FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
Commission file number 0-16005
Unigene Laboratories, Inc.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2328609
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Little Falls Road, Fairfield, New Jersey 07004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 882-0860
--------------
(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 - 43,968,212 shares as of May 3, 2000.
<PAGE>
INDEX
UNIGENE LABORATORIES, INC.
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Condensed balance sheets-
March 31, 2000 and December 31, 1999 3
Condensed statements of operations-
Three months ended March 31, 2000 and 1999 4
Condensed statements of cash flows-
Three months ended March 31, 2000 and 1999 5
Notes to condensed financial statements-
March 31, 2000 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
UNIGENE LABORATORIES, INC.
CONDENSED BALANCE SHEETS
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,019,098 $ 682,629
Contract receivables 3,034,121 3,526,229
Prepaid expenses 610,462 210,195
Inventory 1,245,333 867,566
--------------- ---------------
Total current assets 5,909,014 5,286,619
Property, plant and equipment - net of
accumulated depreciation and
amortization 6,393,433 6,740,354
Patents and other intangibles, net 1,296,343 1,264,268
Other assets 420,364 486,612
----------------- ----------------
$14,019,154 $13,777,853
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,177,534 $ 1,258,334
Accrued expenses 1,878,288 2,217,413
Notes payable - stockholders 1,440,000 1,140,000
Current portion - long-term notes payable -
stockholders 1,165,264 960,606
5% convertible debentures 2,400,000 2,400,000
Current portion - capital lease obligations 69,708 69,708
----------------- ----------------
Total current liabilities 9,130,794 8,046,061
Notes payable - stockholders, excluding
current portion 704,736 909,394
Capital lease obligations, excluding
current portion 68,930 93,415
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Commitments and contingencies
Stockholders' equity:
Common Stock - par value $.01 per share,
authorized 60,000,000 shares, issued
43,975,502 shares in 2000 and
43,088,184 shares in 1999 439,755 430,882
Additional paid-in capital 68,423,730 67,207,604
Accumulated deficit (64,747,760) (62,908,472)
Less: Treasury stock, at cost,
7,290 shares (1,031) (1,031)
----------------- -----------------
Total stockholders' equity 4,114,694 4,728,983
----------------- -----------------
$14,019,154 $13,777,853
========== ==========
</TABLE>
See notes to condensed financial statements.
3
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<TABLE>
<CAPTION>
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31
---------------------------------------------
2000 1999
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<S> <C> <C>
Licensing and other revenue $ 1,001,250 $ 2,500,172
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Operating expenses:
Research and development 1,998,668 2,373,643
General and administrative 599,413 476,236
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2,598,081 2,849,879
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Operating loss (1,596,831) (349,707)
------------ ------------
Other income (expense):
Interest income 12,075 10,953
Interest expense (254,532) (225,001)
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(242,457) (214,048)
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Net loss $ (1,839,288) $ (563,755)
============ ============
Net loss per share, basic $ (.04) $ (.01)
============ ============
Net loss per share, diluted $ (.04) $ (.01)
============ ============
Weighted average number of shares outstanding, 43,342,280 39,558,201
basic and diluted ============ ============
</TABLE>
See notes to condensed financial statements.
4
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<TABLE>
<CAPTION>
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
-------------------------------
2000 1999
------- -------
<S> <C> <C>
Net cash provided by (used for) operating activities $(1,143,926) $ 187,880
----------- -----------
Investing activities:
Purchase of equipment and furniture (29,599) (28,413)
Increase in patents and other intangibles (42,509) (3,985)
Decrease in other assets 55,669 54,064
Construction of leasehold improvements (3,680) (910)
----------- -----------
(20,119) 20,756
----------- -----------
Financing activities:
Issuance of stockholder notes 300,000 --
Exercise of stock options and warrants 1,224,999 --
Repayment of capital lease obligations (24,485) (21,768)
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1,500,514 (21,768)
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Net increase in cash and cash equivalents 336,469 186,868
Cash and cash equivalents at beginning of year 682,629 402,664
----------- -----------
Cash and cash equivalents at end of period $ 1,019,098 $ 589,532
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Conversion of convertible debentures and
accrued interest into Common Stock -- $301,096
====== ========
Cash paid for interest $6,449 $ 4,600
====== ========
</TABLE>
See notes to condensed financial statements
5
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UNIGENE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
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
three-month period ending March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. 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, 1999.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). 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. The Company
must adopt SAB 101, as amended, in the second quarter of 2000 with an effective
date of January 1, 2000, and the recognition of a cumulative effect adjustment,
if any, calculated as of January 1, 2000. The Company is evaluating SAB 101 and
the effect it may have on the financial statements and its current revenue
recognition policy.
