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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, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO______
COMMISSION FILE NUMBER 333-45241
ELITE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3542636
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
165 Ludlow Avenue
Northvale, New Jersey 07647
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including (201) 750-2646
area code:
Securities registered pursuant Common Stock - $.01 par value
to Section 12(b) of the Act: The Common Stock is listed
on the American Stock Exchange
Securities registered pursuant to Section None
12(g) of the Act:
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 an accelerated filer (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 20, 2005 was approximately $51,126,066 based upon the
closing price of the registrant's Common Stock on the American Stock Exchange,
as of June 20, 2005. (For purposes of determining this amount, only directors,
executive officers, and 10% or greater stockholders and their respective
affiliates have been deemed affiliates).
Registrant had 18,178,167 shares of Common Stock, par value $0.01 per share,
outstanding as of June 20, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
There are no documents incorporated by reference into the Annual Report or any
part of the report.
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K 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.
TABLE OF CONTENTS
Form 10-K Index
PART I
PAGE
Item 1. Business......................................................... 2
Item 2. Properties....................................................... 23
Item 3. Legal Proceedings................................................ 23
Item 4. Submission of Matters to a Vote of Security Holders.............. 24
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters................................ 25
Item 6. Selected Financial Data.......................................... 28
Item 7. Management's Discussion and Analysis of Financial................ 28
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.......................................... 35
Item 8. Financial Statements and Supplementary Data...................... 35
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 35
Item 9A. Controls and Procedures.......................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant............... 37
Item 11. Executive Compensation........................................... 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters............. 48
Item 13. Certain Relationships and Related Transactions................... 49
Item 14. Principal Accountant Fees and Services........................... 50
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 50
Signatures .............................................................. 54
PART I
ITEM 1. BUSINESS
Elite Pharmaceuticals, Inc. ("Elite Pharmaceuticals") was incorporated
on October 1, 1997 under the laws of the State of Delaware, and our wholly-owned
subsidiaries, Elite Laboratories, Inc. ("Elite Labs") and Elite Research, Inc.
("Elite Research") were incorporated on August 23, 1990 and December 20, 2002,
respectively, under the laws of the State of Delaware. Elite Pharmaceuticals,
Elite Labs and Elite Research are referred to herein, collectively, as "Elite",
"we", "us", "our" or the "Company".
On October 24, 1997, Elite Pharmaceuticals merged with and into our
predecessor company, Prologica International, Inc. ("Prologica") an inactive
publicly held corporation formed under the laws of the State of Pennsylvania. At
the same time, Elite Labs merged with a wholly-owned subsidiary of Prologica.
Following these mergers, Elite Pharmaceuticals survived as the parent to its
wholly-owned subsidiary, Elite Labs.
On September 30, 2002, we acquired from Elan Corporation, plc and Elan
International Services, Ltd. (together "Elan") Elan's 19.9% interest in Elite
Research, Ltd. ("ERL"), a joint venture formed between Elite and Elan in which
our initial interest was 80.1% of the outstanding capital stock (100% of the
outstanding Common Stock). As a result of the termination of the joint venture,
we owned 100% of ERL's capital stock. On December 31, 2002, ERL (a Bermuda
Corporation) was merged into Elite Research, our wholly-owned subsidiary.
The address of our principal executive offices and our telephone and
facsimile numbers at that address are:
Elite Pharmaceuticals, Inc., 165 Ludlow Avenue, Northvale, New Jersey
07647; Phone No.: (201) 750-2646; Facsimile No.: (201) 750-2755.
We file registration statements, periodic and current reports, proxy
statements and other materials with the Securities and Exchange Commission. You
may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains a web site at www.sec.gov that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC, including our filings.
2
BUSINESS OVERVIEW AND STRATEGY
Elite is a specialty pharmaceutical company principally engaged in the
development and manufacture of oral, controlled release products. Elite develops
controlled release products using proprietary technology and licenses these
products. The Company's strategy includes developing generic versions of
controlled release drug products with high barriers to entry and assisting
partner companies in the life cycle management of products to improve off-patent
drug products. Elite's technology is applicable to develop delayed, sustained or
targeted release pellets, capsules, tablets, granules and powders. Elite has one
product currently being sold commercially and a pipeline of six drug products
under development in the therapeutic areas that include cardiovascular, pain
management, allergy and infection. The addressable market for Elite's pipeline
of products exceeds $2 billion. Elite's current facility in Northvale, New
Jersey also is a Good Manufacturing Practice (GMP) and DEA registered facility
for research, development, and manufacturing.
We have concentrated on developing orally administered controlled
release drug products. These products include drugs that cover therapeutic areas
for pain, angina, hypertension, allergy and infection. One of our products,
24(R), has been commercially developed and is being marketed by ECR
Pharmaceuticals, our partner for this product. An additional controlled release
product is under development for marketing by the same company. A third product
is to be developed pursuant to a recent agreement with another pharmaceutical
company.
We are focusing our efforts on the following areas: (i) manufacturing
of Lodrane 24(R) and the development and manufacture of two of the other
products with partners referred to above; (ii) commercial exploitation of our
products either by license and the collection of royalties, or through the
manufacture of tablets and capsules using our formulations, and (iii)
development of new products and the expansion of our licensing agreements with
other pharmaceutical companies, including contract research and development
projects, joint ventures and other collaborations.
In an effort to reduce costs and improve focus and enhance efficiency,
we reduced the number of products that we are actively developing from fifteen
to seven. The seven products, one of which had been commercially developed and
six that are in development, were deemed by us to be the most suitable for
development given our limited resources.
We are focusing on the development of various types of drug products,
including, generic drug products (which require abbreviated new drug
applications ("ANDA")) as well as branded drug products (which require new drug
applications ("NDA") under Section 505(b)(1) or 505(b)(2) of the Drug Price
Competition and Patent Term Restoration Act of 1984 (the "Drug Price Act").
3
We intend to continue to collaborate in the development of additional
products with our current partners. We also plan to seek additional
collaborations to develop more drug products.
We believe that our business strategy enables us to reduce our risk by
having a diverse product portfolio that includes both branded and generic
products in various therapeutic categories; and building collaborations and
establishing licensing agreements with companies with greater resources thereby
allowing us to share costs of development and to improve cash-flow.
RESEARCH AND DEVELOPMENT
During each of the last three fiscal years, we have focused on research
and development activities. We spent $2,698,641 in the fiscal year ended March
31, 2005, $2,075,074 in the fiscal year ended March 31, 2004 and $2,013,579 in
the fiscal year ended March 31, 2003 on research and development activities.
Of our seven controlled release products, two are for pain (the
Oxycodone CR and a related abuse resistant product), one (diltiazem) is for
cardiovascular indications, two are for allergy indications, one is for an
anti-infective indication and one is for an undisclosed indication. One of the
allergy products has been developed and is being marketed by a pharmaceutical
company which has the responsibility for regulatory matters and is to market the
second drug for allergy indications upon completion of its commercial
development. The drug for the undisclosed indication is to be developed by us
pursuant to a March 30, 2005 agreement. See "Manufacturing and Development
Contracts".
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 FDA and
all are in development ("N/A" means not applicable because there is no branded
product on the market).
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- --------------------------------------------------------------------------------
PRODUCT BRANDED APPROX. U.S. NDA/ INDICATION
PRODUCT(A) SALES FOR BRANCD ANDA
AND/OR GENERIC
PRODUCTS
(2004)
$MM(B)
- --------------------------------------------------------------------------------
1 Oxycodone CR OxyContin(R) $2,000 NDA Pain
Once a day twice a day
- --------------------------------------------------------------------------------
2 Product using abuse N/A N/A NDA Pain
resistant technology
(ART) for use with
Oxycodone (or other
opioids)
Once a day
Twice a day(c)
- --------------------------------------------------------------------------------
3 Diltiazem Cardizem CD(R) $300 ANDA Cardiovascular
Once a day
- --------------------------------------------------------------------------------
4 Undisclosed product Undisclosed $80 ANDA Undisclosed
with a partner
- --------------------------------------------------------------------------------
5 Undisclosed product N/A N/A Undisclosed Allergy
with partner
- --------------------------------------------------------------------------------
6 Undisclosed Undisclosed $100 ANDA Infection
Twice a day
- --------------------------------------------------------------------------------
(a) The name of our competitor's branded product.
(b) Indicates the approximate amount of sales of our competitor's product and
not the sales of any of our products.
(c) An IND was filed and accepted by the FDA with respect to the Twice a day.
The table below presents information with respect to the development of
six of the products under development. For some of the products, we intend to
make NDA filings under Sections 505(b)(1) or 505(b)(2) of the Drug Price Act.
Accordingly, we anticipate, as to which there is no assurance, that the
development timetable for the products for which such NDA filings are made would
be shorter and less expensive. Completion of development of products by us
depends on a number of factors, however, and there can be no assurance that
specific time frames will be met during the development process or that the
development of any particular products will be continued.
5
In the table, Pilot Phase I studies for the NDA products are generally
preliminary studies done in healthy human subjects to assess the
tolerance/safety and pharmacokinetics of the product. Additional larger studies
in humans will be required prior to submission of the product to the FDA for
review. Pilot bioequivalence studies are initial studies done in humans for
generic products and are used to assess the likelihood of achieving
bioequivalence for generic products. Larger pivotal bioequivalence studies will
be required prior to submission of the product to the FDA for review.
- --------------------------------------------------------------------------------
DEVELOPMENT STAGE NUMBER OF PRODUCTS NDA/ANDA
- --------------------------------------------------------------------------------
Preclinical 1 ANDA
- --------------------------------------------------------------------------------
Pilot Phase I study 2 NDA
- --------------------------------------------------------------------------------
Pilot bioequivalence study 2 ANDA
- --------------------------------------------------------------------------------
Pre-Clinical 1 (1)
- --------------------------------------------------------------------------------
(1) The partner is handling the FDA and other regulatory filings in connection
with the product.
