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, 2002
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 882-0860
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- -------------------------------------------------------------------------------
(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___.
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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-- 62,205,098 shares as of November 1, 2002
INDEX
UNIGENE LABORATORIES, INC.
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets-
September 30, 2002 and December 31, 2001 3
Condensed Statements of Operations-
Three months and nine months ended September 30, 2002 and 2001 4
Condensed Statements of Cash Flows-
Nine months ended September 30, 2002 and 2001 5
Notes to Condensed Financial Statements-
September 30, 2002 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Controls and Procedures 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNIGENE LABORATORIES, INC.
CONDENSED BALANCE SHEETS
September 30, 2002 December 31, 2001
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ASSETS (Unaudited)
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Current assets:
Cash and cash equivalents $ 348,509 $ 405,040
Accounts receivable 288,786 --
Prepaid expenses 148,167 72,701
Inventory 630,730 283,328
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Total current assets 1,416,192 761,069
Property, plant and equipment, net 3,124,673 4,109,312
Investment in joint venture 37,500 --
Patents and other intangibles, net 1,256,702 1,375,062
Other assets 268,739 373,811
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$ 6,103,806 $ 6,619,254
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Accounts payable $ 1,810,760 $ 2,177,949
Accrued expenses and interest 4,560,416 6,184,251
Notes payable - stockholders 9,503,323 8,983,323
Notes payable - other 800,000 800,000
Current portion - notes payable -
stockholders 1,870,000 1,870,000
5% convertible debentures -- 2,400,000
Current portion - capital lease obligations 17,026 29,677
Deferred revenue 200,000 --
-------------- --------------
Total current liabilities 18,761,525 22,445,200
Long-term liabilities:
Deferred revenue, excluding current portion 2,700,000 --
Note payable - Tail Wind 985,662 --
Capital lease obligations, excluding current portion 4,917 14,131
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Total liabilities 22,452,104 22,459,331
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Commitments and contingencies
Stockholders' deficit:
Common Stock - par value $.01 per share,
authorized 100,000,000 shares, issued
60,689,660 shares in 2002 and
51,456,715 shares in 2001 606,897 514,567
Additional paid-in capital 75,128,795 71,271,610
Common stock to be issued -- 225,000
Accumulated deficit (92,082,959) (87,850,223)
Less: Treasury stock, at cost, 7,290 shares (1,031) (1,031)
-------------- --------------
Total stockholders' deficit (16,348,298) (15,840,077)
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$ 6,103,806 $ 6,619,254
============== ==============
See notes to condensed financial statements.
3
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
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2002 2001 2002 2001
---- ---- ---- ----
Licensing and other revenue $ 826,199 $ 267,654 $ 1,462,870 $ 629,471
------------ ------------ ------------ ------------
Operating expenses:
Research and development 1,800,274 2,288,764 5,553,943 6,856,780
General and administrative 672,571 681,862 2,173,678 1,918,835
------------ ------------ ------------ ------------
2,472,845 2,970,626 7,727,621 8,775,615
------------ ------------ ------------ ------------
Operating loss (1,646,646) (2,702,972) (6,264,751) (8,146,144)
Other income (expense):
Gain on the extinguishment of debt
and related interest 493,626 -- 2,999,772 --
Gain from sale of tax benefit -- -- 272,125 --
Interest income 990 1,369 7,017 6,862
Interest expense (354,038) (530,063) (1,246,899) (1,526,224)
------------ ------------ ------------ ------------
Net loss $ (1,506,068) $ (3,231,666) $ (4,232,736) $ (9,665,506)
============ ============ ============ ============
Net loss per share, basic and diluted $ (0.02) $ (0.07) $ (0.07) $ (0.21)
============ ============ ============ ============
Weighted average number of shares
outstanding - basic and diluted 59,612,790 48,335,004 56,466,419 46,541,768
============ ============ ============ ============
See notes to condensed financial statements.
4
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
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2002 2001
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Net cash provided by (used for) operating activities $(2,576,312) $(5,563,221)
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Investing activities:
Purchase of equipment and furniture (134,662) (12,673)
Decrease (increase) in patents and other intangibles 807 (124,947)
Decrease in other assets 105,072 55,896
Construction of leasehold and building improvements (49,800) (2,169)
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(78,583) (83,893)
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Financing activities:
Proceeds from sale of stock, net 2,113,856 705,579
Issuance of stockholder notes 700,000 5,035,000
Exercise of stock options and warrants 711 1,495
Repayment of capital lease obligations (21,865) (35,683)
Repayment of stockholder notes (180,000) --
Repayment of note payable - Tail Wind (14,338) --
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2,598,364 5,706,391
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Net increase (decrease) in cash and cash equivalents (56,531) 59,277
Cash and cash equivalents at beginning of period 405,040 17,108
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Cash and cash equivalents at end of period $ 348,509 $ 76,385
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SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Issuance of note payable for settlement of 5%
convertible debentures $ 1,000,000 --
=========== ===========
Issuance of common stock in payment of 5% convertible
debentures, accounts payable and accrued expenses $ 1,557,595 --
=========== ===========
Cash paid for interest $ 20,000 $ 41,000
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See notes to condensed financial statements.
5
UNIGENE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America 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 accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation in accordance with generally
accepted accounting principles have been included. Operating results for the
nine-month period ended September 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. For further
information, please refer to the financial statements and footnotes included in
Unigene's annual report on Form 10-K for the year ended December 31, 2001 filed
with the Securities and Exchange Commission.
Unigene adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 142 "Goodwill and Other Intangible Assets" effective January 1, 2002.
SFAS No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at least
annually. Statement 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144. There was no impact of the adoption of SFAS No. 142 on the financial
statements because Unigene has never entered into a purchase business
combination and has no goodwill or indefinite life intangible assets.
Unigene adopted the provisions of SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" effective January 1, 2002 . SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 requires that long-lived assets, exclusive of
goodwill and indefinite life intangibles, be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to the future discounted net
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future discounted net cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. SFAS No. 144 requires companies to
separately report discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Unigene adopted SFAS No. 144 on January 1, 2002. The adoption of
SFAS No. 144 for long-lived assets did not have a material impact on its
financial statements because the impairment assessment under SFAS No. 144 is
largely unchanged from SFAS No. 121. The provisions of this statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities
and, therefore, the application will depend on future actions initiated by
management. As a result, Unigene cannot determine the potential effects that
adoption of SFAS No. 144 will have on its financial statements with respect to
future decisions, if any.
Certain amounts in the prior period have been reclassified to conform to the
current period's presentation.
6
In April 2002, the Financial Accounting Standards Board ("FASB") adopted
Statement of Financial Accounting Standards 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). This Statement rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions.
Statement No. 145 is effective for fiscal years beginning after May 15, 2002. We
believe that this statement will not have a significant impact on our results of
operations or financial position upon adoption.
In July 2002, the Financial Accounting Standards Board ("FASB") Issued Statement
146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). This Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The principal difference between this
Statement and Issue 94-3 relates to its requirements for recognition of a
liability for a cost associated with an exit or disposal activity. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002. We believe that this new standard will not have a material
effect on our results of operations or financial condition.
