TMCnet News
UNILIFE CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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 Annual Report on Form 10-K. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the "Risk Factors" section of this 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. See "Cautionary Note Regarding Forward-Looking Information" at the beginning of this report. References to our fiscal year refer to the fiscal year ending June 30. Overview We are a designer, manufacturer and supplier of innovative injectable drug delivery systems that can enhance and differentiate the injectable therapies of our customers. We have a broad portfolio of proprietary product platforms, including pre-filled syringes, drug reconstitution delivery systems, auto-injectors, wearable injectors, ocular delivery systems and other novel injectable drug delivery systems. Products within each platform are highly differentiated from competitors' products with a series of innovative features designed to optimize the safe, simple and convenient administration of an injectable therapy. We sell our products directly to pharmaceutical and biotechnology companies who incorporate them into the drug-device combination product that is supplied pre-filled and ready for administration by end-users such as health-care providers or patients. Products within each of our platforms can be customized by us to address specific customer, therapy, patient and/or commercial requirements. Our growing base of customers include Sanofi, MedImmune, Novartis and Hikma. In addition to the filling, assembly and/or packaging of our product with an injectable therapy, our customers are also responsible for the regulatory approval, sale and marketing of their final drug-device combination product. In addition to product sales, we can generate revenue from customization programs, upfront fees and exclusivity or royalty payments. Key Factors Affecting Performance and Financial Condition In fiscal year 2014, we entered into several agreements with our customers and we currently have 12 active customer programs, which include customers with whom we have entered into a customization or supply agreement and customers with whom we have entered into preliminary agreements such as letters of intent. The customization, industrialization and development fees and other payments received from customers in connection with these agreements and development programs accounted for the majority of our revenue in fiscal year 2014. We also increased expenses during fiscal year 2014 as a result of the acceleration of our investments in our manufacturing capacity and increased research and development efforts, both in response to increasing demand from our customers for our products and services. Longer customer development timelines and increases in capital expenses and headcount have impacted us from a liquidity standpoint. Historically, we have funded our operations primarily from a combination of term loans, equity issuances, borrowings under our bank mortgages, and payments from various customers. In recent years we have addressed our capital needs through the use of an "At-The-Market" equity offering, pursuant to which we, from time to time, issued and sold shares of common stock having an aggregate offering price of $45.0 million, customization, industrialization and development fees received from our customers and our debt financing from an affiliate of OrbiMed Advisors, or OrbiMed, in March 2014. Revenue Our revenue is currently generated from customization, industrialization, licensing and development fees (many of which are recognized on the milestone basis of accounting). Customization, industrialization, 33-------------------------------------------------------------------------------- Table of Contents development and licensing fees accounted for substantially all of our consolidated revenue during fiscal year 2014. We expect that product sales, which historically have not had a meaningful impact on our revenue, will begin to account for an increasing portion of our revenue as we increase commercial sales to customers during fiscal year 2015. We expect our revenue to increase as we continue to deliver under our existing contracts with our customers and enter into additional agreements with new and existing customers. We also expect that our future revenue will be favorably impacted by several trends in the industry, including a shift in the focus of large pharmaceutical and biotechnology companies' product development activities to biologic therapies, an emphasis within health-care providers to patient self-administration and a growing demand for passive safety for injectable drug delivery. Operating Expenses Our operating expenses have increased as a result of the acceleration of our investments in our manufacturing capacity and increased research and development efforts, both in response to increasing demand from our customers for our products and services. We have also continued to invest in our facilities and in capital equipment in the amount of $12.1 million during fiscal year 2014. We completed a reconfiguration of our existing cleanroom manufacturing space at our York, Pennsylvania facility to accommodate new assembly lines for our Unifill and wearable injector products that will support scheduled customer demand during fiscal year 2015. We are also installing additional clean room manufacturing space within the existing footprint of our York facility that will accommodate additional assembly lines and related activities. Accordingly, we have secured pre-approval from York County Pennsylvania to construct an additional 100,000 square foot of production space at our York facility, which may be undertaken at some future date subject to commercial demand. We also invested in equipment to expand our manufacturing capacity for wearable injectors in response to accelerating customer demand as well as investing in the expansion of our manufacturing capabilities for additional product platforms across our broad portfolio of injectable drug delivery systems. During fiscal year 2014, we also increased headcount by 45 employees (consisting mostly of employees focused on research and development) and invested $34.1 million to address our research and development requirements, including employee costs, equipment, materials, tooling, prototypes