MANUFACTURING AND DEVELOPMENT CONTRACTS
In September 1999 Elite entered into an agreement with an undisclosed
partner to co-develop a chrono diltiazem product. A pilot pharmacokinetic study
has been conducted, but until we have additional resources to devote to this
product and locate a partner, we will not perform further clinical studies.
In June 2001, we entered into two development contracts pursuant to
which we agreed to commercially develop two products in exchange for development
fees, certain payments, royalties and manufacturing rights. One product, Lodrane
24(R), was first commercially offered in November 2004, and our revenues for
manufacturing the product and a royalty on sales for the year ended March 31,
2005 aggregated $150,030. Development of the second product continues.
The payments under the foregoing agreements for the years ended March
31, 2004 and 2005 were not material.
On March 30, 2005, we entered into a three party agreement with a
marketing company and a formulation development company pursuant to which we are
to commercially develop a drug with the marketing company to share in the
development costs. Upon its development and the securing of the required FDA
approval by the formulation development company, we are to manufacture and sell
the commercially developed drug to the marketing company for distribution. In
addition to the transfer price to the marketing company, we are to share the
profits, if any, realized upon sales.
6
JOINT VENTURE WITH ELAN
A joint research venture with Elan (ERL) was funded through capital
contributions from its partners based on the partners' respective ownership
percentage.
The joint venture was terminated on December 31, 2002 and ERL was
merged into a new Delaware corporation, Elite Research, our wholly-owned
subsidiary.
Under the Termination Agreement, we acquired all proprietary,
development and commercial rights for the worldwide markets for the products
developed by the joint venture. In exchange for this assignment, we agreed to
pay Elan a royalty on certain revenues that may be realized in the future from
the once-a-day Oxycodone product that was in development by the joint venture,
if and when FDA approval is obtained. In the future, we will be solely
responsible for funding product development, which funding we anticipate will be
derived from internal resources or through loans or investment by third parties.
The joint venture had completed the initial Phase I study for its first product,
the once-a-day Oxycodone formulation. Currently there is no once-a-day
formulation for this compound on the market. This compound is part of our
development pipeline.
The joint venture had also performed work on a second, related product
in the central nervous system therapeutic area. Initial formulation work on a
third product combining Oxycodone with a narcotic antagonist has been performed.
We have the exclusive rights to the proprietary, development and commercial
exploitation for the worldwide markets for these two products developed by ERL.
We will not have to pay Elan royalties on revenues that may be realized from
these products.
Under the joint venture, Elan had received 409,165 shares of our Common
Stock; warrants exercisable at $18.00 per share for 100,000 shares of our Common
Stock; and Series A and Series B preferred stock of Elite Labs, which were
convertible into 764,221 shares and 52,089 shares, respectively, of our Common
Stock. Under the Termination Agreement, Elan and its transferees retained the
securities, and the shares of Series A and Series B preferred stock were
converted into our Common Stock under the preexisting terms for conversion. We
did not pay, nor did Elan receive, any cash consideration under the Termination
Agreement.
PATENTS
Since our incorporation, we have secured five United States patents.
Two have been assigned for a fee to another pharmaceutical company. In addition
one patent has been allowed, but not yet issued and we have pending applications
for three United States patents and five foreign patents.
The pending patent applications relate to three different control
release pharmaceutical products on which we are working. Included among these
patent applications is an application for a U.S. patent for a narcotic agonist
and antagonist product that we are developing to be used with oxycodone and
other narcotics to
7
minimize the abuse potential for the narcotics. We intend to apply for patents
for other products in the future; however, there can be no assurance that any of
the pending applications or other applications which we may file will be
granted.
Prior to the enactment in the United States of new laws adopting
certain changes mandated by the General Agreement on Tariffs and Trade (GATT),
the exclusive rights afforded by a U.S. Patent were for a period of 17 years
measured from the date of grant. Under GAAT, the term of any U.S. Patent granted
on an application filed subsequent to June 8, 1995, terminates 20 years from the
date on which the patent application was filed in the United States or the first
priority date, whichever occurs first. Future patents granted on an application
filed before June 8, 1995, will have a term that terminates 20 years from such
date, or 17 years from the date of grant, whichever date is later.
Under the Drug Price Act, a U.S. Product patent or use patent may be
extended for up to five years under certain circumstances to compensate the
patent holder for the time required for FDA regulatory review of the product.
The benefits of this Act are available only to the first approved use of the
active ingredient in the drug product and may be applied only to one patent per
drug product. There can be no assurance that we will be able to take advantage
of this law.
Also, different countries have different procedures for obtaining
patents, and patents issued by different countries provide different degrees of
protection against the use of a patented invention by others. There can be no
assurance, therefore, that the issuance to us in one country of a patent
covering an invention will be followed by the issuance in other countries of
patents covering the same invention, or that any judicial interpretation of the
validity, enforceability, or scope of the claims in a patent issued in one
country will be similar to the judicial interpretation given to a corresponding
patent issued in another country. Furthermore, even if our patents are
determined to be valid, enforceable, and broad in scope, there can be no
assurance that competitors will not be able to design around such patents and
compete with us using the resulting alternative technology.
We also rely upon unpatented proprietary and trade secret technology
that we seek to protect, in part, by confidentiality agreements with our
collaborative partners, employees, consultants, outside scientific
collaborators, sponsored researchers, and other advisors. There can be no
assurance that these agreements provide meaningful protection or that they will
not be breached, that we will have adequate remedies for any such breach, or
that our trade secrets, proprietary know-how, and technological advances will
not otherwise become known to others. In addition, there can be no assurance
that, despite precautions taken by us, others have not and will not obtain
access to our proprietary technology.
8
TRADEMARKS
We have received Notices of Allowance from the U.S. Patent and
Trademark Office granting trademark protection for four trademarks. However,
since we currently plan to license our products to marketing partners and not to
sell under our brand name, we do not currently intend to register or maintain
any trademarks.
GOVERNMENT REGULATION AND APPROVAL
The design, development and marketing of pharmaceutical compounds, on
which our success depends, are intensely regulated by governmental regulatory
agencies, including the FDA. Non-compliance with applicable requirements can
result in fines and other judicially imposed sanctions, including product
seizures, injunction actions and criminal prosecution based on products or
manufacturing practices that violate statutory requirements. In addition,
administrative remedies can involve voluntary withdrawal of products, as well as
the refusal of the FDA to approve ANDAs and NDAs. The FDA also has the authority
to withdraw approval of drugs in accordance with statutory due process
procedures.
Before a drug may be marketed, it must be approved by the FDA. The FDA
approval procedure for an ANDA relies on bioequivalency tests which compare the
applicant's drug with an already approved reference drug, rather than with
clinical studies. Because we concentrated, during our first few years of
business operations, on developing products which are intended to be
bioequivalent to existing controlled-release formulations, we expect that such
drug products will require ANDA filings and not clinical efficacy and safety
studies, which are generally more expensive and time-consuming.
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 on already marketed drugs
9
would be made under Sections 505 (b)(1) or 505 (b)(2) of the Drug Price Act,
which do not require certain studies that would otherwise be necessary;
accordingly, the development timetable should be shorter. While the FDA is
required to review applications within a certain timeframe in the review
process, the FDA frequently requests that additional information be submitted.
The effect of such request and subsequent submission can significantly extend
the time for the NDA review process. Until an NDA is actually approved, there
can be no assurance that the information requested and submitted will be
considered adequate by the FDA to justify approval. The packaging and labeling
of our developed products are also subject to FDA regulation. It is impossible
to anticipate the amount of time that will be needed to obtain FDA approval to
market any product.
Whether or not FDA approval has been obtained, approval of the product
by comparable regulatory authorities in any foreign country must be obtained
prior to the commencement of marketing of the product in that country. The
Company intends to conduct all marketing in territories other than the United
States through other pharmaceutical companies based in those countries. The
approval procedure varies from country to country, can involve additional
testing, and the time required may differ from that required for FDA approval.
Although there are some procedures for unified filings for certain European
countries, in general each country has its own procedures and requirements, many
of which are time consuming and expensive. Thus, there can be substantial delays
in obtaining required approvals from both the FDA and foreign regulatory
authorities after the relevant applications are filed. After such approvals are
obtained, further delays may be encountered before the products become
commercially available.
ANDAS
Under the Generic Drug Enforcement Act, ANDA applicants (including
officers, directors and employees) who are convicted of a crime involving
dishonest or fraudulent activity (even outside the FDA regulatory context) are
subject to debarment. Debarment is disqualification from submitting or
participating in the submission of future ANDAs for a period of years or
permanently. The Generic Drug Enforcement Act also authorizes the FDA to refuse
to accept ANDAs from any company which employs or uses the services of a
debarred individual. We do not believe that we receive any services from any
debarred person.
CONTROLLED SUBSTANCES
We are also subject to federal, state, and local laws of general
applicability, such as laws relating to working conditions. We are also licensed
by, registered with, and subject to periodic inspection and regulation by the
Drug Enforcement Agency (DEA) and New Jersey state agencies, pursuant to federal
and state legislation relating to drugs and narcotics. Certain drugs that we
currently develop or may develop in the future may be subject to regulations
under the Controlled Substances Act and related statutes. As we manufacture such
products, we may become subject to the
10
Prescription Drug Marketing Act, which regulates wholesale distributors of
prescription drugs.
