief
Financial
Officer 10,000(9) -- -- $2.34 03/08/14 -- -- -- --
6,666(10) -- -- $2.80 07/14/15 -- -- -- --
-- 6,667(10) -- $2.80 07/14/15 -- -- -- --
-- 6,667(10) -- $2.80 07/14/15 -- -- -- --
23,333(11) -- -- $2.26 05/03/16 -- -- -- --
-- 23,333(11) -- $2.26 05/03/16 -- -- -- --
-- 23,334(11) -- $2.26 05/03/16 -- -- -- --
Christopher Dick
Executive
Vice
President of
Corporate
Development 10,000(12) -- -- $2.34 10/31/12 -- -- -- --
10,000(12) -- -- $2.34 10/31/12 -- -- -- --
10,000(12) -- -- $2.34 10/31/12 -- -- -- --
10,000(13) -- -- $2.21 06/13/13 -- -- -- --
10,000(13) -- -- $2.21 06/13/13 -- -- -- --
10,000(13) -- -- $2.21 06/13/13 -- -- -- --
40,000(14) -- -- $2.80 07/14/15 -- -- -- --
250,000(15) -- -- $2.25 11/13/16 -- -- -- --
-- -- 150,000(7) $2.25 11/13/16 -- -- -- --
-- -- 150,000(8) $2.25 11/13/16 -- -- -- --
-- -- 200,000(6) $2.25 11/13/16 -- -- -- --
Charan Behl
Head of
Technical Affairs 250,000(15) -- -- $2.25 11/13/16 -- -- -- --
-- -- 150,000(7) $2.25 11/13/16 -- -- -- --
-- -- 150,000(8) $2.25 11/13/16 -- -- -- --
-- -- 200,000(6) $2.25 11/13/16 -- -- -- --
Veerappan
Subramanian
Chief
Scientific
Officer 250,000(16) -- -- $2.13 12/16/16 -- -- -- --
250,000(16) -- -- $2.13 12/16/16 -- -- -- --
250,000(16) -- -- $2.13 12/16/16 -- -- -- --
-- -- 250,000(16) $2.13 12/16/16 -- -- -- --
-- -- 250,000(16) $2.13 12/16/16 -- -- -- --
-- -- 250,000(16) $2.13 12/16/16 -- -- -- --
-- -- 250,000(16) $2.13 12/16/16 -- -- -- --
-----------
1 These options vested as of June 3, 2003.
2 These options vested as of September 2, 2005
3 These options vested on June 22, 2004.
4 These options vest in annual increments over a three year period on August
30, 2006, August 30, 2007 and August 30, 2008, respectively.
5 These options vest in annual increments over a two year period on
September 2, 2006 and September 2, 2007, respectively.
6 These options vest as follows: (i) upon the commencement of the first
Phase III clinical trial relating to the first "Non-Generic Opioid Drug"
developed by us as to 125,000 options and relating to the second
"Non-Generic Opioid Drug" developed by the company as to 75,000 options;
(ii) 50,000 shares of Common Stock shall vest and become immediately
exercisable in full only upon the closing of an exclusive product license
for the United States national market or product sale transaction of all
of our ownership rights (on a product by product basis and only once for
each individual product) for each Company drug product, other than the
"Non-Generic Opioid Drugs" for which the "Non-Generic Opioid Drug" options
were granted; (iii) 10,000 options upon the filing by us (in our name)
with the FDA of either an ANDA or a NDA (including a NDA filed with the
FDA, for a product not covered by a previous FDA application; (iv) 40,000
options upon the approval by the FDA of any ANDA or NDA (filed in our
name) for a product not previously approved by the FDA; (v) 25,000 options
upon filing of an application for U.S. patent by us (filed in our name);
and (vi) 25,000 options upon the granting by U.S. Patent and Trademark
Office of a patent to us (filed in our name).
7 These options vest upon the closing of an exclusive product license for
the first of the United States national market, the entire European Union
market or the Japan market or product sale transaction of all of our
ownership rights in the United States (only once for each individual
product) for our first Non-Generic Opioid Drug.
8 These options vest upon the closing of an exclusive product license for
the United States national market, the entire European Union market or the
Japan market or product sale transaction of all of our ownership rights in
the United States (only once for each individual product) for our second
Non-Generic Opioid Drug.
9 These options vested on June 22, 2004.
10 These options vest in annual increments over a three year period on July
14, 2006, July 14, 2007 and July 14, 2008, respectively.
11 These options vest in annual increments over a three year period on May 3,
2007, May 3, 2008 and May 3, 2009, repsectively.
12 These options vested on November 1, 2003, 2004 and 2005, respectively.
13 These options vested on June 13, 2004, 2005 and 2006, respectively.
14 These options vested on July 14, 2005.
15 These options vested on November 13, 2006.
16 These options vest as follows: (i) 250,000 on December 6, 2006, (ii)
250,000 on May 6, 2007, (iii) 250,000 on December 6, 2007, (iv) 250,000 on
our acceptance of the initial business plan of Novel Laboratories, Inc.
("Novel"), (v) 250,000 on the earliest to occur of the (x) dosing of a
human patient in the first clinical trial, (y) dosing of a human subject
in the first bioequivalence study, or (z) in the event that neither a
clinical trial nor a bioequivalence study is required under applicable law
as a condition of marketing a Product Candidate (as defined below), the
completion of stability testing of an exhibit batch of such Product
Candidate, in each case, with respect to any drug product by us (excluding
any drug products of Novel), developed under the advisory services to be
provided by Dr. Subramanian to us under the Strategic Advisory Agreement
(the "Advisory Services") that occurs on or after the sixtieth (60th) day
after December 6, 2006 (such drug product, a "Product Candidate"), (vi)
250,000 on earliest to occur of (x) the completion of the first successful
clinical trial for such Product Candidate as determined by the clinical
research organization (the "CRO") performing such trial, (y) the
completion of the first successful bioequivalence study for such Product
Candidate as determined by the CRO performing such study that occurs on or
after the sixtieth (60th) day after the date hereof, or (z) in the event
that neither a clinical trial nor a bioequivalence study is required under
applicable law as a condition of marketing such Product Candidate, the
submission of an ANDA with the FDA, and (vii) 250,000 on earliest to occur
of the (x) dosing of a human patient in the first clinical trial, (y)
dosing of a human subject in the first bioequivalence study, (z) in the
event
56
that neither a clinical trial nor a bioequivalence study is required under
applicable law as a condition of marketing a Product Candidate, the
completion of stability testing of an exhibit batch of such Product
Candidate, in each case, with respect to a second Product Candidate
developed under the Advisory Services that occurs on or after the sixtieth
(60th) day after the date hereof.
OPTION EXERCISES AND STOCK VESTED
No options have been exercised by our Named Executive Officers during
fiscal year ended March 31, 2007.
PENSION BENEFITS
We do not provide pension benefits to the Named Executive Officers.
NONQUALIFIED DEFERRED COMPENSATION
We do not have any defined contribution or other plan that provides for
the deferral of compensation on a basis that is not tax-qualified.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
Please see the discussion under "Compensation Discussion and Analysis -
Agreements with Named Executive Officers."
DIRECTOR COMPENSATION
The following table sets forth director compensation for the year ended
March 31, 2007:
CHANGE IN
PENSION
VALUE AND
FEES EARNED NON QUALIFIED
OR PAID STOCK OPTION NON EQUITY DEFERRED
IN CASH AWARDS AWARDS INCENTIVE PLAN COMPENSATION ALL OTHER TOTAL
NAME ($)(1) ($) ($) COMPENSATION EARNINGS COMPENSATION ($)
---- ----------- ------ ------ -------------- -------------- ------------ -------
Bernard Berk $6,000 --- --- --- --- --- $6,000
Edward Neugeboren $6,000 --- --- --- --- --- $6,000
Barry Dash $4,000 --- --- --- --- --- $4,000
Melvin Van Woert $4,000 --- --- --- --- --- $4,000
Veerappan Subramanian --- --- --- --- --- --- ---
-----------
(1) Consists of a fee of $2000 for each meeting attended by a Director.
EQUITY COMPENSATION
Members of the Board of Directors during the fiscal year ended March 31,
2006 received 30,000 options each in August 2005 and no members of the Board of
Directors received any options or other equity compensation during the fiscal
year ended March 31, 2007 for serving as a director.
OTHER COMPENSATION
We do not pay or reimburse non-employee Directors for travel expenses
incurred in connection with attending Board, committee and shareholder meetings.
Each Director receives $2,000 per each meeting such Director attends. Except as
described in this section, non-employee Directors do not receive any additional
compensation for their services on the Board of Directors.
57
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 May 15, 2007 by (i) by each person who is
known by us to own beneficially more than 5% of the Common Stock, (ii) by each
of our directors and nominees for director, (iii) by each of the Named Executive
Officers (as defined below) and (iv) by all our directors and executive officers
as a group. On such date, we had 20,820,048 shares of Common Stock outstanding
(exclusive of 100,000 treasury shares). (The 9,550 shares of Series B Preferred
Stock outstanding and 15,000 shares of Series C Preferred Stock are nonvoting
and none of the individuals listed below beneficially owns any shares of Series
B Preferred Stock or Series C Preferred Stock other than Barry Dash who owns 20
shares of Series C Preferred Stock. There are currently no shares of Series A
Preferred Stock outstanding).
As used in the table below and elsewhere in this proxy statement, the
term beneficial ownership with respect to a security consists of sole or shared
voting power, including the power to vote or direct the vote, and/or sole or
shared investment power, including the power to dispose or direct the
disposition, with respect to the security through any contract, arrangement,
understanding, relationship, or otherwise, including a right to acquire such
power(s) during the 60 days immediately following the Record Date. Except as
otherwise indicated, the stockholders listed in the table have sole voting and
investment powers with respect to the shares indicated.
NAME AND ADDRESS COMMON STOCK
---------------- ------------
AMOUNT %
------ ---
Bernard Berk, Director, President and Chief Executive Officer* 1,532,300(1) 6.9
Edward Neugeboren, Director* 201,063(2) **
Barry Dash, Director* 28,207(3) **
Melvin Van Woert, Director* 10,000(4) **
Veerappan Subramanian, Director and Chief Scientific Officer* 2,962,894(5) 13
Dr. Charan Behl(6)* 1,296,000(7) 6
Chris Dick, Executive Vice President of Corporate Development* 885,287(8) 4.1
Mark I. Gittelman, Chief Financial Officer* 39,999(9) **
Trellus Management Company
Adam Usdan 3,450,795(10) 14.8
350 Madison Avenue, 9th Floor
New York, New York 10017
Mark Fain 1,204,570(11) 5.8
237 Park Avenue, Suite 900
New York, NY 10017
Chad Comiteau 1,152,712(12) 5.5
237 Park Avenue, Suite 900
New York, NY 10017
Davidson Kempner Healthcare International Ltd. 3,735,816(13) 15.2
65 East 55th Street, 19th Floor
New York, NY 10022
All Directors and Officers as a group 6,955,750(14) 26.6
------------------------
* The address is c/o Elite Pharmaceuticals Inc., 165 Ludlow Avenue, Northvale,
NJ 07647.
** Less than 1%
(1) Includes options to purchase 1,365,000 shares of Common Stock. See "Named
Executive Officers."
(2) Includes options and warrants to purchase an aggregate of 170,571 shares of
Common Stock.
(3) Represents options to purchase 10,000 shares of Common Stock, 20 shares of
Series C Preferred Stock convertible into 8,621 shares of Common Stock and
warrants to purchase 2,586 shares of Common Stock.
58
(4) Represents options to purchase shares of Common Stock.
(5) Includes options to purchase 1,500,000 shares of Common Stock which are
owned by Dr. Subramanian and 957,396 shares of Common Stock and warrants to
purchase 478,698 shares of Common Stock which are owned by VGS Pharma, LLC
("VGS"), a wholly-owned subsidiary of Kali Capital, L.P., which is controlled by
Kali Management, LLC ("KALI"), its general partner, and Kali is controlled by
the daughter of Dr. Subramanian, its managing member. Dr. Subramanian disclaims
beneficial ownership of these shares of Common Stock, except to the extent of
his pecuniary interest therein, if any.
