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 March 31, 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 May 15, 2008
|
|
Common
Stock, $0.001 Par Value
|
|
116,315,303
|
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
FORM
10-Q
TABLE
OF CONTENTS
|
PART
I - FINANCIAL INFORMATION
|
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Item
1.
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Financial
Statements
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3
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Condensed
Consolidated Balance Sheets, March 31, 2008 (unaudited) and December
31, 2007
(audited)
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3
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Condensed
Consolidated Statements of Operations for the Three Months
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ended
March 31, 2008 and 2007 (unaudited)
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4
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Condensed
Consolidated Statements of Cash Flows for the Three Months
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ended
March 31, 2008 and 2007 (unaudited)
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5
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Notes
to Condensed Consolidated Financial Statements
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6
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Item
2.
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Management’s
Discussion and Analysis or Plan of Operations
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20
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Item
3.
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Controls
and Procedures
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25
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Part
II - OTHER INFORMATION
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Item
1.
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Legal
proceedings.
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26
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Item
2.
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Unregistered
Sales of Equity Securities and use of Proceeds
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26
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Item
3.
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Defaults
Upon Senior Securities.
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26
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Item
4.
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Submission
of Matters to a Vote of Security Holders.
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26
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Item
5.
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Other
Information.
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26
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Item
6.
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Exhibits
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27
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PART
1 - FINANCIAL INFORMATION
Item
1. Financial Statements
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
Condensed
Consolidated Balance Sheets
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|
|
March
31,
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December
31,
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2008
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2007
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(Unaudited)
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(Audited)
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ASSETS
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Current
Assets:
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Cash
and cash equivalents
|
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$
|
1,081,048
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$
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10,113,584
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Accounts
receivable, net
|
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2,176,346
|
|
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494,762
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Related
party accounts receivable
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262,578
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465,378
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Related
party receivable
|
|
|
-
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8,945
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Inventory
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9,658,516
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7,353,339
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Prepaid
expenses
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953,535
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94,272
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Total
Current Assets
|
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14,132,023
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18,530,280
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Fixed
Assets, Net
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6,201,377
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1,832,573
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Intangible
Assets, Net
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5,510,456
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67,194
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Goodwill
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10,678,793
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-
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Other
Assets:
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|
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Restricted
deposits
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686,872
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682,680
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Other
assets
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200,577
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153,638
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Total
Other Assets
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887,449
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836,318
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TOTAL
ASSETS
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$
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37,410,098
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$
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21,266,365
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Current
Liabilities:
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Accounts
payable
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$
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9,262,073
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$
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5,720,737
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Accrued
rebates
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900,179
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273,148
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Notes
payable - related party
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100,000
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100,000
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Accrued
payroll and associated liabilities
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749,765
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673,918
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Current
portion of severance obligation
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318,518
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334,009
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Current
portion of capital lease obligations
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42,852
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43,433
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Payable
to former preferred stockholders, net
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1,291,769
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-
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Total
Current Liabilities
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12,665,156
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7,145,245
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Long
Term Liabilities:
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Severance
obligation
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395,451
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455,881
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Payable
to former preferred stockholders, net
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-
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1,255,692
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Capital
lease obligations
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47,616
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56,904
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Senior
secured convertible note, net of discount of $9,194,481 and
$10,444,152,
respectively
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1,305,519
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55,848
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Total
Long Term Liabilities
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1,748,586
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1,814,325
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Total
Liabilities
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14,413,742
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8,959,570
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Stockholders'
Equity:
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Preferred
stock, $0.01 Par Value, 1,000,000 Shares Authorized, 0 Shares
Issued
and Outstanding
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-
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-
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Common
stock, $0.001 Par Value, 200,000,000 Shares Authorized,
116,315,303
and 96,682,920 Shares Issued and Outstanding, respectively
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116,315
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96,683
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Additional
paid-in capital
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58,555,561
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40,845,792
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Accumulated
deficit
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(35,675,520
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)
