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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2002
Commission file number 0-16005
UNIGENE LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2328609
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
110 Little Falls Road
Fairfield, New Jersey 07004
(973) 882-0860
(Address and telephone number of
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class:
Common Stock, $.01 Par Value
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) Yes [ ] No[X].
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked prices of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. Aggregate market value as of June 28, 2002: $19,720,858
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's classes of
Common Stock, as of the latest practicable date. Common Stock, $.01 Par Value--
63,644,069 shares as of March 15, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) any annual report
to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.
PART III: Definitive Proxy Statement of Unigene Laboratories, Inc., to be
filed in connection with the Annual Meeting of Stockholders to be held on
June 10, 2003.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Various statements in the items captioned "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Form 10-K 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 the 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 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 this Form 10-K.
Item 1. Business
Overview
Unigene is a biopharmaceutical company engaged in the research, production and
delivery of small proteins, referred to as peptides, that have demonstrated or
may have potential medical use. We have a patented manufacturing technology for
producing many peptides cost-effectively. We also have patented oral and nasal
delivery technology that has been shown to deliver medically useful amounts of
various peptides into the bloodstream. Our primary focus has been on the
development of calcitonin and other peptide products for the treatment of
osteoporosis and other indications. We have licensed rights to our manufacturing
and delivery technologies for oral parathyroid hormone, which we refer to as
PTH, to GlaxoSmithKline, or GSK. We have also licensed our nasal calcitonin
product, which we have trademarked as Fortical(R), to Upsher-Smith Laboratories,
Inc., or USL. Both of these products are for the treatment of osteoporosis. We
have the facilities, subject to FDA approval for commercial production, and the
technology for manufacturing calcitonin and PTH in accordance with current Good
Manufacturing Practice guidelines, referred to as cGMP, and we have an
injectable calcitonin product that is approved for sale in the European Union
for two minor indications and in Switzerland for the treatment of osteoporosis.
Our Accomplishments
Among our major accomplishments are:
.. Development of a Proprietary Peptide Production Process. One of our
principal scientific accomplishments is our success in developing a highly
efficient biotechnology-based peptide production process. Several patents
relating to this process have issued. We believe that these proprietary
processes are key steps in the more efficient and economical commercial
production of medically useful peptides. Many of these peptides cannot be
produced at a reasonable cost in sufficient quantities for human testing or
commercial use by currently available production processes. We have
constructed and are operating a manufacturing facility employing this
process to produce PTH and calcitonin, and we have also produced
laboratory-scale quantities of several other peptides.
.. Development of Proprietary Technology for Oral Delivery. We have also
developed and patented an oral formulation that has successfully delivered
calcitonin into the bloodstream of human subjects. With our collaborators,
we have shown in several human studies that this formulation can deliver
significant quantities of the peptide into the human bloodstream. We
believe that the components of our patented oral product also can enable
the delivery of other peptides and we have initiated studies to investigate
this possibility internally and in collaboration with others. During 2001,
we reported successful oral delivery in animal studies of various peptides
including PTH for the treatment of osteoporosis and insulin for the
treatment of diabetes. During 2002, we licensed rights to our manufacturing
and delivery technologies for oral PTH to GSK.
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These two patented technologies form the basis of our business strategy. The
potential pharmaceutical products that we are developing use one, or in most
cases, both of these technologies. For example, our oral PTH product would use
PTH manufactured by our peptide production process and delivered by our oral
delivery technology.
All of our clinical trials for nasal calcitonin have been completed although, as
with any pharmaceutical application, the U.S. Food and Drug administration, or
FDA, could require additional trials as a condition to marketing approval which
could delay the product release. A new drug application, or NDA, was filed on
March 5, 2003. For this product, we believe that FDA approval may take
approximately 12 months from the filing of the NDA. However, during this review
process additional questions or concerns may be raised by the FDA which also
could delay the product release. During 2002, we licensed this product to USL.
There is an existing nasal calcitonin product on the market. Since our end
product would be similar to the currently existing product, we believe that it
would not require extensive education and sales promotion by our partner. We
believe that Fortical could be on the market as soon as 2004, assuming
successful completion of the FDA approval process. It is also possible that
another NDA holder could challenge our NDA and delay our marketing efforts.
Our oral calcitonin and oral PTH products would utilize our peptide production
process as well as our oral delivery system for peptides. These products are in
development and would be on the market after our nasal calcitonin product.
Strategy
Our business strategy is to develop proprietary products and processes with
applications in human health care to generate revenues from license fees,
royalties on third-party sales and direct sales of bulk or finished products.
Generally, we fund our internal research activities and, due to our limited
financial resources, intend to rely on licensees, which are likely to be
established pharmaceutical companies, to provide development funding. We also
generally expect to rely on these licensees to take responsibility for obtaining
appropriate regulatory approvals, human testing, and marketing of products
derived from our research activities. However, we may, in some cases, retain the
responsibility for human testing and for obtaining the required regulatory
approvals for a particular product.
.. GlaxoSmithKline License Agreement. In April 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 our
activities in the production of raw material for development and clinical
supplies, and will pay us a royalty on its worldwide sales of the product.
Through December 31, 2002, we have recognized an aggregate of $1,587,000 in
revenue from our GSK development activities and $712,000 from the sale of
bulk PTH under a separate supply agreement with GSK. The royalty rate will
be increased if certain sales milestones are achieved. 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 year ended December 31, 2002 includes the recognition of
$150,000 of licensing revenue from GSK. In addition, in January 2003 we
received a $1 million milestone payment from GSK in acknowledgment of the
performance demonstrated by our oral PTH formulation in animal studies.
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 (ii)
if we fail to fulfill certain obligations by a date certain, which
obligations require the cooperation of third parties.
.. Upsher-Smith Laboratories License Agreement. In November 2002, we signed a
$10 million exclusive U.S. licensing agreement with USL to market our
patented nasal formulation of calcitonin for the treatment of
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osteoporosis. Under the terms of the agreement, we received an up-front
payment of $3 million from USL and, in addition, will be eligible to
receive milestone payments up to $7 million in the aggregate and royalty
payments on product sales. We will be responsible for manufacturing the
product and will sell finished calcitonin product to USL. USL will package
the product and will distribute it nationwide. Revenue recognition of the
up-front licensing fee has been deferred over the estimated 19-year
performance period of the license agreement. Revenue for the year ended
December 31, 2002 includes the recognition of $13,000 of licensing revenue
from USL. This agreement may be terminated by either party by mutual
agreement or due to a breach of any material provision of the agreement not
cured within 60 days. We may terminate in the event of a net sales
shortfall. In addition, USL may terminate the agreement under certain
circumstances where USL assigns the agreement and we do not approve the
assignment.
.. China Joint Venture. In June 2000, we entered into a joint venture with
Shijiazhuang Pharmaceutical Group, or SPG, a pharmaceutical company in the
People's Republic of China. We expect that 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 NDA in China is being prepared for injectable and
nasal calcitonin products, which is expected to be filed by mid-2003.
Approvals of NDAs in China require approximately 12-18 months. In addition,
brief local human trials may be required. If the product is successful, the
joint venture may establish a facility in China to fill injectable and
nasal calcitonin products using bulk calcitonin supplied by us. Eventually
the joint venture may manufacture bulk calcitonin in China at a new
facility that would be constructed in the People's Republic of China by the
joint venture. This would require local financing by the joint venture. The
joint venture began operations in March 2002; sales of the injectable
calcitonin product began in April 2002. Initial sales will be used by the
joint venture to offset startup costs. The joint venture's net income or
loss for the period ended December 31, 2002 was immaterial to our results
of operations. Our investment in the joint venture has been immaterial to
date.
.. Other License or Distribution Arrangements. In addition to the joint
venture with SPG, we have entered into distribution agreements for our
injectable calcitonin product in the United Kingdom, Ireland and Israel. We
continue to seek other licensing or distribution agreements with
pharmaceutical companies for the oral, injectable and nasal calcitonin
products as well as for other oral peptides. However, we may not be
successful in our efforts to sign any additional revenue generating
agreements and any new or existing agreements may not be successful in
generating significant revenue.
Competition
Our primary business activity has been biotechnology research and
development. Biotechnology research is highly competitive, particularly in the
field of human health care. We compete with specialized biotechnology companies,
major pharmaceutical and chemical companies, universities and other non-profit
research organizations, many of which can devote considerably greater financial
resources to research activities. We believe that one of our main competitors in
the field of oral delivery of peptides is Emisphere Technologies, Inc. Novartis
is our main competitor and the market-leader in the U.S. for a nasal calcitonin
product. We currently have no products approved for sale in the U.S.
Our calcitonin and PTH products have potential applications in the
treatment of osteoporosis. If we are successful in obtaining approval for any of
these products, we would compete with major pharmaceutical companies. These
competitors can devote considerably greater financial resources to these
activities. Major companies with products in the field of osteoporosis include
Novartis, Wyeth, Merck, Eli Lilly, Aventis and Procter and Gamble. We expect to
be able to compete with these companies due to our collaborations with GSK and
USL. We believe that success in competing with others in the biotechnology
industry will be based primarily upon scientific expertise and technological
superiority. We also believe that success will be based on the ability to
identify and to pursue scientifically feasible and commercially viable
opportunities and to obtain proprietary protection for research achievements.
Our success will further depend on our ability to obtain adequate funding and on
developing, testing, protecting, producing and marketing products and obtaining
their timely regulatory approval.
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We are always at risk that others may develop superior processes or products
that would render our processes or products noncompetitive or obsolete.
Product Manufacture
We have been producing calcitonin since 1992. We constructed a cGMP
facility for the production of calcitonin at leased premises located in Boonton,
New Jersey. The facility began producing calcitonin under cGMP guidelines in
1996. The facility also produces our proprietary amidating enzyme for use in
producing calcitonin as well as PTH. The current production level of the
facility is approximately two kilograms of bulk calcitonin or PTH per year. We
believe that our facility's current capacity will be sufficient to launch
Fortical. However, we are in the process of increasing yield and therefore batch
size in order to increase our peptide production. The facility also contains a
filling line to manufacture the finished nasal calcitonin product.
The facility can be modified to increase peptide production capacity.
However, if we are successful in our efforts to commercialize a peptide product,
we expect that we may incur additional expenditures to expand or upgrade our
manufacturing operations. Although the facility currently is devoted primarily
to calcitonin and PTH production, it also is suitable for producing other
peptide products.
We are following conventional procedures to secure the approval of the
facility by regulatory agencies to allow us to manufacture peptides for human
use. European health authorities inspected the facility in connection with the
filing of our injectable calcitonin dossier and found it to be in compliance
with cGMP guidelines. However, there is always the risk that our operations
might not remain in compliance or that approval by other agencies will not be
obtained. The FDA must approve the facility in order to manufacture calcitonin,
PTH or other peptides for sale in the U.S.
Government Regulation
Our laboratory research, development and production activities and those of
our collaborators are subject to significant regulation by numerous federal,
state, local and foreign governmental authorities. FDA approval, following the
successful completion of various animal and human studies, is required for the
sale of a pharmaceutical product in the U.S. Foreign sales require similar
studies and approval by regulatory agencies.
The regulatory approval process for a pharmaceutical product requires
substantial resources and can take many years. There is always a risk that any
additional regulatory approvals required for our production facility or for any
of our products will not be obtained in a timely manner. Our inability to
obtain, or delays in obtaining, these approvals would adversely affect our
ability to continue to fund our programs, to produce marketable products, or to
receive revenue from milestone payments, product sales or royalties. We also
cannot predict the extent of any adverse governmental regulation that may arise
from future legislative and administrative action.
The FDA or other regulatory agencies may audit our production facility to
ensure that it is operating in compliance with cGMP guidelines. These guidelines
require that production operations be conducted in strict compliance with our
established rules for manufacturing and quality controls. These agencies are
empowered to suspend production operations and/or product sales if, in their
opinion, significant or repeated changes from these guidelines have occurred. A
suspension by any of these agencies could have a material adverse impact on our
operations.
Development of a Nasal Calcitonin Product
A major pharmaceutical company received FDA approval in 1995 for the
marketing of a nasally administered calcitonin product, which has substantially
increased sales of calcitonin products in the U.S. During 1999, we completed
preliminary human studies for our proprietary nasal calcitonin product. We filed
a patent application for our nasal calcitonin product in February 2000 and the
patent issued in August 2002. In January 2000, we filed an Investigational New
Drug Application with the FDA to begin human testing of our nasal product as a
treatment for osteoporosis. In February 2000, we began U.S. human studies. In
December 2000, we successfully completed a human study demonstrating similar
blood levels between our product and that of an existing nasal calcitonin
product. We successfully completed a second human study which showed a rapid and
persistent reduction in bone loss as measured by several accepted blood markers.
A substance in the bloodstream that measures the rate of bone
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loss in the tested subjects decreased by an average of over 40% in the first
month of the study, and that reduction was maintained throughout the three-month
dosing period during which the measurements were taken. In November 2002, we
signed a $10 million exclusive U.S. licensing agreement with USL to market our
patented nasal formulation of calcitonin for the treatment of osteoporosis.
Under the terms of the agreement, we received an up-front payment of $3 million
from USL and will be eligible to receive milestone payments and royalty payments
on product sales. We will be responsible for manufacturing the product and,
subject to FDA approval, will sell finished calcitonin product to USL. USL will
package the product and will distribute it nationwide. However, we may not be
successful in our efforts to obtain the approval of the FDA and other
governmental entities for Fortical, or to manufacture and sell the product. It
is also possible that another NDA holder could challenge our NDA and delay our
marketing efforts. This agreement is subject to certain termination provisions.
Revenue recognition of the up-front licensing fee has been deferred over the
estimated 19 year performance period of the license agreement. Revenue for the
year ended December 31, 2002 includes the recognition of $13,000 of licensing
revenue from USL.
Development of an Oral PTH Product
PTH is a natural peptide involved in the regulation of bone formation.
Third-party studies with several analogs of PTH have demonstrated the ability to
build new bone and PTH could be the first of a new generation of bone building
agents to be used alone or in combination with other currently available
osteoporosis drugs, which principally act to prevent further bone loss.
Employing the same animal model that we used successfully to demonstrate the
oral delivery of calcitonin, we were able to achieve significant blood levels of
PTH in 2001. We believe that this achievement could allow for the development of
a commercially viable oral product that can deliver therapeutic doses of PTH.
In April 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 our
activities in the production of raw material for development and clinical
supplies, and GSK will pay us a royalty on its worldwide sales of the product.
Through December 31, 2002, we have recognized an aggregate of $1,587,000 in
revenue for our GSK development activities and $712,000 from the sale of bulk
PTH under a supply agreement. The royalty rate will be increased if certain
sales milestones are achieved. 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. However, we may not be successful
in our efforts to obtain the approval of the FDA and other government entities
for our oral PTH product or to manufacture and sell the product. This agreement
is subject to certain termination provisions. Revenue for the year ended
December 31, 2002 includes the recognition of $150,000 of deferred licensing
revenue from GSK. In addition, in January 2003 we received a $1 million
milestone payment from GSK in acknowledgment of the performance demonstrated by
our oral PTH formulation in animal studies.
Regulatory Approval of Our Injectable Calcitonin Product
In January 1999, we received approval from the European Committee for
Proprietary Medicinal Products, referred to as the CPMP, to market our
injectable calcitonin product in all 15 member states of the European Union as a
treatment for Paget's disease and for hypercalcemia. The active ingredient for
this product is manufactured at our facility. We began to market this product in
Europe for these indications in 1999. Sales through 2002 have been
insignificant. In 2001, we received an approval in Switzerland for our
injectable calcitonin product that includes an osteoporosis indication. In
November 2002, the CPMP completed its review of all calcitonin products
currently marketed in the European Union, including all injectable and nasal
formulations, and recommended revisions to and harmonization of the authorized
indications for these products. Authorized indications for injectable calcitonin
products will include the prevention of acute bone loss in men or women due to
sudden immobilization (such as for patients with recent osteoporotic fractures)
while nasal calcitonin products will
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be indicated for the treatment of established post-menopausal osteoporosis to
prevent vertebral fractures. Final implementation is expected in 2003.
Regulatory authorities in many non-European Union countries can reference
the approved European Union or Swiss dossiers in order to reduce the
requirements needed to obtain their national approvals for the products, which
we believe could significantly reduce the registration requirements for
injectable calcitonin in other countries, thereby speeding up product launch. We
believe that our abbreviated clinical program, which was accepted by the FDA,
would be sufficient to satisfy approval requirements in the U.S. and other
countries. Accordingly, we expect that the review process for our injectable
calcitonin product in such countries may be shorter than that typically
associated with a new drug submission for numerous reasons:
.. The active ingredient is structurally identical to and indistinguishable
from the active ingredient in products already approved by many regulatory
agencies;
.. The formulation is essentially similar to the formulations used in already
approved products; and
.. The human trial program that was accepted by the FDA is relatively brief
and involved small numbers of subjects. As a result, the amount of
information that must be reviewed is far less than would have been compiled
for the lengthier trials required for a typical new drug submission.
Development of our Oral Calcitonin Product
In December 1995 and January 1996, we successfully tested a proprietary
calcitonin oral formulation in two separate human studies in the United Kingdom.
These studies indicated that the majority of those who received oral calcitonin
showed levels of the peptide in blood samples taken during the trial that were
greater than the minimum levels generally regarded as being required for maximum
medical benefit. We believe that these were the first studies to demonstrate
that significant blood levels of calcitonin could be observed in humans
following oral administration of the peptide. In April 1996, we successfully
conducted a third pilot human study in the United Kingdom which used lower
calcitonin dosages than in the prior two human trials. The results of this trial
indicated that every test subject showed levels of the peptide in their blood
samples that exceeded the minimum levels generally regarded as required for
maximum medical benefit.
