FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
Commission file number 0-16005
Unigene Laboratories, Inc.
- --------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2328609
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Little Falls Road, Fairfield, New Jersey 07004
- ---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 882-0860
- ------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 Par Value - 41,174,329 shares as of November 1, 1999
INDEX
UNIGENE LABORATORIES, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed balance sheets-
September 30, 1999 and December 31, 1998 3
Condensed statements of operations-
Three months and nine months ended September 30, 1999 and 1998 4
Condensed statements of cash flows-
Nine months ended September 30, 1999 and 1998 5
Notes to condensed financial statements-
September 30, 1999 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNIGENE LABORATORIES, INC.
CONDENSED BALANCE SHEETS
September 30 December 31
1999 1998
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 668,379 $ 402,664
Contract receivable 2,000,000 --
Prepaid expenses 68,633 317,823
Other current assets 702,028 887,904
------------ ------------
Total current assets 3,439,040 1,608,391
Contract receivable 2,000,000 --
Property, plant and equipment-net
of accumulated depreciation and amortization 7,030,523 8,085,250
Patents and other intangibles, net 1,228,076 1,206,018
Other assets 512,957 664,434
------------ ------------
$ 14,210,596 $ 11,564,093
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 924,605 $ 982,752
Accrued expenses 1,645,016 1,329,199
Notes payable - stockholders 1,140,000 1,040,000
Current portion-stockholder notes 758,988 --
Current portion-capital lease obligations 61,464 61,464
------------ ------------
Total current liabilities 4,530,073 3,413,415
Stockholder notes, excluding current portion 1,111,012 --
5% convertible debentures 2,800,000 3,802,807
Capital lease obligations, excluding current portion 75,994 127,783
Stockholders' equity:
Common stock-par value $.01 per share;
authorized 60,000,000 shares, issued
41,181,619 shares in 1999 and 39,384,822 in 1998 411,816 393,848
Additional paid-in capital 66,462,635 65,158,403
Accumulated deficit (61,179,903) (61,331,132)
Less: Treasury stock, at cost, 7,290 shares (1,031) (1,031)
------------ ------------
Total stockholders' equity 5,693,517 4,220,088
------------ ------------
$ 14,210,596 $11,564,093
============ ============
See notes to condensed financial statements.
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------------ ------------ ------------ ------------
Licensing and other revenue $ 7,000,733 $ 3,008,795 $ 9,527,575 $ 5,020,652
Operating expenses:
Research and development 2,651,584 2,384,413 7,261,543 6,791,085
General and administrative 561,811 494,585 1,653,944 1,552,113
------------ ------------ ------------ ------------
3,213,395 2,878,998 8,915,487 8,343,198
------------ ------------ ------------ ------------
Operating income (loss) 3,787,338 129,797 612,088 (3,322,546)
------------ ------------ ------------ ------------
Other income (expense):
Interest/other income 13,308 37,290 28,850 81,384
Interest expense (108,052) (103,692) (489,709) (211,970)
------------ ------------ ------------ ------------
(94,744) (66,402) (460,859) (130,586)
------------ ------------ ------------ ------------
Income (loss) before
extraordinary item 3,692,594 63,395 151,229 (3,453,132)
Extraordinary item-loss
on extinguishment of debt (Note D) -- (143,810) -- (143,810)
------------ ------------ ------------ ------------
Net income (loss) $ 3,692,594 $ (80,415) $ 151,229 $ (3,596,942)
============ ============ ============ ============
Earnings per share (Note E):
Basic:
Income (loss) before
extraordinary item $ .09 $ -- $ -- $ (.09)
Extraordinary item -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ .09 $ -- $ -- $ (.09)
============ ============ ============ ============
Diluted:
Income (loss) before
extraordinary item $ .09 $ -- $ -- $ (.09)
Extraordinary item -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ .09 $ -- $ -- $ (.09)
============ ============ ============ ============
Weighted average number of shares
outstanding: Basic 41,169,120 38,647,682 40,284,824 38,562,591
============ ============ ============ ============
Diluted 43,159,961 38,647,682 40,284,824 38,562,591
============ ============ ============ ============
See notes to condensed financial statements.
