Table of Contents

 

 

UNITED STATES

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 December 31, 2011

OR

 

¨	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 incorporation or organization)		(I.R.S. Employer Identification No.)

250 Cross Farm Lane, York, Pennsylvania 17406

(Address of principal executive offices)

Telephone: (717) 384-3400

(Registrant’s 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   ¨

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   þ     No   ¨

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		¨		Accelerated filer		þ
Non-accelerated filer		¨		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of February 3, 2012, 73,957,775 shares of the registrant’s common stock were outstanding.

 

 

 

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Table of Contents

Table of Contents

 

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of December 31, 2011 and June 30, 2011			3
Unaudited Consolidated Statements of Operations for the three and six months ended December  31, 2011 and 2010			4
Unaudited Consolidated Statement of Stockholders’ Equity and Comprehensive Loss for the six months ended December 31, 2011			5
Unaudited Consolidated Statements of Cash Flows for the six months ended December 31, 2011 and 2010			6
Notes to Unaudited Consolidated Financial Statements			7
Report of Independent Registered Public Accounting Firm			17
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			22
Item 4. Controls and Procedures			22
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			23
Item 6. Exhibits			23
Signatures			24

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited)

 

			September 30,				September 30,
		December 31, 2011				June 30, 2011
		(in thousands, except share data)
Assets
Current Assets:
Cash and cash equivalents		$	39,305			$	17,910
Restricted cash			2,400				2,400
Accounts receivable			362				13
Inventories			685				626
Prepaid expenses and other current assets			307				381
Total current assets			43,059				21,330
Property, plant and equipment, net			53,826				54,020
Goodwill			12,752				13,265
Intangible assets, net			37				42
Other assets			1,027				821
Total assets		$	110,701			$	89,478
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	2,225			$	2,405
Accrued expenses			2,411				2,696
Current portion of long-term debt			5,276				2,274
Deferred revenue			2,702				2,706
Total current liabilities			12,614				10,081
Long-term debt, less current portion			25,743				20,413
Deferred revenue			3,897				5,412
Total liabilities			42,254				35,906
Contingencies (Note 9)
Stockholders’ Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized as of December 31, 2011; none issued or outstanding as of December 31, 2011 and June 30, 2011			—				—
Common stock, $0.01 par value, 250,000,000 shares authorized as of December 31, 2011; 73,044,651 and 63,924,403 shares issued, and 73,015,981 and 63,905,053 shares outstanding as of December 31, 2011 and June 30, 2011, respectively			730				639
Additional paid-in-capital			207,304				169,590
Accumulated deficit			(142,887	)			(120,332	)
Accumulated other comprehensive income			3,440				3,775
Treasury stock, at cost, 28,670 and 19,350 shares as of December 31, 2011 and June 30, 2011, respectively			(140	)			(100	)
Total stockholders’ equity			68,447				53,572
Total liabilities and stockholders’ equity		$	110,701			$	89,478

See accompanying notes to the consolidated financial statements.

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

 

			September 30,				September 30,				September 30,				September 30,
		Three Months Ended December 31,								Six Months Ended December 31,
		2011				2010				2011				2010
		(in thousands, except per share data)
Revenues:
Industrialization and development fees		$	249			$	—			$	1,689			$	1,350
Licensing fees			646				630				1,318				1,207
Product sales and other			17				1,132				35				2,748
Total revenues			912				1,762				3,042				5,305
Cost of product sales			16				824				90				1,999
Gross profit			896				938				2,952				3,306
Operating expenses:
Research and development			5,262				2,442				9,560				4,218
Selling, general and administrative			6,712				8,028				12,895				15,269
Depreciation and amortization			1,157				878				2,150				1,665
Total operating expenses			13,131				11,348				24,605				21,152
Operating loss			(12,235	)			(10,410	)			(21,653	)			(17,846	)
Interest expense			639				32				922				64
Interest income			(26	)			(82	)			(56	)			(204	)
Other expense (income), net			2				(2	)			36				(102	)
Net loss		$	(12,850	)		$	(10,358	)		$	(22,555	)		$	(17,604	)
Loss per share:
Basic and diluted loss per share		$	(0.19	)		$	(0.19	)		$	(0.35	)		$	(0.32	)

See accompanying notes to the consolidated financial statements.

