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EX-31.2 - EXHIBIT 31.2 - Unilife Corp | c17233exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - Unilife Corp | c17233exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - Unilife Corp | c17233exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - Unilife Corp | c17233exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-34540
UNILIFE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 27-1049354 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
250 Cross Farm Lane, York, Pennsylvania 17406
(Address of principal executive offices)
(Address of principal executive offices)
Telephone: (717) 384-3400
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 þ No o
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 during the preceding 12 months (or such shorter period that
the registrant was required to submit and post such files). Yes o No o
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 definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of
May 13, 2011, 63,851,300 shares of the registrants common stock were outstanding.
Table of Contents
Page | ||||||||
3 | ||||||||
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5 | ||||||||
6 | ||||||||
7 | ||||||||
18 | ||||||||
22 | ||||||||
22 | ||||||||
PART II. OTHER INFORMATION |
||||||||
23 | ||||||||
24 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I. | FINANCIAL INFORMATION |
Item 1. | Financial Statements |
UNILIFE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
March 31, 2011 | June 30, 2010 | |||||||
(in thousands, except share data) | ||||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 27,788 | $ | 20,750 | ||||
Restricted cash |
2,400 | | ||||||
Accounts receivable |
6 | 1,556 | ||||||
Inventories |
564 | 797 | ||||||
Prepaid expenses and other current assets |
430 | 637 | ||||||
Total current assets |
31,188 | 23,740 | ||||||
Property, plant and equipment, net |
53,562 | 29,972 | ||||||
Goodwill |
12,916 | 10,792 | ||||||
Intangible assets, net |
43 | 40 | ||||||
Other assets |
489 | 273 | ||||||
Total assets |
$ | 98,198 | $ | 64,817 | ||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 3,559 | $ | 6,044 | ||||
Accrued expenses |
3,060 | 2,911 | ||||||
Current portion of long-term debt |
2,297 | 1,648 | ||||||
Deferred revenue |
2,633 | 2,188 | ||||||
Total current liabilities |
11,549 | 12,791 | ||||||
Long-term debt, less current portion |
19,362 | 1,093 | ||||||
Deferred revenue |
5,924 | 6,563 | ||||||
Total liabilities |
36,835 | 20,447 | ||||||
Contingencies (Note 9) |
||||||||
Stockholders Equity: |
||||||||
Preferred stock, $0.01 par value, 50,000,000
shares authorized as of March 31, 2011; none
issued or outstanding as of March 31, 2011 and
June 30, 2010 |
| | ||||||
Common stock, $0.01 par value, 250,000,000
shares authorized as of March 31, 2011;
63,590,343 and 54,761,848 shares issued and
outstanding as of March 31, 2011 and June 30,
2010, respectively |
636 | 548 | ||||||
Additional paid-in-capital |
166,918 | 122,397 | ||||||
Accumulated deficit |
(109,787 | ) | (79,650 | ) | ||||
Accumulated other comprehensive income |
3,596 | 1,075 | ||||||
Total stockholders equity |
61,363 | 44,370 | ||||||
Total liabilities and stockholders equity |
$ | 98,198 | $ | 64,817 | ||||
See accompanying notes to the consolidated financial statements.
3
Table of Contents
UNILIFE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Revenues: |
||||||||||||||||
Industrialization fees |
$ | | $ | 1,250 | $ | 1,350 | $ | 5,082 | ||||||||
Licensing fees |
642 | 576 | 1,849 | 2,006 | ||||||||||||
Product sales and other |
8 | 591 | 2,756 | 1,682 | ||||||||||||
Total revenues |
650 | 2,417 | 5,955 | 8,770 | ||||||||||||
Cost of product sales |
450 | 569 | 2,449 | 1,835 | ||||||||||||
Gross profit |
200 | 1,848 | 3,506 | 6,935 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
2,723 | 6,899 | 6,941 | 8,623 | ||||||||||||
Selling, general and administrative |
9,117 | 7,008 | 24,386 | 17,229 | ||||||||||||
Depreciation and amortization |
827 | 390 | 2,492 | 1,727 | ||||||||||||
Total operating expenses |
12,667 | 14,297 | 33,819 | 27,579 | ||||||||||||
Operating loss |
(12,467 | ) | (12,449 | ) | (30,313 | ) | (20,644 | ) | ||||||||
Interest expense |
177 | 30 | 241 | 91 | ||||||||||||
Interest income |
(128 | ) | (450 | ) | (332 | ) | (707 | ) | ||||||||
Other expense (income), net |
17 | 35 | (85 | ) | 15 | |||||||||||
Net loss |
$ | (12,533 | ) | $ | (12,064 | ) | $ | (30,137 | ) | $ | (20,043 | ) | ||||
Loss per share: |
||||||||||||||||
Basic and diluted loss per share |
$ | (0.20 | ) | $ | (0.23 | ) | $ | (0.53 | ) | $ | (0.45 | ) | ||||
See accompanying notes to the consolidated financial statements.
4
Table of Contents
UNILIFE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity and Comprehensive Loss
(unaudited)
Consolidated Statements of Stockholders Equity and Comprehensive Loss
(unaudited)
Accumulated | ||||||||||||||||||||||||
Additional- | Other | |||||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income | Total | |||||||||||||||||||
(in thousands except share data) | ||||||||||||||||||||||||
Balance as of July 1, 2010 |
54,761,848 | $ | 548 | $ | 122,397 | $ | (79,650 | ) | $ | 1,075 | $ | 44,370 | ||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||
Net loss |
| | | (30,137 | ) | | (30,137 | ) | ||||||||||||||||
Foreign currency translation |
| | | | 2,521 | 2,521 | ||||||||||||||||||
Comprehensive loss |
(27,616 | ) | ||||||||||||||||||||||
Issuance of options and warrants to
purchase common stock |
| | 3,081 | | | 3,081 | ||||||||||||||||||
Issuance of restricted stock |
220,000 | 2 | 5,014 | | | 5,016 | ||||||||||||||||||
Issuance of common stock in
connection with private placement
and share purchase plan, net of
issuance costs |
7,048,373 | 70 | 33,361 | | | 33,431 | ||||||||||||||||||
Issuance of common stock upon
exercise of stock options |
1,536,938 | 16 | 2,939 | | | 2,955 | ||||||||||||||||||
Issuance of common stock to employees |
23,184 | | 126 | | | 126 | ||||||||||||||||||
Balance as of March 31, 2011 |
63,590,343 | $ | 636 | $ | 166,918 | $ | (109,787 | ) | $ | 3,596 | $ | 61,363 | ||||||||||||
See accompanying notes to the consolidated financial statements.
