UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended December 31, 2011
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _________ to __________.
Commission file number 0-16005
UNIGENE LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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22-2328609
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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81 Fulton Street
Boonton, New Jersey 07005
(973) 265-1100
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class:
Common Stock, $.01 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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No
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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
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value as of June 30, 2011 was approximately $87,525,000.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: Common Stock, $.01 Par Value, 95,366,927 shares as of February 29, 2012.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference from portions of Unigene’s definitive proxy statement for its 2012 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2011.
TABLE OF CONTENTS
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PART I
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3
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Item 1.
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Business
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3
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Item 1A.
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Risk Factors
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9
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Item 1B.
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Unresolved Staff Comments
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14
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Item 2.
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Properties
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14
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Item 3.
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Legal Proceedings
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15
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Item 4.
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Mine Safety Disclosures
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15
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PART II
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15
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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15
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Item 6.
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Selected Financial Data
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18
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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18
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk
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28
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Item 8.
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Financial Statements and Supplementary Data
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29
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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62
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Item 9A.
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Controls and Procedures
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62
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Item 9B.
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Other Information
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64
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PART III
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64
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Item 10.
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Directors, Executive Officers and Corporate Governance
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64
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Item 11.
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Executive Compensation
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64
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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64
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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64
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Item 14.
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Principal Accounting Fees and Services
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64
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PART IV
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64
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Item 15.
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Exhibits and Financial Statement Schedules
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64
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Various statements in the items captioned “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” or variations of such words and similar expressions, are intended to identify such forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or activities of our business, or industry results, to be materially different from any future results, performance or activities expressed or implied by the forward-looking statements. These factors include: general economic and business conditions, our financial condition, product sales and royalties, competition, our dependence on other companies to commercialize, manufacture and sell products using our technologies, the uncertainty of results of animal and human testing, the risk of product liability and liability for human trials, our dependence on patents and other proprietary rights, dependence on key management officials, the availability and cost of capital, the availability of qualified personnel, changes in, or the failure to comply with, governmental regulations, the failure to obtain regulatory approvals for our products, litigation, and other factors discussed in this Form 10-K.
Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the statements set forth in other reports or documents we file from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
Item 1. Business
OVERVIEW
Unigene Laboratories, Inc., a biopharmaceutical company, was incorporated in the State of Delaware in 1980. Our single business segment focuses on the research, production and delivery of small proteins, referred to as peptides, for medical use. We have patented oral and nasal drug delivery technologies that have been shown to deliver medically useful amounts of various peptides into the bloodstream and patented manufacturing technologies for producing certain natural peptides cost-effectively. Collectively, we brand our patented peptide drug delivery and manufacturing technologies as “Peptelligence™”. We have three operating locations: administrative and regulatory offices in Boonton, New Jersey; a laboratory research facility in Fairfield, New Jersey; and a pharmaceutical production facility in Boonton, New Jersey.
STRATEGY
Our three-step strategic intent is focused on: increasing available cash for operations by prudent cash conservancy and incremental revenue generation; as resources permit, retiring debt and selectively investing in the advancement of existing core development programs; and maximizing shareholder value by exploiting the full potential of our Peptelligence™ technologies platform.
We are pursuing this strategic intent and, for marketing purposes only, we have focused our resources into two strategic business units: Unigene Biotechnologies and Unigene Therapeutics.
Peptides are a rapidly growing therapeutic class with more than 150 programs currently in active development throughout the industry. To date, more than fifty peptide-based therapeutics have reached the market. Our goal is to see our Peptelligence™ platform, which represents a distinctive set of capabilities and assets, incorporated into as many peptide programs as possible as they advance through development towards commercialization.
Our Peptelligence™ encompasses extensive intellectual property covering drug delivery and manufacturing technologies, peptide research and development expertise, and proprietary know-how. Our core Peptelligence™ assets include proprietary oral and nasal peptide drug delivery technologies, and proprietary, high-yield, scalable and reproducible recombinant manufacturing technologies.
We are focusing our Unigene Therapeutics pipeline on metabolic and inflammatory diseases with significant unmet medical and socioeconomic needs. Programs which do not fit our core focus will be monetized, out-licensed or terminated. We also intend to focus our Unigene Biotechnologies business unit on generating near-term fee-for-service revenues and longer-term milestone payments and royalties by customizing delivery and manufacturing solutions for novel therapeutic peptides.
Our first product to market, Fortical
®
, a nasal calcitonin product, received approval from the Food and Drug Administration (FDA) in 2005 and is marketed in the United States by Upsher-Smith Laboratories, Inc. (USL) for the treatment of postmenopausal osteoporosis. Other product development programs include oral calcitonin licensed to Tarsa Therapeutics, Inc. (Tarsa), which has completed Phase 3 testing for the treatment of osteoporosis, and oral parathyroid hormone (PTH), which has successfully completed Phase 2 clinical studies for the treatment of osteoporosis. Our oral PTH license with GlaxoSmithKline (GSK) was terminated in December 2011 after we received notification from GSK of its decision not to proceed with the oral PTH program. As a result, we regained the exclusive worldwide rights to the oral PTH program and are currently seeking a new licensee for this program.
Unigene Biotechnologies Business Unit
We are expanding our Peptelligence™ platform of peptide oral drug delivery and manufacturing assets and capabilities with the goal of establishing a portfolio of partnered opportunities. We plan to generate near-term revenue from fee-for-service feasibility studies and establish a solid foundation for potential high-value milestones and royalties. We hope to apply our Peptelligence™ platform to as many therapeutic peptide programs as possible and help our partners co-develop those peptides through advanced clinical testing and commercialization.
Unigene Therapeutics Business Unit
Unigene Therapeutics constitutes our own pipeline of proprietary peptide development programs focused on metabolic disease and inflammation. Currently, we are concentrating our peptide development expertise on advancing our PTH program for the treatment of osteoporosis and the development of our lead proprietary preclinical anorexigenic peptide UGP281 for obesity.
In 2009, we licensed our late-stage oral calcitonin formulation to Tarsa, a venture-financed company founded exclusively to conduct Phase 3 clinical testing and prepare our proprietary oral calcitonin formulation for commercialization. We currently own an approximately 16% fully-diluted stake in Tarsa, subject to liquidating preferences and to possible future dilution. In March 2011, Tarsa announced positive Phase 3 study top-line results for its multinational, randomized, double-blind, placebo-controlled Phase 3 ORACAL trial in postmenopausal women with osteoporosis. Tarsa is also the sponsor of an ongoing Phase 2, 48-week oral calcitonin trial for prevention of bone loss in postmenopausal women with low bone mass. Tarsa has indicated that it expects to file its New Drug Application (NDA) submission schedule to the FDA for OSTORA in the second half of 2012.
On November 9, 2011, we announced positive top-line results of our Phase 2 clinical study evaluating an experimental oral PTH analog for the treatment of osteoporosis in 93 postmenopausal women. The study achieved its primary endpoint of statistically significant percent change from baseline of BMD. We sponsored the Phase 2 study as part of the now terminated exclusive worldwide option and licensing agreement with GSK. We are actively seeking a licensing partner for the oral PTH program. We expect to present the full data from the Phase 2 study in a peer review journal and/or scientific congress over the course of 2012.
In February 2011, we announced our plans to accelerate the development of our lead proprietary anorexigenic peptide, UGP281. An anorexigenic peptide is one that diminishes or controls appetite and offers potential therapeutic benefit to morbidly obese patients. This program has initiated pre-clinical development studies and we expect to file an Investigational New Drug (IND) application with the FDA in the second half of 2012.
In October 2011, we and Nordic Bioscience announced our decision to establish a Joint Development Vehicle
to progress up to three of our internally developed, proprietary calcitonin analogs through Phase 2 proof-of-concept in humans for the treatment of Type 2 diabetes, osteoarthritis and osteoporosis.
(See Note 13 to the audited financial statements for a more detailed description).
During 2010, our Annexin 1 analog and Site-Directed Bone Growth (SDBG) programs were put on hold to conserve cash. In September 2011, we sold our SDBG program
by assigning seven patent applications to Kieran Murphy, LLC. In addition, in connection with the sale we terminated an Exclusive License Agreement and Consulting Agreement with Kieran Murphy, LLC, as well as a License Option Agreement and Research Agreement with Yale University. In exchange for the assignment of the patents and patent applications, we will receive sales royalties and future licensing revenue and/or a percentage of all considerations received upon the subsequent sale of the SDBG patent portfolio by Kieran Murphy, LLC
. (See Note 12 to the audited financial statements for a more detailed description.)
Scientific Accomplishments
Among our major accomplishments are:
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Development, Licensing and Commercialization of Proprietary Technology for Nasal Delivery
. We have developed and patented Fortical, our nasal calcitonin formulation that, in human studies, demonstrated similar blood levels to a competitor’s existing nasal calcitonin product and also demonstrated a comparable decrease in bone loss as measured by several industry-accepted blood markers and a comparable increase in bone mineral density. During 2002, we licensed U.S. rights to our nasal calcitonin product, Fortical, to USL. Fortical was approved by the FDA in August 2005. This was our first product approval in the United States. The launch of Fortical has resulted in sales to, and royalty payments from, USL.
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Development and Licensing of Proprietary Technology for Oral Delivery
. We have developed and patented an oral formulation that has successfully delivered therapeutically relevant quantities of calcitonin and PTH into the bloodstream of human subjects in studies performed by us and our collaborators. We believe that the components of our patented oral product also can enable the delivery of other peptides and we have initiated animal studies to investigate this possibility in collaboration with partners. In 2011, we successfully demonstrated oral absorption of 7 other peptides provided to Unigene via our Biotechnology Business Unit.
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Oral PTH Program:
During 2001, we reported successful oral delivery in animal studies of various peptides including PTH for the treatment of osteoporosis and insulin for the treatment of diabetes. During 2004, a Phase 1 study for oral PTH was successfully completed. In November 2011, we announced positive top-line results of our oral PTH Phase 2 study.
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Oral Calcitonin Program:
During 2007, a small, short-term human study for oral calcitonin was initiated by us and successfully concluded. In February 2008, we initiated a Phase 1/2 clinical study for oral calcitonin. The tablets used in these studies utilized an improved solid dosage form of Unigene’s oral delivery technology for which a patent application has been filed. A small, short-term Phase 1 human study for PTH was initiated in 2008 and successfully concluded in 2009 using our improved oral delivery technology. During 2009, we initiated a Phase 3 human study for our oral calcitonin technology and licensed this program to Tarsa. This study was fully enrolled in the first quarter of 2010 and completed in the first quarter of 2011. In March 2011, Tarsa announced positive Phase 3 study top-line results for the oral calcitonin product.
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Development and Licensing of a Proprietary Peptide Production Process
. One of our principal scientific accomplishments is our success in developing a highly efficient biotechnology-based peptide production process. Several patents relating to this process have issued. We believe that this proprietary process is a key step in the more efficient and economical commercial production of medically-useful peptides. Many of these peptides cannot be produced at a reasonable cost in sufficient quantities for human testing or commercial use by other currently available production processes. We have constructed and are operating
a manufacturing facility employing this process which is capable of producing PTH and calcitonin, and we have also produced laboratory-scale quantities of several other peptides. In 2004, we licensed worldwide rights to our patented manufacturing technology for the production of calcitonin to Novartis and provided the active pharmaceutical ingredient for the oral calcitonin and oral PTH clinical trials.
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Partnerships
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Upsher-Smith Laboratories License Agreement.
In November 2002, we signed an exclusive U.S. licensing agreement with USL for a value before royalties of $10,000,000 to market Fortical, our patented nasal formulation of calcitonin for the treatment of osteoporosis. Fortical was approved by the FDA and launched by USL in August 2005. We received the $10,000,000 from 2002 through 2005. We are responsible for manufacturing the product and USL packages the product and distributes it nationwide. Royalty revenue, computed in a range from the transfer price of product to USL to a royalty rate in the mid-thirties depending on the circumstances, is earned on net sales of Fortical by USL and is recognized in the period Fortical is sold by USL. Future sales and royalties are contingent upon many factors including competition, pricing, marketing and acceptance in the market place and, therefore, are difficult to predict. In July 2006, we and USL jointly filed a lawsuit against Apotex for infringement of our Fortical patent. We are seeking a ruling that Apotex’s ANDA and its nasal calcitonin product infringe our Fortical patent and its ANDA should not be approved before the expiration date of the Fortical patent. In the event that we do not prevail, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis’ nasal calcitonin product, but not to Fortical. In June 2009, Par also launched a product generic to Novartis’ nasal calcitonin product. Certain providers have substituted these products for Fortical, causing Fortical sales and royalties to decrease. Our agreement with USL is subject to certain termination provisions. We are currently dependent on USL to market and distribute Fortical and to provide a very significant portion of our revenue. The loss of USL as a licensee would have a material adverse effect on our business (see Note 22 to the audited financial statements for a more detailed description of the USL license agreement and Item 3. Legal Proceedings for a more detailed description of the current legal proceedings with Apotex).
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Tarsa License Agreement.
In October 2009, we licensed our Phase 3 oral calcitonin program to Tarsa, a private company formed by a syndicate of three venture capital funds specializing in the life sciences: MVM Life Science Partners; Quaker BioVentures; and Novo A/S. Simultaneously, Tarsa announced the closing of a $24,000,000 Series A financing from the investor syndicate. In consideration for our sale to Tarsa of an exclusive license for the oral calcitonin program, we received from Tarsa approximately $8,993,000 in cash and 9,215,000 shares of common stock in Tarsa. We are also eligible to receive milestone payments based on the achievement of certain sales benchmarks, as well as royalties, at rates in the single digits, on product sales. Tarsa will be responsible for the future costs of the global Phase 3 clinical program that was initiated in 2009. During 2011, we earned approximately $1,300,000 in revenue for providing testing and development services to Tarsa. This agreement is subject to certain termination provisions. We may terminate this agreement in the event of Tarsa’s insolvency, material breach or in certain circumstances where Tarsa has ceased development and commercialization activities of the licensed product. Tarsa may terminate this agreement in the event of our insolvency, material breach or, in certain circumstances, without cause. Tarsa expects to file its NDA submission schedule to the FDA for OSTORA in the second half of 2012. (See Notes 10 and 22 to the audited financial statements for a more detailed description.)
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Novartis Agreement.
In April 2004, we signed a worldwide licensing agreement with Novartis for a value before royalties of up to $18,700,000 to allow Novartis to manufacture calcitonin using our patented peptide production process. Through December 31, 2011, an aggregate of $13,700,000 has been received from Novartis under this agreement, including calcitonin purchases and a $5,500,000 milestone payment that we received in 2007 for the initiation of their oral calcitonin Phase 3 study for osteoporosis. There were no milestones achieved or additional calcitonin purchases in 2011. Sandoz, a Novartis affiliate, concluded a manufacturing campaign in 2005 based on our process and produced multiple kilograms of calcitonin at a scale that represents a ten-fold increase above our then current production capacity. Calcitonin produced by Sandoz was being used by Novartis in its Phase 3 clinical trials. Novartis has stated that it will not pursue further clinical development of oral calcitonin. This agreement may be terminated by either party due to a material breach not cured within 60 days or due to insolvency or bankruptcy proceedings not dismissed within 60 days and for other customary events of default (see Note 22 to the audited financial statements for a more detailed description).
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Other License or Distribution Arrangements.
To expand our product pipeline, we perform fee-for-service feasibility studies for third parties. We are also working on the development of our anorexigenic peptide to diminish or control appetite, which would utilize our manufacturing and oral delivery technologies. In addition, we are actively seeking additional licensing and/or supply agreements with pharmaceutical companies for our products and technologies. During 2011, we provided clinical supply material to Cara Therapeutics for their Phase 1 program. However, we may not be successful in achieving milestones under our current agreements, obtaining regulatory approval for our products or in licensing any of our other products.
We operate as a single business segment and our revenue for the last three years, including product sales, royalties, licensing revenue and development services, has primarily been pursuant to our current and former agreements with GSK, USL, Novartis and Tarsa, all primarily U.S. sources.
Revenue from Licensees:
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2011
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2010
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2009
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GSK
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57
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%
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2
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%
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1
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%
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USL
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27
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%
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73
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%
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87
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%
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Novartis
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6
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%
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12
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%
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9
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%
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Tarsa
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6
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%
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9
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%
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--
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Other revenue
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4
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%
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4
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%
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3
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%
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There will be no future revenue from GSK due to the termination of our license agreement in December 2011.
For information regarding revenue, losses and total assets, please see our Selected Financial Data in Part II, Item 6 of this report.
Competition
Our primary business activity is biotechnology research and development. Our calcitonin and PTH analog products have potential applications in the treatment of osteoporosis. Biotechnology research is highly competitive, particularly in the field of human health care. We compete with specialized biotechnology and biopharmaceutical companies, major pharmaceutical and chemical companies, universities and other non-profit research organizations, many of which can devote considerably greater financial resources than we can to research activities. Generic versions of Novartis’ nasal calcitonin product were launched by Apotex, Sandoz and Par in 2008 and 2009 and, as a result, certain providers have substituted these products for Fortical, causing Fortical sales and royalties to decrease. There could also be future competition from products that are directly generic to Fortical. In addition, a third-party has conducted studies with an analog of PTH demonstrating the ability to build new bone and has launched an injectable PTH product in the U.S. In July 2006, we and USL jointly filed a lawsuit against Apotex for infringement of our Fortical patent. We are seeking a ruling that Apotex’s abbreviated NDA, or ANDA, and its nasal calcitonin product infringe our Fortical patent and its ANDA should not be approved before the expiration date of the Fortical patent. In the event that we do not prevail, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval (see Item 3. Legal Proceedings for a more detailed description of the current legal proceedings with Apotex).
Fortical currently faces competition from large pharmaceutical companies that produce other osteoporosis products and, if any of our other products receive regulatory approval, these other products would also face competition from such large pharmaceutical companies that have substantially greater financial resources, research and development staffs and facilities, and regulatory experience than we do. Major companies in the field of osteoporosis treatment include Novartis, Merck, Eli Lilly and Sanofi-Aventis. However, we believe that we should be able to compete with these companies due both to our partnerships with USL and Tarsa, and to our patented technologies. Our success will further depend on our ability to obtain adequate funding and on developing, testing, protecting, producing and marketing products and obtaining their timely regulatory approval. However, any of our competitors could, at any time, develop products or a manufacturing process that could render our technology or products noncompetitive or obsolete.
Product Manufacture
We have been producing calcitonin since 1992. We constructed a facility that complies with current good manufacturing practice guidelines, or cGMP, for the production of calcitonin at leased premises located in Boonton, New Jersey. The facility began producing calcitonin under cGMP guidelines in 1996. The facility is capable of producing our proprietary amidating enzyme for use in producing calcitonin as well as PTH. During 2008, we implemented refinements to our manufacturing process which improved our productivity and efficiency. We believe that our facility’s current capacity is sufficient to support expected Fortical sales. The facility also contains a filling line to fill and label Fortical. Since we currently maintain an adequate inventory of calcitonin and enzyme to support Fortical for the next several years, we have temporarily suspended manufacturing of those materials at our Boonton facility. However, we have been able to maintain the cGMP status of the facility and the ability to manufacture peptides at that location. Most of the raw materials we use in our peptide production process are readily available in sufficient quantities from a number of sources. However, certain raw materials have a single supplier. For example, for Fortical production, the pumps currently used are purchased by USL from a single source.
Although our facility currently is devoted primarily to calcitonin and Fortical production, it also is suitable for producing other peptide products and has been the site of active pharmaceutical ingredient (API) manufacture for our PTH analog and satiety peptide. The facility can be modified to increase peptide production capacity. Because we manufacture peptides for human use, the FDA, European health authorities and our licensing partners have all inspected our facility at various times. We hosted a successful FDA inspection in October, 2011. However, there is always the risk that our operations might not remain in compliance or that approval by required regulatory agencies will not be obtained.
Government Regulation
Our laboratory research, development and production activities and those of our collaborators are subject to significant regulation by numerous federal, state, local and foreign governmental authorities. FDA approval, following the successful completion of various animal and human studies, is required for the sale of a pharmaceutical product in the U.S. Foreign sales require similar studies and approval by regulatory agencies.
The regulatory approval process for a pharmaceutical product requires substantial resources and can take many years. There is always a risk that any additional regulatory approvals required for our production facility or for any of our products will not be obtained in a timely manner. Our inability to obtain, or delays in obtaining, these approvals, would adversely affect our ability to continue to fund our programs, to produce marketable products, or to receive revenue from milestone payments, product sales or royalties. We also cannot predict the extent of any adverse governmental regulation that may arise from future legislative and administrative action such as healthcare reform.
The FDA or foreign regulatory agencies may audit our production facility at any time to ensure that it is operating in compliance with cGMP guidelines. These guidelines require that production operations be conducted in strict compliance with our established rules for manufacturing and quality control. These agencies are empowered to suspend our production operations and/or product sales if, in their opinion, significant or repeated deviations from these guidelines have occurred. A suspension by any of these agencies could have a material adverse impact on our operations.
In addition, we are subject to the U.S. Foreign Corrupt Practices Act, which prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business is, and will continue to be, subject to various other laws, rules and/or regulations applicable to us as a result of our international business.
Patents and Proprietary Technology
We have filed a number of applications for U.S. patents relating to our proprietary peptide manufacturing process and our delivery technologies. Our most important U.S. manufacturing and delivery patents expire from 2017 to 2025. To date, the following fourteen U.S. patents are currently in force:
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eight patents covering improvements in our manufacturing technology;
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three patents covering oral delivery of peptides;
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two patents covering our nasal calcitonin formulation; and
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one patent covering our obesity technology.
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We believe that our manufacturing patents give us a competitive advantage in producing peptides cost-effectively and in large quantities, because they cover a highly efficient bacterial fermentation process for producing peptides.
We also believe that our oral delivery patents give us a competitive advantage in enabling us to develop peptide products in oral forms, because they cover a process allowing delivery of significant quantities of peptides into the bloodstream. Peptides are small proteins that get broken down in the digestive system. Most commercial peptide products are currently available only in injectable or nasal spray formulations.
We also believe that our nasal formulation patent gives us a competitive advantage by enabling us to deliver the desired amount of calcitonin without requiring the presence of compounds that have been shown to cause irritation to the lining of the nasal cavity.
We believe that the greatest competitive advantage of our manufacturing and oral delivery patent estates is realized through the combination of both technologies. To successfully commercialize an oral peptide product, an efficient manufacturing process is necessary because oral delivery systems are typically less efficient than injectable or nasal spray products. Reduced efficiency requires an increase in the amount of active pharmaceutical ingredient in each dose. Therefore, an efficient manufacturing process is needed to cost-effectively manufacture the increased quantities that are necessary to make a product that is commercially viable.
We believe that our manufacturing and oral delivery patent estates provide us with both a current and future advantage. Currently, the patent estates protect our intellectual property rights in the development of our manufacturing and oral delivery processes. In the future, we expect that the patent estates will give us a competitive advantage in commercializing our products.
Other patent applications are pending. We also have made filings in selected foreign countries, and fifty-two foreign patents have issued. However, our pending applications may not issue as patents and our issued patents may not provide us with significant competitive advantages. Furthermore, our competitors may independently develop or obtain similar or superior technologies.
Although we believe our patents and patent applications are valid, the invalidity or unenforceability of one or more of our key patents could have a significant adverse effect upon our business. We are currently involved in ANDA litigation in which Apotex claims that our patent for Fortical is invalid. (See Item 3. Legal Proceedings for a more detailed description of the current legal proceedings with Apotex.)
Detecting and proving infringement generally is more difficult with process patents than with product patents. In addition, a process patent’s value is diminished if others have patented the product that can be produced using the process. Under these circumstances, we would require the cooperation of, and likely be required to share royalties with, the product patent holder or its sublicensees in order to make and sell the product. In addition, the patent holder can refuse to license the product to us.
In some cases, we rely on trade secrets to protect our inventions. Our policy is to include confidentiality provisions in all research contracts, joint development agreements and consulting relationships that provide access to our trade secrets and other know-how. All of our employees, consultants and prospective partners sign confidentiality agreements. However, there is a risk that these secrecy obligations could be breached, causing us harm. To the extent licensees, consultants or other third parties apply technological information independently developed by them or by others to our projects, disputes may arise as to the ownership rights to information, which may not be resolved in our favor.
Employees
As of February 29, 2012, we had 57 full-time employees. Twenty-three were engaged in research, development and regulatory activities, 18 were engaged in production activities and 16 were engaged in general, administrative and support functions. Our scientific employees have expertise in molecular biology, including DNA cloning, synthesis, sequencing and expression; protein chemistry, including purification, amino acid analysis, synthesis and sequencing of proteins; immunology, including tissue culture, monoclonal and polyclonal antibody production and immunoassay development; chemical engineering; pharmaceutical production; quality assurance; regulatory affairs and quality control. None of our employees are covered by a collective bargaining agreement.
Research and Development
We have established a multi-disciplinary research team to adapt proprietary amidation, biological production and oral and nasal delivery technologies to the development of proprietary products and processes. Approximately 72% of our employees are directly engaged in activities relating to production of, regulatory compliance for, and the research and development of pharmaceutical products. We expensed $9.0 million on research and development activities in 2011 ($4.3 million related to oral PTH), $6.4 million on research and development activities in 2010, and $12.4 million on research and development activities in 2009 ($3.3 million related to oral calcitonin).
Availability of Reports
Our Internet website address is www.unigene.com. The contents of our website are not part of this annual report on Form 10-K, and our Internet address is included in this document as an inactive textual reference only. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and all amendments to those reports and statements filed by us with the Securities and Exchange Commission (the SEC) pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), are accessible free of charge through our website as soon as reasonably practicable after we electronically file those documents with, or otherwise furnish them to, the SEC. The SEC also maintains a website at www.sec.gov where such information is available.
Item 1A. Risk Factors
You should consider carefully these risk factors together with all of the information included or incorporated by reference in this annual report in addition to our financial statements and the notes to our financial statements. This section includes forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report.
The following is a discussion of the risk factors that we believe are material to us at this time. These risks and uncertainties are not the only ones facing us and there may be additional matters that we are unaware of or that we currently consider immaterial. All of these could adversely affect our business, results of operations, financial condition and cash flows.
Risks Related to Our Business
Our independent auditors have expressed substantial doubt about our ability to continue as a going concern
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Our independent registered public accounting firm has added a paragraph to their opinion issued in connection with their audit of the financial statements as of and for the year ended December 31, 2011 that emphasizes conditions that raise substantial doubt about Unigene’s ability to continue as a going concern. Unigene’s ability to generate additional revenue or obtain additional funding will determine its ability to continue as a going concern for a reasonable period of time. Unigene’s financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We require additional cash to sustain our operations and our ability to secure additional cash is uncertain.
We had cash flow deficits from operations of $6,766,000 for the year ended December 31, 2011, $1,669,000 for the year ended December 31, 2010, and $11,291,000 for the year ended December 31, 2009. We believe that, in the near-term, we will generate cash to apply toward funding our operations through Fortical royalties and sales; from anticipated receipt of licensing fees and revenue generated from fee-for-service feasibility studies; from other corporate development activities; and from our former China joint venture partner. These funds may not be adequate to fully support our operations in the near-term. Therefore, we need additional sources of cash in order to maintain all of our future operations. Based upon management’s projections, we believe our current cash should be sufficient to support our current operations through the end of 2012. We may be unable to raise, on acceptable terms, if at all, the substantial capital resources necessary to conduct our operations. If we are unable to raise the required capital, we may be forced to limit some or all of our research and development programs and related operations, curtail development of our product candidates and the ability to license our technologies, and, ultimately, cease operations. Our future capital requirements will depend on many factors, including:
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our ability to engage new partners for fee-for-service feasibility studies and licensing agreements;
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the level of Fortical sales, particularly in light of new and potential competition;
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our ability to successfully defend our Fortical patent against Apotex’s claim;
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the generation of revenue from our Tarsa agreement;
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continued scientific progress in our discovery and research programs;
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progress with preclinical studies and clinical trials;
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the magnitude and scope of our discovery, research and development programs;
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our ability to maintain existing, and establish additional, corporate partnerships and licensing arrangements;
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our partners’ ability to sell and market our products or their products utilizing our technologies;
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the time and costs involved in obtaining regulatory approvals;
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the time and costs involved in maintaining our production facility;
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the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims including our current litigation regarding Apotex’s ANDA; and
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the pharmaceutical industry’s need to acquire or license new technologies and products.
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There are numerous default provisions under our financing agreement with Victory Park.
Under our amended and restated March 2010 financing agreement with Victory Park, so long as our outstanding note balance is at least $5,000,000, we must maintain a minimum cash balance equal to at least $2,500,000 and our cash flow (as defined in the agreement) must be at least $2,000,000 in any fiscal quarter or $7,000,000 in any three consecutive quarters. These default provisions were temporarily waived under a forbearance agreement that was executed in December 2010 and terminated in December 2011 due to the termination of the GSK agreement. The financing agreement specifies certain events of default including, without limitation: failure to pay principal or interest; filing for bankruptcy; breach of covenants, representations or warranties; the occurrence of a material adverse effect (as defined in the agreement); a change in control (as defined in the agreement); the failure of any registration statement required to be filed to be declared effective by the SEC, and maintained effective pursuant to the terms of our registration rights agreement with Victory Park; and any material decline or depreciation in the value or market price of the collateral. We are subject to certain cash damages, as set forth in the convertible notes, in the case of a failure to timely convert the notes and a failure to timely convert is also an event of default, subject to additional remedies. Upon any default, among other remedies, both principal and interest would be accelerated and additional charges would apply. There is no assurance that we will be able to maintain a minimum cash balance of $2,500,000, or maintain an adequate cash flow, in order to avoid default. As of December 31, 2011, we were in compliance with these covenants. In addition, there is no assurance that the notes will be converted into common stock, in which case, we may not have sufficient cash from operations or from new financings to repay the Victory Park debt when it comes due in 2013, or that new financings will be available on favorable terms, if at all.
The conversion of the Victory Park notes will likely have a dilutive effect on our stock price and could lead to a change in control.
In March 2010, we issued to Victory Park $33,000,000 in convertible notes, which come due in 2013. As of March 17, 2011, these notes are convertible into shares of common stock at the holder’s option. The initial conversion rate, which is subject to adjustment as set forth in the notes, is calculated by dividing the sum of the principal to be converted, plus all accrued and unpaid interest thereon, by $0.70 per share. If we subsequently make certain issuances of common stock or common stock equivalents at an effective purchase price less than the then-applicable conversion price, the conversion price of the notes will be reduced to such lower price. Assuming that the convertible notes were convertible in full on December 31, 2011 at the current $0.70 conversion price (with conversion of the original principal amount plus interest thereon into the conversion shares), then, together with the shares and other securities owned by them, Victory Park and its affiliates would beneficially own in the aggregate approximately 43% of our outstanding common stock (as diluted by outstanding options) as of that date.
We are required to make payments under the Levy loans, most of which are payable in June 2013.
We owe an aggregate original principal amount of $14,737,518 on notes payable to the Estate of Jean Levy and the Jaynjean Levy Family Limited Partnership. As of December 31, 2011, principal and interest on these notes aggregated $21,971,683. An aggregate of $750,000 in principal payments is due on these notes in 2012. We may not be able to generate sufficient cash from operations or from other sources in order to make the payments when due which are required under these notes.