and outside contract services. We increased our cross-functional research and development teams of engineers and other staff that are dedicated to servicing existing and prospective customers. The increase in research and development costs also related to the costs of products and components supplied to existing and prospective customers to support evaluation processes and user studies that are typically undertaken prior to the anticipated signing of customer agreements. Significant Developments in the Industry We believe that recently signed customer contracts and future customer contracts expected to be signed with existing and prospective customers as a result of ongoing discussions will provide significant revenue growth in relation to prior periods. Known trends in the industry that we believe will have a material favorable impact on our revenue include a shift in the focus of large pharmaceutical and biotechnology companies' product development activities to biologic therapies, an emphasis within health-care providers to patient self-administration and a growing demand for passive safety for injectable drug delivery. There has been a marked shift in the product development activities of large customers toward biologic therapies and the majority of therapies in the pipeline of large pharmaceutical and biotechnology companies are complex biologic therapies. The characteristics of many of these therapies (including, for example, large dose volumes and increased viscosity) necessitates administration by injection using innovative injectable drug delivery systems such as our products. We believe that we are well-positioned to meet what we expect to be a growing demand for innovative injectable drug delivery systems in light of the focus on biologic therapies. Concurrently with the shift toward biologic therapies is an emphasis towards patient self-administration. Patient self-administration is viewed as a growing trend in order to reduce demand pressure on the health-care system as well as reducing costs especially for treatment of chronic illnesses. Devices suitable for self-administration of injectable therapies need to be safe 34-------------------------------------------------------------------------------- Table of Contents and intuitive to use. We believe that many of our products, including prefilled syringes, drug reconstitution delivery systems, auto-injectors, and wearable injectors, are well suited for safe and intuitive patient self-administration of injectable therapies and that we will be able to meet the expected increase in demand for such products. Critical Accounting Policies and Estimates We prepare our audited consolidated financial statements in accordance with accounting principles generally accepted in the U.S., or U.S. GAAP. This requires management to make certain estimates, judgments and assumptions that could affect the amounts reported in the audited consolidated financial statements and accompanying notes. We believe there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and other significant areas that involve management's judgments, estimates and assumptions. These critical accounting policies and estimates have been discussed with our audit committee. The preparation of our audited consolidated financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these judgments, estimates and assumptions. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable at such time, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other independent sources. Actual results may ultimately differ from these estimates. While there are a number of accounting policies, methods and estimates affecting our consolidated financial statements as addressed in Note 3 to our audited consolidated financial statements, areas that are particularly significant and critical include: Revenue Recognition We recognize revenue from sales of products at the time of shipment when title passes to the customer. We recognize up front, non-refundable fees ratably over the expected life of the related agreement. Revenue from industrialization and development fees is recognized as services are rendered or upon achievement of the "at risk" milestone events, which represent the culmination of the earnings process related to such events. Milestones can include specific phases of projects such as product design, prototype availability, user tests, manufacturing proof of principle and the various steps to complete the industrialization of the product. The terms of our contracts provide for customer payments to be made to us as services are rendered or milestones are achieved. Payment terms are considered to be standard commercial terms. Revenue is recognized when each substantive milestone has been achieved and we have no future performance obligations related to the milestone. Fees for completed milestones which are dependent upon customer acceptance for non-refundable payment or, if paid, are refundable pending customer acceptance, are recognized upon customer acceptance and the termination of refund rights. We recognized $14.7 million, $2.7 million and $5.5 million of revenue during fiscal years 2014, 2013 and 2012, respectively, as follows: During the fiscal year 2014, we recognized $8.3 million in revenue related to substantive milestones that were completed during the year pursuant to customer agreements to provide customization and development services, clinical support services, collaborative research activities and testing support services. Milestones completed during the year included various customization activities, device design, devices developed for use in customer evaluation testing, compatibility testing, user studies, and verification activities. 