FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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Commission file number 0-16005
Unigene Laboratories, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-2328609
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Little Falls Road, Fairfield, New Jersey 07004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 882-0860
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 Par Value--44,409,429 shares as of November 1, 2000
<PAGE>
INDEX
UNIGENE LABORATORIES, INC.
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements (Unaudited)
Condensed balance sheets-
September 30, 2000 and December 31, 1999 3
Condensed statements of operations-
Three months and nine months ended September 30, 2000 and 1999 4
Condensed statements of cash flows-
Nine months ended September 30, 2000 and 1999 5
Notes to condensed financial statements-
September 30, 2000 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNIGENE LABORATORIES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 48,928 $ 682,629
Contract receivables 1,312,782 3,526,229
Prepaid expenses 150,456 210,195
Inventory 1,333,766 867,566
--------------- ---------------
Total current assets 2,845,932 5,286,619
Property, plant and equipment - net of
accumulated depreciation and
amortization 5,995,717 6,740,354
Patents and other intangibles, net 1,295,894 1,264,268
Investment in joint venture 900,000 --
Other assets 414,514 486,612
----------------- ----------------
$11,452,057 $13,777,853
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,473,497 $ 1,258,334
Accrued expenses 3,490,867 2,217,413
Notes payable - stockholders 2,498,323 1,140,000
Current portion - long-term notes payable -
stockholders 1,583,881 960,606
5% convertible debentures 2,400,000 2,400,000
Current portion - capital lease obligations 69,708 69,708
----------------- ----------------
Total current liabilities 12,516,276 8,046,061
Notes payable - stockholders, excluding
current portion 286,119 909,394
Joint venture obligation, excluding current portion 495,000 --
Capital lease obligations, excluding
current portion 41,460 93,415
Commitments and contingencies
Stockholders' equity (deficit):
Common Stock - par value $.01 per share,
authorized 60,000,000 shares,
issued 44,404,619 shares in 2000 and
43,088,184 shares in 1999 444,046 430,882
Additional paid-in capital 69,699,693 67,207,604
Deferred stock option compensation (410,297) --
Accumulated deficit (71,619,209) (62,908,472)
Less: Treasury stock, at cost, 7,290 shares (1,031) (1,031)
----------------- -----------------
Total stockholders' equity (deficit) (1,886,798) 4,728,983
----------------- -----------------
$11,452,057 $13,777,853
================= =================
</TABLE>
See notes to condensed financial statements.
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UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Licensing and other revenue $ 1,359,164 $ 7,000,733 $ 2,361,190 $ 9,527,575
------------ ------------ ------------ ------------
Operating expenses:
Research and development 2,905,285 2,651,584 7,835,759 7,261,543
General and administrative 800,717 561,811 2,417,786 1,653,944
------------ ------------ ------------ ------------
3,706,002 3,213,395 10,253,545 8,915,487
------------ ------------ ------------ ------------
Operating income (loss) (2,346,838) 3,787,338 (7,892,355) 612,088
------------ ------------ ------------ ------------
Other income (expense):
Interest income 4,650 13,308 41,165 28,850
Interest expense (312,344) (108,052) (859,547) (489,709)
------------ ------------ ------------ ------------
(307,694) (94,744) (818,382) (460,859)
------------ ------------ ------------ ------------
Net income (loss) $ (2,654,532) $ 3,692,594 $ (8,710,737) $ 151,229
============ ============ ============ ============
Net income (loss) per share,
basic and diluted $ (.06) $ .09 $ (.20) $ --
============ ============ ============ ============
Weighted average number of shares
outstanding: Basic 44,279,250 41,169,120 43,868,779 40,284,824
============ ============ ============ ============
Diluted 44,279,250 43,159,961 43,868,779 40,284,824
============ ============ ============ ============
</TABLE>
See notes to condensed financial statements.