NOTE B - LIQUIDITY
Unigene has incurred annual operating losses since its inception and, as a
result, at September 30, 2002 has an accumulated deficit of approximately
$92,000,000 and has a working capital deficiency of approximately $17,300,000.
The Company is also in default of certain loan agreements. These factors raise
substantial doubt about its 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. Unigene's cash requirements are approximately $10 to $11 million
per year to operate its research and peptide manufacturing facilities and
develop its peptide products. Unigene also has principal and interest
obligations under a note it issued to The Tail Wind Fund, Ltd.(" Tail Wind") in
the original principal amount of $1,000,000 and its outstanding notes payable to
the Levys described in Note D, as well as obligations relating to its current
and former joint ventures in China. In addition to the GlaxoSmithKline ("GSK")
license agreement described in Note C, Unigene is actively seeking licensing
and/or supply agreements with pharmaceutical companies for oral, nasal and
injectable forms of calcitonin as well as for other oral peptides. We do not
have sufficient financial resources to continue to fund our operations at the
current level. Under the agreement with Fusion Capital Fund II, LLC ("Fusion"),
Unigene has the contractual right to sell to Fusion, subject to certain
conditions, at the then current market price, on each trading day $43,750 of our
common stock up to an aggregate of $21,000,000 over a period of 24 months. The
Board of Directors has authorized the sale to Fusion of up to 21,000,000 shares
of Unigene common stock. See Note G. During the first nine months of 2002,
Unigene received gross
7
proceeds of $2,321,080 from the sale of 5,680,278 shares of common stock to
Fusion before cash expenses of approximately $207,000. From May 18, 2001,
through September 30, 2002, Unigene has received $4,201,880 through the sale of
10,692,763 shares of common stock to Fusion, before cash expenses of
approximately $500,000. Our sales of common stock to Fusion have been below the
maximum level permitted due to the share price and trading volume of our common
stock as well as due to our desire to keep dilution to a minimum. In addition,
during the first quarter of 2002, we borrowed $700,000 from Jay Levy, the
Chairman of the Board, to fund a portion of our operations.
The extent to which we rely on Fusion as a source of financing will depend on a
number of factors, including the prevailing market price and trading volume of
our common stock and the extent to which we are able to secure working capital
from other sources, such as through the achievement of milestones in the GSK
license agreement and through entering into new licensing agreements or the sale
of calcitonin, both of which we are actively exploring. If we are unable to
achieve milestones in the GSK license agreement on a timely basis or are unable
to enter into a significant new revenue generating license or other arrangement
in the near term, or if the GSK license is terminated, we may need to utilize
Fusion to a greater extent or to secure another source of funding in order to
satisfy our working capital needs or we might need to significantly curtail our
operations. We also could consider a sale or merger of Unigene. Should the
funding we require to sustain our working capital needs be unavailable or
prohibitively expensive when we require it, the consequence would be a material
adverse effect on our business, operating results, financial condition and
prospects.
We believe that satisfying our capital requirements over the long term will
require the successful commercialization of our parathyroid hormone ("PTH")
product, our oral or nasal calcitonin products and/or another peptide product in
the United States and abroad. However, it is uncertain whether or not any of our
products will be approved or will be commercially successful. The
commercialization of one or more peptide products may require us to incur
additional capital expenditures to expand or upgrade our manufacturing
operations to satisfy future supply obligations. We cannot currently determine
either the cost or the timing of such capital expenditures.
NOTE C - GLAXOSMITHKLINE AGREEMENT
On April 13, 2002, we completed a licensing agreement with GSK to develop an
oral formulation of an analog of PTH currently in preclinical development for
the treatment of osteoporosis. Under the terms of the agreement, GSK received an
exclusive worldwide license to develop and commercialize the product. In return,
GSK made a $2 million up-front licensing fee payment and a $1 million
licensing-related milestone payment to us and could make subsequent milestone
payments in the aggregate amount of $147 million, subject to the progress of the
compound through clinical development and through to the market. In addition,
GSK will fund all development activities during the program, including Unigene's
activities in the production of raw material for development and clinical
supplies, and will pay Unigene a royalty on its worldwide sales of the product.
Through September 30, 2002, Unigene has recognized an aggregate of $1,080,000 in
revenue for its GSK development activities. The royalty rate will be increased
if certain sales milestones are achieved. This agreement is subject to certain
termination provisions. Either party may terminate the license agreement if the
other party (i) materially breaches the license agreement, which breach is not
cured within 60 days (or 30 days for a payment default), (ii) voluntarily files,
or has served against it involuntarily, a petition in bankruptcy or insolvency,
which, in the case of involuntary proceedings, remains undismissed for 60 days,
or (iii) makes an assignment for the benefit of creditors. Additionally, GSK may
terminate the license agreement (i) any time after one year from the effective
date due to safety or efficacy concerns of the PTH product, significant
increases in development timelines or costs, or significant changes in the
osteoporosis market or in government regulations, or
8
(ii) if Unigene fails to fulfill certain obligations by a date certain, which
obligations require the cooperation of third parties. Revenue recognition of the
up front licensing fee and first milestone payment has been deferred over the
estimated 15 year performance period of the license agreement. Revenue for the
three and nine month periods ended September 30, 2002 includes $50,000 and
$100,000, respectively, of deferred licensing revenue.
NOTE D - NOTES PAYABLE - STOCKHOLDERS
During the second quarter of 2002, Unigene repaid to Jay Levy, the Chairman of
the Board and an officer of Unigene, $180,000 of demand notes bearing interest
at the Merrill Lynch Margin Loan Rate plus 5.25% (11.0% as of September 30,
2002). During the first quarter of 2002, Jay Levy, the Chairman of the Board and
an officer of Unigene, loaned to Unigene $700,000 evidenced by demand notes
bearing interest at the Merrill Lynch Margin Loan Rate plus .25% (6.0% as of
September 30, 2002).
In 2001, due to the fact that we did not make principal and interest payments
when due, the interest rate on $3,465,000 (currently $3,285,000), $260,000 and
$248,323 of prior demand loans made to Unigene by Jay Levy, Warren Levy and
Ronald Levy, respectively, increased an additional 5% per year to the Merrill
Lynch Margin Loan Rate plus 5.25% (11.0% as of September 30, 2002) and the
interest rate on $1,870,000 of term notes evidencing loans made by Jay Levy to
Unigene increased an additional 5% per year from 6% to 11%. The increased rate
is calculated on both past due principal and interest.