In July 1997, we entered into an agreement under which we granted to the
Parke-Davis division of Warner-Lambert Company (which merged with Pfizer in June
2000), a worldwide license to make, use and sell oral calcitonin. Under this
agreement, Pfizer had the ability to terminate the license if (1) a product was
disapproved in the U.S. or Europe; (2) peak blood levels were too low; (3) the
product was infeasible for scientific or technical reasons; (4) we were declared
bankrupt or insolvent; (5) there was an uncured material breach; or (6) Pfizer
could not meet at least 25% of its sales projections.
During 1999, together with Pfizer, we successfully concluded two pilot
human studies using an oral calcitonin formulation manufactured by
Warner-Lambert. Both studies showed significant measurable blood levels of
calcitonin. In December 1999, Warner-Lambert filed an Investigational NDA with
the FDA for the conduct of human trials in the U.S. of our oral calcitonin
product as a treatment for osteoporosis. Pfizer began a Phase I/II human study
in April 2000 and patient dosing for this study was completed in December 2000.
Pfizer analyzed the results of the study and informed us in March 2001 that the
study did not achieve Pfizer's desired results related to measurement of bone
marker activity. Pfizer terminated the license agreement for scientific reasons
citing this conclusion. We believe that this study, in which an FDA approved
product, nasal calcitonin, 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. We also believe that the results would have been more
favorable if patients in the study had received calcium supplementation, in
addition to the calcitonin. Therefore, we intend to continue the development of
our oral calcitonin product as a treatment for osteoporosis, and we are seeking
licensees for this product in the U.S. and other countries. In addition, due to
the termination of the Pfizer agreement, we no longer have restrictions on
selling bulk calcitonin and rights to all technologies and information developed
in the course of the collaboration have reverted to us. There are no continuing
commitments to Pfizer.
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We have filed patent applications for our oral formulation in the U.S. and
in numerous foreign countries. In 1999, we received a U.S. patent for our basic
technology covering the oral delivery of calcitonin for the treatment of
osteoporosis. In 2000, we received a U.S. patent extending this protection to
the oral delivery of other peptides.
There are risks that we will not be successful in licensing this product,
that a safe and effective oral product will not be developed, that we will not
be successful in obtaining regulatory approval of an oral calcitonin product,
and that we will not succeed in developing, producing or marketing an oral
calcitonin product.
Patents and Proprietary Technology
We have filed a number of applications for U.S. patents relating to our
proprietary peptide manufacturing process and our technology for oral delivery.
To date, the following nine U.S. patents have issued:
.. a patent covering Immunization By Immunogenic Implant, a method for
producing antibodies for developing diagnostic medical tests
.. three patents related to the Alpha-Amidation Enzyme and its use in
manufacturing peptides
.. two patents covering improvements in our manufacturing technology
.. two patents covering oral delivery of peptides
.. a patent covering our nasal calcitonin formulation
We believe that our manufacturing patents give us a competitive advantage
in producing peptides cost-effectively and in large quantities, because they
cover a highly efficient bacterial fermentation process for producing peptides.
We also believe that our oral delivery patents give us a competitive
advantage in enabling us to develop peptide products in oral forms, because they
cover a process allowing delivery of significant quantities of peptides into the
bloodstream. Peptides are small proteins that get broken down in the digestive
system. Almost all commercial peptide products are currently available only in
injectable or nasal spray formulations.
We believe that the greatest competitive advantage of our manufacturing and
oral delivery patent estates is realized through the combination of both
technologies. To successfully commercialize an oral peptide product, an
efficient manufacturing process is necessary, because oral delivery systems are
typically less efficient than injectable or nasal spray products. Reduced
efficiency requires an increase in the amount of active pharmaceutical
ingredient in each dose. Therefore, an efficient manufacturing process is needed
to cost-effectively manufacture the increased quantities that are necessary and
to make a product that is commercially viable.
We believe that our manufacturing and oral delivery patent estates provide
both a current and anticipated advantage. Currently, the patent estates protect
our intellectual property rights in the development of our manufacturing and
oral delivery processes. In the future, we expect that the patent estates will
give us a competitive advantage in commercializing our products.
Other applications are pending. We also have made filings in selected
foreign countries, and eighteen foreign patents have issued. However, our
pending applications may not issue as patents and our issued patents may not
provide us with significant competitive advantages. Furthermore, our competitors
may independently develop or obtain similar or superior technologies.
Although we believe our patents and patent applications are valid, the
invalidity or unenforceability of one or more of our key patents could have a
significant adverse effect upon our business. Detecting and proving infringement
generally is more difficult with process patents than with product patents. In
addition, a process patent's value is diminished if others have patented the
product that can be produced using the process. Under these circumstances, we
would require the cooperation of, and likely be required to share royalties
with, the product patent
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holder or its sublicensees in order to make and sell the product. In addition,
the patent holder can refuse to license the product to us.
In some cases, we rely on trade secrets to protect our inventions. Our
policy is to include confidentiality provisions in all research contracts, joint
development agreements and consulting relationships that provide access to our
trade secrets and other know-how. However, there is a risk that these secrecy
obligations could be breached, causing us harm. To the extent licensees,
consultants or other third parties apply technological information independently
developed by them or by others to our projects, disputes may arise as to the
ownership rights to information, which may not be resolved in our favor.
Employees
As of March 15, 2003 we had 63 full-time employees. Twenty-three were
engaged in research, development and regulatory activities, 29 were engaged in
production activities and 11 were engaged in general and administrative
functions. Eight of our employees hold Ph.D. degrees. Our employees are experts
in molecular biology, including DNA cloning, synthesis, sequencing and
expression; protein chemistry, including purification, amino acid analysis,
synthesis and sequencing of proteins; immunology, including tissue culture,
monoclonal and polyclonal antibody production and immunoassay development;
chemical engineering; pharmaceutical production; quality assurance; and quality
control. None of our employees is covered by a collective bargaining agreement.
Warren P. Levy, President and Ronald S. Levy, Executive Vice President, both
executive officers and directors, have signed employment agreements with us.
Research and Development
We have established a multi-disciplinary research team to adapt proprietary
amidation, biological production and oral and nasal delivery technologies to the
development of proprietary products and processes. Approximately 83% of our
employees are directly engaged in activities relating to production of,
regulatory compliance for, and the research and development of pharmaceutical
products. We spent $8.1 million on research activities in 2002, $9.1 million in
2001, and $11.5 million in 2000.
Properties
We own a one-story office and laboratory facility consisting of
approximately 12,500 square feet. The facility is located on a 2.2 acre site in
Fairfield, New Jersey.
Our 32,000 square foot cGMP production facility, of which 20,000 square
feet are currently being used for the production of calcitonin and PTH and can
be used for the production of other peptides, was constructed in a building
located in Boonton, New Jersey. We lease the facility under a ten-year
agreement, which began in February 1994. We have two 10-year renewal options and
an option to purchase the facility.
Litigation
In July 2000, the Tail Wind Fund, Ltd., or Tail Wind, the holder of
$2,000,000 in principal amount of 5% convertible debentures we previously issued
to Tail Wind in a private placement completed in June 1998, filed with the
American Arbitration Association a demand for arbitration against us. In its
demand, Tail Wind claimed that it was owed, as of June 30, 2000, approximately
$3,400,000, consisting of principal, interest and penalties, resulting from our
default under various provisions of the debentures and related agreements. These
alleged defaults included our failure to redeem the debentures after becoming
obligated to do so, the failure to pay interest when due, and the failure to pay
liquidated damages arising from the delisting of our common stock from the
Nasdaq National Market. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." In July
2000, we submitted to the American Arbitration Association a statement in which
it denied the amount of Tail Wind's claim and made certain counterclaims. On
April 9, 2002, we entered into a settlement with Tail Wind. Pursuant to the
terms of the settlement agreement, Tail Wind agreed to surrender to us the $2
million in principal amount of convertible debentures that remained outstanding
and released all claims against us relating to Tail Wind's purchase of the
convertible debentures, including all issues raised in the arbitration, which
were approximately $4.5 million including accrued interest and penalties in the
approximate amount of $2.5 million. In exchange, we issued to Tail Wind a $1
million promissory note secured by our Fairfield, New Jersey building and
equipment and two million shares of Unigene common stock. The note bears
interest at a
10
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 our closing stock
price on April 9, 2002. We therefore recognized a gain for accounting purposes
of approximately $2.4 million on the extinguishment of debt and related
interest. We 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, or SEC. The escrow agent released the
two million shares to Tail Wind between May 2002 and October 2002.
In July 2000, Reseau de Voyage Sterling, Inc., the plaintiff, filed suit
against us in the Supreme Court of the State of New York. We removed this case
to the U.S. District Court for the Southern District of New York. The plaintiff,
which purchased from a third party a warrant to purchase one million shares of
Unigene common stock, alleges that we breached a verbal agreement with the
plaintiff to extend the term of the warrant beyond its expiration date. The
plaintiff is seeking damages of not less than $2 million. Following discovery,
we moved for summary judgment. On March 30, 2003, the Court accepted the report
and recommendation of the magistrate judge and granted our motion for summary
judgment. We do not yet know whether the plaintiff will appeal the case. We
believe that this suit is completely without merit, and we will continue to
vigorously contest the claim.
Fusion Financing
On May 9, 2001, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC, or Fusion, under which Fusion agreed 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
through May 2003. Unigene, at its option, may extend this period by six months.
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 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, we must satisfy
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 of
our payment obligations in excess of $1,000,000, no insolvency or bankruptcy on
our part, continued listing of Unigene common stock on the OTC Bulletin Board,
and we 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 sales 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. As compensation for its commitment we issued to
Fusion as of March 30, 2001 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 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 March 15, 2003 we have received approximately $4,987,000
through the sale of 13,654,462 shares of common stock to Fusion, before cash
expenses of approximately $554,000.
In December 2000, we issued a five-year warrant to purchase 373,002 shares
of Unigene common stock at $1.126 per share to our 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.
Availability of Reports
Our Internet website address is www.unigene.com. The contents of our
website are not part of this Annual Report on Form 10-K, and our Internet
address is included in this document as an inactive textual reference only. Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to those reports filed by us with the SEC pursuant
to Sections 13(a) and 15(d) of the Securities Exchange Act of
11
1934, as amended, are accessible free of charge through our website as soon as
reasonably practicable after we electronically file those documents with, or
otherwise furnish them to, the SEC. The SEC also maintains a website at
http://www.sec.gov where such information is available.
Risk Factors
Our business is subject to the following risk factors:
We have significant historical losses and may continue to incur losses in the
future.
We have incurred annual operating losses since our inception. As a result,
at December 31, 2002, we had an accumulated deficit of approximately
$94,000,000. Our gross revenues for the years ended December 31, 2002, December
31, 2001 and 2000 were $2,658,000, $865,000, and $3,287,000, respectively.
However, our revenues have not been sufficient to sustain our operations.
Revenue for 2002 consisted primarily of revenue from GSK for our development
activities and for sales of bulk PTH. Revenue for 2001 consisted primarily of
bulk calcitonin sales and the recognition of previously deferred revenue from
Pfizer. Revenue for 2000 consisted principally of milestone payments and other
fees received in connection with our terminated license agreement with Pfizer.
As of March 15, 2003, we have two potential revenue generating license
agreements. Our injectable calcitonin product has been approved for commercial
sale in a number of European countries, but we do not anticipate that these
sales will produce significant revenues. During the same periods, we have
incurred losses from operations of $8,496,000, $10,957,000 and $11,385,000,
respectively. Our net losses for the years ended December 31, 2002, 2001 and
2000 were $6,337,000, $12,472,000, and $12,469,000, respectively. We believe
that our profitability will require at least the successful commercialization of
our nasal calcitonin or oral PTH products or another oral peptide product in the
U.S. and abroad. We might never be profitable.
We will require additional financing to sustain our operations, and our ability
to secure additional financing is uncertain.
We may be unable to raise on acceptable terms, if at all, the substantial
capital resources necessary to conduct our operations. If we are unable to raise
the required capital, we may be forced to limit some or all of our research and
development programs and related operations, curtail commercialization of our
product candidates and, ultimately, cease operations. Our future capital
requirements will depend on many factors, including:
. the achievement of milestones in our GSK and USL agreements;
. continued scientific progress in our discovery and research programs;
. progress with preclinical studies and clinical trials;
. the magnitude and scope of our discovery, research and development
programs;
. our ability to maintain existing, and establish additional, corporate
partnerships and licensing arrangements;
. our ability to sell and market our products;
. the time and costs involved in obtaining regulatory approvals;
. the time and costs involved in expanding and maintaining our
production facility;
. the costs involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims;
. the potential need to develop, acquire or license new technologies and
products;
. the continued ability to refinance demand loans from Jay Levy, Ronald
Levy and Warren Levy; and
. other factors beyond our control.
At December 31, 2002, we had a working capital deficiency of approximately
$15,500,000. The independent auditors' report for the year ended December 31,
2002 includes an explanatory paragraph stating that our recurring losses from
operations and working capital deficiency discussed above raise substantial
doubt about our ability to continue as a going concern. We had cash flow
deficits from operations of $1,315,000, $7,122,000 and $3,382,000 for the years
ended December 31, 2002, 2001, and 2000, respectively. We believe that we will
generate financial resources to apply toward funding our operations through the
achievement of milestones in the GSK or USL
12
agreements and through the sale of PTH to GSK. However, if we are unable to
achieve these milestones, or are unable to achieve the milestones on a timely
basis, we would need additional funds to continue our operations. Our agreement
with Fusion has provided us with some cash to fund our operations, but it alone
has not been sufficient to satisfy all of our working capital needs. From May
18, 2001 through February 12, 2003 we have raised a total of approximately
$4,987,000 through the sale of 13,654,462 shares of our common stock to Fusion,
before cash expenses of approximately $554,000. The extent to which we intend to
rely on 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
achieving milestones and generating sales through our existing agreements, or
through entering into new licensing agreements or the sale of bulk calcitonin,
both of which we are actively exploring. Our agreement with Fusion terminates in
May 2003, unless we decide to extend it for an additional 6 months. If we are
unable to achieve milestones or sales under our existing agreements or enter
into a significant revenue generating license or financing arrangement, we would
need to significantly curtail our operations. We also could consider a sale or
merger of Unigene.
Due to the fact that the financing with Fusion will terminate during 2003,
it is unlikely that we would be able to access all of the remaining $16,000,000
under the common stock purchase agreement with Fusion as of December 31, 2002.
We therefore will likely need additional capital to fully implement our
business, operating and development plans. We only have the right to receive
$43,750 per trading day under the common stock purchase agreement unless our
stock price equals or exceeds $4.00 per share, in which event the daily purchase
amount may be increased. However, our sales of common stock to Fusion have been
well below that level due to the share price and trading volume of our common
stock and due to our desire to keep dilution to a minimum. In addition, the
agreement may be terminated by Fusion at any time due to events of default under
the agreement. See "Business - Fusion Financing."
Our agreement with Fusion may prohibit us from raising funds through other
equity financings. The agreement expressly prohibits us from selling equity
securities in other variable priced financings without Fusion's consent. In
addition, the sale of our common stock to Fusion could cause the price of our
common stock to decline. If our stock price declines, we may be unable to raise
additional funds through the sale of our common stock to others. If we are able
to sell shares of our common stock, the sales could result in significant
dilution to our stockholders.
We believe that satisfying our long-term capital requirements will require
at least the successful commercialization of one of our peptide products.
However, our products may never become commercially successful.
Some of our executives have made loans to us and are entitled to remedies
available to a secured creditor, which gives them a priority over the holders of
our common stock. We also granted similar rights to The Tail Wind Fund, Ltd.
Some of our executives have made loans to us under promissory notes. Our
obligations under these promissory notes are secured by, among other things,
mortgages upon all of the real property we own and pledges of substantially all
of our assets. If we become insolvent or are liquidated, or if payment under the
promissory notes are accelerated, the holders of the promissory notes will be
entitled to exercise the remedies available to a secured lender under applicable
law which would entitle them to full repayment before any funds could be paid to
our shareholders. In addition, we issued to Tail Wind a $1 million secured
promissory note due in February 2005. Our obligation to repay the note is
secured by, among other things, a mortgage on the real property we own and
pledges of our fixed assets in Fairfield, New Jersey. If a default occurs under
the note or the security documents, Tail Wind will also be entitled to remedies
generally available to a secured lender, which would entitle Tail Wind to full
payment before any funds could be paid to our shareholders.
We may not be successful in our efforts to develop a calcitonin, PTH or other
peptide product that will produce revenues sufficient to sustain our operations.
Our success depends on our ability to commercialize a calcitonin, PTH or
other peptide product that will produce revenues sufficient to sustain our
operations. We may never develop a calcitonin, PTH or other peptide product that
makes us profitable. Our joint venture in China may continue to generate losses
and may never be profitable. Our ability to achieve profitability is dependent
on a number of factors, including our ability to complete
13
development efforts, obtain regulatory approval for our product candidates, and
commercialize successfully those product candidates or our technologies. We
believe that the development of more desirable formulations is essential to
expand consumer acceptance of peptide pharmaceutical products. However, we may
not be successful in our development efforts, or other companies may develop
these products before we do.
Even if we are successful in our development efforts, we may not be able to
obtain the necessary regulatory approval for our products. The FDA must approve
the commercial manufacture and sale of pharmaceutical products in the U.S. Our
joint venture in China may not be able to obtain an NDA approval. Similar
regulatory approvals are required for the sale of pharmaceutical products
outside of the U.S. Although we have received regulatory approval in the
European Union and Switzerland for the sale of our injectable calcitonin
product, none of our products have been approved for sale in the U.S., and our
products may never receive the approvals necessary for commercialization. We
must conduct further human testing on certain of our products before they can be
approved for commercial sale. Any delay in receiving, or failure to receive,
these approvals would adversely affect our ability to generate product revenues.
If any of our products are approved for commercial sale, we will need to
manufacture the product in commercial quantities at a reasonable cost in order
for it to be a successful product that will generate profits. Because of our
limited clinical, manufacturing and regulatory experience and the lack of a
marketing organization, we are likely to rely on licensees or other parties to
perform one or more tasks for the commercialization of pharmaceutical products.