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UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
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2000 1999
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<S> <C> <C>
Net cash used for operating activities $(3,085,949) $(1,553,470)
----------- -----------
Investing activities:
Purchase of equipment and furniture (245,259) (75,263)
Increase in patents
and other assets (22,568) (19,753)
Construction of leasehold and building improvements (187,704) (4,010)
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(455,531) (99,026)
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Financing activities:
Issuance of stockholder notes 1,358,323 1,970,000
Exercise of stock options and warrants 1,601,411 --
Repayment of capital lease obligations (51,955) (51,789)
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2,907,779 1,918,211
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Net increase (decrease) in cash and cash equivalents (633,701) 265,715
Cash and cash equivalents at beginning of year 682,629 402,664
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Cash and cash equivalents at end of period $ 48,928 $ 668,379
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Investment in joint venture and related obligation $ 900,000 --
=========== ===========
Conversion of convertible debentures and
accrued interest into Common Stock -- $ 1,390,959
=========== ===========
Cash paid for interest $ 22,000 $ 17,448
=========== ===========
</TABLE>
See notes to condensed financial statements
5
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UNIGENE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 nine-month
period ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending 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 fourth 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 September 30, 2000 had an accumulated deficit of approximately
$71,619,000 and a working capital deficiency of approximately $9,670,000. 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 cash requirements to operate its research and peptide
manufacturing facilities and develop its products are approximately $10 to 11
million per year. In addition to its obligations with respect to its outstanding
5% convertible debentures (the "5% Debentures"), the Company has principal and
interest obligations over the next several years under its outstanding notes
payable to stockholders which consists of $2,498,000 in demand notes and
$1,870,000 in term notes. The Company is also obligated to fund the joint
venture investment described in Note E.
While the Company believes that the execution of a license agreement for its
nasal Calcitonin product, along with additional milestone payments under the
license agreement with Pfizer (successor to Warner-Lambert) would 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 Pfizer and/or one or more of its other products. In
addition, the commercialization of its oral Calcitonin product will require the
Company to
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incur additional capital expenditures to expand or upgrade the Company's
manufacturing operations to satisfy all of its Calcitonin supply obligations
under the Pfizer license agreement. However, neither the cost or timing of such
capital expenditures are determinable at this time.
Due to the receipt of payments totaling approximately $1.3 million from Pfizer
in September and October 2000, consisting of a milestone payment and payments
for testing services and Calcitonin supplies, as well as receipt of
approximately $1,358,000 in the third quarter of 2000 of additional short-term
loans from officers of the Company, the Company believes that it has sufficient
financial resources to sustain its operations at the current level for most of
the fourth quarter of 2000. The Company will require additional funds to ensure
continued operations beyond that time. Payment of the obligations under the 5%
Debentures also may require additional financing. For near term additional
funds, the Company expects to shortly sign one or more licensing agreements
including a nasal calcitonin licensing agreement currently under negotiation
which would provide up-front and other payments in 2000. In addition to a
possible nasal calcitonin license agreement, the Company is actively seeking to
enter into other licensing and/or supply agreements with pharmaceutical
companies for its Calcitonin products and other peptide products that can be
manufactured and/or delivered using its patented technologies. These agreements
could provide funds to the Company in upfront and milestone payments. However,
there is no assurance as to when or if the Company might enter into any such
additional agreements.
The Company also is eligible to sell state tax benefits, which may yield an
additional $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. The Company expects to receive a portion of this
amount in 2000 as 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. Although the Company has $3,388,000 in
confirmed tax benefits available for sale at a maximum 25% discount, the Company
must apply to the NJEDA each year to be eligible to receive approval for the
sale of its benefits. There is 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. A
failure or significant delay in signing other agreements, would require us to
obtain additional funds from other sources, which might include a debt or equity
financing, in order 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 may have
an adverse affect on the Company's ability to raise equity-based capital.
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%. The Company repaid this loan in
April 2000. During the third quarter of 2000, Jay Levy loaned the Company an
aggregate of $1,280,000 and Warren Levy and Ronald Levy, officers and directors
of the Company, loaned the Company an aggregate of $78,323 evidenced by demand
notes bearing interest at the Merrill Lynch Margin Loan Rate plus .25%.
NOTE D - CONVERTIBLE DEBENTURES
In June 1998, the Company completed a private placement of $4 million in
principal amount of 5% Debentures from which it realized net proceeds of
approximately $3.75 million. The 5% Debentures were convertible into shares of
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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 was obligated to issue, in the
aggregate, upon conversion, when combined with the shares issued in payment of
interest and upon the exercise of the Warrants, 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. In December 1999, the
Company was unable to convert $200,000 of the 5% Debentures tendered for
conversion because the conversion would have exceeded the Share Limit. As a
result, the Company accrued as of December 31, 1999 the 20% premium on the
outstanding $2,000,000 in principal amount of the 5% Debentures that had not
been converted in the amount of $400,000. As of September 30, 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 September 30, 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 issued an additional 103,032
shares of Common Stock upon the cashless exercise of all of the 141,123 Warrants
issued upon conversion of the 5% Debentures.