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(28,635,680
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)
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Total
Stockholders' Equity
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22,996,356
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12,306,795
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TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
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$
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37,410,098
|
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$
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21,266,365
|
|
See
notes
to Condensed Consolidated Financial Statements
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
|
Three Months Ended
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March 31,
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2008
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2007
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REVENUES,
(Net of discounts and allowances of $1,079,594 and $18,694,
respectively)
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$
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2,999,403
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$
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146,873
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COST
OF SALES
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2,642,142
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139,245
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GROSS
PROFIT
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357,261
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7,628
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OPERATING
EXPENSES
|
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Selling
expense
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144,967
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450,733
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Salaries,
wages, and benefits expense
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1,366,705
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533,643
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Research
and development
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154,356
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809,558
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General
and administrative expense
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854,771
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303,066
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Amortization
expense
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132,992
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|
650
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Depreciation
expense
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177,252
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37,503
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Total
Operating Expense
|
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2,831,043
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2,135,153
|
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|
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LOSS
FROM OPERATIONS
|
|
|
(2,473,782
|
)
|
|
(2,127,525
|
)
|
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|
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|
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OTHER
INCOME (EXPENSE)
|
|
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Interest
Income
|
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15,828
|
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|
25,901
|
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Interest
expense and penalties
|
|
|
(310,548
|
)
|
|
(100,398
|
)
|
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Amortization
of debt discount
|
|
|
(1,305,519
|
)
|
|
-
|
|
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Loss
on note conversion rate change
|
|
|
(3,755,678
|
)
|
|
-
|
|
|
Termination
of development agreement
|
|
|
800,000
|
|
|
-
|
|
|
Other
expense
|
|
|
(10,141
|
)
|
|
(6,340
|
)
|
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Total
Other Income (Expense)
|
|
|
(4,566,058
|
)
|
|
(80,837
|
)
|
|
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|
|
|
|
|
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NET
LOSS
|
|
$
|
(7,039,840
|
)
|
$
|
(2,208,362
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.06
|
)
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
115,078,715
|
|
|
36,861,241
|
|
See
Notes
to Condensed Consolidated Financial Statements
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2008
|
|
2007
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(7,039,840
|
)
|
$
|
(2,208,362
|
)
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to Reconcile Net Loss to Net Cash Used in Operating
Activities:
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
469,240
|
|
|
38,153
|
|
|
Amortization
of debt discount
|
|
|
1,305,519
|
|
|
-
|
|
|
Amortization
of capitalized costs
|
|
|
28,654
|
|
|
-
|
|
|
Amortization
of prepaid expenses
|
|
|
160,000
|
|
|
-
|
|
|
Fair
value of stock options issued and vesting
|
|
|
127,737
|
|
|
-
|
|
|
Subscription
Shares Issued for Employee Compensation
|
|
|
-
|
|
|
15,229
|
|
|
Subscription
Shares Issued for Services
|
|
|
-
|
|
|
3,495
|
|
|
Termination
of development agreement
|
|
|
(800,000
|
)
|
|
-
|
|
|
Loss
on note conversion rate change
|
|
|
3,755,678
|
|
|
|
|
|
Decrease
(Increase) in Operating Assets
|
|
|
|
|
|
|
|
|
Accounts
and Related Party Receivables, Net
|
|
|
(1,672,639
|
)
|
|
(1,447
|
)
|
|
Inventory
|
|
|
(2,782,444
|
)
|
|
(451,270
|
)
|
|
Prepaid
Expenses
|
|
|
(599,263
|
)
|
|
10,636
|
|
|
Capitalized
Costs
|
|
|
(75,592
|
)
|
|
-
|
|
|
Other
Assets
|
|
|
(4,192
|
)
|
|
(141,171
|
)
|
|
Increase
(Decrease) in Operating Liabilities
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
4,341,336
|
|
|
(1,059,974
|
)
|
|
Accrued
Expenses
|
|
|
738,953
|
|
|
116,729
|
|
|
Net
Cash Used in Operating Activities
|
|
|
(2,006,853
|
)
|
|
(3,677,981
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Cash
paid for acquisition costs
|
|
|
(186,500
|
)
|
|
-
|
|
|
Purchase
of assets
|
|
|
(6,763,393
|
)
|
|
(167,283
|
)
|
|
Net
Cash Used in Investing Activities
|
|
|
(6,949,893
|
)
|
|
(167,283
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from Issuance of Common Stock and Common Stock Subscribed
|
|
|
-
|
|
|
2,249,947
|
|
|
Proceeds
from Convertible Debentures/Notes Payable/Capital leases
|
|
|
-
|
|
|
|
|
|
Payments
on Convertible Debentures/Notes Payable/Capital leases
|
|
|
(75,790
|
)
|
|
(106,719
|
)
|
|
Net
Cash Used by Financing Activities
|
|
|
(75,790
|
)
|
|
2,143,228
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
$
|
(9,032,536
|
)
|
$
|
(1,702,036
|
)
|
|
Cash
and Cash equivalents, Beginning of Period
|
|
|
10,113,584
|
|
|
2,403,144
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$
|
1,081,048
|
|
$
|
701,108
|
|
See
notes
to Condensed Consolidated Financial Statements
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 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 pursuant to which it purchased substantially all of the assets of
FineTech Laboratories, Ltd., a privately held company organized under the laws
of the State of Israel (“FineTech”).
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2008
(Unaudited)
NOTE
2 - BASIS OF PRESENTATION
The
interim financial information of the Company as of March 31, 2008 and March
31, 2007 is unaudited. The balance sheet as of December 31, 2007 is derived
from audited financial statements. 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 months ended March 31, 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.
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 Reverse Merger, which we completed on July 13, 2007, the Company
raised $10,703,092 of equity capital and converted $1,899,273 of convertible
debentures through the issuance of 21,003,959 units in a private placement.
In addition, the Company raised additional gross proceeds in the
amount of $10,500,000 through the sale of shares of our common
stock, a senior secured convertible note and related common stock
warrants completed on December 31, 2007.
If
sales
are 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 March 31, 2008, the Company’s accounts receivable was
$2,176,346, net of allowances for doubtful accounts and payment discounts of
$4,242, and $50,840, 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 is due from a supplier. At March 31, 2008, the
Company continued to have $262,578 of this receivable outstanding. In March
2008, the Company received product from our supplier worth $202,800. The amount
of the received product was offset against the then outstanding receivable
amount.
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2008
(Unaudited)
NOTE
6 – FIXED ASSETS
RxElite,
Inc.
Assets
and depreciation as of March 31, 2008 and December 31, 2007 are as
follows:
|
|
|
March 31,
2008
|
|
December 31,
2007
|
|
|
Equipment
|
|
$
|
131,494
|
|
$
|
-
|
|
|
Furniture,
Fixtures, and Office Equipment
|
|
|
32,452
|
|
|
163,945
|
|
|
Building
(in construction)
|
|
|
493,202
|
|
|
483,407
|
|
|
Computer
hardware and software
|
|
|
761,670
|
|
|
758,123
|
|
|
Product
(vaporizers)
|
|
|
2,514,019
|
|
|
959,856
|
|
|
Installation
Costs (vaporizers)
|
|
|
69,860
|
|
|
-
|
|
|
Gross
Fixed Assets
|
|
|
4,002,687
|
|
|
2,365,331
|
|
|
Accumulated
Depreciation
|
|
|
(786,192
|
)
|
|
(532,758
|
)
|
|
Total
Fixed Assets
|
|
$
|
3,216,495
|
|
$
|
1,832,573
|
|
FineTech
Pharmaceutical, Ltd.
Assets
and depreciation as of March 31, 2008 are as follows:
|
|
|
March 31,
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
|
|
|
(111,468
|
)
|
|
Total
Fixed Assets
|
|
$
|
2,984,882
|
|
Summary
:
|
|
|
March 31,
2008
|
|
December
31, 2007
|
|
|
Equipment
|
|
$
|
2,770,414
|
|
$
|
-
|
|
|
Furniture,
Fixtures, and Office Equipment
|
|
|
139,982
|
|
|
163,945
|
|
|
Building
(includes in construction)
|
|
|
776,302
|
|
|
483,407
|
|
|
Computer
hardware and software
|
|
|
790,070
|
|
|
758,123
|
|
|
Product
(vaporizers)
|
|
|
2,514,019
|
|
|
959,856
|
|
|
Installation
Costs (vaporizers)
|
|
|
69,860
|
|
|
-
|
|
|
Other
|
|
|
38,400
|
|
|
-
|
|
|
Gross
Fixed Assets
|
|
|
7,099,037
|
|
|
2,365,331
|
|
|
Accumulated
Depreciation
|
|
|
(897,660
|
)
|
|
(532,758
|
)
|
|
Total
Fixed Assets
|
|
$
|
6,201,377
|
|
$
|
1,832,573
|
|
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 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 March 31, 2008 and December 31,
2007 are as follows:
|
|
|
March 31,
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
|
|
|
(8,673
|
)
|
|
(7,806
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
Intangible Assets
|
|
$
|
66,327
|
|
$
|
67,194
|
|
FineTech
Pharmaceutical, Ltd.