5
Table of Contents
UNILIFE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (30,137 | ) | $ | (20,043 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
2,492 | 1,727 | ||||||
Share-based compensation expense |
6,602 | 6,765 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
1,745 | 5,744 | ||||||
Inventories |
238 | 384 | ||||||
Prepaid expenses and other current assets |
216 | (821 | ) | |||||
Other assets |
(209 | ) | 255 | |||||
Accounts payable |
(299 | ) | (150 | ) | ||||
Accrued expenses |
972 | (604 | ) | |||||
Deferred revenue |
(1,849 | ) | (2,009 | ) | ||||
Net cash used in operating activities |
(20,229 | ) | (8,752 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property, plant and equipment |
(27,086 | ) | (9,604 | ) | ||||
Purchases of certificates of deposit |
| (9,106 | ) | |||||
Net cash used in investing activities |
(27,086 | ) | (18,710 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from the issuance of common stock, net of issuance costs |
33,431 | 47,117 | ||||||
Proceeds from the exercise of options to purchase common stock |
2,955 | 1,817 | ||||||
Proceeds from the issuance of long-term debt |
19,024 | | ||||||
Principal payments on long-term debt and capital lease obligations |
(357 | ) | (311 | ) | ||||
Proceeds from the issuance of note payable |
6,900 | | ||||||
Principal payments on note payable |
(6,900 | ) | | |||||
Decrease (increase) in restricted cash |
(2,400 | ) | 433 | |||||
Net cash provided by financing activities |
52,653 | 49,056 | ||||||
Effect of exchange rate changes on cash |
1,700 | (416 | ) | |||||
Net increase in cash and cash equivalents |
7,038 | 21,178 | ||||||
Cash and cash equivalents at beginning of period |
20,750 | 3,627 | ||||||
Cash and cash equivalents at end of period |
$ | 27,788 | $ | 24,805 | ||||
Supplemental disclosure of non-cash activities |
||||||||
Purchases of property, plant and equipment in accounts payable and accrued liabilities |
$ | 2,984 | $ | 423 | ||||
Purchases of property, plant and equipment pursuant to capital lease agreements |
$ | 251 | $ | 19 | ||||
Issuance of common stock to former shareholders of Unitract Syringe Pty Limited |
$ | | $ | 5,890 | ||||
Purchases of property, plant and equipment through the issuance of warrants |
$ | 1,621 | $ | | ||||
See accompanying notes to the consolidated financial statements.
6
Table of Contents
Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Description of Business and Unaudited Financial Statements
Unilife Corporation (collectively with its consolidated subsidiaries, the Company) and
subsidiaries is a medical device company focused on the design, development, manufacture and supply
of a proprietary range of retractable syringes. The primary target customers for the Companys
products include pharmaceutical manufacturers and suppliers of medical equipment to healthcare
facilities and distributors to patients who self-administer prescription medication.
The accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America (GAAP). The
accompanying unaudited consolidated financial statements contain all normal and recurring
adjustments that, in the opinion of management, are necessary for a fair presentation for the
periods presented as required by Rule 10-01 of Regulation S-X. Interim results may not be
indicative of results for a full year. The consolidated financial statements should be read in
conjunction with the Companys consolidated financial statements and the notes thereto for the
fiscal year ended June 30, 2010 contained in its Annual Report on Form 10-K.
2. Liquidity
The Company incurred losses from operations during both the year ended June 30, 2010 and the
nine months ended March 31, 2011 and anticipates incurring additional losses until such time that
it can generate sufficient sales of its proprietary range of retractable syringes. Management
estimates that cash and cash equivalents of $27.8 million as of March 31, 2011 are sufficient to
sustain planned operations through the end of the second quarter of fiscal 2012.
Additional funding will be needed by the Company to support its operations and capital
expenditure requirements. Management has a range of short and long-term funding strategies
available to it in this regard. In addition to the sale of its Unitract and Unifill syringe
products to existing partners, the Company is also in discussions with additional pharmaceutical
companies pertaining to the Unifill syringe and other pipeline products. Should the Company enter
into commercial relationships relating to the industrialization, commercial supply or preferred use
of a device within a particular therapeutic market, the Company may pursue additional funding or
revenue streams. The Company may seek to raise additional funds through the sale of additional
equity or debt securities.
During October 2010, the Company secured $18.0 million of external financing from a financial
institution for the construction of its new corporate headquarters and manufacturing facility. The
Company used $6.9 million of the proceeds to repay amounts outstanding under its Credit Agreement
with Univest National Bank and Trust Co. (Univest).
During December 2010, the Company received $2.25 million from the Commonwealth of Pennsylvania
in financing for land and the construction of its new corporate headquarters and manufacturing
facility.
During December 2010, the Company issued 7,048,373 shares of common stock and 2,268,934
options to purchase common stock for aggregate proceeds of A$34.1 million ($33.4 million), net of
issuance costs, through an Australian private placement and a share purchase plan for the Companys
Australian and New Zealand stockholders. The Company is using the proceeds from the private
placement and share purchase plan to purchase additional capital equipment and for general
operations, including the development of additional pipeline products.
The accompanying financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the ordinary course of
business. The financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.
7
Table of Contents
Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Unilife Corporation and its
wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation.
On September 1, 2009, Unilife Medical Solutions Limited, an Australian corporation (UMSL),
entered into a Merger Implementation Agreement with Unilife Corporation, a newly formed Delaware
subsidiary of UMSL, pursuant to which stockholders and option holders of UMSL would exchange their
existing interests in UMSL for equivalent interests in Unilife Corporation and Unilife Corporation
would become the parent or ultimate parent of UMSL and its subsidiaries. The redomiciliation
transaction was approved by the Australian Federal Court and the shareholders and option holders of
UMSL and was completed on January 27, 2010. In the redomiciliation each holder of UMSL ordinary
shares or share options received one share of common stock or one stock option, of Unilife
Corporation for every six UMSL ordinary shares or share options, respectively, held by such holder,
unless a holder of UMSL ordinary shares elected to receive, in lieu of common stock, Chess
Depository Interests, or CDIs of Unilife (each representing one-sixth of a share of Unilife common
stock) in which case such holder received one CDI of Unilife for each ordinary share of UMSL. All
share and per share data have been retroactively restated to reflect the one for six share
recapitalization.
References to the Company include Unilife Corporation and its consolidated subsidiaries,
including UMSL, unless the context otherwise requires. References to Unilife are references
solely to Unilife Corporation.
References to A$ mean the lawful currency of the Commonwealth of Australia. References to or
euros are to the lawful currency of the European Union.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. The estimates are principally in the areas of revenue
recognition and share-based compensation expense. Management bases its estimates on historical
experience and various assumptions that are believed to be reasonable under the circumstances.
Actual results could differ from those estimates.
Inventories
Inventories consist primarily of plastic syringe components and include direct materials,
direct labor and manufacturing overhead. Inventories are stated at the lower of cost or market,
with cost determined using the first in, first out method. The Company routinely reviews its
inventory for obsolete, slow moving or otherwise impaired inventory and records estimated
impairments in the periods in which they occur. Inventories consist of the following:
March 31, 2011 | June 30, 2010 | |||||||
(in thousands) | ||||||||
Raw materials |
$ | 461 | $ | 649 | ||||
Work in process |
63 | 148 | ||||||
Finished goods |
40 | | ||||||
Total inventories |
$ | 564 | $ | 797 | ||||
Share-Based Compensation
The Company grants stock options, restricted stock and common stock as compensation to its
employees, directors and consultants. Certain employee and director awards vest over stated vesting
periods and others also require achievement of specific performance or market conditions. The
Company expenses the grant-date fair value of awards to employees and directors over their
respective vesting periods. To the extent that employee and director awards vest only upon the
achievement of a specific performance condition, expense is recognized over the period from the
date management determines that the performance condition is probable of achievement through the
date they are expected to be met. Awards granted to consultants are sometimes granted for past
services, in which case their fair value is expensed on their grant date, while other awards
require future service, or the achievement of performance or market conditions. Timing of expense
recognition for consultant awards is similar to that of employee and director awards; however,
aggregate expense is re-measured each quarter-end based on the then fair value of the award through
the vesting date of the award. The Company estimates the fair value of stock options using the
Black-Scholes option-pricing model, with the exception of market-based grants, which are valued
based on Barrier and Monte Carlo option pricing models. Option pricing methods require the input of
highly subjective assumptions, including the expected stock price volatility. See Note 4 for
additional information regarding share-based compensation.
8
Table of Contents
Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements
Revenue Recognition
The Company recognizes revenue from licensing fees, industrialization efforts and product
sales.
