10-Q 1 c17233e10vq.htm FORM 10-Q e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-34540
 
UNILIFE CORPORATION
(Exact name of registrant as specified in its charter)
 
     
Delaware   27-1049354
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
250 Cross Farm Lane, York, Pennsylvania 17406
(Address of principal executive offices)
Telephone: (717) 384-3400
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of May 13, 2011, 63,851,300 shares of the registrant’s common stock were outstanding.
 
 

 

 


 

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PART II. OTHER INFORMATION
       
 
       
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 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

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PART I.  
FINANCIAL INFORMATION
Item 1.  
Financial Statements
UNILIFE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
                 
    March 31, 2011     June 30, 2010  
    (in thousands, except share data)  
Assets
               
Current Assets:
               
Cash and cash equivalents
  $ 27,788     $ 20,750  
Restricted cash
    2,400        
Accounts receivable
    6       1,556  
Inventories
    564       797  
Prepaid expenses and other current assets
    430       637  
 
           
Total current assets
    31,188       23,740  
Property, plant and equipment, net
    53,562       29,972  
Goodwill
    12,916       10,792  
Intangible assets, net
    43       40  
Other assets
    489       273  
 
           
Total assets
  $ 98,198     $ 64,817  
 
           
Liabilities and Stockholders’ Equity
               
Current Liabilities:
               
Accounts payable
  $ 3,559     $ 6,044  
Accrued expenses
    3,060       2,911  
Current portion of long-term debt
    2,297       1,648  
Deferred revenue
    2,633       2,188  
 
           
Total current liabilities
    11,549       12,791  
Long-term debt, less current portion
    19,362       1,093  
Deferred revenue
    5,924       6,563  
 
           
Total liabilities
    36,835       20,447  
 
           
Contingencies (Note 9)
               
StockholdersEquity:
               
Preferred stock, $0.01 par value, 50,000,000 shares authorized as of March 31, 2011; none issued or outstanding as of March 31, 2011 and June 30, 2010
           
Common stock, $0.01 par value, 250,000,000 shares authorized as of March 31, 2011; 63,590,343 and 54,761,848 shares issued and outstanding as of March 31, 2011 and June 30, 2010, respectively
    636       548  
Additional paid-in-capital
    166,918       122,397  
Accumulated deficit
    (109,787 )     (79,650 )
Accumulated other comprehensive income
    3,596       1,075  
 
           
Total stockholdersequity
    61,363       44,370  
 
           
Total liabilities and stockholdersequity
  $ 98,198     $ 64,817  
 
           
See accompanying notes to the consolidated financial statements.

 

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UNILIFE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    March 31,     March 31,  
    2011     2010     2011     2010  
    (in thousands, except per share data)  
Revenues:
                               
Industrialization fees
  $     $ 1,250     $ 1,350     $ 5,082  
Licensing fees
    642       576       1,849       2,006  
Product sales and other
    8       591       2,756       1,682  
 
                       
Total revenues
    650       2,417       5,955       8,770  
Cost of product sales
    450       569       2,449       1,835  
 
                       
Gross profit
    200       1,848       3,506       6,935  
Operating expenses:
                               
Research and development
    2,723       6,899       6,941       8,623  
Selling, general and administrative
    9,117       7,008       24,386       17,229  
Depreciation and amortization
    827       390       2,492       1,727  
 
                       
Total operating expenses
    12,667       14,297       33,819       27,579  
 
                       
Operating loss
    (12,467 )     (12,449 )     (30,313 )     (20,644 )
Interest expense
    177       30       241       91  
Interest income
    (128 )     (450 )     (332 )     (707 )
Other expense (income), net
    17       35       (85 )     15  
 
                       
Net loss
  $ (12,533 )   $ (12,064 )   $ (30,137 )   $ (20,043 )
 
                       
Loss per share:
                               
Basic and diluted loss per share
  $ (0.20 )   $ (0.23 )   $ (0.53 )   $ (0.45 )
 
                       
See accompanying notes to the consolidated financial statements.

 

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UNILIFE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
(unaudited)
                                                 
                                    Accumulated        
                    Additional-             Other        
    Common Stock     Paid-In     Accumulated     Comprehensive        
    Shares     Amount     Capital     Deficit     Income     Total  
    (in thousands except share data)  
Balance as of July 1, 2010
    54,761,848     $ 548     $ 122,397     $ (79,650 )   $ 1,075     $ 44,370  
Comprehensive loss:
                                               
Net loss
                      (30,137 )           (30,137 )
Foreign currency translation
                            2,521       2,521  
 
                                             
Comprehensive loss
                                            (27,616 )
Issuance of options and warrants to purchase common stock
                3,081                   3,081  
Issuance of restricted stock
    220,000       2       5,014                   5,016  
Issuance of common stock in connection with private placement and share purchase plan, net of issuance costs
    7,048,373       70       33,361                   33,431  
Issuance of common stock upon exercise of stock options
    1,536,938       16       2,939                   2,955  
Issuance of common stock to employees
    23,184             126                   126  
 
                                   
Balance as of March 31, 2011
    63,590,343     $ 636     $ 166,918     $ (109,787 )   $ 3,596     $ 61,363  
 
                                   
See accompanying notes to the consolidated financial statements.

 

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UNILIFE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
                 
    Nine Months Ended  
    March 31,  
    2011     2010  
    (in thousands)  
Cash flows from operating activities:
               
Net loss
  $ (30,137 )   $ (20,043 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    2,492       1,727  
Share-based compensation expense
    6,602       6,765  
Changes in assets and liabilities:
               
Accounts receivable
    1,745       5,744  
Inventories
    238       384  
Prepaid expenses and other current assets
    216       (821 )
Other assets
    (209 )     255  
Accounts payable
    (299 )     (150 )
Accrued expenses
    972       (604 )
Deferred revenue
    (1,849 )     (2,009 )
 
           
Net cash used in operating activities
    (20,229 )     (8,752 )
Cash flows from investing activities:
               
Purchases of property, plant and equipment
    (27,086 )     (9,604 )
Purchases of certificates of deposit
          (9,106 )
 
           
Net cash used in investing activities
    (27,086 )     (18,710 )
Cash flows from financing activities:
               
Proceeds from the issuance of common stock, net of issuance costs
    33,431       47,117  
Proceeds from the exercise of options to purchase common stock
    2,955       1,817  
Proceeds from the issuance of long-term debt
    19,024        
Principal payments on long-term debt and capital lease obligations
    (357 )     (311 )
Proceeds from the issuance of note payable
    6,900        
Principal payments on note payable
    (6,900 )      
Decrease (increase) in restricted cash
    (2,400 )     433  
 
           
Net cash provided by financing activities
    52,653       49,056  
Effect of exchange rate changes on cash
    1,700       (416 )
 
           
Net increase in cash and cash equivalents
    7,038       21,178  
Cash and cash equivalents at beginning of period
    20,750       3,627  
 
           
Cash and cash equivalents at end of period
  $ 27,788     $ 24,805  
 
           
Supplemental disclosure of non-cash activities
               
Purchases of property, plant and equipment in accounts payable and accrued liabilities
  $ 2,984     $ 423  
 
           
Purchases of property, plant and equipment pursuant to capital lease agreements
  $ 251     $ 19  
 
           
Issuance of common stock to former shareholders of Unitract Syringe Pty Limited
  $     $ 5,890  
 
           
Purchases of property, plant and equipment through the issuance of warrants
  $ 1,621     $  
 
           
See accompanying notes to the consolidated financial statements.