Intellectual
property consists of four patents.
Patent
valuations at March 31, 2008 are as follows:
|
Patent
Valuation
|
|
$
|
5,547,600
|
|
|
Gross
Carrying Value
|
|
|
5,547,600
|
|
|
Less
Accumulated Amortization
|
|
|
(103,471
|
)
|
|
|
|
|
|
|
|
Total
Intangible Assets
|
|
$
|
5,444,129
|
|
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 March 31, 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.
(Formerly
Southridge Technology Group, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 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 March 31, 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 RxElite
Holdings’ 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. 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 $1,291,769 and $1,255,692
at
March 31, 2008 and December 31, 2007, respectively.
NOTE
11 - EQUITY TRANSACTIONS
Common
Stock
On
January 4, 2008, the Company issued 18,632,383 shares of common stock for a
total valuation of $13,330,139 in connection with the acquisition of assets
from
FineTech Laboratories.
On
February 7, 2008, the Company issued 1,000,000 shares of common stock at
forty-six cents ($0.46) per share for a total of $460,000 related to
services being provided under a consulting agreement. (See Note
20.)
Stock
Options
On
January 16, 2008, the Company entered into an employment agreement with a member
of its management team. The Company issued an option to purchase 75,000 shares
of common stock with an exercise price of $0.58 per share for a total value
of
$17,960.
On
January 11, 2008, the Company entered into an employment agreement with a member
of its management team. The Company issued an option to purchase 250,000 shares
of common stock with an exercise price of $0.87 per share for a total value
of
$45,786.
On
February 7, 2008, the Company issued an option to purchase 25,000 shares of
common stock with an exercise price of $0.49 per share for a total value of
$6,485 to a non-executive employee.
On
February 7, 2008, the Board of Directors appointed a new member to the Board.
The Company issued an option to purchase 400,000 shares of common stock with
an
exercise price of $0.49 per share for a total value of $177,422.
On
February 7, 2008, the Board of Directors issued options to purchase 1,030,000
shares of common stock with an exercise price of $0.49 per share for a total
value of $456,861 to various employees of its subsidiary, FineTech
Pharmaceutical, Ltd.
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2008
(Unaudited)
NOTE
11 - EQUITY TRANSACTIONS (CONT.)
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 $127,737 has been reflected
in
the accompanying financial statements at March 31, 2008.
The
following table summarizes the stock option and warrant activity during the
three months ended March 31, 2008:
|
|
|
Derivative
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding
at December 31, 2007
|
|
|
48,068,303
|
|
$
|
0.91
|
|
|
Granted
|
|
|
1,780,000
|
|
|
0.26
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
Expired/Cancelled
|
|
|
(11,213
|
)
|
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2008
|
|
|
49,837,090
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable at
March
31, 2008
|
|
|
27,118,257
|
|
$
|
0.79
|
|
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 quarterly period ended March 31,
2008
in the amount of $1,305,519. The remaining debt discount will be amortized
over
the next seven 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, 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 because it is dependent upon the occurrence of one or more future
events. This amount could 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.
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2008
(Unaudited)
NOTE
14 – LOSS PER SHARE
The
computation of basic loss per common share is based on the weighted average
number of shares outstanding during the period. The computation of loss 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
March 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
Weighted
average number of common shares outstanding
|
|
|
115,078,715
|
|
|
36,861,241
|
|
|
Dilutive
effect of options and warrants
|
|
|
-
|
|
|
-
|
|
|
Weighted
average number of common shares outstanding, assuming dilution
|
|
|
115,078,715
|
|
|
36,861,241
|
|
No
options or warrants are included in the computation of weighted average number
of shares because the effect would be anti-dilutive. At March 31, 2008, the
Company had outstanding options and warrants to purchase a total of 49,837,090
common shares that could have a future dilutive effect on the calculation of
earnings per share.
NOTE
15 – ASSET ACQUISITION
On
January 4, 2008, the Company acquired all of the assets of FineTech
Laboratories, Ltd., a company organized under the laws of the State of Israel
(“FineTech”), other than certain specifically excluded assets, pursuant to an
Asset Purchase Agreement (the “Purchase Agreement”) dated as of January 4, 2008,
for an aggregate purchase price of $27,254,593, comprised of $6,200,000 cash
and
18,632,383 shares of common stock valued
at
$1.13 per share. The purchase price of the assets was determined by review
of
other transactions within the industry and mutually agreed upon by both
parties.
The
purchased assets of FineTech are used and will be used in the future to develop
active pharmaceutical ingredients (APIs). The
API
products produced in our facility are marketed and sold through direct contact
with leading pharmaceutical companies worldwide, and through participation
in
major international chemical and pharmaceutical conferences.
The
companies that compete with our API business include Teva Pharmaceuticals
Industries, Ltd., Aurobindo Pharma India and several international chemical
companies. Cabergoline accounts for the majority of the API sales. The sales
cycle for APIs is usually 6-18 months. We are working to diversify our API
customer base in 2008 and 2009 by offering our API products that are primarily
sold in the U.S. to non-U.S. markets that have similar regulations, product
demand and numbers of competitors.
Pursuant
to the Purchase Agreement, FineTech agreed to provide termination notice to
all
of its employees and the Company agreed simultaneously to present all
such employees an offer to become the employees of the Company, under terms
similar to those applicable to their employment by FineTech.