GMP
All facilities and manufacturing techniques used for the manufacture of
products for clinical use or for sale must be operated in conformity with GMP
regulations issued by the FDA. The Company engages in manufacturing on a
commercial basis for distribution of products, and operates its facilities in
accordance with GMP regulations. If we hire another company to perform contract
manufacturing for us, we must ensure that our contractor's facilities conform to
GMP regulations.
COMPLIANCE WITH ENVIRONMENTAL LAWS
We are subject to comprehensive federal, state and local environmental
laws and regulations that govern, among other things, air polluting emissions,
waste water discharges, solid and hazardous waste disposal, and the remediation
of contamination associated with current or past generation handling and
disposal activities, including the past practices of corporations as to which we
are the successor legally or in possession. We do not expect that compliance
with such environmental laws will have a material effect on our capital
expenditures, earnings or competitive position in the foreseeable future. There
can be no assurance, however, that future changes in environmental laws or
regulations, administrative actions or enforcement actions, or remediation
obligations arising under environmental laws will not have a material adverse
effect on our capital expenditures, earnings or competitive position.
COMPETITION
We have competition with respect to our two principal areas of
operation. We develop and manufacture products using controlled-release drug
technology for other pharmaceutical companies, and we develop and market (either
on our own or by license to other companies) proprietary controlled-release
pharmaceutical products. In both areas, our competition consists of those
companies which develop controlled-release drugs and alternative drug delivery
systems.
In recent years, an increasing number of pharmaceutical companies have
become interested in the development and commercialization of products
incorporating advanced or novel drug delivery systems. We expect that
competition in the field of drug delivery will significantly increase in the
future since smaller specialized research and development companies are
beginning to concentrate on this aspect of the business. Some of the major
pharmaceutical companies have invested and are continuing to invest significant
resources in the development of their own drug delivery systems and technologies
and some have invested funds in such specialized drug delivery companies. Many
of these companies have greater financial and other resources as well as more
experience than we do in commercializing pharmaceutical products. Certain
companies have a track record of success in developing controlled-
11
release drugs. Significant among these are Alpharma, Inc., Andrx Corporation,
Mylan Laboratories, Inc., Par Pharmaceuticals, Inc., Teva Pharmaceuticals
Industries Ltd., Biovail Corporation, Ethypharm S.A., Eurand, Impax
Laboratories, Inc., K-V Pharmaceutical Company and Penwest Pharmaceuticals
Company. Each of these companies has developed expertise in certain types of
drug delivery systems, although such expertise does not carry over to developing
a controlled-release version of all drugs. Such companies may develop new drug
formulations and products or may improve existing drug formulations and products
more efficiently than we can. In addition, almost all of our competitors have
vastly greater resources than we do. While our product development capabilities
and, if obtained, patent protection may help us to maintain our market position
in the field of advanced drug delivery, there can be no assurance that others
will not be able to develop such capabilities or alternative technologies
outside the scope of our patents, if any, or that even if patent protection is
obtained, such patents will not be successfully challenged in the future.
SOURCES AND AVAILABILITY OF RAW MATERIALS; MANUFACTURING
We manufacture for commercial sale by our partner, ECR Pharmaceuticals,
one product, Lodrane 24(R) and for which to date we have obtained sufficient
amounts of the raw materials for its production. We are not currently in the
manufacturing phase for any other products and do not expect that significant
amounts of raw materials will be required for their production. We currently
obtain the raw materials that we need from over twenty suppliers.
We have acquired pharmaceutical manufacturing equipment for
manufacturing our products. We have registered our facilities with the FDA and
the DEA.
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
Each year we have had one or a few customers that have accounted for a
large percentage of our limited sales therefore the termination of a contract
with a customer may result in the loss of substantially all of our revenues. We
are constantly working to develop new relationships with existing or new
customers, but despite these efforts we may not, at the time that any of our
current contracts expire, have other contracts in place generating similar
revenue.
EMPLOYEES
As of June 20, 2005, we had 16 full-time employees and 2 part-time
employees. Both full-time and part-time employees are engaged in administration,
research and development. None of our employees is represented by a labor union
and we have never experienced a work stoppage. We believe our relationship with
our employees to be good. However, our ability to achieve our financial and
operational objectives depends in large part upon our continuing ability to
attract, integrate, retain and motivate highly qualified personnel, and upon the
continued service of our senior management and key personnel.
12
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 Elite and in analyzing our forward-looking statements.
OUR CONTINUING LOSSES ENDANGER OUR VIABILITY AS A GOING-CONCERN AND HAVE CAUSED
OUR AUDITORS TO ISSUE "GOING CONCERN" ANNUAL AUDIT REPORTS.
We reported net losses of $5,906,890, $6,514,217 and $4,061,422 for the
fiscal years ended March 31, 2005, 2004 and 2003, respectively. At March 31,
2005, we had an accumulated deficit of approximately $41.1 million, consolidated
assets of approximately $9.2 million, stockholders' equity of approximately $5.7
million, and working capital of approximately $3.3 million. Our products are in
the development and early deployment stage and have not generated any
significant revenue to date. Our independent auditors have issued a "going
concern" audit report for our financial statements for each of the fiscal years
ended March 31, 2005, March 31, 2004 and March 31, 2003.
WE HAVE A RELATIVELY LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO
EVALUATE OUR FUTURE PROSPECTS.
Although we have been in operation since 1990, we have a relatively
short operating history and limited financial data upon which you may evaluate
our business and prospects. In addition, our business model is likely to
continue to evolve as we attempt to expand our product offerings and enter new
markets. As a result, our potential for future profitability must be considered
in light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies that are attempting to move into new markets and
continuing to innovate with new and unproven technologies. Some of these risks
relate to our potential inability to:
o develop new products;
o obtain regulatory approval of our products;
o manage our growth, control expenditures and align costs with
revenues;
o attract, retain and motivate qualified personnel; and
o respond to competitive developments.
If we do not effectively address the risks we face, our business model may
become unworkable and we may not achieve or sustain profitability or
successfully develop any products.
13
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 $5,906,890, $6,514,217, $4,061,422, and $1,774,527 for the years ended
March 31, 2005, 2004, 2003 and 2002, respectively. We expect to realize
significant losses for the current year of operation. We expect to continue to
incur losses until we are able to generate sufficient revenues to support our
operations and offset operating costs.
OUR FOUNDER AND FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER RESIGNED IN JUNE
2003 ALL OF HIS POSITIONS WITH ELITE, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT
ON US.
On June 3, 2003, Dr. Atul M. Mehta, our founder and former President
and Chief Executive Officer resigned from all of his positions with Elite. In
the past, we relied on Dr. Mehta's scientific expertise in developing our
products. There can be no assurance that we will successfully replace Dr.
Mehta's expertise. In addition, the loss of Dr. Mehta's services may adversely
affect our relationships with our contract partners.
Pursuant to an agreement in April 2004 and a related agreement in
October 2004, to settle a litigation initiated by Dr. Mehta in July 2003 for
alleged breach of his employment agreement, the Company extended the expiration
dates to November 30, 2007 of options to purchase 670,000 shares of Common Stock
held by Dr. Mehta and reduced the exercise price of certain of the options and
he relinquished any rights to the Company's intellectual property and agreed to
certain non-disclosure and non-competition covenants. The Company also provided
him with certain "piggyback" registration rights with respect to the shares
issuable upon exercise of the foregoing options granted by the Company. Dr.
Mehta and members of his family sold in October 2004 an aggregate of 1,362,200
shares of Common Stock representing all of his and his affiliates holdings of
securities of the Company except for the foregoing options.
OUR RESEARCH ACTIVITIES ARE CHARACTERIZED BY INHERENT RISK AND WE MAY NOT BE
ABLE TO SUCCESSFULLY DEVELOP PRODUCTS FOR COMMERCIAL USE THAT ARE IN OUR
PIPELINE.
Our research activities are characterized by the inherent risk that the
research will not yield results that will receive FDA approval or otherwise be
suitable for commercial exploitation.
As of March 31, 2005, we have entered into agreements with respect to
the marketing upon development of three drugs. Each agreement provides that we
are to commercially develop the product and upon securing by a partner or
partners having FDA approval or other regulatory approval, if required, we will
manufacture the product and sell it to a partner or marketing partner for
distribution. The commercial development of one of the three drugs has been
completed and the two other drugs are
14
under development. No assurance can be given that sales, if any, by any
marketing partner will result in profit for Elite from the product.
Of the four additional products and on which we are devoting
substantial attention, two are in pilot Phase I studies and two are in the pilot
bioequivalence stage. Additional studies including either pivotal bioequivalence
or efficacy studies will be required for these products before
commercialization.
In order for any of these four products to be commercialized, the FDA
requires successful completion of pivotal biostudies to file an ANDA followed by
successful completion of pivotal clinical trials before filing a ND. The FDA
next requires successful completion of comparative studies for drug listed
products are required. ANDAs are filed with respect to generic versions of
existing FDA approved products while NDAs are filed with respect to new
products.
WE COULD EXPERIENCE DIFFICULTY IN DEVELOPING AND INTEGRATING STRATEGIC
ALLIANCES, CO-DEVELOPMENT OPPORTUNITIES AND OTHER RELATIONSHIPS.
With respect to products that are developed and are available for
commercial sale, we intend to pursue product-specific licensing, marketing
agreements, co-development opportunities and other partnering arrangements in
connection with the distribution of the product. We have entered into
partnership arrangements as to three products but no assurance can be given that
we will be able to locate other partners or that the arrangement will be
suitable. In addition, assuming we identify suitable partners, the process of
effectively entering into these arrangements involves risks such that our
management's attention may be diverted from other business concerns and that we
may have difficulty integrating the new arrangements into our existing business.