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Comprehensive Loss

(unaudited)

 

			September 30,				September 30,				September 30,				September 30,				September 30,				September 30,				September 30,
																		Accumulated
										Additional-								Other
		Common Stock								Paid-In				Accumulated				Comprehensive				Treasury
		Shares				Amount				Capital				Deficit				Income				Stock				Total
		(in thousands except share data)
Balance as of July 1, 2011			63,924,403			$	639			$	169,590			$	(120,332	)		$	3,775			$	(100	)		$	53,572
Comprehensive loss:
Net loss			—				—				—				(22,555	)			—				—				(22,555	)
Foreign currency translation			—				—				—				—				(335	)			—				(335	)
Comprehensive loss																											(22,890	)
Issuance of options to purchase common stock			—				—				1,127				—				—				—				1,127
Issuance of restricted stock, net of forfeitures			400,338				4				1,900				—				—				—				1,904
Issuance of common stock to directors			90,000				1				353				—				—				—				354
Issuance of common stock from public offering, net of issuance costs			8,250,000				83				33,681				—				—				—				33,764
Issuance of common stock upon exercise of stock options			379,910				3				653				—				—				—				656
Purchase of treasury stock			—				—				—				—				—				(40	)			(40	)
Balance as of December 31, 2011			73,044,651			$	730			$	207,304			$	(142,887	)		$	3,440			$	(140	)		$	68,447

See accompanying notes to the consolidated financial statements.

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

			September 30,				September 30,
		Six Months Ended December 31,
		2011				2010
		(in thousands)
Cash flows from operating activities:
Net loss		$	(22,555	)		$	(17,604	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,150				1,665
Share-based compensation expense			3,385				4,386
Changes in assets and liabilities:
Accounts receivable			(349	)			1,301
Inventories			(59	)			(225	)
Prepaid expenses and other current assets			73				(100	)
Other assets			(210	)			(211	)
Accounts payable			388				(913	)
Accrued expenses			(364	)			254
Deferred revenue			(1,214	)			(1,207	)
Net cash used in operating activities			(18,755	)			(12,654	)
Cash flows from investing activities:
Purchases of property, plant and equipment			(2,707	)			(20,549	)
Net cash used in investing activities			(2,707	)			(20,549	)
Cash flows from financing activities:
Proceeds from the issuance of long-term debt			9,885				15,872
Principal payments on long-term debt and capital lease obligations			(1,317	)			(225	)
Proceeds from the issuance of note payable			—				6,900
Principal payments on note payable			—				(6,900	)
Proceeds from the issuance of common stock, net of issuance costs			33,764				33,431
Proceeds from the exercise of options to purchase common stock			656				2,848
Purchase of treasury stock			(40	)			—
Increase in restricted cash			—				(2,400	)
Net cash provided by financing activities			42,948				49,526
Effect of exchange rate changes on cash			(91	)			2,060
Net increase in cash and cash equivalents			21,395				18,383
Cash and cash equivalents at beginning of period			17,910				20,750
Cash and cash equivalents at end of period		$	39,305			$	39,133
Supplemental disclosure of non-cash activities
Purchases of property, plant and equipment in accounts payable and accrued expenses		$	453			$	1,096
Purchases of property, plant and equipment pursuant to capital lease agreements		$	19			$	190
Purchases of property, plant and equipment through issuance of warrants		$	—			$	1,621

See accompanying notes to the consolidated financial statements.

 

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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 U.S.-based developer, manufacturer and supplier of advanced drug delivery systems. The primary target customers for the Company’s products include pharmaceutical and biotechnology companies seeking access to innovative, differentiated devices that can enable or enhance the administration of their injectable drugs and vaccines. Secondary customers also include 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 accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the fiscal year ended June 30, 2011 contained in its Annual Report on Form 10-K.

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.

2. Liquidity

The Company incurred recurring losses from operations during the year ended June 30, 2011 and the six months ended December 31, 2011 and anticipates incurring additional losses until such time that it can generate sufficient sales of its proprietary range of advanced drug delivery systems. Management estimates that cash and cash equivalents of $39.3 million as of December 31, 2011 are sufficient to sustain planned operations through the third quarter of fiscal 2013.

The Company may need additional funding in the future to support its operations and capital expenditure requirements. Management has identified several possible funding strategies which may be available. In addition to sales of its Unitract and Unifill syringe products to pharmaceutical companies with which the Company has existing commercial relationships, 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 receive additional funding or revenue streams. The Company may also seek to raise additional funds through the sale of additional debt or equity securities. There can be no assurance that any such funding will be available when needed or on acceptable terms.

In November 2011, the Company issued 8,250,000 shares of common stock and raised $33.8 million, net of issuance costs, through an underwritten registered public offering. The Company intends to use the proceeds from the public offering to fund the continued development and commercial supply of its diversified portfolio of advanced drug delivery systems and to drive the expansion of its workforce to support anticipated customer demands.

The accompanying unaudited consolidated 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 unaudited consolidated 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.

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.

