Elite Pharmaceuticals Inc
Annual Report 2007

Plain-text annual report

(cid:10) 10-K(cid:10) 1(cid:10) c49228_10k.txt(cid:10) (cid:10) UNITED STATES(cid:10) SECURITIES AND EXCHANGE COMMISSION(cid:10) WASHINGTON, D.C. 20549(cid:10) FORM 10-K(cid:10) (MARK ONE)(cid:10) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES(cid:10) EXCHANGE ACT OF 1934(cid:10) FOR THE FISCAL YEAR ENDED - March 31, 2007(cid:10) OR(cid:10) |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES(cid:10) EXCHANGE ACT OF 1934(cid:10) FOR THE TRANSITION PERIOD FROM ______ TO ______(cid:10) Commission File Number: 333-45241(cid:10) ELITE PHARMACEUTICALS, INC.(cid:10) (Exact name of registrant as specified in its charter)(cid:10) DELAWARE 22-3542636(cid:10) -------- ----------(cid:10) (State or other jurisdiction (IRS Employer(cid:10) of incorporation) Identification No.)(cid:10) 165 LUDLOW AVENUE, NORTHVALE, NEW JERSEY 07647(cid:10) ----------------------------------------------(cid:10) (Address of principal executive offices)(cid:10) (201) 750-2646(cid:10) --------------(cid:10) (Registrant's telephone number, including area code)(cid:10) Securities registered pursuant to Common Stock - $.01 par value(cid:10) Section 12(b) of the Act: The Common Stock is listed on The(cid:10) American Stock Exchange(cid:10) Securities registered pursuant to None(cid:10) Section 12(g) of the Act:(cid:10) Indicate by check mark if the registrant is a well-known seasoned issuer, as(cid:10) defined in Rule 405 of the Securities Act. Yes |_| No |X|(cid:10) Indicate by check mark if the registrant is not required to file reports(cid:10) pursuant to Section 13 or 15(d) of the Act. Yes |_| ] No |X|(cid:10) Indicate by check mark whether the registrant (1) has filed all reports required(cid:10) to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during(cid:10) the preceding 12 months (or for such shorter period that registrant was required(cid:10) to file such reports) and (2) has been subject to such filing requirements for(cid:10) at least the past 90 days. Yes |X| No |_|(cid:10) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405(cid:10) of Regulation S-K is not contained herein, and will not be contained, to the(cid:10) best of registrant's knowledge, in definitive proxy or information statements(cid:10) incorporated by reference in Part III of this Form 10-K. |_|(cid:10) Indicate by check mark whether the registrant is a large accelerated filer, an(cid:10) accelerated filer, or a non-accelerated filer. See definition of "accelerated(cid:10) file and larger accelerated filer" in Rule 12b-2 of the Exchange Act.(cid:10) Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|(cid:10) Indicate by check mark whether the registrant is a shell company (as defined in(cid:10) Rule 12b-2 of the Act). Yes |_| No |X|(cid:10) The aggregate market value of the voting common equity held by non-affiliates of(cid:10) the registrant as of June 26, 2007 was approximately $45,864,702 based upon the(cid:10) closing price of the registrant's Common Stock on the American Stock Exchange,(cid:10) as of September 29, 2006. (For purposes of determining this amount, only(cid:10) directors, executive officers, and, based on Schedule 13(d) filings as of May(cid:10) 15, 2007 10% or greater stockholders and their respective affiliates have been(cid:10) deemed affiliates).(cid:10) Registrant had 20,820,048 shares of common stock, par value $0.01 per share,(cid:10) outstanding as of June 26, 2007.(cid:10) DOCUMENTS INCORPORATED BY REFERENCE(cid:10) List hereunder the following documents if incorporated by reference and the Part(cid:10) of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is(cid:10) incorporated: (1) Any annual report to security holders; (2) Any proxy or(cid:10) information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or(cid:10) (c) under the Securities Act of 1933. The listed documents should be clearly(cid:10) described for identification purposes (e.g., annual report to security holders(cid:10) for fiscal year ended December 24, 1980). N/A(cid:10) ii(cid:10) (cid:10) FORWARD LOOKING STATEMENTS(cid:10) THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN CONTAIN(cid:10) "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES(cid:10) LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND(cid:10) UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL(cid:10) RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE(cid:10) MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS(cid:10) EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS(cid:10) ANNUAL REPORT, STATEMENTS THAT ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT(cid:10) MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE FOREGOING,(cid:10) THE WORDS "PLAN", "INTEND", "MAY," "WILL," "EXPECT," "BELIEVE", "COULD,"(cid:10) "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR SIMILAR EXPRESSIONS OR OTHER(cid:10) VARIATIONS OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY SUCH(cid:10) FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON(cid:10) THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. EXCEPT(cid:10) AS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY(cid:10) FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE(cid:10) EVENTS OR OTHERWISE.(cid:10) ANY REFERENCE TO "ELITE", THE "COMPANY"," WE", "US", "OUR" OR THE "REGISTRANT"(cid:10) MEANS ELITE PHARMACEUTICALS INC. AND ITS SUBSIDIARIES.(cid:10) iii(cid:10) (cid:10) TABLE OF CONTENTS(cid:10) Form 10-K Index(cid:10) PAGE(cid:10) PART I(cid:10) Item 1. Business.............................................................1(cid:10) Item 1A. Risk Factors........................................................15(cid:10) Item 1B. Unresolved Staff Comments...........................................26(cid:10) Item 2. Properties..........................................................26(cid:10) Item 3. Legal Proceedings...................................................26(cid:10) Item 4. Submission of Matters to a Vote of Security Holders.................27(cid:10) PART II(cid:10) Item 5. Market for Registrant's Common Equity Related Stockholder(cid:10) Matters and Issuer Purchases of Equity Securities...................28(cid:10) Item 6. Selected Financial Data.............................................32(cid:10) Item 7. Management's Discussion and Analysis of Financial Condition and(cid:10) Results of Operation................................................32(cid:10) Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........38(cid:10) Item 8. Financial Statements and Supplementary Data.........................38(cid:10) Item 9. Changes in and Disagreements with Accountants on Accounting(cid:10) and Financial Disclosure............................................38(cid:10) Item 9A. Controls and Procedures.............................................38(cid:10) Item 9B. Other Information...................................................38(cid:10) PART III(cid:10) Item 10. Directors, Executive Officers and Corporate Governance..............40(cid:10) Item 11. Executive Compensation..............................................46(cid:10) Item 12. Security Ownership of Certain Beneficial Owners and(cid:10) Management and Related Stockholder Matters..........................58(cid:10) Item 13. Certain Relationships and Related Transactions, and(cid:10) Director Independence...............................................61(cid:10) Item 14. Principal Accounting Fees and Services..............................64(cid:10) PART IV(cid:10) Item 15. Exhibits, Financial Statements and Schedules........................65(cid:10) Signatures..........................................................73(cid:10) Consolidated Financial Statements..................................F-1(cid:10) iii(cid:10) (cid:10) PART I(cid:10) ITEM 1. BUSINESS(cid:10) GENERAL(cid:10) Elite Pharmaceuticals, Inc. ("ELITE PHARMACEUTICALS") was incorporated on(cid:10) October 1, 1997 under the laws of the State of Delaware, and our wholly-owned(cid:10) subsidiaries, Elite Laboratories, Inc. ("ELITE LABS") and Elite Research, Inc.(cid:10) ("ELITE RESEARCH") were incorporated on August 23, 1990 and December 20, 2002,(cid:10) respectively, under the laws of the State of Delaware. Elite Pharmaceuticals,(cid:10) Elite Labs, Elite Research and Novel, a variable interest entity, are referred(cid:10) to herein, collectively, as "ELITE", "WE", "US", "OUR" or the "COMPANY".(cid:10) On October 24, 1997, Elite Pharmaceuticals merged with and into our(cid:10) predecessor company, Prologica International, Inc. ("PROLOGICA"), an inactive(cid:10) publicly held Pennsylvania corporation. At the same time, Elite Labs merged with(cid:10) a wholly-owned subsidiary of Prologica. Following these mergers, Elite(cid:10) Pharmaceuticals survived as the parent to its wholly-owned subsidiary, Elite(cid:10) Labs.(cid:10) On September 30, 2002, we acquired from Elan Corporation, plc and Elan(cid:10) International Services, Ltd. (together "ELAN") Elan's 19.9% interest in Elite(cid:10) Research, Ltd. ("ERL"), a joint venture formed between Elite and Elan in which(cid:10) our initial interest was 80.1% of the outstanding capital stock (100% of the(cid:10) outstanding Common Stock). As a result of the termination of the joint venture,(cid:10) we owned 100% of ERL's capital stock. On December 31, 2002, ERL (a Bermuda(cid:10) Corporation) was merged into Elite Research, our wholly-owned subsidiary.(cid:10) The address of our principal executive offices and our telephone and(cid:10) facsimile numbers at that address are:(cid:10) Elite Pharmaceuticals, Inc., 165 Ludlow Avenue, Northvale, New Jersey(cid:10) 07647; Phone No.: (201) 750-2646; Facsimile No.: (201) 750-2755.(cid:10) We file registration statements, periodic and current reports, proxy(cid:10) statements and other materials with the Securities and Exchange Commission (the(cid:10) "SEC"). You may read and copy any materials we file with the SEC at the SEC's(cid:10) Public Reference Room at 100 F Street, N.W., Washington, DC 20549. You may(cid:10) obtain information on the operation of the Public Reference Room by calling the(cid:10) SEC at 1-800-SEC-0330. The SEC maintains a web site at www.sec.gov that contains(cid:10) reports, proxy and information statements and other information regarding(cid:10) issuers that file electronically with the SEC, including our filings.(cid:10) BUSINESS OVERVIEW AND STRATEGY(cid:10) We are a specialty pharmaceutical company principally engaged in the(cid:10) development and manufacture of oral, controlled release products. We develop(cid:10) oral, controlled release products using proprietary technology. Our strategy(cid:10) includes improving off-patent drug products for life cycle management and(cid:10) developing generic versions of controlled release drug products with high(cid:10) barriers to entry. Our technology is applicable to develop delayed, sustained or(cid:10) targeted release pellets, capsules, tablets, granules and powders.(cid:10) We have two products, Lodrane 24(R) and Lodrane 24D(R), currently being(cid:10) sold commercially, and a pipeline of seven drug candidates under development in(cid:10) the therapeutic areas that include pain(cid:10) (cid:10) management, allergy and infection. Of the products under development, ELI-216,(cid:10) an abuse deterrent oxycodone product, and ELI-154, a once daily oxycodone(cid:10) product, are in clinical trials and we have completed pilot studies on two of(cid:10) our generic product candidates. The addressable market for the pipeline of(cid:10) products exceeds $6 billion. Our facility in Northvale, New Jersey also is a(cid:10) Good Manufacturing Practice ("GMP") and DEA registered facility for research,(cid:10) development and manufacturing.(cid:10) At the end of 2006, we entered into a joint venture with VGS Pharma, LLC(cid:10) and created Novel Laboratories, Inc. ("NOVEL"), a privately-held company(cid:10) specializing in pharmaceutical research, development, manufacturing, licensing,(cid:10) acquisition and marketing of specialty generic pharmaceuticals. Novel's business(cid:10) strategy is to focus on its core strength in identifying and timely executing(cid:10) niche business opportunities in the generic pharmaceutical area.(cid:10) STRATEGY(cid:10) We are focusing our efforts on the following areas: (i) development of our(cid:10) pain management products, (ii) manufacturing of Lodrane 24(R) and Lodrane 24D(R)(cid:10) product; (ii) the development of the other products in our pipeline; and (iii)(cid:10) commercial exploitation of our products either by license and the collection of(cid:10) royalties, or through the manufacture of our formulations, and (iv) development(cid:10) of new products and the expansion of our licensing agreements with other(cid:10) pharmaceutical companies, including co-development projects, joint ventures and(cid:10) other collaborations, including Novel.(cid:10) We are focusing on the development of various types of drug products,(cid:10) including branded drug products (which require new drug applications ("NDA")(cid:10) under Section 505(b)(1) or 505(b)(2) of the Drug Price Competition and Patent(cid:10) Term Restoration Act of 1984 (the "DRUG PRICE ACT")) as well as generic drug(cid:10) products (which require abbreviated new drug applications ("ANDA")).(cid:10) We intend to continue to collaborate in the development of additional(cid:10) products with our current partners. We also plan to seek additional(cid:10) collaborations to develop more drug products.(cid:10) We believe that our business strategy enables us to reduce our risk by(cid:10) having a diverse product portfolio that includes both branded and generic(cid:10) products in various therapeutic categories and build collaborations and(cid:10) establish licensing agreements with companies with greater resources thereby(cid:10) allowing us to share costs of development and to improve cash-flow.(cid:10) RESEARCH AND DEVELOPMENT(cid:10) During each of the last three fiscal years, we have focused on research(cid:10) and development activities. We spent $6,085,888 for the fiscal year ended March(cid:10) 31, 2007, $4,343,890 in the fiscal year ended March 31, 2006 and $2,698,641 in(cid:10) the fiscal year ended March 31, 2005 on research and development activities. Our(cid:10) research and development spending has increased as we prepare for Phase III(cid:10) clinical trials for ELI-216 and ELI-154 and spend more on development costs(cid:10) including scale up and clinical studies.(cid:10) Of our seven products in the pipeline, three are for treatment or(cid:10) management of pain (ELI 216 is an abuse resistant oxycodone and ELI 154 is a(cid:10) once daily oxycodone and a third is for an analgesic indication), two are for(cid:10) anti-infective indications, and one is for gastrointestinal disorders(cid:10) 2(cid:10) (cid:10) It is our general policy not to disclose products in our development(cid:10) pipeline or the status of such products until a product reaches a stage that we(cid:10) determine, for competitive reasons, in our discretion, to be appropriate for(cid:10) disclosure and because the disclosure of such information might suggest the(cid:10) occurrence of future matters or events that may not occur. In this instance, we(cid:10) believe that disclosure of the information in the following table is helpful for(cid:10) the description of the general nature, orientation and activity of the Company,(cid:10) and the disclosures are made for such purpose. No inference should be made as to(cid:10) the occurrence of matters or events not specifically described. We may or may(cid:10) not disclose such information in the future based on competitive reasons and/or(cid:10) contractual obligations. We believe that the information is helpful on a(cid:10) one-time basis for the purpose described above.(cid:10) The following table provides information concerning the controlled release(cid:10) products that we are developing and to which we are devoting substantial(cid:10) resources and attention. None of these products has been approved by the United(cid:10) Stated Food and Drug Administration (the "FDA") and all are in development.(cid:10)

(cid:10)
(cid:10) PRODUCT APPROX. U.S. SALES FOR NDA/ PARTNER INDICATION(cid:10) BRAND AND/OR GENERIC ANDA (B)(cid:10) PRODUCTS(cid:10) (2006) $MM(A)(cid:10) (cid:10) ELI 154 N/A(c) NDA None Pain Management(cid:10) Once Daily Oxycodone(cid:10) ELI 216 N/A(c) NDA None Pain Management(cid:10) Once daily oxycodone with(cid:10) abuse resistant technology(cid:10) (ART(TM))(cid:10) Generic $40 ANDA Pliva US, Inc. Infection(cid:10) (East Hanover, NJ)(cid:10) Generic $50 ANDA Orit Laboratories, Inc. (d) Anti-Anxiety(cid:10) (East Hanover, NJ)(cid:10) Generic $3,600 ANDA IntelliPharmacutics Gastrointestinal(cid:10) Toronto, Canada) disorders(e)(cid:10) Generic $100 ANDA Tish Technologies, Inc. (d) Infection(cid:10) (East Hanover, NJ) and(cid:10) Harris Pharmaceuticals (Ft.(cid:10) Meyers, FL)(cid:10) Generic $30 ANDA The PharmaNetwork, LLC Pain Management(cid:10) (Montvale, NJ)(cid:10)
(cid:10) ----------(cid:10) (a) Indicates the approximate amount of sales of our competitor's product and(cid:10) any generics (if there are any). It does not represent the sales of any of(cid:10) our products.(cid:10) (b) "NDA" represents a new drug application which is filed with the FDA for(cid:10) new drug products and "ANDA" represents an abbreviated new drug(cid:10) application which is filed with the FDA for generic drug products.(cid:10) (c) N/A means not applicable because there is no branded product on the(cid:10) market. There is neither a once-daily oxycodone or an abuse resistant(cid:10) oxycodone on the market. The market for sustained release oxycodone was(cid:10) approximately $1.3 billion in 2006.(cid:10) 3(cid:10) (cid:10) (d) Orit Laboratories is an affiliate of Tish Technologies.(cid:10) (e) This includes an agreement that grants to Elite a percentage of payments(cid:10) paid to its Canadian partner for commercial sale of a generic of this(cid:10) product.(cid:10) The table below presents information with respect to the development of(cid:10) our seven products under development. For some of the products, we intend to(cid:10) make NDA filings under Sections 505(b)(1) or 505(b)(2) of the Drug Price Act.(cid:10) Accordingly, we anticipate, as to which there is no assurance, that the(cid:10) development timetable for the products for which such NDA filings are made would(cid:10) be shorter and less expensive. Completion of development of products by us(cid:10) depends on a number of factors, however, and there can be no assurance that(cid:10) specific time frames will be met during the development process or that the(cid:10) development of any particular products will be continued.(cid:10) In the table, Pilot Phase I studies for the NDA products are generally(cid:10) preliminary studies done in healthy human subjects to assess the(cid:10) tolerance/safety and pharmacokinetics of the product. The Phase II study listed(cid:10) below was done in recreational drug users and a visual analog scale for euphoria(cid:10) was measured in the study. Additional larger studies in humans will be required(cid:10) prior to submission of the product to the FDA for review. Pilot bioequivalence(cid:10) studies are initial studies done in humans for generic products and are used to(cid:10) assess the likelihood of achieving bioequivalence for generic products. Larger(cid:10) pivotal bioequivalence studies will be required prior to submission of the(cid:10) product to the FDA for review.(cid:10) DEVELOPMENT STAGE NUMBER OF PRODUCTS NDA/ANDA(cid:10) ----------------- ------------------ --------(cid:10) Preclinical 2 ANDA(cid:10) Pilot bioequivalence study 3 ANDA(cid:10) Pilot Phase I study 1 NDA(cid:10) Phase II 1 NDA(cid:10) The above table does not include generic drug products currently under(cid:10) development at Novel.(cid:10) COMMERCIAL PRODUCTS(cid:10) Elite manufactures two once daily allergy products, Lodrane 24(R) and(cid:10) Lodrane 24D(R), that were co-developed with our partner, ECR Pharmaceuticals.(cid:10) Elite entered into development agreements on these two products with ECR in June(cid:10) 2001 whereby Elite agreed to commercially develop two products in exchange for(cid:10) development fees, certain payments, royalties and manufacturing rights. The(cid:10) products are being marketed by ECR which also has the responsibility for(cid:10) regulatory matters. In addition to receiving revenues for manufacture of these(cid:10) products, Elite also receives a royalty on in-market sales.(cid:10) Lodrane 24(R), was first commercially offered in November 2004, and(cid:10) Elite's revenues for manufacturing the product and a royalty on sales for the(cid:10) years ended March 31, 2005, 2006 and 2007 aggregated $150,030, $550,697 and(cid:10) $588,620 respectively. Lodrane 24D(R) was first commercially offered in(cid:10) December, 2006 and Elite's revenues for manufacturing the product and a royalty(cid:10) on sales for the year ended March 31, 2007 aggregated $555,221.(cid:10) 4(cid:10) (cid:10) PRODUCTS UNDER DEVELOPMENT(cid:10) ELI-154 AND ELI-216(cid:10) For ELI-154, Elite has developed a once-daily oxycodone formulation using(cid:10) its proprietary technology. An investigational new drug application or IND has(cid:10) been filed and Elite has completed two pharmacokinetic studies in healthy(cid:10) subjects that compared blood levels of oxycodone from dosing ELI-154 and the(cid:10) twice-a-day product that is on the market currently. ELI-154, when compared to(cid:10) twice daily delivery, demonstrated an equivalent onset, more constant blood(cid:10) levels of the drug over the 24 hours and equivalent blood levels to the(cid:10) twice-a-day product at the end of 24 hours. We are now scaling up that product(cid:10) using commercial size equipment for manufacture of batches. Elite has submitted(cid:10) a proposed clinical plan to the FDA and is awaiting comments from the FDA. Upon(cid:10) receiving their comments, we intend to request a special protocol assessment(cid:10) ("SPA") for the ELI-154 Phase III protocol and, shortly after receiving(cid:10) agreement with the FDA on the SPA, we intend to begin the Phase III trial. Elite(cid:10) will conduct Phase I studies including, but not limited to, a food effect,(cid:10) ascending dose and multi-dose studies. Such Phase I studies are not expected to(cid:10) affect the timetable of the Phase III trial.(cid:10) ELI-216 utilizes our patent-pending abuse deterrent technology that is(cid:10) based on a pharmacological intervention approach. ELI-216 is a combination of a(cid:10) narcotic agonist, oxycodone hydrochloride, in a sustained release formulation(cid:10) intended for use in patients with moderate to severe chronic pain, and an(cid:10) antagonist, naltrexone hydrochloride, formulated to deter abuse of the drug.(cid:10) Both of these compounds, oxycodone hydrochloride and naltrexone hydrochloride,(cid:10) have been on the market for a number of years and sold separately in various(cid:10) dose strengths. Elite has filed an IND for the product and has tested the(cid:10) product in a series of pharmacokinetic studies. In single dose studies for(cid:10) ELI-216, it was demonstrated that no quantifiable blood levels of naltrexone(cid:10) hydrochloride were released at a limit of quantification ("LOQ") of 7.5 pg/ml.(cid:10) When crushed, however, naltrexone hydrochloride was release at levels that would(cid:10) be expected to eliminate the euphoria from the crushed oxycodone hydrochloride.(cid:10) This data is consistent with the premise of Elite's abuse resistant technology(cid:10) or ART, that essentially no naltrexone is released and absorbed when(cid:10) administered as intended.(cid:10) In further studies, ELI-216 demonstrated the euphoria-blocking effect of(cid:10) ELI-216 when the product is crushed. This study was designed to determine the(cid:10) optimal ratio of oxycodone hydrochloride and the opioid antagonist, naltrexone(cid:10) hydrochloride, to significantly block the euphoric effect of the opioid if the(cid:10) product is abused by physically altering it, (i.e., crushing). The study also(cid:10) helped determine the appropriate levels of naltrexone hydrochloride required to(cid:10) reduce or eliminate the euphoria experienced by subjects who might take crushed(cid:10) product to achieve a "high". Elite intends to complete and submit to the FDA a(cid:10) second stage of this study that will be a double blinded, cross-over pivotal(cid:10) study.(cid:10) Elite met with the FDA in October 2006 for a Type C clinical guidance(cid:10) meeting regarding the NDA development program for ELI-216. Elite has(cid:10) incorporated the FDA's guidance into its developmental plan. Elite has begun(cid:10) scale up of ELI-216 to commercial size batches and Elite has submitted an SPA to(cid:10) the FDA for the ELI-216 Phase III protocol. Elite intends to enter Phase III(cid:10) shortly after receiving agreement with the FDA on the SPA. Elite will conduct(cid:10) additional Phase I studies including, but not limited to, food effect, ascending(cid:10) dose and a multi-dose studies.(cid:10) Elite has developed ELI-154 and ELI-216 and retains the rights to these(cid:10) products. Elite has currently chosen to develop these products itself but(cid:10) expects to license these products at a later date to a third party for sales and(cid:10) distribution. The drug delivery technology underlying ELI-154 was originally(cid:10) developed under a joint venture with Elan which terminated in 2002.(cid:10) 5(cid:10) (cid:10) According to the termination agreement, Elite acquired all proprietary,(cid:10) development and commercial rights for the worldwide markets for the products(cid:10) developed by the joint venture including ELI-154. Upon licensing or(cid:10) commercialization of ELI-154, Elite will pay a royalty to Elan pursuant to the(cid:10) termination agreement with Elan. If Elite were to sell the product itself, Elite(cid:10) would pay a 1% royalty to Elan based on the product's net sales and if Elite(cid:10) enters into an agreement with another party to sell the product, Elite will pay(cid:10) a 9% royalty to Elan based on Elite net revenues from this product (Elite net(cid:10) product revenues would include license fees, royalties, manufacturing profits(cid:10) and milestones). Elite is allowed to recoup all development costs including(cid:10) research, process development, analytical development, clinical development and(cid:10) regulatory costs before payment of any royalties to Elan.(cid:10) MANUFACTURING, CO-DEVELOPMENT AND LICENSE AGREEMENTS(cid:10) On March 30, 2005, Elite entered into a three party agreement with Tish(cid:10) Technologies, Inc. and Harris Pharmaceuticals, Inc. ("HARRIS") for the(cid:10) co-development and license of a controlled release generic product. Upon its(cid:10) development and the securing of the required FDA approval by the formulation(cid:10) development company, Elite is to manufacture the product and Harris is to sell(cid:10) and distribute the product. In addition to the transfer price for manufacturing(cid:10) the product, Elite is to share the profits, if any, realized upon sales. The(cid:10) innovator's reference product for this generic was originally a capsule. The(cid:10) innovator has now received approval for an alternative dose form (a tablet(cid:10) rather than capsule) and has discontinued the original dose form. While a(cid:10) reference product remains for the capsule, the market opportunity has changed(cid:10) and this affects how we might commercialize the capsule dosage form. On June 19,(cid:10) 2006, we received written notice from Harris of Harris' intent to terminate the(cid:10) agreement in accordance with Section 9.3 of the agreement. As the date hereof,(cid:10) Elite has received $29,700 for this development work.(cid:10) On June 21, 2005, Elite entered into a product development and(cid:10) commercialization agreement with IntelliPharmaCeutics Corp. ("IPC"), a privately(cid:10) held, specialty pharmaceutical Canadian company that develops generic controlled(cid:10) release drug products. It is affiliated with IntelliPharmaCeutics, Ltd. The(cid:10) agreement provides for the co-development and commercialization of a controlled(cid:10) released generic product. IntelliPharmaCeutics has taken a formulation for the(cid:10) product into a pilot bioequivalence biostudy. Upon commercialization, Elite is(cid:10) to share the profits, if any, realized upon sales. A successful pivotal biostudy(cid:10) and an approved ANDA filing is required to commercialize this product.(cid:10) On December 12, 2005, Elite and IPC amended their obligations to suspend(cid:10) their obligations under the IPC Agreement with respect to the development and(cid:10) commercialization of the controlled release drug product in Canada. IPC, in(cid:10) turn, entered into an agreement with ratiopharm, inc., a Canadian company, for(cid:10) the development and commercialization for the product in Canada and will pay(cid:10) Elite a certain percentage of any payments received by IPC with respect to the(cid:10) commercial sale of this product by ratiopharm, inc. in Canada.(cid:10) On June 22, 2005, Elite entered into a Product Development and License(cid:10) Agreement with PLIVA, Inc. ("PLIVA"), now a subsidiary of Barr Pharmaceuticals(cid:10) Inc., providing, for the development and license of a controlled released(cid:10) generic product. Under the agreement, PLIVA is to make upfront and milestone(cid:10) payments in the aggregate of $550,000 to Elite. Elite is to manufacture and(cid:10) PLIVA is to market and sell the product. The development costs will be paid by(cid:10) PLIVA and Elite and the profits will be shared equally. As of the date hereof,(cid:10) Elite has not received any of the payments from PLIVA. Elite has developed a(cid:10) formulation that matches the branded product and has(cid:10) 6(cid:10) (cid:10) tested it in a pilot study. A successful pivotal biostudy and an approved ANDA(cid:10) filing is required to commercialize this product. On June 28, 2007, Elite and(cid:10) Pliva terminated the Product Development and License Agreement and entered into(cid:10) a termination agreement according to which it was agreed that Elite owns all(cid:10) intellectual property rights relating to the controlled released generic product(cid:10) under development and Pliva agreed to pay Elite $100,000 in discharge of(cid:10) outstanding payments under the Product Development and License Agreement.(cid:10) On January 10, 2006, Elite entered into an agreement with Orit(cid:10) Laboratories LLC ("ORIT"), an affiliate of Tish Technologies LLC, providing that(cid:10) Elite and Orit will co-develop and commercialize an extended release drug(cid:10) product for treatment of anxiety, and, upon completion of development, may(cid:10) license it for manufacture and sale. The parties intend to develop all dose(cid:10) strengths of the product. Orit has been providing formulation and analytical(cid:10) resources for the development work. Elite's facility has been used for(cid:10) manufacture of development batches. Elite is to share in the profits, if any(cid:10) from the sales of the drug. A formulation has been developed that matches the(cid:10) innovator's product using IN VITRO testing and next steps will be scale up and(cid:10) pilot testing.(cid:10) On November 10, 2006, Elite entered into a product collaboration agreement(cid:10) with The PharmaNetwork, LLC ("TPN") for the development of the generic product(cid:10) equivalent of a synthetic narcotic analgesic drug product. TPN is to perform(cid:10) development services and prepare and file an ANDA in the name of TPN with the(cid:10) FDA. Elite is to provide development support, including the purchase of active(cid:10) pharmaceutical ingredients and materials and supplies to manufacture the batch,(cid:10) provide adequate facilities to TPN for use in its development work and following(cid:10) ANDA approval, Elite will manufacture the drug product developed. Elite is to(cid:10) pay TPN for the development services rendered upon the attainment of certain(cid:10) milestones. The out-of-pocket costs are to be shared by TPN and Elite, with(cid:10) TPN's obligation to be payable from the royalty compensation. Formulation(cid:10) development work is currently underway.(cid:10) JOINT VENTURE WITH NOVEL(cid:10) In December 2006, we entered into a joint venture with VGS Pharma, LLC(cid:10) ("VGS") and created Novel Laboratories, Inc ("Novel"), a separate privately-held(cid:10) company specializing in pharmaceutical research, development, manufacturing,(cid:10) licensing, acquisition and marketing of specialty generic pharmaceuticals.(cid:10) We acquired 49% and VGS acquired 51% of Novel's Class A Voting Common(cid:10) Stock for $9,800 and $10,200 respectively. We initially contributed $2,000,000(cid:10) to Novel and have agreed to provide additional contributions upon the(cid:10) achievement of certain performance milestones of Novel to be mutually agreed to(cid:10) by Elite and VGS.(cid:10) In March 2007, Dr. Veerappan Subramanian, Novel's CEO, provided Elite with(cid:10) Novel's initial business plan which identified 22 generic drug products to be(cid:10) developed by Novel and the proposed funding milestones for Elite's remaining(cid:10) contributions to Novel. Pursuant to the agreed upon plan, Elite contributed(cid:10) $2,000,000 on May 15, 2007 and $3,000,000 on June 15, 2007. The remaining(cid:10) contributions to be made by Elite shall be funded in the amounts and upon the(cid:10) occurrence of the following milestones: (i) $10,000,000 upon the submission to(cid:10) the FDA of three ANDAs related to three different prospective products developed(cid:10) by Novel and (ii) $10,000,000 upon the submission to the FDA of three ANDAs(cid:10) related to at least three additional different prospective products developed by(cid:10) Novel; provided that the aggregate contributions to be made by Elite shall not(cid:10) exceed (i) $15,000,000 prior to November 1, 2007 or (ii) $25,000,000 prior to(cid:10) May 1, 2008. The remaining contributions of Elite are not monetary(cid:10) 7(cid:10) (cid:10) obligations but rather conditions that must be met in order for Elite to(cid:10) maintain its current equity interest in Novel.(cid:10) In the event that (i) Elite defers for more than 90 days the payment of a(cid:10) contribution installment due to Novel's failure to achieve a performance(cid:10) milestone, (ii) Elite fails to make a requisite contribution following Novel's(cid:10) achieving a performance milestone or (iii) Novel requires additional financing(cid:10) beyond amounts provided in the business plan or Elite's agreed upon additional(cid:10) contributions, Novel may seek such financing through a subscription offering to(cid:10) its Class A Stockholders and, to the extent not fully subscribed, from third(cid:10) parties.(cid:10) As long as each of Elite and VGS owns at least 10% of the shares of Class(cid:10) A Voting Common Stock of Novel, each shall designate one of the two directors to(cid:10) constitute the Novel Board of Directors, with the VGS designee to be Dr.(cid:10) Subramanian, unless otherwise approved by Elite. Novel is prohibited from taking(cid:10) of certain actions without approval of the two designees, including, but not(cid:10) limited to, amendments of charter, by-laws and other governance agreements,(cid:10) spin-offs or public offerings of equity securities, a liquidation or(cid:10) dissolution, dividends, authorization or issuance of additional securities or(cid:10) options, bankruptcy, a material change of the business or a business plan,(cid:10) approval of a business plan and the yearly operating budget, creation of a(cid:10) security interest, capital expenditures in excess of 110% of the amount provided(cid:10) in the business plan, investments in excess of the amounts approved in the(cid:10) Business Plan, an increase or decrease of the Board; and any investments by Dr.(cid:10) Subramanian in any competitive company or its affiliate.(cid:10) In the event Elite fails to make its remaining contributions after the(cid:10) occurrence of the relevant milestones event, VGS has the right to purchase at(cid:10) the original purchase price from Elite that proportion of its original shares of(cid:10) Novel Class A Common Stock equal to the proportion of the required additional(cid:10) contributions not made by Elite.(cid:10) In the event of Dr. Subramanian's resignation from Novel for other than(cid:10) good reason or his termination by Novel for cause or his death or disability as(cid:10) defined in the employment agreement between Novel and Dr. Subramanian, Elite has(cid:10) the corresponding right to acquire up to 75% of VGS's original shares of Class A(cid:10) Common Stock of Novel at the original purchase price; such percentage to be(cid:10) reduced to 50% and 25% and 0% upon the first, second and third anniversary of(cid:10) the Stockholders' Agreement, with a pro rata portion of such reduction to be(cid:10) effected upon the death or disability of Dr. Subramanian during the applicable(cid:10) period. Each of Elite and VGS has a right to acquire at the then fair value,(cid:10) Elite's or VGS's shares of Novel upon the bankruptcy, dissolution or(cid:10) liquidation, a change of control of the other or, if as a result of the(cid:10) purchases at the original purchase price, the percentage of Novel owned by such(cid:10) party is less than 10% of Novel.(cid:10) On June 5, 2007, the board of directors of Novel agreed to approve a stock(cid:10) option plan (the "NOVEL PLAN") for Novel's key employees. The Novel Plan(cid:10) reserves for granting under the Novel Plan 26,582 shares of Novel's Class B(cid:10) non-voting common stock.(cid:10) On June 5, 2007, Novel granted 8,861 options to purchase Class B(cid:10) non-voting common shares to Veerappan Suramanian, its CEO, at an exercise price(cid:10) of $22.50 per share. The options vest and become exercisable at the rate of (i)(cid:10) 1,266 option shares on the date of each submission to the FDA of an ANDA for the(cid:10) first six new prospective products developed by Novel which is not the subject(cid:10) of any prior ANDA submitted to the FDA by Novel and (ii) 1,265 option shares on(cid:10) the date of approval by the FDA of a drug product that is the subject of an ANDA(cid:10) related to a prospective product developed by Novel which has not been(cid:10) previously approved by the FDA for Novel.(cid:10) 8(cid:10) (cid:10) On June 5, 2007, Novel granted Muthusamy Shanmugam, its Head of Technical(cid:10) Operations, 8,861 options to purchase Novel's Class B non-voting common shares(cid:10) at an exercise price of $22.50. The options vest and become exercisable at the(cid:10) rate of 2,953 on the first, 2,954 on each of the second and third anniversary of(cid:10) the grant date. Novel also entered into an employment agreement with Mr.(cid:10) Shanmugam on June 5, 2007 to act as Novel's Head of Technical Operations. The(cid:10) employment agreement provides for an initial base salary of $170,000 per annum,(cid:10) subject to annual increases at the discretion of Novel's Board of Directors. The(cid:10) initial term of the agreement is three years. Novel shall have the right to(cid:10) terminate the agreement for cause (as defined) or for disability. If Novel(cid:10) elects to terminate the agreement without cause, Mr. Shanmugam shall be(cid:10) entitled to receive, in full satisfaction of all remaining obligations of Novel(cid:10) under the agreement, an aggregate amount equal to the lesser of (i) twelve(cid:10) months of salary or (ii) the salary for the remainder of the actual term.(cid:10) Novel's business strategy is to focus on its core strength in identifying(cid:10) and timely executing niche business opportunities in the generic pharmaceutical(cid:10) area. As of June 15, Novel has 30 employees.(cid:10) As of June 15, 2007, Novel has identified 22 generic product opportunities(cid:10) and is actively developing 11 generic products. It is Novel's general policy not(cid:10) to disclose the specific products in its development pipeline or the status of(cid:10) such products until a product reaches a stage that we determine, for competitive(cid:10) reasons, in our discretion, to be appropriate for disclosure.(cid:10) 9(cid:10) (cid:10) PATENTS(cid:10) Since our incorporation, we have secured seven United States patents of(cid:10) which two have been assigned for a fee to another pharmaceutical company.(cid:10) Elite's patents are:(cid:10) U.S. patent 5,871,776(cid:10) U.S. patent 5,902,632(cid:10) U.S. patent 6,620,439(cid:10) U.S. patent 5,837,284 (assigned to Celgene Corporation)(cid:10) U.S. patent 6,635,284 (assigned to Celgene Corporation)(cid:10) U.S. patent 6,926,909(cid:10) U.S. patent 6,984,402(cid:10) We have pending applications for two United States patents. The pending(cid:10) patent applications relate to two different controlled release pharmaceutical(cid:10) products on which we are working. One is a U.S. patent for an opioid agonist and(cid:10) antagonist product that we are developing to be used with oxycodone and other(cid:10) opioids to minimize the abuse potential for the opioids. A second is a U.S.(cid:10) patent for formulation of oral sustained release opioids intended to improve the(cid:10) delivery of the opioids. We intend to apply for patents for other products in(cid:10) the future; however, there can be no assurance that any of the pending(cid:10) applications or other applications which we may file will be granted.(cid:10) We have also filed corresponding foreign applications for key patents.(cid:10) Prior to the enactment in the United States of new laws adopting certain(cid:10) changes mandated by the General Agreement on Tariffs and Trade (GATT), the(cid:10) exclusive rights afforded by a U.S. Patent were for a period of 17 years(cid:10) measured from the date of grant. Under GAAT, the term of any U.S. Patent granted(cid:10) on an application filed subsequent to June 8, 1995, terminates 20 years from the(cid:10) date on which the patent application was filed in the United States or the first(cid:10) priority date, whichever occurs first. Future patents granted on an application(cid:10) filed before June 8, 1995, will have a term that terminates 20 years from such(cid:10) date, or 17 years from the date of grant, whichever date is later.(cid:10) Under the Drug Price Act, a U.S. Product patent or use patent may be(cid:10) extended for up to five years under certain circumstances to compensate the(cid:10) patent holder for the time required for FDA regulatory review of the product.(cid:10) The benefits of this Act are available only to the first approved use of the(cid:10) active ingredient in the drug product and may be applied only to one patent per(cid:10) drug product. There can be no assurance that we will be able to take advantage(cid:10) of this law.(cid:10) Also, different countries have different procedures for obtaining patents,(cid:10) and patents issued by different countries provide different degrees of(cid:10) protection against the use of a patented invention by others. There can be no(cid:10) assurance, therefore, that the issuance to us in one country of a patent(cid:10) covering an invention will be followed by the issuance in other countries of(cid:10) patents covering the same invention, or that any judicial interpretation of the(cid:10) validity, enforceability, or scope of the claims in a patent issued in one(cid:10) country will be similar to the judicial interpretation given to a corresponding(cid:10) patent issued in another country. Furthermore, even if our patents are(cid:10) determined to be valid, enforceable, and broad in scope, there can be no(cid:10) assurance that competitors will not be able to design around such patents and(cid:10) compete with us using the resulting alternative technology.(cid:10) We also rely upon unpatented proprietary and trade secret technology that(cid:10) we seek to protect, in part, by confidentiality agreements with our(cid:10) collaborative partners, employees, consultants, outside scientific(cid:10) collaborators, sponsored researchers, and other advisors. There can be no(cid:10) assurance that these(cid:10) 10(cid:10) (cid:10) agreements provide meaningful protection or that they will not be breached, that(cid:10) we will have adequate remedies for any such breach, or that our trade secrets,(cid:10) proprietary know-how, and technological advances will not otherwise become known(cid:10) to others. In addition, there can be no assurance that, despite precautions(cid:10) taken by us, others have not and will not obtain access to our proprietary(cid:10) technology.(cid:10) TRADEMARKS(cid:10) We currently plan to license our products to marketing partners and not to(cid:10) sell under our brand name and so we do not currently intend to register any(cid:10) trademarks related to our products.(cid:10) GOVERNMENT REGULATION AND APPROVAL(cid:10) The design, development and marketing of pharmaceutical compounds, on(cid:10) which our success depends, are intensely regulated by governmental regulatory(cid:10) agencies, in particular the FDA. Non-compliance with applicable requirements can(cid:10) result in fines and other judicially imposed sanctions, including product(cid:10) seizures, injunction actions and criminal prosecution based on products or(cid:10) manufacturing practices that violate statutory requirements. In addition,(cid:10) administrative remedies can involve voluntary withdrawal of products, as well as(cid:10) the refusal of the FDA to approve ANDAs and NDAs. The FDA also has the authority(cid:10) to withdraw approval of drugs in accordance with statutory due process(cid:10) procedures.(cid:10) Before a drug may be marketed, it must be approved by the FDA either by an(cid:10) NDA or an ANDA, each of which is discussed below.(cid:10) NDAS AND NDAS UNDER SECTION 505(B) OF THE DRUG PRICE ACT(cid:10) The FDA approval procedure for an NDA is generally a two-step process.(cid:10) During the Initial Product Development stage, an investigational new drug(cid:10) application ("IND") for each product is filed with the FDA. A 30-day waiting(cid:10) period after the filing of each IND is required by the FDA prior to the(cid:10) commencement of initial clinical testing. If the FDA does not comment on or(cid:10) question the IND within such 30-day period, initial clinical studies may begin.(cid:10) If, however, the FDA has comments or questions, they must be answered to the(cid:10) satisfaction of the FDA before initial clinical testing can begin. In some(cid:10) instances this process could result in substantial delay and expense. These(cid:10) initial clinical studies generally constitute Phase I of the NDA process and are(cid:10) conducted to demonstrate the product tolerance/safety and pharmacokinetic in(cid:10) healthy subjects.(cid:10) After Phase I testing, extensive efficacy and safety studies in patients(cid:10) must be conducted. After completion of the required clinical testing, an NDA is(cid:10) filed, and its approval, which is required for marketing in the United States,(cid:10) involves an extensive review process by the FDA. The NDA itself is a complicated(cid:10) and detailed application and must include the results of extensive clinical and(cid:10) other testing, the cost of which is substantial. However, the NDA filings(cid:10) contemplated by us, which on already marketed drugs, would be made under(cid:10) Sections 505 (b)(1) or 505 (b)(2) of the Drug Price Act, which do not require(cid:10) certain studies that would otherwise be necessary; accordingly, the development(cid:10) timetable should be shorter. While the FDA is required to review applications(cid:10) within a certain timeframe, during the review process, the FDA frequently(cid:10) requests that additional information be submitted. The effect of such request(cid:10) and subsequent submission can significantly extend the time for the NDA review(cid:10) process. Until an NDA is actually approved, there can be no assurance that the(cid:10) information requested and submitted will be considered adequate by the FDA to(cid:10) justify approval. The packaging and labeling of our developed products are also(cid:10) subject to FDA regulation. It is impossible to anticipate the amount of time(cid:10) that will be needed to obtain FDA approval to market any product.