(6) Dr. Behl was Executive Vice President and Chief Scientific Officer from
March 9, 2006 to February 9, 2007 and has been Head of Technical Affairs since
February 9, 2007. See "Named Executive Officers."
(7) Includes warrants to purchase 130,000 shares of Common Stock and options to
purchase 750,000 shares of Common Stock. See "Named Executive Officers."
(8) Includes options to purchase 850,000 shares of Common Stock and warrants
held by Mr. Dick and Hedy Rogers as joint tenants to purchase 10,479 shares of
Common Stock.
(9) Represents options to purchase shares of Common Stock.
(10) Based on information provided by Trellus Management Company, LLC ("TMC")
and Adam Usdan in the Schedule 13G filed February 13, 2007 and also based on
information set forth in Form S-3 filed on May 24, 2007. Includes 862,068 shares
of Common Stock issuable upon conversion of Series C Preferred Stock held in the
aggregate by Trellus Partners L.P ("TP"), Trellus Partners II L.P. ("TPI") and
Trellus Offshore Fund Limited ("TPOF"), 888,889 shares of Common Stock issuable
upon conversion of shares of Series B Preferred Stock held by TP and 703,063
shares of Common Stock issuable upon exercise of warrants held in the aggregate
by TP, TPI and TPOF. Adam Usdan is President of TMC. Adam Usdan and TMC share
voting power and dispositive power over the shares. Notwithstanding the
inclusion of the aforementioned beneficial ownership calculation, pursuant to
our Certificate of Designation of Preferences, Rights and Limitations of Series
C 8% Preferred Stock, the Amended Certificate of Designations of the Series B 8%
Convertible Preferred Stock and the Common Stock Purchase Warrant for the
aforementioned warrants, the number of shares of Common Stock into which the
Series C 8% Preferred Stock and Series B 8% Preferred Stock are convertible and
the warrants are exercisable is limited to that number of shares of Common Stock
which would result in the Adam Usdan and TMC affiliated entities having
aggregate beneficial ownership of not more than 9.99% of the total issued and
outstanding shares of Common Stock.
(11) Based on information provided by Mark Fain and Chad Comiteau in their
Schedule 13G/A filed February 6, 2007. Mark Fain beneficially owned 1,204,570
shares of Common Stock, which amount includes (i) 179,967 shares beneficially
owned by Mr. Fain over which he has sole voting power and sole dispositive
power; (ii) 33,333 convertible shares beneficially owned by Mr. Fain over which
he has sole voting power and sole dispositive power; (iii) 33,000 shares
beneficially owned by Stratford Management Money Purchase Pension Plan over
which Mr. Fain has shared voting power and shared dispositive power; (iv)
808,270 shares beneficially owed by Stratford Partners, L.P. of which Mr. Fain
is a Managing Member, and over which Mr. Fain has shared voting power and shared
dispositive power; and (v) 150,000 convertible shares beneficially owed by
Stratford Partners, L.P. over which Mr. Fain has shared voting power and shared
dispositive power.
(12) Based on information provided by Mark Fain and Chad Comiteau in their
Schedule 13G/A filed February 6, 2007. Chad Comiteau beneficially owned
1,152,712 shares of Common Stock which amount includes (i) 187,047 shares
beneficially owned by Mr. Comiteau over which he has sole voting power and sole
dispositive power; (ii) 32,665 convertible shares beneficially owned by Mr.
Comiteau over which he has sole voting power and sole dispositive power; (iii)
33,000 shares beneficially owned by Stratford Management Money Purchase Pension
Plan over which he has shared voting power and shared dispositive power; (iv)
808,270 shares beneficially owed by Stratford Partners, L.P. of which Mr.
Comiteau is a Managing Member,
59
and over which Mr. Comiteau has shared voting power and shared dispositive
power; and (v) 150,000 convertible shares beneficially owed by Stratford
Partners, L.P. over which Mr. Comiteau has shared voting power and shared
dispositive power.
(13) Davidson Kempner Healthcare International Ltd. ("DKHI") and its affiliates,
Davidson Kempner Partners ("DKP"), Davidson Kempner Institutional Partners, L.P.
("DKIP"), M.H. Davidson & Co. ("CO"), Davidson Kempner International, Ltd.
(DKIL"), Serena Limited ("Serena"), Davidson Kempner Healthcare Fund LP
("DKHF"), MHD Management Co., Davidson Kempner Advisors Inc., Davidson Kempner
International Advisors, L.L.C., DK Group LLC, DK Management Partners LP, DK
Stillwater GP LLC, Thomas L. Kempner, Jr., Marvin H. Davidson, Stephen M.
Dowicz, Scott E. Davidson, Michael J. Leffell, Timothy I. Levart, Robert J.
Brivio, Jr., Anthony A. Yoseloff, Eric P. Epstein and Avram Z. Friedman jointly
filed a Schedule 13G, dated May 11, 2007, reflecting the beneficial ownership,
subject to an ownership limitation, of an aggregate of 6,667 Series C 8%
Preferred Stock convertible into 2,873,707 shares of common stock and 862,109
warrants exercisable into 862,109 shares of Common Stock as a result of their
voting and dispositive power over 6,667 Series C 8% Preferred Stock convertible
into 2,873,707 shares of Common Stock and 862,109 warrants exercisable into
862,109 beneficially owned by DKP, DKIP, DKIL, Serena, CO, DKHF and DKHI.
Notwithstanding, the inclusion of the aforementioned beneficial ownership
calculation, pursuant to our Certificate of Designation of Preferences, Rights
and Limitations of Series C 8% Preferred Stock and the Common Stock Purchase
Warrant for the aforementioned warrants, the number of shares of Common Stock
into which the Series C 8% Preferred Stock are convertible and the warrants are
exercisable is limited to that number of shares of Common Stock which would
result in the Davidson Kempner affiliated entities having aggregate beneficial
ownership of not more than 9.99% of the total issued and outstanding shares of
Common Stock. The above information was obtained from such Schedule 13G.
(14) Includes options and warrants to purchase an aggregate of 5,325,954 shares
of Common Stock.
60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
All related person transactions are reviewed and, as appropriate, may be
approved or ratified by the Board of Directors. If a director is involved in the
transaction, he or she may not participate in any review, approval or
ratification of such transaction. Related person transactions are approved by
the Board of Directors only if, based on all of the facts and circumstances,
they are in, or not inconsistent with, our best interests and our stockholders,
as the Board of Directors determines in good faith. The Board of Directors takes
into account, among other factors it deems appropriate, whether the transaction
is on terms generally available to an unaffiliated third-party under the same or
similar circumstances and the extent of the related person's interest in the
transaction. The Board of Directors may also impose such conditions as it deems
necessary and appropriate on us or the related person in connection with the
transaction.
In the case of a transaction presented to the Board of Directors for
ratification, the Board of Directors may ratify the transaction or determine
whether rescission of the transaction is appropriate.
CERTAIN RELATED PERSON TRANSACTIONS
TRANSACTIONS WITH DR. SUBRAMANIAN AND VGS PHARMA LLC
On December 6, 2006, we entered into a Strategic Alliance Agreement with
Dr. Subramanian and VGS Pharma, LLC, a Delaware limited liability company
("VGS"), under which (i) Dr. Subramanian was appointed to our Board of
Directors, (ii) VGS made a $2,000,000 equity investment in Elite, (iii) we
engaged Dr. Subramanian to serve as our strategic advisor on the research,
development and commercialization of our existing pipeline and (iv) we, together
with VGS formed Novel Laboratories Inc., a Delaware corporation ("NOVEL"), as a
separate specialty pharmaceutical company for the research, development,
manufacturing, licensing, acquisition and marketing of specialty generic
pharmaceuticals. VGS is wholly-owned subsidiary of Kali Capital, L.P., which is
controlled by Kali Management, LLC ("KALI"), its general partner, and Kali is
controlled by Anu Subramanian, its managing member and daughter of Dr.
Subramanian.
The specialty pharmaceutical product initiative of the strategic alliance
between Elite and Dr. Subramanian is to be conducted by Novel, of which we
acquired 49% and VGS acquired 51% of its Class A Voting Common Stock for $9,800
and $10,200 respectively. Pursuant to the Alliance Agreement, VGS acquired for
$2,000,000: (i) 957,396 shares of our Common Stock (the "ACQUIRED COMPANY
SHARES") at approximately $2.089 per share and (ii) a five year Warrant to
purchase 478,698 shares of our Common Stock (the "WARRANT SHARES"), for cash, at
an exercise price of $3.00 per share, subject to adjustment upon the occurrence
of certain events.
We initially contributed $2,000,000 to Novel and made additional
contributions of $5,000,000 through June 15, 2007. The remaining contributions
to be made by Elite shall be funded in the amounts and upon the occurrence of
the following milestones: (i) $10,000,000 upon the submission to the FDA of
three ANDAs related to three different prospective products developed by Novel
and (ii) $10,000,000 upon the submission to the FDA of three ANDAs related to at
least three additional different prospective products developed by Novel;
provided that the aggregate contributions to be made by Elite shall not
61
exceed (i) $15,000,000 prior to November 1, 2007 or (ii) $25,000,000 prior to
May 1, 2008. The remaining contributions of Elite are not monetary obligations
but rather conditions that must be met in order for Elite to maintain its
current equity interest in Novel.
In the event that (i) we defer for more than 90 days the payment of a
contribution installment due to Novel's failure to achieve a Performance
Milestone, (ii) we fail to make a requisite contribution following Novel's
achieving a Performance Milestone or (iii) Novel requires additional financing
beyond amounts provided in the Business Plan or our agreed upon additional
contributions, Novel may seek such financing through a subscription offering to
its Class A Stockholders and, to the extent not fully subscribed, from third
parties.
We agreed to use our best efforts to elect Dr. Subramanian a member of our
Board of Directors as long as we and our "permitted transferees" own at least
40% of Novel's outstanding capital stock and Dr. Subramanian is Chairman of the
Board and Chief Executive Officer of Novel.
Pursuant to an advisory agreement, Dr. Subramanian has agreed to provide
advisory services to us, including but not limited to, assisting in the
implementation of current and new drug product development projects of Elite and
assisting in the our recruitment of additional R&D staff members. As an
inducement to enter into the agreement, we granted Dr. Subramanian a
non-qualified stock option to purchase up to 1,750,000 shares of Common Stock
(the "OPTION SHARES") at a price of $2.13 per share. The option vests as to
250,000 shares immediately and in subsequent 250,000 share installments, with
one vesting on May 6, 2007, another on December 6, 2007, a third upon our
acceptance of the Initial Business Plan of Novel, and the other installments
vesting on the accomplishment of certain milestones with respect to the first or
second drug product developed by us (excluding drug products of Novel) on or
after the 60th day after December 6, 2006, under the advisory services provided
to us. The option terminates on December 6, 2016, or 90 days following a
termination of his advisory services to us or his employment by Novel other than
a termination without Cause or by Dr. Subramanian for Good Reason or 48 months
after the termination of his advisory services under the advisory agreement or
his employment under the employment agreement as a result of: (i) a termination
by us of the advisory agreement or by Novel of the employment agreement without
Cause or by Dr. Subramanian without Good Reason or (ii) post-December 6, 2007,
termination of the term of the advisory agreement or of the Novel employment
agreement. All unvested options terminate upon the termination of the advisory
agreement (other than a termination by the Company without cause or by Dr.
Subramanian for Good Reason) or at such time as we and our permitted transferees
own in the aggregate less than 20% of the outstanding capital stock of Novel,
except to the extent we in our sole discretion have determined that Dr.
Subramanian has provided substantial contribution to the development of any drug
product which would otherwise trigger the vesting of options notwithstanding the
failure to satisfy the foregoing 20% threshold.
The parties also entered into a stockholders agreement which provides that
as long as each of Company and VGS owns at least 10% of the shares of Class A
Voting Common Stock of Novel, each shall designate one of the two Directors to
constitute the Novel Board of Directors, with the VGS designee to be Dr.
Subramanian, unless otherwise approved by Company. It prohibits the taking of
certain actions without approval of the two designees, including, but not
limited to, amendments of charter, by-laws and other governance agreements,
spin-offs or public offerings of equity securities, a liquidation or
dissolution, dividends, authorization or issuance of additional securities or
options, bankruptcy, a material change of the business or a Business Plan,
approval of a Business Plan and the yearly operating budget, creation of a
security interest, capital expenditures in excess of 110% of the amount provided
in the Business Plan, investments in excess of the amounts approved in the
Business Plan, an increase or decrease of the Board; and any investments by Dr.
