10-Q 1 c23535e10vq.htm FORM 10-Q e10vq
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
(State or other jurisdiction of
incorporation or organization)
  27-1049354
(I.R.S. Employer
Identification No.)
250 Cross Farm Lane, York, Pennsylvania 17406
(Address of principal executive offices)
Telephone: (717) 384-3400
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No 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 þ 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 þ   Non-accelerated filer o   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 November 4, 2011, 64,368,703 shares of the registrant’s common stock were outstanding.
 
 

 


 

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 EX-10.1
 EX-10.2
 EX-10.3
 EX-10.4
 EX-10.5
 EX-10.6
 EX-10.7
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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PART I. FINANCIAL INFORMATION
Item 1.  
Financial Statements
UNILIFE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
                 
    September 30, 2011     June 30, 2011  
    (in thousands, except share data)  
Assets
               
Current Assets:
               
Cash and cash equivalents
  $ 17,383     $ 17,910  
Restricted cash
    2,400       2,400  
Accounts receivable
    20       13  
Inventories
    708       626  
Prepaid expenses and other current assets
    374       381  
 
           
Total current assets
    20,885       21,330  
Property, plant and equipment, net
    53,881       54,020  
Goodwill
    12,285       13,265  
Intangible assets, net
    37       42  
Other assets
    1,025       821  
 
           
Total assets
  $ 88,113     $ 89,478  
 
           
Liabilities and Stockholders’ Equity
               
Current Liabilities:
               
Accounts payable
  $ 2,286     $ 2,405  
Accrued expenses
    2,021       2,696  
Current portion of long-term debt
    5,879       2,274  
Deferred revenue
    2,501       2,706  
 
           
Total current liabilities
    12,687       10,081  
Long-term debt, less current portion
    25,431       20,413  
Deferred revenue
    4,376       5,412  
 
           
Total liabilities
    42,494       35,906  
 
           
Contingencies (Note 9)
               
StockholdersEquity:
               
Preferred stock, $0.01 par value, 50,000,000 shares authorized as of September 30, 2011; none issued or outstanding as of September 30, 2011 and June 30, 2011
           
Common stock, $0.01 par value, 250,000,000 shares authorized as of September 30, 2011; 64,300,313 and 63,924,403 shares issued, and 64,274,703 and 63,905,053 shares outstanding as of September 30, 2011 and June 30, 2011, respectively
    643       639  
Additional paid-in-capital
    171,952       169,590  
Accumulated deficit
    (130,037 )     (120,332 )
Accumulated other comprehensive income
    3,187       3,775  
Treasury stock, at cost, 25,610 and 19,350 shares as of September 30, 2011 and June 30, 2011, respectively
    (126 )     (100 )
 
           
Total stockholdersequity
    45,619       53,572  
 
           
Total liabilities and stockholdersequity
  $ 88,113     $ 89,478  
 
           
See accompanying notes to the consolidated financial statements.

 

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UNILIFE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
                 
    Three Months Ended  
    September 30,  
    2011     2010  
    (in thousands, except per share data)  
Revenues:
               
Industrialization fees
  $ 1,440     $ 1,350  
Licensing fees
    672       577  
Product sales and other
    18       1,616  
 
           
Total revenues
    2,130       3,543  
Cost of product sales
    74       1,175  
 
           
Gross profit
    2,056       2,368  
Operating expenses:
               
Research and development
    4,298       1,776  
Selling, general and administrative
    6,183       7,241  
Depreciation and amortization
    993       787  
 
           
Total operating expenses
    11,474       9,804  
 
           
Operating loss
    (9,418 )     (7,436 )
Interest expense
    283       32  
Interest income
    (30 )     (122 )
Other expense (income), net
    34       (100 )
 
           
Net loss
  $ (9,705 )   $ (7,246 )
 
           
Loss per share:
               
Basic and diluted loss per share
  $ (0.16 )   $ (0.14 )
 
           
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     Treasury        
    Shares     Amount     Capital     Deficit     Income     Stock     Total  
    (in thousands except share data)  
Balance as of July 1, 2011
    63,924,403     $ 639     $ 169,590     $ (120,332 )   $ 3,775     $ (100 )   $ 53,572  
Comprehensive loss:
                                                       
Net loss
                      (9,705 )                 (9,705 )
Foreign currency translation
                            (588 )           (588 )
 
                                                     
Comprehensive loss
                                                    (10,293 )
Issuance of options to purchase common stock
                702                         702  
Issuance of restricted stock, net of forfeitures
    90,000       1       1,197                         1,198  
Issuance of common stock upon exercise of stock options
    285,910       3       463                         466  
Purchase of treasury stock
                                  (26 )     (26 )
 
                                         
Balance as of September 30, 2011
    64,300,313     $ 643     $ 171,952     $ (130,037 )   $ 3,187     $ (126 )   $ 45,619  
 
                                         
See accompanying notes to the consolidated financial statements.