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Description of Business and Unaudited Financial Statements
Unilife Corporation (collectively with its consolidated subsidiaries, the “Company”) and subsidiaries is a medical device company focused on the design, development, manufacture and supply of a proprietary range of retractable syringes. The primary target customers for the Company’s products include pharmaceutical manufacturers and suppliers of medical equipment to healthcare facilities and distributors to patients who self-administer prescription medication.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited consolidated financial statements contain all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented as required by Rule 10-01 of Regulation S-X. Interim results may not be indicative of results for a full year. The consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and the notes thereto for the fiscal year ended June 30, 2010 contained in its Annual Report on Form 10-K.
2. Liquidity
The Company incurred losses from operations during both the year ended June 30, 2010 and the nine months ended March 31, 2011 and anticipates incurring additional losses until such time that it can generate sufficient sales of its proprietary range of retractable syringes. Management estimates that cash and cash equivalents of $27.8 million as of March 31, 2011 are sufficient to sustain planned operations through the end of the second quarter of fiscal 2012.
Additional funding will be needed by the Company to support its operations and capital expenditure requirements. Management has a range of short and long-term funding strategies available to it in this regard. In addition to the sale of its Unitract and Unifill syringe products to existing partners, the Company is also in discussions with additional pharmaceutical companies pertaining to the Unifill syringe and other pipeline products. Should the Company enter into commercial relationships relating to the industrialization, commercial supply or preferred use of a device within a particular therapeutic market, the Company may pursue additional funding or revenue streams. The Company may seek to raise additional funds through the sale of additional equity or debt securities.
During October 2010, the Company secured $18.0 million of external financing from a financial institution for the construction of its new corporate headquarters and manufacturing facility. The Company used $6.9 million of the proceeds to repay amounts outstanding under its Credit Agreement with Univest National Bank and Trust Co. (“Univest”).
During December 2010, the Company received $2.25 million from the Commonwealth of Pennsylvania in financing for land and the construction of its new corporate headquarters and manufacturing facility.
During December 2010, the Company issued 7,048,373 shares of common stock and 2,268,934 options to purchase common stock for aggregate proceeds of A$34.1 million ($33.4 million), net of issuance costs, through an Australian private placement and a share purchase plan for the Company’s Australian and New Zealand stockholders. The Company is using the proceeds from the private placement and share purchase plan to purchase additional capital equipment and for general operations, including the development of additional pipeline products.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Unilife Corporation and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
On September 1, 2009, Unilife Medical Solutions Limited, an Australian corporation (“UMSL”), entered into a Merger Implementation Agreement with Unilife Corporation, a newly formed Delaware subsidiary of UMSL, pursuant to which stockholders and option holders of UMSL would exchange their existing interests in UMSL for equivalent interests in Unilife Corporation and Unilife Corporation would become the parent or ultimate parent of UMSL and its subsidiaries. The redomiciliation transaction was approved by the Australian Federal Court and the shareholders and option holders of UMSL and was completed on January 27, 2010. In the redomiciliation each holder of UMSL ordinary shares or share options received one share of common stock or one stock option, of Unilife Corporation for every six UMSL ordinary shares or share options, respectively, held by such holder, unless a holder of UMSL ordinary shares elected to receive, in lieu of common stock, Chess Depository Interests, or CDIs of Unilife (each representing one-sixth of a share of Unilife common stock) in which case such holder received one CDI of Unilife for each ordinary share of UMSL. All share and per share data have been retroactively restated to reflect the one for six share recapitalization.
References to the “Company” include Unilife Corporation and its consolidated subsidiaries, including UMSL, unless the context otherwise requires. References to “Unilife” are references solely to Unilife Corporation.
References to A$ mean the lawful currency of the Commonwealth of Australia. References to € or euros are to the lawful currency of the European Union.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The estimates are principally in the areas of revenue recognition and share-based compensation expense. Management bases its estimates on historical experience and various assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Inventories
Inventories consist primarily of plastic syringe components and include direct materials, direct labor and manufacturing overhead. Inventories are stated at the lower of cost or market, with cost determined using the first in, first out method. The Company routinely reviews its inventory for obsolete, slow moving or otherwise impaired inventory and records estimated impairments in the periods in which they occur. Inventories consist of the following:
                 
    March 31, 2011     June 30, 2010  
    (in thousands)  
Raw materials
  $ 461     $ 649  
Work in process
    63       148  
Finished goods
    40        
 
           
Total inventories
  $ 564     $ 797  
 
           
Share-Based Compensation
The Company grants stock options, restricted stock and common stock as compensation to its employees, directors and consultants. Certain employee and director awards vest over stated vesting periods and others also require achievement of specific performance or market conditions. The Company expenses the grant-date fair value of awards to employees and directors over their respective vesting periods. To the extent that employee and director awards vest only upon the achievement of a specific performance condition, expense is recognized over the period from the date management determines that the performance condition is probable of achievement through the date they are expected to be met. Awards granted to consultants are sometimes granted for past services, in which case their fair value is expensed on their grant date, while other awards require future service, or the achievement of performance or market conditions. Timing of expense recognition for consultant awards is similar to that of employee and director awards; however, aggregate expense is re-measured each quarter-end based on the then fair value of the award through the vesting date of the award. The Company estimates the fair value of stock options using the Black-Scholes option-pricing model, with the exception of market-based grants, which are valued based on Barrier and Monte Carlo option pricing models. Option pricing methods require the input of highly subjective assumptions, including the expected stock price volatility. See Note 4 for additional information regarding share-based compensation.