Our strategic realignment might not be successful.
In September 2010, we announced a realignment of our business and the creation of two new highly focused strategic business units. Our new strategic business units may not be successful or effectively implemented. Also, we may be unable to enter into mutually acceptable agreements with third party partners to use our peptide drug delivery platform and/or manufacturing capabilities. If we are unsuccessful, it could have a material adverse effect on our financial condition, results of operations and cash flow.
Our operations for future years are highly dependent on the successful marketing and sales of Fortical and could be further impacted by generic or other competition.
Fortical is our only product approved by the FDA. Any factors that adversely impact the marketing of Fortical including, but not limited to, competition, including generic competition and/or product substitutions, acceptance in the marketplace, or delays related to production and distribution or regulatory issues, will have a negative impact on our cash flow and operating results. For 2011, compared to 2010, Fortical sales decreased 27% while Fortical royalties decreased 46%. Fortical sales to USL are at a fixed transfer price, while Fortical royalties reflect both declining unit sales as well as declining net selling price. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis’ nasal calcitonin product, but not to Fortical. In June 2009, Par also launched a product generic to Novartis’ nasal calcitonin product. Certain providers have substituted these products for Fortical, causing Fortical sales and royalties to decrease. Further decreases in Fortical sales or royalties could have a material adverse effect on our business, financial condition and results of operations. In addition, Apotex has a pending ANDA for a nasal calcitonin product that we claim infringes our Fortical patent. Our Fortical patent expires in 2021. We have sued Apotex for infringement of our Fortical Patent and Apotex has been enjoined from conducting any activities which would infringe the patent. Apotex has appealed that decision and if we do not prevail in this litigation, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval.
We have significant historical losses and may continue to incur losses in the future.
We have incurred annual losses since our inception, and we may never achieve profitability. As a result, at December 31, 2011, we had an accumulated deficit of approximately $189,000,000. Our gross revenues for the years ended December 31, 2011, 2010 and 2009 were $20,508,000, $11,340,000, and $12,792,000, respectively. Our revenues have not been sufficient to sustain our operations. Revenue consisted primarily of Fortical sales and royalties, licensing revenue and Peptelligence™ revenue. As of December 31, 2011, we had two material revenue generating license agreements. We believe that to achieve profitability we will require at least the successful commercialization of one or more of our licensees’ oral or nasal calcitonin products, our oral PTH product, our obesity program or another peptide product or biotechnology in the U.S. and/or abroad. However, our products or technologies may never become commercially successful. For 2011, 2010 and 2009, we had losses from operations of $3,466,000, $10,324,000, and $12,380,000, respectively. Our net losses for the years ended December 31, 2011, 2010 and 2009 were $17,926,000, $27,868,000, and $13,380,000, respectively.
Risks Related to Product Development and Commercialization
Most of our products are in early stages of development and we and our licensees may not be successful in efforts to develop a calcitonin, PTH or other peptide product that will produce revenues sufficient to sustain our operations.
Our success depends on our and our licensees’ ability to commercialize a calcitonin, PTH or other peptide product that will generate revenues sufficient to sustain our operations. Except for Fortical, most of our products are in early stages of development and we and our licensees may never develop a calcitonin, PTH or other peptide product that makes us profitable. Our ability to achieve profitability is dependent on a number of factors, including our and our licensees’ ability to complete development efforts, obtain regulatory approval for additional product candidates and successfully commercialize those product candidates or our technologies. We believe that the development of more desirable formulations is essential to expand consumer acceptance of peptide pharmaceutical products. However, we may not be successful in our development efforts, or other companies may develop such products, or superior products, before we do.
We may not be successful in our efforts to gain regulatory approval for our products other than Fortical and, if approved, the approval may not be on a timely basis.
Even if we or our licensees are successful in our development efforts, we may not be able to obtain the necessary regulatory approval for our products other than Fortical. The FDA must approve the commercial manufacture and sale of pharmaceutical products in the United States. Similar regulatory approvals are required for the sale of pharmaceutical products outside of the United States. None of our products other than Fortical has been approved for sale in the United States, and our other products may never receive the approvals necessary for commercialization. We must conduct further human testing on certain of our products before they can be approved for commercial sale and such testing requires the investment of significant resources. Any delay in receiving, or failure to receive, these approvals would adversely affect our ability to generate product revenues.
We may not be successful in efficiently developing, manufacturing or commercializing our products.
Because of our limited financial resources and our lack of a marketing organization, we are likely to rely on licensees or other parties to perform one or more tasks for the commercialization of our pharmaceutical products, such as USL to market and distribute Fortical in the U.S. If any of our products are approved for commercial sale, the product will need to be manufactured in commercial quantities at a reasonable cost in order for it to be a successful product that can generate profits. We may incur additional costs and delays while working with these parties, and these parties may ultimately be unsuccessful in the commercialization of a product.
Our success is dependent on our ability to establish and maintain commercial partnerships and currently we have only two significant license agreements; we may not be able to relicense our oral PTH program.
We do not currently have, nor do we expect to have in the near future, sufficient financial resources and personnel to develop and market products on our own. Accordingly, we expect to continue to depend on pharmaceutical companies for revenues from sales of products, research sponsorship and distribution of our products.
The process of establishing partnerships is difficult and time-consuming. Our discussions with potential partners may not lead to the establishment of new partnerships on favorable terms, if at all. If we successfully establish new partnerships, the partnerships may never result in the successful development of our product candidates or the generation of significant revenue. Management of our relationships with these partners would require:
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significant time and effort from our management team;
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coordination of our research with the research priorities of our corporate partners;
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effective allocation of our resources to multiple projects; and
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an ability to attract and retain key management, scientific, production and other personnel.
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We may not be able to manage these relationships successfully.
We currently have significant license agreements with USL in the United States for Fortical and with Tarsa worldwide (except for China) for oral calcitonin. Our oral PTH license with GSK was terminated in December 2011 after we received notification from GSK of its decision not to proceed with the oral PTH program. As a result, we regained the exclusive worldwide rights to the oral PTH program and are currently seeking a new licensee for this program. We do not currently have the resources to fund a phase 3 study for oral PTH without a new licensee.
We are pursuing additional opportunities to license or enter into distribution arrangements for products that utilize our oral and nasal delivery technologies and/or our manufacturing technology, as well as our other technologies. However, we may not be successful in any of these efforts.
Because we are a biopharmaceutical company, our operations are subject to extensive government regulation.
Our laboratory research, development and production activities, as well as those of our collaborators and licensees, are subject to significant regulation by federal, state, local and foreign governmental authorities. In addition to obtaining FDA approval and other regulatory approvals for our products, we must maintain approvals for our manufacturing facility to produce calcitonin, PTH and other peptides for human use. The regulatory approval process for a pharmaceutical product requires substantial resources and may take many years. Our inability to obtain approvals or delays in obtaining approvals would adversely affect our ability to continue our development program, to manufacture and sell our products, and to receive revenue from milestone payments, product sales or royalties.
The FDA and other regulatory agencies may audit our production facility at any time to ensure compliance with cGMP guidelines. These guidelines require that we conduct our production operation in strict compliance with our established rules for manufacturing and quality controls. Any of these agencies can suspend production operations and product sales if they find significant or repeated deviations from these guidelines. A suspension would likely cause us to incur additional costs or delays in product development. In addition, we are subject to the U.S. Foreign Corrupt Practices Act, which prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business is, and will continue to be, subject to various other laws, rules and/or regulations applicable to us as a result of our international business.
Fortical currently faces competition from large pharmaceutical companies and, if our other products receive regulatory approval, these other products would also face competition from large pharmaceutical companies with superior resources.
We are engaged in developing pharmaceutical products, which is a rapidly changing and highly competitive field. To date, we have concentrated our efforts primarily on products to treat one indication — osteoporosis. Like the market for any pharmaceutical product, the market for treating osteoporosis has the potential for rapid, unpredictable and significant technological change. Competition is intense from specialized biotechnology and biopharmaceutical companies, major pharmaceutical and chemical companies and universities and research institutions. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis’ nasal calcitonin product, but not to Fortical. In June 2009, Par also launched a product generic to Novartis’ nasal calcitonin product. Certain providers have substituted these products for Fortical, causing Fortical sales and royalties to decrease. There could also be future competition from products that are generic to Fortical, including Apotex’s product that is the subject of our ANDA litigation. Fortical also faces competition from large pharmaceutical companies that produce other osteoporosis products and, if any of our other products receive regulatory approval, these other products likely would also face competition from large pharmaceutical companies with substantially greater financial resources, research and development staffs and facilities, and regulatory experience than we have. Major companies in the field of osteoporosis treatment include Novartis, Merck, Eli Lilly and Sanofi-Aventis. One or more of these potential competitors could, at any time, develop products or a manufacturing process that could render our technology or products noncompetitive or obsolete.
Our success depends upon our ability to protect our intellectual property rights.
We filed applications for U.S. patents relating to proprietary peptide manufacturing technology and oral and nasal formulations that we have invented in the course of our research. Our most important U.S. manufacturing and delivery patents expire from 2017 to 2025 and we have applications pending that could extend that protection. To date, fourteen U.S. patents have issued and other applications are pending. We have also made patent application filings in selected foreign countries and fifty-two foreign patents have issued with other applications pending. We face the risk that any of our pending applications will not be issued as patents. In addition, our patents may be found to be invalid or unenforceable, including in the pending ANDA litigation with Apotex. Our business also is subject to the risk that our issued patents will not provide us with significant competitive advantages if, for example, a competitor were to independently develop or obtain similar or superior technologies. To the extent we are unable to protect our patents and patent applications, our investment in those technologies may not yield the benefits that we expect.
We also rely on trade secrets to protect our inventions. Our policy is to include confidentiality obligations in all research contracts, joint development agreements and consulting relationships that provide access to our trade secrets and other know-how. However, parties with confidentiality obligations could breach their agreements causing us harm. If a secrecy obligation were to be breached, we may not have the financial resources necessary for a legal challenge. If licensees, consultants or other third parties use technological information independently developed by them or by others in the development of our products, disputes may arise from the use of this information and as to the ownership rights to products developed using this information. These disputes may not be resolved in our favor and could materially impact our business.
Our technology or products could give rise to product liability claims.
Our business exposes us to the risk of product liability claims from human testing, manufacturing and sale of pharmaceutical products. The administration of drugs to humans, whether in clinical trials or commercially, can result in product liability claims even if our products are not actually at fault for causing an injury. Furthermore, our products may cause, or may appear to cause, adverse side effects or potentially dangerous drug interactions that we may not learn about or understand fully until the drug is actually manufactured and sold. Product liability claims can be expensive to defend and may result in large judgments against us. Even if a product liability claim is not successful, the adverse publicity, time and expense involved in defending such a claim may interfere with our business. We may not have sufficient resources to defend against or satisfy these claims. We currently maintain $10,000,000 in product liability insurance coverage. However, this amount may not be sufficient to protect us against losses or may be unavailable in the future on acceptable terms, if at all.
Risks Related to Operations
The global financial crisis may adversely affect our business and financial results.
The global credit crisis that began in 2007 was further exacerbated by events occurring in the financial markets in the fall of 2008, and has continued into 2011. These events have negatively impacted the ability of corporations to raise capital through equity financings or borrowings. The credit crisis may continue for the foreseeable future. Based upon management’s projections, we believe our current cash should be sufficient to support our current operations into the second half of 2012. At that time, we may not be able to raise capital on reasonable terms, if at all. In addition, uncertainty about current and future global economic conditions may impact our ability to license our products and technologies to other companies and may cause consumers to defer purchases of prescription medicines, such as Fortical, in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, future demand for our product could differ from our current expectations.
We may be unable to retain key employees or recruit additional qualified personnel.
Because of the specialized scientific nature of our business, we are highly dependent upon qualified scientific, technical, production and managerial personnel. There is intense competition for qualified personnel in our business. Therefore, we may not be able to attract and retain the qualified personnel necessary for the development of our business. The loss of the services of existing personnel, as well as the failure to recruit additional key personnel in a timely manner, could harm our programs and our business.
Compliance with regulations governing public company corporate governance and reporting is complex and expensive.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. For example, on January 30, 2009, the SEC adopted rules requiring companies to provide their financial statements in interactive data format using the eXtensible Business Reporting Language, or XBRL. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted into law. This legislation makes significant changes to corporate governance and executive compensation rules for public companies across all industries. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
Risks Related to our Capital Stock
The market price of our common stock is volatile.
The market price of our common stock has been, and we expect it to continue to be, highly unstable. Factors, including our announcement of technological improvements or announcements by other companies, regulatory matters, research and development activities, new or existing products or procedures, signing or termination of licensing agreements, concerns about competition, sales, our financial condition, operating results, litigation, government regulation, developments or disputes relating to agreements, patents or proprietary rights, and public concern over the safety of activities or products have had a significant impact on the market price of our stock. We expect such factors to continue to impact our market price for the foreseeable future. In addition, future sales of shares of our common stock by us or our stockholders, and by the exercise and subsequent sale of our common stock by the holders of outstanding and future warrants and options, could have an adverse effect on the price of our stock.
Our common stock is classified as a “penny stock” under SEC rules, which may make it more difficult for our stockholders to resell our common stock.
Our common stock is traded on the OTC Bulletin Board. As a result, the holders of our common stock may find it more difficult to obtain accurate quotations concerning the market value of the stock. Stockholders also may experience greater difficulties in attempting to sell the stock than if it was listed on a stock exchange. Because Unigene common stock is not traded on a stock exchange and the market price of the common stock is less than $5.00 per share, the common stock is classified as a “penny stock.” Rule 15g-9 of the Exchange Act imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an “established customer” or an “accredited investor.” These include the requirement that a broker-dealer must make a determination that investments in penny stocks are suitable for the customer and must make special disclosures to the customer concerning the risks of penny stocks. Application of the penny stock rules to our common stock could adversely affect the market liquidity of the shares, which in turn may affect the ability of holders of our common stock to resell the stock.
In addition to the conversion of the Victory Park notes, the exercise of warrants and options, as well as other issuances of shares, will likely have a dilutive effect on our stock price.
As of December 31, 2011, there were outstanding warrants to purchase 60,000 shares of our common stock, all but 20,000 of which are currently exercisable, at an average exercise price of $2.13 per share. There were also outstanding stock options to purchase an aggregate of 8,027,950 shares of common stock, at an average exercise price of $1.09, of which 4,222,866 are currently exercisable. If our stock price should increase above the exercise price of these derivative securities, then such exercise at prices below the market price of our common stock could adversely affect the price of our common stock. Additional dilution may result from the issuance of shares of our common stock in connection with collaborations or licensing agreements or in connection with other financing efforts, including our issuance of stock upon the conversion of Victory Park's notes.
If provisions in our stockholder rights plan or Delaware law delay or prevent a change in control of Unigene, we may be unable to consummate a transaction that our stockholders consider favorable.
In December 2002, we adopted a stockholder rights plan. This stockholder rights plan increases the costs that would be incurred by an unwanted third party acquirer if such party owns or announces its intent to commence a tender offer for more than 15% of our outstanding common stock. The plan is designed to assure our board of directors a full opportunity to review any proposal to acquire us. However, the plan could prolong the take-over process and, arguably, deter a potential bidder. These provisions apply even if the offer may be considered beneficial by some stockholders, and a takeover bid otherwise favored by a majority of our stockholders might be rejected by our board of directors. In addition, specific sections of Delaware law may also discourage, delay or prevent someone from acquiring or merging with us.
Accounting for our revenues and costs involves significant estimates which, if actual results differ from estimates, could have a material adverse effect on our financial position and results of operations.
As further described in “Summary of Critical Accounting Policies” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” accounting for our contract related revenues and costs as well as other cost items requires management to make a variety of significant estimates and assumptions. Although we believe we have sufficient experience and processes in place to enable us to formulate appropriate assumptions and produce reliable estimates, these assumptions and estimates may change significantly in the future and these changes could have a material adverse effect on our financial position and the results of our operations.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We lease a one-story office and laboratory facility consisting of approximately 12,500 square feet. The facility is located on a 2.2 acre site in Fairfield, New Jersey. In January 2011, we executed an agreement of sale on the property and closed on the sale of this property in May 2011. We are leasing the property for an initial seven year term, which may be extended for one renewal term of five years. (See Note 11 to the financial statements for a more detailed description.)
Our 32,000 square foot cGMP production facility, which has been used for the production of Fortical and calcitonin, and can be used for the production of other peptides, was constructed in a building located in Boonton, New Jersey. We lease the facility under a lease which began in February 1994. The current lease will expire in 2014. We have a 10-year renewal option under the lease, as well as an option to purchase the facility.
We are currently leasing approximately 10,000 square feet of administrative and regulatory office space in Boonton, New Jersey. The initial term of the lease runs through May 2017. We have a 10-year renewal option under the lease, as well as an option to purchase the facility.
Item 3. Legal Proceedings
Fortical, our nasal calcitonin product for the treatment of postmenopausal osteoporosis is covered by U.S. Patent No. 6,440,392, which was reissued on June 30, 2009 as U.S. Patent No. RE 40,812 (the “Fortical Patent”). In June 2006, we received a Paragraph IV certification letter from Apotex Inc., a Canadian generic pharmaceutical manufacturer, alleging that this patent is invalid and therefore not infringed by Apotex’s nasal calcitonin product, which is the subject of an Apotex pending ANDA. On July 24, 2006, we and USL jointly filed a lawsuit against Apotex Inc. and Apotex Corp., its U.S. subsidiary (together, “Apotex”), in the U.S. District Court for the Southern District of New York for infringement of our Fortical Patent. Due to our filing of the above-mentioned lawsuit, the Hatch-Waxman Act provided for an automatic stay of FDA approval for Apotex’s ANDA of up to 30 months. In December 2008 this stay ended and we and Apotex entered a preliminary injunction enjoining Apotex from engaging in the commercial manufacture, use, marketing, distribution, selling, transportation or importation of any Fortical generic equivalent product in the United States. The preliminary injunction will remain in effect until the court renders a final decision on the validity and infringement of Unigene’s U.S. Patent. In obtaining the preliminary injunction, Unigene and USL were required to post a bond and, if we do not prevail in the lawsuit, Unigene would be responsible for paying $1,662,500 to Apotex under the injunction agreement. In August 2009, the U.S. District Court, Southern District of New York, confirmed the validity of Unigene’s patent and issued an order permanently enjoining Apotex from engaging in any activity that infringes the patent. The motion of the plaintiffs, Unigene and its licensee USL, for summary judgment in the case was granted. The District Court upheld the validity of the Fortical Patent and entered a permanent injunction against Apotex. Apotex appealed this decision. In October 2009, the District Court vacated its order subject to reinstatement and asked the parties to identify any claims that remain in the case. As a result, Apotex’s appeal was deactivated. In July 2010, the District Court ruled that no claims remain at issue and it reinstated its opinion and order of August 2009 in its entirety. Accordingly, the motion for summary judgment was entered in favor of Unigene and USL. Apotex appealed this decision to the United States Court of Appeals for the Federal Circuit and a hearing was held on March 7, 2011. On August 25, 2011, the United States Court of Appeals for the Federal Circuit issued a decision affirming the District Court’s ruling confirming the validity of Unigene's Fortical Patent. Apotex filed a petition for certiorari for review of the Appeals Court decision by the U.S. Supreme Court on January 13, 2012, which was assigned Supreme Court Docket Number 11-879. Unigene filed an opposition brief on February 17, 2012, and on February 28, 2012, Apotex filed a reply brief. The Supreme Court docket indicates that on February 29, 2012 the case was distributed for conference on March 16, 2012. Unigene now waits to learn whether the Supreme Court grants or denies Apotex’s petition for certiorari. There is the usual litigation risk that we will not be successful in the appeal and potentially subsequent litigation if it is remanded. In the event that we do not prevail, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval. This could have a material adverse impact on our results and financial position.
On September 8, 2011, the United States Patent and Trademark Office (USPTO) granted a request for inter partes reexamination of US Reissue Patent No. RE 40,812 (the “Fortical Patent”) filed by Apotex on July 15, 2011. In granting the Request for Reexamination, the USPTO gave Unigene a two month time period to respond to the substantial new questions of patentability raised in the Reexamination Office Action dated September 8, 2011. Unigene filed its response to the Reexamination Office Action on November 8, 2011. Apotex filed Third Party Comments on December 7, 2011 and January 9, 2012. Unigene now waits to hear from the USPTO, which may take over one year. If the Supreme Court denies Apotex’s petition for certiorari, Unigene will move to Suspend Reexamination of Claim 19. The Reexamination reopens the USPTO prosecution of all claims 13, 14, 16, 17, 19 and 24-29 of the Fortical Patent. Based on USPTO statistics, reexamination proceedings take an average of about 36 months to complete. Potential outcomes for reexamination include the patent emerges with the patent claims remaining unchanged, patent claims being amended, or all patent claims being canceled. There is the usual USPTO prosecution risk that we will not be successful in the reexamination and potentially subsequent USPTO or litigation proceedings. In the event that we do not prevail, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval. This could have a material adverse impact on our results and financial position.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
We have not declared or paid any cash dividends since inception, and do not anticipate paying any in the near future.
We became a public company in 1987. As of February 29, 2012, there were 510 holders of record of our common stock. Our common stock is traded on the OTC Bulletin Board under the symbol UGNE.
On February 29, 2012 the closing price of our common stock, as reported on
the OTC Bulletin Board
, was $0.50 per share.
The prices below represent high and low sale prices per share of our common stock.
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2011
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2010
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|
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High-Low
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High-Low
|
|
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1
st
Quarter
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$
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1.42-0.63
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$
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1.01-0.56
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2
nd
Quarter
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1.36-0.94
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0.95-0.61
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3
rd
Quarter
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1.28-0.80
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0.78-0.52
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4
th
Quarter
|
|
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1.12-0.37
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|
|
|
0.75-0.40
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The graph below compares Unigene Laboratories, Inc.’s cumulative 5-year total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite index and RDG MicroCap Biotechnology Index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from December 31, 2006 to December 31, 2011. The comparisons in this graph are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock.
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12/31/06
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12/31/07
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12/31/08
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12/31/09
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12/31/10
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12/31/11
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Unigene Laboratories, Inc.
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100.00
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|
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76.10
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25.10
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|
|
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28.69
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|
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27.09
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21.12
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NASDAQ Composite
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100.00
|
|
|
|
110.26
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|
|
|
65.65
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|
|
|
95.19
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|
|
112.10
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|
|
|
110.81
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RDG MicroCap Biotechnology
|
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100.00
|
|
|
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73.24
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34.01
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41.57
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37.98
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20.23
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This stock performance information is “furnished” and shall not be deemed to be “soliciting material” or subject to Rule 14A of the Exchange Act, shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, and shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this Annual Report on Form 10-K and irrespective of any general incorporation by reference language in any such filing, except to the extent that we specifically incorporate this information by reference.
Recent Sale of Unregistered Securities
In the fourth quarter of 2011, the following securities were sold by the registrant under the Securities Act. The securities described below were deemed exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act.
Common Stock and Option Purchase Agreement
On October 5, 2011, we entered into a Common Stock Purchase and Option Agreement (the “Purchase Agreement”) with Den Danske Forskiningsfond, a Danish Foundation (“DDF”). Pursuant to the Purchase Agreement, DDF acquired 1,691,729 shares of common stock, par value $0.01 per share from us for an aggregate purchase price of $1,500,000.
Item 6. Selected Financial Data
The following information should be read in conjunction with our financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. The Statement of Operations data for the years ended December 31, 2008 and 2007 and the Balance Sheet data as of December 31, 2009, 2008, and 2007 are derived from audited financial statements not included herein.
STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)
|
|
|
Year Ended December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
Product sales, royalties, licensing and other revenue
|
|
$
|
20,508
|
|
|
$
|
11,340
|
|
|
$
|
12,792
|
|
|
$
|
19,229
|
|
|
$
|
20,423
|
|
|
|
|
|
Costs and expenses:
|
|
|
Cost of goods sold and inventory reserve
|
|
|
1,552
|
|
|
|
3,325
|
|
|
|
2,171
|
|
|
|
5,845
|
|
|
|
7,222
|
|
|
Research and development expenses and unallocated facility expenses
|
|
|
12,362
|
|
|
|
9,534
|
|
|
|
14,062
|
|
|
|
10,445
|
|
|
|
8,485
|
|
|
General and administrative and severance expenses
|
|
|
9,237
|
|
|
|
8,805
|
|
|
|
8,938
|
|
|
|
7,889
|
|
|
|
7,812
|
|
|
Net loss
|
|
|
(17,926
|
)
|
|
|
(27,868
|
)
|
|
|
(13,380
|
)
|
|
|
(6,078
|
)
|
|
|
(3,448
|
)
|
|
Net loss per share, basic and diluted
|
|
|
( .19
|
)
|
|
|
(.30
|
)
|
|
|
(.15
|
)
|
|
|
(.07
|
)
|
|
|
(.04
|
)
|
|
Weighted average number of shares outstanding
|
|
|
93,181
|
|
|
|
91,962
|
|
|
|
90,662
|
|
|
|
88,751
|
|
|
|
87,742
|
|
BALANCE SHEET DATA
(In thousands)
|
|
|
December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash and cash equivalents
|
|
$
|
4,682
|
|
|
$
|
12,201
|
|
|
$
|
4,894
|
|
|
$
|
8,583
|
|
|
$
|
3,678
|
|
|
Working capital (deficiency)
|
|
|
4,593
|
|
|
|
8,758
|
|
|
|
(1,251
|
)
|
|
|
14,914
|
|
|
|
6,390
|
|
|
Total assets
|
|
|
17,675
|
|
|
|
28,471
|
|
|
|
23,955
|
|
|
|
28,641
|
|
|
|
16,874
|
|
|
Total debt, including accrued interest – short term
|
|
|
750
|
|
|
|
1,200
|
|
|
|
5,904
|
|
|
|
--
|
|
|
|
--
|
|
|
Total debt, including accrued interest – long term
|
|
|
59,889
|
|
|
|
49,813
|
|
|
|
33,746
|
|
|
|
32,131
|
|
|
|
16,521
|
|
|
Other long-term obligations, primarily deferred revenue, including current portion
|
|
|
8,606
|
|
|
|
13,915
|
|
|
|
11,217
|
|
|
|
12,354
|
|
|
|
13,712
|
|
|
Total liabilities
|
|
|
72,813
|
|
|
|
68,900
|
|
|
|
54,397
|
|
|
|
47,613
|
|
|
|
33,545
|
|
|
Total stockholders’ deficit
|
|
|
(55,138
|
)
|
|
|
(40,429
|
)
|
|
|
(30,442
|
)
|
|
|
(18,972
|
)
|
|
|
(16,671
|
)
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with our financial statements and the notes appearing elsewhere in this Form 10-K. The following discussion contains forward-looking statements. Our actual results may differ materially from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include those discussed in “Risk Factors” and elsewhere in this Form 10-K.
OVERVIEW
We are a biopharmaceutical company engaged in the research, production and delivery of small proteins, referred to as peptides, for medical use. We have a patented manufacturing technology for producing many peptides cost-effectively. We also have patented oral and nasal delivery technologies that have been shown to deliver medically useful amounts of various peptides into the bloodstream. We currently have three operating locations: administrative and regulatory offices in Boonton, New Jersey; a laboratory research facility in Fairfield, New Jersey; and a pharmaceutical production facility in Boonton, New Jersey.
In June 2010, we appointed Ashleigh Palmer as our Chief Executive Officer and since then, we have hired a number of new executive officers, and new directors have joined our Board of Directors. In addition, in September 2010, we announced a strategic realignment of our business into two strategic business units. One strategic business unit will concentrate on our pipeline of proprietary peptide development programs focused on metabolic and inflammatory diseases. The other strategic business unit will focus on opportunities where we can apply our platform of peptide drug delivery and manufacturing assets, expertise and capabilities to partners’ proprietary development programs. As part of this strategic realignment, we terminated certain programs that do not fit our core focus, such as our China Joint Venture and our SDBG program.
Historically, our primary focus has been on the development of calcitonin and other peptide products for the treatment of osteoporosis and other indications. Our revenue for the past three years has primarily been derived from domestic sources. We have licensed in the U.S. our nasal calcitonin product for the treatment of osteoporosis, which we have trademarked as Fortical, to USL. Fortical was approved by the FDA in 2005. This is our first product approval in the United States. In 2004, we licensed worldwide rights to our patented manufacturing technology for the production of calcitonin to Novartis. In October 2009, we licensed on a worldwide basis (except for China) our Phase 3 oral calcitonin program to Tarsa.
We have expanded our product pipeline with a novel peptide treatment for obesity, which is in a preclinical, early stage of development. We also perform fee-for-service feasibility studies for third parties. Our products, other than Fortical in the United States, will require clinical trials and/or approvals from regulatory agencies and all of our products will require acceptance in the marketplace. There are risks that these clinical trials will not be successful and that we will not receive regulatory approval or significant revenue for these products.
We compete with specialized biotechnology and biopharmaceutical companies, major pharmaceutical and chemical companies and universities and research institutions. Most of these competitors have substantially greater resources than we do. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis’ nasal calcitonin product, but not to Fortical. In June 2009, Par also launched a product generic to Novartis’ nasal calcitonin product. Certain providers have substituted these products for Fortical, causing Fortical sales and royalties to decrease. For 2011, compared to 2010, our Fortical sales decreased 27% while Fortical royalties decreased 46%. We cannot forecast whether, or to what extent, we will continue to experience further declines in sales or royalties. In addition, Apotex has a pending ANDA for a nasal calcitonin product that we claim infringes on our Fortical patent. If we do not prevail in that litigation, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval.
The current need of major pharmaceutical companies to add products to their pipeline is a favorable trend for us and for other small biopharmaceutical companies. However, this need is subject to rapid change and it is uncertain whether any additional pharmaceutical companies will have interest in licensing our products or technologies.
RESULTS OF OPERATIONS - Years ended December 31, 2011, 2010 and 2009
REVENUE
- Revenue is summarized as follows for the years ended December 31, 2011, 2010 and 2009:
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Product Sales
|
|
$
|
3,843,787
|
|
|
$
|
5,246,159
|
|
|
$
|
5,941,254
|
|
|
Royalties
|
|
|
1,603,371
|
|
|
|
2,974,365
|
|
|
|
4,991,266
|
|
|
Licensing Revenue
|
|
|
10,250,740
|
|
|
|
1,300,763
|
|
|
|
1,253,260
|
|
|
Development Fees and Other Revenue
(1)
|
|
|
4,810,448
|
|
|
|
1,818,927
|
|
|
|
606,058
|
|
|
|
|
$
|
20,508,346
|
|
|
$
|
11,340,214
|
|
|
$
|
12,791,838
|
|
|
|
(1)
|
Includes revenue from our agreements with Tarsa.
|
Revenue for the year ended December 31, 2011 increased $9,168,000, or 81%, to $20,508,000 from $11,340,000 in 2010. The increase was primarily due to an increase in licensing revenue of $8,950,000. This increase is mainly a result of the termination of the license agreement with GSK whereby previously deferred upfront and milestone payments in the aggregate amount of $7,748,000 were recognized as revenue. In addition, in 2011, development fees and other revenue increased $2,991,000, or 164%, to $4,810,000 from $1,819,000 in 2010. This increase was primarily due to development and testing services for GSK and Tarsa. However, total revenue was negatively impacted by the continuing decline in Fortical revenue. In 2011, Fortical sales declined 27% to $3,844,000 and Fortical royalties declined 46% to $1,603,000. We expect Fortical revenue to continue to decline in future years.