 

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UNILIFE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
                 
    Three Months Ended  
    September 30,  
    2011     2010  
    (in thousands)  
Cash flows from operating activities:
               
Net loss
  $ (9,705 )   $ (7,246 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    993       787  
Share-based compensation expense
    1,900       2,550  
Changes in assets and liabilities:
               
Accounts receivable
    (7 )     (444 )
Inventories
    (83 )     (325 )
Prepaid expenses and other current assets
    7       (38 )
Other assets
    (205 )     16  
Accounts payable
    513       (1,039 )
Accrued expenses
    (388 )     (158 )
Deferred revenue
    (672 )     (577 )
 
           
Net cash used in operating activities
    (7,647 )     (6,474 )
Cash flows from investing activities:
               
Purchases of property, plant and equipment
    (1,797 )     (7,009 )
 
           
Net cash used in investing activities
    (1,797 )     (7,009 )
Cash flows from financing activities:
               
Proceeds from the issuance of long-term debt
    9,087        
Principal payments on long-term debt and capital lease obligations
    (483 )     (101 )
Proceeds from the issuance of note payable
          6,900  
Proceeds from the exercise of options to purchase common stock
    466       1,124  
Purchase of treasury stock
    (26 )      
Increase in restricted cash
          (7,000 )
 
           
Net cash provided by financing activities
    9,044       923  
Effect of exchange rate changes on cash
    (127 )     800  
 
           
Net decrease in cash and cash equivalents
    (527 )     (11,760 )
Cash and cash equivalents at beginning of period
    17,910       20,750  
 
           
Cash and cash equivalents at end of period
  $ 17,383     $ 8,990  
 
           
Supplemental disclosure of non-cash activities
               
Purchases of property, plant and equipment in accounts payable and accrued expenses
  $ 285     $ 361  
 
           
Purchases of property, plant and equipment pursuant to capital lease agreements
  $ 19     $ 41  
 
           
See accompanying notes to the consolidated financial statements.

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Description of Business and Unaudited Financial Statements
Unilife Corporation (collectively with its consolidated subsidiaries, the “Company”) and subsidiaries is a U.S.-based developer and manufacturer of advanced drug delivery systems. The primary target customers for the Company’s products include pharmaceutical and biotechnology companies seeking to optimize drug lifecycles and generate differentiation for their brand in competitive therapeutic markets through the use of innovative devices that can improve patient care, protect healthcare workers and prevent disease. 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 three months ended September 30, 2011 and anticipates incurring additional losses until such time that it can generate sufficient sales of its proprietary range of advanced drug delivery systems. Management estimates that cash and cash equivalents of $17.4 million as of September 30, 2011 are sufficient to sustain planned operations through the third quarter of fiscal 2012.
Therefore, additional funding will be needed in fiscal 2012 by the Company 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 seek to raise additional funds through the sale of additional equity or debt securities. There can be no assurance that any such funding will be available when needed or on acceptable terms. These various factors raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Subsequent to September 30, 2011, the Company received the final $1.0 million of financing from Varilease Finance, Inc., in connection with its secured lending facility.
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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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
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:
                 
    September 30, 2011     June 30, 2011  
    (in thousands)  
Raw materials
  $ 599     $ 387  
Work in process
    109       210  
Finished goods
          29  
 
           
Total inventories
  $ 708     $ 626  
 
           
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.
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 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 from B. Braun, a customer which accounted for 10% or more of the Company’s revenue during the three months ended September 30, 2010 was $1.5 million.
Reclassifications
Certain amounts in the consolidated statements of operations for the three months ended September 30, 2010 were reclassified from selling, general and administrative expenses to research and development expenses. Management has determined that activities performed by certain employees were more closely associated with research and development activities and has reclassified those items on the accompanying consolidated statements of operations.