Subramanian in any "Competitive Company" or its affiliate. The stockholders
agreement further provides that determination of "Cause" or
62
the "Disability" of Dr. Subramanian under his employment agreement shall be made
solely in the reasonable discretion of the Company designee. Except for certain
enumerated permitted transfers, the Stockholders Agreement provides that no
transfer of Novel stock may be made without the consent of the other
stockholders. In the event Company fails to make required additional
contributions, VGS has the right to purchase at the original purchase price from
Company that proportion of its original shares of Novel Class A Common Stock
equal to the proportion of the required additional contributions not made by
Company.
In the event of Dr. Subramanian's resignation from Novel for other than
Good Reason or his termination by Novel for Cause or his death or disability as
defined in the Employment Agreement, Company has the corresponding right to
acquire up to 75% of VGS's original shares of Class A Common Stock of Novel at
the original purchase price; such percentage to be reduced to 50% and 25% and 0%
upon the first, second and third anniversary of the Stockholders' Agreement,
with a pro rata portion of such reduction to be effected upon the death or
disability of Dr. Subramanian during the applicable period. Each of Company and
VGS has a right to acquire at the then fair value, Company's or VGS's shares of
Novel upon the bankruptcy, dissolution or liquidation, a change of control of
the other or, if as a result of the purchases at the original purchase price,
the percentage of Novel owned by such party is less than 10% of Novel.
Novel agreed to employ Dr. Subramanian as its Chief Executive Officer at a
salary of $220,000 per annum, with bonuses and options to purchase Novel's
Common Stock to be granted at the discretion of Novel's Board of Directors. Dr.
Subramanian is to perform his duties three full business days a week. Dr.
Subramanian's employment may be terminated for "Cause" as defined therein or by
Dr. Subramanian for "Good Reason" as defined. Either party may terminate the
employment upon 30-business days prior written notice to the other.
Dr. Subramanian has agreed to a confidentiality covenant and also agreed
to a non-solicitation covenant and not to directly or indirectly, manage,
control, consult with, or engage (as either an employee or consultant) in any
business or activity anywhere in the world involving a drug product that is
competitive as defined with any drug products being developed or marketed by
Novel, or proposed in a Business plan to be developed by Novel or its affiliate,
or any related inventions or other intellectual property of Novel or any of its
respective subsidiaries or affiliates (collectively, a "COMPETITIVE ACTIVITY");
and without the prior unanimous approval of the Novel Board to make any
investment (whether equity or debt) not exceeding an aggregate of 5% of the
equity, in any person engaging, or providing services or financing for, a
Competitive Activity (a "COMPETITIVE COMPANY"), including any follow-on
investments in any entity that, subsequent to the time of the initial
investment, has become a Competitive Company, except a financing provided to a
subsidiary or affiliate of a Competitive Company which is not itself engaged in
a Competitive Activity during his employment and, unless his termination was by
Novel without "Cause" or by Dr. Subramanian for "Good Reason", for one year
subsequent as to non-competition and two years subsequent as to
non-solicitation.
TRANSACTIONS WITH MARK GITTELMAN AND GITTELMAN & CO. P.C.
For a description of the agreement between Elite and Gittelman & Co.,
P.C., please see "Compensation Discussion Analysis - Agreements with Named
Officers". Mark Gittelman, our chief financial officer is the principal of
Gittelman & Co., P.C.
63
SERIES C PREFERRED STOCK FINANCING
The following related persons participated in our recent Series C
Preferred Stock private placement that closed on April 24, 2007 according to
which we sold 15,000 shares of our Series C 8% Convertible Preferred Stock, par
value $0.01, and 1,939,655 warrants for gross proceeds of $15,000,000.
o Barry Dash, one of our directors, purchased 20 shares of Series C
Preferred Stock and warrants to purchase 2,586 shares of Common
Stock for a purchase price of $20,000. Affiliates of Adam Usdan, one
of our stockholders which beneficially owns more than 5% of our
outstanding Common
o Stock, purchased an aggregate of 2,000 shares of Series C Preferred
Stock and warrants to purchase 258,619 shares of Common Stock for an
aggregate purchase price of $2,000,000. Indigo Securities LLC of
whom Edward Neugeboren, a director until June 26, 2007, is a
consultant, acted as a selected
o dealer in the placement of the Series C Preferred Financing and
received a $194,547 cash commission and warrants to purchase 36,045
shares of Common Stock for its services.
INDIGO VENTURES LLC
On July 12, 2006, we entered into a Financial Advisory Agreement with
Indigo Ventures LLC ("INDIGO") whereby, Indigo, on a non-exclusive basis, agreed
to advise, consult with, and assist us in various matters as requested (and only
to the extent requested) by us which may include, without limitation (i) a
review of our business, operations and financial condition, including advising
on capitalization structures; (ii) advice relating to general capital raising
matters; (iii) recommendations relating to specific business operations,
strategic transactions and joint ventures; (v) advice regarding our future
financings involving debt or equity securities or any affiliate of ours; and (v)
assistance with interaction between us and our current and future investors. We
paid Indigo $45,000 initially and then $15,000 per month in connection with
Indigo providing the consulting services. Additionally, Indigo acquired a
warrant to purchase up to 600,000 shares of Common Stock at an exercise price of
$3.00 per share, which may be payable in the form of a promissory note. On
February 13, 2007, the Financial Advisory Agreement was amended. As a result of
the amendment, the warrant was reduced from 600,000 to 300,000 shares, the
warrant remains exercisable as to the remaining 300,000 shares of common stock
(200,000 of which remain subject to vesting), the monthly cash fees payable to
Indigo terminated as of February 13, 2007 and the outstanding amount of the
promissory note was reduced to $75,000. Edward Neugeboren, a director until June
26, 2007 is a consultant of Indigo.
Previously, 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
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, L.P.
("Miller Ellin") for the audits of our annual financial
64
statements and interim reviews of our quarterly financial statements for the
years ended March 31, 2007 and March 31, 2007 and fees billed for other services
rendered by Miller Ellin during those periods.
2007 2006
---- ----
Audit Fees(1) 58,360 69,923
Audit-Related Fees --- ---
Tax Fees --- ---
All Other Fees --- ---
----------
(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.
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.
(b) Financial Statement Schedules
None.
(c) Exhibits required by Item 601 of Regulation S-K.
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.
65
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.
3.1(e) Amended Certificate of Designations of Preferences, Rights and
Limitations of Series B 8% Convertible Preferred Stock, as filed
with the Secretary of State of the State of Delaware,
incorporated by reference to Exhibit 3.1 to the Form 8-K dated
April 24, 2007, and filed with the SEC on April 25, 2007.
3.1(f) Certificate of Designations, Preferences and Rights of Series C
8% Convertible Preferred Stock, as filed with the Secretary of
the State of Delaware, incorporated by reference to Exhibit 3.2
to the Form 8-K dated April 24, 2007, and filed with the SEC on
April 25, 2007.
3.1(g) Amended Certificate of Designations, Preferences and Rights of
Series C 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 April 24, 2007, and filed with
the SEC on April 25, 2007
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 Form of specimen certificate for Series C 8% Convertible
Preferred Stock of the Company, incorporated by reference to
Exhibit 4.1 to the Form 8-K, dated April 24, 2007 and filed with
the SEC on April 25, 2007.
4.5 Warrant to purchase 100,000 shares of Common Stock issued to DH
Blair Investment
66
Banking Corp., incorporated by reference to Exhibit 10.2 to the
Form 10-Q for the period ended September 30, 2004.
4.6 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.
4.7 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.
4.8 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.
4.9 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.
4.10 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.
4.11 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.
4.12 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.
4.13 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.
4.14 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.
4.15 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.
4.16 Form of Warrant to purchase 600,000 shares of Common Stock
issued to Indigo Ventures, LLC, incorporated by reference to
Exhibit 4.1 to the Form 8-K, dated July 12, 2006 and filed with
the SEC on July 18, 2006.
67
4.17 Form of Warrant to purchase up to 478,698 shares of Common Stock
issued to VGS PHARMA, LLC, incorporated by reference as Exhibit
3(a) to the Form 8-K, dated December 6, 2006 and filed with the
SEC on December 12, 2006.
4.18 Form on Non-Qualified Stock Option Agreement for 1,750,000
shares of Common Stock granted to Veerappan Subramanian,
incorporated by reference as Exhibit 3(b) to the Form 8-K, dated
December 6, 2006 and filed with the SEC on December 12, 2006.
4.19 Form of Warrant to purchase shares of Common Stock issued to
purchasers in the private placement which closed on April 24,
2007 (the "Series C Financing"), incorporated by reference to
Exhibit 4.2 to the Form 8-K, dated April 24, 2007 and filed with
the SEC on April 25, 2007.
4.20 Form of Warrant to purchase shares of Common Stock issued to the
placement agent in the Series C Financing, incorporated by
reference to Exhibit 4.3 to the Form 8-K, dated April 24, 2007
and filed with the SEC on April 25, 2007.
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").
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.
68
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 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.
69
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 10.2 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, between the Registrant 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.
10.22 Financial Advisory Agreement between the Registrant and Indigo
Ventures LLC, incorporated by reference as Exhibit 10.1 to the
Form 8-K dated July 12, 2006 and filed with the SEC on July 18,
2006.
10.23 Seconded Amended and Restated Employment Agreement between the
Registrant and Bernard Berk, incorporated by reference as
Exhibit 10.1 to the Form 10-Q for the quarter ended September
30, 2006 and filed with the SEC on November 14, 2006.
10.24 Employment Agreement between the Registrant and Charan Behl,
incorporated by reference as Exhibit 10.2 to the Form 10-Q for
the quarter ended September 30, 2006 and filed with the SEC on
November 14, 2006.
70
10.25 Employment Agreement between the Registrant and Chris Dick,
incorporated by reference as Exhibit 10.3 to the Form 10-Q for
the quarter ended September 30, 2006 and filed with the SEC on
November 14, 2006.
10.26 Product Collaboration Agreement between the Registrant and
ThePharmaNetwork LLC, incorporated by reference as Exhibit 10.1
to the Form 8-K, dated November 10, 2006 and filed with the SEC
on November 15, 2006. (Confidential Treatment granted with
respect to portions of the Agreement).
10.27 Strategic Alliance Agreement among the Registrant, VGS Pharma
("VGS") and Veerappan S. Subramanian ("VS"), incorporated by
reference as Exhibit 10(a) to the Form 8-K, dated December 6,
2006 and filed with the SEC on December 12, 2006.
10.28 Advisory Agreement, between the Registrant and VS, incorporated
by reference as Exhibit 10(b) to the Form 8-K, dated December 6,
2006 and filed with the SEC on December 12, 2006.
10.29 Registration Rights Agreement between the Registrant, VGS and
VS, incorporated by reference as Exhibit 10(c) to the Form 8-K,
dated December 6, 2006 and filed with the SEC on December 12,
2006.
10.30 Employment Agreement between Novel Laboratories Inc. ("Novel")
and VS, incorporated by reference as Exhibit 10(d) to the Form
8-K, dated December 6, 2006 and filed with the SEC on December
12, 2006.
10.31 Stockholders' Agreement between Registrant, VGS, VS and Novel,
incorporated by reference as Exhibit 10(e) to the Form 8-K,
dated December 6, 2006 and filed with the SEC on December 12,
2006.
10.32 Amended and Restated Employment Agreement, between the
Registrant and Charan Behl, incorporated by reference as Exhibit
10.1 to the Form 8-K, dated February 9, 2007 and filed with the
SEC on February 14, 2007.
10.33 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 April 24, 2007 and filed
with the SEC on April 25, 2007.
10.34 Form of Registration Rights Agreement, between the Registrant
and the signatories thereto, incorporated by reference to
Exhibit 10.2 to the Form 8-K, dated April 24, 2007 and filed
with the SEC on April 25, 2007.
10.35 Form of Placement Agent Agreement, the Company and Oppenheimer &
Company, Inc., incorporated by reference as Exhibit 10.3 to the
Form 8-K, dated April 24, 2007, and filed with the SEC on April
25, 2007.