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Revenue Recognition
The Company recognizes revenue from licensing fees, industrialization efforts and product sales.
In June 2008, the Company entered into an exclusive licensing arrangement to allow its pharmaceutical partner to use certain of the 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 euro up-front, non-refundable fee paid for this license is being amortized over the 5 year expected life of the related agreement. In late fiscal 2009, the Company entered into an industrialization agreement with its pharmaceutical partner, under which specific payment amounts and completion dates were established for achievement of certain pre-defined milestones in its development of the Unifill syringe. Revenue is recognized upon achievement of the “at risk” milestone events, which represents the culmination of the earnings process related to such events. Milestones include specific phases of the project such as product design, prototype availability, user tests, manufacturing proof of principle and the various steps to complete the industrialization of the product. Revenue recognized is commensurate with the milestones achieved and the Company has no future performance obligations related to previous milestone payments as each milestone payment is non-refundable when received.
The Company recognizes revenue from sales of products at the time of shipment and when title passes to the customer. Product sales to B. Braun, a customer who accounted for 10% or more of the Company’s revenue, were $0.6 million during the three months ended March 31, 2010 and $2.5 million and $1.7 million during the nine months ended March 31, 2011 and 2010, respectively.
Reclassifications
Certain amounts in the consolidated statements of operations were reclassified from selling, general and administrative expenses to research and development expenses. Management has determined that activities performed by certain employees were more closely associated with research and development activities and has reclassified those items on the accompanying consolidated statements of operations.
This reclassification did not affect the consolidated balance sheets or consolidated statements of cash flows. Additionally, the reclassification did not affect operating loss or net loss on the consolidated statements of operations. The following table summarizes the as reported and as adjusted amounts related to the reclassification discussed above:
                 
    Three Months Ended     Nine Months Ended  
    March 31, 2010     March 31, 2010  
    (in thousands)  
Research and development — as reported
  $ 6,269     $ 6,955  
Research and development — as adjusted
  $ 6,899     $ 8,623  
Selling, general and administrative — as reported
  $ 7,638     $ 18,897  
Selling, general and administrative — as adjusted
  $ 7,008     $ 17,229  
Recently Issued Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS 168”)”. SFAS 168 represents the last numbered standard issued by the FASB under the old (pre-codification) numbering system, and amends the GAAP hierarchy. On July 1, 2009, the FASB launched its new codification (i.e. the FASB Accounting Standards Codification — “ASC”). The codification supersedes existing GAAP for nongovernmental entities.
In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13 provides amendments to the criteria in Subtopic 605-24 for separating consideration in multiple-deliverable revenue arrangements. It establishes a hierarchy of selling prices to determine the selling price of each specific deliverable which includes vendor-specific objective evidence (if available), third-party evidence (if vendor-specific evidence is not available) or estimated selling price if neither of the first two are available. ASU 2009-13 also eliminates the residual method for allocating revenue between the elements of an arrangement and requires that arrangement consideration be allocated at the inception of the arrangement. Finally, ASU 2009-13 expands the disclosure requirements regarding a vendor’s multiple-deliverable revenue arrangements. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company adopted ASU 2009-13 on July 1, 2010 and its adoption did not have a material impact on its consolidated financial statements.

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” which amends ASC Topic 820 (“ASU 2010-06”). ASU 2010-06 amends the ASC to require disclosure of transfers into and out of Level 1 and Level 2 fair value measurements, and also requires more detailed disclosure about the activity within Level 3 fair value measurements. The changes to the ASC as a result of this update are effective for annual and interim reporting periods beginning after December 15, 2009 except for requirements related to Level 3 disclosures, which are effective for annual and interim periods beginning after December 15, 2010. The Company adopted ASU 2010-06 on January 1, 2011 and its adoption did not have a material impact on its consolidated financial statements.
In March 2010, the FASB issued ASU 2010-17, “Milestone Method of Revenue Recognition, a consensus of the FASB Emerging Issues Task Force (Issue No. 08-9)” (“ASU 2010-17”). ASU 2010-17 provides guidance about the criteria that must be met to use the milestone method of revenue recognition. This ASU is effective for milestones achieved in fiscal years and interim periods within those years, beginning after June 15, 2010. The Company adopted ASU 2010-17 on July 1, 2010 and its adoption did not have a material impact on its consolidated financial statements.
4. Equity Transactions and Share-Based Compensation
In December 2010, the Company issued 7,048,373 shares of common stock and 2,268,934 options to purchase common stock for aggregate proceeds of A$34.1 million ($33.4 million), net of issuance costs, through an Australian private placement and a share purchase plan for the Company’s Australian and New Zealand stockholders. Of these options, 50% are exercisable at A$7.50 per share, and 50% are exercisable at A$12.00 per share. The options first become exercisable in June 2011 and will expire in December 2013.
The Company recognized share-based compensation expense related to stock options, grants of restricted stock and common stock to employees, directors and consultants of $2.2 million and $6.0 million during the three months ended March 31, 2011 and 2010, respectively and $6.6 million and $6.8 million during the nine months ended March 31, 2011 and 2010, respectively.
In January 2011, the Company granted 23,184 shares of common stock to certain employees. The Company recorded a charge to operations of $0.1 million related to the issuance of these shares.
Stock Options
The Company has granted stock options to certain employees and directors under the Employee Share Option Plan (the “Plan”). The Plan is designed to assist in the motivation and retention of employees and to recognize the importance of employees to the long-term performance and success of the Company. The Company has also granted stock options to certain consultants outside of the Plan. The majority of the options to purchase common stock vest on the anniversary of the date of grant, which ranges from one to three years. Additionally, certain stock options vest upon the closing price of the 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, 2011, and on each January 1st thereafter, through January 1, 2019, the share reserve will automatically adjust so that it will equal 12.5% of the weighted average number of shares of common stock outstanding reduced by the sum of any shares of common stock issued under the Stock Incentive Plan and any shares of common stock subject to outstanding awards under the Stock Incentive Plan.
In January 2010, the Company issued 1,000,000 options to purchase common stock to a consultant under the Stock Incentive Plan in consideration for various services to be performed for the Company. The options to purchase common stock are exercisable at A$6.33 per share and vest upon the trading price of the 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, 2011 were valued at $2.73 per option, which is being expensed ratably over the vesting period of each tranche, which ranges from 1.2 years to 2.0 years. The options will be re-valued on a quarterly basis and marked to market until exercised.