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

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 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:

 

			September 30,				September 30,
		December 31, 2011				June 30, 2011
		(in thousands)
Raw materials		$	577			$	387
Work in process			93				210
Finished goods			15				29
Total inventories		$	685			$	626

Share-Based Compensation

The Company grants equity awards 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.

Revenue Recognition

The Company recognizes revenue from industrialization efforts, development fees, licensing fees, and product sales.

In June 2008, the Company entered into an exclusive licensing arrangement to allow Sanofi, a multinational pharmaceutical company to use certain of the Company’s intellectual property in order and solely to develop in collaboration with the Company, the Company’s Unifill syringe for use in and sale to the pre-filled syringe market. The €10.0 million 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.

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

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 which accounted for 10% or more of the Company’s revenue during the three and six months ended December 31, 2010 were $1.0 million and $2.5 million, respectively.

Reclassifications

Certain amounts in the consolidated statements of operations for the three and six months ended December 31, 2010 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:

 

			September 30,				September 30,
		Three Months  Ended December 31, 2010				Six Months Ended December  31, 2010
		(in thousands)
Research and development — as reported		$	1,416			$	2,421
Research and development — as adjusted		$	2,442			$	4,218
Selling, general and administrative — as reported		$	9,054			$	17,066
Selling, general and administrative — as adjusted		$	8,028			$	15,269

Recently Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 removes certain presentation options and requires entities to report components of net income and comprehensive income in either one continuous statement of comprehensive income or two separate but consecutive statements. There is no change to the items that are reported in other comprehensive income. ASU 2011-05 is effective for annual and interim periods beginning after December 15, 2011. Other than additional presentation of other comprehensive loss outside of the statements of stockholders’ equity and comprehensive loss, the adoption of ASU 2011-05 will not have an impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”). ASU 2011-08 allows for assessment of qualitative factors to determine if it is more likely than not that goodwill might be impaired and whether or it is necessary to perform the two-step goodwill impairment test required under current accounting standards. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not believe that the adoption of ASU 2011-08 will have a material impact on its consolidated financial statements.

4. Equity Transactions and Share-Based Compensation

In November 2011, the Company issued 8,250,000 shares of common stock and raised $33.8 million, net of issuance costs, through an underwritten registered public offering. The Company intends to use the proceeds from its public offering to fund the continued development and commercial supply of its diversified portfolio of advanced drug delivery systems and to drive the expansion of its workforce to support anticipated customer demands.

In December 2011, the Company granted certain directors 90,000 shares of common stock that were vested upon issuance, of which 60,000 shares may not be sold or transferred until such time as the director leaves the board for any reason, including a change in control. The grant date fair value was $3.93 per share.

The Company recognized share-based compensation expense related to equity awards to employees, directors and consultants of $1.5 million and $1.8 million during the three months ended December 31, 2011 and 2010, respectively and $3.4 million and $4.4 million during the six months ended December 31, 2011 and 2010, respectively.

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

Stock Options and Warrants

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 Company’s 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, 2012, and on each January 1st thereafter, through January 1, 2019, the share reserve automatically adjusts so that it equals 17.5% 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 Company’s 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 December 31, 2011 were valued at $0.65 per option, which is being expensed ratably over the vesting period of each tranche, which ranges from 1.8 years to 2.2 years. The options are re-valued on a quarterly basis and marked to market until exercised.

During the six months ended December 31, 2011, the Company granted 610,000 options to purchase common stock to certain employees under the Stock Incentive Plan. The weighted average exercise price of the options was $4.68 per share. The majority of the options will vest upon the meeting of certain performance targets, as defined in the agreements, the achievement of which the Company considers to be probable. The weighted average grant date fair value of the options was $2.08 per share.

The following is a summary of activity related to stock options held by employees and directors during the six months ended December 31, 2011:

 

			September 30,				September 30,				September 30,				September 30,
		Number of Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in years)				Aggregate  Intrinsic Value
														(in thousands)
Outstanding as of July 1, 2011			4,699,211			$	4.42
Granted			610,000				4.68
Exercised			(12,000	)			2.01
Cancelled			(176,253	)			5.62
Outstanding as of December 31, 2011			5,120,958			$	4.42				4.3			$	2,093
Exercisable as of December 31, 2011			2,277,836			$	2.78				2.2			$	2,061

The following is a summary of activity related to stock options and warrants held by persons other than employees and directors during the six months ended December 31, 2011:

 

			September 30,				September 30,				September 30,				September 30,
		Number of Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in years)				Aggregate  Intrinsic Value
														(in thousands)
Outstanding as of July 1, 2011			8,126,609			$	8.26
Exercised			(367,910	)			1.71
Outstanding as of December 31, 2011			7,758,699			$	8.57				1.7			$	189
Exercisable as of December 31, 2011			6,758,699			$	8.88				1.5			$	189

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

The aggregate intrinsic value is defined as the difference between the market value of the Company’s 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 December 31, 2011 and 2010 was $0.3 million and $2.9 million, respectively. The total intrinsic value of stock options exercised during the six months ended December 31, 2011 and 2010 was $1.0 million and $5.4 million, respectively. Of the 3,843,122 non-vested options, 1,000,000 are held by a consultant.