35-------------------------------------------------------------------------------- Table of Contents During fiscal year 2014, we recognized $4.1 million in revenue related to services rendered on a time and materials basis pursuant to customer agreements to provide various customization and development services. In addition, during fiscal year 2014, we recognized the final $2.3 million of revenue from our former exclusive licensing agreement with Sanofi. We had previously recognized revenue from our former development agreement on a straight-line basis over the remaining term of the agreement. However, upon termination of the agreement, which was replaced by a long-term supply agreement with the customer, during fiscal year 2014, we recognized the remaining unamortized revenue. Since these revenues were based in euros, fluctuations in the amount of revenue recognized resulted from fluctuations in foreign currency translation rates. Goodwill Goodwill is the excess of purchase price over the fair value of net assets acquired in business acquisitions. Goodwill is subject to, at a minimum, an annual impairment assessment of its carrying value. Additional impairment assessments would be performed if events and circumstances warranted such additional assessments during the year. Goodwill impairment is deemed to exist if the net book value of our reporting unit exceeds its estimated fair value. Estimated fair value of our reporting unit is determined utilizing the value implied by our year end quoted stock price. We did not record any goodwill impairments during fiscal years 2014, 2013 or 2012. We have one reporting unit which includes our product lines, the base technology which we obtained as part of our November 2002 acquisition of Unitract Syringe Pty Limited and the manufacturing capability which we obtained in our January 2007 acquisition of Integrated BioSciences, Inc. In estimating the reporting unit's fair value for purposes of our fiscal year 2014 impairment assessment, management compared the carrying value of our reporting unit to our market capitalization as of June 30, 2014, which is our annual impairment testing date. Our market capitalization of $306.6 million, based on the quoted stock price on NASDAQ was in excess of our stockholders' equity of $6.1 million. Management also considered that market capitalization through early September 2014 continued to be in excess of the carrying value. Research and Development Expense Research and development expenses consist primarily of payroll and related personnel expenses (including share-based compensation expense), fees paid to external service providers, costs of materials, components and supplies, costs for facilities, tooling and equipment and costs related to developing prototype products and samples used for various evaluation, testing and related activities for existing and potential customers. Research and development expenses are included in operating expenses when incurred. Research and development expenses include costs related to the ongoing development and expansion of our broad portfolio of injectable drug delivery systems as well as costs incurred in relation to customization, industrialization and development agreements with our customers. These costs are not segregated from our overall research and development costs as they are not readily distinguishable from the rest of our ongoing research and development expenses. Share-Based Compensation We grant equity awards to our employees, directors, consultants and service providers. Certain employee and director awards vest over stated vesting periods and others also require achievement of specific performance or market conditions. We expense 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 and service providers 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 36-------------------------------------------------------------------------------- Table of Contents performance or market conditions. Timing of expense recognition for consultant and service provider 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. We estimate 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 the Monte Carlo option pricing model. Option pricing methods require the input of highly subjective assumptions, including the expected stock price volatility. Property, plant and equipment We evaluate the recoverability of the recorded value of long-lived assets periodically to determine if facts and circumstances exist that would indicate that the assets might be impaired or that the useful lives should be modified. As part of this valuation, we develop projections of undiscounted future cash flows of the asset group. Our projections of undiscounted cash flows include a combination of revenue from customization and development activities, capital expenses that may be necessary to support projected product sales and commercial product sales. As customization and development activities are completed commercial product sales are expected to scale-up. Expectations of future commercial product sales included in the projections used for our impairment analysis are based on customer-specific information as well as market estimates relating to the anticipated therapies being targeted for use with our products. These projections also include assumptions of future sales growth and profitability based on contracts entered into with customers as well as future contracts to be entered into based on the current discussions and negotiations with existing and prospective customers. Sales projections are based on assumptions including a transition in the market toward patient self-administration of injectable therapies as well as transitions in the market toward biologic therapies in the pharmaceutical industry development pipeline. Our future sales could also be impacted by factors such as our ability to obtain new and retain existing customers, the timing and extent of the customers' product development activities as well as the regulatory approval process, drug efficacy and industry acceptance of injectable therapies. If our future sales or projections of future sales are impacted by any one or more of the preceding factors, we will reassess the recorded value of the long-lived assets. If impairment is indicated, an adjustment will be made to reduce the carrying amount of these assets to their fair value. Fair value measurements In accordance with FASB Accounting Standards Codification ("ASC"), 820, Fair Value Measurements and Disclosures, we measure fair value based on a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. The fair value hierarchy is broken down into three levels based on the source of inputs. We have elected to measure our royalty liability at fair value in accordance with ASC 825, Financial Instruments. The fair value of our royalty liability is based on significant inputs not observable in the market, which require it to be reported as a Level 3 liability within the fair