UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For
the quarterly period ended June 30, 2008.
o
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For
the transition period from ___________ to ___________
Commission
file number: 000-52454
RxElite,
Inc.
(Name
of
Small Business Issuer in its Charter)
|
Delaware
|
|
10-0002110
|
|
State
or other Jurisdiction of
|
|
I.R.S.
Employer
|
|
Incorporation
or Organization
|
|
Identification
No.
|
|
1404
North Main, Suite 200
|
|
|
|
Meridian,
Idaho
|
|
83642
|
|
Address
of Principal Executive Offices
|
|
Zip
Code
|
Registrant's
telephone number, including area code (208) 288-5550
(Former
name or former address, if changed since last report)
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act
.
Large
accelerated filer
o
Accelerated
filer
o
Non-accelerated
filer (Do not check if a smaller reporting company)
o
Smaller
reporting company
x
Indicate
by check mark whether the issuer is a shell company (as defined in Rule 12b-2
of
the Exchange Act).
Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
|
Class
|
|
Outstanding
at August 8, 2008
|
|
Common
Stock, $0.001 Par Value
|
|
116,315,303
|
Transitional
Small Business Disclosure Format (Check One): Yes
o
No
x
RXELITE,
INC.
FORM
10-Q
TABLE
OF CONTENTS
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
2
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets, June 30, 2008 (unaudited) and December
31,
2007
(audited)
|
|
2
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the Three and Six Months
ended
June 30, 2008 and 2007 (unaudited)
|
|
3
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Six Months ended June
30,
2008 and 2007 (unaudited)
|
|
4
|
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
5
|
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis or Plan of Operations
|
|
14
|
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
|
|
|
|
|
|
|
|
Item 4.
|
Controls
and Procedures
|
|
22
|
|
|
|
|
|
|
Part
II - OTHER INFORMATION
|
|
|
|
Item
1.
|
Legal
proceedings.
|
|
23
|
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and use of Proceeds
|
|
23
|
|
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities.
|
|
23
|
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders.
|
|
23
|
|
|
|
|
|
|
Item
5.
|
Other
Information.
|
|
25
|
|
|
|
|
|
|
Item
6.
|
Exhibits
|
|
25
|
PART
1 - FINANCIAL INFORMATION
Item
1. Financial Statements
RXELITE,
INC.
Condensed
Consolidated Balance Sheets
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
ASSETS
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,654,837
|
|
$
|
10,113,584
|
|
|
Accounts
receivable, net of discounts and allowances of $37,154 and $8,006,
respectively
|
|
|
1,779,955
|
|
|
494,762
|
|
|
Related
party accounts receivable
|
|
|
-
|
|
|
465,378
|
|
|
Related
party receivable
|
|
|
8,123
|
|
|
8,945
|
|
|
Inventory
|
|
|
9,549,396
|
|
|
7,353,339
|
|
|
Prepaid
expenses
|
|
|
695,598
|
|
|
94,272
|
|
|
Total
Current Assets
|
|
|
14,687,909
|
|
|
18,530,280
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Assets, Net
|
|
|
6,877,935
|
|
|
1,832,573
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets, Net
|
|
|
5,406,551
|
|
|
67,194
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
10,678,793
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Restricted
deposits
|
|
|
686,872
|
|
|
682,680
|
|
|
Other
assets
|
|
|
187,898
|
|
|
153,638
|
|
|
Total
Other Assets
|
|
|
874,770
|
|
|
836,318
|
|
|
TOTAL
ASSETS
|
|
$
|
38,525,958
|
|
$
|
21,266,365
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
10,629,478
|
|
$
|
5,720,737
|
|
|
Accrued
rebates
|
|
|
729,647
|
|
|
273,148
|
|
|
Notes
payable - related party
|
|
|
100,000
|
|
|
100,000
|
|
|
Accrued
payroll and associated liabilities
|
|
|
795,449
|
|
|
673,918
|
|
|
Current
portion of severance obligation
|
|
|
310,989
|
|
|
334,009
|
|
|
Current
portion of capital lease obligations
|
|
|
46,891
|
|
|
43,433
|
|
|
Note
Payable
|
|
|
3,000,000
|
|
|
-
|
|
|
Stock
liability due to Directors
|
|
|
3,000
|
|
|
-
|
|
|
Payable
to former preferred stockholders, net of discount $72,154
|
|
|
1,519,546
|
|
|
-
|
|
|
Total
Current Liabilities
|
|
|
17,135,000
|
|
|
7,145,245
|
|
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities:
|
|
|
|
|
|
|
|
|
Severance
obligation, net of discount $82,398
|
|
|
343,590
|
|
|
455,881
|
|
|
Payable
to former preferred stockholders, net
|
|
|
-
|
|
|
1,255,692
|
|
|
Capital
lease obligations
|
|
|
40,885
|
|
|
56,904
|
|
|
Senior
secured convertible note, net of discount of $7,880,983 and $10,444,152,
respectively
|
|
|
2,619,017
|
|
|
55,848
|
|
|
Total
Long Term Liabilities
|
|
|
3,003,492
|
|
|
1,814,325
|
|
|
Total
Liabilities
|
|
|
20,138,492
|
|
|
8,959,570
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 Par Value, 1,000,000 Shares Authorized, 0 Shares Issued
and
Outstanding
|
|
|
-
|
|
|
-
|
|
|
Common
stock, $0.001 Par Value, 200,000,000 Share Authorized, 116,315,303
and
96,683,920 Shares Issued and Outstanding, respectively
|
|
|
116,315
|
|
|
96,683
|
|
|
Additional
paid-in capital
|
|
|
60,336,270
|
|
|
40,845,792
|
|
|
Accumulated
deficit
|
|
|
(42,065,119
|
)
|
|
(28,635,680
|
)
|
|
Total
Stockholders' Equity
|
|
|
18,357,466
|
|
|
12,306,795
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
38,525,958
|
|
$
|
21,266,365
|
|
See
notes
to Condensed Consolidated Financial Statements
RXELITE,
INC.
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
REVENUES,
(Net of discounts and allowances of $773,999, $232,398, $1,890,606,
and
$251,092, respectively
|
|
$
|
3,006,036
|
|
$
|
735,600
|
|
$
|
6,005,440
|
|
$
|
882,473
|
|
|
COST
OF SALES
|
|
|
2,503,315
|
|
|
560,254
|
|
|
4,947,161
|
|
|
699,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
502,721
|
|
|
175,346
|
|
|
1,058,279
|
|
|
182,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expense
|
|
|
202,838
|
|
|
785,001
|
|
|
347,805
|
|
|
1,235,734
|
|
|
Product
Purchase Agreements
|
|
|
-
|
|
|
4,400,000
|
|
|
-
|
|
|
4,400,000
|
|
|
Salaries,
wages, and benefits expense
|
|
|
1,858,729
|
|
|
566,850
|
|
|
3,491,204
|
|
|
1,100,493
|
|
|
Research
and development
|
|
|
(54,001
|
)
|
|
739,558
|
|
|
8,163
|
|
|
1,549,116
|
|
|
General
and administrative expense
|
|
|
1,276,612
|
|
|
365,327
|
|
|
2,156,102
|
|
|
668,393
|
|
|
Amortization
expense
|
|
|
114,528
|
|
|
651
|
|
|
247,520
|
|
|
1,301
|
|
|
Depreciation
expense
|
|
|
177,788
|
|
|
40,366
|
|
|
355,040
|
|
|
77,869
|
|
|
Total
Operating Expense
|
|
|
3,576,494
|
|
|
6,897,753
|
|
|
6,605,834
|
|
|
9,032,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
|
(3,073,773
|
)
|
|
(6,722,407
|
)
|
|
(5,547,555
|
)
|
|
(8,849,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
11,156
|
|
|
13,488
|
|
|
26,984
|
|
|
39,389
|
|
|
Interest
expense and penalties
|
|
|
(446,173
|
)
|
|
(62,963
|
)
|
|
(756,721
|
)
|
|
(163,361
|
)
|
|
Loss
on Debt Restructuring
|
|
|
-
|
|
|
(188,054
|
)
|
|
-
|
|
|
(188,054
|
)
|
|
Amortization
of debt discount
|
|
|
(1,419,197
|
)
|
|
-
|
|
|
(2,724,716
|
)
|
|
-
|
|
|
Loss
on note conversion rate change
|
|
|
(1,510,051
|
)
|
|
-
|
|
|
(5,265,729
|
)
|
|
-
|
|
|
Termination
of development agreement
|
|
|
46,666
|
|
|
-
|
|
|
846,666
|
|
|
-
|
|
|
Other
income (expense)
|
|
|
1,773
|
|
|
5,781
|
|
|
(8,368
|
)
|
|
(559
|
)
|
|
Total
Other (Expense)
|
|
|
(3,315,826
|
)
|
|
(231,748
|
)
|
|
(7,881,884
|
)
|
|
(312,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS)
|
|
$
|
(6,389,599
|
)
|
$
|
(6,954,155
|
)
|
$
|
(13,429,439
|
)
|
$
|
(9,162,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per share
|
|
$
|
(0.05
|
)
|
$
|
(0.16
|
)
|
$
|
(0.12
|
)
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
116,315,303
|
|
|
44,898,063
|
|
|
115,697,009
|
|
|
40,901,853
|
|
See
Notes
to Condensed Consolidated Financial Statements
RXELITE,
INC.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
Six Months Ended
|
|
|
|
|
June
30,
|
|
|
Cash
Flows from Operating Activities
|
|
|
2008
|
|
|
2007
|
|
|
Net
Loss
|
|
$
|
(13,429,439
|
)
|
$
|
(9,162,517
|
)
|
|
Adjustments
to Reconcile Net Loss to Net Cash Used in Operating
Activities:
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
563,283
|
|
|
79,170
|
|
|
Depreciation
expense allocated to COGS
|
|
|
468,144
|
|
|
-
|
|
|
Amortization
of debt discount
|
|
|
2,724,716
|
|
|
-
|
|
|
Amortization
of capitalized costs
|
|
|
57,308
|
|
|
-
|
|
|
Amortization
of costs associated with consulting agreement
|
|
|
400,000
|
|
|
-
|
|
|
Loss
on Debt Restructuring
|
|
|
-
|
|
|
188,054
|
|
|
Fair
value of stock options, warrants, and stock appreciation rights issued
and
vesting
|
|
|
401,394
|
|
|
-
|
|
|
Subscription
Shares Issued for Employee Compensation
|
|
|
-
|
|
|
15,229
|
|
|
Subscription
Shares Issued for Services
|
|
|
-
|
|
|
3,495
|
|
|
Subscription
Shares Issued for Product Purchase Agreements
|
|
|
-
|
|
|
4,400,000
|
|
|
Termination
of development agreement
|
|
|
(800,000
|
)
|
|
-
|
|
|
Loss
from change in conversion rate of Note