In June 2008, the Company entered into an exclusive licensing arrangement to allow its
pharmaceutical partner to use certain of the Companys intellectual property in order and solely to
develop in collaboration with the Company, the Companys Unifill syringe for use in and sale to the
pre-filled syringe market. The 10.0 million euro up-front, non-refundable fee paid for this license
is being amortized over the 5 year expected life of the related agreement. In late fiscal 2009, the
Company entered into an industrialization agreement with its pharmaceutical partner, under which
specific payment amounts and completion dates were established for achievement of certain
pre-defined milestones in its development of the Unifill syringe. Revenue is recognized upon
achievement of the at risk milestone events, which represents the culmination of the earnings
process related to such events. Milestones include specific phases of the project such as product
design, prototype availability, user tests, manufacturing proof of principle and the various steps
to complete the industrialization of the product. Revenue recognized is commensurate with the
milestones achieved and the Company has no future performance obligations related to previous
milestone payments as each milestone payment is non-refundable when received.
The Company recognizes revenue from sales of products at the time of shipment and when title
passes to the customer. Product sales to B. Braun, a customer who accounted for 10% or more of the
Companys revenue, were $0.6 million during the three months ended March 31, 2010 and $2.5 million
and $1.7 million during the nine months ended March 31, 2011 and 2010, respectively.
Reclassifications
Certain amounts in the consolidated statements of operations were reclassified from selling,
general and administrative expenses to research and development expenses. Management has
determined that activities performed by certain employees were more closely associated with
research and development activities and has reclassified those items on the accompanying
consolidated statements of operations.
This reclassification did not affect the consolidated balance sheets or consolidated
statements of cash flows. Additionally, the reclassification did not affect operating loss or net
loss on the consolidated statements of operations. The following table summarizes the as reported
and as adjusted amounts related to the reclassification discussed above:
Three Months Ended | Nine Months Ended | |||||||
March 31, 2010 | March 31, 2010 | |||||||
(in thousands) | ||||||||
Research and development as reported |
$ | 6,269 | $ | 6,955 | ||||
Research and development as adjusted |
$ | 6,899 | $ | 8,623 | ||||
Selling, general and administrative as reported |
$ | 7,638 | $ | 18,897 | ||||
Selling, general and administrative as adjusted |
$ | 7,008 | $ | 17,229 |
Recently Issued Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162
(SFAS 168). SFAS 168 represents the last numbered standard issued by the FASB under the old
(pre-codification) numbering system, and amends the GAAP hierarchy. On July 1, 2009, the FASB
launched its new codification (i.e. the FASB Accounting Standards Codification ASC). The
codification supersedes existing GAAP for nongovernmental entities.
In October 2009, the FASB issued Accounting Standards Update (ASU) 2009-13,
Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 provides amendments to the
criteria in Subtopic 605-24 for separating consideration in multiple-deliverable revenue
arrangements. It establishes a hierarchy of selling prices to determine the selling price of each
specific deliverable which includes vendor-specific objective evidence (if available), third-party
evidence (if vendor-specific evidence is not available) or estimated selling price if neither of
the first two are available. ASU 2009-13 also eliminates the residual method for allocating revenue
between the elements of an arrangement and requires that arrangement consideration be allocated at
the inception
of the arrangement. Finally, ASU 2009-13 expands the disclosure requirements regarding a
vendors multiple-deliverable revenue arrangements. ASU 2009-13 should be applied on a prospective
basis for revenue arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. The Company adopted ASU 2009-13 on July 1, 2010 and its adoption did not have
a material impact on its consolidated financial statements.
9
Table of Contents
Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value
Measurements, which amends ASC Topic 820 (ASU 2010-06). ASU 2010-06 amends the ASC to require
disclosure of transfers into and out of Level 1 and Level 2 fair value measurements, and also
requires more detailed disclosure about the activity within Level 3 fair value measurements. The
changes to the ASC as a result of this update are effective for annual and interim reporting
periods beginning after December 15, 2009 except for requirements related to Level 3 disclosures,
which are effective for annual and interim periods beginning after December 15, 2010. The Company
adopted ASU 2010-06 on January 1, 2011 and its adoption did not have a material impact on its
consolidated financial statements.
In March 2010, the FASB issued ASU 2010-17, Milestone Method of Revenue Recognition, a
consensus of the FASB Emerging Issues Task Force (Issue No. 08-9) (ASU 2010-17). ASU 2010-17
provides guidance about the criteria that must be met to use the milestone method of revenue
recognition. This ASU is effective for milestones achieved in fiscal years and interim periods
within those years, beginning after June 15, 2010. The Company adopted ASU 2010-17 on July 1, 2010
and its adoption did not have a material impact on its consolidated financial statements.
4. Equity Transactions and Share-Based Compensation
In December 2010, the Company issued 7,048,373 shares of common stock and 2,268,934 options to
purchase common stock for aggregate proceeds of A$34.1 million ($33.4 million), net of issuance
costs, through an Australian private placement and a share purchase plan for the Companys
Australian and New Zealand stockholders. Of these options, 50% are exercisable at A$7.50 per share,
and 50% are exercisable at A$12.00 per share. The options first become exercisable in June 2011 and
will expire in December 2013.
The Company recognized share-based compensation expense related to stock options, grants of
restricted stock and common stock to employees, directors and consultants of $2.2 million and $6.0
million during the three months ended March 31, 2011 and 2010, respectively and $6.6 million and
$6.8 million during the nine months ended March 31, 2011 and 2010, respectively.
In January 2011, the Company granted 23,184 shares of common stock to certain employees. The
Company recorded a charge to operations of $0.1 million related to the issuance of these shares.
Stock Options
The Company has granted stock options to certain employees and directors under the Employee
Share Option Plan (the Plan). The Plan is designed to assist in the motivation and retention of
employees and to recognize the importance of employees to the long-term performance and success of
the Company. The Company has also granted stock options to certain consultants outside of the Plan.
The majority of the options to purchase common stock vest on the anniversary of the date of grant,
which ranges from one to three years. Additionally, certain stock options vest upon the closing
price of the Companys common stock reaching certain minimum levels, as defined in the agreements.
Share-based compensation expense related to options granted to employees is recognized on a
straight-line basis over the related vesting term. Share-based compensation expense related to
options granted to consultants is recognized ratably over each vesting tranche of the options.
In November 2009, the Company adopted the 2009 Stock Incentive Plan (the Stock Incentive
Plan). The Stock Incentive Plan provides for a maximum of 6,000,000 shares of common stock to be
reserved for the issuance of stock options and other stock-based awards. Commencing on January 1,
2011, and on each January 1st thereafter, through January 1, 2019, the share reserve will
automatically adjust so that it will equal 12.5% of the weighted average number of shares of common
stock outstanding reduced by the sum of any shares of common stock issued under the Stock Incentive
Plan and any shares of common stock subject to outstanding awards under the Stock Incentive Plan.
In January 2010, the Company issued 1,000,000 options to purchase common stock to a consultant
under the Stock Incentive Plan in consideration for various services to be performed for the
Company. The options to purchase common stock are exercisable at A$6.33 per share and vest upon the
trading price of the Companys CDIs reaching certain minimum levels on the Australian Securities
Exchange, which range from A$1.75 to A$3.22 per share. The options are re-measured each reporting
date and as of March 31, 2011
were valued at $2.73 per option, which is being expensed ratably over the vesting period of
each tranche, which ranges from 1.2 years to 2.0 years. The options will be re-valued on a
quarterly basis and marked to market until exercised.
10
Table of Contents
Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements
In December 2010, the Company issued 375,000 warrants to Keystone Redevelopment Group, LLC
(Keystone) and 225,000 warrants to L2 Architecture (L2) outside of both the Plan and the Stock
Incentive Plan. The warrants issued to Keystone were in partial consideration for managing the
development of the Companys new headquarters and manufacturing facility and the warrants issued to
L2 were in partial consideration for the custom design of the facility. The warrants issued to both
Keystone and L2 are exercisable at $5.30 per warrant vested immediately upon issuance and were
valued at $2.70 per warrant. The aggregate fair value of the warrants of $1.6 million has been
capitalized and included as a component of the cost of the building.
