FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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--44,228,934 shares as of August 1, 2000
<PAGE>
INDEX
UNIGENE LABORATORIES, INC.
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Condensed balance sheets-
June 30, 2000 and December 31, 1999 3
Condensed statements of operations-
Three months and six months ended June 30, 2000 and 1999 4
Condensed statements of cash flows-
Six months ended June 30, 2000 and 1999 5
Notes to condensed financial statements-
June 30, 2000 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNIGENE LABORATORIES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------- -----------------
ASSETS (Unaudited)
------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 132,046 $ 682,629
Contract receivables 44,523 3,526,229
Prepaid expenses 304,888 210,195
Inventory 1,542,826 867,566
----------------- ----------------
Total current assets 2,024,283 5,286,619
Property, plant and equipment - net of
accumulated depreciation and
amortization 6,295,979 6,740,354
Patents and other intangibles, net 1,297,834 1,264,268
Investment in joint venture 900,000 --
Other assets 412,529 486,612
----------------- ----------------
$10,930,625 $13,777,853
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,020,054 $ 1,258,334
Accrued expenses 2,895,340 2,217,413
Notes payable - stockholders 1,140,000 1,140,000
Current portion - long-term notes payable -
stockholders 1,373,006 960,606
5% convertible debentures 2,400,000 2,400,000
Current portion - capital lease obligations 69,708 69,708
----------------- ----------------
Total current liabilities 9,898,108 8,046,061
Notes payable - stockholders, excluding
current portion 496,994 909,394
Joint venture obligation, excluding current portion 495,000 --
Capital lease obligations, excluding
current portion 62,189 93,415
Commitments and contingencies
Stockholders' equity (deficit):
Common Stock - par value $.01 per share, authorized
60,000,000 shares, issued 44,044,009 shares in 2000
and 43,088,184 shares in 1999 440,440 430,882
Additional paid-in capital 69,118,976 67,207,604
Deferred stock option compensation (615,374) --
Accumulated deficit (68,964,677) (62,908,472)
Less: Treasury stock, at cost, 7,290 shares (1,031) (1,031)
----------------- -----------------
Total stockholders' equity (deficit) (21,666) 4,728,983
----------------- -----------------
$10,930,625 $13,777,853
================= =================
</TABLE>
See notes to condensed financial statements.
<PAGE>
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2000 1999 2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Licensing and other revenue $ 776 $ 26,670 $ 1,002,026 $ 2,526,842
------------ ------------ ------------ ------------
Operating expenses:
Research and development 2,931,806 2,236,316 4,930,474 4,609,959
General and administrative 1,017,656 615,897 1,617,069 1,092,133
------------ ------------ ------------ ------------
3,949,462 2,852,213 6,547,543 5,702,092
------------ ------------ ------------ ------------
Operating loss (3,948,686) (2,825,543) (5,545,517) (3,175,250)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 24,440 4,589 36,515 15,542
Interest expense (292,671) (156,656) (547,203) (381,657)
------------ ------------ ------------ ------------
(268,231) (152,067) (510,688) (366,115)
------------ ------------ ------------ ------------
Net loss $ (4,216,917) $ (2,977,610) $ (6,056,205) $ (3,541,365)
============ ============ ============ ============
Net loss per share, basic and diluted $ (.10) $ (.07) $ (.14) $ (.09)
============ ============ ============ ============
Weighted average number of shares
outstanding, basic and diluted 43,980,296 40,109,449 43,661,288 39,835,348
============ ============ ============ ============
</TABLE>
See notes to condensed financial statements.
