(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)
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)
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)
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)
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)
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)
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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