In December 2010, the Company issued 2,268,934 options to purchase common stock outside of
both the Plan and the Stock Incentive Plan in connection with the Companys private placement as
discussed above.
In February 2011, the Company issued 300,000 options to purchase common stock to its Chief
Operating Officer under the Stock Incentive Plan. The options are exercisable at $4.85 per share
and vest in eight equal installments based upon the achievement of operational and product
milestones as determined by the compensation committee of the board of directors. The weighted
average grant date fair value of the options was $2.31 per share and the fair value of the options
is being expensed on a straight-line basis over a weighted average estimated service period of 1.2
years.
During the nine months ended March 31, 2011, the Company granted 893,517 additional options to
purchase common stock to certain employees and directors under the Stock Incentive Plan. The
weighted average exercise price of the options was $5.82 per share. The majority of the options
vest over a period of three years, with the exception of 60,000 options, which vest upon meeting
certain performance targets, as defined in the agreement. The weighted average grant date fair
value of the options was $2.74 per share.
The following is a summary of activity related to stock options held by employees and board
members during the nine months ended March 31, 2011:
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Weighted | Remaining | |||||||||||||||
Number of | Average | Contractual | Aggregate Intrinsic | |||||||||||||
Options | Exercise Price | Life (in years) | Value | |||||||||||||
(in thousands) | ||||||||||||||||
Outstanding as of July 1, 2010 |
4,058,701 | $ | 3.64 | |||||||||||||
Granted |
1,193,517 | 5.58 | ||||||||||||||
Exercised |
(506,364 | ) | 2.07 | |||||||||||||
Cancelled |
(263,740 | ) | 3.73 | |||||||||||||
Outstanding as of March 31, 2011 |
4,482,114 | $ | 4.33 | 4.0 | $ | 6,894 | ||||||||||
Exercisable as of March 31, 2011 |
1,583,335 | $ | 2.47 | 2.2 | $ | 4,775 | ||||||||||
The following is a summary of activity related to stock options and warrants held by
non-employees during the nine months ended March 31, 2011:
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Weighted | Remaining | |||||||||||||||
Number of | Average | Contractual | Aggregate Intrinsic | |||||||||||||
Options | Exercise Price | Life (in years) | Value | |||||||||||||
(in thousands) | ||||||||||||||||
Outstanding as of July 1, 2010 |
6,355,642 | $ | 6.95 | |||||||||||||
Granted |
2,868,934 | 9.06 | ||||||||||||||
Exercised |
(1,030,574 | ) | 2.04 | |||||||||||||
Cancelled |
| | ||||||||||||||
Outstanding as of March 31, 2011 |
8,194,002 | $ | 8.31 | 2.4 | $ | 2,563 | ||||||||||
Exercisable as of March 31, 2011 |
4,925,068 | $ | 7.87 | 2.0 | $ | 2,563 | ||||||||||
The aggregate intrinsic value is defined as the difference between the market value of the
Companys common stock as of the end of the period and the exercise price of the in-the-money stock
options. The total intrinsic value of stock options exercised during the
three months ended March 31, 2011 was $0.1 million. The total intrinsic value of stock options
exercised during the nine months ended March 31, 2011 and 2010 was $5.5 million and $4.6 million,
respectively. Of the 6,167,713 non-vested options, 1,000,000 are held by a consultant.
11
Table of Contents
Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements
The Company used the following weighted average assumptions in calculating the fair value of
options and warrants granted during the nine months ended March 31, 2011 (the period subsequent to
the Companys redomiciliation), the period from January 27, 2010 to March 31, 2010 (the period
subsequent to the Companys redomiciliation) and the period from July 1, 2010 to January 26, 2010
(the period prior to the Companys redomiciliation):
Nine Months Ended | Period From January 27, 2009 to | Period From July 1, 2009 to | ||||||||||
March 31, 2011 | March 31, 2010 | January 26, 2010 | ||||||||||
Number of stock
options and warrants
granted |
1,793,517 | 904,000 | 1,383,333 | |||||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | ||||||
Risk-free interest rate |
1.72 | % | 2.43 | % | 4.68 | % | ||||||
Expected volatility |
59 | % | 60 | % | 77 | % | ||||||
Expected life (in years) |
4.8 | 3.99 | 4.38 |
The assumptions noted above for the nine months ended March 31, 2011 do not include amounts
related to the options issued in the December 2010 private placement as discussed above. The
assumptions noted above for the period from July 1, 2009 to January 26, 2010 do not include amounts
related to the 3,643,429 options issued in the Companys October 2009 private placement.
Subsequent to the Companys redomiciliation, the fair value of each stock option was estimated
at the grant date using the Black-Scholes option pricing model, with the exception of grants
subject to market conditions, which were valued using a Monte Carlo option pricing model. The
Company has not historically paid dividends to its stockholders and, as a result, assumed a
dividend yield of 0%. The risk free interest rate is based upon the rates of U.S. Treasury bonds
with a term equal to the expected term of the option. Due to the Companys limited Nasdaq trading
history, the expected volatility used to value options granted after January 27, 2010 is based upon
a blended rate of the historical share price of the Companys stock on the Australian Securities
Exchange and the volatility of peer companies traded on U.S. exchanges operating in the same
industry as the Company. The expected term of the options to purchase common stock issued to
employees and directors is based upon the simplified method, which is the mid-point between the
vesting date of the option and its contractual term unless a reasonable alternate term is estimated
by management. The expected term of the options to purchase common stock issued to consultants is
based on the contractual term of the awards.
Prior to the Companys redomiciliation, the fair value of each stock option was estimated at
the grant date using the Black-Scholes option pricing model, with the exception of grants subject
to market conditions which were valued based on a Barrier option pricing model. The Company has not
historically paid dividends to its shareholders and, as a result, assumed a dividend yield of 0%.
The risk free interest rate is based upon the rates of Australian bonds with a term equal to the
expected term of the option. The expected volatility is based upon the historical share price of
the Companys common stock on the Australian Securities Exchange. The expected term of the stock
options to purchase common stock is based upon the outstanding contractual term of the stock option
on the date of grant.
Restricted Stock
The Company has granted shares of restricted stock to certain employees and consultants under
the Stock Incentive Plan. During the period prior to vesting, the holder of the non-vested
restricted stock will have the right to vote and the right to receive all dividends and other
distributions declared. All non-vested shares of restricted stock are reflected as outstanding;
however, they have been excluded from the calculation of basic earnings per share.
For employees, the fair value of restricted stock is measured on the date of grant using the
price of the Companys common stock on that date. Share-based compensation expense for restricted
stock issued to employees is recognized on a straight-line basis over the requisite service period,
which is generally the longest vesting period. For restricted stock granted to consultants, the
fair value of the awards will be re-valued on a quarterly basis and marked to market until vested.
Share-based compensation expense for restricted stock issued to consultants is recognized ratably
over each vesting tranche.
In February 2011, the Company issued 120,000 shares of restricted stock to its Chief Operating
Officer under the Stock Incentive Plan. A total of 80,000 shares of the restricted stock vest on
certain anniversaries from the date of grant, ranging from one to three years and a total of 40,000
shares of restricted stock vest upon the achievement of certain performance conditions, as defined
in the agreement. The grant date fair value of the restricted shares was $4.85 per share.
12
Table of Contents
Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements
During the nine months ended March 31, 2011, the Company issued 100,000 additional shares of
restricted stock to certain employees. The shares of restricted stock vest on certain anniversaries
from the date of grant, ranging from one to three years. The weighted average grant date fair value
of the restricted shares was $5.67 per share.
As of March 31, 2011, 2,038,000 shares of restricted stock remain unvested.