As
part
of the purchase, on January 4, 2008, the Company entered into an Employment
Agreement (the “Employment Agreement”) with Dr. Arie L. Gutman, engaging Dr.
Gutman to serve as the President of RxElite’s wholly owned subsidiary, FineTech
Pharmaceutical Ltd., a company organized under the laws of the State of Israel
which holds the assets acquired and operates the business.
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2008
(Unaudited)
NOTE
15 – ASSET ACQUISITION (CONT.)
The
initial term of the Employment Agreement is three years and may be extended
by
the mutual agreement of both RxElite and Dr. Gutman. Pursuant to the Employment
Agreement, Dr. Gutman is to receive an annual base salary of $190,000, which
may
be increased annually as determined by the Board of Directors of RxElite (the
“Board”). Dr. Gutman will be entitled to receive a bonus of up to thirty percent
(30%) of his base salary, to be determined by the Board in its sole discretion.
Dr. Gutman is eligible for grants of options, restricted stock and/or other
awards under the RxElite, Inc. 2007 Incentive Stock Plan. The Employment
Agreement provides that any such option grants shall immediately vest if Dr.
Gutman’s employment is terminated by RxElite without cause or upon the
occurrence of a Change of Control (as defined in the Employment Agreement)
of
RxElite.
RxElite
may terminate Dr. Gutman’s employment for cause (as defined in the Employment
Agreement) 30 days after RxElite notifies Dr. Gutman of the cause, provided
that
such cause has not been remedied during such 30 days period. RxElite may also
terminate Dr. Gutman’s employment without cause at any time upon 30 days prior
written notice. If Dr. Gutman’s employment is terminated without cause, then (i)
any unvested stock options held by Dr. Gutman shall immediately vest, (ii)
RxElite will be obligated to continue to pay Dr. Gutman his then current annual
base salary for a period of twelve (12) months, and (iii) RxElite shall
reimburse Dr. Gutman for the costs of obtaining benefits comparable to those
that he received while employed by RxElite, until twelve (12) months following
his termination or, if sooner, until such time as Dr. Gutman obtains other
employment that provides comparable benefits. Dr. Gutman may voluntarily
terminate his employment under the Employment Agreement upon 270 days prior
written notice to RxElite, if such termination occurs during the initial three
year term, or upon 60 days notice, if such termination occurs thereafter. Upon
RxElite’s receipt of any such notice of voluntary termination by Dr. Gutman,
RxElite may accelerate the resignation to an earlier date. Under the Employment
Agreement, Dr. Gutman is prohibited from competing with RxElite and any of
its
subsidiaries during the term of employment and for one year after any
termination of his employment.
In
connection with the Purchase Agreement, RxElite entered into an Assignment
&
Non-Competition Agreement, dated as of January 4, 2008 (the “Gutman Agreement”),
with Dr. Arie Gutman, an Israeli citizen and the sole owner of FineTech.
Pursuant to the Gutman Agreement, Dr. Gutman agreed not to engage in certain
activities that would be competitive with the business of RxElite or its
subsidiaries. The Gutman Agreement also provided for the assignment from Dr.
Gutman to RxElite of certain royalty rights that FineTech had granted Dr.
Gutman. In consideration for Dr. Gutman’s non-competition undertaking and
assignment of royalty rights, the Gutman Agreement provided that RxElite issue
to Dr. Gutman 18,632,383 unregistered shares (the “Gutman Shares”) of common
stock of RxElite, par value $0.001 per share, at a stated price of $1.13 per
share. The issuance of the Gutman Shares was not registered under the Securities
Act of 1933, as amended (the “Securities Act”), or the securities laws of any
state, and such securities were offered and sold in reliance on the exemption
from registration afforded by Section 4(2) and Regulation D (Rule 506) under
the
Securities Act and corresponding provisions of state securities laws, which
exempt transactions by an issuer not involving any public offering.
The
Gutman Agreement further provided that Dr. Gutman shall not transfer any of
the
Gutman Shares until January 4, 2010, except to a Permitted Transferee (as
defined in the Gutman Agreement). In addition, the Gutman Agreement provided
that RxElite would use its best efforts to appoint Dr. Gutman or his nominee
as
a member of the Board of Directors of RxElite.
RxElite
and Dr. Gutman also entered into a Registration Rights Agreement (the
“Registration Rights Agreement”), dated as of January 4, 2008, pursuant to which
RxElite granted Dr. Gutman certain registration rights with respect to the
Gutman Shares. The Registration Rights Agreement permits Dr. Gutman, commencing
on January 4, 2010, to demand up to two registrations (or more, under certain
circumstances) of all of the Gutman Shares and any other securities that may
be
issued to Dr. Gutman or a permitted transferee by virtue of the Gutman Shares
(collectively, the “Registerable Securities”). In addition to the demand
registration rights described above, the Registration Rights Agreement also
provides for “piggy-back” registration rights with respect to the Registerable
Securities, commencing on January 4, 2010.
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2008
(Unaudited)
NOTE
15 – ASSET ACQUISITION (CONT.)
The
total
consideration paid in stock and cash was $27,254,593. The stock issued was
valued for financial statement purposes in accordance with EITF 99-12 at $0.715
per share, reducing the total amount of the investment to $19,530,139. The
consideration paid was first allocated to the assets based on the valuation
in
accordance with SFAS 142 and 141. The total amount allocated to the assets
for
the purchase was $9,037,846. This amount is comprised of $3,096,350 paid for
fixed assets and $5,547,600 paid for the intellectual property and the
non-compete agreement, as well as $393,896 paid for the inventory. The inventory
was valued based on the audited cost value at December 31, 2007. The Company
also incurred $186,500 in acquisition costs for the transaction. This brought
the total purchase price to $19,716,639.
The
excess $10,678,793 of the consideration paid was attributed to goodwill. The
goodwill is attributed to the reputation of the FineTech product in the
industry. Furthermore, the goodwill is attributed to the ability of the renowned
PhD staff to develop APIs, solve complex issues within the industry, and work
out new processes for APIs without infringing upon any existing patents. An
impairment test for goodwill will be undertaken when new circumstances arise,
but no less than annually in accordance with SFAS 142.