We may incur additional costs and delays while working with these parties, and
these parties may ultimately be unsuccessful.
We have made a substantial investment in our production facility which we will
need to upgrade or expand in order to manufacture some of our products in
commercial quantities required by our corporate partners.
We have constructed and are operating a facility intended to produce
calcitonin, PTH and other peptides. This facility has been approved by European
regulatory authorities for the manufacture of calcitonin for human use, but has
not yet been inspected or approved by the FDA. The risks associated with this
facility include the failure to achieve targeted production and profitability
goals, the development by others of superior processes and products, and the
absence of a market for products produced by the facility. In addition, the
successful commercialization of any of our products may require us to make
additional expenditures to expand or upgrade our manufacturing operations. We
may be unable to make these capital expenditures when required.
We are dependent on partners for the commercial development of our products.
We do not currently have, nor do we expect to have in the near future,
sufficient financial resources and personnel to develop and market our products
on our own. Accordingly, we expect to continue to depend on large pharmaceutical
companies for revenues from sales of products, research sponsorship and
distribution of our products.
The process of establishing partnerships is difficult and time-consuming.
Our discussions with potential partners may not lead to the establishment of new
partnerships on favorable terms, if at all. If we successfully establish new
partnerships, the partnerships may never result in the successful development of
our product candidates or the generation of significant revenue. Management of
our relationships with these partners would require:
. significant time and effort from our management team;
. coordination of our research with the research priorities of our
corporate partners;
. effective allocation of our resources to multiple projects; and
. an ability to attract and retain key management, scientific and other
personnel.
We may not be able to manage these relationships successfully.
We currently have license agreements with GSK for oral PTH and with USL for
nasal calcitonin. We are pursuing additional opportunities to license, or enter
into distribution arrangements for, our oral, and injectable calcitonin
products, our nasal calcitonin product outside of the U.S., as well as other
possible peptide products. However, we may not be successful in any of these
efforts.
14
In June 2000, we entered into a joint venture with a pharmaceutical company
in the People's Republic of China for the manufacture and distribution of
injectable and nasal calcitonin products in China and possibly other Asian
markets, for the treatment of osteoporosis. The joint venture began operations
in March 2002; sales of the injectable calcitonin product began in April 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
our overall results of operations. We also have entered into distribution
agreements for our injectable formulation of calcitonin in the United Kingdom,
Ireland and Israel. To date, we have not received material revenues from these
distribution agreements.
Because we are a biopharmaceutical company, our operations are subject to
extensive government regulations.
Our laboratory research, development and production activities, as well as
those of our collaborators and licensees, are subject to significant regulation
by federal, state, local and foreign governmental authorities. In addition to
obtaining FDA approval and other regulatory approvals for our products, we must
obtain approvals for our manufacturing facility to produce calcitonin, PTH and
other peptides for human use. The regulatory approval process for a
pharmaceutical product requires substantial resources and may take many years.
Our inability to obtain approvals or delays in obtaining approvals would
adversely affect our ability to continue our development program, to manufacture
and sell our products, and to receive revenue from milestone payments, product
sales or royalties.
The FDA or other regulatory agencies may audit our production facility at
any time to ensure compliance with cGMP guidelines. These guidelines require
that we conduct our production operation in strict compliance with our
established rules for manufacturing and quality controls. Any of these agencies
can suspend production operations and product sales if they find significant or
repeated changes from these guidelines. A suspension would likely cause us to
incur additional costs or delays in product development.
If our products receive regulatory approval, our competitors may eventually
include large pharmaceutical companies with superior resources.
We are engaged in a rapidly changing and highly competitive field. To date,
we have concentrated our efforts primarily on one product -- calcitonin -- for
treating osteoporosis and other indications. During 2001, we began developing
other peptide products, including PTH for osteoporosis. Like the market for any
pharmaceutical product, the market for treating osteoporosis and these other
indications has the potential for rapid, unpredictable and significant
technological change. Competition is intense from specialized biotechnology
companies, major pharmaceutical and chemical companies and universities and
research institutions. We currently have no products approved for sale in the
U.S. If we are successful in obtaining approval for one of our products, our
future competitors will have substantially greater financial resources, research
and development staffs and facilities, and regulatory experience than we do.
Major companies in the field of osteoporosis treatment include Novartis, Wyeth,
Merck, Eli Lilly, Aventis and Procter and Gamble. We believe that we may be able
to compete with these companies due both to our partnerships with GSK and USL
and to our patented technologies. Any one of these potential competitors could,
at any time, develop products or a manufacturing process that could render our
technology or products noncompetitive or obsolete.
Our success depends upon our ability to protect our intellectual property
rights.
We filed applications for U.S. patents relating to proprietary peptide
manufacturing technology and oral and nasal formulations that we have invented
in the course of our research. To date, nine U.S. patents have issued and other
applications are pending. We have also made patent application filings in
selected foreign countries and eighteen foreign patents have issued. We face the
risk that any of our pending applications will not issue as patents. In
addition, our patents may be found to be invalid or unenforceable. Our business
also is subject to the risk that our issued patents will not provide us with
significant competitive advantages if, for example, a competitor were to
independently develop or obtain similar or superior technologies. To the extent
we are unable to protect our patents and patent applications, our investment in
those technologies may not yield the benefits that we expect.
We also rely on trade secrets to protect our inventions. Our policy is to
include confidentiality obligations in all research contracts, joint development
agreements and consulting relationships that provide access to our trade secrets
and other know-how. However, parties with confidentiality obligations could
breach their agreements
15
causing us harm. If a secrecy obligation were to be breached, we may not have
the financial resources necessary for a legal challenge. If licensees,
consultants or other third parties use technological information independently
developed by them or by others in the development of our products, disputes may
arise from the use of this information and as to the ownership rights to
products developed using this information. These disputes may not be resolved in
our favor.
Our technology or products could give rise to product liability claims.
Our business exposes us to the risk of product liability claims that are a
part of human testing, manufacturing and sale of pharmaceutical products. The
administration of drugs to humans, whether in clinical trials or commercially,
can result in product liability claims even if our products are not actually at
fault for causing an injury. Furthermore, our products may cause, or may appear
to cause, adverse side effects or potentially dangerous drug interactions that
we may not learn about or understand fully until the drug is actually
manufactured and sold. Product liability claims can be expensive to defend and
may result in large judgments against us. Even if a product liability claim is
not successful, the adverse publicity, time, and expense involved in defending
such a claim may interfere with our business. We may not have sufficient
resources to defend against or satisfy these claims. We currently maintain
$2,000,000 in product liability insurance coverage and plan to increase this
coverage as our products advance. However, these amounts may not be sufficient
to protect us against losses or may be unavailable in the future on acceptable
terms, if at all.
We may be unable to retain key employees or recruit additional qualified
personnel.
Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical, and managerial personnel. There
is intense competition for qualified personnel in our business. Therefore, we
may not be able to attract and retain the qualified personnel necessary for the
development of our business. The loss of the services of existing personnel, as
well as the failure to recruit additional key scientific, technical, and
managerial personnel in a timely manner would harm our research and development
programs and our business.
Dr. Warren Levy and Dr. Ronald Levy have been our principal executive
officers since our inception. We rely on them for their leadership and business
direction. Each of them has entered into an agreement with us providing that he
shall not engage in any other employment or business for the period of his
employment with us. However, each of them is only bound by his respective
employment agreement to provide services for a one-year term. The loss of the
services of either of these individuals could significantly delay or prevent the
achievement of our scientific and business objectives.
The market price of our common stock is volatile.
The market price of our common stock has been, and we expect it to continue
to be, highly unstable. Factors, including our announcement of technological
improvements or announcements by other companies, regulatory matters, research
and development activities, new or existing products or procedures, signing or
termination of licensing agreements, concerns about our financial condition,
operating results, litigation, government regulation, developments or disputes
relating to agreements, patents or proprietary rights, and public concern over
the safety of activities or products have had a significant impact on the market
price of our stock. We expect such factors to continue to impact our market
price for the foreseeable future. In addition, potential dilutive effects of
future sales of shares of Unigene common stock by us or our stockholders,
including sales by Fusion and by Tail Wind and by the exercise and subsequent
sale of Unigene common stock by the holders of outstanding and future warrants
and options could have an adverse effect on the price of our stock.
Our common stock is classified as a "penny stock" under SEC rules which may make
it more difficult for our stockholders to resell our common stock.
Our common stock is traded on the OTC Bulletin Board. As a result, the
holders of our common stock may find it more difficult to obtain accurate
quotations concerning the market value of the stock. Stockholders also may
experience greater difficulties in attempting to sell the stock than if it was
listed on a stock exchange or quoted on the Nasdaq National Market or the Nasdaq
Small-Cap Market. Because Unigene common stock is not traded on a
16
stock exchange or on Nasdaq, and the market price of the common stock is less
than $5.00 per share, the common stock is classified as a "penny stock." Rule
15g-9 of the Securities Exchange Act of 1934 imposes additional sales practice
requirements on broker-dealers that recommend the purchase or sale of penny
stocks to persons other than those who qualify as an "established customer" or
an "accredited investor." This includes the requirement that a broker-dealer
must make a determination that investments in penny stocks are suitable for the
customer and must make special disclosures to the customer concerning the risks
of penny stocks. Application of the penny stock rules to our common stock could
adversely affect the market liquidity of the shares, which in turn may affect
the ability of holders of our common stock to resell the stock.
The sale of our common stock to Fusion could cause the price of our common stock
to decline.
Fusion may sell none, some or all of the shares of common stock shares it
previously purchased from us at any time or from time to time in the open
market. However, Fusion has agreed that it will not sell or otherwise transfer
the 2,000,000 commitment shares or the 1,000,000 shares of common stock issuable
upon the exercise of the warrant that we issued to Fusion as part of its
commitment fee until the earlier of the termination of the common stock purchase
agreement, the occurrence of an event of default by us under the common stock
purchase agreement or May 2003. We have been advised by Fusion that the shares
registered in this offering will be sold over a period of up to 24 months from
May 2001 through May 2003. Depending upon market liquidity at the time, the
resale by Fusion of shares at any given time could cause the trading price of
our common stock to decline. The sale by Fusion of a substantial number of
shares purchased from us, or the anticipation of such sales, could make it more
difficult for us to sell equity or equity related securities in the future at a
time and at a price that we might otherwise wish to effect sales.
The sale of common stock to Fusion could cause substantial dilution of our
common stock and significantly impact our capital structure.
The price at which Fusion is obligated to purchase shares of our common
stock under the common stock purchase agreement will fluctuate based on the
market price of our common stock. See "Business - Fusion Financing" for a
detailed description of the purchase price.
Currently, Fusion owns less than 5% of our common stock on a fully diluted
basis. If Fusion purchased the remaining balance of $16,013,119 purchasable
under the common stock purchase agreement, at a price equal to $.288, the
closing sale price of our common stock on February 12, 2003, Fusion would be
able to purchase an additional 55,601,108 shares of our common stock. These
shares, along with the 2,000,000 shares and the 1,000,000 shares of common stock
issuable upon the exercise of the warrant which was issued to Fusion as a
commitment fee, would represent 49% of our outstanding common stock fully
diluted as of February 12, 2003. However, we only have 8,345,538 shares
available to be issued to Fusion under our current registration statement, and
our agreement with Fusion limits their ownership percentage to a maximum of
9.9%.
The issuance of these shares would result in significant dilution to the
ownership interests of other holders of our common stock. The amount of dilution
would be higher if the market price of our common stock is lower than the
current market price at the time Fusion purchases shares under the common stock
purchase agreement, as a lower market price would cause more shares of our
common stock to be issuable to Fusion. Subsequent sales of these shares in the
open market by Fusion may also have the effect of lowering our stock price,
thereby increasing the number of shares issuable under the common stock purchase
agreement and consequently further diluting our outstanding shares. Although we
have the right to reduce or suspend Fusion purchases at any time, our financial
condition at the time may require us to waive our right to suspend purchases
even if there is a decline in the market price. If the closing sale price of our
common stock is at least $4.00 for five consecutive trading days, we have the
right to increase the daily purchase amount above $43,750, provided the closing
sale price of our common stock remains at least $4.00.
The existence of the agreement with Fusion to purchase shares of Unigene common
stock could cause downward pressure on the market price of the Unigene common
stock.
Both the actual dilution and the potential for dilution resulting from
sales of Unigene common stock to Fusion could cause holders to elect to sell
their shares of Unigene common stock, which could cause the trading price of the
Unigene common stock to decrease. In addition, prospective investors
anticipating the downward pressure on the
17
price of the Unigene common stock due to the shares available for sale by Fusion
could refrain from purchases or cause sales or short sales in anticipation of a
decline of the market price, which may itself cause the price of our stock to
decline.
Item 2. Properties
We own a one-story office and laboratory facility consisting of
approximately 12,500 square feet. The facility is located on a 2.2 acre site in
Fairfield, New Jersey.
Our 32,000 square foot cGMP production facility, of which 20,000 square
feet are currently being used for the production of bulk calcitonin, bulk PTH
and finished nasal calcitonin and can be used for the production of other
peptides, was constructed in a building located in Boonton, New Jersey. We lease
the facility under a ten-year agreement, which began in February 1994. We have
two 10-year renewal options and an option to purchase the facility.
We believe that these facilities are adequate for current purposes.
Item 3. Legal Proceedings
In July 2000, the Tail Wind Fund, Ltd., the holder of $2,000,000 in
principal amount of 5% convertible debentures issued by us to Tail Wind in a
private placement completed in June 1998, filed with the American Arbitration
Association a demand for arbitration against us. In its demand, Tail Wind
claimed that it was owed, as of June 30, 2000, approximately $3,400,000,
consisting of principal, interest and penalties, resulting from our default
under various provisions of the debentures and related agreements. These alleged
defaults included our failure to redeem the debentures after becoming obligated
to do so, the failure to pay interest when due, and the failure to pay
liquidated damages arising from the delisting of the Unigene common stock from
the Nasdaq National Market. On April 9, 2002, we entered into a settlement with
Tail Wind. Pursuant to the terms of the settlement agreement, Tail Wind
surrendered to us the $2 million in principal amount of convertible debentures
that remained outstanding and released all claims against us relating to Tail
Wind's purchase of the convertible debentures, including all issues raised in
the arbitration, which were approximately $4.5 million, including accrued
interest and penalties in the approximate amount of $2.5 million. In exchange,
we 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. The shares were
valued at $1.1 million in the aggregate, based on our closing stock price on
April 9, 2002. We therefore recognized a gain for accounting purposes of
approximately $2.4 million on the extinguishment of debt and related interest.
We 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.
The escrow agent released the shares to Tail Wind from May 2002 through October
2002.
In July 2000, Reseau de Voyage Sterling, Inc., the plaintiff, filed suit
against us in the Supreme Court of the State of New York. We removed this case
to the U.S. District Court for the Southern District of New York. The plaintiff,
which purchased from a third party a warrant to purchase one million shares of
Unigene common stock, alleges that we breached a verbal agreement with the
plaintiff to extend the term of the warrant beyond its expiration date. The
plaintiff is seeking damages of not less than $2 million. Following discovery,
we moved for summary judgment. On March 30, 2003, the Court accepted the report
and recommendation of the magistrate judge and granted our motion for summary
judgment. We do not yet know whether the plaintiff will appeal the case. We
believe that this suit is completely without merit, and we will continue to
vigorously contest the claim.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2002.
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
We have not declared or paid any cash dividends since inception, and do not
anticipate paying any in the near future.
We became a public company in 1987. As of March 15, 2003, there were 528
holders of record of our common stock. Our common stock is traded on the OTC
Bulletin Board under the symbol UGNE. The prices below represent high and low
sale prices per share of our common stock.
2002 2001
---------- ----------
High-Low High-Low
---------- ----------
1st Quarter: $0.88-0.53 $1.88-0.38
2nd Quarter: 0.92-0.25 0.65-0.33
3rd Quarter: 0.43-0.26 0.44-0.19
4th Quarter: 0.44-0.23 0.66-0.33
Recent Sales of Unregistered Securities
In the quarter ended December 31, 2002, we sold 1,961,699 shares of common
stock to Fusion for gross proceeds of $475,000. We issued all of such shares
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.
19
Item 6. Selected Financial Data
STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)
Year Ended December 31,
--------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- ------- -------
Revenue:
Licensing & other revenue $ 2,658 $ 865 3,287 $ 9,589 $ 5,050
Costs and expenses:
Research & development expenses 8,136 9,122 11,484 9,375 9,042
General and administrative 3,018 2,700 3,187 2,212 2,068
Loss before extraordinary item and
cumulative effect of accounting change (6,337) (12,472) (11,469) (1,577) (6,737)
Extraordinary item -- -- -- -- (144)
Cumulative effect of accounting change -- -- (1,000) -- --
Net loss (6,337) (12,472) (12,469) (1,577) (6,881)
Basic and diluted loss per share:
Loss before extraordinary item and
cumulative effect of accounting change (.11) (.26) (.26) (.04) (.17)
Extraordinary item -- -- -- -- (.01)
Cumulative effect of accounting change -- -- (.02) -- --
-------- -------- -------- ------- -------
Net loss (.11) (.26) (.28) (.04) (.18)
======== ======== ======== ======= =======
Weighted average number of shares
outstanding 57,877 47,483 44,008 40,719 38,701
BALANCE SHEET DATA
(In thousands) December 31,
--------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- ------- -------
Cash and cash equivalents $ 2,224 $ 405 $ 17 $ 683 $ 403
Working capital (deficiency) (15,534) (21,684) (13,267) (2,759) (1,805)
Total assets 7,064 6,619 9,047 13,778 11,564
Total long-term debt, obligations and
deferred revenue, including current
portion 8,706 4,314 4,576 4,433 3,992
Total liabilities 24,729 22,459 14,540 9,049 7,344
Total stockholders' equity (deficit) (17,965) (15,840) (5,493) 4,729 4,220
20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion together with our financial
statements and the notes appearing elsewhere in this Form 10-K. The following
discussion contains forward-looking statements. Our actual results may differ
materially from those projected in the forward-looking statements. Factors that
might cause future results to differ materially from those projected in the
forward-looking statements include those discussed in "Risk Factors" and
elsewhere in this Form 10-K.
