FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
-------------
Commission file number 0-16005
Unigene Laboratories, Inc.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2328609
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Little Falls Road, Fairfield, New Jersey 07004
- -------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 882-0860
-------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $.01 Par Value--
37,664,651 shares as of August 5, 1997
<PAGE>
INDEX
UNIGENE LABORATORIES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed balance sheets-
June 30, 1997 and December 31, 1996
Condensed statements of operations-
Three months and six months ended June 30, 1997
and 1996
Condensed statements of cash flows-
Six months ended June 30, 1997 and 1996
Notes to condensed financial statements-
June 30, 1997
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Item 4. Submission of Matters to a Vote of
Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
UNIGENE LABORATORIES, INC.
CONDENSED BALANCE SHEETS
June 30 December 31
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................. $ 790,063 $ 4,491,386
Accounts receivable ....................... 380 100,954
Prepaid expenses and other
current assets ......................... 487,825 882,135
------------ ------------
Total current assets ................. 1,278,268 5,474,475
Property, plant and equipment-net
of accumulated depreciation and
amortization .............................. 9,782,677 10,356,070
Patents and other assets ..................... 1,368,119 1,338,691
------------ ------------
$ 12,429,064 $ 17,169,236
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................... $ 827,372 $ 1,025,136
Accrued expenses .......................... 702,854 685,568
Notes payable - stockholders .............. 610,000 810,000
------------ ------------
Total current liabilities ........... 2,140,226 2,520,704
Note payable - stockholders ............... 655,000 655,000
9.5% convertible debentures ............... 502,694 1,283,400
10% convertible debentures ................ 450,000 850,000
Stockholders' equity:
Common stock-par value $.01 per share;
authorized 60,000,000 shares, issued
and outstanding 37,366,494 shares in
1997 and 35,352,824 shares in 1996 ..... 373,665 353,528
Additional paid-in capital ................ 59,740,115 55,829,641
Accumulated deficit ....................... (51,431,605) (44,322,006)
Less: Treasury stock, at cost,
7,290 shares ........................... (1,031) (1,031)
------------ ------------
Total stockholders' equity ........... 8,681,144 11,860,132
------------ ------------
$ 12,429,064 $ 17,169,236
============ ============
See notes to condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Licensing and
other revenue ........... $ 42 $ 628 $ 1,484 $ 305,809
------------ ------------ ------------ ------------
Operating expenses:
Research and
development ........... 2,210,570 1,785,509 4,403,531 3,550,955
Settlement of contractual
right (Note D) ........ -- -- 1,669,063 --
General and
administrative ........ 444,581 518,030 994,597 909,210
------------ ------------ ------------ ------------
2,655,151 2,303,539 7,067,191 4,460,165
------------ ------------ ------------ ------------
Operating loss ............ (2,655,109) (2,302,911) (7,065,707) (4,154,356)
------------ ------------ ------------ ------------
Other income (expense):
Interest/other income ... 39,209 58,454 87,407 136,792
Interest expense ........ (57,699) (286,053) (131,300) (460,642)
------------ ------------ ------------ ------------
(18,490) (227,599) (43,893) (323,850)
------------ ------------ ------------ ------------
Net loss .................. $ (2,673,599) $ (2,530,510) $ (7,109,600) $ (4,478,206)
============ ============ ============ ============
Net loss per share ........ $ (.07) $ (.10) $ (.19) $ (.18)
============ ============ ============ ============
Weighted average number
of shares outstanding ... 37,148,345 25,190,637 36,586,995 24,520,790
============ ============ ============ ============
See notes to condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
Net cash used for operating activities ......... $ (4,328,679) $(6,125,813)
----------- -----------
Investing activities:
Construction of leasehold improvements ...... (18,298) --
Purchase of equipment and furniture ......... (147,809) (125,574)
Increase in patents and other assets ........ (80,962) (55,833)
----------- -----------
(247,069) (181,407)
----------- -----------
Financing activities:
Sales of stock, net of related expenses ..... -- 300,440
Issuance of debt, net of related expenses ... -- 8,137,000
Exercise of stock options and warrants ...... 874,425 152,032
Repayment of debt ........................... -- (60,000)
----------- -----------
874,425 8,529,472
----------- -----------
Net increase (decrease) in cash and
cash equivalents ............................ (3,701,323) 2,222,252
Cash and cash equivalents at
beginning of year ........................... 4,491,386 258,627
----------- -----------
Cash and cash equivalents at
end of period ............................... $ 790,063 $ 2,480,879
=========== ===========
Supplemental cash flow information:
Exchange of notes ........................... -- $ 3,300,000
Conversion of convertible debentures
and accrued interest, net of related
offering expenses into common stock ......... $ 1,181,136 $ 4,605,147
Conversion of notes payable-stockholders
into common stock ........................... $ 200,000 --
Interest paid .................................. $ 46,669 $ 182,923
See notes to condensed financial statements.