The
results of operations shown in our financial statements are on a consolidated
basis for the period ended March 31, 2008. The results of operations for the
period ended March 31, 2007 and the year ended December 31, 2007 do not include
the operating results of FineTech. No preexisting relationships between the
parties were in place prior to the asset purchase.
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2008
(Unaudited)
NOTE
15 – ASSET ACQUISITION (CONT.)
Pursuant
to SFAS 141, paragraphs 51 and 58, the following table represents unaudited
condensed pro forma statements of operations as if the asset acquisition had
taken place in the prior year: No adjustments were made for the period ended
March 31, 2008 as essentially the entire operating results are contained in
the
historical data presented herein.
|
|
|
UNAUDITED
CONDENSED COMBINED PRO FORMA STATEMENT OF
OPERATIONS
|
|
|
|
Historical
RxElite
for the
Quarter
March 31, 2007
|
|
Historical
FineTech
for the
Quarter
March 31,
2007
|
|
Combined
RxElite
&
FineTech
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Combined
RxElite
& FineTech
for the
Quarter
March 31, 2007
|
|
|
REVENUES,
Net
|
|
$
|
146,873
|
|
$
|
1,864,081
|
|
$
|
2,010,954
|
|
$
|
(84,000
|
)
(2)
|
$
|
1,926,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
139,245
|
|
|
186,655
|
|
|
325,900
|
|
|
-
|
|
|
325,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
7,628
|
|
|
1,677,426
|
|
|
1,685,054
|
|
|
(84,000
|
)
|
|
1,601,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
2,135,153
|
|
|
752,612
|
|
|
2,887,765
|
|
|
(309,317
|
)
(1)
|
|
2,578,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
|
(2,127,525
|
)
|
|
924,814
|
|
|
(1,202,711
|
)
|
|
225,317
|
|
|
(977,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
OTHER INCOME(EXPENSE)
|
|
|
(80,837
|
)
|
|
59,342
|
|
|
(21,495
|
)
|
|
-
|
|
|
(21,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
(2,208,362
|
)
|
$
|
984,156
|
|
$
|
(1,224,206
|
)
|
$
|
225,317
|
|
$
|
(998,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per share
|
|
$
|
(0.06
|
)
|
$
|
-
|
|
$
|
(0.03
|
)
|
$
|
0.01
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
38,861,241
|
|
|
-
|
|
|
38,861,241
|
|
|
18,632,383
|
|
|
57,493,624
|
|
|
(1)
To record depreciation of assets acquired and amortization of intangible
assets acquired based on life of assets.
|
|
(2)
To remove amounts for royalty contracts not assigned to FineTech
Pharmaceutical, Ltd.
|
NOTE
16 - SIGNIFICANT CUSTOMERS
During
the three months ended March 31, 2008, RxElite recorded revenues from two
customers that accounted for approximated 36.7% and 22.3% of gross sales,
respectively. These same customers made up approximately 27.8% and 45.2% of
accounts receivable, respectively, for the same period. During the three months
ended March 31, 2007, RxElite recorded revenues from three customers that
accounted for approximately 19%, 12%, and 6% of net sales.
NOTE
17 - SIGNIFICANT SUPPLIERS
The
Company outsources all of its generic pharmaceutical manufacturing for its
own
label to outside sources. For the three-month period ended March 31, 2008,
RxElite’s largest suppliers accounted for approximately $198,250 and $4,115,085
or 4.6% and 95.4% of product purchases. The Company had one supplier during
the
period ended March 31, 2007 that made up approximatedly 88%, or $507,000 of
purchases.
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2008
(Unaudited)
NOTE
18 - RECENT ACCOUNTING PRONOUNCEMENTS
In
February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”).
SFAS No. 159 permits companies to elect to follow fair value
accounting for certain financial assets and liabilities in an effort to mitigate
volatility in earnings without having to apply complex hedge accounting
provisions. The standard also establishes presentation and disclosure
requirements designed to facilitate comparison between entities that choose
different measurement attributes for similar types of assets and liabilities.
SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest
in Consolidated Financial Statements, an amendment of ARB No. 51. These new
standards will significantly change the accounting for and reporting of business
combinations and non-controlling (minority) interests in consolidated financial
statements. Statement Nos. 141(R) and 160 are required to be adopted
simultaneously and are effective for the first annual reporting period beginning
on or after December 15, 2008. Earlier adoption is prohibited. The Company
does not expect the adoption of this Issue to have a material impact on its
consolidated financial statements.
In
June
2007, the Financial Accounting Standards Board ratified EITF Issue
No. 07-3, which clarifies the method and timing for recognition of
nonrefundable advance payments for goods and services to be used or rendered
in
future research and development activities pursuant to an executory contractual
arrangement. In particular, it addresses whether nonrefundable advance payments
for goods or services that will be used or rendered for research and development
activities should be expensed when the advance payment is made or when the
research and development activity has been performed. The consensus in this
Issue is effective for financial statements issued for fiscal years beginning
after December 15, 2007, and interim periods within those fiscal years.
Earlier application is not permitted.
Other
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
NOTE
19 – LOSS ON NOTE CONVERSION RATE CHANGE
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 and we have made our initial interest
payment.
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2008
(Unaudited)
NOTE
19 – LOSS ON NOTE CONVERSION RATE CHANGE (CONT.)
The
Convertible Note
is
convertible at the option of the note holder into shares of our common stock
at
an initial conversion price of $1.1262 per share, subject to adjustment for
stock splits, combinations or similar events and for other price protection
events on a “full ratchet” basis. Based upon a conversion price of
$1.1262, the Convertible Note would be convertible into an aggregate of
9,323,388 shares of Common Stock.
In
addition to the adjustments to the conversion price described above, under
the terms of the Convertible Note, if we failed to record consolidated EBITDA,
as defined in the Convertible Note, of at least (i) ($1,000,000) for the
fiscal quarter ending March 31, 2008, the conversion price shall be reset
to the lower of (A) the then current conversion price or (B) 85% of the average
market price, as defined in the Convertible Note, of the common stock at
such time.
As
of
March 31, 2008, we failed to satisfy the EBITDA ratio and as a result, the
conversion price of the Convertible Note was adjusted downward from $1.1262
to
an estimated price of $0.24 per share. Based upon the new conversion
price, if the Convertible Note were converted in full, we would be required to
issue 44,435,040 shares of Common Stock to the holder of the Convertible
Note. These new shares would represent approximately 38% 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.