RESULTS OF OPERATIONS
Years ended December 31, 2002, 2001 and 2000
Revenue.
Revenue increased 207% to $2,658,000 for the year ended December 31, 2002
as compared to $865,000 for the year ended December 31, 2001, due to revenue
received under the license agreement with GSK signed in 2002. Revenue decreased
74% to $865,000 for the year ended December 31, 2001 as compared to $3,287,000
for the year ended December 31, 2000, due to Pfizer's termination of its license
agreement with us in March 2001. Revenue for 2002 consisted primarily of
$1,587,000 in revenue for GSK development activities and $712,000 from the sale
of bulk PTH to GSK. In 2002, we received a $2,000,000 up-front payment under an
agreement for an oral PTH product licensed to GSK. We 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, $150,000 of the deferred
up-front and milestone payments from GSK was recognized as revenue during 2002.
Also in 2002, we received a $3,000,000 up-front payment under an agreement for a
nasal calcitonin product licensed to USL. This $3,000,000 is being deferred in
accordance with SAB 101 and recognized as revenue over a 19-year period which is
our estimated performance period of the license agreement. Therefore, $13,000 of
the up-front payment from USL was recognized as revenue during 2002. Revenue for
2001 consisted primarily of $339,000 in bulk calcitonin sales as well as
recognition of previously deferred revenue, final analytical testing services
provided to Pfizer and $94,000 received in a grant from the National Institute
of Health. In 2000, revenue consisted primarily of milestone revenue from Pfizer
resulting from the achievement of milestones in the development of an oral
calcitonin product for treating osteoporosis. In addition, revenue for the year
ended December 31, 2000 included $800,000 from the recognition of deferred
revenue related to the initial licensing fee paid by Pfizer in 1997 and $345,000
for analytical testing services provided to Pfizer.
Research and Development Expenses.
Research and development, our largest expense, decreased 11% in 2002 to
$8,136,000 from $9,122,000 in 2001 and decreased 21% in 2001 from $11,484,000 in
2000. The decrease in 2002 was primarily attributable to decreased expenses
related to our nasal calcitonin product, the non-renewal of two sponsored
research collaborations, decreases in utility and production expenditures as
well as deferred employee stock compensation expense recognized in 2001. This
was partially offset by increased expenditures for scientific and regulatory
consultants and for PTH development. The decrease in 2001 was primarily
attributable to decreased expenses related to our nasal calcitonin product, as
well as decreased production expenditures. Expenditures for the sponsorship of
collaborative research programs were $67,000, $405,000 and $411,000 in 2002,
2001 and 2000, respectively, which are included as research and development
expenses.
General and Administrative Expenses.
General and administrative expenses increased 12% in 2002 to $3,018,000
from $2,700,000 in 2001 and decreased 15% in 2001 from $3,187,000 in 2000. The
increase in 2002 was primarily due to increased legal fees related to the GSK
and USL license agreements, foreign trademarks and the Tail Wind settlement. The
increase was partially offset by the decrease in non-cash compensation expense
recognized in 2001. The decrease in 2001 was primarily attributable to the
recognition of a non-cash expense in 2000 of $220,000 due to the issuance of a
warrant to a consultant, and to the recognition of a $350,000 expense in 2000 to
terminate our former joint venture in China. This was partially offset by the
recognition of a non-cash expense in 2001 of $225,000 due to additional shares
of common stock to be issued to two consultants as compensation for the lack of
an effective registration statement.
21
Gain on the Extinguishment of Debt and Related Interest.
Gain on the extinguishment of debt and related interest results primarily
from the April 9, 2002 settlement agreement between Tail Wind and us. Pursuant
to the terms of the settlement agreement, Tail Wind surrendered to us the $2
million in principal amount of convertible debentures that remained outstanding
and released all claims against us relating to Tail Wind's purchase of the
convertible debentures, which equaled $4,583,000 in the aggregate including
accrued interest and penalties in the amount of $2,583,000. In exchange, we
issued to Tail Wind a $1 million promissory note with a first security interest
in our Fairfield, New Jersey building and equipment and two million shares of
Unigene common stock, which were placed in escrow. 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 our closing stock
price on April 9, 2002. We therefore recognized a gain for accounting purposes
of $2,443,000 on the extinguishment of debt and related interest in 2002. In
addition, during 2002, we recognized additional gains in the aggregate amount of
$557,000 due to favorable settlements of amounts owed to vendors in exchange for
Unigene common stock.
Income Tax Benefit.
The income tax benefit in 2002, 2001, and 2000 of $755,000, $561,000 and
$1,065,000 respectively, consists of proceeds received for sales of a portion of
our 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.
Interest Income.
Interest income increased $3,000 or 33% in 2002 from 2001 and decreased
$41,000 or 84% in 2001 from 2000. The increase in 2002 was due to additional
funds from GSK and USL available for investment, partially offset by lower
interest rates on investments. The 2001 decrease in interest income resulted
from reduced funds available for investment.
Interest Expense.
Interest expense decreased $479,000 or 23% in 2002 to $1,605,000 from
$2,084,000 in 2001 and increased $885,000 or 74% in 2001 from $1,199,000 in
2000. Interest expense for 2002 was reduced by the settlement with Tail Wind in
April 2002. We issued a $1,000,000 note accruing interest at 6% per annum in
connection with the Tail Wind settlement. Previously, we were accruing interest
on our 5% convertible debentures held by Tail Wind. The annual interest rate on
the $2,000,000 in outstanding principal amount of the 5% debentures was 20% due
to our defaults on the debentures. In addition, we 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 our common stock
from trading on the Nasdaq Stock Market. Officers' loans to us 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 we 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 $564,000 for 2002 and $512,000 for 2001. Interest
expense increased in 2001 due to increased stockholders' loans and higher
interest rates on a portion of these loans. Stockholders' loans to us increased
$6,110,000 during 2001.
Cumulative Effect of Accounting Change.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," which we refer to as SAB 101.
Prior to the implementation of SAB 101, non-refundable license fees received
upon execution of license agreements were recognized as revenue immediately. SAB
101 summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements and
specifically addresses revenue recognition in the biotechnology industry for
non-refundable technology access fees and other non-refundable fees. We were
required to adopt SAB 101, as amended, in the fourth quarter of 2000 with an
effective date of January 1, 2000, and the recognition of a cumulative effect
adjustment calculated as of January 1, 2000. We adopted SAB 101 in 2000,
changing our revenue recognition
22
policy for up-front licensing fees that require services to be performed in the
future from immediate revenue recognition to deferral of revenue with the
up-front fee recognized over the life of the agreement. In 1997, we recognized
$3,000,000 in revenue from an up-front licensing fee from Pfizer. With the
adoption of SAB 101, we are now recognizing this revenue over a 45 month period,
equivalent to the term of our oral calcitonin agreement with Pfizer which was
terminated in March 2001. We therefore recognized a non-cash cumulative effect
adjustment of $1,000,000 as of January 1, 2000 representing a revenue deferral
over the remaining 15 months of the agreement. We recognized $800,000 in revenue
in 2000 and $200,000 of revenue in 2001 as a result of this deferral.
Net Loss.
Net loss for 2002 decreased 49% or $6,135,000 to $6,337,000 from
$12,472,000 for 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, partially offset by an increase
in general and administrative expense. During 2001, operating expenses decreased
from the prior year. In addition, a cumulative effect adjustment was recognized
in 2000. This was offset by a reduction in revenue from Pfizer, after Pfizer
terminated its license agreement with us, and also by an increase in interest
expense. As a result, net loss increased $3,000 to $12,472,000 for the year
ended December 31, 2001 from $12,469,000 in the prior year.
Summary of Critical Accounting Policies.
The SEC has issued disclosure guidance for "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 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 this Annual Report. 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 we have continuing involvement are deferred and
recognized as revenue over the life of the agreement. This requires management
to estimate the expected 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, we have no approved products for sale
in the U.S. However, we do sell calcitonin overseas and both calcitonin and PTH
in the U.S. for research purposes. We therefore capitalize and recognize in
finished goods inventory the estimated value of saleable calcitonin and PTH.
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 for employees 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 Statement of Financial Accounting Standards, or 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,
23
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, our net loss would have increased for the years
ended December 31, 2002, 2001 and 2000 by approximately $28,000, $780,000, and
$175,000, 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.
Liquidity and Capital Resources.
At December 31, 2002, we had cash and cash equivalents of $2,224,000, an
increase of $1,819,000 from December 31, 2001.
We believe that we will generate financial resources to apply towards
funding our operations through the achievement of milestones in the GSK or USL
license agreements, and through the sale of PTH to GSK. However, if we are
unable to achieve these milestones, or are unable to achieve the milestones on a
timely basis, we would need additional funds to continue our operations. We have
incurred annual operating losses since our inception and, as a result, at
December 31, 2002, had an accumulated deficit of approximately $94,000,000 and a
working capital deficiency of approximately $15,500,000. In addition, we are in
default of demand and term loans to the Levys in the aggregate amount of
approximately $5,663,000. The independent auditors' report covering our 2002
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.
Our cash requirements to operate our research and peptide manufacturing
facilities and develop our products are approximately $10 to 11 million per
year. In addition, we have principal and interest obligations under the Tail
Wind note and our outstanding notes payable to the Levys, as well as obligations
relating to our current and former joint ventures in China.
In April 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 our
activities in the production of raw material for development and clinical
supplies, and will pay us a royalty on its worldwide sales of the product.
Through December 31, 2002, we have recognized an aggregate of $1,587,000 in
revenue from our GSK development activities and $712,000 from the sale of bulk
PTH under a separate supply agreement with GSK. The royalty rate will be
increased if certain sales milestones are achieved. 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
year ended December 31, 2002 includes the recognition of $150,000 of previously
deferred licensing revenue from GSK. In addition, in January 2003 we received a
$1 million milestone payment from GSK in acknowledgment of the performance
demonstrated by our oral PTH formulation in animal studies. 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 (ii) if we fail to fulfill certain obligations by a date
certain, which obligations require the cooperation of third parties.
24
In November 2002, we signed a $10 million exclusive U.S. licensing
agreement with USL to market our patented nasal formulation of calcitonin for
the treatment of osteoporosis. Under the terms of the agreement, we received an
up-front payment of $3 million from USL and will be eligible to receive
milestone payments and royalty payments on product sales. We will be responsible
for manufacturing the product and will sell finished calcitonin product to USL.
USL will package the product and will distribute it nationwide. Revenue
recognition of the up-front licensing fee has been deferred over the estimated
19 year performance period of the license agreement. Revenue for the year ended
December 31, 2002 includes the recognition of $13,000 of licensing revenue from
USL. This agreement may be terminated by either party by mutual agreement or due
to breach of any material provision of the agreement not cured within 60 days.
We may terminate in the event of a net sales shortfall. In addition, USL may
terminate the agreement under certain circumstances where USL assigns the
agreement and we do not approve the assignment.
Our future ability to generate cash from operations will depend in the
short-term primarily upon the achievement of milestones in the GSK and USL
agreements, GSK-reimbursed development activities and through the sale of PTH to
GSK and, in the long-term by receiving royalties from the sale of our licensed
products. We are actively seeking additional licensing and/or supply agreements
with pharmaceutical companies for oral, nasal and injectable forms of calcitonin
as well as for other oral peptides. However, we may not be successful in
achieving milestones in our current agreements, obtaining regulatory approval
for our products or in licensing any of our other products.
As a result of the termination of the Pfizer agreement, we no longer have
restrictions on selling bulk calcitonin. During 2002, we sold a total of $53,000
of bulk calcitonin. We also have the right to license the use of our
technologies for oral and injectable formulations of calcitonin on a worldwide
basis and for nasal calcitonin outside the U.S. We have licensed distributors in
the United Kingdom, Ireland and Israel for our 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. We are actively seeking
other licensing and/or supply agreements with pharmaceutical companies for our
oral, injectable and nasal calcitonin products and for other pharmaceutical
products that can be manufactured and/or delivered using our patented
technologies. 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-related
products. Our primary focus has been on the development of various forms of
calcitonin products for the treatment of osteoporosis, including nasal and oral
calcitonin, and, beginning in 2001, PTH for the treatment of osteoporosis. In
general, 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 2002, we did not track costs
on a per project basis, and therefore were unable to allocate our total research
and development costs 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. A license agreement was signed in November 2002
with USL and an NDA was filed with the FDA on March 5, 2003. Contingent upon
receipt of FDA approval, USL will market nasal calcitonin in the U.S. and we
believe that this product could be on the market as soon as 2004. It is also
possible that another NDA holder could challenge our NDA and delay our marketing
efforts. For oral calcitonin, Pfizer terminated its license agreement with us 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 it is too
early to speculate on the probability or timing of a marketable product using
our PTH. A license agreement for the product was signed with GSK in April, 2002.
Due to our limited financial resources, the delay in achieving milestones in our
existing GSK and USL agreements, or in signing new license or distribution
agreements for our products, or the delay in obtaining regulatory approvals for
our products would have an adverse effect on our operations and our cash flow.
25
We have a number of future payment obligations under various agreements.
They are summarized at December 31, 2002, as follows:
Contractual Obligations Total 2003 2004 2005 2006 2007
- --------------------------------------- ---------- ---------- ------- --------- ------- ----
Chinese joint ventures (SPG & Qingdao) 1,057,500 60,000 427,500 60,000 510,000 --
Tail Wind Note 985,662 -- -- 985,662
Short-term notes payable - stockholders 9,503,323 9,503,323 -- -- -- --
Long-term notes payable - stockholders 1,870,000 1,870,000 -- -- -- --
Capital leases 13,307 13,307 -- -- -- --
Operating leases 298,989 227,010 39,676 21,472 10,831 --
Executive compensation 335,000 335,000 -- -- -- --
Other note payable 800,000 800,000 -- -- -- --
Accrued interest 3,290,767 3,247,932 -- 42,835 -- --
---------- ---------- ------- --------- ------- ---
Total Contractual Obligations 18,154,548 16,056,572 467,176 1,109,969 520,831 --
---------- ---------- ------- --------- ------- ---
We maintain our peptide production facility on leased premises in Boonton,
New Jersey. We began production under cGMP guidelines at this facility in 1996.
The current lease expires in 2004. We have two consecutive ten-year renewal
options under the lease, as well as an option to purchase the facility. During
2002, we invested approximately $200,000 in fixed assets and leasehold
improvements. Currently, we have no material commitments outstanding for capital
expenditures relating to our office and laboratory facility in Fairfield, New
Jersey. We have capital commitments relating to the Boonton facility in the
approximate amount of $500,000 in order to expand our fill line in anticipation
of the launch of our nasal calcitonin product.
Under the terms of the joint venture in China with SPG, we are obligated to
contribute up to $405,000 in cash after approval of its Chinese NDA which is
expected in 2004 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 December 31, 2002, we contributed $37,500 to the
joint venture. At December 31, 2002, our investment in the joint venture is
$32,970. This represents our $37,500 contribution reduced by $4,530 which is our
45% share of the joint venture's 2002 loss. The joint venture began operations
in March 2002.
In addition, we are 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) in order to terminate our former joint venture in China,
of which $195,000 is remaining as of December 31, 2002. We recognized the entire
$350,000 obligation as an expense in 2000. As of December 31, 2001, the Company
had $265,000 remaining under this obligation.
In June 1998, we completed a private placement of $4,000,000 in principal
amount of 5% convertible debentures to Tail Wind from which we realized net
proceeds of approximately $3,750,000. The 5% debentures were convertible into
shares of our common stock. The interest on the debentures, at our option, was
payable in shares of common stock. Upon conversion, Tail Wind was also 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 we were 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 1999, $2,000,000 of principle of the
notes was converted into common stock. In December 1999, we were 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, we
accrued, as of December 31, 1999, an amount equal to $400,000 representing the
20% premium on the outstanding $2,000,000 held by Tail Wind in principal amount
of 5% debentures that had not been
26
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, 2002, we
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, we issued an additional 103,032 shares of common stock in 2000
upon the cashless exercise of all of the 141,123 warrants issued upon conversion
of the 5% debentures.
On January 5, 2000, we 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
also were not made. In addition, due to the delisting of our common stock from
the Nasdaq National Market in October 1999, we became obligated under a separate
agreement to pay Tail Wind an amount equal to 2% of the outstanding principal
amount of the debentures per month. We 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. As a result, Tail Wind filed a demand
for arbitration against us in July 2000. On April 9, 2002, we entered into a
settlement with Tail Wind. Pursuant to the terms of the settlement agreement,
Tail Wind surrendered to us the $2 million in principal amount of convertible
debentures that remained outstanding and released all claims against us relating
to Tail Wind's purchase of the convertible debentures, including all issues
raised in the arbitration, which were approximately $4.5 million including
accrued interest and penalties in the approximate amount of $2.5 million. In
exchange, we issued to Tail Wind a $1 million promissory note secured by our
Fairfield, New Jersey building and equipment 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. The shares were valued at $1.1 million in
the aggregate, based on our closing stock price on April 9, 2002. We therefore
recognized a gain for accounting purposes of approximately $2.4 million on the
extinguishment of debt and related interest. We 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. The escrow agent released the shares to
Tail Wind over the course of May 2002 through October 2002.
To satisfy our 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 us. During 2002, Jay Levy made demand loans to us in the aggregate
principal amount of $700,000. We repaid $180,000 in loans to Jay Levy in May
2002, and repaid an additional $100,000 in loans in January 2003. We have 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 $564,000, and total interest expense on all Levy
loans was approximately $1,240,000 for 2002. As of December 31, 2002, total
accrued interest on all Levy loans was approximately $3,248,000 and the
outstanding loans by these individuals to us, 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% (10.75% at December 31, 2002 and
11% at December 31, 2001) that are classified as short-term debt. These
loans were originally at the Merrill Lynch Margin Loan Rate plus .25%.