Revenue for the year ended December 31, 2010 decreased $1,452,000, or 11%, to $11,340,000 from $12,792,000 in 2009. This decrease in revenue was due to a decline in Fortical sales and royalties as a result of increased competition in the nasal calcitonin market since the launch of competitive products in December 2008. In 2010, our Fortical sales declined $695,000, or 12%, and Fortical royalties declined $2,017,000, or 40%, from 2009. Fortical royalties fluctuate each quarter based upon the timing and pricing of USL’s shipment to its customers. Royalty revenue is earned on sales of Fortical by USL and is recognized in the period Fortical is sold by USL. Licensing revenue represents the partial recognition of milestones and up-front payments received in prior years. Licensing revenue remained relatively constant in 2010 from 2009. Development fees and other revenue increased 200% to $1,819,000 in 2010 from $606,000 in 2009 primarily due to an increase in development work and fee-for-service feasibility studies we performed for various pharmaceutical and biotechnology companies, including Tarsa.
Future sales and royalties are contingent upon many factors including competition, pricing, marketing and acceptance in the marketplace and, therefore, are difficult to predict. Milestone revenue is based upon one-time events and is generally correlated with the development strategy of our licensees. It is therefore subject to uncertain timing and not predictive of future revenue. Bulk peptide sales to our partners under license or supply agreements prior to product approval are typically of limited quantity and duration and also not necessarily predictive of future revenue. Additional peptide sales are dependent upon the future needs of our partners, which we cannot currently estimate. Sales revenue from Fortical in the future will depend on Fortical’s continued acceptance in the marketplace, as well as competition and other factors. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis’ nasal calcitonin product, but not to Fortical. In June 2009, Par also launched a product generic to Novartis’ nasal calcitonin product. Certain providers have substituted these products for Fortical, causing Fortical sales and royalties to decrease. Therefore, Fortical alone will never generate sufficient revenue for us to achieve profitability. In addition, Apotex has a pending ANDA for a nasal calcitonin product that we claim infringes on our Fortical patent. If we do not ultimately prevail in defending our patent, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval.
EXPENSES
In December 2011, we announced a restructuring plan that included a reduction in workforce and expenses to improve operational efficiencies and to better match resources with market demand. Our restructuring expenses for 2011 were $161,000, which represented severance pay. These expenses are included in research and development expenses and in general and administrative expenses. There were no restructuring expenses in 2010. Under the comprehensive plan, we will continue Fortical production and will maintain all of our core programs and partnered activities while decreasing cash expenditures by approximately $1 million. Since we currently maintain an adequate multi-year inventory of calcitonin and enzyme to support Fortical, we are continuing to suspend manufacturing of those materials at our Boonton facility. However, we are maintaining the cGMP status of the facility and the ability to manufacture peptides at that location. Implementation of the plan resulted in an immediate company-wide workforce reduction of approximately 25%. From time to time, we will evaluate the feasibility of additional expenditures in areas such as preclinical and/or clinical studies in order to add value to certain of our current research projects.
Cost of Goods Sold
Cost of goods sold varies by product and consists primarily of material costs, personnel costs, manufacturing supplies and overhead costs such as depreciation and maintenance. Cost of goods sold decreased 40% in 2011 to $1,552,000 from $2,608,000 in 2010. The decrease was due to the 27% decline in Fortical sales, as well as the use of older calcitonin in 2010 (see below). Cost of goods sold increased 20% in 2010 to $2,608,000 from $2,171,000 in 2009. This increase was due to the utilization in 2010 of older calcitonin from inventory which was manufactured by a less efficient production process. The less efficient process produced batches with a lower yield per batch, therefore, cost per gram of calcitonin was higher. This older calcitonin was fully utilized in 2010. Cost of goods sold represented our costs associated with Fortical production. Cost of goods sold as a percentage of product sales was 40%, 50% and 37% for 2011, 2010 and 2009, respectively. Future production related expenses will be dependent upon the level of future Fortical sales, as well as possible peptide production to meet our partners’ needs.
Research and Development Expenses
Research and development expenses primarily consist of personnel costs, pre-clinical and clinical trials, supplies, outside testing and consultants primarily related to our research and development efforts or activities related to our license agreements, as well as depreciation and amortization expense.
Research and development expenses increased $2,588,000, or 40%, in 2011 to $9,016,000 from $6,428,000 in 2010. The increase was primarily due to an increase in oral PTH expenditures of $3,342,000 as a result of our Phase 2 clinical trial. This increase was partially offset by a decline in lab salaries of $430,000 as well as a decline in consulting fees of $306,000. Research and development expenses decreased $5,923,000, or 48%, in 2010 to $6,428,000 from $12,351,000 in 2009. This decrease was largely due to a reduction of $3,283,000 in oral calcitonin expenditures following the licensing of our oral calcitonin program to Tarsa in October 2009, as well as a reduction of $2,964,000 in personnel expenditures allocated to research and development due to staff and salary reductions.
Research and development expenses will fluctuate in future years depending on the timing of expenses, including preclinical and clinical trials. Expenditures for the sponsorship of collaborative research programs were $14,000, $354,000 and $712,000 in 2011, 2010 and 2009, respectively, which are included as research and development expenses. The 2009 increase was due to expenses related to our collaboration with Queen Mary, University of London.
General and Administrative Expenses
General and administrative expenses increased $1,202,000, or 16%, to $8,887,000 in 2011 from $7,685,000 in 2010. This was primarily due to an increase of $1,247,000 in executive and administrative compensation, of which $414,000 represents an increase in non-cash stock option compensation. The balance represents additional personnel hires in the executive and administrative departments. General and administrative expenses decreased $1,253,000, or 14%, to $7,685,000 in 2010 from $8,938,000 in 2009. The decrease was due to a reduction of $1,267,000 in professional fees, primarily due to legal expenses in 2009 related to the Apotex litigation, as well as Tarsa licensing activities.
Unallocated Facility Cost
Unallocated facility cost represents underutilization of our Boonton manufacturing facility. These costs primarily consist of salaries, as well as overhead expenses, which increased $240,000 to $3,346,000 in 2011 from $3,106,000 in 2010 and increased $1,394,000 in 2010 as compared to $1,712,000 in 2009. The expenses in 2011 and 2010 primarily relate to our current cessation of calcitonin and enzyme production, as well as our decreased production of Fortical. The expenses in 2009 primarily relate to manufacturing calcitonin, enzyme and Fortical at below normal production capacity.
Inventory Reserve
Inventory reserve charges were $717,000 for 2010. This expense is primarily due to our decision in the first quarter of 2010 not to pursue an additional improvement for our calcitonin manufacturing process. Therefore, calcitonin batches manufactured by this process have been fully reserved. There were no inventory reserve charges in 2011 or 2009.
Loss on Sale of Patents
In September 2011, we sold our non-core asset, the Site Directed Bone Growth (SDBG) program, by assigning seven patent applications to Kieran Murphy, LLC. In addition, we terminated an Exclusive License Agreement and Consulting Agreement with Kieran Murphy, LLC, as well as a License Option Agreement and Research Agreement with Yale University. In exchange for the assignment of the patents and patent applications, we will receive sales royalties in excess of seven percent (7%) and will receive forty percent (40%) of any future licensing revenue and/or forty percent (40%) of all considerations received upon the subsequent sale of the SDBG patent portfolio by Kieran Murphy, LLC.
In addition to the potential revenue above, we received cash payments aggregating $20,000. In association with this transaction we divested ourselves of various SDBG patents and patent applications with a total book value of $844,241. We therefore recognized a non-cash loss of $824,241 on the sale of SDBG.
Severance and Other Related Expenses
This expense in 2011 represented a one-time, non-cash charge for stock option compensation for Warren Levy and Ronald Levy, our former executive officers. It is a result of the extension of their period of exercise for certain stock options from three months following termination of their employment in September 2010 to 3½ years following such termination, according to the terms of their employment and settlement agreements.
Severance expense of $1,120,000 in 2010 represented an accrual of salary and health insurance costs associated with the resignations of Warren Levy and Ronald Levy.
Other Income/Expenses
Loss on Change in Fair Value of Embedded Conversion Feature
The Victory Park notes issued in March 2010 are convertible into shares of our common stock and, until June 15, 2010, we did not have sufficient authorized shares to effectuate a full conversion of the notes. Therefore, the conversion feature was treated as a liability based on its fair value. The liability for the conversion feature was marked to the market at March 31, 2010 and at June 15, 2010, the date of our annual meeting of stockholders, when additional shares were authorized. We therefore recognized a non-cash expense of $10,034,000 in the first quarter of 2010, which represented the change in the fair value of the embedded conversion feature of the note from the closing date of March 17, 2010 to the balance sheet date of March 31, 2010 and we recognized a non-cash gain of $1,909,000 which represented the change in the fair value of the conversion feature of the note from March 31, 2010 to June 15, 2010. We therefore showed an overall loss on change in fair value of the embedded conversion feature in the amount of $8,125,000 for the year ended December 31, 2010.
Qualifying Therapeutic Discovery Grant
In November 2010, we received notification that we were awarded an aggregate of $978,000 in grants under the Qualifying Therapeutic Discovery Project (QTDP) program of the Internal Revenue Service (IRS). The program, which targets therapeutic discovery projects that show potential to result in new therapies to treat areas of unmet medical need or treat chronic or acute diseases and conditions potentially resulting in reduced health care costs, was awarded to us to help fund the development of four of our programs.
Gain on Technology License to Tarsa
In October 2009, we licensed our Phase 3 oral calcitonin program to Tarsa, a private company formed by a syndicate of three venture capital funds. In consideration for our sale to Tarsa of an exclusive license for the oral calcitonin program, we received from Tarsa approximately $8,993,000 in cash and 9,215,000 shares of common stock in Tarsa. We valued the common stock at $0.23 per share or a total of $2,119,000 with the assistance of an outside valuation firm. In October 2009, we recognized $4,854,000 in expenses for our oral calcitonin program as well as an additional $573,000 in expenses related to the warrant exchange with Victory Park related to the Tarsa transaction. We therefore recognized a net gain of $5,685,000 on the licensing of our oral calcitonin program to Tarsa during the year ended December 31, 2009.
Interest Expense
Interest expense increased 18% in 2011 to $10,924,000 from $9,292,000 in 2010 and increased 91% in 2010 from $4,862,000 in 2009. These increases were primarily due to the debt restructuring with Victory Park in March 2010. These new notes for an aggregate of $33,000,000 bear interest at the prime rate plus 5%, with a floor of 15%. The prior Victory Park notes bore interest at the prime rate plus 7%, subject to a floor of 14% per annum and a cap of 18% per annum. During 2011, 2010 and 2009 we recognized $8,607,000, $7,765,000 and $3,356,000, respectively, in cash and non-cash interest expense under the Victory Park notes. In addition, interest expense on the Levy loans increased to $2,302,000 in 2011 from $1,446,000 in 2010 due to the increase in interest rate from 9% to 12% as a result of the Levy loan restructuring in March 2010.
Loss from Investment in China Joint Venture
For the year ended December 31, 2011, this loss includes the sale of our 45% ownership interest in the China joint venture. We recognized a loss of $1,073,000 based upon the near-term first payment of $600,000 and our net investment of $1,673,000. If we eventually receive the contingent second payment in the amount of $450,000, we would recognize a gain at that time.
This loss also includes the basis difference between our investment of the intellectual property in the China Joint Venture and our 45% equity interest in the underlying assets of the China Joint Venture. This basis difference was being recognized over 17 years, the estimated life of the transferred assets. We revised our accounting prospectively to account for the calculation of the basis difference between our investment in the China Joint Venture and our 45% equity interest in the underlying net assets of the China Joint Venture. We had originally calculated the amortization of the difference based upon the $4.5 million of intellectual property (licensed patent rights, know-how, etc.) that has been and was agreed to be contributed to the China Joint Venture. However, as of January 1, 2011, we calculated the amortization of the difference based upon the $2.1 million of intellectual property that has been contributed to that date and recorded on the financial statements of the China Joint Venture. The cumulative adjustment in the first quarter of 2011 totaled $317,643. In the first quarter of 2011 we also recognized a revised basis difference of $30,882. Therefore, the net basis difference included in the year ended December 31, 2011 was an expense of $286,761.
Loss from Investment in Tarsa
On April 8, 2011, along with the founding investors of Tarsa, we entered into an agreement to purchase $1,518,000 in convertible promissory notes and warrants from Tarsa to help fund Tarsa’s business operations into the first half of 2012. After recording this investment in Tarsa, we recognized Tarsa’s prior years’ losses up to our $1,518,000 investment, reducing our investment in Tarsa to zero. On July 8, 2011, along with the founding investors of Tarsa, we purchased $1,301,000 in additional convertible promissory notes and warrants from Tarsa to further help fund Tarsa’s business operations. After recording this investment in Tarsa, we recognized Tarsa’s prior years’ losses up to our $1,301,000 investment, again reducing our investment in Tarsa to zero. These two transactions resulted in our recognizing losses from our investment in Tarsa in the aggregate amount of $2,819,000 for the year ended December 31, 2011.
Income Tax Benefit
The income tax benefits of $601,000 in 2011 and $701,000 in 2010 consist of proceeds received for sales of a portion of our state tax net operating loss carry forwards and research credits under a New Jersey Economic Development Authority program, which allows certain New Jersey taxpayers to sell their state tax benefits to third parties. The purpose of the New Jersey program is to provide financial assistance to high-technology and biotechnology companies in order to facilitate future growth and job creation. The New Jersey tax benefit sale for 2009 was concluded and recognized in February 2010. The income tax benefit of $67,000 in 2009 consists primarily of a partial refund of federal research and development tax credits.
Net Loss
Net loss for 2011 decreased approximately $9,942,000, or 36%, to $17,926,000 from $27,868,000 in 2010. This was primarily due to an increase in revenue of $9,168,000 mainly due to an increase in licensing revenue of $8,950,000. In addition, in 2011, interest expense increased $1,632,000 and losses from our investments in Tarsa and our former China joint venture increased $4,311,000 from 2010. However, in 2010 we recognized a loss on change in fair value of embedded conversion feature of $8,125,000 and debt issuance cost of $2,008,000.
Net loss for 2010 increased approximately $14,488,000, or 108%, to $27,868,000 from $13,380,000 for the corresponding period in 2009. This was primarily due to loss on change in fair value of embedded conversion feature of $8,125,000, debt issuance cost of $2,008,000, a reduction in revenue of $1,452,000, severance expense of $1,120,000, an inventory reserve of $717,000 and an increase in interest expense of $4,429,000. These were partially offset by a decrease in other operating expenses of $5,344,000. In addition, in 2009, we recognized a one-time, net gain in the amount of $5,685,000 on our license to Tarsa.
Net losses will continue unless we achieve sufficient non-deferred revenue under our USL or Tarsa agreements or sign new revenue generating research, licensing or distribution agreements.
Summary of Critical Accounting Policies
The SEC defines “critical accounting policies” as those that are both important to the portrayal of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
The following discussion of critical accounting policies represents our attempt to bring to the attention of the readers of this report those accounting policies which we believe are critical to our financial statements and other financial disclosure. It is not intended to be a comprehensive list of all of our significant accounting policies, which are more fully described in Note 3 of the Notes to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2011. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles (“GAAP”), with no need for management’s judgment in the application of GAAP.
Revenue Recognition:
We recognize revenue from the sale of products and from royalties, licensing agreements, research services and grants. Revenue from the sale of product is recognized when title to product and risk of loss are transferred, collection is reasonably assured and we have no further obligations. If there are elements of the revenue recognition requirements that are not met at the time of shipment, the revenue is deferred and the corresponding cost of the product is included on our balance sheet as a deferred asset. Revenue from research services is recognized when services are rendered. Sales revenue generally does not involve difficult, subjective or complex judgments. We recognize royalty revenue on an accrual basis in accordance with the terms of individual agreements. If the receipt of royalty revenue is contingent on a future event, revenue would be recognized when that event has occurred. Typically, royalties are recognized when third party results can be reliably measured and collectability is reasonably assured. In the case of USL, we recognize royalty revenue based upon the quarterly USL royalty report. This enables a reliable measure, as well as reasonable assurances of collectability. Royalty revenue is earned on sales of Fortical by USL and is recognized in the period Fortical is sold by USL.
We follow the accounting guidance for licensing agreements which typically include several elements of revenue, such as up-front payments, milestones, royalties upon sales of product and the delivery of product and/or research services to the licensee. Non-refundable license fees received upon execution of license agreements where we have continuing involvement are deferred and recognized as revenue over the estimated performance period of the agreement. This requires management to estimate the expected term of the agreement or, if applicable, the estimated life of its licensed patents. For our USL and GSK agreements, the following described our revenue recognition accounting policy. Non-refundable milestone payments that represent the completion of a separate earnings process and a substantive step in the research and development process are recognized as revenue when earned at the lesser of 1) the non-refundable cash received or 2) the proportionate level of effort expended to date during the development stage multiplied by the development stage revenue. This sometimes requires management to judge whether or not a milestone has been met and when it should be recognized in the financial statements. Typically, this would involve discussions between management and our licensing partner. Payments for milestones for which the earnings process is not yet complete (for example, payment received for the commencement of an activity that represents a separate earnings process) or for which we have continuing involvement, are recognized over the estimated performance period of such activity. This is to comply with accounting guidance which provides for revenue to be recognized once delivery has occurred or services have been rendered. On January 1, 2011, we adopted new authoritative guidance on revenue recognition for milestone payments related to arrangements under which we have continuing performance obligations. Milestone payments are recognized as revenue upon achievement of the milestone only if all of the following conditions are met: (i) the milestone payments are non-refundable; (ii) there was substantive uncertainty at the date of entering into the arrangement that the milestone would be achieved; (iii) the milestone is commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the delivered item by the vendor; (iv) the milestone relates solely to past performance; and (v) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions are not met, the milestone payments are not considered to be substantive and are, therefore, deferred and recognized as revenue over the term of the arrangement as we complete our performance obligations. If our estimated performance period for a milestone is revised, we account for the change prospectively. Upon achievement of any future regulatory and sales milestones, as stipulated under the applicable agreements with our licensing partners, we will evaluate each milestone as of the arrangement date to determine whether the milestones are substantive and could be recognized as revenue in their entirety during the period of achievement. The adoption of this guidance does not materially change our previous method of recognizing milestone payments. All potential future milestones under existing arrangements with licensing partners, as specified below, and any new arrangements with milestones, will be evaluated under the new revenue recognition guidance for milestone payments. Royalties and/or milestones relating to sales of products by our licensees, and the delivery of products and research services, will be recognized as such events occur as they represent the completion of a separate earnings process.
In addition, accounting guidance requires a company to evaluate its arrangements under which it will perform multiple revenue-generating activities. For example, a license agreement with a pharmaceutical company may involve a license, research and development activities and/or contract manufacturing. On January 1, 2011, we adopted new authoritative guidance on revenue recognition for multiple-element arrangements. The guidance, which applies to multiple-element arrangements entered into or materially modified on or after January 1, 2011, amends the criteria for separating and allocating consideration in a multiple-element arrangement by modifying the fair value requirements for revenue recognition and eliminating the use of the residual method. The fair value of deliverables under the arrangement may be derived using a “best estimate of selling price” if vendor specific objective evidence and third-party evidence is not available. Deliverables under the arrangement will be separate units of accounting provided (i) a delivered item has value to the customer on a standalone basis; and (ii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. Our existing agreements continue to be accounted for under previously-issued revenue recognition guidance for multiple-element arrangements.
Accounting for Stock Options:
For stock options granted to employees and directors, we recognize compensation expense based on the grant-date fair value estimated in accordance with accounting guidance. We estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model. Stock options and warrants issued to consultants are accounted for in accordance with accounting guidance. Compensation expense is calculated each quarter for consultants using the Black-Scholes option pricing model until the option is fully vested and is included in research and development expenses.
Inventory:
Production inventories, at our Boonton, New Jersey location, are stated at the lower of cost or market, valued at specifically identified cost which approximates FIFO. Research inventories, at our Fairfield, New Jersey location, are stated at the lower of cost (using the FIFO method) or market. Typically, finished goods and work in process inventory are fully reserved except for the amounts deemed saleable by management based upon current or anticipated orders, primarily under contractual arrangements.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our most significant estimates involve estimating the lives of our license agreements, which typically are determined by the estimated useful lives of our licensed patents or the estimated length of the collaboration. This would determine the period over which certain revenue would be recognized. Other significant estimates relate to valuation of inventory and intangible assets, both of which involve management estimates of the lives of the assets and the recoverability of costs. In addition, there are estimates used in calculating the allocation of certain expenses to cost of goods sold and unallocated facility expenses.
Equity Method Investments:
We use the equity method of accounting for significant investments where we own at least 20% of the entity’s voting stock. We account for our investment in Tarsa under the equity method and, prior to the 2011 sale of our 45% equity interest in the China joint venture, we also accounted for that investment under the equity method. These investments were initially valued at cost, adjusted for our proportionate share of the entities’ profits and losses. If our share of an entity’s losses reduces our investment to zero, we temporarily discontinue the equity method of accounting for that investment.
Patents and Other Intangibles:
Amounts paid for patents and trademarks are capitalized. Patent and trademark costs are deferred pending the successful outcome of the relevant applications. These costs primarily consist of outside legal fees and typically relate to filings and prosecution of applications for improvements to existing patents or to the filings of foreign applications based upon domestic patents. Most of these applications relate to our patented peptide manufacturing and patented oral delivery technologies, as well as for our satiety program technology. Internal costs related to intangible assets are expensed as incurred. Successful patent costs are amortized using the straight-line method over the lives of the patents, typically five to fifteen years. Successful trademark costs are amortized using the straight-line method over their estimated useful lives of typically five to ten years. We assess the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable, or we decide not to support the applications in certain jurisdictions. Some factors we consider important which could trigger an impairment review include (i) significant underperformance relative to expected historical or projected future operating results; (ii) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (iii) significant negative industry or economic trends.
When we determine that the carrying value of intangible assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we first will perform an assessment of the asset’s recoverability based on expected undiscounted future net cash flow, and if the amount is less than the asset’s value, we will measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Unsuccessful patent costs are expensed when determined worthless or when patent applications will no longer be pursued. Other intangibles are recorded at cost and are amortized over their estimated useful lives.
LIQUIDITY AND CAPITAL RESOURCES
We have a number of future payment obligations under various agreements. They are summarized, at December 31, 2011, as follows:
|
Contractual Obligations
|
|
Total
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Thereafter
|
|
|
Notes payable – Victory Park
(1)
|
|
$
|
38,018,750
|
|
|
$
|
¾
|
|
|
$
|
38,018,750
|
|
|
$
|
¾
|
|
|
$
|
¾
|
|
|
$
|
¾
|
|
|
$
|
¾
|
|
|
Interest – Victory Park
(1)
|
|
|
12,461,635
|
|
|
|
¾
|
|
|
|
12,461,635
|
|
|
|
¾
|
|
|
|
¾
|
|
|
|
¾
|
|
|
|
¾
|
|
|
Notes payable-Levys
|
|
|
14,737,518
|
|
|
|
750,000
|
|
|
|
13,987,518
|
|
|
|
¾
|
|
|
|
¾
|
|
|
|
¾
|
|
|
|
¾
|
|
|
Interest – Levys
|
|
|
9,743,117
|
|
|
|
¾
|
|
|
|
9,743,117
|
|
|
|
¾
|
|
|
|
¾
|
|
|
|
¾
|
|
|
|
¾
|
|
|
Operating Leases
|
|
|
1,827,995
|
|
|
|
428,937
|
|
|
|
432,021
|
|
|
|
248,370
|
|
|
|
235,500
|
|
|
|
238,583
|
|
|
|
244,584
|
|
|
Vacation pay/deferred compensation-Levys
|
|
|
362,296
|
|
|
|
362,296
|
|
|
|
¾
|
|
|
|
¾
|
|
|
|
¾
|
|
|
|
¾
|
|
|
|
¾
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
77,151,311
|
|
|
$
|
1,541,233
|
|
|
$
|
74,643,041
|
|
|
$
|
248,370
|
|
|
$
|
235,500
|
|
|
$
|
238,583
|
|
|
$
|
244,584
|
|
|
(1)
Convertible into common stock
|
|
At December 31, 2011, we had cash and cash equivalents of $4,682,000, a decrease of $7,519,000 from December 31, 2010. We have incurred annual operating losses since our inception and, as a result, at December 31, 2011, had an accumulated deficit of approximately $189,000,000.
As of December 31, 2011, the Company’s total principal debt was approximately $48.8 million. Under the restated financing agreement with Victory Park (see Note 8), we must maintain a cash balance equal to at least $2,500,000 and our cash flow (as defined in the restated financing agreement) must be at least $2,000,000 in any fiscal quarter or $7,000,000 in any three consecutive quarters. These default provisions were temporarily waived under a forbearance agreement executed in December 2010, which expired upon the termination of the amended GSK license agreement in December 2011. In the event the Company is not now able to achieve management’s projected cash flow forecasts, it may be in violation of its covenants with Victory Park. Any such default could result in the Company’s long term debt owed to Victory Park becoming currently due.
Based upon management’s projections, we believe our current cash should be sufficient to support current operations through the end of 2012. However, our ability to meet these projections will require us to maintain or generate cash proceeds from Fortical sales and royalties, fee-for-service feasibility studies, milestone payments from existing agreements or upfront licensing fees from new agreements or from fund raising activity.
The global credit crisis that began in 2007 was further exacerbated by events occurring in the financial markets in the fall of 2008, and has continued into 2012. These events have negatively impacted the ability of corporations to raise capital through equity financings or borrowings. The credit crisis may continue for the foreseeable future. In addition, uncertainty about current and future global economic conditions may impact our ability to license our products and technologies to other companies and may cause consumers to defer purchases of prescription medicines, such as Fortical, in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, future demand for our product could differ from our current expectations.
Due to our limited financial resources, any further significant decline in Fortical sales and/or royalties, or delay in achieving milestones under our existing license agreements, or in signing new license, feasibility or distribution agreements for our products or technologies or loss of patent protection, ability to sell additional shares of our common stock, or ability to not violate our covenants with Victory Park could have a material adverse effect on our cash flow and operations (see Notes 10, 22 and 23).
If we are unable to achieve significant milestones or sales under our existing agreements and/or enter into a new significant revenue generating license or other arrangement, at a certain point we would need to either secure another source of funding in order to satisfy our working capital needs and to remain in compliance with covenants in our financing agreement with Victory Park (see Note 8) or significantly curtail our operations. Should the funding we require to sustain our working capital needs be unavailable or prohibitively expensive, the consequence would be a material adverse effect on our business, operating results, financial condition and prospects. We believe that satisfying our cash requirements over the long term will require the successful commercialization of one or more of our biotechnologies or our licensees’ oral or nasal calcitonin products, our oral PTH product, the obesity program or another peptide product in the U.S. and/or abroad. However, it is uncertain whether any of these products other than Fortical will be approved or will be commercially successful. The amount of future revenue we will derive from Fortical is also uncertain.
In December 2011, we announced a restructuring plan that included a reduction in workforce and expenses to improve operational efficiencies and to better match resources with market demand. Under the comprehensive plan, we are continuing Fortical production and maintaining all of our core programs and partnered activities while decreasing cash expenditures. Since we currently maintain an adequate inventory of calcitonin and enzyme to support Fortical, we are continuing to suspend manufacturing of those materials at our Boonton facility. However, we are maintaining the cGMP status of the facility and the ability to manufacture peptides at that location. Implementation of the plan resulted in an immediate company-wide workforce reduction of approximately 25%. Our cash requirements in 2012 to operate our research and peptide manufacturing facilities and develop our products are expected to decrease from 2011 due to our December 2011 restructuring.
In addition to a $4,000,000 milestone payment received from GSK, other cash received during 2011 was primarily from Fortical sales and royalties, as well as from development work and fee-for-service feasibility studies, primarily for GSK and Tarsa. In addition, in 2011 we sold stock to DDF. Our primary sources of cash have historically been (1) licensing fees for new agreements, (2) milestone and other payments under licensing or development agreements, (3) bulk peptide sales under licensing or supply agreements, (4) loans from our stockholders and Victory Park, (5) the sale of our common stock and (6) since 2005, Fortical sales and royalties. In 2011, we divested our equity interest in our former China joint venture as well as our SDBG program, which may result in additional sources of cash in the future. We cannot be certain that any of these cash sources will continue to be available to us in the future. Licensing fees from new collaborations are dependent upon the successful completion of complex and lengthy negotiations. Milestone payments are based upon progress achieved in collaborations, which cannot be guaranteed, and are often subject to factors that are controlled neither by our licensees nor us. Product sales to our partners under these agreements are based upon our licensees’ needs, which are sometimes difficult to predict. Sale of our common stock is dependent upon our ability to attract interested investors, our ability to negotiate favorable terms and the performance of the stock market in general and biotechnology investments in particular. Future Fortical sales and royalties will be affected by competition and continued acceptance in the marketplace and could be impacted by manufacturing, distribution or regulatory issues. We believe that in 2012, we will generate cash to apply toward funding our operations through Fortical sales and royalties; from anticipated receipt of licensing fees and revenue generated from fee-for-service feasibility studies; from other corporate development activities; and from our former China joint venture partner. We expect to generate cash in the long term on sales and royalties from the sale of Fortical and oral calcitonin, the achievement of milestones under our existing license agreements and revenue from future licensed products and technologies and, possibly, from the sale of common stock. We are actively seeking additional licensing and/or supply agreements with pharmaceutical companies for various oral peptides, including PTH and our obesity peptide, and for our peptide manufacturing technology. In October 2011, we announced our decision to establish a Joint Development Vehicle with Nordic Bioscience (see Note 13). However, we may not be successful in achieving milestones under our current agreements, in obtaining regulatory approval for our other products or in licensing any of our other products or technologies.
These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. Unigene’s 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.
Net Cash Used in Operating Activities
: Net cash used in operating activities was $6,766,000 in 2011, which was primarily due to our net loss adjusted for non-cash items of $618,000 and a decrease in our operating assets and liabilities of $11,777,000. Net cash used in operating activities was $1,669,000 in 2010, which was primarily due to our net loss adjusted for non-cash items of $14,302,000 and an increase in our operating assets and liabilities of $11,897,000, primarily from increased accrued interest and deferred revenue. The decrease in our operating assets and liabilities primarily resulted from a reduction in prepaid expenses and accounts receivable. Cash provided by operating activities has not been sufficient to meet our needs.
Net Cash Used in Investing Activities
: Net cash used in investing activities was $2,693,000 in 2011, primarily due to our investments in Tarsa. Net cash used in investing activities was $678,000 in 2010, primarily resulting from costs related to our intellectual property.