OUR LIMITED EXPERIENCE IN CONDUCTING CLINICAL TRIALS AND SUBMITTING NDAS AND THE
UNCERTAINTIES INHERENT IN CLINICAL TRIALS COULD RESULT IN DELAYS IN PRODUCT
DEVELOPMENT AND COMMERCIALIZATION.
Prior to seeking FDA approval for the commercial sale of any drug we
develop, which does not qualify for the FDA's abbreviated application
procedures, we or our partner must demonstrate through clinical trials that
these products are safe and effective for use. We have limited experience in
conducting and supervising clinical trials. The process of completing clinical
trials and preparing an NDA may take several years and requires substantial
resources. Our studies and filings may not result in FDA approval to market our
new drug products and, if the FDA grants approval, we cannot predict the timing
of any approval.
IF OUR CLINICAL TRIALS ARE NOT SUCCESSFUL OR TAKE LONGER TO COMPLETE THAN WE
EXPECT, WE MAY NOT BE ABLE TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS.
In order to obtain regulatory approvals for the commercial sale of our
potential products, we will be required to complete clinical trials in humans to
demonstrate the
15
safety and efficacy of the products. We may not be able to obtain authority from
the FDA or other regulatory agencies to commence or complete these clinical
trials.
The results from preclinical testing of a product that is under
development may not be predictive of results that will be obtained in human
clinical trials. In addition, the results of early human clinical trials may not
be predictive of results that will be obtained in larger scale advanced stage
clinical trials. Furthermore, we or the FDA may suspend clinical trials at any
time if the subjects participating in such trials are being exposed to
unacceptable health risks, or for other reasons.
The rate of completion of clinical trials is dependent in part upon the
rate of enrollment of subjects. A favorable clinical trial result is a function
of many factors including the size of the subject population, the proximity of
subjects to clinical sites, the eligibility criteria for the study and the
existence of competitive clinical trials. Delays in planned subject enrollment
may result in increased costs and program delays.
We may not be able to successfully complete any clinical trial of a
potential product within any specified time period. In some cases, we may not be
able to complete the trial at all. Moreover, clinical trials may not show any
potential product to be safe or efficacious. Thus, the FDA and other regulatory
authorities may not approve any of our potential products for any indication.
Our business, financial condition, or results of operations could be
materially adversely affected if:
o we are unable to complete a clinical trial of one of our potential
products;
o the results of any clinical trial are unfavorable; or
o the time or cost of completing the trial exceeds our expectations.
WE ARE DEPENDENT ON A SMALL NUMBER OF SUPPLIERS FOR OUR RAW MATERIALS, AND ANY
DELAY OR UNAVAILABILITY OF RAW MATERIALS CAN MATERIALLY ADVERSELY AFFECT OUR
ABILITY TO PRODUCE PRODUCTS.
The FDA requires identification of raw material suppliers in
applications for approval of drug products. If raw materials were unavailable
from a specified supplier, FDA approval of a new supplier could delay the
manufacture of the drug involved. In addition, some materials used in our
products are currently available from only one supplier or a limited number of
suppliers. Further, a significant portion of our raw materials may be available
only from foreign sources. Foreign sources can be subject to the special risks
of doing business abroad, including:
o greater possibility for disruption due to transportation or communication
problems;
o the relative instability of some foreign governments and economies;
16
o interim price volatility based on labor unrest, materials or equipment
shortages, export duties, restrictions on the transfer of funds, or
fluctuations in currency exchange rates; and
o uncertainty regarding recourse to a dependable legal system for the
enforcement of contracts and other rights.
In addition, recent changes in patent laws in certain foreign
jurisdictions (primarily in Europe) may make it increasingly difficult to obtain
raw materials for research and development prior to expiration of applicable
United States or foreign patents. Any inability to obtain raw materials on a
timely basis, or any significant price increases that cannot be passed on to
customers, could have a material adverse effect on us.
The delay or unavailability of raw materials can materially adversely
affect our ability to produce products. This can materially adversely affect our
business and operations.
IF WE NEED ADDITIONAL FINANCING IN ORDER TO SATISFY OUR SIGNIFICANT CAPITAL
REQUIREMENTS AND ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, IT WOULD IMPAIR OUR
ABILITY TO CONTINUE TO DO BUSINESS.
We completed a $6,600,000 private placement in October 2004 of (i)
516,558 shares of our Series A Preferred Stock convertible into shares of Common
Stock, (ii) warrants ("Short Term Warrants") expiring December 31, 2005 to
purchase an aggregate of 2,582,790 shares of Common Stock at prices ranging from
$1.54 to $1.84, (iii) warrants ("Long Term Warrants") expiring December 27, 2009
to purchase 2,582,790 shares of Common Stock at prices ranging from $1.54 to
$1.84 per share, and (iv) additional Long Term Warrants issued to the Placement
Agent to purchase 494,931 shares of Common Stock at prices ranging from $1.23 to
$1.47 per share. All of the shares of the Series A Preferred Stock have been
converted into an aggregate of 5,265,516 shares of Common Stock, including
26,961 shares of Common Stock issued as payment of the accrued dividend on
December 1, 2004. Based on our currently proposed plans and assumptions relating
to our operations, we anticipate that we will have sufficient capital to satisfy
our contemplated cash requirements through March 31, 2006. After that time, we
may require additional financing. In particular, we expect to make substantial
expenditures as we further develop and seek to commercialize our products. As of
March 31, 2005, our cash position was $3.9 million. Based on current
expenditures, we are depleting cash at the rate of $300,000 per month. We expect
that our rate of spending will accelerate as the result of increased costs and
expenses associated with seeking regulatory approval and commercialization of
products now in development. We have no current arrangements with respect to
additional financings other than the potential exercise of the Short Term and
Long Term Warrants issued in the October 2004 private placement, the Class B and
Class C Warrants and other warrants and options that are currently outstanding.
We have no way of knowing whether any of the options or warrants will be
exercised and if so the extent by which their exercise will be pursuant to
cashless exercise provisions. We do not currently
17
have commitments for their exercise or other financing, and so do not know
whether additional financing would be available to us on favorable terms, or at
all. Our inability to obtain additional financing when needed would impair our
ability to continue our business.
If any future financing involves the 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.
If our plans change, or our assumptions change or prove to be inaccurate, or our
cash flow proves to be insufficient to fund our operations due to unanticipated
expenses or problems, we would be required to seek additional financing sooner
than anticipated.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND AVOID CLAIMS
THAT WE INFRINGED ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, OUR ABILITY TO
CONDUCT BUSINESS MAY BE IMPAIRED.
Our success, competitive position and amount of royalty income, if any,
will depend in part on our ability to obtain patent protection in various
jurisdictions related to our technologies, processes and products. We intend to
file patent applications seeking such protection, but we cannot be certain that
these applications will result in the issuance of patents. If patents are
issued, third parties may sue us to challenge such patent protection, and
although we know of no reason why they should prevail, it is possible that they
could. It is likewise possible that our patents may not prevent third parties
from developing similar or competing products. In addition, although we are not
aware of any threatened or pending actions by third parties asserting that we
have infringed on their patents, and are not aware of any actions we have taken
that would lead to such a claim, it is possible that we might be sued for
infringement. The cost involved in bringing suits against others for
infringement of our patents, or in defending any suits brought against us, can
be substantial. We may not possess sufficient funds to prosecute or defend such
suits. If our products were found to infringe upon patents issued to others, we
would be prohibited from manufacturing or selling such products and we could be
required to pay substantial damages.
In addition, we may be required to obtain licenses to patents, or other
proprietary rights of third parties, in connection with the development and use
of our products and technologies as they relate to other persons' technologies.
At such time as we discover a need to obtain any such license, we will need to
establish whether we will be able to obtain such a license on favorable terms.
The failure to obtain the necessary licenses or other rights could preclude the
sale, manufacture or distribution of our products.
We also rely upon trade secrets and proprietary know-how. We seek to protect
this know-how in part by confidentiality agreements. We consistently require our
employees and potential business partners to execute confidentiality agreements
prior to doing business with us. However, it is possible that an employee would
disclose confidential
18
information in violation of his or her agreement, or that our trade secrets
would otherwise become known or be independently developed in such a manner that
we will have no practical recourse.
We are not engaged in any litigation, nor contemplating any, with regard to a
claim that someone has infringed one of our patents, revealed any of our trade
secrets, or otherwise misused our confidential information.
THE PHARMACEUTICAL INDUSTRY IS SUBJECT TO EXTENSIVE FDA REGULATION AND FOREIGN
REGULATION, WHICH PRESENTS NUMEROUS RISKS TO US.
The manufacturing and marketing of pharmaceutical products in the
United States and abroad are subject to stringent governmental regulation. The
sale of any of our products for use in humans in the United States will require
the approval of the FDA. Similar approvals by comparable agencies are required
in most foreign countries. The FDA has established mandatory procedures and
safety standards that apply to the clinical testing, manufacture and marketing
of pharmaceutical products. Obtaining FDA approval for a new therapeutic product
may take several years and involve substantial expenditures. The six products
currently under development have not yet been approved for sale or use in humans
in the United States or elsewhere.
If we or our licensees fail to obtain or maintain requisite
governmental approvals or fail to obtain or maintain approvals of the scope
requested, it will delay or preclude us or our licensees or marketing partners
from marketing our products. It could also limit the commercial use of our
products.
THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND
SIGNIFICANT TECHNOLOGICAL CHANGE, WHICH COULD IMPAIR OUR ABILITY TO IMPLEMENT
OUR BUSINESS MODEL.