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
In December 2010, the Company issued 375,000 warrants to Keystone Redevelopment Group, LLC (“Keystone’) and 225,000 warrants to L2 Architecture (“L2”) outside of both the Plan and the Stock Incentive Plan. The warrants issued to Keystone were in partial consideration for managing the development of the Company’s new headquarters and manufacturing facility and the warrants issued to L2 were in partial consideration for the custom design of the facility. The warrants issued to both Keystone and L2 are exercisable at $5.30 per warrant vested immediately upon issuance and were valued at $2.70 per warrant. The aggregate fair value of the warrants of $1.6 million has been capitalized and included as a component of the cost of the building.
In December 2010, the Company issued 2,268,934 options to purchase common stock outside of both the Plan and the Stock Incentive Plan in connection with the Company’s private placement as discussed above.
In February 2011, the Company issued 300,000 options to purchase common stock to its Chief Operating Officer under the Stock Incentive Plan. The options are exercisable at $4.85 per share and vest in eight equal installments based upon the achievement of operational and product milestones as determined by the compensation committee of the board of directors. The weighted average grant date fair value of the options was $2.31 per share and the fair value of the options is being expensed on a straight-line basis over a weighted average estimated service period of 1.2 years.
During the nine months ended March 31, 2011, the Company granted 893,517 additional options to purchase common stock to certain employees and directors under the Stock Incentive Plan. The weighted average exercise price of the options was $5.82 per share. The majority of the options vest over a period of three years, with the exception of 60,000 options, which vest upon meeting certain performance targets, as defined in the agreement. The weighted average grant date fair value of the options was $2.74 per share.
The following is a summary of activity related to stock options held by employees and board members during the nine months ended March 31, 2011:
                                 
                    Weighted        
                    Average        
            Weighted     Remaining        
    Number of     Average     Contractual     Aggregate Intrinsic  
    Options     Exercise Price     Life (in years)     Value  
                      (in thousands)  
Outstanding as of July 1, 2010
    4,058,701     $ 3.64                  
Granted
    1,193,517       5.58                  
Exercised
    (506,364 )     2.07                  
Cancelled
    (263,740 )     3.73                  
 
                           
Outstanding as of March 31, 2011
    4,482,114     $ 4.33       4.0     $ 6,894  
 
                       
Exercisable as of March 31, 2011
    1,583,335     $ 2.47       2.2     $ 4,775  
 
                       
The following is a summary of activity related to stock options and warrants held by non-employees during the nine months ended March 31, 2011:
                                 
                    Weighted        
                    Average        
            Weighted     Remaining        
    Number of     Average     Contractual     Aggregate Intrinsic  
    Options     Exercise Price     Life (in years)     Value  
                      (in thousands)  
Outstanding as of July 1, 2010
    6,355,642     $ 6.95                  
Granted
    2,868,934       9.06                  
Exercised
    (1,030,574 )     2.04                  
Cancelled
                           
 
                           
Outstanding as of March 31, 2011
    8,194,002     $ 8.31       2.4     $ 2,563  
 
                       
Exercisable as of March 31, 2011
    4,925,068     $ 7.87       2.0     $ 2,563  
 
                       
The aggregate intrinsic value is defined as the difference between the market value of the Company’s common stock as of the end of the period and the exercise price of the in-the-money stock options. The total intrinsic value of stock options exercised during the three months ended March 31, 2011 was $0.1 million. The total intrinsic value of stock options exercised during the nine months ended March 31, 2011 and 2010 was $5.5 million and $4.6 million, respectively. Of the 6,167,713 non-vested options, 1,000,000 are held by a consultant.

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
The Company used the following weighted average assumptions in calculating the fair value of options and warrants granted during the nine months ended March 31, 2011 (the period subsequent to the Company’s redomiciliation), the period from January 27, 2010 to March 31, 2010 (the period subsequent to the Company’s redomiciliation) and the period from July 1, 2010 to January 26, 2010 (the period prior to the Company’s redomiciliation):
                         
    Nine Months Ended     Period From January 27, 2009 to     Period From July 1, 2009 to  
    March 31, 2011     March 31, 2010     January 26, 2010  
Number of stock options and warrants granted
    1,793,517       904,000       1,383,333  
Expected dividend yield
    0 %     0 %     0 %
Risk-free interest rate
    1.72 %     2.43 %     4.68 %
Expected volatility
    59 %     60 %     77 %
Expected life (in years)
    4.8       3.99       4.38  
The assumptions noted above for the nine months ended March 31, 2011 do not include amounts related to the options issued in the December 2010 private placement as discussed above. The assumptions noted above for the period from July 1, 2009 to January 26, 2010 do not include amounts related to the 3,643,429 options issued in the Company’s October 2009 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.
Prior to the Company’s redomiciliation, the fair value of each stock option was estimated at the grant date using the Black-Scholes option pricing model, with the exception of grants subject to market conditions which were valued based on a Barrier option pricing model. The Company has not historically paid dividends to its shareholders and, as a result, assumed a dividend yield of 0%. The risk free interest rate is based upon the rates of Australian bonds with a term equal to the expected term of the option. The expected volatility is based upon the historical share price of the Company’s common stock on the Australian Securities Exchange. The expected term of the stock options to purchase common stock is based upon the outstanding contractual term of the stock option on the date of grant.
Restricted Stock
The Company has granted shares of restricted stock to certain employees and consultants under the Stock Incentive Plan. During the period prior to vesting, the holder of the non-vested restricted stock will have the right to vote and the right to receive all dividends and other distributions declared. All non-vested shares of restricted stock are reflected as outstanding; however, they have been excluded from the calculation of basic earnings per share.
For employees, the fair value of restricted stock is measured on the date of grant using the price of the Company’s common stock on that date. Share-based compensation expense for restricted stock issued to employees is recognized on a straight-line basis over the requisite service period, which is generally the longest vesting period. For restricted stock granted to consultants, the fair value of the awards will be re-valued on a quarterly basis and marked to market until vested. Share-based compensation expense for restricted stock issued to consultants is recognized ratably over each vesting tranche.
In February 2011, the Company issued 120,000 shares of restricted stock to its Chief Operating Officer under the Stock Incentive Plan. A total of 80,000 shares of the restricted stock vest on certain anniversaries from the date of grant, ranging from one to three years and a total of 40,000 shares of restricted stock vest upon the achievement of certain performance conditions, as defined in the agreement. The grant date fair value of the restricted shares was $4.85 per share.