On January 5, 2000, 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. The semi-annual
interest payment due July 5, 2000 was also not made by the Company. As of
September 30, 2000, the accrued and unpaid interest on the 5% Debentures totaled
approximately $366,000.
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 of
these payments to date, but has accrued the amounts as interest expense. As of
September 30, 2000, the accrued and unpaid amount totaled approximately
$497,000.
The holder of the 5% Debentures has commenced an arbitration proceeding in which
the holder claims that it is entitled, as of June 30, 2000, to payments in
respect of the 5% Debentures in the amount of approximately $3.4 million. The
parties have had settlement discussions in an effort to arrive at a mutually
satisfactory settlement. The outcome of this proceeding is uncertain.
NOTE E - JOINT VENTURE
In June 2000, the Company entered into a joint venture with the Shijiazhuang
Pharmaceutical Group ("SPG"), a pharmaceutical company in the People's Republic
of China. The joint venture will manufacture and distribute injectable and nasal
Calcitonin products for the treatment of osteoporosis in China and possibly
other selected Asian markets. The Company will own 45% of the joint venture and
will receive 45% of the joint venture profits. The Company will account for its
investment under the equity method. 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 the Company's product under this
license. The joint venture would need to file a New Drug Application (NDA) in
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China for its injectable and nasal products. In addition, brief local clinical
trials may be required. If the product is successful, the joint venture may
establish a facility to fill injectable and nasal Calcitonin products containing
bulk Calcitonin produced at the Company's Boonton, New Jersey plant and plans to
eventually manufacture the bulk drug in China in a new facility to be
constructed by the joint venture. This would require local financing by the
joint venture. As of September 30, 2000, the joint venture had not yet begun
operations.
Under the terms of the joint venture agreement, the Company is obligated to
contribute up to $405,000 in cash during the next 12 months and up to an
additional $495,000 in cash within two years thereafter. However, these amounts
may be reduced or offset by the Company's share of joint venture profits. No
amounts have been invested as of September 30, 2000.
In addition, the Company is obligated to pay to the Qingdao General
Pharmaceutical Company an aggregate of $350,000 in 14 monthly installment
payments of $25,000 in order to terminate its former joint venture in China, of
which $75,000 had been paid as of September 30, 2000. The entire $350,000
obligation was recognized as an expense in the second quarter of 2000.
NOTE F- INVENTORY
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist of the following:
September 30, 2000 December 31, 1999
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Finished goods.......... $ 1,002,729 $ 596,359
Raw materials........... 331,037 271,207
----------- ------------
Total.............. $ 1,333,766 $ 867,566
=========== ============
NOTE G - STOCK OPTION PLAN
In November 1999, the Board of Directors approved, subject to stockholder
approval, the adoption of a new Stock Option Plan (the "New Plan") to replace
the 1994 Employee Stock Option Plan (the "1994 Plan"). All employees (including
directors who are employees), as well as certain consultants, are eligible to
receive option grants under the New Plan. Options granted under the New 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 New Plan.
In November 1999, the Board granted under the New Plan, to employees of the
Company, 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 New Plan. At the Company's June
6, 2000 Annual Meeting, the stockholders approved the New Plan. In accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", 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 will be charged to compensation
expense over the vesting periods of the options, which vest in approximately 50%
increments on November 5, 2000 and November 5, 2001. The Company recognized
$68,359 and $205,077 as compensation expense in the second and third quarters of
2000, respectively, leaving a balance of $410,297 as deferred stock option
compensation.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Revenue for the three-month period ended September 30, 2000 decreased 81% to
$1,359,000 from $7,001,000 for the three-month period ended September 30, 1999.
Revenue for the first nine months of 2000 decreased 75% to $2,361,000 from
$9,528,000 for the first nine months of 1999. In both years the revenue consists
primarily of revenue from Pfizer/Warner-Lambert, 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, increased 10% to
$2,905,000 from $2,652,000 for the three months ended September 30, 2000, and
increased 8% to $7,836,000 from $7,262,000 for the nine months ended September
30, 2000, as compared to the same periods in 1999. The increases for both
periods were primarily attributable to expenses related to the Company's ongoing
clinical trials for its nasal Calcitonin product, partially offset by a
reduction in consulting fees related to the Pfizer collaboration. Expenses for
the three months ended September 30, 2000 also include additional expenditures
related to an increase in Calcitonin production.
