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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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  x    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  x    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   x
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  x

As of November 5, 2012, 83,259,411 shares of the registrant’s common stock were outstanding.

 

 

 


Table of Contents

Table of Contents

 

     Page  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Unaudited Consolidated Balance Sheets as of September 30, 2012 and June 30, 2012

     3   

Unaudited Consolidated Statements of Operations and Comprehensive Loss for the three months ended September 30, 2012 and 2011

     4   

Unaudited Consolidated Statement of Stockholders’ Equity for the three months ended September  30, 2012

     5   

Unaudited Consolidated Statements of Cash Flows for the three months ended September 30, 2012 and 2011

     6   

Notes to Unaudited Consolidated Financial Statements

     7   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     17   

Item 4. Controls and Procedures

     18   

PART II. OTHER INFORMATION

  

Item 6. Exhibits

     18   

Signatures

     19   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited)

 

     September 30, 2012     June 30, 2012  
     (in thousands, except share data)  

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 18,458      $ 11,410   

Restricted cash

     2,400        2,400   

Accounts receivable

     1,111        1,042   

Inventories

     207        212   

Prepaid expenses and other current assets

     463        676   
  

 

 

   

 

 

 

Total current assets

     22,639        15,740   

Property, plant and equipment, net

     51,568        52,514   

Goodwill

     13,002        12,734   

Intangible assets, net

     33        34   

Other assets

     1,280        1,286   
  

 

 

   

 

 

 

Total assets

   $ 88,522      $ 82,308   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current Liabilities:

    

Accounts payable

   $ 2,198      $ 2,399   

Accrued expenses

     2,231        2,209   

Current portion of long-term debt

     6,729        5,655   

Deferred revenue

     2,651        2,595   
  

 

 

   

 

 

 

Total current liabilities

     13,809        12,858   

Long-term debt, less current portion

     20,919        23,110   

Deferred revenue

     2,038        2,595   
  

 

 

   

 

 

 

Total liabilities

     36,766        38,563   
  

 

 

   

 

 

 

Contingencies (Note 9)

    

Stockholders’ Equity:

    

Preferred stock, $0.01 par value, 50,000,000 shares authorized as of September 30, 2012; none issued or outstanding as of September 30, 2012 and June 30, 2012

     —          —     

Common stock, $0.01 par value, 250,000,000 shares authorized as of September 30, 2012; 81,844,749 and 75,849,439 shares issued, and 81,816,079 and 75,820,769 shares outstanding as of September 30, 2012 and June 30, 2012, respectively

     818        758   

Additional paid-in-capital

     232,601        212,326   

Accumulated deficit

     (185,131     (172,634

Accumulated other comprehensive income

     3,608        3,435   

Treasury stock, at cost, 28,670 and 28,670 shares as of September 30, 2012 and June 30, 2012, respectively

     (140     (140
  

 

 

   

 

 

 

Total stockholders’ equity

     51,756        43,745   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 88,522      $ 82,308   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

3


Table of Contents

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

 

     Three Months Ended
September 30,
 
     2012     2011  
     (In thousands, except per share data)  

Revenues:

    

Industrialization and development fees

   $ —        $ 1,440   

Licensing fees

     663        672   

Product sales and other

     29        18   
  

 

 

   

 

 

 

Total revenues

     692        2,130   

Cost of product sales

     59        74   
  

 

 

   

 

 

 

Gross profit

     633        2,056   
  

 

 

   

 

 

 

Operating expenses:

    

Research and development

     4,738        4,298   

Selling, general and administrative

     6,577        6,183   

Depreciation and amortization

     1,223        993   
  

 

 

   

 

 

 

Total operating expenses

     12,538        11,474   
  

 

 

   

 

 

 

Operating loss

     (11,905     (9,418

Interest expense

     616        283   

Interest income

     (24     (30

Other expense, net

     —          34   
  

 

 

   

 

 

 

Net loss

     (12,497     (9,705

Other comprehensive (income) loss, net:

    

Foreign currency translation

     (173     588   
  

 

 

   

 

 

 

Comprehensive loss

   $ (12,324   $ (10,293
  

 

 

   

 

 

 

Net loss per share:

    

Basic and diluted net loss per share

   $ (0.16   $ (0.16
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

4


Table of Contents

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

(unaudited)

 

    Common
Stock
    Additional-
Paid-In
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income
    Treasury
Stock
    Total  
    (in thousands)  