21 Subsidiaries of the Company.*
71
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.
72
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 28, 2007
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 28, 2007
--------------------------- (Principal Executive
Bernard Berk Officer)
/s/ Mark Gittelman Chief Financial Officer June 28, 2007
-------------------------- and Treasurer (Principal
Mark I. Gittelman Financial and Accounting
Officer)
/s/ Barry Dash Director June 28, 2007
--------------------------
Barry Dash
/s/ Melvin Van Woert Director June 28, 2007
--------------------------
Melvin Van Woert
/s/ Veerappan Subramanian Director June 28, 2007
--------------------------
Veerappan Subramanian
73
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2007, 2006 AND 2005
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, 2007 and
2006, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended March 31, 2007, 2006 and 2005. 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, 2007 and 2006, and the
results of their operations and their cash flows for each of the three years
ended March 31, 2007, 2006 and 2005 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 7, 2007
F-2
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 AND 2006
ASSETS
2007 2006
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 2,045,390 $ 8,919,354
Accounts receivable, net of allowance for doubtful accounts of $0
and $153,250 as of March 31, 2007 and 2006, respectively 215,837 --
Current portion of restricted cash - capital project fund -- 1,173,896
Prepaid expenses and other current assets 1,149,185 470,633
----------- -----------
Total current assets 3,410,412 10,563,883
PROPERTY AND EQUIPMENT- net of accumulated
depreciation and amortization 5,454,026 4,308,969
INTANGIBLE ASSETS - net of accumulated amortization 42,809 59,457
OTHER ASSETS:
Accrued interest receivable 949 --
Deposit on equipment 32,880 --
Security deposit 6,980 6,980
Restricted cash - debt service 414,999 415,500
EDA bond offering costs, net of accumulated
amortization of $21,178 and $7,000, respectively 333,274 347,452
----------- -----------
Total other assets 789,082 769,932
----------- -----------
TOTAL ASSETS $ 9,696,329 $15,702,241
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 AND 2006
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
2007 2006
---- ----
CURRENT LIABILITIES:
Current portion of EDA bonds $ 185,000 $ 175,000
Accounts payable and accrued expenses 2,205,781 1,740,263
Dividends payable -- 33,333
------------ ------------
Total current liabilities 2,390,781 1,948,596
------------ ------------
LONG TERM DEBT:
EDA bonds - net of current portion 3,795,000 3,980,000
------------ ------------
Total long-term liabilities 3,795,000 3,980,000
------------ ------------
Total liabilities 6,185,781 5,928,596
------------ ------------
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)
March 31, 2007 and 2006, respectively
Authorized - 10,000 Convertible Series B Preferred Stock - issued and
outstanding - 9,695 shares and 10,000 shares, respectively
97 100
Common Stock - $.01 par value;
Authorized - 65,000,000
Issued and outstanding - 20,799,102 and 19,190,159
shares in 2007 and 2006, respectively 207,991 191,902
Subscription receivable (75,000) --
Additional paid-in capital 66,495,618 60,105,107
Accumulated deficit (62,811,317) (50,216,623)
------------ ------------
3,817,389 10,080,486
Treasury stock, at cost (100,000 shares) (306,841) (306,841)
------------ ------------
Total stockholders' equity 3,510,548 9,773,645
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,696,329 $ 15,702,241
============ ============
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,
---------------------
2007 2006 2005
---- ---- ----
REVENUES:
Licensing and test fees $ -- $ -- $ 151,450
Manufacturing fees 1,038,916 494,231 125,739
Royalties 104,925 56,466 24,291
------------ ------------ ------------
Total revenues 1,143,841 550,697 301,480
Cost of Revenues 831,250 -- --
------------ ------------ ------------
Gross Profit 312,591 550,697 301,480
OPERATING EXPENSES:
Research and development 6,085,888 4,343,890 2,698,641
General and administrative 2,534,507 1,726,626 2,159,670
Depreciation and amortization 439,994 486,687 356,438
------------ ------------ ------------
9,060,389 6,557,203 5,214,749
------------ ------------ ------------
LOSS FROM OPERATIONS (8,747,798) (6,006,506) (4,913,269)
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 312,698 90,862 39,932
Sale of New Jersey tax losses 377,259 219,121 205,792
Interest expense (275,031) (283,464) (229,495)
Non-cash compensation satisfied by issuance of
stock options and warrants (3,479,070) (902,927) (1,008,850)
------------ ------------ ------------
(3,064,144) (876,408) (992,621)
------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME
TAXES (11,811,942) (6,882,914) (5,905,890)
Provision For Income Taxes (1,770) (1,000) (1,000)
Minority Interest in Loss of Novel Laboratories, Inc. 10,200 -- --
------------ ------------ ------------
NET LOSS (11,803,512) (6,883,914) (5,906,890)
Preferred Stock Dividends (791,181) (2,155,250) (165,418)
------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $(12,594,693) $ (9,039,164) $ (6,072,308)
============ ============ ============
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (.64) $ (.49) $ (0.47)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,815,780 18,463,514 12,869,924
============ ============ ============
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
--------------- ------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
BALANCES AT APRIL 1, 2004 -- $ -- 12,204,423 $ 122,044 $ 39,338,140
Net proceeds from issuance of Series A 8%
Convertible Preferred Stock and warrants 516,558 5,166 -- -- 5,786,436
Issuance of Common Stock for consulting
services -- -- 26,500 265 58,035
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
Common Stock issued as dividend on Series
A 8% Convertible Preferred Stock -- -- 99,936 1,000 164,418
Exercise of stock options and warrants -- -- 525,744 5,257 579,250
Proceeds - Short swing profits -- -- -- -- 117,740
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCES AT MARCH 31, 2005 -- $ -- 18,022,183 180,222 $ 47,006,379
============ ============ ============ ============ ============
TREASURY STOCK
-------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
------ ------ ------- ------
BALANCES AT APRIL 1, 2004 (100,000) $ (306,841) $(35,105,151) $ 4,048,192
Net proceeds from issuance of Series A 8%
Convertible Preferred Stock and warrants -- -- -- 5,791,602
Issuance of Common Stock for consulting
services -- -- -- 58,300
Issuance of Common Stock upon conversion
of Series A 8% Convertible Preferred
Stock -- -- -- --
Non-cash compensation satisfied by the
issuance of stock, options and warrants 1,008,850
Common Stock issued as dividend on Series
A 8% Convertible Preferred Stock -- -- (165,418) --
Exercise of stock options and warrants -- -- -- 584,507
Proceeds - Short swing profits -- -- -- 117,740
Net loss -- -- (5,906,890) (5,906,890)
------------ ------------ ------------ ------------
BALANCES AT MARCH 31, 2005 $ (100,000) $ (306,841) $(41,177,459) $ 5,702,301
============ ============ ============ ============
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
--------------- ------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
BALANCES AT APRIL 1, 2005 -- $ -- 18,022,183 $ 180,222 $ 47,006,379
Net proceeds from issuance of Series B
8% Convertible Preferred Stock and
warrants 10,000 $ 100 -- -- 8,792,569
Non-cash compensation satisfied by the
issuance of stock, options and
warrants -- -- -- -- 902,927
Exercise of stock options -- -- 20,000 200 39,800
Exercise of stock warrants -- -- 1,147,976 11,480 1,241,515
Net loss -- -- -- -- --
Dividends -- -- -- -- 2,121,917
------------ ------------ ------------ ------------ ------------
BALANCES AT MARCH 31, 2006 10,000 $ 100 19,190,159 $ 191,902 $ 60,105,107
============ ============ ============ ============ ============
TREASURY STOCK
-------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
------ ------ ------- ------
BALANCES AT APRIL 1, 2005 (100,000) $ (306,841) $(41,177,459) $ 5,702,301
Net proceeds from issuance of Series B
8% Convertible Preferred Stock and
warrants -- -- -- 8,792,669
Non-cash compensation satisfied by the
issuance of stock, options and
warrants 902,927
Exercise of stock options -- -- -- 40,000
Exercise of stock warrants -- -- -- 1,252,995
Net loss -- -- (6,883,914) (6,883,914)
Dividends -- -- (2,155,250) (33,333)
------------ ------------ ------------ ------------
BALANCES AT MARCH 31, 2006 (100,000) $ (306,841) $(50,216,623) $ 9,773,645
============ ============ ============ ============
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 SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT RECEIVABLE
------ ------ ------ ------ ----------
BALANCES AT APRIL 1, 2006 10,000 $ 100 19,190,159 $ 191,902 --
Equity Investment in Company -- -- 957,396 9,574 --
Conversion of Preferred to Common (305) (3) 135,555 1,356 --
Conversion of Warrants to Common -- -- 84,430 844 --
Exercise of Stock Options -- -- 59,000 590 --
Non-cash compensation through issuance of
stock options and warrants -- -- -- -- --
Sale of Warrants -- -- -- -- (75,000)
Costs associated with Raising Capital -- -- -- -- --
Net loss -- -- -- -- --
Dividends -- -- 372,562 3,725 --
------------ ------------ ------------ ------------ ------------
BALANCES AT MARCH 31, 2007 9,695 $ 97 20,799,102 $ 207,991 $ (75,000)
============ ============ ============ ============ ============
ADDITION
PAID-IN TREASURY STOCK ACCUMULATED STOCKHOLDERS'
CAPITAL SHARES AMOUNT DEFICIT EQUITY
------- ------ ------ ------- ------
BALANCES AT APRIL 1, 2006 $ 60,105,107 (100,000) $ (306,841) $(50,216,623) $ 9,773,645
Equity Investment in Company 1,990,426 -- -- -- 2,000,000
Conversion of Preferred to Common (1,353) -- -- -- --
Conversion of Warrants to Common (844) -- -- -- --
Exercise of Stock Options 87,910 -- -- -- 88,500
Non-cash compensation through issuance of
stock options and warrants 3,479,070 -- -- -- 3,479,070
Sale of Warrants 75,000 -- -- -- --
Costs associated with Raising Capital (26,347) -- -- -- (26,347)
Net loss -- -- -- (11,803,512) (11,803,512)
Dividends 786,649 -- -- (791,182) (808)
------------ ------------ ------------ ------------ ------------
BALANCES AT MARCH 31, 2007 66,495,618 (100,000) $ (306,841) $(62,811,317) $ (3,510,548)
============ ============ ============ ============ ============
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,
---------------------
2007 2006 2005
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,803,512) $ (6,883,914) $ (5,906,890)
Adjustments to reconcile net loss to cash
used in operating activities:
Provision for doubtful accounts -- -- 153,250
Depreciation and amortization 439,994 486,687 356,438
Non-cash compensation satisfied by issuance of stock,
options and warrants 3,479,070 902,927 1,067,150
Changes in assets and liabilities:
Accounts receivable (215,837) 142,113 (142,113)
Accrued interest receivable (949) -- --
Prepaid expenses and other current assets (678,552) (123,728) (209,013)
Security Deposit -- (6,980) --
Accounts payable, accrued expenses and other current
liabilities 465,518 857,346 (202,325)
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (8,314,268) (4,625,549) (4,883,503)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of patent (5,470) -- --
Deposits to restricted cash -- (1,175,971) --
Release of restricted cash 1,174,397 -- 315,570
Payment of deposit for manufacturing equipment (32,880) -- --
Purchases of property and equipment (1,548,755) (448,280) (27,843)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (412,708) (1,624,251) 287,727
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal bank note payments -- -- (225,000)
Dividends paid (34,141) -- --
Proceeds from issuance of Common Stock and warrants 2,000,000 -- --
Principal repayments of NJEDA bonds (175,000) (2,345,000) (150,000)
Proceeds from issuance of Series A 8% Convertible Preferred
Stock and warrants -- -- 5,791,602
Costs associated with raising capital (26,347) -- --
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 88,500 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 1,853,012 11,267,151 6,392,910
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (6,873,964) 5,017,351 1,797,134
CASH AND CASH EQUIVALENTS - beginning of period 8,919,354 3,902,003 2,104,869
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - end of period $ 2,045,390 $ 8,919,354 $ 3,902,003
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 275,554 $ 275,071 $ 230,464
Cash received for income taxes (375,489) (218,121) (204,792)
SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Preferred Stock dividends of $791,182 and $120,675 paid by issuance of
372,562 and 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, 2007, 2006 AND 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Elite
Pharmaceuticals, Inc. and its consolidated subsidiaries, (collectively the
"Company") including its wholly-owned subsidiaries, Elite Laboratories,
Inc. ("Elite Labs") and Elite Research, Inc. ("ERI") and its variable
interest entity, Novel Laboratories, Inc. ("Novel"). Our Company
consolidates all entities that we control by ownership of a majority
voting interest as well as variable interest entities for which our
Company is the primary beneficiary. Our judgment in determining if we are
the primary beneficiary of the variable interest entities includes
assessing our Company's level of involvement in setting up the entity,
determining if the activities of the entity are substantially conducted on
behalf of our Company, determining whether the Company provides more than
half of the subordinated financial support to the entity, and determining
if we absorb the majority of the entity's expected losses or returns. As
of March 31, 2007, the financial statements of all wholly-owned entities
and its variable interest entity are consolidated and all significant
intercompany accounts are eliminated upon consolidation.