These loans are secured by a security interest in our equipment and real
property. Accrued interest on these loans at December 31, 2002 was
approximately $1,624,000.
.. 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 our equipment and a mortgage
on our real property. The terms of the notes required us 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 December 31, 2002 was approximately $661,000.
27
.. Loans from Jay Levy in 2001 and 2002 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%, (5.75% at
December 31, 2002 and 6% at December 31, 2001) 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 December 31, 2002 was
approximately $495,000.
.. 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% (10.75% at December 31, 2002 and
11% at December 31, 2001) 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% (5.75% at December 31, 2002 and 6% at December 31,
2001) and is classified as short-term debt. These loans are secured by a
secondary security interest in our equipment and real property. Accrued
interest on these loans at December 31, 2002 was approximately $236,000.
.. 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% (10.75% at December 31, 2002 and
11% at December 31, 2001) 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% (5.75% at December 31, 2002 and 6% at December
31, 2001) and is classified as short-term debt. These loans are secured by
a secondary security interest in our equipment and real property. Accrued
interest on these loans at December 31, 2002 was approximately $232,000.
Under the agreement with Fusion Capital, we have 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 our common stock
up to an aggregate of $21,000,000. See Note 8 to our financial statements. 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 December 31, 2002, we have
received $4,676,881 through the sale of 12,654,462 shares to Fusion, before cash
expenses of approximately $533,000. 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. Our ability to realize additional funds will also depend on our
continuing compliance with the Fusion agreement. However, we only have 8,345,538
shares available to be issued under our current registration statement. In
addition, our agreement with Fusion terminates in May 2003, unless we decide to
extend it for an additional six months.
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 achieving milestones and generating sales through
our existing agreements, or through entering into new licensing agreements or
the sale of bulk calcitonin, both of which we are actively exploring. If we are
unable to achieve milestones or sales under our existing agreements or enter
into a new significant revenue generating license or other arrangement in the
near term, we would need either to secure another source of funding in order to
satisfy our working capital needs or 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 oral or nasal calcitonin products, our oral
PTH product or another peptide product in the U.S. and abroad. However, it is
uncertain whether or not any of our products will be approved or will be
commercially successful. In addition, the commercialization of an oral peptide
product may require us to incur additional capital expenditures to expand or
upgrade our manufacturing operations. We cannot determine either the cost or the
timing of such capital expenditures at this time.
As of December 31, 2002, we had available for federal income tax reporting
purposes net operating loss carryforwards in the approximate amount of
$79,000,000, expiring from 2003 through 2021, which are available to reduce
future earnings which would otherwise be subject to federal income taxes. Our
ability to use such net operating losses may be limited by change in control
provisions under Internal Revenue Code Section 382. In addition, as of December
31, 2002, we have research and development credits in the approximate amount of
28
$3,000,000, which are available to reduce the amount of future federal income
taxes. These credits expire from 2003 through 2021. We have New Jersey operating
loss carryforwards in the approximate amount of $25,600,000, expiring from 2005
through 2008, which are available to reduce future earnings, which would
otherwise be subject to state income tax. As of December 31, 2002, all of these
New Jersey loss carryforwards have been approved for future sale under a program
of the New Jersey Economic Development Authority, which we refer to as the
NJEDA. In order to realize these benefits, we 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 have sold tax benefits and realized a total of $755,000
in 2002.
We follow 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, 2002 and 2001 under SFAS No. 109, we had
deferred tax assets of approximately $34,000,000 and $34,000,000, respectively,
subject to valuation allowances of $34,000,000 and $34,000,000, respectively.
The deferred tax assets are primarily a result of our net operating losses and
tax credits.
Recently Issued Accounting Pronouncements.
We adopted the provisions of 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 we have never
entered into a purchase business combination and have no goodwill or indefinite
life intangible assets.
We 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. We adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS
No. 144 for long-lived assets did not result in an impairment charge based upon
our expected future cash flows. 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, we cannot determine the potential effects that adoption of SFAS No. 144
will have on our financial statements with respect to future decisions, if any.
In April 2002, the Financial Accounting Standards Board (FASB) adopted SFAS
No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". 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, with early adoption encouraged. We adopted SFAS No. 145 effective as
of December 31, 2002 and for the
29
year then ended. As a result, the gain on early extinguishment of debt
recognized in 2002 is classified in the income from operations portion of the
statement of operations.
In July 2002, the FASB Issued Statement 146 "Accounting for Costs
Associated with Exit or Disposal Activities". 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.
In December 2002, the FASB issued Statement 148, "Accounting for Stock
Based Compensation - Transition and Disclosure." This Statement amends FASB
Statement No. 123, "Accounting for Stock Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reporting results. The transition guidance and annual disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.
Under the provisions of Statement 123 that remain unaffected by Statement 148,
companies may either recognize expenses on a fair value based method in the
income statement or disclose the pro forma effects of that method in the
footnotes to the financial statements. We adopted the disclosure requirement
provisions of this statement. There was no significant impact on the financial
statements upon adoption.
In November 2002, the EITF reached a consensus on Issue 00-21 ("EITF
00-21"), "Multiple-Deliverable Revenue Arrangements." EITF 00-21 addresses how
to account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The consensus mandates
how to identify whether goods or services or both are to be delivered separately
in a bundled sales arrangement should be accounted for separately because they
are separate units of accounting. The guidance can affect the timing of revenue
recognition for such arrangements, even though it does not change rules
governing the timing or pattern of revenue recognition of individual items
accounted for separately. The final consensus will be applicable to agreements
entered into in fiscal years beginning after June 15, 2003 with early adoption
permitted. Additionally, companies will be permitted to apply the consensus
guidance to all existing arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, "Accounting
Changes." We are assessing, but at this point do not believe the adoption of
EITF 00-21 will have a material impact on our financial position, cash flows or
results of operations.
In November 2002, FASB Interpretation No. 45 ("FIN No. 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," was issued. FIN No. 45 requires a
guarantor entity, at the inception of a guarantee covered by the measurement
provisions of the interpretation, to record a liability for the fair value of
the obligation undertaken in issuing the guarantee. We previously did not record
a liability when guaranteeing obligations unless it became probable that we
would have to perform under the guarantee. FIN No. 45 applies prospectively to
guarantees we issue or modify subsequent to December 31, 2002, but has certain
disclosure requirements effective for interim and annual periods ending after
December 15, 2002. We have historically issued guarantees only on a limited
basis and do not anticipate FIN No. 45 will have a material effect on our 2003
financial statements. Disclosures required by FIN No. 45 are included in the
accompanying financial statements.
In January 2003, the FASB issued FIN No. 46 "Consolidation of Variable
Interest Entities, an interpretation of ARB 51." FIN 46 provides guidance on the
identification of entities for which control is achieved through means other
than through voting rights called "variable interest entities" or "VIEs" and how
to determine when and which
30
business enterprise should consolidate the VIE (the "primary beneficiary"). This
new model for consolidation applies to an entity which either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities
without receiving additional subordinated financial support from other parties.
In addition, FIN 46 requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE make additional
disclosures. Certain transitional disclosures are required in financial
statements initially issued after January 31, 2003, if it is reasonably possible
that once this guidance is effective the enterprise will either be required to
consolidate a variable interest entity or will hold a significant variable
interest in a variable interest entity. We do not believe that we have any
interests that would change our current reporting entity or require additional
disclosures outlined in FIN 46.
Related Parties.
One of our directors is a partner in a law firm that we have engaged for
legal services. In 2002, we incurred an aggregate of $472,000 in legal fees with
this firm. In addition, one of our directors serves as our Research Director,
receiving $73,500 in annual compensation. 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 us. We have 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. As of
December 31, 2002, total accrued interest on all Levy loans was approximately
$3,248,000 and the outstanding loans by these individuals to us, classified as
short-term debt, totaled $11,373,323, of which approximately $5,663,000 are in
default. For a further discussion, please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we are exposed to fluctuations in
interest rates due to the use of debt as a component of the funding of our
operations. We do not employ specific strategies, such as the use of derivative
instruments or hedging, to manage our interest rate exposure. Beginning in 2001,
our interest rate exposure on our notes payable-stockholders has been affected
by our failure to make principal and interest payments when due. Our exposure to
interest rate fluctuations over the near-term will continue to be affected by
these events.
31
The information below summarizes our market risks associated with debt
obligations as of December 31, 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 December 31, 2002.
Given our 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
---------- --------- ---- ---- --------
Notes payable - stockholders $3,793,323 3,793,323 -- -- --
Variable interest rate (1) 10.75% -- -- --
Notes payable - stockholders $5,710,000 5,710,000 -- -- --
Variable interest rate 5.75% -- -- --
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 we did not make principal and interest payments on our
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 we did not make principal and interest payments on our
notes payable to stockholders when due, the fixed interest rate on these
notes has increased from 6% to 11%.
32
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report..................................................34
BALANCE SHEETS -- December 31, 2002 and 2001..................................36
STATEMENTS OF OPERATIONS --
Years Ended December 31, 2002, 2001 and 2000...............................37
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) --
Years Ended December 31, 2002, 2001 and 2000...............................38
STATEMENTS OF CASH FLOWS --
Years Ended December 31, 2002, 2001 and 2000...............................40
NOTES TO FINANCIAL STATEMENTS --
Years Ended December 31, 2002, 2001 and 2000...............................41
33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Unigene Laboratories, Inc.
We have audited the accompanying balance sheet of Unigene Laboratories, Inc.
(the "Company") as of December 31, 2002, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the year ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Unigene Laboratories, Inc. as
of December 31, 2002, and the results of its operations and its cash flows for
the year ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 to the
financial statements the Company has stockholder demand loans in default at
December 31, 2002. As discussed in Note 2 to the financial statements the
Company has suffered recurring losses from operations and has a working capital
deficiency. These matters raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 2. These financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
GRANT THORNTON LLP
Edison, New Jersey
February 25, 2003
34
Independent Auditors' Report
The Stockholders and Board of Directors
Unigene Laboratories, Inc.:
We have audited the accompanying balance sheet of Unigene Laboratories, Inc. as
of December 31, 2001 and the related statements of operations, stockholders'
equity (deficit) and cash flows for each of the years in the two-year period
ended December 31, 2001. These financial statements are the responsibility of
Unigene's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Unigene Laboratories, Inc. as
of December 31, 2001 and the results of its operations and its cash flows for
each of the years in the two-year period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that Unigene
will continue as a going concern. As discussed in Note 2 to the financial
statements, Unigene has suffered recurring losses from operations and has a
working capital deficiency which raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 3 to the financial statements, the Company changed its
method of accounting for revenue recognition for up-front, non-refundable
license fees in 2000.
/s/ KPMG LLP
Short Hills, New Jersey
March 29, 2002, except as
to the third paragraph of
note 7, which is as of
April 9, 2002
35
UNIGENE LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 2002 and 2001
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,224,198 $ 405,040
Accounts receivable 118,092 --
Prepaid expenses 122,742 72,701
Inventory 264,830 283,328
------------ ------------
Total current assets 2,729,862 761,069
Property, plant and equipment - net 2,766,274 4,109,312
Patents and other intangibles, net 1,237,657 1,375,062
Investment in joint venture 32,970 --
Other assets 297,067 373,811
------------ ------------
$ 7,063,830 $ 6,619,254
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,076,041 $ 2,177,949
Accrued interest 3,290,767 3,971,463
Accrued expenses -other 1,352,732 2,212,788
Deferred licensing fees 357,895 --
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 13,307 29,677
------------ ------------
Total current liabilities 18,264,065 22,445,200
Deferred licensing fees, excluding current portion 5,478,946 --
Note payable - Tail Wind 985,662 --
Capital lease obligations, excluding current portion -- 14,131
------------ ------------
Total liabilities 24,728,673 22,459,331
------------ ------------
Commitments and contingencies
Liabilities to be settled in common stock 300,000 --
Stockholders' equity (deficit):
Common Stock - par value $.01 per share, authorized
100,000,000 shares, issued 62,651,359 shares in
2002 and 51,456,715 shares in 2001 626,514 514,567
Additional paid-in capital 75,596,520 71,271,610
Common Stock to be issued -- 225,000
Accumulated deficit (94,186,846) (87,850,223)
Less: Treasury stock, at cost, 7,290 shares (1,031) (1,031)
------------ ------------
Total stockholders' equity (deficit) (17,964,843) (15,840,077)
------------ ------------
$ 7,063,830 $ 6,619,254
============ ============
See accompanying notes to financial statements.
36
UNIGENE LABORATORIES, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------ ------------ ------------
Licensing and other revenue $ 2,657,958 $ 864,645 $ 3,286,961
------------ ------------ ------------
Operating expenses:
Research and development 8,135,965 9,121,999 11,484,379
General and administrative 3,018,201 2,699,572 3,187,465
------------ ------------ ------------
11,154,166 11,821,571 14,671,844
------------ ------------ ------------
Operating loss (8,496,208) (10,956,926) (11,384,883)
Other income (expense):
Gain on the extinguishment of
debt and related interest 2,999,772 -- --
Interest income 10,608 7,989 49,130
Interest expense (1,605,427) (2,084,008) (1,198,508)
------------ ------------ ------------
Loss before income taxes and cumulative effect of
accounting change (7,091,255) (13,032,945) (12,534,261)
Income tax benefit - sale of New Jersey tax benefits 754,632 560,599 1,064,856
------------ ------------ ------------
Loss before cumulative effect of accounting change (6,336,623) (12,472,346) (11,469,405)
Cumulative effect of revenue recognition accounting
change -- -- (1,000,000)
------------ ------------ ------------
Net loss $ (6,336,623) $(12,472,346) $(12,469,405)
============ ============ ============
Loss per share - basic and diluted:
Loss before cumulative effect of accounting
change $ (.11) $ (.26) $ (.26)
Cumulative effect of accounting change -- -- (.02)
------------ ------------ ------------
Net loss per share $ (.11) $ (.26) $ (.28)
============ ============ ============
Weighted average number of shares outstanding -
basic and diluted 57,876,804 47,482,705 44,008,154
============ ============ ============
See accompanying notes to financial statements.
37
UNIGENE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 2002, 2001, and 2000
Common Stock Common Deferred Deferred
---------------------- Additional Stock Stock Stock
Number of Paid-in to be Option Offering Accumulated Treasury
Shares Par Value Capital Issued Compensation Costs Deficit Stock
---------- --------- ------------ ----------- ------------ --------- ------------ --------
Balance, January 1,
2000 43,088,184 $430,882 $67,207,604 $ -- -- $ -- $(62,908,472) $(1,031)
Exercise of warrants 1,118,071 11,181 1,317,087 -- -- -- -- --
Exercise of stock
options 235,600 2,356 298,177 -- -- -- -- --
Grant and recognition
of stock option
compensation -- -- 683,733 -- (284,948) -- -- --
Deferred stock
offering costs -- -- 327,000 -- -- (327,000) -- --
Issuance of warrants
as compensation -- -- 220,109 -- -- -- -- --
Net loss -- -- -- -- -- -- (12,469,405) --
---------- -------- ----------- ----------- --------- --------- ------------ -------
Balance, December 31,
2000 44,441,855 444,419 70,053,710 -- (284,948) (327,000) (75,377,877) (1,031)
Sale of common stock
to Fusion at $.23
to $.47 per share
(net of cash
issuance costs of
$292,000) 5,012,485 50,125 1,211,427 -- -- 327,000 -- --
Issuance of common
stock as a
commitment fee to
Fusion 2,000,000 20,000 (20,000) -- -- -- -- --
Grant and recognition
of stock option
compensation -- -- 25,000 -- 284,948 -- -- --
Common stock to be
issued -- -- -- 225,000 -- -- -- --
Exercise of stock
options 2,375 23 1,473 -- -- -- -- --
Net loss -- -- -- -- -- -- (12,472,346) --
---------- -------- ----------- ----------- --------- --------- ------------ -------
Balance, December 31,
2001 51,456,715 514,567 71,271,610 225,000 -- -- (87,850,223) (1,031)
Total
------------
Balance, January 1,
2000 $ 4,728,983
Exercise of warrants 1,328,268
Exercise of stock
options 300,533
Grant and recognition
of stock option
compensation 398,785
Deferred stock
offering costs --
Issuance of warrants
as compensation 220,109
Net loss (12,469,405)
------------
Balance, December 31,
2000 (5,492,727)
Sale of common stock
to Fusion at $.23
to $.47 per share
(net of cash
issuance costs of
$292,000) 1,588,552
Issuance of common
stock as a
commitment fee to
Fusion --
Grant and recognition
of stock option
compensation 309,948
Common stock to be
issued 225,000
Exercise of stock
options 1,496
Net loss (12,472,346)
------------
Balance, December 31,
2001 (15,840,077)
38
UNIGENE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - Continued
Years Ended December 31, 2002, 2001, and 2000
Common Stock
---------------------- Common
Additional Stock
Number of Paid-in to be Accumulated Treasury
Shares Par Value Capital Issued Deficit Stock Total
---------- --------- ----------- ----------- ------------ -------- ------------
Balance, December 31,
2001 51,456,715 514,567 71,271,610 225,000 (87,850,223) (1,031) (15,840,077)
Sale of common stock
to Fusion at $.22
to $.59 per share
(net of cash
issuance costs of
$240,000) 7,641,977 76,420 2,479,186 -- -- -- 2,555,606
Issuance of common
stock to Tail Wind 2,000,000 20,000 1,120,000 -- -- -- 1,140,000
Issuance of common
stock to vendors 993,224 9,933 407,663 -- -- -- 417,596
Grant and recognition
of stock option
compensation -- -- 97,944 -- -- -- 97,944
Common stock issued in
2002 as subscribed
in 2001 557,643 5,576 219,424 (225,000) -- -- --
Exercise of stock
options 1,800 18 693 -- -- -- 711
Net loss -- -- -- -- (6,336,623) -- (6,336,623)
---------- -------- ----------- ----------- ------------ ------- ------------
Balance, December 31,
2002 62,651,359 $626,514 $75,596,520 $ -- $(94,186,846) $(1,031) $(17,964,843)
========== ======== =========== =========== ============ ======= ============
See accompanying notes to financial statements.