The pharmaceutical industry is highly competitive, and we may be unable
to compete effectively. In addition, it is undergoing rapid and significant
technological change, and we expect competition to intensify as technical
advances in each field are made and become more widely known. An increasing
number of pharmaceutical companies have been or are becoming interested in the
development and commercialization of products incorporating advanced or novel
drug delivery systems. We expect that competition in the field of drug delivery
will increase in the future as other specialized research and development
companies begin to concentrate on this aspect of the business. Some of the major
pharmaceutical companies have invested and are continuing to invest significant
resources in the development of their own drug delivery systems and technologies
and some have invested funds in such specialized drug delivery companies. Many
of our competitors have longer operating histories and greater financial,
research and development, marketing and other resources than we do. Such
companies may develop new formulations and products, or may improve existing
ones, more efficiently than we can. Our success, if any, will depend in part on
our ability to keep pace with the changing technology in the fields in which we
operate.
19
IF KEY PERSONNEL WERE TO LEAVE ELITE OR IF WE ARE UNSUCCESSFUL IN ATTRACTING
QUALIFIED PERSONNEL, OUR ABILITY TO DEVELOP PRODUCTS COULD BE MATERIALLY HARMED.
Our success depends in large part on our ability to attract and retain
highly qualified scientific, technical and business personnel experienced in the
development, manufacture and marketing of controlled release drug delivery
systems and products. Our business and financial results could be materially
harmed by the inability to attract or retain qualified personnel.
IF WE WERE SUED ON A PRODUCT LIABILITY CLAIM, AN AWARD COULD EXCEED OUR
INSURANCE COVERAGE AND COST US SIGNIFICANTLY.
The design, development and manufacture of our products involve an
inherent risk of product liability claims. We have procured product liability
insurance having a maximum limit of $5,000,000; however, a successful claim
against us in excess of the policy limits could be very expensive to us,
damaging our financial position. The amount of our insurance coverage, which has
been limited due to our limited financial resources, may be materially below the
coverage maintained by many of the other companies engaged in similar
activities. To the best of our knowledge, no product liability claim has been
made against us as of March 31, 2005.
OUR STOCK PRICE HAS BEEN VOLATILE AND MAY FLUCTUATE IN THE FUTURE.
There has been significant volatility in the market prices for publicly
traded shares of pharmaceutical companies, including ours. For the twelve months
ended March 31, 2005, the closing sale price on the American Stock Exchange of
our Common Stock fluctuated from a high of $4.79 per share to a low of $1.05 per
share. The per share price of our Common Stock may not remain at or exceed
current levels. The market price for our Common Stock, and for the stock of
pharmaceutical companies generally, has been highly volatile. The market price
of our Common Stock may be affected by:
o Results of our clinical trials;
o Approval or disapproval of abbreviated new drug applications or new
drug applications;
o Announcements of innovations, new products or new patents by us or by
our competitors;
o Governmental regulation;
o Patent or proprietary rights developments;
o Proxy contests or litigation;
20
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.
All of the 516,558 shares of Series A Preferred Stock originally issued in the
private placement of October 2004 have been converted into an aggregate of
5,238,555 shares of Common Stock and have been registered under the Securities
Act of 1933 for resale. In addition, we have registered under the Securities Act
of 1933, as amended for reoffering 5,660,511 shares of Common Stock which may be
acquired upon exercise of the Short Term Warrants, Long Term Warrants and the
Placement Agent Warrants as well as 670,000 shares which may be acquired upon
exercise of options at prices ranging from $1.00 to $3.00 per share granted to
Dr. Atul Mehta. As of this date sales of substantial amounts of the Common Stock
in the public market are eligible for sale by these holders. Perceptions that
substantial sales may take place in the future may lower the Common Stock's
market price.
THE FAILURE TO MAINTAIN THE AMERICAN STOCK EXCHANGE LISTING OF THE COMMON STOCK
WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE MARKET FOR THE COMMON STOCK AND ITS
MARKET PRICE.
One of the requirements for the continued listing of Common Stock on
the American Stock Exchange for a company that has net losses for its five most
recent fiscal years is that it have a stockholders' equity of at least
$6,000,000. The Company has sustained a net loss for the year ending March 31,
2005, and as a result will have sustained net losses in its five most recent
fiscal years. As of March 31, 2005, the Company had stockholders equity of
approximately $5.7 million. The related provision of the American Stock Exchange
guide provides that the Exchange will not normally consider removing a stock
from listing if the total value of the Company's market capitalization as of the
end of its most recent fiscal year is at least $50,000,000 as well as satisfying
other conditions which the Company meets and expects to meet. The failure to
maintain listing of the Common Stock on the Exchange will have an adverse effect
on the market and the market price for the Common Stock.
21
THE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK OR OUR PREFERRED STOCK
COULD MAKE A CHANGE OF CONTROL MORE DIFFICULT TO ACHIEVE.
The issuance of additional shares of the Company's Common Stock or the
issuance of shares of an additional series of Preferred Stock could be used to
make a change of control of the Company more difficult and expensive. Under
certain circumstances, such shares could be used to create impediments to or
frustrate persons seeking to cause a takeover or to gain control of the Company.
Such shares could be sold to purchasers who might side with the Board in
opposing a takeover bid that the Board determines not to be in the best
interests of its stockholders. It might also have the effect of discouraging an
attempt by another person or entity through the acquisition of a substantial
number of shares of the Company's Common Stock to acquire control of the Company
with a view to consummating a merger, sale of all or part of the Company's
assets, or a similar transaction, since the issuance of new shares could be used
to dilute the stock ownership of such person or entity.
IF PENNY STOCK REGULATIONS BECOME APPLICABLE TO OUR COMMON STOCK THEY WILL
IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR COMMON STOCK AND THE ABILITY OF
OUR STOCKHOLDERS TO SELL SHARES OF OUR STOCK COULD BE IMPAIRED.
The SEC has adopted regulations that generally define a "penny stock"
to be an equity security that has a market price of less than $5.00 per share or
an exercise price of less than $5.00 per share subject to certain exceptions.
Exceptions include equity securities issued by an issuer that has (i) net
tangible assets of at least $2,000,000, if such issuer has been in continuous
operation for more than three years, or (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years, or (iii) average revenue of at least $6,000,000 for the preceding three
years. Unless an exception is available, the regulations require that prior to
any transaction involving a penny stock, a risk of disclosure schedule must be
delivered to the buyer explaining the penny stock market and its risks. Our
Common Stock is currently trading at under $5.00 per share. Although we
currently fall under one of the exceptions, if at a later time we fail to meet
one of the exceptions, our Common Stock will be considered a penny stock. As
such the market liquidity for our Common Stock will be limited to the ability of
broker-dealers to sell it in compliance with the above-mentioned disclosure
requirements.
You should be aware that, according to the SEC, the market for penny
stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include:
o Control of the market for the security by one or a few broker-dealers;
o "Boiler room" practices involving high-pressure sales tactics;
o Manipulation of prices through prearranged matching of purchases and
sales;
o The release of misleading information;
22
o Excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
o Dumping of securities by broker-dealers after prices have been
manipulated to a desired level, which hurts the price of the stock and
causes investors to suffer loss.
We are aware of the abuses that have occurred in the penny stock market.
Although we do not expect to be in a position to dictate the behavior of the
market or of broker-dealers who participate in the market, we will strive within
the confines of practical limitations to prevent such abuses with respect to our
Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW MAY DETER A THIRD PARTY FROM
ACQUIRING US.
Section 203 of the Delaware General Corporation Law prohibits a merger
with a 15% shareholder within three years of the date such shareholder acquired
15%, unless the merger meets one of several exceptions. The exceptions include,
for example, approval by the holders of two-thirds of the outstanding shares
(not counting the 15% shareholder), or approval by the Board prior to the 15%
shareholder acquiring its 15% ownership. This provision makes it difficult for a
potential acquirer to force a merger with or takeover of the Company, and could
thus limit the price that certain investors might be willing to pay in the
future for shares of our Common Stock.
ITEM 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 document contains
certain customary provisions including, without limitation, the right of NJEDA
to foreclose upon a default by Elite.
We are currently using our facilities as a laboratory, manufacturing
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 party to litigation
from time to time.
23
The Company and Dr. Mehta, the Company's former President and Chief
Executive Officer entered into a settlement agreement in April 2004 and a
related agreement in October 2004, to settle a litigation initiated by Dr. Mehta
in July 2003 for alleged breach of his employment agreement. The agreements
provide for the extension of the expiration dates to December 31, 2007 of
options to purchase 670,000 shares of Common Stock held by Dr. Mehta, the
reduction of the exercise price of 170,000 options from $10.00 to $2.34 per
share and his relinquishment of any rights to the Company's intellectual
property and agreement to certain non-disclosure and non-competition covenants.
The Company also provided him with certain "piggyback" registration rights with
respect to the shares issuable upon exercise of the foregoing options granted by
the Company. Dr. Mehta and members of his family sold in October 2004 an
aggregate of 1,362,200 shares of Common Stock representing all of his and his
affiliates holdings of Common Stock of the Company and the Company has
registered for resale the 670,000 shares of Common Stock which may be issued
upon exercise of the options.
We are not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders during the fourth
quarter of our fiscal year ended March 31, 2005. However at the Annual Meeting
of Stockholders held on April 15, 2005 the stockholders (i) elected as its four
Directors Mr. Bernard Berk, Mr. Edward Neugeboren, Dr. Melvin Van Woert and Mr.
Barry Dash, Ph. D; (ii) approved an amendment to our 2004 Stock Option Plan
increasing the number of shares subject to the Plan to 4,000,000 shares; (iii)
ratified the actions of the Board of Director's amending an option granted to a
former officer and director and the issuance of warrants granted to a consultant
and (iv) ratified the engagement of Miller Ellin & Co., LLP as the Company's
independent auditors for the year ending March 31, 2005.
