Note 2 - Basis of Presentation and Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2012

Basisof Presentationand Recent Accounting Pronouncements [Text Block]

NOTE B - BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, which are of a normal and recurring nature only, have been included. Certain prior year amounts have been reclassified for presentation purposes.  Operating results for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or for any interim period. For further information, including a summary of significant accounting policies and practices, please refer to our financial statements and footnotes thereto included in Unigene’s annual report on Form 10-K, as amended, for the year ended December 31, 2011.

Restatement of Financial Statements

In November 2012, the Company identified an error related to the Company’s accounting for an embedded derivative liability associated with the Company’s senior secured convertible notes, which were issued in March 2010, during the periods ended June 30, 2012 and  March 31, 2012 and the years ended December 31, 2011 and 2010 and interim periods therein, which resulted in the restatement of previously issued financial statements. Specifically, management determined that the Company’s convertible notes contain a conversion reset provision that lowers the stated conversion price under certain circumstances, which requires the conversion feature to be accounted for as an embedded derivative that must be marked to fair value each reporting period.  As a result,the Company should not have reversed the carrying value of the liability for the embedded derivative in the quarter ended June 30, 2010 and should have continued to mark such liability to fair value in its financial statements for the quarterly periods from June 30, 2010 through June 30, 2012.  Additionally, the Company determined that the methodology utilized to determine the fair value of the embedded derivative liability for the quarter ended March 31, 2010 was not appropriate as it did not properly consider a reset feature contained within the related convertible notes and consequently, that the conclusion that the issuance of the senior secured convertible notes in March 2010 represented a troubled debt restructuring was incorrect. As a result of the re-assessment of the transaction, the Company has concluded that the addition of the conversion feature to the notes indicates the new notes are substantially different from the previously issued notes and as a result, the transaction should have been accounted for as a debt extinguishment.

As a result of the restatement, the Company was unable to finalize and file its Form 10-Q for the period ended September 30, 2012 by the SEC’s extended filing deadline of November 21, 2012.  Therefore, the Company gave the VPC Parties notice that an event of default occurred under the Restated Finance Agreement by virtue of the Company’s failure to timely file such Form 10-Q.

As a result of the aforementioned accounting errors, the financial statements presented herein as well as footnotes H, I and S have been amended and restated to reflect the following accounting corrections:

· As of June 30, 2012 and December 31, 2011: (i) the adjustment of deferred financing fees within prepaid expenses and other current assets (2012) and within other assets (2011) related to the convertible note issuance; (ii) the recordation of an embedded conversion feature liability representing the fair value of the conversion feature; (iii) the adjustment of the debt discount related to the convertible note issuance; (iv) the reversal of the accounting adjustment that was recorded in 2010 to reverse the embedded derivative liability through additional paid-in capital and (v) the cumulative impact to accumulated deficit of related adjustments to the statements of operations.

· For the three and six months ended June 30, 2012 and 2011: (i) the recordation of changes in fair value of  the embedded derivative liability through gain (loss) on change in fair value of embedded conversion feature within the statements of operations; and (ii) the recordation of adjustments to non-cash interest expense based on the revised debt discount and to reflect such interest expense based on the effective interest rate method. 

The following represents a summary of the adjustments by financial statement line item:

	June 30, 2012			December 31, 2011
Balance sheet data:
Prepaid expenses and other current assets	$	341,373		$	-
Other assets		-			520,474
Total assets		341,373			520,474
Embedded conversion feature liability		14,980,000			12,470,000
Notes payable - Victory Park, net		(1,126,955	)		(1,390,170	)
Total liabilities		13,853,045			11,079,830
Additional paid-in capital		(16,724,000	)		(16,724,000	)
Accumulated deficit		3,212,328			6,164,644
Stockholders' deficit		(13,511,672	)		(10,559,356	)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2011		2012			2011
Statements of operations data:
Gain (loss) on change in fair value of embedded conversion feature	$	(5,430,000	)	$	10,670,000	$	(2,510,000	)	$	( 15,770,000	)
Interest expense		(337,509	)		108,158		(442,317	)		405,834
Net income (loss)		(5,767,509	)		10,778,158		(2,952,316	)		(15,364,166	)

The effects of these adjustments to the condensed financial statements are as set forth below.

	June 30, 2012						December 31, 2011
	As Reported			As Restated			As Reported			As Restated
Balance sheet data:
Prepaid expenses and other current assets	$	663,063		$	1,004,436		$	862,761		$	862,761
Other assets		415,049			415,049			440,307			960,781
Total assets		11,691,126			12,032,499			17,674,695			18,195,169
Embedded conversion feature liability		-			14,980,000			-			12,470,000
Notes payable - Victory Park, net		41,503,773			40,376,818			34,073,626			32,683,456
Total liabilities		77,569,710			91,422,755			72,812,503			83,892,333
Additional paid-in capital		133,163,489			116,439,489			132,415,958			115,691,958
Accumulated deficit		(199,996,222	)		(196,783,894	)		(188,505,922	)		(182,341,278	)
Stockholders' deficit		(65,878,584	)		(79,390,256	)		(55,137,808	)		(65,697,164	)

	Three months ended
	June 30, 2012						June 30, 2011
	As Reported			As Restated			As Reported			As Restated
Statements of operations data:
Gain (loss) on change in fair value of embedded conversion feature	$	-		$	(5,430,000	)	$	-		$	10,670,000
Interest expense		(2,944,246	)		(3,281,755	)		(2,797,860	)		(2,689,702	)
Net income (loss)		(5,478,458	)		(11,245,967	)		(8,435,674	)		2,342,484
Net income (loss) per share - basic		(0.06	)		(0.12	)		(0.09	)		0.03
Net income (loss) per share - diluted		(0.06	)		(0.12	)		(0.09	)		0.02

	Six months ended
	June 30, 2012						June 30, 2011
	As Reported			As Restated			As Reported			As Restated
Statements of operations data:
Gain (loss) on change in fair value of embedded conversion feature	$	-		$	(2,510,000	)	$	-		$	(15,770,000	)
Interest expense		(5,706,441	)		(6,148,758	)		(5,534,076	)		(5,128,242	)
Net income (loss)		(11,490,300	)		(14,442,616	)		(15,080,982	)		(30,445,148	)
Net income (loss) per share - basic and diluted		(0.12	)		(0.15	)		(0.16	)		(0.33	)
Statements of cash flows data:
Net income (loss)		(11,490,300	)		(14,442,616	)		(15,080,982	)		(30,445,148	)
Amortization of debt discounts and deferred financing fees		1,673,370			2,115,686			1,673,379			1,267,545
(Gain) loss on change in fair value of embedded conversion feature		-			2,510,000			-			15,770,000

Recent 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 was effective as of January 1, 2012. The adoption of the amended guidance did not have a significant effect on our financial statements.