General and administrative expenses increased 43% to $801,000 from $562,000 for
the three months ended September 30, 2000, and increased 46% to $2,418,000 from
$1,654,000 for the nine months ended September 30, 2000, as compared to the same
periods in 1999. The increases for the three month and nine month periods ended
September 30, 2000 were primarily due to the recognition of non-cash expenses of
$220,000 due to the issuance of warrants to a consultant and due to stock option
compensation of $205,000 for the three months ended September 30, 2000 and
$273,000 for the nine months ended September 30, 2000. The nine month period
ended September 30, 2000 also includes the recognition of a $350,000 expense in
June 2000 to terminate the Company's former joint venture in China.
Interest income decreased $9,000 and increased $12,000 for the three months and
nine months ended September 30, 2000, respectively, as compared to the same
periods in 1999, due to the amount of funds available for investment in 2000.
Interest expense increased $204,000 or 189% for the three months ended September
30, 2000 to $312,000 from $108,000 for the three months ended September 30,
1999. Interest expense increased $370,000 or 76% for the nine months ended
September 30, 2000 to $860,000 from $490,000 for the nine months ended September
30, 1999. Interest expense for the nine month period ended September 30, 1999
includes the amortization of the value of the beneficial conversion feature and
related warrants of the Company's 5% Convertible Debentures (the "5%
Debentures") in the amount of $197,000. Excluding the effect of the amortization
charged to interest, interest expense increased in the three month and nine
month periods ended September 30, 2000, as compared to the comparable periods in
1999, primarily due to an increase in the annual interest rate on the $2,000,000
in outstanding principal amount of the 5% Debentures to 20% resulting from the
failure of the Company to make a semi-annual interest payment that was due in
January 2000. In addition, since October 1999, the Company has been accruing
additional interest expense monthly in an amount equal to 2% of the outstanding
principal amount of the 5% Debentures as a result of the removal of the
Company's Common Stock from trading on the Nasdaq Stock Market in October 1999.
The expenses incurred in connection with the 5% Debentures were partially offset
by a 50% decrease in the principal balance outstanding as a result of
conversions to Common Stock.
Due to a $5.7 million decrease in revenue from Pfizer/Warner-Lambert in the
three month period ended September 30, 2000, in addition to increased operating
expenses and interest expense, net loss increased $6,347,000 from the profit of
$3,693,000 for the corresponding period in 1999.
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Due to a $7.2 million decrease in revenue from Pfizer/Warner-Lambert in the
nine-month period ended September 30, 2000, in addition to increases in
operating expenses and interest expense, net loss increased $8,862,000 from the
profit of $151,000 for the corresponding period in 1999.
As of December 31, 1999, the Company had available for federal income tax
reporting purposes net operating loss carryforwards of approximately
$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 nine months ended September 30, 2000, the Company accumulated additional
operating loss carryforwards of approximately $8,700,000. In addition, as of
December 31, 1999, the Company has federal investment tax credits and research
and development credits in the amounts of $14,000 and $2,376,000, 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 subject to state income tax. Approximately $25,000,000 of these
New Jersey loss carryforwards have been approved for future sale pursuant to a
program of the New Jersey Economic Development Authority (the "NJEDA"). In order
to realize these benefits, the Company 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.
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 nine-month
period ended September 30, 2000, the Company's deferred tax assets and valuation
allowances each increased by approximately $3,500,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains its peptide production facility on 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. The Company has two consecutive ten-year renewal options under
the lease, as well as an option to purchase the facility. During 2000, the
Company invested approximately $433,000 in fixed assets and leasehold
improvements. The majority of these expenditures were to increase the Company's
analytical testing capabilities. 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. The
Company, at September 30, 2000, had cash and cash equivalents of $49,000, a
decrease of $634,000 from December 31, 1999.
The Company has incurred annual operating losses since its inception and, as a
result, at September 30, 2000 had an accumulated deficit of approximately
$71,619,000 and a working capital deficiency of approximately $9,670,000. The
independent auditors' report covering the Company's 1999 financial statements
includes an explanatory paragraph stating that these 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.
