Unigene first-quarter revenue decreases to $2.5 million

Unigene Laboratories, Inc. (OTCBB: UGNE, http://www.unigene.com) has reported its financial results for the quarter ended March 31, 2010.

Revenue for the three months ended March 31, 2010 was $2,533,000, compared to $3,191,000 for the three months ended March 31, 2009. Revenue for both periods primarily consisted of Fortical sales and royalties. Fortical sales were $1,289,000 for the three months ended March 31, 2010, compared to $1,309,000 for the three months ended March 31, 2009. Fortical royalties were $779,000 for the three months ended March 31, 2010, compared to $1,326,000 for the three months ended March 31, 2009. Fortical sales fluctuate each quarter based upon Upsher-Smith's ordering schedule. Fortical royalties fluctuate each quarter based upon the timing, pricing and volume of Upsher-Smith's shipments to its customers. Fortical sales and royalties have declined since the launch of competitive products in December 2008.

Total operating expenses were $5,333,000 for the three months ended March 31, 2010, a decrease of $111,000 from $5,444,000 for the three months ended March 31, 2009. Operating expenses for the three months ended March 31, 2010 include a non-cash inventory reserve charge of $576,000 as well as non-cash equity compensation and depreciation and amortization expenses of $481,000. Non-cash equity compensation and depreciation and amortization expenses for the three months ended March 31, 2009 were $389,000.

Other expense includes a non-cash loss on change in fair value of the embedded convertible feature of the Victory Park note in the amount of $10,034,000. This loss is due to the fact that the Victory Park note is convertible into shares of our Common Stock and we currently do not have sufficient authorized shares to effectuate a full conversion of the notes. We have therefore established a liability for the convertible feature based on its fair value determined by a lattice model. The liability for the convertible feature will be marked to market at the end of each quarter until such time as additional shares are authorized. The non-cash expense recognized represents the change in the fair value of the convertible feature of the note from the closing date of March 17, 2010 to the balance sheet date of March 31, 2010. The initial fair value of the convertible feature was $8,599,000 as determined by a lattice model. The change in fair value was largely determined by the increase in price of our Common Stock from $0.63 at March 16, 2010 (signing date of the agreements) to $0.88 at March 31, 2010. If and when the increase in authorized shares is approved by our stockholders, we will recognize a gain or loss on the change in fair value determined at the date of approval. The discount on the Victory Park note is being recognized as interest expense over the three-year term of the note.

Other expense also includes approximately $2,000,000 in closing costs and fees related to the restructuring of our Victory Park debt.

Interest expense was $1,523,000 for the three months ended March 31, 2010, an increase of $458,000 from $1,065,000 for the three months ended March 31, 2009, primarily due to our notes issued to Victory Park.

Net loss for the three months ended March 31, 2010, including the $10,034,000 non-cash loss described above, was $15,947,000, or $.17 per share, compared to a net loss of $3,275,000, or $.04 per share, for the three months ended March 31, 2009.

Cash at March 31, 2010 was $13,437,000, an increase of approximately $8,543,000 from December 31, 2009. Accounts receivable at March 31, 2010 were $1,712,000, a decrease of approximately $509,000 from December 31, 2009.

Following are recent highlights and developments that will be discussed during Tuesday's earnings call:

• On March 16, 2010 we entered into an amended and restated financing agreement with Victory Park. 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 by way of surrender of 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 by way of cash payment of approximately $13,642,000 for the balance. Total fees and expenses at closing were approximately $2,007,000. We therefore received net cash proceeds of approximately $11,635,000. 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. The convertible notes are secured by a first priority lien on all 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. The initial conversion rate is calculated by dividing the sum of the principal to be converted plus all accrued and unpaid interest thereon by $0.70 per share, and is subject to adjustment under certain circumstances. The notes are not currently convertible. We lack sufficient shares of Common Stock to deliver all of the shares of Common Stock to be issued upon conversion of the notes, therefore we are required to obtain stockholder approval to amend our certificate of incorporation to increase the number of authorized shares.
• In conjunction with the Victory Park refinancing in March, we restructured our debt with the Levys. Under the amended notes, the interest rate increased from 9% to 12% as of March 17, 2010. We are due to make principal payments on these notes of $1,000,000 on May 10, 2010, $500,000 on November 10, 2010 and $250,000 on May 10, 2011. The balance of all unpaid principal and accrued and unpaid interest is now due on June 18, 2013.
• Data from IMS indicates that as of February 2010, Fortical^® had a 44% share of U.S. nasal calcitonin prescriptions. Beginning in December 2008, three products have launched which are generic to the innovator product, but not to Fortical. Certain providers have substituted these products for Fortical, causing Fortical sales and royalties to decrease. Despite the availability of these competing products, Fortical still remains the most frequently prescribed nasal calcitonin product in the U.S.