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
During the nine months ended March 31, 2011, the Company issued 100,000 additional shares of restricted stock to certain employees. The shares of restricted stock vest on certain anniversaries from the date of grant, ranging from one to three years. The weighted average grant date fair value of the restricted shares was $5.67 per share.
As of March 31, 2011, 2,038,000 shares of restricted stock remain unvested.
5. Property, Plant and Equipment, net
Property, plant and equipment consist of the following:
                 
    March 31, 2011     June 30, 2010  
    (in thousands)  
Building
  $ 31,272     $  
Machinery and equipment
    15,012       10,848  
Computer software
    2,457       528  
Furniture and fixtures
    318       737  
Construction in progress
    7,435       18,560  
Land
    2,036       2,036  
Leasehold improvements
          1,026  
 
           
 
    58,530       33,735  
Less: accumulated depreciation and amortization
    (4,968 )     (3,763 )
 
           
Property, plant and equipment, net
  $ 53,562     $ 29,972  
 
           
Construction in progress as of March 31, 2011 consisted primarily of amounts incurred in connection with the machinery related to the lines for the Unifill syringe. Construction in progress as of June 30, 2010 consisted primarily of amounts incurred in connection with the construction of the Company’s new manufacturing facility and the machinery related to the lines for the Unifill syringe.
6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill during the nine months ended March 31, 2011 are as follows:
         
    (in thousands)  
Balance as of July 1, 2010
  $ 10,792  
Foreign currency translation
    2,124  
 
     
Balance as of March 31, 2011
  $ 12,916  
 
     
Intangible assets consist of patents acquired in a business acquisition of $80,000. Related accumulated amortization as of March 31, 2011 and June 30, 2010 was $37,000 and $40,000 respectively, and future amortization expense is scheduled to be $5,000 annually.
7. Long-Term Debt
Long-term debt consists of the following:
                 
    March 31, 2011     June 30, 2010  
    (in thousands)  
Mortgage loans
  $ 16,774     $  
Bank term loans
    2,168       2,393  
Commonwealth of Pennsylvania financing authority loan
    2,239        
Commonwealth of Pennsylvania assisted machinery loans
    260       332  
Other
    218       16  
 
           
 
    21,659       2,741  
Less: current portion of long-term debt
    2,297       1,648  
 
           
Total long-term debt
  $ 19,362     $ 1,093  
 
           

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Mortgage Loans
In October 2010, the Company entered into a loan agreement with Metro Bank (“Metro”), pursuant to which Metro agreed to provide the Company with two notes in the amounts of $14.25 million and $3.75 million. The proceeds received have been used to finance construction of the Company’s new corporate headquarters and manufacturing facility in York, Pennsylvania, including the repayment of its $6.9 million bridge construction loan with Univest. Under the loan agreement, the Company may borrow funds based upon the percentage of construction completed on the facility.
The $14.25 million term note matures 20 years from completion of construction of the Company’s new corporate headquarters and manufacturing facility and the $3.75 million term note matures on October 20, 2020. During construction, the Company will pay only interest on both term notes at the Prime Rate plus 1.50% per annum, with a floor of 4.50% per annum. For a period of five years subsequent to construction, the Company will pay principal and interest on both term notes, with interest at a fixed rate based on the 5 year Treasury-bill plus 300 basis points per annum, with a floor of 6.0% per annum. Commencing five years subsequent to construction through the maturity dates for each term note, the Company will pay principal and interest on both term notes, with interest at a rate to be negotiated by the parties, or if no rate is negotiated, based upon the Prime Rate plus 1.0% per annum, with a floor not to exceed 250 basis points over the Prime Rate. The Company will also pay one final payment of principal and interest upon the maturity of each term note.
The loan agreement contains certain customary covenants, including the maintenance of a Debt Service Reserve Account in the amount of $2.4 million, classified as restricted cash on the consolidated balance sheet, which will remain in place until the Company and Metro agree on the financial covenants. The Company may prepay the loan, but will incur a prepayment penalty of 2.0% during the first three years. The U.S. Department of Agriculture has guaranteed $10.0 million of the loan.
As of March 31, 2011, $13.02 million was outstanding under the $14.25 million note and the Company was fully drawn on the $3.75 million note.
Bank Term Loans
Bank term loans consist of three term loans payable. The loans bear interest at a rate of prime (3.25% as of March 31, 2011) plus 1.50%. (4.75% as of March 31, 2011) per annum and mature on dates ranging from August 2011 through August 2021. The borrowings under the bank term loans are collateralized by the Company’s accounts receivable, inventories and certain machinery and equipment. In February 2011, the bank term loan agreements were amended so that the covenants are consistent with those under the Company’s mortgage loans as discussed above. Due to the previous violation of the bank term loan covenants, the $1.2 million long-term portion outstanding as of March, 2011 under these bank term loans is classified in the current portion of long-term debt.
Commonwealth of Pennsylvania Financing Authority Loan
In October 2009, the Company accepted a $5.45 million offer of assistance from the Commonwealth of Pennsylvania which included up to $2.25 million in financing for land and the construction of its new manufacturing facility. In December 2010, Unilife Cross Farm LLC, a subsidiary of the Company (“Cross Farm”), received the $2.25 million loan which bears interest at a rate of 5.0% per annum, matures in January 2021 and is secured by a third mortgage on its new facility. In connection with the loan agreement, Cross Farm entered into an intercreditor agreement by which the Commonwealth of Pennsylvania agreed that it would not exercise its rights in the event of a default by Cross Farm without the consent of Metro, who holds the first and second mortgages on its new facility.
Commonwealth of Pennsylvania Assisted Machinery Loans
The Company has qualified for two Commonwealth of Pennsylvania assisted loans for the purchase of specific machinery and equipment. These loans bear interest at rates ranging from 2.75% to 3.25% per annum and mature on dates ranging from July 2011 through July 2013. The borrowings under these loans are collateralized by the related equipment.

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
8. Loss Per Share
The Company’s net loss per share is as follows:
                                 
    Three Months Ended March 31,     Nine Months Ended March 31,  
    2011     2010     2011     2010  
    (in thousands, except share and per share data)  
Numerator
                               
Net loss
  $ (12,533 )   $ (12,064 )   $ (30,137 )   $ (20,043 )
Denominator
                               
Weighted average number of shares used to compute basic loss per share
    61,504,793       52,497,400       56,593,944       44,882,882  
Effect of dilutive options to purchase common stock
                       
 
                       
Weighted average number of shares used to compute diluted loss per share
    61,504,793       52,497,400       56,593,944       44,882,882  
Basic and diluted loss per share
  $ (0.20 )   $ (0.23 )   $ (0.53 )   $ (0.45 )
 
