XASX:UNS Unilife Corp DR Quarterly Report 10-Q Filing - 3/31/2012

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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 March 31, 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 May 4, 2012, 74,181,520 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 March 31, 2012 and June 30, 2011

     3   

Unaudited Consolidated Statements of Operations for the three and nine months ended March  31, 2012 and 2011

     4   

Unaudited Consolidated Statement of Stockholders’ Equity and Comprehensive Loss for the nine months ended March 31, 2012

     5   

Unaudited Consolidated Statements of Cash Flows for the nine months ended March 31, 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

     16   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     20   

Item 4. Controls and Procedures

     20   

PART II. OTHER INFORMATION

  

Item 6. Exhibits

     20   

Signatures

     21   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited)

 

     March 31, 2012     June 30, 2011  
     (in thousands, except share data)  
Assets     

Current Assets:

    

Cash and cash equivalents

   $ 24,796      $ 17,910   

Restricted cash

     2,400        2,400   

Accounts receivable

     371        13   

Inventories

     618        626   

Prepaid expenses and other current assets

     876        381   
  

 

 

   

 

 

 

Total current assets

     29,061        21,330   

Property, plant and equipment, net

     53,336        54,020   

Goodwill

     13,009        13,265   

Intangible assets, net

     36        42   

Other assets

     1,293        821   
  

 

 

   

 

 

 

Total assets

   $ 96,735      $ 89,478   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current Liabilities:

    

Accounts payable

   $ 2,686      $ 2,405   

Accrued expenses

     1,927        2,696   

Current portion of long-term debt

     5,503        2,274   

Deferred revenue

     2,652        2,706   
  

 

 

   

 

 

 

Total current liabilities

     12,768        10,081   

Long-term debt, less current portion

     24,557        20,413   

Deferred revenue

     3,315        5,412   
  

 

 

   

 

 

 

Total liabilities

     40,640        35,906   
  

 

 

   

 

 

 

Contingencies (Note 9)

    

StockholdersEquity:

    

Preferred stock, $0.01 par value, 50,000,000 shares authorized as of March 31, 2012; none issued or outstanding as of March 31, 2012 and June 30, 2011

     —          —     

Common stock, $0.01 par value, 250,000,000 shares authorized as of March 31, 2012; 74,210,190 and 63,924,403 shares issued, and 74,181,520 and 63,905,053 shares outstanding as of March 31, 2012 and June 30, 2011, respectively

     742        639   

Additional paid-in-capital

     209,695        169,590   

Accumulated deficit

     (157,773     (120,332

Accumulated other comprehensive income

     3,571        3,775   

Treasury stock, at cost, 28,670 and 19,350 shares as of March 31, 2012 and June 30, 2011, respectively

     (140     (100
  

 

 

   

 

 

 

Total stockholdersequity

     56,095        53,572   
  

 

 

   

 

 

 

Total liabilities and stockholdersequity

   $ 96,735      $ 89,478   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

3


Table of Contents

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2012     2011     2012     2011  
     (in thousands, except per share data)  

Revenues:

        

Industrialization and development fees

   $ 566      $ —        $ 2,255      $ 1,350   

Licensing fees

     675        642        1,993        1,849   

Product sales and other

     10        8        45        2,756   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,251        650        4,293        5,955   

Cost of product sales

     18        450        108        2,449   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,233        200        4,185        3,506   

Operating expenses:

        

Research and development

     6,668        2,723        16,228        6,941   

Selling, general and administrative

     7,677        9,117        20,572        24,386   

Depreciation and amortization

     1,193        827        3,343        2,492   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     15,538        12,667        40,143        33,819   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (14,305     (12,467     (35,958     (30,313

Interest expense

     626        177        1,548        241   

Interest income

     (46     (128     (102     (332

Other expense (income), net

     1        17        37        (85
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (14,886   $ (12,533   $ (37,441   $ (30,137
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share:

        

Basic and diluted loss per share

   $ (0.21   $ (0.20   $ (0.57   $ (0.53
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

4


Table of Contents

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Comprehensive Loss

(unaudited)

 

            Additional-
Paid-In
Capital
     Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income
    Treasury
Stock
    Total  
    

Common Stock

    Shares         Amount  

             
              
     (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

     —           —           —           (37,441     —          —          (37,441

Foreign currency translation

     —           —           —           —          (204     —          (204
                 

 

 

 