(cid:10) 11(cid:10) (cid:10) Whether or not FDA approval has been obtained, approval of the product by(cid:10) comparable regulatory authorities in any foreign country must be obtained prior(cid:10) to the commencement of marketing of the product in that country. We intend to(cid:10) conduct all marketing in territories other than the United States through other(cid:10) pharmaceutical companies based in those countries. The approval procedure varies(cid:10) from country to country, can involve additional testing, and the time required(cid:10) may differ from that required for FDA approval. Although there are some(cid:10) procedures for unified filings for certain European countries, in general each(cid:10) country has its own procedures and requirements, many of which are time(cid:10) consuming and expensive. Thus, there can be substantial delays in obtaining(cid:10) required approvals from both the FDA and foreign regulatory authorities after(cid:10) the relevant applications are filed. After such approvals are obtained, further(cid:10) delays may be encountered before the products become commercially available.(cid:10) ANDAS(cid:10) The FDA approval procedure for an ANDA differs from that from the(cid:10) procedure for a NDA in that the FDA waives the requirement of conducting(cid:10) complete clinical studies, although it normally requires bioavailability and/or(cid:10) bioequivalence studies. "Bioavailability" indicates the rate and extent of(cid:10) absorption and levels of concentration of a drug product in the blood stream(cid:10) needed to produce a therapeutic effect. "Bioequivalence" compares the(cid:10) bioavailability of one drug product with another, and when established,(cid:10) indicates that the rate of absorption and levels of concentration of the active(cid:10) drug substance in the body are equivalent for the generic drug and the(cid:10) previously approved drug. An ANDA may be submitted for a drug on the basis that(cid:10) it is the equivalent of a previously approved drug or, in the case of a new(cid:10) dosage form, is suitable for use for the indications specified.(cid:10) The timing of final FDA approval of an ANDA depends on a variety of(cid:10) factors, including whether the applicant challenges any listed patents for the(cid:10) drug and whether the brand-name manufacturer is entitled to one or more(cid:10) statutory exclusivity periods, during which the FDA may be prohibited from(cid:10) accepting applications for, or approving, generic products. In certain(cid:10) circumstances, a regulatory exclusivity period can extend beyond the life of a(cid:10) patent, and thus block ANDAs from being approved on the patent expiration date.(cid:10) In May 1992, Congress enacted the Generic Drug Enforcement Act of 1992,(cid:10) which allows the FDA to impose debarment and other penalties on individuals and(cid:10) companies that commit certain illegal acts relating to the generic drug approval(cid:10) process. In some situations, the Generic Drug Enforcement Act requires the FDA(cid:10) to not accept or review ANDAs for a period of time from a company or an(cid:10) individual that has committed certain violations. It also provides for temporary(cid:10) denial of approval of applications during the investigation of certain(cid:10) violations that could lead to debarment and also, in more limited circumstances,(cid:10) provides for the suspension of the marketing of approved drugs by the affected(cid:10) company. Lastly, the Generic Drug Enforcement Act allows for civil penalties and(cid:10) withdrawal of previously approved applications. Neither we nor any of our(cid:10) employees have ever been subject to debarment. We do not believe that we receive(cid:10) any services from any debarred person.(cid:10) 12(cid:10) (cid:10) CONTROLLED SUBSTANCES(cid:10) We are also subject to federal, state, and local laws of general(cid:10) applicability, such as laws relating to working conditions. We are also licensed(cid:10) by, registered with, and subject to periodic inspection and regulation by the(cid:10) Drug Enforcement Agency (DEA) and New Jersey state agencies, pursuant to federal(cid:10) and state legislation relating to drugs and narcotics. Certain drugs that we(cid:10) currently develop or may develop in the future may be subject to regulations(cid:10) under the Controlled Substances Act and related statutes. As we manufacture such(cid:10) products, we may become subject to the Prescription Drug Marketing Act, which(cid:10) regulates wholesale distributors of prescription drugs.(cid:10) GMP(cid:10) All facilities and manufacturing techniques used for the manufacture of(cid:10) products for clinical use or for sale must be operated in conformity with GMP(cid:10) regulations issued by the FDA. We engage in manufacturing on a commercial basis(cid:10) for distribution of products, and operates its facilities in accordance with GMP(cid:10) regulations. If we hire another company to perform contract manufacturing for(cid:10) us, we must ensure that our contractor's facilities conform to GMP regulations.(cid:10) COMPLIANCE WITH ENVIRONMENTAL LAWS(cid:10) We are subject to comprehensive federal, state and local environmental(cid:10) laws and regulations that govern, among other things, air polluting emissions,(cid:10) waste water discharges, solid and hazardous waste disposal, and the remediation(cid:10) of contamination associated with current or past generation handling and(cid:10) disposal activities, including the past practices of corporations as to which we(cid:10) are the successor legally or in possession. We do not expect that compliance(cid:10) with such environmental laws will have a material effect on our capital(cid:10) expenditures, earnings or competitive position in the foreseeable future. There(cid:10) can be no assurance, however, that future changes in environmental laws or(cid:10) regulations, administrative actions or enforcement actions, or remediation(cid:10) obligations arising under environmental laws will not have a material adverse(cid:10) effect on our capital expenditures, earnings or competitive position.(cid:10) COMPETITION(cid:10) We have competition with respect to our two principal areas of operation.(cid:10) We develop and manufacture products using controlled-release drug technology for(cid:10) other pharmaceutical companies, and we develop and market (either on our own or(cid:10) by license to other companies) proprietary controlled-release pharmaceutical(cid:10) products. In both areas, our competition consists of those companies which(cid:10) develop controlled-release drugs and alternative drug delivery systems.(cid:10) In recent years, an increasing number of pharmaceutical companies have(cid:10) become interested in the development and commercialization of products(cid:10) incorporating advanced or novel drug delivery systems. We expect that(cid:10) competition in the field of drug delivery will significantly increase in the(cid:10) future since smaller specialized research and development companies are(cid:10) beginning to concentrate on this aspect of the business. Some of the major(cid:10) pharmaceutical companies have invested and are continuing to invest significant(cid:10) resources in the development of their own drug delivery systems and technologies(cid:10) and some have invested funds in such specialized drug delivery companies. Many(cid:10) of these companies have greater financial and other resources as well as more(cid:10) experience than we do in commercializing pharmaceutical products. Certain(cid:10) companies have a track record of success in developing controlled-release drugs.(cid:10) Significant among these are Alpharma, Inc., Sandoz (a Novartis company), Durect(cid:10) Corporation, Mylan Laboratories, Inc., Par Pharmaceuticals, Inc., Teva(cid:10) Pharmaceuticals Industries Ltd., Biovail Corporation, Ethypharm S.A., Eurand,(cid:10) Impax Laboratories, Inc., K-V Pharmaceutical Company and Penwest(cid:10) 13(cid:10) (cid:10) Pharmaceuticals Company. Each of these companies has developed expertise in(cid:10) certain types of drug delivery systems, although such expertise does not carry(cid:10) over to developing a controlled-release version of all drugs. Such companies may(cid:10) develop new drug formulations and products or may improve existing drug(cid:10) formulations and products more efficiently than we can. In addition, almost all(cid:10) of our competitors have vastly greater resources than we do. While our product(cid:10) development capabilities and, if obtained, patent protection may help us to(cid:10) maintain our market position in the field of advanced drug delivery, there can(cid:10) be no assurance that others will not be able to develop such capabilities or(cid:10) alternative technologies outside the scope of our patents, if any, or that even(cid:10) if patent protection is obtained, such patents will not be successfully(cid:10) challenged in the future.(cid:10) In addition to competitors that are developing products based on drug(cid:10) delivery technologies, there are also companies who have announced that they are(cid:10) developing opioid abuse deterrent products that might compete directly or(cid:10) indirectly with Elite's products. These include, but are not limited to(cid:10) Alpharma, Inc., Pain Therapeutics (who have an agreement with Durect(cid:10) Corporation), Shire Pharmaceuticals Group plc (who purchased New River(cid:10) Pharmaceuticals Inc.), Endo Pharmaceuticals, Inc. through an agreement with(cid:10) Collegium Pharmaceuticals, Inc., Purdue Pharma LP, and Acura Pharmaceuticals,(cid:10) Inc.(cid:10) We also face competition in the generic pharmaceutical market and expect(cid:10) this competition to become more significant to us as a result of our joint(cid:10) venture with Novel. The principal competitive factors in the generic(cid:10) pharmaceutical market include: (i) introduction of other generic drug(cid:10) manufacturers' products in direct competition with our products under(cid:10) development, (ii) introduction of authorized generic products in direct(cid:10) competition with any of our products under development, particularly if such(cid:10) products are approved and sold during exclusivity periods, (iii) consolidation(cid:10) among distribution outlets through mergers and acquisitions and the formation of(cid:10) buying groups, (iv) ability of generic competitors to quickly enter the market(cid:10) after the expiration of patents or exclusivity periods, diminishing the amount(cid:10) and duration of significant profits, (v) the willingness of generic drug(cid:10) customers, including wholesale and retail customers, to switch among(cid:10) pharmaceutical manufacturers, (vi) pricing pressures and product deletions by(cid:10) competitors, (vii) a company's reputation as a manufacturer and distributor of(cid:10) quality products, (viii) a company's level of service (including maintaining(cid:10) sufficient inventory levels for timely deliveries), (ix) product appearance and(cid:10) labeling and (x) a company's breadth of product offerings.(cid:10) SOURCES AND AVAILABILITY OF RAW MATERIALS; MANUFACTURING(cid:10) We manufacture for commercial sale by our partner, ECR Pharmaceuticals,(cid:10) two products, Lodrane 24(R) and Lodrane 24D(R) and for which to date we have(cid:10) obtained sufficient amounts of the raw materials for its production. We are not(cid:10) currently in the manufacturing phase for any other products and do not expect(cid:10) that significant amounts of raw materials will be required for their production.(cid:10) We currently obtain the raw materials that we need from over twenty suppliers.(cid:10) We have acquired pharmaceutical manufacturing equipment for manufacturing(cid:10) our products. We have registered our facilities with the FDA and the DEA.(cid:10) DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS(cid:10) Each year we have had one or a few customers that have accounted for a(cid:10) large percentage of our limited revenues therefore the termination of a contract(cid:10) with a customer may result in the loss of substantially all of our revenues. We(cid:10) are constantly working to develop new relationships with existing or new(cid:10) customers, but despite these efforts we may not, at the time that any of our(cid:10) current contracts(cid:10) 14(cid:10) (cid:10) expire, have other contracts in place generating similar or material revenue. We(cid:10) have an agreement with ECR Pharmaceuticals which sells and distributes two(cid:10) products that we manufactures: Lodrane 24(R) and Lodrane 24D(R). We receive(cid:10) revenues to manufacture these products and also receives royalties based on(cid:10) in-market sales of the products. These are our only products that are being sold(cid:10) commercially now and are the primary source of our revenue currently. We receive(cid:10) development fees or milestone payments under some of the co-development(cid:10) agreements with partners, but these fees are currently small compared to the(cid:10) Lodrane 24(R) and Lodrane 24D(R) revenues.(cid:10) EMPLOYEES(cid:10) As of June 15, 2007, we had 41 full-time employees and no part-time(cid:10) employees. Full-time employees are engaged in administration, research and(cid:10) development. None of our employees is represented by a labor union and we have(cid:10) never experienced a work stoppage. We believe our relationship with our(cid:10) employees to be good. However, our ability to achieve our financial and(cid:10) operational objectives depends in large part upon our continuing ability to(cid:10) attract, integrate, retain and motivate highly qualified personnel, and upon the(cid:10) continued service of our senior management and key personnel.(cid:10) ITEM 1A. RISK FACTORS(cid:10) In addition to the other information contained in this report, the(cid:10) following risk factors should be considered carefully in evaluating an(cid:10) investment in us and in analyzing our forward-looking statements.(cid:10) RISKS RELATED TO OUR BUSINESS(cid:10) WE HAVE A RELATIVELY LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO(cid:10) EVALUATE OUR FUTURE PROSPECTS.(cid:10) Although we have been in operation since 1990, we have a relatively short(cid:10) operating history and limited financial data upon which you may evaluate our(cid:10) business and prospects. In addition, our business model is likely to continue to(cid:10) evolve as we attempt to expand our product offerings and our presence in the(cid:10) generic pharmaceutical market. As a result, our potential for future(cid:10) profitability must be considered in light of the risks, uncertainties, expenses(cid:10) and difficulties frequently encountered by companies that are attempting to move(cid:10) into new markets and continuing to innovate with new and unproven technologies.(cid:10) Some of these risks relate to our potential inability to:(cid:10) o develop new products;(cid:10) o obtain regulatory approval of our products;(cid:10) o manage our growth, control expenditures and align costs with(cid:10) revenues;(cid:10) o attract, retain and motivate qualified personnel; and(cid:10) o respond to competitive developments.(cid:10) If we do not effectively address the risks we face, our business model may(cid:10) become unworkable and we may not achieve or sustain profitability or(cid:10) successfully develop any products.(cid:10) 15(cid:10) (cid:10) WE HAVE NOT BEEN PROFITABLE AND EXPECT FUTURE LOSSES.(cid:10) To date, we have not been profitable, and since our inception in 1990, we(cid:10) have not generated any significant revenues. We may never be profitable or, if(cid:10) we become profitable, we may be unable to sustain profitability. We have(cid:10) sustained losses in each year since our incorporation in 1990. We incurred net(cid:10) losses of $11,803,512, $6,883,914, $5,906,890, $6,514,217 and $4,061,422, for(cid:10) the years ended March 31, 2007, 2006, 2005, 2004 and 2003, respectively. We(cid:10) expect to realize significant losses for the current year of operation and to(cid:10) continue to incur losses until we are able to generate sufficient revenues to(cid:10) support our operations and offset operating costs.(cid:10) IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING NEEDED FOR THE EXPENDITURES FOR(cid:10) THE DEVELOPMENT AND COMMERCIALIZATION OF OUR DRUG PRODUCTS, IT WOULD IMPAIR OUR(cid:10) ABILITY TO CONTINUE TO MEET OUR BUSINESS OBJECTIVES.(cid:10) We continue to require additional financing to ensure that we will be able(cid:10) to meet our expenditures to develop and commercialize our products. In(cid:10) particular, in order to maintain our investment in our joint venture in Novel,(cid:10) we are required to make a substantial investment of up to an additional(cid:10) $20,000,000. If we fail to meet this financing requirement, VGS, our co-venturer(cid:10) in Novel, may exercise a purchase right that would result in significant(cid:10) dilution of our interest in Novel.(cid:10) We do not have committed external sources of funding and may not be able(cid:10) to obtain any additional funding, especially if volatile market conditions(cid:10) persist for biotechnology companies. We believe our existing cash resources,(cid:10) including the $15 million raised in the private placement that closed on April(cid:10) 24, 2007, is sufficient to meet our cash requirements for the next 12 months.(cid:10) Other possible sources of the required financing are income from product(cid:10) sales or sales of market rights, distributions from Novel, income from(cid:10) co-development or partnering arrangements and the cash exercise of warrants and(cid:10) options that are currently outstanding. No representation can be made that we(cid:10) will be able to obtain such revenue or additional financing or if obtained it(cid:10) will be on favorable terms, or at all. No assurance can be given that any(cid:10) offering if undertaken will be successfully concluded or that if concluded the(cid:10) proceeds will be material. Our inability to obtain additional financing when(cid:10) needed would impair our ability to continue our business.(cid:10) If any future financing involves the further sale of our securities, our(cid:10) then-existing stockholders' equity could be substantially diluted. On the other(cid:10) hand, if we incurred debt, we would be subject to risks associated with(cid:10) indebtedness, including the risk that interest rates might fluctuate and cash(cid:10) flow would be insufficient to pay principal and interest on such indebtedness.(cid:10) SUBSTANTIALLY ALL OF OUR PRODUCT CANDIDATES ARE AT AN EARLY STAGE OF DEVELOPMENT(cid:10) AND ONLY A PORTION OF THESE ARE IN CLINICAL DEVELOPMENT.(cid:10) Other than ELI-154 which is in Phase I clinical development and ELI-216(cid:10) which is in Phase II clinical development, our five other product candidates are(cid:10) still at an early stage of development. We do not have any products that are(cid:10) commercially available other than Lodrane 24(R) and Lodrane 24D(R). We will need(cid:10) to perform additional development work for all of our product candidates in our(cid:10) pipeline before we can seek the regulatory approvals necessary to begin(cid:10) commercial sales.(cid:10) IF WE ARE UNABLE TO SATISFY REGULATORY REQUIREMENTS, WE MAY NOT BE ABLE TO(cid:10) COMMERCIALIZE OUR PRODUCT CANDIDATES.(cid:10) 16(cid:10) (cid:10) We need FDA approval prior to marketing our product candidates in the(cid:10) United States of America. If we fail to obtain FDA approval to market our(cid:10) product candidates, we will be unable to sell our product candidates in the(cid:10) United States of America and we will not generate any revenue from the sale of(cid:10) such products.(cid:10) This regulatory review and approval process, which includes evaluation of(cid:10) preclinical studies and clinical trials of our product candidates is lengthy,(cid:10) expensive and uncertain. To receive approval, we must, among other things,(cid:10) demonstrate with substantial evidence from well-controlled clinical trials that(cid:10) our product candidates are both safe and effective for each indication where(cid:10) approval is sought. Satisfaction of these requirements typically takes several(cid:10) years and the time needed to satisfy them may vary substantially, based on the(cid:10) type, complexity and novelty of the pharmaceutical product. We cannot predict if(cid:10) or when we might submit for regulatory approval any of our product candidates(cid:10) currently under development. Any approvals we may obtain may not cover all of(cid:10) the clinical indications for which we are seeking approval. Also, an approval(cid:10) might contain significant limitations in the form of narrow indications,(cid:10) warnings, precautions, or contra-indications with respect to conditions of use.(cid:10) The FDA has substantial discretion in the approval process and may either(cid:10) refuse to file our application for substantive review or may form the opinion(cid:10) after review of our data that our application is insufficient to allow approval(cid:10) of our product candidates. If the FDA does not file or approve our application,(cid:10) it may require that we conduct additional clinical, preclinical or manufacturing(cid:10) validation studies and submit that data before it will reconsider our(cid:10) application. Depending on the extent of these or any other studies, approval of(cid:10) any applications that we submit may be delayed by several years, or may require(cid:10) us to expend more resources than we have available. It is also possible that(cid:10) additional studies, if performed and completed, may not be considered sufficient(cid:10) by the FDA to make our applications approvable. If any of these outcomes occur,(cid:10) we may be forced to abandon our applications for approval, which might cause us(cid:10) to cease operations.(cid:10) We will also be subject to a wide variety of foreign regulations governing(cid:10) the development, manufacture and marketing of our products. Whether or not FDA(cid:10) approval has been obtained, approval of a product by the comparable regulatory(cid:10) authorities of foreign countries must still be obtained prior to manufacturing(cid:10) or marketing the product in those countries. The approval process varies from(cid:10) country to country and the time needed to secure approval may be longer or(cid:10) shorter than that required for FDA approval. We cannot assure you that clinical(cid:10) trials conducted in one country will be accepted by other countries or that(cid:10) approval in one country will result in approval in any other country.(cid:10) BEFORE WE CAN OBTAIN REGULATORY APPROVAL, WE NEED TO SUCCESSFULLY COMPLETE(cid:10) CLINICAL TRIALS, OUTCOMES OF WHICH ARE UNCERTAIN.(cid:10) In order to obtain FDA approval to market a new drug product, we must(cid:10) demonstrate proof of safety and effectiveness in humans. To meet these(cid:10) requirements, we must conduct extensive preclinical testing and "adequate and(cid:10) well-controlled" clinical trials. Conducting clinical trials is a lengthy, time(cid:10) consuming, and expensive process. Completion of necessary clinical trials may(cid:10) take several years or more. Delays associated with products for which we are(cid:10) directly conducting preclinical or clinical trials may cause us to incur(cid:10) additional operating expenses. The commencement and rate of completion of(cid:10) clinical trials may be delayed by many factors, including, for example:(cid:10) o ineffectiveness of our product candidate or perceptions by(cid:10) physicians that the product candidate is not safe or effective for a(cid:10) particular indication;(cid:10) 17(cid:10) (cid:10) o inability to manufacture sufficient quantities of the product(cid:10) candidate for use in clinical trials;(cid:10) o delay or failure in obtaining approval of our clinical trial(cid:10) protocols from the FDA or institutional review boards;(cid:10) o slower than expected rate of patient recruitment and enrollment;(cid:10) o inability to adequately follow and monitor patients after treatment;(cid:10) o difficulty in managing multiple clinical sites;(cid:10) o unforeseen safety issues;(cid:10) o government or regulatory delays; and(cid:10) o clinical trial costs that are greater than we currently anticipate.(cid:10) Even if we achieve positive interim results in clinical trials, these(cid:10) results do not necessarily predict final results, and positive results in early(cid:10) trials may not be indicative of success in later trials. A number of companies(cid:10) in the pharmaceutical industry have suffered significant setbacks in advanced(cid:10) clinical trials, even after promising results in earlier trials. Negative or(cid:10) inconclusive results or adverse medical events during a clinical trial could(cid:10) cause us to repeat or terminate a clinical trial or require us to conduct(cid:10) additional trials. We do not know whether our existing or any future clinical(cid:10) trials will demonstrate safety and efficacy sufficiently to result in marketable(cid:10) products. Our clinical trials may be suspended at any time for a variety of(cid:10) reasons, including if the FDA or we believe the patients participating in our(cid:10) trials are exposed to unacceptable health risks or if the FDA finds deficiencies(cid:10) in the conduct of these trials.(cid:10) Failures or perceived failures in our clinical trials will directly delay(cid:10) our product development and regulatory approval process, damage our business(cid:10) prospects, make it difficult for us to establish collaboration and partnership(cid:10) relationships, and negatively affect our reputation and competitive position in(cid:10) the pharmaceutical community.(cid:10) Because of these risks, our research and development efforts may not(cid:10) result in any commercially viable products. Any delay in, or termination of, our(cid:10) preclinical or clinical trials will delay the filing of our drug applications(cid:10) with the FDA and, ultimately, our ability to commercialize our product(cid:10) candidates and generate product revenues. If a significant portion of these(cid:10) development efforts are not successfully completed, required regulatory(cid:10) approvals are not obtained or any approved products are not commercially(cid:10) successfully, our business, financial condition, and results of operations may(cid:10) be materially harmed.(cid:10) IF OUR COLLABORATION OR LICENSE ARRANGEMENTS ARE UNSUCCESSFUL, OUR REVENUES AND(cid:10) PRODUCT DEVELOPMENT MAY BE LIMITED.(cid:10) We have entered into several collaboration and licensing arrangements for(cid:10) the development of generic products. However, there can be no assurance that any(cid:10) of these agreements will result in FDA approvals, or that we will be able to(cid:10) market any such finished products at a profit. Collaboration and licensing(cid:10) arrangements pose the following risks:(cid:10) 18(cid:10) (cid:10) o collaborations and licensee arrangements may be terminated, in which(cid:10) case we will experience increased operating expenses and capital(cid:10) requirements if we elect to pursue further development of the(cid:10) product candidate;(cid:10) o collaborators and licensees may delay clinical trials and prolong(cid:10) clinical development, under-fund a clinical trial program, stop a(cid:10) clinical trial or abandon a product candidate;(cid:10) o expected revenue might not be generated because milestones may not(cid:10) be achieved and product candidates may not be developed;(cid:10) o collaborators and licensees could independently develop, or develop(cid:10) with third parties, products that could compete with our future(cid:10) products;(cid:10) o the terms of our contracts with current or future collaborators and(cid:10) licensees may not be favorable to us in the future;(cid:10) o a collaborator or licensee with marketing and distribution rights to(cid:10) one or more of our products may not commit enough resources to the(cid:10) marketing and distribution of our products, limiting our potential(cid:10) revenues from the commercialization of a product;(cid:10) o disputes may arise delaying or terminating the research, development(cid:10) or commercialization of our product candidates, or result in(cid:10) significant and costly litigation or arbitration; and(cid:10) o one or more third party developers could obtain approval for a(cid:10) similar product prior to the collaborator or licensee resulting in(cid:10) unforeseen price competition in connection with the development(cid:10) product.(cid:10) IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND AVOID CLAIMS(cid:10) THAT WE INFRINGED ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, OUR ABILITY TO(cid:10) CONDUCT BUSINESS MAY BE IMPAIRED.(cid:10) Our success depends on our ability to protect our current and future(cid:10) products and to defend our intellectual property rights. If we fail to protect(cid:10) our intellectual property adequately, competitors may manufacture and market(cid:10) products similar to ours.(cid:10) We currently hold five patents, have two patents pending and we intend to(cid:10) file further patent applications in the future. With respect to our pending(cid:10) patents, we cannot be certain that these applications will result in the(cid:10) issuance of patents. If patents are issued, third parties may sue us to(cid:10) challenge such patent protection, and although we know of no reason why they(cid:10) should prevail, it is possible that they could. It is likewise possible that our(cid:10) patent rights may not prevent or limit our present and future competitors from(cid:10) developing, using or commercializing products that are similar or functionally(cid:10) equivalent to our products.(cid:10) In addition, we may be required to obtain licenses to patents, or other(cid:10) proprietary rights of third parties, in connection with the development and use(cid:10) of our products and technologies as they relate to other persons' technologies.(cid:10) At such time as we discover a need to obtain any such license, we will need to(cid:10) establish whether we will be able to obtain such a license on favorable terms.(cid:10) The failure to obtain the necessary licenses or other rights could preclude the(cid:10) sale, manufacture or distribution of our products.(cid:10) 19(cid:10) (cid:10) We rely particularly on trade secrets, unpatented proprietary expertise(cid:10) and continuing innovation that we seek to protect, in part, by entering into(cid:10) confidentiality agreements with licensees, suppliers, employees and consultants.(cid:10) We cannot provide assurance that these agreements will not be breached or(cid:10) circumvented. We also cannot be certain that there will be adequate remedies in(cid:10) the event of a breach. Disputes may arise concerning the ownership of(cid:10) intellectual property or the applicability of confidentiality agreements. We(cid:10) cannot be sure that our trade secrets and proprietary technology will not(cid:10) otherwise become known or be independently developed by our competitors or, if(cid:10) patents are not issued with respect to products arising from research, that we(cid:10) will be able to maintain the confidentiality of information relating to these(cid:10) products. In addition, efforts to ensure our intellectual property rights can be(cid:10) costly, time-consuming and/or ultimately unsuccessful.(cid:10) LITIGATION IS COMMON IN OUR INDUSTRY, PARTICULARLY THE GENERIC PHARMACEUTICAL(cid:10) INDUSTRY, AND CAN BE PROTRACTED AND EXPENSIVE AND COULD DELAY AND/OR PREVENT(cid:10) ENTRY OF OUR PRODUCTS INTO THE MARKET, WHICH, IN TURN, COULD HAVE A MATERIAL(cid:10) ADVERSE EFFECT ON OUR BUSINESS.(cid:10) Litigation concerning patents and proprietary rights can be protracted and(cid:10) expensive. Companies that produce brand pharmaceutical products routinely bring(cid:10) litigation against applicants that seek FDA approval to manufacture and market(cid:10) generic forms of their branded products. These companies allege patent(cid:10) infringement or other violations of intellectual property rights as the basis(cid:10) for filing suit against an applicant. Likewise, other patent holders may bring(cid:10) patent infringement suits against us alleging that our products, product(cid:10) candidates and technologies infringe upon intellectual property rights.(cid:10) Litigation often involves significant expense and can delay or prevent(cid:10) introduction or sale of our products.(cid:10) There may also be situations where we use our business judgment and decide(cid:10) to market and sell products, notwithstanding the fact that allegations of patent(cid:10) infringement(s) have not been finally resolved by the courts. The risk involved(cid:10) in doing so can be substantial because the remedies available to the owner of a(cid:10) patent for infringement include, among other things, damages measured by the(cid:10) profits lost by the patent owner and not by the profits earned by the infringer.(cid:10) In the case of a willful infringement, the definition of which is subjective,(cid:10) such damages may be trebled. Moreover, because of the discount pricing typically(cid:10) involved with bioequivalent products, patented brand products generally realize(cid:10) a substantially higher profit margin than bioequivalent products. An adverse(cid:10) decision in a case such as this or in other similar litigation could have a(cid:10) material adverse effect on our business, financial position and results of(cid:10) operations and could cause the market value of our common stock to decline.(cid:10) THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND(cid:10) SIGNIFICANT TECHNOLOGICAL CHANGE, WHICH COULD IMPAIR OUR ABILITY TO IMPLEMENT(cid:10) OUR BUSINESS MODEL.(cid:10) The pharmaceutical industry is highly competitive, and we may be unable to(cid:10) compete effectively. In addition, it is undergoing rapid and significant(cid:10) technological change, and we expect competition to intensify as technical(cid:10) advances in each field are made and become more widely known. An increasing(cid:10) number of pharmaceutical companies have been or are becoming interested in the(cid:10) development and commercialization of products incorporating advanced or novel(cid:10) drug delivery systems. We expect that competition in the field of drug delivery(cid:10) will increase in the future as other specialized research and development(cid:10) companies begin to concentrate on this aspect of the business. Some of the major(cid:10) pharmaceutical companies have invested and are continuing to invest significant(cid:10) resources in the development of their own drug delivery systems and technologies(cid:10) and some have invested funds in such specialized drug delivery companies. Many(cid:10) of our competitors have longer operating histories and greater financial,(cid:10) research and development, marketing and other resources than(cid:10) 20(cid:10) (cid:10) we do. Such companies may develop new formulations and products, or may improve(cid:10) existing ones, more efficiently than we can. Our success, if any, will depend in(cid:10) part on our ability to keep pace with the changing technology in the fields in(cid:10) which we operate.(cid:10) As we expand our presence in the generic pharmaceuticals market through(cid:10) our joint venture, Novel, its product candidates may face intense competition(cid:10) from brand-name companies that have taken aggressive steps to thwart competition(cid:10) from generic companies. In particular, brand-name companies continue to sell or(cid:10) license their products directly or through licensing arrangements or strategic(cid:10) alliances with generic pharmaceutical companies (so-called "authorized(cid:10) generics"). No significant regulatory approvals are required for a brand-name(cid:10) company to sell directly or through a third party to the generic market, and(cid:10) brand-name companies do not face any other significant barriers to entry into(cid:10) such market. In addition, such companies continually seek to delay generic(cid:10) introductions and to decrease the impact of generic competition, using tactics(cid:10) which include:(cid:10) o obtaining new patents on drugs whose original patent protection is(cid:10) about to expire;(cid:10) o filing patent applications that are more complex and costly to(cid:10) challenge;(cid:10) o filing suits for patent infringement that automatically delay(cid:10) approval of the FDA;(cid:10) o filing citizens' petitions with the FDA contesting approval of the(cid:10) generic versions of products due to alleged health and safety(cid:10) issues;(cid:10) o developing controlled-release or other "next-generation" products,(cid:10) which often reduce demand for the generic version of the existing(cid:10) product for which we may be seeking approval;(cid:10) o changing product claims and product labeling;(cid:10) o developing and marketing as over-the-counter products those branded(cid:10) products which are about to face generic competition; and(cid:10) o making arrangements with managed care companies and insurers to(cid:10) reduce the economic incentives to purchase generic pharmaceuticals.(cid:10) These strategies may increase the costs and risks associated with our(cid:10) efforts to introduce our generic products under development and may delay or(cid:10) prevent such introduction altogether.(cid:10) IF OUR PRODUCT CANDIDATES DO NOT ACHIEVE MARKET ACCEPTANCE AMONG PHYSICIANS,(cid:10) PATIENTS, HEALTH CARE PAYORS AND THE MEDICAL COMMUNITY, THEY WILL NOT BE(cid:10) COMMERCIALLY SUCCESSFUL AND OUR BUSINESS WILL BE ADVERSELY AFFECTED.(cid:10) The degree of market acceptance of any of our approved product candidates(cid:10) among physicians, patients, health care payors and the medical community will(cid:10) depend on a number of factors, including:(cid:10) o acceptable evidence of safety and efficacy;(cid:10) o relative convenience and ease of administration;(cid:10) 21(cid:10) (cid:10) o the prevalence and severity of any adverse side effects;(cid:10) o availability of alternative treatments;(cid:10) o pricing and cost effectiveness;(cid:10) o effectiveness of sales and marketing strategies; and(cid:10) o ability to obtain sufficient third-party coverage or reimbursement.(cid:10) If we are unable to achieve market acceptance for our product candidates,(cid:10) then such product candidates will not be commercially successful and our(cid:10) business will be adversely affected.(cid:10) WE ARE DEPENDENT ON A SMALL NUMBER OF SUPPLIERS FOR OUR RAW MATERIALS AND ANY(cid:10) DELAY OR UNAVAILABILITY OF RAW MATERIALS CAN MATERIALLY ADVERSELY AFFECT OUR(cid:10) ABILITY TO PRODUCE PRODUCTS.(cid:10) The FDA requires identification of raw material suppliers in applications(cid:10) for approval of drug products. If raw materials were unavailable from a(cid:10) specified supplier, FDA approval of a new supplier could delay the manufacture(cid:10) of the drug involved. In addition, some materials used in our products are(cid:10) currently available from only one supplier or a limited number of suppliers.(cid:10) Further, a significant portion of our raw materials may be available only(cid:10) from foreign sources. Foreign sources can be subject to the special risks of(cid:10) doing business abroad, including:(cid:10) o greater possibility for disruption due to transportation or(cid:10) communication problems;(cid:10) o the relative instability of some foreign governments and economies;(cid:10) o interim price volatility based on labor unrest, materials or(cid:10) equipment shortages, export duties, restrictions on the transfer of(cid:10) funds, or fluctuations in currency exchange rates; and(cid:10) o uncertainty regarding recourse to a dependable legal system for the(cid:10) enforcement of contracts and other rights.(cid:10) In addition, recent changes in patent laws in certain foreign(cid:10) jurisdictions (primarily in Europe) may make it increasingly difficult to obtain(cid:10) raw materials for research and development prior to expiration of applicable(cid:10) United States or foreign patents. Any delay or inability to obtain raw materials(cid:10) on a timely basis, or any significant price increases that cannot be passed on(cid:10) to customers, can materially adversely affect our ability to produce products.(cid:10) This can materially adversely affect our business and operations.(cid:10) EVEN AFTER REGULATORY APPROVAL, WE WILL BE SUBJECT TO ONGOING SIGNIFICANT(cid:10) REGULATORY OBLIGATIONS AND OVERSIGHT.(cid:10) Even if regulatory approval is obtained for a particular product(cid:10) candidate, the FDA and foreign regulatory authorities may, nevertheless, impose(cid:10) significant restrictions on the indicated uses or marketing of such products, or(cid:10) impose ongoing requirements for post-approval studies. Following any regulatory(cid:10) approval of our product candidates, we will be subject to continuing regulatory(cid:10) obligations, such as safety reporting requirements, and additional(cid:10) post-marketing obligations, including regulatory(cid:10) 22(cid:10) (cid:10) oversight of the promotion and marketing of our products. If we become aware of(cid:10) previously unknown problems with any of our product candidates here or overseas(cid:10) or our contract manufacturers' facilities, a regulatory agency may impose(cid:10) restrictions on our products, our contract manufacturers or on us, including(cid:10) requiring us to reformulate our products, conduct additional clinical trials,(cid:10) make changes in the labeling of our products, implement changes to or obtain(cid:10) re-approvals of our contract manufacturers' facilities or withdraw the product(cid:10) from the market. In addition, we may experience a significant drop in the sales(cid:10) of the affected products, our reputation in the marketplace may suffer and we(cid:10) may become the target of lawsuits, including class action suits. Moreover, if we(cid:10) fail to comply with applicable regulatory requirements, we may be subject to(cid:10) fines, suspension or withdrawal of regulatory approvals, product recalls,(cid:10) seizure of products, operating restrictions and criminal prosecution. Any of(cid:10) these events could harm or prevent sales of the affected products or could(cid:10) substantially increase the costs and expenses of commercializing and marketing(cid:10) these products.(cid:10) IF KEY PERSONNEL WERE TO LEAVE US OR IF WE ARE UNSUCCESSFUL IN ATTRACTING(cid:10) QUALIFIED PERSONNEL, OUR ABILITY TO DEVELOP PRODUCTS COULD BE MATERIALLY HARMED.(cid:10) Our success depends in large part on our ability to attract and retain(cid:10) highly qualified scientific, technical and business personnel experienced in the(cid:10) development, manufacture and marketing of oral, controlled release drug delivery(cid:10) systems and generic products. Our business and financial results could be(cid:10) materially harmed by the inability to attract or retain qualified personnel.(cid:10) IF WE WERE SUED ON A PRODUCT LIABILITY CLAIM, AN AWARD COULD EXCEED OUR(cid:10) INSURANCE COVERAGE AND COST US SIGNIFICANTLY.(cid:10) The design, development and manufacture of our products involve an(cid:10) inherent risk of product liability claims. We have procured product liability(cid:10) insurance; however, a successful claim against us in excess of the policy limits(cid:10) could be very expensive to us, damaging our financial position. The amount of(cid:10) our insurance coverage, which has been limited due to our limited financial(cid:10) resources, may be materially below the coverage maintained by many of the other(cid:10) companies engaged in similar activities. To the best of our knowledge, no(cid:10) product liability claim has been made against us as of March 31, 2007.(cid:10) RISKS RELATED TO OUR COMMON STOCK(cid:10) FUTURE SALES OF OUR COMMON STOCK COULD LOWER THE MARKET PRICE OF OUR COMMON(cid:10) STOCK.(cid:10) Sales of substantial amounts of our shares in the public market could harm(cid:10) the market price of our common stock, even if our business is doing well. A(cid:10) significant number of shares of our common stock are eligible for sale in the(cid:10) public market under SEC Rule 144 subject in some cases to volume and other(cid:10) limitations. In addition, we have recently filed a registration statement for(cid:10) the resale of 6,465,504 shares of common stock issuable upon conversion of(cid:10) outstanding shares of our Series C Preferred Stock issued in the private(cid:10) placement that closed on April 24, 2007, 4,187,643 shares of common stock(cid:10) issuable in satisfaction of certain Series C Preferred Stock dividend(cid:10) obligations and 2,133,606 shares of common stock issuable upon exercise of(cid:10) warrants issued in the private placement and a registration statement for the(cid:10) resale of 957,396 shares of Common Stock and 478,698 shares of Common Stock(cid:10) issuable upon the exercise of warrants issued to VGS Pharma, an affiliate of(cid:10) Veerappan Subramanian, one of our directors and acting Chief Scientific Officer(cid:10) and 1,750,000 shares of Common Stock issuable upon the exercise of options(cid:10) granted to Dr. Subramanian.(cid:10) Due to the foregoing factors sales of a substantial number of shares of(cid:10) our common stock in the(cid:10) 23(cid:10) (cid:10) public market could occur at any time. These sales, or the perception in the(cid:10) market that the holders of a large number of shares intend to sell shares, could(cid:10) reduce the market price of our common stock.(cid:10) OUR STOCK PRICE HAS BEEN VOLATILE AND MAY FLUCTUATE IN THE FUTURE.(cid:10) There has been significant volatility in the market prices for publicly(cid:10) traded shares of pharmaceutical companies, including ours. For the twelve months(cid:10) ended March 31, 2007, the closing sale price on the American Stock Exchange(cid:10) ("AMEX") of our common stock fluctuated from a high of $2.54 per share to a low(cid:10) of $1.94 per share. The per share price of our common stock may not remain at or(cid:10) exceed current levels. The market price for our common stock, and for the stock(cid:10) of pharmaceutical companies generally, has been highly volatile. The market(cid:10) price of our common stock may be affected by:(cid:10) o Results of our clinical trials;(cid:10) o Approval or disapproval of abbreviated new drug applications or new(cid:10) drug applications;(cid:10) o Announcements of innovations, new products or new patents by us or(cid:10) by our competitors;(cid:10) o Governmental regulation;(cid:10) o Patent or proprietary rights developments;(cid:10) o Proxy contests or litigation;(cid:10) o News regarding the efficacy of, safety of or demand for drugs or(cid:10) drug technologies;(cid:10) o Economic and market conditions, generally and related to the(cid:10) pharmaceutical industry;(cid:10) o Healthcare legislation;(cid:10) o Changes in third-party reimbursement policies for drugs; and(cid:10) o Fluctuations in our operating results.(cid:10) THE FAILURE TO MAINTAIN THE AMERICAN STOCK EXCHANGE LISTING OF THE COMMON STOCK(cid:10) WOULD HAVE A MATERIAL ADVERSE AFFECT ON THE MARKET FOR OUR COMMON STOCK AND OUR(cid:10) MARKET PRICE.(cid:10) On January 4, 2006, we received a letter from the AMEX notifying us that,(cid:10) based on our unaudited financial statements as of September 30, 2005, we were(cid:10) not in compliance with the continued listing standards set forth in the AMEX(cid:10) Company Guide in that under one listing standard our shareholders' equity is(cid:10) less than $4,000,000 and we had losses from continuing operations and/or net(cid:10) losses in three of our four most recent fiscal years and under another listing(cid:10) standard our shareholders' equity is less than $6,000,000 and we had losses from(cid:10) continuing operations and/or net losses in our five most recent fiscal years. At(cid:10) the request of AMEX, we submitted a plan on February 3, 2006 advising AMEX of(cid:10) action, we had taken, and will take, to bring ourselves in compliance with the(cid:10) continued listing standards within a maximum of 18 months from January 4, 2006.(cid:10) On March 15, 2006,(cid:10) 24(cid:10) (cid:10) we completed a private placement of our Series B Preferred Stock and warrants to(cid:10) purchase common stock. We received $10,000,000 in gross proceeds from the(cid:10) private placement. On March 21, 2006, we submitted an update to the plan we had(cid:10) previously submitted on February 6, 2006. Upon notice of the March 2006 private(cid:10) placement and the acceptance of the updated plan, AMEX allowed us to maintain(cid:10) our AMEX listing, subject to periodic review of the our progress by the AMEX(cid:10) staff. If we are not in compliance with the continued listing standards, AMEX(cid:10) may then initiate delisting proceedings. The failure to maintain listing of our(cid:10) common stock on AMEX will have an adverse effect on the market and the market(cid:10) price for our common stock.(cid:10) THE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK OR OUR PREFERRED STOCK(cid:10) COULD MAKE A CHANGE OF CONTROL MORE DIFFICULT TO ACHIEVE.