                       
Due to the Company’s net losses, unvested shares of restricted stock (participating securities) totaling 1,987,333 and 757,288 were excluded from the calculation of basic and diluted loss per share during the three months ended March 31, 2011 and 2010, respectively and unvested shares of restricted stock totaling 1,921,763 and 252,429 were excluded from the calculation of basic and diluted loss per share during the nine months ended March 31, 2011 and 2010, respectively.
In addition, stock options (non-participating securities) totaling 12,542,042 and 9,904,732 during the three months ended March 31, 2011 and 2010, respectively, were excluded from the calculation of diluted loss per share and stock options totaling 10,805,392 and 7,315,529 during the nine months ended March 31, 2011 and 2010, respectively, were excluded from the calculation of diluted loss per share, as their effect would have been anti-dilutive. Certain of these stock options were excluded solely due to the Company’s net loss position. Had the Company reported net income during the three months ended March 31, 2011 and 2010, these shares would have had an effect of 1,576,992 and 2,580,716 diluted shares, respectively, for purposes of calculating diluted loss per share. Had the Company reported net income during the nine months ended March 31, 2011 and 2010, these shares would have had an effect of 1,784,345 and 2,296,046 diluted shares, respectively, for purposes of calculating diluted loss per share.
9. Contingencies
From time to time, the Company is involved in various legal proceedings, claims, suits and complaints arising out of the normal course of business. Based on the facts currently available to the Company, management believes that these claims, suits and complaints are adequately provided for, covered by insurance, without merit or not probable that an unfavorable outcome will result.
10. Business Alliances
sanofi-aventis
The Company signed an exclusive licensing agreement and an industrialization agreement with sanofi-aventis, a multinational pharmaceutical company, between June 2008 and July 2009. Under the terms of these agreements, sanofi-aventis has agreed to pay the Company an aggregate of approximately $36.4 million in exclusivity fees and industrialization milestone payments for the exclusive right to negotiate the purchase of the Unifill ready-to-fill (prefilled) syringe (Unifill syringe or product).
Pursuant to the exclusive licensing agreement, sanofi-aventis has paid the Company a 10.0 million euro ($13.0 million) up front non-refundable one-time fee. During the year ended June 30, 2009, the Company recognized $2.5 million of this up-front payment as revenue and deferred $10.6 million, which is being recognized on a straight-line basis over the remaining term of the agreement.
Pursuant to the industrialization agreement, sanofi-aventis has agreed to pay the Company up to 17.0 million euros ($23.4 million) in milestone-based payments to fund the completion of the Company’s industrialization program for the Unifill syringe. As of March 31, 2011 there is one remaining 1.0 million euro milestone payment to be recognized under the industrialization agreement, which requires the Company to produce commercially viable units of the Unifill syringe.
This exclusive right for sanofi-aventis to negotiate for the purchase of the Unifill syringe is limited to the therapeutic drug classes of anti-thrombotic agents, vaccines and four confidential sub-classes until June 30, 2014 (exclusivity list). The Company is able to negotiate with other pharmaceutical companies seeking to utilize the Unifill syringe with drugs targeted for use in therapeutic drug classes outside of those retained by sanofi-aventis under its exclusivity list. Upon mutual agreement by both parties, sanofi-aventis may add additional therapeutic sub-classes to the exclusivity list for the Unifill syringe provided the Company has not previously signed exclusive terms for the product to a third party. The Company is not obligated to sell more than 30% of its annual production capacity for the Unifill syringe to sanofi-aventis without written notification up to two years in advance.

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Stason Pharmaceuticals
In March 2010, the Company signed an exclusive five year agreement with Stason Pharmaceuticals; a U.S. based pharmaceutical company to market its Unitract 1mL syringe in Japan, China and Taiwan. Under the agreement, Stason Pharmaceuticals is required to purchase a minimum of 1.0 million units of the Unitract 1 mL syringe per year during the term of the contract.
11. Financial Instruments
The Company does not hold or issue financial instruments for trading purposes. The estimated fair values of the Company’s financial instruments are as follows:
                                 
    March 31, 2011     June 30, 2010  
    Carrying     Estimated     Carrying     Estimated  
    Amount     Fair Value     Amount     Fair Value  
    (in thousands)  
Assets:
                               
Cash equivalents — certificates of deposit
  $ 1,000     $ 1,000     $ 18,629     $ 18,629  
 
                       

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
The carrying amount of the Company’s cash equivalents, which includes certificates of deposit, accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short term maturities of these items. The estimated fair value of the Company’s debt approximates its carrying value based upon the rates that the Company would currently be able to receive for similar instruments of comparable maturity.
The Company categorizes its assets and liabilities measured at fair value into a fair value hierarchy that prioritizes the inputs used in pricing the asset or liability. The three levels of the fair value hierarchy are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The levels in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
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     Significant     Significant        
    Markets for     Other     Unobservable     Total  
    Identical Assets     Observable Inputs     Inputs     Fair Value  
    (Level 1)     (Level 2)     (Level 3)     Measurements  
    (in thousands)  
Cash equivalents — certificates of deposit (March 31, 2011)
  $     $ 1,000     $     $ 1,000  
 
                       
Cash equivalents — certificates of deposit (June 30, 2010)
  $     $ 18,629     $     $ 18,629  
 
                       

 

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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.
Redomiciliation
On January 27, 2010, Unilife Medical Solutions Limited, an Australian corporation (“UMSL”), completed a redomiciliation from Australia to the State of Delaware pursuant to which stockholders and option holders of UMSL exchanged their interests in UMSL for equivalent interests in Unilife Corporation, a Delaware corporation (“Unilife”) and Unilife became the parent company of UMSL and its subsidiaries. The redomiciliation was conducted by way of schemes of arrangement under Australian law. The issuance of Unilife common stock and stock options under the schemes of arrangement was exempt from registration under Section 3(a)(10) of the Securities Act of 1933, as amended. The redomiciliation was approved by the Australian Federal Court, and approved by UMSL shareholders and option holders.
In connection with the redomiciliation, holders of UMSL ordinary shares or share options received one share of Unilife common stock or an option to purchase one share of Unilife common stock, for every six UMSL ordinary shares or share options, respectively, held by such holders, unless the holder elected to receive in lieu of Unilife common stock, Chess Depositary Interests of Unilife, or CDIs (each representing one-sixth of one share of Unilife common stock), in which case such holder received one CDI for every UMSL ordinary share. All share and per share amounts in this Form 10-Q have been restated to reflect the one for six share recapitalization effected in connection with the redomiciliation.
On February 16, 2010, Unilife’s common stock began trading on the Nasdaq Global Market under the symbol “UNIS.”
Overview
We are a U.S.-based medical device company focused on the design, development, manufacture and supply of a proprietary range of retractable syringes. Primary target customers for our products include pharmaceutical manufacturers and suppliers of medical equipment to healthcare facilities and distributors to patients who self-administer prescription medication. All of our syringes incorporate automatic and fully-integrated safety features which are designed to protect those at risk of needlestick injuries and other unsafe injection practices.
Our main product is the Unifill ready-to-fill syringe, which is designed to be supplied to pharmaceutical manufacturers in a form that is ready for filling with their injectable drugs and vaccines. We have a strategic partnership with sanofi-aventis, a large global pharmaceutical company, pursuant to which sanofi-aventis has paid us a 10.0 million euro exclusivity fee and has paid us 16.0 million euros and committed to pay us up to an additional 1.0 million euros to fund our industrialization program for the Unifill syringe. We are also in discussions with other pharmaceutical companies that are seeking to obtain access to the Unifill syringe.