Net Cash Provided by Financing Activities
: Net cash provided by financing activities was $1,920,000 in 2011, resulting from the proceeds we received from the sale of stock to DDF and from stock option exercises. Net cash provided by financing activities was $9,654,000 in 2010 primarily resulting from our issuances of notes payable to Victory Park.
Off-Balance Sheet Arrangements.
None.
Recently Issued Accounting Pronouncements
In December 2011, an update to guidance was issued regarding the offsetting or netting of assets and liabilities. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. This amendment is effective as of January 1, 2013. We do not believe that the adoption of this update will have a significant effect on our financial statements.
In May 2011, an update to guidance was issued clarifying how to measure and disclose fair value. This guidance amends the application of the “highest and best use” concept to be used only in the measurement of fair value of nonfinancial assets, clarifies that the measurement of the fair value of equity-classified financial instruments should be performed from the perspective of a market participant who holds the instrument as an asset, clarifies that an entity that manages a group of financial assets and liabilities on the basis of its net risk exposure can measure those financial instruments on the basis of its net exposure to those risks, and clarifies when premiums and discounts should be taken into account when measuring fair value. The fair value disclosure requirements also were amended. This amendment is effective as of January 1, 2012. We do not believe that the adoption of the amended guidance will have a significant effect on our financial statements.
On January 1, 2011, we adopted new authoritative guidance on revenue recognition for multiple-element arrangements. The guidance, which applies to multiple-element arrangements entered into or materially modified on or after January 1, 2011, amends the criteria for separating and allocating consideration in a multiple-element arrangement by modifying the fair value requirements for revenue recognition and eliminating the use of the residual method. The fair value of deliverables under the arrangement may be derived using a “best estimate of selling price” if vendor specific objective evidence and third-party evidence is not available. Deliverables under the arrangement will be separate units of accounting provided (i) a delivered item has value to the customer on a standalone basis; and (ii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. We did not enter into or materially modify any multiple-element arrangements during the year ended December 31, 2011. Our existing agreements continue to be accounted for under previously-issued revenue recognition guidance for multiple-element arrangements.
On January 1, 2011, we adopted new authoritative guidance on revenue recognition for milestone payments related to arrangements under which we have continuing performance obligations. Milestone payments are recognized as revenue upon achievement of the milestone only if all of the following conditions are met: (i) the milestone payments are non-refundable; (ii) there was substantive uncertainty at the date of entering into the arrangement that the milestone would be achieved; (iii) the milestone is commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the delivered item by the vendor; (iv) the milestone relates solely to past performance; and (v) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions are not met, the milestone payments are not considered to be substantive and are, therefore, deferred and recognized as revenue over the term of the arrangement as we complete our performance obligations. If our estimated performance period for a milestone is revised, we account for the change prospectively. Upon achievement of any future regulatory and sales milestones, as stipulated under the applicable agreements with our licensing partners, we will evaluate each milestone as of the arrangement date to determine whether the milestones are substantive and could be recognized as revenue in their entirety during the period of achievement. The adoption of this guidance does not materially change our previous method of recognizing milestone payments. All potential future milestones under existing arrangements with licensing partners, as specified below, and any new arrangements with milestones, will be evaluated under the new revenue recognition guidance for milestone payments.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
On September 30, 2008, we entered into a financing agreement with Victory Park whereby Victory Park purchased $15,000,000 of three-year senior secured non-convertible term notes from us. In May 2009, we issued an additional $5,000,000 in notes to affiliates of Victory Park. In March 2010, we restructured our debt with Victory Park and increased our borrowing to $33,000,000. Under our agreement with Victory Park, accrued and unpaid interest is added to the outstanding principal balance. As a result, $5,018,750 in accrued interest was added to the principal balance which now totals $38,018,750. These convertible notes bear interest at the prime rate plus 5%, subject to a floor of 15% per annum. Therefore, we are exposed to interest rate fluctuations in the near-term and long-term until these notes are converted or repaid in full. We do not employ specific strategies, such as the use of derivative instruments or hedging, to manage our interest rate exposure. We estimate that, due to the short-term nature of our cash and investments, a change of 100 basis points in interest rates would not have materially affected their fair value.
The information below summarizes our market risks associated with interest bearing debt obligations as of December 31, 2011. The table below presents principal cash flows and related interest rates by year of maturity based on the terms of the debt. Given our financial condition, described in “Liquidity and Capital Resources,” it is not practicable to estimate the fair value of our debt.
|
Debt Obligations
|
|
Carrying Amount
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Note payable – Victory Park
Variable interest rate: 15%
(1)
|
|
$
|
38,018,750
|
|
|
$
|
--
|
|
|
$
|
38,018,750
|
|
|
$
|
--
|
|
|
Notes payable – Levys
Fixed interest rate: 12%
|
|
|
14,737,518
|
|
|
|
750,000
|
|
|
|
13,987,518
|
|
|
|
--
|
|
|
Total
|
|
$
|
52,756,268
|
|
|
$
|
750,000
|
|
|
$
|
52,006,268
|
|
|
$
|
--
|
|
(1)
Prime rate plus 5%, with a floor of 15%
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page Number
|
Report of Independent Registered Public Accounting Firm
|
30
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
31
|
|
|
|
|
BALANCE SHEETS – December 31, 2011 and 2010
|
32
|
|
|
|
|
STATEMENTS OF OPERATIONS - Years Ended December 31, 2011, 2010 and 2009
|
33
|
|
|
|
|
STATEMENTS OF STOCKHOLDERS’ DEFICIT - Years Ended December 31, 2011, 2010 and 2009
|
34
|
|
|
|
|
STATEMENTS OF CASH FLOW - Years Ended December 31, 2011, 2010 and 2009
|
35
|
|
|
|
|
NOTES TO FINANCIAL STATEMENTS
|
36
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Unigene Laboratories, Inc.
We have audited the accompanying balance sheets of Unigene Laboratories, Inc. (a Delaware corporation) (the “Company”) as of December 31, 2011 and 2010, and the related statements of operations, stockholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2011.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits. The 2009 financial statements of Tarsa Therapeutics, Inc. (an equity method investment) have been audited by other auditors whose report has been furnished to us, and our opinion on the 2009 financial statements, insofar as it related to the amounts included for Tarsa Therapeutics, Inc., is based solely on the report of other auditors. In the financial statements, the Company investment in Tarsa Therapeutics, Inc. is stated at $0 at December 31, 2009 and the Company’s equity in the net loss of Tarsa Therapeutics, Inc. is stated at $2,119,000 for the year ended December 31, 2009.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Unigene Laboratories, Inc. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred a net loss of $17,900,000 during the year ended December 31, 2011, and, as of that date, has an accumulated deficit of approximately $189,000,000 and the Company’s total liabilities exceeded total assets by $55,138,000. These conditions, along with others matters as set forth in Note 2, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2012, expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
New York, New York
March 15, 2012
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Tarsa Therapeutics, Inc.
We have audited the accompanying balance sheet of Tarsa Therapeutics, Inc. (a development-stage company) as of December 31, 2009, and the related statements of operations, shareholders’ deficit, and cash flows for the period from March 13, 2009 (date of inception) to December 31, 2009 (not presented separately herein). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tarsa Therapeutics, Inc. at December 31, 2009, and the results of its operations and its cash flows for the period from March 13, 2009 (date of inception) to December 31, 2009, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Tarsa Therapeutics, Inc. will continue as a going concern. As more fully described in Note 2, the Company has incurred operating losses since inception and will need additional capital to continue its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The 2009 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 8, 2010
UNIGENE LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 2011 and 2010
|
|
|
2011
|
|
|
2010
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,681,683
|
|
|
$
|
12,200,800
|
|
|
Accounts receivable
|
|
|
2,854,038
|
|
|
|
1,553,091
|
|
|
Accounts receivable – Tarsa
|
|
|
8,193
|
|
|
|
186,263
|
|
|
Inventory, net
|
|
|
1,283,550
|
|
|
|
1,417,934
|
|
|
Due from former China joint venture partner
|
|
|
600,000
|
|
|
|
--
|
|
|
Prepaid expenses and other current assets
|
|
|
862,761
|
|
|
|
699,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
10,290,225
|
|
|
|
16,058,038
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent inventory
|
|
|
1,946,647
|
|
|
|
2,881,980
|
|
|
Property, plant and equipment, net
|
|
|
2,977,058
|
|
|
|
3,190,117
|
|
|
Patents and other intangibles, net
|
|
|
2,020,458
|
|
|
|
2,670,044
|
|
|
Investment in China joint venture
|
|
|
--
|
|
|
|
3,175,925
|
|
|
Investment in Tarsa
|
|
|
--
|
|
|
|
--
|
|
|
Deferred financing costs, net
|
|
|
99,293
|
|
|
|
181,457
|
|
|
Other assets
|
|
|
341,014
|
|
|
|
313,382
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
17,674,695
|
|
|
$
|
28,470,943
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,472,925
|
|
|
$
|
974,998
|
|
|
Accrued expenses
|
|
|
2,094,449
|
|
|
|
2,834,345
|
|
|
Current portion - deferred licensing revenues
|
|
|
1,262,622
|
|
|
|
2,290,916
|
|
|
Current portion – deferred gain on sale/leaseback
|
|
|
116,760
|
|
|
|
--
|
|
|
Notes payable – Levys
|
|
|
750,000
|
|
|
|
--
|
|
|
Due to China joint venture partner
|
|
|
--
|
|
|
|
1,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
5,696,756
|
|
|
|
7,300,259
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable – Levys, excluding current portion
|
|
|
13,987,518
|
|
|
|
14,737,518
|
|
|
Note payable – Victory Park –net of discount of $3,945,124 in 2011 and $7,209,700 in 2010
|
|
|
34,073,626
|
|
|
|
25,790,300
|
|
|
Accrued interest –Victory Park and Levys, excluding current portion
|
|
|
11,827,982
|
|
|
|
9,285,359
|
|
|
Accrued expenses, excluding current portion
|
|
|
--
|
|
|
|
162,296
|
|
|
Deferred licensing revenues, excluding current portion
|
|
|
6,101,287
|
|
|
|
11,152,037
|
|
|
Deferred gain on sale/leaseback, excluding current portion
|
|
|
632,483
|
|
|
|
--
|
|
|
Deferred compensation
|
|
|
492,851
|
|
|
|
471,890
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
72,812,503
|
|
|
|
68,899,659
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
|
Common Stock - par value $.01 per share, authorized 275,000,000 shares in 2011 and 2010; issued and outstanding: 95,215,599 shares in 2011 and 92,448,947 shares in 2010
|
|
|
952,156
|
|
|
|
924,756
|
|
|
Additional paid-in capital
|
|
|
132,415,958
|
|
|
|
129,227,058
|
|
|
Accumulated deficit
|
|
|
(188,505,922
|
)
|
|
|
(170,580,263
|
)
|
|
Treasury Stock – at cost (26,650 shares in 2010)
|
|
|
--
|
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Deficit
|
|
|
(55,137,808
|
)
|
|
|
(40,428,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
17,674,695
|
|
|
$
|
28,470,943
|
|
The accompanying notes are an integral part of these financial statements.
UNIGENE LABORATORIES, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 2011, 2010 and 2009
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
3,843,787
|
|
|
$
|
5,246,159
|
|
|
$
|
5,941,254
|
|
|
Royalties
|
|
|
1,603,371
|
|
|
|
2,974,365
|
|
|
|
4,991,266
|
|
|
Licensing revenue
|
|
|
10,250,740
|
|
|
|
1,300,763
|
|
|
|
1,253,260
|
|
|
Development fees and other revenues
|
|
|
3,517,440
|
|
|
|
811,992
|
|
|
|
545,788
|
|
|
Tarsa revenue
|
|
|
1,293,008
|
|
|
|
1,006,935
|
|
|
|
60,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,508,346
|
|
|
|
11,340,214
|
|
|
|
12,791,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,551,624
|
|
|
|
2,608,083
|
|
|
|
2,171,231
|
|
|
Research and development
|
|
|
9,015,749
|
|
|
|
6,428,041
|
|
|
|
12,350,796
|
|
|
General and administrative
|
|
|
8,887,010
|
|
|
|
7,685,039
|
|
|
|
8,937,683
|
|
|
Unallocated facility expenses
|
|
|
3,345,971
|
|
|
|
3,105,989
|
|
|
|
1,711,642
|
|
|
Inventory reserve
|
|
|
--
|
|
|
|
716,989
|
|
|
|
--
|
|
|
Loss on sale of patents
|
|
|
824,241
|
|
|
|
--
|
|
|
|
--
|
|
|
Severance expense - Levys
|
|
|
349,980
|
|
|
|
1,120,000
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,974,575
|
|
|
|
21,664,141
|
|
|
|
25,171,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(3,466,229
|
)
|
|
|
(10,323,927
|
)
|
|
|
(12,379,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on change in fair value of embedded conversion feature
|
|
|
--
|
|
|
|
(8,125,000
|
)
|
|
|
--
|
|
|
Debt issuance cost
|
|
|
--
|
|
|
|
(2,007,534
|
)
|
|
|
--
|
|
|
Qualifying therapeutic discovery grant
|
|
|
--
|
|
|
|
977,917
|
|
|
|
--
|
|
|
Gain on technology license to Tarsa - net
|
|
|
--
|
|
|
|
--
|
|
|
|
5,685,530
|
|
|
Interest and other income
|
|
|
58,535
|
|
|
|
85,546
|
|
|
|
133,581
|
|
|
Interest expense
|
|
|
(10,923,967
|
)
|
|
|
(9,291,773
|
)
|
|
|
(4,862,319
|
)
|
|
Gain (loss) from investment in former China joint venture
|
|
|
(1,375,925
|
)
|
|
|
115,774
|
|
|
|
95,378
|
|
|
Loss from investment in Tarsa
|
|
|
(2,819,143
|
)
|
|
|
--
|
|
|
|
(2,119,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(18,526,729
|
)
|
|
|
(28,568,997
|
)
|
|
|
(13,446,794
|
)
|
|
Income tax benefit – principally from sale of New Jersey tax benefits in 2011 and 2010
|
|
|
601,070
|
|
|
|
700,503
|
|
|
|
67,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,925,659
|
)
|
|
$
|
(27,868,494
|
)
|
|
$
|
(13,379,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share – basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.19
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding – basic and diluted
|
|
|
93,181,384
|
|
|
|
91,961,673
|
|
|
|
90,662,089
|
|
The accompanying notes are an integral part of these financial statements.
UNIGENE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS’ DEFICIT
Years Ended December 31, 2011, 2010 and 2009
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Par Value
|
|
|
Additional
Paid-in Capital
|
|
|
Accumulated Deficit
|
|
|
Treasury Stock
|
|
|
Total
|
|
|
Balance January 1, 2009
|
|
|
90,195,520
|
|
|
$
|
901,955
|
|
|
$
|
109,457,677
|
|
|
$
|
(129,332,090
|
)
|
|
$
|
--
|
|
|
$
|
(18,972,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock to Victory Park in connection with debt issuance and Tarsa transaction
|
|
|
675,000
|
|
|
|
6,750
|
|
|
|
930,000
|
|
|
|
--
|
|
|
|
--
|
|
|
|
936,750
|
|
|
Stock issued in lieu of director fees
|
|
|
91,886
|
|
|
|
919
|
|
|
|
72,581
|
|
|
|
--
|
|
|
|
--
|
|
|
|
73,500
|
|
|
Recognition of restricted stock compensation expense
|
|
|
--
|
|
|
|
--
|
|
|
|
119,700
|
|
|
|
--
|
|
|
|
--
|
|
|
|
119,700
|
|
|
Issuance of restricted stock
|
|
|
60,000
|
|
|
|
600
|
|
|
|
(600
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Discount on note payable issued to joint venture partner
|
|
|
--
|
|
|
|
--
|
|
|
|
27,978
|
|
|
|
--
|
|
|
|
--
|
|
|
|
27,978
|
|
|
Recognition of stock option compensation expense – employees and directors
|
|
|
--
|
|
|
|
--
|
|
|
|
378,212
|
|
|
|
--
|
|
|
|
--
|
|
|
|
378,212
|
|
|
Recognition of stock option compensation expense – consultants
|
|
|
--
|
|
|
|
--
|
|
|
|
43,393
|
|
|
|
--
|
|
|
|
--
|
|
|
|
43,393
|
|
|
Cashless warrant exercise
|
|
|
77,811
|
|
|
|
778
|
|
|
|
(778
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Exercise of stock options
|
|
|
629,900
|
|
|
|
6,299
|
|
|
|
324,644
|
|
|
|
--
|
|
|
|
--
|
|
|
|
330,943
|
|
|
Net loss
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(13,379,679
|
)
|
|
|
--
|
|
|
|
(13,379,679
|
)
|
|
Balance December 31, 2009
|
|
|
91,730,117
|
|
|
|
917,301
|
|
|
|
111,352,807
|
|
|
|
(142,711,769
|
)
|
|
|
--
|
|
|
|
(30,441,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued in lieu of director fees
|
|
|
174,780
|
|
|
|
1,748
|
|
|
|
127,252
|
|
|
|
--
|
|
|
|
--
|
|
|
|
129,000
|
|
|
Issuance of restricted stock
|
|
|
372,100
|
|
|
|
3,721
|
|
|
|
(3,721
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Exercise of stock options
|
|
|
158,600
|
|
|
|
1,586
|
|
|
|
71,762
|
|
|
|
--
|
|
|
|
--
|
|
|
|
73,348
|
|
|
Embedded conversion feature
|
|
|
--
|
|
|
|
--
|
|
|
|
16,724,000
|
|
|
|
--
|
|
|
|
--
|
|
|
|
16,724,000
|
|
|
Issuance of common stock to directors
|
|
|
40,000
|
|
|
|
400
|
|
|
|
30,400
|
|
|
|
--
|
|
|
|
--
|
|
|
|
30,800
|
|
|
Discount on note payable issued to joint venture partner
|
|
|
--
|
|
|
|
--
|
|
|
|
(1,918
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
(1,918
|
)
|
|
Forfeiture of restricted stock
|
|
|
--
|
|
|
|
--
|
|
|
|
267
|
|
|
|
--
|
|
|
|
(267
|
)
|
|
|
--
|
|
|
Recognition of restricted stock compensation
|
|
|
--
|
|
|
|
--
|
|
|
|
243,240
|
|
|
|
--
|
|
|
|
--
|
|
|
|
243,240
|
|
|
Recognition of stock option compensation expense – employees and directors
|
|
|
--
|
|
|
|
--
|
|
|
|
689,340
|
|
|
|
--
|
|
|
|
--
|
|
|
|
689,340
|
|
|
Recognition of stock option compensation expense - consultants
|
|
|
--
|
|
|
|
--
|
|
|
|
(6,371
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
(6,371
|
)
|
|
Net loss
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(27,868,494
|
)
|
|
|
--
|
|
|
|
(27,868,494
|
)
|
|
Balance, December 31, 2010
|
|
|
92,475,597
|
|
|
|
924,756
|
|
|
|
129,227,058
|
|
|
|
(170,580,263
|
)
|
|
|
(267
|
)
|
|
|
(40,428,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued in lieu of director fees
|
|
|
114,423
|
|
|
|
1,144
|
|
|
|
100,856
|
|
|
|
--
|
|
|
|
--
|
|
|
|
102,000
|
|
|
Issuance of restricted stock
|
|
|
40,000
|
|
|
|
400
|
|
|
|
(400
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Exercise of stock options
|
|
|
893,850
|
|
|
|
8,939
|
|
|
|
411,217
|
|
|
|
--
|
|
|
|
267
|
|
|
|
420,423
|
|
|
Sale of stock to DDF (see Note 13)
|
|
|
1,691,729
|
|
|
|
16,917
|
|
|
|
1,483,083
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,500,000
|
|
|
Adjustment to fair value for 2009 Victory Park warrant exchange
|
|
|
--
|
|
|
|
--
|
|
|
|
(283,880
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
(283,880
|
)
|
|
Recognition of restricted stock compensation
|
|
|
--
|
|
|
|
--
|
|
|
|
68,834
|
|
|
|
--
|
|
|
|
--
|
|
|
|
68,834
|
|
|
Recognition of stock option compensation expense – employees and directors
|
|
|
--
|
|
|
|
--
|
|
|
|
1,410,598
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,410,598
|
|
|
Recognition of stock option compensation expense - consultants
|
|
|
--
|
|
|
|
--
|
|
|
|
(1,408
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
(1,408
|
)
|
|
Net loss
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(17,925,659
|
)
|
|
|
--
|
|
|
|
(17,925,659
|
)
|
|
Balance, December 31, 2011
|
|
|
95,215,599
|
|
|
$
|
952,156
|
|
|
$
|
132,415,958
|
|
|
$
|
(188,505,922
|
)
|
|
$
|
-
|
|
|
$
|
(55,137,808
|
)
|
The accompanying notes are an integral part of these financial statements.
UNIGENE LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2011, 2010 and 2009
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,925,659
|
)
|
|
$
|
(27,868,494
|
)
|
|
$
|
(13,379,679
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred revenue
|
|
|
(10,921,803
|
)
|
|
|
(1,326,620
|
)
|
|
|
(1,367,664
|
)
|
|
Amortization of deferred credit
|
|
|
(68,110
|
)
|
|
|
--
|
|
|
|
--
|
|
|
Amortization of debt discounts and deferred financing fees
|
|
|
3,346,749
|
|
|
|
2,844,736
|
|
|
|
845,803
|
|
|
Non-cash equity compensation
|
|
|
1,296,144
|
|
|
|
1,086,009
|
|
|
|
614,805
|
|
|
Gain on technology license to Tarsa, net
|
|
|
--
|
|
|
|
--
|
|
|
|
(5,685,530
|
)
|
|
Debt issuance cost
|
|
|
--
|
|
|
|
2,007,534
|
|
|
|
--
|
|
|
Loss on change in fair value of embedded conversion feature
|
|
|
--
|
|
|
|
8,125,000
|
|
|
|
--
|
|
|
Depreciation, amortization and impairment of long-lived assets
|
|
|
709,588
|
|
|
|
965,008
|
|
|
|
732,464
|
|
|
Inventory reserve provision
|
|
|
--
|
|
|
|
716,989
|
|
|
|
--
|
|
|
Loss on sale of patents
|
|
|
824,241
|
|
|
|
--
|
|
|
|
--
|
|
|
Loss on investment in Tarsa
|
|
|
2,819,143
|
|
|
|
--
|
|
|
|
2,119,450
|
|
|
Loss (gain) on investment in China joint venture
|
|
|
1,375,925
|
|
|
|
(115,774
|
)
|
|
|
(95,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivables
|
|
|
(1,122,877
|
)
|
|
|
481,744
|
|
|
|
2,413,938
|
|
|
Decrease in prepaid interest
|
|
|
--
|
|
|
|
--
|
|
|
|
525,000
|
|
|
Decrease (increase) in inventory
|
|
|
1,069,717
|
|
|
|
1,905,777
|
|
|
|
(2,092,971
|
)
|
|
(Increase) decrease in other assets
|
|
|
(190,250
|
)
|
|
|
(583,095
|
)
|
|
|
1,716,948
|
|
|
(Decrease) increase in accounts payable and accrued expenses
|
|
|
(404,272
|
)
|
|
|
505,271
|
|
|
|
503,892
|
|
|
Increase in accrued interest-Victory Park and Levys
|
|
|
7,561,373
|
|
|
|
5,562,757
|
|
|
|
1,627,629
|
|
|
Increase in deferred compensation
|
|
|
20,961
|
|
|
|
34,477
|
|
|
|
66,267
|
|
|
Increase in deferred revenue
|
|
|
4,842,754
|
|
|
|
3,990,160
|
|
|
|
164,252
|
|
|
Net cash used in operating activities
|
|
|
(6,766,376
|
)
|
|
|
(1,668,521
|
)
|
|
|
(11,290,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Tarsa
|
|
|
(2,819,143
|
)
|
|
|
--
|
|
|
|
--
|
|
|
Proceeds from sale of patents
|
|
|
20,000
|
|
|
|
--
|
|
|
|
--
|
|
|
Proceeds from sale/leaseback
|
|
|
1,119,963
|
|
|
|
--
|
|
|
|
--
|
|
|
Net proceeds from technology license to Tarsa
|
|
|
--
|
|
|
|
--
|
|
|
|
4,139,080
|
|
|
Investment in China joint venture
|
|
|
--
|
|
|
|
--
|
|
|
|
(317,354
|
)
|
|
Construction of leasehold and building improvements
|
|
|
(5,880
|
)
|
|
|
(2,941
|
)
|
|
|
(76,916
|
)
|
|
Purchase of equipment and furniture
|
|
|
(694,600
|
)
|
|
|
(144,478
|
)
|
|
|
(220,055
|
)
|
|
Increase in patents and other intangibles
|
|
|
(293,504
|
)
|
|
|
(531,078
|
)
|
|
|
(494,548
|
)
|
|
Net cash (used in) provided by investing activities
|
|
|
(2,673,164
|
)
|
|
|
(678,497
|
)
|
|
|
3,030,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of note payable – Victory Park, net
|
|
|
--
|
|
|
|
13,642,473
|
|
|
|
4,803,402
|
|
|
Expenses related to issuance of note payable – Victory Park
|
|
|
--
|
|
|
|
(2,007,534
|
)
|
|
|
--
|
|
|
Proceeds from sale of stock, net – DDF
|
|
|
1,500,000
|
|
|
|
--
|
|
|
|
--
|
|
|
Repayment of notes payable – Levys
|
|
|
--
|
|
|
|
(1,000,000
|
)
|
|
|
--
|
|
|
Repayment on note payable – Victory Park
|
|
|
--
|
|
|
|
(179,679
|
)
|
|
|
(462,794
|
)
|
|
Repayment on note payable-China joint venture
|
|
|
--
|
|
|
|
(875,000
|
)
|
|
|
(100,000
|
)
|
|
Proceeds from exercise of stock options
|
|
|
420,423
|
|
|
|
73,348
|
|
|
|
330,943
|
|
|
Net cash provided by financing activities
|
|
|
1,920,423
|
|
|
|
9,653,608
|
|
|
|
4,571,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(7,519,117
|
)
|
|
|
7,306,590
|
|
|
|
(3,689,016
|
)
|
|
Cash and cash equivalents at beginning of year
|
|
$
|
12,200,800
|
|
|
$
|
4,894,210
|
|
|
$
|
8,583,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
4,681,683
|
|
|
$
|
12,200,800
|
|
|
$
|
4,894,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of convertible note in exchange for non-convertible note
|
|
$
|
--
|
|
|
$
|
19,357,527
|
|
|
$
|
--
|
|
|
Common stock received for license to Tarsa
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
2,119,450
|
|
|
Contribution to joint venture financed through interest-free note payable to joint venture partner
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
1,200,000
|
|
|
Common stock issued with debt financing (see Note 8)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
363,750
|
|
|
Common stock issued in exchange for warrant
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
573,000
|
|
|
Cash payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
--
|
|
|
$
|
803,000
|
|
|
$
|
1,750,000
|
|
|
Cash paid for income taxes
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
The accompanying notes are an integral part of these financial statements.
1. Description of Business
We are a biopharmaceutical company engaged in the research, production and delivery of small proteins, referred to as peptides, for medical use. We have a patented manufacturing technology for producing many peptides cost-effectively. We also have patented oral and nasal delivery technologies that have been shown to deliver medically useful amounts of various peptides into the bloodstream. We have three operating locations: administrative and regulatory offices in Boonton, New Jersey; a laboratory research facility in Fairfield, New Jersey; and a pharmaceutical production facility in Boonton, New Jersey. Our primary focus has been on the development of calcitonin and other peptide products for the treatment of osteoporosis and other indications. We have licensed in the U.S. our nasal calcitonin product for the treatment of osteoporosis, which we have trademarked as Fortical, to Upsher-Smith Laboratories, Inc. (USL). Fortical was approved by the FDA in 2005. We have licensed worldwide rights to our patented manufacturing technology for the production of calcitonin to Novartis. In 2009, we licensed on a worldwide basis (except for China) our Phase 3 oral calcitonin program to Tarsa Therapeutics, Inc. (Tarsa). We have expanded our product pipeline with a novel peptide for obesity, and we perform fee-for-service feasibility studies for third parties. During the period of 2009 through 2011, most of our revenue was generated from two customers; USL and GlaxoSmithKline (GSK) (see Note 22 to the financial statements). Our oral PTH license with GSK was terminated in December 2011 after we received notification from GSK of its decision not to proceed with the oral PTH program. As a result, we regained the exclusive worldwide rights to the oral PTH program and are currently seeking a new licensee for this program.
2. Liquidity
At December 31, 2011, we had cash and cash equivalents of $4,682,000, a decrease of $7,519,000 from December 31, 2010. We have incurred annual operating losses since our inception and, as a result, at December 31, 2011, had an accumulated deficit of approximately $189,000,000.
As of December 31, 2011, the Company’s total principal debt was approximately $48.8 million. Under the restated financing agreement with Victory Park
Management, LLC (together with its affiliates, Victory Park),
(see Note 8), we must maintain a cash balance equal to at least $2,500,000 and our cash flow (as defined in the restated financing agreement) must be at least $2,000,000 in any fiscal quarter or $7,000,000 in any three consecutive quarters. These default provisions were temporarily waived under a forbearance agreement executed in December 2010, which expired upon the termination of the amended GSK license agreement in December 2011. In the event the Company is not now able to achieve management’s projected cash flow forecasts, it may be in violation of its covenants with Victory Park. Any such default could result in the Company’s long term debt owed to Victory Park becoming currently due.
Based upon management’s projections, we believe our current cash should be sufficient to support current operations through the end of 2012. However, our ability to meet these projections will require us to maintain or generate cash proceeds from Fortical sales and royalties, fee-for-service feasibility studies, milestone payments from existing agreements or upfront licensing fees from new agreements or from fund raising activity.
The global credit crisis that began in 2007 was further exacerbated by events occurring in the financial markets in the fall of 2008, and has continued into 2012. These events have negatively impacted the ability of corporations to raise capital through equity financings or borrowings. The credit crisis may continue for the foreseeable future. In addition, uncertainty about current and future global economic conditions may impact our ability to license our products and technologies to other companies and may cause consumers to defer purchases of prescription medicines, such as Fortical, in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, future demand for our product could differ from our current expectations.
Due to our limited financial resources, any further significant decline in Fortical sales and/or royalties, or delay in achieving milestones under our existing license agreements, or in signing new license, feasibility or distribution agreements for our products or technologies or loss of patent protection, ability to sell additional shares of our common stock, or ability to not violate our covenants with Victory Park could have a material adverse effect on our cash flow and operations (see Notes 10, 22 and 23).
If we are unable to achieve significant milestones or sales under our existing agreements and/or enter into a new significant revenue generating license or other arrangement, at a certain point we would need to either secure another source of funding in order to satisfy our working capital needs and to remain in compliance with covenants in our financing agreement with Victory Park (see Note 8) or significantly curtail our operations. Should the funding we require to sustain our working capital needs be unavailable or prohibitively expensive, the consequence would be a material adverse effect on our business, operating results, financial condition and prospects. We believe that satisfying our cash requirements over the long term will require the successful commercialization of one or more of our biotechnologies or our licensees’ oral or nasal calcitonin products, our oral PTH product, the obesity program or another peptide product in the U.S. and/or abroad. However, it is uncertain whether any of these products other than Fortical will be approved or will be commercially successful. The amount of future revenue we will derive from Fortical is also uncertain.