39
UNIGENE LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $(6,336,623) $(12,472,346) $(12,469,405)
Adjustments to reconcile net loss to net cash
used by operating activities:
Non-cash cumulative effect adjustment ......................... -- -- 1,000,000
Increase (decrease) in deferred revenue ....................... 5,836,841 (200,000) (800,000)
Non-cash compensation ......................................... 97,944 534,948 618,894
Depreciation and amortization ................................. 1,717,339 1,647,510 1,617,957
Gain on payment of 5% debentures and interest and trade
payables through the issuance of common stock .............. (2,999,772) -- --
Changes in operating assets and liabilities
Decrease in other assets ...................................... 4,530 42,313 42,312
(Increase) decrease in accounts receivables ................... (118,092) 165,671 3,360,558
(Increase) decrease in prepaid expenses and inventory ......... (31,543) 188,884 532,848
Increase (decrease) in accounts payable and accrued
expenses-other ............................................. 1,195,404 1,004,820 1,421,761
Increase (decrease) in accrued interest ....................... (680,696) 1,966,547 1,293,325
----------- ------------ ------------
Net cash used for operating activities (1,314,668) (7,121,653) (3,381,750)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in joint venture ................................... (37,500) -- --
Construction of leasehold and building improvements ........... (49,800) (2,169) (235,764)
Purchase of furniture and equipment ........................... (167,764) (17,556) (283,589)
Increase in patents and other intangibles ..................... (19,332) (139,346) (66,795)
(Increase) decrease in other assets ........................... 76,744 30,770 (2,594)
----------- ------------ ------------
Net cash used in investing activities ......................... (197,652) (128,301) (588,742)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock, net .............................. 2,555,606 1,588,552 --
Proceeds from issuance of short-term stockholder notes ........ 700,000 6,110,000 1,733,323
Liabilities to be settled in common stock ..................... 300,000 -- --
Repayment of stockholder notes ................................ (180,000) -- --
Repayment of capital lease obligations ........................ (30,501) (62,162) (57,153)
Repayment of note payable - Tail Wind ......................... (14,338) -- --
Proceeds from exercise of stock options and warrants .......... 711 1,496 1,628,801
----------- ------------ ------------
Net cash provided by financing activities ..................... 3,331,478 7,637,886 3,304,971
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents .......... 1,819,158 387,932 (665,521)
Cash and cash equivalents at beginning of period .............. 405,040 17,108 682,629
----------- ------------ ------------
Cash and cash equivalents at end of period .................... $ 2,224,198 $ 405,040 $ 17,108
=========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Issuance of note payable in settlement of 5% convertible
debentures ................................................. $ 1,000,000 -- --
=========== ============ ============
Issuance of common stock in payment of 5% convertible
debentures--Tail Wind and accounts payable and accrued
expenses ................................................... $ 1,557,595 -- --
=========== ============ ============
Cash paid for interest ........................................ $ 25,000 $ 58,500 $ 39,800
=========== ============ ============
See accompanying notes to financial statements.
40
UNIGENE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. Description of Business
Unigene Laboratories, Inc. ("Unigene"), a biopharmaceutical company, was
incorporated in the State of Delaware in 1980. Our single business segment
focuses on research, production and delivery of peptides for medical use. We
have concentrated most of our efforts to date on one peptide - calcitonin, for
the treatment of osteoporosis and other indications. Our initial products will
be injectable, nasal and oral formulations of calcitonin. We are also developing
other peptide products including parathyroid hormone, or PTH, for osteoporosis.
Our peptide products require clinical trials and/or approvals from regulatory
agencies as well as acceptance in the marketplace. Our injectable calcitonin
product has been approved for marketing in all 15-member states of the European
Union as well as Switzerland. Through December 31, 2002, sales of injectable
calcitonin have not been significant. Although we believe our patents and patent
applications are valid, the invalidation of our patents or the failure of
certain of our pending patent applications to issue as patents could have a
material adverse effect upon our business. We compete with specialized
biotechnology companies, major pharmaceutical and chemical companies and
universities and research institutions. Most of these competitors have
substantially greater resources than we do. During 2002, Unigene signed license
agreements with GlaxoSmithKline, or GSK, for oral PTH and with Upsher-Smith
Laboratories, Inc., or USL, for nasal calcitonin. During 2002, most of our
revenue was generated from one customer, GSK (see Note 18).
2. Liquidity
We believe that we will generate financial resources to apply toward funding our
operations through the achievement of milestones in the GSK or USL agreements
and through the sale of PTH to GSK. However, if we are unable to achieve these
milestones, or are unable to achieve the milestones on a timely basis, we would
need additional funds to continue our operations. We have incurred annual
operating losses since our inception and, as a result, at December 31, 2002, had
an accumulated deficit of approximately $94,000,000 and a working capital
deficiency of approximately $15,500,000. Our cash requirements to operate our
research and peptide manufacturing facilities and develop our products are
approximately $10 to 11 million per year. In addition, we have principal and
interest obligations under the Tail Wind note and our outstanding notes payable
to the Levys (our executive officers), as well as obligations relating to our
current and former joint ventures in China. As discussed in Note 4 to the
financial statements the Company has stockholder demand loans in default at
December 31, 2002. These factors, among others, raise substantial doubt about
our ability to continue as a going concern. The financial statements have been
prepared on a going concern basis and as such do not include any adjustments
that might result from the outcome of this uncertainty.
In April 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 our
activities in the production of raw material for development and clinical
supplies, and will pay us a royalty on its worldwide sales of the product, once
commercialized. Through December 31, 2002, we had recognized an aggregate of
$1,587,000 in revenue for our GSK development activities and $712,000 from the
sale of bulk PTH under a separate supply agreement.
In November 2002, we signed a $10 million exclusive U.S. licensing agreement
with USL to market our patented nasal formulation of calcitonin for the
treatment of osteoporosis. Under the terms of the agreement, we received an
up-front payment of $3 million from USL and will be eligible to receive
milestone payments up to $7 million and royalty payments on product sales. We
will be responsible for manufacturing the product and will sell finished
calcitonin product to USL. USL will package the product and will distribute it
nationwide.
Our future ability to generate cash from operations will depend primarily upon
the achievement of milestones in the GSK and USL agreements and through the sale
of PTH to GSK in the short-term and, in the long-term by receiving royalties
from the sale of our licensed products. We are actively seeking additional
licensing and/or supply
41
agreements with pharmaceutical companies for oral, nasal and injectable forms of
calcitonin as well as for other oral peptides. However, we may not be successful
in achieving milestones in our current agreements, obtaining regulatory approval
for our products or in licensing any of our other products.
3. Summary of Significant Accounting Policies & Practices
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.
Segment Information - We are managed and operated as one business. The entire
business is managed by a single management team that reports to the chief
executive officer. We do not operate separate lines of business or separate
business entities with respect to any of our product candidates. Accordingly, we
do not prepare discrete financial information with respect to separate product
areas or by location and does not have separately reportable segments as defined
by Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
Cash Equivalents - We consider all highly liquid securities purchased with an
original maturity of three months or less to be cash equivalents.
Accounts Receivable - We our estimate an allowance for doubtful accounts based
on the creditworthiness of our customers as well as general economic conditions.
Consequently, an adverse change in those conditions could affect our estimate.
Inventory - Inventories are stated at the lower of cost (using the first-in,
first-out method) or market.
Property, Plant and Equipment - Property, plant and equipment are carried at
cost. Equipment under capital leases are stated at the present value of the
minimum lease payments. Depreciation is computed using the straight-line method.
Amortization of equipment under capital leases and leasehold improvements is
computed over the shorter of the lease term or estimated useful life of the
asset. Additions and improvements are capitalized, while repairs and maintenance
are charged to expense as incurred.
Patents and Other Intangibles - Patent costs are deferred pending the outcome of
patent applications. Successful patent costs are amortized using the
straight-line method over the lives of the patents. Unsuccessful patent costs
are expensed when determined worthless or when patent applications will no
longer be pursued. As of December 31, 2002, nine of our patents had issued in
the U.S. and eighteen had issued in various foreign countries. Various other
applications are still pending. Other intangibles are recorded at cost and are
amortized over their estimated useful lives. Accumulated amortization on patents
and other intangibles is $396,000 and $239,000 at December 31, 2002 and 2001,
respectively.
Recently Adopted Principles
We adopted the provisions of 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 we have never entered into a
purchase business combination and have no goodwill or indefinite life intangible
assets.
We 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
42
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. We adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS
No. 144 did not result in an impairment charge based upon our expected future
cash flows. 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, we cannot
determine the potential effects that adoption of SFAS No. 144 will have on our
financial statements with respect to future decisions, if any.
In April 2002, the Financial Accounting Standards Board ("FASB") adopted SFAS
145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". 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, with early adoption encouraged. The Company has adopted SFAS No. 145
effective as of December 31, 2002 and for the year then ended. As a result, the
gain on early extinguishment of debt recognized in 2002 is classified in the
income from operations portion of the statement of operations.
In July 2002, the FASB Issued Statement 146 "Accounting for Costs Associated
with Exit or Disposal Activities". 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.
In December 2002, the FASB issued Statement 148, "Accounting for Stock Based
Compensation - Transition and Disclosure." This Statement amends FASB Statement
No. 123, "Accounting for Stock Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reporting results. The transition guidance and annual disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.
Under the provisions of Statement 123 that remain unaffected by Statement 148,
companies may either recognize expenses on a fair value based method in the
income statement or disclose the pro forma effects of that method in the
footnotes to the financial statements. We adopted the disclosure requirement
provisions of this statement. There was no significant impact on the financial
statements upon adoption. We expect to continue to follow the provisions of
APB Opinion No. 25.
In November 2002, the EITF reached a consensus on Issue 00-21 ("EITF 00-21"),
"Multiple-Deliverable Revenue Arrangements." EITF 00-21 addresses how to account
for arrangements that may involve the delivery or performance of multiple
products, services, and/or rights to use assets. The consensus mandates how to
identify whether goods or services or both are to be delivered separately in a
bundled sales arrangement should be accounted for separately because they are
separate units of accounting. The guidance can affect the timing of revenue
recognition for such arrangements, even though it does not change rules
governing the timing or pattern of revenue
43
recognition of individual items accounted for separately. The final consensus
will be applicable to agreements entered into in fiscal years beginning after
June 15, 2003 with early adoption permitted. Additionally, companies will be
permitted to apply the consensus guidance to all existing arrangements as the
cumulative effect of a change in accounting principle in accordance with APB
Opinion No. 20, "Accounting Changes." We are assessing, but at this point do not
believe the adoption of EITF 00-21 will have a material impact on our financial
position, cash flows or results of operations.
In November 2002, FASB Interpretation No. 45 ("FIN No. 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," was issued. FIN No. 45 requires a
guarantor entity, at the inception of a guarantee covered by the measurement
provisions of the interpretation, to record a liability for the fair value of
the obligation undertaken in issuing the guarantee. We previously did not record
a liability when guaranteeing obligations unless it became probable that we
would have to perform under the guarantee. FIN No. 45 applies prospectively to
guarantees we issue or modify subsequent to December 31, 2002, but has certain
disclosure requirements effective for interim and annual periods ending after
December 15, 2002. We have historically issued guarantees only on a limited
basis and do not anticipate FIN No. 45 will have a material effect on our 2003
financial statements. Disclosures required by FIN No. 45 are included in the
accompanying financial statements.
In January 2003, the FASB issued FIN No. 46 "Consolidation of Variable Interest
Entities, an interpretation of ARB 51." FIN 46 provides guidance on the
identification of entities for which control is achieved through means other
than through voting rights called "variable interest entities" or "VIEs" and how
to determine when and which business enterprise should consolidate the VIE (the
"primary beneficiary"). This new model for consolidation applies to an entity
which either (1) the equity investors (if any) do not have a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN 46 requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. Certain transitional disclosures
are required in financial statements initially issued after January 31, 2003, if
it is reasonably possible that once this guidance is effective the enterprise
will either be required to consolidate a variable interest entity or will hold a
significant variable interest in a variable interest entity. We do not believe
that we have any interests that would change our current reporting entity or
require additional disclosures outlined in FIN 46.
Others
Fair Value of Financial Instruments - The fair value of a financial instrument
represents the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation.
Significant differences can arise between the fair value and carrying amounts of
financial instruments that are recognized at historical cost amounts. Given our
financial condition described in Note 2, it is not practicable to estimate the
fair value of our financial instruments at December 31, 2002.
Revenue Recognition - In December 1999, the SEC staff issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101").
Commencing in 2000, non-refundable license fees received upon execution of
license agreements where we have continuing involvement are deferred and
recognized as revenue over the life of the agreement. Prior to the
implementation of SAB 101, non-refundable license fees received upon execution
of license agreements were recognized as revenue immediately. 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. Revenue from the sale of product is recognized upon
shipment to the customer. Revenue from grants is recognized when earned, and
when we have no continuing commitments.
SAB 101 summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements and
specifically addresses revenue recognition in the biotechnology industry for
non-refundable technology access fees and other non-refundable fees. We were
required to adopt SAB 101, as amended, in the fourth quarter of 2000 with an
effective date of January 1, 2000, and the recognition of a cumulative effect
adjustment calculated as of January 1, 2000. We adopted SAB 101 in 2000,
changing our revenue recognition policy for up-front licensing fees that require
services to be performed in the future from immediate revenue recognition to
deferral of revenue with the up-front fee recognized over the life of the
agreement. In 1997, we recognized $3,000,000 in revenue from an up-front
licensing fee from Pfizer. With the adoption of SAB 101, we recognized this
revenue over a 45-month period, equivalent to the term of our oral calcitonin
agreement with Pfizer.
44
When this agreement was terminated in March 2001 the remaining deferred revenue
was recognized. We therefore recognized a non-cash cumulative effect adjustment
of $1,000,000 as of January 1, 2000 representing a revenue deferral over the
remaining 15 months of the agreement. We recognized $800,000 of revenue in 2000
and $200,000 in revenue in 2001 as a result of this deferral.
Research and Development - Research and development expenses include the costs
associated with our internal research and development and research and
development conducted for us by third parties. These costs primarily consist of
salaries, clinical trials, outside consultants, supplies, and indirect costs.
Indirect costs such as depreciation, rent, utilities, insurance, taxes, and
maintenance are allocated to research and development based on specific criteria
such as square footage utilized. All research and development costs discussed
above are expensed as incurred. Third-party expenses reimbursed under research
and development contracts, which are not refundable, are recorded as a reduction
to research and development expense in the statement of operations.
Stock Options - We account for stock options issued 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 for
employees only if the current market price of the underlying stock exceeded the
exercise price of the option at the date of grant and it is recognized on a
straight-line basis over the vesting period; compensation expense on variable
stock option grants is estimated until the measurement date. As permitted by
SFAS No. 123, "Accounting for Stock-Based Compensation", we provide pro forma
net loss and pro forma loss per share disclosures for employee and director
stock option grants as if the fair-value-based method defined in SFAS No. 123
had been applied. We account for stock options and warrants issued to
consultants on a fair value basis in accordance with SFAS No. 123 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."
Had compensation cost for options granted to employees and directors been
determined consistent with the fair value method under SFAS No. 123, our pro
forma net loss and pro forma net loss per share would have been as follows for
the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
----------- ------------ ------------
Net loss:
As reported $(6,336,623) $(12,472,346) $(12,469,405)
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards (28,000) (780,000) (175,000)
----------- ------------ ------------
Pro forma (6,364,623) (13,252,346) (12,644,405)
=========== ============ ============
Basic and diluted net loss per share:
As reported $ (0.11) $ (0.26) $ (0.28)
Pro forma (0.11) (0.28) (0.29)
=========== ============ ============
Income Taxes - Income taxes are accounted for under the asset and liability
method with deferred tax assets and liabilities recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be reversed or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in operations in the period that includes the enactment date. A
valuation allowance is established to reduce deferred tax assets if it is more
likely than not that all, or some portion, of such deferred tax assets will not
be realized.
Net Loss per Share - We compute and present both basic and diluted earnings per
share ("EPS") on the face of the statement of operations. Basic EPS is computed
using the weighted average number of common shares outstanding during the period
being reported on. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue Common Stock were exercised or
converted into Common Stock at the beginning of the period being reported on and
the effect was dilutive. Our net loss and weighted average shares outstanding
used for computing diluted loss per share were the same as that used for
computing basic loss per share for each of the years ended December 31, 2002,
2001 and 2000 because our convertible debentures, stock options and warrants
were not included in the calculation since the inclusion of such potential
shares (approximately 5,585,000, 4,500,000 and
45
3,200,000 potential shares of Common Stock at December 31, 2002, 2001 and 2000
respectively) would be antidilutive.
Reclassifications - Certain reclassifications to prior years' financial
statements have been made to conform to the current presentation.
4. Related Party Transactions
To satisfy our 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 us. During 2002, Jay Levy made demand loans to us in the aggregate
principal amount of $700,000. We repaid $180,000 in loans to Jay Levy in May
2002 and repaid an additional $100,000 in loans in January, 2003. We have 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. Pursuant to the loan agreements and
because of the defaults, 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
$564,000, and total interest expense on all Levy loans was approximately
$1,240,000 for 2002 ($1,087,000 for 2001 and $281,000 for 2000). As of December
31, 2002, total accrued interest on all Levy loans was approximately $3,248,000
($2,008,000 as of December 31, 2001) and the outstanding loans by these
individuals to us, classified as short-term debt, totaled $11,373,323, of which
approximately $5,663,000 are in default.