The Company used the following weighted average assumptions in calculating the fair value of options granted during the six months ended December 31, 2011 and 2010:

 

			September 30,				September 30,
		Six Months Ended December  31, 2011				Six Months Ended December  31, 2010
Number of stock options granted			610,000				1,228,000
Expected dividend yield			0	%			0	%
Risk-free interest rate			1.38	%			1.51	%
Expected volatility			56	%			59	%
Expected life (in years)			6.0				4.7

Subsequent to the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 is 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.

The Company committed to issue its Chief Executive Officer a total of 1,166,000 shares of restricted stock and 750,000 options to purchase common stock in connection with the execution of his employment agreement dated October 1, 2011. The issuance of the shares of restricted stock and options to purchase common stock were subject to the approval of shareholders, which was obtained on December 1, 2011. For accounting purposes, 273,338 shares of restricted stock were considered granted on December 1, 2011. The remaining 892,662 shares of restricted stock and 750,000 options to purchase common stock were granted on January 3, 2012, when sufficient shares under the Stock Incentive Plan became available for grant. The grant date fair value of the restricted stock on December 1, 2011 was $3.93 per share.

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

The following is a summary of activity related to restricted stock awards during the six months ended December 31, 2011:

 

			September 30,				September 30,
		Number of Restricted Stock Awards				Weighted Average Grant  Date Fair Value
Unvested as of July 1, 2011			1,957,000			$	6.19
Granted			400,338				4.05
Vested			(30,000	)			5.50
Unvested as of December 31, 2011			2,327,338			$	5.83

5. Property, Plant and Equipment and Construction-in-Progress

Property, plant and equipment consist of the following:

 

			September 30,				September 30,
		December 31, 2011				June 30, 2011
		(in thousands)
Building		$	32,116			$	31,866
Machinery and equipment			16,243				16,130
Computer software			2,482				2,457
Furniture and fixtures			369				323
Construction in progress			6,794				5,734
Land			2,036				2,036
			60,040				58,546
Less: accumulated depreciation and amortization			(6,214	)			(4,526	)
Property, plant and equipment, net		$	53,826			$	54,020

Construction in progress as of December 31, 2011 and June 30, 2011 consisted primarily of amounts incurred in connection with machinery and equipment.

6. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill during the six months ended December 31, 2011 are as follows:

 

			September 30,
		(in thousands)
Balance as of July 1, 2011		$	13,265
Foreign currency translation			(513	)
Balance as of December 31, 2011		$	12,752

Intangible assets consist of patents acquired in a business acquisition of $0.1 million. Related accumulated amortization as of both December 31, 2011 and June 30, 2011 was $0.1 million. Future amortization expense is scheduled to be $7,000 annually, excluding the impact of foreign currency exchange.

7. Long-Term Debt

Long-term debt consists of the following:

 

			September 30,				September 30,
		December 31, 2011				June 30, 2011
		(in thousands)
Mortgage loans		$	17,948			$	17,940
Secured lending facility			8,416				—
Bank term loans			2,088				2,095
Commonwealth of Pennsylvania financing authority loan			2,205				2,227
Other			362				425
			31,019				22,687
Less: current portion of long-term debt			5,276				2,274
Total long-term debt		$	25,743			$	20,413

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

Mortgage Loans

In October 2010, Unilife Cross Farm LLC, a wholly owned subsidiary of the Company, (“Cross Farm”) entered into a loan agreement with Metro Bank (“Metro”), pursuant to which Metro provided Cross Farm with two loans in the amounts of $14.25 million and $3.75 million. The proceeds received were used to finance the purchase of land and construction of the Company’s new corporate headquarters and manufacturing facility in York, Pennsylvania, including the repayment of a $6.9 million bridge construction loan.

The $14.25 million term note matures in December 2031 and the $3.75 million term note matures in October 2020. During construction, Cross Farm paid only interest on both term notes at the Prime Rate plus 1.50% per annum, with a floor of 4.50% per annum. Subsequent to construction, Cross Farm is paying principal and interest on both term notes, with interest at a fixed rate of 6.00%.

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 Cross Farm and Metro agree on the financial covenants. The Company was in compliance with its debt covenants as of December 31, 2011. Cross Farm 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.