(cid:10) The issuance of additional shares of our common stock or the issuance of(cid:10) shares of an additional series of preferred stock could be used to make a change(cid:10) of control of us more difficult and expensive. Under certain circumstances, such(cid:10) shares could be used to create impediments to or frustrate persons seeking to(cid:10) cause a takeover or to gain control of us. Such shares could be sold to(cid:10) purchasers who might side with the Board of Directors in opposing a takeover bid(cid:10) that the Board of Directors determines not to be in the best interests of our(cid:10) stockholders. It might also have the effect of discouraging an attempt by(cid:10) another person or entity through the acquisition of a substantial number of(cid:10) shares of our common stock to acquire control of us with a view to consummating(cid:10) a merger, sale of all or part of our assets, or a similar transaction, since the(cid:10) issuance of new shares could be used to dilute the stock ownership of such(cid:10) person or entity.(cid:10) IF PENNY STOCK REGULATIONS BECOME APPLICABLE TO OUR COMMON STOCK THEY WILL(cid:10) IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR COMMON STOCK AND THE ABILITY OF(cid:10) OUR STOCKHOLDERS TO SELL SHARES OF OUR STOCK COULD BE IMPAIRED.(cid:10) The SEC has adopted regulations that generally define a "penny stock" to(cid:10) be an equity security that has a market price of less than $5.00 per share or an(cid:10) exercise price of less than $5.00 per share subject to certain exceptions.(cid:10) Exceptions include equity securities issued by an issuer that has (i) net(cid:10) tangible assets of at least $2,000,000, if such issuer has been in continuous(cid:10) operation for more than three years, or (ii) net tangible assets of at least(cid:10) $5,000,000, if such issuer has been in continuous operation for less than three(cid:10) years, or (iii) average revenue of at least $6,000,000 for the preceding three(cid:10) years. Unless an exception is available, the regulations require that prior to(cid:10) any transaction involving a penny stock, a risk of disclosure schedule must be(cid:10) delivered to the buyer explaining the penny stock market and its risks. Our(cid:10) common stock is currently trading at under $5.00 per share. Although we(cid:10) currently fall under one of the exceptions, if at a later time we fail to meet(cid:10) one of the exceptions, our common stock will be considered a penny stock. As(cid:10) such the market liquidity for our common stock will be limited to the ability of(cid:10) broker-dealers to sell it in compliance with the above-mentioned disclosure(cid:10) requirements.(cid:10) You should be aware that, according to the SEC, the market for penny(cid:10) stocks has suffered in recent years from patterns of fraud and abuse. Such(cid:10) patterns include:(cid:10) o Control of the market for the security by one or a few(cid:10) broker-dealers;(cid:10) o "Boiler room" practices involving high-pressure sales tactics;(cid:10) o Manipulation of prices through prearranged matching of purchases and(cid:10) sales;(cid:10) 25(cid:10) (cid:10) o The release of misleading information;(cid:10) o Excessive and undisclosed bid-ask differentials and markups by(cid:10) selling broker- dealers; and(cid:10) o Dumping of securities by broker-dealers after prices have been(cid:10) manipulated to a desired level, which hurts the price of the stock(cid:10) and causes investors to suffer loss.(cid:10) We are aware of the abuses that have occurred in the penny stock market.(cid:10) Although we do not expect to be in a position to dictate the behavior of the(cid:10) market or of broker-dealers who participate in the market, we will strive within(cid:10) the confines of practical limitations to prevent such abuses with respect to our(cid:10) common stock.(cid:10) SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW MAY DETER A THIRD PARTY FROM(cid:10) ACQUIRING US.(cid:10) Section 203 of the Delaware General Corporation Law prohibits a merger(cid:10) with a 15% shareholder within three years of the date such shareholder acquired(cid:10) 15%, unless the merger meets one of several exceptions. The exceptions include,(cid:10) for example, approval by the holders of two-thirds of the outstanding shares(cid:10) (not counting the 15% shareholder), or approval by the Board of Directors prior(cid:10) to the 15% shareholder acquiring its 15% ownership. This provision makes it(cid:10) difficult for a potential acquirer to force a merger with or takeover of us, and(cid:10) could thus limit the price that certain investors might be willing to pay in the(cid:10) future for shares of our common stock.(cid:10) ITEM 1B. UNRESOLVED STAFF COMMENTS.(cid:10) Not applicable.(cid:10) ITEM 2. PROPERTIES.(cid:10) Our facility, which we own, is located at 165 Ludlow Avenue, Northvale,(cid:10) New Jersey, and contains approximately 20,000 square feet of floor space. This(cid:10) real property and the improvements thereon are encumbered by a mortgage in favor(cid:10) of the New Jersey Economic Development Authority ("NJEDA") as security for a(cid:10) loan through tax-exempt bonds from the NJEDA to Elite. The mortgage contains(cid:10) certain customary provisions including, without limitation, the right of NJEDA(cid:10) to foreclose upon a default by Elite. See "Note 5. - Long Term Debt".(cid:10) On July 15, 2005, we entered into a lease for two years commencing on July(cid:10) 1, 2005 for a portion of a one-story warehouse for the storage of finished and(cid:10) raw material of pharmaceutical products and equipment. We have exercised an(cid:10) option to rent the property through July 1, 2008.(cid:10) We are currently using our facilities as a laboratory, manufacturing,(cid:10) storage and office space. Properties used in our operations are considered(cid:10) suitable for the purposes for which they are used and are believed to be(cid:10) adequate to meet our needs for the reasonably foreseeable future.(cid:10) ITEM 3. LEGAL PROCEEDINGS.(cid:10) In the ordinary course of business we may be subject to litigation from(cid:10) time to time. There is no past, pending or, to our knowledge, threatened(cid:10) litigation or(cid:10) 26(cid:10) (cid:10) administrative action (including litigation or action involving our officers,(cid:10) directors or other key personnel) which in our opinion has or is expected to(cid:10) have, a material adverse effect upon our business, prospects financial condition(cid:10) or operations.(cid:10) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.(cid:10) No matters were submitted to a vote of security holders during the three(cid:10) months ended March 31, 2007.(cid:10) 27(cid:10) (cid:10) PART II(cid:10) ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.(cid:10) Our Common Stock is quoted on the American Stock Exchange under the symbol(cid:10) "ELI". The following table shows, for the periods indicated, the high and low(cid:10) sales prices per share of our Common Stock as reported by the American Stock(cid:10) Exchange.(cid:10) COMMON STOCK(cid:10) QUARTER ENDED HIGH LOW(cid:10) FISCAL YEAR ENDING MARCH 31, 2007:(cid:10) March 31, 2007..........................................$2.40 $1.94(cid:10) December 31, 2006.......................................$2.49 $2.02(cid:10) September 30, 2006......................................$2.46 $2.03(cid:10) June 30, 2006 ..........................................$2.54 $2.02(cid:10) FISCAL YEAR ENDING MARCH 31, 2006:(cid:10) March 31, 2006..........................................$2.49 $1.85(cid:10) December 31, 2005.......................................$3.02 $1.69(cid:10) September 30, 2005......................................$3.05 $2.62(cid:10) June 30, 2005 ..........................................$4.42 $2.67(cid:10) On June 26, 2007, the last reported sale price of our Common Stock, as(cid:10) reported by the American Stock Exchange, was $2.33 per share.(cid:10) As of June 26, 2007, there were approximately 101 holders of record and,(cid:10) we believe, approximately 2,081 are beneficial owners of our Common Stock. We(cid:10) are informed and believe that as of June 26, 2007, Cede & Co. held 18,391,573(cid:10) shares of our Common Stock as nominee for Depository Trust Company, 55 Water(cid:10) Street, New York, New York 10004. It is our understanding that Cede & Co. and(cid:10) Depository Trust Company both disclaim any beneficial ownership therein and that(cid:10) such shares are held for the account of numerous other persons.(cid:10) We have never paid cash dividends on our common stock. During the fiscal(cid:10) year ended March 31, 2007, we have paid dividends in the aggregate principal(cid:10) amount of $791,182 payable in cash of $808 and in 372,562 shares of our common(cid:10) stock, on our Series B Convertible Preferred Stock. We currently anticipate that(cid:10) we will retain all available funds for use in the operation and expansion of our(cid:10) business.(cid:10) Please see our Quarterly Reports on Form 10-Q for the three month periods(cid:10) ending June 30, 2006, September 30, 2006 and December 31, 2006 and our Current(cid:10) Reports on Form 8-K dated July 12, 2006 and December 6, 2006, for information(cid:10) concerning our issuances of unregistered securities during the 12 months ended(cid:10) March 31, 2007.(cid:10) 28(cid:10) (cid:10) EQUITY COMPENSATION PLAN INFORMATION(cid:10) The following table sets forth certain information regarding Elite's(cid:10) equity compensation plans as of March 31, 2007.(cid:10) (cid:10)
(cid:10) Number of(cid:10) Number of securities remaining(cid:10) securities available for future(cid:10) to be issued upon Weighted-average issuance under(cid:10) exercise of exercise price per equity compensation(cid:10) outstanding options, share of outstanding plans (excluding(cid:10) warrants and options, warrants and securities reflected(cid:10) Plan Category rights rights in column (a))(cid:10) ------------------------- -------------------- -------------------- --------------------(cid:10) (a) (b) (c)(cid:10) (cid:10) Equity compensation plans(cid:10) approved by security(cid:10) holders 3,776,500 (1) $2.34 3,223,500(cid:10) Equity compensation plans(cid:10) not approved by(cid:10) security holders 2,846,000 (2) $2.20 --(cid:10) -------------------- -------------------- --------------------(cid:10) Total: 6,622,500 $2.28 3,223,500(cid:10) ==================== ==================== ====================(cid:10)
(cid:10) (1) Stock options issued under the 2004 Stock Option Plan(cid:10) (2) Represents 1,750,000 options granted to Veerappan Subramanian, 511,000 to(cid:10) Atul Mehta and 585,000 to directors and outside consultants(cid:10) 2004 STOCK OPTION PLAN(cid:10) If options granted under our 2004 Stock Option Plan (the "STOCK OPTION(cid:10) PLAN") lapse without being exercised, other options may be granted covering the(cid:10) shares not purchased under such lapsed options. Options may be granted to(cid:10) employees, officers, Directors of and consultants to Elite. The Stock Option(cid:10) Plan permits us to grant both incentive stock options ("INCENTIVE STOCK OPTIONS"(cid:10) or "ISOs") within the meaning of Section 422 of the Code, and other options(cid:10) which do not qualify as Incentive Stock Options (the "NON-QUALIFIED OPTIONs").(cid:10) Unless earlier terminated by the Board of Directors, the Stock Option Plan(cid:10) (but not outstanding options) terminates on March 1, 2014, after which no(cid:10) further awards may be granted under the Stock Option Plan. The Stock Option Plan(cid:10) is administered by the full Board of Directors or, at the Board's discretion, by(cid:10) a committee of the Board of Direcotrs consisting of at least two persons who are(cid:10) "disinterested persons" defined under Rule 16b-2(c)(ii) under the Securities(cid:10) Exchange Act of 1934, as amended (the "COMMITTEE").(cid:10) Recipients of options under the Stock Option Plan ("OPTIONEES") are(cid:10) selected by the Board of Directors or the Committee. The Board of Directors or(cid:10) Committee determines the terms of each option grant including (1) the purchase(cid:10) price of shares subject to options, (2) the dates on which options become(cid:10) exercisable and (3) the expiration date of each option (which may not exceed ten(cid:10) years from the date of grant). The minimum per share purchase price of options(cid:10) granted under the Stock Option Plan for Incentive Stock Options is the fair(cid:10) market value (as defined in the Stock Option Plan) or for Nonqualified(cid:10) 29(cid:10) (cid:10) Options is 85% of Fair Market Value of one share of the Common Stock on the date(cid:10) the option is granted.(cid:10) Optionees will have no voting, dividend or other rights as stockholders(cid:10) with respect to shares of Common Stock covered by options prior to becoming the(cid:10) holders of record of such shares. The purchase price upon the exercise of(cid:10) options may be paid in cash, by certified bank or cashier's check, by tendering(cid:10) stock held by the Optionee, as well as by cashless exercise either through the(cid:10) surrender of other shares subject to the option or through a broker. The total(cid:10) number of shares of Common Stock available under the Stock Option Plan, and the(cid:10) number of shares and per share exercise price under outstanding options will be(cid:10) appropriately adjusted in the event of any stock dividend, reorganization,(cid:10) merger or recapitalization or similar corporate event.(cid:10) The Board of Directors may at any time terminate the Stock Option Plan or(cid:10) from time to time make such modifications or amendments to the Stock Option Plan(cid:10) as it may deem advisable and the Board of Directors or Committee may adjust,(cid:10) reduce, cancel and regrant an unexercised option if the fair market value(cid:10) declines below the exercise price except as may be required by any national(cid:10) stock exchange or national market association on which the Common Stock is then(cid:10) listed. In no event may the Board, of Directors without the approval of(cid:10) stockholders, amend the Stock Option Plan to increase the maximum number of(cid:10) shares of Common Stock for which options may be granted under the Stock Option(cid:10) Plan or change the class of persons eligible to receive options under the Stock(cid:10) Option Plan.(cid:10) Subject to limitations set forth in the Stock Option Plan, the terms of(cid:10) option agreements will be determined by the Board of Directors or Committee, and(cid:10) need not be uniform among Optionees.(cid:10) 30(cid:10) (cid:10) COMPARATIVE STOCKHOLDER RETURN(cid:10) The table which follows compares the yearly percentage change in Elite's(cid:10) cumulative total stockholder return on its Common Stock for the five year period(cid:10) ended March 31, 2007 with the cumulative total stockholder return of (1) all(cid:10) United States companies traded on the American Stock Exchange (where Elite's(cid:10) Common Stock is now traded) and (2) all companies traded on the American Stock(cid:10) Exchange which carry the Standard Industrial Classification (SIC) code 283(cid:10) (Pharmaceuticals). The table was prepared by the Center for Research in Security(cid:10) Prices at the University of Chicago Graduate School of Business, Chicago, IL.(cid:10) Elite's Common Stock was traded on the NASDAQ over-the-counter bulletin(cid:10) board from July 23, 1998 until February 24, 2000. Elite's Common began trading(cid:10) on the American Stock Exchange on February 24, 2000. Elite's fiscal year ends on(cid:10) March 31.(cid:10) Date Company Index Market Index Peer Index(cid:10) 03/28/2002 100.000 100.000 100.000(cid:10) 04/30/2002 86.693 97.347 96.087(cid:10) 05/31/2002 78.811 95.605 86.976(cid:10) 06/28/2002 67.183 88.383 75.591(cid:10) 07/31/2002 46.512 81.026 62.297(cid:10) 08/30/2002 43.411 81.828 60.093(cid:10) 09/30/2002 36.434 75.663 53.021(cid:10) 10/31/2002 32.558 79.874 56.438(cid:10) 11/29/2002 32.300 84.076 65.716(cid:10) 12/31/2002 24.419 80.060 57.688(cid:10) 01/31/2003 24.031 78.857 62.242(cid:10) 02/28/2003 24.419 78.427 57.846(cid:10) 03/31/2003 19.767 78.951 55.731(cid:10) 04/30/2003 19.509 84.721 66.126(cid:10) 05/30/2003 27.132 91.181 83.673(cid:10) 06/30/2003 36.822 93.029 95.607(cid:10) 07/31/2003 31.654 94.467 92.797(cid:10) 08/29/2003 36.047 97.407 100.728(cid:10) 09/30/2003 37.468 97.005 101.800(cid:10) 10/31/2003 41.473 101.839 102.890(cid:10) 11/28/2003 41.344 103.655 101.302(cid:10) 12/31/2003 38.760 108.359 97.216(cid:10) 01/30/2004 47.804 111.270 111.627(cid:10) 02/27/2004 32.300 112.539 107.594(cid:10) 03/31/2004 38.372 112.543 110.856(cid:10) 04/30/2004 41.990 108.546 111.142(cid:10) 05/28/2004 38.760 109.949 102.725(cid:10) 06/30/2004 29.845 112.815 97.931(cid:10) 07/30/2004 28.424 109.428 84.188(cid:10) 08/31/2004 16.925 109.359 81.726(cid:10) 09/30/2004 15.504 112.389 84.974(cid:10) 10/29/2004 22.610 114.757 85.243(cid:10) 11/30/2004 41.990 120.844 90.257(cid:10) 12/31/2004 47.416 125.203 94.370(cid:10) 01/31/2005 53.618 122.619 88.354(cid:10) 02/28/2005 61.886 125.684 85.399(cid:10) 03/31/2005 56.848 122.277 75.909(cid:10) 04/29/2005 45.866 119.122 74.968(cid:10) 05/31/2005 38.760 123.099 70.965(cid:10) 06/30/2005 39.793 125.726 71.889(cid:10) 07/29/2005 37.468 131.539 80.278(cid:10) 08/31/2005 35.530 131.118 79.906(cid:10) 09/30/2005 38.501 132.917 77.509(cid:10) 10/31/2005 31.654 128.688 77.854(cid:10) 11/30/2005 23.385 133.155 79.966(cid:10) 12/30/2005 23.773 135.492 81.308(cid:10) 01/31/2006 26.227 142.254 99.788(cid:10) 02/28/2006 30.103 141.492 104.850(cid:10) 03/31/2006 32.171 145.067 112.032(cid:10) 04/28/2006 29.457 147.470 108.789(cid:10) 05/31/2006 28.424 141.110 100.703(cid:10) 06/30/2006 29.716 140.732 96.451(cid:10) 07/31/2006 28.424 140.684 88.769(cid:10) 08/31/2006 31.008 143.690 93.201(cid:10) 09/29/2006 30.879 144.108 89.657(cid:10) 10/31/2006 26.357 149.850 97.365(cid:10) 11/30/2006 27.519 154.640 101.799(cid:10) 12/29/2006 28.165 157.186 108.331(cid:10) 01/31/2007 25.840 159.233 109.553(cid:10) 02/28/2007 25.969 158.279 107.426(cid:10) 03/30/2007 30.362 160.585 109.236(cid:10) The index level for all series was set to 100.0 on 03/28/2002(cid:10) Legend(cid:10) (cid:10)
(cid:10) SYMBOL CRSP TOTAL RETURNS INDEX FOR: 03/2002 03/2003 03/2004 03/2005 03/2006 03/2007(cid:10) ------ ----------------------------- ------- ------- ------- ------- ------- -------(cid:10) (cid:10) [CLIP ART] Elite Pharmaceuticals, Inc. 100.0 19.8 38.4 56.8 32.2 30.4(cid:10) [CLIP ART] AMEX Stock Market (US Companies) 100.0 79.0 ll2.5 122.3 145.1 160.6(cid:10) [CLIP ART] AMEX Stocks (SIC 2830-2839 US Companies) 100.0 55.7 l10.9 75.9 l12.0 109.2(cid:10) Drugs(cid:10)
(cid:10) NOTES:(cid:10) A The lines represent monthly index levels derived from compounded(cid:10) daily returns that include all dividends.(cid:10) B. The indexes are reweighted daily, using the market capitalizatian on(cid:10) the previous trading day.(cid:10) C. If the monthly interval, based on the fiscal year-end, is not a(cid:10) trading day, the preceding trading day is used.(cid:10) D. The index level for all series was set to $100.0 on 03/28/2002.(cid:10) [PERFORMANCE CHART OMITTED](cid:10) 31(cid:10) (cid:10) ITEM 6. SELECTED FINANCIAL DATA(cid:10) The following consolidated selected financial data, at the end of and for(cid:10) the last five fiscal years, should be read in conjunction with our Consolidated(cid:10) Financial Statements and related Notes thereto appearing elsewhere in this(cid:10) Annual Report on Form 10-K. The consolidated selected financial data are derived(cid:10) from our consolidated financial statements that have been audited by Miller,(cid:10) Ellin & Company, LLP, our independent auditors, as indicated in their report(cid:10) included herein. The selected financial data provided below is not necessarily(cid:10) indicative of our future results of operations or financial performance.(cid:10) (cid:10)
(cid:10) 2007 2006 2005 2004 2003(cid:10) ---- ---- ---- ---- ----(cid:10) (cid:10) Net revenues $ 1,143,841 $ 550,697 $ 301,480 $ 258,250 $ 630,310(cid:10) Net (loss) $(11,803,512) $ (6,883,914) $ (5,906,890) $ (6,514,217) $ (4,061,422)(cid:10) Net (loss) per common share $ (.64) $ (0.49) $ (0.47) $ (0.58) $ (0.40)(cid:10) Total assets $ 9,696,329 $ 15,702,241 $ 9,245,292 $ 7,853,434 $ 8,696,222(cid:10) Long-term obligations $ 3,795,000 $ 3,980,000 $ 2,367,128 $ 2,495,000 $ 2,720,000(cid:10) Weighted average number 19,815,780 18,463,514 12,869,924 11,168,618 10,069,991(cid:10) of shares outstanding(cid:10)
(cid:10) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS(cid:10) OF OPERATION(cid:10) GENERAL(cid:10) The following discussion and analysis should be read with the financial(cid:10) statements and accompanying notes, included elsewhere in this Annual Report on(cid:10) Form 10-K. It is intended to assist the reader in understanding and evaluating(cid:10) our financial position.(cid:10) OVERVIEW(cid:10) We are a specialty pharmaceutical company principally engaged in the(cid:10) development and manufacture of oral, controlled release products. We develop(cid:10) oral, controlled release products using proprietary technology and licenses(cid:10) these products. Our strategy includes improving off-patent drug products for(cid:10) life cycle management and developing generic versions of controlled release drug(cid:10) products with high barriers to entry. Our technology is applicable to develop(cid:10) delayed, sustained or targeted release pellets, capsules, tablets, granules and(cid:10) powders.(cid:10) We have two products, Lodrane 24(R) and Lodrane 24D(R), for treating(cid:10) allergies, currently being sold commercially, and a pipeline of seven drug(cid:10) candidates under development in the therapeutic areas that include pain(cid:10) management, infection and gastrointestinal disorder. Of the products under(cid:10) 32(cid:10) (cid:10) development, ELI-216, an abuse deterrent oxycodone product, and ELI-154, a once(cid:10) daily oxycodone product, are in clinical trials and we have two generic product(cid:10) candidates that are undergoing pivotal studies. The addressable market for the(cid:10) pipeline of products exceeds $6 billion. Our facility in Northvale, New Jersey(cid:10) also is a GMP and DEA registered facility for research, development and(cid:10) manufacturing.(cid:10) At the end of 2006, we entered into a joint venture with VGS Pharma, LLC(cid:10) and created Novel Novel, a privately-held company specializing in pharmaceutical(cid:10) research, development, manufacturing, licensing, acquisition and marketing of(cid:10) specialty generic pharmaceuticals.(cid:10) We intend to continue to collaborate in the development of additional(cid:10) products with our current partners. We also plan to seek additional(cid:10) collaborations to develop more drug products.(cid:10) We believe that our business strategy enables us to reduce our risk by(cid:10) having a diverse product portfolio that includes both branded and generic(cid:10) products in various therapeutic categories and build collaborations and(cid:10) establish licensing agreements with companies with greater resources thereby(cid:10) allowing us to share costs of development and to improve cash-flow.(cid:10) CRITICAL ACCOUNTING POLICIES AND ESTIMATES(cid:10) Management's discussion addresses our consolidated financial statements,(cid:10) which have been prepared in accordance with accounting principles generally(cid:10) accepted in the United States of America. The preparation of these financial(cid:10) statements requires management to make estimates and assumptions that affect the(cid:10) reported amounts of assets and liabilities, the disclosure of contingent assets(cid:10) and liabilities at the date of financial statements and the reported amounts of(cid:10) revenues and expenses during the reporting period. On an ongoing basis,(cid:10) management evaluates its estimates and judgment, including those related to bad(cid:10) debts, intangible assets, income taxes, workers compensation, and contingencies(cid:10) and litigation. Management bases its estimates and judgments on historical(cid:10) experience and on various other factors that are believed to be reasonable under(cid:10) the circumstances, the results of which form the basis for making judgments(cid:10) about the carrying values of assets and liabilities that are not readily(cid:10) apparent from other sources. Actual results may differ from these estimates(cid:10) under different assumptions or conditions.(cid:10) Management believes the following critical accounting policies, among(cid:10) others, affect its more significant judgments and estimates used in the(cid:10) preparation of its consolidated financial statements. Our most critical(cid:10) accounting policies include the recognition of revenue upon completion of(cid:10) certain phases of projects under research and development contracts. We also(cid:10) assess a need for an allowance to reduce our deferred tax assets to the amount(cid:10) that we believe is more likely than not to be realized. We assess the(cid:10) recoverability of long-lived assets and intangible assets whenever events or(cid:10) changes in circumstances indicate that the carrying value of the asset may not(cid:10) be recoverable. We assess our exposure to current commitments and contingencies.(cid:10) It should be noted that actual results may differ from these estimates under(cid:10) different assumptions or conditions.(cid:10) During the year ended March 31, 2003, we elected to prospectively(cid:10) recognize the fair value of stock options granted to employees and members of(cid:10) the Board of Directors, effective as of the beginning of the fiscal year, which(cid:10) resulted in our taking charges of $1,008,850, $902,967 and $3,479,070 during the(cid:10) years ended March 31, 2005, 2006 and 2007, respectively. The fair value of stock(cid:10) options held by employees and members of the Board of Directors which have been(cid:10) granted subsequent to March 31, 2003 is expected to continue to affect the(cid:10) results of operations of future periods, as we continue to grant or reprice(cid:10) stock options to reward our management team.(cid:10) 33(cid:10) (cid:10) YEAR ENDED MARCH 31, 2007 VS. YEAR ENDED MARCH 31, 2006(cid:10) Our revenues for the year ended March 31, 2007 were $1,143,841, an(cid:10) increase of $593,144 or approximately 108%, over revenues for the comparable(cid:10) prior year, and consisted of $1,038,916 in manufacturing fees and $104,925 in(cid:10) royalty fees. Revenues for the year ended March 31, 2006, consisted $494,231 in(cid:10) manufacturing fees and $56,466 in royalty fees. The increase in manufacturing(cid:10) fees and royalties was primarily due to the launch of our second product,(cid:10) Lodrane 24D(R).(cid:10) Research and development costs for the year ended March 31, 2007, were(cid:10) $6,085,888, an increase of $1,741,998 or approximately 40% from $4,343,890 of(cid:10) such costs for the prior year, primarily the result of increased wages, raw(cid:10) materials, laboratory and manufacturing supplies and consulting fees. Elite now(cid:10) has 41 employees, an increase of 58% from 26 employees one year ago. The(cid:10) increase in employees is primarily for the scale up work for the pain products(cid:10) and includes manufacturing, analytical and quality assurance people. Elite has(cid:10) also increased its spending on raw materials, primarily API, by 100% from(cid:10) $300,000 to $600,000. The raw materials are also primarily for scale up of the(cid:10) pain products. Spending on biostudies has increased to $1,000,000 from $100,000(cid:10) a year ago due to spending on the Phase II study for ELI-216. Research and(cid:10) development costs associated with Novel's activities also contribute to the(cid:10) increase. We expect our research and development costs to continue to increase(cid:10) in future periods primarily due to clinical costs for Phase III and other(cid:10) clinical trials for ELI-216 and ELI-154.(cid:10) General and administrative expenses (G&A) for the year ended March 31,(cid:10) 2007, were $2,534,507, an increase of $807,881, or approximately 47% from(cid:10) $1,726,626 of G&A for the prior year. The increase was attributable to increases(cid:10) in salaries and fringe benefits as a result of increases in staff, consulting(cid:10) fees associated with seeking potential strategic transitions in addition to(cid:10) costs associated with our Novel activities.(cid:10) We are in the initial stages of breaking down the specific costs(cid:10) associated with the research and development of each product on which we devoted(cid:10) resources through the use of detailed time sheets and general ledger account(cid:10) classifications. In the past, we have not historically allocated these expenses(cid:10) to any particular product. We cannot estimate the additional costs and expenses(cid:10) that may be incurred in order to potentially complete the development of any(cid:10) product, nor can we estimate the amount of time that might be involved in such(cid:10) development because of the uncertainties associated with the development of(cid:10) controlled release drug delivery products as described in this report.(cid:10) Depreciation and amortization decreased by $46,693 from $486,687 for the(cid:10) prior year to $439,994. The decrease was the result of our taking in 2006 the(cid:10) full write-off of financing costs associated with the redemption of tax exempt(cid:10) NJEDA Bonds, partially offset by an increase in depreciation in 2007 due to(cid:10) acquired new machinery and equipment and upgrading of the corporate and(cid:10) warehouse facilities.(cid:10) Other income (expenses) for the year ended March 31, 2007 were(cid:10) $(3,064,144), an increase of $2,187,736, or approximately 250%, from $(876,408)(cid:10) for the prior year due to an increase of $2,576,143 in charges related to the(cid:10) issuances of stock options and warrants, offset by (i) an increase of $158,138(cid:10) in sale of New Jersey tax losses, (ii) additional interest income of $221,836,(cid:10) due to higher compensating balances as a result of the private placement and,(cid:10) (iii) a decrease of $8,433 in interest expense resulting from a decrease in(cid:10) NJEDA Bonds outstanding.(cid:10) As a result of the foregoing, our net loss for the year ended March 31,(cid:10) 2007 was $11,803,512 compared to $6,883,914 for the year ended March 31, 2006.(cid:10) 34(cid:10) (cid:10) YEAR ENDED MARCH 31, 2006 VS. YEAR ENDED MARCH 31, 2005(cid:10) Our revenues for the year ended March 31, 2006 were $550,697, an increase(cid:10) of $249,217 or approximately 83%, over revenues for the comparable prior year,(cid:10) and consisted of $494,231 in manufacturing fees and $56,466 in royalty fees.(cid:10) Revenues for the year ended March 31, 2005, consisted of a $150,000(cid:10) non-refundable payment received from Purdue Pharma L.P. granting us the right to(cid:10) evaluate certain abuse resistant drug formulation technology, $125,739 in(cid:10) manufacturing fees, $24,291 in royalty fees and $1,450 in testing fees.(cid:10) Research and development costs for the year ended March 31, 2006 were(cid:10) $4,343,890, an increase of $1,645,249, or approximately 61%, from $2,698,641 of(cid:10) such costs for the comparable period of the prior year, primarily the result of(cid:10) increased wages, raw materials, laboratory and manufacturing supplies and(cid:10) consulting fees. We expect our research and development costs to continue to(cid:10) increase in future periods as a result of the developing and testing of products(cid:10) currently in our pipeline.(cid:10) General and administrative expenses (G&A) for the year ended March 31,(cid:10) 2006, were $1,726,626, a decrease of $433,044, or approximately 20% from G&A for(cid:10) the prior year. The decrease was attributable to a decrease in litigation costs,(cid:10) bad debt expense, auditing and legal fees, somewhat offset by increases in(cid:10) salaries and staff.(cid:10) For the years ended March 31, 2006 and 2005, we were unable to provide a(cid:10) break-down of the specific costs associated with the research and development of(cid:10) each product on which we devoted resources because a significant portion of the(cid:10) costs are generally associated with salaries, laboratory supplies, laboratory(cid:10) and manufacturing expenses, utilities and similar expenses. We have not(cid:10) historically allocated these expenses to any particular product. In addition, we(cid:10) cannot estimate the additional costs and expenses that may be incurred in order(cid:10) to potentially complete the development of any product, nor can we estimate the(cid:10) amount of time that might be involved in such development because of the(cid:10) uncertainties associated with the development of controlled release drug(cid:10) delivery products as described in this report.(cid:10) Depreciation and amortization increased by $130,249 from $356,438 for the(cid:10) prior year to $486,687. The increase was the result of writing off the balance(cid:10) of the prior NJEDA Bond Offering costs as a result of the refinancing.(cid:10) Other income (expenses) for the year ended March 31, 2006 were ($876,408),(cid:10) a decrease of $116,213, or approximately 12%, from ($992,621) for the prior year(cid:10) due to (i) a reduction by $105,923 in charges related to the issuances of stock(cid:10) options and warrants, (ii) an increase of $13,329 in sale of New Jersey tax(cid:10) losses, and (iii) additional interest income of $50,930, due to higher(cid:10) compensating balances as a result of the private placement, partially offset by(cid:10) an increase of $53,969 in interest expense resulting from an increase in NJEDA(cid:10) Bonds outstanding.(cid:10) As a result of the foregoing, our net loss for the year ended March 31,(cid:10) 2006 was $6,883,914 compared to $5,906,890 for the year ended March 31, 2005.(cid:10) MATERIAL CHANGES IN FINANCIAL CONDITION(cid:10) Our working capital (total current assets less total current liabilities),(cid:10) decreased from $8,615,287 as of March 31, 2006 to $1,019,631, primarily due to(cid:10) the net loss of $7,884,448 from operations, exclusive of non-cash charges of(cid:10) $3,919,064.(cid:10) 35(cid:10) (cid:10) We experienced negative cash flows from operations of ($8,314,268) for the(cid:10) year ended March 31, 2007, primarily due to our net loss from operations of(cid:10) $11,803,512, less non-cash charges of $3,919,064, which included $3,479,070 in(cid:10) connection with the issuance of stock options and warrants, and $439,994 in(cid:10) depreciation and amortization expenses.(cid:10) On November 15, 2004 and on December 18, 2006, Elite's partner, ECR,(cid:10) launched Lodrane 24(R) and Lodrane 24D(R), respectively. Under its agreement(cid:10) with ECR, Elite is currently manufacturing commercial batches of Lodrane 24(R)(cid:10) and Lodrane 24D(R) in exchange for manufacturing margins and royalties on(cid:10) product revenues. Royalty income earned for the year ended March 31, 2007 was(cid:10) $104,925. We expect future cash flows from royalties to provide additional cash(cid:10) to help fund our operations.(cid:10) On June 21, 2005, Elite and IntelliPharmaCeutics Corp. ("IPC"), entered(cid:10) into an agreement for the development and commercialization of a controlled(cid:10) released generic drug for certain anti-infective diseases by the parties. We(cid:10) estimate that the product had an addressable market in the U.S. of approximately(cid:10) $4 billion in 2004. We are to share in the profits, if any, from the sales of(cid:10) the drug. On December 12, 2005, the agreement was amended with respect to the(cid:10) development and commercialization of the controlled release drug product in(cid:10) Canada. Since IPC intended to enter into an agreement with a Canadian company(cid:10) with respect to the development, distribution and sale of the drug product in(cid:10) Canada, the parties agreed to suspend their obligations under the agreement with(cid:10) respect to the development and commercialization of the controlled release drug(cid:10) product in Canada. IPC agreed to pay us a certain percentage of any payments(cid:10) received by IPC with respect to the commercialization of the controlled release(cid:10) drug product by such Canadian company.(cid:10) On June 22, 2005, Elite and PLIVA, Inc. ("PLIVA") entered into a Product(cid:10) Development and License Agreement providing for the development and license of a(cid:10) controlled released generic anti-infective drug formulated by us. We are to(cid:10) manufacture and PLIVA will market and sell the product. Under the agreement, the(cid:10) partner is to make milestone payments to us and the development costs are to be(cid:10) paid both by PLIVA and us, and the profits are to be shared equally. On June 28,(cid:10) 2007, Elite and PLIVA terminated the Product Development and License Agreement,(cid:10) effective January 31, 2007, and entered into a termination agreement according(cid:10) to which it was agreed that Elite owns all intellectual property rights relating(cid:10) to the controlled released generic product under development and PLIVA agreed to(cid:10) pay Elite $100,000 in discharge of outstanding payments under the Product(cid:10) Development and License Agreement.(cid:10) On January 10, 2006, Elite entered into a Product Development and(cid:10) Commercialization Agreement with Orit Laboratories LLC ("ORIT") providing that(cid:10) we and Orit will co-develop and commercialize an extended release drug product(cid:10) for treatment of anxiety, and upon completion of development, the possible(cid:10) licensing of the product for manufacture and sale. The parties intend to develop(cid:10) all dose strengths of the product. We are to share in the profits, if any from(cid:10) the sales of the drug. The term of the agreement is for the longer of (i) 15(cid:10) years from the date the product is first commercially sold to a third party, or(cid:10) (ii) the life of the applicable patent(s), if any. The agreement is(cid:10) automatically renewable for 3-year periods unless terminated by either party by(cid:10) providing the other party with twelve (12) months written notice prior to any(cid:10) renewal period.(cid:10) In January 2006, the FDA accepted our IND for ELI-154, its once-a-day(cid:10) oxycodone painkiller. Under the new drug application, we will begin our(cid:10) development program with an early stage study to evaluate ELI-154's sustained(cid:10) release formation. Currently there is no once-daily oxycodone available;(cid:10) 36(cid:10) (cid:10) we estimate that the U.S. market for sustained release, twice-daily oxycodone(cid:10) was about $2 billion as of September, 2005.(cid:10) No assurance can be given that we will consummate any of the transactions(cid:10) discussed above or that any material revenues will be generated for us(cid:10) therefrom.(cid:10) LIQUIDITY AND CAPITAL RESOURCES(cid:10) For the year ended March 31, 2007, we recorded negative cash flow and(cid:10) financed our operations through utilization of our existing cash. Our working(cid:10) capital at March 31, 2007 was $1.0 million compared with working capital of $8.6(cid:10) million at March 31, 2006. Cash and cash equivalents at March 31, 2007 were $2(cid:10) million, a decrease of $6.9 million from the $8.9 million at March 31, 2006.(cid:10) We spent approximately $1,548,000 on improvements and machinery and(cid:10) equipment during the year ended March 31, 2007.(cid:10) On April 24, 2007, we sold in a private placement through Oppenheimer &(cid:10) Company, Inc., the placement agent (the "PLACEMENT AGENT"), 15,000 shares of our(cid:10) Series C Preferred Stock, at a price of $1,000 per share, each share convertible(cid:10) (at $2.32 per share) into 431.0345 shares of Common Stock, or an aggregate of(cid:10) 6,465,504 shares of Common Stock. The investors also acquired warrants to(cid:10) purchase shares of Common Stock, exercisable on or prior to April 24, 2012. The(cid:10) warrants represent the right to purchase an aggregate of 1,939,641 shares of(cid:10) Common Stock at an exercise price of $3.00 per share. The gross proceeds of the(cid:10) sale were $15,000,000 before payment of $1,050,000 in commissions to the(cid:10) Placement Agent and selected dealers. We also paid certain legal fees and(cid:10) expenses of counsel to the Placement Agent. We issued to the Placement Agent and(cid:10) its designees five year warrants to purchase 193,965 shares of Common Stock with(cid:10) similar terms to the warrants issued to the Investors with an exercise price of(cid:10) $3.00 per share. We expect that the approximate $13,900,000 of net proceeds will(cid:10) contribute materially to our efforts to advance our portfolio of pain products(cid:10) through the clinic as well as accelerate the development of our other controlled(cid:10) release products which utilize our proprietary oral drug delivery systems and(cid:10) abuse resistant technology.(cid:10) From time to time we will consider potential strategic transactions(cid:10) including acquisitions, strategic alliances, joint ventures and licensing(cid:10) arrangements with other pharmaceutical companies. We retained an investment(cid:10) banking firm to assist with our efforts. There can be no assurance that any such(cid:10) transaction will be available or consummated in the future.(cid:10) As of March 31, 2007, our principal source of liquidity was approximately(cid:10) $2,045,390 of cash and cash equivalents. After the closing of the private(cid:10) placement in April 2007, our principal source of liquidity was approximately(cid:10) $15,750,000 of cash and cash equivalents. We intend to sell the remaining 5,000(cid:10) shares of such Series C Preferred Stock, together with warrants to purchase(cid:10) shares of our Common Stock, which should result in gross proceeds of up to(cid:10) $5,000,000. Additionally, we may have access to funds through the exercise of(cid:10) outstanding stock options and warrants in addition to funds that may be(cid:10) generated from the potential sale of New Jersey tax losses. There can be no(cid:10) assurance that the sale of tax losses or that any proceeds generated from any(cid:10) potential future sale of Series C Preferred Stock or by the exercise of(cid:10) outstanding warrants or options will be generated or provide sufficient cash.(cid:10) 37(cid:10) (cid:10) The following table depicts our obligations and commitments to make future(cid:10) payments under existing contracts or contingent commitments.(cid:10) (cid:10)
(cid:10) Payments Due by Period(cid:10) ----------------------(cid:10) Contractual Obligations Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years(cid:10) ----- ---------------- --------- --------- -------------(cid:10) (cid:10) NJEDA Bonds payable $3,980,000 $ 185,000 $ 635,000 $ 505,000 $2,655,000(cid:10)
(cid:10) OFF-BALANCE SHEET ARRANGEMENTS(cid:10) None.(cid:10) ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK(cid:10) We do not invest in or own any market risk sensitive instruments entered(cid:10) into for trading purposes or for purposes other than trading purposes. All loans(cid:10) to us have been made at fixed interest rates and; accordingly, the market risk(cid:10) to us prior to maturity is minimal.(cid:10) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA(cid:10) Attached hereto and filed as a part of this Annual Report on Form 10-K are(cid:10) our Consolidated Financial Statements, beginning on page F-1.(cid:10) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND(cid:10) FINANCIAL DISCLOSURE(cid:10) None.(cid:10) ITEM 9A. CONTROLS AND PROCEDURES(cid:10) Within the 90 days prior to the date of this report, based on an(cid:10) evaluation of our disclosure controls and procedures (as defined in Rules(cid:10) 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended),(cid:10) our Chief Executive and Chief Financial Officer have concluded that our(cid:10) disclosure controls and procedures are effective for ensuring that information(cid:10) required to be disclosed by us in our Exchange Act reports is recorded,(cid:10) processed, summarized and reported within the applicable time periods specified(cid:10) by the SEC's rules and forms. We also concluded that information required to be(cid:10) disclosed in such reports is accumulated and communicated to our management,(cid:10) including our principal executive and principal financial officer, as(cid:10) appropriate to allow timely decisions regarding required disclosure. There was(cid:10) no change in our internal controls over financial reporting that occurred during(cid:10) the most recent fiscal quarter that materially affected or is reasonably likely(cid:10) to materially affect our internal controls over financial reporting. Our(cid:10) management has not yet completed, and is not yet required to have completed, its(cid:10) assessment of internal controls over financial reporting.(cid:10) ITEM 9B. OTHER INFORMATION.(cid:10) The following disclosure would have otherwise been filed on Form 8-K under(cid:10) the heading "Item 1.02 - Termination of Material Agreement":(cid:10) On June 28, 2007, Elite and Pliva, now a subsidiary of Barr(cid:10) Pharmaceuticals, Inc., terminated the Product Development and License Agreement(cid:10) entered into on June 22, 2005. The Product Development and License Agreement(cid:10) provided for the development and license of a controlled release generic(cid:10) product. According to the termination agreement between Elite and Pliva, which(cid:10) is effective as of January 31, 2007, it was agreed that Elite owns all(cid:10) intellectual property rights relating to the controlled released generic product(cid:10) in(cid:10) 38(cid:10) (cid:10) development under the Product Development and License Agreement and Pliva agreed(cid:10) to pay Elite $100,000 in discharge of outstanding payments under the Product(cid:10) Development and License Agreement.(cid:10) The following disclosure would have otherwise been filed on Form 8-K under(cid:10) the heading "Item 3.01 - Notice of Delisting or Failure to Satisfy a Continued(cid:10) Listing Rule or Standard":(cid:10) On June 22, 2007, we received notice from the American Stock Exchange(cid:10) ("AMEX") stating that we were not in compliance with Section 301 of the Amex(cid:10) Company Guide pertaining to the issuance of securities prior to filing an(cid:10) application for the listing of such additional securities and receiving(cid:10) notification from AMEX that the securities have been approved for listing.(cid:10) Specifically, on December 6, 2006, we issued 957,396 shares of its common(cid:10) stock to VGS Pharma, LLC ("VGS SHARES") and prior to submitting an Additional(cid:10) Listing Application and receiving AMEX approval of such application.(cid:10) We submitted an Additional Listing Application covering, among other(cid:10) things, the VGS Shares, as well as the shares underlying the securities issued(cid:10) in our April 24, 2007 Series C financing, to AMEX on June 6, 2007, which(cid:10) application was subsequently amended and restated on June 21, 2007. Upon(cid:10) approval of such application, we will regain compliance with all applicable(cid:10) continued listing standards of AMEX.(cid:10) 39(cid:10) (cid:10) PART III(cid:10) ITEM 10. DIRECTORS , EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.(cid:10) DIRECTORS AND EXECUTIVE OFFICERS(cid:10) Our current directors, executive officers and key employees, and their(cid:10) biographical information are set forth below:(cid:10) (cid:10)
(cid:10) NAME AGE TITLE(cid:10) ---- --- -----(cid:10) (cid:10) Bernard Berk 58 Director, Chairman, Chief Executive Officer and President(cid:10) Barry Dash, Ph. D 75 Director(cid:10) Melvin M. Van Woert, M.D. 76 Director(cid:10) Veerappan Subramanian, Ph. D. 57 Director, Acting Chief Scientific Officer(cid:10) Robert J. Levenson 66 Director*(cid:10) Edward Neugeboren Former Director**(cid:10) Mark I. Gittelman 47 Chief Financial Officer, Secretary and Treasurer(cid:10) Chris Dick 52 Executive Vice President of Corporate Development(cid:10) Charan Behl 55 Head of Technical Affairs(cid:10)
