Yesterday, the stock of Elite Pharmaceuticals, Inc. (OTC:ELTP) nearly touched the support of $0.12 on the news that the company’s preferred stock has been converted into shares of common stock. The number of ELTP outstanding shares has thus more than doubled in three months, and while that dilution has not yet scared traders away, certain long-term investors have already sold their shares. 
ELTP closed yesterday at $0.152, or 10.59% down from Monday closed. The volume was 9.90 million shares, which is less than the 30-day average of 12.85 million. Nearly 43% of the total volume consisted of short sales. That is usually not a positive sign, signaling that today ELTP may actually break the $0.12 support. On Monday, the portion of short sales was 23% of the whole volume, while it was about 25% on Friday last week.
Yesterday morning ELTP issued a press release announcing that the holders of its Series D 8% Convertible Preferred Stock have elected to convert all their shares into shares of common stock of the company. According to the press release, ELTP does not have the obligation any more to pay $720,000 in annual dividends and associated costs. In exchange for that benefits, however, the company’s shareholders saw themselves massively diluted. From about 106 million in February 2011, ELTP number of outstanding shares has now grown to over 243 million.
According to Elite Pharmaceuticals last available 10-Q, as of end-December 2010 the company had also Preferred Stock Series B, C, and E, which is convertible into another 82 million common shares, suggesting that another wave of dilution might follow.
ELTP latest SEC filing also reveal that a beneficial owner of the company has already sold out large part of the shares received upon the conversion of the Series D Preferred Stock. The reporting person, members of his family and a foundation of which he is a co-trustee have received at the end of April over 23 million ELTP common shares upon the conversion of the preferred stock. As of yesterday, they hold together only 10.76 million of those shares after selling more than 11.6 million shares on the market at a price per share between $0.12 and $0.21.