NOTE E - CONVERTIBLE DEBENTURES
In June 1998, Unigene completed a private placement of $4,000,000 in principal
amount of 5% convertible debentures to Tail Wind from which Unigene realized net
proceeds of approximately $3,750,000. The 5% debentures were convertible into
shares of Unigene's common stock. The interest on the debentures, at our option,
was payable in shares of common stock. Upon conversion, the holder of a 5%
debenture was entitled to receive warrants to purchase a number of shares of
common stock equal to 4% of the number of shares issued as a result of the
conversion. However, the number of shares of common stock that Unigene was
obligated to issue, in the aggregate, upon conversion, when combined with the
shares issued in payment of interest and upon the exercise of the warrants, was
limited to 3,852,500 shares. After this share limit was reached, we became
obligated to redeem all 5% debentures tendered for conversion at a redemption
price equal to 120% of the principal amount, plus accrued interest. In December
1999, Unigene was unable to convert $200,000 in principal of the 5% debentures
tendered for conversion because the conversion would have exceeded the share
limit. As a result, Unigene accrued, as of December 31, 1999, an amount equal to
$400,000 representing the 20% premium on the outstanding $2,000,000 in principal
amount of 5% debentures that had not been converted. As of March 31, 2001, all
of the $2,000,000 in principal amount of 5% debentures were tendered for
conversion and therefore were classified as a current liability in the amount of
$2,400,000. Through March 31, 2001, Unigene issued a total of 3,703,362 shares
of common stock upon conversion of $2,000,000 in principal amount of the 5%
debentures and in payment of interest on the 5% debentures. Also, in 2001
Unigene issued an additional 103,032 shares of common stock upon the cashless
exercise of all of the 141,123 warrants issued upon conversion of the 5%
debentures.
On January 5, 2000, Unigene failed to make the required semi-annual interest
payment on the outstanding 5% debentures. As a result, the interest rate on the
outstanding 5% debentures increased to 20% per year. The semi-annual interest
payments due July 5, 2000, January 5, 2001, July 5, 2001 and January 5, 2002
were not made. In addition, due to the delisting of Unigene's
9
common stock from the Nasdaq National Market in October 1999, we became
obligated to pay the holder of the 5% debentures an amount equal to 2% of the
outstanding principal amount of the debentures per month. Unigene did not make
any of these payments, but accrued the amounts as additional interest expense.
Because of our failure to make cash payments to the holder of the debentures, an
event of default occurred. On April 9, 2002, Unigene and Tail Wind entered into
a settlement agreement. Pursuant to the terms of the settlement agreement, Tail
Wind surrendered to Unigene the $2 million in principal amount of convertible
debentures that remained outstanding and released all claims against Unigene
relating to Tail Wind's purchase of the convertible debentures, including
accrued interest in the amount of $2,183,000, which aggregated approximately
$4,583,000. In exchange, Unigene issued to Tail Wind a $1 million promissory
note with a first security interest in Unigene's Fairfield, New Jersey plant and
equipment and two million shares of Unigene common stock, which were placed in
escrow as described below. The note bears interest at a rate of 6% per annum and
principal and interest are due in February 2005. Under the terms of the
settlement, if any repayments are made on the Levy debt, a proportionate payment
must be made on the Tail Wind note based on the ratio of Tail Wind debt and Levy
debt at the time of payment. During the second quarter of 2002, $180,000 was
paid on the Levy debt and therefore $14,338 was paid on the Tail Wind note. The
shares issued to Tail Wind were valued at $1.1 million in the aggregate, based
on Unigene's closing stock price on April 9, 2002. Unigene therefore recognized
a gain for accounting purposes of approximately $2,443,000 on the extinguishment
of debt and related interest in the second quarter of 2002. In accordance with
recently adopted SFAS No. 145, the gain on extinguishment of debt is classified
with other income (expense) items on the statement of operations. Under the
terms of the settlement agreement, Unigene deposited the two million shares of
common stock with an escrow agent and filed a registration statement covering
the resale of the shares with the Securities and Exchange Commission ("SEC").
Beginning May 13, 2002, the escrow agent released the shares to Tail Wind at a
rate of 50,000 shares per week with additional monthly releases depending on
prior month trading volume. Through September 30, 2002, 1,850,000 shares of
common stock have been released. In October 2002, the escrow agent released the
remaining 150,000 shares to Tail Wind.
NOTE F- INVENTORY
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist of the following:
September 30, 2002 December 31, 2001
------------------ -----------------
Finished goods .......... $ 295,500 $ 100,000
Raw materials ........... 335,230 183,328
----------- -----------
Total ................ $ 630,730 $ 283,328
=========== ===========
NOTE G - FUSION FINANCING
On May 9, 2001, Unigene entered into a common stock purchase agreement with
Fusion, under which Fusion has agreed, subject to certain conditions, to
purchase on each trading day during the term of the agreement $43,750 of our
common stock up to an aggregate of $21,000,000. Fusion is committed to purchase
the shares over a twenty-four month period. We may decrease this amount or
terminate the agreement at any time. If our stock price equals or exceeds $4.00
per share for five (5) consecutive trading days, we have the right to increase
the daily purchase amount above $43,750, provided that the closing sale price of
our stock remains at least $4.00. Fusion is not
10
obligated to purchase any shares of our common stock if the purchase price is
less than $0.25 per share. Under the agreement with Fusion, Unigene must satisfy
the requirements that are a condition to Fusion's obligation, including: the
continued effectiveness of the registration statement for the resale of the
shares by Fusion, no default on, or acceleration prior to maturity of, any
payment obligations of Unigene in excess of $1,000,000, no insolvency or
bankruptcy of Unigene, our transfer agent's failure for five trading days to
issue to Fusion shares of our common stock which Fusion is entitled to under the
common stock purchase agreement, any material breach of the representations or
warranties or covenants contained in the common stock purchase agreement or any
related agreements which has or which could have a material adverse affect on us
subject to a cure period of ten trading days, continued listing of Unigene
common stock on the OTC Bulletin Board. In addition, Unigene must avoid the
failure to meet the maintenance requirements for listing on the OTC Bulletin
Board for a period of 10 consecutive trading days or for more than an aggregate
of 30 trading days in any 365-day period. The selling price per share to Fusion
is equal to the lesser of: the lowest sale price of our common stock on the day
of purchase by Fusion, or the average of the lowest five closing sale prices of
our common stock during the 15 trading days prior to the date of purchase by
Fusion. We issued to Fusion 2,000,000 shares of common stock and a five-year
warrant to purchase 1,000,000 shares of common stock at an exercise price of
$.50 per share as of March 30, 2001 as compensation for its commitment, which
was charged to additional paid-in-capital. Fusion has agreed not to sell the
shares issued as a commitment fee or the shares issuable upon the exercise of
the warrant until the earlier of May 2003 or the termination or a default under
the common stock purchase agreement. In addition to the compensation shares, the
Board of Directors has authorized the issuance and sale to Fusion of up to
21,000,000 shares of Unigene common stock. From May 18, 2001 through September
30, 2002, we have received $4,201,880 through the sale of 10,692,763 shares of
common stock to Fusion, before cash expenses of approximately $500,000.
In December 2000, we issued a five-year warrant to purchase 373,002 shares of
Unigene common stock at $1.126 per share to an investment banker as a fee in
connection with the Fusion financing agreement.
Fusion has agreed that neither it nor any of its affiliates will engage in any
direct or indirect short-selling or hedging of our common stock during any time
prior to the termination of the common stock purchase agreement.