(cid:10) *Robert Levenson became a director on June 26, 2007.(cid:10) ** Edward Neugeboren ceased being a director on June 26, 2007.(cid:10) The principal occupations and employment of each such person during the(cid:10) past five years is set forth below. In each instance in which dates are not(cid:10) provided in connection with a nominee's business experience, such nominee has(cid:10) held the position indicated for at least the past five years.(cid:10) MR. BERNARD BERK, President and Chief Executive Officer since June 2003,(cid:10) Chairman of the Board and Director since February 2004 and Member of the(cid:10) Nominating Committee since June 2004. Prior to joining Elite, Mr. Berk was the(cid:10) President and Chief Executive Officer of Michael Andrews Corporation, a(cid:10) pharmaceutical management consultant firm, from 1996 to 2003. Prior to that, Mr.(cid:10) Berk was from 1994 until 1996, President and Chief Executive Officer of Nale(cid:10) Pharmaceutical Corporation. From 1989 until 1994, he was Senior Vice President(cid:10) of Sales, Marketing and Business Development of Par Pharmaceuticals, Inc. Mr.(cid:10) Berk holds a B.S. from New York University.(cid:10) DR. BARRY DASH, Director since April 2005, Member of Audit Committee since(cid:10) April 2005, Member of Nominating Committee since April 2005 and Member of(cid:10) Compensation Committee since June 2007, has been since 1995 President and(cid:10) Managing Member of Dash Associates, L.L.C., an independent consultant to the(cid:10) pharmaceutical and healthcare industries. From 1983 to 1996 he was employed by(cid:10) American Home Products Corporation (now known as Wyeth), its Whitehall-Robins(cid:10) Healthcare Division, initially as Vice President of Scientific Affairs, then(cid:10) Senior Vice President of Scientific Affairs and then Senior Vice President of(cid:10) Advanced Technologies during which time he personally supervised six separate(cid:10) departments: Medical and Clinical Affairs, Regulatory Affairs, Technical(cid:10) Affairs, Research and Development, Analytical R&D and Quality Management/Q.C. He(cid:10) had previously been employed by the Whitehall Robins Healthcare Division from(cid:10) 1960 to 1976, during which(cid:10) 40(cid:10) (cid:10) time he served as Director of Product Development Research, Assistant Vice(cid:10) President of Product Development and Vice President of Scientific Affairs. Dr.(cid:10) Dash had been employed by J.B. Williams Company (Nabisco Brands, Inc.) from 1978(cid:10) to 1982. From 1976 to 1978 he was Vice President, Director of Laboratories of(cid:10) the Consumer Products Division of American Can Company. He currently serves on(cid:10) the board of GeoPharma, Inc. (NASDQ: GORX) Dr. Dash holds a Ph.D. from the(cid:10) University of Florida and M.S. and B.S. degrees from Columbia University at(cid:10) which he was Assistant Professor at the College of Pharmaceutical Sciences from(cid:10) 1956 to 1960. He is a member of the American Pharmaceutical Association, The(cid:10) American Association for the Advancement of Science and the Society of Cosmetic(cid:10) Chemist, American Association of Pharmaceutical Scientists, Drug Information(cid:10) Association, American Foundation for Pharmaceutical Education, and Diplomate(cid:10) American Board of Forensic Examiners. He is the author of scientific(cid:10) publications and patents in the pharmaceutical field.(cid:10) DR. MELVIN VAN WOERT, Director since April 2005, Member of Audit Committee(cid:10) since April 2005, Member of Nominating Committee since April 2005 and Member of(cid:10) Compensation Committee since June 2007, has been since 1974, a member of the(cid:10) staff of Mount Sinai Medical Center where since 1978 he has also been a(cid:10) Professor in the Department of Neurology and Pharmacology at Mount Sinai School(cid:10) of Medicine. Dr. Van Woert had been a consultant for Neuropharmacological Drug(cid:10) Products to the United States Food and Drug Administration from 1974 to 1980;(cid:10) Associate Editor for Journal of the Neurological Sciences; Member of the(cid:10) Editorial Board of Journal of Clinical Neurphamacology; and Medical Director of(cid:10) National Organization for Rare Disorders for which he received in 1993 the(cid:10) Humanitarian Award. His other awards include the U.S. Public Health Service(cid:10) Award for Exceptional Achievement in Orphan Products Development and the(cid:10) National Myoclonus Foundation Award. He has authored and co-authored more than(cid:10) 150 articles appearing in pharmacological, medical and other professional(cid:10) journals or publications.(cid:10) DR. VEERAPPAN SUBRAMANIAN, Acting Chief Scientific Officer since February(cid:10) 2007 and Director since December 2006. Since December 2006, Dr. Subramanian(cid:10) serves as Chief Executive Officer and Chairman of the Board of Novel(cid:10) Laboratories, Inc. Dr. Subramanian has been a pharmaceutical executive since(cid:10) 1981 and a pharmaceutical entrepreneur since 1997, when he formed Kali(cid:10) Laboratories, Inc. ("KALI LABS"). Kali Labs was acquired by Par Pharmaceuticals,(cid:10) Inc. in 2004 and Dr. Subramanian continued to work as an executive vice(cid:10) president at Par Pharmaceuticals after the acquisition. Dr. Subramanian ended(cid:10) his relationship with Par Pharmaceuticals in January 2006. Prior to organizing(cid:10) Kali Labs, Dr. Subramanian served for 6 years as vice president of scientific(cid:10) affairs for Zenith Laboratories, Inc. Prior to working with Zenith Laboratories,(cid:10) he was (i) the Director of New Product Development and Technical Services for(cid:10) Kali Pharma, Inc., (ii) a Senior Scientist, Commercial Products with Vicks(cid:10) Research Center, (iii) a Research Pharmacist, Dermatological with Johnson &(cid:10) Johnson and (iv) a Research Pharmacist in Product Development with E.R. Squibb &(cid:10) Sons. Between 2001 and 2005, Dr. Subramanian served on the board of Generic(cid:10) Pharmaceutical Industry Association. Dr. Subramanian has a Ph.D. in Pharmacy(cid:10) (1981) from Rutgers University, a M.S. in Phamaceutics (1973) from Birla(cid:10) Institute of Technology & Science, and a B.S. in Pharmacy (1971) from Madurai(cid:10) Medical College.(cid:10) ROBERT J. LEVENSON, Director since June 2007 and Member of the Audit(cid:10) Committee and Compensation Committee since June 2007, is currently Managing(cid:10) Member of the Lenox Capital Group, L.L.C. since 2000. Mr. Levenson was(cid:10) previously an Executive Vice President of First Data Corporation from 1993 to(cid:10) 2000 and a member of its Board of Directors from 1992 to 2003. He was Senior(cid:10) Executive Vice President, Chief Operating Officer, and Member of the Office of(cid:10) the President and Director of Medco Containment Services, Inc., a provider of(cid:10) managed care prescription benefits, from October 1990 to December 1992. From(cid:10) 1985 until October 1990, he was a Group President and Director of Automatic Data(cid:10) Processing, Inc. (ADP-NYSE). Mr. Levenson has been a director of several other(cid:10) companies, public and private. Mr. Levenson is currently nominated to be a(cid:10) director of Ceridian Corporation (NYSE: CEN).(cid:10) 41(cid:10) (cid:10) Mr. Levenson is a trustee of the Washington Institute, the Jewish Community(cid:10) Federation, and the Jewish Community Foundation of Metrowest New Jersey.(cid:10) MR. EDWARD NEUGEBOREN, Director from January 2005 to June 2007 and Member(cid:10) of Audit Committee from January 2005 to June 2007, has been a Managing Partner(cid:10) of Ledgemont Capital Group LLC, an investment banking firm based in New York(cid:10) from January 2005 to May 2007, Mr. Neugeboren was a consultant with Indigo(cid:10) Ventures LLC, an investment banking firm based in New York. From May 2001 to(cid:10) January 2004, Mr. Neugeboren was a managing partner of Third Ridge Capital(cid:10) Management, LLC, a U.S. equity hedge fund. He was from October 2000 to April(cid:10) 2001 the Chief Administrative Officer of Soceron, a then emerging Silicon Alley(cid:10) based media software company, and from 1988 to 2000 the Chief Administrative(cid:10) Officer and director of Equity Research Operations at Lehman Brothers. He was(cid:10) from 1996 to 1998 deputy director of Equity Research at UBS Warburg, formerly(cid:10) Warburg, Dillon Read, and director of Equity Research Operations from 1995 to(cid:10) 1996. Mr. Neugeboren began his career in 1992 as an equity research analyst(cid:10) covering the specialty pharmaceuticals industry, constituting generic drugs and(cid:10) drug delivery, at Dillon Read & Co., Kidder, Peabody & Co. and Furman Selz, Inc.(cid:10) Mr. Neugeboren is a Director of KineMed, Inc. a platform based drug development(cid:10) and advanced medical diagnostics company based in San Francisco, California.(cid:10) MARK I. GITTELMAN, Chief Financial Officer, Secretary and Treasurer of the(cid:10) Company, is the President of Gittelman & Co., P.C., an accounting firm in(cid:10) Clifton, New Jersey. Prior to forming Gittelman & Co., P.C. in 1984, he worked(cid:10) as a certified public accountant with the international accounting firm of KPMG(cid:10) Peat Marwick, LLP. Mr. Gittelman holds a B.S. in accounting from New York(cid:10) University and a Masters of Science in Taxation from Fairleigh Dickinson(cid:10) University. He is a Certified Public Accountant licensed in New Jersey and New(cid:10) York, and is a member of the American Institute of Certified Public Accountants(cid:10) ("AICPA"), and the New Jersey State and New York State Societies of CPAs. Other(cid:10) than Elite Labs, no company with which Mr. Gittelman was affiliated in the past(cid:10) was a parent, subsidiary or other affiliate of the Company.(cid:10) CHRIS DICK was appointed Executive Vice President of Corporate Development(cid:10) in March, 2006. Since November 2002, the Company has engaged Mr. Dick to direct(cid:10) its licensing and business development activities. From 1999 to 2002, Mr. Dick(cid:10) served as Director of Business Development for Elan Drug Delivery, Inc.(cid:10) responsible for licensing and business development of Elan's portfolio of drug(cid:10) delivery technologies. From 1997 to 1999, he was Manager of Business Development(cid:10) and Marketing for EnTec, a drug delivery business unit within FMC Corporation's(cid:10) Pharmaceutical Division. Prior thereto he held various other business and(cid:10) technical positions at FMC Corporation, including Manager of Marketing for its(cid:10) pharmaceutical functional coatings product line. Mr. Dick holds an M.B.A. from(cid:10) the Stern School of Business, New York University, and a B.S. and M.S. in(cid:10) Chemical Engineering from Cornell University.(cid:10) DR. CHARAN BEHL was appointed Head of Technical Affairs in February 2007(cid:10) and was previously Executive Vice President and Chief Scientific Officer of the(cid:10) Company from March 2006 to February 2007. Dr. Behl has provided the Company(cid:10) since June 2003 consulting technological services as an independent contractor.(cid:10) He was from January 1995 to July 1998 Vice President of R&D and from July 1988(cid:10) to January 2001 Executive Vice President of R&D of Nastech Pharmaceutical(cid:10) Corporation, Inc. From April 1981 to November 1994, Dr. Behl was employed by(cid:10) Hoffman La Roche, where he held a number of positions, including research leader(cid:10) of its Pharmaceutical R&D Department. During his tenure at Roche and Nastech,(cid:10) Dr. Behl created intellectual property in the area of drug delivery. His patent(cid:10) portfolio includes over 40 patents issued, pending and in preparation. Dr. Behl(cid:10) holds a B.S. in Pharmaceutical Sciences from BITS, Pilani, India, an M.S. in(cid:10) Pharmaceutics from Duquesne University,(cid:10) 42(cid:10) (cid:10) under the mentorship of Dr. Alvin M. Galinsky, and a Ph.D. in Pharmaceutical(cid:10) Sciences from the University of Michigan, under the mentorship of Dr. William I.(cid:10) Higuchi. Dr. Behl was an Assistant Research Scientist from 1978 to 1981 at the(cid:10) University of Michigan. Dr. Behl is internationally known for his scientific and(cid:10) professional activities. He has coauthored over 200 publications, including(cid:10) research articles, book chapters, and abstracts, and has made numerous(cid:10) presentations at national and international conferences and workshops. In(cid:10) conjunction with associates from academia and industry and representatives of(cid:10) the FDA, Dr. Behl has co-organized several workshops and symposia. He was the(cid:10) founding chair of Nasal Drug Delivery Focus Group formed in 1995 under the(cid:10) auspices of the American Association of Pharmaceutical Scientists ("AAPS"), and(cid:10) served as its Chairman from 1995 to 2001. Dr. Behl is a fellow of the AAPS.(cid:10) There is no family relationship among our directors and executive(cid:10) officers.(cid:10) Each director holds office (subject to our By-Laws) until the next annual(cid:10) meeting of stockholders and until such director's successor has been elected and(cid:10) qualified. Except for Mr. Berk, Mr. Dick and Dr. Behl, each of which is employed(cid:10) pursuant to an employment agreement, all of our executive officers are serving(cid:10) until the next annual meeting of directors and until their successors have been(cid:10) duly elected and qualified. There are no family relationships between any of our(cid:10) directors and executive officers.(cid:10) BOARD MEETINGS(cid:10) During the fiscal year ended March 31, 2007, our Board of Directors held 7(cid:10) meetings. No director who served during the fiscal year ended March 31, 2007(cid:10) attended fewer than 75% of the meetings of the Board of Directors during that(cid:10) year other than Veerappan Subramanian who joined the Board in December 2006.(cid:10) We do not have a formal policy regarding attendance by members of the(cid:10) Board of Directors at our annual meeting of stockholders, although it does(cid:10) encourage attendance by the directors. Historically, more than a majority of the(cid:10) directors have attended the annual meeting.(cid:10) COMMITTEES OF THE BOARD(cid:10) The Board of Directors has an Audit Committee, a Nominating Committee and(cid:10) a Compensation Committee. For the fiscal year ended March 31, 2007, the members(cid:10) of the Nominating Committee were Bernard Berk, Barry Dash and Melvin Van Woert(cid:10) and of the Audit Committee are Edward Neugeboren, Barry Dash and Melvin Van(cid:10) Woert. Robert J. Levenson replaced Edward Neugeboren as a member of the audit(cid:10) committee on June 26, 2007. On June 26, 2007, we constituted a Compensation(cid:10) Committee, the members of which are Robert J. Levenson, Barry Dash and Melvin(cid:10) Van Woert.(cid:10) AUDIT COMMITTEE(cid:10) The Audit Committee held one meeting during the fiscal year ended March(cid:10) 31, 2007. A copy of its written charter (adopted by the Board of Directors) was(cid:10) included as an appendix to our proxy statement sent to stockholders in(cid:10) connection with the annual meeting of stockholders held October 11, 2001.(cid:10) We deem the members of our Audit Committee to be independent. Mr.(cid:10) Neugeboren, a member of our audit committee during the fiscal year ended March(cid:10) 31, 2007 qualified as an audit committee financial expert. Mr. Levenson, who(cid:10) replaced Mr. Neugeboren on the audit committee on June 26, 2007 also qualifies(cid:10) as an audit committee financial expert.(cid:10) The audit committee's primary responsibilities are to monitor the(cid:10) integrity of our financial statements and reporting process and systems of(cid:10) internal controls regarding finance and accounting and to monitor our compliance(cid:10) with legal and regulatory requirements, including disclosures and procedures.(cid:10) The committee also has the responsibility to evaluate our independent auditor's(cid:10) qualifications, independence and performance as well as to evaluate the(cid:10) performance of the internal audit function.(cid:10) NOMINATING COMMITTEE(cid:10) The Nominating Committee held one meeting during the fiscal year ended(cid:10) March 31, 2007. This committee does not have a charter. This committee assists(cid:10) the Board of Directors in identifying and(cid:10) 43(cid:10) (cid:10) recommending qualified Board candidates. The committee identifies Board(cid:10) candidates through numerous sources, including recommendations from Directors,(cid:10) executive officers and our stockholders. The committee seeks to have available(cid:10) to it qualified candidates from a broad pool of individuals with a range of(cid:10) talents, experience, backgrounds and perspectives. The committee seeks to(cid:10) identify those individuals most qualified to serve as Board members and(cid:10) considers many factors with regard to each candidate, including judgment,(cid:10) integrity, diversity, prior experience, the interplay of the candidate's(cid:10) experience with the experience of other Board members, the extent to which the(cid:10) candidate would be desirable as a member of any committees of the Board of(cid:10) Directors, and the candidate's willingness to devote substantial time and effort(cid:10) to Board responsibilities. The Nominating Committee makes recommendations to the(cid:10) Board of Directors with respect to Director nominees.(cid:10) COMPENSATION COMMITTEE(cid:10) On June 26, 2007, we constituted a Compensation Committee. The role of the(cid:10) Compensation Committee will be to determine executive compensation and make(cid:10) recommendations with respect to incentive compensation and executive(cid:10) compensation.(cid:10) Prior to the establishment of the Compensation Committee, the full Board(cid:10) of Directors, which includes two Directors employed by us, participated in(cid:10) deliberations concerning executive compensation and established the compensation(cid:10) and benefit plans and programs of Elite. For more information on the(cid:10) compensation of directors and officers of the Company, see the "Compensation(cid:10) Discussion and Analysis" and "Compensation" sections below.(cid:10) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION(cid:10) As noted above, until June 26, 2007, the Board of Directors as a whole(cid:10) performed the functions normally associated with the compensation committee.(cid:10) However, while Bernard Berk, our President and Chief Executive Officer and(cid:10) Veerappan Subramanian, our Chief Scientific Officer, served as members of the(cid:10) Board of Directors, at no time did Mr. Berk or Dr. Subramanian participate in(cid:10) deliberations of the Board of Directors concerning either of their own(cid:10) compensation.(cid:10) The newly constituted Compensation Committee is currently composed of(cid:10) members who are neither currently nor ever have been an employee or officer of(cid:10) the Company and no executive officer of the Company served in the last fiscal(cid:10) year as a director or member of the compensation committee of another entity one(cid:10) of whose executive officers served as a member of our Board of Directors.(cid:10) CODE OF CONDUCT(cid:10) At the first meeting of the Board of Directors following the Annual(cid:10) Meeting of Stockholders held on June 22, 2004, the Board of Directors adopted a(cid:10) Code of Business Conduct and Ethics for its officers and employees which it(cid:10) believes complies with the requirements for a company code of ethics for(cid:10) financial officers that were promulgated by the SEC pursuant to the(cid:10) Sarbanes-Oxley Act of 2002 (the "SARBANES-OXLEY ACT") as well as for the members(cid:10) of our Board of Directors. The directors will be surveyed annually regarding(cid:10) their compliance with the policies as set forth in the Code of Conduct for(cid:10) Directors. A copy of the Code of Business Conduct and Ethics is available on our(cid:10) website www.elitepharma.com. To receive a copy of our Code of Business Conduct(cid:10) and Ethics, at no cost, requests should be directed to the Secretary, Elite(cid:10) Pharmaceuticals, Inc., 165 Ludlow Avenue, Northvale, New Jersey 07647. We intend(cid:10) to disclose any amendment to, or waiver of, a provision of the Business(cid:10) 44(cid:10) (cid:10) Conduct and Ethics for Directors in a report filed under the Securities Exchange(cid:10) Act of 1934, as amended, within five business days of the amendment or waiver.(cid:10) STOCKHOLDER COMMUNICATIONS(cid:10) Stockholders and other interested parties may contact the Board of(cid:10) Directors or the non-management directors as a group at the following address:(cid:10) Board of Directors or Outside Directors Elite Pharmaceuticals, Inc., 165 Ludlow(cid:10) Avenue, Northvale, NJ 07647. All communications received at the above address(cid:10) will be relayed to the Board of Directors or the non-management directors,(cid:10) respectively. Communications regarding accounting, internal accounting controls(cid:10) or auditing matters may also be reported to the Board of Directors using the(cid:10) above address(cid:10) Typically, we do not forward to our directors communications from our(cid:10) stockholders or other communications which are of a personal nature or not(cid:10) related to the duties and responsibilities of the Board, including:(cid:10) o Junk mail and mass mailings(cid:10) o New product suggestions(cid:10) o Resumes and other forms of job inquiries(cid:10) o Opinion surveys and polls(cid:10) o Business solicitations or advertisements(cid:10) COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934(cid:10) Section 16(a) of the Securities Exchange Act of 1934, as amended, requires(cid:10) our directors and executive officers and persons who own more than ten percent(cid:10) of a registered class of our equity securities (collectively, "REPORTING(cid:10) PERSONS") to file with the SEC initial reports of ownership and reports of(cid:10) changes in ownership of our Common Stock and other equity securities of Elite.(cid:10) Reporting Persons are required by SEC regulation to furnish Elite with copies of(cid:10) all Section 16(a) forms that they file. To our knowledge, based solely on a(cid:10) review of the copies of such reports furnished to us, we believe that during(cid:10) fiscal year ended March 31, 2007 all Reporting Persons complied with all(cid:10) applicable filing requirements other than Dr. Dash and Dr. Subramanian who did(cid:10) not timely file a Form 4 and Form 3, respectively.(cid:10) 45(cid:10) (cid:10) ITEM 11. EXECUTIVE COMPENSATION.(cid:10) COMPENSATION DISCUSSION AND ANALYSIS(cid:10) SUMMARY(cid:10) Our approach to executive compensation, one of the most important and also(cid:10) most complex aspects of corporate governance, is influenced by our belief in(cid:10) rewarding people for consistently strong execution and performance. We believe(cid:10) that the ability to attract and retain qualified executive officers and other(cid:10) key employees is essential to our long term success.(cid:10) Our plan to obtain and retain highly skilled employees is to provide(cid:10) significant incentive compensation opportunities and market competitive(cid:10) salaries. The plan was intended to link individual employee objectives with(cid:10) overall company strategies and results, and to reward executive officers and(cid:10) significant employees for their individual contributions to those strategies and(cid:10) results. We use compensation and performance data from comparable companies in(cid:10) the pharmaceutical industry to establish market competitive compensation and(cid:10) performance standards for our employees. Furthermore, we believe that equity(cid:10) awards serve to align the interests of our executives with those of our(cid:10) stockholders. As such, equity is a key component of our compensation program.(cid:10) NAMED EXECUTIVE OFFICERS(cid:10) The named executive officers for fiscal year ended March 31, 2007 are(cid:10) Bernard Berk, President and Chief Executive Officer; Mark I. Gittelman, Chief(cid:10) Financial Officer; Chris Dick, Executive Vice President of Corporate(cid:10) Development; Charan Behl, Chief Scientific Officer until February 9, 2007, Head(cid:10) of Technical Affairs since February 9, 2007; and Veerappan Subramanian, Chief(cid:10) Scientific Officer since February 9, 2007. These individuals are referred to(cid:10) collectively in this Annual Report on Form 10-K as the "NAMED EXECUTIVE(cid:10) OFFICERS."(cid:10) OUR EXECUTIVE COMPENSATION PROGRAM(cid:10) OVERVIEW(cid:10) The primary elements of our executive compensation program are base(cid:10) salary, incentive cash and stock bonus opportunities and equity incentives(cid:10) typically in the form of stock option grants. Although we provide other types of(cid:10) compensation, these three elements are the principal means by which we provide(cid:10) the Named Executive Officers with compensation opportunities.(cid:10) The emphasis on the annual bonus opportunity and equity compensation(cid:10) components of the executive compensation program reflect our belief that a large(cid:10) portion of an executive's compensation should be performance-based. This(cid:10) compensation is performance-based because payment is tied to the achievement of(cid:10) corporate performance goals. To the extent that performance goals are not(cid:10) achieved, executives will receive a lesser amount of total compensation. We have(cid:10) entered into employment agreements with three of our Named Executive Officers.(cid:10) Such employment agreements set forth base salaries, bonuses and stock option(cid:10) grants. Such stock option grants are predicated on our achievement of corporate(cid:10) performance goals as set forth in such agreements.(cid:10) 46(cid:10) (cid:10) ELEMENTS OF OUR EXECUTIVE COMPENSATION PROGRAM(cid:10) BASE SALARY(cid:10) We pay a base salary to certain of the Named Executive Officers. In(cid:10) general, base salaries for the Named Executive Officers are determined by(cid:10) evaluating the responsibilities of the executive's position, the executive's(cid:10) experience and the competitive marketplace. Base salary adjustments are(cid:10) considered and take into account changes in the executive's responsibilities,(cid:10) the executive's performance and changes in the competitive marketplace. We(cid:10) believe that the base salaries of the Named Executive Officers are appropriate(cid:10) within the context of the compensation elements provided to the executives and(cid:10) because they are at a level which remains competitive in the marketplace.(cid:10) BONUSES(cid:10) The Board of Directors may authorize us to give discretionary bonuses,(cid:10) payable in cash or shares of common stock, to the Named Executive Officers and(cid:10) other key employees. Such bonuses are designed to motivate the Named Executive(cid:10) Officers and other employees to achieve specified corporate, business unit(cid:10) and/or individual, strategic, operational and other performance objectives.(cid:10) During the fiscal year ended March 31, 2007, the Company awarded bonuses of(cid:10) $25,000 each to Charan Behl and Chris Dick in accordance with the terms of their(cid:10) employment agreements.(cid:10) STOCK OPTIONS(cid:10) Stock options constitute performance-based compensation because they have(cid:10) value to the recipient only if the price of our common stock increases. Stock(cid:10) options for each of the Named Executive Officers generally vest over time,(cid:10) obtainment of a corporate goal or a combination.(cid:10) The grant of stock options at Elite is the centerpiece of our compensation(cid:10) program and is designed to motivate our Named Executive Officers to achieve our(cid:10) short term and long term corporate goals.(cid:10) As the pharmaceutical industry is characterized by a long product(cid:10) development cycle, including a lengthy research and product-testing period and a(cid:10) rigorous approval phase involving human testing and governmental regulatory(cid:10) approval, many of the traditional benchmarking metrics for vesting, such as(cid:10) product sales, revenues and profits are inappropriate for an early-stage(cid:10) pharmaceutical company such as Elite. We consider when determining vesting(cid:10) benchmarks the following which are aligned with our short term and long term(cid:10) corporate goals:(cid:10) o clinical trial progress;(cid:10) o achievement of regulatory milestones; and(cid:10) o establishment of key strategic relationships.(cid:10) RETIREMENT AND DEFERRED COMPENSATION BENEFITS(cid:10) We do not presently provide the Named Executive Officers with a defined(cid:10) benefit pension plan or any supplemental executive retirement plans, nor do we(cid:10) provide the Named Executive Officers with retiree health benefits. We have(cid:10) adopted a deferred compensation plan under Code Section 401(k) of the(cid:10) 47(cid:10) (cid:10) Internal Revenue Service Code. The Stock Option Plan provides for employees to(cid:10) defer compensation on a pretax basis subject to certain limits, however, Elite(cid:10) does not provide a matching contribution to its participants.(cid:10) The retirement and deferred compensation benefits provided to the Named(cid:10) Executive Officers are not material factors considered in making other(cid:10) compensation determinations with respect to Named Executive Officers.(cid:10) PERQUISITES(cid:10) As described in more detail below, the perquisites provided to certain of(cid:10) the Named Executive Officers consists of car and parking allowances and life(cid:10) insurance premiums. These perquisites represent a small fraction of the total(cid:10) compensation of each such Named Executive Officer. The value of the perquisites(cid:10) we provide are taxable to the Named Executive Officers and the incremental cost(cid:10) to us of providing these perquisites is reflected in the Summary Compensation(cid:10) Table. The Board of Directors believes that the perquisites provided are(cid:10) reasonable and appropriate. For more information on perquisites provided to the(cid:10) Named Executive Officers, please see the All Other Compensation column of the(cid:10) Summary Compensation Table and "Agreements with Named Executive Officers" below.(cid:10) POST-TERMINATION/ CHANGE OF CONTROL COMPENSATION(cid:10) In addition to retirement and deferred compensation benefits described(cid:10) above, we have arrangements with certain of the Named Executive Officers that(cid:10) may provide them with compensation following termination of employment. These(cid:10) arrangements are discussed below under "Agreements with Named Executive(cid:10) Officers".(cid:10) TAX IMPLICATIONS OF EXECUTIVE COMPENSATION(cid:10) Our aggregate deductions for each Named Executive Officer compensation are(cid:10) potentially limited by Section 162(m) of the Internal Revenue Code to the extent(cid:10) the aggregate amount paid to an executive officer exceeds $1 million, unless it(cid:10) is paid under a predetermined objective performance plan meeting certain(cid:10) requirements, or satisfies one of various other exceptions specified in the(cid:10) Internal Revenue Code. At our 2006 Named Executive Officer compensation levels,(cid:10) we did not believe that Section 162(m) of the Internal Revenue Code would be(cid:10) applicable, and accordingly, we did not consider its impact in determining(cid:10) compensation levels for our Named Executive Officers in 2006.(cid:10) AGREEMENTS WITH NAMED EXECUTIVE OFFICERS(cid:10) MESSRS BERK, DICK AND DR. BEHL(cid:10) On November 13, 2006, we entered into (i) the Second Amended and Restated(cid:10) Employment Agreement with Mr. Berk, our President, Chief Executive Officer and(cid:10) Chairman of the Board of Directors (the "BERK AGREEMENT"); (ii) an employment(cid:10) agreement with Dr. Behl as Executive Vice President and Chief Scientific Officer(cid:10) (the "BEHL AGREEMENT"); and (iii) an employment agreement with Mr. Dick as(cid:10) Executive Vice President of Corporate Development (the "DICK AGREEMENT"). The(cid:10) employment agreement with Dr. Behl was subsequently amended and restated on(cid:10) February 9, 2007, under which Dr. Behl's position was changed from Chief(cid:10) Scientific Officer to Head of Technical Affairs and he is to report to our Chief(cid:10) Executive Officer, Chief Scientific Officer and any additional executive officer(cid:10) designated by the Board of Directors.(cid:10) 48(cid:10) (cid:10) The Berk Agreement provides for a base annual salary of $330,140 (his(cid:10) current salary) which may at the discretion of the Board of Directors be(cid:10) increased in light of factors including our existing financial condition and Mr.(cid:10) Berk's success in implementing our business plan and achieving our strategic(cid:10) alternatives. Mr. Berk is to continue to receive an automobile allowance of $800(cid:10) per month. The Behl and Dick Agreements provide for an initial base annual(cid:10) salary of $250,000 and $200,000, respectively, a guaranteed bonus of $25,000(cid:10) payable on January 1, 2007 and within 30 calendar days of the end of each fiscal(cid:10) year during the term and a $700 per month automobile allowance.(cid:10) Each of the three agreements provides for payment of a discretionary bonus(cid:10) following the end of each fiscal year of up to 50% of the executive's then(cid:10) annual base salary. The amount, if any, of the discretionary bonus will be(cid:10) determined by the Compensation Committee as to Mr. Berk and by the Board of(cid:10) Directors or a Compensation Committee as to Dr. Behl and Mr. Dick. Mr. Berk's(cid:10) bonus is to be based on any commercialization of products, merger or(cid:10) acquisition, business combination or collaborations, growth in revenues and(cid:10) earnings, additional financings or other strategic business transaction that(cid:10) inure to the benefit of our stockholders. The bonus, if any, may be paid in cash(cid:10) or shares of common stock, valued at the closing price of the common stock on(cid:10) the immediately preceding trading day. The discretionary bonus which may be paid(cid:10) to Dr. Behl or Mr. Dick is to be based on the achievement of goals discussed(cid:10) with the executive in good faith and within a reasonable time following the(cid:10) commencement of each fiscal year and may be paid in cash or shares of our common(cid:10) stock valued at the average of the closing price per share during the five(cid:10) trading days immediately preceding the date of issuance of the shares.(cid:10) Each of Dr. Behl's and Mr. Dick's agreement provides for the grant under(cid:10) the Company's Stock Option Plan to the executive at an exercise price of $2.25(cid:10) of options to purchase 250,000 shares. The Berk, Behl and Dick Agreements each(cid:10) provide for the grant to the executive of options at the foregoing exercise(cid:10) price to purchase up to 300,000 additional shares (the "OPIOID PRODUCT OPTIONS")(cid:10) which are to vest in two 150,000 share tranches upon the closing of an exclusive(cid:10) product license for the United States national market, the entire European Union(cid:10) Market or the Japan market or a product sale transaction of all our ownership(cid:10) rights in the United States (only once for each product) for our first drug(cid:10) developed by us for which the FDA approval will be sought under a NDA (including(cid:10) a 505(b) (2) application) for oxycodone, hydrocone, hydromorphone, oxymorphone,(cid:10) or morphine ("NON-GENERIC OPIOID PRODUCT") as to the first tranche and as to our(cid:10) second Non-Generic Opioid Drug for the second tranche.(cid:10) The Berk Agreement provides for the amendment of the vesting of options as(cid:10) to 400,000 shares which had been granted on September 2, 2005 to Mr. Berk at an(cid:10) exercise price of $2.69 per share ("BERK'S PREVIOUS MILESTONE OPTIONS") and the(cid:10) Behl and Dick Agreements provides for the grant of options at the exercise price(cid:10) of $2.25 per share for each of Behl and Dick as to 200,000 shares (collectively(cid:10) along with Mr. Berk's Previous Milestone Options, the "MILESTONE OPTIONS") with(cid:10) the Milestone Options of each of the three executives to vest (A) as to not more(cid:10) than 125,000 shares and 75,000 shares, respectively, upon the commencement of(cid:10) the first Phase III clinical trial relating to the first and then the second(cid:10) Non-Generic Opioid Drug developed by us; (B) 50,000 shares upon the closing of(cid:10) each product license or product sale transaction (on a product by product basis(cid:10) and only once for each product) other than Non-Generic Opioid Drugs for which(cid:10) options were granted above; (C) 10,000 shares upon the filing by us (in our(cid:10) name) with the FDA of either an ANDA or an NDA (including an application filed(cid:10) with the FDA under Section 505(b)(2) of the Federal, Food, Drug, and Cosmetic(cid:10) Act, 21 U.S.C. Section 301 et seq.) (collectively, a "NDA"), for a product not(cid:10) covered by a previous FDA application; (D) 40,000 shares upon the approval by(cid:10) the FDA of any ANDA or NDA (filed in our name) for a product not previously(cid:10) approved by the FDA; (E) 25,000 shares upon the filing of an application for a(cid:10) U.S. patent by us (in our name); and (F) 25,000 shares upon the granting by the(cid:10) U.S. Patent and Trademark Office (the "PTO") of a patent to us filed in our name(cid:10) or an approval of an ANDA or NDA;(cid:10) 49(cid:10) (cid:10) provided, however the foregoing options terminate upon the executive's(cid:10) termination of employment except that options under (D) and (F) nevertheless(cid:10) vest if the filing was made during the initial term but prior to termination of(cid:10) the executive's employment by us without cause and the approval was made within(cid:10) 540 days of the filing of the ANDA, NDA or patent application.(cid:10) We also agreed that in the event that, as to Mr. Berk, all of the options(cid:10) to purchase the full 400,000 Mr. Berk's Previous Milestone Options have fully(cid:10) vested during the initial term of the agreement and as to each of Dr. Behl and(cid:10) Mr. Dick all 200,000 Milestone Options have fully vested during the initial term(cid:10) of his agreement, we will grant under the Stock Option Plan to the executive at(cid:10) the end of the first current fiscal year in which the following event occurs(cid:10) fully vested additional options to purchase the following shares at the fair(cid:10) market value on the date of grant (the "ADDITIONAL MILESTONE OPTIONS"): (a) to(cid:10) the extent not previously vested with respect to his comparable Milestone(cid:10) Options: (i) up to 125,000 shares upon the commencement of the first Phase III(cid:10) clinical trial relating to the first Non-Generic Opioid Drug developed by us and(cid:10) (ii) up to an additional 125,000 shares as to such trial relating to the second(cid:10) Non-Generic Opioid Drug developed by us, (b) 50,000 shares upon the closing of(cid:10) each product license for the United States national market or product sale(cid:10) transaction of all ownership rights (on a product by product basis and only once(cid:10) for each product); (c) 10,000 shares upon the filing by us (in our name) with(cid:10) the FDA of either an ANDA or NDA for a product not covered by a previous FDA(cid:10) application for each drug product of us, other than the Non-Generic Opioid Drugs(cid:10) for which any Opioid Option was granted under the Agreement; (d) 40,000 shares(cid:10) upon the approval by the FDA of any ANDA, NDA or 505(b)(2) application filed in(cid:10) our name for a product not previously approved by the FDA; (e) 25,000 shares in(cid:10) the event of the filing of an application of an additional U.S. patent by us(cid:10) (filed in our name); and (f) 25,000 shares in the event of the granting by the(cid:10) PTO of the foregoing additional patent applications to us (filed in our name).(cid:10) The Berk Agreement acknowledges that Mr. Berk holds previously granted(cid:10) incentive stock options to purchase 725,000 shares, of which 300,000 vested(cid:10) options are exercisable at $2.01 per share, 225,000 vested options are(cid:10) exercisable at $2.15 per share and 100,000 vested options are exercisable at(cid:10) $2.69 per share, and the remaining 100,000 options, which vest on September 2,(cid:10) 2007, are exercisable at $2.69 per share.(cid:10) Each employment agreement allows us at our discretion to grant to the(cid:10) executive additional options under the Stock Option Plan and provides each(cid:10) executive the right to register at our expense for reoffering shares issued upon(cid:10) exercise of the options under the Securities Act of 1933, as amended, in certain(cid:10) registration statements filed by us with respect to offerings of securities by(cid:10) us.(cid:10) Berk's Agreement provides that if we terminate his employment due to his(cid:10) permanent disability, without cause or he terminates his employment for good(cid:10) reason, Mr. Berk shall be entitled to the following severance: (i) any earned(cid:10) but unpaid base salary plus any unpaid reimbursable expenses as of the effective(cid:10) date of termination of his employment, (ii) the then-current base salary and(cid:10) reimbursement of the cost to replace the life and disability insurance coverages(cid:10) afforded to Mr. Berk under our benefit plans with substantially similar(cid:10) coverages, following the effective date of termination of his employment, for a(cid:10) period equal to the greater of (x) the remainder of the then-current term, or(cid:10) (y) two years following the effective date of termination and (iii) payment by(cid:10) us of premiums for health insurance for the period during which Mr. Berk is(cid:10) entitled to continued health insurance coverage as specified in the(cid:10) Comprehensive Omnibus Budget Reconciliation Act. In the event that we terminate(cid:10) Mr. Berk's employment because of his permanent disability, Mr. Berk is to be(cid:10) entitled to the severance specified above, less any amounts actually received by(cid:10) him under any disability insurance coverage provided for and paid by us. In the(cid:10) event that we terminate Mr. Berk's employment for cause or Mr. Berk terminates(cid:10) 50(cid:10) (cid:10) his employment with us without good reason, Mr. Berk shall be entitled to any(cid:10) earned but unpaid base salary plus any unpaid reimbursable expenses as of the(cid:10) effective date of termination of his employment.(cid:10) Berk's Agreement provides that in the event of a change of control in lieu(cid:10) of any severance that may otherwise be payable to him if Mr. Berk elects to(cid:10) terminate his employment for any reason within 90 days thereof, or we elect to(cid:10) terminate his employment within 180 days thereof, other than for cause, he is to(cid:10) be entitled to the following: (i) any earned but unpaid base salary plus any(cid:10) unpaid reimbursable expenses as of the effective date of termination of his(cid:10) employment, (ii) $1,000,000, (iii) the then-current base salary for a period of(cid:10) 12 months following the effective date of termination, (iv) reimbursement of the(cid:10) cost, for a period of 12 months following the effective date of termination, of(cid:10) replacing the life and disability insurance coverage afforded to Mr. Berk under(cid:10) our benefit plans with substantially similar coverage and (v) payment by us of(cid:10) premiums for health insurance for the period during which Mr. Berk is entitled(cid:10) to continued health insurance coverage as specified in the Comprehensive Omnibus(cid:10) Budget Reconciliation Act.(cid:10) Each of Behl's and Dick's Agreements provide that in the event we(cid:10) terminate his employment for "CAUSE" as defined in the agreement or the(cid:10) executive terminates employment without good reason, he is to receive salary(cid:10) through date of termination, reimbursement for expenses incurred prior to(cid:10) termination, all unvested options will terminate as of the date of termination(cid:10) and vested options will be governed by the terms of the Stock Option Plan and(cid:10) the related option agreement. In the event of a termination due to death,(cid:10) disability or by us without cause or by Dr. Behl or Mr. Dick for good reason, we(cid:10) are to pay him or his estate subject to his compliance with certain covenants,(cid:10) including non-competition, non-solicitation, confidentiality and assignment of(cid:10) intellectual property, his base salary for the longer of the balance of the(cid:10) initial term or one year from date of termination, continue health insurance(cid:10) coverage for 12 months from termination and his vested options are to be(cid:10) exercisable for 90 days from date of termination. Dr. Behl's amended agreement(cid:10) provides that the definition of "cause" has been amended to include a(cid:10) determination by the Board of Directors, in its sole discretion, that the(cid:10) employment of Dr. Behl should terminate, provided that such termination will be(cid:10) effective on the 30th day after the written notice to Dr. Behl of such(cid:10) determination.(cid:10) In the event the employment of Dr. Behl or Mr. Dick is terminated by us(cid:10) following a "CHANGE OF CONTROL" of Elite, each will be entitled to the amounts(cid:10) payable as a result of termination by us without cause plus a lump sum payment(cid:10) of $500,000 and all unvested options shall immediately vest and along with(cid:10) unexercised vested options be exercisable within 90 days from the date of(cid:10) termination. "Change of control" is defined in each of their agreements as the(cid:10) acquisition of Elite pursuant to a merger or consolidation which results in the(cid:10) reduction to less than 50% of the shares outstanding upon consummation of the(cid:10) holders of its outstanding shares immediately prior thereto or sale of(cid:10) substantially all our assets or capital stock to another person, or the(cid:10) acquisition by a person or a related group in a single transaction or a series(cid:10) of related transaction of more than 50% of the combined voting power of Elite's(cid:10) outstanding voting securities.(cid:10) Berk's Agreement contains his non-solicitation covenant for a period of(cid:10) one year from termination. Each of Dr. Behl and Mr. Dick has agreed to a(cid:10) one-year following termination non-competition covenant and a two year following(cid:10) termination non-solicitation covenant.(cid:10) The executives are to be reimbursed for expenses (including business,(cid:10) travel and entertainment) reasonably incurred in the performance of their(cid:10) duties, with Dr. Behl's and Mr. Dick's agreements providing that reimbursement(cid:10) of expenses in excess of $2,000 per month are subject to the approval of our(cid:10) Chief Executive Officer. Each of the executives is entitled to participate in(cid:10) such employee benefit and welfare plans and programs, which may be offered to(cid:10) our senior executives including life insurance, health and accident, medical(cid:10) plans and programs and profit sharing and retirement plans.(cid:10) 51(cid:10) (cid:10) Each employment agreement is for an initial term ending November 13, 2009,(cid:10) subject to automatic one-year renewals unless terminated by the executive or us(cid:10) upon at least 60 days notice prior to the end of the then scheduled expiration(cid:10) date. We have the right to terminate Mr. Berk's employment in the event of his(cid:10) inability to perform work due to physical or mental illness or injury for nine(cid:10) full calendar months during any eight consecutive calendar months. We have the(cid:10) right to terminate Dr. Behl's or Mr. Dick's employment due to disability as(cid:10) defined in a long-term disability insurance policy reasonably satisfactory to(cid:10) him or, in the absence of such policy, due to Dr. Behl's or Mr. Dick's, as the(cid:10) case may be, inability for 120 days in any 12 month period to substantially(cid:10) perform his duties as a result of a physical or mental illness.(cid:10) MR. GITTELMAN(cid:10) On February 26, 1998, we entered into an agreement with Gittelman & Co.,(cid:10) P.C., whereby fees are paid to Gittelman & Co., P.C., a firm wholly-owned by(cid:10) Mark I. Gittelman, our Chief Financial Officer, Secretary and Treasurer, in(cid:10) consideration for services rendered by the firm as internal accountant and(cid:10) financial and management consultant. The firm's services include the services(cid:10) rendered by Mr. Gittelman in his capacity as Chief Financial Officer, Secretary(cid:10) and Treasurer. For the fiscal years ended March 31, 2007, 2006 and 2005, the(cid:10) fees paid by us under the agreement were $151,214, $154,704, and $111,312. The(cid:10) services rendered by the firm to us averaged 98, 103 and 84 hours per month,(cid:10) respectively, of which an average of 25 hours per month were services rendered(cid:10) by him in his capacity as an officer of Elite.(cid:10) DR. SUBRAMANIAN(cid:10) Dr. Subramanian entered into an Advisory Services Agreement with us on(cid:10) December 6, 2006, the terms of which are summarized under Item 13. - Certain(cid:10) Relationships and Related Transactions, and Director Independence."(cid:10) HEDGING POLICY(cid:10) We do not permit the Named Executive Officers, to "hedge" ownership by(cid:10) engaging in short sales or trading in any options contracts involving our(cid:10) securities.(cid:10) 52(cid:10) (cid:10) COMPENSATION OF EXECUTIVE OFFICERS(cid:10) SUMMARY COMPENSATION TABLE(cid:10) The table below summarizes the compensation information in respect of the(cid:10) Named Executive Officers for the fiscal years ended March 31, 2007, 2006 and(cid:10) 2005.(cid:10) (cid:10)