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PART II
ITEM 5. MARKET FOR REGISTRANT'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, 2005:
March 31, 2005.............................................$4.79 $1.15
December 31, 2004..........................................$4.01 $1.20
September 30, 2004.........................................$2.35 $1.05
June 30, 2004 .............................................$4.31 $2.15
FISCAL YEAR
ENDING MARCH 31, 2004:
March 31, 2004.............................................$3.80 $2.40
December 30, 2003..........................................$3.30 $2.70
September 30, 2003.........................................$3.49 $2.05
June 30, 2003 .............................................$3.49 $1.25
FISCAL YEAR
ENDING MARCH 31, 2003:
March 31, 2003.............................................$2.20 $1.45
December 31, 2002..........................................$3.15 $1.80
September 30, 2002.........................................$5.25 $2.41
June 30, 2002..............................................$7.75 $4.50
FISCAL YEAR
ENDING MARCH 31, 2002:
March 31, 2002.............................................$8.30 $5.65
December 31, 2001..........................................$7.75 $5.90
September 30, 2001........................................$11.50 $5.10
June 30, 2001.............................................$11.45 $4.85
On June 20, 2005, the last reported sale price of our Common Stock, as
reported by the American Stock Exchange, was $2.84 per share.
25
As of June 20, 2005, there were approximately 122 holders of record and
approximately 1,650 beneficial owners of our Common Stock. We are informed and
believe that as of June 20, 2005, Cede & Co. held 15,846,250 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 capital stock. We currently
anticipate that we will retain all available funds for use in the operation and
expansion of our business, and do not anticipate paying any cash dividends in
the foreseeable future.
Please see our Quarterly Report on Form 10-Q for the three month
periods ending June 30, 2004, September 30, 2004 and December 31, 2004 and our
Current Reports on Form 8-K dated October 6, 2004, October 12, 2004 and October
26, 2004 for information concerning our issuances of unregistered securities
during the 12 months ended March 31, 2005.
EQUITY COMPENSATION PLAN INFORMATION
As of March 31, 2005, we had authorized the issuance of 1,500,000
shares of Common Stock upon exercise of options pursuant to our Stock Option
Plan (which was approved by our stockholders on June 22, 2004 and amended by our
stockholders on April 15, 2005 to increase to 4,000,000 the number of shares
subject to our Stock Option Plan). As of March 31, 2005, under the 2004 Stock
Option Plan, there was an aggregate of 93,300 shares of Common Stock issuable
upon exercise of outstanding options having a weighted average exercise price of
$2.34. In addition, there was an aggregate of 2,005,000 shares of Common Stock
issuable upon exercise of other outstanding options granted to employees and
directors having a weighted average exercise price of $2.16.
If options granted under the Plan lapse without being exercised, other
options may be granted covering the shares not purchased under such lapsed
options. Options may be granted pursuant to the Plan to employees, officers,
Directors of and consultants to Elite. The Plan permits the Company to grant
both incentive stock options ("Incentive Stock Options" or "ISOs") within the
meaning of Section 422 of the Code, and other options which do not qualify as
Incentive Stock Options (the "Non-Qualified Options").
Of the incentive stock options outstanding, options for 93,300 shares
with an exercise price of $2.34 per share were granted on June 22, 2004 to
employee holders of outstanding options previously granted by the Company having
on the date of the grant a higher exercise price; such grants subject to the
cancellation of the previously granted options. To the extent that stock options
previously granted are not surrendered for cancellation then options exercisable
for that same number of shares of Common Stock will be available for grant under
the Plan. Such grants may be deemed
26
repricing of the outstanding options and will result in charges to earnings of
the Company equal to the difference between (i) the fair value of the vested
portion of the new options granted, utilizing the Black-Scholes options pricing
model on each grant date and (ii) the charges to earnings previously made as a
result of the grants of the options being replaced, which will have a dilutive
effect on the earnings per share and, as a result, will likely have an adverse
effect on the market price of the Common Stock of the Company.
Options to purchase 30,000 shares of Common Stock were granted under
the Plan on June 22, 2004 to each of Bernard Berk, our Chief Executive Officer
and a Director, and Mr. John A. Moore, Mr. Harmon Aronson, and Dr. Eric L.
Sichel, each of whom was then a Director of the Company, exercisable at $2.34
per share.
Unless earlier terminated by the Board of Directors, the Plan (but not
outstanding options) terminates on March 1, 2014, after which no further awards
may be granted under the Plan. The Plan is administered by the full Board of
Directors or, at the Board's discretion, by a committee of the Board consisting
of at least two persons who are "disinterested persons" defined under Rule
16b-2(c)(ii) under the Securities Exchange Act of 1934, as amended (the
"Committee"). As of March 31, 2005, the full Board of Directors administers the
Plan and no Committee has been appointed.
Recipients of options under the Plan ("Optionees") are selected by the
Board or the Committee. The Board or Committee determines the terms of each
option grant including (1) the purchase price of shares subject to options, (2)
the dates on which options become exercisable and (3) the expiration date of
each option (which may not exceed ten years from the date of grant). The minimum
per share purchase price of options granted under the Plan for Incentive Stock
Options is the fair market value (as defined in the Plan) or for Nonqualified
Options is 85% of Fair Market Value of one share of the Common Stock on the date
the option is granted.
Optionees will have no voting, dividend or other rights as stockholders
with respect to shares of Common Stock covered by options prior to becoming the
holders of record of such shares. The purchase price upon the exercise of
options may be paid in cash, by certified bank or cashier's check, by tendering
stock held by the Optionee, as well as by cashless exercise either through the
surrender of other shares subject to the option or through a broker. The total
number of shares of Common Stock available under the Plan, and the number of
shares and per share exercise price under outstanding options will be
appropriately adjusted in the event of any stock dividend, reorganization,
merger or recapitalization of the Company or similar corporate event.
The Board of Directors may at any time terminate the Plan or from time
to time make such modifications or amendments to the Plan as it may deem
advisable and the Board or Committee may adjust, reduce, cancel and regrant an
unexercised option if the fair market value declines below the exercise price
except as may be required by any national stock exchange or national market
association on which the Common Stock is then listed. In no event may the Board,
without the approval of stockholders,
27
amend the Plan to increase the maximum number of shares of Common Stock for
which options may be granted under the Plan or change the class of persons
eligible to receive options under the Plan.
Subject to limitations set forth in the Plan, the terms of option
agreements will be determined by the Board or Committee, and need not be uniform
among Optionees.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data, at the end of and
for the last five fiscal years, should be read in conjunction with our
Consolidated Financial Statements and related Notes thereto appearing elsewhere
in this Annual Report on Form 10-K. The consolidated selected financial data are
derived from our consolidated financial statements that have been audited by
Miller, Ellin & Company, LLP, our independent auditors, as indicated in their
report included herein. The selected financial data provided below is not
necessarily indicative of our future results of operations or financial
performance.
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Net Revenues $301,480 $ 258,250 $ 630,310 $ 1,197,507 $ 95,246
Net (loss) $(5,906,890) $(6,514,217) $(4,061,422) $(1,774,527) $(13,964,981)
Net (loss) per $(0.47) $(0.58) $(0.40) $(0.19) $(1.53)
common share
Total Assets $9,245,292 $7,853,434 $8,696,222 $12,724,498 $12,350,301
Long-term obligations $2,367,128 $2,495,000 $2,720,000 $3,788,148 $2,765,000
Weighted average 12,869,924 11,168,618 10,069,991 9,561,299 9,135,369
number 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
Elite Pharmaceuticals is a specialty pharmaceutical company principally
engaged in the development and manufacture of oral, controlled release products.
Elite
28
develops controlled release products using proprietary technology and
licenses these products. The Company's strategy includes developing generic
versions of controlled release drug products with high barriers to entry and
assisting partner companies in the life cycle management of products to improve
off-patent drug products. Elite's technology is applicable to develop delayed,
sustained or targeted release pellets, capsules, tablets, granules and powders.
Elite has one product currently being sold commercially and a pipeline of six
drug products under development in the therapeutic areas that include
cardiovascular, pain management, allergy and infection. The addressable market
for Elite's pipeline of products exceeds $2 billion. Elite's current facility in
Northvale, New Jersey also is a GMP and DEA registered facility for research,
development, and manufacturing.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion addresses our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgment, including those
related to bad debts, intangible assets, income taxes, workers compensation, and
contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. Our most critical
accounting policies include the recognition of revenue upon completion of
certain phases of projects under research and development contracts. The Company
also assesses a need for an allowance to reduce its deferred tax assets to the
amount that it believes is more likely than not to be realized. The Company
assesses the recoverability of long-lived assets and intangible assets whenever
events or changes in circumstances indicate that the carrying value of the asset
may not be recoverable. The Company assesses its exposure to current commitments
and contingencies. It should be noted that actual results may differ from these
estimates under different assumptions or conditions.
During the year ended March 31, 2003, we elected to prospectively
recognize the fair value of stock options granted to employees and members of
the Board of Directors, effective as of the beginning of the fiscal year, which
resulted in our taking a charge of $20,550, $1,166,601 and $370,108 during the
years ended March 31, 2003, 2004 and 2005, respectively. The fair value of stock
options held by employees and
29
members of the Board of Directors which have been granted or repriced subsequent
to March 31, 2005 is expected to continue to affect the results of operations of
future periods, as we continue to grant or reprice stock options to reward our
management team.
YEAR ENDED MARCH 31, 2005 VS. YEAR ENDED MARCH 31, 2004
Our Auditor's Report on the accompanying financial statements state
that such financial statements have been prepared assuming that we will continue
as a going concern. We have incurred significant losses during our fiscal years
ended March 31, 2005 and March 31, 2004. Although proceeds were raised during
our latest private placement, our Auditor's continued to state in their report
that conditions raise substantial doubt about our ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of the assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty. Management believes that cost reductions already
implemented will reduce losses in the future, and with our existing working
capital levels, anticipate that we will be able to continue our operations at
least through the end of our current fiscal year.