NOTE H - CHINA JOINT VENTURE
Current Agreement
In June 2000, we entered into a joint venture with Shijiazhuang Pharmaceutical
Group ("SPG"), a pharmaceutical company in the People's Republic of China. The
joint venture will manufacture and distribute injectable and nasal calcitonin
products in China (and possibly other selected Asian markets with the consent of
Unigene) for the treatment of osteoporosis. We own 45% of the joint venture and
have a 45% interest in the joint venture profits and losses. In the first phase
of the collaboration, SPG will contribute its existing injectable calcitonin
license to the joint venture, which will allow the joint venture to sell our
product in China. The joint venture is now preparing a new drug application
("NDA") in China for its injectable and nasal products which is expected to be
filed in late 2002. In addition, the joint venture may be required to conduct
brief local human trials. If the product is successful, the joint venture may
establish a facility in China to fill injectable and nasal calcitonin products
using bulk calcitonin produced at our Boonton, New Jersey plant. Eventually the
joint venture may manufacture bulk calcitonin in China at a new facility that
would be constructed by it. This would require local financing by the joint
venture. The joint venture commenced operations
11
in March 2002. Initial sales will be used by the joint venture to offset startup
costs. Therefore, the joint venture's initial net income or loss will be
immaterial to Unigene's results of operations. Under the terms of the joint
venture with SPG, Unigene is obligated to contribute up to $405,000 in cash
during 2003 and up to an additional $495,000 in cash within two years
thereafter, contingent upon receiving required business licenses. However, these
amounts may be reduced or offset by our share of joint venture profits. As of
September 30, 2002, we invested $37,500 in the joint venture.
Former Agreement
In addition, Unigene is obligated to pay to the Qingdao General Pharmaceutical
Company, our former joint venture partner, an aggregate of $350,000 in monthly
installment payments of $5,000 (reduced from $25,000 per month) in order to
terminate its former joint venture in China, of which $140,000 has been paid as
of September 30, 2002. We recognized the entire $350,000 obligation as an
expense in 2000.
NOTE I - LEGAL MATTERS
Reseau de Voyage Sterling, Inc. ("Reseau") filed suit against Unigene in July
2000. Reseau, which purchased from a third party a warrant to purchase one
million shares of Unigene common stock, alleges that Unigene breached a verbal
agreement to extend the term of the warrant beyond its expiration date. Reseau
is seeking damages of $2 million. We believe that the suit is completely without
merit and we intend to continue to vigorously contest this claim.
NOTE J - INCOME TAXES
The income tax benefit in 2002 of $272,000 consists of proceeds received for the
sale of a portion of Unigene's state tax net operating loss carryforwards and
research credits under a New Jersey Economic Development Authority program,
which allows certain New Jersey taxpayers to sell their state tax benefits to
third parties. Tax benefits are not recognized in the financial statements until
they are realized.
NOTE K - OTHER
For the three month and nine month periods ended September 30, 2002, Unigene
recognized additional gains in the amount of $494,000 and $557,000,
respectively. These gains were due to favorable settlements of amounts owed to
vendors in exchange for Unigene common stock.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following management's discussion and analysis of financial condition and
results of operations should be read in conjunction with Unigene's Annual Report
on Form 10-K for the year ended December 31, 2001, including the financial
statements and notes contained therein.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Various 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"). These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or activities of our business, or industry results, to be materially different
from any future results, performance or activities expressed or implied by such
forward-looking
12
statements. These factors include: general economic and business conditions, our
financial condition, competition, our dependence on other companies to
commercialize, manufacture and sell products using our technologies, the
uncertainty of results of animal and human testing, the risk of product
liability and liability for human clinical trials, our 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 for our products, litigation and other factors
discussed in our various filings with the SEC, including Unigene's Annual Report
on Form 10-K for the year ended December 31, 2001.
RESULTS OF OPERATIONS
Revenue increased 208% to $826,000 from $268,000 for the three months ended
September 30, 2002, and increased 133% to $1,463,000 from $629,000 for the nine
months ended September 30, 2002, as compared to the same periods in 2001.
Revenue for the three and nine months ended September 30, 2002 consisted
primarily of revenue from GSK for an aggregate of $592,000 and $1,080,000,
respectively, for its GSK development activities. In April 2002, Unigene
received a $2,000,000 up-front payment under an agreement for an oral PTH
product licensed to GSK. Unigene also received a $1,000,000 licensing-related
milestone payment from GSK. These $3,000,000 in payments are being deferred in
accordance with SEC Staff Accounting Bulletin No. 101 ("SAB 101") and recognized
as revenue over a 15-year period which is our estimated performance period of
the license agreement. Therefore, $50,000 and $100,000, respectively, of the
deferred up-front and milestone payments was recognized as revenue during the
three and nine month periods ended September 30, 2002. Revenue for the three
months ended September 30, 2001 consisted primarily of calcitonin sales. Revenue
for the nine months ended September 30, 2001 consisted primarily of $339,000 in
calcitonin sales as well as revenue from Pfizer, including $200,000 from the
amortization of deferred revenue and $89,000 for analytical testing services. In
March 2001, Pfizer terminated its license agreement with Unigene.
Research and development, Unigene's largest expense, decreased 21% to $1,800,000
from $2,289,000 for the three months ended September 30, 2002, and decreased 19%
to $5,554,000 from $6,857,000 for the nine months ended September 30, 2002, as
compared to the same periods in 2001. The decreases were primarily attributable
to decreased development expenses related to Unigene's nasal calcitonin product,
the capitalization into inventory of certain PTH production expenses,
non-renewal of two outside research collaborations and a reduction in utility
costs.
General and administrative expenses decreased 1% to $673,000 from $682,000 for
the three months ended September 30, 2002, and increased 13% to $2,174,000 from
$1,919,000 for the nine months ended September 30, 2002, as compared to the same
periods in 2001. The increase was primarily due to increased legal fees related
to the GSK license agreement, foreign trademarks and the Tail Wind settlement.
Gain on the extinguishment of debt and related interest results primarily from
the April 9, 2002 settlement agreement between Unigene and Tail Wind. Pursuant
to the terms of the settlement agreement, Tail Wind surrendered to Unigene the
$2 million in principal amount of convertible debentures that remained
outstanding and released all claims against Unigene relating to Tail Wind's
purchase of the convertible debentures, which aggregated $4,583,000. In
exchange, Unigene issued to Tail Wind a $1 million promissory note with a first
security interest in Unigene's Fairfield, New Jersey plant and equipment and two
million shares of Unigene common stock, which
13
were placed in escrow as described below. The note bears interest at a rate of
6% per annum and principal and interest are due in February 2005. The shares
were valued at $1.1 million in the aggregate, based on Unigene's closing stock
price on April 9, 2002. Unigene therefore recognized a gain for accounting
purposes of $2,443,000 on the extinguishment of debt and related interest in the
second quarter of 2002. In addition, for the three month and nine month periods
ended September 30, 2002, Unigene recognized additional gains in the amount of
$494,000 and $557,000, respectively. These gains were due to favorable
settlements of amounts owed to vendors in exchange for Unigene common stock.
Interest income decreased $400 for the three months ended September 30, 2002,
and increased $200 for the nine months ended September 30, 2002, as compared to
the same periods in 2001.
