product, nor can we estimate the amount of time that might be involved in such development because of the uncertainties associated with the development of controlled release drug delivery products as described in this
report.
General and administrative expenses (G&A) for the three months ended September 30, 2007, were $805,449, an increase of $262,644, or approximately 48.4% from $542,805
of general and administrative expenses for the comparable period of the prior year. The increase was primarily attributable to increase in salaries and fringe benefits as a result of increases in staff and costs associated with our Novel activities.
For the three months ended September 30, 2007, G&A costs of Novel were $188,203 or 23.4% of the total G&A expenses, which represented 71.7% of the increase.
Depreciation and amortization increased by $185,330 from $119,535 for the comparable period of the prior year to $304,865. The increase was due to the acquisition of new machinery
and equipment by Novel and the upgrading of Elites corporate and warehouse facilities.
Other expenses for the three months ended September 30, 2007 were $560,084, an increase of $287,981, or approximately 105.8% from $272,103 for the comparable period of the prior
year due to an increase of $362,918 in charges related to the issuances of stock options and warrants and increases in interest expense of 13,065 due to the borrowing of bank debt. These increases were somewhat offset by additional interest
income of $88,002, due to higher compensating balances as a result of the private placements of our Series C 8% Convertible Preferred Stock.
As a result of the foregoing, our net loss for the three months ended September 30, 2007 was $5,685,415 compared to $2,084,249 for the three months ended September 30, 2006.
Six Months Ended September 30, 2007 Compared to Six Months Ended September 30, 2006
Our revenues for the six months ended September 30, 2007 were $662,796, an increase of $350,693 or approximately 112.4%, over revenues for the comparable period of the prior year, and
consisted of $554,873 in manufacturing fees and $107,923 in royalty fees. Revenues for the six months ended September 30, 2006, consisted of $267,459 in manufacturing fees and $44,644 in royalty fees. The increase in manufacturing
fees and royalties was primarily due to the launch of our second product, Lodrane 24D(R).
Research and development costs for the six months ended September 30, 2007, were $6,149,262, an increase of $3,523,972 or approximately 134.2% from $2,625,290 of such costs for the
comparable period of the prior year, primarily due to the costs associated with Novel Labs. Research and development costs associated with Novels activities amounting to $2,315,472 and representing 37.7% of the total research and
development costs contributed 88.2% to the increase. Elite has also increased spending on raw materials which are also primarily for scale up of the pain products. We expect our research and development costs to continue to increase in future
periods primarily due to the costs for Novel Labs, clinical costs for Phase III and other clinical trials for ELI-216 and ELI-154.
General and administrative expenses (G&A) for the six months ended September 30, 2007, were $1,694,839, an increase of $605,121, or approximately 55.5% from
$1,089,718 of G&A for the comparable period of the prior year. The increase was attributable to increases in salaries and fringe benefits as a result of increases in staff and costs associated with our Novel activities. For the six months
ended September 30, 2007, G&A costs of Novel were $521,024 or 30.7% of the total G&A expenses, which represented 86.1% of the increase.
Depreciation and amortization increased by $273,993 from $239,070 for the comparable period of the prior year to $513,063. The increase was due to the acquisition of new machinery
and equipment by Novel and the upgrading of Elites corporate and warehouse facilities.
Other expenses for the six months ended September 30, 2007 were $1,439,906, an increase of $897,678, or approximately 165.5%, from $542,228 for the comparable period of the prior
year due to an increase of $987,181 in charges related to the issuances of stock options and warrants and increases in interest expense of $21,973 due to the borrowing of bank debt. These increases were somewhat offset by additional interest
income of $111,476, due to higher compensating balances as a result of the private placements of our Series C 8% Convertible Preferred Stock.
As a result of the foregoing, our net loss for the six months ended September 30, 2007 was $9,667,631compared to $4,185,203 for the six months ended September 30, 2006.
Material Changes in Financial Condition
Our working capital (total current assets less total current liabilities), increased to $10,355,268 as of September 30, 2007 from $1,019,631 as of March 31, 2007, primarily due to net
proceeds received as a result of our private placement of Series C 8% Convertible Preferred Stock, offset by the net loss of $7,578,075 from operations, exclusive of non-cash charges of $2,089,556.
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We experienced negative cash flows from operations of $7,993,969 for the six months ended September 30, 2007, primarily due to our net loss from operations of $9,667,631, an increase in
prepaid expenses and security deposits of $316,933 and reductions of $311,986 in accounts payable, accrued expenses and other liabilities, offset by reductions in accounts receivable of $213,025 and by non-cash charges of $2,089,556,
which included $1,576,493 in connection with the issuance of stock options and warrants, and $513,063 in depreciation and amortization expenses.