In December 2011, we announced a restructuring plan that included a reduction in workforce and expenses to improve operational efficiencies and to better match resources with market demand. Under the comprehensive plan, we are continuing Fortical production and maintaining all of our core programs and partnered activities while decreasing cash expenditures. Since we currently maintain an adequate inventory of calcitonin and enzyme to support Fortical, we are continuing to suspend manufacturing of those materials at our Boonton facility. However, we are maintaining the cGMP status of the facility and the ability to manufacture peptides at that location. Implementation of the plan resulted in an immediate company-wide workforce reduction of approximately 25%. Our cash requirements in 2012 to operate our research and peptide manufacturing facilities and develop our products are expected to decrease from 2011 due to our December 2011 restructuring.
In addition to a $4,000,000 milestone payment received from GSK, other cash received during 2011 was primarily from Fortical sales and royalties, as well as from development work and fee-for-service feasibility studies, primarily for GSK and Tarsa. In addition, in 2011 we sold stock to DDF. Our primary sources of cash have historically been (1) licensing fees for new agreements, (2) milestone and other payments under licensing or development agreements, (3) bulk peptide sales under licensing or supply agreements, (4) loans from our stockholders and Victory Park, (5) the sale of our common stock and (6) since 2005, Fortical sales and royalties. In 2011, we divested our equity interest in our former China joint venture as well as our SDBG program, which may result in additional sources of cash in the future. We cannot be certain that any of these cash sources will continue to be available to us in the future. Licensing fees from new collaborations are dependent upon the successful completion of complex and lengthy negotiations. Milestone payments are based upon progress achieved in collaborations, which cannot be guaranteed, and are often subject to factors that are controlled neither by our licensees nor us. Product sales to our partners under these agreements are based upon our licensees’ needs, which are sometimes difficult to predict. Sale of our common stock is dependent upon our ability to attract interested investors, our ability to negotiate favorable terms and the performance of the stock market in general and biotechnology investments in particular. Future Fortical sales and royalties will be affected by competition and continued acceptance in the marketplace and could be impacted by manufacturing, distribution or regulatory issues. We believe that in 2012, we will generate cash to apply toward funding our operations through Fortical sales and royalties; from anticipated receipt of licensing fees and revenue generated from fee-for-service feasibility studies; from other corporate development activities; and from our former China joint venture partner. We expect to generate cash in the long term on sales and royalties from the sale of Fortical and oral calcitonin, the achievement of milestones under our existing license agreements and revenue from future licensed products and technologies and, possibly, from the sale of common stock. We are actively seeking additional licensing and/or supply agreements with pharmaceutical companies for various oral peptides, including PTH and our obesity peptide, and for our peptide manufacturing technology. In October 2011, we announced our decision to establish a Joint Development Vehicle with Nordic Bioscience (see Note 13). However, we may not be successful in achieving milestones under our current agreements, in obtaining regulatory approval for our other products or in licensing any of our other products or technologies.
These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. Unigene’s 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.
3. Summary of Significant Accounting Policies & Practices
Revenue Recognition:
We recognize revenue from the sale of products and from royalties, licensing agreements and research services. Revenue from the sale of product is recognized when title to product and risk of loss are transferred, collection is reasonably assured and we have no further obligations. If there are elements of the revenue recognition requirements that are not met at the time of shipment, the revenue is deferred and the corresponding cost of the product is included on our balance sheet as a deferred asset. Revenue from research services, such as for Tarsa, is recognized when services are rendered. Sales revenue generally does not involve difficult, subjective or complex judgments. We recognize royalty revenue on an accrual basis in accordance with the terms of individual agreements. If the receipt of royalty revenue is contingent on a future event, revenue would be recognized when that event has occurred. Typically, royalties are recognized when third party results can be reliably measured and collectability is reasonably assured. In the case of USL, we recognize royalty revenue based upon the quarterly USL royalty report. This enables a reliable measure, as well as reasonable assurances of collectability.
We follow the accounting guidance for licensing agreements which typically include several elements of revenue, such as up-front payments, milestones, royalties upon sales of product and the delivery of product and/or research services to the licensor. Non-refundable license fees received upon execution of license agreements where we have continuing involvement are deferred and recognized as revenue over the estimated performance period of the agreement. This requires management to estimate the expected term of the agreement or, if applicable, the estimated life of its licensed patents. For our USL and GSK agreements, the following describes our revenue recognition accounting policy. Non-refundable milestone payments that represent the completion of a separate earnings process and a substantive step in the research and development process are recognized as revenue when earned at the lesser of 1) the non-refundable cash received or 2) the proportionate level of effort expended to date during the development stage multiplied by the development stage revenue. This sometimes requires management to judge whether or not a milestone has been met and when it should be recognized in the financial statements. Typically, this would involve discussions between management and our licensing partner. Payments for milestones for which the earnings process is not yet complete (for example, payment received for the commencement of an activity that represents a separate earnings process) or for which we have continuing involvement, are recognized over the estimated performance period of such activity. This is to comply with accounting guidance, which provides for revenue to be recognized once delivery has occurred or services have been rendered. On January 1, 2011, we adopted new authoritative guidance on revenue recognition for milestone payments related to arrangements under which we have continuing performance obligations. Milestone payments are recognized as revenue upon achievement of the milestone only if all of the following conditions are met: (i) the milestone payments are non-refundable; (ii) there was substantive uncertainty at the date of entering into the arrangement that the milestone would be achieved; (iii) the milestone is commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the delivered item by the vendor; (iv) the milestone relates solely to past performance; and (v) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions are not met, the milestone payments are not considered to be substantive and are, therefore, deferred and recognized as revenue over the term of the arrangement as we complete our performance obligations. If our estimated performance period for a milestone is revised, we account for the change prospectively. Upon achievement of any future regulatory and sales milestones, as stipulated under the applicable agreements with our licensing partners, we will evaluate each milestone as of the arrangement date to determine whether the milestones are substantive and could be recognized as revenue in their entirety during the period of achievement. The adoption of this guidance does not materially change our previous method of recognizing milestone payments. All potential future milestones under existing arrangements with licensing partners, as specified below, and any new arrangements with milestones, will be evaluated under the new revenue recognition guidance for milestone payments. Management must determine if a milestone payment is substantive, i.e., whether or not it is reasonable relative to all of the deliverables and payment terms in the agreement; commensurate with our level of effort; and commensurate with the enhanced value of the deliverables. Royalties and/or milestones relating to sales of products by our licensees, and the delivery of products and research services, will be recognized as such events occur as they represent the completion of a separate earnings process. In addition, accounting guidance requires a company to evaluate its arrangements under which it will perform multiple revenue-generating activities. For example, a license agreement with a pharmaceutical company may involve a license, research and development activities and/or contract manufacturing. On January 1, 2011, we adopted new authoritative guidance on revenue recognition for multiple-element arrangements. The guidance, which applies to multiple-element arrangements entered into or materially modified on or after January 1, 2011, amends the criteria for separating and allocating consideration in a multiple-element arrangement by modifying the fair value requirements for revenue recognition and eliminating the use of the residual method. The fair value of deliverables under the arrangement may be derived using a “best estimate of selling price” if vendor specific objective evidence and third-party evidence is not available. Deliverables under the arrangement will be separate units of accounting provided (i) a delivered item has value to the customer on a standalone basis; and (ii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. Our existing agreements continue to be accounted for under previously-issued revenue recognition guidance for multiple-element arrangements.
Accounting for Stock Options
- For stock options granted to employees and directors, we recognize compensation expense based on the grant-date fair value estimated in accordance with accounting guidance. We estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model. Stock options and warrants issued to consultants are accounted for in accordance with accounting guidance at their fair value on the measurement date using the Black-Scholes option pricing model. The measurement of share-based compensation is subject to periodic adjustment as the underlying awards vest. Compensation expense is calculated each quarter for scientific consultants using the Black-Scholes option pricing model until the option is fully vested and is included in research and development expenses.
Inventory
- Production inventories at our Boonton, NJ location are stated at the lower of cost or market, valued at specifically identified cost which approximates FIFO. Research inventories at our Fairfield, NJ location are stated at the lower of cost (using the FIFO method) or market. Typically, finished goods and work in process inventory are fully reserved except for the amounts deemed saleable by management based upon current or anticipated orders, primarily under contractual arrangements.
Use of Estimates
- The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our most significant estimates involve estimating the lives of our license agreements, which typically are determined by the estimated useful lives of our licensed patents. This would determine the period over which certain revenue would be recognized. Other significant estimates relate to valuation of inventory, fixed assets, deferred tax assets and intangible assets, which involve management estimates of the lives of the assets and the recoverability of costs.
Equity Method Investments
- We use the equity method of accounting for significant investments where we own at least 20% of the entity’s voting stock. We account for our investment in Tarsa under the equity method and, prior to the 2011 sale of our 45% equity interest in the China joint venture, we also accounted for that investment under the equity method. These investments were initially valued at cost, adjusted for our proportionate share of the entities’ profits and losses. If our share of an entity’s losses reduces our investment to zero, we temporarily discontinue the equity method of accounting for that investment. For Tarsa, in 2009, we recognized approximately 26% of the entity’s profits or losses. Our share of Tarsa’s 2009 loss that we recognized was $2,119,000, the amount of our investment in Tarsa, as a result of our valuation of Tarsa’s common stock with the assistance of an outside appraiser. Our share of Tarsa’s loss would have been $3,795,000 so that the unrecognized loss of $1,676,000, as well as Tarsa’s losses from 2010 and 2011, are to be carried over to future periods. Since we have no future funding obligations, we discontinued the equity method of accounting for our investment in Tarsa. In 2011, we invested $2,819,000 in Tarsa and, recognizing prior losses, wrote down our investment to zero. For our former China joint venture, our share of its losses for 2011, 2010 and 2009 were $16,000, $149,000 and $169,000, respectively.
Patents and Other Intangibles
- Costs incurred that are directly related to patents and trademarks are capitalized. Patent and trademark costs are deferred pending the successful outcome of the relevant applications. These costs primarily consist of outside legal fees and typically relate to filings and prosecution of applications for improvements to existing patents or to the filings of foreign applications based upon domestic patents. Most of these applications relate to our patented peptide manufacturing and patented oral delivery technologies, as well as for our satiety program technology. Internal costs related to intangible assets are expensed as incurred. Successful patent costs are amortized using the straight-line method over the lives of the patents, typically five to fifteen years. Successful trademark costs are amortized using the straight-line method over their estimated useful lives of typically five to ten years. We assess the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Some factors we consider important which could trigger an impairment review include (i) significant underperformance relative to expected historical or projected future operating results; (ii) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (iii) significant negative industry or economic trends.
When we determine that the carrying value of intangible assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we first will perform an assessment of the asset’s recoverability based on expected undiscounted future net cash flow, and if the amount is less than the asset’s value, we will measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Unsuccessful patent costs are expensed when determined worthless or when patent applications will no longer be pursued. Other intangibles are recorded at cost and are amortized over their estimated useful lives.
Segment Information
- We are managed and operated as one business. Our entire business is managed by a single management team that reports to the chief executive officer. We do not operate separate lines of business or separate business entities with respect to any of our product candidates. Accordingly, we do not prepare discrete financial information with respect to separate product areas or by location and do not have separately reportable segments as defined by accounting guidance.
Deferred Financing Costs
– Amounts paid related to debt financing activities are capitalized and amortized as interest expense over the term of the loan. Our expenses incurred related to the Victory Park financing are being amortized over the three-year term of the notes to interest expense on a straight-line basis which approximates the effective interest rate method.
Cash Equivalents
- We consider all highly liquid securities purchased with an original maturity of three months or less to be cash equivalents, which currently consist of money market and checking accounts.
Accounts Receivable
- During 2011 and 2010, most of our accounts receivable involved transactions with established pharmaceutical companies, GSK and USL. The terms of payments and collections in these transactions are governed by contractual agreements. Our policy is that an allowance for doubtful accounts is established for estimated losses resulting from the inability of our customers to make required payments. Such allowance is computed based upon a specific customer account review of larger customers and balances in excess of 90 days old. Our assessment of our customers’ ability to pay generally includes direct contact with the customer, investigation into our customers’ financial status, as well as consideration of our customers’ payment history with us. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. If we determine, based on our assessment, that it is more likely than not that our customers will be unable to pay, we will write-off the account receivables. At both December 31, 2011 and 2010, no allowances were recorded based upon our analysis that all receivables were deemed collectible.
Property, Plant and Equipment
- Property, plant and equipment are carried at cost, net of accumulated depreciation. Equipment under capital leases is stated at the present value of the minimum lease payments. Depreciation is computed using the straight-line method. Depreciation of equipment under capital leases and leasehold improvements is computed over the shorter of the lease term or estimated useful life of the asset. Additions and improvements are capitalized, while repairs and maintenance are expensed as incurred.
Fair Value of Financial Instruments
- The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Significant differences can arise between the fair value and carrying amounts of financial instruments that are recognized at historical cost amounts. Given our financial condition described in Note 2, it is not practicable to estimate the fair value of our notes payable at December 31, 2011 and 2010. We believe that the carrying amounts of cash and cash equivalents, our accounts receivable, deferred compensation assets and accounts payable approximate fair value due to their short-term nature.
Research and Development
- Research and development expenses include the costs associated with our internal research and development and research and development conducted for us by third parties. These costs primarily consist of salaries, pre-clinical and clinical trials, outside consultants, supplies, and indirect costs. Indirect costs such as depreciation, rent, utilities, insurance, taxes, and maintenance are allocated to research and development based on specific criteria such as square footage utilized. All research and development costs discussed above are expensed as incurred. Third-party expenses reimbursed under research and development contracts, which are not refundable, are recorded as a reduction to research and development expense in the statement of operations.
Sales Concentrations
– Our revenue for the last three years has almost entirely been from product sales, royalties and licensing revenue under our agreements with GSK, USL, Novartis and Tarsa.
Revenue from Licensees:
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
GSK
|
|
|
57
|
%
|
|
|
2
|
%
|
|
|
1
|
%
|
|
USL
|
|
|
27
|
%
|
|
|
73
|
%
|
|
|
87
|
%
|
|
Novartis
|
|
|
6
|
%
|
|
|
12
|
%
|
|
|
9
|
%
|
|
Tarsa
|
|
|
6
|
%
|
|
|
9
|
%
|
|
|
--
|
|
|
Other
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
3
|
%
|
In December 2011, we terminated our amended and restated exclusive worldwide license agreement and related development services and clinical supply agreement with GSK. The termination of these agreements followed notification by GSK of its decision not to proceed based on its internal evaluation criteria. Therefore, there will be no future revenue from GSK due to the termination of our license agreement in December 2011.
Concentrations of Credit Risk
– Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We maintain our holdings in cash in excess of federally insured amounts and in cash equivalents with high credit-quality financial institutions in order to minimize credit exposure. We have concentrations of credit risk with respect to accounts receivable, as most of our accounts receivable are concentrated among a very small number of customers. As of December 31, 2011 and December 31, 2010, USL accounted for approximately 39% and 84%, respectively, of our total accounts receivable. As of December 31, 2011 and 2010, GSK accounted for approximately 48% and 0%, respectively, of our accounts receivable. We perform credit evaluations of our customers, but generally do not require collateral to support accounts receivable.
Income Taxes
- Income taxes are accounted for under the asset and liability method with deferred tax assets and liabilities recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that all, or some portion, of such deferred tax assets will not be realized.
Net Loss Per Share
- We compute and present both basic and diluted earnings per share (“EPS”) on the face of the statement of operations. Basic EPS is computed using the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock at the beginning of the period (or as of the date of issuance if issued in the current year) being reported on, and the effect was dilutive. Our weighted average shares outstanding used for computing diluted loss per share were the same as that used for computing basic loss per share for each of the years ended December 31, 2011, 2010 and 2009 because inclusion of our convertible notes, restricted stock, stock options and warrants (approximately 52,303,000, 7,374,000, and 7,025,000 shares of common stock, if vested or exercised, at December 31, 2011, 2010 and 2009, respectively) would be antidilutive.
The year ended December 31, 2011 also includes approximately 43,170,000 shares of common stock that would be issued if Victory Park were to convert all of their outstanding convertible notes, plus accrued interest, as of March 17, 2011, the first day that their notes became convertible.
At December 31, 2011 and 2010, there were warrants outstanding to purchase an aggregate of 60,000 shares of common stock at exercise prices ranging from $2.00 to $2.20 per share, with expiration dates ranging from 2012 to 2015.
Reconciliation between the number of issued shares shown on the balance sheet and the number of shares used to determine EPS at December 31, 2011 and 2010:
|
|
|
2011
|
|
|
2010
|
|
|
Issued shares per balance sheet
|
|
|
95,215,599
|
|
|
|
92,475,597
|
|
|
Unvested restricted stock
|
|
|
(40,000
|
)
|
|
|
(164,000
|
)
|
|
Treasury Stock
|
|
|
--
|
|
|
|
(26,650
|
)
|
|
Shares used in determining EPS
|
|
|
95,175,599
|
|
|
|
92,284,947
|
|
New Accounting Pronouncements
In December 2011, an update to guidance was issued regarding the offsetting or netting of assets and liabilities. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards (IFRS). This amendment is effective as of January 1, 2013. We do not believe that the adoption of this update will have a significant effect on our financial statements.
In May 2011, an update to guidance was issued clarifying how to measure and disclose fair value. This guidance amends the application of the “highest and best use” concept to be used only in the measurement of fair value of nonfinancial assets, clarifies that the measurement of the fair value of equity-classified financial instruments should be performed from the perspective of a market participant who holds the instrument as an asset, clarifies that an entity that manages a group of financial assets and liabilities on the basis of its net risk exposure can measure those financial instruments on the basis of its net exposure to those risks, and clarifies when premiums and discounts should be taken into account when measuring fair value. The fair value disclosure requirements also were amended. This amendment is effective as of January 1, 2012. We do not believe that the adoption of the amended guidance will have a significant effect on our financial statements.
On January 1, 2011, we adopted new authoritative guidance on revenue recognition for multiple-element arrangements. The guidance, which applies to multiple-element arrangements entered into or materially modified on or after January 1, 2011, amends the criteria for separating and allocating consideration in a multiple-element arrangement by modifying the fair value requirements for revenue recognition and eliminating the use of the residual method. The fair value of deliverables under the arrangement may be derived using a “best estimate of selling price” if vendor specific objective evidence and third-party evidence is not available. Deliverables under the arrangement will be separate units of accounting provided (i) a delivered item has value to the customer on a standalone basis; and (ii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. We did not enter into or materially modify any multiple-element arrangements during the year ended December 31, 2011. Our existing agreements continue to be accounted for under previously-issued revenue recognition guidance for multiple-element arrangements.
On January 1, 2011, we adopted new authoritative guidance on revenue recognition for milestone payments related to arrangements under which we have continuing performance obligations. Milestone payments are recognized as revenue upon achievement of the milestone only if all of the following conditions are met: (i) the milestone payments are non-refundable; (ii) there was substantive uncertainty at the date of entering into the arrangement that the milestone would be achieved; (iii) the milestone is commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the delivered item by the vendor; (iv) the milestone relates solely to past performance; and (v) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions are not met, the milestone payments are not considered to be substantive and are, therefore, deferred and recognized as revenue over the term of the arrangement as we complete our performance obligations. If our estimated performance period for a milestone is revised, we account for the change prospectively. Upon achievement of any future regulatory and sales milestones, as stipulated under the applicable agreements with our licensing partners, we will evaluate each milestone as of the arrangement date to determine whether the milestones are substantive and could be recognized as revenue in their entirety during the period of achievement. The adoption of this guidance does not materially change our previous method of recognizing milestone payments. All potential future milestones under existing arrangements with licensing partners, as specified below, and any new arrangements with milestones, will be evaluated under the new revenue recognition guidance for milestone payments.
4. Notes Payable - Levys
To satisfy our short-term liquidity needs, Jay Levy, Jean Levy, Warren Levy and Ronald Levy (the “Levys”) from time to time (prior to 2003) made loans to us. Jay Levy, our former director, Chairman of the Board, Treasurer and Assistant Secretary, and Jean Levy are/were the parents of Warren Levy and Ronald Levy, our former executive officers and directors. At May 10, 2007, the outstanding principal and interest on these loans were $7,095,000 and $8,642,518, respectively, with interest rates ranging from 8.5% to 14.2%. The total owed at May 10, 2007 aggregated $15,737,518, of which approximately $8,900,000 in principal and interest were in default, and was restructured in 2007 as eight-year term notes, with a fixed simple interest rate of 9% per annum. No gain or loss was recognized on the restructuring transaction. Required quarterly payments of principal and interest under these new notes were to begin in May 2010 and continue over a five-year period.
In March 2010, in conjunction with the Victory Park refinancing, the Levy loans were amended and restated to modify their terms. The amended notes, which continue to be secured by a secondary lien on certain of our equipment and certain of our United States patents and patent applications, bore interest at a rate of 9% per annum (non-compounding) from May 10, 2007 to March 17, 2010 and 12% per annum (non-compounding)thereafter. Subject to the conditions set forth in our financing agreement with Victory Park, we were obligated to make the following payments as set forth in, and pursuant to, the amended notes: an aggregate principal payment of $1,000,000 on May 10, 2010, which has been paid; an aggregate principal payment of $500,000 on November 10, 2010 (unpaid but adjusted as described below); an aggregate principal payment of $250,000 on May 10, 2011 (unpaid but adjusted as described below); and payment of all unpaid principal and accrued and unpaid interest on June 18, 2013. These loans remain subordinated to the Victory Park notes. These loans are collateralized by secondary security interests in our equipment and certain of our patents.
On March 10, 2011, we entered into the Settlement and Release Agreement and Amendments (the “Settlement Agreement”) by and among the Company and the Estate of Jean Levy, The Jaynjean Levy Family Limited Partnership, Dr. Warren Levy, our former president, and Dr. Ronald S. Levy, our former executive vice president (collectively, the “Levy Parties”).
Pursuant to the Settlement Agreement, the parties agreed to settle any and all claims, whether known or unknown, arising from or relating to the Levy employment agreements, the deferred compensation program for Dr. Warren Levy and Dr. Ronald Levy and the amended notes and the Levy Parties agreed to release their secondary mortgage and related liens on certain of our real property. In connection with this settlement, we agreed, among other things, to make the following payments, which modified certain terms of the Levy employment agreements and the deferred compensation program referred to above:
|
|
(1)
|
In March 2011, we paid (a) Dr. Warren Levy a lump-sum severance payment in the amount of $327,750; (b) Dr. Ronald Levy a lump-sum severance payment in the amount of $280,250; and (c) into escrow remaining severance payments in the aggregate amount of $303,996 (included in prepaid expenses and other current assets), $163,875 of which shall be released to Dr. Warren Levy and $140,125 of which shall be released to Dr. Ronald Levy, each in accordance with his respective employment agreement in monthly increments beginning September 2011 (which has been paid) through February 2012;
|
|
|
(2)
|
In March 2011, we paid (a) $151,268 to Dr. Warren Levy representing a portion of his vacation pay and (b) $136,736 to Dr. Ronald Levy representing a portion of his vacation pay;
|
|
|
(3)
|
On October 11, 2012 and November 13, 2012, we will pay an aggregate of $162,296: $85,241 to Dr. Warren Levy and $77,055 to Dr. Ronald Levy, in full satisfaction of their respective vacation pay; and
|
|
|
(4)
|
On November 13, 2012 and December 11, 2012, we will pay an aggregate of $200,000 into Rabbi Trust Accounts, $100,000 into an account for the benefit of Dr. Warren Levy and $100,000 into an account for the benefit of Dr. Ronald Levy, in full satisfaction of our obligations to each of them under the deferred compensation program.
|
Loan payments under the amended notes of $500,000 previously due on November 10, 2010 and $250,000 due on May 10, 2011 have been postponed under the Settlement Agreement. The new payment schedule specifies five monthly payments of $150,000 from May 2012 through September 2012.
Furthermore, we agreed that if we receive net cash proceeds (the “Proceeds”) totaling at least $10 million from a single transaction or transactions, subject to certain exceptions and qualifications described in the Settlement Agreement, before all of the payments due pursuant to the Settlement Agreement are paid in full, we will pay certain specified remaining payments due under the Settlement Agreement in full within five business days of receipt of the Proceeds.
Accordingly, among other things, the Settlement Agreement (i) settled a disagreement between us and Dr. Warren Levy and Dr. Ronald Levy regarding the aggregate amount of, and the timing of the payments in respect of, their vacation pay; (ii) required that a portion of the previously agreed to severance payments be placed into escrow and then be released to Dr. Warren Levy and Dr. Ronald Levy at the times previously agreed; (iii) required our payment in 2012 of an aggregate of $200,000 under the deferred compensation program for Dr. Warren Levy and Dr. Ronald Levy, $100,000 to each of two Rabbi Trust Accounts; and (iv) accelerates the payment of certain remaining payments under the Settlement Agreement upon the receipt of the Proceeds.
Total interest expense on all Levy loans was approximately $2,302,000, $1,446,000 and $1,403,000 respectively, for 2011, 2010 and 2009, respectively. As of December 31, 2011, total accrued interest on all Levy loans was $7,234,165 and the outstanding loans to the Levy Parties from us totaled $14,737,518, for an aggregate owed to them of $21,971,683.
Outstanding Levy loans consisted of the following at December 31, 2011 and December 31, 2010:
|
|
|
2011
|
|
|
2010
|
|
|
Long-term loans, current portion
|
|
$
|
750,000
|
|
|
$
|
--
|
|
|
Long-term loans, net of current portion
|
|
|
13,988,000
|
|
|
|
14,738,000
|
|
|
|
|
|
14,738,000
|
|
|
|
14,738,000
|
|
|
Accrued interest, short-term
|
|
|
--
|
|
|
|
--
|
|
|
Accrued interest, long-term
|
|
|
7,234,000
|
|
|
|
4,932,000
|
|
|
Total loans and interest
|
|
$
|
21,972,000
|
|
|
$
|
19,670,000
|
|
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31, 2011 and 2010:
|
|
|
2011
|
|
|
2010
|
|
Estimated Useful Lives
|
|
Building and improvements
|
|
$
|
--
|
|
|
$
|
1,497,425
|
|
25 years
|
|
Leasehold improvements
|
|
|
10,470,946
|
|
|
|
10,470,946
|
|
Lesser of lease term or useful life
|
|
Manufacturing equipment
|
|
|
6,386,070
|
|
|
|
5,759,643
|
|
10 years
|
|
Laboratory equipment
|
|
|
3,618,143
|
|
|
|
3,603,600
|
|
5 years
|
|
Other equipment
|
|
|
48,618
|
|
|
|
724,580
|
|
10 years
|
|
Office equipment and furniture
|
|
|
1,417,906
|
|
|
|
1,395,019
|
|
5 years
|
|
Equipment formerly under capital leases
|
|
|
1,093,424
|
|
|
|
1,093,424
|
|
Lesser of lease term or useful life
|
|
|
|
|
23,035,107
|
|
|
|
24,544,637
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(20,058,049
|
)
|
|
|
(21,475,687
|
)
|
|
|
|
|
|
2,977,058
|
|
|
|
3,068,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
--
|
|
|
|
121,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
2,977,058
|
|
|
$
|
3,190,117
|
|
|
Depreciation and amortization expense on property, plant and equipment was approximately $611,000, $637,000, and $641,000 in 2011, 2010, and 2009, respectively. Our fully depreciated assets included above at December 31, 2011 and December 31, 2010, respectively, were approximately $17,000,000 and $19,000,000.
6. Patents and Other Intangible Assets
Details patents and other of intangible assets are summarized as follows:
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
1,180,000
|
|
|
$
|
377,000
|
|
|
$
|
803,000
|
|
|
$
|
1,440,000
|
|
|
$
|
571,000
|
|
|
$
|
869,000
|
|
|
Deferred Patents
|
|
|
1,202,000
|
|
|
|
--
|
|
|
|
1,202,000
|
|
|
|
1,784,000
|
|
|
|
--
|
|
|
|
1,784,000
|
|
|
Trademarks
|
|
|
144,000
|
|
|
|
144,000
|
|
|
|
--
|
|
|
|
144,000
|
|
|
|
142,000
|
|
|
|
2,000
|
|
|
Deferred Trademarks
|
|
|
15,000
|
|
|
|
--
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
--
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,541,000
|
|
|
$
|
521,000
|
|
|
$
|
2,020,000
|
|
|
$
|
3,383,000
|
|
|
$
|
713,000
|
|
|
$
|
2,670,000
|
|
Trademarks and patents are all intangible assets with definite useful lives and therefore continue to be amortized in accordance with accounting guidance. Amortization expense amounted to $99,000, $104,000, and $92,000 for the years ended December 31, 2011, 2010 and 2009, respectively. The weighted-average remaining amortization period for trademarks for 2011 and 2010 was approximately 0 years and two years, respectively. The weighted-average amortization period remaining for patents for 2011 and 2010 was approximately 10 years and 11 years, respectively. Future amortization expense on our amortizable intangible assets over the next five years is estimated as follows:
|
2012
|
|
$
|
85,000
|
|
|
2013
|
|
|
85,000
|
|
|
2014
|
|
|
85,000
|
|
|
2015
|
|
|
84,000
|
|
|
2016
|
|
|
82,000
|
|
|
|
|
$
|
421,000
|
|
During 2010 and 2009, we wrote off certain foreign patents in countries that had limited commercial potential and/or wrote off certain foreign and domestic patent applications for technologies that were no longer being pursued or had limited commercial potential in their respective countries. Charges in 2011, 2010, and 2009 to general and administrative expense to write off certain abandoned intangible assets were $0, $225,000, and $3,000, respectively, representing their carrying value. As of December 31, 2011,
fourteen of our patents had issued in the U.S. and fifty-two had issued in various foreign countries. Various other domestic and foreign applications are pending.
7. China Joint Venture
In 2008, we initiated the transfer of technology and know-how to the China Joint Venture. This technology and know-how contribution gave rise to a basis difference between our investment in the China Joint Venture and our 45% equity interest in the underlying assets of the China Joint Venture. This basis difference was being recognized over 17 years, the estimated life of the transferred assets. We revised our accounting prospectively to account for the calculation of the basis difference between our investment in the China Joint Venture and our 45% equity interest in the underlying net assets of the China Joint Venture. We had originally calculated the amortization of the difference based upon the $4.5 million of intellectual property (licensed patent rights, know-how, etc.) that has been and was agreed to be contributed to the China Joint Venture. However, as of January 1, 2011, we calculated the amortization of the difference based upon the $2.1 million of intellectual property that had been contributed to that date and recorded on the financial statements of the China Joint Venture. The cumulative adjustment in the first quarter of 2011 totaled $317,643. We also recognized a revised basis difference of $30,882. Therefore, the net basis difference recognized in the first quarter of 2011 was an expense of $286,761. These expenses are included in our statement of operations under “loss (gain) from investment in former China joint venture.”