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
----------------------------
1999 1998
----------- -----------
Net cash used for operating activities $(1,553,470) $(2,085,805)
----------- -----------
Investing activities:
Purchase of equipment and furniture (75,263) (261,927)
Increase in patents and other assets (19,753) (122,474)
Construction of leasehold and building improvements (4,010) (5,284)
----------- -----------
(99,026) (389,685)
----------- -----------
Financing activities:
Issuance of stockholder notes 1,970,000 --
Issuance of 5% Debenture, net of related expenses -- 3,751,919
Exercise of stock options and warrants -- 47,969
Repayment of capital lease obligations (51,789) --
Redemption of convertible debentures -- (107,171)
----------- -----------
1,918,211 3,692,717
----------- -----------
Net increase in cash and cash equivalents 265,715 1,217,227
Cash and cash equivalents at beginning of year 402,664 2,126,327
----------- -----------
Cash and cash equivalents at end of period $ 668,379 $ 3,343,554
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Conversion of convertible debentures and
accrued interest into Common Stock $ 1,390,959 $ 204,375
=========== ===========
Conversion of notes payable-stockholders
into Common Stock $ -- $ 225,000
=========== ===========
Cash paid for interest $ 17,448 $ 43,455
=========== ===========
See notes to condensed financial statements
UNIGENE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for the nine-month
period ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999. For further
information, please refer to the Company's financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1998.
NOTE B - CONVERTIBLE DEBENTURES
During January 1999, $200,000 of principal amount of the Company's 5%
Convertible Debentures, due December 31, 2001, were converted into (a) 164,102
shares of Common Stock and (b) warrants, expiring January 29, 2004, to purchase
6,564 shares of Common Stock at an exercise price of $1.52 per share. In
addition, the Company issued 79,384 shares of Common Stock as payment of
interest on the 5% Convertible Debentures in lieu of a semi-annual cash interest
payment in the amount of $101,000.
During the second quarter of 1999, $1,000,000 of principal amount of the
Company's 5% Convertible Debentures, due December 31, 2001, were converted into
(a) 1,457,458 shares of Common Stock and (b) warrants, expiring April - June
2004, to purchase an aggregate of 58,298 shares of Common Stock at exercise
prices ranging from $.78 to $1.15 per share.
During July 1999, the Company issued 95,853 shares of Common Stock as payment of
interest on the 5% Convertible Debentures in lieu of a semi-annual cash interest
payment in the amount of $90,000.
NOTE C - NOTES PAYABLE - STOCKHOLDERS
During the second quarter of 1999 (a) Jay Levy, the chairman of the board and an
officer of the Company, loaned the Company $1,500,000 evidenced by demand notes
bearing interest at 6% per year, and (b) Warren Levy and Ronald Levy, directors
and officers of the Company, loaned the Company $100,000 evidenced by demand
notes bearing interest at the Merrill Lynch Margin Loan Rate plus .25% (8.625%
at September 30, 1999) (the "Floating Rate"). In July 1999, Jay Levy loaned the
Company an additional $370,000 evidenced by term notes maturing January 2002 and
bearing interest at 6% per year, and the $1,500,000 of demand notes evidencing
loans made by Jay Levy in the second quarter were converted into 6% term notes
maturing January 2002. The Company has granted Jay Levy a security interest in
all of its equipment and a mortgage on its real property to secure payment of
the term notes which are senior to all notes payable to Warren Levy and Ronald
Levy. The Company is required to make installment payments on the term notes
commencing in October 1999 and ending in January 2002 in an aggregate amount of
$72,426 per month. Jay Levy has agreed to postpone the October and November
installment payments.
NOTE D - EXTRAORDINARY ITEM
During September 1998, $178,515 of principal amount of the Company's 10%
Convertible Debentures due March 4, 1999, plus $44,060 of accrued interest, was
converted into 214,131 shares of Common Stock. Due to restrictions on the total
number of shares which could be issued upon conversion of the Debentures, the
Company redeemed an additional $271,485 of principal, and in connection
therewith paid to the holder $68,899 of accrued interest and $143,810 in
redemption premiums, for an aggregate payment of $484,194. The premium of
$143,810 was recorded as an extraordinary loss in September 1998.
NOTE E - EARNINGS PER SHARE
Basic earnings per share is computed by dividing the net income available to
common shareholders by the weighted average number of shares of common stock
outstanding. For purposes of calculating diluted earnings per share, the
denominator includes both the weighted average number of shares of common stock
outstanding and the number of dilutive common stock equivalents.