On November 15, 2004 and on December 18, 2006, Elites partner, ECR, launched Lodrane 24(R) and Lodrane 24D(R), respectively. Under its agreement with ECR, Elite is currently manufacturing
commercial batches of Lodrane 24(R) and Lodrane 24D(R) in exchange for manufacturing margins and royalties on product revenues. Manufacturing revenues and royalty income earned for the six months ended September 30, 2007 was $554,873 and
$107,923, respectively. We expect future cash flows from manufacturing fees and royalties to provide additional cash to help fund our operations.
On March 30, 2005, Elite entered into a three party agreement with Tish Technologies, Inc. and Harris Pharmaceuticals, Inc. (Harris) for the co-development and license of a controlled release generic product.
Upon its development and the securing of the required Food and Drug Administration (FDA) approval by the formulation development company, Elite is to manufacture the product and Harris is to sell and distribute the product. In addition
to the transfer price for manufacturing the product, Elite is to share the profits, if any, realized upon sales. The innovators reference product for this generic was originally a capsule. The innovator has now received approval for an
alternative dose form (a tablet rather than capsule) and has discontinued the original dose form. While a reference product remains for the capsule, the market opportunity has changed and this affects how we might commercialize the capsule dosage
form. On June 19, 2006, we received written notice from Harris of Harris intent to terminate the agreement in accordance with Section 9.3 of the agreement. As the date hereof, Elite has received $29,700 for this development
work.
On June 21, 2005, Elite entered into a product development and commercialization agreement with IntelliPharmaCeutics Corp. (IPC), a privately held, specialty pharmaceutical Canadian company that develops
generic controlled release drug products. It is affiliated with IntelliPharmaCeutics, Ltd. The agreement provides for the co-development and commercialization of a controlled released generic product. IntelliPharmaCeutics has taken a formulation
for the product into a pilot bioequivalence biostudy. Upon commercialization, Elite is to share the profits, if any, realized upon sales. A successful pivotal biostudy and an approved ANDA filing is required to commercialize this product. On
December 12, 2005, Elite and IPC amended their obligations to suspend their obligations under the IPC Agreement with respect to the development and commercialization of the controlled release drug product in Canada. IPC, in turn, entered into an
agreement with ratiopharm, inc., a Canadian company, for the development and commercialization for the product in Canada and will pay Elite a certain percentage of any payments received by IPC with respect to the commercial sale of this product by
ratiopharm, inc. in Canada.
On June 22, 2005, Elite entered into a Product Development and License Agreement with PLIVA, Inc. (PLIVA), now a subsidiary of Barr Pharmaceuticals Inc., providing, for the development and license of a
controlled released generic product. Under the agreement, PLIVA is to make upfront and milestone payments in the aggregate of $550,000 to Elite. Elite is to manufacture and PLIVA is to market and sell the product. The development costs will be
paid by PLIVA and Elite and the profits will be shared equally. As of the date hereof, Elite has not received any of the payments from PLIVA. Elite has developed a formulation that matches the branded product and has tested it in a pilot study. A
successful pivotal biostudy and an approved ANDA filing is required to commercialize this product. On June 28, 2007, Elite and Pliva terminated the Product Development and License Agreement and entered into a termination agreement according to which
it was agreed that Elite owns all intellectual property rights relating to the controlled released generic product under development and Pliva paid Elite $100,000 in discharge of outstanding payments under the Product Development and License
Agreement.
On January 10, 2006, Elite entered into an agreement with Orit Laboratories LLC (Orit), an affiliate of Tish Technologies LLC, providing that Elite and Orit will co-develop and commercialize an extended release
drug product for treatment of anxiety, and, upon completion of development, may license it for manufacture and sale. The parties intend to develop all dose strengths of the product. Orit has been providing formulation and analytical resources for
the development work. Elites facility has been used for manufacture of development batches. Elite is to share in the profits, if any from the sales of the drug. A formulation has been developed that matches the innovators product using
IN VITRO testing and next steps will be scale up and pilot testing.
On November 10, 2006, Elite entered into a product collaboration agreement with The PharmaNetwork, LLC (TPN) for the development of the generic product equivalent of a synthetic narcotic analgesic drug product.
TPN is to perform development services and prepare and file an ANDA in the name of TPN with the FDA. Elite is to provide development support, including the purchase of active pharmaceutical ingredients and materials and supplies to manufacture the
batch, provide adequate facilities to TPN for use in its development work and following ANDA
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approval, Elite will manufacture the drug product developed. Elite is to pay TPN for the development services rendered upon the attainment of certain milestones. The out-of-pocket costs are to be shared by TPN and Elite,
with TPNs obligation to be payable from the royalty compensation. Formulation development work is currently underway.