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
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  
    September 30, 2010  
    (in thousands)  
Research and development — as reported
  $ 1,005  
Research and development — as adjusted
  $ 1,776  
Selling, general and administrative — as reported
  $ 8,012  
Selling, general and administrative — as adjusted
  $ 7,241  
Recently Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2011-05, “Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 removes certain presentation options and requires entities to report components of net income and comprehensive income in either one continuous statement of comprehensive income or two separate but consecutive statements. There is no change to the items that are reported in other comprehensive income. ASU 2011-05 is effective for annual and interim periods beginning after December 15, 2011. Other than additional presentation of other comprehensive loss outside of the statements of stockholders’ equity and comprehensive loss, the adoption of ASU 2011-05 will not have an impact on the Company’s consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”). ASU 2011-08 allows for assessment of qualitative factors to determine if it is more likely than not that goodwill might be impaired and whether or it is necessary to perform the two-step goodwill impairment test required under current accounting standards. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not believe that the adoption of ASU 2011-08 will have a material impact on its consolidated financial statements.
4. Share-Based Compensation and Warrants
The Company recognized share-based compensation expense related to stock options and grants of restricted stock to employees, directors and consultants of $1.9 million and $2.6 million during the three months ended September 30, 2011 and 2010, respectively.
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 automatically adjusts so that it equals 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 September 30, 2011 were valued at $1.55 per option, which is being expensed ratably over the vesting period of each tranche, which ranges from 1.6 years to 2.0 years. The options are 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
During the three months ended September 30, 2011, the Company granted 270,000 options to purchase common stock to certain employees under the Stock Incentive Plan. The weighted average exercise price of the options was $4.24 per share. The majority of the options will vest upon the meeting of certain performance targets, as defined in the agreement, the achievement of which the Company considers to be probable. The weighted average grant date fair value of the options was $2.27 per share.
In April and May 2011, the Company granted 300,000 options to purchase common stock to certain employees under the Stock Incentive Plan, with a weighted average exercise price of $5.02 per share for which the performance-based vesting terms have not been mutually agreed upon between the parties. Due to the fact that material terms have not been mutually agreed upon between the grantees and the Company, the criteria for establishing a grant date under Accounting Standards Codification (“ASC”) Topic 718, “Compensation —Stock Compensation” has not been met. As a result, share-based compensation expense recorded during the three months ended September 30, 2011 does not include any amounts related to these awards.
The following is a summary of activity related to stock options held by employees and directors during the three months ended September 30, 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, 2011
    4,699,211     $ 4.37                  
Granted
    270,000       4.24                  
Exercised
    (12,000 )     1.94                  
Cancelled
    (77,967 )     5.77                  
 
                           
Outstanding as of September 30, 2011
    4,879,244     $ 4.35       4.2     $ 4,363  
 
                       
Exercisable as of September 30, 2011
    2,171,836     $ 2.56       2.1     $ 4,282  
 
                       
The following is a summary of activity related to stock options and warrants held by non-employees during the three months ended September 30, 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, 2011
    8,126,609     $ 7.96                  
Exercised
    (273,910 )     1.55                  
 
                           
Outstanding as of September 30, 2011
    7,852,699     $ 8.18       2.0     $ 709  
 
                       
Exercisable as of September 30, 2011
    6,852,699     $ 8.48       1.8     $ 709  
 
                       
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 September 30, 2011 and 2010 was $0.7 million and $2.5 million, respectively. Of the 3,707,408 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 three months ended September 30, 2011 and 2010:
                 
    Three Months Ended     Three Months Ended  
    September 30, 2011     September 30, 2010  
Number of stock options granted
    270,000       314,000  
Expected dividend yield
    0 %     0 %
Risk-free interest rate
    1.54 %     1.47 %
Expected volatility
    57 %     61 %
Expected life (in years)
    6.0       4.3  

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Subsequent to the Company’s redomiciliation, the fair value of each stock option was estimated at the grant date using the Black-Scholes option pricing model, with the exception of grants subject to market conditions, which were valued using a Monte Carlo option pricing model. The Company has not historically paid dividends to its stockholders and, as a result, assumed a dividend yield of 0%. The risk free interest rate is based upon the rates of U.S. Treasury bonds with a term equal to the expected term of the option. Due to the Company’s limited Nasdaq trading history, the expected volatility used to value options granted after January 27, 2010 is based upon a blended rate of the historical share price of the Company’s stock on the Australian Securities Exchange and the volatility of peer companies traded on U.S. exchanges operating in the same industry as the Company. The expected term of the options to purchase common stock issued to employees and directors is based upon the simplified method, which is the mid-point between the vesting date of the option and its contractual term unless a reasonable alternate term is estimated by management. The expected term of the options to purchase common stock issued to consultants is based on the contractual term of the awards.
Prior to the Company’s redomiciliation, the fair value of each stock option was estimated at the grant date using the Black-Scholes option pricing model, with the exception of grants subject to market conditions which were valued based on a Barrier option pricing model. The Company has not historically paid dividends to its shareholders and, as a result, assumed a dividend yield of 0%. The risk free interest rate is based upon the rates of Australian bonds with a term equal to the expected term of the option. The expected volatility is based upon the historical share price of the Company’s common stock on the Australian Securities Exchange. The expected term of the stock options to purchase common stock is based upon the outstanding contractual term of the stock option on the date of grant.
Restricted Stock
The Company has granted shares of restricted stock to certain employees and consultants under the Stock Incentive Plan. During the period prior to vesting, the holder of the non-vested restricted stock will have the right to vote and the right to receive all dividends and other distributions declared. All non-vested shares of restricted stock are reflected as outstanding; however, they have been excluded from the calculation of basic earnings per share.
For employees, the fair value of restricted stock is measured on the date of grant using the price of the Company’s common stock on that date. Share-based compensation expense for restricted stock issued to employees is recognized on a straight-line basis over the requisite service period, which is generally the longest vesting period. For restricted stock granted to consultants, the fair value of the awards is re-valued on a quarterly basis and marked to market until vested. Share-based compensation expense for restricted stock issued to consultants is recognized ratably over each vesting tranche.
The following is a summary of activity related to restricted stock awards during the three months ended September 30, 2011:
                 