Our revenues for the year ended March 31, 2005 were $301,480, an
increase of $43,230 or approximately 17%, over the comparable prior year. For
the year ended March 31, 2005, revenues consisted of a $150,000 non-refundable
payment received from Purdue Pharma L.P. granting it the right to evaluate
certain abuse resistant drug formulation technology, $125,739 in manufacturing
fees, $24,291 in royalty fees and $1,450 in testing fees. Revenues for the year
ended March 31, 2004 consisted of research and development fees earned in
conjunction with our distinct development, license and manufacturing agreements.
Research and development costs for the year ended March 31, 2005, were
$2,698,641 an increase of $623,567 or approximately 30% from $2,075,074 for the
comparable period of the prior year, primarily the result of an increase
relating to 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 ERL joint venture termination as
we will be solely responsible to fund product development, which we will do from
the internal resources or through loans or investment by third parties.
General and administrative expenses for the year ended March 31, 2005,
were $2,159,670, a decrease of $390,176, or approximately 18% from the prior
year. The decrease was attributable to a decrease in litigation costs offset
somewhat by increases in salaries and staff, consulting fees and the write-off
of a bad debt relating to accounts receivable.
We are unable to provide a break-down of the specific costs associated
with the research and development of each product on which we devoted resources
because a
30
significant portion of the costs are generally associated with salaries,
laboratory supplies, laboratory and manufacturing expenses, utilities and
similar expenses. We have not historically allocated these expenses to any
particular product. In addition, we cannot estimate the additional costs and
expenses that may be incurred in order to potentially complete the development
of any product, nor can we estimate the amount of time that might be involved in
such development because of the uncertainties associated with the development of
controlled release drug delivery products as described in this report.
Depreciation and amortization increased by $23,602 from $332,836 to
$356,438.
Other expenses for the year ended March 31, 2005 were $992,621, a
decrease of $821,090, or approximately 45% from $1,813,711 for the prior year.
The decrease was due to a reduction by $1,143,466 in charges related to the
issuances of stock options and warrants and a charge of $172,324 in the prior
year related to the warrant exchange offer, offset partially by a charge in the
year ended March 31, 2005 relating to the repricing of stock options in the
amount of $397,732. Additional interest income, due to higher compensating
balances as a result of the private placement, was offset by increases in
interest expense resulting from the equipment financing.
As a result of the foregoing, the Company's net loss for the year ended
March 31, 2005 was $5,906,890 compared to $6,514,217 for the year ended March
31, 2004. Increases in operating expenses of $256,993, were more than offset by
decreases in other expenses of $821,090.
YEAR ENDED MARCH 31, 2004 VS. YEAR ENDED MARCH 31, 2003
Our Auditor's Report on the accompanying financial statements for the
years ended March 31, 2005 and 2004 and a prior Report for the year ended March
2003 states that such financial statements have been prepared assuming that we
will continue as a going concern. We incurred a significant loss and negative
cash flow during our fiscal year ended March 31, 2004 which significantly
decreased our working capital and increased our accumulated deficit.
Our revenues for the year ended March 31, 2004 were $258,250, a
decrease of $372,060 or approximately 59% from the comparable prior year. For
the year ended March 31, 2004 our revenues consisted of research and development
fees earned in conjunction with our distinct development, license and
manufacturing agreements. For the year ended March 31, 2003, revenues consisted
of product formulation fees of $187,810 earned in conjunction with our joint
venture in ERL which terminated on September 30, 2002. Of our revenues for the
years ended March 31, 2004 and March 31, 2003, $108,500 and $442,500,
respectively, were research and development and testing fees earned in
conjunction with our distinct development, license and manufacturing agreements.
31
General and administrative expenses for the year ended March 31, 2004
were $2,549,846, an increase of $691,777, or approximately 37% from the prior
year. The increase was substantially due to increases in legal and consulting
fees as well as approximately $550,000 in expenses, including $400,000 as
compensation, resulting from a settlement of litigation instituted by our former
President with respect to the termination of his employment agreement.
Research and development costs for the year ended March 31, 2004, were
$2,075,074, an increase of $61,495 or approximately 3% from the prior year,
primarily due to increased research and development wages, laboratory supplies
and raw materials used in our research and development processes and additional
biostudies.
We are unable to provide a break-down of the specific costs associated
with the research and development of each product on which we devoted resources
because a significant portion of the costs are generally associated with
salaries, laboratory supplies, laboratory and manufacturing expenses, utilities
and similar expenses. We have not historically allocated these expenses to any
particular product. In addition, we cannot estimate the additional costs and
expenses that may be incurred in order to potentially complete the development
of any product, nor can we estimate the amount of time that might be involved in
such development because of the uncertainties associated with the development of
controlled release drug delivery products as described in this report.
Other expenses for the year ended March 31, 2004 were $1,813,711, an
increase of $1,304,903, or approximately 256% from the prior year. The increase
was primarily due to charges related to the modification of the warrant exchange
offer, the issuance of stock options and warrants valued at $1,926,908 (an
increase of $1,664,020) and the reduction in interest income due to lower rates
and compensating balances in the amount of $72,927, partially offset by
increases in sale of New Jersey, tax losses of $79,353 and the settlement of
vendor litigation for $150,000.
Our net loss for the year ended March 31, 2004 was $6,514,217 as
compared to $4,061,422 in the prior year, or an increase of approximately 60%
from the prior year, primarily due to the decrease in net revenues, and
increases in research and development and administrative expenses, including
increased charges of $1,664,020 due to the issuance of stock options, warrants
and the modification of warrant exchange offer.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company's working capital (total current assets less total current
liabilities), which was $1,289,764 as of March 31, 2004, increased to $3,328,583
as of March 31, 2005, primarily due to net proceeds of $5,791,600 received from
the sale of Series A Preferred Stock partially offset by the net loss of
$4,883,302 from operations, exclusive of non-cash charges of $1,423,588.
32
The Company experienced negative cash flows from operations of
($4,883,503) for the year ended March 31, 2005, primarily due to the Company's
net loss from operations of $5,906,890, less non-cash charges of $1,423,588,
which included, but were not limited to, the charges of $397,732 in connection
with the repricing of stock options, $370,108 in connection with the issuance of
stock options, and $241,010 in connection with the issuance of stock warrants.
The Company recently completed a Good Manufacturing Practices ("GMP")
batch for a product currently licensed with a pharmaceutical company under s
development and license agreement entered into June 2001. The Company received
$30,000 in November 2003 under the Agreement and expects to complete two
additional GMP batches in the near future under the terms of the licensing
agreement. On November 15, 2004, Elite's partner, ECR, launched LODRANE 24, once
a day allergy product, utilizing Elite's extended release technology to provide
for once daily dosing. Under its agreement with ECR, Elite is currently
manufacturing commercial batches of LODRANE 24 in exchange for royalties on
product revenues. The Company expects these royalties to provide additional cash
to help fund its operations.
The Company recently entered into a development agreement with Pivotal
Development, L.L.C. pursuant to which the Company is to receive an aggregate of
$750,000 upon attaining certain milestones. The Company anticipates that some of
the milestones will be achieved the first quarter of the year March 2006.
The Company in April 2005 announced the entry into an agreement with a
specialty marketing company and a boutique formulation development company, for
the manufacture and distribution of a controlled release drug product. The
product is a generic equivalent to a branded drug which has addressable market
revenues of approximately $80 million per year. The agreement provides for (1)
the development of the drug by Elite with costs of development to be shared by
Elite and the marketing company, (2) the manufacture by Elite and its sale to
the marketing company for distribution and (3) the boutique development company
to be responsible for any requisite submissions to the FDA relating to the
product. Elite is to share in the profits generated from the sale of the
product.
No assurance can be given that the Company will consummate any of the
transactions discussed above or that any material revenues will be generated for
Elite therefrom.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended March 31, 2005, the Company recorded positive cash
flow and financed its operations through utilization of its existing cash. In
October 2004, the Company raised net cash of $5,791,000 from its private
placement of its Series A Preferred Stock. The Company's working capital at
March 31, 2005 was $3.3 million compared with working capital of $1.3 million at
March 31, 2004. Cash and cash
33
equivalents at March 31, 2005 were $3.9 million, an increase of $1.8 million
from the $2.1 million at March 31, 2004.
The Company's purchase of machinery and equipment of approximately
$426,000 during the year ending March 31, 2005 was fully financed except for
minor expenditures. No capital expenditures were made during the year ended
March 31, 2004.
The Company had bonds of $2,345,000 outstanding as of March 31, 2005.
The bonds bear interest at a rate of 7.75% per annum and are due on various
dates between 2005 and thereafter. The bonds are secured by a first lien on the
Company's facility in Northvale, New Jersey. Pursuant to the terms of the bonds,
several restricted cash accounts have been established for the payment of bond
principal and interest. Bonds proceeds were utilized for the refinancing of the
land and building the Company currently own, the purchase of certain
manufacturing equipment and related building improvements and the maintenance of
a $300,000 debt service reserve. All of the restricted cash, other than the debt
service reserve, is expected to be expended within twelve months and is
therefore categorized as a current asset on the Company's consolidated balance
sheet as of March 31, 2005. Pursuant to the terms of the related bond indenture
agreement, the Company is required to observe certain covenants, including
covenants relating to the incurrence of additional indebtedness, the granting of
liens and the maintenance of certain financial covenants. As of March 31, 2005
the Company was in compliance with the covenants contained in the bond indenture
agreement.