The Company's 5% Convertible Debentures were dilutive for the three-month period
ended September 30, 1999, but anti-dilutive for all other periods. Stock options
to purchase 1,746,490 shares of Common Stock and warrants to purchase 3,983,768
shares of Common Stock were not included in computing diluted earnings per share
because their effects are anti-dilutive.
The following table sets forth the computation for basic and diluted earnings
per share (EPS) for the three months ended September 30, 1999:
Numerator for basic EPS - net income $ 3,692,594
Interest expense - 5% Convertible Debentures 35,287
-----------
Numerator for diluted EPS $ 3,727,881
-----------
Denominator for basic EPS - weighted
average shares outstanding 41,169,120
Effect of conversion of 5% Convertible
Debentures into maximum number of shares 1,990,841
-----------
Denominator for diluted EPS 43,159,961
===========
NOTE F - LIQUIDITY
The Company has incurred annual operating losses since its inception and, as a
result, at September 30, 1999 had an accumulated deficit of approximately
$61,180,000 and a working capital deficit of approximately $1,091,000. The
independent auditors' report covering the Company's 1998 financial statements
includes an explanatory paragraph that states the above factors raise
substantial doubt about the Company's ability to continue as a going concern.
However, the financial statements have been prepared on a going concern basis
and as such do not include any adjustments that might result from the outcome of
this uncertainty. In October 1999, the Company was delisted by Nasdaq. The
delisting of the Company's Common Stock may have an adverse effect on the
Company's ability to raise capital.
In August 1999, the Company and Warner-Lambert successfully concluded their
second pilot human study for their oral calcitonin formulation, resulting in a
payment to the Company of $2.5 million. In September 1999, the Company and
Warner-Lambert identified an oral calcitonin formulation to be used in their
upcoming Phase I clinical study entitling the Company to a milestone, payable in
installments, totaling $4.5 million. The first installment of $500,000 was
received in September 1999, with payment of an additional $500,000 due every 90
days thereafter, with the unpaid balance payable upon the initiation of the
Phase I study, which the Company expects to occur in the first half of 2000. Due
to the completion of this milestone in September 1999, the Company recognized
$4.5 million as revenue in the third quarter; $2 million was recorded as a
current contract receivable and an additional $2 million was recorded as a
non-current contract receivable.
With the receipt of almost $2 million in stockholder loans during the second and
third quarters of 1999, in addition to an aggregate of $3 million in payments
from Warner-Lambert in the third quarter, management believes that the Company
will have sufficient financial resources to sustain its operations at the
current level into the fourth quarter of 1999. The Company expects to receive
$500,000 from Warner-Lambert in December 1999, and $3.5 million in one or more
payments in the first half of 2000 from the milestone completed in September
1999. The Company also expects to achieve additional milestones under the
Warner-Lambert agreement during 2000, which will result in further payments.
However, there can be no assurance as to when or if the Company will achieve
such milestones. The Company is currently pursuing licensing agreements for its
nasal and injectable calcitonin products. These agreements could provide
short-term funds to the Company in upfront payments as well as milestone
payments. The Company has executed an agreement for the sale of state tax
benefits, to yield approximately $4 million, under a New Jersey Economic
Development Authority program, which allows certain New Jersey taxpayers to sell
their state tax benefits to third-parties. However, the proceeds will be
received over the next few years and the size and timing of such proceeds are
subject to the continued funding of the program by the State of New Jersey as
well as limitations based on the level of participation by other companies. The
Company's application for the sale was approved by the New Jersey Economic
Development Authority in October 1999 and the Company expects to receive at
least $1 million in the first year's allocation. However, there can be no
assurance that any of these transactions will be completed or, if completed,
that the terms and timing of such transactions would provide sufficient funds to
sustain operations at the current level.
While the Company believes that the transactions it currently is pursuing and
the milestone payments under the Warner-Lambert agreement would satisfy the
Company's liquidity requirements in the near term, satisfying the Company's
long-term liquidity requirements will require the successful commercialization
of its nasal or oral calcitonin product. In addition, the commercialization of
its calcitonin products will require the Company to incur additional capital
expenditures, including expenditures to expand or upgrade the Company's
manufacturing operations to satisfy certain of its calcitonin supply
obligations. However, neither the cost nor timing of such capital expenditures
is determinable at this time.