    Number of Restricted     Weighted Average  
    Stock Awards     Grant Date Fair Value  
Unvested as of July 1, 2011
    1,957,000     $ 6.19  
Granted
    90,000       4.27  
Vested
    (20,000 )     5.28  
 
           
Unvested as of September 30, 2011
    2,027,000     $ 6.11  
 
           

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
5. Property, Plant and Equipment and Construction-in-Progress
Property, plant and equipment consist of the following:
                 
    September 30,     June 30,  
    2011     2011  
    (in thousands)  
Building
  $ 32,153     $ 31,866  
Machinery and equipment
    16,032       16,130  
Computer software
    2,457       2,457  
Furniture and fixtures
    323       323  
Construction in progress
    5,969       5,734  
Land
    2,036       2,036  
 
           
 
    58,970       58,546  
Less: accumulated depreciation and amortization
    (5,089 )     (4,526 )
 
           
Property, plant and equipment, net
  $ 53,881     $ 54,020  
 
           
Construction in progress as of September 30, 2011 and June 30, 2011 consisted primarily of amounts incurred in connection with machinery and equipment.
6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill during the three months ended September 30, 2011 are as follows:
         
    (in thousands)  
Balance as of July 1, 2011
  $ 13,265  
Foreign currency translation
    (980 )
 
     
Balance as of September 30, 2011
  $ 12,285  
 
     
Intangible assets consist of patents acquired in a business acquisition of $0.1 million. Related accumulated amortization as of both September 30, 2011 and June 30, 2011 was $0.1 million. Future amortization expense is scheduled to be $7,000 annually, excluding the impact of foreign currency exchange.
7. Long-Term Debt
Long-term debt consists of the following:
                 
    September 30, 2011     June 30, 2011  
    (in thousands)  
Mortgage loans
  $ 18,000     $ 17,940  
Secured lending facility
    8,668        
Bank term loans
    2,028       2,095  
Commonwealth of Pennsylvania financing authority loan
    2,216       2,227  
Other
    398       425  
 
           
 
    31,310       22,687  
Less: current portion of long-term debt
    5,879       2,274  
 
           
Total long-term debt
  $ 25,431     $ 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 new corporate headquarters and manufacturing facility in York, Pennsylvania, including the repayment of a $6.9 million bridge construction loan.