NOTE B - LIQUIDITY
The Company has incurred annual operating losses since its inception and, as a
result, at March 31, 2000 had an accumulated deficit of approximately
$64,748,000 and a working capital deficiency of approximately $3,222,000. The
independent auditors' report covering the Company's 1999 financial statements
includes an explanatory paragraph that states the above factors raise
substantial doubt about the Company's ability to continue as a going concern.
However, the financial statements have been prepared on a going concern basis
and as such do not include any adjustments that might result from the outcome of
this uncertainty.
The Company's operational cash requirements are approximately $10 to 11 million
per year to operate its research and peptide manufacturing facilities and
develop its products. In addition to its obligations with respect to the 5%
Debentures, the Company has principal and interest obligations over the next
several years under its outstanding notes payable to stockholders.
After receipt of $1.5 million from Warner-Lambert in February and March 2000,
and an additional $3 million in April 2000 in satisfaction of outstanding
receivables and for achieving an additional milestone pursuant to a license
agreement with Warner-Lambert, management believes that the Company has
sufficient financial resources to sustain its operations at the current level
into the third quarter of 2000. The Company will require additional funds to
ensure continued operations beyond that time. Payment of the obligations under
the 5% Debentures may require additional financing. The Company expects to
achieve additional milestones under the Warner-Lambert agreement during 2000,
which will result in further payments. However, there can be no assurance as to
when or if the Company will achieve such milestones.
In addition to the Warner-Lambert agreement, management is actively seeking
other licensing and/or supply agreements with pharmaceutical companies for its
injectable and nasal Calcitonin products and for other pharmaceutical products
that can be manufactured and/or delivered using its patented technologies. These
agreements could provide short-term funds to the Company in upfront payments as
well as milestone payments. The Company also is eligible to sell state tax
benefits, which may yield up to $2.5 million, under a New Jersey Economic
Development Authority (the "NJEDA") program, which allows certain New Jersey
taxpayers to sell their state tax benefits to third-parties. However, the
6
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proceeds will be received over the next few years and the size and timing of
such proceeds are subject to the continued funding of the program by the State
of New Jersey as well as limitations based on the level of participation by
other companies. The Company must apply to the NJEDA each year to be eligible to
receive approval for the sale of its benefits. There can be no assurance that
any of these transactions will be completed or, if completed, that the terms and
timing of such transactions would provide sufficient funds to sustain operations
at the current level. In the absence of or the delay in achieving the
Warner-Lambert milestones or in signing other agreements, obtaining adequate
funds from other sources, which might include a debt or equity financing, would
be necessary to sustain the Company's operations. However, there is no assurance
as to the terms on which such additional funds would be available or that in
such circumstances sufficient funds could be obtained. In addition, the
delisting of the Company's Common Stock by the Nasdaq National Market also may
have an adverse affect on the Company's ability to raise equity-based capital.
While the Company believes that the Warner-Lambert licensing transaction will
satisfy the Company's liquidity requirements over the near-term, satisfying the
Company's long-term liquidity requirements will require the successful
commercialization of the product licensed to Warner-Lambert and/or one or more
of its other products to be licensed. In addition, the commercialization of its
products will require the Company to incur additional capital expenditures,
including expenditures to expand or upgrade the Company's manufacturing
operations to satisfy all of its Calcitonin supply obligations under the
Warner-Lambert license agreement. However, neither the cost or timing of such
capital expenditures are determinable at this time.