5. Property, Plant and Equipment, net
Property, plant and equipment consist of the following:
March 31, 2011 | June 30, 2010 | |||||||
(in thousands) | ||||||||
Building |
$ | 31,272 | $ | | ||||
Machinery and equipment |
15,012 | 10,848 | ||||||
Computer software |
2,457 | 528 | ||||||
Furniture and fixtures |
318 | 737 | ||||||
Construction in progress |
7,435 | 18,560 | ||||||
Land |
2,036 | 2,036 | ||||||
Leasehold improvements |
| 1,026 | ||||||
58,530 | 33,735 | |||||||
Less: accumulated depreciation and amortization |
(4,968 | ) | (3,763 | ) | ||||
Property, plant and equipment, net |
$ | 53,562 | $ | 29,972 | ||||
Construction in progress as of March 31, 2011 consisted primarily of amounts incurred in
connection with the machinery related to the lines for the Unifill syringe. Construction in
progress as of June 30, 2010 consisted primarily of amounts incurred in connection with the
construction of the Companys new manufacturing facility and the machinery related to the lines for
the Unifill syringe.
6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill during the nine months ended March 31, 2011 are
as follows:
(in thousands) | ||||
Balance as of July 1, 2010 |
$ | 10,792 | ||
Foreign currency translation |
2,124 | |||
Balance as of March 31, 2011 |
$ | 12,916 | ||
Intangible assets consist of patents acquired in a business acquisition of $80,000. Related
accumulated amortization as of March 31, 2011 and June 30, 2010 was $37,000 and $40,000
respectively, and future amortization expense is scheduled to be $5,000 annually.
7. Long-Term Debt
Long-term debt consists of the following:
March 31, 2011 | June 30, 2010 | |||||||
(in thousands) | ||||||||
Mortgage loans |
$ | 16,774 | $ | | ||||
Bank term loans |
2,168 | 2,393 | ||||||
Commonwealth of Pennsylvania financing authority loan |
2,239 | | ||||||
Commonwealth of Pennsylvania assisted machinery loans |
260 | 332 | ||||||
Other |
218 | 16 | ||||||
21,659 | 2,741 | |||||||
Less: current portion of long-term debt |
2,297 | 1,648 | ||||||
Total long-term debt |
$ | 19,362 | $ | 1,093 | ||||
13
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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements
Mortgage Loans
In October 2010, the Company entered into a loan agreement with Metro Bank (Metro), pursuant
to which Metro agreed to provide the Company with two notes in the amounts of $14.25 million and
$3.75 million. The proceeds received have been used to finance construction of the Companys new
corporate headquarters and manufacturing facility in York, Pennsylvania, including the repayment of
its $6.9 million bridge construction loan with Univest. Under the loan agreement, the Company may
borrow funds based upon the percentage of construction completed on the facility.
The $14.25 million term note matures 20 years from completion of construction of the Companys
new corporate headquarters and manufacturing facility and the $3.75 million term note matures on
October 20, 2020. During construction, the Company will pay only interest on both term notes at the
Prime Rate plus 1.50% per annum, with a floor of 4.50% per annum. For a period of five years
subsequent to construction, the Company will pay principal and interest on both term notes, with
interest at a fixed rate based on the 5 year Treasury-bill plus 300 basis points per annum, with a
floor of 6.0% per annum. Commencing five years subsequent to construction through the maturity
dates for each term note, the Company will pay principal and interest on both term notes, with
interest at a rate to be negotiated by the parties, or if no rate is negotiated, based upon the
Prime Rate plus 1.0% per annum, with a floor not to exceed 250 basis points over the Prime Rate.
The Company will also pay one final payment of principal and interest upon the maturity of each
term note.
The loan agreement contains certain customary covenants, including the maintenance of a Debt
Service Reserve Account in the amount of $2.4 million, classified as restricted cash on the
consolidated balance sheet, which will remain in place until the Company and Metro agree on the
financial covenants. The Company may prepay the loan, but will incur a prepayment penalty of 2.0%
during the first three years. The U.S. Department of Agriculture has guaranteed $10.0 million of
the loan.
As of March 31, 2011, $13.02 million was outstanding under the $14.25 million note and the
Company was fully drawn on the $3.75 million note.
Bank Term Loans
Bank term loans consist of three term loans payable. The loans bear interest at a rate of
prime (3.25% as of March 31, 2011) plus 1.50%. (4.75% as of March 31, 2011) per annum and mature on
dates ranging from August 2011 through August 2021. The borrowings under the bank term loans are
collateralized by the Companys accounts receivable, inventories and certain machinery and
equipment. In February 2011, the bank term loan agreements were amended so that the covenants are
consistent with those under the Companys mortgage loans as discussed above. Due to the previous
violation of the bank term loan covenants, the $1.2 million long-term portion outstanding as of
March, 2011 under these bank term loans is classified in the current portion of long-term debt.
Commonwealth of Pennsylvania Financing Authority Loan
In October 2009, the Company accepted a $5.45 million offer of assistance from the
Commonwealth of Pennsylvania which included up to $2.25 million in financing for land and the
construction of its new manufacturing facility. In December 2010, Unilife Cross Farm LLC, a
subsidiary of the Company (Cross Farm), received the $2.25 million loan which bears interest at a
rate of 5.0% per annum, matures in January 2021 and is secured by a third mortgage on its new
facility. In connection with the loan agreement, Cross Farm entered into an intercreditor agreement
by which the Commonwealth of Pennsylvania agreed that it would not exercise its rights in the event
of a default by Cross Farm without the consent of Metro, who holds the first and second mortgages
on its new facility.
Commonwealth of Pennsylvania Assisted Machinery Loans
The Company has qualified for two Commonwealth of Pennsylvania assisted loans for the purchase
of specific machinery and equipment. These loans bear interest at rates ranging from 2.75% to 3.25%
per annum and mature on dates ranging from July 2011 through July 2013. The borrowings under these
loans are collateralized by the related equipment.
14
Table of Contents
Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements
8. Loss Per Share
The Companys net loss per share is as follows:
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands, except share and per share data) | ||||||||||||||||
Numerator |
||||||||||||||||
Net loss |
$ | (12,533 | ) | $ | (12,064 | ) | $ | (30,137 | ) | $ | (20,043 | ) | ||||
Denominator |
||||||||||||||||
Weighted average number of shares used to compute
basic loss per share |
61,504,793 | 52,497,400 | 56,593,944 | 44,882,882 | ||||||||||||
Effect of dilutive options to purchase common stock |
| | | | ||||||||||||
Weighted average number of shares used to compute
diluted loss per share |
61,504,793 | 52,497,400 | 56,593,944 | 44,882,882 | ||||||||||||
Basic and diluted loss per share |
$ | (0.20 | ) | $ | (0.23 | ) | $ | (0.53 | ) | $ | (0.45 | ) | ||||
Due to the Companys net losses, unvested shares of restricted stock (participating
securities) totaling 1,987,333 and 757,288 were excluded from the calculation of basic and diluted loss
per share during the three months ended March 31, 2011 and 2010, respectively and unvested shares
of restricted stock totaling 1,921,763 and 252,429 were excluded from the calculation of basic and
diluted loss per share during the nine months ended March 31, 2011 and 2010, respectively.
In
addition, stock options (non-participating securities) totaling
12,542,042 and 9,904,732 during
the three months ended March 31, 2011 and 2010, respectively, were excluded from the calculation of
diluted loss per share and stock options totaling 10,805,392 and
7,315,529 during the nine months ended
March 31, 2011 and 2010, respectively, were excluded from the calculation of diluted loss per
share, as their effect would have been anti-dilutive. Certain of these stock options were excluded
solely due to the Companys net loss position. Had the Company reported net income during the three
months ended March 31, 2011 and 2010, these shares would have
had an effect of 1,576,992 and 2,580,716
diluted shares, respectively, for purposes of calculating diluted loss per share. Had the Company
reported net income during the nine months ended March 31, 2011 and 2010, these shares would have
had an effect of 1,784,345 and 2,296,046 diluted shares, respectively, for purposes of calculating
diluted loss per share.