Interest expense decreased $176,000 or 33% for the three months ended September
30, 2002 to $354,000 from $530,000 and decreased $279,000 or 18% for the nine
months ended September 30, 2002 to $1,247,000 from $1,526,000 as compared to the
same periods in 2001. Interest expense for the three months and nine months
ended September 30, 2002 was reduced by the settlement with Tail Wind in April
2002. Unigene issued a $1,000,000 note accruing interest at 6% per annum in
connection with the Tail Wind settlement. Previously, Unigene was accruing
interest on its Tail Wind 5% convertible debentures. The annual interest rate on
the $2,000,000 in outstanding principal amount of the 5% debentures was 20%. In
addition, Unigene had been accruing additional interest expense monthly in an
amount equal to 2% of the outstanding principal amount of the 5% debentures as a
penalty for the removal of Unigene's common stock from trading on the Nasdaq
Stock Market. Officers' loans to Unigene increased $700,000 during the first
quarter of 2002 and decreased $180,000 during the second quarter of 2002. Both
years were affected by the fact that in 2001 Unigene did not make principal and
interest payments on certain officers' loans when due. Therefore, the interest
rate on certain prior loans increased an additional 5% per year and applied to
both past due principal and interest. This additional interest was approximately
$414,000 for the first nine months of 2002 and $382,000 for the first nine
months of 2001.
The income tax benefit in 2002 of $272,000 consists of proceeds received for the
sale of a portion of Unigene's state tax net operating loss carryforwards and
research credits under a New Jersey Economic Development Authority program,
which allows certain New Jersey taxpayers to sell their state tax benefits to
third parties. The purpose of the New Jersey program is to provide financial
assistance to high-technology and biotechnology companies in order to facilitate
future growth and job creation.
Due to the gain on the extinguishment of debt, the increase in revenue and the
decrease in operating and interest expenses, net loss for the three months ended
September 30, 2002 decreased 53% or $1,726,000 to $1,506,000 from $3,232,000 for
the corresponding period in 2001.
Due to the gain on the extinguishment of debt and related interest, the increase
in revenue, the decrease in research and interest expenses and the increase in
income tax benefit, net loss for the nine months ended September 30, 2002
decreased 56% or $5,433,000 to $4,233,000 from $9,666,000 for the corresponding
period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, Unigene had cash and cash equivalents of $349,000, a
decrease of $57,000 from December 31, 2001.
14
We do not have sufficient financial resources to continue to fund our operations
at the current level. Unigene has incurred annual operating losses since its
inception and, as a result, at September 30, 2002, had an accumulated deficit of
approximately $92,000,000 and a working capital deficiency of approximately
$17,300,000. We are in default of certain of our debt obligations. The
independent auditors' report covering Unigene's 2001 financial statements
includes an explanatory paragraph stating that these factors raise substantial
doubt about our 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.
Unigene's cash requirements to operate its research and peptide manufacturing
facilities and develop its products are approximately $10 to $11 million per
year. In addition, Unigene has principal and interest obligations under the Tail
Wind note and its outstanding notes payable to the Levys, as well as obligations
relating to its current and former joint ventures in China.
Our future ability to generate cash from operations will depend primarily upon
signing research or licensing agreements, achieving defined benchmarks in such
agreements that entitle Unigene to receive milestone payments and receiving
royalties from the sale of its licensed products. We are actively seeking
licensing and/or supply agreements with pharmaceutical companies for oral, nasal
and injectable forms of calcitonin as well as for other oral peptides.
On April 13, 2002, we completed a licensing agreement with GSK to develop an
oral formulation of an analog of PTH currently in preclinical development for
the treatment of osteoporosis. Under the terms of the agreement, GSK received an
exclusive worldwide license to develop and commercialize the product. In return,
GSK made a $2 million up-front licensing fee payment and a $1 million
licensing-related milestone payment to us and could make additional milestone
payments in the aggregate amount of $147 million, subject to the progress of the
compound through clinical development and through to the market. In addition,
GSK will fund all development activities during the program, including Unigene's
activities in the production of raw material for development and clinical
supplies, and will pay Unigene a royalty on its worldwide sales of the product.
The royalty rate will be increased if certain sales milestones are achieved.
This agreement is subject to certain termination provisions.
In July 1997, Unigene entered into an agreement under which it granted to
Warner-Lambert Company a worldwide license to use its oral calcitonin
technology. In June 2000, Pfizer Inc. acquired Warner-Lambert. Through March 31,
2001, we received a total of $22.9 million from Pfizer consisting of $3 million
for an equity investment, $3 million for a licensing fee, $400,000 for
analytical testing services and recognized an aggregate of $16.5 million in
milestone revenue. Pfizer conducted a Phase I/II human study which was completed
in December 2000. Pfizer analyzed the results of the study and informed Unigene
in March 2001 that the study did not achieve Pfizer's desired results. Pfizer
terminated the license agreement citing this conclusion. As a result of the
termination, Pfizer was no longer obligated to make additional milestone
payments or royalty payments to us (previously achieved milestones had been paid
in full prior to December 31, 2000). At the time the agreement was terminated,
there were remaining milestone payments in the aggregate amount of $32 million.
Of this total, $16 million was related to commencement of clinical trials or
regulatory submissions and $16 million was related to regulatory approvals in
the U.S. and overseas. We believe that this study, in which a U.S. Food & Drug
Administration ("FDA") approved product also did not work and which produced
results contrary to many published studies, was not capable of determining the
performance of our oral calcitonin product. Unigene also believes that the
results would have been more favorable if subjects in the study had received
calcium supplementation in addition to the calcitonin. Therefore, Unigene
intends to continue the
15
development of its oral calcitonin product as a treatment for osteoporosis, and
is seeking potential licensees in the U.S. and other countries.
As a result of the termination of the Pfizer agreement, we no longer have
restrictions on selling bulk calcitonin. During 2001 and in the first nine
months of 2002, we sold a total of $339,000 and $49,000, respectively, of bulk
calcitonin. Unigene also has the right to license the use of its technologies
for injectable and nasal formulations of calcitonin on a worldwide basis.
Unigene has licensed distributors in the United Kingdom, Ireland and Israel for
its injectable product. However, these distribution agreements have not produced
significant revenues. In June 2000, we entered into a joint venture agreement in
China with SPG, to manufacture and market our injectable and nasal calcitonin
products. The joint venture commenced operations in March 2002. Initial sales
will be used by the joint venture to offset startup costs. Therefore, the joint
venture's initial net income or loss will be immaterial to Unigene's results of
operations. Unigene is actively seeking other licensing and/or supply agreements
with pharmaceutical companies for its injectable and nasal calcitonin products
and for other pharmaceutical products that can be manufactured and/or delivered
using its patented technologies, and is also exploring other opportunities
including business combinations. However, we may not be successful in our
efforts to enter into any additional revenue generating agreements.