<PAGE>
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
Net cash used for operating activities $ (1,417,619) $(1,349,104)
-------------- ---------------
Investing activities:
Purchase of equipment and furniture (168,646) (62,625)
(Increase) decrease in patents
and other assets (1,510) 12,450
Construction of leasehold and building improvements (168,779) (4,010)
-------------- ---------------
(338,935) (54,185)
-------------- ---------------
Financing activities:
Issuance of stockholder notes -- 1,600,000
Exercise of stock options and warrants 1,237,197 --
Repayment of capital lease obligations (31,226) (28,126)
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1,205,971 1,571,874
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Net increase (decrease) in cash and cash equivalents (550,583) 168,585
Cash and cash equivalents at beginning of year 682,629 402,664
--------------- ---------------
Cash and cash equivalents at end of period $ 132,046 $ 571,249
=============== ===============
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 -- $ 1,301,096
============== ===============
Cash paid for interest $ 16,991 $ 9,041
============== ===============
</TABLE>
See notes to condensed financial statements.
<PAGE>
UNIGENE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 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 six-month
period ended June 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 June 30, 2000 had an accumulated deficit of approximately $68,965,000
and a working capital deficiency of approximately $7,874,000. 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 which consists
of $1,140,000 in demand notes and $1,870,000 in term notes. In June 2000, the
Company became obligated to fund the joint venture investment described in Note
E.
While the Company believes that the final execution of a licensing agreement for
its nasal Calcitonin product along with 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.
<PAGE>
Due to the receipt of $3 million from Warner-Lambert in April 2000, in
satisfaction of outstanding receivables, as well as receipt of $480,000 in July
2000 of additional short-term loans from an officer of the Company, the Company
has sufficient financial resources to sustain its operations at the current
level part-way through 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 shortly sign a nasal calcitonin licensing agreement which
should provide up-front and other payments in 2000 and also 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 sign the nasal license agreement or 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 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. 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. 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 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.
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. In July 2000, Jay Levy loaned the Company an aggregate of $480,000
under the same terms.
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
<PAGE>
accrued interest. During December 1999, the Company was unable to convert
$200,000 of the 5% Debentures tendered 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 June 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 June 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. As of June 30, 2000,
the accrued and unpaid interest on the 5% Debentures totaled approximately
$266,000.
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 interest expense. As of June 30,
2000, the accrued and unpaid amount totaled approximately $377,000.
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.
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
therefore 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 later this year. Following the successful launch of
the product, the joint venture may establish a state-of-the-art facility to fill
injectable and nasal Calcitonin products containing bulk Calcitonin produced at
the Company's Boonton, New Jersey plant and plans to manufacture the bulk drug
in China in a new facility to be constructed by the joint venture.
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 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 June 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. The
obligation of $350,000 was recognized as an expense in the second quarter of
2000.
<PAGE>
NOTE F- INVENTORY
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist of the following:
June 30, 2000 December 31, 1999
------------- -----------------
Finished goods.......... $ 1,200,000 $ 596,359
Raw materials........... 342,826 271,207
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Total.............. $ 1,542,826 $ 867,566
=========== ===========
NOTE G - STOCK OPTION PLAN
At the Company's June 6, 2000 Annual Meeting, the stockholders approved 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 for grants
under the New Plan. Each option granted under the New Plan will have a ten-year
term and the exercise price of each option will be 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 and, accordingly, the
measurement date for valuing the stock options in order to determine
compensation expense under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", 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 as compensation expense in June 2000, leaving a
balance of $615,374 as deferred stock option compensation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
--------------
RESULTS OF OPERATIONS
Revenue for the first half of 2000 decreased 60% to $1,002,000 from $2,527,000
in the first half of 1999. In both years the 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. Revenue for the three month periods ended June 30, 2000 and
June 30, 1999 were minimal.
Research and development, the Company's largest expense, increased 31% to
$2,931,000 from $2,236,000 for the three months ended June 30, 2000, and
increased 7% to $4,930,000 from $4,610,000 for the six months ended June 30,
2000, as compared to the same periods in 1999. The increases were primarily
attributable to expenses related to the Company's ongoing clinical trials for
its nasal Calcitonin product.