|
|
|
5,265,729
|
|
|
-
|
|
|
Decrease
(Increase) in Operating Assets
|
|
|
|
|
|
|
|
|
Accounts
and Related Party Receivables, Net
|
|
|
(1,276,248
|
)
|
|
(661,449
|
)
|
|
Inventory
|
|
|
(3,906,680
|
)
|
|
(1,107,304
|
)
|
|
Prepaid
Expenses
|
|
|
5,174
|
|
|
(609,376
|
)
|
|
Other
Assets
|
|
|
(621,111
|
)
|
|
3,897
|
|
|
Increase
(Decrease) in Operating Liabilities
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
5,692,766
|
|
|
185,863
|
|
|
Accrued
Expenses
|
|
|
774,729
|
|
|
429,210
|
|
|
Net
Cash Used in Operating Activities
|
|
|
(3,680,235
|
)
|
|
(6,195,728
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of assets
|
|
|
(6,602,096
|
)
|
|
(906,549
|
)
|
|
Net
Cash Used in Investing Activities
|
|
|
(6,602,096
|
)
|
|
(906,549
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from Issuance of Common Stock and Common Stock Subscribed
|
|
|
-
|
|
|
5,357,860
|
|
|
Payments
on capital lease obligations
|
|
|
(12,561
|
)
|
|
(8,302
|
)
|
|
Cash
Paid for Offering Costs
|
|
|
-
|
|
|
(78,834
|
)
|
|
Proceeds
from Notes Payable
|
|
|
3,000,000
|
|
|
-
|
|
|
Payments
on Notes Payable
|
|
|
(163,855
|
)
|
|
(180,888
|
)
|
|
Net
Cash Used by Financing Activities
|
|
|
2,823,584
|
|
|
5,089,836
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
$
|
(7,458,747
|
)
|
$
|
(2,012,441
|
)
|
|
Cash
and Cash equivalents, Beginning of Period
|
|
$
|
10,113,584
|
|
$
|
2,403,144
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$
|
2,654,837
|
|
$
|
390,703
|
|
See
notes
to Condensed Consolidated Financial Statements
RXELITE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
NOTE
1 - ORGANIZATION AND MERGER
We
develop and market generic prescription drug products in specialty generic
markets in the areas of anesthesia, sterile liquid dose drugs (which includes
ophthalmic and sterile inhalation respiratory products and injectible drugs)
and
active pharmaceutical ingredients (API).
We
were
formed as a Delaware limited liability company in November 2001 for the purpose
of providing customized computing and communications services and solutions
for
small to medium-sized businesses. On August 24, 2005, we were converted into
a
Delaware corporation and changed our name from Southridge Technology Group,
LLC
to Southridge Technology Group, Inc. On July 13, 2007, we completed a reverse
merger, pursuant to which a wholly-owned subsidiary of ours merged with and
into
a privately held Delaware corporation engaged in the development and marketing
of generic pharmaceuticals, RxElite Holdings Inc., with the private company
being the surviving company. In connection with the reverse merger, we
discontinued our former business and succeeded to the business of RxElite
Holdings Inc. as our sole line of business. For financial reporting purposes,
RxElite Holdings Inc., and not us, is considered the accounting acquirer.
Accordingly, the historical financial statements presented and the discussion
of
financial condition and results of operations herein are those of RxElite
Holdings Inc. and do not include our historical financial results. Our July
13,
2007 merger is being accounted for as a reverse acquisition and recapitalization
of RxElite Holdings Inc. for financial accounting purposes. Consequently, the
assets and liabilities and the historical operations reflected in the financial
statements prior to the merger are those of RxElite Holdings Inc. and recorded
at the historical cost basis of RxElite Holdings, and the consolidated financial
statements after completion of the merger includes our assets and liabilities
and the assets and liabilities of RxElite Holdings Inc., historical operations
of RxElite Holdings Inc. and our operations from the closing date of the
merger.
On
October 29, 2007, we amended our certificate of incorporation to change our
name
to “RxElite, Inc.” from “Southridge Technology Group, Inc.” and to increase the
number of shares of authorized capital stock to 201,000,000, divided into two
classes: 200,000,000 shares of common stock, par value $0.001 per share, and
1,000,000 shares of preferred stock, par value $0.001 per share. Prior to the
amendment, the number of shares of authorized capital stock was 99,000,000,
divided into two classes: 98,000,000 shares of common stock, par value $0.001
per share, and 1,000,000 shares of preferred stock, par value $0.001 per share.
On
January 4, 2008, our wholly owned subsidiary, FineTech Pharmaceutical Ltd.
(formerly known as RxElite Israel Ltd.), a company organized under the laws
of
the State of Israel (“FineTech Pharmaceutical”), entered into an asset purchase
agreement to acquire substantially all of the assets of FineTech Laboratories,
Ltd., a privately held company organized under the laws of the State of Israel
(“FineTech”) (the “FineTech Acquisition”). In connection with the FineTech
Acquisition, Dr. Arie Gutman, the sole owner of FineTech and currently the
president of FineTech Pharmaceutical and a director of our company, agreed
not
to engage in certain activities that would be competitive with our or FineTech
Pharmaceutical’s business and to assign the right to receive royalties with
respect to the sale of certain pharmaceutical products to us. On January 22,
2008 we issued 18,632,383 shares of our common stock to Dr. Gutman in
consideration for his non-competition undertaking and assignment of royalty
rights. Dr. Gutman became a member of our Board of Directors effective on
February 7, 2008 and currently serves as President of FineTech Pharmaceutical,
Ltd.
RXELITE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
NOTE
2 - BASIS OF PRESENTATION
The
interim financial information of the Company as of June 30, 2008 is unaudited.
The accompanying condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles (“GAAP”) in the
United States of America for interim financial statements. Accordingly, they
omit or condense footnotes and certain other information normally included
in
financial statements prepared in accordance with GAAP. The accounting policies
followed for quarterly financial reporting conform to the accounting policies
disclosed in Note 2 to the Notes to Financial Statements for the year ended
December 31, 2007. In the opinion of management, all adjustments that are
necessary for a fair presentation of the financial information for the interim
period reported have been made. All such adjustments are of a normal recurring
nature. The results of operations for the three and six months ended June 30,
2008 are not necessarily indicative of the results that can be expected for
the
entire year ending December 31, 2008. The unaudited condensed consolidated
financial statements should be read in conjunction with the Company’s audited
financial statements and the notes thereto for the year ended December 31,
2007.
NOTE
3 - GOING CONCERN
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. The Company has incurred losses
since inception and may continue to incur losses for the foreseeable future.
These conditions raise substantial doubt about the ability of the Company to
continue as a going concern. The Company’s business plan anticipates that its
near future activities will be funded from the issuance of additional equity
or
debt and funds provided by ongoing operations.
Immediately
following the Merger, the Company raised $10,703,092 in gross proceeds of equity
capital and converted $1,899,273 of convertible debentures through the issuance
of 21,003,959 units in a private placement offering of its securities. In
addition, the Company received proceeds of $10,500,000 from the issuance of
a a
senior secured convertible note on December 31, 2007. Further to these funds,
the Company received proceeds of $3,000,000 from a secured note on May 30,
2008,
wherein the Company may also draw down an additional $2,000,000 at its request,
subject to lender approval.
If
sales
continue to be insufficient to support planned development of new products
and
expansion of operations, the Company will need to access additional equity
or
debt capital. If public or private financing is not available when needed or
is
not available on terms acceptable to the Company, the Company’s growth and
revenue-generating plans may be materially impaired. Such results could have
a
material adverse effect on the Company’s financial condition, results of
operations and future prospects. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
NOTE
4 – ACCOUNTS RECEIVABLE
At
December 31, 2007, the Company’s accounts receivable was $494,762, net of
allowances for doubtful accounts and payment discounts of $4,092, and $3,914,
respectively. At June 30, 2008, the Company’s accounts receivable was
$1,779,955, net of allowances for doubtful accounts and payment discounts of
$29,836, and $7,318, respectively.
NOTE
5 – RELATED PARTY ACCOUNTS RECEIVABLE
At
December 31, 2007, the Company had an accounts receivable from a related party
of $465,378. The receivable was due from a key supplier, Minrad International.