We are engaged in the research, production and delivery of peptide products. Our
primary focus has been on the development of various forms of calcitonin and
other peptide products for the treatment of osteoporosis, including nasal and
oral calcitonin and, beginning in 2001, PTH. In each case, we seek to develop
the basic product and then license the product to an established pharmaceutical
company to complete the development, clinical trials and regulatory process. As
a result, we will not control the nature, timing or cost of bringing our
products to market. Prior to our agreement with GSK, we did not track costs on a
per project basis, and therefore were unable to allocate our total research and
development costs incurred to date to our various products. Each of these
products is in various stages of development. For nasal calcitonin, we filed an
Investigational New Drug Application with the FDA in February 2000 and
successfully completed human studies using our product. The remaining steps to
commercialize this product would include the completion of a licensing agreement
and the filing of an NDA with the FDA in the fourth quarter of 2002. The
remaining cost for preparing and filing the NDA is approximately $100,000. We
believe that this product could be on the market as soon as late 2003 if all
required procedures are completed timely and without significant exceptions. For
oral calcitonin, Pfizer terminated its license agreement with Unigene in March
2001 and as a result we will require a new licensee to repeat a Phase I/II
clinical trial and also to conduct a Phase III clinical trial. We expect that
the costs of these trials would be borne by our future licensee due to our
limited financial resources. Because multiple clinical trials are still
necessary for our oral calcitonin product, the product launch would take at
least several years. PTH is in very early stages of development and therefore it
is too early to speculate on the timing of commercialization for this product.
However, GSK will fund all development activities during the program, including
Unigene's activities in the production of raw material for development and
clinical supplies. Typically, we would expect cash inflows prior to
commercialization from any license agreement we sign in the form of up-front
payments and milestone payments. Due to our limited financial resources, the
delay in signing license or distribution agreements for our products, the delay
in achieving milestones, the termination of the GSK agreement, or the delay in
obtaining regulatory approvals for our products would have an adverse effect on
our operations and our cash flow.
We have a number of future payment obligations under various agreements. They
are summarized at September 30, 2002, as follows:
16
Fourth
Quarter of
Contractual Obligations Total 2002 2003 2004 Thereafter
----------------------- ----- ---- ---- ---- ----------
Chinese joint ventures $ 1,072,500 15,000 427,500 60,000 570,000
Tail Wind note and accrued interest 1,161,506 -- -- -- 1,161,506
Short-term notes payable - stockholders 9,503,323 9,503,323 -- -- --
Long-term notes payable - stockholders 1,870,000 1,870,000 -- -- --
Capital leases 21,943 17,026 4,917 -- --
Operating leases 359,158 60,169 227,010 39,676 32,303
Executive compensation 83,750 83,750 -- -- --
----------------------------------------------------------------------
Total Contractual Obligations $14,072,180 11,549,268 659,427 99,676 1,763,809
----------------------------------------------------------------------
Unigene maintains its peptide production facility on leased premises in Boonton,
New Jersey. We began production under current Good Manufacturing Practice
guidelines at this facility in 1996. The current lease expires in 2004. Unigene
has two consecutive ten-year renewal options under the lease, as well as an
option to purchase the facility. Currently, Unigene has no material commitments
outstanding for capital expenditures relating to either the Boonton facility or
the office and laboratory facility in Fairfield, New Jersey.
Under the terms of the joint venture with SPG, Unigene is obligated to
contribute up to $405,000 in cash during 2003 and up to an additional $495,000
in cash within two years thereafter. However, these amounts may be reduced or
offset by Unigene's share of joint venture profits. As of September 30, 2002,
Unigene had contributed $37,500 to the joint venture. The joint venture began
operations in March 2002. In addition, Unigene is obligated to pay to the
Qingdao General Pharmaceutical Company an aggregate of $350,000 in monthly
installment payments of $5,000 (reduced from $25,000 per month) in order to
terminate its former joint venture in China, of which $140,000 had been paid as
of September 30, 2002. We recognized the entire $350,000 obligation as an
expense in 2000.
In June 1998, Unigene completed a private placement of $4,000,000 in principal
amount of 5% convertible debentures to Tail Wind from which Unigene realized net
proceeds of approximately $3,750,000. The 5% debentures were convertible into
shares of Unigene's common stock. The interest on the debentures, at our option,
was payable in shares of common stock. Upon conversion, the holder of a 5%
debenture was entitled to receive warrants to purchase a number of shares of
common stock equal to 4% of the number of shares issued as a result of the
conversion. However, the number of shares of common stock that Unigene was
obligated to issue, in the aggregate, upon conversion, when combined with the
shares issued in payment of interest and upon the exercise of the warrants, was
limited to 3,852,500 shares. After this share limit was reached, we became
obligated to redeem all 5% debentures tendered for conversion at a redemption
price equal to 120% of the principal amount, plus accrued interest. In December
1999, Unigene was unable to convert $200,000 in principal of the 5% debentures
tendered for conversion because the conversion would have exceeded the share
limit. As a result, Unigene accrued, as of December 31, 1999, an amount equal to
$400,000 representing the 20% premium on the outstanding $2,000,000 in principal
amount of 5% debentures that had not been converted. As of December 31, 2001,
all of the $2,000,000 in principal amount of 5% debentures were tendered for
conversion and therefore were classified as a current liability in the amount of
$2,400,000. Through December 31, 2001, Unigene issued a total of
17
3,703,362 shares of common stock upon conversion of $2,000,000 in principal
amount of the 5% debentures and in payment of interest on the 5% debentures.
Also, Unigene issued an additional 103,032 shares of common stock upon the
cashless exercise of all of the 141,123 warrants issued upon conversion of the
5% debentures.
On January 5, 2000, Unigene failed to make the required semi-annual interest
payment on the outstanding 5% debentures. As a result, the interest rate on the
outstanding 5% debentures increased to 20% per year. The semi-annual interest
payments due July 5, 2000, January 5, 2001, July 5, 2001 and January 5, 2002
were not made. In addition, due to the delisting of Unigene's common stock from
the Nasdaq National Market in October 1999, we became obligated to pay the
holder of the 5% debentures an amount equal to 2% of the outstanding principal
amount of the debentures per month. Unigene did not make any of these payments,
but accrued the amounts as additional interest expense.
Because of our failure to make cash payments to the holder of the debentures, an
event of default occurred. On April 9, 2002, Unigene and Tail Wind entered into
a settlement agreement. Pursuant to the terms of the settlement agreement, Tail
Wind surrendered to Unigene the $2 million in principal amount of convertible
debentures that remained outstanding and released all claims against Unigene
relating to Tail Wind's purchase of the convertible debentures, which aggregated
approximately $4.5 million. In exchange, Unigene issued to Tail Wind a $1
million secured promissory note and two million shares of Unigene common stock.
The note bears interest at a rate of 6% per annum and principal and interest are
due in February 2005; however, payments of principal may be required prior to
the note's maturity date if repayments of the Levy debt are made. The shares are
valued at $1.1 million in the aggregate, based on Unigene's closing stock price
on April 9, 2002. Unigene therefore recognized a gain for accounting purposes of
approximately $2.4 million on the extinguishment of debt and related interest.
Under the terms of the settlement agreement, Unigene deposited the two million
shares of common stock with an escrow agent and filed a registration statement
covering the resale of the shares with the SEC. Beginning May 13, 2002, the
escrow agent has released the shares to Tail Wind at a rate of 50,000 shares per
week. In addition, beginning in July, the escrow agent released on a monthly
basis additional shares to Tail Wind based upon Unigene's stock trading volume.
As of November 1, 2002, all 2,000,000 shares have been released to Tail Wind.