General and administrative expenses increased 65% to $1,017,000 from $616,000
for the three months ended June 30, 2000, and increased 48% to $1,617,000 from
$1,092,000 for the six months ended June 30, 2000, as compared to the same
periods in 1999. The increases for the three month and six month periods ended
June 30, 2000 were primarily due to the recognition of a $350,000 expense in
<PAGE>
June 2000 to terminate the Company's former joint venture in China. The three
month increase was also due to increased travel and personnel costs, partially
offset by reduced professional fees. The six month increase was also due to
increased personnel costs and professional fees.
Interest income increased $20,000 and $21,000 for the three months and six
months ended June 30, 2000, respectively, as compared to the same periods in
1999, due to additional funds available for investment in 2000.
Interest expense increased $136,000 or 87% for the three months ended June 30,
2000 to $293,000 from $157,000 for the three months ended June 30, 1999.
Interest expense increased $166,000 or 43% for the six months ended June 30,
2000 to $547,000 from $382,000 for the six months ended June 30, 1999. Interest
expense for the three month and six month periods ending June 30, 1999 includes
the amortization of the value of the beneficial conversion feature and related
warrants of the Company's 5% Convertible Debentures in the amounts of $46,000
and $151,000, respectively. Excluding the change in the amortization charged to
interest, interest expense increased in the three month and six month periods
ended June 30, 2000, as compared to the comparable periods in 1999, primarily
due to an increase in the annual interest rate on the 5% Debentures to 20%
resulting from the failure of the Company to make a semi-annual interest payment
on the 5% Debentures that was due in January 2000. In addition, since October
1999, the Company also 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. 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 increased operating expenses and interest expense, net loss increased
$1,239,000 or 42% for the three months ended June 30, 2000 from the
corresponding period in 1999.
Due to the $1.5 million decrease in milestone revenue from Warner-Lambert in the
first half of 2000, in addition to increases in operating expenses and interest
expense, net loss increased $2,515,000 or 71% from the corresponding period in
1999.
As of December 31, 1999, the Company had available for federal 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 six months ended June 30, 2000, the Company accumulated additional losses of
approximately $6,056,000. In addition, the Company has federal 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. 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"). 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 six-month
period ended June 30, 2000, the Company's deferred tax assets and valuation
allowances each increased by approximately $2,600,000.
<PAGE>
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 $337,000 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 June 30, 2000, had cash and cash equivalents of $132,000, a
decrease of $551,000 from December 31, 1999.
The Company has incurred annual operating losses since its inception and, as a
result, at June 30, 2000 had an accumulated deficit of approximately $68,965,000
and a working capital deficiency of approximately $7,874,000. 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 June 30, 2000, the Company had
received $3 million for an equity investment, $3 million for a licensing fee and
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 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
therefore will receive 45% of the joint venture profits. The Company will
account for its investment
<PAGE>
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 later this year. Following the successful launch of the product, the
joint venture may establish a state-of-the-art facility to fill injectable and
nasal Calcitonin products containing bulk Calcitonin produced at the Company's
Boonton, New Jersey plant and plans to manufacture the bulk drug in China in a
new facility to be constructed by the joint venture.
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 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 June 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. The
obligation of $350,000 was recognized as an expense in the second quarter of
2000.
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 tendered for conversion as such conversion would have exceeded the
Share Limit. As a result, the Company accrued the 20% premium on the outstanding
$2 million principal amount of the 5% Debentures in the amount of $400,000 as of
December 31, 1999. As of June 30, 2000, all of the $2 million in principal
amount of 5% Debentures have been tendered for conversion and therefore are
classified as a current liability in the amount of $2.4 million.
Through June 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. As of August 14, 2000,
the accrued and unpaid interest on the 5% Debentures totaled approximately
$315,000.
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 August 14,
2000, the accrued and unpaid amount of this penalty totaled approximately
$437,000.
<PAGE>
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).
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 June 30, 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 $1,140,000
evidenced by demand notes bearing a floating interest rate equal to the Merrill
Lynch Margin Loan Rate plus .25% (9.875% at June 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
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. In July 2000, Jay Levy loaned the
Company an aggregate of $480,000 under the same terms as the Demand Notes.
