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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 June 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__.
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--59,184,848 shares as of August 1, 2002
INDEX
UNIGENE LABORATORIES, INC.
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets-
June 30, 2002 and December 31, 2001 3
Condensed Statements of Operations-
Three months and six months ended June 30, 2002 and 2001 4
Condensed Statements of Cash Flows-
Six months ended June 30, 2002 and 2001 5
Notes to Condensed Financial Statements-
June 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 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNIGENE LABORATORIES, INC.
CONDENSED BALANCE SHEETS
June 30, 2002 December 31, 2001
------------- -----------------
ASSETS (Unaudited)
- ------
Current assets:
Cash and cash equivalents $ 911,827 $ 405,040
Receivables 454,372 --
Prepaid expenses 139,771 72,701
Inventory 541,733 283,328
------------ ------------
Total current assets 2,047,703 761,069
Property, plant and equipment - net 3,428,333 4,109,312
Investment in joint venture 900,000 900,000
Patents and other intangibles, net 1,377,107 1,375,062
Other assets 259,738 373,811
------------ ------------
$ 8,012,881 $ 7,519,254
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Accounts payable $ 1,831,604 $ 2,177,949
Accrued expenses 4,767,212 6,589,251
Notes payable - stockholders 9,503,323 8,983,323
Notes payable - other 800,000 800,000
Current portion - long-term notes payable -
stockholders 1,870,000 1,870,000
5% convertible debentures -- 2,400,000
Current portion - capital lease obligations 19,972 29,677
Deferred revenue 200,000 --
------------ ------------
Total current liabilities 18,992,111 22,850,200
Note payable - Tail Wind 985,662 --
Joint venture obligation, excluding current portion 495,000 495,000
Capital lease obligations, excluding current portion 6,976 14,131
Deferred revenue, excluding current portion 2,750,000 --
Commitments and contingencies
Stockholders' deficit:
Common Stock - par value $.01 per share, authorized 100,000,000 shares,
issued 59,127,138 shares in 2002 and
51,456,715 shares in 2001 591,271 514,567
Additional paid-in capital 74,769,783 71,271,610
Common stock to be issued -- 225,000
Accumulated deficit (90,576,891) (87,850,223)
Less: Treasury stock, at cost, 7,290 shares (1,031) (1,031)
------------ ------------
Total stockholders' deficit (15,216,868) (15,840,077)
------------ ------------
$ 8,012,881 $ 7,519,254
============ ============
See notes to condensed financial statements.
3
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Licensing and other revenue $ 556,700 $ 88,042 $ 636,671 $ 361,817
------------ ------------ ------------ ------------
Operating expenses:
Research and development 1,931,740 2,267,546 3,753,669 4,568,016
General and administrative 953,521 627,458 1,501,107 1,236,973
------------ ------------ ------------ ------------
2,885,261 2,895,004 5,254,776 5,804,989
------------ ------------ ------------ ------------
Operating loss (2,328,561) (2,806,962) (4,618,105) (5,443,172)
Other income (expense):
Gain on the extinguishment of debt
and related interest 2,506,146 -- 2,506,146 --
Interest income 4,934 2,157 6,027 5,493
Interest expense (344,883) (503,924) (892,861) (996,161)
------------ ------------ ------------ ------------
Loss before income taxes (162,364) (3,308,729) (2,998,793) (6,433,840)
Income tax benefit -- -- 272,125 --
------------ ------------ ------------ ------------
Net loss $ (162,364) $ (3,308,729) $ (2,726,668) $ (6,433,840)
============ ============ ============ ============
Net loss per share, basic and diluted $ 0.00 $ (0.07) $ (.05) $ (.14)
============ ============ ============ ============
Weighted average number of shares
outstanding - basic and diluted 57,220,630 46,767,154 54,867,158 45,630,289
============ ============ ============ ============
See notes to condensed financial statements.