NATURE OF BUSINESS
Elite Pharmaceuticals, Inc. was incorporated on October 1, 1997 under the
laws of the State of Delaware, and its wholly-owned subsidiary Elite
Laboratories, Inc. 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
concentrated on developing orally administered controlled release
products. These products include drugs that cover therapeutic areas for
pain, 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.
F-10
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS (CONTINUED)
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.
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 manufacturing,
licensing, 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 due to uncertainty of collectability is
established based on historical collection experience. 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, 2007, 2006 AND 2005
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, 2007, 2006 AND 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Revenues earned by licensing certain pharmaceutical products developed by
the Company are recognized at the beginning of a license term when the
Company'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.
STOCK-BASED COMPENSATION
Beginning with stock options and warrants granted in 2003, the Company has
accounted for stock-based compensation in accordance with the provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," which provided
guidance for the recognition of compensation expense as it related to the
issuance of stock options and warrants. In addition, the Company adopted
the provisions of SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of SFAS No. 123." SFAS No. 148
amended SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation provided by SFAS No. 123. As permitted
by SFAS No. 148, the Company has adopted the fair value method recommended
by SFAS No. 123 to effect a change in accounting for stock-based employee
compensation. In addition, the Company adopted the provisions of SFAS No.
123R, "Share-Based Payment," which revised SFAS No. 123 to require all
share-based payments to employees, including grants of employee stock
options, to be recognized based on their fair values.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FASB Statement No. 123 (R), "Share Based Payment" ("FASB No. 123 (R)")
requires all entities to recognize compensation expense in an amount equal
to the fair value of share based payments made to employees, among other
requirements. Under the fair value based method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized on a straight-line basis over the award vesting period. The
Company previously adopted FASB No. 123 (R) during the year ended March
31, 2003.
Accordingly, share based payments issued to officers, directors and
vendors are measured at fair value and recognized as expense over the
related vesting periods.
The compensation expense recognized for the years ended March 31, 2007,
2006 and 2005 was $3,479,070, $902,927 and $1,008,850, respectively.
F-13
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes,"
an interpretation of FASB Statement No. 109 ("FIN 48"), which provides
criteria for the recognition, measurement, presentation and disclosure of
uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is "more likely than not" that the position is
sustainable on its technical merits. The provisions of FIN 48 are
effective for fiscal years beginning after December 15, 2006. The Company
does not expect FIN 48 will have a material effect on its consolidated
financial condition, results of operations or cash flows.
In September 2006, the FASB issued FASB Statement No. 157 "Fair Value
Measurements" ("FASB No. 157") which relate to the definition of fair
value, the methods used to measure fair value, and the expanded
disclosures about fair value measurements. The provisions of FASB No. 157
are effective for financial statements issued for fiscal years beginning
after November 15, 2007. The Company does not expect this statement to
have a material effect on its consolidated financial condition, results of
operations or cash flows upon adoption.
In September 2006, the SEC issued Staff Accounting Bulletin 108,
"Considering The Effects Of Prior Year Misstatements When Quantifying
Misstatements In Current Year Financial Statements", which provides
guidance regarding the process of quantifying financial statements
misstatements for the purpose of materiality assessment. The provisions
are effective for fiscal years ending on or after November 15, 2006. This
bulletin did not have a material effect on its consolidated financial
condition, results of operations or cash flows upon adoption.
In February 2007, the FASB issued FASB Statement No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115," ("FASB No. 159") which permits
entities to choose to measure many financial instruments and certain other
items at fair value that are not currently required to be measured at fair
value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. FASB No. 159 is
expected to expand the use of fair value measurement, which is consistent
with the Board's long-term measurement objectives for accounting for
financial instruments. FASB No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between
entities that choose different measurement attributes for similar types of
assets and liabilities. FASB No. 159 does not affect any existing
accounting literature that requires certain assets and liabilities to be
carried at fair value. FASB No. 159 does not establish requirements for
recognizing and measuring dividend income, interest income, or interest
expense. FASB No. 159 does not eliminate disclosure requirements included
in other accounting standards, including requirements for disclosures
about fair value measurements, included in FASB Statements No. 157, "Fair
Value Measurements, and No. 107, Disclosures about
F-14
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Fair Value of Financial Instruments." FASB No. 159 is effective as of the
beginning of an entity's first fiscal year that begins after November 15,
2007. The Company has not yet completed its assessment of the impact upon
adoption of FASB No. 159 on its consolidated financial condition, results
of operations or cash flows.
RECLASSIFICATIONS
Certain accounts and amounts in the 2005 and 2006 financial statements
have been reclassified in order to conform with the 2007 presentation.
These reclassifications have no effect on net income.
NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS
The Company reported net losses of $11,803,512, $6,883,914 and $5,906,890
for the fiscal years ended March 31, 2007, 2006 and 2005, respectively. At
March 31, 2007, the Company had an accumulated deficit of approximately
$62.8 million, consolidated assets of approximately $9.7 million,
stockholders' equity of approximately $3.5 million, and working capital of
approximately $1 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.
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 two products currently being sold commercially and a pipeline of seven
products under development.
As of March 31, 2007, the Company's principal source of liquidity was
approximately $2,045,000 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.
F-15
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS (CONTINUED)
The Company retained an investment banking firm in 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 result, during April 2007, the Company raised approximately $13,900,000
of net proceeds from the sale of Series C Convertible Preferred Stock.
Management plans to use these net proceeds over the next twelve to
fourteen months to fund its research and development activities as well to
fund its continuing investment in Novel Laboratories, Inc.
See "Note 11 - Subsequent Events" for description of Series C 8%
Convertible Preferred Stock.
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 2008.
NOTE 3- PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2007 and 2006 consists of the
following:
2007 2006
---- ----
Laboratory manufacturing, and warehouse equipment $5,216,272 $3,763,163
Office equipment 88,397 32,981
Furniture and fixtures 51,781 51,781
Transportation equipment 4,500 --
Land, building and improvements 2,385,401 2,349,459
Equipment under capital lease 168,179 168,179
---------- ----------
7,914,530 6,365,563
Less: Accumulated depreciation and amortization 2,460,504 2,056,594
---------- ----------
$5,454,026 $4,308,969
========== ==========
Depreciation and amortization expense amounted to $403,698, $333,748 and
$300,303 for the years ended March 31, 2007, 2006 and 2005, respectively.
F-16
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at March 31, 2007 and 2006, consist of the following:
2007 2006
---- ----
Patents $151,300 $145,830
Trademarks 8,120 8,120
-------- --------
159,420 153,950
Less: Accumulated amortization 116,611 94,493
-------- --------
$ 42,809 $ 59,457
======== ========
Amortization of intangible assets amounted to $22,118, $21,727 and $21,012
for the years ended March 31, 2007, 2006 and 2005, respectively.
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 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 had been deposited in a short-term
restricted cash account to fund the purchase of manufacturing equipment
and
F-17
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 5 - LONG TERM DEBT (CONTINUED)
development of the Company's facility. As of March 31, 2007, all of these
proceeds were utilized to upgrade the Company's manufacturing facilities
and for the purchase of manufacturing and laboratory equipment.
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 $14,178 and $7,000 for the years ended March 31, 2007
and 2006, respectively.
Bond issue costs of the 1999 bonds were being amortized over the term of
those bonds. Such amortization amounted to $5,500 and $13,190 in the years
ended March 31, 2006 and 2005, respectively. Upon the refinancing the
remaining unamortized issue costs of $118,712 were charged to expenses.
As of March 31, 2007, $1,274,311 has been requisitioned and 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:
2007 2006
---- ----
Refinanced NJEDA Bonds $ 3,980,000 $ 4,155,000
----------- -----------
3,980,000 4,155,000
Current portion (185,000) (175,000)
----------- -----------
Long term portion, net of current maturities $ 3,795,000 3,980,000
=========== ===========
Maturities of Bonds for the next five years follow:
YEAR ENDING MARCH 31, AMOUNT
--------------------- ------
2008 $ 185,000
2009 200,000
2010 210,000
2011 225,000
2012 245,000
Thereafter 2,915,000
-----------
$ 3,980,000
===========
F-18
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 5 - LONG TERM DEBT (CONTINUED)
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.
NOTE 6 - INCOME TAXES
The components of the provision for income taxes are as follows:
YEAR ENDED MARCH 31,
2007 2006 2005
---- ---- ----
Federal:
Current $ -- $ -- $ --
Deferred -- -- --
------ ------ ------
-- -- --
------ ------ ------
State:
Current 1,770 1,000 1,000
Deferred -- -- --
------ ------ ------
1,770 1,000 1,000
------ ------ ------
$1,770 $1,000 $1,000
====== ====== ======
During the years ended March 31, 2007, 2006 and 2005 the Company received
approval for the sale of an additional $4,818,122, $2,798,478 and $2,628,257 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 years ended March 31, 2007, 2006 and 2005
were $377,259, $219,121 and $205,792, respectively and are recorded as other
income in the statements of operations.
F-19
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 6 - INCOME TAXES (CONTINUED)
The major components of deferred tax assets at March 31, 2007 and 2006 are
as follows:
2007 2006
---- ----
Net operating loss carry forwards $ 11,733,884 $ 10,785,800
Valuation allowance (11,733,884) (10,785,800)
------------ ------------
$ -- $ --
============ ============
At March 31, 2007 and 2006, 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 2007, 2006 and
2005 by $948,084, $2,363,575 and $1,685,889, respectively.
At March 31, 2007, for federal income tax purposes, the Company has unused
net operating loss carryforwards of approximately $36,816,851 expiring in
2008 through 2022. For state tax purposes, the Company has $15,835,173 of
unused net operating losses, which are net of the $19,784,360 of the New
Jersey net-operating losses sold, as discussed above.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
On September 2, 2005, the Company entered into an amended and restated
employment agreement with Bernard J. Berk, providing for Mr. Berk to
continue to serve as the Company's Chief Executive Officer through August
31, 2009. The Employment Agreement also provides for an annual bonus as
determined by the Compensation Committee of the Company's Board of
Directors. Pursuant to the 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.
- Mr. Berk was granted under the Company's 2004 Stock Option Plan,
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.
F-20
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED)
- Mr. Berk will be entitled to receive severance in accordance with
the employment agreement if he is terminated without cause or
because of his death or permanent disability or if he terminates his
employment for good reason or as a result of a "change of control"
(as defined in the employment agreement).
The Company on November 13, 2006 entered into (i) the Second Amended and
Restated Employment Agreement with Mr. Bernard Berk ("Berk"), its Chief
Executive Officer and Chairman of the Board of Directors (the "Berk
Agreement"); (ii) an employment agreement with Dr. Charan Behl ("Behl") as
Executive Vice President and Chief Scientific Officer; and (iii) an
employment agreement with Mr. Chris Dick ("Dick") as Executive Vice
President of Corporate Development.
The employment agreement with Dr. Behl was subsequently amended and
restated on February 9, 2007, under which Dr. Behl's position was changed
from Chief Scientific Officer to Head of Technical Affairs and he is to
report to our Chief Executive Officer, Chief Scientific Officer and any
additional executive officer designated by the Board of Directors.