Comprehensive loss

                    (37,645

Issuance of options to purchase common stock

     —           —           2,039         —          —          —          2,039   

Issuance of restricted stock, net of forfeitures

     1,529,415         16         3,261         —          —          —          3,277   

Issuance of common stock to directors

     90,000         1         353         —          —          —          354   

Issuance of common stock to employees

     36,462         —           118         —          —          —          118   

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 March 31, 2012

     74,210,190       $ 742       $ 209,695       $ (157,773   $ 3,571      $ (140   $ 56,095   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

5


Table of Contents

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

     Nine Months Ended
March 31,
 
     2012     2011  
     (in thousands)  

Cash flows from operating activities:

    

Net loss

   $ (37,441   $ (30,137

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

    

Depreciation and amortization

     3,343        2,492   

Share-based compensation expense

     5,788        6,602   

Changes in assets and liabilities:

    

Accounts receivable

     (358     1,745   

Inventories

     8        238   

Prepaid expenses and other current assets

     (495     216   

Other assets

     (477     (209

Accounts payable

     1,056        (299

Accrued expenses

     (490     972   

Deferred revenue

     (1,993     (1,849
  

 

 

   

 

 

 

Net cash used in operating activities

     (31,059     (20,229

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (3,522     (27,086
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,522     (27,086

Cash flows from financing activities:

    

Proceeds from the issuance of long-term debt

     9,885        19,024   

Principal payments on long-term debt and capital lease obligations

     (2,768     (357

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        2,955   

Purchase of treasury stock

     (40     —     

Increase in restricted cash

     —          (2,400
  

 

 

   

 

 

 

Net cash provided by financing activities

     41,497        52,653   

Effect of exchange rate changes on cash

     (30     1,700   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     6,886        7,038   

Cash and cash equivalents at beginning of period

     17,910        20,750   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 24,796      $ 27,788   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash activities

    

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

   $ 91      $ 2,984   
  

 

 

   

 

 

 

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

   $ 305      $ 251   
  

 

 

   

 

 

 

Purchases of property, plant and equipment through issuance of warrants

   $ —        $ 1,621   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

6


Table of Contents

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

1. Description of Business and Unaudited Financial Statements

Unilife Corporation (collectively with its consolidated subsidiaries, the “Company”) and subsidiaries is a 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 nine months ended March 31, 2012 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 $24.8 million as of March 31, 2012 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.

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.

 

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Table of Contents

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

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:

 

     March 31, 2012      June 30, 2011  
     (in thousands)  

Raw materials

   $ 548       $ 387   

Work in process

     70         210   

Finished goods

     —           29   
  

 

 

    

 

 

 

Total inventories

   $ 618       $ 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 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 Sanofi, under which specific payment amounts and completion dates were established for achievement of certain pre-defined milestones in its development of the Unifill syringe. Revenue is recognized upon achievement of the “at risk” milestone events, which represents the culmination of the earnings process related to such events. Milestones include specific phases of the project such as product design, prototype availability, user tests, manufacturing proof of principle and the various steps to complete the industrialization of the product. Revenue recognized is commensurate with the milestones achieved and the Company has no future performance obligations related to previous milestone payments as each milestone payment is non-refundable when received.

The Company recognizes revenue from sales of products at the time of shipment and when title passes to the customer. Product sales to B. Braun, a customer which accounted for 10% or more of the Company’s revenue during the nine months ended March 31, 2011 were $2.5 million.

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 for fiscal years 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.

 

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Table of Contents

Unilife Corporation and Subsidiaries

Notes to Unaudited 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.

In January 2012, the Company granted 36,462 shares of common stock to certain employees. The Company recorded a charge to operations of $0.1 million related to the issuance of these shares.

The Company recognized share-based compensation expense related to equity awards to employees, directors and consultants of $2.4 million and $2.2 million during the three months ended March 31, 2012 and 2011, respectively and $5.8 million and $6.6 million during the nine months ended March 31, 2012 and 2011, respectively.

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 March 31, 2012 were valued at $0.91 per option, which is being expensed ratably over the vesting period of each tranche, which ranges from 1.5 years to 2.0 years. The options are re-valued on a quarterly basis and marked to market until exercised.

During the nine months ended March 31, 2012, the Company granted 1,390,000 options to purchase common stock to certain employees under the Stock Incentive Plan. The weighted average exercise price of the options was $3.88 per share. Certain 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 remaining options will vest upon certain anniversaries of the date of grant. The weighted average grant date fair value of the options was $1.86 per share.