4
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30
----------------------
2002 2001
---- ----
Net cash provided by (used for) operating activities $(1,783,193) $(3,754,870)
----------- -----------
Investing activities:
Purchase of equipment and furniture (44,771) (12,166)
Increase in patents and other intangibles (78,587) (91,174)
Decrease in other assets 114,073 57,105
Construction of leasehold and building improvements (49,800) (2,169)
----------- -----------
(59,085) (48,404)
----------- -----------
Financing activities:
Proceeds from sale of stock, net 1,859,552 262,829
Issuance of stockholder notes 700,000 3,560,000
Exercise of stock options and warrants 711 1,495
Repayment of capital lease obligations (16,860) (13,637)
Repayment of stockholder notes (180,000) --
Repayment of note payable - Tail Wind (14,338) --
----------- -----------
2,349,065 3,810,687
----------- -----------
Net increase (decrease) in cash and cash equivalents 506,787 7,413
Cash and cash equivalents at beginning of year 405,040 17,108
----------- -----------
Cash and cash equivalents at end of period $ 911,827 $ 24,521
=========== ===========
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 $ 1,431,200 --
=========== ===========
Cash paid for interest $ 17,151 $ 30,896
=========== ===========
See notes to condensed financial statements
5
UNIGENE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 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 considered necessary for a fair
presentation have been included. Operating results for the six-month period
ended June 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 undiscounted
net cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future undiscounted 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, 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.
6
NOTE B - LIQUIDITY
Unigene has incurred annual operating losses since its inception and, as a
result, at June 30, 2002 has an accumulated deficit of approximately $90,577,000
and has a working capital deficiency of approximately $16,944,000. 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 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. 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, 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
six months of 2002, Unigene received gross proceeds of $2,047,635 from the sale
of 4,553,602 shares of common stock to Fusion before cash expenses of
approximately $188,000. From May 18, 2001, through June 30, 2002, Unigene has
received approximately $3,928,000 through the sale of 9,566,087 shares of common
stock to Fusion, before cash expenses of approximately $480,000. 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 determine either the
cost or the timing of such capital expenditures at this time.
7
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 June 30, 2002, Unigene has recognized an aggregate of $488,000 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 1 year from the effective
date for various articulated reasons related to a substantial diminution of the
perceived business opportunity from the development or commercialization of
product, or (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 performance period of the license agreement of 15
years. Revenue for both of the three and six month periods ended June 30, 2002
includes $50,000 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 June 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 June 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 June 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 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
8
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, 2002, 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, 2002, 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, 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 had not made any of these payments,
but had 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 all
issues raised in the arbitration, 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 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 SEC. Beginning May 13, 2002, the escrow agent has 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 June 30, 2002, 350,000
shares of common stock have been released. In addition, in July and August 2002,
the
9
escrow agent released an additional 750,000 shares to Tail Wind based upon
Unigene's stock trading volume in June and July 2002.
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:
June 30, 2002 December 31, 2001
------------- -----------------
Finished goods.......... $195,000 $ 100,000
Raw materials........... 346,733 183,328
-------- ------------
Total.............. $541,733 $ 283,328
======== ============
NOTE G - FUSION CAPITAL FINANCING
On May 9, 2001, Unigene entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC, 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, providing that
the closing sale price of our stock remains at least $4.00. Fusion is not
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, and 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 June 30, 2002, we have
received approximately $3,928,000 through the sale of 9,566,087 shares of common
stock to Fusion, before cash expenses of approximately $480,000.
10
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
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) for the treatment
of osteoporosis. We own 45% of the joint venture and will 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 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 2002 and up to an additional $495,000 in cash within
two years thereafter. However, these amounts may be reduced or offset by our
share of joint venture profits. As of June 30, 2002 we invested $37,500 in the
joint venture. 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 $120,000 has been paid as of June 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.
11
NOTE K - OTHER
For the three month and six month periods ended June 30, 2002, Unigene
recognized additional gains in the amount of $15,000 and $63,000, respectively.
These gains were due to a favorable settlement of amounts owed to a vendor in
exchange for Unigene common stock.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
Revenue increased 533% to $557,000 from $88,000 for the three months ended June
30, 2002, and increased 76% to $637,000 from $362,000 for the six months ended
June 30, 2002, as compared to the same periods in 2001. Revenue for 2002
consisted primarily of revenue from GlaxoSmithKline ("GSK") for an aggregate of
$488,000 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 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 of the deferred up-front and milestone payments was
recognized as revenue during the second quarter of 2002. Revenue for the three
months ended June 30, 2001 consisted primarily of calcitonin sales. Revenue for
the six months ended June 30, 2001 consisted primarily of revenue from Pfizer,
including $200,000 from the amortization of deferred revenue and $54,000 for
analytical testing services. In March 2001, Pfizer terminated its license
agreement with Unigene.