As of June 30, 2008, the Company had received the full amount of this
receivable.
RXELITE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
NOTE
6 – FIXED ASSETS
RxElite,
Inc.
Assets
and depreciation as of June 30, 2008 and December 31, 2007 are as
follows:
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
Equipment
|
|
$
|
137,250
|
|
$
|
-
|
|
|
Furniture,
Fixtures, and Office Equipment
|
|
|
35,063
|
|
|
163,945
|
|
|
Building
(in construction)
|
|
|
505,531
|
|
|
483,407
|
|
|
Computer
hardware and software
|
|
|
761,670
|
|
|
758,123
|
|
|
Product
(vaporizers)
|
|
|
3,698,013
|
|
|
959,856
|
|
|
Gross
Fixed Assets
|
|
|
5,137,527
|
|
|
2,365,331
|
|
|
Accumulated
Depreciation
|
|
|
(1,133,006
|
)
|
|
(532,758
|
)
|
|
Total
Fixed Assets, Net
|
|
$
|
4,004,521
|
|
$
|
1,832,573
|
|
FineTech
Pharmaceutical, Ltd.
Assets
and depreciation as of June 30, 2008 are as follows:
|
|
|
June 30,
2008
|
|
|
Equipment
|
|
$
|
2,638,920
|
|
|
Furniture,
Fixtures, and Office Equipment
|
|
|
107,530
|
|
|
Building
|
|
|
283,100
|
|
|
Computer
hardware and software
|
|
|
28,400
|
|
|
Other
|
|
|
38,400
|
|
|
Gross
Fixed Assets
|
|
|
3,096,350
|
|
|
Accumulated
Depreciation
|
|
|
(222,936
|
)
|
|
Total
Fixed Assets, Net
|
|
$
|
2,873,414
|
|
Summary
:
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
Equipment
|
|
$
|
2,776,170
|
|
$
|
-
|
|
|
Furniture,
Fixtures, and Office Equipment
|
|
|
142,593
|
|
|
163,945
|
|
|
Building
(includes in construction)
|
|
|
788,631
|
|
|
483,407
|
|
|
Computer
hardware and software
|
|
|
790,070
|
|
|
758,123
|
|
|
Product
(vaporizers)
|
|
|
3,698,013
|
|
|
959,856
|
|
|
Other
|
|
|
38,400
|
|
|
-
|
|
|
Gross
Fixed Assets
|
|
|
8,233,877
|
|
|
2,365,331
|
|
|
Accumulated
Depreciation
|
|
|
(1,355,942
|
)
|
|
(532,758
|
)
|
|
Total
Fixed Assets, net
|
|
$
|
6,877,935
|
|
$
|
1,832,573
|
|
RXELITE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
NOTE
7 – INTANGIBLE ASSETS
RxElite,
Inc.
Intellectual
property consists of a patent valued at $25,000 and an FDA approved “Abbreviated
New Drug Application” (ANDA) for the generic pharmaceutical Fluoxetine valued at
$50,000.
Patent
and ANDA acquisition and application costs are recorded at cost. Patent costs
are amortized over their remaining useful life, not to exceed their legal life.
ANDA acquisition and application costs are recorded at cost and their
value is periodically tested for impairment. At December 31, 2007, the Company
concluded that there was no impairment of this intangible asset.
Patent
and ANDA acquisition and application costs at June 30, 2008 and December 31,
2007 are as follows:
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
Patent
Costs
|
|
$
|
25,000
|
|
$
|
25,000
|
|
|
ANDA
Acquisition and Application Costs
|
|
|
50,000
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying Value
|
|
|
75,000
|
|
|
75,000
|
|
|
Less
Accumulated Amortization
|
|
|
(9,107
|
)
|
|
(7,806
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
Intangible Assets
|
|
$
|
65,893
|
|
$
|
67,194
|
|
FineTech
Pharmaceutical, Ltd.
Intellectual
property consists of four active patents.
Patent
valuations at June 30, 2008 are as follows:
|
Gross
Carrying Value
|
|
$
|
5,547,600
|
|
|
Less
Accumulated Amortization
|
|
|
(206,942
|
)
|
|
|
|
|
|
|
|
Total
Intangible Assets
|
|
$
|
5,340,658
|
|
NOTE
8 – GOODWILL
Goodwill
represents the excess of the valuation of the assets purchased from FineTech
Laboratories, Ltd. The Company accounts for its goodwill in accordance with
Statement of Financial Accounting Standards No. 142 (SFAS 142)
Goodwill
and Other Intangible Assets
,
which
requires the Company to test goodwill for impairment annually or whenever events
or changes in circumstances indicate that the carrying value of an asset may
not
be recoverable, rather than amortize.
The
entire goodwill balance of $10,678,793 at June 30, 2008, which is not fully
deductible for tax purposes due to the purchase being completed partially
through the exchange of stock, is related to the Company's acquisition of assets
from FineTech Laboratories, Ltd. completed on January 4, 2008. With the
acquisition of assets and employees from FineTech Laboratories, Ltd., the
Company gained the affect of FineTech Laboratories’ reputation for product
development in the industry. Furthermore, the Company gained renowned PhD staff
that have the ability to develop active pharmaceutical ingredients (APIs) and
solve complex issues within the industry.
RXELITE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
NOTE
8 – GOODWILL (CONT.)
The
provisions of SFAS 142 require that a two-step impairment test be performed
annually or whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. The first step of the test
for impairment compares the book value of the Company to its estimated fair
value. The second step of the goodwill impairment test, which is only required
when the net book value of the item exceeds the fair value, compares the implied
fair value of goodwill to its book value to determine if an impairment is
required.
NOTE
9 – NOTES PAYABLE - RELATED PARTY
At
December 31, 2007, the Company had a note payable to a related party of
$100,000. The note is due on demand, and bears simple interest computed at
12%
per annum. At June 30, 2008, the Company continued to have this note payable
outstanding.
NOTE
10 – PAYABLE TO FORMER PREFERRED STOCKHOLDERS
Pursuant
to a transaction entered into immediately following the Merger, the Company
is
obligated to offer to purchase from the former holders of the RHI’s Series A
Preferred Stock on/or before December 31, 2008 up to an aggregate of 350,000
shares of the Company’s common stock at a price of $4.00 per share, or a total
obligation of $1,400,000. In addition, the Company recorded an additional
contingency related to the late effectiveness for its Registration Statement
in
the amount of approximately $190,000. The Company has recorded this obligation
at its present value, using an interest rate of 11.25% per annum. The present
value of the payable to stockholders, recorded as a current liability in the
accompanying consolidated balance sheet, was $1,519,546 and $1,255,692 at June
30, 2008 and December 31, 2007, respectively.
NOTE
11 - EQUITY TRANSACTIONS
Common
Stock
During
the quarter ended June 30, 2008, the Company had no transactions related to
common stock.
Options,
Stock Appreciation Rights and Restricted Stock Units
During
the quarter ended June 30, 2008, the Company had the following transactions
related to options, stock appreciation rights and restricted stock
units:
On
May 2,
2008, the Company issued an option to purchase 628,700 shares of common stock
with an exercise price of $0.285 per share for a total Black-Scholes value
of
$151,342 to its Chief Executive Officer, Jonathan Houssian.
On
May 2,
2008, the Company issued an option to purchase 450,000 shares of common stock
with an exercise price of $0.285 per share for a total Black-Scholes value
of
$108,325 to its Chief Operating Officer, Earl Sullivan.
On
May 2,
2008, the Company issued an option to purchase 58,300 shares of common stock
with an exercise price of $0.285 per share for a total Black-Scholes value
of
$14,034 to its Vice President of Administration.
On
May 2,
2008, the Company issued an option to purchase 66,667 shares of common stock
with an exercise price of $0.285 per share for a total Black-Scholes value
of
$16,048 to its Vice President of Sterile Operations.
On
May 2,
2008, the Company issued an option to purchase 750,000 shares of common stock
with an exercise price of $0.285 per share for a total Black-Scholes value
of
$204,739 to its Chief Operating Officer, Earl Sullivan.
On
May 2,
2008, the Company issued an option to purchase 125,000 shares of common stock
with an exercise price of $0.285 per share for a total Black-Scholes value
of
$34,123 to its Vice President of Business Development.
RXELITE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
NOTE
11 - EQUITY TRANSACTIONS (CONT.)
On
May 2,
2008, the Company issued an option to purchase 37,500 shares of common stock
with an exercise price of $0.285 per share for a total Black-Scholes value
of
$10,237 to its Principal Financial Officer, Shannon Stith.
On
May 2,
2008, the Company issued an option to purchase 12,500 shares of common stock
with an exercise price of $0.285 per share for a total Black-Scholes value
of
$3,412 to a non-executive employee.
On
June
4, 2008, the Company issued 1,260,000 stock appreciation rights of common stock
with a base price of $0.36 per share for a total Black-Scholes value of $302,175
to its Vice President of Sterile Operations. The stock appreciation right vests
annually over four years on June 4
th
.
The
stock appreciation rights forfeit each year on the vesting date if no
appreciation in stock value has occurred.
On
June
4, 2008, the Company issued 2,100,000 stock appreciation rights of common stock
with a base price of $0.36 per share for a total Black-Scholes value of $503,626
to its Chief Operating Officer, Earl Sullivan. The stock appreciation right
vests annually over four years on June 4
th
.
The
stock appreciation rights forfeit each year on the vesting date if no
appreciation in stock value has occurred.