</TABLE>
<PAGE>
UNIGENE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE A-BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for the six month
period ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997. For further information,
please refer to the Company's financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1996.
NOTE B-LICENSING AGREEMENT WITH WARNER-LAMBERT COMPANY
In July 1997 the Company signed a worldwide licensing agreement for oral
calcitonin with the Parke-Davis division of Warner-Lambert Company. Pursuant to
the terms of the licensing agreement, Unigene received $6 million in up-front
payments from Warner-Lambert. This total consisted of a $3 million purchase of
the Company's common stock at a price that will be equal to the average closing
price of stock for the 60 day period ending on August 14, 1997 and a licensing
fee of $3 million. Unigene is also eligible to receive an additional $48.5
million in milestone payments during the development program as well as revenue
from the sale of raw material to Warner-Lambert and royalties on product sales.
As part of the agreement, Warner-Lambert will develop and market an oral
calcitonin product and Unigene will be the exclusive supplier of the bulk
calcitonin and will provide analytical support services.
NOTE C - CONVERSION OF NOTES PAYABLE TO STOCKHOLDERS INTO COMMON STOCK
In 1995, executive officers of the company, Warren Levy, Ronald Levy and Jay
Levy, and another member of the Levy family loaned to the Company an aggregate
of $1,905,000. A total of $440,000 of these loans was repaid in 1996. On May 2,
1997, an aggregate of $200,000 in principal amount of these loans was converted
into 57,200 shares of the common stock of the Company at a conversion price of
$3.4965 per share. The closing price of the common stock on May 1, 1997, as
reported in the Wall Street Journal, was $3.21875 per share.
NOTE D - SETTLEMENT OF CONTRACTUAL RIGHT
On February 7, 1997, the Company issued an aggregate of 490,000 shares of common
stock to the holders of the Company's 9.5% Senior Secured Convertible Debentures
(the "Debentures") in exchange for the surrender of certain contractual rights.
The shares were issued in consideration for the cancellation of an obligation of
the Company to pay to the holders a fee equal to 2% of the sum of the market
value as of December 31, 1998 of the Company's common stock plus the principal
amount of all outstanding debt of the Company, less its cash on deposit, up to a
maximum fee of $3,000,000. The expense associated with this transaction was
valued at $1,669,063, based on a closing price of the common stock of $3.40625
on February 7, 1997.
<PAGE>
NOTE E - CONVERTIBLE DEBENTURES
During the period January 1, 1997 through June 30, 1997, $780,706 of principal
amount of the Company's 9.5% Senior Secured Convertible Debentures was converted
into 697,058 shares of common stock.
During the period January 1, 1997 through June 30, 1997, $400,000 of principal
amount of the Company's 10% Convertible Debentures, plus $40,931 of accrued
interest, was converted into 220,465 shares of common stock.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenues for the first six months of 1996 included a license fee of $300,000
from the Company's joint venture in China. Revenues from hormone and enzyme
sales were $1,000 and $6,000 for the six months ended June 30, 1997 and 1996,
respectively.
Research and development, the Company's largest expense, increased 24% from
$1,786,000 to $2,211,000, and 24% from $3,551,000 to $4,404,000 for the three
months and six months ended June 30, 1997, respectively, as compared to the same
periods in 1996. The increase was primarily related to regulatory documentation
preparation fees and increased expenditures for supplies and salaries.