9. Contingencies
From time to time, the Company is involved in various legal proceedings, claims, suits and
complaints arising out of the normal course of business. Based on the facts currently available to
the Company, management believes that these claims, suits and complaints are adequately provided
for, covered by insurance, without merit or not probable that an unfavorable outcome will result.
10. Business Alliances
sanofi-aventis
The Company signed
an exclusive licensing agreement and an industrialization agreement with sanofi-aventis, a
multinational pharmaceutical company, between June 2008 and July 2009. Under the terms of these
agreements, sanofi-aventis has agreed to pay the Company an aggregate of approximately
$36.4 million in exclusivity fees and industrialization milestone payments for the exclusive right
to negotiate the purchase of the Unifill ready-to-fill (prefilled) syringe (Unifill syringe or
product).
Pursuant to the
exclusive licensing agreement, sanofi-aventis has paid the Company a 10.0 million euro
($13.0 million) up front non-refundable one-time fee. During the year ended June 30, 2009, the
Company recognized $2.5 million of this up-front payment as revenue and deferred $10.6 million,
which is being recognized on a straight-line basis over the remaining term of the agreement.
Pursuant to the
industrialization agreement, sanofi-aventis has agreed to pay the Company up to 17.0 million
euros ($23.4 million) in milestone-based payments to fund the completion of the Companys
industrialization program for the Unifill syringe. As of March 31, 2011 there is one
remaining 1.0 million euro milestone payment to be recognized under the industrialization
agreement, which requires the Company to produce commercially viable units
of the Unifill syringe.
This exclusive
right for sanofi-aventis to negotiate for the purchase of the Unifill syringe is limited to the
therapeutic drug classes of anti-thrombotic agents, vaccines and four confidential sub-classes
until June 30, 2014 (exclusivity list). The Company is able to negotiate with other pharmaceutical
companies seeking to utilize the Unifill syringe with drugs targeted for use in therapeutic drug
classes outside of those retained by sanofi-aventis under its exclusivity list. Upon mutual
agreement by both parties, sanofi-aventis may add additional therapeutic sub-classes to the
exclusivity list for the Unifill syringe provided the Company has not previously signed
exclusive terms for the product to a third party. The Company is not obligated to sell more
than 30% of its annual production capacity for the Unifill syringe to sanofi-aventis without
written notification up to two years in advance.
15
Table of Contents
Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements
Stason Pharmaceuticals
In March 2010, the Company signed an exclusive five year agreement with Stason
Pharmaceuticals; a U.S. based pharmaceutical company to market its Unitract 1mL syringe in Japan,
China and Taiwan. Under the agreement, Stason Pharmaceuticals is required to purchase a minimum of
1.0 million units of the Unitract 1 mL syringe per year during the term of the contract.
11. Financial Instruments
The Company does not hold or issue financial instruments for trading purposes. The estimated
fair values of the Companys financial instruments are as follows:
March 31, 2011 | June 30, 2010 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
(in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Cash equivalents certificates of deposit |
$ | 1,000 | $ | 1,000 | $ | 18,629 | $ | 18,629 | ||||||||
16
Table of Contents
Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements
The carrying amount of the Companys cash equivalents, which includes certificates of deposit,
accounts receivable, accounts payable and accrued expenses approximate their fair value due to the
short term maturities of these items. The estimated fair value of
the Companys debt approximates its carrying value based upon the rates that the Company would
currently be able to receive for similar instruments of comparable maturity.
The Company categorizes its assets and liabilities measured at fair value into a fair value
hierarchy that prioritizes the inputs used in pricing the asset or liability. The three levels of
the fair value hierarchy are as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices for identical or similar
assets and liabilities in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data.
Level 3 Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. This includes certain pricing models,
discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The levels in the fair value hierarchy within which a fair value measurement in its entirety
falls is based on the lowest level input that is significant to the fair value measurement in its
entirety.
The following table presents the Companys assets that are measured at fair value on a
recurring basis for the periods presented:
Fair Value Based On | ||||||||||||||||
Quoted Market | ||||||||||||||||
Prices in Active | Significant | Significant | ||||||||||||||
Markets for | Other | Unobservable | Total | |||||||||||||
Identical Assets | Observable Inputs | Inputs | Fair Value | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | Measurements | |||||||||||||
(in thousands) | ||||||||||||||||
Cash equivalents certificates of deposit (March 31, 2011) |
$ | | $ | 1,000 | $ | | $ | 1,000 | ||||||||
Cash equivalents certificates of deposit (June 30, 2010) |
$ | | $ | 18,629 | $ | | $ | 18,629 | ||||||||
17
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Cautionary Note Regarding Forward-Looking Information
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and related notes
appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis includes
certain forward-looking statements that involve risks, uncertainties and assumptions. You should
review the Risk Factors section of our Annual Report on Form 10-K for a discussion of important
factors that could cause actual results to differ materially from the results described in or
implied by such forward-looking statements.
Certain statements in this Quarterly Report on Form 10-Q may constitute forward looking
statements. In some cases, you can identify forward-looking statements by terms such as may,
will, should, could, would, expects, plans, anticipates, believes, estimates,
projects, predicts, potential and similar expressions intended to identify forward-looking
statements. These forward-looking statements are based on managements beliefs and assumptions and
on information currently available to our management. Our management believes that these
forward-looking statements are reasonable as and when made. However, you should not place undue
reliance on any such forward-looking statements because such statements speak only as of the date
when made. We do not undertake any obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise, except as required
by law. In addition, forward-looking statements are subject to certain risks and uncertainties that
could cause actual results, events and developments to differ materially from our historical
experience and our present expectations or projections. These risks and uncertainties include, but
are not limited to, those described in Item 1A. Risk Factors in our Annual Report on Form 10-K
and those described from time to time in other reports which we file with the Securities and
Exchange Commission.
Redomiciliation
On January 27, 2010, Unilife Medical Solutions Limited, an Australian corporation (UMSL),
completed a redomiciliation from Australia to the State of Delaware pursuant to which stockholders
and option holders of UMSL exchanged their interests in UMSL for equivalent interests in Unilife
Corporation, a Delaware corporation (Unilife) and Unilife became the parent company of UMSL and
its subsidiaries. The redomiciliation was conducted by way of schemes of arrangement under
Australian law. The issuance of Unilife common stock and stock options under the schemes of
arrangement was exempt from registration under Section 3(a)(10) of the Securities Act of 1933, as
amended. The redomiciliation was approved by the Australian Federal Court, and approved by UMSL
shareholders and option holders.
In connection with the redomiciliation, holders of UMSL ordinary shares or share options
received one share of Unilife common stock or an option to purchase one share of Unilife common
stock, for every six UMSL ordinary shares or share options, respectively, held by such holders,
unless the holder elected to receive in lieu of Unilife common stock, Chess Depositary Interests of
Unilife, or CDIs (each representing one-sixth of one share of Unilife common stock), in which case
such holder received one CDI for every UMSL ordinary share. All share and per share amounts in this
Form 10-Q have been restated to reflect the one for six share recapitalization effected in
connection with the redomiciliation.
On February 16, 2010, Unilifes common stock began trading on the Nasdaq Global Market under
the symbol UNIS.
Overview
We are a U.S.-based medical device company focused on the design, development, manufacture and
supply of a proprietary range of retractable syringes. Primary target customers for our products
include pharmaceutical manufacturers and suppliers of medical equipment to healthcare facilities
and distributors to patients who self-administer prescription medication. All of our syringes
incorporate automatic and fully-integrated safety features which are designed to protect those at
risk of needlestick injuries and other unsafe injection practices.