Balance as of July 1, 2012

  $ 758      $ 212,326      $ (172,634   $ 3,435      $ (140   $ 43,745   

Net loss

    —          —          (12,497     —          —          (12,497

Foreign currency translation

    —          —          —          173        —          173   

Share-based compensation expense

    (2     1,557        —          —          —          1,555   

Issuance of common stock from public offering, net of issuance costs

    62        18,718        —          —          —          18,780   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2012

  $ 818      $ 232,601      $ (185,131   $ 3,608      $ (140   $ 51,756   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

5


Table of Contents

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

     Three Months Ended
September 30,
 
     2012     2011  
     (in thousands)  

Cash flows from operating activities:

    

Net loss

   $ (12,497   $ (9,705

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     1,223        993   

Share-based compensation expense

     1,555        1,900   

Changes in assets and liabilities:

    

Accounts receivable

     (69     (7

Inventories

     5        (83

Prepaid expenses and other current assets

     213        7   

Other assets

     3        (205

Accounts payable

     (300     513   

Accrued expenses

     18        (388

Deferred revenue

     (613     (672
  

 

 

   

 

 

 

Net cash used in operating activities

     (10,462     (7,647

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (111     (1,797
  

 

 

   

 

 

 

Net cash used in investing activities

     (111     (1,797

Cash flows from financing activities:

    

Proceeds from the issuance of long-term debt

     —          9,087   

Principal payments on long-term debt and capital lease obligations

     (1,173     (483

Proceeds from the issuance of common stock, net of issuance costs

     18,780        —     

Proceeds from the exercise of options to purchase common stock

     —          466   

Purchase of treasury stock

     —          (26
  

 

 

   

 

 

 

Net cash provided by financing activities

     17,607        9,044   

Effect of exchange rate changes on cash

     14        (127
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     7,048        (527

Cash and cash equivalents at beginning of period

     11,410        17,910   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 18,458      $ 17,383   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash activities

    

Purchases of property, plant and equipment in accounts payable and accrued expenses

   $ 166      $ 285   
  

 

 

   

 

 

 

Purchases of property, plant and equipment pursuant to capital lease agreements

   $ —        $ 19   
  

 

 

   

 

 

 

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 and subsidiaries (the “Company”) is a U.S. based developer and commercial supplier of injectable drug delivery systems. The Company builds long-term collaborations with pharmaceutical and biotechnology companies seeking to utilize its innovative and highly differentiated devices to enable or enhance the clinical development, regulatory approval and lifecycle management of their injectable therapies. The Company’s proprietary devices are designed for supply to pharmaceutical companies in a format where they can be integrated into the filling and packaging processes utilized for a target injectable drug or vaccine.

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, 2012 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 has incurred recurring losses from operations during the year ended June 30, 2012 and the three months ended September 30, 2012 and anticipates incurring additional losses until such time that it can generate sufficient sales of its proprietary range of injectable drug delivery systems. Management estimates that cash and cash equivalents of $20.9 million as of September 30, 2012, which includes $2.4 million of restricted cash, are sufficient to sustain planned operations through the third quarter of fiscal 2013.

The Company will need additional funding in the future to support its operations and capital expenditure requirements. Management has identified several possible funding strategies, which may or may not 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. These various factors raise substantial doubt about the Company’s ability to continue as a going concern.

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.

In July 2012, the Company issued 6,154,000 shares of common stock and raised $18.8 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 injectable drug delivery systems, to purchase and operate capital equipment, to expand production and for working capital and other general corporate purposes.

In October 2012, the Company entered into a Controlled Equity Offering Sales Agreement, pursuant to which the Company may, from time to time, issue and sell shares of common stock having an aggregate offering price of up to $45.0 million. The Company is not obligated to make any sales of shares under the Sales Agreement. To date, the Company has not made any sales of shares under the Sales Agreement.

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.

 

7


Table of Contents

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, 2012      June 30, 2012  
     (in thousands)  

Raw materials

   $ 39       $ 58   

Work in process

     145         143   

Finished goods

     23         11   
  

 

 

    

 

 

 

Total inventories

   $ 207       $ 212   
  

 

 

    

 

 

 

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 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 and development fees, licensing fees and product sales.

The Company recognizes up front, non-refundable licensing fees ratably over the expected life of the related agreement. Revenue from industrialization and development fees 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 projects 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.

4. Equity Transactions and Share-Based Compensation

In July 2012, the Company issued 6,154,000 shares of common stock and raised $18.8 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 injectable drug delivery systems, to purchase and operate capital equipment to expand production and for working capital and other general corporate purposes.