On June 7, 2011 (the “Signing Date”), we entered into an Equity Sale and Purchase Agreement with an effective date of June 4, 2011 (the “Effective Date”), (which agreement was restated and replaced in July 2011 without altering the substantive terms of the June agreement; as so restated, the “Equity Transfer Agreement”), under which we sold our equity interest in Unigene Biotechnology Co., Ltd. (the “China Joint Venture”), which represents forty-five percent of the registered capital and the profits and losses of the China Joint Venture (the “Equity Interest”). Thereunder, we sold the Equity Interest to China Charmaine Pharmaceutical Company Limited (the “Purchaser”), an affiliate of China Pharmaceutical Group Limited (“CPG”) for an aggregate purchase price of up to $1,050,000, payable in two installments in the amounts and at the times described below.
The China Joint Venture was formed between us and CPG’s predecessor under that certain Joint Venture Contract dated June 15, 2000 (the “JV Contract”), those certain Articles of Association dated June 15, 2000 (the “Articles of Association”) and that certain Agreement dated April 23, 2008 (the “Agreement”). We also granted certain licenses and other rights to the China Joint Venture under that certain Technology Transfer Agreement dated April 23, 2008 (the “Technology Transfer Agreement”).
Furthermore, in connection with the Technology Transfer Agreement, on May 10, 2008, we entered into a common stock purchase agreement (the “Stock Purchase Agreement”) pursuant to which we sold 1,080,000 shares of our common stock, par value $0.01 per share (the “Shares”), at a price of $1.86 per share to Tin Lon Investment Limited, a Hong Kong limited liability company that is a wholly-owned subsidiary of CPG, in a private placement. Pursuant to the Equity Transfer Agreement, from the Effective Date through and until the first anniversary of the Closing Date (defined below) (the “Final Payment Date”), we have the option (the “Option”), but not the obligation, upon ten days prior written notice to the Purchaser, to repurchase the Shares at a purchase price of $1.86 per share, if they have not previously been disposed of by the holder.
In consideration for the sale and transfer of the Equity Interest: (i) upon the receipt of certain governmental approvals and satisfaction of certain other customary conditions, the Purchaser shall pay the first installment of $600,000 to us (such payment date, the “Closing Date”); and (ii) the Purchaser shall pay the remaining $450,000 (the “Final Payment”) on the date the Option is exercised, provided that if the Option is not exercised on or before the Final Payment Date and the Shares are not otherwise disposed of by the holder, we will forego the Final Payment.
Furthermore, as of the Effective Date, we have no further obligations under the JV Contract or the Articles of Association.
As of the Signing Date, our investment in the China Joint Venture was $2,873,070 and we had recorded a liability to the China Joint Venture in the amount of $1,200,000 for a net investment of $1,673,070. Due to the expected first payment of $600,000 we recognized a loss of $1,073,070 on the termination and sale of the China Joint Venture. We will recognize a gain if and when we receive the $450,000 contingent final payment.
8. Notes Payable – Victory Park
On September 30, 2008, we entered into a financing agreement with Victory Park pursuant to which we borrowed $15,000,000 from Victory Park and, in connection therewith, we issued to Victory Park a three-year senior secured non-convertible term note. Richard Levy (no relation to the Levys), our Chairman of the Board, is the Managing Principal and Founder of Victory Park. We received net proceeds of $14,372,000 after fees and closing expenses paid as of September 30, 2008. On May 22, 2009, we drew down the remaining $5,000,000 available under this agreement. These term notes were purchased by Victory Park at a 3% discount to the face amount and we received net proceeds of $4,803,000 after fees and closing expenses. Pursuant to the financing agreement, we issued an aggregate of 1,500,000 shares of Common Stock to Victory Park. Subsequently, pursuant to a Warrant Exchange Agreement, dated as of October 19, 2009, with Victory Park, we issued 300,000 shares of Common Stock to Victory Park in exchange for Victory Park’s surrender of a warrant to purchase 1,000,000 shares of Common Stock.
During January 2009 and February 2010, respectively, we repaid approximately $463,000 and $180,000 in principal in accordance with mandatory prepayment terms. There were no such payments in 2011.
These notes bore interest through March 16, 2010 at the prime rate plus 7%, subject to a floor of 14% per annum and a cap of 18% per annum. In conjunction with this financing, loans held by the Levys were subordinated to the Victory Park notes. We pledged all of our current and future assets, including intellectual property, as collateral under the Victory Park notes.
In March 2010, we entered into an amended and restated financing agreement with Victory Park. The restated financing agreement amends and restates in its entirety and replaces the financing agreement dated as of September 30, 2008.
Under the terms of the restated financing agreement, we issued to Victory Park $33,000,000 aggregate principal amount of three-year, senior secured convertible notes in exchange for the three-year, senior secured non-convertible notes previously issued pursuant to the original financing agreement, in the aggregate principal amount of approximately $19,358,000, and additional net proceeds of approximately $13,642,000 (before debt issuance costs). These convertible notes were purchased at a 2% discount to the face amount. Total fees and expenses at closing were approximately $2,007,000 and were expensed as incurred and reported on our Statement of Operations as debt issuance costs because the financing was considered a troubled debt restructuring due to our financial condition. We therefore received net cash proceeds of approximately $11,635,000. The balance of deferred financing costs ($99,000 at December 31, 2011) and note discount ($3,945,000 at December 31, 2011) from the 2008, 2009 and 2010 Victory Park financings are being amortized over the three-year term of the new convertible notes to interest expense on a straight-line basis which approximates the effective interest rate method. In addition, under certain circumstances, we may request that Victory Park purchase (which purchase shall be in Victory Park’s sole discretion) up to an additional $3 million aggregate principal amount of convertible notes at one subsequent closing. The maturity date of the convertible notes has been extended to March 17, 2013 from September 30, 2011 under the original notes. After the first anniversary of the first closing, under certain circumstances, we have the right to prepay up to $10,642,472 (this was reduced from $13,642,472 in conjunction with the forbearance agreement described below) of the convertible notes at a price equal to 110% of the convertible notes being repaid plus accrued and unpaid interest, subject to customary conditions. The convertible notes are secured by a first priority lien on all of our current and future assets. The convertible notes will accrue interest at a rate per annum equal to the greater of the prime rate plus 5% and 15%, which, in the absence of an event of default, shall be capitalized and added to the outstanding principal balance of the convertible notes on each anniversary of the date of issuance other than the maturity date. As a result, in 2011, $5,018,750 in accrued interest was reclassified from long-term accrued interest to long-term notes payable.
For 2011, 2010 and 2009, we recognized approximately $8,607,000, $7,765,000 and $3,356,000, respectively, in cash and non-cash interest expense on these notes.
The notes are convertible into shares of common stock at the holder’s option as of March 17, 2011. The initial conversion rate, which is subject to adjustment as set forth in the notes, is calculated by dividing the sum of the principal to be converted, plus all accrued and unpaid interest thereon, by $0.70 per share. If we subsequently make certain issuances of common stock or common stock equivalents at an effective purchase price less than the then-applicable conversion price, the conversion price of the notes will be reduced to such lower price. We lacked sufficient shares of common stock to deliver all of the shares of common stock to be issued upon conversion of the notes and therefore, we were required to obtain stockholder approval to amend our certificate of incorporation to increase the number of authorized shares. We obtained this approval on June 15, 2010 at our annual meeting of stockholders.
As the Victory Park notes are convertible into shares of our common stock and prior to June 15, 2010 we did not have sufficient authorized shares to effectuate a full conversion of the notes, the conversion feature was being treated as a liability for part of 2010. As such, we established a liability for the conversion feature based on its fair value. The liability for the conversion feature was marked to the market at the end of each quarter until such time as additional shares were authorized. We therefore recognized a non-cash expense of $10,034,000 in the first quarter of 2010 which represented the change in the fair value of the conversion feature of the notes from the closing date of March 16, 2010 to the balance sheet date of March 31, 2010. In the second quarter of 2010, we recognized a non-cash gain of $1,909,000 due to the change in the fair value of the conversion feature of the note from March 31, 2010 to June 15, 2010, the date of stockholder approval of the amendment to increase the number of authorized shares. In addition, at March 31, 2010, we had a liability on our balance sheet for the embedded conversion feature in the amount of $18,633,000, which was the value of the embedded conversion feature as of March 31, 2010. After reducing this liability by the $1,909,000 gain as described above, the balance of $16,724,000 was reclassified to additional paid-in capital since the embedded conversion feature no longer met the bifurcation criteria.
Pursuant to the amended and restated registration rights agreement executed in connection with the March 2010 financing, we filed a registration statement with the SEC registering the resale of the shares currently or to be held by Victory Park including the conversion shares, which registration statement was declared effective on July 13, 2010 and as amended on April 21, 2011. We agreed to keep the registration statement effective at all times until the earlier of (i) the date as of which all the registrable securities may be sold without restriction pursuant to Rule 144 and (ii) the date on which all of the registrable securities covered by such registration statement have been sold. If on any day after the effective date of the registration statement, sales of all of the registrable securities cannot be made (other than during an allowable grace period) pursuant to the registration statement (including because of a suspension or delisting of the common stock on its principal market or a failure to register a sufficient number of shares of common stock), then as partial relief for the damages to any holder of registrable securities we shall pay to each holder of registrable securities an amount in cash equal to two percent (2%) of the aggregate value of such holder’s registrable securities required to be included in such registration statement on the initial date of such failure and on every 30
th
day thereafter (pro-rated for periods totaling less than 30 days) until such failure is cured These damages do not have a maximum limitation.
In addition, pursuant to the restated financing agreement, in March 2010, Richard Levy became a member of the Board, Chairman of the Board and a member of our Nominating and Corporate Governance Committee. Victory Park has the right, subject to certain conditions, to designate an individual to fill the current vacant seat on the Board. That individual (the “VPC Designee”) will become a member of the Board’s Compensation Committee and Audit Committee. Moreover, we agreed that until such time as (i) the aggregate principal amount outstanding under the senior secured convertible notes issued to Victory Park is less than $5 million and (ii) Victory Park beneficially owns less than twenty percent of the issued and outstanding shares of our Common Stock, our Nominating and Corporate Governance Committee shall take all actions reasonably necessary to recommend the nomination of, and the Board shall nominate for reelection to the Board, Richard Levy and the VPC Designee (or substitutes or replacements designated by Victory Park).
Under the restated financing agreement, we must maintain a cash balance equal to at least $2,500,000 and our cash flow (as defined in the restated financing agreement) must be at least $2,000,000 in any fiscal quarter or $7,000,000 in any three consecutive quarters. These default provisions were temporarily waived under a forbearance agreement executed in December 2010. The forbearance period began December 10, 2010 and terminated upon the termination of the amended GSK license agreement in December 2011. The restated financing agreement specifies certain events of default including, without limitation: failure to pay principal or interest; filing for bankruptcy; breach of covenants, representations or warranties; the occurrence of a material adverse effect (as defined in the restated financing agreement); a change in control (as defined in the restated financing agreement); lack of timely filing or effectiveness of a required registration statement; and any material decline or depreciation in the value or market price of the collateral. We are subject to certain cash damages, as set forth in the convertible notes, in the case of a failure to timely convert the notes, and a failure to timely convert is also an event of default, subject to additional remedies. Upon any default, among other remedies, both principal and interest would be accelerated and additional charges would apply. As of December 31, 2011, we were in compliance with all of these covenants. In the event the Company is not now able to achieve management’s projected cash flow forecasts, it may be in violation of its covenants with Victory Park.
9. Debt
We have short-term and long-term debt outstanding to Victory Park and the Levys.
Aggregate maturities of all outstanding debt at December 31, 2011 were as follows:
|
2012
|
|
|
750,000
|
|
|
2013
|
|
|
52,006,268
|
|
|
Thereafter
|
|
|
--
|
|
|
|
|
|
52,756,268
|
|
|
Discount – Victory Park (see Note 8)
|
|
|
(3,945,124
|
)
|
|
|
|
|
|
|
|
|
|
$
|
48,811,144
|
|
Presentation on Balance Sheet:
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
Notes payable – Levys: long-term (see Note 4)
|
|
$
|
13,987,518
|
|
|
$
|
14,737,518
|
|
|
Notes payable – Levys: short-term (see Note 4)
|
|
|
750,000
|
|
|
|
--
|
|
|
Notes payable – Victory Park –net of discount of $3,945,124 in 2011 and $7,209,700 in (see Note 8)
|
|
|
34,073,626
|
|
|
|
25,790,300
|
|
|
Note payable-China Joint Venture Partner (see Note 7)
|
|
|
--
|
|
|
|
1,200,000
|
|
|
|
|
$
|
48,811,144
|
|
|
$
|
41,727,818
|
|
10. Tarsa
In October 2009, we licensed our Phase 3 oral calcitonin program (“the Program”) to Tarsa Therapeutics, Inc. (“Tarsa”), a private company formed by a syndicate of three venture capital funds specializing in the life sciences: MVM Life Science Partners, Quaker BioVentures and Novo A/S. Simultaneously, Tarsa announced the closing of a $24 million Series A financing from the investor syndicate.
In consideration for our sale to Tarsa of an exclusive license for the Program, we received from Tarsa approximately $8,993,000 in cash and 9,215,000 shares of common stock in Tarsa, which initially represented a 26% ownership on a non-diluted basis (see below). The cash consideration was derived based upon the expenses we had incurred for the Program. We valued the common stock at $0.23 per share or a total of $2,119,000 with the assistance of an outside valuation firm, and we accounted for this as an equity method investment as of December 31, 2009. These shares are pledged as security under the Victory Park loans.
Tarsa was solely responsible for the future costs of the global Phase 3 clinical trials of the Program that was initiated in 2009 and completed in the first quarter of 2011. We are eligible to receive up to $3,000,000 in milestone payments based on the achievement of certain sales benchmarks, as well as royalties, at rates in the single digits, on product sales. We have no further cash or non-cash obligations to Tarsa or the Program.
As of the effective date of the agreement, Tarsa is responsible for all expenses incurred related to the Program, thus no additional expenses will be incurred by us related to the clinical study, except as agreed upon in subsequent statement of works. Furthermore, we note there is no joint development or steering committee between us and Tarsa related to the manufacturing and development of Phase 3 and future product. Any additional involvement by Unigene requires a separate statement of works to be negotiated and executed.
As an equity method investment, we are required to recognize our proportionate share of Tarsa’s earnings and losses. Our 2009 operations include a loss of $2,119,000, which represented our proportionate share of Tarsa’s loss for the year ended December 31, 2009 of $3,795,000, which exceeded the amount of our investment in Tarsa. The loss reduced our investment in Tarsa to zero.
We recognized approximately $1,293,000 and $1,007,000 of revenue, for development, testing and other services performed for Tarsa under statements of work in 2011 and 2010, respectively.
On March 24, 2011, we announced that statistically significant top-line results from Tarsa’s Phase 3 ORACAL study of oral calcitonin for postmenopausal osteoporosis validate our proprietary oral peptide drug delivery technology. The ORACAL study achieved its primary endpoint that was agreed with the FDA through a formalized Special Protocol Assessment (“SPA”) process. On September 19, 2011, we announced that Tarsa presented positive Phase 3 data from its ORACAL trial of OSTORA
TM
during the annual
American Society for Bone and Mineral Research
(ASBMR)
2011 meeting. The data demonstrated that OSTORA achieved all of the efficacy endpoints in the trial and indicated that the safety profile of OSTORA did not substantially differ from nasal calcitonin or placebo.
We also announced in April 2011 that Tarsa had selected us to conduct the stability testing for its oral calcitonin and has agreed to pay us $1.04 million for these services. The stability testing results will be included in Tarsa’s NDA to be filed with the FDA in the second half of 2012.
On April 8, 2011, along with the founding investors of Tarsa, we entered into an agreement to purchase $1,518,000 in convertible promissory notes and warrants (the “Purchase Agreement”) from Tarsa to help fund Tarsa’s business operations into the first half of 2012. After recording this investment in Tarsa, we recognized
our proportionate share of
Tarsa’s accumulated losses which exceeded the book value of our investment and, as a result, reduced the book value of our investment in Tarsa to zero. This investment maintained our fully-diluted ownership of Tarsa at approximately 20% (subject to liquidating preferences), taking into account a prior financing in 2010 (in which we did not participate) as well as outstanding stock options. In addition, pursuant to the Purchase Agreement, Tarsa’s three founding investors may elect to purchase additional convertible promissory notes and warrants from Tarsa in one or more closings to occur between the April 8, 2011 closing date and December 2011 (the “Subsequent Closings”). If we do not purchase our pro rata portion of such additional securities in those Subsequent Closings, our outstanding principal and accrued interest under the notes previously purchased will mandatorily, automatically convert into shares of Tarsa common stock at the then current conversion price for the Series A Preferred Stock set forth in Tarsa’s certificate of incorporation, as amended from time to time. Therefore, on July 8, 2011, we entered into another Purchase Agreement and we invested an additional $1,301,000 in Tarsa convertible promissory notes and warrants. After recording this investment in Tarsa, we recognized
our proportionate share of
Tarsa’s accumulated losses and reduced our investment in Tarsa to zero. As of December 31, 2011, we owned an approximate 20% interest in Tarsa (on a fully-diluted basis), subject to liquidating preferences and future dilution. In January 2012, we purchased additional convertible promissory notes with an aggregate original principal amount of $650,571 and additional warrants to purchase up to an aggregate of 67,435 shares of Series A Preferred Stock. In March 2012, our fully-diluted ownership in Tarsa was reduced to approximately 16%, see Note 28.
11. Sale/Leaseback
On May 24, 2011 (the Closing Date), we sold our real property located at 110 Little Falls Road, Fairfield, New Jersey, with the buildings and improvements thereon, and any furniture, machinery, equipment and other personal property (other than property used in the conduct of our laboratory business) that we owned and used to operate, repair and maintain the property (the “
Property
”), to RCP Birch Road, L.L.C. (the Purchaser). This sale was affected pursuant to an Agreement for Sale of Real Estate, dated as of January 31, 2011, by and between us and the Purchaser. In connection with the transfer of title of the Property, on the Closing Date, we received an aggregate purchase price of $1,200,000 from the Purchaser. In connection with the transfer of title of the Property, pursuant to the Settlement Agreement, Victory Park and the Levy Parties, respectively, released their primary and secondary mortgages and related liens on the Property (see Notes 4 and 8).
In connection with the sale of the Property, we executed a Lease for Real Property, dated as of the Closing Date, pursuant to which we have leased the Property from the Purchaser for an initial term of seven years, which may be extended for one renewal term of five years, for an annual base rent during the initial term ranging from $135,000 to $145,000, and up to approximately $156,000 in the renewal term.
After expenses of $80,000, we received net proceeds of $1,120,000. Our basis in the land, building and improvements was $303,000. Therefore, we will recognize a gain on this transaction in the amount of $817,000. This gain is being recognized ratably over seven years, the length of the lease term. For the period ended December 31, 2011, we recognized a gain in the amount of $68,000 which is included in the Statement of Operations as a reduction in rent expense.
12. Site-directed Bone Growth
In September 2011, we sold our non-core asset, the Site Directed Bone Growth (SDBG) program, by assigning seven patent applications to Kieran Murphy, LLC. In addition, we terminated an Exclusive License Agreement and Consulting Agreement with Kieran Murphy, LLC, as well as a License Option Agreement and Research Agreement with Yale University. In exchange for the assignment of the patents and patent applications, we will receive sales royalties in excess of seven percent (7%) and will receive forty percent (40%) of any future licensing revenue and/or forty percent (40%) of all considerations received upon the subsequent sale of the SDBG patent portfolio by Kieran Murphy, LLC.
In divesting our SDBG patent portfolio, we also terminated our License Option Agreement and Research Agreement (which expired May 31, 2010) with Yale University. We had previously been working with Yale Professor Agnes Vignery and filed a number of patent applications covering the SDBG Patent Portfolio. We have terminated these agreements and returned a number of patent applications to Yale University.
In addition to the potential revenue above, we received cash payments aggregating $20,000. In association with this transaction we sold various SDBG patents and patent applications with a total book value of $844,241. We therefore recognized a loss of $824,241 on the sale of SDBG.
13. Nordic Bioscience
In October 2011, we and Nordic Bioscience announced our decision to establish a Joint Development Vehicle (JDV) to progress up to three of our internally developed, proprietary calcitonin analogs through Phase 2 proof-of-concept in humans for the treatment of Type 2 diabetes, osteoarthritis and osteoporosis. We and Nordic will each own 50% of the resulting JDV. The consummation of the transaction contemplated in connection with the JDV remains subject to the negotiation and execution of a series of agreements among the parties.
In addition to the option for an exclusive, royalty free license grant, it is anticipated that we will supply to the JDV without charge the analogs selected for development by the JDV for preclinical studies and, thereafter, manufacture sufficient quantities of the selected lead analog for clinical trials. In exchange for a 50% ownership of the JDV, Nordic is responsible for conducting and fully funding all preclinical, toxicology and clinical development through Phase 2 proof-of-concept for the Type 2 diabetes indication.
On October 5, 2011, we entered into a Common Stock Purchase and Option Agreement pursuant to which Dr. Claus Christiansen, Chairman of Nordic Bioscience, purchased 1,691,729 shares of our common stock for an aggregate purchase of $1.5 million, at a purchase price equivalent to the average share price over the previous 30 days, through his Danish foundation, DDF, with an option to purchase an additional $1.5 million worth of our common stock on or before March 15, 2012. DDF also has an option to make an additional equity investment of up to $3.0 million in our common stock on or before June 30, 2012. These options are priced at the average of our closing bid price for 30 consecutive trading days.
14. Inventory
Inventories consisted of the following as of December 31, 2011 and 2010:
|
|
|
2011
|
|
|
2010
|
|
|
Current Inventory
|
|
|
|
|
|
|
|
Finished goods – net of allowances of $1,151,000 and $1,214,000 respectively
|
|
$
|
873,341
|
|
|
$
|
896,471
|
|
|
Raw materials – net of allowances of $38,000 and $63,000, respectively
|
|
|
410,209
|
|
|
|
521,462
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,283,550
|
|
|
$
|
1,417,933
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Inventory
|
|
|
|
|
|
|
|
|
|
Raw Materials
|
|
$
|
1,373,545
|
|
|
$
|
1,439,460
|
|
|
Finished Goods
|
|
|
573,102
|
|
|
|
1,442,520
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,946,647
|
|
|
$
|
2,881,980
|
|
Typically, finished goods inventory is fully reserved except for the amounts deemed saleable by management based upon current or anticipated orders, primarily under contractual arrangements. Our reserves for finished goods and raw materials were $1,189,000 at December 31, 2011, a decrease of $88,000 from December 31, 2010. Based upon expected future orders, $573,000 of our finished goods inventory and $1,373,000 of our raw material inventory were classified as a noncurrent asset at December 31, 2011. Noncurrent inventory decreased in 2011 due to the cessation of production of calcitonin and enzyme and the utilization of previously manufactured calcitonin. We expect this inventory to be fully recoverable, therefore no reserve was established.
15. Accrued Expenses
Accrued expenses consisted of the following at December 31, 2011 and 2010:
|
|
|
2011
|
|
|
2010
|
|
|
Current Accrued Expenses
|
|
|
|
|
|
|
|
Severance payments
|
|
$
|
248,470
|
|
|
$
|
911,000
|
|
|
Vacation, payroll taxes and other payroll-related expenses
|
|
|
545,051
|
|
|
|
734,970
|
|
|
Consultants, clinical trials
|
|
|
903,879
|
|
|
|
938,642
|
|
|
Professional fees and other
|
|
|
397,049
|
|
|
|
249,733
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,094,449
|
|
|
$
|
2,834,345
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Accrued Expenses
|
|
|
|
|
|
|
|
|
|
Vacation Pay
|
|
$
|
--
|
|
|
$
|
162,296
|
|
16. Obligations under Operating Leases
We are obligated under a net-lease for our manufacturing facility located in Boonton, New Jersey that expires in 2014. We also lease office space in a second location in Boonton, New Jersey that expires in 2017. We have 10-year renewal options on both Boonton locations, as well as options to purchase these facilities. We are leasing our research facility in Fairfield, New Jersey under a sale/leaseback agreement. The lease is for seven years with a 5-year renewal option. Total future minimum rentals under these non-cancelable operating leases are as follows:
|
2012
|
|
$
|
428,937
|
|
|
2013
|
|
|
432,021
|
|
|
2014
|
|
|
248,370
|
|
|
2015
|
|
|
235,500
|
|
|
2016
|
|
|
238,583
|
|
|
2017 and thereafter
|
|
|
244,584
|
|
|
|
|
|
|
|
|
|
|
$
|
1,827,995
|
|
Total rent expense was approximately $304,000 for 2011 and $290,000 for each of 2010 and 2009. The rent on our Boonton, NJ office space increases by $1,000 per year and the rent on our Fairfield, New Jersey facility increases by $5,000 per year in years two and five of the lease.
17. Warrants
As of December 31, 2011, there were 60,000 warrants outstanding, all but 20,000 of which are currently exercisable, to purchase an aggregate of 60,000 shares of Common Stock at exercise prices ranging from $2.00 to $2.20 per share. The following summarizes warrant activity for the past three years:
|
|
|
Warrants
|
|
|
Warrants Exercisable at End of Year
|
|
|
Weighted Average Exercise Price
|
|
|
Outstanding January 1, 2009
|
|
|
2,121,571
|
|
|
|
2,101,571
|
|
|
$
|
2.95
|
|
|
Granted
|
|
|
--
|
|
|
|
|
|
|
|
--
|
|
|
Cancelled – Victory Park stock swap
|
|
|
(1,000,000
|
)
|
|
|
|
|
|
|
4.25
|
|
|
Exercised – Fusion Capital
|
|
|
(1,061,571
|
)
|
|
|
|
|
|
|
1.77
|
|
|
Outstanding December 31, 2009
|
|
|
60,000
|
|
|
|
40,000
|
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2010
|
|
|
60,000
|
|
|
|
40,000
|
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
--
|
|
|
|
|
|
|
|
--
|
|
|
Cancelled
|
|
|
--
|
|
|
|
|
|
|
|
--
|
|
|
Exercised
|
|
|
--
|
|
|
|
|
|
|
|
--
|
|
|
Outstanding December 31, 2011
|
|
|
60,000
|
|
|
|
40,000
|
|
|
$
|
2.13
|
|
A summary of warrants outstanding as of December 31, 2011 follows:
|
|
|
|
Warrants Outstanding
|
|
|
Exercise Price
|
|
|
Number Outstanding
|
|
|
Weighted Ave. Remaining Life (years)
|
|
|
Weighted Ave. Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
2.00
|
|
|
|
20,000
|
|
|
|
3.4
|
|
|
$
|
2.00
|
|
|
$
2.20
|
|
|
|
40,000
|
|
|
|
0.9
|
|
|
|
2.20
|
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
$
|
2.13
|
|
18. Rights Plan
In December 2002, pursuant to a rights agreement, we distributed common stock purchase rights to stockholders of record as a dividend at the rate of one right for each share of common stock. Each right entitles the holder to purchase from us one ten-thousandth of a share of common stock at an exercise price of $4.00. Initially the rights are attached to the common stock and are not exercisable. There is one right outstanding for every share of common stock outstanding.
The rights become exercisable and will separate from the common stock ten calendar days after a person or group acquires beneficial ownership of fifteen percent or more of our common stock, or ten business days (or a later date following such announcement as determined by our Board of Directors) after the announcement of a tender offer or an exchange offer to acquire fifteen percent or more of our outstanding common stock.
The rights are redeemable for $.00001 per right at the option of the Board of Directors at any time prior to the close of business on the tenth calendar day after a person or group acquires beneficial ownership of fifteen percent or more of our common stock. If not redeemed, the rights will expire on December 30, 2012. Prior to the date upon which the rights would become exercisable under the rights agreement, our outstanding stock certificates will represent both the shares of common stock and the rights, and the rights will trade only with the shares of common stock.
Generally, if the rights become exercisable, then each stockholder, other than the stockholder whose acquisition has caused the rights to become exercisable, is entitled to purchase, for the exercise price, that number of shares of common stock that, at the time of the transaction, will have a market value of two times the exercise price of the rights. In addition, if, after the rights become exercisable, we are acquired in a merger or other business combination, or fifty percent or more of our assets, cash flow or earning power are sold, each right will entitle the holder to purchase, at the exercise price of the rights, that number of shares of common stock of the acquiring company that, at the time of the transaction, will have a market value of two times the exercise price of the rights.
The rights plan is intended to improve the ability of our Board of Directors to protect the interests of Unigene and our stockholders in the event of an unsolicited proposal to acquire a significant interest in Unigene.
19. Stock Option Plans
We have had various shareholder-approved stock option plans for employees and directors under which we have granted non-qualified and incentive stock options. Options granted under these plans must be at a price per share not less than the fair market value per share of common stock on the date the option is granted. The options generally vest over a one to four year period and typically expire ten years from the date of grant. Shares for option exercises are issued from authorized and unissued shares.
At our June 2006 Annual Meeting, the stockholders approved the adoption of the 2006 Stock Based Incentive Compensation Plan (as amended, the “2006 Plan”). All employees and directors, as well as certain consultants, are eligible to receive grants under the 2006 Plan. Allowable grants under the 2006 Plan include stock options, phantom stock, stock appreciation rights, restricted stock and deferred stock. Options granted under the 2006 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. The 2006 Plan replaced our older stock option plans and, initially, had 3,426,000 shares authorized for issuance. At December 31, 2011, we had reserved approximately 3,065,000 shares for future grants under the 2006 Plan.
Compensation expense is calculated each quarter for consultants using the Black-Scholes option pricing model, until the option is fully vested. Based upon options issued to consultants, we recognized a compensation benefit of $1,400 in 2011, a compensation benefit of $6,000 in 2010, and compensation expense of $43,000 in 2009. These amounts are included in general and administrative and research and development expenses.
For 2011, we recognized share-based compensation cost of approximately $1,411,000, which consisted of $1,333,000 in general, and administrative expenses, and $78,000 in research and development expenses. For 2010 we recognized share-based compensation cost of approximately $689,000, which consisted of $601,000 in general, and administrative expenses and $88,000 in research and development expenses. For 2009, we recognized share-based compensation costs of $378,000, which consisted of $270,000 in general, and administrative expense and $108,000 in research and development expenses. We did not capitalize any share-based compensation cost.
As of December 31, 2011, there was $1,136,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of approximately 1 year.
For 2011, 2010 and 2009, we estimated the fair value of each option award on the date of grant using the Black-Scholes model. We utilized the risk-free interest rate for periods equal to the expected term of the option based upon U.S. Treasury securities in effect at the time of the grant. We have no present intention of declaring any dividends. We based expected volatility on historical volatility. Option forfeiture rates are based on our historical forfeiture rates. We estimated the expected term of stock options using historical exercise experience.