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
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. For a period of five years subsequent to construction, Cross Farm 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, Cross Farm 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. Cross Farm 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 Cross Farm and Metro agree on the financial covenants. The Company was in compliance with its debt covenants as of September 30, 2011. However, the Company is not certain that it will be able to maintain the Debt Service Reserve Account balance for a period of 12 months from September 30, 2011. Cross Farm may prepay the loan, but will incur a prepayment penalty of 2.0% during the first three years. The U.S. Department of Agriculture has guaranteed $10.0 million of the loan.
The loans are guaranteed by the Company and by Unilife Medical Solutions, Inc. (“USMI”). The Company and USMI pledged certain assets to secure their obligations under their respective guarantees, including a pledge by the Company of all of its membership interests in Cross Farm and 65% of its ownership interest in Unilife Medical Solutions (PTY) Ltd., a subsidiary of the Company and the parent entity of USMI.
As of September 30, 2011, Cross Farm was fully drawn on both the $14.25 million and $3.75 million notes.
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%. As of September 30, 2011 Varilease has provided $9.0 million. Subsequent to September 30, 2011, the Company received the final $1.0 million of financing from Varilease in connection with this agreement. At the end of the 24 month initial term, the Company has the option to (i) return the equipment; (ii) extend the term for 12 months followed by optional 6 month extensions terminable by either party; or (iii) repurchase the equipment for a price to be agreed upon by both lessor and lessee. The secured lending facility contains covenants and provisions for events of default customarily found in lease agreements.
The aggregate maturities related to amounts outstanding as of September 30, 2011 under this secured lending facility will be $3.7 million and $5.0 million for the twelve months ending September 30, 2012 and 2013, respectively.
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 September 30, 2011) plus 1.50%. (4.75% as of September 30, 2011) per annum and mature on dates ranging from December 2020 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, thus removing the covenants that were in violation as of June 30, 2010. Due to the previous violation of the bank term loan covenants as of June 30, 2010 and the uncertainty of being able to maintain the Debt Service Reserve Account balance for a period of 12 months from September 30, 2011, the $1.2 million long-term portion outstanding as of September 30, 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 the facility. In connection with the loan agreement, Cross Farm entered into an intercreditor agreement by which the Commonwealth of Pennsylvania agreed that it would not exercise its rights in the event of a default by Cross Farm without the consent of Metro, which holds the first and second mortgages on the facility.

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
8. Loss Per Share
The Company’s net loss per share is as follows:
                 
    Three Months Ended September 30,  
    2011     2010  
    (in thousands, except share and per share data)  
Numerator
               
Net loss
  $ (9,705 )   $ (7,246 )
Denominator
               
Weighted average number of shares used to compute basic loss per share
    62,082,396       53,190,043  
Effect of dilutive options to purchase common stock
           
 
           
Weighted average number of shares used to compute diluted loss per share
    62,082,396       53,190,043  
 
           
Basic and diluted loss per share
  $ (0.16 )   $ (0.14 )
 
           
Due to the Company’s net losses, unvested shares of restricted stock (participating securities) totaling 1,984,935 and 1,863,000 were excluded from the calculation of basic and diluted loss per share during the three months ended September 30, 2011 and 2010, respectively.
In addition, stock options (non-participating securities) totaling 9,990,013 and 9,867,246 during the three months ended September 30, 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 September 30, 2011 and 2010, these shares would have had an effect of 1,353,703 and 1,915,176 diluted shares, respectively, for purposes of calculating diluted loss per share.
9. Contingencies
From time to time, the Company is involved in various legal proceedings, claims, suits and complaints arising out of the normal course of business. Based on the facts currently available to the Company, management believes that these claims, suits and complaints are adequately provided for, covered by insurance, without merit or not probable that an unfavorable outcome will result.
10. Business Alliances
Sanofi
The Company signed an exclusive licensing agreement and an industrialization agreement with Sanofi, a multinational pharmaceutical company, between June 2008 and July 2009. Under the terms of these agreements, Sanofi has agreed to pay the Company an aggregate of approximately $36.4 million in exclusivity fees and industrialization milestone payments for the exclusive right to negotiate the purchase of the Unifill ready-to-fill (prefilled) syringe (Unifill syringe or product).
Pursuant to the exclusive licensing agreement, Sanofi has paid the Company a €10.0 million ($13.0 million) up front non-refundable one-time fee. During the year ended June 30, 2009, the Company recognized $2.5 million of this up-front payment as revenue and deferred $10.6 million, which is being recognized on a straight-line basis over the remaining term of the agreement.
Pursuant to the industrialization agreement, Sanofi has agreed to pay the Company up to €17.0 million in milestone-based payments to fund the completion of the Company’s industrialization program for the Unifill syringe. During the three months ended September 30, 2011 the Company received and recognized as revenue the final €1.0 million milestone payment under the industrialization agreement.
This exclusive right for Sanofi to negotiate for the purchase of the Unifill syringe is limited to the therapeutic drug classes of anti-thrombotic agents, vaccines and four confidential sub-classes until June 30, 2014 (exclusivity list). The Company is able to negotiate with other pharmaceutical companies seeking to utilize the Unifill syringe with drugs targeted for use in therapeutic drug classes outside of those retained by Sanofi under its exclusivity list. Upon mutual agreement by both parties, Sanofi may add additional therapeutic sub-classes to the exclusivity list for the Unifill syringe provided the Company has not previously signed exclusive terms for the product to a third party. The Company is not obligated to sell more than 30% of its annual production capacity for the Unifill syringe to Sanofi without written notification up to two years in advance.