NOTE G - DIRECTORS STOCK OPTION PLAN
At the Company's June 23, 1999 Annual Meeting, the stockholders approved the
adoption of a new Directors Stock Option Plan (the "New Plan") to replace the
1994 Outside Directors Stock Option Plan (the "1994 Plan"). Under the New Plan,
each person elected to the Board after June 23, 1999 who is not an employee will
receive, on the date of his initial election, an option to purchase 21,000
shares of Common Stock. In addition, on May 1st of each year, commencing May 1,
1999, each non-employee director will receive an option to purchase 10,000
shares of Common Stock if he or she has served as a non-employee director for at
least six months prior to the May 1st grant. Each option granted under the New
Plan will have a ten-year term and the exercise price of each option will be
equal to the fair value of the Company's Common Stock on the date of the grant.
A total of 350,000 shares of Common Stock are reserved for issuance under the
New Plan.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Revenue increased 133% from $3 million to $7 million and 90% from $5 million to
$9.5 million for the three months and nine months ended September 30, 1999,
respectively, as compared to the same periods in 1998. Revenue for all periods
consisted primarily of milestone revenue from Warner-Lambert Company, as the
result of the achievement of benchmarks in the development of an oral calcitonin
product for treating osteoporosis.
Research and development, the Company's largest expense, increased 11% from
$2,384,000 to $2,652,000 for the three months ended September 30, 1999, as
compared to the same period in 1998. Research and development expenses increased
7% from $6,791,000 to $7,262,000 for the nine months ended September 30, 1999,
as compared to the same period in 1998. The 1999 increases were primarily
attributable to consulting and testing expenses related to the Company's Type II
variation for its injectable calcitonin product, development expenses related to
the Company's nasal calcitonin product, and consulting fees related to the
Company's collaboration with Warner-Lambert.
General and administrative expenses increased 14% from $495,000 to $562,000 and
7% from $1,552,000 to $1,654,000 for the three months and nine months ended
September 30, 1999, respectively, as compared to the same periods in 1998. The
increases were primarily due to increased personnel costs and professional fees,
partially offset by reductions in public relations and travel expenses.
Interest income decreased $24,000 and $53,000 for the three months and nine
months ended September 30, 1999, respectively, as compared to the same periods
in 1998, due to reduced funds available for investment in 1999.
Interest expense increased $4,000 and $278,000 for the three months and nine
months ended September 30, 1999, respectively, as compared to the same periods
in 1998. The nine month increase for 1999 was due primarily to the amortization
of the value of the beneficial conversion feature and related warrants of the
Company's 5% Convertible Debentures in the amount of $197,000 for the first nine
months of 1999.
As a result of increased revenue from Warner-Lambert milestones during 1999,
partially offset by increased operating expenses and interest expense, net
income improved by $3.7 million ($.09 per share) for both the three-month and
nine-month periods ended September 30, 1999. The Company had net income of
$3,693,000 for the three months ended September 30, 1999 as compared to a net
loss of $80,000 for the comparable period in 1998. The Company had net income of
$151,000 for the nine months ended September 30, 1999 as compared to a net loss
of $3,597,000 for the comparable period in 1998.
As of December 31, 1998, the Company had available for federal income tax
reporting purposes net operating loss carryforwards in the approximate amount of
$58,400,000, expiring from 1999 through 2018, which are available to reduce
future earnings that would otherwise be subject to federal income taxes. For the
nine months ending September 30, 1999, the Company had a profit of approximately
$151,000. In addition, the Company has investment tax credits and research and
development credits in the amounts of $19,000 and $2,178,000, respectively,
which are available to reduce the amount of future federal income taxes. These
credits expire from 1999 through 2018. For 1999, the Company does not expect to
have income before income taxes in excess of its available net operating loss
and tax credit carryforwards.