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. In June 2000,
the Company became obligated to fund the Company's joint venture investment with
Shijiazhuang Pharmaceutical Group with contributions of up to $405,000 in the
next 12 months and up to $495,000 two years thereafter. However, these amounts
may be reduced or offset by the Company's share of joint venture profits. At the
same time, the Company is required to pay in monthly installments a $350,000
termination payment to its former Chinese joint venture partner.
Due to the receipt of $3 million from Warner-Lambert in April 2000, in
satisfaction of outstanding receivables, as well as receipt of $480,000 in July
2000 of additional short-term loans from an officer of the Company, the Company
has sufficient financial resources to sustain its operations at the current
level part-way through 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 shortly sign a nasal calcitonin licensing agreement which
should provide up-front and other payments in 2000 and also 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 sign the nasal license agreement or 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 could yield an additional $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
<PAGE>
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 and must meet
various requirements for continuing eligibility. However, 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. 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 final execution of a licensing agreement for
its nasal Calcitonin product along with 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.
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
<PAGE>
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 June 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 June 30, 2000.
<TABLE>
<CAPTION>
Year of Maturity
Carrying ----------------
Amount 2000 2001 2002 2003 2004
------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Notes payable - stockholders 1,140,000 1,140,000 -- -- -- --
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.
<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 holder of the 5% Debentures, the Tail Wind Fund, Ltd.
("Tail Wind"), filed with the American Arbitration Association a demand for
arbitration against the Company claiming that the Company owes it, as of June
30, 2000, approximately $3.4 million by reason of the Company's default with
respect to the 5% Debenture financing. 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." On July 31, 2000, the Company submitted to the American
Arbitration Association a statement of defense with respect to Tail Wind's
arbitration demand. The outcome of the proceeding is uncertain.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) Recent Sales of Unregistered Securities.
In the second quarter of 2000, the Company issued 56,007 shares of Common Stock
upon the cashless exercise of a total of 116,666 warrants at exercise prices
ranging from $1.38 to $1.44 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% Convertible Debentures in Part I, Item 2: "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources".
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The matters described under item 4(c) below were submitted to a
vote of security holders at the Annual Meeting of Stockholders held on
June 6, 2000 (the "Annual Meeting") in connection with which proxies
were solicited pursuant to Regulation 14A under the Securities Exchange
Act.
(b) Not applicable
(c) The following describes the matters voted upon at the Annual
Meeting and sets forth the number of votes cast for and against or
withheld and, as applicable, the number of abstentions and broker
non-votes as to each such matter:
(i) Election of directors:
Nominee For Withheld
------- --- --------
Jay Levy 34,600,814 297,126
Ronald S. Levy 34,633,814 264,126
Warren P. Levy 34,636,614 261,326
Robert F. Hendrickson 34,619,539 278,401
Allen Bloom 34,640,914 257,026
(ii) Proposal to approve the adoption of the Company's
2000 Stock Option Plan:
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
13,704,164 1,708,091 144,354 19,341,331
(iii) Proposal to ratify the appointment of KPMG LLP as
independent auditors of the Company for 2000:
For Against Abstain
--- ------- -------
34,610,618 222,007 65,315
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.1 - Joint Venture Contract between Shijiazhuang
Pharmaceutical Group Company, Ltd., and Unigene Laboratories,
Inc., dated June 15, 2000 (certain confidential information
omitted and filed separately with the Secretary of the
Commission).
Exhibit 10.2 - Articles of Association of Shijiazhuang-Unigene
Pharmaceutical Corporation Limited, dated June 15, 2000
(certain confidential information omitted and filed separately
with the Secretary of the Commission).
Exhibit 27 - Financial Data Schedule - period ended June 30,
2000.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months ended
June 30, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIGENE LABORATORIES, INC.
--------------------------
(Registrant)
/s/ Warren P. Levy
August 14, 2000 -------------------------
Warren P. Levy, President
(Chief Executive Officer)
/s/ Jay Levy
August 14, 2000 ----------------------------
Jay Levy, Treasurer
(Chief Financial Officer and
Chief Accounting Officer)