 

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Table of Contents

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

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

     4,699,211      $ 4.45         

Granted

     1,390,000        3.88         

Exercised

     (12,000     2.06         

Cancelled

     (176,253     5.62         
  

 

 

   

 

 

       

Outstanding as of March 31, 2012

     5,900,958      $ 4.29         4.8       $ 4,065   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable as of March 31, 2012

     2,414,046      $ 3.03         2.1       $ 3,381   
  

 

 

   

 

 

    

 

 

    

 

 

 

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

     8,126,609      $ 8.42         

Exercised

     (367,910     1.75         
  

 

 

   

 

 

       

Outstanding as of March 31, 2012

     7,758,699      $ 8.74         1.5       $ 366   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable as of March 31, 2012

     6,758,699      $ 9.06         1.3       $ 366   
  

 

 

   

 

 

    

 

 

    

 

 

 

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 March 31, 2012. The total intrinsic value of stock options exercised during the three months ended March 31, 2011 was $0.1 million. The total intrinsic value of stock options exercised during the nine months ended March 31, 2012 and 2011 was $1.0 million and $5.5 million, respectively. Of the 4,486,912 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 nine months ended March 31, 2012 and 2011:

 

     Nine Months Ended
March 31, 2012
    Nine Months Ended
March 31, 2011
 

Number of stock options granted

     1,390,000        1,793,517   

Expected dividend yield

     0     0

Risk-free interest rate

     1.26     1.72

Expected volatility

     56     59

Expected life (in years)

     6.0        4.8   

The assumptions noted above for the nine months ended March 31, 2011 do not include amounts related to the options issued in the December 2010 private placement.

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.

 

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Table of Contents

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

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 and on January 3, 2012 was $3.24 per share. The grant date fair value of the options to purchase common stock was $1.69 per share.

The following is a summary of activity related to restricted stock awards during the nine months ended March 31, 2012:

 

     Number of Restricted
Stock Awards
    Weighted Average
Grant Date Fair Value
 

Unvested as of July 1, 2011

     1,957,000      $ 6.19   

Granted

     1,545,415        3.49   

Vested

     (40,000     5.52   

Cancelled

     (16,000     4.10   
  

 

 

   

 

 

 

Unvested as of March 31, 2012

     3,446,415      $ 5.00   
  

 

 

   

 

 

 

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

Property, plant and equipment consist of the following:

 

     March 31,
2012
    June 30,
2011
 
     (in thousands)  

Building

   $ 32,144      $ 31,866   

Machinery and equipment

     18,234        16,130   

Computer software

     2,500        2,457   

Furniture and fixtures

     388        323   

Construction in progress

     5,458        5,734   

Land

     2,036        2,036   
  

 

 

   

 

 

 
     60,760        58,546   

Less: accumulated depreciation and amortization

     (7,424     (4,526
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 53,336      $ 54,020   
  

 

 

   

 

 

 

Construction in progress as of March 31, 2012 and June 30, 2011 consisted primarily of amounts incurred in connection with machinery and equipment.

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

6. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill during the nine months ended March 31, 2012 are as follows:

 

     (in thousands)  

Balance as of July 1, 2011

   $ 13,265   

Foreign currency translation

     (256
  

 

 

 

Balance as of March 31, 2012

   $ 13,009   
  

 

 

 

Intangible assets consist of patents acquired in a business acquisition of $0.1 million. Related accumulated amortization as of both March 31, 2012 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:

 

     March 31, 2012      June 30, 2011  
     (in thousands)  

Mortgage loans

   $ 17,786       $ 17,940   

Secured lending facility

     7,437         —     

Bank term loans

     2,048         2,095   

Commonwealth of Pennsylvania financing authority loan

     2,194         2,227   

Other

     595         425   
  

 

 

    

 

 

 
     30,060         22,687   

Less: current portion of long-term debt

     5,503         2,274   
  

 

 

    

 

 

 

Total long-term debt

   $ 24,557       $ 20,413   
  

 

 

    

 

 

 

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 current 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 March 31, 2012. 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.

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

The aggregate maturities related to amounts outstanding as of March 31, 2012 under this secured lending facility will be $4.3 million and $3.1 million during the twelve months ending March 31, 2013 and 2014, respectively.

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 March 31, 2012) plus 1.50% (4.75% as of March 31, 2012) 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 current 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.