Settlement of contractual right in 1997 represents the following transaction. On
February 7, 1997, the Company issued an aggregate of 490,000 shares of common
stock to the holders of the Company's 9.5% Senior Secured Convertible Debentures
(the "Debentures") in exchange for the surrender of certain contractual rights.
The shares were issued in consideration for the cancellation of an obligation of
the Company to pay to the holders a fee equal to 2% of the sum of the market
value as of December 31, 1998 of the Company's common stock plus the principal
amount of all outstanding debt of the Company, less its cash on deposit, up to a
maximum fee of $3,000,000. The expense associated with this transaction was
valued at $1,669,063, based on a closing price of the common stock of $3.40625
on February 7, 1997.
General and administrative expenses decreased 14% from $518,000 to $445,000 and
increased 9% from $909,000 to $995,000, for the three months and six months
ended June 30, 1997, respectively, as compared to the same periods in 1996. The
three month decrease was primarily due to reduced financing expenses partially
offset by increased legal costs. The six month increase was primarily due to
higher insurance and legal expenses.
Interest and other income decreased $19,000 and $49,000 for the three months and
six months ended June 30, 1997, respectively, as compared to the same periods in
1996. The decreases were due to a reduction in the amount of funds to be
invested in 1997, decreasing interest income in 1997, as well as gains on
settlement of debt recognized in 1996.
Interest expense decreased $228,000 and $329,000 for the three months and six
months ended June 30, 1997, respectively, as compared to the same periods in
1996 due to conversions in 1996 and 1997 of a portion of the Company's
convertible debentures.
As a result of decreased revenue, as well as increased operating expenses which
included the $1,669,000 settlement in the first quarter of 1997, partially
offset by decreased interest expense, the Company's net loss increased $143,000
or 6% and $2,631,000 or 59% for the three months and six months ended June 30,
1997, respectively, as compared to the same periods in 1996.
<PAGE>
As of December 31, 1996, the Company had available for income tax reporting
purposes net operating loss carryforwards in the approximate amount of
$44,300,000, expiring from 1997 through 2011, which are available to reduce
future earnings that otherwise would be subject to federal income taxes. For the
six months ending June 30, 1997, the Company accumulated additional losses of
approximately $7,100,000. In addition, the Company has investment tax credits
and research and development credits in the amounts of $64,000 and $1,454,000,
respectively, which are available to reduce the amount of future federal income
taxes. These credits expire from 1997 through 2011.
The Company follows Statement of Financial Accounting Standards No. 109 (FASB
109), "Accounting for Income Taxes". Given the Company's past history of
incurring operating losses, any deferred tax assets that are recognizable under
FASB 109 have been fully reserved. As of January 1, 1997, under FASB 109, the
Company had deferred tax assets of approximately $19,200,000, subject to a
valuation allowance of $19,200,000. The deferred tax assets were generated
primarily as a result of the Company's net operating losses and available tax
credits. For the six-month period ended June 30, 1997, the Company's deferred
tax assets and valuation allowances each increased by approximately $2,800,000.
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" changes
the reporting requirements for earnings per share (EPS) for publicly traded
companies by replacing primary EPS with basic EPS and changing the disclosures
associated with this change. The Company is required to adopt this standard in
the fourth quarter of 1997 and is currently evaluating the impact of this
standard.
Liquidity and Capital Resources
During 1994, the Company completed construction of its peptide production
facility in Boonton, New Jersey. The facility was constructed in a shell
building that is being leased under a ten year net lease which began in February
1994. The Company has two ten-year renewal options as well as an option to
purchase the facility. The cost of leasehold improvements and process equipment
for this facility, including current validation costs, totaled approximately $12
million. The improvements and equipment have been primarily financed from the
remainder of the $17 million of proceeds received as a result of the exercise by
the warrant holders of the Company's Class A Warrants in 1991 and the proceeds
of $2.2 million from the sale of stock in 1994. There are currently no material
commitments for capital expenditures relating to either the Boonton facility or
the Company's facility in Fairfield.