In
accordance with EITF Issue No. 00-27
Application
of EITF Issue No. 98-5 to Certain Convertible Instruments
,
("EITF
00-27"), the Company recorded a non-cash charge of $3,755,678 to loss on note
conversion and an increase in the debt discount of $55,848 for the period ended
March 31, 2008. The non-cash charge measures the difference between the relative
fair value of the Note with a conversion price of $1.1262 and an estimated
conversion price of $0.24. The conversion price was estimated using
a descent of 15% from the average trading price of the Company’s
common stock for the last 20 trading days.
As
such,
the Company revalued the convertible debenture based on the amended terms of
the
Convertible Note. Accordingly, $55,848 was allocated to Debt Discount,
$3,755,678 to Loss on Note Conversion Rate Change, and $3,811,526 was allocated
to the equity component of the Note.
RXELITE,
INC.
(Formerly
Southridge Technology Group, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2008
(Unaudited)
NOTE
20 - AMENDMENT TO CONVERTIBLE NOTE
The
Company obtained a waiver from Castlerigg Master Investments, Ltd., the
holder
of its Convertible Note, on January 18, 2008. The waiver was with respect
to the
issuance of up to 1,000,000 at $0.46 per share for a consulting agreement
(see
Note 11). The definition of “Excluded Securities” (as defined in the Note) with
respect to anti-dilution price protection in both the Note and the Warrants
was
expanded to include the issuance of up to 1,000,000 shares of common stock
that
may be issued to consultants during the fiscal quarter ending March 31,
2008.
NOTE
21 - SUPPLEMENTAL STATEMENTS OF CASH FLOWS
Cash
payments for interest for continuing operations were $272,654 and $74,287
for
the three month period ended March 31, 2008 and 2007, respectively. There
were
no cash payments made for income taxes during either the three month period
ended March 31, 2008 or March 31, 2007.
During
the three months ended March 31, 2008, the Company had the following non-cash
investing and financing activities that have not been previously disclosed
in
the accompanying Notes 11, 15, 19, and 20:
|
·
|
Increased
fixed assets through the transfer of property from inventory
in the amount
of $1,073,963.
|
|
·
|
Issued
18,632,383 common shares, increased common stock by $18,632,
increased
additional paid-in capital by $13,311,507, increased fixed assets
by
$3,096,350, increased inventory by $393,896, increased intangible
assets
by $5,547,600, decreased cash by $6,386,500 and increased goodwill
by
$10,678,793 for the purchase of the assets of FineTech Laboratories
(Notes
8, 11, and 15)
|
|
·
|
Issued
1,000,000 common shares, increased common stock by $1,000, increased
additional paid-in capital by $459,000, and increased prepaid
expense by
$460,000 for a consulting agreement (Notes 11 and
20),
|
|
·
|
Increased
debt discount by $55,848 and increased additional paid-in capital
by
$55,848 for the loss on note conversion rate change (Note
19).
|
During
the three months ended March 31, 2007, the Company had the following non-cash
investing and financing activities:
|
·
|
Issued
7,520,169 common shares, increased common stock by $17,823, increased
additional paid-in capital by $4,494,278, and reduced subscription
shares
payable by $4,512,101.
|
|
·
|
Increased
accounts payable and decreased additional paid-in capital by
$62,608 for
warrants to be issued for finder’s
fees.
|
|
·
|
Increased
accounts payable and decreased additional paid-in capital by
$164,710 for
finder’s fees payable.
|
|
·
|
Acquired
property and equipment through the issuance of accounts payable
of
$67,514.
|
NOTE
22 - SUBSEQUENT EVENTS
On
May 2,
2008, the Board of Directors approved additional stock option grants to certain
employees of the Company as follows:
Jonathan
Houssian, CEO and President, received an option award to purchase up to 628,700
shares of common stock at an exercise price of $0.285. The option will vest
in
25% increments and expire after five years.
Earl
Sullivan, Chief Operating Officer, received an option award to purchase up
to
450,000 shares of common stock at an exercise price of $0.285. The option will
vest in 25% increments and expire after five years.
Patrick
Poisson, VP of Manufacturing, received an option award to purchase up to 66,667
shares of common stock at an exercise price of $0.285. The option will vest
in
25% increments and expire after five years.
Richard
Tener, VP of Administration, received an option award to purchase up to 58,300
shares of common stock at an exercise price of $0.285. The option will vest
in
25% increments and expire after five years.
Earl
Sullivan, Chief Operating Officer, received an option award to purchase up
to
750,000 shares of common stock at an exercise price of $0.285. The option will
vest in 25% increments and expire after ten years.
Shannon
Stith, VP of Finance, received an option award to purchase up to 37,500 shares
of common stock at an exercise price of $0.285. The option will vest in 25%
increments and expire after ten years.
Gene
Ioli, Regulatory Affairs Manager, received an option award to purchase up to
12,500 shares of common stock at an exercise price of $0.285. The option will
vest in 25% increments and expire after ten years.
Rick
Schindewolf, VP of Business Development, received an option award to purchase
up
to 125,000 shares of common stock at an exercise price of $0.285. The option
will vest in 25% increments and expire after ten years
.
The
option grants are subject to approval by our stockholders of our incentive
stock
option plan being submitted for approval at the annual meeting scheduled
for June 4, 2008.
Item
2. Management’s Discussion and Analysis or Plan of
Operations
Results
of Operations
Three
Months Ended March 31, 2008 Compared to Three Months Ended March 31,
2007
.
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
% Change
|
|
|
Sales
(Net of Discounts)
|
|
$
|
2,999,403
|
|
$
|
146,873
|
|
$
|
2,852,530
|
|
|
1,942
|
%
|
|
Cost
of Goods Sold (Net of Discounts)
|
|
|
2,642,142
|
|
|
139,245
|
|
|
2,502,897
|
|
|
1,797
|
%
|
|
Gross
Profit
|
|
$
|
357,261
|
|
$
|
7,628
|
|
$
|
349,579
|
|
|
4,551
|
%
|
|
Gross
Profit %
|
|
|
11.9
|
%
|
|
5.2
|
%
|
|
|
|
|
|
|
Sales
Net
sales
increased by $2,852,530 from $146,873 for the three months ended March 31,
2007
to $2,999,403 for the three months ended March 31, 2008. This increase reflects
the acquisition of assets of FineTech Laboratories and the opening of our
subsidiary, FineTech Pharmaceutical, Ltd., as well as the launch of our
Sevoflurane product line in late 2007.