8. Loss Per Share

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

 

     Three Months Ended March 31,     Nine Months Ended March 31,  
     2012     2011     2012     2011  
     (in thousands, except share and per share data)  

Numerator

        

Net loss

   $ (14,886   $ (12,533   $ (37,441   $ (30,137

Denominator

        

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

     70,746,919        61,504,793        66,266,207        56,593,944   

Effect of dilutive options to purchase common stock

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     70,746,919        61,504,793        66,266,207        56,593,944   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted loss per share

   $ (0.21   $ (0.20   $ (0.57   $ (0.53
  

 

 

   

 

 

   

 

 

   

 

 

 

Due to the Company’s net losses, unvested shares of restricted stock (participating securities) totaling 3,197,963 and 1,987,333 were excluded from the calculation of basic and diluted loss per share during the three months ended March 31, 2012 and 2011, respectively and unvested shares of restricted stock (participating securities) totaling 2,437,257 and 1,921,763 were excluded from the calculation of basic and diluted loss per share during the nine months ended March 31, 2012 and 2011, respectively.

In addition, stock options (non-participating securities) totaling 10,466,010 and 12,542,042 during the three months ended March 31, 2012 and 2011, respectively, were excluded from the calculation of diluted loss per share and stock options (non-participating securities) totaling 10,071,369 and 10,805,392 during the nine months ended March 31, 2012 and 2011, 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 March 31, 2012 and 2011, these shares would have had an effect of 908,573 and 1,576,992 diluted shares, respectively, for purposes of calculating diluted loss per share. Had the Company reported net income during the nine months ended March 31, 2012 and 2011, these shares would have had an effect of 1,130,156 and 1,784,345 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.

 

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Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

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 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 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 nine months ended March 31, 2012 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.

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:

 

     March 31, 2012      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.

 

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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 (March 31, 2012)

   $ —         $ 1,002       $ —         $ 1,002   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash equivalents — certificates of deposit (June 30, 2011)

   $ —         $ 1,000       $ —         $ 1,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
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.

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 March 31, 2012 and 2011 and the nine months ended March 31, 2012 and 2011:

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2012     2011     2012     2011  
     (in thousands, except per share data)  

Revenues:

        

Industrialization and development fees

   $ 566      $ —        $ 2,255      $ 1,350   

Licensing fees

     675        642        1,993        1,849   

Product sales and other

     10        8        45        2,756   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,251        650        4,293        5,955   

Cost of product sales

     18        450        108        2,449   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,233        200        4,185        3,506   

Operating expenses:

        

Research and development

     6,668        2,723        16,228        6,941   

Selling, general and administrative

     7,677        9,117        20,572        24,386   

Depreciation and amortization

     1,193        827        3,343        2,492   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     15,538        12,667        40,143        33,819   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (14,305     (12,467     (35,958     (30,313

Interest expense

     626        177        1,548        241   

Interest income

     (46     (128     (102     (332

Other expense (income), net

     1        17        37        (85
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (14,886   $ (12,533   $ (37,441   $ (30,137
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share:

        

Basic and diluted loss per share

   $ (0.21   $ (0.20   $ (0.57   $ (0.53
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Revenues. Revenues increased by $0.6 million or 92%. During the three months ended March 31, 2012, industrialization and development fees included $0.6 million related to the clinical development and supply of a novel drug device for targeted organ delivery. During both the three months ended March 31, 2012 and 2011, we recognized revenues from our exclusive licensing agreement with Sanofi of $0.7 million and $0.6 million, respectively. 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.

Cost of product sales. Our cost of product sales decreased by $0.4 million or 96% as a result of amounts incurred related to the write-off of obsolete inventory during the three months ended March 31, 2011.

Research and development expenses. Research and development expenses increased by $3.9 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 $1.4 million or 16% primarily due to a decrease in our non-research and development payroll expenses.

Depreciation and amortization expense. Depreciation and amortization expense increased by $0.4 million or 44% primarily as a result of additional machinery and equipment placed into service during the latter part of fiscal 2011 and fiscal 2012.

Interest expense. Interest expense increased by $0.4 million, primarily resulting from debt incurred in relation to our secured lending facility for production equipment for the Unifill syringe during August 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 March 31, 2012 and 2011 was $14.9 million and $12.5 million, respectively. Basic and diluted loss per share was $0.21 and $0.20, respectively, on weighted average shares outstanding of 70,746,919 and 61,504,793, respectively. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with our November 2011 equity financing.