The Company, at June 30, 1997, had cash and cash equivalents of $790,000, a
decrease of $3,700,000 from December 31, 1996.
The Company's ability to generate additional cash from operations will depend
primarily upon signing research or licensing agreements, achieving defined
benchmarks in such agreements, receiving regulatory approval for its products,
and marketing hormones and enzyme products. As of June 30, 1997, the Company had
one joint venture agreement in effect, which contributed $300,000 to 1996
revenues. However, there is no assurance that any additional revenues will be
recognized or received under this agreement.
In July 1997, the Company finalized a worldwide licensing agreement for oral
calcitonin with the Parke-Davis division of Warner-Lambert Company. Pursuant to
the terms of this agreement, in July 1997, the Company received $6 million in
payments from Warner-Lambert consisting of a $3 million licensing fee and a $3
million equity investment by Warner-Lambert. The Company is also entitled to
<PAGE>
receive an additional $48.5 million in milestone payments during the course of
the development program, of which $15.5 million would be received prior to the
commencement of Phase I studies in the U.S., as well as revenue from the sale of
raw material to Warner-Lambert and royalties on product sales by Warner-Lambert
and affiliates. Unigene has retained the right to license the use of its
technologies for injectable and nasal formulations of calcitonin on a worldwide
basis.
The Company's cash requirements have increased to approximately $9 million per
year with the opening of its peptide manufacturing facility. In addition, the
Company faces principal and interest obligations over the next several years
under its outstanding debentures and other indebtedness. However, because of the
recent increase in the Company's stock price and the current below-market
conversion prices of each of the issues of debentures, a substantial portion of
such debentures has been, and a substantial portion of the remainder is expected
to be, converted into common stock decreasing cash required for principal and
interest payments. After the receipt of $6 million from Warner-Lambert,
management believes that the Company currently has sufficient financial
resources to sustain its operations at the current level through at least the
first quarter of 1998. The Company will require additional funds through the
achievement of specified milestones in the Warner-Lambert agreement or the
signing of additional licensing agreements to ensure continued operations beyond
that time. Management believes that the various milestones in the Warner-Lambert
agreement can be achieved on a timely basis thereby precluding the need for any
outside financing of the Company's operations. Early-stage milestones primarily
relate to the product's performance characteristics, while the latter-stage
milestones are primarily related to regulatory filings and approvals.
In addition to the Warner-Lambert agreement, management is actively seeking
other licensing and/or supply agreements with pharmaceutical companies for
injectable and nasal forms of calcitonin. However, there is no assurance that
any additional revenue-generating agreements will be signed or that the
milestones associated with the Warner-Lambert agreement will be achieved. In the
absence of or the delay in achieving the Warner-Lambert milestones or in signing
other agreements, obtaining adequate interim financing from other sources would
be necessary. However, there is no assurance that in such event sufficient funds
will be obtained. The Company believes that while the implementation of the
Warner-Lambert licensing transaction will satisfy the Company's liquidity
requirements over the short-term, satisfying the Company's long-term liquidity
requirements will require the successful commercialization of the product
licensed to Warner-Lambert or one of its other calcitonin products.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or activities of the Company, or industry results, to be materially different
from any future results, performance or activities expressed or implied by such
forward-looking statements. Such factors include: general economic and business
conditions, the financial condition of the Company, competition, the Company's
dependence on other companies to commercialize, manufacture and sell products
<PAGE>
using the Company's technologies, the uncertainty of results of preclinical and
clinical testing, the risk of product liability and liability for human clinical
trials, the Company's dependence on patents and other proprietary rights,
dependence on key management officials, the availability and cost of capital,
the availability of qualified personnel, changes in, or the failure to comply
with, governmental regulations and the failure to obtain regulatory approvals of
the Company's products.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
(a) and (b) Not applicable
(c) Recent Sales of Unregistered Securities
On May 2, 1997, the Company issued 57,200 shares of common stock upon
the conversion of $200,000 in principal amount of loans from officers of the
Company. All of such shares were issued by the Company without registration in
reliance on an exemption under Section 4(2) of the Securities Act.