The Company recognized share-based compensation expense related to equity awards to employees, directors and consultants of $1.6 million and $1.9 million during the three months ended September 30, 2012 and 2011, respectively.

 

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Table of Contents

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 CHESS Depositary Interests 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 September 30, 2012 were valued at $0.07 per option, which is being expensed ratably over the vesting period of each tranche, which ranges from 1.8 years to 2.1 years. The options are re-valued on a quarterly basis and marked to market until exercised.

The following is a summary of activity related to stock options held by employees and directors during the three months ended September 30, 2012:

 

     Number of
Options
    Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Life (in years)
     Aggregate Intrinsic
Value
 
                         (in thousands)  

Outstanding as of July 1, 2012

     5,577,959      $ 4.41         

Cancelled

     (644,643     5.08         
  

 

 

   

 

 

       

Outstanding as of September 30, 2012

     4,933,316      $ 4.32         4.5       $ 1,304   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable as of September 30, 2012

     2,157,831      $ 3.35         2.1       $ 1,304   
  

 

 

   

 

 

    

 

 

    

 

 

 

The following is a summary of activity related to stock options and warrants held by persons other than employees and directors during the three months ended September 30, 2012:

 

     Number of
Options
     Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Life (in years)
     Aggregate Intrinsic
Value
 
                          (in thousands)  

Outstanding as of July 1, 2012

     7,758,699       $ 8.73         
  

 

 

    

 

 

       

Outstanding as of September 30, 2012

     7,758,699       $ 8.73         1.0       $ 146   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable as of September 30, 2012

     6,758,699       $ 9.05         0.8       $ 146   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. There were no stock options exercised during the three months ended September 30, 2012. The total intrinsic value of stock options exercised during the three months ended September 30, 2011 was $0.7 million.

 

9


Table of Contents

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

The Company did not grant any stock options during the three months ended September 30, 2012. The Company used the following weighted average assumptions in calculating the fair value of options granted during the three months ended September 30, 2011:

 

     Three Months Ended
September 30, 2011
 

Number of stock options granted

     270,000   

Expected dividend yield

     0

Risk-free interest rate

     1.54

Expected volatility

     57

Expected life (in years)

     6.0   

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 when the Company redomiciled onto the U.S. exchange 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.

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 following is a summary of activity related to restricted stock awards during the three months ended September 30, 2012:

 

     Number of Restricted
Stock Awards
    Weighted Average
Grant Date Fair Value
 

Unvested as of July 1, 2012

     4,511,665      $ 4.86   

Vested

     (54,000     5.47   

Cancelled

     (158,690     4.80   
  

 

 

   

 

 

 

Unvested as of September 30, 2012

     4,298,975      $ 4.85   
  

 

 

   

 

 

 

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

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

Property, plant and equipment consist of the following:

 

     September 30,
2012
    June 30,
2012
 
     (in thousands)  

Building

   $ 32,188      $ 32,182   

Machinery and equipment

     18,538        18,356   

Computer software

     2,544        2,544   

Furniture and fixtures

     374        374   

Construction in progress

     5,722        5,615   

Land

     2,036        2,036   

Leasehold Improvements

     32        32   
  

 

 

   

 

 

 
     61,434        61,139   

Less: accumulated depreciation and amortization

     (9,866     (8,625
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 51,568      $ 52,514   
  

 

 

   

 

 

 

Construction in progress as of September 30, 2012 and June 30, 2012 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 three months ended September 30, 2012 are as follows:

 

     (in thousands)  

Balance as of July 1, 2012

   $ 12,734   

Foreign currency translation

     268   
  

 

 

 

Balance as of September 30, 2012

   $ 13,002   
  

 

 

 

Intangible assets consist of patents acquired in a business acquisition of $0.1 million. Related accumulated amortization as of both September 30, 2012 and June 30, 2012 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, 2012      June 30, 2012  
     (In thousands)  

6.00% Mortgage loans, due December 2031

   $ 13,972       $ 14,033   

6.00% Mortgage loans, due October 2020

     3,541         3,588   

12.85% Secured lending facility, due 2013

     5,536         6,420   

4.75% Bank term loans, due January 2021 through August 2021

     1,831         1,874   

5.00% Commonwealth of Pennsylvania financing authority loan, due January 2021

     2,170         2,182   

Other

     598         668   
  

 

 

    

 

 

 
     27,648         28,765   

Less: current portion of long-term debt

     6,729         5,655   
  

 

 

    

 

 

 

Total long-term debt

   $ 20,919       $ 23,110   
  

 

 

    

 

 

 

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 mortgage 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 current corporate headquarters and manufacturing facility in York, Pennsylvania.