On
June
4, 2008, the Company issued 1,380,000 stock appreciation rights of common stock
with a base price of $0.36 per share for a total Black-Scholes value of $330,954
to its Vice President of Business Development. The stock appreciation right
vests annually over four years on June 4
th
.
The
stock appreciation rights forfeit each year on the vesting date if no
appreciation in stock value has occurred.
On
June
4, 2008, the Company issued 1,260,000 stock appreciation rights of common stock
with a base price of $0.36 per share for a total Black-Scholes value of $302,175
to its Principal Financial Officer, Shannon Stith. The stock appreciation right
vests annually over four years on June 4
th
.
The
stock appreciation rights forfeit each year on the vesting date if no
appreciation in stock value has occurred.
On
June
4, 2008, each of the Company’s four independent directors converted his 400,000
currently outstanding stock options into 100,000 restricted stock units. The
restricted stock units vest annually over four years on June 4
th
.
The
conversion was under a modification to prior awards wherein employees and
directors may convert four stock options into one restricted stock unit with
the
same vesting period. The value of the original award was higher than the
modification to the award and thus no incremental expense was
recorded.
The
Company has adopted the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123R, Share Based Payments, which requires companies to
measure the cost of employee services received in exchange for equity
instruments based on the fair value of those awards and to recognize the
compensation expense over the requisite service period during which the awards
are expected to vest. A stock based compensation expense for the above noted
and
previously issued stock options in the amount of $401,394 has been reflected
in
the accompanying financial statements for the six month period ended June 30,
2008.
The
Company uses the Black-Scholes valuation model to estimate the grant date fair
value of its stock options, stock appreciation rights, and warrants. The model
requires various judgmental assumptions including estimated stock price
volatility, forfeiture rates and expected life.
RXELITE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
NOTE
11 - EQUITY TRANSACTIONS (CONT.)
Our
calculations of the fair market value of each stock-based award that was
granted, modified or calculated during the quarter ended June 30, 2008 used
the
following assumptions:
|
Black-Scholes
Input
|
|
Average
Value
|
|
|
Risk-free
interest rate
|
|
|
3.40
|
%
|
|
Expected
life in years
|
|
|
6
|
|
|
Dividend
yield
|
|
|
0.00
|
%
|
|
Expected
volatility
|
|
|
124.43
|
%
|
The
following table summarizes the stock option, warrant, and stock appreciation
rights activity during the six months ended June 30, 2008:
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average Black-Scholes Value
|
|
|
Outstanding,
beginning of year
|
|
|
48,068,303
|
|
$
|
0.91
|
|
$
|
0.63
|
|
|
Granted
|
|
|
9,908,667
|
|
$
|
0.38
|
|
$
|
0.27
|
|
|
Expired/Cancelled
|
|
|
(1,696,216
|
)
|
$
|
0.58
|
|
$
|
0.57
|
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Outstanding,
end of year
|
|
|
56,280,754
|
|
$
|
0.83
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
41,103,340
|
|
$
|
0.91
|
|
$
|
0.63
|
|
NOTE
12 – AMORTIZATION OF DEBT DISCOUNT
The
Company booked non-cash amortization of debt discount related to the December
31, 2007 convertible debt funding for the six month period ended June 30, 2008
in the amount of $2,724,716. The remaining debt discount will be amortized
over
the next six quarters at which time the convertible debt funding will
mature.
NOTE
13 – TERMINATION OF DEVELOPMENT AGREEMENT
In
March
2008, the Company executed an Acknowledgement regarding the termination of
an
agreement between the Company and Core Tech Solutions, Inc. to develop a
Fentanyl transdermal system. The outstanding accounts payable to Core Tech
was
$800,000 at December 31, 2007. As of the date of the Acknowledgement, the
Company no longer owed the amount to Core Tech. As a result, the Company
recognized other income in the amount of $800,000 for the quarter ended March
31, 2008.
Pursuant
to the agreement with Core Tech, the Company may have a contingent asset for
reimbursement of amounts previously paid to Core Tech in the amount of
$2,200,000. The amount of this contingency is not recorded on the financial
statements of the Company is it is dependent upon the occurrence of one or
more
future events. This amount will be reimbursed to the Company within three years
of FDA approval and commencement of sales of the Fentanyl transdermal system,
or
equivalent. However, the amount will not be reimbursed to the Company unless
Core Tech is able to sign an equivalent partnership agreement with an alternate
manufacturing and distribution entity prior to March 31, 2009.
On
May
30, 2008, the Company executed a Mutual Termination regarding the termination
of
an agreement between the Company and Alkem Laboratories, Ltd. The Company was
refunded a prepayment from Alkem Laboratories, Ltd. in the amount of $46,666.
As
a result, the Company recognized other income in the amount of $46,666 for
the
quarter ended June 30, 2008.
RXELITE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
NOTE
14 – EARNINGS PER SHARE
The
computation of basic earnings (loss) per common share is based on the weighted
average number of shares outstanding during the period. The computation of
diluted earnings per common share is based on the weighted average number of
shares outstanding during the period plus the weighted average common stock
equivalents which would arise from the exercise of stock options and warrants
outstanding and the conversion of convertible debentures using the treasury
stock method and the average market price per share during the
period
.
A
reconciliation of the number of shares used in the computation of the Company’s
basic and diluted earnings (loss) per common share is as follows:
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Weighted
average number of common shares outstanding
|
|
|
116,315,303
|
|
|
44,898,063
|
|
|
115,697,009
|
|
|
40,901,853
|
|
|
Dilutive
effect of options and warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Weighted
average number of common shares outstanding, assuming dilution
|
|
|
116,315,303
|
|
|
44,898,063
|
|
|
115,697,009
|
|
|
40,901,853
|
|
No
stock
options, stock appreciation rights, warrants or restricted stock units are
included in the computation of weighted average number of shares for the six
months ended June 30, 2008 because the effect would be anti-dilutive. At June
30, 2008, the Company had outstanding stock options, stock appreciation
rights, and warrants to purchase a total of 56,280,754 common shares that
could have a future dilutive effect on the calculation of earnings per share.
Furthermore, the Company has convertible note payable with a total
of 48,231,511 shares of common stock, which assumes conversion as of June
30, 2008, underlying the note that could have a future dilutive effect on the
calculation of earnings per share.
NOTE
15 - SIGNIFICANT CUSTOMERS
During
the six months ended June 30, 2008, RxElite recorded revenues from two customers
that approximated 18% and 20% of gross sales, respectively. During the six
months ended June 30, 2008, our subsidiary, FineTech Pharmaceutical, recorded
revenues from two customers that approximated 93% and 17% of gross sales,
respectively.
NOTE
16 - SIGNIFICANT SUPPLIERS
The
Company outsources all of its generic pharmaceutical manufacturing for its
own
label to outside sources. For the six month period ended June 30, 2008,
RxElite’s largest suppliers accounted for approximately $762,450 and $1,874,834
or 28% and 70% of product purchases. For the six months ended June 30, 2008,
our
subsidiary, FineTech Pharmaceutical’s largest suppliers accounted for
approximately $11,765 and $10,885 or 8% and 7% of product
purchases.
RXELITE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
NOTE
17 – LOSS ON NOTE CONVERSION
As
previously reported in our filings with the SEC, on December 31, 2007, we
entered into a securities purchase agreement with Castlerigg Master Investments
Ltd., pursuant to which we sold 5,594,033 shares of our common stock,
a 9.50% senior secured redeemable convertible note in the
principal amount of $10,500,000 (“Convertible Note”), a Series A warrant to
purchase up to 13,985,083 shares of our common stock (“Series A Warrant”), and a
Series B warrant to purchase up to 4,661,694 shares of our common stock (“Series
B Warrant”, and together with the Series A Warrant, “Warrants”) for
aggregate gross proceeds of $10,500,000 (“Securities Purchase Agreement”). To
secure our obligations under the Convertible Note, we granted the selling
stockholder a first priority perfected security interest in all of our assets
and properties, together with all of the assets and properties of RxElite
Holdings Inc., including the stock of RxElite Holdings Inc. On January 18,
2008, we entered into a letter agreement with the investor, pursuant to which
we
amended certain terms of the Convertible Note, the Series A Warrant and the
Series B Warrant.
The
Convertible Note matures on December 31, 2009, which date may be extended at
the
option of the note holder as described below. The entire outstanding principal
balance and any outstanding fees or interest are due and payable in full on
the
maturity date. The Convertible Note bears interest at the rate of 9.50% per
annum, which rate may be increased to 15% upon the occurrence of an event of
default, as described below. Interest on the Convertible Note is payable
quarterly beginning on April 1, 2008. We have made our first two interest
payments.
As
of
March 31, 2008, we failed to satisfy the Higher EBITDA ratio and as a result,
the conversion price of the Convertible Note was adjusted downward to $0.2177
per share. Based upon the new conversion price, if the Convertible Note
were converted in full, we would be required to issue 48,231,511 shares of
Common Stock to the holder of the Convertible Note. These new shares would
represent approximately 42% of our then outstanding shares of Common
Stock. No further adjustment in the conversion prices was required as of
June 30, 2008. Notwithstanding the new conversion price, under the terms of
the
Note and Warrants, the investor cannot convert the Note or exercise any warrants
to the extent that such conversion or exercise would result in the investor
holding in excess of 4.99% of our outstanding common stock. Since the
investor presently holds 5,594,033 shares of our common stock, it could not
convert the convertible Note for an amount that would exceed 210,101 shares,
based upon 116,315,303 shares outstanding prior to such conversion.