 

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Table of Contents

Nine Months Ended March 31, 2012 Compared to Nine Months Ended March 31, 2011

Revenues. Revenues decreased by $1.7 million or 28%. During both the nine months ended March 31, 2012 and 2011, we recognized $1.4 million related to the achievement of one milestone under our industrialization agreement with Sanofi. The milestone met during the nine months ended March 31, 2012 was the last remaining milestone under the agreement. During the nine months ended March 31, 2012 we also recognized $0.8 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 $1.8 million to $2.0 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 $2.3 million or 96%, primarily as a result of the associated decrease in our contract manufacturing revenue.

Research and development expenses. Research and development expenses increased by $9.3 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 $3.8 million or 16%. During the nine months ended March 31, 2012, we recorded $5.2 million of share-based compensation expense, a decrease of $1.4 million compared to the same period last year. Additionally, during the nine months ended March 31, 2012, our non-research and development payroll expenses and recruitment fees declined by $1.8 million, primarily as a result of amounts incurred to recruit and relocate certain members of our management team during the nine months ended March 31, 2011, which did not recur during the current year. Finally, during the nine months ended March 31, 2011 we incurred expenses of $0.3 million in connection with the relocation to our current headquarters and manufacturing facility.

Depreciation and amortization expense. Depreciation and amortization expense increased by $0.9 million or 34%, primarily as a result of the completion of construction of our current headquarters and manufacturing facility, as well as equipment placed into service during the latter part of fiscal 2011 and fiscal 2012.

Interest expense. Interest expense increased by $1.3 million, primarily resulting from debt incurred in relation to our secured lending facility for production equipment for the Unifill syringe during August 2011. Additionally, interest on our debt financing obtained for our current headquarters and manufacturing facility was capitalized during construction through December 2010, while recorded as expense during the nine months ended March 31, 2012.

Interest income. Interest income decreased by $0.2 million, primarily as a result of fluctuations in interest rates.

Net loss and loss per share. Net loss during the nine months ended March 31, 2012 and 2011 was $37.4 million and $30.1 million, respectively. Basic and diluted loss per share was $0.57 and $0.53, respectively, on weighted average shares outstanding of 66,266,207 and 56,593,944, 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, term loans, an external secured financing and payments from Sanofi under our exclusive licensing and industrialization agreements. As of March 31, 2012, cash and cash equivalents were $24.8 million, restricted cash was $2.4 million and our long-term debt was $30.1 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 incurred recurring losses from operations during the year ended June 30, 2011 and the nine months ended March 31, 2012 and anticipate incurring additional losses until such time that we can generate sufficient sales of our proprietary range of advanced drug delivery systems. We estimate that cash and cash equivalents of $24.8 million as of March 31, 2012 are sufficient to sustain planned operations through the third quarter of fiscal 2013.

The following table summarizes our cash flows during the nine months ended March 31, 2012 and 2011:

 

     Nine Months Ended March 31,  
     2012     2011  
     (in thousands)  

Net cash provided by (used in):

    

Operating activities

   $ (31,059   $ (20,229

Investing activities

     (3,522     (27,086

Financing activities

     41,497        52,653   

 

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Net Cash Used In Operating Activities

Net cash used in operating activities during the nine months ended March 31, 2012 was $31.1 million compared to $20.2 million during the nine months ended March 31, 2011. The increase in net cash used in operations was primarily due to increased operating expenses leading to $7.3 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 $3.5 million during the nine months ended March 31, 2012, primarily as a result of costs incurred in connection with the purchase of machinery and related equipment, compared to $27.1 million during the nine months ended March 31, 2011, primarily resulting from construction costs incurred in connection with our current headquarters and manufacturing facility.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the nine months ended March 31, 2012 was $41.5 million compared to $52.7 million during the nine months ended March 31, 2011. During the nine months ended March 31, 2012, 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, partially offset by principal debt payments of $2.8 million. During the nine months ended March 31, 2011, we received $33.4 million in connection with our December 2010 private placement and share purchase plan, as well as $3.0 million upon the exercise of stock options. Additionally, during the nine months ended March 31, 2011 we received $19.0 million in aggregate proceeds from our external financing with Metro and the Commonwealth of Pennsylvania.

Contractual Obligations

The aggregate maturities related to amounts outstanding as of March 31, 2012 under our secured lending facility will be $4.3 million and $3.1 million during the twelve months ending March 31, 2013 and 2014, respectively.

 

19


Table of Contents
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.

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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Table of Contents

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: May 10, 2012     UNILIFE CORPORATION
    By:  

/s/ R. Richard Wieland II

      R. Richard Wieland II
      Chief Financial Officer

 

21

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