Cost
of Goods Sold
Cost
of
goods sold increased by $2,502,897 from $139,245 for the three months ended
March 31, 2007 to $2,642,142 for the three months ended March 31, 2008. This
increase reflects acquisition of assets and launch of our Sevoflurane product
line.
Gross
Profit
Gross
profit increased by $349,579 from $7,628 for the three months ended March 31,
2007 to $357,261 for the three months ended March 31, 2008. Gross profit as
a
percentage of sales increased for the three months ended March 31, 2008
resulting from a transition in product mix.
Operating
Expenses
Three
Months Ended March 31, 2008 Compared to Three Months Ended March 31,
2007
.
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
% Change
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling
Expenses
|
|
$
|
144,967
|
|
$
|
450,733
|
|
$
|
(305,766
|
)
|
|
68
|
%
|
|
Salaries,
Wages and Benefits
|
|
|
1,366,705
|
|
|
533,643
|
|
|
833,062
|
|
|
156
|
%
|
|
Research
and Development
|
|
|
154,356
|
|
|
809,558
|
|
|
(655,202
|
)
|
|
81
|
%
|
|
General
and Administrative Expenses
|
|
|
854,771
|
|
|
303,066
|
|
|
551,705
|
|
|
182
|
%
|
|
Amortization
Expense
|
|
|
132,992
|
|
|
650
|
|
|
132,342
|
|
|
20,360
|
%
|
|
Depreciation
Expense
|
|
|
177,252
|
|
|
37,503
|
|
|
139,749
|
|
|
373
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
$
|
2,831,043
|
|
$
|
2,135,153
|
|
$
|
695,890
|
|
|
33
|
%
|
Selling
Expense (Sales & Marketing)
Sales
and
marketing expense decreased by $305,766 from $450,733 for the three months
ended
March 31, 2007 to $144,967 for the three months ended March 31, 2008. This
decrease in sales and marketing expenses was a result of reclassification for
financial statement preparation from a selling expense to the salaries, wages
and benefits account.
Salaries,
Wages and Benefits
Salaries,
wages and benefits increased by $833,062 from $533,643 for the three months
ended March 31, 2007 to $1,366,705 for the three months ended March 31, 2008.
The increase in salaries, wages and benefits in the three months ended March
31,
2008 compared to the three months ended March 31, 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 three months ended
March 31, 2008 decreased by $655,202 from $809,558 for the three month period
ended March 31, 2007 to $154,356 for the three month period ended March 31,
2008. The decrease in research and development was due to the termination of
the
Core Tech agreement in the period ended March 31, 2008, which was in effect
during the period ended March 31, 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 $551,705 from $303,066 for the three
months ended March 31, 2007 to $854,771 for the three months ended March 31,
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 $132,342 from $650 for the three months ended March 31, 2007
to $132,992 for the three months ended March 31, 2008. This amount was due
to
the increase in intangible assets acquired by our subsidiary, FineTech
Pharmaceutical, Ltd.
Depreciation
Depreciation
expense increased $139,749 from $37,503 for the three months ended March 31,
2007 to $177,252 for the three months ended March 31, 2008. The increase was
due
to the increase in assets acquired by our subsidiary, FineTech Pharmaceutical,
Ltd.
Other
Income (Expenses)
Three
Months Ended March 31, 2008 Compared to Three Months Ended March 31,
2007
.
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
% Change
|
|
|
Other
Income (Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
15,828
|
|
$
|
25,901
|
|
$
|
(10,073
|
)
|
|
39
|
%
|
|
Penalties
and interest expense
|
|
|
(310,548
|
)
|
|
(100,398
|
)
|
|
(210,149
|
)
|
|
209
|
%
|
|
Amortization
of debt discount
|
|
|
(1,305,519
|
)
|
|
-
|
|
|
(1,305,519
|
)
|
|
100
|
%
|
|
Termination
of development agreement
|
|
|
800,000
|
|
|
-
|
|
|
800,000
|
|
|
100
|
%
|
|
Loss
on note conversion rate
|
|
|
(3,755,678
|
)
|
|
-
|
|
|
(3,755,678
|
)
|
|
100
|
%
|
|
Other
expense
|
|
|
(10,141
|
)
|
|
(6,340
|
)
|
|
(3,801
|
)
|
|
60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Expenses
|
|
$
|
(4,566,058
|
)
|
$
|
(80,837
|
)
|
$
|
(4,485,221
|
)
|
|
5,548
|
%
|
Interest
Income
Interest
income decreased by $10,073 from $25,901 for the three month period ended March
31, 2007 to $15,828 for the three month period ended March 31, 2008. The
decrease is due to lower levels of interest-bearing deposits during the first
three months.
Interest
Expense
Interest
expense increased by $210,149 from $100,398 for the three month period ended
March 31, 2007 to $310,548 for the three month period ended March 31, 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.
Amortization
of Debt Discount
Amortization
of debt discount increased by $1,305,519 from $0 for the three month period
ended March 31, 2007 to $1,305,519 for the three month period ended March 31,
2008. The increase is due to the present value discount related to our
convertible debt acquired on December 31, 2007.
Termination
of Development Agreement
Termination
of Development Agreement increased by $800,000 from $0 for the three month
period ended March 31, 2007 to $800,000 for the three month period ended March
31, 2008. The increase is due to the termination of the agreement with Core
Tech
Technologies, Ltd. during the first three months of the current
year.