Research and development, Unigene's largest expense, decreased 15% to $1,932,000
from $2,268,000 for the three months ended June 30, 2002, and decreased 18% to
$3,754,000 from $4,568,000 for the six months ended June 30, 2002, as compared
to the same periods in 2001. The decrease was primarily attributable to
decreased development expenses related to Unigene's nasal calcitonin product, a
reduction in utility costs and non-renewal of an outside research collaboration.
General and administrative expenses increased 52% to $954,000 from $627,000 for
the three months ended June 30, 2002, and increased 21% to $1,501,000 from
$1,237,000 for the six months ended June 30, 2002, as compared to the same
periods in 2001. The increases were primarily due to increased legal fees
related to the GSK license agreement and to 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, including all issues raised in the
arbitration, 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 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 six month periods ended June 30, 2002, Unigene recognized additional gains
in the
12
amount of $15,000 and $63,000, respectively. These gains were due to a favorable
settlement of amounts owed to a vendor in exchange for Unigene common stock.
Interest income increased $3,000 or 129% for the three months ended June 30,
2002, and increased $500 or 10% for the six months ended June 30, 2002, as
compared to the same periods in 2001, due to additional funds available for
investments in 2002, partially offset by lower prevailing interest rates.
Interest expense decreased $159,000 or 32% for the three months ended June 30,
2002 to $345,000 from $504,000 and decreased $103,000 or 10% for the six months
ended June 30, 2002 to $893,000 from $996,000 as compared to the same periods in
2001. Interest expense for the three months and six months ended June 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 periods 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 $317,000
for the first half of 2002 and $276,000 for the first half 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 and related interest and the
increase in revenue, net loss for the three months ended June 30, 2002 decreased
95% or $3,146,000 to $162,000 from $3,309,000 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 operating expenses and the increase in income tax
benefit, net loss for the six months ended June 30, 2002 decreased 58% or
$3,707,000 to $2,727,000 from $6,434,000 for the corresponding period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, Unigene had cash and cash equivalents of $912,000, an increase
of $507,000 from December 31, 2001.
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 June 30, 2002, had an accumulated deficit of
approximately $90,577,000 and a working capital deficiency of
13
approximately $16,944,000. 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 had 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 development of its oral calcitonin product as a
treatment for osteoporosis, and is seeking potential licensees in the U.S. and
other countries.
14
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 half 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 completion. 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 signing of a license or
distribution agreement and the filing of an NDA with the FDA in the third
quarter of 2002. The remaining cost for preparing and filing the NDA is
approximately $130,000. Unigene is seeking a licensing partner or contract sales
organization which could proceed to market nasal calcitonin after FDA approval.
We believe that this product could be on the market as soon as 2003. 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 a marketable 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 June 30, 2002, as follows:
15
Second
half of
Contractual Obligations Total 2002 2003 2004 Thereafter
----------------------- ----- ---- ---- ---- ----------
Chinese joint ventures $ 1,092,500 402,500 60,000 555,000 75,000
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 26,948 15,850 11,098 -- --
Operating leases 419,971 120,982 227,010 39,676 32,303
Executive compensation 167,500 167,500 -- -- --
----------- ----------- ----------- ----------- -----------
Total Contractual Obligations $14,241,748 12,080,155 298,108 594,676 1,268,809
----------- ----------- ----------- ----------- -----------
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 2002 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 June 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 $120,000 had been paid as of June 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
16
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 had not made any of these payments,
but had 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 all
issues raised in the arbitration, 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, in July and August 2002, the escrow agent released an additional
750,000 shares to Tail Wind based upon Unigene's stock trading volume in June
and July 2002.