NOTE C - NOTES PAYABLE - STOCKHOLDERS
During February 2000 Jay Levy, the chairman of the board and an officer of the
Company, loaned the Company $300,000 evidenced by demand notes bearing interest
at the Merrill Lynch Margin Loan Rate plus .25% (9.375 at March 31, 2000). The
Company repaid this loan in April 2000.
NOTE D - CONVERTIBLE DEBENTURES
In June 1998, the Company completed a private placement of $4 million in
principal amount of 5% convertible debentures (the "5% Debentures") from which
it realized net proceeds of approximately $3.75 million. The 5% Debentures were
convertible into shares of Common Stock and, in addition, provided that (i) the
interest on the 5% Debentures, at the option of the Company, was payable in
shares of Common Stock and (ii) upon conversion, the holder was entitled to
receive warrants to purchase a number of shares of Common Stock equal to 4% of
the number of shares issued pursuant to the conversion (the "Warrants").
However, the number of shares of Common Stock that the Company is 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, is limited to
3,852,500 shares (the "Share Limit"). After this Share Limit is reached, the
Company is obligated to redeem all 5% Debentures tendered for conversion at a
redemption price equal to 120% of the principal amount, plus accrued interest.
During December 1999, the Company was unable to convert $200,000 of the 5%
Debentures temdered for conversion as such conversion would have exceeded the
Share Limit. As a result, the Company accrued the 20% premium on the outstanding
$2,000,000 principal amount of the 5% Debentures in the amount of $400,000 as of
December 31, 1999. As of March 31, 2000, all of the $2,000,000 in principal
amount of 5% Debentures have been tendered for conversion and therefore are
classified as a current liability.
Through March 31, 2000, the Company has issued a total of 3,703,362 shares of
Common Stock upon conversion of $2 million in principal amount of the 5%
Debentures or in payment of interest thereon, and an additional 103,032 shares
of Common Stock upon the cashless exercise of all of the 141,123 Warrants issued
upon conversion of the 5% Debentures.
On January 5, 2000, the Company 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 has increased to 20% per year. As of May 15, 2000, the
accrued and unpaid interest on the 5% Debentures totaled approximately $215,000.
In addition, due to the delisting of the Common Stock from the Nasdaq National
Market in October 1999, the Company 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. The Company has not made any such
payments to date but has accrued the amounts as an expense. As of May 15, 2000,
the accrued and unpaid amount of this penalty totaled approximately $317,000.
The Company is in discussions with the holder of the 5% Debentures in an effort
to settle its payment obligations on acceptable terms. However, there can be no
assurance that the Company will be able to reach a settlement or to obtain terms
the Company considers acceptable.
NOTE E - INVENTORY
Inventories are stated at the lower cost (using the first-in, first-out method)
or market and consist of the following:
March 31, 2000 December 31, 1999
-------------- -----------------
Finished goods...................... $ 952,429 $ 596,359
Raw materials....................... 292,904 271,207
---------- ---------
Total.......................... $1,245,333 $ 867,566
========== =========
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Revenue for the first quarter of 2000 decreased 60% to $1,001,000 from
$2,500,000 in the first quarter of 1999. Revenue consists primarily of revenue
from Warner-Lambert Company, resulting from the achievement of milestones in the
development of an oral Calcitonin product for treating osteoporosis. Yearly
revenue is affected by the timing of the completion of the various milestones.
Research and development, the Company's largest expense, decreased 16% to
$1,999,000 from $2,374,000 for the three months ended March 31, 2000, as
compared to the same period in 1999. The decrease was primarily attributable to
a reduction in the production costs per gram of Calcitonin, principally due to
production efficiencies, as a result of the implementation of an enhanced
manufacturing process at the Company's Boonton manufacturing facility and to an
increase of such costs that could be inventoried. In addition, there was a
reduction in first quarter 2000 consulting and regulatory filing expenses as
compared to comparable expenses incurred in 1999 in connection with the
Company's filing of a Type II Variation in Europe for its injectable calcitonin
product. These were partially offset by increased development expenses related
to the Company's nasal calcitonin product.
General and administrative expenses increased 26% to $599,000 from $476,000 for
the three months ended March 31, 2000, as compared to the same period in 1999.
The increase was primarily due to increased personnel costs and professional
fees.