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

During construction, Cross Farm paid only interest on both term loans 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 loans, with interest at a fixed rate of 6.00%. The weighted average interest rate on both term notes was 6.00% and 5.38% during the three months ended September 30, 2012 and the year ended June 30, 2012, respectively.

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 September 30, 2012. However, there can be no assurance that the Company will be able to maintain the Debt Service Reserve Account balance for a period of 12 months from September 30, 2012. Cross Farm may prepay the loan, but will incur a prepayment penalty of 2.0%, if it does so before October 2013. The U.S. Department of Agriculture has guaranteed $10.0 million of the loan.

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.

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 current manufacturing facility. In December 2010, Cross Farm received the $2.25 million loan which bears interest at a rate of 5.00% 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.

8. Net Loss Per Share

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

 

     Three Months Ended September 30,  
     2012     2011  
     (In thousands, except share and
per share data)
 

Numerator

    

Net loss

   $ (12,497   $ (9,705

Denominator

    

Weighted average number of shares used to compute basic net loss per share

     77,250,687        62,082,396   

Effect of dilutive options to purchase common stock

     —          —     
  

 

 

   

 

 

 

Weighted average number of shares used to compute diluted net loss per share

     77,250,687        62,082,396   
  

 

 

   

 

 

 

Basic and diluted net loss per share

   $ (0.16   $ (0.16
  

 

 

   

 

 

 

Due to the Company’s net losses, unvested shares of restricted stock (participating securities) totaling 4,424,146 and 1,984,935 were excluded from the calculation of basic and diluted loss per share during the three months ended September 30, 2012 and 2011, respectively.

In addition, stock options (non-participating securities) totaling 10,054,103 and 9,990,013 during the three months ended September 30, 2012 and 2011, respectively, were excluded from the calculation of diluted net 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 September 30, 2012 and 2011, these shares would have had an effect of 583,090 and 1,353,703 diluted shares, respectively, for purposes of calculating diluted net loss per share.

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

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 had 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 had 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 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 three months ended September 30, 2011 the Company received and recognized as revenue the final €1.0 million milestone payment under the industrialization agreement.

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.

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, 2012      June 30, 2012  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 
     (in thousands)  

Assets:

           

Cash equivalents — certificates of deposit

   $ 1,003       $ 1,003       $ 1,003       $ 1,003   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

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

 

     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 (September 30, 2012)

   $ —         $ 1,003       $ —         $ 1,003   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash equivalents — certificates of deposit (June 30, 2012)

   $ —         $ 1,003       $ —         $ 1,003   
  

 

 

    

 

 

    

 

 

    

 

 

 

12. Subsequent Event

In October 2012, the Company entered into a Controlled Equity Offering Sales Agreement, pursuant to which the Company may, from time to time, issue and sell shares of common stock having an aggregate offering price of up to $45.0 million. The Company is not obligated to make any sales of shares under the Sales Agreement. To date, the Company has not made any sales of shares under the Sales Agreement.

 

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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 and commercial supplier of injectable drug delivery systems. We build long-term collaborations with pharmaceutical and biotechnology companies seeking to utilize our innovative and highly differentiated devices to enable or enhance the clinical development, regulatory approval and lifecycle management of their injectable therapies. Our proprietary devices are designed for supply to pharmaceutical companies in a format where they can be integrated into the filling and packaging processes utilized for a target injectable drug or vaccine. Pharmaceutical companies are responsible for the final shipment of the drug-device combination to healthcare workers or patients for safe, intuitive and convenient administration.

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 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 “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.

 

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Table of Contents

Results of Operations

The following table summarizes our results of operations for the three months ended September 30, 2012 and 2011:

 

     Three Months Ended
September 30,
 
     2012     2011  
     (in thousands, except per share data)  

Revenues:

    

Industrialization and development fees

   $ —        $ 1,440   

Licensing fees

     663        672   

Product sales and other

     29        18   
  

 

 

   

 

 

 

Total revenues

     692        2,130   

Cost of product sales

     59        74   
  

 

 

   

 

 

 

Gross profit

     633        2,056   

Operating expenses:

    

Research and development

     4,738        4,298   

Selling, general and administrative

     6,577        6,183   

Depreciation and amortization

     1,223        993   
  

 

 

   

 

 

 

Total operating expenses

     12,538        11,474   
  

 

 

   

 

 

 

Operating loss

     (11,905     (9,418

Interest expense

     616        283   

Interest income

     (24     (30

Other expense, net

     —          34   
  

 

 

   

 

 

 

Net loss

   $ (12,497   $ (9,705
  

 

 

   

 

 

 

Net loss per share:

    

Basic and diluted net loss per share

   $ (0.16   $ (0.16
  

 

 

   

 

 

 

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Revenues. Revenues decreased by $1.4 million or 68%. During both the three months ended September 30, 2012 and 2011, we recognized revenues from our exclusive licensing agreement with Sanofi of $0.7 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. During the three months ended September 30, 2011, we recognized $1.4 million related to the achievement of the last milestone under our industrialization agreement with Sanofi.