The
loss
on note conversion account recorded an estimated loss due to the reduction
in
conversion price for the first quarter in the amount of $3,755,678. This amount
was adjusted after the actual conversion price reduction amount to $0.2177
per
share was calculated pursuant to the Note. An additional non-cash expense of
$1,510,051 was recorded during the second quarter of 2008.
As
of
June 30, 2008, we failed to satisfy both the Higher and Lower EBITDA ratio
and
as a result, the Company is now in default of the terms of the Convertible
Note.
No additional ratchet to the conversion price is necessary as the resulting
share price is higher than the previous adjustment at the end of the quarter
ended March 31, 2008. Based upon the event of default, the Convertible Note
may
be redeemed in part or in full by the holder at a price equal to the greater
of
(i) the product of (A) the conversion amount to be redeemed and (b) the
redemption premium and (ii) the product of (a) the conversion rate with respect
to such conversion amount in effect at such time as the holder delivers an
event
of default redemption notice and (b) the product of (1) the equity value
redemption premium and (2) the greatest closing sale price of the common stock
during the period beginning on the date immediately preceding such event of
default and ending on the date the holder delivers the event of default
redemption notice. Furthermore, the Company now must pay an interest rate of
15%
per annum until the default is cured. The default may be cured and the interest
rate adjusted down to the original 9.50% per annum by meeting future EBITDA
requirements. There is no assurance that the Company will satisfy future EBITDA
requirements.
We
are currently in discussion with the holder of the
note (Castlerigg Master Investments) regarding the default. There can be no
assurance that the holder will agree to amend the terms of the loan or waive
any
default.
NOTE
18 - RECENT ACCOUNTING PRONOUNCEMENTS
Recently
issued FASB Statements or Interpretations, Securities and Exchange Commission
or
SEC Staff Accounting Bulletins, and AICPA Emerging Issue Task Force Consensuses
have either been implemented or are not applicable to the Company during the
current quarter.
NOTE
19 - SUBSEQUENT EVENTS
None.
Item
2. Management’s Discussion and Analysis or Plan of
Operations
Results
of Operations
Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
.
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
%
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
Sales
(Net of Discounts)
|
|
$
|
3,006,036
|
|
$
|
735,600
|
|
$
|
2,270,436
|
|
|
309
|
%
|
|
Cost
of Goods Sold (Net of Discounts)
|
|
|
2,503,315
|
|
|
560,254
|
|
|
1,943,061
|
|
|
347
|
%
|
|
Gross
Profit
|
|
$
|
502,721
|
|
$
|
175,346
|
|
$
|
327,375
|
|
|
187
|
%
|
|
Gross
Profit %
|
|
|
16.7
|
%
|
|
23.8
|
%
|
|
|
|
|
|
|
Sales
Net
sales
increased by $2,270,436 from $735,600 for the three months ended June 30, 2007
to $3,006,036 for the three months ended June 30, 2008. This increase reflects
the acquisition of assets of FineTech Laboratories and the opening of our
subsidiary, FineTech Pharmaceutical, Ltd., as well as quarter-over-quarter
increase in sales since the launch of our Sevoflurane product line in the second
quarter of 2007.
Cost
of Goods Sold
Cost
of
goods sold increased by $1,943,061 from $560,254 for the three months ended
June
30, 2007 to $2,503,315 for the three months ended June 30, 2008. This increase
reflects acquisition of assets and launch of our Sevoflurane product
line.
Gross
Profit
Gross
profit increased by $327,375 from $175,346 for the three months ended June
30,
2007 to $502,721 for the three months ended June 30, 2008. Gross profit as
a
percentage of sales decreased for the three months ended June 30, 2008 resulting
from a transition in product mix from the prior year, as well as a decrease
in
our average selling price to customers during the quarter.
Operating
Expenses
Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
.
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
%
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Expenses
|
|
$
|
202,838
|
|
$
|
785,001
|
|
$
|
(582,163
|
)
|
|
-74
|
%
|
|
Salaries,
Wages and Benefits
|
|
|
1,858,729
|
|
|
566,850
|
|
|
1,291,879
|
|
|
228
|
%
|
|
Research
and Development
|
|
|
(54,001
|
)
|
|
739,558
|
|
|
(793,559
|
)
|
|
-107
|
%
|
|
Product
Purchase Agreements
|
|
|
-
|
|
|
4,400,000
|
|
|
(4,400,000
|
)
|
|
-100
|
%
|
|
General
and Administrative Expenses
|
|
|
1,276,612
|
|
|
365,327
|
|
|
911,285
|
|
|
249
|
%
|
|
Amortization
Expense
|
|
|
114,528
|
|
|
651
|
|
|
113,877
|
|
|
17493
|
%
|
|
Depreciation
Expense
|
|
|
177,788
|
|
|
40,366
|
|
|
137,422
|
|
|
340
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
$
|
3,576,494
|
|
$
|
6,897,753
|
|
$
|
(3,321,259
|
)
|
|
-48
|
%
|
Selling
Expense (Sales & Marketing)
Sales
and
marketing expense decreased by $582,163 from $785,001 for the three months
ended
June 30, 2007 to $202,838 for the three months ended June 30, 2008. This
decrease in sales and marketing expenses was a result of reclassification
in the
2008 financial statements of approximately $700,000 from a selling expense
to
the salaries, wages and benefits account. This reclassification for the quarter
ended June 30, 2008 was partially offset by an increase in selling expenses
related to higher attendance at trade shows and training requirements of
newly
hired sales staff.
Salaries,
Wages and Benefits
Salaries,
wages and benefits increased by $1,291,879 from $566,850 for the three months
ended June 30, 2007 to $1,858,729 for the three months ended June 30, 2008.
The
increase in salaries, wages and benefits in the three months ended June 30,
2008
compared to the three months ended June 30, 2007 was due an increase in
salaries, wages and benefits due to the launch of generic Sevoflurane and
related increased operating activities. Further increase was a result of
opening
our subsidiary, FineTech Pharmaceutical, in Israel after our recent asset
acquisition, as well as a reclassification from the selling expense account
as
noted above.
Research
and Product Development
Research
and development, or product development expenses for the three months ended
June
30, 2008 decreased by $793,559 from $739,558 for the three month period ended
June 30, 2007 to a credit of $54,001 for the three month period ended June
30,
2008. The decrease in research and development was due to the termination
of the
Core Tech agreement in the period ended March 31, 2008 and the Alkem agreement
in the period ended June 30, 2008, which were in effect during the prior
year.
This amount was partially offset by costs incurred for research and development
conducted by our subsidiary
General
and Administrative
General
and administrative expenses increased by $911,285 from $365,327 for the three
months ended June 30, 2007 to $1,276,612 for the three months ended June
30,
2008. These increases were driven by the increase in new employee costs related
the launch of generic Sevoflurane, professional fees and expenses related
to our
asset acquisition, professional fees and expenses related to operating as
a
public company, and the addition of board of director fees and
expenses.
Amortization
Amortization
expense increased $113,877 from $651 for the three months ended June 30,
2007 to
$114,528 for the three months ended June 30, 2008. This amount was due to
the
increase in intangible assets acquired by our subsidiary, FineTech
Pharmaceutical, Ltd.
Depreciation
Depreciation
expense increased $137,422 from $40,366 for the three months ended June 30,
2007
to $177,788 for the three months ended June 30, 2008. The increase was due
to
the increase in assets acquired by our subsidiary, FineTech Pharmaceutical,
Ltd.
Other
Income (Expenses)
Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
.
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
$
|
11,156
|
|
$
|
13,488
|
|
$
|
(2,332
|
)
|
|
-17
|
%
|
|
Interest
expense and penalties
|
|
|
(446,173
|
)
|
|
(62,963
|
)
|
|
(383,210
|
)
|
|
609
|
%
|
|
Loss
on Debt Restructuring
|
|
|
-
|
|
|
(188,054
|
)
|
|
188,054
|
|
|
-100
|
%
|
|
Amortization
of debt discount
|
|
|
(1,419,197
|
)
|
|
-
|
|
|
(1,419,197
|
)
|
|
n/a
|
|
|
Loss
on note conversion rate change
|
|
|
(1,510,051
|
)
|
|
-
|
|
|
(1,510,051
|
)
|
|
n/a
|
|
|
Termination
of development agreement
|
|
|
46,666
|
|
|
-
|
|
|
46,666
|
|
|
n/a
|
|
|
Other
income (expense)
|
|
|
1,773
|
|
|
5,781
|
|
|
4,088
|
|
|
-69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Expenses
|
|
$
|
(3,315,826
|
)
|
$
|
(231,748
|
)
|
$
|
(3,084,078
|
)
|
|
1331
|
%
|
Interest
Income
Interest
income decreased by $2,332 from $13,488 for the three month period ended
June
30, 2007 to $11,156 for the three month period ended June 30, 2008. The decrease
is due to lower levels of interest-bearing deposits during the
quarter.
Interest
Expense
Interest
expense increased by $383,210 from $62,963 for the three month period ended
June
30, 2007 to $446,173 for the three month period ended June 30, 2008. The
increase is due to the quarterly interest payments of $249,375 to Castlerigg
Investments, Ltd. related to our convertible debt acquired on December 31,
2007.
There are seven additional quarterly interest payments due related to the
convertible debt financing. In addition, the Company accrued a penalty due
to
original investors for approximately $190,000 during the quarter.
Amortization
of Debt Discount
Amortization
of debt discount increased by $1,419,197 from $0 for the three month period
ended June 30, 2007 to $1,419,197 for the three month period ended June 30,
2008. The increase is due to the present value discount related to our
convertible debt acquired on December 31, 2007.