The Berk Agreement provides for a base annual salary of $330,140 (his
current salary) which may at the discretion of the Board of Directors be
increased in light of factors including the existing financial condition
of the Company and his success in implementing the Company's business plan
and achieving its strategic alternatives. He is to continue to receive an
automobile allowance of $800 per month. The Behl and Dick Agreements
provide for an initial base annual salary of $250,000 and $200,000,
respectively, a guaranteed bonus of $25,000 payable on January 1, 2007 and
within 30 calendar days of the end of each fiscal year during the term and
a $700 per month automobile allowance.
Each of the three agreements provides for payment of a discretionary bonus
following the end of each fiscal year of up to 50% of the executive's then
annual base salary. The amount, if any, of the discretionary bonus will be
determined by the Compensation Committee as to Berk and by the Board of
Directors or a Compensation Committee as to Behl and Dick. Berk's bonus is
to be based on any commercialization of products, merger or acquisition,
business combination or collaborations, growth in revenues and earnings,
additional financings or other strategic business transaction that inure
to the benefit of the Company's stockholders. The bonus, if any, may be
paid in cash or shares of Common Stock, valued at the closing price of the
Common Stock on the immediately preceding trading day. The discretionary
bonus which may be paid to Behl or Dick is to be based on the achievement
of goals discussed with the executive in good faith and within a
reasonable time following the commencement of each fiscal year and may be
paid in cash or shares of the Company's Common Stock valued at the average
of the closing price per share during the five trading days immediately
preceding the date of issuance of the shares.
F-21
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED)
Each of Behl's and Dick's agreement provides for the grant under the 2004
Stock Option Plan (the "2004 Plan") to the executive at an exercise price
of $2.25 of options to purchase 250,000 shares. The Berk, Behl and Dick
Agreements each provide for the grant to the executive of options at the
foregoing exercise price to purchase up to 300,000 additional shares (the
"Opioid Product Options") which are to vest in two 150,000 share tranches
upon the closing of an exclusive product license for the United States
national market, the entire European Union Market or the Japan market or a
product sale transaction of all the Company's ownership rights in the
United States (only once for each product) for the Company's first drug
developed by the Company for which the United States Food and Drug
Administration (the "FDA") approval will be sought under a NDA (including
a 505(b) (2) application) for oxycodone, hydrocone, hydromorphone,
oxymorphone, or morphine ("Non-Generic Opioid Product") as to the first
tranche and as to the Company's second Non-Generic Opioid Drug for the
second tranche. The Berk Agreement provides for the amendment of the
vesting of options as to 400,000 shares which had been granted on
September 2, 2005 to Berk at an exercise price of $2.69 per share ("Berk's
Previous Milestone Options") and the Behl and Dick Agreements provides for
the grant of options at the exercise price of $2.25 per share for each of
Behl and Dick as to 200,000 shares (collectively along with Berk's
Previous Milestone Options, the "Milestone Options") with the Milestone
Options of each of the three executives to vest (A) as to not more than
125,000 shares and 75,000 shares, respectively, upon the commencement of
the first Phase III clinical trial relating to the first and then the
second Non-Generic Opioid Drug developed by the Company; (B) 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) other than
Non-Generic Opioid Drugs for which options were granted above; (C) 10,000
shares upon the filing by the Company (in the Company's name) with the FDA
of either an ANDA or an NDA (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; (D) 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; (E) 25,000 shares upon the filing of
an application for a U.S. patent by the Company (in the Company's name);
and (F) 25,000 shares upon the granting by the U.S. Patent and Trademark
Office (the "PTO") of a patent to the Company filed in the Company's name
or an approval of an ANDA or NDA; provided, however the foregoing options
terminate upon the executive's termination of employment except that
options under (D) and (F) nevertheless vest if the filing was made during
the initial term but prior to termination of the executive's employment by
the Company without cause and the approval was made within 540 days of the
filing of the ANDA, NDA or patent application.
F-22
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED)
The Company also agreed that in the event that as to Berk all of the
options to purchase the full 400,000 Berk's Previous Milestone Options has
fully vested during the initial term of the agreement and as to each of
Behl and Dick all 200,000 Milestone Options have fully vested during the
initial term of his agreement, the Company will grant under the Plan to
the executive at the end of the first current fiscal year in which the
following event occurs fully vested additional options to purchase the
following shares at the fair market value on the date of grant (the
"Additional Milestone Options"): (a) to the extent not previously vested
with respect to his comparable Milestone Options: (i) up to 125,000 shares
upon the commencement of the first Phase III clinical trial relating to
the first Non-Generic Opioid Drug developed by the Company and (ii) up to
an additional 125,000 shares as to such trial relating to the second
Non-Generic Opioid Drug developed by the Company, (b) 50,000 shares upon
the closing of each product license for the United States national market
or product sale transaction of all ownership rights (on a product by
product basis and only once for each product); (c) 10,000 shares 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 for
each drug product of the Company, other than the Non-Generic Opioid Drugs
for which any Opioid Option was granted under the Agreement; (d) 40,000
shares 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; (e) 25,000 shares in the event of the filing of an
application of an additional U.S. patent by the Company (filed in the
Company's name); and (f) 25,000 shares in the event of the granting by the
PTO of the foregoing additional patent applications to the Company (filed
in the Company's name).
The Berk Agreement acknowledges that Berk holds previously granted fully
vested incentive stock options to purchase 725,000 shares, of which
300,000 vested options are exercisable at $2.01 per share, 225,000 vested
options are exercisable at $2.15 per share and 100,000 vested options are
exercisable at $2.69 per share, and the remaining 100,000 options, which
vest on September 2, 2007, are exercisable at $2.69 per share.
Each employment agreement allows the Company at its discretion to grant to
the executive additional options under the 2004 Plan and provides each
executive the right to register at the Company's expense for reoffering
shares issued upon exercise of the options under the Securities Act of
1933, as amended, in certain registration statements filed by the Company
with respect to offerings of securities by the Company.
F-23
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED)
Berk's Agreement, as did his Amended and Restated Employment Agreement,
provides that if the Company terminates his employment due to his
permanent disability, without cause or he terminates his employment for
good reason, 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 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 Berk
is entitled to continued health insurance coverage as specified in the
Comprehensive Omnibus Budget Reconciliation Act. In the event that the
Company terminates Berk's employment because of his permanent disability,
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
Berk's employment for cause or Berk terminates his employment with the
Company without good reason, 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.
Berk's Agreement, as did his prior agreement, provides that in the event
of a change of control in lieu of any severance that may otherwise be
payable to him if 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 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 12 months following the
effective date of termination, of replacing the life and disability
insurance coverage afforded to 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 Berk is entitled to
continued health insurance coverage as specified in the Comprehensive
Omnibus Budget Reconciliation Act.
Each of Behl's and Dick's Agreements provide that in the event the Company
terminates his employment for "Cause" as defined in the agreement or the
executive terminates employment without good reason, he is to receive
salary through date of termination, reimbursement for expenses incurred
prior to termination, all unvested options will terminate as of the date
of termination and vested options will be governed by the terms of the
2004 Plan and the related option agreement. In the event of a termination
due to death, disability or by the Company without cause or by Behl or
Dick for good reason, the Company is to pay him or his estate subject to
his compliance with certain covenants, including non-competition,
non-solicitation, confidentiality and assignment of intellectual property,
his base salary for the longer of the balance of the initial term or one
year from date of
F-24
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED)
termination, continue health insurance coverage for 12 months from
termination and his vested options are to be exercisable for 90 days from
date of termination. Dr. Behl's amended agreement provides that the
definition of "cause" has been amended to include a determination by the
Board of Directors, in its sole discretion, that the employment of Dr.
Behl should terminate, provided that such termination will be effective on
the 30th day after the written notice to Dr. Behl of such determination.
In the event the employment of Behl or Dick is terminated by the Company
following a "Change of Control" of the Company, he will be entitled to the
amounts payable as a result of termination by the Company without cause
plus a lump sum payment of $500,000 and all unvested options shall
immediately vest and along with unexercised vested options be exercisable
within 90 days from the date of termination. "Change of control" is
defined in each of their agreements as the acquisition of the Company
pursuant to a merger or consolidation which results in the reduction to
less than 50% of the shares outstanding upon consummation of the holders
of its outstanding shares immediately prior thereto or sale of
substantially all the assets or capital stock of the Company to another
person, or the acquisition by a person or a related group in a single
transaction or a series of related transaction of more than 50% of the
combined voting power of the Company's outstanding voting securities.
Berk's Agreement contains his non-solicitation covenant for a period of
one year from termination. Each of Behl and Dick has agreed to a one-year
following termination non-competition covenant and a two year following
termination non-solicitation covenant.
The executives are to be reimbursed for expenses (including business,
travel and entertainment) reasonably incurred in the performance of his
duties, with Behl's and Dick's agreements providing that reimbursement of
expenses in excess of $2,000 per month are subject to the approval of the
Company's Chief Executive Officer. Each of the executives is entitled to
participate in such employee benefit and welfare plans and programs, which
may be offered to senior executives of the Company including life
insurance, health and accident, medical plans and programs and profit
sharing and retirement plans.
Each employment agreement is for an initial term ending November 13, 2009,
subject to automatic one-year renewals unless terminated by the executive
or the Company upon at least 60 days notice prior to the end of the then
scheduled expiration date. The Company has the right to terminate Berk's
employment in the event of his inability to perform work due to physical
or mental illness or injury for nine full calendar months during any eight
consecutive calendar months. It has the right to terminate Behl's or
Dick's employment due to disability as defined in a long-term disability
insurance policy reasonably satisfactory to him or, in the absence of such
policy, due to his inability for 120 days in any 12 month period to
substantially perform his duties as a result of a physical or mental
illness.
F-25
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ALLIANCE AGREEMENT
On December 6, 2006, the Company entered into a Strategic Alliance
Agreement (the "ALLIANCE AGREEMENT") with Dr. Veerappan S. Subramanian
("VS") and VGS Pharma, LLC, a Delaware limited liability company ("VGS"),
under which (i) VS was appointed to the Company's Board of Directors, (ii)
VGS made a $2,000,000 equity investment in the Company, (iii) VS was
engaged to serve as strategic advisor on the research, development and
commercialization of the Company's existing pipeline, (iv) the Company and
VGS formed Novel Laboratories Inc., a Delaware corporation ("Novel"), as a
separate specialty pharmaceutical company for the research, development,
manufacturing, licensing, acquisition and marketing of specialty generic
pharmaceuticals, and (v) the Company contributed $2,000,000 to Novel and
agreed to make additional contributions.
Pursuant to the Alliance Agreement, Novel entered into an employment
agreement with VS and the Company entered into (i) an Advisory Agreement
with VS, (ii) a Registration Rights Agreement with VGS and VS, and (iii) a
Stockholders Agreement with VS, VGS and Novel.
The specialty pharmaceutical product initiative of the strategic alliance
between the Company and VS is to be conducted by Novel of which the
Company acquired 49% and VGS acquired 51% of its Class A Voting Common
Stock for $9,800 and $10,200 respectively. Pursuant to the Alliance
Agreement, VGS acquired for $2,000,000: (i) 957,396 shares of Company's
Common Stock (the "Acquired Company Shares") valued at approximately
$2.089 per share (the average closing price of the Common Stock during the
ten trading days on the American Stock Exchange immediately preceding
December 6, 2006) and (ii) a five year Warrant to purchase 478,698
additional shares (the "Warrant Shares"), for cash, at a price of $3.00
per share.
The Company initially contributed $2,000,000 to Novel and made additional
contributions of $5,000,000 through June 15, 2007. The remaining
contributions to be made by the Company shall be funded in the amounts and
upon the occurrence of the following milestones (i) $10,000,000 upon the
submission to the FDA of three ANDAs related to three different
prospective products developed by Novel and (ii) $10,000,000 upon the
submission to the FDA of three ANDAs related to at least three additional
different prospective products developed by Novel; provided that the
aggregate contributions to be made by the Company shall not exceed (i)
$15,000,000 prior to November 1, 2007 or (ii) $25,000,000 prior to May 1,
2008. The remaining contributions of the Company are not monetary
obligations but rather conditions that must be met in order for the
Company to maintain its equity interest in Novel.