(cid:10) CHANGE IN(cid:10) PENSION VALUE(cid:10) AND(cid:10) NONQUALIFIED(cid:10) NON-EQUITY DEFERRED(cid:10) NAME STOCK OPTION INCENTIVE COMPENSATION ALL OTHER(cid:10) AND YEAR SALARY BONUS AWARDS AWARDS PLAN EARNINGS COMPENSATION TOTAL(cid:10) PRINCIPAL (1) (2) (3) (4) COMPENSATION(cid:10) POSITION ($) ($) ($) ($) ($) ($) ($) ($)(cid:10) ----------------- ------- ------- ------- ------ ------- ------------ ------------ ------------ -----(cid:10) (cid:10) Bernard Berk 2006-07 393,203 -- -- 574,422 -- -- 21,260(7) 988,885(cid:10) President and(cid:10) Chief Executive 2005-06 344,295 150,000 -- 379,439 -- -- -- 873,734(cid:10) Officer(cid:10) 2004-05 200,000 50,000 -- 488,782 -- -- -- 738,782(cid:10) Mark. Gittelman 2006-07 -- -- -- 83,293 -- -- -- 83,293(cid:10) Chief(cid:10) Financial Officer 2005-06 -- -- -- 23,100 -- -- -- 23,100(cid:10) 2004-05 -- -- -- 19,109 -- -- -- 19,109(cid:10) Chris Dick 2006-07 168,750 25,000 -- 482,037 -- -- 678,937(cid:10) Executive(cid:10) Vice President 2005-06 150,000 25,000 -- -- -- -- 3,150(8) 175,000(cid:10) of Corporate(cid:10) Development 2004-05 140,250 25,000 -- 76,687 -- -- -- 241,937(cid:10) Charan Behl(5) 2006-07 344,135 25,000 -- 482,037 -- -- 851,172(cid:10) Head of(cid:10) Technical Affairs 2005-06 450,000 -- -- -- -- -- -- 450,000(cid:10) 2004-05 392,455(6) -- -- -- -- -- -- 392,455(cid:10) Veerappan 2006-07 -- -- -- 1,114,445 -- -- -- 1,114,445(cid:10) Subramanian(cid:10) Chief Scientific 2005-06 -- -- -- -- -- -- -- --(cid:10) Officer(cid:10) 2004-05 -- -- -- -- -- -- -- --(cid:10)
(cid:10) 53(cid:10) (cid:10) ----------(cid:10) 1 The information is provided for each fiscal year which begins on April 1(cid:10) and ends on March 31.(cid:10) 2 Bonuses paid to Mr. Berk represent discretionary bonuses and bonuses paid(cid:10) to Mr. Dick and Dr. Behl represents guaranteed bonuses.(cid:10) 3 No stock awards were granted to the Named Executive Officers in the fiscal(cid:10) years ended March 31, 2007, 2006 and 2005.(cid:10) 4 The amounts reflect the compensation expense in accordance with FAS 123(R)(cid:10) of these option awards. The assumptions used to determine the fair value(cid:10) of the option awards for fiscal years ended March 31, 2007, 2006 and 2005(cid:10) are set forth in note 9 of our financial statements for the year ended(cid:10) March 31, 2007. Our Named Executive Officers will not realize the value of(cid:10) these awards in cash unless and until these awards are exercised and the(cid:10) underlying shares subsequently sold.(cid:10) 5 Dr. Behl was Executive Vice President and Chief Scientific Officer from(cid:10) March 9, 2006 to February 9, 2007 and has been Head of Technical Affairs(cid:10) since February 9, 2007.(cid:10) 6 Includes $229,325 of fees paid by the issuance to Dr. Behl of units, each(cid:10) consisting of (i) a share of Series A Preferred Stock convertible into ten(cid:10) shares of Common Stock and (ii) ten common stock purchase warrants, at the(cid:10) rate of $12.30 per unit.(cid:10) 7 Represents $16,345 for auto and parking allowance and $4,915 for life(cid:10) insurance premiums.(cid:10) 8 Represents $3,150 for auto and parking allowance.(cid:10) GRANTS OF PLAN-BASED AWARDS(cid:10) The following table sets forth information regarding grants of plan based(cid:10) awards to the Named Executive Officers during the fiscal year ended March 31,(cid:10) 2007.(cid:10) (cid:10)
(cid:10) ESTIMATED FUTURE PAYOUTS(cid:10) ESTIMATED POSSIBLE PAYOUTS UNDER(cid:10) UNDER NON-EQUITY INCENTIVE EQUITY INCENTIVE PLAN(cid:10) PLAN AWARDS AWARDS(cid:10) ------------------------------------ -------------------------------------------(cid:10) GRANT THRESHOLD TARGET MAXIMUM THRESHOLD TARGET MAXIMUM(cid:10) NAME DATE ($) ($) ($) (#) (#) 7(#)(cid:10) ---- ----- --------- ------ ------- --------- ------ -------(cid:10) (cid:10) Bernard Berk 11.13.06 -- -- -- -- 300,000(3)(4) --(cid:10) President and(cid:10) Chief Executive(cid:10) Officer(cid:10) Mark. Gittelman 05.3.06 -- -- -- -- 70,000(2) --(cid:10) Chief(cid:10) Financial(cid:10) Officer(cid:10) Chris Dick 11.13.06 -- -- -- -- 750,000(3)(4)(5)(6) --(cid:10) Executive(cid:10) Vice(cid:10) President of(cid:10) Corporate(cid:10) Development(cid:10) Charan Behl 11.13.06 -- -- -- -- 750,000(3)(4)(5)(6) --(cid:10) Head of(cid:10) Technical Affairs(cid:10) Veerappan 12.06.06 -- -- -- -- 1,750,000(7) --(cid:10) Subramanian(cid:10) Chief(cid:10) Scientific(cid:10) Officer(cid:10) (cid:10) ALL OTHER ALL OTHER GRANT(cid:10) STOCK OPTION DATE FAIR(cid:10) AWARDS: AWARDS: EXERCISE OR VALUE OF(cid:10) NUMBER OF NUMBER OF BASE PRICE STOCK AND(cid:10) SHARES OF SECURITIES OF OPTION OPTION(cid:10) STOCK OR UNDERLYING AWARDS AWARDS(cid:10) NAME UNITS (#) OPTIONS (#) ($/SH) (1)(cid:10) ---- --------- ----------- ---------- ---------(cid:10) (cid:10) Bernard Berk -- -- $ 3.00(8) $ 411,000(cid:10) President and(cid:10) Chief Executive(cid:10) Officer(cid:10) Mark. Gittelman -- -- $ 2.26 $ 116,200(cid:10) Chief(cid:10) Financial(cid:10) Officer(cid:10) Chris Dick -- -- $ 2.25(9) $1,027,500(cid:10) Executive(cid:10) Vice(cid:10) President of(cid:10) Corporate(cid:10) Development(cid:10) Charan Behl -- -- $ 2.25(9) $1,027,500(cid:10) Head of(cid:10) Technical Affairs(cid:10) Veerappan -- -- $ 2.13(10) $2,380,000(cid:10) Subramanian(cid:10) Chief(cid:10) Scientific(cid:10) Officer(cid:10)
(cid:10) 54(cid:10) (cid:10) 1 The amounts reflect the compensation expense in accordance with FAS 123(R)(cid:10) of these option awards. The assumptions used to determine the fair value(cid:10) of the option awards for fiscal years ended March 31, 2007, 2006 and 2005(cid:10) are set forth in note 9 of our financial statements for the year ended(cid:10) March 31, 2007. Our Named Executive Officers will not realize the value of(cid:10) these awards in cash unless and until these awards are exercised and the(cid:10) underlying shares subsequently sold.(cid:10) 2 Represents options that vest in annual increments over a three year period(cid:10) on May 3, 2007, May 3, 2008 and May 3, 2009, respectively.(cid:10) 3 The options were granted under our 2004 Stock Option Plan.(cid:10) 4 Represents (i) 150,000 options that vest upon the closing of an exclusive(cid:10) product license for the first of the United States national market, the(cid:10) entire European Union market or the Japan market or product sale(cid:10) transaction of all of our ownership rights in the United States (only once(cid:10) for each individual product) for our first Non-Generic Opioid Drug; and(cid:10) (ii) 150,000 options that vest upon the closing of an exclusive product(cid:10) license for the United States national market, the entire European Union(cid:10) market or the Japan market or product sale transaction of all of our(cid:10) ownership rights in the United States (only once for each individual(cid:10) product) for our second Non-Generic Opioid Drug.(cid:10) 5 Represents 250,000 options that vested on November 13, 2006.(cid:10) 6 Represents 200,000 options that vest as follows: (i) upon the commencement(cid:10) of the first Phase III clinical trial relating to the first "Non-Generic(cid:10) Opioid Drug" developed by us as to 125,000 options and relating to the(cid:10) second "Non-Generic Opioid Drug" developed by the company as to 75,000(cid:10) options; (ii) 50,000 shares of Common Stock shall vest and become(cid:10) immediately exercisable in full only upon the closing of an exclusive(cid:10) product license for the United States national market or product sale(cid:10) transaction of all of our ownership rights (on a product by product basis(cid:10) and only once for each individual product) for each Company drug product,(cid:10) other than the "Non-Generic Opioid Drugs" for which the "Non-Generic(cid:10) Opioid Drug" options were granted; (iii) 10,000 options upon the filing by(cid:10) us (in our name) with the FDA of either an ANDA or a NDA (including a NDA(cid:10) filed with the FDA, for a product not covered by a previous FDA(cid:10) application; (iv) 40,000 options upon the approval by the FDA of any ANDA(cid:10) or NDA (filed in our name) for a product not previously approved by the(cid:10) FDA; (v) 25,000 options upon filing of an application for U.S. patent by(cid:10) us (filed in our name); and (vi) 25,000 options upon the granting by U.S.(cid:10) Patent and Trademark Office of a patent to us (filed in our name).(cid:10) 7 Represents options that vest as follows: (i) 250,000 on December 6, 2006,(cid:10) (ii) 250,000 on May 6, 2007, (iii) 250,000 on December 6, 2007, (iv)(cid:10) 250,000 on our acceptance of the initial business plan of Novel, (v)(cid:10) 250,000 on the earliest to occur of the (x) dosing of a human patient in(cid:10) the first clinical trial, (y) dosing of a human subject in the first(cid:10) bioequivalence study, or (z) in the event that neither a clinical trial(cid:10) nor a bioequivalence study is required under applicable law as a condition(cid:10) of marketing a Product Candidate (as defined below), the completion of(cid:10) stability testing of an exhibit batch of such Product Candidate, in each(cid:10) case, with respect to any drug product by us (excluding any drug products(cid:10) of Novel), developed under the advisory services to be provided by Dr.(cid:10) Subramanian to us under the Strategic Advisory Agreement (the "Advisory(cid:10) Services") that occurs on or after the sixtieth (60th) day after December(cid:10) 6, 2006 (such drug product, a "Product Candidate"), (vi) 250,000 on(cid:10) earliest to occur of (x) the completion of the first successful clinical(cid:10) trial for such Product Candidate as determined by the clinical research(cid:10) organization (the "CRO") performing such trial, (y) the completion of the(cid:10) first successful bioequivalence study for such Product Candidate as(cid:10) determined by the CRO performing such study that occurs on or after the(cid:10) sixtieth (60th) day after the date hereof, or (z) in the event that(cid:10) neither a clinical trial nor a bioequivalence study is required under(cid:10) applicable law as a condition of marketing such Product Candidate, the(cid:10) submission of an ANDA with the FDA, and (vii) 250,000 on earliest to occur(cid:10) of the (x) dosing of a human patient in the first clinical trial, (y)(cid:10) dosing of a human subject in the first bioequivalence study, (z) in the(cid:10) event that neither a clinical trial nor a bioequivalence study is required(cid:10) under applicable law as a condition of marketing a Product Candidate, the(cid:10) completion of stability testing of an exhibit batch of such Product(cid:10) Candidate, in each case, with respect to a second Product Candidate(cid:10) developed under the Advisory Services that occurs on or after the sixtieth(cid:10) (60th) day after the date hereof.(cid:10) 55(cid:10) (cid:10) OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END(cid:10) The following table sets forth information concerning stock options and(cid:10) stock awards held by the Named Executive Officers as of March 31, 2007.(cid:10) (cid:10)
(cid:10) OPTION AWARDS STOCK AWARDS(cid:10) ------------------------------------------------------------------ -------------------------------------(cid:10) EQUITY(cid:10) EQUITY INCENTIVE(cid:10) MARKET INCENTIVE PLAN(cid:10) NUMBER VALUE PLAN AWARDS:(cid:10) OF OF AWARDS: MARKET OR(cid:10) EQUITY SHARES SHARES NUMBER PAYOUT(cid:10) INCENTIVE OR OR OF VALUE OF(cid:10) PLAN UNITS UNITS UNEARNED UNEARNED(cid:10) AWARDS OF OF SHARES, SHARES,(cid:10) NUMBER OF NUMBER OF NUMBER OF STOCK STOCK UNITS UNITS(cid:10) SECURITIES SECURITIES SECURITIES HELD HELD OR OTHER OR OTHER(cid:10) UNDERLYING UNDERLYING UNDERLYING THAT THAT RIGHTS RIGHTS(cid:10) UNEXERCISED UNEXERCISED UNEXERCISED OPTION HAVE HAVE THAT THAT(cid:10) OPTIONS OPTIONS UNEARNED EXERCISE OPTION NOT NOT HAVE NOT HAVE NOT(cid:10) (#) (#) OPTIONS PRICE EXPIRATION VESTED VESTED VESTED VESTED(cid:10) NAME EXERCISABLE UNEXERCISABLE (#) ($) DATE (#) ($) (#) ($)(cid:10) -------------------- ----------- ------------- ----------- -------- ---------- ------- ------ --------- ---------(cid:10) (cid:10) Bernard Berk 300,000(1) -- -- $2.01 06/03/13 -- -- -- --(cid:10) President and 225,000(2) -- -- $2.15 07/22/13 -- -- -- --(cid:10) Chief Executive 30,000(3) -- -- $2.34 06/22/14 -- -- -- --(cid:10) Officer 10,000(4) -- -- $2.75 08/30/15 -- -- -- --(cid:10) -- 10,000(4) -- $2.75 08/30/15 -- -- -- --(cid:10) -- 10,000(4) -- $2.75 08/30/15 -- -- -- --(cid:10) 100,000(5) -- -- $2.69 09/02/15 -- -- -- --(cid:10) -- 100,000(5) -- $2.69 09/02/15 -- -- -- --(cid:10) -- -- 400,000(6) $2.69 09/02/15 -- -- -- --(cid:10) -- -- 150,000(7) $3.00 11/13/16 -- -- -- --(cid:10) -- -- 150,000(8) $3.00 11/13/16 -- -- -- --(cid:10) Mark.(cid:10) Gittelman(cid:10) Chief(cid:10) Financial(cid:10) Officer 10,000(9) -- -- $2.34 03/08/14 -- -- -- --(cid:10) 6,666(10) -- -- $2.80 07/14/15 -- -- -- --(cid:10) -- 6,667(10) -- $2.80 07/14/15 -- -- -- --(cid:10) -- 6,667(10) -- $2.80 07/14/15 -- -- -- --(cid:10) 23,333(11) -- -- $2.26 05/03/16 -- -- -- --(cid:10) -- 23,333(11) -- $2.26 05/03/16 -- -- -- --(cid:10) -- 23,334(11) -- $2.26 05/03/16 -- -- -- --(cid:10) Christopher Dick(cid:10) Executive(cid:10) Vice(cid:10) President of(cid:10) Corporate(cid:10) Development 10,000(12) -- -- $2.34 10/31/12 -- -- -- --(cid:10) 10,000(12) -- -- $2.34 10/31/12 -- -- -- --(cid:10) 10,000(12) -- -- $2.34 10/31/12 -- -- -- --(cid:10) 10,000(13) -- -- $2.21 06/13/13 -- -- -- --(cid:10) 10,000(13) -- -- $2.21 06/13/13 -- -- -- --(cid:10) 10,000(13) -- -- $2.21 06/13/13 -- -- -- --(cid:10) 40,000(14) -- -- $2.80 07/14/15 -- -- -- --(cid:10) 250,000(15) -- -- $2.25 11/13/16 -- -- -- --(cid:10) -- -- 150,000(7) $2.25 11/13/16 -- -- -- --(cid:10) -- -- 150,000(8) $2.25 11/13/16 -- -- -- --(cid:10) -- -- 200,000(6) $2.25 11/13/16 -- -- -- --(cid:10) Charan Behl(cid:10) Head of(cid:10) Technical Affairs 250,000(15) -- -- $2.25 11/13/16 -- -- -- --(cid:10) -- -- 150,000(7) $2.25 11/13/16 -- -- -- --(cid:10) -- -- 150,000(8) $2.25 11/13/16 -- -- -- --(cid:10) -- -- 200,000(6) $2.25 11/13/16 -- -- -- --(cid:10) Veerappan(cid:10) Subramanian(cid:10) Chief(cid:10) Scientific(cid:10) Officer 250,000(16) -- -- $2.13 12/16/16 -- -- -- --(cid:10) 250,000(16) -- -- $2.13 12/16/16 -- -- -- --(cid:10) 250,000(16) -- -- $2.13 12/16/16 -- -- -- --(cid:10) -- -- 250,000(16) $2.13 12/16/16 -- -- -- --(cid:10) -- -- 250,000(16) $2.13 12/16/16 -- -- -- --(cid:10) -- -- 250,000(16) $2.13 12/16/16 -- -- -- --(cid:10) -- -- 250,000(16) $2.13 12/16/16 -- -- -- --(cid:10)
(cid:10) -----------(cid:10) 1 These options vested as of June 3, 2003.(cid:10) 2 These options vested as of September 2, 2005(cid:10) 3 These options vested on June 22, 2004.(cid:10) 4 These options vest in annual increments over a three year period on August(cid:10) 30, 2006, August 30, 2007 and August 30, 2008, respectively.(cid:10) 5 These options vest in annual increments over a two year period on(cid:10) September 2, 2006 and September 2, 2007, respectively.(cid:10) 6 These options vest as follows: (i) upon the commencement of the first(cid:10) Phase III clinical trial relating to the first "Non-Generic Opioid Drug"(cid:10) developed by us as to 125,000 options and relating to the second(cid:10) "Non-Generic Opioid Drug" developed by the company as to 75,000 options;(cid:10) (ii) 50,000 shares of Common Stock shall vest and become immediately(cid:10) exercisable in full only upon the closing of an exclusive product license(cid:10) for the United States national market or product sale transaction of all(cid:10) of our ownership rights (on a product by product basis and only once for(cid:10) each individual product) for each Company drug product, other than the(cid:10) "Non-Generic Opioid Drugs" for which the "Non-Generic Opioid Drug" options(cid:10) were granted; (iii) 10,000 options upon the filing by us (in our name)(cid:10) with the FDA of either an ANDA or a NDA (including a NDA filed with the(cid:10) FDA, for a product not covered by a previous FDA application; (iv) 40,000(cid:10) options upon the approval by the FDA of any ANDA or NDA (filed in our(cid:10) name) for a product not previously approved by the FDA; (v) 25,000 options(cid:10) upon filing of an application for U.S. patent by us (filed in our name);(cid:10) and (vi) 25,000 options upon the granting by U.S. Patent and Trademark(cid:10) Office of a patent to us (filed in our name).(cid:10) 7 These options vest upon the closing of an exclusive product license for(cid:10) the first of the United States national market, the entire European Union(cid:10) market or the Japan market or product sale transaction of all of our(cid:10) ownership rights in the United States (only once for each individual(cid:10) product) for our first Non-Generic Opioid Drug.(cid:10) 8 These options vest upon the closing of an exclusive product license for(cid:10) the United States national market, the entire European Union market or the(cid:10) Japan market or product sale transaction of all of our ownership rights in(cid:10) the United States (only once for each individual product) for our second(cid:10) Non-Generic Opioid Drug.(cid:10) 9 These options vested on June 22, 2004.(cid:10) 10 These options vest in annual increments over a three year period on July(cid:10) 14, 2006, July 14, 2007 and July 14, 2008, respectively.(cid:10) 11 These options vest in annual increments over a three year period on May 3,(cid:10) 2007, May 3, 2008 and May 3, 2009, repsectively.(cid:10) 12 These options vested on November 1, 2003, 2004 and 2005, respectively.(cid:10) 13 These options vested on June 13, 2004, 2005 and 2006, respectively.(cid:10) 14 These options vested on July 14, 2005.(cid:10) 15 These options vested on November 13, 2006.(cid:10) 16 These options vest as follows: (i) 250,000 on December 6, 2006, (ii)(cid:10) 250,000 on May 6, 2007, (iii) 250,000 on December 6, 2007, (iv) 250,000 on(cid:10) our acceptance of the initial business plan of Novel Laboratories, Inc.(cid:10) ("Novel"), (v) 250,000 on the earliest to occur of the (x) dosing of a(cid:10) human patient in the first clinical trial, (y) dosing of a human subject(cid:10) in the first bioequivalence study, or (z) in the event that neither a(cid:10) clinical trial nor a bioequivalence study is required under applicable law(cid:10) as a condition of marketing a Product Candidate (as defined below), the(cid:10) completion of stability testing of an exhibit batch of such Product(cid:10) Candidate, in each case, with respect to any drug product by us (excluding(cid:10) any drug products of Novel), developed under the advisory services to be(cid:10) provided by Dr. Subramanian to us under the Strategic Advisory Agreement(cid:10) (the "Advisory Services") that occurs on or after the sixtieth (60th) day(cid:10) after December 6, 2006 (such drug product, a "Product Candidate"), (vi)(cid:10) 250,000 on earliest to occur of (x) the completion of the first successful(cid:10) clinical trial for such Product Candidate as determined by the clinical(cid:10) research organization (the "CRO") performing such trial, (y) the(cid:10) completion of the first successful bioequivalence study for such Product(cid:10) Candidate as determined by the CRO performing such study that occurs on or(cid:10) after the sixtieth (60th) day after the date hereof, or (z) in the event(cid:10) that neither a clinical trial nor a bioequivalence study is required under(cid:10) applicable law as a condition of marketing such Product Candidate, the(cid:10) submission of an ANDA with the FDA, and (vii) 250,000 on earliest to occur(cid:10) of the (x) dosing of a human patient in the first clinical trial, (y)(cid:10) dosing of a human subject in the first bioequivalence study, (z) in the(cid:10) event(cid:10) 56(cid:10) (cid:10) that neither a clinical trial nor a bioequivalence study is required under(cid:10) applicable law as a condition of marketing a Product Candidate, the(cid:10) completion of stability testing of an exhibit batch of such Product(cid:10) Candidate, in each case, with respect to a second Product Candidate(cid:10) developed under the Advisory Services that occurs on or after the sixtieth(cid:10) (60th) day after the date hereof.(cid:10) OPTION EXERCISES AND STOCK VESTED(cid:10) No options have been exercised by our Named Executive Officers during(cid:10) fiscal year ended March 31, 2007.(cid:10) PENSION BENEFITS(cid:10) We do not provide pension benefits to the Named Executive Officers.(cid:10) NONQUALIFIED DEFERRED COMPENSATION(cid:10) We do not have any defined contribution or other plan that provides for(cid:10) the deferral of compensation on a basis that is not tax-qualified.(cid:10) POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL(cid:10) Please see the discussion under "Compensation Discussion and Analysis -(cid:10) Agreements with Named Executive Officers."(cid:10) DIRECTOR COMPENSATION(cid:10) The following table sets forth director compensation for the year ended(cid:10) March 31, 2007:(cid:10) (cid:10)
(cid:10) CHANGE IN(cid:10) PENSION(cid:10) VALUE AND(cid:10) FEES EARNED NON QUALIFIED(cid:10) OR PAID STOCK OPTION NON EQUITY DEFERRED(cid:10) IN CASH AWARDS AWARDS INCENTIVE PLAN COMPENSATION ALL OTHER TOTAL(cid:10) NAME ($)(1) ($) ($) COMPENSATION EARNINGS COMPENSATION ($)(cid:10) ---- ----------- ------ ------ -------------- -------------- ------------ -------(cid:10) (cid:10) Bernard Berk $6,000 --- --- --- --- --- $6,000(cid:10) Edward Neugeboren $6,000 --- --- --- --- --- $6,000(cid:10) Barry Dash $4,000 --- --- --- --- --- $4,000(cid:10) Melvin Van Woert $4,000 --- --- --- --- --- $4,000(cid:10) Veerappan Subramanian --- --- --- --- --- --- ---(cid:10)
(cid:10) -----------(cid:10) (1) Consists of a fee of $2000 for each meeting attended by a Director.(cid:10) EQUITY COMPENSATION(cid:10) Members of the Board of Directors during the fiscal year ended March 31,(cid:10) 2006 received 30,000 options each in August 2005 and no members of the Board of(cid:10) Directors received any options or other equity compensation during the fiscal(cid:10) year ended March 31, 2007 for serving as a director.(cid:10) OTHER COMPENSATION(cid:10) We do not pay or reimburse non-employee Directors for travel expenses(cid:10) incurred in connection with attending Board, committee and shareholder meetings.(cid:10) Each Director receives $2,000 per each meeting such Director attends. Except as(cid:10) described in this section, non-employee Directors do not receive any additional(cid:10) compensation for their services on the Board of Directors.(cid:10) 57(cid:10) (cid:10) ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND(cid:10) RELATED STOCKHOLDER MATTERS(cid:10) The following table sets forth certain information regarding beneficial(cid:10) ownership of our Common Stock as of May 15, 2007 by (i) by each person who is(cid:10) known by us to own beneficially more than 5% of the Common Stock, (ii) by each(cid:10) of our directors and nominees for director, (iii) by each of the Named Executive(cid:10) Officers (as defined below) and (iv) by all our directors and executive officers(cid:10) as a group. On such date, we had 20,820,048 shares of Common Stock outstanding(cid:10) (exclusive of 100,000 treasury shares). (The 9,550 shares of Series B Preferred(cid:10) Stock outstanding and 15,000 shares of Series C Preferred Stock are nonvoting(cid:10) and none of the individuals listed below beneficially owns any shares of Series(cid:10) B Preferred Stock or Series C Preferred Stock other than Barry Dash who owns 20(cid:10) shares of Series C Preferred Stock. There are currently no shares of Series A(cid:10) Preferred Stock outstanding).(cid:10) As used in the table below and elsewhere in this proxy statement, the(cid:10) term beneficial ownership with respect to a security consists of sole or shared(cid:10) voting power, including the power to vote or direct the vote, and/or sole or(cid:10) shared investment power, including the power to dispose or direct the(cid:10) disposition, with respect to the security through any contract, arrangement,(cid:10) understanding, relationship, or otherwise, including a right to acquire such(cid:10) power(s) during the 60 days immediately following the Record Date. Except as(cid:10) otherwise indicated, the stockholders listed in the table have sole voting and(cid:10) investment powers with respect to the shares indicated.(cid:10) (cid:10)
(cid:10) NAME AND ADDRESS COMMON STOCK(cid:10) ---------------- ------------(cid:10) AMOUNT %(cid:10) ------ ---(cid:10) (cid:10) Bernard Berk, Director, President and Chief Executive Officer* 1,532,300(1) 6.9(cid:10) Edward Neugeboren, Director* 201,063(2) **(cid:10) Barry Dash, Director* 28,207(3) **(cid:10) Melvin Van Woert, Director* 10,000(4) **(cid:10) Veerappan Subramanian, Director and Chief Scientific Officer* 2,962,894(5) 13(cid:10) Dr. Charan Behl(6)* 1,296,000(7) 6(cid:10) Chris Dick, Executive Vice President of Corporate Development* 885,287(8) 4.1(cid:10) Mark I. Gittelman, Chief Financial Officer* 39,999(9) **(cid:10) Trellus Management Company(cid:10) Adam Usdan 3,450,795(10) 14.8(cid:10) 350 Madison Avenue, 9th Floor(cid:10) New York, New York 10017(cid:10) Mark Fain 1,204,570(11) 5.8(cid:10) 237 Park Avenue, Suite 900(cid:10) New York, NY 10017(cid:10) Chad Comiteau 1,152,712(12) 5.5(cid:10) 237 Park Avenue, Suite 900(cid:10) New York, NY 10017(cid:10) Davidson Kempner Healthcare International Ltd. 3,735,816(13) 15.2(cid:10) 65 East 55th Street, 19th Floor(cid:10) New York, NY 10022(cid:10) All Directors and Officers as a group 6,955,750(14) 26.6(cid:10)
(cid:10) ------------------------(cid:10) * The address is c/o Elite Pharmaceuticals Inc., 165 Ludlow Avenue, Northvale,(cid:10) NJ 07647.(cid:10) ** Less than 1%(cid:10) (1) Includes options to purchase 1,365,000 shares of Common Stock. See "Named(cid:10) Executive Officers."(cid:10) (2) Includes options and warrants to purchase an aggregate of 170,571 shares of(cid:10) Common Stock.(cid:10) (3) Represents options to purchase 10,000 shares of Common Stock, 20 shares of(cid:10) Series C Preferred Stock convertible into 8,621 shares of Common Stock and(cid:10) warrants to purchase 2,586 shares of Common Stock.(cid:10) 58(cid:10) (cid:10) (4) Represents options to purchase shares of Common Stock.(cid:10) (5) Includes options to purchase 1,500,000 shares of Common Stock which are(cid:10) owned by Dr. Subramanian and 957,396 shares of Common Stock and warrants to(cid:10) purchase 478,698 shares of Common Stock which are owned by VGS Pharma, LLC(cid:10) ("VGS"), a wholly-owned subsidiary of Kali Capital, L.P., which is controlled by(cid:10) Kali Management, LLC ("KALI"), its general partner, and Kali is controlled by(cid:10) the daughter of Dr. Subramanian, its managing member. Dr. Subramanian disclaims(cid:10) beneficial ownership of these shares of Common Stock, except to the extent of(cid:10) his pecuniary interest therein, if any.(cid:10) (6) Dr. Behl was Executive Vice President and Chief Scientific Officer from(cid:10) March 9, 2006 to February 9, 2007 and has been Head of Technical Affairs since(cid:10) February 9, 2007. See "Named Executive Officers."(cid:10) (7) Includes warrants to purchase 130,000 shares of Common Stock and options to(cid:10) purchase 750,000 shares of Common Stock. See "Named Executive Officers."(cid:10) (8) Includes options to purchase 850,000 shares of Common Stock and warrants(cid:10) held by Mr. Dick and Hedy Rogers as joint tenants to purchase 10,479 shares of(cid:10) Common Stock.(cid:10) (9) Represents options to purchase shares of Common Stock.(cid:10) (10) Based on information provided by Trellus Management Company, LLC ("TMC")(cid:10) and Adam Usdan in the Schedule 13G filed February 13, 2007 and also based on(cid:10) information set forth in Form S-3 filed on May 24, 2007. Includes 862,068 shares(cid:10) of Common Stock issuable upon conversion of Series C Preferred Stock held in the(cid:10) aggregate by Trellus Partners L.P ("TP"), Trellus Partners II L.P. ("TPI") and(cid:10) Trellus Offshore Fund Limited ("TPOF"), 888,889 shares of Common Stock issuable(cid:10) upon conversion of shares of Series B Preferred Stock held by TP and 703,063(cid:10) shares of Common Stock issuable upon exercise of warrants held in the aggregate(cid:10) by TP, TPI and TPOF. Adam Usdan is President of TMC. Adam Usdan and TMC share(cid:10) voting power and dispositive power over the shares. Notwithstanding the(cid:10) inclusion of the aforementioned beneficial ownership calculation, pursuant to(cid:10) our Certificate of Designation of Preferences, Rights and Limitations of Series(cid:10) C 8% Preferred Stock, the Amended Certificate of Designations of the Series B 8%(cid:10) Convertible Preferred Stock and the Common Stock Purchase Warrant for the(cid:10) aforementioned warrants, the number of shares of Common Stock into which the(cid:10) Series C 8% Preferred Stock and Series B 8% Preferred Stock are convertible and(cid:10) the warrants are exercisable is limited to that number of shares of Common Stock(cid:10) which would result in the Adam Usdan and TMC affiliated entities having(cid:10) aggregate beneficial ownership of not more than 9.99% of the total issued and(cid:10) outstanding shares of Common Stock.(cid:10) (11) Based on information provided by Mark Fain and Chad Comiteau in their(cid:10) Schedule 13G/A filed February 6, 2007. Mark Fain beneficially owned 1,204,570(cid:10) shares of Common Stock, which amount includes (i) 179,967 shares beneficially(cid:10) owned by Mr. Fain over which he has sole voting power and sole dispositive(cid:10) power; (ii) 33,333 convertible shares beneficially owned by Mr. Fain over which(cid:10) he has sole voting power and sole dispositive power; (iii) 33,000 shares(cid:10) beneficially owned by Stratford Management Money Purchase Pension Plan over(cid:10) which Mr. Fain has shared voting power and shared dispositive power; (iv)(cid:10) 808,270 shares beneficially owed by Stratford Partners, L.P. of which Mr. Fain(cid:10) is a Managing Member, and over which Mr. Fain has shared voting power and shared(cid:10) dispositive power; and (v) 150,000 convertible shares beneficially owed by(cid:10) Stratford Partners, L.P. over which Mr. Fain has shared voting power and shared(cid:10) dispositive power.(cid:10) (12) Based on information provided by Mark Fain and Chad Comiteau in their(cid:10) Schedule 13G/A filed February 6, 2007. Chad Comiteau beneficially owned(cid:10) 1,152,712 shares of Common Stock which amount includes (i) 187,047 shares(cid:10) beneficially owned by Mr. Comiteau over which he has sole voting power and sole(cid:10) dispositive power; (ii) 32,665 convertible shares beneficially owned by Mr.(cid:10) Comiteau over which he has sole voting power and sole dispositive power; (iii)(cid:10) 33,000 shares beneficially owned by Stratford Management Money Purchase Pension(cid:10) Plan over which he has shared voting power and shared dispositive power; (iv)(cid:10) 808,270 shares beneficially owed by Stratford Partners, L.P. of which Mr.(cid:10) Comiteau is a Managing Member,(cid:10) 59(cid:10) (cid:10) and over which Mr. Comiteau has shared voting power and shared dispositive(cid:10) power; and (v) 150,000 convertible shares beneficially owed by Stratford(cid:10) Partners, L.P. over which Mr. Comiteau has shared voting power and shared(cid:10) dispositive power.(cid:10) (13) Davidson Kempner Healthcare International Ltd. ("DKHI") and its affiliates,(cid:10) Davidson Kempner Partners ("DKP"), Davidson Kempner Institutional Partners, L.P.(cid:10) ("DKIP"), M.H. Davidson & Co. ("CO"), Davidson Kempner International, Ltd.(cid:10) (DKIL"), Serena Limited ("Serena"), Davidson Kempner Healthcare Fund LP(cid:10) ("DKHF"), MHD Management Co., Davidson Kempner Advisors Inc., Davidson Kempner(cid:10) International Advisors, L.L.C., DK Group LLC, DK Management Partners LP, DK(cid:10) Stillwater GP LLC, Thomas L. Kempner, Jr., Marvin H. Davidson, Stephen M.(cid:10) Dowicz, Scott E. Davidson, Michael J. Leffell, Timothy I. Levart, Robert J.(cid:10) Brivio, Jr., Anthony A. Yoseloff, Eric P. Epstein and Avram Z. Friedman jointly(cid:10) filed a Schedule 13G, dated May 11, 2007, reflecting the beneficial ownership,(cid:10) subject to an ownership limitation, of an aggregate of 6,667 Series C 8%(cid:10) Preferred Stock convertible into 2,873,707 shares of common stock and 862,109(cid:10) warrants exercisable into 862,109 shares of Common Stock as a result of their(cid:10) voting and dispositive power over 6,667 Series C 8% Preferred Stock convertible(cid:10) into 2,873,707 shares of Common Stock and 862,109 warrants exercisable into(cid:10) 862,109 beneficially owned by DKP, DKIP, DKIL, Serena, CO, DKHF and DKHI.(cid:10) Notwithstanding, the inclusion of the aforementioned beneficial ownership(cid:10) calculation, pursuant to our Certificate of Designation of Preferences, Rights(cid:10) and Limitations of Series C 8% Preferred Stock and the Common Stock Purchase(cid:10) Warrant for the aforementioned warrants, the number of shares of Common Stock(cid:10) into which the Series C 8% Preferred Stock are convertible and the warrants are(cid:10) exercisable is limited to that number of shares of Common Stock which would(cid:10) result in the Davidson Kempner affiliated entities having aggregate beneficial(cid:10) ownership of not more than 9.99% of the total issued and outstanding shares of(cid:10) Common Stock. The above information was obtained from such Schedule 13G.(cid:10) (14) Includes options and warrants to purchase an aggregate of 5,325,954 shares(cid:10) of Common Stock.(cid:10) 60(cid:10) (cid:10) ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR(cid:10) INDEPENDENCE.(cid:10) All related person transactions are reviewed and, as appropriate, may be(cid:10) approved or ratified by the Board of Directors. If a director is involved in the(cid:10) transaction, he or she may not participate in any review, approval or(cid:10) ratification of such transaction. Related person transactions are approved by(cid:10) the Board of Directors only if, based on all of the facts and circumstances,(cid:10) they are in, or not inconsistent with, our best interests and our stockholders,(cid:10) as the Board of Directors determines in good faith. The Board of Directors takes(cid:10) into account, among other factors it deems appropriate, whether the transaction(cid:10) is on terms generally available to an unaffiliated third-party under the same or(cid:10) similar circumstances and the extent of the related person's interest in the(cid:10) transaction. The Board of Directors may also impose such conditions as it deems(cid:10) necessary and appropriate on us or the related person in connection with the(cid:10) transaction.(cid:10) In the case of a transaction presented to the Board of Directors for(cid:10) ratification, the Board of Directors may ratify the transaction or determine(cid:10) whether rescission of the transaction is appropriate.(cid:10) CERTAIN RELATED PERSON TRANSACTIONS(cid:10) TRANSACTIONS WITH DR. SUBRAMANIAN AND VGS PHARMA LLC(cid:10) On December 6, 2006, we entered into a Strategic Alliance Agreement with(cid:10) Dr. Subramanian and VGS Pharma, LLC, a Delaware limited liability company(cid:10) ("VGS"), under which (i) Dr. Subramanian was appointed to our Board of(cid:10) Directors, (ii) VGS made a $2,000,000 equity investment in Elite, (iii) we(cid:10) engaged Dr. Subramanian to serve as our strategic advisor on the research,(cid:10) development and commercialization of our existing pipeline and (iv) we, together(cid:10) with VGS formed Novel Laboratories Inc., a Delaware corporation ("NOVEL"), as a(cid:10) separate specialty pharmaceutical company for the research, development,(cid:10) manufacturing, licensing, acquisition and marketing of specialty generic(cid:10) pharmaceuticals. VGS is wholly-owned subsidiary of Kali Capital, L.P., which is(cid:10) controlled by Kali Management, LLC ("KALI"), its general partner, and Kali is(cid:10) controlled by Anu Subramanian, its managing member and daughter of Dr.(cid:10) Subramanian.(cid:10) The specialty pharmaceutical product initiative of the strategic alliance(cid:10) between Elite and Dr. Subramanian is to be conducted by Novel, of which we(cid:10) acquired 49% and VGS acquired 51% of its Class A Voting Common Stock for $9,800(cid:10) and $10,200 respectively. Pursuant to the Alliance Agreement, VGS acquired for(cid:10) $2,000,000: (i) 957,396 shares of our Common Stock (the "ACQUIRED COMPANY(cid:10) SHARES") at approximately $2.089 per share and (ii) a five year Warrant to(cid:10) purchase 478,698 shares of our Common Stock (the "WARRANT SHARES"), for cash, at(cid:10) an exercise price of $3.00 per share, subject to adjustment upon the occurrence(cid:10) of certain events.(cid:10) We initially contributed $2,000,000 to Novel and made additional(cid:10) contributions of $5,000,000 through June 15, 2007. The remaining contributions(cid:10) to be made by Elite shall be funded in the amounts and upon the occurrence of(cid:10) the following milestones: (i) $10,000,000 upon the submission to the FDA of(cid:10) three ANDAs related to three different prospective products developed by Novel(cid:10) and (ii) $10,000,000 upon the submission to the FDA of three ANDAs related to at(cid:10) least three additional different prospective products developed by Novel;(cid:10) provided that the aggregate contributions to be made by Elite shall not(cid:10) 61(cid:10) (cid:10) exceed (i) $15,000,000 prior to November 1, 2007 or (ii) $25,000,000 prior to(cid:10) May 1, 2008. The remaining contributions of Elite are not monetary obligations(cid:10) but rather conditions that must be met in order for Elite to maintain its(cid:10) current equity interest in Novel.(cid:10) In the event that (i) we defer for more than 90 days the payment of a(cid:10) contribution installment due to Novel's failure to achieve a Performance(cid:10) Milestone, (ii) we fail to make a requisite contribution following Novel's(cid:10) achieving a Performance Milestone or (iii) Novel requires additional financing(cid:10) beyond amounts provided in the Business Plan or our agreed upon additional(cid:10) contributions, Novel may seek such financing through a subscription offering to(cid:10) its Class A Stockholders and, to the extent not fully subscribed, from third(cid:10) parties.(cid:10) We agreed to use our best efforts to elect Dr. Subramanian a member of our(cid:10) Board of Directors as long as we and our "permitted transferees" own at least(cid:10) 40% of Novel's outstanding capital stock and Dr. Subramanian is Chairman of the(cid:10) Board and Chief Executive Officer of Novel.(cid:10) Pursuant to an advisory agreement, Dr. Subramanian has agreed to provide(cid:10) advisory services to us, including but not limited to, assisting in the(cid:10) implementation of current and new drug product development projects of Elite and(cid:10) assisting in the our recruitment of additional R&D staff members. As an(cid:10) inducement to enter into the agreement, we granted Dr. Subramanian a(cid:10) non-qualified stock option to purchase up to 1,750,000 shares of Common Stock(cid:10) (the "OPTION SHARES") at a price of $2.13 per share. The option vests as to(cid:10) 250,000 shares immediately and in subsequent 250,000 share installments, with(cid:10) one vesting on May 6, 2007, another on December 6, 2007, a third upon our(cid:10) acceptance of the Initial Business Plan of Novel, and the other installments(cid:10) vesting on the accomplishment of certain milestones with respect to the first or(cid:10) second drug product developed by us (excluding drug products of Novel) on or(cid:10) after the 60th day after December 6, 2006, under the advisory services provided(cid:10) to us. The option terminates on December 6, 2016, or 90 days following a(cid:10) termination of his advisory services to us or his employment by Novel other than(cid:10) a termination without Cause or by Dr. Subramanian for Good Reason or 48 months(cid:10) after the termination of his advisory services under the advisory agreement or(cid:10) his employment under the employment agreement as a result of: (i) a termination(cid:10) by us of the advisory agreement or by Novel of the employment agreement without(cid:10) Cause or by Dr. Subramanian without Good Reason or (ii) post-December 6, 2007,(cid:10) termination of the term of the advisory agreement or of the Novel employment(cid:10) agreement. All unvested options terminate upon the termination of the advisory(cid:10) agreement (other than a termination by the Company without cause or by Dr.(cid:10) Subramanian for Good Reason) or at such time as we and our permitted transferees(cid:10) own in the aggregate less than 20% of the outstanding capital stock of Novel,(cid:10) except to the extent we in our sole discretion have determined that Dr.(cid:10) Subramanian has provided substantial contribution to the development of any drug(cid:10) product which would otherwise trigger the vesting of options notwithstanding the(cid:10) failure to satisfy the foregoing 20% threshold.(cid:10) The parties also entered into a stockholders agreement which provides that(cid:10) as long as each of Company and VGS owns at least 10% of the shares of Class A(cid:10) Voting Common Stock of Novel, each shall designate one of the two Directors to(cid:10) constitute the Novel Board of Directors, with the VGS designee to be Dr.(cid:10) Subramanian, unless otherwise approved by Company. It prohibits the taking of(cid:10) certain actions without approval of the two designees, including, but not(cid:10) limited to, amendments of charter, by-laws and other governance agreements,(cid:10) spin-offs or public offerings of equity securities, a liquidation or(cid:10) dissolution, dividends, authorization or issuance of additional securities or(cid:10) options, bankruptcy, a material change of the business or a Business Plan,(cid:10) approval of a Business Plan and the yearly operating budget, creation of a(cid:10) security interest, capital expenditures in excess of 110% of the amount provided(cid:10) in the Business Plan, investments in excess of the amounts approved in the(cid:10) Business Plan, an increase or decrease of the Board; and any investments by Dr.(cid:10) Subramanian in any "Competitive Company" or its affiliate. The stockholders(cid:10) agreement further provides that determination of "Cause" or(cid:10) 62(cid:10) (cid:10) the "Disability" of Dr. Subramanian under his employment agreement shall be made(cid:10) solely in the reasonable discretion of the Company designee. Except for certain(cid:10) enumerated permitted transfers, the Stockholders Agreement provides that no(cid:10) transfer of Novel stock may be made without the consent of the other(cid:10) stockholders. In the event Company fails to make required additional(cid:10) contributions, VGS has the right to purchase at the original purchase price from(cid:10) Company that proportion of its original shares of Novel Class A Common Stock(cid:10) equal to the proportion of the required additional contributions not made by(cid:10) Company.(cid:10) In the event of Dr. Subramanian's resignation from Novel for other than(cid:10) Good Reason or his termination by Novel for Cause or his death or disability as(cid:10) defined in the Employment Agreement, Company has the corresponding right to(cid:10) acquire up to 75% of VGS's original shares of Class A Common Stock of Novel at(cid:10) the original purchase price; such percentage to be reduced to 50% and 25% and 0%(cid:10) upon the first, second and third anniversary of the Stockholders' Agreement,(cid:10) with a pro rata portion of such reduction to be effected upon the death or(cid:10) disability of Dr. Subramanian during the applicable period. Each of Company and(cid:10) VGS has a right to acquire at the then fair value, Company's or VGS's shares of(cid:10) Novel upon the bankruptcy, dissolution or liquidation, a change of control of(cid:10) the other or, if as a result of the purchases at the original purchase price,(cid:10) the percentage of Novel owned by such party is less than 10% of Novel.(cid:10) Novel agreed to employ Dr. Subramanian as its Chief Executive Officer at a(cid:10) salary of $220,000 per annum, with bonuses and options to purchase Novel's(cid:10) Common Stock to be granted at the discretion of Novel's Board of Directors. Dr.(cid:10) Subramanian is to perform his duties three full business days a week. Dr.(cid:10) Subramanian's employment may be terminated for "Cause" as defined therein or by(cid:10) Dr. Subramanian for "Good Reason" as defined. Either party may terminate the(cid:10) employment upon 30-business days prior written notice to the other.(cid:10) Dr. Subramanian has agreed to a confidentiality covenant and also agreed(cid:10) to a non-solicitation covenant and not to directly or indirectly, manage,(cid:10) control, consult with, or engage (as either an employee or consultant) in any(cid:10) business or activity anywhere in the world involving a drug product that is(cid:10) competitive as defined with any drug products being developed or marketed by(cid:10) Novel, or proposed in a Business plan to be developed by Novel or its affiliate,(cid:10) or any related inventions or other intellectual property of Novel or any of its(cid:10) respective subsidiaries or affiliates (collectively, a "COMPETITIVE ACTIVITY");(cid:10) and without the prior unanimous approval of the Novel Board to make any(cid:10) investment (whether equity or debt) not exceeding an aggregate of 5% of the(cid:10) equity, in any person engaging, or providing services or financing for, a(cid:10) Competitive Activity (a "COMPETITIVE COMPANY"), including any follow-on(cid:10) investments in any entity that, subsequent to the time of the initial(cid:10) investment, has become a Competitive Company, except a financing provided to a(cid:10) subsidiary or affiliate of a Competitive Company which is not itself engaged in(cid:10) a Competitive Activity during his employment and, unless his termination was by(cid:10) Novel without "Cause" or by Dr. Subramanian for "Good Reason", for one year(cid:10) subsequent as to non-competition and two years subsequent as to(cid:10) non-solicitation.(cid:10) TRANSACTIONS WITH MARK GITTELMAN AND GITTELMAN & CO. P.C.(cid:10) For a description of the agreement between Elite and Gittelman & Co.,(cid:10) P.C., please see "Compensation Discussion Analysis - Agreements with Named(cid:10) Officers". Mark Gittelman, our chief financial officer is the principal of(cid:10) Gittelman & Co., P.C.(cid:10) 63(cid:10) (cid:10) SERIES C PREFERRED STOCK FINANCING(cid:10) The following related persons participated in our recent Series C(cid:10) Preferred Stock private placement that closed on April 24, 2007 according to(cid:10) which we sold 15,000 shares of our Series C 8% Convertible Preferred Stock, par(cid:10) value $0.01, and 1,939,655 warrants for gross proceeds of $15,000,000.(cid:10) o Barry Dash, one of our directors, purchased 20 shares of Series C(cid:10) Preferred Stock and warrants to purchase 2,586 shares of Common(cid:10) Stock for a purchase price of $20,000. Affiliates of Adam Usdan, one(cid:10) of our stockholders which beneficially owns more than 5% of our(cid:10) outstanding Common(cid:10) o Stock, purchased an aggregate of 2,000 shares of Series C Preferred(cid:10) Stock and warrants to purchase 258,619 shares of Common Stock for an(cid:10) aggregate purchase price of $2,000,000. Indigo Securities LLC of(cid:10) whom Edward Neugeboren, a director until June 26, 2007, is a(cid:10) consultant, acted as a selected(cid:10) o dealer in the placement of the Series C Preferred Financing and(cid:10) received a $194,547 cash commission and warrants to purchase 36,045(cid:10) shares of Common Stock for its services.(cid:10) INDIGO VENTURES LLC(cid:10) On July 12, 2006, we entered into a Financial Advisory Agreement with(cid:10) Indigo Ventures LLC ("INDIGO") whereby, Indigo, on a non-exclusive basis, agreed(cid:10) to advise, consult with, and assist us in various matters as requested (and only(cid:10) to the extent requested) by us which may include, without limitation (i) a(cid:10) review of our business, operations and financial condition, including advising(cid:10) on capitalization structures; (ii) advice relating to general capital raising(cid:10) matters; (iii) recommendations relating to specific business operations,(cid:10) strategic transactions and joint ventures; (v) advice regarding our future(cid:10) financings involving debt or equity securities or any affiliate of ours; and (v)(cid:10) assistance with interaction between us and our current and future investors. We(cid:10) paid Indigo $45,000 initially and then $15,000 per month in connection with(cid:10) Indigo providing the consulting services. Additionally, Indigo acquired a(cid:10) warrant to purchase up to 600,000 shares of Common Stock at an exercise price of(cid:10) $3.00 per share, which may be payable in the form of a promissory note. On(cid:10) February 13, 2007, the Financial Advisory Agreement was amended. As a result of(cid:10) the amendment, the warrant was reduced from 600,000 to 300,000 shares, the(cid:10) warrant remains exercisable as to the remaining 300,000 shares of common stock(cid:10) (200,000 of which remain subject to vesting), the monthly cash fees payable to(cid:10) Indigo terminated as of February 13, 2007 and the outstanding amount of the(cid:10) promissory note was reduced to $75,000. Edward Neugeboren, a director until June(cid:10) 26, 2007 is a consultant of Indigo.