To satisfy Unigene's short-term liquidity needs, Jay Levy, the Chairman of the
Board and an officer of Unigene, and Warren Levy and Ronald Levy, directors and
officers of Unigene, and another Levy family member from time to time have made
loans to Unigene. From January 1, 2002 through September 30, 2002, Jay Levy made
demand loans to Unigene in the aggregate principal amount of $700,000. Unigene
repaid $180,000 in loans to Jay Levy in May 2002. During 2001, Jay Levy made
demand loans to Unigene of $6,100,000 and Warren Levy and Ronald Levy each made
demand loans to Unigene of $5,000. Unigene has not made principal and interest
payments on certain loans when due. However, the Levys waived all default
provisions including additional interest penalties due under these loans through
December 31, 2000. Beginning January 1, 2001, interest on loans originated
through March 4, 2001 increased an additional 5% per year and is calculated on
both past due principal and interest. This additional interest was approximately
$414,000, and total interest expense on all Levy loans was approximately
$920,000 for the nine months ended September 30, 2002. As of September 30, 2002,
total accrued interest on all Levy loans was approximately $2,929,000 and the
outstanding loans by these individuals to Unigene, classified as short-term
debt, totaled $11,373,323 and consist of:
Loans from Jay Levy in the aggregate principal amount of $3,285,000, which are
evidenced by demand notes bearing a floating interest rate equal to the Merrill
Lynch Margin Loan Rate plus 5.25%
18
per annum (11.00% at September 30, 2002) that are classified as short-term debt.
These loans originally accrued interest at the Merrill Lynch Margin Loan Rate
plus .25% per annum. These loans are secured by a security interest in Unigene's
equipment and real property. Accrued interest on these loans at September 30,
2002 was approximately $1,485,000.
Loans from Jay Levy in the aggregate principal amount of $1,870,000 evidenced by
term notes maturing January 2002 and bearing interest at the fixed rate of 11%
per year. These loans originally accrued interest at a rate of 6% per annum.
These loans are secured by a security interest in all of Unigene's equipment and
a mortgage on Unigene's real property. The terms of the notes required Unigene
to make installment payments of principal and interest beginning in October 1999
and ending in January 2002 in an aggregate amount of $72,426 per month. No
installment payments have been made to date. Accrued interest on these loans at
September 30, 2002 was approximately $592,000.
Loans from Jay Levy in the aggregate principal amount of $5,700,000 which are
evidenced by demand notes bearing a floating interest rate equal to the Merrill
Lynch Margin Loan Rate plus .25% per annum, (6.00% at September 30, 2002) and
are classified as short-term debt and which are secured by a security interest
in certain of our patents. Accrued interest on these loans at September 30, 2002
was approximately $411,000.
Loans from Warren Levy in the aggregate principal amount of $260,000 which are
evidenced by demand notes bearing a floating interest rate equal to the Merrill
Lynch Margin Loan Rate plus 5.25% (11.00% at September 30, 2002) that are
classified as short-term debt. These loans originally accrued interest at the
Merrill Lynch Margin Loan Rate plus .25% per annum. An additional loan in the
amount of $5,000 bears interest at the Merrill Lynch Loan Rate plus .25% per
annum (6.00% at September 30, 2002) and is classified as short-term debt. These
loans are secured by a secondary security interest in Unigene's equipment and
real property. Accrued interest on these loans at September 30, 2002 was
approximately $222,000.
Loans from Ronald Levy in the aggregate principal amount of $248,323 which are
evidenced by demand notes bearing a floating interest rate equal to the Merrill
Lynch Margin Loan Rate plus 5.25% per annum (11.00% at September 30, 2002) that
are classified as short-term debt. These loans originally accrued interest at
the Merrill Lynch Margin Loan Rate plus .25% per annum. An additional loan in
the amount of $5,000 bears interest at the Merrill Lynch Margin Loan Rate plus
..25% per annum (6.00% at September 30, 2002) and is classified as short-term
debt. These loans are secured by a secondary security interest in Unigene's
equipment and real property. Accrued interest on these loans at September 30,
2002 was approximately $219,000.
Under the agreement with Fusion, Unigene has the contractual right to sell to
Fusion, subject to certain conditions, at the then current market price, on each
trading day during the term of the agreement, $43,750 of its common stock up to
an aggregate of $21,000,000. See Note G. The Board of Directors authorized the
sale to Fusion of up to 21,000,000 shares of Unigene common stock. From May 18,
2001 through September 30, 2002, Unigene received $4,201,880 through the sale of
10,692,763 shares to Fusion, before cash expenses of approximately $500,000. Our
sales of common stock to Fusion have been below the maximum level due to the
share price and trading volume of our common stock as well as our desire to keep
dilution to a minimum. Depending on the future price at which shares are sold,
Fusion could provide Unigene with sufficient funding to sustain its operations
through the fourth quarter of 2003. The ability of Unigene to realize these
funds will also depend on its continuing compliance with the Fusion agreement.
19
The extent to which we intend to utilize Fusion as a source of financing will
depend on a number of factors, including the prevailing market price of our
common stock and the extent to which we are able to secure working capital from
other sources, such as through the achievement of milestones in the GSK license
agreement and through entering into new licensing agreements or the sale of
calcitonin, both of which we are actively exploring. If we are unable to achieve
milestones in the GSK license agreement on a timely basis or are unable to enter
into a significant new revenue generating license or other arrangement in the
near term, or if the GSK license is terminated, we may need to utilize Fusion to
a greater extent or to secure another source of funding in order to satisfy our
working capital needs or we might need to significantly curtail our operations.
We also could consider a sale or merger of Unigene. Should the funding we
require to sustain our working capital needs be unavailable or prohibitively
expensive when we require it, the consequence would be a material adverse effect
on our business, operating results, financial condition and prospects. Unigene
believes that satisfying its capital requirements over the long term will
require the successful commercialization of its PTH product, its oral or nasal
calcitonin products or another peptide product in the United States and abroad.
However, it is uncertain whether or not any of its products will be approved or
will be commercially successful. In addition, the commercialization of its
peptide products may require Unigene to incur additional capital expenditures to
expand or upgrade its manufacturing operations. Unigene cannot currently
determine either the cost or the timing of such capital expenditures.
As of December 31, 2001, Unigene had available for federal income tax reporting
purposes net operating loss carryforwards in the approximate amount of
$80,000,000, expiring from 2002 through 2021, which are available to reduce
future earnings which would otherwise be subject to federal income taxes. In
addition, as of December 31, 2001, Unigene had research and development credits
in the approximate amount of $3,000,000, which are available to reduce the
amount of future federal income taxes. These credits expire from 2002 through
2021. Unigene has New Jersey operating loss carryforwards in the approximate
amount of $26,000,000, expiring from 2005 through 2008, which are available to
reduce future taxable income, which would otherwise be subject to state income
tax. As of September 30, 2002, all of these New Jersey loss carryforwards have
been approved for future sale under a program of the New Jersey Economic
Development Authority, ("NJEDA"). In order to realize these benefits, Unigene
must apply to the NJEDA each year and must meet various requirements for
continuing eligibility. In addition, the program must continue to be funded by
the State of New Jersey, and there are limitations based on the level of
participation by other companies. As a result, future tax benefits will be
recognized in the financial statements as specific sales are approved. We sold
tax benefits and realized a total of $272,000 in January 2002.