Research and development expenses. Research and development expenses increased by $0.4 million or 10% due to additional payroll costs and expenditures related to the development of our portfolio of injectable drug delivery systems.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $0.4 million or 6% primarily due to an increase in our non-research and development payroll expenses.

Depreciation and amortization expense. Depreciation and amortization expense increased by $0.2 million or 23% primarily as a result of additional machinery and equipment placed into service subsequent to September 30, 2011.

Interest expense. Interest expense increased by $0.3 million, primarily resulting from debt incurred in relation to our secured lending facility for production equipment for the Unifill syringe during August 2011.

Net loss and net loss per share. Net loss during the three months ended September 30, 2012 and 2011 was $12.5 million and $9.7 million, respectively. Basic and diluted net loss per share was $0.16, on weighted average shares outstanding of 77,250,687 and 62,082,396, for the three months ended September 30, 2012 and 2011, respectively. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with our November 2011 and July 2012 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, term loans, an external secured financing and payments from Sanofi under our exclusive licensing and industrialization agreements. As of September 30, 2012, cash and cash equivalents were $18.5 million, restricted cash was $2.4 million and our long-term debt was $27.6 million. As of June 30, 2012, cash and cash equivalents were $11.4 million, restricted cash was $2.4 million and our long-term debt was $28.8 million. The $2.4 million of restricted cash relates to amounts that must remain in cash deposits under our loan agreement with Metro Bank (“Metro”).

 

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Table of Contents

During July 2012, we issued 6,154,000 shares of common stock and raised $18.8 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 injectable drug delivery systems, to purchase and operate capital equipment to expand production and for working capital and other general corporate purposes.

During October 2012, we entered into a Controlled Equity Offering Sales Agreement, pursuant to which we may, from time to time, issue and sell shares of common stock having an aggregate offering price of up to $45.0 million. We are not obligated to make any sales of shares under the Sales Agreement. To date, we have not made any sales of shares under the Sales Agreement.

We incurred recurring losses from operations during the year ended June 30, 2012 and the three months ended September 30, 2012 and anticipate incurring additional losses until such time that we can generate sufficient sales of our proprietary range of injectable drug delivery systems. We estimate that cash and cash equivalents of $20.9 million as of September 30, 2012, which includes $2.4 million of restricted cash, are sufficient to sustain planned operations through the third quarter of fiscal 2013.

The following table summarizes our cash flows during the three months ended September 30, 2012 and 2011:

 

     Three Months  Ended
September 30,
 
     2012     2011  
     (in thousands)  

Net cash provided by (used in):

    

Operating activities

   $ (10,462   $ (7,647

Investing activities

     (111     (1,797

Financing activities

     17,607        9,044   

Net Cash Used In Operating Activities

Net cash used in operating activities during the three months ended September 30, 2012 was $10.5 million compared to $7.6 million during the three months ended September 30, 2011. The increase in net cash used in operations was primarily due to increased operating expenses leading to $2.9 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 $0.1 million during the three months ended September 30, 2012 compared to $1.8 million during the three months ended September 30, 2011, primarily as a result of costs incurred in connection with the purchase of machinery and related equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the three months ended September 30, 2012 was $17.6 million compared to $9.0 million during the three months ended September 30, 2011. During the three months ended September 30, 2012, we received $18.8 million in connection with our public offering of common stock, partially offset by principal debt payments of $1.2 million. During the three months ended September 30, 2011, we received $9.1 million in proceeds associated with our secured lending facility agreement with Varilease.

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.

 

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Table of Contents

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.

PART II. OTHER INFORMATION

Item 6. Exhibits

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

 

Exhibit

No.

  

Description of Exhibit

  

Included
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   
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: November 8, 2012       UNILIFE CORPORATION
      By:    /s/ R. Richard Wieland II
        

 

         R. Richard Wieland II
         Chief Financial Officer

 

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