 

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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, subject to regulatory approval of the Unitract 1 mL syringe in those markets, which is currently pending.
11. Financial Instruments
The Company does not hold or issue financial instruments for trading purposes. The estimated fair values of the Company’s financial instruments are as follows:
                                 
    September 30, 2011     June 30, 2011  
    Carrying     Estimated     Carrying     Estimated  
    Amount     Fair Value     Amount     Fair Value  
    (in thousands)  
Assets:
                               
Cash equivalents — certificates of deposit
  $ 1,001     $ 1,001     $ 1,000     $ 1,000  
 
                       
The carrying amount of the Company’s cash equivalents, which includes certificates of deposit, accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short term maturities of these items. The estimated fair value of the Company’s debt approximates its carrying value based upon the rates that the Company would currently be able to receive for similar instruments of comparable maturity.
The Company categorizes its assets and liabilities measured at fair value into a fair value hierarchy that prioritizes the inputs used in pricing the asset or liability. The three levels of the fair value hierarchy are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The levels in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
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
(September 30, 2011)
  $     $ 1,001     $     $ 1,001  
 
                       
Cash equivalents — certificates of deposit
(June 30, 2011)
  $     $ 1,000     $     $ 1,000  
 
                       

 

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Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
12. Subsequent Event
Effective October 1, 2011, the Company signed a new employment agreement with its Chief Executive Officer. The agreement provides, subject to stockholder approval, for the issuance of 1,166,000 shares of restricted stock and 750,000 options to purchase common stock under the Stock Incentive Plan. The vesting of the restricted stock is conditioned on the satisfaction of certain performance milestones. The options to purchase common stock will vest equally over a period of three years annually and will be exercisable at the NASDAQ closing price of the Company’s stock on the date of grant.

 

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Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Information
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of our Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements.
Certain statements in this Quarterly Report on Form 10-Q may constitute forward looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. These forward-looking statements are based on management’s beliefs and assumptions and on information currently available to our management. Our management believes that these forward-looking statements are reasonable as and when made. However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events and developments to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in “Item 1A. Risk Factors” in our Annual Report on Form 10-K and those described from time to time in other reports which we file with the Securities and Exchange Commission.
Overview
We are a U.S.-based developer and manufacturer of a diverse portfolio of advanced drug delivery systems. We collaborate with pharmaceutical and biotechnology companies seeking to optimize drug lifecycles and generate differentiation for their brand in competitive therapeutic markets through the use of innovative devices that can improve patient care, protect healthcare workers and prevent disease. We have developed a broad portfolio of drug delivery systems in direct response to unmet market needs for injectable drugs including macromolecule biologics.
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 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.
In addition, we manufacture our Unitract 1mL insulin syringes at our FDA-registered manufacturing facility in Pennsylvania, which are designed primarily for use in healthcare facilities and by patients who self-administer prescription medication such as insulin.
Recent Developments
Secured Lending Facility
In August 2011, we 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 our 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, we will make 24 monthly installments based upon the amount drawn. This facility has an effective interest rate of 12.85%. As of September 30, 2011 Varilease has provided $9.0 million. Subsequent to September 30, 2011, we received the final $1.0 million of financing from Varilease in connection with this agreement. At the end of the 24 month initial term, we have 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.
Compensation to Chief Executive Officer
Effective October 1, 2011, we signed a new employment agreement with our Chief Executive Officer. The agreement provides, subject to stockholder approval, for the issuance of 1,166,000 shares of restricted stock and 750,000 options to purchase common stock under the 2009 Stock Incentive Plan. The vesting of the restricted stock is conditioned on the satisfaction of certain performance milestones. The options to purchase common stock will vest equally over a period of three years annually and will be exercisable at the NASDAQ closing price of our stock on the date of grant.

 

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Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. This requires management to make certain estimates, judgments and assumptions that could affect the amounts reported in the consolidated financial statements and accompanying notes.
Our critical accounting policies and estimates are described in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” of our Annual Report on Form 10-K. There have been no changes in critical accounting policies in the current year from those described in our Annual Report on Form 10-K.
Results of Operations
The following table summarizes our results of operations for the three months ended September 30, 2011 and 2010:
                 
    Three Months Ended  
    September 30,  
    2011     2010  
    (in thousands, except per share data)  
Revenues:
               
Industrialization fees
  $ 1,440     $ 1,350  
Licensing fees
    672       577  
Product sales and other
    18       1,616  
 
           
Total revenues
    2,130       3,543  
Cost of product sales
    74       1,175  
 
           
Gross profit
    2,056       2,368  
Operating expenses:
               
Research and development
    4,298       1,776  
Selling, general and administrative
    6,183       7,241  
Depreciation and amortization
    993       787  
 