The loans are guaranteed by the Company and by Unilife Medical Solutions, Inc. (“USMI”). The Company and USMI pledged certain assets to secure their obligations under their respective guarantees, including a pledge by the Company of all of its membership interests in Cross Farm and 65% of its ownership interest in Unilife Medical Solutions (PTY) Ltd., a wholly owned subsidiary of the Company and the parent entity of USMI.

Secured Lending Facility

In August 2011, the Company entered into a Master Lease Agreement with Varilease Finance, Inc. (“Varilease”) for up to $10.0 million of secured financing for production equipment for the Unifill syringe. Based on the Company’s continuing involvement throughout the term of the agreement and the integral nature of the production equipment, the transaction is being accounted for under the financing method. Over the term of the agreement, the Company will make 24 monthly installments based upon the amount drawn. This facility has an effective interest rate of 12.85%. At the end of the 24 month initial term, the Company has the option to (i) return the equipment; (ii) extend the term for 12 months followed by optional 6 month extensions terminable by either party; or (iii) repurchase the equipment for a price to be agreed upon by both lessor and lessee. The secured lending facility contains covenants and provisions for events of default customarily found in lease agreements.

The aggregate maturities related to amounts outstanding as of December 31, 2011 under this secured lending facility will be $4.2 million during both the twelve months ending December 31, 2012 and 2013.

Bank Term Loans

Bank term loans consist of three term loans payable. The loans bear interest at rates ranging from prime (3.25% as of December 31, 2011) plus 1.50% (4.75% as of December 31, 2011) to 6.00% per annum and mature on dates ranging from October 2014 through August 2021. The borrowings under the bank term loans are collateralized by the Company’s accounts receivable, inventories and certain machinery and equipment.

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 wholly owned subsidiary of the Company , 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 the 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, which holds the first and second mortgages on the facility.

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

8. Loss Per Share

The Company’s net loss per share is as follows:

 

			September 30,				September 30,				September 30,				September 30,
		Three Months Ended December 31,								Six Months Ended December 31,
		2011				2010				2011				2010
		(in thousands, except share and per share data)
Numerator
Net loss		$	(12,850	)		$	(10,358	)		$	(22,555	)		$	(17,604	)
Denominator
Weighted average number of shares used to compute basic loss per share			66,053,226				55,193,753				64,050,203				54,191,898
Effect of dilutive options to purchase common stock			—				—				—				—
Weighted average number of shares used to compute diluted loss per share			66,053,226				55,193,753				64,050,203				54,191,898
Basic and diluted loss per share		$	(0.19	)		$	(0.19	)		$	(0.35	)		$	(0.32	)

Due to the Company’s net losses, unvested shares of restricted stock (participating securities) totaling 2,128,872 and 1,914,957 were excluded from the calculation of basic and diluted loss per share during the three months ended December 31, 2011 and 2010, respectively and unvested shares of restricted stock (participating securities) totaling 2,056,904 and 1,888,979 were excluded from the calculation of basic and diluted loss per share during the six months ended December 31, 2011 and 2010, respectively.

In addition, stock options (non-participating securities) totaling 9,758,083 and 10,006,888 during the three months ended December 31, 2011 and 2010, respectively, were excluded from the calculation of diluted loss per share and stock options (non-participating securities) totaling 9,874,048 and 9,937,067 during the six months ended December 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 Company’s net loss position. Had the Company reported net income during the three months ended December 31, 2011 and 2010, these shares would have had an effect of 1,128,193 and 1,860,867 diluted shares, respectively, for purposes of calculating diluted loss per share. Had the Company reported net income during the six months ended December 31, 2011 and 2010, these shares would have had an effect of 1,240,948 and 1,888,022 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

The Company signed an exclusive licensing agreement and an industrialization agreement with Sanofi, a multinational pharmaceutical company, between June 2008 and July 2009. Under the terms of these agreements, Sanofi 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 has paid the Company a €10.0 million ($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 has agreed to pay the Company up to €17.0 million in milestone-based payments to fund the completion of the Company’s industrialization program for the Unifill syringe. During the six months ended December 31, 2011 the Company received and recognized as revenue the final €1.0 million milestone payment under the industrialization agreement.

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

This exclusive right for Sanofi 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 under its exclusivity list. Upon mutual agreement by both parties, Sanofi 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 without written notification up to two years in advance.

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, subject to regulatory approval of the Unitract 1 mL syringe in those markets, which is currently pending.

11. Financial Instruments

The Company does not hold or issue financial instruments for trading purposes. The estimated fair values of the Company’s financial instruments are as follows:

 

September 30,

September 30,

September 30,

September 30,

December 31, 2011

June 30, 2011

Carrying Amount

Estimated Fair  Value

Carrying Amount

Estimated Fair  Value

(in thousands)

Assets:

Cash equivalents — certificates of deposit

$

1,002

$

1,002

$

1,000

$

1,000

The carrying amount of the Company’s 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 Company’s 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.