F-26
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ALLIANCE AGREEMENT (CONTINUED)
In the event that (i) the Company defers for more than 90 days the payment
of a contribution installment due to Novel's failure to achieve a
Performance Milestone, (ii) the Company fails to make a requisite
contribution following Novel's achieving a Performance Milestone or (iii)
Novel requires additional financing beyond amounts provided in the
Business Plan or the additional contributions the Company has agreed to
provide, Novel may seek such financing through a subscription offering to
its Class A Stockholders and, to the extent not fully subscribed, from
third parties.
The Company agreed to use its best efforts to elect VS a member of its
Board of Directors as long as the Company and its "permitted transferees"
own at least 40% of Novel's outstanding capital stock and VS is Chairman
of the Board and Chief Executive Officer of Novel.
Pursuant to an employment agreement, Novel has agreed to employ VS to
perform his duties three full business days a week as its Chief Executive
Officer at a salary of $220,000 per annum, with bonuses and options to
purchase Novel's Common Stock to be granted at the discretion of Novel's
Board of Directors.
VS's employment may be terminated for "Cause" or by VS for "Good Reason",
with both such terms defined in the VS employment agreement. Either party
may terminate the employment upon 30-business days prior written notice to
the other.
The stockholders agreement provides that as long as each owns at least 10%
of the shares of Class A Voting Common Stock of Novel, each shall
designate one of the two Directors to constitute the Novel Board of
Directors, with the VGS designee to be VS, unless otherwise approved by
the Company. It prohibits the taking of certain actions without approval
of the two designees, including, but not limited to, amendments of
charter, by-laws and other governance agreements, spin-offs or public
offerings of equity securities, a liquidation or dissolution, dividends,
authorization or issuance of additional securities or options, bankruptcy,
a material change of the business or a Business Plan, approval of a
Business Plan and the yearly operating budget, creation of a security
interest, capital expenditures in excess of 110% of the amount provided in
the Business Plan, investments in excess of the amounts approved in the
Business Plan, an increase or decrease of the Board; and any investments
by VS in any "Competitive Company" or its affiliate.
It further provides that determination of "Cause" or the "Disability" of
VS under his employment agreement shall be made solely in the reasonable
discretion of the Company designee.
Except for certain enumerated permitted transfers, the stockholders
agreement provides that no transfer of Novel stock may be made without the
consent of the other stockholders.
F-27
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ALLIANCE AGREEMENT (CONTINUED)
In the event the Company fails to make required additional contributions,
VGS has the right to purchase from the Company at its original purchase
price that proportion of the shares of Novel Class A Common Stock
originally acquired by it equal to the proportion of the required
additional contributions not made by the Company.
In the event of VS's resignation from Novel for other than Good Reason,
his termination by Novel for Cause, or his death or disability as defined
in the Employment Agreement, the Company has the right to acquire from VGS
up to 75% of the shares of Class A Common Stock of Novel originally
acquired by it at the original purchase price; such percentage to be
reduced to 50% and 25% upon the first and second anniversary of the
agreement and no reduction on the third anniversary, with a pro rata
portion of such reduction to be effected upon the death or disability of
VS during the applicable period. Each of the Company and VGS has a right
to acquire from the other at the then fair value, its shares of Novel upon
the bankruptcy, dissolution or liquidation, a change of control of the
other or, if as a result of such purchases at the original purchase price,
the percentage of Novel owned by such party is less than 10%.
The agreement subjects VS to a confidentiality covenant, a non-competition
covenant terminating one year following the end of the term and a
non-solicitation covenant terminating two years following the end of the
term, provided his termination by Novel was not without "Cause" or by VS
was with "Good Reason".
ADVISORY AGREEMENT
The Advisory Agreement obligates VS to provide advisory services to the
Company, including but not limited, to assist in the implementation of
current and new drug product development projects of the Company and
assisting in the Company's recruitment of additional R&D staff members. As
an inducement to enter into the agreement, the Company granted VS a
non-qualified stock option to purchase up to 1,750,000 shares of Common
Stock (the "Option Shares") at a price of $2.13 per share. The option
vests in 250,000 share installments, the first immediately, the second on
May 6, 2007, the third on December 6, 2007, the fourth upon the Company's
acceptance of the Initial Business Plan of Novel, and the other
installments vesting on the accomplishment of certain milestones with
respect to the first or second drug product developed by the Company
(excluding drug products of Novel) on or after February 4, 2007, under the
advisory services provided to the Company.
F-28
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ADVISORY AGREEMENT (CONTINUED)
The option terminates on December 6, 2016, or 90 days following a
termination of his advisory services to the Company or his employment by
Novel other than a termination without Cause or by VS for Good Reason or
48 months after the termination of his advisory services under the
Advisory Agreement or his employment under the employment agreement as a
result of: (i) a termination by the Company of the Advisory Agreement or
by Novel of the employment agreement without Cause or by VS without Good
Reason or (ii) the post-December 6, 2007, termination of the term of the
Advisory Agreement or of the Novel employment agreement.
All unvested options terminate upon the termination of the Advisory
Agreement (other than a termination by the Company without Cause or by VS
for Good Reason) or at such time as the Company and its permitted
transferees own in the aggregate less than 20% of the outstanding capital
stock of Novel, except to the extent the Company at its sole discretion
has determined that VS has provided substantial contribution to the
development of any drug product which would otherwise trigger the vesting
of options notwithstanding the failure to satisfy the foregoing 20%
threshold.
The Company has granted certain rights to have the Acquired Company
Shares, the Option Shares and Warrant Shares registered for reoffering
under the Securities Act of 1933, as amended (the "Act"), including the
provision of one Registration Statement upon the demand of holders of 75%
of the Acquired Company Shares, Warrant Shares and Option Shares and the
rights to have registered as part of a registration statement related to
an offering of common stock by the Company or other security holders. The
Company is to bear all reasonable expenses other than underwriting
discounts and commissions in connection with the registration and
qualification under applicable state securities law.
CHIEF SCIENTIFIC OFFICER
On February 9, 2007, VS, a recently appointed director of the Company,
agreed to become the acting Chief Scientific Officer of the Company and,
as such, will oversee all scientific activities and employees.
On the same date, the Company and Dr. Behl entered into an Amended and
Restated Employment Agreement under which Dr. Behl's position was changed
from Chief Scientific Officer to Head of Technical Affairs and Dr. Behl
reports to the Chief Executive Officer, the Chief Scientific Officer and
any additional executive officer designated by the Board. In addition, the
definition of "cause" has been amended to include a determination by the
Board, in its sole discretion, that the employment of Dr. Behl should
terminate, provided that such termination will be effective on the 30th
day after the written notice to Dr. Behl of such determination.
F-29
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONSULTING AGREEMENTS
On June 1, 2006, the Company 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.
REFERRAL AGREEMENTS
On January 29, 2002, the Company entered into a Referral Agreement with a
Director whereby the Company will pay referral fees based upon payments
net of direct costs received by the Company from sales of products,
development fees, licensing fees and royalties generated as a direct
result of this Director identifying customers for the Company. 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, 2007.
F-30
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COLLABORATIVE AGREEMENTS
On March 30, 2005, the Company 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 generic product.
Upon its development and the securing of the required FDA approval by the
formulation development company, the Company is to manufacture the product
and Harris is to sell and distribute the product. In addition to the
transfer price for manufacturing the product, the Company is to share the
profits, if any, realized upon sales. The innovator's reference product
for this generic was originally a capsule. The innovator has now received
approval for an alternative dose form (a tablet rather than capsule) and
has discontinued the original dose form. While a reference product remains
for the capsule, the market opportunity has changes and this affects how
we might commercialize the capsule dosage form. On June 19, 2006, the
Company received written notice from Harris of Harris' intent to terminate
the agreement in accordance with Section 9.3 of the agreement. As the date
hereof, the Company has received $29,700 for this development work.
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. The Company
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"), now a subsidiary
of Barr Pharmaceuticals, Inc., 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 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-31
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COLLABORATIVE AGREEMENTS (CONTINUED)
On November 10, 2006, the Company entered into a product collaboration
agreement with The PharmaNetwork, LLC for the development of the generic
equivalent of a synthetic narcotic analgesic drug product. TPN is to
perform development services and prepare and file an ANDA in the name of
TPN with the FDA. The Company is to provide development support including
the purchase of active pharmaceutical ingredients and materials and
supplies to manufacture the batch, provide adequate facilities to TPN for
use in its development work and following ANDA approval, The Company will
manufacture the drug product developed. The Company is to pay TPN for the
development services rendered upon the attainment of certain milestones.
The out-of-pocket costs are to be shared by TPN and the Company, with
TPN's obligation to be payable from its royalty compensation. Formulation
development work is currently underway.
The aforementioned agreements are in their infancy stages.
The Company is a party to two separate and distinct development and
license agreements with ECR Pharmaceuticals ("ECR"). Pursuant to the
agreements, the Company agreed to commercially develop two products,
Lodrane 24(R) and Lodrane 24D(R) in exchange for development fees, certain
payments, royalties and manufacturing rights. The products are currently
being marketed by ECR which also has the responsibility for regulatory
matters. In addition to receiving revenues for manufacture of these
products, the Company also receives a royalty on in-market sales.
F-32
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
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:
2007 2006 2005
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Stock options 6,622,500 $ 2.28 2,971,250 $ 2.36 2,777,050 $ 2.16
Convertible
Preferred Stock 4,308,885 $ 2.25 4,444,444 $ 2.25
Warrants 6,640,446 $ 2.31 6,079,199 $ 2.26 8,035,875 $ 2.69
---------- ---------- ----------
17,571,831 13,494,893 10,312,925
========== ========== ==========
F-33
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
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 classes of warrants which 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-34
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
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 Company 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-35
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
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 exceeded 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 Company 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-36
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
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
Company 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-37
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
COMMON STOCK TRANSACTIONS
During the year ended March 31, 2007, 305 shares of Series B Preferred
Stock were converted into 135,555 shares of Common Stock.
Dividends accrued on Series B Stock through conversion date and March 31,
2007 were satisfied by the issuance of 1,318 and 371,244 shares of Common
Stock, respectively.
During the year ended March 31, 2007, 3,750 options expired, 65,500 were
forfeited and 59,000 options were exercised for gross proceeds of $88,500.
On December 6, 2006, the Company issued to VGS Pharma, LLC a five year
warrant to purchase 478,698 shares of Common Stock for cash at a price of
$3.00 per share, subject to adjustment upon the occurrence of certain
events. The per share weighted value of the warrant to purchase 478,698
shares of Common Stock at $3.00 per share is $0.77. The warrant was valued
using the Black-Scholes option pricing model with the following weighted
average assumptions: no dividend yield; expected volatility of 46.12%;
risk free interest rate of 5%; and expected life of 5 years. As a result,
a charge of $366,396 is reflected in the consolidated statement of
operations.
In addition, on December 6, 2006, the Company granted to Veerappan
Subramanian ("VS") an option to purchase up to 1,750,000 shares of the
Common Stock at $2.13 a share. The option vests as to 250,000 shares
immediately and in subsequent 250,000 share installments, with one vesting
on May 6, 2007, another on December 6, 2007, a third upon acceptance of
the initial business plan of Novel, and the other installments vesting on
the accomplishment of certain milestones with respect to the first or
second drug product developed by the Company (excluding drug products of
Novel) on or after the 60th day after December 6, 2006, under the advisory
services provided to the Company. The per share weighted-average fair
value of the option to purchase up to 1,750,000 shares of Common Stock
granted to VS is $1.36 a share for an actual charge of $2,380,000 which
will be recognized over the vesting period of the instrument. The option
was valued using the Black-Scholes option pricing model with the following
weighted average assumptions: no dividend yield; expected volatility of
46.12%; risk free interest rate of 5%; and expected life of 10 years.
VGS is a wholly owned subsidiary of Kali Capital, L.P., which is
controlled by Kali Management, LLC ("KALI"), its general partner, and Kali
is controlled by Anu Subramanian, its managing member and daughter of VS.
VS was subsequently appointed to the board of directors of the Company and
became the Company's Chief Scientific Officer.