 

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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.
Results of Operations
The following table summarizes our results of operations for the three months ended March 31, 2011 and 2010 and the nine months ended March 31, 2011 and 2010:
                                 
    Three Months Ended     Nine Months Ended  
    March 31,     March 31,  
    2011     2010     2011     2010  
    (in thousands, except per share data)  
Revenues:
                               
Industrialization fees
  $     $ 1,250     $ 1,350     $ 5,082  
Licensing fees
    642       576       1,849       2,006  
Product sales and other
    8       591       2,756       1,682  
 
                       
Total revenues
    650       2,417       5,955       8,770  
Cost of product sales
    450       569       2,449       1,835  
 
                       
Gross profit
    200       1,848       3,506       6,935  
Operating expenses:
                               
Research and development
    2,723       6,899       6,941       8,623  
Selling, general and administrative
    9,117       7,008       24,386       17,229  
Depreciation and amortization
    827       390       2,492       1,727  
 
                       
Total operating expenses
    12,667       14,297       33,819       27,579  
 
                       
Operating loss
    (12,467 )     (12,449 )     (30,313 )     (20,644 )
Interest expense
    177       30       241       91  
Interest income
    (128 )     (450 )     (332 )     (707 )
Other expense (income), net
    17       35       (85 )     15  
 
                       
Net loss
  $ (12,533 )   $ (12,064 )   $ (30,137 )   $ (20,043 )
 
                       
Loss per share:
                               
Basic and diluted loss per share
  $ (0.20 )   $ (0.23 )   $ (0.53 )   $ (0.45 )
 
                       
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Revenues. Revenues decreased by $1.8 million or 73%. During the three months ended March 31, 2011, we did not recognize any revenue under our industrialization agreement with sanofi-aventis. As of March 31, 2011, there is one remaining milestone payment to be recognized, the recognition of which is dependent upon the production of commercially viable units of our Unifill syringe. Revenues from our industrialization agreement with sanofi-aventis were $1.3 million during the three months ended March 31, 2010. Revenues from our exclusive licensing agreement with sanofi-aventis were $0.6 million during both the three months ended March 31, 2011 and 2010. We have recognized and will continue to recognize revenue from the exclusive licensing agreement on a straight-line basis over the remaining term of the agreement. Since these revenues are based in euros, fluctuations in the amount of revenue recognized will result from fluctuations in foreign currency translation rates. Revenues from product sales of our contract manufacturing business decreased by $0.6 million, as we discontinued our contract manufacturing activities in December 2010 in order to focus our efforts on the Unifill syringe.

 

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Cost of product sales. Our cost of product sales during the three months ended March 31, 2011 consist primarily of amounts incurred related to the write-off of obsolete inventory.
Research and development expenses. Research and development expenses decreased by $4.2 million. During the three months ended March 31, 2010, we incurred a charge of $4.3 million in connection with the issuance of 833,333 fully vested shares of common stock to certain employees in consideration of their transfer to us of certain intellectual property rights.
Selling, general and administrative expenses. Selling, general and administrative expenses increased by $2.1 million or 30%. During the three months ended March 31, 2011, we recorded $2.2 million of share-based compensation expense, an increase of $0.5 million compared to the same period last year. Our share-based compensation expense during the three months ended March 31, 2011 relates primarily to restricted stock and stock options issued to employees, directors and consultants under our 2009 Stock Incentive Plan. Additionally, during fiscal 2010, and continuing into fiscal 2011, we increased the workforce at our York, Pennsylvania manufacturing facility, and as a result, we incurred payroll expenses and recruiting fees during the three months ended March 31, 2011 of $3.5 million, an increase of $1.5 million compared to the same period last year. These amounts were partially offset by a decrease of $0.6 million in legal and consulting fees due to significant costs incurred during the three months ended March 31, 2010 in connection with our redomiciliation to the United States.
Depreciation and amortization expense. Depreciation and amortization expense increased by $0.4 million or 112%, primarily as a result of the completion of construction of our new headquarters and manufacturing facility. We expect our depreciation and amortization expense to increase in the future as a result of our anticipated fourth quarter purchases of machinery for the Unifill syringe.
Interest expense. Interest expense was $0.2 million and $30,000 during the three months ended March 31, 2011 and 2010, respectively. This increase was attributable to interest expense incurred related to our $18.0 million in debt financing obtained in October 2010 for the construction of our new headquarters and manufacturing facility.
Interest income. Interest income decreased by $0.3 million, primarily as a result of fluctuations in interest rates.
Net loss and loss per share. Net loss during the three months ended March 31, 2011 and 2010 was $12.5 million and $12.1 million, respectively. Basic and diluted loss per share was $0.20 and $0.23, respectively, on weighted average shares outstanding of 61,504,793 and 52,497,400, respectively. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with our December 2010 equity financing.
Nine Months Ended March 31, 2011 Compared to Nine Months Ended March 31, 2010
Revenues. Revenues decreased by $2.8 million or 32%. Revenues from our industrialization agreement with sanofi-aventis decreased from $5.1 million to $1.4 million due to the nature and timing of milestones achieved during the nine months ended March 31, 2011. As of March 31, 2011, there is one remaining milestone payment to be recognized, the recognition of which is dependent upon the production of commercially viable units of our Unifill syringe. Revenues from our exclusive licensing agreement with sanofi-aventis decreased from $2.0 million to $1.8 million. We have recognized and will continue to recognize revenue from the exclusive licensing agreement on a straight-line basis over the remaining term of the agreement. Since these revenues are based in euros, the $0.2 million decrease resulted from fluctuations in foreign currency translation rates. Revenues from product sales of our contract manufacturing business increased from $1.7 million to $2.8 million, primarily as a result of increased sales to B. Braun, our most significant contract manufacturing customer during the first and second quarters of fiscal 2011. We discontinued contract manufacturing activities in December 2010 in order to focus our efforts on the Unifill syringe.
Cost of product sales. Cost of product sales increased by $0.6 million, or 33%, which was attributable to a higher level of product sales under our contract manufacturing sales activity. Our cost of product sales during the nine months ended March 31, 2011 include amounts incurred related to the write-off of obsolete inventory.
Research and development expenses. Research and development expenses decreased by $1.7 million. During the nine months ended March 31, 2010, we incurred a charge of $4.3 million in connection with the issuance of 833,333 fully vested shares of common stock to certain employees in consideration of their transfer to us of certain intellectual property rights. This decrease was partially offset by an increase in expenditures incurred to finalize the product specifications of our Unifill syringe.