           
Total operating expenses
    11,474       9,804  
 
           
Operating loss
    (9,418 )     (7,436 )
Interest expense
    283       32  
Interest income
    (30 )     (122 )
Other expense (income), net
    34       (100 )
 
           
Net loss
  $ (9,705 )   $ (7,246 )
 
           
Loss per share:
               
Basic and diluted loss per share
  $ (0.16 )   $ (0.14 )
 
           
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
Revenues. Revenues decreased by $1.4 million or 40%. During both the three months ended September 30, 2011 and 2010, we recognized $1.4 million related to the achievement of one milestone under our industrialization agreement with Sanofi. The milestone met during the three months ended September 30, 2011 was the last remaining milestone under the agreement. Revenues from our exclusive licensing agreement with Sanofi increased from $0.6 million to $0.7 million. We have recognized and will continue to recognize revenue from the exclusive licensing agreement on a straight-line basis over the remaining term of the agreement. Since these revenues are based in euros, fluctuations in the amount of revenue recognized will result from fluctuations in foreign currency translation rates. Revenues from product sales of our contract manufacturing business decreased by $1.6 million, as we discontinued our contract manufacturing activities in December 2010 in order to focus our efforts on the Unifill syringe and other advanced drug delivery systems.
Cost of product sales. Our cost of product sales decreased by $1.1 million or 94% as a result of the associated decrease in our contract manufacturing revenue. Our cost of product sales during the three months ended September 2011 includes amounts related to the write-off of obsolete inventory.

 

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Research and development expenses. Research and development expenses increased by $2.5 million due to expenditures related to the development of additional advanced drug delivery systems.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $1.1 million or 15%. During the three months ended September 30, 2011, we recorded $1.8 million of share-based compensation expense, a decrease of $0.8 million compared to the same period last year. The decrease in share-based compensation expense was attributable to a decline in the fair value of certain non-employee options to purchase common stock which are revalued each reporting period using the Monte Carlo option pricing model. Additionally, during the three months ended September 30, 2011, our payroll expenses and recruitment fees declined by $0.4 million, primarily as a result of amounts incurred to recruit and relocate certain members of our management team during the three months ended September 30, 2010, which did not recur during the current year.
Depreciation and amortization expense. Depreciation and amortization expense increased by $0.2 million or 26%, primarily as a result of the completion of construction of our new headquarters and manufacturing facility, as well as equipment placed into service during fiscal 2011. We expect our depreciation and amortization expense to increase in the future as a result of our purchases of machinery to manufacture the Unifill syringe.
Interest expense. Interest expense increased by $0.3 million, primarily as a result of interest 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 $0.1 million, primarily as a result of fluctuations in interest rates.
Net loss and loss per share. Net loss during the three months ended September 30, 2011 and 2010 was $9.7 million and $7.2 million, respectively. Basic and diluted loss per share was $0.16 and $0.14, respectively, on weighted average shares outstanding of 62,082,396 and 53,190,043, 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.
Liquidity and Capital Resources
To date, we have funded our operations primarily from a combination of equity issuances, borrowings under our bank mortgage and term loans, an external secured financing and payments from Sanofi under our exclusive licensing and industrialization agreements. As of September 30, 2011, cash and cash equivalents were $17.4 million, restricted cash was $2.4 million and our long-term debt was $31.3 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.
During August 2011, we entered into an agreement which will provide for up to $10.0 million of secured financing from Varilease Finance Inc. (“Varilease”) for production equipment for the Unifill syringe. As of September 30, 2011 we received $9.0 million under the agreement and subsequent to September 30, 2011, have received the remaining $1.0 million.
During September 2011, we received €1.0 million from Sanofi related to the achievement of the final milestone under the industrialization agreement.
We believe that our cash and cash equivalents on hand will be sufficient to sustain planned operations through the third 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 revenue from product sales.
The following table summarizes our cash flows during the three months ended September 30, 2011 and 2010:
                 
    Three Months Ended September 30,  
    2011     2010  
    (in thousands)  
Net cash provided by (used in):
               
Operating activities
  $ (7,647 )     (6,474 )
Investing activities
    (1,797 )     (7,009 )
Financing activities
    9,044       923  

 