Outstanding stockholder loans consist of the following at December 31, 2002 and
2001 (in thousands):
2002 2001
------- -------
Jay Levy term loans $ 1,870 $ 1,870
Jay Levy demand loans 8,985 8,465
Warren Levy demand loans 265 265
Ronald Levy demand loans 253 253
------- -------
$11,373 $10,853
======= =======
.. 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% (10.75% at December 31, 2002 and
11% at December 31, 2001) that are classified as short-term debt. These
loans were originally at the Merrill Lynch Margin Loan Rate plus .25%.
These loans are secured by a security interest in our equipment and real
property. Accrued interest on these loans at December 31, 2002 was
approximately $1,624,000.
.. 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 our equipment and a mortgage
on our real property. The terms of the notes required us 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 December 31, 2002 was approximately $661,000.
.. Loans from Jay Levy in 2001 and 2002 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%, (5.75% at
December 31, 2002 and 6% at December 31, 2001) 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 December 31, 2002 was
approximately $495,000.
.. 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% (10.75% at December 31, 2002 and
11% at December 31, 2001) 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% (5.75% at December 31, 2002 and 6% at December 31,
2001) and is classified as short-term debt. These loans are secured by a
secondary security interest in our equipment and real property. Accrued
interest on these loans at December 31, 2002 was approximately $236,000.
46
.. 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% (10.75% at December 31, 2002 and
11% at December 31, 2001) 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% (5.75% at December 31, 2002 and 6% at December
31, 2001) and is classified as short-term debt. These loans are secured by
a secondary security interest in our equipment and real property. Accrued
interest on these loans at December 31, 2002 was approximately $232,000.
One of our directors is a partner in a law firm that we have engaged for
legal services. In 2002, we incurred an aggregate of $472,000 in legal fees with
this firm ($11,432 in 2001). In addition, one of our directors serves as our
Research Director, receiving $73,500 in annual compensation in both 2002 and
2001.
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31, 2002
and 2001:
Estimated
Depreciable
2002 2001 Lives
----------- ----------- -----------
Building and improvements $ 1,447,010 $ 1,397,210 25 years
Leasehold improvements 8,698,020 8,698,020 Lease Term
Manufacturing equipment 4,086,456 4,009,741 10 years
Laboratory equipment 2,874,039 2,819,801 5 years
Other equipment 466,523 466,523 10 years
Office equipment and furniture 382,478 345,667 5 years
Equipment under capital leases 258,517 258,517 Lease Term
----------- -----------
18,213,043 17,995,479
Less accumulated depreciation and
amortization 15,567,936 14,007,334
----------- -----------
2,645,107 3,988,145
Land 121,167 121,167
----------- -----------
$ 2,766,274 $ 4,109,312
=========== ===========
Depreciation and amortization expense on property, plant and equipment was
$1,561,000, $1,595,000 and $1,576,000 in 2002, 2001 and 2000, respectively.
6. China Joint Ventures
Current joint venture
- ---------------------
In June 2000, we entered into a joint venture with Shijiazhuang Pharmaceutical
Group, or SPG, a pharmaceutical company in the People's Republic of China. We
expect that 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 NDA in China is being prepared for injectable and nasal
calcitonin products, which is expected to be filed by mid- 2003. Approvals of
NDAs in China require approximately 12-18 months. In addition, brief local human
trials may be required. If the product is successful, the joint venture may
establish a facility in China to fill injectable and nasal calcitonin products
using bulk calcitonin supplied by us. 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 began operations in March 2002; sales of the injectable calcitonin
product began in April 2002. Initial sales will be used by the joint venture to
offset startup costs. Therefore, the joint venture's net loss for the period
ended December 31, 2002 was immaterial to our overall results of operations.
47
During 2002, we revisited our analysis as to whether a liability had been
incurred relative to our funding requirements under the joint venture, and
concluded that neither a liability nor an investment in the joint venture had
occurred to date. Accordingly, the obligation to fund the joint venture of
$900,000 is considered a contingent obligation, pending reaching the effective
date as defined in the joint venture agreement. Further, the presentation of the
asset and obligation in the 2001 balance sheet reflects the results of this
analysis.
Under the terms of the joint venture in China with SPG, we are obligated to
contribute up to $405,000 in cash after approval of its Chinese NDA which is
expected in 2004 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 December 31, 2002, we contributed $37,500 to the
joint venture. At December 31, 2002, our investment in the joint venture is
$32,970. This represents our $37,500 contribution reduced by $4,530 which is our
45% share of the joint venture's 2002 loss. The joint venture began operations
in March 2002.
Former joint venture
- --------------------
In addition, we are 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) in order to terminate our former joint venture in China,
of which $195,000 is remaining as of December 31, 2002. We recognized the entire
$350,000 obligation as an expense in 2000. As of December 31, 2001, the Company
had $265,000 remaining under this obligation.
7. Convertible Debentures
In June 1998, we completed a private placement of $4,000,000 in principal amount
of 5% convertible debentures to Tail Wind from which we realized net proceeds of
approximately $3,750,000. The 5% debentures were convertible into shares of our
common stock. The interest on the debentures, at our option, was also payable in
shares of common stock. Upon conversion, Tail Wind was also 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 we were 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 1999, $2,000,000 of principle of the notes was converted
into common stock. In December 1999, we were 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, we accrued, as of December 31,
1999, an amount equal to $400,000 representing the 20% premium on the
outstanding $2,000,000 (held by Tail Wind) 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, 2002, we 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, we issued an additional 103,032 shares
of common stock in 2000 upon the cashless exercise of all of the 141,123
warrants issued upon conversion of the 5% debentures.
On January 5, 2000, we 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
also were not made. In addition, due to the delisting of our common stock from
the Nasdaq National Market in October 1999, we became obligated under a separate
agreement to pay the holder of the 5% debentures an amount equal to 2% of the
outstanding principal amount of the debentures per month. We 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. As a result, the holder filed a demand for
arbitration against us in July 2000. On April 9, 2002, we entered into a
settlement with Tail Wind. Pursuant to the terms of the settlement agreement,
Tail Wind surrendered to us the $2 million in principal amount of convertible
debentures that remained outstanding and released all claims against us relating
to Tail Wind's purchase of the convertible debentures, including all issues
raised in the arbitration, which were approximately $4.5 million including
accrued interest and penalties in the approximate amount of $2.5 million. In
exchange, we issued to Tail Wind a $1 million promissory note secured by our
Fairfield, New Jersey building and equipment 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. The shares were valued at $1.1 million in
the aggregate, based on our closing stock price on April 9, 2002. We therefore
recognized a gain for accounting purposes of approximately $2.4 million on the
extinguishment of debt and related interest. We 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.
The escrow agent released the shares to Tail Wind over the course of May 2002
through October 2002.
48
8. Fusion Capital Financing
On May 9, 2001, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC, (Fusion) under which Fusion 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 through May 2003, if not extended by us for
six months. 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 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, we
must satisfy 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 of
our payment obligations in excess of $1,000,000, no insolvency or bankruptcy on
our part, continued listing of Unigene common stock on the OTC Bulletin Board,
and we 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 sales 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. 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. As compensation for its commitment, we issued to Fusion as
of March 30, 2001 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
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
December 31, 2002, we have received $4,676,881 through the sale of 12,654,462
shares of common stock to Fusion, before cash expenses of approximately
$533,000.
In December 2000, we issued a five-year warrant to purchase 373,002 shares of
Unigene common stock to our investment banker as a fee in connection with the
Fusion financing agreement. The warrant has an exercise price of $1.126 and a
fair value of $327,000 using the Black-Scholes pricing model, which was
recognized upon the first Fusion purchase, which occurred in 2001.
9. Inventory - Inventories consist of the following as of December 31, 2002
and 2001:
2002 2001
-------- --------
Finished goods $ -- $100,000
Raw material 264,830 183,328
-------- --------
Total $264,830 $283,328
======== ========
10. Accrued expenses
Accrued interest consists of the following as of
December 31, 2002 and 2001: 2002 2001
---------- ----------
Interest - notes payable to stockholders (Note 4) $3,247,932 $2,008,273
Interest - note payable to Tail Wind (Note 7) 42,835 --
Interest and penalties on 5% convertible debentures
(Note 7) -- 1,963,190
---------- ----------
$3,290,767 $3,971,463
========== ==========
49
Accrued expenses - other consists of the following at December 31, 2002 and
2001:
2002 2001
---------- ----------
China joint venture (Note 6) 195,000 265,000
Clinical trials and contract research 98,508 991,399
Vacation and other payroll-related expenses 452,610 480,134
Consultants 384,382 203,656
Other 222,232 272,599
---------- ----------
Total $1,352,732 $2,212,788
========== ==========
11. Notes Payable - Other
Notes payable - other consists of two notes to a vendor aggregating $800,000.
One note for $300,000 is a demand note with a per annum interest rate of 6%. The
other is a note for $500,000 which was due December 31, 2001. The per annum
interest rate was originally 8%, but increased to 12% on January 1, 2002 when
the note was not paid on its due date. No principal or interest payments have
been made on these notes.
12. Obligations Under Capital Leases
We entered into various lease arrangements during 1999 and 1998 which qualify as
capital leases. The future years' minimum lease payments under the capital
leases, together with the present value of the net minimum lease payments, as of
December 31, 2002 are as follows:
Total minimum lease payments - 2003 $15,319
Less amount representing interest 2,012
-------
Present value of net minimum lease payments 13,307
Less current portion 13,307
-------
Obligations under capital leases, excluding current portion $ --
=======
The interest rates on these leases vary from 12% to 14%.
Following is a summary of property held under capital leases:
2002 2001
--------- ---------
Lab equipment $ 167,410 $ 167,410
Manufacturing equipment 61,714 61,714
Office equipment 29,393 29,393
--------- ---------
258,517 258,517
Less: accumulated depreciation (200,510) (157,917)
--------- ---------
$ 58,007 $ 100,600
========= =========
50
13. Obligations Under Operating Leases
We are obligated under a 10-year net-lease, which began in February 1994, for
our manufacturing facility located in Boonton, New Jersey. We have two 10-year
renewal options as well as an option to purchase the facility. In addition, we
lease laboratory, production, and office equipment under various operating
leases expiring in 2003 through 2006. Total future minimum rentals under these
noncancelable operating leases are as follows:
2003 $227,010
2004 39,676
2005 21,472
2006 10,831
2007 and thereafter --
--------
$298,989
========
Total rent expense was approximately $252,000, $236,000, and $259,000 for 2002,
2001, and 2000 respectively.
14. Stockholders' Equity
As of December 31, 2002, there are warrants outstanding to various consultants
and an investment banker, 1,648,002 of which are currently exercisable, to
purchase an aggregate of 1,728,002 shares of Common Stock at exercise prices
ranging from $.50 to $2.66 per share (warrants to purchase 1,598,002 shares of
Common Stock were exercisable at December 31, 2001 at a weighted average
exercise price of $.97 per share).
The following summarizes warrant activity for the past three years:
Warrants
Exercisable At Weighted Average
Warrants End of Year Exercise Price
---------- -------------- ----------------
Outstanding January 1, 2000 1,802,159 1,802,159
=========
Granted 523,002 $1.57
Cancelled (10,000) 1.38
Exercised (1,326,159) 1.44
----------
Outstanding December 31, 2000 989,002 989,002
=========
Granted 1,000,000 $0.50
Cancelled (391,000) 2.63
Exercised -- --
----------
Outstanding December 31, 2001 1,598,002 1,598,002
=========
Granted 200,000 $0.63
Cancelled (70,000) 3.23
Exercised -- --
----------
Outstanding December 31, 2002 1,728,002 1,648,002
========== =========
51
A summary of warrants outstanding and exercisable as of December 31, 2002
follows:
Warrants Outstanding Warrants Exercisable
--------------------------------------------- ----------------------------
Range of Weighted Ave.
Exercise Number Remaining Life Weighted Ave. Number Weighted Ave.
Price Outstanding (years) Exercise Price Exercisable Exercise Price
- ----------- ----------- -------------- -------------- ----------- --------------
$0.50-$0.99 1,200,000 3.4 $0.52 1,120,000 $0.51
$1.00-$1.99 373,002 3.0 1.13 373,002 1.13
$2.00-$2.66 155,000 2.5 2.65 155,000 2.65
--------- ----- --------- -----
1,728,002 0.84 1,648,002 0.85
========= ===== ========= =====
In 1995, two consultants received warrants from us to purchase an aggregate of
112,000 shares of common stock. These warrants were exercised, but we were
unable to issue unlegended stock due to the lack of an effective registration
statement. As compensation for the delay, we issued additional shares to the
holders which we recorded as a non-cash expense of $225,000 in 2001.
Rights Plan
Each share of common stock outstanding has attached one purchase right. Each
right entitles the registered holder to purchase 1/10,000th of a share of Common
stock for $4.00 per right and will expire on December 30, 2012. Following a
merger or certain other transactions, the rights will entitle the holder to
purchase common stock of the company that will have a market value of two times
the purchase price.
15. Stock Option Plans
During 1994, our stockholders approved the adoption of the 1994 Employee Stock
Option Plan (the "1994 Plan"). All of our employees were eligible to participate
in the 1994 Plan, including executive officers and directors who are our
employees. The 1994 Plan terminated on June 6, 2000; however, 1,440,965 options
previously granted continue to be outstanding, of which 1,427,965 are currently
exercisable under that plan as of December 31, 2002.
At our 1999 Annual Meeting, the stockholders approved the adoption of a 1999
Directors Stock Option Plan (the "1999 Plan") under which each person elected to
the Board after June 23, 1999 who is not an employee will receive, on the date
of his initial election, an option to purchase 21,000 shares of Common Stock. In
addition, on May 1st of each year, commencing May 1, 1999, each non-employee
director will receive an option to purchase 10,000 shares of Common Stock if he
or she has served as a non-employee director for at least six months prior to
the May 1st grant. Each option granted under the 1999 Plan will have a ten-year
term and the exercise price of each option will be equal to the market price of
Unigene's Common Stock on the date of the grant. A total of 350,000 shares of
Common Stock are reserved for issuance under the 1999 Plan.
In November 1999, the Board of Directors approved, subject to stockholder
approval, the adoption of a new Stock Option Plan (the "2000 Plan") to replace
the 1994 Plan. All employees (including directors who are employees), as well as
certain consultants, are eligible to receive option grants under the 2000 Plan.
Options granted under the 2000 Plan have a ten-year term and an exercise price
equal to the market price of the Common Stock on the date of the grant. A total
of 4,000,000 shares of Common Stock are reserved for issuance under the 2000
Plan.
In November 1999, the Board granted under the 2000 Plan, to our employees, stock
options to purchase an aggregate of 482,000 shares (of which 14,650 shares were
subsequently cancelled) of Common Stock at an exercise price of $0.63 per share,
the market price on the date of grant. Each of the grants was made subject to
stockholder approval of the 2000 Plan. At our June 6, 2000 Annual Meeting, the
stockholders approved the 2000 Plan. In accordance with APB Opinion No. 25, the
measurement date for valuing the stock options for the purpose of determining
compensation expense was June 6, 2000, the date of stockholder approval. The
market price of the Common Stock on this date was $2.093 per share. Therefore,
an aggregate of $683,733 was charged to compensation expense over the vesting
periods of the options, which vested in approximately 50% increments on November
5, 2000 and November 5, 2001. We recognized $398,785 as compensation expense in
2000 and $284,948 as compensation expense in 2001.
52
The following summarizes activity for options granted to directors and
employees:
Weighted
Options Average Weighted
Exercisable At Grant-date Average
Options End of Year Fair Value Exercise Price
--------- -------------- ---------- --------------
Outstanding January 1, 2000 2,045,865 1,639,615
=========
Granted 571,500 $1.96 $0.87
Cancelled (64,650) -- 1.78
Exercised (245,600) -- 1.28
---------
Outstanding December 31, 2000 2,307,115 1,968,540
=========
Granted 1,955,000 $0.41 $0.44
Cancelled (348,000) -- 1.82
Exercised (2,375) -- 0.63
---------
Outstanding December 31, 2001 3,911,740 2,118,990
=========
Granted 53,000 $0.53 $0.56
Cancelled (105,700) -- 1.45
Exercised (1,800) -- 0.40
---------
Outstanding December 31, 2002 3,857,240 3,195,290
========= =========
The fair value of the stock options granted in 2002, 2001 and 2000 is estimated
at grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions: dividend yields of 0%; expected volatility of 116%
in 2002, 113% in 2001 and 103% in 2000; a risk-free interest rate of 2.9% in
2002, 4.4% in 2001 and 4.7% in 2000; and expected lives of 5 years.
A summary of options outstanding and exercisable as of December 31, 2002,
follows:
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Weighted Ave.
Range of Number Remaining Weighted Ave. Number Weighted Ave.
Exercise Price Outstanding Life (years) Exercise Price Exercisable Exercise Price
- -------------- ----------- ------------- -------------- ----------- --------------
$.28-.99 2,630,875 8.2 $ .49 1,985,925 $ .51
1.00-1.99 689,365 4.5 1.81 678,365 1.82
2.00-4.69 537,000 3.6 2.81 531,000 2.80
--------- ---------
3,857,240 1.05 3,195,290 1.17
========= ===== ========= =====
As of December 31, 2002, options to purchase 248,000 shares and 2,037,000 shares
of Common Stock were available for grant under the 1999 and 2000 Plans,
respectively.
16. Income Taxes
As of December 31, 2002, we had available for federal income tax reporting
purposes net operating loss carryforwards in the approximate amount of
$79,000,000, expiring from 2003 through 2021, which are available to reduce
future earnings which would otherwise be subject to federal income taxes. Our
ability to use such net operating losses may be limited by change in control
provisions under Internal Revenue Code Section 382. In addition, as of December
31, 2002, we have 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 2003 through 2021.