value hierarchy. The valuation uses a methodology and assumptions that we believe would be made by a market participant. In particular, the valuation analysis used a discounted cash flow methodology under the income approach based on the present value sum of payments to be made in the future. The fair value of the royalty liability is estimated by applying a risk adjusted discount rate to the adjusted royalty revenue stream. These fair value estimates are most sensitive to changes in the payment stream. Interest expense We recognize interest expense in the income statement for all debt instruments using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating the interest expense over the relevant period. The effective interest rate is the rate that exactly discounts the estimated future cash payments through the expected life of the financial instrument to the net 37-------------------------------------------------------------------------------- Table of Contents carrying amount of the financial liability. The application of the method has the effect of recognizing expense payable on the instrument evenly in proportion to the amount outstanding over the period to maturity or repayment. In calculating the effective interest rate, we estimate cash flows considering all contractual terms of the financial instrument. The calculation takes into account all fees, including those for early redemption, between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. Recently Issued Accounting Pronouncements In May 2014, FASB issued ASU 2014-09 "Revenue from Contracts with Customers." This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to a customer. ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective, January 1, 2017. Early application is not permitted, but the standard permits the use of either the retrospective or cumulative effect transition method. We have not selected a transition method and we are currently evaluating the impact this guidance will have on our financial condition, results of operations and cash flows. In June 2014, FASB issued ASU 2014-12 "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period" which is part of ASC 718: Compensation-Stock Compensation. This guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and should not be reflected in the estimate of the grant-date fair value of the award. This guidance is effective for annual periods beginning after December 15, 2015. This guidance can be applied prospectively for all awards granted or modified after the effective date or retrospectively to all awards with performance targets outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. We do not expect a material impact on our financial condition, results of operations or cash flows from the adoption of this guidance. In August 2014, the FASB issued ASU 2014-15 "Disclosure of Uncertainties about and Entity's Ability to Continue as a Going Concern". The guidance requires an entity to perform a going concern assessment by evaluating its ability to meet its obligations for a look-forward period of one year from the financial statement issuance date. Disclosures are required if it is probable an entity will be unable to meet its obligations within the look-forward period. Incremental substantial doubt disclosure is required if the probability is not mitigated by management's plans. The guidance is effective for all entities for the first annual period ending after December 15, 2016 and interim periods thereafter. Early application is permitted. We are currently evaluating the impact this guidance will have on our financial disclosures, however; as the guidance only impacts disclosure, the adoption of this guidance is not expected to have a significant impact on our financial condition, results of operations and cash flows. Basis of Presentation Revenue We derive revenue primarily from customization, industrialization and development programs with our customers. The agreements with our customers generally provide for fees to be paid to us for providing specific products or services. Certain of these agreements provide for fees to be paid upon completion of certain agreed-upon milestones. In these instances, we recognize revenue when these agreed-upon milestones have been completed and there is no further performance obligation related to the milestone. Certain of our agreements provide for fees to be paid for specific services to be rendered or the provision of certain deliverables and we recognize revenue upon completion of the related service or deliverable. Certain of our agreements provide for fees to be paid on an ongoing basis over the life of the agreement for agreed-upon services and we recognize revenue ratably over the requisite service period. 38 -------------------------------------------------------------------------------- Table of Contents Cost of product sales We include the following expenses in cost of product sales: amounts paid for the cost of raw materials and component parts used to manufacture products for commercial sales to customers as well as direct labor expenses and manufacturing overhead expenses used in the commercial production process. Cost of product sales does not include any expense related to labor or overhead costs incurred on customization and development service arrangements, raw materials and components for these activities, or developing prototype products or samples used for various evaluation and related activities under customer agreements. Operating expenses Operating expenses primarily include costs related to research and development, selling, general and administrative expenses, as well as depreciation and amortization expense. Research and development costs Research and development costs consist primarily of payroll and related personnel expenses (including share-based compensation expense), fees paid to external service providers, costs of materials, components and supplies, costs for facilities, tooling and equipment and costs related to customization and development service arrangements and developing prototype products and samples used for various evaluation, testing and related activities for existing and potential customers. Selling, general and administrative costs Selling, general and administrative costs include marketing and commercial development costs, quality assurance and regulatory