In January 2006, the FDA accepted our IND for ELI-154, its once-a-day oxycodone painkiller. Under the new drug application, we will begin our development program with an early stage study to
evaluate ELI-154s sustained release formation. Currently there is no once-daily oxycodone available; we estimate that the U.S. market for sustained release, twice-daily oxycodone was about $1.6 billion as of September,
2006.
No assurance can be given that we will consummate any of the transactions discussed above or that any material revenues will be generated for us therefrom.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended September 30, 2007, we recorded positive cash flow and financed our operations through utilization of our existing cash and cash raised through our private placement of Series C 8% Preferred Stock.
Our working capital at September 30, 2007 was $10.4 million compared with working capital of $4.9 million at September 30, 2006. Cash and cash equivalents at September 30, 2007 were $11.0 million, an increase of $6.1 million from the
$4.9 million at September 30, 2006.
We spent approximately $1,390,000 on improvements and machinery and equipment during the six months ended September 30, 2007.
On April 24, 2007, we sold in a private placement through Oppenheimer & Company, Inc., the placement agent (the placement agent), 15,000 shares of our Series C 8% Preferred
Stock, at a price of $1,000 per share, each share convertible (at $2.32 per share) into 431.0345 shares of Common Stock, or an aggregate of 6,465,517 shares of Common Stock. The investors also acquired warrants to purchase shares of Common
Stock, exercisable on or prior to April 24, 2012. The warrants represent the right to purchase an aggregate of 1,939,655 shares of Common Stock at an exercise price of $3.00 per share. The gross proceeds of the sale were $15,000,000 before
payment of $1,050,000 in commissions to the Placement Agent and selected dealers. We also paid certain legal fees and expenses of counsel to the Placement Agent. We issued to the Placement Agent and its designees five year warrants to purchase
193,965 shares of Common Stock with similar terms to the warrants issued to the Investors with an exercise price of $3.00 per share.
On July 17, 2007 we sold, in a private placement, the remaining 5,000 authorized shares of its Series C 8% Preferred Stock at a price of $1,000 per share, each share convertible (at
$2.32 per share) into 431.0345 shares of Common Stock, or an aggregate 2,155,172 shares of Common Stock. The investors also acquired warrants to purchase shares of Common Stock, exercisable on or prior to July 17, 2012. The warrants represent
the right to purchase 646,554 shares of Common Stock, at an exercise price of $3.00 per share. The gross proceeds of the sale were $5,000,000 before payment of 350,000 in commissions to Placement Agent and selected dealers and $18,000 in
expenses incurred by Placement Agent and selected dealers. We issued to the Placement Agent and its designees five year warrants to purchase 64,655 shares of Common Stock with similar terms to the warrants issued to the Investors with exercise price
of $3.00 per share. The approximate $18,531,500 of net proceeds generated from these private placements will contribute materially to our efforts to advance our part of pain products through the clinic as well as accelerate the development
of our other controlled release products, which utilize our proprietary oral drug delivery systems and abuse resistant technology.
From time to time we will consider potential strategic transactions including acquisitions, strategic alliances, joint ventures and licensing arrangements with other pharmaceutical companies.
We retained an investment-banking firm to assist with our efforts. There can be no assurance that any such transaction will be available or consummated in the future.
As of September 30, 2007, after the closing of the sale of the additional Series C 8% Preferred Stock, our principal source of liquidity was approximately $10,989,000 of cash and cash equivalents. Additionally, we may
have access to funds through the exercise of outstanding stock options and warrants in addition to funds that may be generated from the potential sale of New Jersey tax losses. There can be no assurance that the sale of tax losses or by the exercise
of outstanding warrants or options will generate or provide sufficient cash.
The Company had outstanding, as of September 30, 2007, bonds in the aggregate principal amount of $3,795,000, consisting of $3,415,000 of 6.5% tax exempt Bonds with an outside maturity of September 1, 2030 and
$380,000 of 9.0% Bonds with an outside maturity of September 1, 2012. The bonds are secured by a first lien on the Companys facility in Northvale, New Jersey. Pursuant to the terms of the bonds, several restricted cash accounts have been
established for the payment of bond principal and interest. Bond proceeds were utilized for the redemption of previously issued tax exempt bonds issued by the Authority in September 1999 and to refinance equipment financing, as
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well as provide approximately $1,000,000 of capital for the purchase of additional equipment for the manufacture and development at the Companys facility of pharmaceutical products and the maintenance of a
$415,500 debt service reserve. All of the restricted cash, other than the debt service was expended within the year ended March 31, 2007. Pursuant to the terms of the related bond indenture agreement, the Company is required to observe certain
covenants, including covenants relating to the incurrence of additional indebtedness, the granting of liens and the maintenance of certain financial covenants. As of September 30, 2007, the Company was in compliance with the bond covenants.