In the second quarter of 1997, the Company issued 111,397 shares of
common stock upon the conversion of $222,794 in principal amount of and accrued
interest on the Company's 10% Convertible Debentures due March 4, 1999 (the "10%
Debentures"). All of such shares were issued by the Company without registration
in reliance on an exemption under Section 3(a)(9) of the Securities Act.
In the second quarter of 1997, the Company issued 50,000 shares of
common stock upon the exercise of an equal number of warrants exercisable to
purchase one share of common stock at an exercise price of $2.10 per share. An
additional 16,795 shares were issued upon the "cashless" exercise of a total of
35,000 warrants. The warrants were issued by the Company to certain accredited
investors in connection with the sale of the 10% Debentures in March 1996. The
sale of such shares was effected in reliance on an exemption from registration
pursuant to Section 4(2) of the Securities Act.
In the second quarter of 1997, the Company issued an aggregate of
105,000 shares of common stock to certain financial and public relations
consultants upon the exercise of an equal number of warrants exercisable to
purchase one share of common stock at exercise prices ranging from $1.625 to
$2.00 per share. The sale of such shares was effected in reliance on an
exemption from registration pursuant to Section 4(2) of the Securities Act.
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security-Holders
(a) The matters described under item 4(c) below were
submitted to a vote of security-holders at the Annual
Meeting of Stockholders held on June 30, 1997 (the
"Annual Meeting") in connection with which proxies
were solicited pursuant to Regulation 14A under the
Securities Exchange Act.
(b) Not applicable.
(c) The following describes the matters voted upon at the
Annual Meeting and sets forth the number of votes
cast for, against or withheld and the number of
abstentions as to each such matter (except as
provided below in (iii), there were no broker
non-votes):
(i) Election of directors:
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Jay Levy 30,266,235 472,123
Ronald S. Levy 30,266,135 472,223
Warren P. Levy 30,280,635 457,723
Robert G. Ruark 30,313,435 424,923
George M. Weimer 30,294,435 443,923
Robert F. Hendrickson 30,313,045 425,313
</TABLE>
(ii) Proposal to amend the Company's Certificate
of Incorporation to increase the number of
authorized shares of common stock from
48,000,000 shares to 60,000,000 shares:
For Against Abstain
--- ------- -------
29,064,857 1,492,703 180,798
(iii) Proposal to amend the Company's 1994
Employee Stock Option Plan to increase the
total number of shares of common stock that
may be sold hereunder from 1,500,000 shares
to 2,250,000 shares:
For Against Abstain
--- ------- -------
27,611,386 1,838,379 202,210
There were 1,086,383 broker non-votes in connection
with this item.
<PAGE>
(iv) Proposal to ratify the appointment of KPMG
Peat Marwick LLP as auditors of the Company
for 1997:
For Against Abstain
--- ------- -------
30,402,470 246,935 88,953
(d) Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
June 30, 1997 (announcement of the signing of a letter of
intent for a worldwide licensing agreement for oral calcitonin
with the Parke-Davis division of Warner-Lambert Company).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIGENE LABORATORIES, INC.
-----------------------------
(Registrant)
/s/ Warren P. Levy
August 14, 1997 -----------------------------
Warren P. Levy, President
(Chief Executive Officer)
/s/ Jay Levy
August 14, 1997 -----------------------------
Jay Levy, Treasurer
(Chief Financial Officer and
Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 790,063
<SECURITIES> 0
<RECEIVABLES> 380
<ALLOWANCES> 0
<INVENTORY> 420,713
<CURRENT-ASSETS> 1,278,268
<PP&E> 16,813,785
<DEPRECIATION> 7,031,108
<TOTAL-ASSETS> 12,429,064
<CURRENT-LIABILITIES> 2,140,226
<BONDS> 1,607,694
0
0
<COMMON> 373,665
<OTHER-SE> 8,307,479
<TOTAL-LIABILITY-AND-EQUITY> 12,429,064
<SALES> 1,484
<TOTAL-REVENUES> 1,484
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,067,191
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131,300
<INCOME-PRETAX> (7,109,600)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,109,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,109,600)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