The Company follows Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". Given the Company's past history of incurring
operating losses, any deferred tax assets that are recognizable under SFAS 109
have been fully reserved. As of January 1, 1999, under SFAS 109, the Company had
deferred tax assets of approximately $25,500,000, subject to a valuation
allowance of $25,500,000. The deferred tax assets are primarily a result of the
Company's net operating losses and tax credits generated. For the nine-month
period ended September 30, 1999, the Company's deferred tax assets and valuation
allowances each decreased by approximately $60,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no material commitments outstanding for capital
expenditures relating to the Boonton, New Jersey production facility, the
Company's facility in Fairfield, New Jersey, or to its other activities.
The Company, at September 30, 1999, had cash and cash equivalents of $668,000,
an increase of $266,000 from December 31, 1998.
The Company has incurred annual operating losses since its inception and, as a
result, at September 30, 1999 had an accumulated deficit of approximately
$61,180,000 and a working capital deficit of approximately $1,091,000. The
independent auditors' report covering the Company's 1998 financial statements
includes an explanatory paragraph that states the above factors raise
substantial doubt about the Company's ability to continue as a going concern.
However, the financial statements have been prepared on a going concern basis
and as such do not include any adjustments that might result from the outcome of
this uncertainty. In October 1999, the Company was delisted by Nasdaq. The
delisting of the Company's Common Stock may have an adverse effect on the
Company's ability to raise capital.
The Company's future ability to generate cash from operations will depend
primarily upon signing research or licensing agreements, achieving defined
benchmarks in such agreements, receiving regulatory approval for its licensed
products, and the commercial sale of these products.
In July 1997, the Company entered into an agreement under which it granted to
the Parke-Davis division of Warner-Lambert Company a worldwide license to use
the Company's oral calcitonin technology. Through September 30, 1999, the
Company had received an aggregate of $16.5 million from Warner-Lambert in the
form of an equity investment, a licensing fee and milestone payments. Under the
terms of the license agreement, the Company is eligible to receive up to an
additional $38 million in milestone payments during the course of the
development program. Early-stage milestones primarily relate to the product's
performance characteristics, while the latter-stage milestones are primarily
related to regulatory activities and approvals. If the product is successfully
commercialized, the Company also would receive revenue from royalties on product
sales by Warner-Lambert and its affiliates and from the sale of raw material to
Warner-Lambert. The Company has retained the right to license the use of its
technologies for injectable and nasal formulations of calcitonin on a worldwide
basis. The Company is actively seeking other licensing and/or supply agreements
with pharmaceutical companies for injectable and nasal forms of calcitonin.
However, there is no assurance that any additional revenue-generating agreements
will be signed.
The Company's cash requirements are approximately $10-11 million per year due to
the operations of its research and peptide manufacturing facilities and with
three calcitonin products in various stages of development. In addition, the
Company has principal and interest obligations over the next several years under
its outstanding notes payable to stockholders and 5% Convertible Debentures.
However, because of the conversion features of the 5% Convertible Debentures, a
substantial portion of this debt is expected to be converted into Common Stock,
thereby decreasing the amount of cash required for principal payments. The
Company may elect to pay interest on these debentures in Common Stock, which
would decrease the amount of cash required for interest payments. Due to the
delisting of its Common Stock from the Nasdaq National Market System, the
Company is required to make payments to the holder of the 5% Convertible
Debentures, in an amount equal to 2% per month of the aggregate principal amount
of these debentures for any month or portion thereof. In addition, if the
delisting period lasts for 4 months, then, at the option of the investor, the
Company shall redeem these debentures on a redemption date designated by such
investor at a redemption price equal to 120% of the outstanding principal amount
of these debentures.
During the second quarter of 1999 (a) Jay Levy, the chairman of the board and an
officer of the Company, loaned the Company $1,500,000 evidenced by demand notes
bearing interest at 6% per year, and (b) Warren Levy and Ronald Levy, directors
and officers of the Company, loaned the Company $100,000 evidenced by demand
notes bearing interest at the Merrill Lynch Margin Loan Rate plus .25% (8.625%
at June 30, 1999) (the "Floating Rate"). In July 1999, Jay Levy loaned the
Company an additional $370,000 evidenced by term notes maturing January 2002 and
bearing interest at 6% per year, and the $1,500,000 of demand notes evidencing
loans made by Jay Levy in the second quarter were converted into 6% term notes
maturing January 2002. The Company has granted Jay Levy a security interest in
all of its equipment and a mortgage on its real property to secure payment of
the term notes which are senior to all notes payable to Warren Levy and Ronald
Levy. The Company is required to make installment payments on the term notes
commencing in October 1999 and ending in January 2002 in an aggregate amount of
$72,426 per month. Jay Levy has agreed to postpone the October and November
installment payments.