 

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Selling, general and administrative expenses. Selling, general and administrative expenses increased by $7.2 million or 42%. During the nine months ended March 31, 2011, we recorded $6.6 million of share-based compensation expense, an increase of $4.1 million compared to the same period last year. Our share-based compensation expense during the nine months ended March 31, 2011 relates primarily to restricted stock and stock options issued to employees, directors and consultants under our 2009 Stock Incentive Plan. Additionally, during fiscal 2010 and continuing into fiscal 2011, we increased the workforce at our York, Pennsylvania manufacturing facility, and as a result, we incurred payroll expenses and recruiting fees during the nine months ended March 31, 2011 of $8.8 million, an increase of $3.5 million compared to the same period last year. These amounts were partially offset by a decrease of $2.4 million in legal and consulting fees due to significant costs incurred during the nine months ended March 31, 2010 in connection with our redomiciliation to the United States.
Depreciation and amortization expense. Depreciation and amortization expense increased by $0.8 million or 44% which was attributable to $4.0 million of machinery placed into service during October 2009 relating to our 1mL syringe and the completion of construction of our new headquarters and manufacturing facility. We expect our depreciation and amortization expense to increase in the future as a result of our anticipated fourth quarter purchases of machinery for the Unifill syringe.
Interest expense. Interest expense was $0.2 million and $91,000 during the nine months ended March 31, 2011 and 2010, respectively. This increase was attributable to interest expense incurred related to our $18.0 million in debt financing obtained in October 2010 for the construction of our new headquarters and manufacturing facility.
Interest income. Interest income decreased by $0.4 million, primarily as a result of fluctuations in interest rates.
Net loss and loss per share. Net loss during the nine months ended March 31, 2011 and 2010 was $30.1 million and $20.0 million, respectively. Basic and diluted loss per share was $0.53 and $0.45, respectively, on weighted average shares outstanding of 56,593,944 and 44,882,882, respectively. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with both our October 2009 and December 2010 equity financings.
Liquidity and Capital Resources
To date, we have funded our operations primarily from a combination of equity issuances, borrowings under our bank term loans and payments from sanofi-aventis under our exclusive licensing and industrialization agreements. As of March 31, 2011, cash and cash equivalents were $27.8 million, restricted cash was $2.4 million and our long-term debt was $21.7 million. The $2.4 million of restricted cash relates to amounts that must remain in cash deposits under our loan agreement with Metro. As of June 30, 2010, cash and cash equivalents were $20.8 million and our long-term debt was $2.7 million. We expect to receive $3.2 million in assistance from the Commonwealth of Pennsylvania during fiscal 2012. Additionally, we expect to receive 1.0 million euros of additional milestone-based payments from sanofi-aventis under the industrialization agreement during the first quarter of fiscal 2012.
During October 2010, we secured $18.0 million of external financing from Metro for the construction of our new manufacturing facility. We used $6.9 million of the proceeds to repay amounts borrowed in August 2010 under our credit agreement with Univest.
During December 2010, we received $2.25 million from the Commonwealth of Pennsylvania in low-interest financing for land and the construction of our new corporate headquarters and manufacturing facility.
During December 2010 we raised $33.4 million, net of issuance costs, through a private placement and share purchase plan for our Australian and New Zealand stockholders.
We believe that our cash on hand will be sufficient to sustain operations through the end of the second quarter of fiscal 2012.
Our recurring losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. We anticipate incurring additional losses until such time that we can generate significant sales and other potential sources of revenue from our propriety range of retractable syringes.

 

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The following table summarizes our cash flows during the nine months ended March 31, 2011 and 2010:
                 
    Nine Months Ended March 31,  
    2011     2010  
    (in thousands)  
Net cash provided by (used in):
               
Operating activities
  $ (20,229 )     (8,752 )
Investing activities
    (27,086 )     (18,710 )
Financing activities
    52,653       49,056  
Net Cash Used In Operating Activities
Net cash used in operating activities during the nine months ended March 31, 2011 was $20.2 million compared $8.8 million during the nine months ended March 31, 2010. The increase in cash used in operating activities was primarily due to $9.5 million of higher net loss after adding back depreciation and amortization and share-based compensation expense and increases in accounts receivable as a result of the nature and timing of amounts due from sanofi-aventis as well as the timing of accounts payable.
Net Cash Used in Investing Activities
Net cash used in investing activities was $27.1 million during the nine months ended March 31, 2011, primarily as a result of construction costs incurred in connection with our new headquarters and manufacturing facility as well as costs incurred in connection with the purchase of machinery related to the lines for our Unifill syringe.
Net Cash Provided by Financing Activities
Net cash provided by financing activities during the nine months ended March 31, 2011 was $52.7 million compared to $49.1 million during the nine months ended March 31, 2010. During the nine months ended March 31, 2011, we received $33.4 million in connection with our December 2010 private placement and share purchase plan, as well as $3.0 million upon the exercise of stock options. Additionally, during the nine months ended March 31, 2011 we received $19.0 million in aggregate proceeds from our external financing from Metro and the Commonwealth of Pennsylvania. During the nine months ended March 31, 2010, we received $47.1 million in connection with our October 2009 private placement and share purchase plan, as well as $1.8 million upon the exercise of stock options.
Item 3.  
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in interest rates and foreign currency exchange rates. Changes in these factors could cause fluctuations in our results of operations and cash flows.
Interest Rate Risk
Our exposure to interest rate risk is limited to our cash and cash equivalents that are invested in money market funds with highly liquid short term investments and our variable interest rate term loans. We currently do not utilize derivative instruments to mitigate changes in interest rates.
Foreign Currency Exchange Rate Fluctuations
Certain of our revenues are derived from payments under our industrialization agreement received in euros while we incur most of our expenses in U.S. dollars and Australian dollars. In addition, a portion of our cash and cash equivalents and investments are held at Australian banking institutions and are denominated in Australian dollars. We are exposed to foreign currency exchange rate risks on these amounts. We currently do not utilize options or forward contracts to mitigate changes in foreign currency exchange rates. For U.S. reporting purposes, we translate all assets and liabilities of our non-U.S. entities into U.S. dollars using the exchange rate as of the end of the related period and we translate all revenues and expenses of our non-U.S. entities using the average exchange rate during the applicable period.
Item 4.  
Controls and Procedures
Disclosure Controls and Procedures
Our management with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such terms is defined in Rules 13a-15(e) under the Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

 

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Changes in Internal Control
There has not been any change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 6.  
Exhibits
The exhibits to this report are listed in the Exhibit Index below.
             
Exhibit         Included
No.     Description of Exhibit   Herewith
  31.1    
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
  X
  31.2    
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
  X
  32.1    
Section 1350 Certification
  X
  32.2    
Section 1350 Certification
  X

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  UNILIFE CORPORATION
 
 
Date: May 16, 2011  /s/ R. Richard Wieland II    
  R. Richard Wieland II   
  Chief Financial Officer   
 

 

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