Loss
on Note Conversion Rate Change
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 from $1.1262 to $0.24 per share. Based upon the new
conversion price, if the Convertible Note were converted in full, we would
be
required to issue 44,435,040 shares of Common Stock to the holder of the
Convertible Note. These new shares would represent approximately 38% 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 revalued the convertible debenture based on the amended terms of
the
Convertible Note. Accordingly, $55,848 was allocated to Debt Discount,
$3,755,678 to Loss on Note Conversion Rate Change, and $3,811,526 was allocated
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 Available for Common Stock Holders
Net
loss
available for common stockholders increased by $
4,831,478
from net loss of $2,208,362 for the three months ended March 31, 2007 to a
net
loss of $7,039,840 for the three months ended March 31, 2008. The increase
in
our net loss for the first three months of the current fiscal year was due
to
the loss on the note conversion ($3,755,678), which was partially offset by
a
gain in an accounts payable write off ($800,000). 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
March 31, 2008, we had current assets of $14,132,023, including cash and
equivalents of $1,081,048, accounts receivable of $2,176,346, related party
accounts receivable of $262,578, inventory of $9,658,516 and other current
assets of $953,535. As of March 31, 2008, we had current liabilities of
$12,665,156, consisting primarily of accounts payable of $9,262,073, accrued
rebates of $900,179, accrued expenses of $749,765, and accounts payable to
former preferred shareholders of $1,291,769 (due after December 31, 2008).
As a
result, at March 31, 2008, we had net working capital of
$1,466,867.
Net
cash
used in operating activities was $2,006,853 and $3,677,981 for the three months
ended March 31, 2008 and 2007, respectively. The decrease in net cash used
in
operating activities in the first three 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 $6,949,893 and $167,283 for the three months
ended March 31, 2008 and 2007, respectively. Cash used in investing activities
consisted 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 used in financing activities was $75,790 and $2,143,228 for the
three months ended March 31, 2008 and 2007, respectively, comprised mostly
of a
cash payment for 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.
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 of equity capital and
converted $1,899,273 of convertible debentures through the issuance
of 21,003,959 units in a private placement. In addition, the Company
received proceeds of $10,500,000 from a senior secured convertible note on
December 31, 2007. As of March 31, 2008, the Company currently had cash and
cash
equivalents of $1,081,048.
If
sales
are 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 March 31, 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
In
February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”).
SFAS No. 159 permits companies to elect to follow fair value
accounting for certain financial assets and liabilities in an effort to mitigate
volatility in earnings without having to apply complex hedge accounting
provisions. The standard also establishes presentation and disclosure
requirements designed to facilitate comparison between entities that choose
different measurement attributes for similar types of assets and liabilities.
SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of the
adoption of SFAS No. 159, if any, on our financial position, results
of operations and cash flows.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest
in Consolidated Financial Statements, an amendment of ARB No. 51. These new
standards will significantly change the accounting for and reporting of business
combinations and non-controlling (minority) interests in consolidated financial
statements. Statement Nos. 141(R) and 160 are required to be adopted
simultaneously and are effective for the first annual reporting period beginning
on or after December 15, 2008. Earlier adoption is prohibited. We are
currently evaluating the impact of adopting SFAS Nos. 141(R) and
SFAS 160 on our consolidated financial statements.
In
June
2007, the Financial Accounting Standards Board ratified EITF Issue
No. 07-3, which clarifies the method and timing for recognition of
nonrefundable advance payments for goods and services to be used or rendered
in
future research and development activities pursuant to an executory contractual
arrangement. In particular, it addresses whether nonrefundable advance payments
for goods or services that will be used or rendered for research and development
activities should be expensed when the advance payment is made or when the
research and development activity has been performed. The consensus in this
Issue is effective for financial statements issued for fiscal years beginning
after December 15, 2007, and interim periods within those fiscal years.
Earlier application is not permitted. The Company does not expect the adoption
of this Issue to have a material impact on its consolidated financial
statements.
Other
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
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
March 31, 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 March 31, 2008 in accordance with
a
recognized framework, due to its lack of resources.
However,
we have identified what we believe to be material weaknesses. 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 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 March
31,
2008.
No
significant changes in internal controls
There
have been no 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.
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.
On
February 7, 2008, the Company issued 1,000,000 shares of common stock at
forty-six cents ($0.46) per share for a total 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.
None.
Item
4. Submission of Matters to a Vote of Security Holders.
The
Company did not submit any matters to a vote of security holders during the
quarter ended March 31, 2008. The Company has scheduled its annual meeting
of
shareholders for June 4, 2008. At such meeting, shareholders will be requested
to vote upon the following matters:
|
|
·
|
The
election of seven (7) nominees for directors for the company, for
a term
expiring at the 2009 annual meeting of shareholders (or until successors
are duly elected and qualified);
|
|
|
·
|
Approval
of a reverse stock split of 1 share for up to each 20 shares of common
stock issued and outstanding, with the final ratio to be determined
by the
Board of Directors at the time of the reverse
split;
|
|
|
·
|
Adoption
of the 2007 Incentive Stock Plan;
and
|
|
|
·
|
Ratification
of HJ & Associates, LLC as the Company’s independent registered public
accounting firm for the year ending December 31,
2008.
|
The
Company filed its Definitive Proxy Statement with the SEC on May 9,
2008.
Shareholders
who owned shares of common stock of the Company, par value $0.001 per share,
on
April 10, 2008, may attend and vote at the annual meeting. As of April 10,
2008,
there were 116,315,303 shares of common stock issued and outstanding, which
constitute all of the outstanding capital stock of the Company. Shareholders
are
entitled to one vote for each share of common stock held by them. A majority
of
the outstanding shares (58,157,652) shares, present in person or represented
by
proxy, will constitute a quorum at the meeting. For purposes of the quorum
and
the discussion below regarding the vote necessary to take shareholder action,
shareholders of record who are present at the annual meeting in person or by
proxy and who abstain, including brokers holding customers’ shares of record who
cause abstentions to be recorded at the meeting, are considered shareholders
who
are present and entitled to vote and are counted towards a quorum.
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 and 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:
May
19, 2008
|
By:
|
/s/ Jonathan
Houssian
|
|
|
Jonathan
Houssian
|
|
|
President
and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
Date:
May
19, 2008
|
By:
|
/s/
Shannon M. Stith
|
|
|
Shannon
M. Stith
|
|
|
Vice
President Finance
|
|
|
(Principal
Financial Officer)
|
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