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Interest income increased $1,000 or 10% for the three months ended March 31,
2000, as compared to the same period in 1999, due to higher interest rates
earned on investments in 2000.
Interest expense increased $30,000 or 13% in first quarter 2000 to $255,000 from
$225,000 in first quarter 1999. Interest expense for 1999 includes the
amortization of the value of the beneficial conversion feature and related
warrants of the Company's 5% convertible debentures in the amount of $151,000.
Excluding the change in the amortization charged to interest, interest expense
increased in first quarter 2000 as compared to first quarter 1999 primarily due
to a 2% monthly delisting penalty on the 5% Debentures and an increase in the
annual interest rate to 20% due to the failure of the Company to make a
semi-annual interest payment on the 5% Debentures that was due in January 2000.
These were partially offset by a decrease in the balance outstanding under the
Company's 5% Debentures as a result of partial conversions to Common Stock.
Due to the $1.5 million decrease in milestone revenue from Warner-Lambert in the
first quarter of 2000, partially offset by a reduction in operating expenses,
net loss increased $1,275,000 or 226% from the corresponding period in 1999.
As of December 31, 1999, the Company had available for income tax reporting
purposes net operating loss carryforwards in the approximate amount of
$58,200,000, expiring from 2000 through 2019, which are available to reduce
future earnings which would otherwise be subject to federal income taxes. For
the three months ending March 31, 2000, the Company accumulated additional
losses of approximately $1,839,000. In addition, the Company has investment tax
credits and research and development credits in the amounts of $14,000 and
$2,300,000, respectively, which are available to reduce the amount of future
federal income taxes. These credits expire from 2000 through 2019. As of
December 31, 1999, the Company had New Jersey operating loss carryforwards in
the approximate amount of $26,500,000, expiring from 2003 through 2006, which
are available to reduce future earnings, which would otherwise be subject to
state income tax. To date, approximately $25,000,000 of these New Jersey loss
carryforwards have been approved for future sale pursuant to a program of the
NJEDA. However, the Company must apply to the NJEDA each year and must meet
various requirements for continuing eligibility and the program must continue to
be funded by the State of New Jersey.
The Company follows Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". Given the Company's past history of incurring
operating losses, any deferred tax assets that are recognizable under SFAS 109
have been fully reserved. As of December 31, 1999, under SFAS 109, the Company
had deferred tax assets of approximately $26,000,000, subject to a valuation
allowance of $26,000,000. The deferred tax assets are primarily a result of the
Company's net operating losses and tax credits generated. For the three-month
period ended March 31, 2000, the Company's deferred tax assets and valuation
allowances each increased by approximately $800,000.
LIQUIDITY AND CAPITAL RESOURCES
During 1994, the Company constructed its peptide production facility at leased
premises in Boonton, New Jersey. The facility began production under current
Good Manufacturing Practice ("cGMP") guidelines in 1996. The Company's current
lease expires in 2004 and it has two ten-year renewal options on the lease as
well as an option to purchase the facility. There currently are no material
commitments outstanding for capital expenditures relating to either the Boonton
facility or the Company's office and laboratory facility in Fairfield, New
Jersey. However, the Company must apply to the NJEDA each year and must meet
various requirements for continuing eligibility and the program must continue to
be funded by the State of New Jersey.
The Company, at March 31, 2000, had cash and cash equivalents of $1,019,000, an
increase of $336,000 from December 31, 1999.
8
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The Company has incurred annual operating losses since its inception and, as a
result, at March 31, 2000 had an accumulated deficit of approximately
$64,748,000 and a working capital deficiency of approximately $3,222,000. The
independent auditors' report covering the Company's 1999 financial statements
includes an explanatory paragraph stating that the above factors raise
substantial doubt about the Company's ability to continue as a going concern.
However, the financial statements have been prepared on a going concern basis
and as such do not include any adjustments that might result from the outcome of
this uncertainty. In October 1999, the Company's Common Stock was delisted by
the Nasdaq Stock Market. The delisting of the Common Stock may have an adverse
effect on the Company's ability to raise capital.
The Company's future ability to generate cash from operations will depend
primarily upon signing research or licensing agreements, achieving defined
benchmarks in such agreements, receiving regulatory approval for its licensed
products, and the commercial sale of these products.