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

The following table presents the Company’s assets that are measured at fair value on a recurring basis for the periods presented:

 

			September 30,				September 30,				September 30,				September 30,
		Fair Value Based On
		Quoted Market Prices in  Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total Fair Value Measurements
		(in thousands)
Cash equivalents — certificates of deposit (December 31, 2011)		$	—			$	1,002			$	—			$	1,002
Cash equivalents — certificates of deposit (June 30, 2011)		$	—			$	1,000			$	—			$	1,000

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Unilife Corporation:

We have reviewed the consolidated balance sheet of Unilife Corporation and subsidiaries as of December 31, 2011, the related consolidated statements of operations for the three months and six months ended December 31, 2011 and 2010, and the related consolidated statements of stockholders’ equity and comprehensive loss, and cash flows for the six months ended December 31, 2011 and 2010. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Unilife Corporation and subsidiaries as of June 30, 2011, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for the year then ended (not presented herein); and in our report dated September 13, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Note 2 of Unilife Corporation’s audited consolidated financial statements as of June 30, 2011, and for the year then ended, discloses that the Company has incurred recurring losses from operations and estimated that its existing cash and cash equivalents would last only through the third quarter of fiscal 2012. Our auditors’ report on those consolidated financial statements dated September 13, 2011, includes an explanatory paragraph referring to the matters in note 2 of those consolidated financial statements, and indicating that these matters raised substantial doubt about the Company’s ability to continue as a going concern. As indicated in note 2 of the Company’s unaudited interim consolidated financial statements as of December 31, 2011, and for the six months then ended, the Company has continued to incur operating losses. The accompanying interim financial information does not include any adjustments that might result from the outcome of this uncertainty.

/s/ KPMG LLP

Harrisburg, Pennsylvania

February 9, 2012

 

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Item 2. Management’s 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 management’s 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.

Overview

We are a U.S.-based developer, manufacturer and supplier of advanced drug delivery systems. We collaborate with pharmaceutical and biotechnology companies seeking access to innovative, differentiated devices that can enable or enhance the administration of their injectable drugs and vaccines. Secondary customers include suppliers of medical equipment to healthcare facilities and distributors to patients who self-administer prescription medication.

We have developed a broad portfolio of drug delivery systems in direct response to unmet market needs for injectable drugs including macromolecule biologics. Proprietary technology platforms include prefilled syringes with integrated safety features, auto-injectors, subcutaneous patch infusion systems, drug reconstitution delivery systems and specialized devices for targeted organ delivery.

Our lead 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 alliance with Sanofi, a large global pharmaceutical company, pursuant to which Sanofi has paid us a €10.0 million exclusivity fee and has paid us €17.0 million 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, or other proprietary devices within our diversified portfolio.

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.

Recent Developments

In November 2011, we issued 8,250,000 shares of common stock and raised $33.8 million, net of issuance costs, through an underwritten registered public offering. We intend to use the proceeds from the public offering to fund the continued development and commercial supply of our diversified portfolio of advanced drug delivery systems and to drive the expansion of our workforce to support anticipated customer demands.

 

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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 “Management’s 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 December 31, 2011 and 2010 and the six months ended December 31, 2011 and 2010:

 

			September 30,				September 30,				September 30,				September 30,
		Three Months Ended December 31,								Six Months Ended December 31,
		2011				2010				2011				2010
		(in thousands, except per share data)
Revenues:
Industrialization and development fees		$	249			$	—			$	1,689			$	1,350
Licensing fees			646				630				1,318				1,207
Product sales and other			17				1,132				35				2,748
Total revenues			912				1,762				3,042				5,305
Cost of product sales			16				824				90				1,999
Gross profit			896				938				2,952				3,306
Operating expenses:
Research and development			5,262				2,442				9,560				4,218
Selling, general and administrative			6,712				8,028				12,895				15,269
Depreciation and amortization			1,157				878				2,150				1,665
Total operating expenses			13,131				11,348				24,605				21,152
Operating loss			(12,235	)			(10,410	)			(21,653	)			(17,846	)
Interest expense			639				32				922				64
Interest income			(26	)			(82	)			(56	)			(204	)
Other expense (income), net			2				(2	)			36				(102	)
Net loss		$	(12,850	)		$	(10,358	)		$	(22,555	)		$	(17,604	)
Loss per share:
Basic and diluted loss per share		$	(0.19	)		$	(0.19	)		$	(0.35	)		$	(0.32	)

Three Months Ended December 31, 2011 Compared to Three Months Ended December 31, 2010

Revenues. Revenues decreased by $0.9 million or 48%. During the three months ended December 31, 2011, industrialization and development fees included $0.2 million related to the clinical development and supply of a novel drug device for targeted organ delivery. During both the three months ended December 31, 2011 and 2010, we recognized revenues from our exclusive licensing agreement with Sanofi of $0.6 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, 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 $1.1 million, as we ceased contract manufacturing activities in December 2010 in order to focus our efforts on the Unifill syringe and other advanced drug delivery systems.