Unigene follows Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Given our past history of incurring operating
losses, any deferred tax assets that are recognizable under SFAS No. 109 were
fully reserved. As of December 31, 2001 and 2000 under SFAS No. 109, Unigene had
deferred tax assets of approximately $34,000,000 and $29,000,000, respectively,
subject to valuation allowances of $34,000,000 and $29,000,000, respectively.
The deferred tax assets are primarily a result of Unigene's net operating losses
and tax credits. For the nine-month period ended September 30, 2002, Unigene's
deferred tax assets and valuation allowances each increased by approximately
$1,800,000.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The SEC defines "critical accounting policies" as those that are both important
to the portrayal of a company's financial condition and results, and require
management's most difficult, subjective or
20
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain.
The following discussion of critical accounting policies represents our attempt
to bring to the attention of the readers of this report those accounting
policies which we believe are critical to our financial statements and other
financial disclosure. It is not intended to be a comprehensive list of all of
our significant accounting policies which are more fully described in Note 3 of
the Notes to the Financial Statements included in our Annual Report on Form 10-K
for the year ended December 31, 2001. In many cases, the accounting treatment of
a particular transaction is specifically dictated by generally accepted
accounting principles, with no need for management's judgment in their
application. There are also areas in which the selection of an available policy
would not produce a materially different result.
Revenue Recognition: Revenue from the sale of product is recognized upon
shipment to the customer. Revenue from grants is recognized when earned. Such
revenues generally do not involve difficult, subjective or complex judgments.
Non-refundable milestone payments that represent the completion of a separate
earnings process and a significant step in the research and development process
are recognized as revenue when earned. This sometimes requires management to
judge whether or not a milestone has been met, and when it should be recognized
in the financial statements. Non-refundable license fees received upon execution
of license agreements where Unigene has continuing involvement are deferred and
recognized as revenue over the life of the agreement. This requires management
to estimate the expected performance period or term of the agreement or, if
applicable, the estimated life of its licensed patents.
Inventory Valuation: Inventories are stated at the lower of cost (using the
first-in, first-out method) or market. This requires management to estimate the
marketability of its products. Currently, Unigene has no approved products for
sale in the United States. However, we do sell peptides overseas and in the U.S.
for research purposes. We therefore capitalize and recognize in finished goods
inventory the estimated value of saleable peptides.
Accounting for Stock Options: We account for stock options granted to employees
and directors in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense is recorded on fixed stock option
grants only if the current fair value of the underlying stock exceeds the
exercise price of the option at the date of grant and it is recognized on a
straight-line basis over the vesting period. We account for stock options
granted to non-employees on a fair value basis in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation", and Emerging Issues Task Force Issue
No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services." As
a result, the non-cash charge to operations for non-employee options with
vesting or other performance criteria is affected each reporting period by
changes in the fair value of our common stock. Had compensation cost for options
granted to employees and directors been determined consistent with SFAS No. 123,
Unigene's net loss would have increased for the years ended December 31, 2001,
2000 and 1999 by approximately $780,000, $175,000 and $605,000, respectively.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, Unigene is exposed to fluctuations in interest
rates due to the use of debt as a component of the funding of its operations.
Unigene does not employ specific strategies, such as the use of derivative
instruments or hedging, to manage its interest rate exposure. Beginning in the
first quarter of 2001, Unigene's interest rate exposure on its notes
payable-stockholders has been affected by its failure to make principal and
interest payments when due. Unigene's exposure to interest rate fluctuations
over the near-term will continue to be affected by these events.
The information below summarizes Unigene's market risks associated with debt
obligations as of September 30, 2002. The table below presents principal cash
flows and related interest rates by year of maturity based on the terms of the
debt. Variable interest rates disclosed represent the rates at September 30,
2002. Given Unigene's financial condition described in "Liquidity and Capital
Resources" it is not practicable to estimate the fair value of our debt
instruments.
Year of Maturity
--------------------------------------------------------------------
Carrying
Amount 2002 2003 2004 2005 2006
----------- ----------- ------------ ----------- ----------- -----------
Notes payable - stockholders $ 3,793,323 3,793,323 -- -- -- --
Variable interest rate (1) 11.0% -- -- -- --
Notes payable - stockholders $ 5,710,000 5,710,000 -- -- -- --
Variable interest rate 6.0% -- -- -- --
Notes payable - stockholders $ 1,870,000 1,870,000 -- -- -- --
Fixed interest rate (2) 11% -- -- -- --
Tail Wind note $ 985,662 -- -- -- $ 985,662 --
Fixed interest rate - 6%
(1) Due to the fact that Unigene did not make principal and interest payments
on its notes payable to stockholders when due, the variable interest rate
on these notes has increased from the Merrill Lynch Margin Loan Rate plus
.25% to the Merrill Lynch Margin Loan Rate plus 5.25%.
(2) Due to the fact that Unigene did not make principal and interest payments
on its notes payable to stockholders when due, the fixed interest rate on
these notes has increased from 6% to 11%.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In July 2000, Reseau de Voyage Sterling, Inc. ("Reseau") filed suit against
Unigene in the State of New York. Reseau, which purchased from a third party a
warrant to purchase one million shares of Unigene common stock, alleges that
Unigene breached a verbal agreement with Reseau to extend the term of the
warrant beyond its expiration date. Reseau is seeking damages of $2 million. We
believe that this suit is completely without merit, and we will continue to
vigorously contest the claim.
22
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Recent Sales of Unregistered Securities.
In the quarter ended September 30, 2002, Unigene issued 435,846 shares of common
stock to Yale University in exchange for cancellation of indebtedness in the
amount of $620,022. All of such shares were issued by Unigene without
registration in reliance on an exemption under Section 4(2) of the Securities
Act of 1933, because the offer and sale was made to a limited number of
investors in a private transaction.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities
See description of notes payable to stockholders in Part I, Item 2:
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
Item 4. Controls and Procedures
(a) Within 90 days prior to the date of the filing of this report, we carried
out an evaluation, under the supervision and with the participation of our
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in our periodic SEC reports. It should be noted
that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote.
(b) In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K:
August 30, 2002 (termination of KPMG LLP as independent accountants).
August 30, 2002 (hiring of Grant Thornton LLP as independent accountants).
September 5, 2002 (letter to shareholders).
September 19, 2002 (hiring of Grant Thornton LLP as independent accountants).
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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 19, 2002 -----------------------
Warren P. Levy, President
(Chief Executive Officer)
/s/ Jay Levy
November 19, 2002 -----------------------
Jay Levy, Treasurer
(Chief Financial Officer and
Chief Accounting Officer)
24
CERTIFICATION
I, Jay Levy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unigene
Laboratories, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Jay Levy
Jay Levy, Treasurer
(Chief Financial Officer and Chief Accounting Officer)
25
CERTIFICATION
I, Warren Levy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unigene
Laboratories, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Warren Levy
Warren Levy
(Chief Executive Officer)
26