In July 1997, the Company entered into an agreement under which it granted to
the Parke-Davis division of Warner-Lambert Company a worldwide license to use
the Company's oral Calcitonin technology. Through March 31, 2000, the Company
had received $3 million for an equity investment, $3 million for a licensing fee
and recognized an aggregate of $15.5 million in milestone revenue from
Warner-Lambert. Under the terms of the license agreement, the Company is
eligible to receive up to an additional $33 million in milestone revenue during
the course of the development program. Early-stage milestones primarily relate
to the product's performance characteristics, while the latter-stage milestones
are primarily related to regulatory activities and approvals. If the product is
successfully commercialized, the Company also would receive revenue from
royalties on product sales by Warner-Lambert and its affiliates and from the
sale of raw material to Warner-Lambert. The Company has retained the right to
license the use of its technologies for injectable and nasal formulations of
Calcitonin on a worldwide basis. The Company has licensed distributors in the
United Kingdom and Ireland and in Israel for its injectable formulation. The
Company is actively seeking other licensing and/or supply agreements with
pharmaceutical companies for its injectable and nasal Calcitonin products and
for other pharmaceutical products that can be manufactured and/or delivered
using its patented technologies. However, there is no assurance that any
additional revenue-generating agreements will be signed.
In June 1998, the Company completed a private placement of $4 million in
principal amount of 5% convertible debentures (the "5% Debentures") from which
it realized net proceeds of approximately $3.75 million. The 5% Debentures were
convertible into shares of Common Stock and, in addition, provided that (i) the
interest on the 5% Debentures, at the option of the Company, was payable in
shares of Common Stock and (ii) upon conversion, the holder was entitled to
receive warrants to purchase a number of shares of Common Stock equal to 4% of
the number of shares issued pursuant to the conversion (the "Warrants").
However, the number of shares of Common Stock that the Company is 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, is limited to
3,852,500 shares (the "Share Limit"). After this Share Limit is reached, the
Company is obligated to redeem all 5% Debentures tendered for conversion at a
redemption price equal to 120% of the principal amount, plus accrued interest.
During December 1999, the Company was unable to convert $200,000 of the 5%
Debentures temdered for conversion as such conversion would have exceeded the
Share Limit. As a result, the Company accrued the 20% premium on the outstanding
$2,000,000 principal amount of the 5% Debentures in the amount of $400,000 as of
December 31, 1999. As of March 31, 2000, all of the $2,000,000 in principal
amount of 5% Debentures have been tendered for conversion and therefore are
classified as a current liability.
Through March 31, 2000, the Company has issued a total of 3,703,362 shares of
Common Stock upon conversion of $2 million in principal amount of the 5%
Debentures or in payment of interest thereon, and an additional 103,032 shares
of Common Stock upon the cashless exercise of all of the 141,123 Warrants issued
upon conversion of the 5% Debentures.
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On January 5, 2000, the Company 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 has increased to 20% per year. As of May 15, 2000, the
accrued and unpaid interest on the 5% Debentures totaled approximately $215,000.
In addition, due to the delisting of the Common Stock from the Nasdaq National
Market in October 1999, the Company 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. The Company has not made any such
payments to date but has accrued the amounts as an expense. As of May 15, 2000,
the accrued and unpaid amount of this penalty totaled approximately $317,000.
The Company is in discussions with the holder of the 5% Debentures in an effort
to settle its payment obligations on acceptable terms. However, there can be no
assurance that the Company will be able to reach a settlement or to obtain terms
the Company considers acceptable.