Loss
on Note Conversion Rate
As
of
March 31, 2008, we failed to satisfy the EBITDA ratio of our Convertible
Note
and, as a result, the conversion price of the Convertible Note was adjusted
downward to $0.2177 per share. Based upon the new conversion price, if the
Convertible Note were converted in full, we would be required to issue
48,231,511 shares of Common Stock to the holder of the Convertible Note.
These new shares would represent approximately 42% of our then outstanding
shares of Common Stock. No further reduction in the conversion price was
required as of June 30, 2008. Notwithstanding the new conversion price, under
the terms of the Note and Warrants, the investor cannot convert the Note
or
exercise any warrants to the extent that such conversion or exercise would
result in the investor holding in excess of 4.99% of our outstanding common
stock. Since the investor presently holds 5,594,033 shares of our common
stock, it could not convert the convertible Note for an amount that would
exceed
210,101 shares, based upon 116,315,303 shares outstanding prior to such
conversion.
As
such,
the Company
estimated
the value of the convertible debenture based on the amended terms of the
Convertible Note during the first quarter of 2008. The valuation was performed
on the seventh trading day following the filing of our Form 10-Q for the
period
ended March 31, 2008. An adjustment was made during the second quarter of
2008
to true up the original estimate. The additional non-cash expense was
$1,510,051. The total non-cash expense related to the change in conversion
rate
was allocated as follows: $55,848 to Debt Discount, $5,265,729 to Loss on
Note
Conversion, and $5,321,577 to the equity component of the Note.
Termination
of Development Agreement
Termination
of a development agreement increased by $46,666 from $0 for the three month
period ended June 30, 2007 to $46,666 for the three month period ended June
30,
2008. The increase is due to the termination of the agreement with Alkem
Laboratories, Ltd. during the current quarter.
Changes
in the other income (expense) amounts not discussed above were not material
to
our operations.
Net
Loss
Net
loss
decreased by $564,556 from net loss of $6,954,155 for the three months ended
June 30, 2007 to a net loss of $6,389,599 for the three months ended June
30,
2008. The decrease in our net loss for the first three months of the current
fiscal year was due to the product purchase agreements made during the second
quarter ended June 30, 2007 in the amount of $4,400,000 not recurring in
the
second quarter ended June 30, 2008. This decrease was partially offset by
the
adjustment for the Convertible Note and increase in expenses incurred as
a
result of the launch of Sevoflurane, the asset acquisition depreciation and
amortization costs, and the formation and operating expenses of our new
subsidiary.
Results
of Operations
Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007
.
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
|
Sales
(Net of Discounts)
|
|
$
|
6,005,440
|
|
$
|
882,473
|
|
$
|
5,122,967
|
|
|
581
|
%
|
|
Cost
of Goods Sold (Net of Discounts)
|
|
|
4,947,161
|
|
|
699,499
|
|
|
4,247,662
|
|
|
607
|
%
|
|
Gross
Profit
|
|
$
|
1,058,279
|
|
$
|
182,974
|
|
$
|
875,305
|
|
|
478
|
%
|
|
Gross
Profit %
|
|
|
17.6
|
%
|
|
20.7
|
%
|
|
|
|
|
|
|
Sales
Net
sales
increased by $5,122,967 from $882,473 for the six months ended June 30, 2007
to
$6,005,440 for the six months ended June 30, 2008. This increase reflects
the
acquisition of assets of FineTech Laboratories and the opening of our
subsidiary, FineTech Pharmaceutical, Ltd., as well as quarter-over-quarter
increase in sales since the launch of our Sevoflurane product line in the
second
quarter of 2007.
Cost
of Goods Sold
Cost
of
goods sold increased by $4,247,662 from $699,499 for the six months ended
June
30, 2007 to $4,947,161 for the six months ended June 30, 2008. This increase
reflects acquisition of assets and launch of our Sevoflurane product
line.
Gross
Profit
Gross
profit increased by $875,305 from $182,974 for the six months ended June
30,
2007 to $1,058,279 for the six months ended June 30, 2008. Gross profit as
a
percentage of sales decreased for the six months ended June 30, 2008 resulting
from a transition in product mix, as well as a decrease in our average selling
price to customers during the second quarter ended June 30,
2008.
Operating
Expenses
Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007
.
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Expenses
|
|
$
|
347,805
|
|
$
|
1,235,734
|
|
$
|
(887,929
|
)
|
|
-72
|
%
|
|
Salaries,
Wages and Benefits
|
|
|
3,491,204
|
|
|
1,100,493
|
|
|
2,390,711
|
|
|
217
|
%
|
|
Research
and Development
|
|
|
8,163
|
|
|
1,549,116
|
|
|
(1,540,953
|
)
|
|
-99
|
%
|
|
Product
Purchase Agreements
|
|
|
-
|
|
|
4,400,000
|
|
|
(4,400,000
|
)
|
|
-100
|
%
|
|
General
and Administrative Expenses
|
|
|
2,156,102
|
|
|
668,393
|
|
|
1,487,709
|
|
|
223
|
%
|
|
Amortization
Expense
|
|
|
247,520
|
|
|
1,301
|
|
|
246,219
|
|
|
18925
|
%
|
|
Depreciation
Expense
|
|
|
355,040
|
|
|
77,869
|
|
|
277,171
|
|
|
356
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
$
|
6,605,834
|
|
$
|
9,032,906
|
|
$
|
(2,427,072
|
)
|
|
-27
|
%
|
Selling
Expense (Sales & Marketing)
Sales
and
marketing expense decreased by $887,929 from $1,235,734 for the six months
ended
June 30, 2007 to $347,805 for the six months ended June 30, 2008. This decrease
in sales and marketing expenses was a result of reclassification in the 2008
financial statements of approximately $1.4M from a selling expense to the
salaries, wages and benefits account. This reclassification for the interim
period ended June 30, 2008 was partially offset by an increase in selling
expenses related to higher attendance at trade shows and training requirements
of newly hired sales staff.
Salaries,
Wages and Benefits
Salaries,
wages and benefits increased by $2,390,711 from $1,100,493 for the six months
ended June 30, 2007 to $3,491,204 for the six months ended June 30, 2008.
The
increase in salaries, wages and benefits in the six months ended June 30,
2008
compared to the six months ended June 30, 2007 was due an increase in salaries,
wages and benefits due to the launch of generic Sevoflurane and related
increased operating activities. Further increase was a result of opening
our
subsidiary, FineTech Pharmaceutical, in Israel after our recent asset
acquisition, as well as a reclassification from the selling expense
account.
Research
and Product Development
Research
and development, or product development expenses for the six months ended
June
30, 2008 decreased by $1,540,953 from $1,549,116 for the six month period
ended
June 30, 2007 to $8,163 for the six month period ended June 30, 2008. The
decrease in research and development was due to the termination of the Core
Tech
agreement in the period ended March 31, 2008 and the Alkem Laboratories
agreement in the period ended June 30, 2008, which were in effect during
the
period ended June 30, 2007. This amount was partially offset by costs incurred
for research and development conducted by our subsidiary
General
and Administrative
General
and administrative expenses increased by $1,487,709 from $668,393 for the
six
months ended June 30, 2007 to $2,156,102 for the six months ended June 30,
2008.
These increases were driven by the increase in new employee costs related
the
launch of generic Sevoflurane, professional fees and expenses related to
our
asset acquisition, professional fees and expenses related to operating as
a
public company, and the addition of board of director fees and
expenses.
Amortization
Amortization
expense increased $246,219 from $1,301 for the six months ended June 30,
2007 to
$247,520 for the six months ended June 30, 2008. This amount was due to the
increase in intangible assets acquired by our subsidiary, FineTech
Pharmaceutical, Ltd.
Depreciation
Depreciation
expense increased $277,171 from $77,869 for the six months ended June 30,
2007
to $355,040 for the six months ended June 30, 2008. The increase was due
to the
increase in assets acquired by our subsidiary, FineTech Pharmaceutical,
Ltd.
Other
Income (Expenses)
Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007
.
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
|
Other
Income (Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
$
|
26,984
|
|
$
|
39,389
|
|
$
|
(12,405
|
)
|
|
-31
|
%
|
|
Interest
expense and penalties
|
|
|
(756,721
|
)
|
|
(163,361
|
)
|
|
(593,360
|
)
|
|
363
|
%
|
|
Loss
on Debt Restructuring
|
|
|
-
|
|
|
(188,054
|
)
|
|
188,054
|
|
|
-100
|
%
|
|
Amortization
of debt discount
|
|
|
(2,724,716
|
)
|
|
-
|
|
|
(2,724,716
|
)
|
|
n/a
|
|
|
Loss
on note conversion rate change
|
|
|
(5,265,729
|
)
|
|
-
|
|
|
(5,265,729
|
)
|
|
n/a
|
|
|
Termination
of development agreement
|
|
|
846,666
|
|
|
-
|
|
|
846,666
|
|
|
n/a
|
|
|
Other
income (expense)
|
|
|
(8,368
|
)
|
|
(559
|
)
|
|
(7,809
|
)
|
|
1397
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Expenses
|
|
$
|
(7,881,884
|
)
|
$
|
(312,585
|
)
|
$
|
(7,569,299
|
)
|
|
2422
|
%
|
Interest
Income
Interest
income decreased by $12,405 from $39,389 for the six month period ended June
30,
2007 to $26,984 for the six month period ended June 30, 2008. The decrease
is
due to lower levels of interest-bearing deposits during the first six
months.