The following table shows the weighted average assumptions we used to develop the fair value estimates for employee and director stock options:
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Expected volatility
|
|
|
60
|
%
|
|
|
59
|
%
|
|
|
52
|
%
|
|
Expected dividends
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Expected term (in years)
|
|
|
7.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
Risk-free rate
|
|
|
1.8
|
%
|
|
|
1.9
|
%
|
|
|
1.9
|
%
|
|
Forfeiture rate - employees
|
|
|
25
|
%
|
|
|
20
|
%
|
|
|
20
|
%
|
|
Forfeiture rate – officers and directors
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The total fair value of shares vested during 2011, 2010 and 2009 was approximately $758,000, $385,000 and $378,000, respectively. The weighted average grant-date fair value of the 1,774,417 options that vested during 2011 was $.43 per share. The total intrinsic value, which represents the difference between the underlying stock’s market price and the option’s exercise price, of options exercised during 2011, 2010 and 2009 was $479,000, $42,000 and $498,000, respectively. The aggregate intrinsic value for all fully vested shares at December 31, 2011 was $58,000.
The weighted average grant-date fair value per share of non-vested options as of December 31, 2011 and 2010 was $.43 and $.41, respectively. Total non-vested options as of December 31, 2011 and 2010 were 3,805,084 and 5,548,251, respectively. Of the total non-vested options at December 31, 2011, approximately 3,755,000 are expected to vest.
Cash received from option exercises under all share-based payment arrangements for 2011, 2010 and 2009 was approximately $420,000, $73,000, and $331,000, respectively. No tax benefit was realized from option exercises of the share-based payment arrangements for 2011, 2010 and 2009. During 2011, stock options were modified for certain former officers and directors, extending their exercise period. Total incremental expense associated with the modifications was $391,000, of which $350,000 represented options held by the Levys. During 2010, certain options were modified for former officers and/or directors whereby the period of time to exercise was extended from 3 months to 12 months. Total incremental expense associated with these modifications was $67,000 of which $48,000 represented options held by Jay Levy.
The following summarizes activity for options granted to directors, employees and consultants:
|
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
|
Options Exercisable at End of Year
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average
Grant-date
Fair Value
|
|
|
Outstanding January 1, 2009
|
|
|
4,864,315
|
|
|
$
|
1.37
|
|
|
|
3,475,285
|
|
|
$
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
731,000
|
|
|
|
0.63
|
|
|
|
|
|
|
|
|
|
|
$
|
0.31
|
|
|
Forfeited
|
|
|
(116,500
|
)
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(629,900
|
)
|
|
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(66,000
|
)
|
|
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009
|
|
|
4,782,915
|
|
|
$
|
1.37
|
|
|
|
3,281,915
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,747,000
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
$
|
0.38
|
|
|
Forfeited
|
|
|
(98,000
|
)
|
|
|
1.85
|
|
|
|
|
|
|
|
|
|
|
$
|
1.29
|
|
|
Exercised
|
|
|
(158,600
|
)
|
|
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(65,115
|
)
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2010
|
|
|
9,208,200
|
|
|
$
|
1.03
|
|
|
|
3,659,949
|
|
|
$
|
1.48
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
875,000
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
$
|
0.50
|
|
|
Forfeited
|
|
|
(1,124,750
|
)
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
|
$
|
0.61
|
|
|
Exercised
|
|
|
(920,500
|
)
|
|
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(10,000
|
)
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2011
|
|
|
8,027,950
|
|
|
$
|
1.09
|
|
|
|
4,222,866
|
|
|
$
|
1.37
|
|
|
|
|
|
A summary of options outstanding and exercisable as of December 31, 2011, follows:
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of
Exercise Price
|
|
Number Outstanding
|
|
Weighted Average Remaining Life (years)
|
|
Weighted Average Exercise Price
|
|
Number Exercisable
|
|
Weighted Average Exercise Price
|
|
$
0.28-0.49
|
|
248,200
|
|
1.27
|
|
$
|
0.31
|
|
248,200
|
|
$
|
0.31
|
|
$
0.50-0.99
|
|
5,085,000
|
|
6.51
|
|
|
0.68
|
|
1,832,166
|
|
|
0.66
|
|
$
1.00-1.99
|
|
1,680,750
|
|
6.76
|
|
|
1.40
|
|
1,128,500
|
|
|
1.47
|
|
$
2.00-2.99
|
|
679,000
|
|
4.14
|
|
|
2.25
|
|
679,000
|
|
|
2.25
|
|
$
3.00-3.99
|
|
35,000
|
|
4.13
|
|
|
3.61
|
|
35,000
|
|
|
3.61
|
|
$
4.00-4.36
|
|
300,000
|
|
4.30
|
|
|
4.02
|
|
300,000
|
|
|
4.02
|
|
|
|
|
8,027,950
|
|
6.11
|
|
$
|
1.09
|
|
4,222,866
|
|
$
|
1.37
|
Restricted Stock Awards
During 2009, 2010 and 2011, we granted restricted stock awards to certain officers and other employees, as well as directors, which vest six months to one year from their grant date. We recognized $69,000 of compensation expense during the year ended December 31, 2011 related to restricted stock awards. Stock compensation expense is recognized over the vesting period of the restricted stock. At December 31, 2011, we had $8,000 of total unrecognized compensation cost related to non-vested restricted stock, all of which will be recognized in 2012.
The following table summarizes restricted stock activity:
|
|
|
Shares
|
|
|
Weighted Average Grant-Date Fair Value
|
|
|
Non-vested balance at January 1, 2009
|
|
|
178,961
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares granted
|
|
|
60,000
|
|
|
$
|
0.80
|
|
|
Shares vested
|
|
|
(188,961
|
)
|
|
|
0.74
|
|
|
Shares forfeited
|
|
|
--
|
|
|
|
--
|
|
|
Non-vested balance at December 31, 2009
|
|
|
50,000
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares granted
|
|
|
372,100
|
|
|
$
|
0.70
|
|
|
Shares vested
|
|
|
(231,450
|
)
|
|
|
0.72
|
|
|
Shares forfeited
|
|
|
(26,650
|
)
|
|
|
0.70
|
|
|
Non-vested Balance at December 31, 2010
|
|
|
164,000
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares granted
|
|
|
40,000
|
|
|
$
|
1.24
|
|
|
Shares vested
|
|
|
(164,000
|
)
|
|
|
0.70
|
|
|
Shares forfeited
|
|
|
--
|
|
|
|
--
|
|
|
Non-vested Balance at December 31, 2011
|
|
|
40,000
|
|
|
$
|
1.24
|
|
20. Income Taxes
As of December 31, 2011, we had available for federal income tax reporting purposes net operating loss carryforwards in the approximate amount of $106,000,000, expiring from 2012 through 2031, which are available to reduce future earnings which would otherwise be subject to federal income taxes. Our ability to use such net operating losses may be limited by change in control provisions under Internal Revenue Code Section 382. Approximately $3,475,000 of these net operating losses is related to deductions resulting from exercises of employee stock options. The tax benefit related to these stock options would be credited to additional paid-in capital when realized. In addition, as of December 31, 2011, we had federal research and development credits in the approximate amount of $3,500,000, which are available to reduce the amount of future federal income taxes. These credits expire from 2012 through 2031. We have capital losses of approximately $5,000,000 that were generated during 2011 that will expire if unused by 2016.
We have New Jersey operating loss carryforwards in the approximate amount of
$53,000,000, expiring from 2013 through 2017, which are available to reduce future earnings, which would otherwise be subject to state income tax. As of December 31, 2011, approximately $4,000,000 of these New Jersey loss carryforwards had been approved for future sale under a program of the New Jersey Economic Development Authority, which we refer to as the NJEDA. In order to realize these benefits, we must apply to the NJEDA each year and must meet various requirements for continuing eligibility. In addition, the program must continue to be funded by the State of New Jersey, and there are limitations based on the level of participation by other companies. As a result, future tax benefits will be recognized in the financial statements as specific sales are approved. We sold tax benefits and received cash of $601,000 in 2011 and $701,000 in 2010 (for 2009 and 2010). In addition, as of December 31, 2011, we had New Jersey research and development credits in the approximate amount of $880,000, which are available to reduce the amount of future New Jersey income taxes. These credits expire from 2012 through 2017.
Management has established a full valuation allowance against the net deferred tax assets at December 31, 2011 since it is more likely than not that these future tax benefits will not be realized. For the year ended December 31, 2011 the valuation allowance increased by approximately $3,425,000.
Income tax benefits recorded are summarized as follows:
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Proceeds from sale of New Jersey tax benefits
|
|
$
|
(601,000
|
)
|
|
$
|
(701,000
|
)
|
|
$
|
0
|
|
|
Federal research and development credit benefit
|
|
|
0
|
|
|
|
0
|
|
|
|
(69,000
|
)
|
|
Federal alternative minimum tax expense
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
State tax expense
|
|
|
0
|
|
|
|
0
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
$
|
(601,000
|
)
|
|
$
|
(701,000
|
)
|
|
$
|
(67,000
|
)
|
The reconciliation for the benefit from income taxes and the amount computed by applying the federal statutory income tax rate (34%) is summarized as follows:
|
Pre-tax book loss at statutory rate
|
|
$
|
(6,300,000
|
)
|
|
$
|
(9,720,000
|
)
|
|
$
|
(4,572,000
|
)
|
|
Change in valuation allowance
|
|
|
6,514,000
|
|
|
|
10,299,000
|
|
|
|
5,293,000
|
|
|
Permanent tax differences
|
|
|
129,000
|
|
|
|
5,000
|
|
|
|
6,000
|
|
|
State taxes
|
|
|
(1,233,000
|
)
|
|
|
(1,797,000
|
)
|
|
|
(958,000
|
)
|
|
Other
|
|
|
289,000
|
|
|
|
512,000
|
|
|
|
164,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded income tax benefit
|
|
$
|
(601,000
|
)
|
|
$
|
(701,000
|
)
|
|
$
|
(67,000
|
)
|
Deferred tax assets are summarized as follows:
|
|
|
December 31,
|
|
|
Deferred Tax Asset:
|
|
2011
|
|
|
2010
|
|
|
Federal net operating loss carryforwards
|
|
$
|
35,866,000
|
|
|
$
|
33,169,000
|
|
|
State net operating loss carryforwards
|
|
|
3,161,000
|
|
|
|
1,906,000
|
|
|
Capital losses
|
|
|
1,985,000
|
|
|
|
0
|
|
|
Tax credits carryforward
|
|
|
3,833,000
|
|
|
|
4,224,000
|
|
|
Deferred revenue
|
|
|
3,240,000
|
|
|
|
5,389,000
|
|
|
Fixed asset
|
|
|
1,951,000
|
|
|
|
1,923,000
|
|
|
Stock options
|
|
|
1,489,000
|
|
|
|
1,152,000
|
|
|
Deferred compensation
|
|
|
197,000
|
|
|
|
552,000
|
|
|
Accrued vacation
|
|
|
226,000
|
|
|
|
239,000
|
|
|
Patent costs
|
|
|
833,000
|
|
|
|
896,000
|
|
|
Inventory reserve
|
|
|
475,000
|
|
|
|
510,000
|
|
|
Deferred financing costs
|
|
|
334,000
|
|
|
|
601,000
|
|
|
Investment in China joint venture
|
|
|
0
|
|
|
|
1,682,000
|
|
|
Investment in Tarsa
|
|
|
1,972,000
|
|
|
|
846,000
|
|
|
|
|
|
55,562,000
|
|
|
|
53,089,000
|
|
|
Valuation allowance
|
|
|
(53,986,000
|
)
|
|
|
(50,561,000
|
)
|
|
Deferred tax asset
|
|
|
1,576,000
|
|
|
|
2,528,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liability:
|
|
|
|
|
|
|
|
|
|
Embedded conversion feature
|
|
|
(1,576,000
|
)
|
|
|
(2,528,000
|
)
|
|
Total deferred tax liabilities
|
|
|
(1,576,000
|
)
|
|
|
(2,528,000
|
)
|
|
Net deferred tax assets
|
|
$
|
0
|
|
|
$
|
0
|
|
On January 1, 2007, we adopted the provisions of ASC 740-10-25. ASC 740-10-25 provides recognition criteria and a related measurement model for uncertain tax positions taken or expected to be taken in income tax returns. ASC 740-10-25 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. Tax positions that meet the more likely than not threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company records tax related interest and penalty in the tax provision. The Company has not recognized any tax related interest or penalty in the statement of operations due to its net operating loss carryforwards.
The following is a reconciliation of the beginning and ending amount of unrecognized tax benefit:
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Balance at January 1
|
|
$
|
380,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Additions/reductions based on tax positions related to the current year
|
|
|
(35,000
|
)
|
|
|
20,000
|
|
|
|
-
|
|
|
Additions/reductions based on tax positions related to the prior years
|
|
|
93,000
|
|
|
|
360,000
|
|
|
|
-
|
|
|
Balance at December 31
|
|
$
|
438,000
|
|
|
$
|
380,000
|
|
|
$
|
-
|
|
The Company expects that $50,000 of the unrealized tax benefits will expire in the next twelve months. All of the unrealized tax benefits would impact the tax rate when settled.
The Company’s 2007, 2008 and 2009 federal tax returns remain subject to examination by the IRS and the Company’s 2006, 2007, 2008 and 2009 New Jersey tax returns are also open to potential examination. In addition, net operating losses arising from prior years are also subject to examination at the time that they are utilized in future years. Neither the Company’s federal nor state tax returns are currently under examination.
21. Employee Benefit Plan
We maintain a deferred compensation plan covering all full-time employees. The plan allows participants to defer a portion of their compensation on a pre-tax basis pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended, up to an annual maximum for each employee set by the IRS. Our discretionary matching contribution expense for 2011, 2010 and 2009 was approximately $0, $0, and $117,000, respectively.
22. Research, Licensing and other Revenue
Research Agreement
GSK
In April 2002, we signed a licensing agreement with GSK for a value before royalties, PTH sales and reimbursement of development expenses, of up to $150,000,000 to develop an oral formulation of an analog of PTH currently in clinical development for the treatment of osteoporosis. Under the terms of the agreement, GSK received an exclusive worldwide license to develop and commercialize the product. In addition, GSK reimbursed us for certain development activities during the program, including our activities in the production of raw material for development and clinical supplies, and was to pay us a royalty at a rate in the low to mid-teens based on its worldwide sales of the product, subject to a reduction under certain circumstances as described in the agreement. The royalty rate would be increased if certain sales milestones were achieved. A Phase 1 human trial, which commenced in 2004, demonstrated positive preliminary results. As agreed with GSK, we conducted further development including a small Phase 1 study, which we initiated in 2008 and successfully completed in 2009. An aggregate of $16,000,000 in up-front and milestone payments has been received from inception through December 31, 2011, including the two $4,000,000 payments received in December 2010 and May 2011, described below. We have also received an additional $7,500,000 from GSK for PTH sales and in support of our PTH development activities from inception through December 31, 2011.
In December 2010, we entered into an amended and restated exclusive worldwide license agreement with GSK (the Amended License Agreement) and we received $4,000,000 for Phase 2 development costs. This revenue was recognized through December 2011 due to the termination of the Amended License Agreement. This payment was considered substantive due to its reasonableness relative to all of the deliverables and payment terms in the agreement; commensurate with our level of effort; and commensurate with the enhanced value of the deliverables. We received an additional $4,000,000 in May 2011 due to the completion of Phase 2 patient enrollment in April 2011. This milestone was also recognized through December 2011 due to the termination of the agreement. We recognized $7,950,000 of revenue under these two milestones in 2011. The now-terminated agreements provided that GSK could make additional milestone payments in the aggregate amount of up to approximately $140,000,000 subject to the progress of the compound through clinical development and through to the market.
On August 3, 2011, we entered into a Development Services and Clinical Supply Agreement (the “Development Agreement”) with GSK. Under the terms of the Development Agreement, we received approximately $2,000,000 in payments from GSK for certain development and manufacturing activities related to the active pharmaceutical ingredient and finished drug product of an oral PTH analog. This agreement has also been terminated.
In November 2011, we announced positive top-line results of our Phase 2 clinical study evaluating an experimental oral PTH analog for the treatment of osteoporosis in 93 postmenopausal women. The study achieved its primary endpoint with statistical significance. The Phase 2 study was conducted by us as part of the license agreement with GSK.
The primary objective of the study was to assess the change in bone mineral density (BMD) at the lumbar spine, a clinically validated predictor of fracture risk. The study demonstrated that once-daily treatment with 5 mg of orally delivered PTH resulted in a statistically significant mean increase in BMD at the lumbar spine of 2.2 percent (p<0.001) at week 24 as compared to baseline.
In December 2011, we terminated our amended and restated exclusive worldwide license agreement and related development services and clinical supply agreement with GSK. The termination of these agreements followed notification by GSK of its decision not to proceed based on its internal evaluation criteria. As a result, we regained the exclusive worldwide rights to our oral PTH program with no financial obligations to GSK. We will now seek to publish the full data set of the statistically significant Phase 2 results in a scientific journal and appropriate scientific conferences in 2012 and we intend to commercialize the oral PTH program.
During 2011, 2010 and 2009, and since inception, direct and indirect costs associated with this project, included in research and development expenses, were approximately, $4,741,000, $1,134,000, $1,747,000, and $16,362,000, respectively.
License Agreements
Tarsa
In October 2009, we licensed our Phase 3 oral calcitonin program to Tarsa, a private company formed by a syndicate of three venture capital funds specializing in the life sciences: MVM Life Science Partners; Quaker BioVentures; and Novo A/S. Simultaneously, Tarsa announced the closing of a $24,000,000 Series A financing from the investor syndicate. In consideration for our sale to Tarsa of an exclusive license for the oral calcitonin program, we received from Tarsa approximately $8,993,000 in cash and 9,215,000 shares of common stock in Tarsa (which initially represented a 26% ownership on a non-diluted basis, see Note 10). We valued the common stock at $0.23 per share or a total of $2,119,000 with the assistance of an outside valuation firm. Tarsa was responsible for the costs of the global Phase 3 clinical program that was initiated in 2009. We are eligible to receive up to $3,000,000 in milestone payments based on the achievement of certain sales benchmarks, as well as royalties, at rates in the single digits, on product sales. This study was fully enrolled in the first quarter of 2010 and completed in the first quarter of 2011. In addition, in the first quarter of 2011, Tarsa initiated a Phase 2 clinical trial for the prevention of postmenopausal osteoporosis.
USL
In November 2002, we signed an exclusive U.S. licensing agreement with USL for a value before royalties of $10,000,000 to market our patented nasal formulation of calcitonin for the treatment of osteoporosis. We are responsible for manufacturing the product and USL packages the product and distributes it nationwide. Fortical was approved by the FDA and launched by USL in August 2005. During 2011, we recognized $3,844,000 in sales revenue and $1,603,000 in royalty revenue. During 2010, we recognized $5,246,000 in sales revenue and $2,974,000 in royalty revenue. During 2009, we recognized $5,941,000 in sales revenue and $4,991,000 in royalty revenue. We recognize USL royalty revenue based upon the quarterly USL royalty report. This provides for a reliable measure as well as reasonable assurances of collectability. Royalty revenue, computed in a range from the transfer price of product to USL to a royalty rate in the mid-thirties depending on the circumstances, is earned on net sales of Fortical by USL and is recognized in the period Fortical is sold by USL. Future sales and royalties are contingent upon many factors including competition, pricing, marketing and acceptance in the market place and, therefore, are difficult to predict. Pursuant to an amendment effected in 2009, there are no net sales minimums in the agreement. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis’ nasal calcitonin product, but not to Fortical. In June 2009, Par also launched a product generic to Novartis’ nasal calcitonin product. Certain providers have substituted these products for Fortical, causing Fortical sales and royalties to steadily decline. This agreement may be terminated by either party by mutual agreement or due to breach of any material provision of the agreement not cured within 60 days. In addition, USL may terminate the agreement under certain circumstances where USL assigns the agreement and we do not approve the assignment. The term of the USL agreement shall continue through the expiration of USL’s obligation to pay royalties and continue thereafter, unless terminated earlier.
Novartis
In April 2004, we signed a worldwide licensing agreement with Novartis for a value before royalties of up to $18,700,000 to allow Novartis to manufacture calcitonin using our patented peptide production process. We have received an aggregate of $13,700,000 from Novartis under this agreement and there are up to $5,000,000 in potential milestone payments remaining. We will receive royalties, at rates in the single digits, on net sales of any existing or future Novartis products that contain recombinant salmon calcitonin which in the future are approved for sale by health authorities, and are manufactured by Novartis using our technology. In each of 2011, 2010 and 2009, we recognized $893,000 in licensing revenue. During 2004, Novartis purchased calcitonin from us for use in their oral calcitonin development program and implemented our patented manufacturing process at Novartis facilities. Sandoz, a Novartis affiliate, concluded a manufacturing campaign in 2005 based on our process and produced multiple kilograms of calcitonin at a scale that represents a ten-fold increase above our current production capacity. Calcitonin produced by Sandoz was being used by Novartis in Phase 3 clinical trials. In July 2010, an independent Data Monitoring Committee (DMC) reviewed and conducted a “futility” analysis of one-year data for all patients enrolled in one of Novartis’s osteoarthritis studies, including both an assessment of safety and efficacy parameters. The DMC concluded there was no reason to stop the study because of safety findings. In addition, the DMC concluded there was no reason to continue the study because of efficacy findings, but also determined that the final decision whether to continue this study rests with the study sponsors. In October 2010, Novartis and its partner Nordic Bioscience announced that this study of patients with osteoarthritis of the knee was ongoing. In addition, in October 2010, Novartis released information on a different study on oral calcitonin for the treatment of osteoarthritis. The top-line results indicated that the study did not meet the first of three co-primary endpoints and results from the other two co-primary endpoints indicated clinical efficacy related to certain symptom modification. Novartis and its partner Nordic Bioscience announced their plan to continue to analyze and evaluate the results of this study and to determine appropriate next steps. In October 2011, Novartis’ collaborator announced that it had been informed by Novartis that Novartis had reviewed the first interpretable results and advised that its top line conclusions were that (a) preliminary analysis of two-year study data showed that both co-primary endpoints and secondary endpoints of the study were not met, and (b) preliminary analysis of this study data showed a positive safety profile. Additionally, a Phase 3 study of oral calcitonin in osteoporosis was completed and first interpretable results were announced in December of 2011. In December 2011, Novartis’ collaborator announced that Novartis had informed them that it would not pursue further clinical development of the investigational drug SMC021 (oral calcitonin) being studied by Nordic Bioscience (the exclusive license partner of Novartis) as a treatment option in two indications, osteoarthritis (OA) and post-menopausal osteoporosis (OP), and that it would not seek regulatory submission for SMC021 in OA or OP indications. Novartis advised that its decision to stop the clinical program of SMC021 in both indications was based in analysis and evaluation of data from three Phase 3 clinical trials (two in OA and one in OP) that showed that while SMC021 displayed a favorable safety profile, it failed to meet key efficacy endpoints in all three trials.
This agreement may be terminated by either party due to a material breach not cured within 60 days or due to insolvency or bankruptcy proceedings not dismissed within 60 days and for other customary events of default. The Novartis license agreement shall continue in full force and effect until the earlier of (a) the date Novartis and its affiliates cease to manufacture calcitonin for use in Novartis drug products and in Unigene drug products and (b) the date Novartis and/or its affiliates decide not to manufacture calcitonin.
Deferred licensing fees:
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
Current portion
|
|
|
|
|
|
|
|
GSK
|
|
$
|
--
|
|
|
$
|
1,200,000
|
|
|
USL
|
|
|
157,895
|
|
|
|
157,895
|
|
|
Novartis
|
|
|
892,872
|
|
|
|
892,861
|
|
|
Tarsa and other
|
|
|
211,855
|
|
|
|
40,160
|
|
|
|
|
$
|
1,262,622
|
|
|
$
|
2,290,916
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
GSK
|
|
$
|
--
|
|
|
$
|
4,000,000
|
|
|
USL
|
|
|
1,407,885
|
|
|
|
1,565,789
|
|
|
Novartis
|
|
|
4,693,402
|
|
|
|
5,586,248
|
|
|
|
|
$
|
6,101,287
|
|
|
$
|
11,152,037
|
|
23. Legal Matters
Fortical, our nasal calcitonin product for the treatment of postmenopausal osteoporosis is covered by the Fortical Patent. In June 2006, we received a Paragraph IV certification letter from Apotex Inc., a Canadian generic pharmaceutical manufacturer, alleging that this patent is invalid and therefore not infringed by Apotex’s nasal calcitonin product, which is the subject of an Apotex pending ANDA. On July 24, 2006, we and USL jointly filed a lawsuit against Apotex in the U.S. District Court for the Southern District of New York for infringement of our Fortical Patent. Due to our filing of the above-mentioned lawsuit, the Hatch-Waxman Act provided for an automatic stay of FDA approval for Apotex’s ANDA of up to 30 months. In December 2008 this stay ended and we and Apotex entered a preliminary injunction enjoining Apotex from engaging in the commercial manufacture, use, marketing, distribution, selling, transportation or importation of any Fortical generic equivalent product in the United States. The preliminary injunction will remain in effect until the court renders a final decision on the validity and infringement of Unigene’s U.S. Patent. In obtaining the preliminary injunction, Unigene and USL were required to post a bond and, if we do not prevail in the lawsuit, Unigene would be responsible for paying $1,662,500 to Apotex under the injunction agreement. In August 2009, the U.S. District Court, Southern District of New York, confirmed the validity of Unigene’s patent and issued an order permanently enjoining Apotex from engaging in any activity that infringes the patent. The motion of the plaintiffs, Unigene and its licensee USL, for summary judgment in the case was granted. The District Court upheld the validity of the Fortical Patent and entered a permanent injunction against Apotex. Apotex appealed this decision. In October 2009, the District Court vacated its order subject to reinstatement and asked the parties to identify any claims that remain in the case. As a result, Apotex’s appeal was deactivated. In July 2010, the District Court ruled that no claims remain at issue and it reinstated its opinion and order of August 2009 in its entirety. Accordingly, the motion for summary judgment was entered in favor of Unigene and USL. Apotex appealed this decision to the United States Court of Appeals for the Federal Circuit and a hearing was held on March 7, 2011. On August 25, 2011, the United States Court of Appeals for the Federal Circuit issued a decision affirming the District Court’s ruling confirming the validity of Unigene's Fortical Patent. Apotex filed a petition for certiorari for review of the Appeals Court decision by the U.S. Supreme Court on January 13, 2012, which was assigned Supreme Court Docket Number 11-879. Unigene filed an opposition brief on February 17, 2012, and on February 28, 2012, Apotex filed a reply brief. The Supreme Court docket indicates that on February 29, 2012 the case was distributed for conference on March 16, 2012. Unigene now waits to learn whether the Supreme Court grants or denies Apotex’s petition for certiorari. There is the usual litigation risk that we will not be successful in the appeal and potentially subsequent litigation if it is remanded. In the event that we do not prevail, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval. This could have a material adverse impact on our results and financial position.
On September 8, 2011, the United States Patent and Trademark Office (USPTO) granted a request for inter partes reexamination of the Fortical Patent filed by Apotex on July 15, 2011. The Reexamination reopens the USPTO prosecution of all claims 13, 14, 16, 17, 19 and 24-29 of the Fortical Patent. In granting the Request for Reexamination, the USPTO gave Unigene a two month time period to respond to the substantial new questions of patentability raised in the Reexamination Office Action dated September 8, 2011. Unigene filed its response to the Reexamination Office Action on November 8, 2011. Apotex filed Third Party Comments on December 7, 2011 and January 9, 2012. Unigene now waits to hear from the USPTO, which may take over one year. If the Supreme Court denies Apotex’s petition for certiorari, Unigene will move to Suspend Reexamination of Claim 19. Based on USPTO statistics, reexamination proceedings take an average of about 36 months to complete. Potential outcomes for reexamination include the patent emerges with the patent claims remaining unchanged, patent claims being amended, or all patent claims being canceled. There is the usual USPTO prosecution risk that we will not be successful in the reexamination and potentially subsequent USPTO or litigation proceedings. In the event that we do not prevail, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval. This could have a material adverse impact on our results and financial position.
24. Fair Value Measurements
U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability to a third party with the same credit standing (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In many cases, the exit price and the transaction (or entry) price will be the same at initial recognition. However, in certain cases, the transaction price may not represent fair value. Given our financial condition described in Note 2, it is not practicable to estimate the fair value of our debt at December 31, 2011 and 2010. We believe that the carrying amounts of cash and cash equivalents, our accounts receivable and accounts payable approximate fair value due to their short-term nature. Fair value is a market-based measurement determined based on a hypothetical transaction at the measurement date, considered from the perspective of a market participant, not based solely upon the perspective of the reporting entity. When quoted prices are not used to determine fair value, consideration is given to three broad valuation techniques: (i) the market approach, (ii) the income approach, and (iii) the cost approach. Entities are required to determine the most appropriate valuation technique to use, given what is being measured and the availability of sufficient inputs. Inputs to fair valuation techniques are prioritized, allowing for the use of unobservable inputs to the extent that observable inputs are not available. The applicable guidance establishes a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. The input levels are defined as follows:
|
|
|
Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2
|
Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1, quoted prices in markets that are not active, or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
Level 3
|
Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as those for which the determination of fair value requires significant management judgment or estimation.
|
The Company has categorized its liabilities measured at fair value into the three-level fair value hierarchy, as defined above, based upon the priority of inputs to respective valuation techniques. Liabilities included within Level 3 of the fair value hierarchy included an embedded conversion feature which requires fair value on a recurring basis. The valuation methodology uses a combination of observable and unobservable inputs in calculating fair value. The fair value of the conversion feature was determined using a lattice pricing model.
The changes in Level 3 liabilities measured at fair value on a recurring basis during the year ended December 31, 2010 are summarized as follows:
|
|
|
Balance Beginning of Period
|
|
|
Issuance
|
|
|
(Gain) or Loss Recognized in Earning from Change in Fair Value
|
|
|
Reclassification to Additional Paid-in Capital
|
|
|
Balance End
of Period
|
|
|
For the year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion feature
|
|
$
|
--
|
|
|
$
|
8,599,000
|
|
|
$
|
8,125,000
|
|
|
$
|
(16,724,000
|
)
|
|
$
|
--
|
|
For the year ended December 31, 2010, total loss of approximately $8,125,000 is included in the Statements of Operations caption “Loss on change in fair value of embedded conversion feature.” The balance of $16,724,000 was reclassified to additional paid-in capital since the embedded conversion feature no longer met the bifurcation criteria after stockholder approval of the increase in authorized shares in June 2010.
25. Deferred Compensation Plan
In December 2005, our Board of Directors approved the adoption of a deferred compensation plan for Ronald Levy, former Executive Vice President and Director of the Company, and Warren Levy, former President, Chief Executive Officer and Director of the Company. The major features of the plan are as follows: The Company agrees to credit a book account with $25,000 per year on January 1
st
of such year beginning on January 1, 2006 and ending on January 1, 2014 for each participant; the credits to the accounts would be 100% vested; upon the death of a participant, any remaining contributions would be made to his account; and in the event of a “change in control” of Unigene, all remaining contributions shall be made to each participant’s account. The related contracts were finalized and executed in February 2006. Therefore, we recognized this liability in the first quarter of 2006 in the amount of $304,000, which represented the net present value of the future payments. As of December 31, 2011, this liability was approximately $493,000. As of December 31, 2011, both of these accounts had been funded to date in the aggregate amount of $308,000 ($250,000 plus $58,000 in interest and investment gains) and these accounts are included on the Balance Sheet in other assets.