From time to time, Jay Levy, the chairman of the board and an officer of the
Company, and Warren Levy and Ronald Levy, directors and officers of the Company,
have made loans to the Company. During February 2000, Jay Levy loaned the
Company $300,000. This loan was repaid in April 2000. As of March 31, 2000, the
outstanding loans by these individuals to the Company consisted of: (i) joint
loans from the three individuals in the aggregate principal amount of $1,440,000
evidenced by demand notes bearing a floating interest rate equal to the Merrill
Lynch Margin Loan Rate plus .25% (9.375% at March 31, 2000), which are
classified as short-term debt, and (ii) 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 6% per year (the "Jay Levy Notes") and
which are secured by a security interest in all of the Company's equipment and a
mortgage on the Company's real property. The terms of the Jay Levy Notes require
the Company to make installment payments of principal and interest commencing 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. Jay Levy has agreed to
temporarily postpone current payments and has also agreed that he will not,
prior to January 1, 2001, declare all or any portion of the principal or the
accrued interest on the notes immediately due and payable by reason of the
failure of the Company to make, when due, any scheduled payment of principal or
interest on any of the notes as permitted by the loan agreements.
The Company's operational cash requirements are approximately $10 to 11 million
per year to operate its research and peptide manufacturing facilities and
develop its products. In addition to its obligations with respect to the 5%
Debentures, the Company has principal and interest obligations over the next
several years under its outstanding notes payable to stockholders.
After receipt of $1.5 million from Warner-Lambert in February and March 2000,
and an additional $3 million in April, in satisfaction of outstanding
receivables and for achieving an additional milestone pursuant to a license
agreement with Warner-Lambert, management believes that the Company has
sufficient financial resources to sustain its operations at the current level
into the third quarter of 2000. The Company will require additional funds to
ensure continued operations beyond that time. Payment of the obligations under
the 5% Debentures may require additional financing. The Company expects to
achieve additional milestones under the Warner-Lambert agreement during 2000,
which will result in further payments. However, there can be no assurance as to
when or if the Company will achieve such milestones.
The proprietary rights licensed to Warner-Lambert involve only the oral
formulation of Calcitonin. The Company has retained the right to license the use
of its technologies for other Calcitonin and peptide products on a worldwide
basis. The Company currently is seeking to enter into licensing and/or supply
agreements with other pharmaceutical companies for these products. These
agreements could provide short-term funds to the Company in upfront payments as
well as milestone payments. The Company also is eligible to sell state tax
benefits, which may yield up to $2.5 million, under a NJEDA program, which
allows certain New Jersey taxpayers to sell their state tax benefits to third
parties. However, the proceeds will be received over the next few years and the
size and timing of such proceeds are subject to the continued funding of the
program by the State of New Jersey as well as limitations based on the level of
participation by other companies. In addition, the Company must apply to the
NJEDA each year and must meet various requirements for continuing eligibility.
However, there can be no assurance that any of these
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transactions will be completed or, if completed, that the terms and timing of
such transactions would provide sufficient funds to sustain operations at the
current level.
In the absence of, or the delay in, achieving the Warner-Lambert milestones or
in signing other agreements, obtaining adequate funds from other sources, which
might include a debt or equity financing, would be necessary to sustain the
Company's operations. However, there is no assurance as to the terms on which
such additional funds would be available or that in such circumstances
sufficient funds could be obtained. Equity financing of the Company also may be
adversely affected by the delisting of the Company's Common Stock by the Nasdaq
Stock Market.
While the Company believes that the Warner-Lambert licensing transaction will
satisfy the Company's liquidity requirements over the near-term, satisfying the
Company's long-term liquidity requirements will require the successful
commercialization of the product licensed to Warner-Lambert and/or one or more
of its other products to be licensed. In addition, the commercialization of its
Calcitonin products will require the Company to incur additional capital
expenditures, including expenditures to expand or upgrade the Company's
manufacturing operations to satisfy all of its Calcitonin supply obligations
under the Warner-Lambert license agreement. However, neither the cost or timing
of such capital expenditures are determinable at this time.
OTHER
The Company's Common Stock has been delisted from the Nasdaq National Market
System effective October 5, 1999 and is now trading on the OTC Bulletin Board.
The Company has filed an appeal with Nasdaq to review the delisting decision.
The outcome of the appeal is pending.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting For Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133, as amended, will be effective for the
Company's fiscal year beginning January 1, 2001. The adoption of SFAS No. 133 is
not expected to have a material effect on the Company's financial position or
results of operations.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). 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. The Company
must adopt SAB 101, as amended, in the second quarter of 2000 with an effective
date of January 1, 2000, and the recognition of a cumulative effect adjustment,
if any, calculated as of January 1, 2000. The Company is evaluating SAB 101 and
the effect it may have on the financial statements and its current revenue
recognition policy.