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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 that entitle the Company to receive milestone
payments, 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
Warner-Lambert Company a worldwide license to use the Company's oral Calcitonin
technology. In June 2000, Warner-Lambert was acquired by Pfizer Inc. Through
September 30, 2000, the Company had received $3 million for an equity
investment, $3 million for a licensing fee and recognized an aggregate of $16.5
million in milestone revenue under the agreement, including a $1 million payment
received in October, 2000 for a milestone achieved in September 2000. The
Company is eligible to receive up to an additional $32 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 Pfizer and its affiliates and
from the sale of raw material to Pfizer. 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, Ireland and in Israel for its injectable formulation and in June
2000 entered into a joint venture agreement in China to manufacture and market
its injectable and nasal formulations. 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 2000, the Company entered into a joint venture with the Shijiazhuang
Pharmaceutical Group ("SPG"), a pharmaceutical company in the People's Republic
of China. The joint venture will manufacture and distribute injectable and nasal
Calcitonin products for the treatment of osteoporosis in China and possibly
other selected Asian markets. The Company will own 45% of the joint venture and
will receive 45% of the joint venture profits. The Company will account for its
investment under the equity method. 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 the Company's product under this
license. The joint venture would need to file a New Drug Application (NDA) in
China for its injectable and nasal products. In addition, brief local clinical
trials may be required. If the product is successful, the joint venture may
establish a facility to fill injectable and nasal Calcitonin products containing
bulk Calcitonin produced at the Company's Boonton, New Jersey plant and plans to
eventually manufacture the bulk drug in China in a new facility to be
constructed by the joint venture. This would require local financing by the
joint venture. As of September 30, 2000, the joint venture had not yet begun
operations.
Under the terms of the joint venture agreement, the Company is obligated to
contribute up to $405,000 in cash during the next 12 months and up to an
additional $495,000 in cash within two years thereafter. However, these amounts
may be reduced or offset by the Company's share of joint venture profits. No
amounts have been invested as of September 30, 2000.
In addition, the Company is obligated to pay to the Qingdao General
Pharmaceutical Company an aggregate of $350,000 in 14 monthly installment
payments of $25,000 in order to terminate its former joint venture in China, of
which $75,000 had been paid as of September 30, 2000. The entire $350,000
obligation was recognized as an expense in the second quarter of 2000.
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<PAGE>
In June 1998, the Company completed a private placement of $4 million in
principal amount of 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 was obligated to issue, in the
aggregate, upon conversion, when combined with the shares issued in payment of
interest and upon the exercise of the Warrants, 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. In December 1999, the
Company was unable to convert $200,000 of the 5% Debentures tendered for
conversion because the conversion would have exceeded the Share Limit. As a
result, the Company accrued as of December 31, 1999 the 20% premium on the
outstanding $2,000,000 in principal amount of the 5% Debentures that had not
been converted in the amount of $400,000. As of September 30, 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 September 30, 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 issued an additional 103,032
shares of Common Stock upon the cashless exercise of all of the 141,123 Warrants
issued upon conversion of the 5% Debentures.
On January 5, 2000, 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. The semi-annual
interest payment due July 5, 2000 was also not made by the Company. As of
November 14, 2000, the accrued and unpaid interest on the 5% Debentures totaled
approximately $416,000.
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 of
these payments to date, but has accrued the amounts as interest expense. As of
November 14, 2000, the accrued and unpaid amount totaled approximately $557,000.
The holder of the 5% Debentures has commenced an arbitration proceeding in which
the holder claims that it is entitled, as of June 30, 2000, to payments in
respect of the 5% Debentures in the amount of approximately $3.4 million. The
parties have had settlement discussions and the Company is attempting to seek a
mutually satisfactory settlement. The outcome of this proceeding is uncertain.
(See Part II, Item 1 - Legal Proceedings).
To satisfy the Company's short-term liquidity needs, 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, from time to time 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 November 1, 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 $2,498,323 evidenced by demand
notes bearing a floating interest rate equal to the Merrill Lynch Margin Loan
Rate plus .25% (9.875% at September 30, 2000), which are classified as
short-term debt (the "Demand Notes") 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
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<PAGE>
aggregate amount of $72,426 per month. No installment payments have been made to
date. Jay Levy has agreed to postpone temporarily 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.
The Company's cash requirements to operate its research and peptide
manufacturing facilities and develop its products are approximately $10 to 11
million per year. In addition 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 as well as
obligations for its joint venture in China.