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Net Cash Used In Operating Activities
Net cash used in operating activities during the three months ended September 30, 2011 was $7.6 million compared $6.5 million during the three months ended September 30, 2010. The increase in net cash used in operations was primarily due to increased operating expenses leading to $2.9 million of higher net loss after adding back depreciation and amortization and share-based compensation expense.
Net Cash Used in Investing Activities
Net cash used in investing activities was $1.8 million during the three months ended September 30, 2011, primarily as a result of costs incurred in connection with the purchase of machinery and related equipment, compared to $7.0 million during the three months ended September 30, 2010, primarily resulting from construction costs incurred in connection with our new headquarters and manufacturing facility.
Net Cash Provided by Financing Activities
Net cash provided by financing activities during the three months ended September 30, 2011 was $9.0 million compared to $0.9 million during the three months ended September 30, 2010. During the three months ended September 30, 2011, we received $9.0 million in proceeds associated with our secured lending facility agreement with Varilease. During the three months ended September 30, 2010, we received $1.1 million in proceeds upon the exercise of stock options.
Contractual Obligations
The aggregate maturities related to amounts outstanding as of September 30, 2011 under our secured lending facility will be $3.7 million and $5.0 million during the twelve months ending September 30, 2012 and 2013, respectively.
Item 3.  
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in interest rates and foreign currency exchange rates. Changes in these factors could cause fluctuations in our results of operations and cash flows.
Interest Rate Risk
Our exposure to interest rate risk is limited to our cash and cash equivalents that are invested in money market funds with highly liquid short term investments and our variable interest rate term loans. We currently do not utilize derivative instruments to mitigate changes in interest rates.
Foreign Currency Exchange Rate Fluctuations
Certain of our revenues are derived from payments under our industrialization agreement received in euros while we incur most of our expenses in U.S. dollars and Australian dollars. In addition, a portion of our cash and cash equivalents and investments are held at Australian banking institutions and are denominated in Australian dollars. We are exposed to foreign currency exchange rate risks on these amounts. We currently do not utilize options or forward contracts to mitigate changes in foreign currency exchange rates. For U.S. reporting purposes, we translate all assets and liabilities of our non-U.S. entities into U.S. dollars using the exchange rate as of the end of the related period and we translate all revenues and expenses of our non-U.S. entities using the average exchange rate during the applicable period.
Item 4.  
Controls and Procedures
Disclosure Controls and Procedures
Our management with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such terms is defined in Rules 13a-15(e) under the Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

 

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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.
PART II. OTHER INFORMATION
Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information about repurchases of Unilife Corporation common stock made by us during the first quarter of fiscal year 2012.
                                 
                    Total Number     Maximum  
                    of Shares     Number of  
                    Purchased as     Shares that  
                    Part of     May Yet Be  
                    Publicly     Purchased  
    Total Number     Average Price     Announced     Under the  
    of Shares     Paid Per     Plans or     Plans or  
Date   Purchased     Share     Programs     Programs  
September 2, 2011
    6,260     $ 4.15              
The number of shares reported as purchased are attributable to shares surrendered to Unilife Corporation by employees in payment of tax obligations relating to vesting of restricted shares.
Item 6.  
Exhibits
The exhibits to this report are listed in the Exhibit Index below.
             
Exhibit         Included
No.     Description of Exhibit   Herewith
  10.1    
Amendment to Executive Employment Agreement, dated July 18, 2011 between Unilife Corporation and Alan D. Shortall
  X
  10.2    
Master Lease Agreement dated August 15, 2011 between Unilife Medical Solutions, Inc. and Varilease Finance, Inc.
  X
  10.3    
Guaranty to Varilease Finance, Inc. from Unilife Corporation, dated August 15, 2011
  X
  10.4    
Employment Agreement, effective October 1, 2011 between Unilife Corporation and Alan D. Shortall
  X
  10.5    
Letter Amendments to Employment Agreement, dated November 4, 2011 between Unilife Corporation and R. Richard Wieland
  X
  10.6    
Letter Amendments to Employment Agreement, dated November 4, 2011 between Unilife Corporation and J. Christopher Naftzger
  X
  10.7    
Letter Amendments to Employment Agreement, dated November 4, 2011 between Unilife Corporation and Mark Iampietro
  X
  31.1    
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
  X
  31.2    
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
  X
  32.1    
Section 1350 Certification
  X
  32.2    
Section 1350 Certification
  X
  101.INS    
XBRL Instance Document
  X
  101.SCH    
XBRL Taxonomy Extension Schema
  X
  101.CAL    
XBRL Taxonomy Extension Calculation Linkbase
  X
  101.LAB    
XBRL Taxonomy Extension Label Linkbase
  X
  101.PRE    
XBRL Taxonomy Extension Presentation Linkbase
  X
  101.DEF    
XBRL Taxonomy Extension Definition Linkbase
  X

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  UNILIFE CORPORATION
 
 
Date: November 9, 2011  /s/ R. Richard Wieland II    
  R. Richard Wieland II   
  Chief Financial Officer   

 

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