Our main product is the Unifill ready-to-fill syringe, which is designed to be supplied to
pharmaceutical manufacturers in a form that is ready for filling with their injectable drugs and
vaccines. We have a strategic partnership with sanofi-aventis, a large global pharmaceutical
company, pursuant to which sanofi-aventis has paid us a 10.0 million euro exclusivity fee and has
paid us 16.0 million euros and committed to pay us up to an additional 1.0 million euros to fund
our industrialization program for the Unifill syringe. We are also in discussions with other
pharmaceutical companies that are seeking to obtain access to the Unifill syringe.
18
Table of Contents
In addition, we manufacture our Unitract 1mL insulin syringes at our FDA-registered
manufacturing facility in Pennsylvania, which are designed primarily for use in healthcare
facilities and by patients who self-administer prescription medication such as insulin.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America. This requires management to make certain
estimates, judgments and assumptions that could affect the amounts reported in the consolidated
financial statements and accompanying notes.
Our critical accounting policies and estimates are described in Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting
Policies and Estimates of our Annual Report on Form 10-K. There have been no changes in critical
accounting policies in the current year from those described in our Annual Report on Form 10-K.
Results of Operations
The following table summarizes our results of operations for the three months ended March 31,
2011 and 2010 and the nine months ended March 31, 2011 and 2010:
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Revenues: |
||||||||||||||||
Industrialization fees |
$ | | $ | 1,250 | $ | 1,350 | $ | 5,082 | ||||||||
Licensing fees |
642 | 576 | 1,849 | 2,006 | ||||||||||||
Product sales and other |
8 | 591 | 2,756 | 1,682 | ||||||||||||
Total revenues |
650 | 2,417 | 5,955 | 8,770 | ||||||||||||
Cost of product sales |
450 | 569 | 2,449 | 1,835 | ||||||||||||
Gross profit |
200 | 1,848 | 3,506 | 6,935 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
2,723 | 6,899 | 6,941 | 8,623 | ||||||||||||
Selling, general and administrative |
9,117 | 7,008 | 24,386 | 17,229 | ||||||||||||
Depreciation and amortization |
827 | 390 | 2,492 | 1,727 | ||||||||||||
Total operating expenses |
12,667 | 14,297 | 33,819 | 27,579 | ||||||||||||
Operating loss |
(12,467 | ) | (12,449 | ) | (30,313 | ) | (20,644 | ) | ||||||||
Interest expense |
177 | 30 | 241 | 91 | ||||||||||||
Interest income |
(128 | ) | (450 | ) | (332 | ) | (707 | ) | ||||||||
Other expense (income), net |
17 | 35 | (85 | ) | 15 | |||||||||||
Net loss |
$ | (12,533 | ) | $ | (12,064 | ) | $ | (30,137 | ) | $ | (20,043 | ) | ||||
Loss per share: |
||||||||||||||||
Basic and diluted loss per share |
$ | (0.20 | ) | $ | (0.23 | ) | $ | (0.53 | ) | $ | (0.45 | ) | ||||
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Revenues. Revenues decreased by $1.8 million or 73%. During the three months ended March 31,
2011, we did not recognize any revenue under our industrialization agreement with sanofi-aventis.
As of March 31, 2011, there is one remaining milestone payment to be recognized, the recognition of
which is dependent upon the production of commercially viable units of our Unifill syringe.
Revenues from our industrialization agreement with sanofi-aventis were $1.3 million during the
three months ended March 31, 2010. Revenues from our exclusive licensing agreement with
sanofi-aventis were $0.6 million during both the three months ended March 31, 2011 and 2010. We
have recognized and will continue to recognize revenue from the exclusive licensing agreement on a
straight-line basis over the remaining term of the agreement. Since these revenues are based in
euros, fluctuations in the amount of revenue recognized will result from fluctuations in foreign
currency translation rates. Revenues from product sales of our contract manufacturing business
decreased by $0.6 million, as we discontinued our contract manufacturing activities in December
2010 in order to focus our efforts on the Unifill syringe.
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Cost of product sales. Our cost of product sales during the three months ended March 31, 2011
consist primarily of amounts incurred related to the write-off of obsolete inventory.
Research and development expenses. Research and development expenses decreased by $4.2
million. During the three months ended March 31, 2010, we incurred a charge of $4.3 million in
connection with the issuance of 833,333 fully vested shares of common stock to certain employees in
consideration of their transfer to us of certain intellectual property rights.
Selling, general and administrative expenses. Selling, general and administrative expenses
increased by $2.1 million or 30%. During the three months ended March 31, 2011, we recorded $2.2
million of share-based compensation expense, an increase of $0.5 million compared to the same
period last year. Our share-based compensation expense during the three months ended March 31, 2011
relates primarily to restricted stock and stock options issued to employees, directors and
consultants under our 2009 Stock Incentive Plan. Additionally, during fiscal 2010, and continuing
into fiscal 2011, we increased the workforce at our York, Pennsylvania manufacturing facility, and
as a result, we incurred payroll expenses and recruiting fees during the three months ended March
31, 2011 of $3.5 million, an increase of $1.5 million compared to the same period last year.
These amounts were partially offset by a decrease of $0.6 million in legal and consulting fees due
to significant costs incurred during the three months ended March 31, 2010 in connection with our
redomiciliation to the United States.
Depreciation and amortization expense. Depreciation and amortization expense increased by $0.4
million or 112%, primarily as a result of the completion of construction of our new headquarters
and manufacturing facility. We expect our depreciation and amortization expense to increase in the
future as a result of our anticipated fourth quarter purchases of machinery for the Unifill
syringe.
Interest expense. Interest expense was $0.2 million and $30,000 during the three months ended
March 31, 2011 and 2010, respectively. This increase was attributable to interest expense
incurred related to our $18.0 million in debt financing obtained in October 2010 for the
construction of our new headquarters and manufacturing facility.
Interest income. Interest income decreased by $0.3 million, primarily as a result of
fluctuations in interest rates.
Net loss and loss per share. Net loss during the three months ended March 31, 2011 and 2010
was $12.5 million and $12.1 million, respectively. Basic and diluted loss per share was $0.20 and
$0.23, respectively, on weighted average shares outstanding of 61,504,793 and 52,497,400,
respectively. The increase in the weighted average shares outstanding was primarily due to the
issuance of common stock in connection with our December 2010 equity financing.
Nine Months Ended March 31, 2011 Compared to Nine Months Ended March 31, 2010
Revenues. Revenues decreased by $2.8 million or 32%. Revenues from our industrialization
agreement with sanofi-aventis decreased from $5.1 million to $1.4 million due to the nature and
timing of milestones achieved during the nine months ended March 31, 2011. As of March 31, 2011,
there is one remaining milestone payment to be recognized, the recognition of which is dependent
upon the production of commercially viable units of our Unifill syringe. Revenues from our
exclusive licensing agreement with sanofi-aventis decreased from $2.0 million to $1.8 million. We
have recognized and will continue to recognize revenue from the exclusive licensing agreement on a
straight-line basis over the remaining term of the agreement. Since these revenues are based in
euros, the $0.2 million decrease resulted from fluctuations in foreign currency translation rates.
Revenues from product sales of our contract manufacturing business increased from $1.7 million to
$2.8 million, primarily as a result of increased sales to B. Braun, our most significant contract
manufacturing customer during the first and second quarters of fiscal 2011. We discontinued
contract manufacturing activities in December 2010 in order to focus our efforts on the Unifill
syringe.
Cost of product sales. Cost of product sales increased by $0.6 million, or 33%, which was
attributable to a higher level of product sales under our contract manufacturing sales activity.
Our cost of product sales during the nine months ended March 31, 2011 include amounts incurred
related to the write-off of obsolete inventory.