On July 12, 2006, the Company sold to Indigo Ventures, LLC ("Indigo") for
$150,000 a warrant to purchase up to 600,000 shares of Common Stock at
$3.00 per share pursuant to the Financial Advisory Agreement with Indigo
(the "Advisory Agreement"), of which 100,000 shares of Common Stock have
vested. The Advisory Agreement has been amended and the warrant reduced
from 600,000 to 300,000 shares of common stock.
F-38
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The following grants were made under the Company's 2004 Stock Option Plan
in the year ended March 31, 2007:
On November 21, 2006, the Company granted options to sixteen employees to
purchase an aggregate of 66,500 shares of Common Stock with an exercise
price of $2.26 to vest over a period of three years from grant date.
On November 13, 2006, the Company granted to Bernard Berk, the Company's
Chief Executive Officer, according to terms of the Second Amended and
Restated Employment Agreement additional stock options to purchase up to
300,000 shares of the Company's Common Stock at $3.00 a share. See Note 7
Commitments and Contingencies - Employment Agreements.
Additionally, under employment agreements with each of Dr. Charan Behl,
Executive Vice President and Chief Scientific Officer, and Chris Dick,
Executive Vice President of Corporate Development, the Company granted to
each, options to purchase up to 750,000 shares of Common Stock at $2.25 a
share. See Note 7 Commitments and Contingencies - Employment Agreements.
On June 1, 2006, the Company entered into a one year consulting agreement
with David Filer, whereby Dr. Filer is to provide financial advisory
services to the Company, in consideration of the grant of three year
options to purchase 10,000 shares of Common Stock, at a price of $3.00 per
share.
On May 3, 2006, the Company granted options to purchase 70,000 shares of
Common Stock at a price of $2.26 per share to Mark Gittelman, its Chief
Financial Officer. One-third of the options vest on each of May 3, 2007,
May 3, 2008 and May 3, 2009.
Between February and October 2006, the Company granted ten year options to
twelve employees to purchase an aggregate of 83,000 shares of Common Stock
with exercise prices ranging from $2.25 to $2.30 per share, which vest
over a period of three years from grant date.
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.
F-39
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
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-40
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
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:
2007 2006 2005
---- ---- ----
Balance at beginning of year: 6,079,199 8,035,875 2,654,239
Warrants issued 778,698 220,705 200,000
Warrants issued pursuant to Placement Agent
Agreements -- 381,028 519,931
Warrants issued pursuant to Private Placement -- 2,222,222 5,165,580
Placement Agent Warrants Exercised -- -- (7,500)
Warrants exercised or expired (217,452) (4,780,631) (496,375)
--------- --------- ---------
Ending balance 6,640,445 6,079,199 8,035,875
========= ========= =========
F-41
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
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, 2005, 2006 and 2007 the Company issued
120,000, 969,200 and 3,779,500, respectively options to purchase Common
Stock to employees and to members of the board of directors. The options
have an exercise price ranging from $2.25 to $3.00 per share and all vest
over three years except 120,000 issued for year ended March 31, 2005 which
vested upon grant date, 75,000 issued for the year ending March 31, 2006
which vested pro-rata over a 6 month period and 750,000 issued for year
ending March 31, 2007 which vested upon grant date, 250,000 which vest in
6 months and 2,000,000 which vest based upon strategic events or
accomplishments of certain milestones. The options expire between five and
ten years from the date of grant. The Company has recorded compensation
expense of $1,008,850, $902,927 and $3,479,070 for the years ended March
31, 2005, 2006 and 2007, respectively, which represents the fair value of
the options vested computed using the Black-Scholes options pricing model
on each grant date.
F-42
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
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:
2007 2006 2005
AVERAGE AVERAGE AVERAGE
WEIGHTED WEIGHTED WEIGHTED
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
Outstanding at
beginning of year 2,971,250 $ 2.36 2,277,050 $ 2.16 2,417,050 $ 3.70
Granted 3,779,500 2.20 969,200 2.74 120,000 2.34
Exercised (59,000) 1.50 (20,000) 2.00 (100,000) 1.00
Expired (69,250) 2.31 (255,000) 2.04 (160,000) 7.13
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end
of year 6,622,500 $ 2.28 2,971,250 $ 2.36 2,277,050 $ 2.16
========== ========== ========== ========== ========== ==========
The following table summarizes information about stock options outstanding
at March 31, 2007:
WEIGHTED AVERAGE WEIGHTED- WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISABLE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------------- ----------- ------------ ----- ----------- -----
$1.00 - $2.00 141,000 .75 $1.85 141,000 $1.85
$2.01 - $3.00 6,481,500 8.44 2.28 2,782,694 2.28
-------------- ---------- ----- ----- ---------- -----
$1.00 - $3.00 6,622,500 7.77 $2.28 2,923,694 $2.26
-------------- ---------- ----- ----- ---------- -----
F-43
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 9 - STOCK OPTION PLANS (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
The per share weighted-average fair value of each option granted during
fiscal 2007, 2006, and 2005 ranged from $1.36 to $1.39 during fiscal 2007,
$1.48 to $1.70 during fiscal 2006 and $1.91 during fiscal 2005 on the date
of grant using the Black-Scholes options pricing model with the following
weighted-average assumptions; no dividend yield; expected volatility of
ranging from 46.12% to 57.95% for fiscal 2007, expected volatility of
97.84% for fiscal year 2006 and 76.69% for fiscal year 2005; risk-free
interest rates of 5.00% in 2007, 4.18% in 2006 and 4.00% in 2005 and
expected lives ranging from five to ten years.
There are 888,500 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:
2007 2006 2005
---- ---- ----
Customer A - 100% 100% 49.80%
Customer B - -- -- --
Customer C - -- -- 49.80%
F-44
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 11 - SUBSEQUENT EVENTS
On April 3, 2007, a holder of 145 shares of Series B 8% Preferred Stock
converted his shares and accrued dividends through the date of conversion
into 64,490 shares of Common Stock.
On April 17, there was a cashless exercise of 39,630 warrants issued in
our October, 2004 Private Placement, which resulted in the issuance of
15,456 shares of Common Stock.
On April 20, $61,500 was received from the exercise of stock options
previously granted to purchase 41,000 shares of Common Stock at $1.50 per
share.
On April 24, 2007, the Company sold 15,000 shares of its Series C 8%
Convertible Preferred Stock, par value $0.01, and 1,939,655 warrants for
gross proceeds of $15,000,000. The 15,000 Preferred Series C shares are
convertible into 6,465,517 shares of common stock. The warrants are
exercisable at $3.00 per share and are exercisable through April 27, 2012.
The Company paid $1,050,000 in commissions to the placement agent and
others in connection with the sale of the Series C Preferred. In addition,
the Company granted the placement agent 193,965 warrants exercisable at
$3.00 per share which were valued at $129,627. The Series C 8% Convertible
Preferred will pay a quarterly dividend at 8% per annum on its purchase
price of $1,000 per share. The dividend will be payable in other shares or
cash. The gross proceeds of the private placement were $15,000,000 before
payment of $1,050,000 in commissions to the Placement Agent and selected
dealers. In addition, the Company agreed to reimburse the Placement Agent
for all documented out-of-pocket expenses incurred by the Placement Agent
in connection with the private placement, including reasonable fees and
expenses of its counsel, which the Company and Placement Agent agreed to
be limited to $25,000. Pursuant to the placement agent agreement, the
Company issued to the Placement Agent and its designees warrants to
purchase 193,965 shares of Common Stock. Such warrants are at an exercise
price of $3.00 per share, exercisable on or prior to April 24, 2012.
On April 24, 2007, pursuant to the authority of its Board of Directors,
Company filed with the Secretary of State of Delaware the Certificate of
Designations, Preferences and Rights of Series C Preferred Stock .
F-45
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)
On May 8, 2007, the Company approved the details provided by Veerappan
Subramanian of the Initial Business Plan for purposes of the requirements
set forth in the Strategic Alliance Agreement dated December 6, 2006 by
and between the parties. Upon agreement to the Initial Business Plan, the
milestones for the Company's remaining contributions were established.
Upon achievement of agreed upon milestones relating to the identification
and commencement of development of generic drug products, on May 15, 2007,
the Company funded $2,000,000 and $3,000,000 on May 15, 2007 and on June
15, 2007, respectively, to Novel Laboratories, Inc. The remaining
contributions to be made by the Company shall be funded in the amounts and
upon the occurrence of the following milestones: (i) $10,000,000 upon the
submission to the FDA of three ANDAs related to three different
prospective products developed by Novel and (ii) $10,000,000 upon the
submission to the FDA of three ANDAs related to at least three additional
different prospective products developed by Novel; provided that the
aggregate contributions to be made by the Company shall not exceed (i)
$15,000,000 prior to November 1, 2007 or (ii) $25,000,000 prior to May 1,
2008. The remaining contributions of the Company are not monetary
obligations but rather conditions that must be met in order for the
Company to maintain its current equity interest in Novel. In the event of
the Company's failure to fund remaining contributions, VGS Pharma shall
have the right to exercise the VGS Purchase Right under the Stockholders
Agreement dated December 6, 2006 and if Novel fails to achieve its
performance milestones, the Company may exercise remedies set forth in the
Strategic Alliance Agreement and Stockholders Agreement dated December 6,
2006.
On June 11, 2007, the Company borrowed $3,000,000 from a commercial bank
at the bank's prime rate minus 1/2% per annum, with interest only payable
on July 1, 2007 and on the 1st day of each month thereafter until June 30,
2008, when all unpaid principal and interest is due in full. The Company
pledged $3,000,000 of its cash to the commercial bank as collateral for
the loan. There were no other forms of guarantees by the Company or fees
associated with the line of credit agreement. The $3,000,000 credit
facility is a short-term bridge in order to fund the June 15, 2007 funding
commitment to Novel. The Company intends to raise up to an additional
$5,000,000 through the sale of the remaining 5,000 shares of Series C
Preferred Stock. The net proceeds of the Series C funding would fund the
repayment, without prepayment penalty, of the $3 million credit facility
to the commercial bank.
On June 5, 2007, the Board of Directors unanimously authorized Bernard
Berk, as the Company designee to the board of directors of Novel, to
approve the Novel employee stock option plan reserving up to 26,582 shares
of Novel's Class B non-voting common stock, as well as the employment
contract for Muthusamy Shanmugam ("Sammy"), its Head of Technical
operations, and the grant of options to purchase 8,861 shares of Novel's
Class B non-voting common stock to each of Sammy and Veerappan
Subramanian.
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ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)
Sammy's employment contract calls for a base salary of $170,000 per
calendar year, subject to annual review for increase at the discretion of
the Board of Directors of Novel. The term of the agreement is three years.
The options granted by Novel to Sammy to purchase up to 8,861 shares of
Novel's Class B non-voting common stock vest and become exercisable, with
an exercise price of $22.50 per share, at the rate of 2,953 options on the
first anniversary of the grant date and 2,954 exercisable on the second
and third anniversaries of the grant date, respectively.
The options granted by Novel to Dr. Subramanian to purchase up to 8,861
shares of Novel's Class B non-voting common stock vest and become
exercisable, with an exercise price of $22.50 per share, at the rate of
(i) 1,266 option shares on the date of each submission to the FDA of an
ANDA for the first six new prospective products developed by Novel which
is not the subject of any prior ANDA submitted to the FDA by Novel and
(ii) 1,265 option shares on the date of approval by the FDA of a drug
product that is the subject of an ANDA related to a prospective product
developed by Novel which has not been previously approved by the FDA for
Novel.
The remaining 8,860 options under the stock option plan have not been
granted to date and are being served for future awards to employees at the
discretion of Novel's Board of Directors.
Upon the grant and subsequent exercise of all of the stock options under
the Novel stock option plan, The Company's 49% current interest in Novel
would be diluted to approximately 39%, VGS Pharma's 51% current interest
in Novel would be diluted to 40%, Sammy would maintain a 7% interest in
Novel and Dr. Subramanian's would maintain a 7% interest in Novel.
On June 28, 2007, Elite and PLIVA terminated the Product Development and
License Agreement entered into on June 22, 2005. According to the
termination agreement, effective as of January 31, 2007, it was agreed
that Elite owns all intellectual property rights relating to the
controlled released generic product in development under the Product
Development and License Agreement and PLIVA agreed to pay Elite $100,000
in discharge of outstanding payments under the Product Development and
License Agreement.
F-47