Due to the receipt of payments totaling approximately $1.3 million from Pfizer
in September and October 2000, consisting of a milestone payment and payments
for testing services and Calcitonin supplies, as well as receipt of
approximately $1,358,000 in the third quarter of 2000 of additional short-term
loans from officers of the Company, the Company believes that it has sufficient
financial resources to sustain its operations at the current level for most of
the fourth quarter of 2000. The Company will require additional funds to ensure
continued operations beyond that time. Payment of the obligations under the 5%
Debentures also may require additional financing. For near term additional
funds, the Company expects to shortly sign one or more licensing agreements
including a nasal calcitonin licensing agreement currently under negotiation
which would provide up-front and other payments in 2000. In addition to a
possible nasal calcitonin license agreement, the Company is actively seeking to
enter into other licensing and/or supply agreements with pharmaceutical
companies for its Calcitonin products and other peptide products that can be
manufactured and/or delivered using its patented technologies. These agreements
could provide funds to the Company in upfront and milestone payments. However,
there is no assurance as to when or if the Company might enter into any such
additional agreements.
The Company also is eligible to sell state tax benefits, which may yield an
additional $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. The Company expects to receive a portion of this
amount in 2000 as 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. Although the Company has $3,388,000 in
confirmed tax benefits available for sale at a maximum 25% discount, the Company
must apply to the NJEDA each year to be eligible to receive approval for the
sale of its benefits. There is 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. A
failure or significant delay in signing other agreements, would require us to
obtain additional funds from other sources, which might include a debt or equity
financing, in order 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. A sale of equity
securities may be adversely affected by the delisting of the Company's Common
Stock by the Nasdaq Stock Market.
While the Company believes that the execution of a license agreement for its
nasal Calcitonin product, along with additional milestone payments under the
license agreement with Pfizer (successor to Warner-Lambert) would satisfy the
Company's liquidity requirements over the near-term, satisfying the Company's
long-term liquidity requirements will require the successful commercialization
14
<PAGE>
of the product licensed to Pfizer and/or one or more of its other products. In
addition, the commercialization of its oral Calcitonin product will require the
Company to incur additional capital expenditures to expand or upgrade the
Company's manufacturing operations to satisfy all of its Calcitonin supply
obligations under the Pfizer license agreement. However, neither the cost or
timing of such capital expenditures are determinable at this time.
OTHER
The Company's Common Stock was delisted from the Nasdaq National Market System
effective October 5, 1999 and is now trading on the OTC Bulletin Board. In order
to be relisted on the Nasdaq National Market or the Nasdaq SmallCap Market, the
Company must meet the initial listing requirements.
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 fourth 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.
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 as a component of the funding 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 September 30, 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 September 30, 2000.
15
<PAGE>
<TABLE>
<CAPTION>
Year of Maturity
Carrying ----------------
Amount 2000 2001 2002 2003 2004
------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Notes payable - stockholders $2,498,323 2,498,323 -- -- -- --
Variable interest rate 9.875% -- -- -- --
Notes payable - stockholders $1,870,000 960,606 837,328 72,066 -- --
Fixed interest rate 6% 6% 6% -- --
5% convertible debentures $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.
16
<PAGE>
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
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 11, 2000, the Tail Wind Fund, Ltd. ("Tail Wind"), the holder of the
outstanding $2,000,000 in principal amount of the 5% Debentures, , filed with
the American Arbitration Association a demand for arbitration against the
Company. 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 the Company's default under various provisions of the debentures
and related agreements. These alleged defaults included the Company's 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 Company's common stock from the Nasdaq National Market. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The purchase agreement pursuant
to which the Company sold the 5% Debentures requires that all disputes relating
to the debentures be submitted to binding arbitration. On July 31, 2000, the
Company submitted to the American Arbitration Association a statement of defense
in which it denies the amount of Tail Wind's claim and makes certain
counterclaims. A hearing on the matter before an arbitrator appointed by the
American Arbitration Association has been scheduled for December 2000. The
outcome of the proceeding is uncertain. However, an extremely unfavorable ruling
could have a material adverse effect on the Company. The Company and Tail Wind
have had settlement discussions in an effort to arrive at a mutually
satisfactory settlement.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Recent Sales of Unregistered Securities.
In the third quarter of 2000, the Company issued 99,860 shares of Common Stock
upon the cashless exercise of a total of 205,834 warrants and options at
exercise prices ranging from $1.38 to $1.44 per share. In addition, the Company
17
<PAGE>
issued 224,500 shares of Common Stock upon the exercise of warrants at exercise
prices ranging from $1.38 to $1.50 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 discussion of 5% Debentures in Part I, 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 September 30, 2000.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months ended
September 30, 2000.
18
<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
November 14, 2000 -----------------
Warren P. Levy, President
(Chief Executive Officer)
/s/ Jay Levy
November 14, 2000 -----------------
Jay Levy, Treasurer
(Chief Financial Officer and
Chief Accounting Officer)
19