Research and development expenses. Research and development expenses decreased by $1.7
million. During the nine months ended March 31, 2010, we incurred a charge of $4.3 million in
connection with the issuance of 833,333 fully vested shares of common stock to certain employees in
consideration of their transfer to us of certain intellectual property rights. This decrease was
partially offset by an increase in expenditures incurred to finalize the product specifications of
our Unifill syringe.
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Selling, general and administrative expenses. Selling, general and administrative expenses
increased by $7.2 million or 42%. During the nine months ended March 31, 2011, we recorded $6.6
million of share-based compensation expense, an increase of $4.1 million compared to the same
period last year. Our share-based compensation expense during the nine months ended March 31, 2011
relates primarily to restricted stock and stock options issued to employees, directors and
consultants under our 2009 Stock Incentive Plan. Additionally, during fiscal 2010 and continuing
into fiscal 2011, we increased the workforce at our York, Pennsylvania manufacturing facility, and
as a result, we incurred payroll expenses and recruiting fees during the nine months ended March
31, 2011 of $8.8 million, an increase of $3.5 million compared to the same period last year. These amounts
were partially offset by a decrease of $2.4 million in legal and consulting fees due to significant
costs incurred during the nine months ended March 31, 2010 in connection with our redomiciliation
to the United States.
Depreciation and amortization expense. Depreciation and amortization expense increased by $0.8
million or 44% which was attributable to $4.0 million of machinery placed into service during
October 2009 relating to our 1mL syringe and the completion of construction of our new headquarters
and manufacturing facility. We expect our depreciation and amortization expense to increase in the
future as a result of our anticipated fourth quarter purchases of machinery for the Unifill
syringe.
Interest expense. Interest expense was $0.2 million and $91,000 during the nine months ended
March 31, 2011 and 2010, respectively. This increase was attributable to interest expense incurred
related to our $18.0 million in debt financing obtained in October 2010 for the construction of our
new headquarters and manufacturing facility.
Interest income. Interest income decreased by $0.4 million, primarily as a result of
fluctuations in interest rates.
Net loss and loss per share. Net loss during the nine months ended March 31, 2011 and 2010 was
$30.1 million and $20.0 million, respectively. Basic and diluted loss per share was $0.53 and
$0.45, respectively, on weighted average shares outstanding of 56,593,944 and 44,882,882,
respectively. The increase in the weighted average shares outstanding was primarily due to the
issuance of common stock in connection with both our October 2009 and December 2010 equity
financings.
Liquidity and Capital Resources
To date, we have funded our operations primarily from a combination of equity issuances,
borrowings under our bank term loans and payments from sanofi-aventis under our exclusive licensing
and industrialization agreements. As of March 31, 2011, cash and cash equivalents were $27.8
million, restricted cash was $2.4 million and our long-term debt was $21.7 million. The $2.4
million of restricted cash relates to amounts that must remain in cash deposits under our loan
agreement with Metro. As of June 30, 2010, cash and cash equivalents were $20.8 million and our
long-term debt was $2.7 million. We expect to receive $3.2 million in assistance from the
Commonwealth of Pennsylvania during fiscal 2012. Additionally, we expect to receive 1.0 million
euros of additional milestone-based payments from sanofi-aventis under the industrialization
agreement during the first quarter of fiscal 2012.
During October 2010, we secured $18.0 million of external financing from Metro for the
construction of our new manufacturing facility. We used $6.9 million of the proceeds to repay
amounts borrowed in August 2010 under our credit agreement with Univest.
During December 2010, we received $2.25 million from the Commonwealth of Pennsylvania in
low-interest financing for land and the construction of our new corporate headquarters and
manufacturing facility.
During December 2010 we raised $33.4 million, net of issuance costs, through a private
placement and share purchase plan for our Australian and New Zealand stockholders.
We believe that our cash on hand will be sufficient to sustain operations through the end of
the second quarter of fiscal 2012.
Our recurring losses and negative cash flows from operations raise substantial doubt about our
ability to continue as a going concern. We anticipate incurring additional losses until such time
that we can generate significant sales and other potential sources of revenue from our propriety
range of retractable syringes.
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The following table summarizes our cash flows during the nine months ended March 31, 2011 and
2010:
Nine Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Net cash provided by (used in): |
||||||||
Operating activities |
$ | (20,229 | ) | (8,752 | ) | |||
Investing activities |
(27,086 | ) | (18,710 | ) | ||||
Financing activities |
52,653 | 49,056 |
Net Cash Used In Operating Activities
Net cash used in operating activities during the nine months ended March 31, 2011 was $20.2
million compared $8.8 million during the nine months ended March 31, 2010. The increase in cash
used in operating activities was primarily due to $9.5 million of higher net loss after adding back
depreciation and amortization and share-based compensation expense
and increases in accounts
receivable as a result of the nature and timing of amounts due from sanofi-aventis as well as the
timing of accounts payable.
Net Cash Used in Investing Activities
Net cash used in investing activities was $27.1 million during the nine months ended March 31,
2011, primarily as a result of construction costs incurred in connection with our new headquarters
and manufacturing facility as well as costs incurred in connection with the purchase of machinery
related to the lines for our Unifill syringe.
Net Cash Provided by Financing Activities
Net cash provided by financing activities during the nine months ended March 31, 2011 was
$52.7 million compared to $49.1 million during the nine months ended March 31, 2010. During the
nine months ended March 31, 2011, we received $33.4 million in connection with our December 2010
private placement and share purchase plan, as well as $3.0 million upon the exercise of stock
options. Additionally, during the nine months ended March 31, 2011 we received $19.0 million in
aggregate proceeds from our external financing from Metro and the Commonwealth of Pennsylvania.
During the nine months ended March 31, 2010, we received $47.1 million in connection with our
October 2009 private placement and share purchase plan, as well as $1.8 million upon the exercise
of stock options.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to market risk from changes in interest rates and foreign currency exchange
rates. Changes in these factors could cause fluctuations in our results of operations and cash
flows.
Interest Rate Risk
Our exposure to interest rate risk is limited to our cash and cash equivalents that are
invested in money market funds with highly liquid short term investments and our variable interest
rate term loans. We currently do not utilize derivative instruments to mitigate changes in interest
rates.
Foreign Currency Exchange Rate Fluctuations
Certain of our revenues are derived from payments under our industrialization agreement
received in euros while we incur most of our expenses in U.S. dollars and Australian dollars. In
addition, a portion of our cash and cash equivalents and investments are held at Australian banking
institutions and are denominated in Australian dollars. We are exposed to foreign currency exchange
rate risks on these amounts. We currently do not utilize options or forward contracts to mitigate
changes in foreign currency exchange rates. For U.S. reporting purposes, we translate all assets
and liabilities of our non-U.S. entities into U.S. dollars using the exchange rate as of the end of
the related period and we translate all revenues and expenses of our non-U.S. entities using the
average exchange rate during the applicable period.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
Our management with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such terms
is defined in Rules 13a-15(e) under the Exchange Act of 1934, as amended),
as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such
date, our disclosure controls and procedures were effective.
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Changes in Internal Control
There has not been any change in our internal control over financial reporting (as such term
is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report
relates that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Item 6. | Exhibits |
The exhibits to this report are listed in the Exhibit Index below.
Exhibit | Included | |||||
No. | Description of Exhibit | Herewith | ||||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of the
Chief Executive Officer
|
X | ||||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of the
Chief Financial Officer
|
X | ||||
32.1 | Section 1350 Certification
|
X | ||||
32.2 | Section 1350 Certification
|
X |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UNILIFE CORPORATION |
||||
Date: May 16, 2011 | /s/ R. Richard Wieland II | |||
R. Richard Wieland II | ||||
Chief Financial Officer | ||||
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