In August 1999, the Company and Warner-Lambert successfully concluded their
second pilot human study for their oral calcitonin formulation, resulting in a
payment to the Company of $2.5 million. In September 1999, the Company and
Warner-Lambert identified an oral calcitonin formulation to be used in their
upcoming Phase I clinical study entitling the Company to a milestone, payable in
installments, totaling $4.5 million. The first installment of $500,000 was
received in September 1999, with payment of an additional $500,000 due every 90
days thereafter, with the unpaid balance payable upon the initiation of the
Phase I study, which the Company expects to occur in the first half of 2000. Due
to the completion of this milestone in September 1999, the Company recognized
$4.5 million as revenue in the third quarter; $2 million was recorded as a
current contract receivable and an additional $2 million was recorded as a
non-current contract receivable.
With the receipt of almost $2 million in stockholder loans during the second and
third quarters of 1999, in addition to an aggregate of $3 million in payments
from Warner-Lambert in the third quarter, management believes that the Company
will have sufficient financial resources to sustain its operations at the
current level into the fourth quarter of 1999. The Company expects to receive
$500,000 from Warner-Lambert in December 1999, and $3.5 million in one or more
payments in the first half of 2000 from the milestone completed in September
1999. The Company also expects to achieve additional milestones under the
Warner-Lambert agreement during 2000, which will result in further payments.
However, there can be no assurance as to when or if the Company will achieve
such milestones. The Company is currently pursuing licensing agreements for its
nasal and injectable calcitonin products. These agreements could provide
short-term funds to the Company in upfront payments as well as milestone
payments. The Company has executed an agreement for the sale of state tax
benefits, to yield approximately $4 million, under a New Jersey Economic
Development Authority program, which allows certain New Jersey taxpayers to sell
their state tax benefits to third-parties. However, the proceeds will be
received over the next few years and the size and timing of such proceeds are
subject to the continued funding of the program by the State of New Jersey as
well as limitations based on the level of participation by other companies. The
Company's application for the sale was approved by the New Jersey Economic
Development Authority in October 1999 and the Company expects to receive at
least $1 million in the first year's allocation. However, there can be no
assurance that any of these transactions will be completed or, if completed,
that the terms and timing of such transactions would provide sufficient funds to
sustain operations at the current level.
While the Company believes that the transactions it currently is pursuing and
the milestone payments under the Warner-Lambert agreement will satisfy the
Company's liquidity requirements in the near term, satisfying the Company's
long-term liquidity requirements will require the successful commercialization
of its nasal or oral calcitonin product. In addition, the commercialization of
its calcitonin products will require the Company to incur additional capital
expenditures, including expenditures to expand or upgrade the Company's
manufacturing operations to satisfy certain of its calcitonin supply
obligations. However, neither the cost nor timing of such capital expenditures
is determinable at this time.
YEAR 2000
The Company has established a Year 2000 taskforce that is responsible for
identifying and reviewing all of the Company's internal computer systems for
Year 2000 compliance, including workstations, the accounting system, and the
control systems for equipment in the Company's manufacturing and laboratory
facilities. The taskforce has reviewed and tested all critical and non-critical
systems for Year 2000 compliance. All critical systems, such as the accounting
and telephone systems have been brought into compliance so that the Company
believes that its business will not be adversely affected by the non-performance
of these systems. Of the non-critical workstations tested and found not to be in
compliance, most have been updated to be compliant. The Company intends to
repair or replace the few remaining non-critical noncompliant systems in a
timely manner. To date, the costs of remediation have not been material.
The Company has no material relationships with third-party suppliers, to the
extent that third-party noncompliance could seriously disrupt operations. The
Company could be significantly affected by Year 2000 noncompliance on the part
of Warner-Lambert as the Company currently is dependent upon timely milestone
payments from Warner-Lambert. In addition, the loss of the utility supply to the
Company's laboratory, production and administrative facilities would cause a
shut down of those facilities which, depending on the duration of the shut down,
may have a material adverse impact on the Company's business. In addition, the
loss of telecommunications services and banking services would, as is the case
with all businesses, adversely affect the Company.