Interest
Expense
Interest
expense increased by $593,360 from $163,361 for the six month period ended
June
30, 2007 to $756,721 for the six month period ended June 30, 2008. The increase
is due to the quarterly interest payments of $249,375 to Castlerigg Investments,
Ltd. related to our convertible debt acquired on December 31, 2007. We have
made
the first two interest payments. There are six additional quarterly interest
payments due related to the convertible debt financing. The additional increase
is due to the accrual of a penalty payment due to original investors in the
amount of approximately $190,000.
Amortization
of Debt Discount
Amortization
of debt discount increased by $2,724,716 from $0 for the six month period
ended
June 30, 2007 to $2,724,716 for the six month period ended June 30, 2008.
The
increase is due to the amortization of the present value discount related
to our
convertible debt acquired on December 31, 2007.
Termination
of Development Agreement
Termination
of Development Agreement increased by $846,666 from $0 for the six month
period
ended June 30, 2007 to $846,666 for the six month period ended June 30, 2008.
The increase is due to the termination of agreements with Core Tech
Technologies, Ltd. and Alkem Laboratories, ltd. during the first six months
of
the current year.
Loss
on Note Conversion Rate
As
of
March 31, 2008, we failed to satisfy the EBITDA ratio of our Convertible
Note
and, as a result, the conversion price of the Convertible Note was adjusted
downward to $0.2177 per share. Based upon the new conversion price, if the
Convertible Note were converted in full, we would be required to issue
48,231,511 shares of Common Stock to the holder of the Convertible Note.
These new shares would represent approximately 42% of our then outstanding
shares of Common Stock. Notwithstanding the new conversion price, under
the terms of the Note and Warrants, the investor cannot convert the Note
or
exercise any warrants to the extent that such conversion or exercise would
result in the investor holding in excess of 4.99% of our outstanding common
stock. Since the investor presently holds 5,594,033 shares of our common
stock, it could not convert the convertible Note for an amount that would
exceed
210,101 shares, based upon 116,315,303 shares outstanding prior to such
conversion.
As
such,
the Company
estimated
the value of the convertible debenture based on the amended terms of the
Convertible Note during the first quarter of 2008. The valuation was performed
on the seventh trading day following the filing of our Form 10-Q for the
period
ended March 31, 2008. An adjustment was made during the second quarter of
2008
to true up the original estimate. The additional non-cash expense was
$1,510,051. The total non-cash expense related to the change in conversion
rate
was allocated as follows: $55,848 to Debt Discount, $5,265,729 to Loss on
Note
Conversion, and $5,321,577 to the equity component of the Note.
Changes
in the other income (expense) amounts not discussed above were not material
to
our operations.
Net
Loss
Net
loss
increased by $4,266,922
from
net
loss of $9,162,517 for the six months ended June 30, 2007 to a net loss of
$13,429,439 for the six months ended June 30, 2008. The increase in our net
loss
for the first three months of the current fiscal year was due to the non-cash
loss on the note conversion ($5,265,729) and non-cash amortization of the
debt
discount associated with the convertible note ($2,724,716), which was partially
offset by a non-cash gain in an accounts payable write off ($800,000) during
the
first quarter of 2008. In addition, the increase was attributed to the increased
expenses incurred as a result of our recent launch of Sevoflurane, the asset
acquisition depreciation and amortization costs, and the formation and operating
expenses of our new subsidiary.
Liquidity
and Capital Resources
As
of
June 30, 2008, we had current assets of $14,687,909, including cash and
equivalents of $2,654,837, accounts receivable of $1,779,955, inventory of
$9,549,396 and other current assets of $703,721. As of June 30, 2008, we
had
current liabilities of $17,135,000, consisting primarily of accounts payable
of
$10,629,478, accrued rebates of $729,647, accrued expenses of $795,449, notes
payable to NPIL of $3,000,000, and notes payable to former preferred
shareholders of $1,519,546. As a result, at June 30, 2008, we had a working
capital deficit of $2,447,091.
Net
cash
used in operating activities was $3,680,235 and $6,195,728 for the six months
ended June 30, 2008 and 2007, respectively. The decrease in net cash used
in
operating activities in the first six months of the current year resulted
from
increased reliance on our suppliers (increase in accounts payable), which
was
partially offset by an increase in inventory and accounts
receivables.
Net
cash
used in investing activities was $6,602,096 and $905,549 for the six months
ended June 30, 2008 and 2007, respectively. Cash used in investing activities
consisted primarily of purchases of assets through our subsidiary, FineTech
Pharmaceutical, Ltd. on January 4, 2008.
We
have
funded our operating losses primarily from proceeds from the sale of our
common
stock and proceeds from the issuance of convertible debentures and notes
payable
to related parties.
Net
cash
provided by financing activities was $2,823,584 for the six months ended
June
30, 2008 is comprised mostly of funds received from the issuance of a note
during the second quarter in the amount of $3,000,000. This amount is partially
offset by cash payments for interest and principal related to a severance
agreement.
Going
Concern Uncertainty
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. The Company has incurred losses
since inception and may continue to incur losses for the foreseeable future.
These conditions raise substantial doubt about the ability of the Company
to
continue as a going concern. The Company’s business plan anticipates that its
near future activities will be funded from the issuance of additional equity
or
debt and funds provided by ongoing operations.
Immediately
following the Merger, the Company raised $10,703,092 in gross proceeds of
equity
capital and converted $1,899,273 of convertible debentures through the issuance
of 21,003,959 units in a private placement offering of its securities. In
addition, the Company received proceeds of $10,500,000 from the issuance
of a
senior secured convertible note on December 31, 2007. As of June 30, 2008,
the
Company currently had cash and cash equivalents of $2,654,837.
If
sales
continue to be insufficient to support planned development of new products
and
expansion of operations, the Company will need to access additional equity
or
debt capital. If public or private financing is not available when needed
or is
not available on terms acceptable to the Company, the Company’s growth and
revenue-generating plans may be materially impaired. Such results could have
a
material adverse effect on the Company’s financial condition, results of
operations and future prospects. The consolidated financial statements do
not
include any adjustments that might result from the outcome of these
uncertainties.
Critical
Accounting Estimates and Policies
Cash
and Cash Equivalents.
Cash and
cash equivalents include highly liquid investments with a maturity of three
months or less.
Accounts
Receivable.
We
record our accounts receivable at the original invoice amount less an allowance
for doubtful accounts and less any applicable difference between the wholesale
acquisition cost price and the negotiated contract price (rebate amount).
We
also adjust the receivable amount for a discount allowance for timely payments.
An account receivable is considered to be past due if any portion of the
receivable balance is outstanding beyond its scheduled due date. On a quarterly
basis, we evaluate our accounts receivable and establish an allowance for
doubtful accounts, based on our history of past write-offs and collections,
and
current credit conditions. No interest is accrued on past due accounts
receivable. Payment discounts are recorded against sales at the end of each
period to the extent they remain eligible against the corresponding receivable.
Customers are given payment discounts of between 2% and 3% for making payments
within a range of 30 to 45 days.
Inventories.
Inventories
are stated at the lower of cost (first-in, first-out) or market. A reserve
for
slow-moving and obsolete inventory is established for all inventory deemed
potentially non-saleable by management in the period in which it is determined
to be potentially non-saleable. The current inventory is considered properly
valued and saleable. We concluded that there was no need for a reserve for
slow
moving and obsolete inventory at June 30, 2008.
Property
and Equipment.
Property
and Equipment are stated at cost less accumulated depreciation. Expenditures
related to repairs and maintenance that are not capital in nature are expensed
in the period incurred. Appropriate gains and or losses related to the
disposition of property and equipment are realized in the period in which
such
assets are disposed. Depreciation is computed using the straight-line method
over the following estimated useful lives:
|
Category
|
|
Useful Life
|
|
Furniture
and Fixtures
|
|
3-7 years
|
|
Computer
Equipment
|
|
5 years
|
|
Software
|
|
3 years
|
|
Machinery
and Equipment
|
|
7-10 years
|
|
Product
(vaporizers)
|
|
2 years
|
Revenue
Recognition.
We
recognize revenue from product sales when the goods are received by the
customer, resulting in the transfer of title and risk of loss. We sell our
products to some wholesalers at the wholesale acquisition cost price and
to some
wholesalers at a negotiated contract price. Upon sale to wholesalers who
operate
based on the WAC price, the wholesale acquisition cost price less an allowance
for the difference between the wholesale acquisition cost price and the contract
price (rebate amount), is recorded based on the maximum calculated rebate
amount
which is treated as a sales revenue offset. Upon sale of our product by the
wholesaler using the wholesale acquisition cost price, we are invoiced for
the
difference between the wholesale acquisition cost and the contract price
and
create a credit note for the difference. The credit notes are then reconciled
with the sales revenue offset. Sales at negotiated contract prices, as opposed
to wholesale acquisition costs, are recognized at the negotiated contract
price.
FineTech
Pharmaceutical, Ltd. generates its revenues mainly from sales of chemical
compounds for the use in the manufacturing of pharmaceutical products and
from
granting an exclusive right of supply. Revenues from chemical compounds are
recognized upon delivery in accordance with Staff Accounting Bulletin No.
104
"Revenue Recognition" ("SAB 104"), when persuasive evidence of an agreement
exists, delivery of the product has occurred, the fee is fixed or determinable
and collectibility is probable. The Company does not have any significant
obligations after delivery. Amounts received from granting exclusive rights
to
the manufacturing and production outputs are recognized throughout the terms
period. The Company also generates revenues from sales of professional services
including consulting. Service revenues are recognized as work is
performed.