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 August 1, 2002, Jay Levy made
demand loans to Unigene 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 $269,000, and total
interest expense on all Levy loans was approximately $604,000 for the six months
ended June 30, 2002. As of August 1, 2002, total accrued interest on all Levy
loans was approximately $2,718,000 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% (11.00% at August 1, 2002) that are classified
as short-term debt. These loans were originally at the
17
Merrill Lynch Margin Loan Rate plus .25%. These loans are secured by a security
interest in Unigene's equipment and real property. Accrued interest on these
loans at August 1, 2002 was approximately $1,394,000.
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 were originally at 6%. 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 August 1, 2002 was
approximately $547,000.
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%, (6.00% at August 1, 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 August 1, 2002 was approximately
$354,000.
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 August 1, 2002) that are classified
as short-term debt. These loans were originally at the Merrill Lynch Margin Loan
Rate plus .25%. An additional loan in the amount of $5,000 bears interest at the
Merrill Lynch Loan Rate plus .25% (6.00% at August 1, 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 August
1, 2002 was approximately $213,000.
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% (11.00% at August 1, 2002) that are classified
as short-term debt. These loans were originally at the Merrill Lynch Margin Loan
Rate plus .25%. An additional loan in the amount of $5,000 bears interest at the
Merrill Lynch Margin Loan Rate plus .25% (6.00% at August 1, 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 August 1, 2002 was approximately $210,000.
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 has authorized
the sale to Fusion of up to 21,000,000 shares of Unigene common stock. From May
18, 2001 through July 15, 2002, Unigene has received $3,943,430 through the sale
of 9,621,087 shares to Fusion, before cash expenses of approximately $480,000.
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 due to 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.
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
18
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 determine either
the cost or the timing of such capital expenditures at this time.
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 July 31, 2002, approximately $26,000,000 of these New Jersey loss
carryforwards has 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 six-month period ended June 30, 2002, the Unigene's
deferred tax assets and valuation allowances each increased by approximately
$1,000,000.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission 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
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain.
19
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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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 June 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 June 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 $1,000,000 -- -- -- $1,000,000 --
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%.
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 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
21
filings with the SEC, including Unigene's Annual Report on Form 10-K for the
year ended December 31, 2001.
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
In July 2000, Reseau de Voyage Sterling, Inc. filed suit against Unigene in the
State of New York. The plaintiff, 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 the plaintiff to extend the term of the warrant
beyond its expiration date. The plaintiff is seeking damages of $2 million. We
believe that this suit is completely without merit, and we will continue to
vigorously contest the claim.
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 June 30, 2002, Unigene sold 257,378 shares of common stock
to Rutgers University in exchange for cancellation of indebtedness in the amount
of $129,155. 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.
In the quarter ended June 30, 2002, Unigene exchanged 2,000,000 shares of common
stock to The Tail Wind Fund, Ltd. along with a $1,000,000 secured promissory
note in exchange for cancellation of indebtedness in the amount of $4,583,191.
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. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The matters described under item 4(c) below were submitted to a vote
of security holders at the Annual Meeting of Stockholders held on June
11, 2002 (the "Annual Meeting") in connection with which proxies were
solicited pursuant to Regulation 14A under the Securities Exchange
Act.
(b) Not applicable
22
(c) The following describes the matters voted upon at the Annual Meeting and
sets forth the number of votes cast for and against or withheld and, as
applicable, the number of abstentions as to each such matter:
(i) Election of directors:
Nominee For Withheld
------- --- --------
Jay Levy 46,373,907 651,671
Ronald S. Levy 46,377,902 647,676
Warren P. Levy 46,378,502 647,076
Allen Bloom 46,314,302 711,276
J. Thomas August 46,383,032 642,546
Bruce Morra 46,314,302 711,276
(ii) Proposal to ratify the appointment of KPMG LLP as independent auditors
of the Company for 2002:
For Against Abstain
--- ------- -------
46,504,055 482,958 38,565
(d) Not applicable.
23
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: None.
(b) Reports on Form 8-K:
April 13, 2002 (announcement of a worldwide licensing agreement for oral
parathyroid hormone with SmithKline Beecham Corporation, a GlaxoSmithKline
company).
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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
August 14, 2002 --------------------------------
Warren P. Levy, President
(Chief Executive Officer)
/s/ Jay Levy
August 14, 2002 --------------------------------
Jay Levy, Treasurer
(Chief Financial Officer and
Chief Accounting Officer)
25