(cid:10) Previously, in March 2006, Indigo received $800,000 cash compensation and(cid:10) placement agent warrants to purchase 355,555 shares of Common Stock in(cid:10) connection with acting as placement agent for the offering of our Series B(cid:10) Preferred Stock(cid:10) See "Item 10 - Directors and Executive Officers of Registrant" for(cid:10) information as to employment or engagement agreements with Bernard Berk, Chris(cid:10) Dick, Charan Behl and an affiliate of Mark I. Gittelman.(cid:10) ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.(cid:10) The following table presents fees, including reimbursements for expenses,(cid:10) for professional audit services rendered by Miller Ellin & Company, L.P.(cid:10) ("Miller Ellin") for the audits of our annual financial(cid:10) 64(cid:10) (cid:10) statements and interim reviews of our quarterly financial statements for the(cid:10) years ended March 31, 2007 and March 31, 2007 and fees billed for other services(cid:10) rendered by Miller Ellin during those periods.(cid:10) 2007 2006(cid:10) ---- ----(cid:10) Audit Fees(1) 58,360 69,923(cid:10) Audit-Related Fees --- ---(cid:10) Tax Fees --- ---(cid:10) All Other Fees --- ---(cid:10) ----------(cid:10) (1) Audit fees consist of fees billed for professional services rendered for(cid:10) the audit of the Company's consolidated annual financial statements and(cid:10) review of the interim consolidated financial statements included in(cid:10) quarterly reports and services that are normally provided by Miller Ellin(cid:10) in connection with statutory and regulatory filings or engagements.(cid:10) PART IV(cid:10) ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES.(cid:10) (a) Documents filed as part of this Report(cid:10) (1) The financial statements listed in the Index to Consolidated Financial(cid:10) Statements are filed as part of this report.(cid:10) (2) The financial statements listed in the Index are filed a part of this(cid:10) report.(cid:10) (3) List of Exhibits(cid:10) See Index to Exhibits in paragraph (b) below.(cid:10) The Exhibits are filed with or incorporated by reference in this report.(cid:10) (b) Financial Statement Schedules(cid:10) None.(cid:10) (c) Exhibits required by Item 601 of Regulation S-K.(cid:10) EXHIBIT NO. DESCRIPTION(cid:10) 3.1(a) Certificate of incorporation of the Company, together with all(cid:10) other amendments thereto, as filed with the Secretary of State(cid:10) of the State of Delaware, incorporated by reference to (a)(cid:10) Exhibit 4.1 to the Registration Statement on Form S-4 (Reg. No.(cid:10) 333-101686), filed with the SEC on December 6, 2002 (the "Form(cid:10) S-4") and (b) Exhibit 4.1 to the Company's Report on Form 8-K(cid:10) dated July 28, 2004.(cid:10) 65(cid:10) (cid:10) 3.1(b) Certificate of Designations, Preferences and Rights of Series A(cid:10) Preferred Stock, as filed with the Secretary of the State of(cid:10) Delaware, incorporated by reference to Exhibit 4.5 to the Form(cid:10) 8-K dated October 6, 2004, and filed with the SEC on October 12,(cid:10) 2004.(cid:10) 3.1(c) Certificate of Retirement with the Secretary of the State of the(cid:10) Delaware to retire 516,558 shares of the Series A Preferred(cid:10) Stock, as filed with the Secretary of State of Delaware,(cid:10) incorporated by reference to Exhibit 3.1 to the Form 8-K dated(cid:10) March 10, 2006, and filed with the SEC on March 14, 2006.(cid:10) 3.1(d) Certificate of Designations, Preferences and Rights of Series B(cid:10) 8% Convertible Preferred Stock, as filed with the Secretary of(cid:10) the State of Delaware, incorporated by reference to Exhibit 3.1(cid:10) to the Form 8-K dated March 15, 2006, and filed with the SEC on(cid:10) March 16, 2006.(cid:10) 3.1(e) Amended Certificate of Designations of Preferences, Rights and(cid:10) Limitations of Series B 8% Convertible Preferred Stock, as filed(cid:10) with the Secretary of State of the State of Delaware,(cid:10) incorporated by reference to Exhibit 3.1 to the Form 8-K dated(cid:10) April 24, 2007, and filed with the SEC on April 25, 2007.(cid:10) 3.1(f) Certificate of Designations, Preferences and Rights of Series C(cid:10) 8% Convertible Preferred Stock, as filed with the Secretary of(cid:10) the State of Delaware, incorporated by reference to Exhibit 3.2(cid:10) to the Form 8-K dated April 24, 2007, and filed with the SEC on(cid:10) April 25, 2007.(cid:10) 3.1(g) Amended Certificate of Designations, Preferences and Rights of(cid:10) Series C 8% Convertible Preferred Stock, as filed with the(cid:10) Secretary of the State of Delaware, incorporated by reference to(cid:10) Exhibit 3.1 to the Form 8-K dated April 24, 2007, and filed with(cid:10) the SEC on April 25, 2007(cid:10) 3.2 By-Laws of the Company, as amended, incorporated by reference to(cid:10) Exhibit 3.2 to the Company's Registration Statement on Form SB-2(cid:10) (Reg. No. 333-90633) made effective on February 28, 2000 (the(cid:10) "Form SB-2").(cid:10) 4.1 Form of specimen certificate for Common Stock of the Company,(cid:10) incorporated by reference to Exhibit 4.1 to the Form SB-2.(cid:10) 4.2 Form of specimen certificate for Series A 8% Convertible(cid:10) Preferred Stock of the Company, incorporated by reference to(cid:10) Exhibit 4.5 to the Form 8-K, dated October 6, 2004, and filed(cid:10) with the SEC on October 12, 2004.(cid:10) 4.3 Form of specimen certificate for Series B 8% Convertible(cid:10) Preferred Stock of the Company, incorporated by reference to(cid:10) Exhibit 4.1 to the Form 8-K, dated March 15, 2006 and filed with(cid:10) the SEC on March 16, 2006.(cid:10) 4.4 Form of specimen certificate for Series C 8% Convertible(cid:10) Preferred Stock of the Company, incorporated by reference to(cid:10) Exhibit 4.1 to the Form 8-K, dated April 24, 2007 and filed with(cid:10) the SEC on April 25, 2007.(cid:10) 4.5 Warrant to purchase 100,000 shares of Common Stock issued to DH(cid:10) Blair Investment(cid:10) 66(cid:10) (cid:10) Banking Corp., incorporated by reference to Exhibit 10.2 to the(cid:10) Form 10-Q for the period ended September 30, 2004.(cid:10) 4.6 Warrant to purchase 50,000 shares of Common Stock issued to(cid:10) Jason Lyons incorporated by reference to Exhibit 10.3 to the(cid:10) Form 10-Q for the period ended June 30, 2004.(cid:10) 4.7 Form of Warrant to purchase shares of Common Stock issued to(cid:10) designees of lender with respect to financing of an equipment(cid:10) loan incorporated by reference to Exhibit 10.2 to the Form 10-Q(cid:10) for the period ended June 30, 2004.(cid:10) 4.8 Form of Short Term Warrant to purchase shares of Common Stock(cid:10) issued to purchasers in the private placement which initially(cid:10) closed on October 6, 2004 (the "Series A Financing"),(cid:10) incorporated by reference to Exhibit 4.6 to the Form 8-K, dated(cid:10) October 6, 2004, and filed with the SEC on October 12, 2004.(cid:10) 4.9 Form of Long Term Warrant to purchase shares of Common Stock(cid:10) issued to purchasers in the Series A Financing, incorporated by(cid:10) reference to Exhibit 4.7 to the Form 8-K, dated October 6, 2004,(cid:10) and filed with the SEC on October 12, 2004.(cid:10) 4.10 Form of Warrant to purchase shares of Common Stock issued to the(cid:10) Placement Agent, in connection with the Series A Financing,(cid:10) incorporated by reference to Exhibit 4.8 to the Form 8-K, dated(cid:10) October 6, 2004, and filed with the SEC on October 12, 2004.(cid:10) 4.11 Form of Replacement Warrant to purchase shares of Common Stock(cid:10) in connection with the offer to holders of Warrants in the(cid:10) Series A Financing (the "Warrant Exchange"), incorporated by(cid:10) reference as Exhibit 4.1 to the Form 8-K, dated December 14,(cid:10) 2005, and filed with the SEC on December 20, 2005.(cid:10) 4.12 Form of Warrant to purchase shares of Common Stock to the(cid:10) Placement Agent, in connection with the Warrant Exchange,(cid:10) incorporated by reference as Exhibit 4.2 to the Form 8-K, dated(cid:10) December 14, 2005, and filed with the SEC on December 20, 2005.(cid:10) 4.13 Form of Warrant to purchase shares of Common Stock issued to(cid:10) purchasers in the private placement which closed on March 15,(cid:10) 2006 (the "Series B Financing"), incorporated by reference to(cid:10) Exhibit 4.2 to the Form 8-K, dated March 15, 2006 and filed with(cid:10) the SEC on March 16, 2006.(cid:10) 4.14 Form of Warrant to purchase shares of Common Stock issued to(cid:10) purchasers in the Series B Financing, incorporated by reference(cid:10) to Exhibit 4.3 to the Form 8-K, dated March 15, 2006 and filed(cid:10) with the SEC on March 16, 2006.(cid:10) 4.15 Form of Warrant to purchase shares of Common Stock issued to the(cid:10) Placement Agent, in connection with the Series B Financing,(cid:10) incorporated by reference to Exhibit 4.4 to the Form 8-K, dated(cid:10) March 15, 2006 and filed with the SEC on March 16, 2006.(cid:10) 4.16 Form of Warrant to purchase 600,000 shares of Common Stock(cid:10) issued to Indigo Ventures, LLC, incorporated by reference to(cid:10) Exhibit 4.1 to the Form 8-K, dated July 12, 2006 and filed with(cid:10) the SEC on July 18, 2006.(cid:10) 67(cid:10) (cid:10) 4.17 Form of Warrant to purchase up to 478,698 shares of Common Stock(cid:10) issued to VGS PHARMA, LLC, incorporated by reference as Exhibit(cid:10) 3(a) to the Form 8-K, dated December 6, 2006 and filed with the(cid:10) SEC on December 12, 2006.(cid:10) 4.18 Form on Non-Qualified Stock Option Agreement for 1,750,000(cid:10) shares of Common Stock granted to Veerappan Subramanian,(cid:10) incorporated by reference as Exhibit 3(b) to the Form 8-K, dated(cid:10) December 6, 2006 and filed with the SEC on December 12, 2006.(cid:10) 4.19 Form of Warrant to purchase shares of Common Stock issued to(cid:10) purchasers in the private placement which closed on April 24,(cid:10) 2007 (the "Series C Financing"), incorporated by reference to(cid:10) Exhibit 4.2 to the Form 8-K, dated April 24, 2007 and filed with(cid:10) the SEC on April 25, 2007.(cid:10) 4.20 Form of Warrant to purchase shares of Common Stock issued to the(cid:10) placement agent in the Series C Financing, incorporated by(cid:10) reference to Exhibit 4.3 to the Form 8-K, dated April 24, 2007(cid:10) and filed with the SEC on April 25, 2007.(cid:10) 10.1 2004 Employee Stock Option Plan approved by stockholders on June(cid:10) 22, 2004, incorporated by reference to Exhibit A to the Proxy(cid:10) Statement filed on Schedule 14A with respect to the Annual(cid:10) Meeting of Stockholders held on June 22, 2004.(cid:10) 10.2 Form of Confidentiality Agreement (corporate), incorporated by(cid:10) reference to Exhibit 10.7 to the Form SB-2.(cid:10) 10.3 Form of Confidentiality Agreement (employee), incorporated by(cid:10) reference to Exhibit 10.8 to the Form SB-2.(cid:10) 10.4 Amended and Restated Employment Agreement dated as of September(cid:10) 2, 2005 between Bernard Berk and the Company, incorporated by(cid:10) reference to Exhibit 10.1 to Form 8-K, dated September 2, 2005,(cid:10) and filed with the SEC on September 9, 2005.(cid:10) 10.5 Option Agreement between Bernard Berk and the Company dated as(cid:10) of July 23, 2003 incorporated by reference to Exhibit 10.7 to(cid:10) the Report on Form 10-Q for three months ended June 30, 2003(cid:10) (the "June 30, 2003 10Q Report").(cid:10) 10.6 Option Agreement between Bernard Berk and the Company dated as(cid:10) of July 23, 2003, incorporated by reference to Exhibit 10.8 to(cid:10) the June 30, 2003 10Q Report.(cid:10) 10.7 Amendment, dated as of September 2, 2005, by and between, the(cid:10) Company and Bernard Berk, to the Stock Option Agreement, dated(cid:10) as of July 23, 2003, incorporated by reference to Exhibit 10.2(cid:10) to Form 8-K, dated September 2, 2005, and filed with the SEC on(cid:10) September 9, 2005.(cid:10) 10.8 Stock Option Agreement, dated as of September 2, 2005, by and(cid:10) between the Company and Bernard Berk, incorporated by reference(cid:10) to Exhibit 10.3 to Form 8-K, dated September 2, 2005, and filed(cid:10) with the SEC on September 9, 2005.(cid:10) 68(cid:10) (cid:10) 10.9 Stock Option Agreement, dated as of September 2, 2005, by and(cid:10) between the Company and Bernard Berk, incorporated by reference(cid:10) to Exhibit 10.4 to Form 8-K, dated September 2, 2005, and filed(cid:10) with the SEC on September 9, 2005.(cid:10) 10.10 Engagement letter dated February 26, 1998, between Gittelman &(cid:10) Co. P.C. and the Company incorporated by reference to Exhibit(cid:10) 10.10 to the Form 10-K for the period ended March 31, 2004 filed(cid:10) with the SEC on June 29, 2004.(cid:10) 10.11 Product Development Manufacturing and Distribution Agreement,(cid:10) dated as of March 30, 2005, by and among Elite Laboratories,(cid:10) Inc., a Delaware corporation and wholly-owned subsidiary of the(cid:10) Company ("Elite Labs"), Harris Pharmaceuticals, Inc. and Tish(cid:10) Technologies LLC, incorporated by reference as Exhibit 10.1 to(cid:10) the Form 8-K, dated March 30, 2005, originally filed with the(cid:10) SEC on April 5, 2005, as amended on the Form 8-K/A filed May 10,(cid:10) 2005, as further amended by the Form 8-K/A filed June 13, 2005,(cid:10) as further amended by the Form 8-K/A filed July 20, 2005, as(cid:10) further amended by the Form 8-K/A filed August 23, 2005, as(cid:10) further amended by the Form 8-K/A filed September 27, 2005, as(cid:10) further amended by the Form 8-K/A filed December 7, 2005(cid:10) (Confidential Treatment granted with respect to portions of the(cid:10) Agreement).(cid:10) 10.12 Product Development and Commercialization Agreement, dated as of(cid:10) June 21, 2005, between the Company and IntelliPharmaceutics,(cid:10) Corp., incorporated by reference as Exhibit 10.1 to the Form(cid:10) 8-K, dated June 21, 2005 and originally filed with the SEC on(cid:10) June 27, 2005, as amended on the Form 8-K/A filed September 7,(cid:10) 2005, as further amended by the Form 8-K/A filed December 7,(cid:10) 2005 (Confidential Treatment granted with respect to portions of(cid:10) the Agreement).(cid:10) 10.13 Product Development and License Agreement, dated as of June 22,(cid:10) 2005, between the Company and Pliva, Inc., incorporated by(cid:10) reference as Exhibit 10.1 to the Form 8-K, dated June 22, 2005(cid:10) and originally filed with the SEC on June 28, 2005, as amended(cid:10) on the Form 8-K/A filed September 6, 2005, as further amended by(cid:10) the Form 8-K/A filed December 7, 2005 (Confidential Treatment(cid:10) granted with respect to portions of the Agreement).(cid:10) 10.14 Agreement, dated December 12, 2005, by and among the Company,(cid:10) Elite Labs, and IntelliPharmaCeutics Corp., incorporated by(cid:10) reference as Exhibit 10.1 to the Form 8-K, dated December 12,(cid:10) 2005, and originally filed with the SEC on December 16, 2005, as(cid:10) amended by the Form 8-K/A filed March 7, 2006 (Confidential(cid:10) Treatment granted with respect to portions of the Agreement).(cid:10) 10.15 Product Development and Commercialization Agreement, dated(cid:10) January 10, 2006, by and among the Company, Elite Laboratories,(cid:10) Inc., its wholly-owned subsidiary and Orit Laboratories LLC,(cid:10) incorporated by reference as Exhibit 10.1 to the Form 8-K, dated(cid:10) January 10, 2006, and filed with the SEC on January 17, 2006.(cid:10) (Confidential Treatment granted with respect to portions of the(cid:10) Agreement).(cid:10) 10.16 Loan Agreement, dated as of August 15, 2005, between New Jersey(cid:10) Economic Development Authority ("NJEDA") and the Company,(cid:10) incorporated by reference to Exhibit 10.1 to the Form 8-K, dated(cid:10) August 31, 2005 and filed with the SEC on September 6, 2005.(cid:10) 69(cid:10) (cid:10) 10.17 Series A Note in the aggregate principal amount of $3,660,000.00(cid:10) payable to the order of the NJEDA, incorporated by reference to(cid:10) Exhibit 10.2 to the Form 8-K, dated August 31, 2005 and filed(cid:10) with the SEC on September 6, 2005.(cid:10) 10.18 Series B Note in the aggregate principal amount of $495,000.00(cid:10) payable to the order of the NJEDA, incorporated by reference to(cid:10) Exhibit 10.3 to the Form 8-K, dated August 31, 2005 and filed(cid:10) with the SEC on September 6, 2005.(cid:10) 10.19 Mortgage from the Company to the NJEDA, incorporated by(cid:10) reference to Exhibit 10.4 to the Form 8-K, dated August 31, 2005(cid:10) and filed with the SEC on September 6, 2005.(cid:10) 10.20 Indenture between NJEDA and the Bank of New York as Trustee,(cid:10) dated as of August 15, 2005, incorporated by reference to(cid:10) Exhibit 10.5 to the Form 8-K, dated August 31, 2005 and filed(cid:10) with the SEC on September 6, 2005.(cid:10) 10.21 Form of Warrant Exercise Agreement, between the Registrant and(cid:10) the signatories thereto, incorporated by reference to Exhibit(cid:10) 10.1 to the Form 8-K, dated December 14, 2005 and filed with the(cid:10) SEC on December 20, 2005.(cid:10) 10.22 Form of Registration Rights Agreement, between the Registrant(cid:10) and signatories thereto, incorporated by reference to Exhibit(cid:10) 10.2 to the Form 8-K, dated December 14, 2005 and filed with the(cid:10) SEC on December 20, 2005.(cid:10) 10.23 Form of Securities Purchase Agreement, between the Registrant(cid:10) and the signatories thereto, incorporated by reference to(cid:10) Exhibit 10.1 to the Form 8-K, dated March 15, 2006 and filed(cid:10) with the SEC on March 16, 2006.(cid:10) 10.24 Form of Registration Rights Agreement, between the Registrant(cid:10) and the signatories thereto, incorporated by reference to(cid:10) Exhibit 10.2 to the Form 8-K, dated March 15, 2006 and filed(cid:10) with the SEC on March 16, 2006.(cid:10) 10.21 Form of Placement Agent Agreement, between the Registrant and(cid:10) Indigo Securities, LLC, incorporated by reference as Exhibit(cid:10) 10.3 to the Form 8-K, dated March 15, 2006, and filed with the(cid:10) SEC on March 16, 2006.(cid:10) 10.22 Financial Advisory Agreement between the Registrant and Indigo(cid:10) Ventures LLC, incorporated by reference as Exhibit 10.1 to the(cid:10) Form 8-K dated July 12, 2006 and filed with the SEC on July 18,(cid:10) 2006.(cid:10) 10.23 Seconded Amended and Restated Employment Agreement between the(cid:10) Registrant and Bernard Berk, incorporated by reference as(cid:10) Exhibit 10.1 to the Form 10-Q for the quarter ended September(cid:10) 30, 2006 and filed with the SEC on November 14, 2006.(cid:10) 10.24 Employment Agreement between the Registrant and Charan Behl,(cid:10) incorporated by reference as Exhibit 10.2 to the Form 10-Q for(cid:10) the quarter ended September 30, 2006 and filed with the SEC on(cid:10) November 14, 2006.(cid:10) 70(cid:10) (cid:10) 10.25 Employment Agreement between the Registrant and Chris Dick,(cid:10) incorporated by reference as Exhibit 10.3 to the Form 10-Q for(cid:10) the quarter ended September 30, 2006 and filed with the SEC on(cid:10) November 14, 2006.(cid:10) 10.26 Product Collaboration Agreement between the Registrant and(cid:10) ThePharmaNetwork LLC, incorporated by reference as Exhibit 10.1(cid:10) to the Form 8-K, dated November 10, 2006 and filed with the SEC(cid:10) on November 15, 2006. (Confidential Treatment granted with(cid:10) respect to portions of the Agreement).(cid:10) 10.27 Strategic Alliance Agreement among the Registrant, VGS Pharma(cid:10) ("VGS") and Veerappan S. Subramanian ("VS"), incorporated by(cid:10) reference as Exhibit 10(a) to the Form 8-K, dated December 6,(cid:10) 2006 and filed with the SEC on December 12, 2006.(cid:10) 10.28 Advisory Agreement, between the Registrant and VS, incorporated(cid:10) by reference as Exhibit 10(b) to the Form 8-K, dated December 6,(cid:10) 2006 and filed with the SEC on December 12, 2006.(cid:10) 10.29 Registration Rights Agreement between the Registrant, VGS and(cid:10) VS, incorporated by reference as Exhibit 10(c) to the Form 8-K,(cid:10) dated December 6, 2006 and filed with the SEC on December 12,(cid:10) 2006.(cid:10) 10.30 Employment Agreement between Novel Laboratories Inc. ("Novel")(cid:10) and VS, incorporated by reference as Exhibit 10(d) to the Form(cid:10) 8-K, dated December 6, 2006 and filed with the SEC on December(cid:10) 12, 2006.(cid:10) 10.31 Stockholders' Agreement between Registrant, VGS, VS and Novel,(cid:10) incorporated by reference as Exhibit 10(e) to the Form 8-K,(cid:10) dated December 6, 2006 and filed with the SEC on December 12,(cid:10) 2006.(cid:10) 10.32 Amended and Restated Employment Agreement, between the(cid:10) Registrant and Charan Behl, incorporated by reference as Exhibit(cid:10) 10.1 to the Form 8-K, dated February 9, 2007 and filed with the(cid:10) SEC on February 14, 2007.(cid:10) 10.33 Form of Securities Purchase Agreement, between the Registrant(cid:10) and the signatories thereto, incorporated by reference to(cid:10) Exhibit 10.1 to the Form 8-K, dated April 24, 2007 and filed(cid:10) with the SEC on April 25, 2007.(cid:10) 10.34 Form of Registration Rights Agreement, between the Registrant(cid:10) and the signatories thereto, incorporated by reference to(cid:10) Exhibit 10.2 to the Form 8-K, dated April 24, 2007 and filed(cid:10) with the SEC on April 25, 2007.(cid:10) 10.35 Form of Placement Agent Agreement, the Company and Oppenheimer &(cid:10) Company, Inc., incorporated by reference as Exhibit 10.3 to the(cid:10) Form 8-K, dated April 24, 2007, and filed with the SEC on April(cid:10) 25, 2007.(cid:10) 21 Subsidiaries of the Company.*(cid:10) 71(cid:10) (cid:10) 31.1* Certification of Chief Executive Officer pursuant to Section 302(cid:10) of the Sarbanes-Oxley Act of 2002.*(cid:10) 31.2* Certification of Chief Financial Officer pursuant to Section 302(cid:10) of the Sarbanes-Oxley Act of 2002.*(cid:10) 32.1** Certification of Chief Executive Officer pursuant to Section 906(cid:10) of the Sarbanes-Oxley Act of 2002.*(cid:10) 32.2** Certification of Chief Financial Officer pursuant to Section 906(cid:10) of the Sarbanes-Oxley Act of 2002.*(cid:10) ----------(cid:10) * Filed herewith(cid:10) ** As contemplated by SEC Release No. 33-8212, these exhibits are furnished with(cid:10) this Annual Report on Form 10-K and are not deemed filed with the Securities and(cid:10) Exchange Commission and are not incorporated by reference in any filing of Elite(cid:10) Pharmaceuticals, Inc. under the Securities Act of 1933 or the Securities(cid:10) Exchange Act of 1934, whether made before or after the date hereof and(cid:10) irrespective of any general incorporation language in any such filings.(cid:10) 72(cid:10) (cid:10) SIGNATURES(cid:10) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange(cid:10) Act of 1934, the registrant has duly caused this report to be signed on its(cid:10) behalf by the undersigned, thereunto duly authorized.(cid:10) ELITE PHARMACEUTICALS, INC.(cid:10) By: /s/ Bernard Berk(cid:10) -------------------------------(cid:10) Bernard Berk(cid:10) Chief Executive Officer(cid:10) Dated: June 28, 2007(cid:10) Pursuant to the requirements of the Securities Exchange Act of 1934, this report(cid:10) has been signed by the following persons on behalf of the registrant and in the(cid:10) capacities and on the dates indicated.(cid:10) SIGNATURE TITLE DATE(cid:10) --------- ----- ----(cid:10) /s/ Bernard Berk Chief Executive Officer June 28, 2007(cid:10) --------------------------- (Principal Executive(cid:10) Bernard Berk Officer)(cid:10) /s/ Mark Gittelman Chief Financial Officer June 28, 2007(cid:10) -------------------------- and Treasurer (Principal(cid:10) Mark I. Gittelman Financial and Accounting(cid:10) Officer)(cid:10) /s/ Barry Dash Director June 28, 2007(cid:10) --------------------------(cid:10) Barry Dash(cid:10) /s/ Melvin Van Woert Director June 28, 2007(cid:10) --------------------------(cid:10) Melvin Van Woert(cid:10) /s/ Veerappan Subramanian Director June 28, 2007(cid:10) --------------------------(cid:10) Veerappan Subramanian(cid:10) 73(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED FINANCIAL STATEMENTS(cid:10) FOR THE YEARS ENDED MARCH 31, 2007, 2006 AND 2005(cid:10) CONTENTS(cid:10) PAGE(cid:10) ----(cid:10) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 2(cid:10) CONSOLIDATED BALANCE SHEETS F - 3(cid:10) CONSOLIDATED STATEMENTS OF OPERATIONS F - 5(cid:10) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F - 6(cid:10) CONSOLIDATED STATEMENTS OF CASH FLOWS F - 9(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F -10(cid:10) F-1(cid:10) (cid:10) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM(cid:10) To Elite Pharmaceuticals, Inc.(cid:10) We have audited the accompanying consolidated balance sheets of Elite(cid:10) Pharmaceuticals, Inc. and Subsidiaries (the "Company") as of March 31, 2007 and(cid:10) 2006, and the related consolidated statements of operations, stockholders'(cid:10) equity and cash flows for the years ended March 31, 2007, 2006 and 2005. These(cid:10) financial statements are the responsibility of the Company's management. Our(cid:10) responsibility is to express an opinion on these financial statements based on(cid:10) our audits.(cid:10) We conducted our audits in accordance with standards of the Public Company(cid:10) Oversight Board (United States). Those standards require that we plan and(cid:10) perform the audit to obtain reasonable assurance about whether the financial(cid:10) statements are free of material misstatement. An audit includes examining, on a(cid:10) test basis, evidence supporting the amounts and disclosures in the financial(cid:10) statements. An audit also includes assessing the accounting principles used and(cid:10) significant estimates made by management, as well as evaluating the overall(cid:10) financial statement presentation. We believe that our audits provide a(cid:10) reasonable basis for our opinion.(cid:10) In our opinion, the consolidated financial statements referred to above present(cid:10) fairly, in all material respects, the financial position of Elite(cid:10) Pharmaceuticals, Inc. and Subsidiaries as of March 31, 2007 and 2006, and the(cid:10) results of their operations and their cash flows for each of the three years(cid:10) ended March 31, 2007, 2006 and 2005 in conformity with accounting principles(cid:10) generally accepted in the United States of America.(cid:10) /s/ MILLER, ELLIN & COMPANY, LLP(cid:10) CERTIFIED PUBLIC ACCOUNTANTS(cid:10) New York, New York(cid:10) June 7, 2007(cid:10) F-2(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED BALANCE SHEETS(cid:10) MARCH 31, 2007 AND 2006(cid:10) ASSETS(cid:10) (cid:10)
(cid:10) 2007 2006(cid:10) ---- ----(cid:10) (cid:10) CURRENT ASSETS:(cid:10) Cash and cash equivalents $ 2,045,390 $ 8,919,354(cid:10) Accounts receivable, net of allowance for doubtful accounts of $0(cid:10) and $153,250 as of March 31, 2007 and 2006, respectively 215,837 --(cid:10) Current portion of restricted cash - capital project fund -- 1,173,896(cid:10) Prepaid expenses and other current assets 1,149,185 470,633(cid:10) ----------- -----------(cid:10) Total current assets 3,410,412 10,563,883(cid:10) PROPERTY AND EQUIPMENT- net of accumulated(cid:10) depreciation and amortization 5,454,026 4,308,969(cid:10) INTANGIBLE ASSETS - net of accumulated amortization 42,809 59,457(cid:10) OTHER ASSETS:(cid:10) Accrued interest receivable 949 --(cid:10) Deposit on equipment 32,880 --(cid:10) Security deposit 6,980 6,980(cid:10) Restricted cash - debt service 414,999 415,500(cid:10) EDA bond offering costs, net of accumulated(cid:10) amortization of $21,178 and $7,000, respectively 333,274 347,452(cid:10) ----------- -----------(cid:10) Total other assets 789,082 769,932(cid:10) ----------- -----------(cid:10) TOTAL ASSETS $ 9,696,329 $15,702,241(cid:10) =========== ===========(cid:10)
(cid:10) The accompanying notes are an integral part of the(cid:10) consolidated financial statements.(cid:10) F-3(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED BALANCE SHEETS(cid:10) MARCH 31, 2007 AND 2006(cid:10) (CONTINUED)(cid:10) LIABILITIES AND STOCKHOLDERS' EQUITY(cid:10) (cid:10)
(cid:10) 2007 2006(cid:10) ---- ----(cid:10) (cid:10) CURRENT LIABILITIES:(cid:10) Current portion of EDA bonds $ 185,000 $ 175,000(cid:10) Accounts payable and accrued expenses 2,205,781 1,740,263(cid:10) Dividends payable -- 33,333(cid:10) ------------ ------------(cid:10) Total current liabilities 2,390,781 1,948,596(cid:10) ------------ ------------(cid:10) LONG TERM DEBT:(cid:10) EDA bonds - net of current portion 3,795,000 3,980,000(cid:10) ------------ ------------(cid:10) Total long-term liabilities 3,795,000 3,980,000(cid:10) ------------ ------------(cid:10) Total liabilities 6,185,781 5,928,596(cid:10) ------------ ------------(cid:10) COMMITMENTS AND CONTINGENCIES(cid:10) STOCKHOLDERS' EQUITY:(cid:10) Preferred stock - $.01 par value;(cid:10) Authorized - 4,483,442 (originally 5,000,000 shares of which 516,558(cid:10) shares of Series A Preferred retired)(cid:10) March 31, 2007 and 2006, respectively(cid:10) Authorized - 10,000 Convertible Series B Preferred Stock - issued and(cid:10) outstanding - 9,695 shares and 10,000 shares, respectively(cid:10) 97 100(cid:10) Common Stock - $.01 par value;(cid:10) Authorized - 65,000,000(cid:10) Issued and outstanding - 20,799,102 and 19,190,159(cid:10) shares in 2007 and 2006, respectively 207,991 191,902(cid:10) Subscription receivable (75,000) --(cid:10) Additional paid-in capital 66,495,618 60,105,107(cid:10) Accumulated deficit (62,811,317) (50,216,623)(cid:10) ------------ ------------(cid:10) 3,817,389 10,080,486(cid:10) Treasury stock, at cost (100,000 shares) (306,841) (306,841)(cid:10) ------------ ------------(cid:10) Total stockholders' equity 3,510,548 9,773,645(cid:10) ------------ ------------(cid:10) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,696,329 $ 15,702,241(cid:10) ============ ============(cid:10)
(cid:10) The accompanying notes are an integral part of the(cid:10) consolidated financial statements.(cid:10) F-4(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED STATEMENTS OF OPERATIONS(cid:10) (cid:10)
(cid:10) YEARS ENDED MARCH 31,(cid:10) ---------------------(cid:10) 2007 2006 2005(cid:10) ---- ---- ----(cid:10) (cid:10) REVENUES:(cid:10) Licensing and test fees $ -- $ -- $ 151,450(cid:10) Manufacturing fees 1,038,916 494,231 125,739(cid:10) Royalties 104,925 56,466 24,291(cid:10) ------------ ------------ ------------(cid:10) Total revenues 1,143,841 550,697 301,480(cid:10) Cost of Revenues 831,250 -- --(cid:10) ------------ ------------ ------------(cid:10) Gross Profit 312,591 550,697 301,480(cid:10) OPERATING EXPENSES:(cid:10) Research and development 6,085,888 4,343,890 2,698,641(cid:10) General and administrative 2,534,507 1,726,626 2,159,670(cid:10) Depreciation and amortization 439,994 486,687 356,438(cid:10) ------------ ------------ ------------(cid:10) 9,060,389 6,557,203 5,214,749(cid:10) ------------ ------------ ------------(cid:10) LOSS FROM OPERATIONS (8,747,798) (6,006,506) (4,913,269)(cid:10) ------------ ------------ ------------(cid:10) OTHER INCOME (EXPENSES):(cid:10) Interest income 312,698 90,862 39,932(cid:10) Sale of New Jersey tax losses 377,259 219,121 205,792(cid:10) Interest expense (275,031) (283,464) (229,495)(cid:10) Non-cash compensation satisfied by issuance of(cid:10) stock options and warrants (3,479,070) (902,927) (1,008,850)(cid:10) ------------ ------------ ------------(cid:10) (3,064,144) (876,408) (992,621)(cid:10) ------------ ------------ ------------(cid:10) LOSS BEFORE PROVISION FOR INCOME(cid:10) TAXES (11,811,942) (6,882,914) (5,905,890)(cid:10) Provision For Income Taxes (1,770) (1,000) (1,000)(cid:10) Minority Interest in Loss of Novel Laboratories, Inc. 10,200 -- --(cid:10) ------------ ------------ ------------(cid:10) NET LOSS (11,803,512) (6,883,914) (5,906,890)(cid:10) Preferred Stock Dividends (791,181) (2,155,250) (165,418)(cid:10) ------------ ------------ ------------(cid:10) NET LOSS ATTRIBUTABLE TO COMMON(cid:10) SHAREHOLDERS $(12,594,693) $ (9,039,164) $ (6,072,308)(cid:10) ============ ============ ============(cid:10) BASIC AND DILUTED LOSS PER COMMON(cid:10) SHARE $ (.64) $ (.49) $ (0.47)(cid:10) ============ ============ ============(cid:10) WEIGHTED AVERAGE NUMBER OF(cid:10) COMMON SHARES OUTSTANDING 19,815,780 18,463,514 12,869,924(cid:10) ============ ============ ============(cid:10)
(cid:10) The accompanying notes are an integral part of the(cid:10) consolidated financial statements.(cid:10) F-5(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(cid:10) (cid:10)
(cid:10) PREFERRED STOCK COMMON STOCK ADDITIONAL(cid:10) --------------- ------------ PAID-IN(cid:10) SHARES AMOUNT SHARES AMOUNT CAPITAL(cid:10) ------ ------ ------ ------ -------(cid:10) (cid:10) BALANCES AT APRIL 1, 2004 -- $ -- 12,204,423 $ 122,044 $ 39,338,140(cid:10) Net proceeds from issuance of Series A 8%(cid:10) Convertible Preferred Stock and warrants 516,558 5,166 -- -- 5,786,436(cid:10) Issuance of Common Stock for consulting(cid:10) services -- -- 26,500 265 58,035(cid:10) Issuance of Common Stock upon conversion(cid:10) of Series A 8% Convertible Preferred(cid:10) Stock (516,558) (5,166) 5,165,580 51,656 (46,490)(cid:10) Non-cash compensation satisfied by the(cid:10) issuance of stock, options and warrants 1,008,850(cid:10) Common Stock issued as dividend on Series(cid:10) A 8% Convertible Preferred Stock -- -- 99,936 1,000 164,418(cid:10) Exercise of stock options and warrants -- -- 525,744 5,257 579,250(cid:10) Proceeds - Short swing profits -- -- -- -- 117,740(cid:10) Net loss -- -- -- -- --(cid:10) ------------ ------------ ------------ ------------ ------------(cid:10) BALANCES AT MARCH 31, 2005 -- $ -- 18,022,183 180,222 $ 47,006,379(cid:10) ============ ============ ============ ============ ============(cid:10) (cid:10) TREASURY STOCK(cid:10) -------------- ACCUMULATED STOCKHOLDERS'(cid:10) SHARES AMOUNT DEFICIT EQUITY(cid:10) ------ ------ ------- ------(cid:10) (cid:10) BALANCES AT APRIL 1, 2004 (100,000) $ (306,841) $(35,105,151) $ 4,048,192(cid:10) Net proceeds from issuance of Series A 8%(cid:10) Convertible Preferred Stock and warrants -- -- -- 5,791,602(cid:10) Issuance of Common Stock for consulting(cid:10) services -- -- -- 58,300(cid:10) Issuance of Common Stock upon conversion(cid:10) of Series A 8% Convertible Preferred(cid:10) Stock -- -- -- --(cid:10) Non-cash compensation satisfied by the(cid:10) issuance of stock, options and warrants 1,008,850(cid:10) Common Stock issued as dividend on Series(cid:10) A 8% Convertible Preferred Stock -- -- (165,418) --(cid:10) Exercise of stock options and warrants -- -- -- 584,507(cid:10) Proceeds - Short swing profits -- -- -- 117,740(cid:10) Net loss -- -- (5,906,890) (5,906,890)(cid:10) ------------ ------------ ------------ ------------(cid:10) BALANCES AT MARCH 31, 2005 $ (100,000) $ (306,841) $(41,177,459) $ 5,702,301(cid:10) ============ ============ ============ ============(cid:10)
(cid:10) The accompanying notes are an integral part of the(cid:10) consolidated financial statements.(cid:10) F-6(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(cid:10) (cid:10)
(cid:10) PREFERRED STOCK COMMON STOCK ADDITIONAL(cid:10) --------------- ------------ PAID-IN(cid:10) SHARES AMOUNT SHARES AMOUNT CAPITAL(cid:10) ------ ------ ------ ------ -------(cid:10) (cid:10) BALANCES AT APRIL 1, 2005 -- $ -- 18,022,183 $ 180,222 $ 47,006,379(cid:10) Net proceeds from issuance of Series B(cid:10) 8% Convertible Preferred Stock and(cid:10) warrants 10,000 $ 100 -- -- 8,792,569(cid:10) Non-cash compensation satisfied by the(cid:10) issuance of stock, options and(cid:10) warrants -- -- -- -- 902,927(cid:10) Exercise of stock options -- -- 20,000 200 39,800(cid:10) Exercise of stock warrants -- -- 1,147,976 11,480 1,241,515(cid:10) Net loss -- -- -- -- --(cid:10) Dividends -- -- -- -- 2,121,917(cid:10) ------------ ------------ ------------ ------------ ------------(cid:10) BALANCES AT MARCH 31, 2006 10,000 $ 100 19,190,159 $ 191,902 $ 60,105,107(cid:10) ============ ============ ============ ============ ============(cid:10) (cid:10) TREASURY STOCK(cid:10) -------------- ACCUMULATED STOCKHOLDERS'(cid:10) SHARES AMOUNT DEFICIT EQUITY(cid:10) ------ ------ ------- ------(cid:10) (cid:10) BALANCES AT APRIL 1, 2005 (100,000) $ (306,841) $(41,177,459) $ 5,702,301(cid:10) Net proceeds from issuance of Series B(cid:10) 8% Convertible Preferred Stock and(cid:10) warrants -- -- -- 8,792,669(cid:10) Non-cash compensation satisfied by the(cid:10) issuance of stock, options and(cid:10) warrants 902,927(cid:10) Exercise of stock options -- -- -- 40,000(cid:10) Exercise of stock warrants -- -- -- 1,252,995(cid:10) Net loss -- -- (6,883,914) (6,883,914)(cid:10) Dividends -- -- (2,155,250) (33,333)(cid:10) ------------ ------------ ------------ ------------(cid:10) BALANCES AT MARCH 31, 2006 (100,000) $ (306,841) $(50,216,623) $ 9,773,645(cid:10) ============ ============ ============ ============(cid:10)
(cid:10) The accompanying notes are an integral part of the(cid:10) consolidated financial statements.(cid:10) F-7(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(cid:10) (cid:10)
(cid:10) PREFERRED STOCK COMMON STOCK SUBSCRIPTION(cid:10) SHARES AMOUNT SHARES AMOUNT RECEIVABLE(cid:10) ------ ------ ------ ------ ----------(cid:10) (cid:10) BALANCES AT APRIL 1, 2006 10,000 $ 100 19,190,159 $ 191,902 --(cid:10) Equity Investment in Company -- -- 957,396 9,574 --(cid:10) Conversion of Preferred to Common (305) (3) 135,555 1,356 --(cid:10) Conversion of Warrants to Common -- -- 84,430 844 --(cid:10) Exercise of Stock Options -- -- 59,000 590 --(cid:10) Non-cash compensation through issuance of(cid:10) stock options and warrants -- -- -- -- --(cid:10) Sale of Warrants -- -- -- -- (75,000)(cid:10) Costs associated with Raising Capital -- -- -- -- --(cid:10) Net loss -- -- -- -- --(cid:10) Dividends -- -- 372,562 3,725 --(cid:10) ------------ ------------ ------------ ------------ ------------(cid:10) BALANCES AT MARCH 31, 2007 9,695 $ 97 20,799,102 $ 207,991 $ (75,000)(cid:10) ============ ============ ============ ============ ============(cid:10) (cid:10) ADDITION(cid:10) PAID-IN TREASURY STOCK ACCUMULATED STOCKHOLDERS'(cid:10) CAPITAL SHARES AMOUNT DEFICIT EQUITY(cid:10) ------- ------ ------ ------- ------(cid:10) (cid:10) BALANCES AT APRIL 1, 2006 $ 60,105,107 (100,000) $ (306,841) $(50,216,623) $ 9,773,645(cid:10) Equity Investment in Company 1,990,426 -- -- -- 2,000,000(cid:10) Conversion of Preferred to Common (1,353) -- -- -- --(cid:10) Conversion of Warrants to Common (844) -- -- -- --(cid:10) Exercise of Stock Options 87,910 -- -- -- 88,500(cid:10) Non-cash compensation through issuance of(cid:10) stock options and warrants 3,479,070 -- -- -- 3,479,070(cid:10) Sale of Warrants 75,000 -- -- -- --(cid:10) Costs associated with Raising Capital (26,347) -- -- -- (26,347)(cid:10) Net loss -- -- -- (11,803,512) (11,803,512)(cid:10) Dividends 786,649 -- -- (791,182) (808)(cid:10) ------------ ------------ ------------ ------------ ------------(cid:10) BALANCES AT MARCH 31, 2007 66,495,618 (100,000) $ (306,841) $(62,811,317) $ (3,510,548)(cid:10) ============ ============ ============ ============ ============(cid:10)
(cid:10) The accompanying notes are an integral part of the(cid:10) consolidated financial statements.(cid:10) F-8(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED STATEMENTS OF CASH FLOWS(cid:10) (cid:10)
(cid:10) YEARS ENDED MARCH 31,(cid:10) ---------------------(cid:10) 2007 2006 2005(cid:10) ---- ---- ----(cid:10) (cid:10) CASH FLOWS FROM OPERATING ACTIVITIES:(cid:10) Net loss $(11,803,512) $ (6,883,914) $ (5,906,890)(cid:10) Adjustments to reconcile net loss to cash(cid:10) used in operating activities:(cid:10) Provision for doubtful accounts -- -- 153,250(cid:10) Depreciation and amortization 439,994 486,687 356,438(cid:10) Non-cash compensation satisfied by issuance of stock,(cid:10) options and warrants 3,479,070 902,927 1,067,150(cid:10) Changes in assets and liabilities:(cid:10) Accounts receivable (215,837) 142,113 (142,113)(cid:10) Accrued interest receivable (949) -- --(cid:10) Prepaid expenses and other current assets (678,552) (123,728) (209,013)(cid:10) Security Deposit -- (6,980) --(cid:10) Accounts payable, accrued expenses and other current(cid:10) liabilities 465,518 857,346 (202,325)(cid:10) ------------ ------------ ------------(cid:10) NET CASH USED IN OPERATING ACTIVITIES (8,314,268) (4,625,549) (4,883,503)(cid:10) ------------ ------------ ------------(cid:10) CASH FLOWS FROM INVESTING ACTIVITIES:(cid:10) Purchase of patent (5,470) -- --(cid:10) Deposits to restricted cash -- (1,175,971) --(cid:10) Release of restricted cash 1,174,397 -- 315,570(cid:10) Payment of deposit for manufacturing equipment (32,880) -- --(cid:10) Purchases of property and equipment (1,548,755) (448,280) (27,843)(cid:10) ------------ ------------ ------------(cid:10) NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (412,708) (1,624,251) 287,727(cid:10) ------------ ------------ ------------(cid:10) CASH FLOWS FROM FINANCING ACTIVITIES:(cid:10) Principal bank note payments -- -- (225,000)(cid:10) Dividends paid (34,141) -- --(cid:10) Proceeds from issuance of Common Stock and warrants 2,000,000 -- --(cid:10) Principal repayments of NJEDA bonds (175,000) (2,345,000) (150,000)(cid:10) Proceeds from issuance of Series A 8% Convertible Preferred(cid:10) Stock and warrants -- -- 5,791,602(cid:10) Costs associated with raising capital (26,347) -- --(cid:10) Proceeds from equipment loan -- -- 400,000(cid:10) Proceeds - NJEDA Tax Exempt Bonds -- 4,155,000 --(cid:10) Payment - NJEDA Bond Offering Costs -- (354,452) --(cid:10) Proceeds from issuance of Series B 8% Convertible Preferred(cid:10) Stock and warrants -- 8,792,669 --(cid:10) Principal equipment note payments -- (315,074) (84,926)(cid:10) Prepaid interest -- 41,013 (41,013)(cid:10) Proceeds from exercise of stock options 88,500 40,000 100,000(cid:10) Proceeds from exercise of stock warrants -- 1,252,995 484,507(cid:10) Proceeds from short swing profits -- -- 117,740(cid:10) ------------ ------------ ------------(cid:10) NET CASH PROVIDED BY FINANCING ACTIVITIES 1,853,012 11,267,151 6,392,910(cid:10) ------------ ------------ ------------(cid:10) NET CHANGE IN CASH AND CASH EQUIVALENTS (6,873,964) 5,017,351 1,797,134(cid:10) CASH AND CASH EQUIVALENTS - beginning of period 8,919,354 3,902,003 2,104,869(cid:10) ------------ ------------ ------------(cid:10) CASH AND CASH EQUIVALENTS - end of period $ 2,045,390 $ 8,919,354 $ 3,902,003(cid:10) ============ ============ ============(cid:10) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:(cid:10) Cash paid for interest $ 275,554 $ 275,071 $ 230,464(cid:10) Cash received for income taxes (375,489) (218,121) (204,792)(cid:10) SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:(cid:10) Preferred Stock dividends of $791,182 and $120,675 paid by issuance of(cid:10) 372,562 and 64,033 shares of Common Stock $ -- $ -- $ 165,418(cid:10) Utilization of equipment deposit towards purchase of equipment -- -- 398,580(cid:10) Dividends accrued on preferred stock -- 33,333 --(cid:10) Beneficial conversion -- 2,121,917 --(cid:10)