Earnings
Per Share
.
We have
adopted the provisions of SFAS No. 128, “Earnings Per Share.” Basic earnings or
loss per share is computed by dividing income or loss (numerator) applicable
to
common stockholders by the weighted number of common shares outstanding
(denominator) for the period. Diluted earnings per share assumes the exercise
or
conversion of all dilutive securities.
Share
Based Payments.
We
use
the Black-Scholes valuation model to estimate the fair value of our stock
options and warrants. The model requires judgment in various assumptions,
including estimated stock price volatility, forfeiture rates and expected
life.
Prior to our reverse merger on July 13, 2007, we were privately held and
did not
have an internal or external market for our shares and therefore we did not
have
sufficient information available to support an estimate of our stock’s expected
volatility and share prices. In accordance with FAS 123(R), we identified
a
similar public entity for which sufficient share price information was available
and used that information for estimating our expected volatility.
Research
and Development Costs
.
All
costs related to research and development and product development are expensed
as incurred. These costs include labor and other operating expenses related
to
product development, as well as costs to obtain regulatory
approval.
Advertising.
We
expense advertising as incurred.
Accounting
Estimates
.
The
process of preparing financial statements in conformity with accounting
principles generally accepted in the U.S. requires the use of estimates and
assumptions regarding certain types of assets, liabilities, sales, and expenses.
Such estimates primarily relate to unsettled transactions and events as of
the
date of the financial statements. Accordingly, actual results may differ
from
estimated amounts.
Concentration
of Credit Risk
.
Financial instruments that potentially subject us to concentration of credit
risk consist of cash accounts in financial institutions. Although the cash
accounts exceed the federally insured deposit amount, we do not anticipate
nonperformance by the financial institutions.
Shipping
and Handling
.
We
record shipping and handling expenses in the period in which they are incurred
and are included in the cost of goods sold.
Recent
Accounting Pronouncements
Recently
issued FASB Statements or Interpretations, Securities and Exchange Commission
or
SEC Staff Accounting Bulletins, and AICPA Emerging Issue Task Force Consensuses
have either been implemented or are not applicable to the Company during
the
current quarter.
Item
3. Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed in our Company's reports
filed
or submitted under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commission's rules
and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed
in
our Company's reports filed under the Exchange Act is accumulated and
communicated to management, including our Company's president and chief
executive officer as appropriate, to allow timely decisions regarding required
disclosure.
Evaluation
of disclosure controls and procedures
Rules
13a-15(e) and 15d-15(e) under the Exchange Act, require management to carry
out
an evaluation of the effectiveness of our Company's disclosure controls and
procedures as of the end of the period covered by this quarterly report,
being
June 30, 2008. As a result of our recent merger, management has not carried
out
such an evaluation, nor has management concluded that our Company's disclosure
controls and procedures are effective or ineffective as the end of this
quarterly report.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
The
Company's management did not assess the effectiveness of the Company's internal
control over financial reporting as of June 30, 2008 in accordance with a
recognized framework, due to its lack of resources. However, we have
identified what we believe to be material weaknesses in our internal controls.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company's annual or interim financial
statements will not be prevented or detected on a timely basis.
The
material weaknesses identified were (i) lack of segregation of duties, and
(ii)
lack of sufficient personnel and/or resources with generally accepted accounting
principals (GAAP) and tax accounting expertise. These control deficiencies
resulted in audit adjustments to the Company's 2007 annual financial statements.
Accordingly, management has determined that these control deficiencies
constitute material weaknesses.
Because
of these material weaknesses, management concluded that the Company did not
maintain effective internal control over financial reporting as of June 30,
2008.
Significant
changes in internal controls
There
have been significant changes in our Company's internal controls over financial
reporting that occurred during the period covered by this quarterly report
that
have materially affected, or are reasonably likely to materially affect,
our
internal control over financial reporting.
The
changes were made
to
enhance and strengthen the financial reporting department of the
Company
.
The
changes included additional finance and accounting personnel, creation
of
documentation of policies and procedures for all levels of employees that
affect
financial reporting, and further segregation of duties within the financial
reporting department.
Although
the Company has made the changes noted above, it still believes that the
material weaknesses noted above exist. The Company will continue to improve
its
compliance in future quarters.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
The
Company is not involved or subject to any legal proceedings which could have
a
material adverse effect upon its operations or financial condition.
Item
2. Unregistered Sales of Equity Securities.
On
January 4, 2008, the Company issued 18,632,383 shares of common stock for
a
total valuation of $13,330,139 for a non-competition undertaking and assignment
of royalty rights. These shares were issued to Dr. Arie Gutman, who currently
serves as President of our FineTech subsidiary and a member of our Board
of
Directors.
On
February 7, 2008, the Company issued 1,000,000 shares of common stock to
a
third-party consultant at forty-six cents ($0.46) per share for a total value
of
$460,000 for a consulting agreement.
With
respect to the foregoing transactions, the Company relied upon exemptions
from
registration for the issuances of the securities provided under Section 4(2)
for
transactions not involving a public offering.
Item
3. Defaults Upon Senior Securities.
As
of
June 30, 2008, the Company failed to satisfy both the Higher and Lower EBITDA
ratios as required under our related to its Convertible Note with Castlerigg
Master Investments, Ltd. As a result, the Company is now in default of the
terms
of the Convertible Note. Based upon the event of default, the Convertible
Note
may be redeemed in part or in full by the holder at a price equal to the
greater
of (i) the product of (A) the conversion amount to be redeemed and (b) the
redemption premium (principal and interest) and (ii) the product of (a) the
conversion rate with respect to such conversion amount in effect at such
time as
the holder delivers an event of default redemption notice and (b) the product
of
(1) the equity value redemption premium and (2) the greatest closing sale
price
of the common stock during the period beginning on the date immediately
preceding such event of default and ending on the date the holder delivers
the
event of default redemption notice. Furthermore, as a result of the default
the
Company must now accrue and pay an interest rate of 15% per annum until the
default is cured. The default may be cured and the interest rate adjusted
down
to the 9.50% per annum by meeting future EBITDA requirements.
We
are currently in discussion with the holder of the
note (Castlerigg Master Investments) regarding the default. There can be
no
assurance that the holder will agree to amend the terms of the loan or waive
any
default.
Item
4. Submission of Matters to a Vote of Security Holders.
Information
presented in the following paragraphs relates to the convening of an annual
meeting of shareholders, and the matters voted upon, including the election
of
directors.
The
Company’s Annual Meeting was held on June 4, 2008 at the Hilton Airport
conference center in Newark, New Jersey.
The
shareholders, either in person or by proxy, voted as listed below on the
matters
presented in the Company’s Proxy Statement.
Proposal
No. 1
:
Election of Directors for a term expiring at the 2009 annual meeting of
stockholders.
|
Name:
|
Peter
W. Williams
|
|
For
|
59,299,209
|
|
Abstain/Withhold
|
11,662,542
|
|
Name:
|
Mark
Auerbach
|
|
For
|
60,808,644
|
|
Abstain/Withhold
|
10,153,107
|
|
Name:
|
Jonathan
Houssian
|
|
For
|
70,103,418
|
|
Abstain/Withhold
|
858,333
|
|
Name:
|
David
Rector
|
|
For
|
70,070,085
|
|
Abstain/Withhold
|
891,666
|
|
Name:
|
Frank
Leo
|
|
For
|
70,103,418
|
|
Abstain/Withhold
|
858,333
|
|
Name:
|
Arie
Gutman
|
|
For
|
70,070,085
|
|
Abstain/Withhold
|
891,666
|
|
Name:
|
Daniel
Chen
|
|
For
|
65,878,572
|
|
Abstain/Withhold
|
5,083,179
|
Proposal
No. 2
:
Approval of a reverse stock split of 1 share for up to each twenty (20) shares
of common stock issued and outstanding, subject to the final ratio to be
determined by the Board of Directors at the time of the reverse split.
The
Board
has not yet determined the ratio of the reverse stock split as of the date
of
this Form 10-Q.
|
For
|
59,368,514
|
|
Against
|
10,537,316
|
|
Abstain/Withhold
|
1,055,921
|
Proposal
No. 3
:
Approval of the 2007 Incentive Stock Plan
|
For
|
69,782,451
|
|
Against
|
1,179,300
|
|
Abstain/Withhold
|
1,112,238
|
Proposal
No. 4
:
Ratification of HJ & Associates, LLC as the Company’s
independent registered public accounting firm for the fiscal year ending
December 31, 2008.
|
For
|
70,927,918
|
|
Against
|
33,833
|
|
Abstain/Withhold
|
132,659
|
No
other
matters than those presented in the Company’s Proxy Statement were voted upon
during the Annual Meeting.
Item
5. Other Information.
None.
Item
6. Exhibits.
(a)
Exhibits:
|
|
31.1
|
|
Certification
of principal executive officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
|
Certification
of principal financial officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
|
Certification
of principal executive officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
32.2
|
|
Certification
of principal financial officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Registrant caused
this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
RXELITE,
INC.
|
|
|
|
|
|
Date: August
14, 2008
|
By:
|
/s/ Jonathan
Houssian
|
|
|
|
Jonathan
Houssian
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
Date: August
14, 2008
|
By:
|
/s/
Shannon M. Stith
|
|
|
|
Shannon
M. Stith
|
|
|
|
Vice
President Finance
|
|
|
|
(Principal
Financial Officer)
|
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