The entire value of the account would be distributed as follows: upon attainment of age 75, 25% of balance, upon attainment of age 76, 33.33% of remaining balance, upon attainment of age 77, 50% of remaining balance, and the remainder of the balance upon attainment of age 78; in the event of a participant’s death or disability, 50% of the participant’s account balance shall be distributed following his death or disability and the remainder distributed on the first anniversary of his death or disability.
26. Unconsolidated Affiliates
We used the equity method to account for our former 45% ownership of the China joint venture and our current 26% (non-diluted) ownership of Tarsa. Our proportionate share of each joint venture’s net loss was included in our Statements of Operations. In addition, in 2011, we recognized a $2,819,000 loss on our investment in Tarsa and a $1,376,000 loss on our investment in the China joint venture. Below is summarized balance sheet information as of December 31, 2011 and 2010 and summarized statement of operations information for the years ended December 31, 2011 and 2010. Due to the sale of our interest in the China joint venture in 2011, the summarized information below for 2011 only includes Tarsa.
Summarized Balance Sheet information as of December 31, 2011 and 2010, as follows:
|
|
|
2011
|
|
|
2010
|
|
|
Current Assets
|
|
$
|
3,013,559
|
|
|
$
|
7,557,116
|
|
|
Fixed assets - net
|
|
|
104,953
|
|
|
|
12,183,164
|
|
|
Intangible and other assets
|
|
|
7,142,469
|
|
|
|
5,403,461
|
|
|
Current liabilities
|
|
|
27,571,779
|
|
|
|
19,862,510
|
|
|
Non-current liabilities
|
|
|
1,713,408
|
|
|
|
659,756
|
|
|
Stockholders’ (deficit) equity
|
|
|
(19,024,206
|
)
|
|
|
4,621,475
|
|
Summarized Statement of Operations information for the years ended December 31, 2011 and 2010, as follows:
|
|
|
2011
|
|
|
2010
|
|
|
Revenue
|
|
$
|
--
|
|
|
$
|
--
|
|
|
Operating loss
|
|
|
(13,984,573
|
)
|
|
|
(13,971,628
|
)
|
|
Net loss
|
|
$
|
(18,563,930
|
)
|
|
$
|
(14,149,614
|
)
|
27. Selected Quarterly Financial Data (Unaudited)
|
2011
|
|
1
st
Quarter
|
|
|
2
nd
Quarter
|
|
|
3
rd
Quarter
|
|
|
4
th
Quarter
|
|
|
Revenue
|
|
$
|
2,125,809
|
|
|
$
|
2,469,052
|
|
|
$
|
3,428,683
|
|
|
$
|
12,484,802
|
|
|
Operating income (loss)
|
|
|
(3,633,932
|
)
|
|
|
(3,070,102
|
)
|
|
|
(3,139,449
|
)
|
|
|
6,377,254
|
|
|
Net income (loss)
|
|
|
(6,645,308
|
)
|
|
|
(8,435,674
|
)
|
|
|
(7,291,313
|
)
|
|
|
4,446,636
|
|
|
Net income (loss) per share, basic
|
|
$
|
(0.07
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.05
|
|
|
Net income (loss) per share, diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.03
|
|
|
2010
|
|
1
st
Quarter
|
|
|
2
nd
Quarter
|
|
|
3
rd
Quarter
|
|
|
4
th
Quarter
|
|
|
Revenue
|
|
$
|
2,532,502
|
|
|
$
|
3,028,313
|
|
|
$
|
2,856,389
|
|
|
$
|
2,923,010
|
|
|
Operating loss
|
|
|
(2,800,972
|
)
|
|
|
(3,001,274
|
)
|
|
|
(1,834,088
|
)
|
|
|
(2,687,593
|
)
|
|
Net loss
|
|
|
(15,946,719
|
)
|
|
|
(3,643,788
|
)
|
|
|
(4,383,557
|
)
|
|
|
(3,894,430
|
)
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.17
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
28. Subsequent Event (unaudited)
In January 2012, we made an additional investment in Tarsa by purchasing convertible promissory notes in the principal amount of $650,571 and warrants to purchase up to an aggregate of 67,435 shares of Series A Preferred Stock. As a result of such investment, we expect to recognize a loss on the investment as the accumulated losses of Tarsa exceed the carrying value of the original investment.
In March 2012, Tarsa announced the closing of a Series B Preferred Stock financing. Prior to such closing, Unigene owned 9,215,000 shares of Tarsa's common stock, three convertible promissory notes in the aggregate principal amount of $3,469,714, and warrants to purchase Tarsa's Series A Preferred Stock. At the time of the closing of the Series B Preferred Stock financing, the convertible promissory notes, including all principal and accrued interest, were converted into 3,662,305 shares of Tarsa's Series A Preferred Stock. Unigene did not acquire any of Tarsa's Series B Preferred Stock in the financing. As a result, following the closing of Tarsa's Series B Preferred Stock financing, Unigene owned approximately 16% of the outstanding capital stock of Tarsa, on a fully-diluted basis. Unigene's ownership position in Tarsa is subject to potential future dilution, including dilution as a result of a potential second Series B closing.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
. We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and principal financial officer concluded that, as of December 31, 2011, our disclosure controls and procedures were effective and provide reasonable assurance that the information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
Management’s Annual Report on Internal Control over Financial Reporting.
The management of Unigene Laboratories, Inc. (the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:
|
|
(1)
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company;
|
|
|
(2)
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
|
|
|
(3)
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
|
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our internal control over financial reporting, using the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, for the period covered by this report. Based on our evaluation, our principal executive officer and principal financial officer concluded that the Company’s internal control over financial reporting was effective as of December 31, 2011.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent registered public accounting firm has audited, and reported on, the Company’s internal control over financial reporting as of December 31, 2011. This report appears on page 63.
Changes in Internal Control Over Financial Reporting.
Our principal executive officer and principal financial officer determined that there were no changes in our internal control over financial reporting during the quarterly period ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Unigene Laboratories, Inc.
We have audited Unigene Laboratories, Inc’s (a Delaware Corporation) internal control over financial reporting as of December 31, 2011, based on criteria established in
Internal Control—Integrated Fram
ework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Unigene Laboratories, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Unigene Laboratories, Inc.’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Unigene Laboratories, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in
Internal Control—Integrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Unigene Laboratories, Inc. as of December 31, 2011 and 2010, and the related statements of operations, stockholders’ deficit and cash flows, for each of the three years in the period ended December 31, 2011 and our report dated March 15, 2012, expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
New York, New York
March 15, 2012
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item will be included in the sections entitled “Information Regarding Directors, Nominees and Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” of the Registrant's definitive proxy statement for its Annual Meeting of Stockholders to be held on June 14, 2012 and is hereby incorporated by reference.
Item 11. Executive Compensation
The information required by this item will be included in the sections entitled “Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation” and “Director Compensation” of the Registrant's definitive proxy statement for its Annual Meeting of Stockholders to be held on June 14, 2012 and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be included in the sections entitled “Security Ownership of Certain Beneficial Owners,” “Security Ownership of Management” and “Equity Compensation Plan Information” of the Registrant's definitive proxy statement for its Annual Meeting of Stockholders to be held on June 14, 2012 and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in the sections entitled “Certain Relationships and Related Transactions” and “Director Independence” of the Registrant's definitive proxy statement for its Annual Meeting of Stockholders to be held on June 14, 2012 and is hereby incorporated by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item will be included in the section entitled “Proposal 2: Ratification of the Appointment of Independent Auditors” of the Registrant's definitive proxy statement for its Annual Meeting of Stockholders to be held on June 14, 2012 and is hereby incorporated by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements.
The Financial Statements and Supplementary Data are listed under Item 8 of this Report on Form 10-K.
(b) Exhibits.
See Index to Exhibits which appears on Pages 65-69.
(c) Financial Statement Schedules.
None.
INDEX TO EXHIBITS
|
Exhibit Number
|
|
Description
|
|
3.1
|
|
Certificate of Incorporation of Unigene Laboratories, Inc., dated October 31, 1980, as filed with the Secretary of State in the State of Delaware on November 3, 1980, and all amendments thereto through June 15, 2006 (incorporated by reference from Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).
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|
|
|
|
|
3.2
|
|
Certificates of Amendment to Certificate of Incorporation of Unigene Laboratories, Inc., dated June 16, 2010, as filed with the Secretary of State in the State of Delaware on June 16, 2010 (incorporated by reference from Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010).
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|
|
|
|
|
3.3
|
|
Amended By-Laws of Unigene Laboratories, Inc. (incorporated by reference from Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004).
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|
|
|
|
|
4.1
|
|
Rights Agreement between Unigene Laboratories, Inc. and Registrar and Transfer Company, dated December 20, 2002 (incorporated by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, dated December 23, 2002).
|
|
|
|
|
|
4.2
|
|
Amendment to Rights Agreement, dated March 16, 2010 (incorporated by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, dated March 17, 2010 (the “March 2010 Form 8-K”)).
|
|
|
|
|
|
4.3
|
|
Specimen Certificate for Common Stock, par value $.01 per share (incorporated by reference from Exhibit 3.1.1 to the Registrant’s Registration Statement No. 33-6877 on Form S-1, filed July 1, 1986).
|
|
|
|
|
|
10.1
|
|
Lease agreement between Unigene Laboratories, Inc. and Fulton Street Associates, dated May 20, 1993 (incorporated by reference from Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1992).
|
|
|
|
|
|
10.2
|
|
First Amendment to Lease Agreement between Unigene Laboratories, Inc. and Fulton Street Associates, dated May 20, 1993 (incorporated by reference from Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007).
|
|
|
|
|
|
10.3
|
|
Second Amendment to Lease between Fulton Street Associates and Unigene Laboratories, Inc., dated as of May 15, 2003 (incorporated by reference from Exhibit 10.48 to Post-Effective Amendment No. 1 to Registrant’s Registration Statement No. 333-75960, filed August 1, 2003).
|
|
|
|
|
|
10.4
|
|
Directors Stock Option Plan (incorporated by reference from Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).**
|
|
|
|
|
|
10.5
|
|
Amendment to Directors Stock Option Plan (incorporated by reference from Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009).**
|
|
|
|
|
|
10.6
|
|
2000 Stock Option Plan (incorporated by reference from Attachment A to the Registrant’s Schedule 14A, filed April 28, 2000, containing the Registrant’s Definitive Proxy Statement for its 2000 Annual Meeting of Stockholders). **
|
|
|
|
|
|
10.7
|
|
Unigene Laboratories, Inc. 2006 Stock-Based Incentive Compensation Plan, as amended by Amendment No. 1 (incorporated by reference from Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009). **
|
|
|
|
|
|
10.8
|
|
Amendment No. 2 to the Unigene Laboratories, Inc. 2006 Stock-Based Incentive Compensation Plan (incorporated by reference from Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010). **
|
|
|
|
|
|
10.9
|
|
Form of Incentive Stock Option Agreement under 2006 Stock-Based Incentive Compensation Plan (incorporated by reference from Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007).**
|
|
|
|
|
|
10.10
|
|
Form of Non-qualified Stock Option Agreement under 2006 Stock-Based Incentive Compensation Plan (incorporated by reference from Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007).**
|
|
|
|
|
|
10.11
|
|
Form of Restricted Stock Agreement under 2006 Stock-Based Incentive Compensation Plan (incorporated by reference from Exhibit 10.11 to the Registrant's Annual Report of Form 10-K for the year ended December 31, 2009).**
|
|
|
|
|
|
10.12
|
|
Employment Agreement by and between Unigene Laboratories, Inc. and Ashleigh Palmer, dated June 9, 2010 (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated June 9, 2010).**
|
|
|
|
|
|
10.12(a)
|
|
Employment Agreement by and between Unigene Laboratories, Inc. and Ashleigh Palmer, dated June 8, 2011 (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated June 8, 2011).**
|
|
|
|
|
|
10.13
|
|
Employment Agreement by and between the Company and Gregory T. Mayes, dated September 12, 2010 (incorporated by reference from Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).**
|
|
|
|
|
|
10.14
|
|
Employment Agreement between Unigene Laboratories, Inc. and Warren P. Levy, dated January 1, 2000 (incorporated by reference from Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).**
|
|
|
|
|
|
10.15
|
|
First Amendment to Employment Agreement between Unigene Laboratories, Inc. and Warren P. Levy, dated December 22, 2008 (incorporated by reference from Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).**
|
|
Exhibit Number
|
|
Description
|
|
10.16
|
|
Second Amendment to Employment Agreement, dated March 17, 2010, by and between the Company and Warren P. Levy (incorporated by reference from Exhibit 10.11 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010).**
|
|
|
|
|
|
10.17
|
|
Employment Agreement between Unigene Laboratories, Inc. and Ronald S. Levy, dated January 1, 2000 (incorporated by reference from Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).**
|
|
|
|
|
|
10.18
|
|
First Amendment to Employment Agreement between Unigene Laboratories, Inc. and Ronald S. Levy, dated December 22, 2008 (incorporated by reference from Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).**
|
|
|
|
|
|
10.19
|
|
Second Amendment to Employment Agreement, dated March 17, 2010, by and between the Company and Ronald Levy (incorporated by reference from Exhibit 10.12 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010).**
|
|
|
|
|
|
10.20
|
|
Employment Agreement between Unigene Laboratories, Inc. and Jay Levy, dated January 1, 2000 (incorporated by reference from Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).**
|
|
|
|
|
|
10.21
|
|
First Amendment to Employment Agreement between Unigene Laboratories, Inc. and Jay Levy, dated December 22, 2008 (incorporated by reference from Exhibit 10.15.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).**
|
|
|
|
|
|
10.22
|
|
Separation Agreement, dated March 16, 2010, by and between the Company and Jay Levy (incorporated by reference from Exhibit 10.13 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010).**
|
|
|
|
|
|
10.23
|
|
Summary of Deferred Compensation Plan between Unigene Laboratories, Inc. and Dr. Warren P. Levy and Dr. Ronald S. Levy, dated December 14, 2005 (incorporated by reference from Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated December 14, 2005).**
|
|
|
|
|
|
10.24
|
|
Non-qualified Deferred Compensation Agreement between Unigene Laboratories, Inc. and Dr. Warren P. Levy, dated February 1, 2006 (incorporated by reference from Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).**
|
|
|
|
|
|
10.25
|
|
Non-qualified Deferred Compensation Agreement between Unigene Laboratories, Inc. and Dr. Ronald S. Levy, dated February 1, 2006 (incorporated by reference from Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).**
|
|
|
|
|
|
10.26
|
|
Amendment to Non-qualified Deferred Compensation Agreement between Unigene Laboratories, Inc. and Dr. Warren P. Levy, dated December 19, 2008 (incorporated by reference from Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).**
|
|
|
|
|
|
10.27
|
|
Amendment to Non-qualified Deferred Compensation Agreement between Unigene Laboratories, Inc. and Dr. Ronald S. Levy, dated December 22, 2008 (incorporated by reference from Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).**
|
|
|
|
|
|
10.28
|
|
Form of Amended and Restated Change in Control Agreement, by and between the Company and the vice president named therein (incorporated by reference from Exhibit 10.8 to the March 2010 Form 8-K).**
|
|
|
|
|
|
10.29
|
|
Amended and Restated Change in Control Agreement, dated April 5, 2010, by and between the Company and Dr. James P. Gilligan (incorporated by reference from Exhibit 10.15 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010).**
|
|
|
|
|
|
10.30
|
|
Director Stock Option Agreement between Allen Bloom and Unigene Laboratories, Inc., dated December 5, 2001 (incorporated by reference from Exhibit 10.45 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002).**
|
|
|
|
|
|
10.31
|
|
Director Stock Option Agreement between J. Thomas August and Unigene Laboratories, Inc., dated December 5, 2001 (incorporated by reference from Exhibit 10.46 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002).**
|
|
|
|
|
|
10.32
|
|
Joint Venture Contract between Shijiazhuang Pharmaceutical Group Company, Ltd., and Unigene Laboratories, Inc., dated June 15, 2000 (incorporated by reference from Exhibit 10.1 to the Registrant’s Amended Quarterly Report on Form 10-Q/A , filed April 2, 2008, for the quarter ended June 30, 2000).
|
|
|
|
|
|
10.33
|
|
Articles of Association of Shijiazhuang-Unigene Pharmaceutical Corporation Limited, dated June 15, 2000 (incorporated by reference from Exhibit 10.2 to the Registrant’s Amended Quarterly Report on Form 10-Q/A, , filed April 2, 2008 for the quarter ended June 30, 2000).
|
|
|
|
|
|
10.34
|
|
Agreement by and between Shijiazhuang Pharmaceutical Group Company, Ltd. and Unigene Laboratories, Inc., dated April 23, 2008 (incorporated by reference from Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).*
|
|
Exhibit Number
|
|
Description
|
|
10.35
|
|
Technology Transfer Agreement by and between Shijiazhuang Pharmaceutical Group Corporation and Unigene Laboratories, Inc., dated April 23, 2008 (incorporated by reference from Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).*
|
|
|
|
|
|
10.36
|
|
Agreement of Assignment among Shijiazhuang Pharmaceutical Group Corporation, Unigene Laboratories Inc., and China Pharmaceutical Group Limited, dated April 23, 2008 (incorporated by reference from Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).
|
|
|
|
|
|
10.37
|
|
Stock Purchase Agreement, dated as of May 10, 2008, between Unigene Laboratories, Inc. and Tin Lon Investment Limited (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 10, 2008).
|
|
|
|
|
|
10.38
|
|
Amended and Restated License Agreement, dated as of December 10, 2010, by and between Unigene Laboratories, Inc. and GlaxoSmithKline LLC (incorporated by reference from Exhibit 10.38 to the Registrant’s Amended Annual Report on Form 10-K/A for the year ended December 31, 2010).*
|
|
|
|
|
|
10.39
|
|
License and Development Agreement between Upsher-Smith Laboratories, Inc. and Unigene Laboratories, Inc., dated November 26, 2002 (incorporated by reference from Exhibit 10.1 to Registrant’s Current Report on Form 8-K/A, dated October 16, 2007). *
|
|
|
|
|
|
10.40
|
|
License Agreement, dated April 7, 2004, between Unigene Laboratories, Inc. and Novartis Pharma AG (incorporated by reference from Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).*
|
|
|
|
|
|
10.41
|
|
Supply Agreement, dated January 22, 2007, by and between Unigene Laboratories, Inc. and Novartis Pharma AG (incorporated by reference from Exhibit 10.1 to the Registrant’s Amended Quarterly Report on Form 10-Q/A filed March 20, 2008, for the quarter ended March 31, 2007). *
|
|
|
|
|
|
10.42
|
|
Amended and Restated Security Agreement, dated May 10, 2007, by and between Unigene Laboratories, Inc. and Jay Levy (incorporated by reference from Exhibit 10.3 to Registrant’s Current Report on Form 8-K, dated May 10, 2007). *
|
|
|
|
|
|
10.43
|
|
Patent Security Agreement, dated March 13, 2001, between Unigene Laboratories, Inc. and Jay Levy (incorporated by reference from Exhibit 10.38 to Amendment No. 2 to Registrant’s Registration Statement No. 333-04557 on Form S-1, filed December 12, 2001).
|
|
|
|
|
|
10.44
|
|
First Amendment to Patent Security Agreement, dated May 29, 2001, between Unigene Laboratories, Inc. and Jay Levy (incorporated by reference from Exhibit 10.39 to Amendment No. 2 to Registrant’s Registration Statement No. 333-04557 on Form S-1, filed December 12, 2001).
|
|
|
|
|
|
10.45
|
|
Second Amendment to Patent Security Agreement, dated November 26, 2002, by and between Unigene Laboratories, Inc. and Jay Levy (incorporated by reference from Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007).
|
|
|
|
|
|
10.46
|
|
Third Amendment to Patent Security Agreement, dated May 10, 2007, by and between Unigene Laboratories, Inc. and the Jaynjean Family Limited Partnership (incorporated by reference from Exhibit 10.4 to Registrant’s Current Report on Form 8-K, dated May 10, 2007).*
|
|
|
|
|
|
10.47
|
|
Mortgage and Security Agreement, dated July 13, 1999, by and between Unigene Laboratories, Inc. and Jay Levy (incorporated by reference from Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
|
|
|
|
|
|
10.48
|
|
Modification of Mortgage and Security Agreement, dated August 5, 1999, by and between Unigene Laboratories, Inc. and Jay Levy (incorporated by reference from Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
|
|
|
|
|
|
10.49
|
|
Modification of Mortgage and Security Agreement, dated May 10, 2007, by and between Unigene Laboratories, Inc. and Jay Levy (incorporated by reference from Exhibit 10.5 to Registrant’s Current Report on Form 8-K, dated May 10, 2007).*
|
|
|
|
|
|
10.50
|
|
Third Modification of Mortgage and Security Agreement, dated September 30, 2008, by and between Unigene Laboratories, Inc. and Jay Levy (incorporated by reference from Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on October 6, 2008 (the “October 2008 8-K Report”)).
|
|
|
|
|
|
10.51
|
|
Assignment of Mortgage by Jay Levy to Jean Levy, dated February 25, 2010 (incorporated by reference from Exhibit 10.56 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009).
|
|
|
|
|
|
10.52
|
|
Senior Secured Term Note, dated May 22, 2009, issued by Unigene Laboratories, Inc. in favor of the Lenders signatory to the Financing Agreement, dated as of September 30, 2008 (the "VPC Financing Agreement") by and among Unigene Laboratories, Inc., the Lenders and Victory Park Management, LLC, as agent (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated May 29, 2009).
|
|
|
|
|
|
10.53
|
|
Pledge and Security Agreement, dated as of September 30, 2008, by and among Unigene Laboratories, Inc., Victory Park Management, LLC, as agent, and the Secured Parties (incorporated by reference from Exhibit 10.3 to the October 2008 8-K Report).*
|
|
|
|
|
|
10.54
|
|
Amended and Restated Financing Agreement (the “Restated Financing Agreement”), dated as of March 16, 2010, by and among the Company, the Lenders and Victory Park Management, LLC, as agent (incorporated by reference from Exhibit 10.1 to the March 2010 Form 8-K).
|
|
Exhibit Number
|
|
Description
|
|
10.55
|
|
Master Reaffirmation and Amendment to Transaction Documents, dated as of March 17, 2010, by and among the Company and Victory Park Management, LLC, as agent (incorporated by reference from Exhibit 10.2 to the March 2010 Form 8-K).*
|
|
|
|
|
|
10.56
|
|
Senior Secured Convertible Term Note, dated March 17, 2010, issued by the Company in favor of the Lenders signatory to the Restated Financing Agreement (incorporated by reference from Exhibit 10.3 to the March 2010 Form 8-K).
|
|
|
|
|
|
10.57
|
|
Amended and Restated Registration Rights Agreement, dated as of March 17, 2010, by and among the Company and the Lenders (incorporated by reference from Exhibit 10.4 to the March 2010 Form 8-K).
|
|
|
|
|
|
10.58
|
|
Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filing, dated as of September 30, 2008, by and between the Company and Victory Park Management, LLC, as agent (incorporated by reference from Exhibit 10.5 to the October 2008 Form 8-K).
|
|
|
|
|
|
10.59
|
|
First Amendment to Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filing, dated as of March 17, 2010, by and between the Company and Victory Park Management, LLC, as agent (incorporated by reference from Exhibit 10.6 to the October 2008 Form 8-K).
|
|
|
|
|
|
10.60
|
|
Affiliate Subordination Agreement, dated as of September 30, 2008, by and among Unigene Laboratories, Inc., Jay Levy, Jaynjean Levy Family Limited Partnership and Victory Park Management, LLC, as agent for the Lenders signatory to the VPC Financing Agreement (incorporated by reference from Exhibit 10.5 to the October 2008 8-K Report).
|
|
|
|
|
|
10.61
|
|
Assignment and Assumption Agreement, dated January 11, 2010, by and between Jay Levy and Jean Levy (incorporated by reference from Exhibit 10.64 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009).
|
|
|
|
|
|
10.62
|
|
Affiliate Subordination Reaffirmation, dated as of March 17, 2010, by and among the Company, Jean Levy, Jaynjean Levy Family Limited Partnership and Victory Park Management, LLC, as agent for the Lenders (incorporated by reference from Exhibit 10.7 to the March 2010 Form 8-K).
|
|
|
|
|
|
10.63
|
|
Amended and Restated Secured Promissory Note, dated March 17, 2010, issued by the Company in favor of Jean Levy (incorporated by reference from Exhibit 10.8 to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2010).
|
|
|
|
|
|
10.64
|
|
Amended and Restated Secured Promissory Note, dated March 17, 2010, issued by the Company in favor of the Jaynjean Levy Family Limited Partnership (incorporated by reference from Exhibit 10.9 to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2010).
|
|
|
|
|
|
10.65
|
|
Fourth Modification of Mortgage, in favor of Jean Levy, dated March 17, 2010 (incorporated by reference from Exhibit 10.10 to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2010).
|
|
|
|
|
|
10.66
|
|
Forbearance Agreement, dated December 10, 2010, by and among Unigene Laboratories, Inc., Victory Park Management, LLC, as agent, and the Secured Parties named therein (incorporated by reference from Exhibit 10.66 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010).
|
|
|
|
|
|
10.67
|
|
Letter Agreement, dated as of December 10, 2010, by and among Unigene Laboratories, Inc., Victory Park Management, LLC, as agent, and the Secured Parties named therein (incorporated by reference from Exhibit 10.67 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010).
|
|
|
|
|
|
10.68
|
|
License Agreement, dated October 19, 2009, by and between Unigene Laboratories, Inc. and Tarsa Therapeutics, Inc. (incorporated by reference from Exhibit 10.67 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009).*
|
|
|
|
|
|
10.69
|
|
Amendment to License Agreement, dated January 15, 2010, by and among Unigene Laboratories, Inc. and Tarsa Therapeutics, Inc. (incorporated by reference from Exhibit 10.68 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009).*
|
|
|
|
|
|
10.70
|
|
Omnibus Amendment Agreement, dated October 19, 2009, by and among Unigene Laboratories, Inc., Victory Park Management, LLC, as agent, and the holders signatory thereto (incorporated by reference from Exhibit 10.69 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009).
|
|
|
|
|
|
10.71
|
|
Collateral Assignment Agreement, dated October 19, 2009, by and between Unigene Laboratories, Inc. and Victory Park Management, LLC, as agent (incorporated by reference from Exhibit 10.70 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009).
|
|
|
|
|
|
10.72
|
|
Warrant Exchange Agreement, dated October 19, 2009, by and between Unigene Laboratories, Inc. and Victory Park Special Situations Master Fund, Ltd. (incorporated by reference from Exhibit 10.71 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009).
|
|
|
|
|
|
10.73
|
|
Master Agreement for Joint Development Vehicle by and between Unigene Laboratories, Inc., and Nordic Bioscience Clinical Development A/S, dated as of October 5, 2011.*
|
|
|
|
|
|
10.74
|
|
Common Stock Purchase and Option Agreement dated as of October 5, 2011, by and between Unigene Laboratories, Inc., and Den Danske Forskningsfond.
|
|
Exhibit Number
|
|
Description
|
|
10.75
|
|
Omnibus Amendment to the Note and Warrant Purchase Agreement, Notes and Warrants dated as of the 8
th
day of April, 2011, by and among Tarsa Therapeutics, Inc., and Purchasers including Unigene Laboratories, Inc. (incorporated by reference from Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2011).
|
|
|
|
|
|
10.76
|
|
Patent Assignment Agreement effective as of September 15, 2011 by and between Unigene Laboratories, Inc., and Kieran Murphy, LLC (incorporated by reference from Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2011).
|
|
|
|
|
|
10.77
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|
Agreement for Sale of Real Estate dated as of January 31, 2011 by and between the Company and RCP Birch Road, L.L.C. (incorporated by reference from Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2011)
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10.78
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Settlement and Release Agreement and Amendments dated as of March 10, 2011 between the Company and the Estate of Jean Levy; the Jaynjean Levy Family Limited Partnership; Warren P. Levy; and Ronald S. Levy (incorporated by reference from Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2011).
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10.79
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Master Services Agreement, effective as of April 7, 2011, by and between Unigene Laboratories, Inc. and Tarsa Therapeutics, Inc. (incorporated by reference from Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2011).
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10.80
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Equity Sale and Purchase Agreement, dated July 2011, by and among the Company, China Pharmaceutical Group Limited and China Charmaine Pharmaceutical Company Limited (incorporated by reference from Exhibit 10.3 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2011).
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10.81
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Termination Agreement, effective as of June 4, 2011, by and among the Company, China Pharmaceutical Group Limited and Unigene Biotechnology Company Limited (incorporated by reference from Exhibit 10.4 to the Company’s quarterly report of Form 10-Q for the quarter ended June 30, 2011).
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10.82
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Lease for Real Property, dated May 24, 2011, by and between RCP Birch-Little Falls, LLC, 110 Little Falls DCLA, LLC and the Company (incorporated by reference from Exhibit 10.5 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2011).
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10.83
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Development Services and Clinical Supply Agreement, dated August 3, 2011, by and between GlaxoSmithKline LLC and the Company* (incorporated by reference from Exhibit 10.3 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2011).
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23.1
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Consent of Grant Thornton LLP.
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23.2
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Consent of Ernst & Young LLP.
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24.1
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Power of Attorney (included on signature pages to this report).
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31.1
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Certification by Ashleigh Palmer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification by William Steinhauer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification by Ashleigh Palmer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification by William Steinhauer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101.INS
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XBRL Instance Document***
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101.SCH
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XBRL Taxonomy Extension Schema Document***
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document***
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document***
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101.LAB
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XBRL Taxonomy Extension Labels Linkbase Document***
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document***
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*
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Portions of the exhibit have been omitted pursuant to a request for confidential treatment.
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**
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Management contract or compensatory plan.
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***
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XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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UNIGENE LABORATORIES, INC.
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March 15, 2012
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/s/ Ashleigh Palmer
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Ashleigh Palmer, President
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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March 15, 2012
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/s/ Ashleigh Palmer
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Ashleigh Palmer, President, Chief Executive Officer and Director (Principal Executive Officer)
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March 15, 2012
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/s/ William Steinhauer
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William Steinhauer, Vice President of Finance
(Principal Financial Officer and Principal Accounting Officer)
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March 15, 2012
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/s/ Richard Levy
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Richard Levy, Chairman of the Board
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March 15, 2012
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/s/ Zvi Eiref
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Zvi Eiref, Director
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March 15, 2012
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/s/ Theron Odlaug
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Theron Odlaug, Director
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March 15, 2012
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/s/ Thomas Sabatino, Jr.
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Thomas Sabatino, Jr., Director
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March 15, 2012
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/s/ Joel Tune
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Joel Tune, Director
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Each person whose signature appears above in so signing also makes, constitutes and appoints each of Ashleigh Palmer, President and Chief Executive Officer of the registrant, and William Steinhauer, Vice President of Finance of the registrant, his true and lawful attorney-in-fact, in his name, place and stead to execute and cause to be filed with the Securities and Exchange Commission any or all amendments to this Form 10-K.
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