(cid:10) The accompanying notes are an integral part of the(cid:10) consolidated financial statements.(cid:10) F-9(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(cid:10) PRINCIPLES OF CONSOLIDATION(cid:10) The consolidated financial statements include the accounts of Elite(cid:10) Pharmaceuticals, Inc. and its consolidated subsidiaries, (collectively the(cid:10) "Company") including its wholly-owned subsidiaries, Elite Laboratories,(cid:10) Inc. ("Elite Labs") and Elite Research, Inc. ("ERI") and its variable(cid:10) interest entity, Novel Laboratories, Inc. ("Novel"). Our Company(cid:10) consolidates all entities that we control by ownership of a majority(cid:10) voting interest as well as variable interest entities for which our(cid:10) Company is the primary beneficiary. Our judgment in determining if we are(cid:10) the primary beneficiary of the variable interest entities includes(cid:10) assessing our Company's level of involvement in setting up the entity,(cid:10) determining if the activities of the entity are substantially conducted on(cid:10) behalf of our Company, determining whether the Company provides more than(cid:10) half of the subordinated financial support to the entity, and determining(cid:10) if we absorb the majority of the entity's expected losses or returns. As(cid:10) of March 31, 2007, the financial statements of all wholly-owned entities(cid:10) and its variable interest entity are consolidated and all significant(cid:10) intercompany accounts are eliminated upon consolidation.(cid:10) NATURE OF BUSINESS(cid:10) Elite Pharmaceuticals, Inc. was incorporated on October 1, 1997 under the(cid:10) laws of the State of Delaware, and its wholly-owned subsidiary Elite(cid:10) Laboratories, Inc. was incorporated on August 23, 1990 under the laws of(cid:10) the State of Delaware. Elite Labs engages primarily in researching,(cid:10) developing and licensing proprietary controlled release drug delivery(cid:10) systems and products. The Company is also equipped to manufacture(cid:10) controlled release products on a contract basis for third parties and(cid:10) itself if and when the products are approved; however the Company has(cid:10) concentrated on developing orally administered controlled release(cid:10) products. These products include drugs that cover therapeutic areas for(cid:10) pain, allergy and infection. The Company also engages in research and(cid:10) development activities for the purpose of obtaining Food and Drug(cid:10) Administration approval, and, thereafter, commercially exploiting generic(cid:10) and new controlled-release pharmaceutical products. The Company also(cid:10) engages in contract research and development on behalf of other(cid:10) pharmaceutical companies.(cid:10) CASH AND CASH EQUIVALENTS(cid:10) The Company considers all highly liquid investments with an original(cid:10) maturity of three months or less to be cash equivalents. Cash and cash(cid:10) equivalents consist of cash on deposit with banks and money market(cid:10) instruments. The Company places its cash and cash equivalents with(cid:10) high-quality, U.S. financial institutions and, to date, has not(cid:10) experienced losses on any of its balances.(cid:10) F-10(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10) LONG-LIVED ASSETS (CONTINUED)(cid:10) The Company periodically evaluates the fair value of long-lived assets,(cid:10) which include property and equipment and intangibles, whenever events or(cid:10) changes in circumstances indicate that its carrying amounts may not be(cid:10) recoverable. Such conditions may include an economic downturn or a change(cid:10) in the assessment of future operations. A charge for impairment is(cid:10) recognized whenever the carrying amount of a long-lived asset exceeds its(cid:10) fair value. Management has determined that no impairment of long-lived(cid:10) assets has occurred.(cid:10) Property and equipment are stated at cost. Depreciation is provided on the(cid:10) straight-line method based on the estimated useful lives of the respective(cid:10) assets which range from five to forty years. Major repairs or improvements(cid:10) are capitalized. Minor replacements and maintenance and repairs which do(cid:10) not improve or extend asset lives are expensed currently.(cid:10) Upon retirement or other disposition of assets, the cost and related(cid:10) accumulated depreciation are removed from the accounts and the resulting(cid:10) gain or loss, if any, is recognized in income.(cid:10) Costs incurred to acquire intangible assets such as for the application of(cid:10) patents and trademarks are capitalized and amortized on the straight-line(cid:10) method, based on their estimated useful lives ranging from five to fifteen(cid:10) years, commencing upon approval of the patent and trademarks. Such costs(cid:10) are charged to expense if the patent or trademark is unsuccessful.(cid:10) RESEARCH AND DEVELOPMENT(cid:10) Research and development expenditures are charged to expense as incurred.(cid:10) CONCENTRATION OF CREDIT RISK(cid:10) The Company derives substantially all of its revenues from manufacturing,(cid:10) licensing, research and development agreements with other pharmaceutical(cid:10) companies.(cid:10) The Company maintains cash balances, which, at times, may exceed the(cid:10) amounts insured by the Federal Deposit Insurance Corp. Management does not(cid:10) believe that there is any significant risk of losses.(cid:10) The Company in the normal course of business extends credit to its(cid:10) customers based on contract terms and performs ongoing credit evaluations.(cid:10) An allowance for doubtful accounts due to uncertainty of collectability is(cid:10) established based on historical collection experience. Amounts are written(cid:10) off when payment is not received after exhaustive collection efforts.(cid:10) F-11(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10) USE OF ESTIMATES(cid:10) The preparation of financial statements in conformity with generally(cid:10) accepted accounting principles requires management to make estimates and(cid:10) assumptions that affect the reported amounts of assets and liabilities and(cid:10) disclosure of contingent assets and liabilities at the date of the(cid:10) financial statements and the reported amounts of revenues and expenses(cid:10) during the reporting period. Actual results could differ from those(cid:10) estimates. Significant estimates made by management include, but are not(cid:10) limited to, the recognition of revenue, the amount of the allowance for(cid:10) doubtful accounts receivable and the fair value of intangible assets and(cid:10) stock-based awards.(cid:10) INCOME TAXES(cid:10) The Company uses the liability method for reporting income taxes, under(cid:10) which current and deferred tax liabilities and assets are recorded in(cid:10) accordance with enacted tax laws and rates. Deferred income taxes reflect(cid:10) the net tax effects of temporary differences between the carrying amounts(cid:10) of assets and liabilities for financial reporting purposes and the amounts(cid:10) used for income tax purposes. Under the liability method, the amounts of(cid:10) deferred tax liabilities and assets at the end of each period are(cid:10) determined using the tax rate expected to be in effect when taxes are(cid:10) actually paid or recovered. Further tax benefits are recognized when it is(cid:10) more likely than not that such benefits will be realized. Valuation(cid:10) allowances are provided to reduce deferred tax assets to the amount(cid:10) considered likely to be realized.(cid:10) EARNINGS PER COMMON SHARE(cid:10) Basic earnings per common share is calculated by dividing net earnings by(cid:10) the weighted average number of shares outstanding during each period(cid:10) presented. Diluted earnings per share is calculated by dividing earnings(cid:10) by the weighted average number of shares and common stock equivalents. The(cid:10) Company's common stock equivalents, consist of options, warrants and(cid:10) convertible securities.(cid:10) REVENUE RECOGNITION(cid:10) Revenues derived from providing research and development services under(cid:10) contracts with other pharmaceutical companies are recognized when earned.(cid:10) These contracts provide for non-refundable upfront and milestone payments.(cid:10) Because no discrete earnings event has occurred when the upfront payment(cid:10) is received, that amount is deferred until the achievement of a defined(cid:10) milestone. Each nonrefundable milestone payment is recognized as revenue(cid:10) when the performance criteria for that milestone have been met. Under each(cid:10) contract, the milestones are defined, substantive effort is required to(cid:10) achieve the milestone, the amount of the non-refundable milestone payment(cid:10) is reasonable, commensurate with the effort expended, and achievement of(cid:10) the milestone is reasonably assured.(cid:10) F-12(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10) REVENUE RECOGNITION (CONTINUED)(cid:10) Revenues earned by licensing certain pharmaceutical products developed by(cid:10) the Company are recognized at the beginning of a license term when the(cid:10) Company's customer has legal right to the use of the product. To date, no(cid:10) revenues have been earned by licensing products and there are no(cid:10) continuing obligations under any licensing agreements.(cid:10) Revenues derived from royalties to the extent that they cannot be(cid:10) reasonably estimated are recognized when the payment is received.(cid:10) Revenues earned under manufacturing agreements with other pharmaceutical(cid:10) companies are recognized when product is shipped.(cid:10) TREASURY STOCK(cid:10) The Company records common shares purchased and held in treasury at cost.(cid:10) FAIR VALUE OF FINANCIAL INSTRUMENTS(cid:10) The carrying amounts of current assets and liabilities approximate fair(cid:10) value due to the short-term nature of these instruments. The carrying(cid:10) amounts of noncurrent assets are reasonable estimates of their fair values(cid:10) based on management's evaluation of future cash flows. The long-term(cid:10) liabilities are carried at amounts that approximate fair value based on(cid:10) borrowing rates available to the Company for obligations with similar(cid:10) terms, degrees of risk and remaining maturities.(cid:10) STOCK-BASED COMPENSATION(cid:10) Beginning with stock options and warrants granted in 2003, the Company has(cid:10) accounted for stock-based compensation in accordance with the provisions(cid:10) of SFAS No. 123, "Accounting for Stock-Based Compensation," which provided(cid:10) guidance for the recognition of compensation expense as it related to the(cid:10) issuance of stock options and warrants. In addition, the Company adopted(cid:10) the provisions of SFAS No. 148, "Accounting for Stock-Based Compensation -(cid:10) Transition and Disclosure - an amendment of SFAS No. 123." SFAS No. 148(cid:10) amended SFAS No. 123 to provide alternative methods of transition for a(cid:10) voluntary change to the fair value based method of accounting for(cid:10) stock-based employee compensation provided by SFAS No. 123. As permitted(cid:10) by SFAS No. 148, the Company has adopted the fair value method recommended(cid:10) by SFAS No. 123 to effect a change in accounting for stock-based employee(cid:10) compensation. In addition, the Company adopted the provisions of SFAS No.(cid:10) 123R, "Share-Based Payment," which revised SFAS No. 123 to require all(cid:10) share-based payments to employees, including grants of employee stock(cid:10) options, to be recognized based on their fair values.(cid:10) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS(cid:10) FASB Statement No. 123 (R), "Share Based Payment" ("FASB No. 123 (R)")(cid:10) requires all entities to recognize compensation expense in an amount equal(cid:10) to the fair value of share based payments made to employees, among other(cid:10) requirements. Under the fair value based method, compensation cost is(cid:10) measured at the grant date based on the fair value of the award and is(cid:10) recognized on a straight-line basis over the award vesting period. The(cid:10) Company previously adopted FASB No. 123 (R) during the year ended March(cid:10) 31, 2003.(cid:10) Accordingly, share based payments issued to officers, directors and(cid:10) vendors are measured at fair value and recognized as expense over the(cid:10) related vesting periods.(cid:10) The compensation expense recognized for the years ended March 31, 2007,(cid:10) 2006 and 2005 was $3,479,070, $902,927 and $1,008,850, respectively.(cid:10) F-13(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)(cid:10) In June 2006, the Financial Accounting Standards Board ("FASB") issued(cid:10) FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes,"(cid:10) an interpretation of FASB Statement No. 109 ("FIN 48"), which provides(cid:10) criteria for the recognition, measurement, presentation and disclosure of(cid:10) uncertain tax positions. A tax benefit from an uncertain position may be(cid:10) recognized only if it is "more likely than not" that the position is(cid:10) sustainable on its technical merits. The provisions of FIN 48 are(cid:10) effective for fiscal years beginning after December 15, 2006. The Company(cid:10) does not expect FIN 48 will have a material effect on its consolidated(cid:10) financial condition, results of operations or cash flows.(cid:10) In September 2006, the FASB issued FASB Statement No. 157 "Fair Value(cid:10) Measurements" ("FASB No. 157") which relate to the definition of fair(cid:10) value, the methods used to measure fair value, and the expanded(cid:10) disclosures about fair value measurements. The provisions of FASB No. 157(cid:10) are effective for financial statements issued for fiscal years beginning(cid:10) after November 15, 2007. The Company does not expect this statement to(cid:10) have a material effect on its consolidated financial condition, results of(cid:10) operations or cash flows upon adoption.(cid:10) In September 2006, the SEC issued Staff Accounting Bulletin 108,(cid:10) "Considering The Effects Of Prior Year Misstatements When Quantifying(cid:10) Misstatements In Current Year Financial Statements", which provides(cid:10) guidance regarding the process of quantifying financial statements(cid:10) misstatements for the purpose of materiality assessment. The provisions(cid:10) are effective for fiscal years ending on or after November 15, 2006. This(cid:10) bulletin did not have a material effect on its consolidated financial(cid:10) condition, results of operations or cash flows upon adoption.(cid:10) In February 2007, the FASB issued FASB Statement No. 159, "The Fair Value(cid:10) Option for Financial Assets and Financial Liabilities, including an(cid:10) amendment of FASB Statement No. 115," ("FASB No. 159") which permits(cid:10) entities to choose to measure many financial instruments and certain other(cid:10) items at fair value that are not currently required to be measured at fair(cid:10) value. The objective is to improve financial reporting by providing(cid:10) entities with the opportunity to mitigate volatility in reported earnings(cid:10) caused by measuring related assets and liabilities differently without(cid:10) having to apply complex hedge accounting provisions. FASB No. 159 is(cid:10) expected to expand the use of fair value measurement, which is consistent(cid:10) with the Board's long-term measurement objectives for accounting for(cid:10) financial instruments. FASB No. 159 also establishes presentation and(cid:10) disclosure requirements designed to facilitate comparisons between(cid:10) entities that choose different measurement attributes for similar types of(cid:10) assets and liabilities. FASB No. 159 does not affect any existing(cid:10) accounting literature that requires certain assets and liabilities to be(cid:10) carried at fair value. FASB No. 159 does not establish requirements for(cid:10) recognizing and measuring dividend income, interest income, or interest(cid:10) expense. FASB No. 159 does not eliminate disclosure requirements included(cid:10) in other accounting standards, including requirements for disclosures(cid:10) about fair value measurements, included in FASB Statements No. 157, "Fair(cid:10) Value Measurements, and No. 107, Disclosures about(cid:10) F-14(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)(cid:10) Fair Value of Financial Instruments." FASB No. 159 is effective as of the(cid:10) beginning of an entity's first fiscal year that begins after November 15,(cid:10) 2007. The Company has not yet completed its assessment of the impact upon(cid:10) adoption of FASB No. 159 on its consolidated financial condition, results(cid:10) of operations or cash flows.(cid:10) RECLASSIFICATIONS(cid:10) Certain accounts and amounts in the 2005 and 2006 financial statements(cid:10) have been reclassified in order to conform with the 2007 presentation.(cid:10) These reclassifications have no effect on net income.(cid:10) NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS(cid:10) The Company reported net losses of $11,803,512, $6,883,914 and $5,906,890(cid:10) for the fiscal years ended March 31, 2007, 2006 and 2005, respectively. At(cid:10) March 31, 2007, the Company had an accumulated deficit of approximately(cid:10) $62.8 million, consolidated assets of approximately $9.7 million,(cid:10) stockholders' equity of approximately $3.5 million, and working capital of(cid:10) approximately $1 million. The Company has not generated any significant(cid:10) revenue to date. During 2006, the Company raised $8,792,669 of net(cid:10) proceeds from the sale of Series B Preferred Stock.(cid:10) The Company's strategy is to continue to be engaged in the development and(cid:10) manufacturing of oral controlled-release products. It will continue to(cid:10) develop generic versions of controlled release drug products with high(cid:10) barriers to entry and assist partner companies in the life cycle(cid:10) management of products to improve off patent drug products. The Company(cid:10) has two products currently being sold commercially and a pipeline of seven(cid:10) products under development.(cid:10) As of March 31, 2007, the Company's principal source of liquidity was(cid:10) approximately $2,045,000 of cash and cash equivalents. The Company may(cid:10) also receive funds through the exercise of outstanding stock options and(cid:10) warrants in addition to funds that may be generated from the potential(cid:10) sale of New Jersey tax losses. There can be no assurance that proceeds(cid:10) from the sale of the tax losses and from the exercise, if any, of(cid:10) outstanding warrants or options will be material.(cid:10) F-15(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS (CONTINUED)(cid:10) The Company retained an investment banking firm in 2006 to assist the(cid:10) Company in connection with potential acquisitions, strategic alliances(cid:10) with other pharmaceutical companies, advice to future financings and(cid:10) introductions to key parties in capital markets.(cid:10) As result, during April 2007, the Company raised approximately $13,900,000(cid:10) of net proceeds from the sale of Series C Convertible Preferred Stock.(cid:10) Management plans to use these net proceeds over the next twelve to(cid:10) fourteen months to fund its research and development activities as well to(cid:10) fund its continuing investment in Novel Laboratories, Inc.(cid:10) See "Note 11 - Subsequent Events" for description of Series C 8%(cid:10) Convertible Preferred Stock.(cid:10) There is no assurance that the Company's business strategy will be(cid:10) successfully implemented, however with the Company's existing working(cid:10) capital levels, it will be able to continue operations at least through(cid:10) the end of fiscal 2008.(cid:10) NOTE 3- PROPERTY AND EQUIPMENT(cid:10) Property and equipment at March 31, 2007 and 2006 consists of the(cid:10) following:(cid:10) (cid:10)
(cid:10) 2007 2006(cid:10) ---- ----(cid:10) (cid:10) Laboratory manufacturing, and warehouse equipment $5,216,272 $3,763,163(cid:10) Office equipment 88,397 32,981(cid:10) Furniture and fixtures 51,781 51,781(cid:10) Transportation equipment 4,500 --(cid:10) Land, building and improvements 2,385,401 2,349,459(cid:10) Equipment under capital lease 168,179 168,179(cid:10) ---------- ----------(cid:10) 7,914,530 6,365,563(cid:10) Less: Accumulated depreciation and amortization 2,460,504 2,056,594(cid:10) ---------- ----------(cid:10) $5,454,026 $4,308,969(cid:10) ========== ==========(cid:10)
(cid:10) Depreciation and amortization expense amounted to $403,698, $333,748 and(cid:10) $300,303 for the years ended March 31, 2007, 2006 and 2005, respectively.(cid:10) F-16(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 4 - INTANGIBLE ASSETS(cid:10) Intangible assets at March 31, 2007 and 2006, consist of the following:(cid:10) 2007 2006(cid:10) ---- ----(cid:10) Patents $151,300 $145,830(cid:10) Trademarks 8,120 8,120(cid:10) -------- --------(cid:10) 159,420 153,950(cid:10) Less: Accumulated amortization 116,611 94,493(cid:10) -------- --------(cid:10) $ 42,809 $ 59,457(cid:10) ======== ========(cid:10) Amortization of intangible assets amounted to $22,118, $21,727 and $21,012(cid:10) for the years ended March 31, 2007, 2006 and 2005, respectively.(cid:10) NOTE 5 - LONG TERM DEBT(cid:10) On September 2, 1999, the Company completed the issuance of tax exempt(cid:10) bonds by the New Jersey Economic Development Authority ("NJEDA" or the(cid:10) "Authority"). The aggregate proceeds from the issuance of the fifteen year(cid:10) term bonds was $3,000,000. Interest on the bonds accrues at 7.75% per(cid:10) annum. A portion of the proceeds were used by the Company to refinance its(cid:10) land and building, and the remaining proceeds were intended to be used for(cid:10) the purchase of manufacturing equipment and building improvements.(cid:10) On August 31, 2005, the Company successfully completed a refinancing of(cid:10) the 1999 bond issue through the issuance of new tax-exempt bonds (the(cid:10) "Bonds"). The refinancing involved borrowing $4,155,000, evidenced by a(cid:10) 6.5% Series A Note in the principal amount of $3,660,000 maturing on(cid:10) September 1, 2030 and a 9% Series B Note in the principal amount of(cid:10) $495,000 maturing on September 1, 2012. The net proceeds, after payment of(cid:10) issuance costs, were used (i) to redeem the outstanding tax-exempt Bonds(cid:10) originally issued by the Authority on September 2, 1999, (ii) refinance(cid:10) other equipment financing and (iii) for the purchase of certain equipment(cid:10) to be used in the manufacture of pharmaceutical products.(cid:10) Interest is payable semiannually on March 1 and September 1 of each year.(cid:10) The Bonds are collateralized by a first lien on the Company's facility and(cid:10) equipment acquired with the proceeds of the original and refinanced Bonds.(cid:10) The related Indenture requires the maintenance of a $415,500 Debt Service(cid:10) Reserve Fund consisting of $366,000 from the Series A Notes proceeds and(cid:10) $49,500 from the Series B Notes proceeds. The Debt Service Reserve is(cid:10) maintained in restricted cash accounts that are classified in Other(cid:10) Assets. $1,274,311 of the proceeds had been deposited in a short-term(cid:10) restricted cash account to fund the purchase of manufacturing equipment(cid:10) and(cid:10) F-17(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 5 - LONG TERM DEBT (CONTINUED)(cid:10) development of the Company's facility. As of March 31, 2007, all of these(cid:10) proceeds were utilized to upgrade the Company's manufacturing facilities(cid:10) and for the purchase of manufacturing and laboratory equipment.(cid:10) Bond issue costs of $354,000 were paid from the bond proceeds and are(cid:10) being amortized over the life of the bonds. Amortization of bond financing(cid:10) costs amounted to $14,178 and $7,000 for the years ended March 31, 2007(cid:10) and 2006, respectively.(cid:10) Bond issue costs of the 1999 bonds were being amortized over the term of(cid:10) those bonds. Such amortization amounted to $5,500 and $13,190 in the years(cid:10) ended March 31, 2006 and 2005, respectively. Upon the refinancing the(cid:10) remaining unamortized issue costs of $118,712 were charged to expenses.(cid:10) As of March 31, 2007, $1,274,311 has been requisitioned and deposited into(cid:10) operating accounts to fund the purchase of equipment and to upgrade and(cid:10) manufacturing facility.(cid:10) Bond financings consisted of the following at March 31:(cid:10) 2007 2006(cid:10) ---- ----(cid:10) Refinanced NJEDA Bonds $ 3,980,000 $ 4,155,000(cid:10) ----------- -----------(cid:10) 3,980,000 4,155,000(cid:10) Current portion (185,000) (175,000)(cid:10) ----------- -----------(cid:10) Long term portion, net of current maturities $ 3,795,000 3,980,000(cid:10) =========== ===========(cid:10) Maturities of Bonds for the next five years follow:(cid:10) YEAR ENDING MARCH 31, AMOUNT(cid:10) --------------------- ------(cid:10) 2008 $ 185,000(cid:10) 2009 200,000(cid:10) 2010 210,000(cid:10) 2011 225,000(cid:10) 2012 245,000(cid:10) Thereafter 2,915,000(cid:10) -----------(cid:10) $ 3,980,000(cid:10) ===========(cid:10) F-18(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 5 - LONG TERM DEBT (CONTINUED)(cid:10) In 2004, the Company entered into a loan and financing agreement to(cid:10) purchase machinery and equipment. The $400,000 loan was payable in 36(cid:10) monthly installments of $13,671, each, including principal and interest at(cid:10) 14% annum. As part of the agreement, the Company issued to the lender's(cid:10) designees warrants to purchase 50,000 shares of the Company's Common Stock(cid:10) at $4.20 per share. The warrants vested immediately and their cost of(cid:10) $41,252 was charged to expense in the year ended March 31, 2005. Proceeds(cid:10) from the refinancing of the Company's EDA Bonds were used to pay off the(cid:10) unpaid portion of the loan.(cid:10) NOTE 6 - INCOME TAXES(cid:10) The components of the provision for income taxes are as follows:(cid:10) YEAR ENDED MARCH 31,(cid:10) 2007 2006 2005(cid:10) ---- ---- ----(cid:10) Federal:(cid:10) Current $ -- $ -- $ --(cid:10) Deferred -- -- --(cid:10) ------ ------ ------(cid:10) -- -- --(cid:10) ------ ------ ------(cid:10) State:(cid:10) Current 1,770 1,000 1,000(cid:10) Deferred -- -- --(cid:10) ------ ------ ------(cid:10) 1,770 1,000 1,000(cid:10) ------ ------ ------(cid:10) $1,770 $1,000 $1,000(cid:10) ====== ====== ======(cid:10) During the years ended March 31, 2007, 2006 and 2005 the Company received(cid:10) approval for the sale of an additional $4,818,122, $2,798,478 and $2,628,257 of(cid:10) New Jersey net-operating losses under the Technology Tax Certificate Transfer(cid:10) Program sponsored by the New Jersey Economic Development Authority (NJEDA). The(cid:10) total tax benefits received during the years ended March 31, 2007, 2006 and 2005(cid:10) were $377,259, $219,121 and $205,792, respectively and are recorded as other(cid:10) income in the statements of operations.(cid:10) F-19(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 6 - INCOME TAXES (CONTINUED)(cid:10) The major components of deferred tax assets at March 31, 2007 and 2006 are(cid:10) as follows:(cid:10) 2007 2006(cid:10) ---- ----(cid:10) Net operating loss carry forwards $ 11,733,884 $ 10,785,800(cid:10) Valuation allowance (11,733,884) (10,785,800)(cid:10) ------------ ------------(cid:10) $ -- $ --(cid:10) ============ ============(cid:10) At March 31, 2007 and 2006, a 100% valuation allowance is provided, as it(cid:10) is uncertain if the deferred tax assets will provide any future benefits(cid:10) because of the uncertainty about the Company's ability to generate the(cid:10) future taxable income necessary to use the net operating loss(cid:10) carryforwards. The valuation allowance increased during 2007, 2006 and(cid:10) 2005 by $948,084, $2,363,575 and $1,685,889, respectively.(cid:10) At March 31, 2007, for federal income tax purposes, the Company has unused(cid:10) net operating loss carryforwards of approximately $36,816,851 expiring in(cid:10) 2008 through 2022. For state tax purposes, the Company has $15,835,173 of(cid:10) unused net operating losses, which are net of the $19,784,360 of the New(cid:10) Jersey net-operating losses sold, as discussed above.(cid:10) NOTE 7 - COMMITMENTS AND CONTINGENCIES(cid:10) EMPLOYMENT AGREEMENTS(cid:10) On September 2, 2005, the Company entered into an amended and restated(cid:10) employment agreement with Bernard J. Berk, providing for Mr. Berk to(cid:10) continue to serve as the Company's Chief Executive Officer through August(cid:10) 31, 2009. The Employment Agreement also provides for an annual bonus as(cid:10) determined by the Compensation Committee of the Company's Board of(cid:10) Directors. Pursuant to the agreement:(cid:10) - Mr. Berk waived his rights to 75,000 of 300,000 options granted to(cid:10) him on July 23, 2003. The Company determined that the remaining(cid:10) 225,000 options are fully vested.(cid:10) - Mr. Berk's salary was increased to $330,140, effective May 1, 2005.(cid:10) - Mr. Berk was granted under the Company's 2004 Stock Option Plan,(cid:10) ten-year options to purchase 600,000 shares of Common Stock at(cid:10) $2.69, the fair market value of Common Stock as of the time of(cid:10) grant.(cid:10) F-20(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) EMPLOYMENT AGREEMENTS (CONTINUED)(cid:10) - Mr. Berk will be entitled to receive severance in accordance with(cid:10) the employment agreement if he is terminated without cause or(cid:10) because of his death or permanent disability or if he terminates his(cid:10) employment for good reason or as a result of a "change of control"(cid:10) (as defined in the employment agreement).(cid:10) The Company on November 13, 2006 entered into (i) the Second Amended and(cid:10) Restated Employment Agreement with Mr. Bernard Berk ("Berk"), its Chief(cid:10) Executive Officer and Chairman of the Board of Directors (the "Berk(cid:10) Agreement"); (ii) an employment agreement with Dr. Charan Behl ("Behl") as(cid:10) Executive Vice President and Chief Scientific Officer; and (iii) an(cid:10) employment agreement with Mr. Chris Dick ("Dick") as Executive Vice(cid:10) President of Corporate Development.(cid:10) The employment agreement with Dr. Behl was subsequently amended and(cid:10) restated on February 9, 2007, under which Dr. Behl's position was changed(cid:10) from Chief Scientific Officer to Head of Technical Affairs and he is to(cid:10) report to our Chief Executive Officer, Chief Scientific Officer and any(cid:10) additional executive officer designated by the Board of Directors.(cid:10) The Berk Agreement provides for a base annual salary of $330,140 (his(cid:10) current salary) which may at the discretion of the Board of Directors be(cid:10) increased in light of factors including the existing financial condition(cid:10) of the Company and his success in implementing the Company's business plan(cid:10) and achieving its strategic alternatives. He is to continue to receive an(cid:10) automobile allowance of $800 per month. The Behl and Dick Agreements(cid:10) provide for an initial base annual salary of $250,000 and $200,000,(cid:10) respectively, a guaranteed bonus of $25,000 payable on January 1, 2007 and(cid:10) within 30 calendar days of the end of each fiscal year during the term and(cid:10) a $700 per month automobile allowance.(cid:10) Each of the three agreements provides for payment of a discretionary bonus(cid:10) following the end of each fiscal year of up to 50% of the executive's then(cid:10) annual base salary. The amount, if any, of the discretionary bonus will be(cid:10) determined by the Compensation Committee as to Berk and by the Board of(cid:10) Directors or a Compensation Committee as to Behl and Dick. Berk's bonus is(cid:10) to be based on any commercialization of products, merger or acquisition,(cid:10) business combination or collaborations, growth in revenues and earnings,(cid:10) additional financings or other strategic business transaction that inure(cid:10) to the benefit of the Company's stockholders. The bonus, if any, may be(cid:10) paid in cash or shares of Common Stock, valued at the closing price of the(cid:10) Common Stock on the immediately preceding trading day. The discretionary(cid:10) bonus which may be paid to Behl or Dick is to be based on the achievement(cid:10) of goals discussed with the executive in good faith and within a(cid:10) reasonable time following the commencement of each fiscal year and may be(cid:10) paid in cash or shares of the Company's Common Stock valued at the average(cid:10) of the closing price per share during the five trading days immediately(cid:10) preceding the date of issuance of the shares.(cid:10) F-21(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) EMPLOYMENT AGREEMENTS (CONTINUED)(cid:10) Each of Behl's and Dick's agreement provides for the grant under the 2004(cid:10) Stock Option Plan (the "2004 Plan") to the executive at an exercise price(cid:10) of $2.25 of options to purchase 250,000 shares. The Berk, Behl and Dick(cid:10) Agreements each provide for the grant to the executive of options at the(cid:10) foregoing exercise price to purchase up to 300,000 additional shares (the(cid:10) "Opioid Product Options") which are to vest in two 150,000 share tranches(cid:10) upon the closing of an exclusive product license for the United States(cid:10) national market, the entire European Union Market or the Japan market or a(cid:10) product sale transaction of all the Company's ownership rights in the(cid:10) United States (only once for each product) for the Company's first drug(cid:10) developed by the Company for which the United States Food and Drug(cid:10) Administration (the "FDA") approval will be sought under a NDA (including(cid:10) a 505(b) (2) application) for oxycodone, hydrocone, hydromorphone,(cid:10) oxymorphone, or morphine ("Non-Generic Opioid Product") as to the first(cid:10) tranche and as to the Company's second Non-Generic Opioid Drug for the(cid:10) second tranche. The Berk Agreement provides for the amendment of the(cid:10) vesting of options as to 400,000 shares which had been granted on(cid:10) September 2, 2005 to Berk at an exercise price of $2.69 per share ("Berk's(cid:10) Previous Milestone Options") and the Behl and Dick Agreements provides for(cid:10) the grant of options at the exercise price of $2.25 per share for each of(cid:10) Behl and Dick as to 200,000 shares (collectively along with Berk's(cid:10) Previous Milestone Options, the "Milestone Options") with the Milestone(cid:10) Options of each of the three executives to vest (A) as to not more than(cid:10) 125,000 shares and 75,000 shares, respectively, upon the commencement of(cid:10) the first Phase III clinical trial relating to the first and then the(cid:10) second Non-Generic Opioid Drug developed by the Company; (B) 50,000 shares(cid:10) upon the closing of each product license or product sale transaction (on a(cid:10) product by product basis and only once for each product) other than(cid:10) Non-Generic Opioid Drugs for which options were granted above; (C) 10,000(cid:10) shares upon the filing by the Company (in the Company's name) with the FDA(cid:10) of either an ANDA or an NDA (including an application filed with the FDA(cid:10) under Section 505(b)(2) of the Federal, Food, Drug, and Cosmetic Act, 21(cid:10) U.S.C. Section 301 et seq.) (collectively, a "NDA"), for a product not(cid:10) covered by a previous FDA application; (D) 40,000 shares upon the approval(cid:10) by the FDA of any ANDA or NDA (filed in the Company's name) for a product(cid:10) not previously approved by the FDA; (E) 25,000 shares upon the filing of(cid:10) an application for a U.S. patent by the Company (in the Company's name);(cid:10) and (F) 25,000 shares upon the granting by the U.S. Patent and Trademark(cid:10) Office (the "PTO") of a patent to the Company filed in the Company's name(cid:10) or an approval of an ANDA or NDA; provided, however the foregoing options(cid:10) terminate upon the executive's termination of employment except that(cid:10) options under (D) and (F) nevertheless vest if the filing was made during(cid:10) the initial term but prior to termination of the executive's employment by(cid:10) the Company without cause and the approval was made within 540 days of the(cid:10) filing of the ANDA, NDA or patent application.(cid:10) F-22(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) EMPLOYMENT AGREEMENTS (CONTINUED)(cid:10) The Company also agreed that in the event that as to Berk all of the(cid:10) options to purchase the full 400,000 Berk's Previous Milestone Options has(cid:10) fully vested during the initial term of the agreement and as to each of(cid:10) Behl and Dick all 200,000 Milestone Options have fully vested during the(cid:10) initial term of his agreement, the Company will grant under the Plan to(cid:10) the executive at the end of the first current fiscal year in which the(cid:10) following event occurs fully vested additional options to purchase the(cid:10) following shares at the fair market value on the date of grant (the(cid:10) "Additional Milestone Options"): (a) to the extent not previously vested(cid:10) with respect to his comparable Milestone Options: (i) up to 125,000 shares(cid:10) upon the commencement of the first Phase III clinical trial relating to(cid:10) the first Non-Generic Opioid Drug developed by the Company and (ii) up to(cid:10) an additional 125,000 shares as to such trial relating to the second(cid:10) Non-Generic Opioid Drug developed by the Company, (b) 50,000 shares upon(cid:10) the closing of each product license for the United States national market(cid:10) or product sale transaction of all ownership rights (on a product by(cid:10) product basis and only once for each product); (c) 10,000 shares upon the(cid:10) filing by the Company (in the Company's name) with the FDA of either an(cid:10) ANDA or NDA for a product not covered by a previous FDA application for(cid:10) each drug product of the Company, other than the Non-Generic Opioid Drugs(cid:10) for which any Opioid Option was granted under the Agreement; (d) 40,000(cid:10) shares upon the approval by the FDA of any ANDA, NDA or 505(b)(2)(cid:10) application filed in the Company's name for a product not previously(cid:10) approved by the FDA; (e) 25,000 shares in the event of the filing of an(cid:10) application of an additional U.S. patent by the Company (filed in the(cid:10) Company's name); and (f) 25,000 shares in the event of the granting by the(cid:10) PTO of the foregoing additional patent applications to the Company (filed(cid:10) in the Company's name).(cid:10) The Berk Agreement acknowledges that Berk holds previously granted fully(cid:10) vested incentive stock options to purchase 725,000 shares, of which(cid:10) 300,000 vested options are exercisable at $2.01 per share, 225,000 vested(cid:10) options are exercisable at $2.15 per share and 100,000 vested options are(cid:10) exercisable at $2.69 per share, and the remaining 100,000 options, which(cid:10) vest on September 2, 2007, are exercisable at $2.69 per share.(cid:10) Each employment agreement allows the Company at its discretion to grant to(cid:10) the executive additional options under the 2004 Plan and provides each(cid:10) executive the right to register at the Company's expense for reoffering(cid:10) shares issued upon exercise of the options under the Securities Act of(cid:10) 1933, as amended, in certain registration statements filed by the Company(cid:10) with respect to offerings of securities by the Company.(cid:10) F-23(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) EMPLOYMENT AGREEMENTS (CONTINUED)(cid:10) Berk's Agreement, as did his Amended and Restated Employment Agreement,(cid:10) provides that if the Company terminates his employment due to his(cid:10) permanent disability, without cause or he terminates his employment for(cid:10) good reason, Berk shall be entitled to the following severance: (i) any(cid:10) earned but unpaid base salary plus any unpaid reimbursable expenses as of(cid:10) the effective date of termination of his employment, (ii) the then-current(cid:10) base salary and reimbursement of the cost to replace the life and(cid:10) disability insurance coverages afforded to Berk under the Company's(cid:10) benefit plans with substantially similar coverages, following the(cid:10) effective date of termination of his employment, for a period equal to the(cid:10) greater of (x) the remainder of the then-current term, or (y) two years(cid:10) following the effective date of termination and (iii) payment by the(cid:10) Company of premiums for health insurance for the period during which Berk(cid:10) is entitled to continued health insurance coverage as specified in the(cid:10) Comprehensive Omnibus Budget Reconciliation Act. In the event that the(cid:10) Company terminates Berk's employment because of his permanent disability,(cid:10) Berk is to be entitled to the severance specified above, less any amounts(cid:10) actually received by him under any disability insurance coverage provided(cid:10) for and paid by the Company. In the event that the Company terminates(cid:10) Berk's employment for cause or Berk terminates his employment with the(cid:10) Company without good reason, Berk shall be entitled to any earned but(cid:10) unpaid base salary plus any unpaid reimbursable expenses as of the(cid:10) effective date of termination of his employment.(cid:10) Berk's Agreement, as did his prior agreement, provides that in the event(cid:10) of a change of control in lieu of any severance that may otherwise be(cid:10) payable to him if Berk elects to terminate his employment for any reason(cid:10) within 90 days thereof, or the Company elects to terminate his employment(cid:10) within 180 days thereof, other than for cause, he is to be entitled to the(cid:10) following: (i) any earned but unpaid base salary plus any unpaid(cid:10) reimbursable expenses as of the effective date of termination of his(cid:10) employment, (ii) $1,000,000, (iii) the then-current base salary for a(cid:10) period of 12 months following the effective date of termination, (iv)(cid:10) reimbursement of the cost, for a period equal to 12 months following the(cid:10) effective date of termination, of replacing the life and disability(cid:10) insurance coverage afforded to Berk under the Company's benefit plans with(cid:10) substantially similar coverage and (v) payment by the Company of premiums(cid:10) for health insurance for the period during which Berk is entitled to(cid:10) continued health insurance coverage as specified in the Comprehensive(cid:10) Omnibus Budget Reconciliation Act.(cid:10) Each of Behl's and Dick's Agreements provide that in the event the Company(cid:10) terminates his employment for "Cause" as defined in the agreement or the(cid:10) executive terminates employment without good reason, he is to receive(cid:10) salary through date of termination, reimbursement for expenses incurred(cid:10) prior to termination, all unvested options will terminate as of the date(cid:10) of termination and vested options will be governed by the terms of the(cid:10) 2004 Plan and the related option agreement. In the event of a termination(cid:10) due to death, disability or by the Company without cause or by Behl or(cid:10) Dick for good reason, the Company is to pay him or his estate subject to(cid:10) his compliance with certain covenants, including non-competition,(cid:10) non-solicitation, confidentiality and assignment of intellectual property,(cid:10) his base salary for the longer of the balance of the initial term or one(cid:10) year from date of(cid:10) F-24(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) EMPLOYMENT AGREEMENTS (CONTINUED)(cid:10) termination, continue health insurance coverage for 12 months from(cid:10) termination and his vested options are to be exercisable for 90 days from(cid:10) date of termination. Dr. Behl's amended agreement provides that the(cid:10) definition of "cause" has been amended to include a determination by the(cid:10) Board of Directors, in its sole discretion, that the employment of Dr.(cid:10) Behl should terminate, provided that such termination will be effective on(cid:10) the 30th day after the written notice to Dr. Behl of such determination.(cid:10) In the event the employment of Behl or Dick is terminated by the Company(cid:10) following a "Change of Control" of the Company, he will be entitled to the(cid:10) amounts payable as a result of termination by the Company without cause(cid:10) plus a lump sum payment of $500,000 and all unvested options shall(cid:10) immediately vest and along with unexercised vested options be exercisable(cid:10) within 90 days from the date of termination. "Change of control" is(cid:10) defined in each of their agreements as the acquisition of the Company(cid:10) pursuant to a merger or consolidation which results in the reduction to(cid:10) less than 50% of the shares outstanding upon consummation of the holders(cid:10) of its outstanding shares immediately prior thereto or sale of(cid:10) substantially all the assets or capital stock of the Company to another(cid:10) person, or the acquisition by a person or a related group in a single(cid:10) transaction or a series of related transaction of more than 50% of the(cid:10) combined voting power of the Company's outstanding voting securities.(cid:10) Berk's Agreement contains his non-solicitation covenant for a period of(cid:10) one year from termination. Each of Behl and Dick has agreed to a one-year(cid:10) following termination non-competition covenant and a two year following(cid:10) termination non-solicitation covenant.(cid:10) The executives are to be reimbursed for expenses (including business,(cid:10) travel and entertainment) reasonably incurred in the performance of his(cid:10) duties, with Behl's and Dick's agreements providing that reimbursement of(cid:10) expenses in excess of $2,000 per month are subject to the approval of the(cid:10) Company's Chief Executive Officer. Each of the executives is entitled to(cid:10) participate in such employee benefit and welfare plans and programs, which(cid:10) may be offered to senior executives of the Company including life(cid:10) insurance, health and accident, medical plans and programs and profit(cid:10) sharing and retirement plans.(cid:10) Each employment agreement is for an initial term ending November 13, 2009,(cid:10) subject to automatic one-year renewals unless terminated by the executive(cid:10) or the Company upon at least 60 days notice prior to the end of the then(cid:10) scheduled expiration date. The Company has the right to terminate Berk's(cid:10) employment in the event of his inability to perform work due to physical(cid:10) or mental illness or injury for nine full calendar months during any eight(cid:10) consecutive calendar months. It has the right to terminate Behl's or(cid:10) Dick's employment due to disability as defined in a long-term disability(cid:10) insurance policy reasonably satisfactory to him or, in the absence of such(cid:10) policy, due to his inability for 120 days in any 12 month period to(cid:10) substantially perform his duties as a result of a physical or mental(cid:10) illness.(cid:10) F-25(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) ALLIANCE AGREEMENT(cid:10) On December 6, 2006, the Company entered into a Strategic Alliance(cid:10) Agreement (the "ALLIANCE AGREEMENT") with Dr. Veerappan S. Subramanian(cid:10) ("VS") and VGS Pharma, LLC, a Delaware limited liability company ("VGS"),(cid:10) under which (i) VS was appointed to the Company's Board of Directors, (ii)(cid:10) VGS made a $2,000,000 equity investment in the Company, (iii) VS was(cid:10) engaged to serve as strategic advisor on the research, development and(cid:10) commercialization of the Company's existing pipeline, (iv) the Company and(cid:10) VGS formed Novel Laboratories Inc., a Delaware corporation ("Novel"), as a(cid:10) separate specialty pharmaceutical company for the research, development,(cid:10) manufacturing, licensing, acquisition and marketing of specialty generic(cid:10) pharmaceuticals, and (v) the Company contributed $2,000,000 to Novel and(cid:10) agreed to make additional contributions.(cid:10) Pursuant to the Alliance Agreement, Novel entered into an employment(cid:10) agreement with VS and the Company entered into (i) an Advisory Agreement(cid:10) with VS, (ii) a Registration Rights Agreement with VGS and VS, and (iii) a(cid:10) Stockholders Agreement with VS, VGS and Novel.(cid:10) The specialty pharmaceutical product initiative of the strategic alliance(cid:10) between the Company and VS is to be conducted by Novel of which the(cid:10) Company acquired 49% and VGS acquired 51% of its Class A Voting Common(cid:10) Stock for $9,800 and $10,200 respectively. Pursuant to the Alliance(cid:10) Agreement, VGS acquired for $2,000,000: (i) 957,396 shares of Company's(cid:10) Common Stock (the "Acquired Company Shares") valued at approximately(cid:10) $2.089 per share (the average closing price of the Common Stock during the(cid:10) ten trading days on the American Stock Exchange immediately preceding(cid:10) December 6, 2006) and (ii) a five year Warrant to purchase 478,698(cid:10) additional shares (the "Warrant Shares"), for cash, at a price of $3.00(cid:10) per share.(cid:10) The Company initially contributed $2,000,000 to Novel and made additional(cid:10) contributions of $5,000,000 through June 15, 2007. The remaining(cid:10) contributions to be made by the Company shall be funded in the amounts and(cid:10) upon the occurrence of the following milestones (i) $10,000,000 upon the(cid:10) submission to the FDA of three ANDAs related to three different(cid:10) prospective products developed by Novel and (ii) $10,000,000 upon the(cid:10) submission to the FDA of three ANDAs related to at least three additional(cid:10) different prospective products developed by Novel; provided that the(cid:10) aggregate contributions to be made by the Company shall not exceed (i)(cid:10) $15,000,000 prior to November 1, 2007 or (ii) $25,000,000 prior to May 1,(cid:10) 2008. The remaining contributions of the Company are not monetary(cid:10) obligations but rather conditions that must be met in order for the(cid:10) Company to maintain its equity interest in Novel.(cid:10) F-26(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) ALLIANCE AGREEMENT (CONTINUED)(cid:10) In the event that (i) the Company defers for more than 90 days the payment(cid:10) of a contribution installment due to Novel's failure to achieve a(cid:10) Performance Milestone, (ii) the Company fails to make a requisite(cid:10) contribution following Novel's achieving a Performance Milestone or (iii)(cid:10) Novel requires additional financing beyond amounts provided in the(cid:10) Business Plan or the additional contributions the Company has agreed to(cid:10) provide, Novel may seek such financing through a subscription offering to(cid:10) its Class A Stockholders and, to the extent not fully subscribed, from(cid:10) third parties.(cid:10) The Company agreed to use its best efforts to elect VS a member of its(cid:10) Board of Directors as long as the Company and its "permitted transferees"(cid:10) own at least 40% of Novel's outstanding capital stock and VS is Chairman(cid:10) of the Board and Chief Executive Officer of Novel.(cid:10) Pursuant to an employment agreement, Novel has agreed to employ VS to(cid:10) perform his duties three full business days a week as its Chief Executive(cid:10) Officer at a salary of $220,000 per annum, with bonuses and options to(cid:10) purchase Novel's Common Stock to be granted at the discretion of Novel's(cid:10) Board of Directors.(cid:10) VS's employment may be terminated for "Cause" or by VS for "Good Reason",(cid:10) with both such terms defined in the VS employment agreement. Either party(cid:10) may terminate the employment upon 30-business days prior written notice to(cid:10) the other.(cid:10) The stockholders agreement provides that as long as each owns at least 10%(cid:10) of the shares of Class A Voting Common Stock of Novel, each shall(cid:10) designate one of the two Directors to constitute the Novel Board of(cid:10) Directors, with the VGS designee to be VS, unless otherwise approved by(cid:10) the Company. It prohibits the taking of certain actions without approval(cid:10) of the two designees, including, but not limited to, amendments of(cid:10) charter, by-laws and other governance agreements, spin-offs or public(cid:10) offerings of equity securities, a liquidation or dissolution, dividends,(cid:10) authorization or issuance of additional securities or options, bankruptcy,(cid:10) a material change of the business or a Business Plan, approval of a(cid:10) Business Plan and the yearly operating budget, creation of a security(cid:10) interest, capital expenditures in excess of 110% of the amount provided in(cid:10) the Business Plan, investments in excess of the amounts approved in the(cid:10) Business Plan, an increase or decrease of the Board; and any investments(cid:10) by VS in any "Competitive Company" or its affiliate.(cid:10) It further provides that determination of "Cause" or the "Disability" of(cid:10) VS under his employment agreement shall be made solely in the reasonable(cid:10) discretion of the Company designee.(cid:10) Except for certain enumerated permitted transfers, the stockholders(cid:10) agreement provides that no transfer of Novel stock may be made without the(cid:10) consent of the other stockholders.(cid:10) F-27(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) ALLIANCE AGREEMENT (CONTINUED)(cid:10) In the event the Company fails to make required additional contributions,(cid:10) VGS has the right to purchase from the Company at its original purchase(cid:10) price that proportion of the shares of Novel Class A Common Stock(cid:10) originally acquired by it equal to the proportion of the required(cid:10) additional contributions not made by the Company.