Cost of product sales. Our cost of product sales decreased by $0.8 million or 98% as a result of the associated decrease in our contract manufacturing revenue.

Research and development expenses. Research and development expenses increased by $2.8 million due to additional payroll costs and expenditures related to the development of additional advanced drug delivery systems.

 

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Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $1.3 million or 16%. During the three months ended December 31, 2011, we recorded $1.3 million of share-based compensation expense, a decrease of $0.5 million compared to the same period last year. The decrease in share-based compensation expense was attributable to a decline in the fair value of certain non-employee options to purchase common stock which are revalued each reporting period using the Monte Carlo option pricing model. Additionally, during the three months ended December 31, 2011, our non-research and development payroll expenses declined by $0.5 million. Finally, during the three months ended December 31, 2010, we incurred expenses of $0.3 million in connection with the relocation to our new headquarters and manufacturing facility.

Depreciation and amortization expense. Depreciation and amortization expense increased by $0.3 million or 32%, primarily as a result of the completion of construction of our new headquarters and manufacturing facility, as well as equipment placed into service during fiscal 2011.

Interest expense. Interest expense increased by $0.6 million, primarily resulting from debt incurred in relation to our secured lending facility for production equipment for the Unifill syringe during August 2011. Interest on our debt financing obtained for our new headquarters and manufacturing facility was capitalized during construction during the three months ended December 31, 2010, while recorded as expense during the three months ended December 31, 2011.

Interest income. Interest income decreased primarily as a result of fluctuations in interest rates.

Net loss and loss per share. Net loss during the three months ended December 31, 2011 and 2010 was $12.9 million and $10.4 million, respectively. Basic and diluted loss per share was $0.19 and $0.19, respectively, on weighted average shares outstanding of 66,053,226 and 55,193,753, respectively. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with our December 2010 and November 2011 equity financings.

Six Months Ended December 31, 2011 Compared to Six Months Ended December 31, 2010

Revenues. Revenues decreased by $2.3 million or 43%. During both the six months ended December 31, 2011 and 2010, we recognized $1.4 million related to the achievement of one milestone under our industrialization agreement with Sanofi. The milestone met during the six months ended December 31, 2011 was the last remaining milestone under the agreement. During the six months ended December 31, 2011 we also recognized $0.2 million related to the clinical development and supply of a novel drug device for targeted organ delivery. Revenues from our exclusive licensing agreement with Sanofi increased from $1.2 million to $1.3 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, 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 $2.7 million, as we ceased contract manufacturing activities in December 2010 in order to focus our efforts on the Unifill syringe and other advanced drug delivery systems.

Cost of product sales. Our cost of product sales decreased by $1.9 million or 95% as a result of the associated decrease in our contract manufacturing revenue.

Research and development expenses. Research and development expenses increased by $5.3 million due to additional payroll costs and expenditures related to the development of additional advanced drug delivery systems.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $2.4 million or 16%. During the six months ended December 31, 2011, we recorded $3.1 million of share-based compensation expense, a decrease of $1.3 million compared to the same period last year. The decrease in share-based compensation expense was attributable to a decline in the fair value of certain non-employee options to purchase common stock which are revalued each reporting period using the Monte Carlo option pricing model. Additionally, during the six months ended December 31, 2011, our non-research and development payroll expenses and recruitment fees declined by $0.9 million, primarily as a result of amounts incurred to recruit and relocate certain members of our management team during the six months ended December 31, 2010, which did not recur during the current year. Finally, during the six months ended December 31, 2010 we incurred expenses of $0.3 million in connection with the relocation to our new headquarters and manufacturing facility.

 

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Depreciation and amortization expense. Depreciation and amortization expense increased by $0.5 million or 29%, primarily as a result of the completion of construction of our new headquarters and manufacturing facility, as well as equipment placed into service during fiscal 2011.

Interest expense. Interest expense increased by $0.9 million, primarily resulting from debt incurred in relation to our secured lending facility for production equipment for the Unifill syringe during August 2011. Interest on our debt financing obtained for our new headquarters and manufacturing facility was capitalized during construction during the six months ended December 31, 2010, while recorded as expense during the six months ended December 31, 2011.