OTHER
The Company's Common Stock has been delisted from the Nasdaq National Market
System effective October 5, 1999 and is now trading on the OTC Bulletin Board.
The stock price has been adversely affected, but the impact on the liquidity of
the stock has not yet been determined. The Company has filed an appeal with
Nasdaq to review the delisting decision. However, the ultimate resolution of the
hearing is unknown.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting For Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133, as amended, will be effective for the
Company's fiscal year beginning January 1, 2001. The adoption of SFAS No. 133 is
not expected to have a material effect on the Company's financial position or
results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
In the normal course of business, the Company is exposed to fluctuations in
interest rates as the Company seeks debt financing to sustain its operations.
The Company does not use derivative instruments or hedging to manage its
exposures.
The information below summarizes the Company's market risks associated with debt
obligations as of September 30, 1999. Fair values included herein have been
estimated taking into consideration the nature and terms of each instrument and
the prevailing economic and market condition at September 30, 1999. The table
below presents principal cash flows and related interest rates by year of
maturity based on the terms of the debt. The information presented as to the
convertible debentures is without consideration as to conversion features, as
the Company is unable to predict if and when such conversions may occur.
Variable interest rates disclosed represent the rates at September 30, 1999.
Estimated Year of Maturity
Fair Carrying ----------------
Value Amount 1999 2000 2001 2002 2003
------ ------ ---- ---- ---- ---- ----
Notes payable - stockholders $1,140,000 1,140,000 1,140,000 -- -- -- --
Variable interest rate 8.625% -- -- -- --
Notes payable - stockholders $1,870,000 1,870,000 171,922 788,684 837,328 72,066 --
Fixed interest rate 6% 6% 6% 6%
5% convertible debentures $2,800,000 2,800,000 -- -- 2,800,000 -- --
Fixed interest rate (1) 5% 5% 5% -- --
(1) At the option of the Company, interest payments may be made using the
Company's Common Stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or activities of the Company, or industry results, to be materially different
from any future results, performance or activities expressed or implied by such
forward-looking statements. Such factors include: general economic and business
conditions, the financial condition of the Company, including the Company's need
for and success in securing additional financing, competition, the Company's
dependence on other companies to commercialize, manufacture and sell products
using the Company's technologies, the uncertainty of results of preclinical and
clinical testing, the risk of product liability and liability for human clinical
trials, the Company's dependence on patents and other proprietary rights,
dependence on key management officials, the availability and cost of capital,
the availability of qualified personnel, changes in, or the failure to comply
with, governmental regulations, the failure to obtain regulatory approvals of
the Company's products and other factors discussed in the Company's various
filings with the Securities and Exchange Commission, including the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Recent Sales of Unregistered Securities.
In July 1999, the Company issued 95,853 shares of Common Stock as payment of
approximately $90,000 in accrued interest on the Company's 5% Convertible
Debentures due December 31, 2001. All of such shares were issued by the Company
without registration in reliance on an exemption under Section 4 (2) of the
Securities Act.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.1 Amended and Restated Secured Note dated July
13, 1999.
Exhibit 10.2 Amended and Restated Security Agreement
dated July 13, 1999.
Exhibit 10.3 Subordination Agreement dated July 13, 1999.
Exhibit 10.4 Mortgage and Security Agreement dated July
13, 1999.
Exhibit 10.5 $70,000 Secured Note dated July 30, 1999.
Exhibit 10.6 $200,000 Secured Note dated August 5, 1999.
Exhibit 10.7 Modification of Mortgage and Security
Agreement dated August 5, 1999.
Exhibit 10.8 Amendment to Security Agreement and
Subordination Agreement between the Company
and Jay Levy, Warren Levy and Ronald Levy
dated August 5, 1999.
Exhibit-27 Financial Data Schedule - period ended
September 30, 1999.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months ended
September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIGENE LABORATORIES, INC.
-----------------------
(Registrant)
/s/ Warren P. Levy
November 15, 1999 -----------------------
Warren P. Levy, President
(Chief Executive Officer)
/s/ Jay Levy
November 15, 1999 -----------------------
Jay Levy, Treasurer
(Chief Financial Officer and
Chief Accounting Officer)