(cid:10) In the event of VS's resignation from Novel for other than Good Reason,(cid:10) his termination by Novel for Cause, or his death or disability as defined(cid:10) in the Employment Agreement, the Company has the right to acquire from VGS(cid:10) up to 75% of the shares of Class A Common Stock of Novel originally(cid:10) acquired by it at the original purchase price; such percentage to be(cid:10) reduced to 50% and 25% upon the first and second anniversary of the(cid:10) agreement and no reduction on the third anniversary, with a pro rata(cid:10) portion of such reduction to be effected upon the death or disability of(cid:10) VS during the applicable period. Each of the Company and VGS has a right(cid:10) to acquire from the other at the then fair value, its shares of Novel upon(cid:10) the bankruptcy, dissolution or liquidation, a change of control of the(cid:10) other or, if as a result of such purchases at the original purchase price,(cid:10) the percentage of Novel owned by such party is less than 10%.(cid:10) The agreement subjects VS to a confidentiality covenant, a non-competition(cid:10) covenant terminating one year following the end of the term and a(cid:10) non-solicitation covenant terminating two years following the end of the(cid:10) term, provided his termination by Novel was not without "Cause" or by VS(cid:10) was with "Good Reason".(cid:10) ADVISORY AGREEMENT(cid:10) The Advisory Agreement obligates VS to provide advisory services to the(cid:10) Company, including but not limited, to assist in the implementation of(cid:10) current and new drug product development projects of the Company and(cid:10) assisting in the Company's recruitment of additional R&D staff members. As(cid:10) an inducement to enter into the agreement, the Company granted VS a(cid:10) non-qualified stock option to purchase up to 1,750,000 shares of Common(cid:10) Stock (the "Option Shares") at a price of $2.13 per share. The option(cid:10) vests in 250,000 share installments, the first immediately, the second on(cid:10) May 6, 2007, the third on December 6, 2007, the fourth upon the Company's(cid:10) acceptance of the Initial Business Plan of Novel, and the other(cid:10) installments vesting on the accomplishment of certain milestones with(cid:10) respect to the first or second drug product developed by the Company(cid:10) (excluding drug products of Novel) on or after February 4, 2007, under the(cid:10) advisory services provided to the Company.(cid:10) F-28(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) ADVISORY AGREEMENT (CONTINUED)(cid:10) The option terminates on December 6, 2016, or 90 days following a(cid:10) termination of his advisory services to the Company or his employment by(cid:10) Novel other than a termination without Cause or by VS for Good Reason or(cid:10) 48 months after the termination of his advisory services under the(cid:10) Advisory Agreement or his employment under the employment agreement as a(cid:10) result of: (i) a termination by the Company of the Advisory Agreement or(cid:10) by Novel of the employment agreement without Cause or by VS without Good(cid:10) Reason or (ii) the post-December 6, 2007, termination of the term of the(cid:10) Advisory Agreement or of the Novel employment agreement.(cid:10) All unvested options terminate upon the termination of the Advisory(cid:10) Agreement (other than a termination by the Company without Cause or by VS(cid:10) for Good Reason) or at such time as the Company and its permitted(cid:10) transferees own in the aggregate less than 20% of the outstanding capital(cid:10) stock of Novel, except to the extent the Company at its sole discretion(cid:10) has determined that VS has provided substantial contribution to the(cid:10) development of any drug product which would otherwise trigger the vesting(cid:10) of options notwithstanding the failure to satisfy the foregoing 20%(cid:10) threshold.(cid:10) The Company has granted certain rights to have the Acquired Company(cid:10) Shares, the Option Shares and Warrant Shares registered for reoffering(cid:10) under the Securities Act of 1933, as amended (the "Act"), including the(cid:10) provision of one Registration Statement upon the demand of holders of 75%(cid:10) of the Acquired Company Shares, Warrant Shares and Option Shares and the(cid:10) rights to have registered as part of a registration statement related to(cid:10) an offering of common stock by the Company or other security holders. The(cid:10) Company is to bear all reasonable expenses other than underwriting(cid:10) discounts and commissions in connection with the registration and(cid:10) qualification under applicable state securities law.(cid:10) CHIEF SCIENTIFIC OFFICER(cid:10) On February 9, 2007, VS, a recently appointed director of the Company,(cid:10) agreed to become the acting Chief Scientific Officer of the Company and,(cid:10) as such, will oversee all scientific activities and employees.(cid:10) On the same date, the Company and Dr. Behl entered into an Amended and(cid:10) Restated Employment Agreement under which Dr. Behl's position was changed(cid:10) from Chief Scientific Officer to Head of Technical Affairs and Dr. Behl(cid:10) reports to the Chief Executive Officer, the Chief Scientific Officer and(cid:10) any additional executive officer designated by the Board. In addition, the(cid:10) definition of "cause" has been amended to include a determination by the(cid:10) Board, in its sole discretion, that the employment of Dr. Behl should(cid:10) terminate, provided that such termination will be effective on the 30th(cid:10) day after the written notice to Dr. Behl of such determination.(cid:10) F-29(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) CONSULTING AGREEMENTS(cid:10) On June 1, 2006, the Company entered into a one year consulting agreement(cid:10) with David Filer, whereby Dr. Filer is to provide financial advisory(cid:10) services to the Company. In consideration for his services, Dr. Filer(cid:10) received options to purchase 10,000 shares of common stock exercisable(cid:10) from June 1, 2006 to June 1, 2009, with an exercise price of $3.00 per(cid:10) share.(cid:10) REFERRAL AGREEMENTS(cid:10) On January 29, 2002, the Company entered into a Referral Agreement with a(cid:10) Director whereby the Company will pay referral fees based upon payments(cid:10) net of direct costs received by the Company from sales of products,(cid:10) development fees, licensing fees and royalties generated as a direct(cid:10) result of this Director identifying customers for the Company. The(cid:10) referral fee each year is roughly based on the percentages of from 1% to(cid:10) 5% applied inversely to the total amount gross margins attributable to the(cid:10) referrals. No amounts had been earned through March 31, 2007.(cid:10) F-30(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) COLLABORATIVE AGREEMENTS(cid:10) On March 30, 2005, the Company entered into a three party agreement with(cid:10) Tish Technologies, Inc. and Harris Pharmaceuticals, Inc. ("Harris") for(cid:10) the co-development and license of a controlled release generic product.(cid:10) Upon its development and the securing of the required FDA approval by the(cid:10) formulation development company, the Company is to manufacture the product(cid:10) and Harris is to sell and distribute the product. In addition to the(cid:10) transfer price for manufacturing the product, the Company is to share the(cid:10) profits, if any, realized upon sales. The innovator's reference product(cid:10) for this generic was originally a capsule. The innovator has now received(cid:10) approval for an alternative dose form (a tablet rather than capsule) and(cid:10) has discontinued the original dose form. While a reference product remains(cid:10) for the capsule, the market opportunity has changes and this affects how(cid:10) we might commercialize the capsule dosage form. On June 19, 2006, the(cid:10) Company received written notice from Harris of Harris' intent to terminate(cid:10) the agreement in accordance with Section 9.3 of the agreement. As the date(cid:10) hereof, the Company has received $29,700 for this development work.(cid:10) On June 21, 2005, the Company and IntelliPharmaCeutics Corp. ("IPC"),(cid:10) entered into an agreement for the development and commercialization of a(cid:10) controlled released generic drug for certain gastric diseases. The Company(cid:10) is to share in the profits, if any, from the sales of the drug. This(cid:10) agreement was amended on December 12, 2005, whereby IPC and a Canadian(cid:10) company with marketing and distribution capabilities in Canada, have(cid:10) agreed to develop and commercialize the product for Canada. The Company(cid:10) and IPC will share their proceeds of commercialization in Canada on the(cid:10) same terms as in the June 21, 2005 Agreement.(cid:10) On June 22, 2005, the Company and PLIVA, Inc. ("Pliva"), now a subsidiary(cid:10) of Barr Pharmaceuticals, Inc., entered into a Product Development and(cid:10) License Agreement, providing for the development and license of a(cid:10) controlled released generic anti-infective drug formulated by the Company.(cid:10) The Company is to manufacture and PLIVA is to market and sell the product.(cid:10) The development costs are to be paid by PLIVA and the Company and the(cid:10) profits are to be shared equally. PLIVA is to make milestone payments to(cid:10) the Company.(cid:10) On January 10, 2006, the Company entered into a Product Development and(cid:10) Commercialization Agreement with Orit Laboratories LLC ("ORIT") providing(cid:10) that the Company and Orit will co-develop an extended release drug product(cid:10) for the treatment of anxiety, and upon completion of development,(cid:10) commercialize the possibility of licensing the product for manufacture and(cid:10) sale. The parties intend to develop all dose strengths of the product. The(cid:10) Company is to share in the profits, if any from the sales of the drug. The(cid:10) initial term of the agreement is for the longer of (i) 15 years from the(cid:10) date the product is first commercially sold to a third party, or (ii) the(cid:10) life of the applicable patent(s), if any. After the initial term, the(cid:10) agreement is automatically renewable for 3-year periods unless terminated(cid:10) by either party by providing the other party with twelve (12) months(cid:10) written notice prior to any renewal period.(cid:10) F-31(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) COLLABORATIVE AGREEMENTS (CONTINUED)(cid:10) On November 10, 2006, the Company entered into a product collaboration(cid:10) agreement with The PharmaNetwork, LLC for the development of the generic(cid:10) equivalent of a synthetic narcotic analgesic drug product. TPN is to(cid:10) perform development services and prepare and file an ANDA in the name of(cid:10) TPN with the FDA. The Company is to provide development support including(cid:10) the purchase of active pharmaceutical ingredients and materials and(cid:10) supplies to manufacture the batch, provide adequate facilities to TPN for(cid:10) use in its development work and following ANDA approval, The Company will(cid:10) manufacture the drug product developed. The Company is to pay TPN for the(cid:10) development services rendered upon the attainment of certain milestones.(cid:10) The out-of-pocket costs are to be shared by TPN and the Company, with(cid:10) TPN's obligation to be payable from its royalty compensation. Formulation(cid:10) development work is currently underway.(cid:10) The aforementioned agreements are in their infancy stages.(cid:10) The Company is a party to two separate and distinct development and(cid:10) license agreements with ECR Pharmaceuticals ("ECR"). Pursuant to the(cid:10) agreements, the Company agreed to commercially develop two products,(cid:10) Lodrane 24(R) and Lodrane 24D(R) in exchange for development fees, certain(cid:10) payments, royalties and manufacturing rights. The products are currently(cid:10) being marketed by ECR which also has the responsibility for regulatory(cid:10) matters. In addition to receiving revenues for manufacture of these(cid:10) products, the Company also receives a royalty on in-market sales.(cid:10) F-32(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 8 - STOCKHOLDERS' EQUITY(cid:10) During 2005, the Certificate of Incorporation was amended to increase the(cid:10) number of authorized shares of capital stock from 25,000,000 shares of(cid:10) Common Stock to 65,000,000 shares of Common Stock and 5,000,000 shares of(cid:10) Preferred Stock, each with a par value of $.01 per share.(cid:10) LOSS PER COMMON SHARE(cid:10) Basic net loss per common share has been calculated by dividing the net(cid:10) loss by the weighted average number of shares outstanding during the(cid:10) periods presented. Diluted earnings per share is not presented because the(cid:10) effect of the Company's common stock equivalents is antidilutive. For the(cid:10) three years ended March 31, the following potentially dilutive securities(cid:10) were not included in the computation of diluted loss per share:(cid:10) (cid:10)
(cid:10) 2007 2006 2005(cid:10) WEIGHTED- WEIGHTED- WEIGHTED-(cid:10) AVERAGE AVERAGE AVERAGE(cid:10) EXERCISE EXERCISE EXERCISE(cid:10) SHARES PRICE SHARES PRICE SHARES PRICE(cid:10) (cid:10) Stock options 6,622,500 $ 2.28 2,971,250 $ 2.36 2,777,050 $ 2.16(cid:10) Convertible(cid:10) Preferred Stock 4,308,885 $ 2.25 4,444,444 $ 2.25(cid:10) Warrants 6,640,446 $ 2.31 6,079,199 $ 2.26 8,035,875 $ 2.69(cid:10) ---------- ---------- ----------(cid:10) 17,571,831 13,494,893 10,312,925(cid:10) ========== ========== ==========(cid:10)
(cid:10) F-33(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)(cid:10) SERIES B 8% CONVERTIBLE PREFERRED STOCK(cid:10) On March 15, 2006, the Company sold in a private placement 10,000 shares(cid:10) of Series B 8% Convertible Preferred Stock (the "Series B Preferred(cid:10) Stock"), for gross proceeds of $10,000,000. The Series B Preferred Stock(cid:10) is convertible at $2.25 per share, into 4,444,444 shares of Common Stock.(cid:10) In connection with the issuance of the Series B Preferred Stock, the(cid:10) Company also issued two classes of warrants which are exercisable for a(cid:10) period of five years and represent the right to purchase an aggregate of(cid:10) 1,111,111 shares of Common Stock at an exercise price of $2.75 per share(cid:10) and the second class of warrants are exercisable for a period of five(cid:10) years and represent the right to purchase an aggregate of 1,111,111 shares(cid:10) of Common Stock at an exercise price of $3.25 per share. Based on the(cid:10) relative fair values, the Company has attributed $2,033,029 of the total(cid:10) proceeds to the warrants and has recorded the warrants as additional(cid:10) paid-in capital. The remaining portion of the proceeds of $7,966,971 was(cid:10) used to determine the value of the 4,444,444 shares of the Company Common(cid:10) Stock underlying the Series B Preferred Stock, or $1.7925 per share. Since(cid:10) the value was $0.4774 lower than the fair market value of the Company's(cid:10) Common Stock on March 15, 2006, the $2,121,917 instrinsic value of the(cid:10) conversion option resulted in the recognition of a preferred stock(cid:10) dividend and an increase to additional paid-in capital.(cid:10) The Series B Preferred Stock accrues dividends at the rate of 8% per annum(cid:10) on their purchase price of $1,000 per share (increasing to 15% per annum(cid:10) after March 15, 2008) payable quarterly on January 1, April 1, July 1 and(cid:10) October 1, payable in cash or shares of Common Stock (each valued at 95%(cid:10) of the average of the value weighted average price (VWAP) as defined in(cid:10) the Certificate of Designations, Preferences and Rights of the Series B(cid:10) Preferred Stock (the "Preferred Certificate").(cid:10) Each share of Series B Preferred Stock is entitled to a preference equal(cid:10) to the per share purchase price ($1,000 subject to adjustment) plus any(cid:10) accrued but unpaid dividends thereon and any other fees or liquidated(cid:10) damages owing thereon upon the liquidation, dissolution or winding-up of(cid:10) the Company, which preference is senior to any other capital stock ranked(cid:10) junior to the Series B Preferred Stock.(cid:10) F-34(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) SERIES B 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (CONTINUED)(cid:10) The holders of Series B Preferred Stock do not have any voting rights,(cid:10) except as specifically provided in the Preferred Certificate or as(cid:10) required by law. The Company may not without the prior affirmative vote of(cid:10) holders of at least 70% of the then outstanding shares of Series B(cid:10) Preferred Stock: (i) alter or change adversely the powers, preferences or(cid:10) rights given to the Series B Preferred Stock or alter or amend the(cid:10) Preferred Certificate, (ii) authorize or create any class of stock ranking(cid:10) as to dividends, redemption or distribution of assets upon a Liquidation(cid:10) senior to or otherwise PARI PASSU with the Series B Preferred Stock, (iii)(cid:10) amend its certificate of incorporation, bylaws or other charter documents(cid:10) in any manner that adversely affects any rights of the holders of the(cid:10) Series B Preferred Stock, (iv) increase the authorized number of shares of(cid:10) Series B Preferred Stock, (v) enter into any agreement with respect to any(cid:10) of the foregoing, (vi) other than Permitted Indebtedness (as defined in(cid:10) the Preferred Certificate) until March 15, 2009, incur any indebtedness(cid:10) for borrowed money of any kind, (vii) other than Permitted Liens (as(cid:10) defined in the Preferred Certificate) until March 15, 2009, incur any(cid:10) liens of any kind, (viii) repay or repurchase other than more than a de(cid:10) minimis number of shares of Common Stock or securities convertible or(cid:10) exchangeable into Common Stock, other than as permitted by the Preferred(cid:10) Certificate, (ix) pay cash dividends or distributions on any securities of(cid:10) the Company junior to the Series B Preferred Stock or (x) enter into any(cid:10) agreement or understanding to effect the clauses (iii), (vi), (vii), or(cid:10) (viii). Actions notwithstanding the above, the Company may issue any(cid:10) security issued in connection with a Strategic Transaction (as defined in(cid:10) the Preferred Certificate) that ranks as to dividends, redemption or(cid:10) distribution of assets upon a Liquidation PARI PASSU with or junior to the(cid:10) Series B Preferred Stock without the prior affirmative vote of holders of(cid:10) at least 70% of the then outstanding shares of Series B Preferred Stock.(cid:10) If the Company does not meet its share delivery requirements with respect(cid:10) to conversion set forth in the Preferred Certificate, the holders of(cid:10) Preferred Stock are entitled to (i) liquidated damages, payable in cash,(cid:10) and (ii) cash equal to the amount by which such holder's total purchase(cid:10) price for the shares of Common Stock exceeds the product of (1) the(cid:10) aggregate number of shares of Common Stock that such holder was entitled(cid:10) to receive from the conversion at issue multiplied by (2) the actual sale(cid:10) price at which the sell order giving rise to such purchase obligation was(cid:10) executed.(cid:10) F-35(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) SERIES B 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (CONTINUED)(cid:10) The Company may force conversion of the Series B Preferred Stock in the(cid:10) event it provides written notice to the holders of the Series B Preferred(cid:10) Stock that the VWAP for each 20 consecutive trading day period during a(cid:10) Threshold Period (as defined in the Preferred Certificate) of Common Stock(cid:10) exceeded $5.38 (subject to adjustment) and the volume for each trading day(cid:10) during such Threshold Period exceeded 50,000 shares (subject to adjustment(cid:10) for forward and reverse stock splits, recapitalizations, stock dividends(cid:10) and the like).(cid:10) Upon the occurrence of certain Triggering Events (as defined in the(cid:10) Preferred Certificate), the Company is required to redeem each share of(cid:10) Series B Preferred Stock for cash in an amount equal to 130% of the stated(cid:10) value, all accrued but unpaid dividends thereon and all liquidated damages(cid:10) and other costs, expenses or amounts due in respect of the Series B(cid:10) Preferred Stock (the "TRIGGERING REDEMPTION AMOUNT"). Upon certain(cid:10) Triggering Events, the Company is required to redeem each share of Series(cid:10) B Preferred Stock for shares of Common Stock equal to the number of shares(cid:10) of Common Stock equal to the Triggering Redemption Amount divided by 85%(cid:10) of the average of the VWAP for the 10 consecutive trading days immediately(cid:10) prior to the date of the redemption.(cid:10) The Company may redeem all of the Series B Preferred Stock outstanding, at(cid:10) any time after March 15, 2008 for a redemption price, payable in cash, for(cid:10) each share of Series B Preferred Stock equal to (i) 150% of the stated(cid:10) value, (ii) accrued but unpaid dividends thereon and (iii) all liquidated(cid:10) damages and other amounts due in respect of the Series B Preferred Stock.(cid:10) SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION(cid:10) In October 2004, the Company completed a private placement through Indigo(cid:10) Securities LLC, the Placement Agent, for aggregate gross proceeds of(cid:10) $6,600,000 of 516,558 shares of Series A Preferred Stock, par value $0.01(cid:10) per share ("PREFERRED SHARES") convertible into 5,165,580 shares of Common(cid:10) Stock. The Preferred Shares were accompanied by warrants to purchase an(cid:10) aggregate of 5,165,580 shares of Common Stock at exercise prices ranging(cid:10) from $1.54 to $1.84 per share. The Company paid commissions aggregating(cid:10) $633,510 and issued five year warrants to purchase 494,931 shares of(cid:10) Common Stock to the Placement Agent. The Company also paid legal fees and(cid:10) expenses of the Agent's counsel of $75,000 and legal fees and expenses of(cid:10) one counsel for the investors in the private placement of $25,000.(cid:10) The holders of the Preferred Shares (the "INVESTORS") were entitled to(cid:10) dividends at the rate of 8% of the original issue price of $12.30 per(cid:10) share payable on December 1 and June 1 of each year in(cid:10) F-36(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (CONTINUED)(cid:10) cash or shares of Common Stock. Holders were entitled to elect one(cid:10) Director, were entitled to ten votes per share, and vote with the Common(cid:10) Stockholders as one class on all other matters. Each Preferred Share is(cid:10) convertible into ten shares of Common Stock. The purchaser of the(cid:10) Preferred Shares received for each Preferred Share acquired two Common(cid:10) Stock Purchase Warrants, one exercisable on or prior to December 31, 2005(cid:10) ("SHORT-TERM WARRANTS") and the other exercisable on or prior to December(cid:10) 28, 2009 ("LONG-TERM WARRANTS"). Each warrant represents the right to(cid:10) purchase five shares of Common Stock.(cid:10) The private placement was effected in three tranches. The first tranche(cid:10) involved the sale on October 6, 2004 of 379,122 Preferred Shares at a(cid:10) price of $12.30 per share convertible into an aggregate of 3,791,220(cid:10) shares of Common Stock accompanied by Short-Term Warrants and Long-Term(cid:10) Warrants to purchase at $1.54 per share an aggregate of 3,791,220 shares(cid:10) of Common Stock. The second tranche involved the sale on October 12, 2004(cid:10) of 119,286 Preferred Shares at a price of $14.00 per share convertible(cid:10) into 1,192,860 shares of Common Stock accompanied by Short-Term and(cid:10) Long-Term Warrants to purchase an aggregate of 1,192,860 shares of Common(cid:10) Stock at a price of $1.75 per share. The third tranche involved the sale(cid:10) on October 26, 2004 of 18,150 Preferred Shares at a price of $14.70 per(cid:10) share convertible in to 181, 500 shares of Common Stock accompanied by(cid:10) Short Term and Long Term Warrants to purchase at a price of $1.84 per(cid:10) share an aggregate of 181,500 shares of Common Stock(cid:10) Pursuant to the Placement Agent Agreement, the Company issued to the(cid:10) Placement Agent and its designees Long Term Warrants to purchase 357,495(cid:10) shares of Common Stock at $1.23 per share, 119,286 shares of Common Stock(cid:10) at a price of $1.40 per share, and 18,150 shares of Common Stock at a(cid:10) price of $1.47 per share, respectively.(cid:10) The Company has registered at its expense under the Securities Act of 1933(cid:10) (the "ACT") for resale by the Investors of the shares of Common Stock(cid:10) issuable upon conversion of the Preferred Shares, exercise of the warrants(cid:10) (including the Placement Agent's warrants) and as payment of dividends on(cid:10) the Preferred Shares.(cid:10) Each Investor has represented that the Investor is an "accredited(cid:10) investor" and has agreed that the securities issued in the private(cid:10) placement are to bear a restrictive legend against resale without(cid:10) registration under the Act. The Preferred Shares and warrants were sold by(cid:10) Company pursuant to the exemption from registration afforded by Section(cid:10) 4(2) of the Act and Registration D thereunder.(cid:10) Dr. Charan Behl, the Company's Chief Scientific Advisor, purchased at(cid:10) $12.30 per share 20,000 Preferred Shares and received warrants to purchase(cid:10) 200,000 shares of Common Stock. His payment consisted of $16,675 in cash(cid:10) and the release of the Company's obligation to pay him $229,325 for(cid:10) consulting fees for services rendered through September 30, 2004.(cid:10) F-37(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) COMMON STOCK TRANSACTIONS(cid:10) During the year ended March 31, 2007, 305 shares of Series B Preferred(cid:10) Stock were converted into 135,555 shares of Common Stock.(cid:10) Dividends accrued on Series B Stock through conversion date and March 31,(cid:10) 2007 were satisfied by the issuance of 1,318 and 371,244 shares of Common(cid:10) Stock, respectively.(cid:10) During the year ended March 31, 2007, 3,750 options expired, 65,500 were(cid:10) forfeited and 59,000 options were exercised for gross proceeds of $88,500.(cid:10) On December 6, 2006, the Company issued to VGS Pharma, LLC a five year(cid:10) warrant to purchase 478,698 shares of Common Stock for cash at a price of(cid:10) $3.00 per share, subject to adjustment upon the occurrence of certain(cid:10) events. The per share weighted value of the warrant to purchase 478,698(cid:10) shares of Common Stock at $3.00 per share is $0.77. The warrant was valued(cid:10) using the Black-Scholes option pricing model with the following weighted(cid:10) average assumptions: no dividend yield; expected volatility of 46.12%;(cid:10) risk free interest rate of 5%; and expected life of 5 years. As a result,(cid:10) a charge of $366,396 is reflected in the consolidated statement of(cid:10) operations.(cid:10) In addition, on December 6, 2006, the Company granted to Veerappan(cid:10) Subramanian ("VS") an option to purchase up to 1,750,000 shares of the(cid:10) Common Stock at $2.13 a share. The option vests as to 250,000 shares(cid:10) immediately and in subsequent 250,000 share installments, with one vesting(cid:10) on May 6, 2007, another on December 6, 2007, a third upon acceptance of(cid:10) the initial business plan of Novel, and the other installments vesting on(cid:10) the accomplishment of certain milestones with respect to the first or(cid:10) second drug product developed by the Company (excluding drug products of(cid:10) Novel) on or after the 60th day after December 6, 2006, under the advisory(cid:10) services provided to the Company. The per share weighted-average fair(cid:10) value of the option to purchase up to 1,750,000 shares of Common Stock(cid:10) granted to VS is $1.36 a share for an actual charge of $2,380,000 which(cid:10) will be recognized over the vesting period of the instrument. The option(cid:10) was valued using the Black-Scholes option pricing model with the following(cid:10) weighted average assumptions: no dividend yield; expected volatility of(cid:10) 46.12%; risk free interest rate of 5%; and expected life of 10 years.(cid:10) VGS is a wholly owned subsidiary of Kali Capital, L.P., which is(cid:10) controlled by Kali Management, LLC ("KALI"), its general partner, and Kali(cid:10) is controlled by Anu Subramanian, its managing member and daughter of VS.(cid:10) VS was subsequently appointed to the board of directors of the Company and(cid:10) became the Company's Chief Scientific Officer.(cid:10) On July 12, 2006, the Company sold to Indigo Ventures, LLC ("Indigo") for(cid:10) $150,000 a warrant to purchase up to 600,000 shares of Common Stock at(cid:10) $3.00 per share pursuant to the Financial Advisory Agreement with Indigo(cid:10) (the "Advisory Agreement"), of which 100,000 shares of Common Stock have(cid:10) vested. The Advisory Agreement has been amended and the warrant reduced(cid:10) from 600,000 to 300,000 shares of common stock.(cid:10) F-38(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) The following grants were made under the Company's 2004 Stock Option Plan(cid:10) in the year ended March 31, 2007:(cid:10) On November 21, 2006, the Company granted options to sixteen employees to(cid:10) purchase an aggregate of 66,500 shares of Common Stock with an exercise(cid:10) price of $2.26 to vest over a period of three years from grant date.(cid:10) On November 13, 2006, the Company granted to Bernard Berk, the Company's(cid:10) Chief Executive Officer, according to terms of the Second Amended and(cid:10) Restated Employment Agreement additional stock options to purchase up to(cid:10) 300,000 shares of the Company's Common Stock at $3.00 a share. See Note 7(cid:10) Commitments and Contingencies - Employment Agreements.(cid:10) Additionally, under employment agreements with each of Dr. Charan Behl,(cid:10) Executive Vice President and Chief Scientific Officer, and Chris Dick,(cid:10) Executive Vice President of Corporate Development, the Company granted to(cid:10) each, options to purchase up to 750,000 shares of Common Stock at $2.25 a(cid:10) share. See Note 7 Commitments and Contingencies - Employment Agreements.(cid:10) On June 1, 2006, the Company entered into a one year consulting agreement(cid:10) with David Filer, whereby Dr. Filer is to provide financial advisory(cid:10) services to the Company, in consideration of the grant of three year(cid:10) options to purchase 10,000 shares of Common Stock, at a price of $3.00 per(cid:10) share.(cid:10) On May 3, 2006, the Company granted options to purchase 70,000 shares of(cid:10) Common Stock at a price of $2.26 per share to Mark Gittelman, its Chief(cid:10) Financial Officer. One-third of the options vest on each of May 3, 2007,(cid:10) May 3, 2008 and May 3, 2009.(cid:10) Between February and October 2006, the Company granted ten year options to(cid:10) twelve employees to purchase an aggregate of 83,000 shares of Common Stock(cid:10) with exercise prices ranging from $2.25 to $2.30 per share, which vest(cid:10) over a period of three years from grant date.(cid:10) Pursuant to the Certificate of Designation of the Series A Preferred Stock(cid:10) of the Corporation, all outstanding 21,922 shares of Preferred Stock were(cid:10) automatically converted on March 7, 2005 into 219,200 shares of Common(cid:10) Stock, par value $0.01 upon the Corporation as a result of the Company's(cid:10) written notice to holders of Preferred Stock certifying that the Current(cid:10) Market Price of the Common Stock for 30 consecutive Trading Days from(cid:10) January 18, 2005 through and including March 1, 2005 exceeded $3.69 (300%(cid:10) of the Initial Conversion Price of $1.23 per share) and the average daily(cid:10) trading volume of the Common Stock for such 30 consecutive Trading Days(cid:10) equaled or exceeded 50,000 shares per day.(cid:10) F-39(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) Accordingly, the Corporation has issued an aggregate of 5,265,516 shares(cid:10) of Common Stock with respect to the issuance of conversion shares and(cid:10) dividend shares. Pursuant to the terms of an Exchange Offer, the Company(cid:10) sold on or before the expiration date of December 31, 2005, an aggregate(cid:10) of 735,674 shares of common stock upon the exercise for cash of Short Term(cid:10) Warrants for aggregate gross proceeds of $1,172,912 and issued five year(cid:10) Replacement Warrants to purchase at a price of $3.00 per share an(cid:10) aggregate 220,705 shares of the Company's Common Stock. The Exchange Agent(cid:10) received cash commissions aggregating $76,418 and five-year placement(cid:10) warrants to purchase an aggregate of 25,473 shares of Common Stock at a(cid:10) price of $3.00 per share. The remaining unexercised Short Term Warrants,(cid:10) issued as part of the Private Placement in October 2004, expired on(cid:10) December 31, 2005.(cid:10) During the year ended March 31, 2006, there were cashless exercises of(cid:10) 1,066,612 warrants resulting in the issuance of 310,678 shares of Common(cid:10) Stock.(cid:10) On May 18, 2005, $40,000 were received from the exercise of stock options(cid:10) previously granted to purchase 20,000 shares of Common Stock at $2.00 per(cid:10) share.(cid:10) On May 24, 2005 $156,503 were received and 101,625 shares of Common Stock(cid:10) were issued upon the exercise of 101,625 Long-Term Warrants granted at an(cid:10) exercise price of $1.54, as part of the Company's private placement in(cid:10) October, 2004.(cid:10) On July 6, 2004, the Company issued 26,500 shares of Common Stock valued(cid:10) at $58,300 and agreed to pay $10,000 per month to a corporation in(cid:10) consideration for its rendering for a six-month period of investor(cid:10) relation consulting services, including the distribution of the Company's(cid:10) press releases, the provision of related strategic advice and the(cid:10) inclusion of the Company on the consultant's website. The Company agreed(cid:10) to provide the holder with "piggy-back" registration rights with respect(cid:10) to the shares.(cid:10) F-40(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) WARRANTS(cid:10) To date, the Company has authorized the issuance of Common Stock Purchase(cid:10) Warrants, with terms of five to six years, to various corporations and(cid:10) individuals, in connection with the sale of securities, loan agreements(cid:10) and consulting agreements. Exercise prices range from $2.00 to $4.20 per(cid:10) warrant. The warrants expire at various times through March 15, 2011.(cid:10) A summary of warrant activity for the fiscal years indicated below were as(cid:10) follows:(cid:10) (cid:10)
(cid:10) 2007 2006 2005(cid:10) ---- ---- ----(cid:10) (cid:10) Balance at beginning of year: 6,079,199 8,035,875 2,654,239(cid:10) Warrants issued 778,698 220,705 200,000(cid:10) Warrants issued pursuant to Placement Agent(cid:10) Agreements -- 381,028 519,931(cid:10) Warrants issued pursuant to Private Placement -- 2,222,222 5,165,580(cid:10) Placement Agent Warrants Exercised -- -- (7,500)(cid:10) Warrants exercised or expired (217,452) (4,780,631) (496,375)(cid:10) --------- --------- ---------(cid:10) Ending balance 6,640,445 6,079,199 8,035,875(cid:10) ========= ========= =========(cid:10)
(cid:10) F-41(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) CLASS B WARRANTS(cid:10) The Company's Class B Warrants originally issued in a private placement in(cid:10) September 1998 expired on November 30, 2005, their amended expiration(cid:10) date.(cid:10) NOTE 9 - STOCK OPTION PLANS(cid:10) STOCK-BASED COMPENSATION(cid:10) During the years ended March 31, 2005, 2006 and 2007 the Company issued(cid:10) 120,000, 969,200 and 3,779,500, respectively options to purchase Common(cid:10) Stock to employees and to members of the board of directors. The options(cid:10) have an exercise price ranging from $2.25 to $3.00 per share and all vest(cid:10) over three years except 120,000 issued for year ended March 31, 2005 which(cid:10) vested upon grant date, 75,000 issued for the year ending March 31, 2006(cid:10) which vested pro-rata over a 6 month period and 750,000 issued for year(cid:10) ending March 31, 2007 which vested upon grant date, 250,000 which vest in(cid:10) 6 months and 2,000,000 which vest based upon strategic events or(cid:10) accomplishments of certain milestones. The options expire between five and(cid:10) ten years from the date of grant. The Company has recorded compensation(cid:10) expense of $1,008,850, $902,927 and $3,479,070 for the years ended March(cid:10) 31, 2005, 2006 and 2007, respectively, which represents the fair value of(cid:10) the options vested computed using the Black-Scholes options pricing model(cid:10) on each grant date.(cid:10) F-42(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 9 - STOCK OPTION PLANS (CONTINUED)(cid:10) STOCK-BASED COMPENSATION (CONTINUED)(cid:10) Under its 2004 Stock Option Plan and prior option plans, the Company may(cid:10) grant stock options to officers, selected employees, as well as members of(cid:10) the board of directors and advisory board members. All options have(cid:10) generally been granted at a price equal to or greater than the fair market(cid:10) value of the Company's Common Stock at the date of grant. Generally,(cid:10) options are granted with a vesting period of up to three years and expire(cid:10) ten years from the date of grant. Transactions under the plans for the(cid:10) years indicated were as follows:(cid:10) (cid:10)
(cid:10) 2007 2006 2005(cid:10) AVERAGE AVERAGE AVERAGE(cid:10) WEIGHTED WEIGHTED WEIGHTED(cid:10) EXERCISE EXERCISE EXERCISE(cid:10) OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE(cid:10) ------- ----- ------- ----- ------- -----(cid:10) (cid:10) Outstanding at(cid:10) beginning of year 2,971,250 $ 2.36 2,277,050 $ 2.16 2,417,050 $ 3.70(cid:10) Granted 3,779,500 2.20 969,200 2.74 120,000 2.34(cid:10) Exercised (59,000) 1.50 (20,000) 2.00 (100,000) 1.00(cid:10) Expired (69,250) 2.31 (255,000) 2.04 (160,000) 7.13(cid:10) ---------- ---------- ---------- ---------- ---------- ----------(cid:10) Outstanding at end(cid:10) of year 6,622,500 $ 2.28 2,971,250 $ 2.36 2,277,050 $ 2.16(cid:10) ========== ========== ========== ========== ========== ==========(cid:10)
(cid:10) The following table summarizes information about stock options outstanding(cid:10) at March 31, 2007:(cid:10) (cid:10)
(cid:10) WEIGHTED AVERAGE WEIGHTED- WEIGHTED(cid:10) REMAINING AVERAGE AVERAGE(cid:10) RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISABLE(cid:10) EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE(cid:10) -------------- ----------- ------------ ----- ----------- -----(cid:10) (cid:10) $1.00 - $2.00 141,000 .75 $1.85 141,000 $1.85(cid:10) $2.01 - $3.00 6,481,500 8.44 2.28 2,782,694 2.28(cid:10) -------------- ---------- ----- ----- ---------- -----(cid:10) $1.00 - $3.00 6,622,500 7.77 $2.28 2,923,694 $2.26(cid:10) -------------- ---------- ----- ----- ---------- -----(cid:10)
(cid:10) F-43(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 9 - STOCK OPTION PLANS (CONTINUED)(cid:10) STOCK-BASED COMPENSATION (CONTINUED)(cid:10) The per share weighted-average fair value of each option granted during(cid:10) fiscal 2007, 2006, and 2005 ranged from $1.36 to $1.39 during fiscal 2007,(cid:10) $1.48 to $1.70 during fiscal 2006 and $1.91 during fiscal 2005 on the date(cid:10) of grant using the Black-Scholes options pricing model with the following(cid:10) weighted-average assumptions; no dividend yield; expected volatility of(cid:10) ranging from 46.12% to 57.95% for fiscal 2007, expected volatility of(cid:10) 97.84% for fiscal year 2006 and 76.69% for fiscal year 2005; risk-free(cid:10) interest rates of 5.00% in 2007, 4.18% in 2006 and 4.00% in 2005 and(cid:10) expected lives ranging from five to ten years.(cid:10) There are 888,500 options available for future grant under our Stock(cid:10) Option Plan.(cid:10) NOTE 10 - MAJOR CUSTOMERS(cid:10) For the years ended March 31, revenues from its three major customers are(cid:10) as follows:(cid:10) 2007 2006 2005(cid:10) ---- ---- ----(cid:10) Customer A - 100% 100% 49.80%(cid:10) Customer B - -- -- --(cid:10) Customer C - -- -- 49.80%(cid:10) F-44(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 11 - SUBSEQUENT EVENTS(cid:10) On April 3, 2007, a holder of 145 shares of Series B 8% Preferred Stock(cid:10) converted his shares and accrued dividends through the date of conversion(cid:10) into 64,490 shares of Common Stock.(cid:10) On April 17, there was a cashless exercise of 39,630 warrants issued in(cid:10) our October, 2004 Private Placement, which resulted in the issuance of(cid:10) 15,456 shares of Common Stock.(cid:10) On April 20, $61,500 was received from the exercise of stock options(cid:10) previously granted to purchase 41,000 shares of Common Stock at $1.50 per(cid:10) share.(cid:10) On April 24, 2007, the Company sold 15,000 shares of its Series C 8%(cid:10) Convertible Preferred Stock, par value $0.01, and 1,939,655 warrants for(cid:10) gross proceeds of $15,000,000. The 15,000 Preferred Series C shares are(cid:10) convertible into 6,465,517 shares of common stock. The warrants are(cid:10) exercisable at $3.00 per share and are exercisable through April 27, 2012.(cid:10) The Company paid $1,050,000 in commissions to the placement agent and(cid:10) others in connection with the sale of the Series C Preferred. In addition,(cid:10) the Company granted the placement agent 193,965 warrants exercisable at(cid:10) $3.00 per share which were valued at $129,627. The Series C 8% Convertible(cid:10) Preferred will pay a quarterly dividend at 8% per annum on its purchase(cid:10) price of $1,000 per share. The dividend will be payable in other shares or(cid:10) cash. The gross proceeds of the private placement were $15,000,000 before(cid:10) payment of $1,050,000 in commissions to the Placement Agent and selected(cid:10) dealers. In addition, the Company agreed to reimburse the Placement Agent(cid:10) for all documented out-of-pocket expenses incurred by the Placement Agent(cid:10) in connection with the private placement, including reasonable fees and(cid:10) expenses of its counsel, which the Company and Placement Agent agreed to(cid:10) be limited to $25,000. Pursuant to the placement agent agreement, the(cid:10) Company issued to the Placement Agent and its designees warrants to(cid:10) purchase 193,965 shares of Common Stock. Such warrants are at an exercise(cid:10) price of $3.00 per share, exercisable on or prior to April 24, 2012.(cid:10) On April 24, 2007, pursuant to the authority of its Board of Directors,(cid:10) Company filed with the Secretary of State of Delaware the Certificate of(cid:10) Designations, Preferences and Rights of Series C Preferred Stock .(cid:10) F-45(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)(cid:10) On May 8, 2007, the Company approved the details provided by Veerappan(cid:10) Subramanian of the Initial Business Plan for purposes of the requirements(cid:10) set forth in the Strategic Alliance Agreement dated December 6, 2006 by(cid:10) and between the parties. Upon agreement to the Initial Business Plan, the(cid:10) milestones for the Company's remaining contributions were established.(cid:10) Upon achievement of agreed upon milestones relating to the identification(cid:10) and commencement of development of generic drug products, on May 15, 2007,(cid:10) the Company funded $2,000,000 and $3,000,000 on May 15, 2007 and on June(cid:10) 15, 2007, respectively, to Novel Laboratories, Inc. The remaining(cid:10) contributions to be made by the Company shall be funded in the amounts and(cid:10) upon the occurrence of the following milestones: (i) $10,000,000 upon the(cid:10) submission to the FDA of three ANDAs related to three different(cid:10) prospective products developed by Novel and (ii) $10,000,000 upon the(cid:10) submission to the FDA of three ANDAs related to at least three additional(cid:10) different prospective products developed by Novel; provided that the(cid:10) aggregate contributions to be made by the Company shall not exceed (i)(cid:10) $15,000,000 prior to November 1, 2007 or (ii) $25,000,000 prior to May 1,(cid:10) 2008. The remaining contributions of the Company are not monetary(cid:10) obligations but rather conditions that must be met in order for the(cid:10) Company to maintain its current equity interest in Novel. In the event of(cid:10) the Company's failure to fund remaining contributions, VGS Pharma shall(cid:10) have the right to exercise the VGS Purchase Right under the Stockholders(cid:10) Agreement dated December 6, 2006 and if Novel fails to achieve its(cid:10) performance milestones, the Company may exercise remedies set forth in the(cid:10) Strategic Alliance Agreement and Stockholders Agreement dated December 6,(cid:10) 2006.(cid:10) On June 11, 2007, the Company borrowed $3,000,000 from a commercial bank(cid:10) at the bank's prime rate minus 1/2% per annum, with interest only payable(cid:10) on July 1, 2007 and on the 1st day of each month thereafter until June 30,(cid:10) 2008, when all unpaid principal and interest is due in full. The Company(cid:10) pledged $3,000,000 of its cash to the commercial bank as collateral for(cid:10) the loan. There were no other forms of guarantees by the Company or fees(cid:10) associated with the line of credit agreement. The $3,000,000 credit(cid:10) facility is a short-term bridge in order to fund the June 15, 2007 funding(cid:10) commitment to Novel. The Company intends to raise up to an additional(cid:10) $5,000,000 through the sale of the remaining 5,000 shares of Series C(cid:10) Preferred Stock. The net proceeds of the Series C funding would fund the(cid:10) repayment, without prepayment penalty, of the $3 million credit facility(cid:10) to the commercial bank.(cid:10) On June 5, 2007, the Board of Directors unanimously authorized Bernard(cid:10) Berk, as the Company designee to the board of directors of Novel, to(cid:10) approve the Novel employee stock option plan reserving up to 26,582 shares(cid:10) of Novel's Class B non-voting common stock, as well as the employment(cid:10) contract for Muthusamy Shanmugam ("Sammy"), its Head of Technical(cid:10) operations, and the grant of options to purchase 8,861 shares of Novel's(cid:10) Class B non-voting common stock to each of Sammy and Veerappan(cid:10) Subramanian.(cid:10) F-46(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2007, 2006 AND 2005(cid:10) NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)(cid:10) Sammy's employment contract calls for a base salary of $170,000 per(cid:10) calendar year, subject to annual review for increase at the discretion of(cid:10) the Board of Directors of Novel. The term of the agreement is three years.(cid:10) The options granted by Novel to Sammy to purchase up to 8,861 shares of(cid:10) Novel's Class B non-voting common stock vest and become exercisable, with(cid:10) an exercise price of $22.50 per share, at the rate of 2,953 options on the(cid:10) first anniversary of the grant date and 2,954 exercisable on the second(cid:10) and third anniversaries of the grant date, respectively.(cid:10) The options granted by Novel to Dr. Subramanian to purchase up to 8,861(cid:10) shares of Novel's Class B non-voting common stock vest and become(cid:10) exercisable, with an exercise price of $22.50 per share, at the rate of(cid:10) (i) 1,266 option shares on the date of each submission to the FDA of an(cid:10) ANDA for the first six new prospective products developed by Novel which(cid:10) is not the subject of any prior ANDA submitted to the FDA by Novel and(cid:10) (ii) 1,265 option shares on the date of approval by the FDA of a drug(cid:10) product that is the subject of an ANDA related to a prospective product(cid:10) developed by Novel which has not been previously approved by the FDA for(cid:10) Novel.(cid:10) The remaining 8,860 options under the stock option plan have not been(cid:10) granted to date and are being served for future awards to employees at the(cid:10) discretion of Novel's Board of Directors.(cid:10) Upon the grant and subsequent exercise of all of the stock options under(cid:10) the Novel stock option plan, The Company's 49% current interest in Novel(cid:10) would be diluted to approximately 39%, VGS Pharma's 51% current interest(cid:10) in Novel would be diluted to 40%, Sammy would maintain a 7% interest in(cid:10) Novel and Dr. Subramanian's would maintain a 7% interest in Novel.(cid:10) On June 28, 2007, Elite and PLIVA terminated the Product Development and(cid:10) License Agreement entered into on June 22, 2005. According to the(cid:10) termination agreement, effective as of January 31, 2007, it was agreed(cid:10) that Elite owns all intellectual property rights relating to the(cid:10) controlled released generic product in development under the Product(cid:10) Development and License Agreement and PLIVA agreed to pay Elite $100,000(cid:10) in discharge of outstanding payments under the Product Development and(cid:10) License Agreement.(cid:10) F-47(cid:10) (cid:10) (cid:10)

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