11
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
In the normal course of business, the Company is exposed to fluctuations in
interest rates due to the use of debt financing to fund part of its operations.
The Company does not employ specific strategies, such as the use of derivative
instruments or hedging, to manage its interest rate exposure. Since December 31,
1999, the Company's interest rate exposure on the 5% Debentures has been
affected by the Company's delisting from the Nasdaq National Market and failure
to make the semi-annual interest payment in January 2000.
The information below summarizes the Company's market risks associated with debt
obligations as of March 31, 2000. Fair values included herein have been
estimated taking into consideration the nature and terms of each instrument and
the prevailing economic and market conditions at March 31, 2000. The table below
presents principal cash flows and related interest rates by year of maturity
based on the terms of the debt. Under the terms of the 5% Debentures, no
additional shares may be issued to convert the remaining principal balance.
Therefore, the information presented as to these debentures is without
consideration as to conversion features. Variable interest rates disclosed
represent the rates at March 31, 2000.
<TABLE>
<CAPTION>
Estimated Year of Maturity
Fair Carrying -------------------
Value Amount 2000 2001 2002 2003 2004
---------- -------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Notes payable - stockholders $1,440,000 1,440,000 1,440,000 -- -- -- --
Variable interest rate 9.375% -- -- -- --
Notes payable - stockholders $1,506,000 1,870,000 960,606 837,328 72,066 -- --
Fixed interest rate 6% 6% 6% -- --
5% convertible debentures $2,400,000 2,400,000 2,400,000 -- -- -- --
Fixed interest rate (1) 20%
</TABLE>
(1) As a result of the Company's failure to make the semi-annual interest
payment that was due January 5, 2000, the interest rate on the 5%
Debentures increased from 7% at December 31, 1999 to 20% beginning
January 5, 2000.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or activities of the Company, or industry results, to be materially different
from any future results, performance or activities expressed or implied by such
forward-looking statements. Such factors include: general economic and business
conditions, the financial condition of the Company, including the Company's need
for and success in securing additional financing, competition, the Company's
dependence on other companies to commercialize, manufacture and sell products
<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, the failure to obtain regulatory approvals of
the Company's products and other factors discussed in the Company's various
filings with the Securities and Exchange Commission, including the Company's
Annual Report or Form 10-K for the year ended December 31, 1999.
12
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Recent Sales of Unregistered Securities.
In the first quarter of 2000, the Company issued 626,036 shares of Common Stock
upon the exercise of an equal number of warrants exercisable to purchase one
share of Common Stock at exercise prices ranging from $1.38 to $2.43 per share.
An additional 103,032 shares of Common Stock were issued upon the cashless
exercise of a total of 141,123 warrants at exercise prices ranging from $.46 to
$1.52 per share. All of such shares were issued by the Company without
registration in reliance on an exemption under Section 4 (2) of the Securities
Act.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities
See description of 5% Debentures in Part 1, Item 2: "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibit 27 Financial Data Schedule - period ended
March 31, 2000.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months ended
March 31, 2000.
13
<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
-------------------
May 15, 2000 Warren P. Levy, President
(Chief Executive Officer)
/s/ Jay Levy
------------
May 15, 2000 Jay Levy, Treasurer
(Chief Financial Officer and
Chief Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,019,098
<SECURITIES> 0
<RECEIVABLES> 3,034,121
<ALLOWANCES> 0
<INVENTORY> 1,245,333
<CURRENT-ASSETS> 5,909,014
<PP&E> 17,610,847
<DEPRECIATION> 11,217,414
<TOTAL-ASSETS> 14,019,154
<CURRENT-LIABILITIES> 9,130,794
<BONDS> 773,666
0
0
<COMMON> 439,755
<OTHER-SE> 3,674,939
<TOTAL-LIABILITY-AND-EQUITY> 14,019,154
<SALES> 0
<TOTAL-REVENUES> 1,001,250
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,598,081
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 254,532
<INCOME-PRETAX> (1,839,288)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,839,288)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,839,288)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