Interest income. Interest income decreased by $0.1 million, primarily as a result of fluctuations in interest rates.

Net loss and loss per share. Net loss during the six months ended December 31, 2011 and 2010 was $22.6 million and $17.6 million, respectively. Basic and diluted loss per share was $0.35 and $0.32, respectively, on weighted average shares outstanding of 64,050,203 and 54,191,898, respectively. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with our December 2010 and November 2011 equity financings.

Liquidity and Capital Resources

To date, we have funded our operations primarily from a combination of equity issuances, borrowings under our bank mortgage and term loans, an external secured financing and payments from Sanofi under our exclusive licensing and industrialization agreements. As of December 31, 2011, cash and cash equivalents were $39.3 million, restricted cash was $2.4 million and our long-term debt was $31.0 million. As of June 30, 2011, cash and cash equivalents were $17.9 million, restricted cash was $2.4 million and our long-term debt was $22.7 million. The $2.4 million of restricted cash relates to amounts that must remain in cash deposits under our loan agreement with Metro.

In November 2011, we issued 8,250,000 shares of common stock and raised $33.8 million, net of issuance costs, through an underwritten registered public offering. We intend to use the proceeds from the public offering to fund the continued development and commercial supply of our diversified portfolio of advanced drug delivery systems and to drive the expansion of our workforce to support anticipated customer demands.

We believe that our cash and cash equivalents on hand will be sufficient to sustain planned operations through the third quarter of fiscal 2013.

We anticipate incurring additional losses until such time that we can generate significant revenue from product sales.

The following table summarizes our cash flows during the six months ended December 31, 2011 and 2010:

 

			September 30,				September 30,
		Six Months Ended December 31,
		2011				2010
		(in thousands)
Net cash provided by (used in):
Operating activities		$	(18,755	)		$	(12,654	)
Investing activities			(2,707	)			(20,549	)
Financing activities			42,948				49,526

Net Cash Used In Operating Activities

Net cash used in operating activities during the six months ended December 31, 2011 was $18.8 million compared to $12.7 million during the three months ended December 31, 2010. The increase in net cash used in operations was primarily due to increased operating expenses leading to $5.5 million of higher net loss after adding back depreciation and amortization and share-based compensation expense.

Net Cash Used in Investing Activities

Net cash used in investing activities was $2.7 million during the six months ended December 31, 2011, primarily as a result of costs incurred in connection with the purchase of machinery and related equipment, compared to $20.5 million during the six months ended December 31, 2010, primarily resulting from construction costs incurred in connection with our new headquarters and manufacturing facility.

 

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Net Cash Provided by Financing Activities

Net cash provided by financing activities during the three months ended December 31, 2011 was $42.9 million compared to $49.5 million during the six months ended December 31, 2010. During the six months ended December 31, 2011, we received $33.8 million in connection with our public offering of common stock and $9.9 million in proceeds from the issuance of long-term debt. During the six months ended December 31, 2010, we received $33.4 million in connection with our December 2010 private placement and share purchase plan, as well as $2.8 million upon the exercise of stock options. Additionally, during the six months ended December 31, 2010 we received $15.9 million in aggregate proceeds from our external financing with Metro and the Commonwealth of Pennsylvania.

Contractual Obligations

The aggregate maturities related to amounts outstanding as of December 31, 2011 under our secured lending facility will be $4.2 million during both the twelve months ending December 31, 2012 and 2013, respectively.

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.

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.

 

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PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information about repurchases of Unilife Corporation common stock made by us during the second quarter of fiscal 2012.

 

September 30,

September 30,

September 30,

September 30,

Date

Total Number of Shares Purchased

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

November 14, 2011

3,060

$

4.62

—

—

The number of shares reported as purchased are attributable to shares surrendered to Unilife Corporation by employees in payment of tax obligations relating to vesting of restricted shares.

Item 6. Exhibits

The exhibits to this report are listed in the Exhibit Index below.

 

Exhibit No.		Description of Exhibit		Included Herewith
15		Awareness Letter of Independent Registered Public Accounting Firm		X
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
101.INS		XBRL Instance Document		X
101.SCH		XBRL Taxonomy Extension Schema		X
101.CAL		XBRL Taxonomy Extension Calculation Linkbase		X
101.LAB		XBRL Taxonomy Extension Label Linkbase		X
101.PRE		XBRL Taxonomy Extension Presentation Linkbase		X
101.DEF		XBRL Taxonomy Extension Definition Linkbase		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.

 

Date: February 9, 2012				UNILIFE CORPORATION
				By:		/s/ R. Richard Wieland II
						R. Richard Wieland II
						Chief Financial Officer

 

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