53
We have New Jersey operating loss carryforwards in the approximate amount of
$25,600,000, expiring from 2005 through 2008, which are available to reduce
future earnings, which would otherwise be subject to state income tax. However,
2002's recent law changes do not allow the use of New Jersey net operating
losses to offset current taxable income. As of December 31, 2002, all of these
New Jersey loss carryforwards have been approved for future sale under a program
of the New Jersey Economic Development Authority, which we refer to as the
NJEDA. In order to realize these benefits, we 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 have sold tax benefits and realized a total of $755,000
in 2002, $561,000 in 2001 and $1,065,000 in 2000.
Given our past history of incurring operating losses, any deferred tax assets
that are recognizable were fully reserved. As of December 31, 2002 and 2001, we
had deferred tax assets of approximately $34,000,000 and $34,000,000,
respectively, subject to valuation allowances of $34,000,000 and $34,000,000,
respectively. The deferred tax assets are primarily a result of our net
operating losses and tax credits.
17. Employee Benefit Plan
We maintain a deferred compensation plan covering all full-time employees. The
plan allows participants to defer a portion of their compensation on a pre-tax
basis pursuant to Section 401(k) of the Internal Revenue Code of 1986, as
amended, up to an annual maximum for each employee set by the Internal Revenue
Service. Our discretionary matching contribution expense for 2002, 2001 and 2000
was approximately $49,000, $43,000 and $48,000, respectively.
18. Research and Licensing Revenue
In April 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. 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 year ended December 31, 2002 includes the recognition of
$150,000 of deferred licensing revenue from GSK. In addition, GSK will fund all
development activities during the program, including our activities in the
production of raw material for development and clinical supplies, and will pay
us a royalty on its worldwide sales of the product. Through December 31, 2002,
we have recognized an aggregate of $1,587,000 in revenue for our GSK-reimbursed
development activities and $712,000 from the sale of bulk PTH under a separate
supply agreement. During 2002, direct and indirect costs associated with this
project were approximately $4,119,000.
In November 2002, we signed a $10 million exclusive U.S. licensing agreement
with USL to market our patented nasal formulation of calcitonin for the
treatment of osteoporosis. Under the terms of the agreement, we received an
up-front payment of $3 million from USL and will be eligible to receive
milestone payments and royalty payments on product sales. Revenue recognition of
the up-front licensing fee has been deferred over the estimated 19-year
performance period of the license agreement. Revenue for the year ended December
31, 2002 includes the recognition of $13,000 of deferred licensing revenue from
USL. We will be responsible for manufacturing the product and will sell finished
calcitonin product to USL. USL will package the product and will distribute it
nationwide. During 2002, direct and indirect costs associated with this project
were approximately $1,728,000.
In July 1997, we entered into an agreement under which we granted to the
Parke-Davis division of Warner-Lambert Company a worldwide license to use our
oral calcitonin technology. In June 2000, Pfizer Inc. acquired Warner-Lambert.
During 1997, we received $3 million for an equity investment and $3 million for
a licensing fee (see Note 3). Several milestones were achieved during 1998,
resulting in milestone revenue of $5 million. In 1999, two pilot human studies
for our oral calcitonin formulation were successfully concluded, resulting in
milestone revenue totaling $5 million. Also in 1999, Unigene and Pfizer
identified an oral calcitonin formulation to be used in the Phase I/II clinical
study entitling us to milestone revenue of an additional $4.5 million. During
2000, two milestones were achieved resulting in milestone revenue of $2 million.
Patient dosing for this study was completed in
54
December 2000. Pfizer analyzed the results of this study and terminated the
agreement in March 2001 citing scientific and technical reasons.
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. While the Company did
not track costs on a specific research and development basis, management
estimated that our direct and indirect costs were approximately $4 million per
year (of which indirect costs represented approximately 33% of the total)
related to the Warner-Lambert program, based upon an estimate of research
personnel time and a review of batch production records.
Research and development costs primarily consist of personnel costs, supplies,
outside consultants and indirect costs and are included in research and
development expenses.
19. Legal Matters
In July 2000, Reseau de Voyage Sterling, Inc., the plaintiff, filed suit
against us in the Supreme Court of the State of New York. We removed this case
to the United States District Court for the Southern District of New York. The
plaintiff, which purchased from a third party a warrant to purchase one million
shares of Unigene common stock, alleges that we breached a verbal agreement with
the plaintiff to extend the term of the warrant beyond its expiration date. The
plaintiff is seeking damages of not less than $2 million. Following discovery,
we moved for summary judgment. On March 30, 2003, the Court accepted the report
and recommendation of the magistrate judge and granted our motion for summary
judgment. We do not yet know whether the plaintiff will appeal the case. We
believe that this suit is completely without merit, and we will continue to
vigorously contest the claim.
The Company is also subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
Company's financial statements.
20. Selected Quarterly Financial Data (Unaudited)
2002 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---- ----------- ----------- ----------- -----------
Revenue $ 79,971 $ 556,700 $ 826,199 $ 1,195,088
Operating loss $(2,289,544) $(2,328,561) $(1,646,646) $(2,231,457)
Net loss $(2,564,304) $ (162,364) $(1,506,068) $(2,103,887)
Net loss per share, basic
and diluted $ (.05) $ -- $ (.02) $ (.04)
2001 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---- ----------- ----------- ----------- -----------
Revenue $ 273,775 $ 88,042 $ 267,654 $ 235,174
Operating loss $(2,636,210) $(2,806,962) $(2,702,972) $(2,810,782)
Net loss $(3,125,111) $(3,308,729) $(3,231,666) $(2,806,840)
Net loss per share, basic
and diluted $ (.07) $ (.07) $ (.07) $ (.05)
55
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information required by this item is included in the section entitled
"Proposal 2, Ratification of the Appointment of Independent Auditors" of the
Registrant's definitive proxy statement for its Annual Meeting of Stockholders
to be held on June 10, 2003 and is hereby incorporated by reference.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to Directors is included in
the sections entitled "Election of Directors" of the Registrant's definitive
proxy statement for its Annual Meeting of Stockholders to be held on June 10,
2003 and is hereby incorporated by reference. Information concerning the
Executive Officers of the Registrant is included in Item I of Part I above, in
the section entitled "Executive Officers of the Registrant".
Item 11. Executive Compensation
The information required by this item is included in the sections entitled
"Compensation Committee Interlocks and Insider Participation" and "Executive
Compensation" of the Registrant's definitive proxy statement for its Annual
Meeting of Stockholders to be held on June 10, 2003 and is hereby incorporated
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
related Stockholder Matters
The information required by this item is included in the sections entitled
"Security Ownership of Management" and "Equity Compensation Plan Information" of
the Registrant's definitive proxy statement for its Annual Meeting of
Stockholders to be held on June 10, 2003 and is hereby incorporated by
reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is included in the section entitled
"Compensation Committee Interlocks and Insider Participation" of the
Registrant's definitive proxy statement for its Annual Meeting of Stockholders
to be held on June 10, 2003 and is hereby incorporated by reference.
Item 14. 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 were effective in timely alerting them to material information
required to be included in our periodic SEC reports.
(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.
56
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1. Financial Statements
The Financial Statements and Supplementary Data set forth under Item 8 of
this Report on Form 10-K are incorporated herein by reference.
(a)2. Financial Statement Schedules
None.
(a)3. Exhibits.
See Index to Exhibits which appears on Pages 59-62.
(b)Reports on Form 8-K:
December 23, 2002 (adoption of stockholder rights plan).
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
April 17, 2003 /s/ Warren P. Levy
---------------------------------------------
Warren P. Levy, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
April 17, 2003 /s/ Warren P. Levy
---------------------------------------------
Warren P. Levy, President, Chief Executive
Officer and Director
April 17, 2003 /s/ Jay Levy
---------------------------------------------
Jay Levy, Treasurer, Chief Financial Officer,
Chief Accounting Officer and Director
April 17, 2003 /s/ Ronald S. Levy
---------------------------------------------
Ronald S. Levy, Secretary, Executive Vice
President and Director
April 17, 2003 /s/ Allen Bloom
---------------------------------------------
Allen Bloom, Director
April 17, 2003 /s/ J. Thomas August
---------------------------------------------
J. Thomas August, Director
April 17, 2003 /s/ Bruce S. Morra
---------------------------------------------
Bruce S. Morra, Director
58
CERTIFICATION
I, Warren Levy, certify that:
1. I have reviewed this annual report on Form 10-K of Unigene Laboratories,
Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual report whether 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: April 17, 2003 /s/ Warren P. Levy
---------------------------------------
Chief Executive Officer
CERTIFICATION
I, Jay Levy, certify that:
1. I have reviewed this annual report on Form 10-K of Unigene Laboratories,
Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual report whether 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: April 17, 2003 /s/ Jay Levy
---------------------------------------
Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation of the Registrant and Amendments thereto
to July 1, 1986 (incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement No. 33-6877 on Form S-1, filed
July 1, 1986).
3.1.1 Certificate of Amendments of Certificate of Incorporation filed July
29, 1986 and May 22, 1987 (incorporated by reference to Exhibit 3.1.1
to the Registrant's Registration Statement No. 33-6877 on Form S-1,
filed July 1, 1986).
3.1.2 Certificate of Amendments of Certificate of Incorporation filed August
22, 1997 (incorporated by reference to Exhibit 3.1.2 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).
3.1.3 Amendment to Certificate of Incorporation filed July 18, 2001
(incorporated by reference to Exhibit 3.1.3 of Post-Effective
Amendment No. 2 to Registrant's Registration Statement No. 333-04557
on Form S-1, filed December 12, 2001).
3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993).
4.1 Rights Agreement between Unigene Laboratories, Inc. and Registrar and
Transfer Company, dated December 20, 2002 (incorporated by reference
to Exhibit 4.1 to the Registrant's Current Report on Form 8-K, dated
December 11, 2002).
4.2 Specimen Certificate for Common Stock, par value $.01 per share
(incorporated by reference to Exhibit 3.1.1 to the Registrant's
Registration Statement No. 33-6877 on Form S-1, filed July 1, 1986).
10.1 Lease agreement between the Registrant and Fulton Street Associates,
dated May 20, 1993 (incorporated by reference to Exhibit 10.1 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1992 (File No. 0-16005)).
10.2 1994 Employee Stock Option Plan (incorporated by reference to the
Registrant's Definitive Proxy Statement dated April 28, 1994, which is
set forth as Appendix A to Exhibit 28 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993 (File No.
0-16005)).
10.3 Directors Stock Option Plan (incorporated by reference to Exhibit 10.4
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 (File No. 0-16005)).
10.4 Mortgage and Security Agreement between the Registrant and Jean Levy
dated February 10, 1995 (incorporated by reference to Exhibit 10.4 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.5 Loan and Security Agreement between the Registrant and Jay Levy,
Warren P. Levy and Ronald S. Levy dated March 2, 1995 (incorporated by
reference to Exhibit 10.5 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994).
10.6 Employment Agreement between the Registrant and Warren P. Levy, dated
January 1, 2000 (incorporated by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1999).
10.7 Employment Agreement between the Registrant and Ronald S. Levy, dated
January 1, 2000 (incorporated by reference to Exhibit 10.7 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1999).
10.8 Employment Agreement between the Registrant and Jay Levy, dated
January 1, 2000 (incorporated by reference to Exhibit 10.8 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1999).
10.9 Split Dollar Agreement dated September 30, 1992 between the Registrant
and Warren P. Levy (incorporated by reference to Exhibit 10.9 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1992).
10.10 Split Dollar Agreement dated September 30, 1992 between the Registrant
and Ronald S. Levy (incorporated by reference to Exhibit 10.10 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1992).
10.12 Amendment to Loan Agreement and Security Agreement between the
Registrant and Jay Levy, Warren P. Levy and Ronald S. Levy, dated
March 20, 1995 (incorporated by reference to Exhibit 10.12 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1994).
10.14 Amendment to Loan and Security Agreement between the Registrant and
Jay Levy, Warren P. Levy and Ronald S. Levy, dated June 29, 1995
(incorporated by reference to Exhibit 10.14 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995).
10.15 Promissory Note between the Registrant and Jay Levy, Warren P. Levy
and Ronald S. Levy, dated June 29, 1995 (incorporated by reference to
Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.17 License Agreement, dated as of July 15, 1997, between the Registrant
and Warner-Lambert Company (incorporated by reference to Exhibit 10.1
to the Registrant's Current Report on Form 8-K, dated July 15, 1997).
*
10.19 Purchase Agreement, dated June 29, 1998, between the Registrant and
The Tail Wind Fund, Ltd. (incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
10.20 Registration Rights Agreement, dated June 29, 1998, between the
Registrant and The Tail Wind Fund, Ltd. (incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
10.21 Form of Promissory Note between the Registrant and Jay Levy
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
10.22 Form of Promissory Note between the Registrant and Warren Levy and
Ronald Levy (incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999).
10.23 Amendment to Loan Agreement and Security Agreement between the
Registrant and Jay Levy, Warren Levy and Ronald Levy, dated June 25,
1999 (incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
10.24 Amended and Restated Secured Note between the Registrant and Jay
Levy, dated July 13, 1999 (incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999).
10.25 Amended and Restated Security Agreement between the Registrant and
Jay Levy, Warren P. Levy and Ronald S. Levy, dated July 13, 1999
(incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
10.26 Subordination Agreement between the Registrant and Jay Levy,
Warren P. Levy and Ronald S. Levy, dated July 13, 1999
(incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
10.27 Mortgage and Security Agreement, dated July 13, 1999, between the
Registrant and Jay Levy (incorporated by reference to Exhibit 10.4
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999).
10.28 $70,000 Secured Note between the Registrant and Jay Levy dated
July 30, 1999 (incorporated by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
10.29 $200,000 Secured Note between the Registrant and Jay Levy dated
August 5, 1999 (incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
10.30 Modification of Mortgage and Security Agreement between the
Registrant and Jay Levy dated August 5, 1999 (incorporated by
reference to Exhibit 10.7 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999).
10.31 Amendment to Security Agreement and Subordination Agreement
between the Registrant and Jay Levy, Warren Levy and Ronald Levy,
dated August 5, 1999 (incorporated by reference to Exhibit 10.8 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999).
10.32 Joint Venture Contract between Shijiazhuang Pharmaceutical Group
Company, Ltd., and Unigene Laboratories, Inc., dated June 15, 2000
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
with certain confidential information omitted and filed separately
with the Secretary of the Commission).
10.33 Articles of Association of Shijiazhuang-Unigene Pharmaceutical
Corporation Limited, dated June 15, 2000 (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, with certain
confidential information omitted and filed separately with the
Secretary of the Commission).
10.34 2000 Stock Option Plan (incorporated by reference to Attachment A
to the Registrant's Schedule 14A, dated April 28, 2000, containing
the Registrant's Definitive Proxy Statement for its 2000 Annual
Meeting of Stockholders (File No. 0-16005)).
10.35 Common Stock Purchase Agreement, dated May 9, 2001, between the
Registrant and Fusion Capital Fund II, LLC (incorporated by
reference to Exhibit 10.35 to the Registrant's Registration
Statement No. 333-60642 on Form S-1, filed May 10, 2001).
10.36 Registration Rights Agreement, dated April 23, 2001, between the
Registrant and Fusion Capital Fund II, LLC (incorporated by
reference to Exhibit 10.36 to the Registrant's Registration
Statement No. 333-60642 on Form S-1, filed May 10, 2001).
10.37 Warrant, dated March 30, 2001, between the Registrant and Fusion
Capital Fund II, LLC (incorporated by reference to Exhibit 10.37
to the Registrant's Registration Statement No. 333-60642 on Form
S-1, filed May 10, 2001).
10.38 Patent Security Agreement, dated March 13, 2001, between the
Registrant and Jay Levy (incorporated by reference to Exhibit
10.38 of Amendment No. 2 to Registrant's Registration Statement
No. 333-04557 on Form S-1, filed December 12, 2001).
10.39 First Amendment to Patent Security Agreement, dated May 29, 2001,
between the Registrant and Jay Levy (incorporated by reference to
Exhibit 10.39 of Amendment No. 2 to Registrant's Registration
Statement No. 333-04557 on Form S-1, filed December 12, 2001).
10.40 Letter Agreement between Fusion Capital Fund II, LLC and Unigene
Laboratories, Inc., dated November 1, 2001 (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001).
10.41 Letter Agreement between Fusion Capital Fund II, LLC and Unigene
Laboratories, Inc., dated November 26, 2001 (incorporated by reference
to Exhibit 10.41 of Amendment No. 2 to Registrant's Registration
Statement No. 333-04557 on Form S-1, filed December 12, 2001).
10.42 License agreement between Unigene Laboratories, Inc. and SmithKline
Beecham Corporation dated April 13, 2002 (incorporated by reference to
Exhibit 10.1 of Registrant's Current Report on Form 8-K, dated April
26, 2002). *
10.43 License and development agreement between Upsher-Smith Laboratories,
Inc. and Unigene Laboratories, Inc. dated November 26, 2002
(incorporated by reference to Exhibit 10.1 of Registrant's Current
Report on form 8-K, dated January 9, 2003). *
10.44 Settlement agreement between The Tail Wind Fund, Ltd. and Unigene
Laboratories, Inc., dated April 9, 2002 (incorporated by reference to
Exhibit 10.42 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 2002).
10.45 Director Stock Option Agreement between Allen Bloom and Unigene
Laboratories, Inc., dated December 5, 2001.
10.46 Director Stock Option Agreement between J. Thomas August and Unigene
Laboratories, Inc., dated December 5, 2001.
10.47 Director Stock Option Agreement between Bruce Morra and Unigene
Laboratories, Inc., dated December 5, 2001.
23.1 Consent of Grant Thornton LLP for year 2002.
23.2 Consent of KPMG LLP for years 2001 and 2000.
* Portions of the exhibit have been omitted pursuant to a request
for confidential treatment.