On July 8, 2004, Elite Labs entered into a loan and financing agreement
in order to finance the purchase of certain machinery and equipment. Elite Labs
borrowed $400,000 payable in 36 monthly installments each of $13,671, including
principal and interest at 14% per annum. The first four and the last three
months of scheduled payments are being held by the lender and were and are to be
applied to the principal balance when due. The loan is secured by two pieces of
equipment and the guaranty of the Company. In addition, the Company issued to
designees of the lender 50,000 warrants, which vest immediately, to purchase
50,000 shares of the Company's Common Stock at $4.20 per share. A charge of
$41,252 for the cost of these warrants is reflected in the year ended March 31,
2005.
The Company from time to time will consider potential strategic
transactions including acquisitions, strategic alliances, joint ventures and
licensing arrangements with other pharmaceutical companies. The Company retained
an investment banking firm to assist with its efforts. There can be no assurance
that any such transaction will be available or consummated in the future.
In October 2004, the Company effected a private placement of 516,558
shares of its Series A Convertible Preferred Stock and the short and long term
warrants for gross proceeds of $6,600,000, before payment of commission of
$623,520 and other expenses. The Series A Preferred Shareholders were entitled
to a preferential dividend
34
of 8% per annum of the original issue price of $12.30 per share payable on
December 1 and June 1 of each year and at the time of conversion. Dividends are
payable in cash or shares of Common Stock valued at their fair market value as
defined. The December 1, 2004 dividend of $75,076 was paid by the issuance of
26,961 shares of Common Stock. As of March 7, 2005, all of the shares have been
converted at the holder's option or by mandatory conversion pursuant to their
terms. An aggregate of 5,265,516 shares of Common Stock have been issued,
including 26,961 shares of Common Stock issued to satisfy payment of $75,076
accrued dividend on December 1, 2004. The Company believes that the net proceeds
of the placement have provided sufficient cash to fund the Company's operations
and capital requirements through at least March 31, 2006.
As of March 31, 2005, our principal source of liquidity was
approximately $3,900,000 of cash and cash equivalents. Additionally, we may have
access to funds through the exercise of outstanding stock options and warrants
in addition to funds that may be generated from the potential sale of New Jersey
tax losses. There can be no assurance that the sale of tax losses or that any
proceeds generated by the exercise of outstanding warrants or options will
provide sufficient cash.
The following table depicts our obligations and commitments to make
future payments under existing contracts or contingent commitments.
PAYMENTS DUE BY PERIOD
LESS THAN 1 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 4-5 YEARS YEARS
-----
Equipment note payable 315,074 127,946 187,128 - -
EDA Bonds payable 2,345,000 165,000 570,000 460,000 1,150,000
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest in or own any market risk sensitive instruments
entered into for trading purposes or for purposes other than trading purposes.
All loans to us have been made at fixed interest rates and; accordingly, the
market risk to us prior to maturity is minimal.
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.
35
ITEM 9A. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, based on an
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the
Chief Executive and Chief Financial Officer of the Company have concluded that
the Company's disclosure controls and procedures are effective for ensuring that
information required to be disclosed by the Company in its Exchange Act reports
is recorded, processed, summarized and reported within the applicable time
periods specified by the SEC's rules and forms. The Company also concluded that
information required to be disclosed in such reports is accumulated and
communicated to the Company's management, including its principal executive and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure. There was no change in the Company's internal controls over
financial reporting that occurred during the most recent fiscal quarter that
materially affected or is reasonably likely to materially affect the Company's
internal controls over financial reporting. The Company's management has not yet
completed, and is not yet required to have have completed, its assessment of
internal control over financial reporting.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers, as of June 22, 2005, and their
biographical information are set forth below:
- -------------------------------------- --------- -------------------------------
NAME AGE POSITION
- -------------------------------------- --------- -------------------------------
Bernard Berk 56 Chairman of the Board, Chief
Executive Officer
- -------------------------------------- --------- -------------------------------
Edward Neugeboren 36 Director
- -------------------------------------- --------- -------------------------------
Barry Dash, Ph.D 73 Director
- -------------------------------------- --------- -------------------------------
Dr. Melvin Van Woert 74 Director
- -------------------------------------- --------- -------------------------------
Mark I. Gittelman 44 Chief Financial Officer,
Secretary and Treasurer
- -------------------------------------- --------- -------------------------------
The principal occupations and employment of each such person during at
least the past five years is set forth below. In each instance in which dates
are not provided in connection with the person's business experience, he has
held the position indicated for at least the past five years.
Bernard Berk was appointed the Chief Executive Officer of the Company
in June 2003, a Director in February 2004 and Chairman of the Board on May 12,
2004. Mr. Berk has been the President and Chief Executive Officer of Michael
Andrews Corporation, a pharmaceutical management consultant firm, since 1996.
Mr. Berk devotes and is to devote during his employment substantially all of his
time to the operations of the Company. From 1994 until 1996, Mr. Berk was
President and Chief Executive Officer of Nale Pharmaceutical Corporation. From
1989 until 1994, 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.
Mr. Edward Neugeboren has been a Managing Partner of IndiGo Ventures
LLC, a boutique investment-banking firm based in New York since January 2003.
From April 2001 to January 2004, he was a Managing Partner of Third Ridge
Capital Management, LLC, a U.S. equity hedge fund. From October 2000 to April
2001, he was Chief Administrative Officer of Soceron, an emerging Silicon Alley
based media software company, responsible for managing corporate operations. He
aided in capital raising, business development and strategic planning and
tactical operations. Mr. Neugeboren as Chief Administrative Officer and Director
of Equity Research Operations at Lehman Brothers from 1998 to 2000 was a senior
member of the management team responsible for department operations, including
technology, finance, editorial and production, human resources, and compliance.
He managed the equity research business of Lehman's strategic alliance with
Fidelity Investments. He also managed the hard dollar broker-dealer research
business with P&L responsibility. Additionally, he was the investment-banking
liaison. He was from 1996 to 1998 Deputy Director of
37
Equity Research and from 1995 to 1996 Director of Equity Research Operations at
UBS Warburg, formerly Warburg, Dillon Read. He was a senior member of the
management team as well as the Investment Policy & Equity Commitment Committees.
Mr. Neugeboren began his career in 1992 as an equity research analyst covering
the Specialty Pharmaceuticals industry, including generic drugs and drug
delivery, at Dillon Read & Co., Kidder, Peabody & Co. and Furman Selz, Inc. He
was a member of top ranked Greenwich Associates Mid-Cap Pharmaceuticals Team. He
graduated with a B. S. in Economics from Union College in 1992. Mr. Neugeboren
serves on the Board of Directors of KineMed, Inc. a platform based drug
development and advanced medical diagnostics company based in Emeryville,
California.
Barry Dash Ph.D. has been since 1995 President and Managing Member
of Dash Associates, L.L.C., an independent consultant to the pharmaceutical and
health and beauty aid industries. From 1983 to 1996 he was employed by American
Home Products Corporation, its Whitehall-Robins Healthcare Division, initially
as Vice President of Scientific Affairs, then Senior Vice President of
Scientific Affairs and then Senior Vice President of Advanced Technologies
during which time he personally supervised six separate departments: Medical and
Clinical Affairs, Regulatory Affairs, Technical Affairs, Research and
Development, Analytical R&D and Quality Management/Q.C. He had previously been
employed by the Whitehall Robins Healthcare Division from 1960 to 1976, during
which time he served as Director of Product Development Research, Assistant Vice
President of Product Development and Vice President of Scientific Affairs. Dr.
Dash had been employed by J.B. Williams Company (Nabisco Brands, Inc.) from 1978
to1982, during which time he helped introduce more than 14 national and test
market brands. From 1976 to1978 he was Vice President, Director of Laboratories
of the Consumer Products Division of American Can Company. He is a director of
GeoPharma, Inc. He 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. Dr. Dash is a member of
the American Pharmaceutical Association, The American Association for the
Advancement of Science and the Society of Cosmetic Chemist.
Dr. Melvin Van Woert, a neurologist, has been since 1974, a member
of the staff of Mount Sinai Medical Center where he has been a Professor of the
Department of Neurology and Pharmacology at Mount Sinai School of Medicine since
1978. Dr. Van Woert had been a consultant for Neuropharmacological Drug Products
to the Food and Drug Administration from 1974 to 1980; Associate Editor for
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.
38
Mark I. Gittelman, CPA, our Chief Financial Officer, Secretary and
Treasurer, is the President of Gittelman & Co., P.C., an accounting firm. Prior
to forming Gittelman & Co., P.C. in 1984, he worked as a certified public
accountant with the international accounting firm of KPMG Peat Marwick, LLP. Mr.
Gittelman holds a B.S. in accounting from New York University and a Masters of
Science in Taxation from Farleigh Dickinson University. He is a Certified Public
Accountant licensed in New Jersey and New York, and is a member of the American
Institute of Certified Public Accountants ("AICPA") and the New Jersey and New
York States Societies of CPAs.
Each director holds office (subject to our By-Laws) until the next
annual meeting of shareholders and until such director's successor has been
elected and qualified. All of our executive officers are serving until the next
annual meeting of directors and until their successors have been duly elected
and qualified. There are no family relationships between any of our directors
and executive officers.
AUDIT COMMITTEE
Our Board of Directors has an Audit Committee and, since March 2004, a
Nominating Committee. The Board has no other standing committees. The current
Audit Committee, appointed on April 15, 2005, consists of Edward Neugeboren, Dr.
Melvin Van Woert and Barry Dash, Ph.D. The prior Audit Committee members were
John A. Moore, Harmon Aronson and Eric L. Sichel. The Audit Committee had one
meeting during the fiscal year ended March 31, 2005. The Company's Board of
Directors has adopted a written charte