costs, accounting and financial related costs, information and technology costs, legal and professional fees, corporate facility costs, corporate payroll and related benefit costs (including share-based compensation expense). Depreciation Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets, which range from 40 years for our York, Pennsylvania facility to 2 to 15 years for machinery, equipment, furniture and software and the lesser of the lease term or estimated useful life for leasehold improvements. Intangible assets are being amortized using the straight-line method over their estimated useful lives up to 15 years. Interest expense Interest expense includes the cash and non-cash interest cost for all debt instruments. Interest expense is recognized under the effective interest method such that non-cash interest includes the additional expense recognized over and above the cash interest paid during a period as a result of the application of the effective interest method. Net loss Net loss includes the results from revenue recognized during the period after deducting all operating and non-operating expenses. 39-------------------------------------------------------------------------------- Table of Contents Results of Operations The following table summarizes our results of operations for fiscal years 2014, 2013 and 2012: Fiscal Year Ended June 30, 2014 2013 2012 (in thousands, except per share data) Revenue $ 14,689 $ 2,743 $ 5,519 Cost of product sales - 128 584 Research and development 34,111 21,749 23,137 Selling, general and administrative 27,894 32,437 27,685 Depreciation and amortization 4,079 9,487 4,582 Total operating expenses: 66,084 63,801 55,988 Operating loss (51,395 ) (61,058 ) (50,469 ) Interest expense 7,332 2,392 2,120 Interest income (20 ) (54 ) (124 ) Other income (208 ) (198 ) (163 ) Change in fair value of financial instruments (600 ) - - Net loss $ (57,899 ) $ (63,198 ) $ (52,302 ) Net loss per share: Basic and diluted net loss per share $ (0.59 ) $ (0.78 ) $ (0.78 ) Fiscal Year 2014 Compared to Fiscal Year 2013 Revenue. Revenue increased by $11.9 million or 436.0% during fiscal year 2014 compared to fiscal year 2013 due to additional revenue recognized related to development activities for various customers. During fiscal year 2014, we recognized $8.3 million in revenue related to substantive milestones that were completed during the year pursuant to customer agreements to provide customization and development services, clinical support services, collaborative research activities and testing support services. During fiscal year 2014, we recognized $4.1 million in revenue related to services rendered on a time and materials basis pursuant to customer agreements to provide various customization and development services. Also, during fiscal year 2014, we recognized $2.3 million of revenue related to our development agreement with Sanofi which was superseded by a supply agreement with Sanofi. Since these revenues are based in euros, fluctuation in the amount of revenue recognized will result from fluctuations in foreign currency translation rates. During fiscal year 2013, we recognized revenue from our former agreement with Sanofi in the amount of $2.6 million and $0.1 million from other sales. We expect future revenue to continue to increase as we deliver under the customer agreements we have previously entered into and from additional customer agreements that we expect to enter into in future periods. Research and development expenses. Research and development expenses increased in fiscal year 2014 by $12.4 million or 57.0% compared to fiscal year 2013 primarily due to increased payroll and related costs of $5.1 million, increased share-based compensation expense of $1.7 million related to increased headcount to support ongoing and future customer programs, increased material and tooling costs of $3.9 million, and increased third party contracting costs of $1.7 million related to customer programs. The increased investment in research and development during fiscal year 2014 related to the supply of products and components to existing customers including for customization, industrialization and development programs and prospective customers to support evaluation processes and user studies that are typically undertaken prior to the anticipated signing of contracts. We expect to continue our investment in research and development as we service existing customers and enter into additional customer agreements in future periods. Selling, general and administrative expenses. Selling, general and administrative expenses decreased in fiscal year 2014 by $4.5 million or 14.0% compared to fiscal year 2013, primarily due to decreased share-based 40-------------------------------------------------------------------------------- Table of Contents compensation expense of $6.6 million, partially offset by increased legal and professional fees of $0.9 million, increased payroll and related costs of $0.5 million and increased other administrative costs of $0.7 million. Depreciation and amortization expense. Depreciation and amortization expense decreased in fiscal year 2014 by $5.4 million or 57.0% compared to fiscal year 2013, primarily as a result of the disposal of equipment used to manufacture the discontinued Unitract product line during fiscal year 2013. Interest expense. Interest expense increased in fiscal year 2014 by $4.9 million or 207.0% compared to fiscal year 2013, as a result of $1.2 million paid in connection with the term loan which we entered into during March 2014 and $3.7 million related to our settlement agreement with Varilease Finance, Inc., or Varilease, entered into during fiscal year 2014. Interest income. Interest income decreased by less than $0.1 million in fiscal year 2014 compared to fiscal year 2013, primarily as a result of lower cash balances. Net loss and net loss per share. Net loss during fiscal years 2014 and 2013 was $57.9 million and $63.2 million, respectively. Basic and diluted net loss per share was $0.59 and $0.78 during fiscal years 2014 and 2013, respectively, on weighted average shares outstanding of 98,062,664 and 81,165,773 during fiscal years 2014 and 2013, respectively. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with our February 2013 equity financing as well as shares issued under the Sales Agreement during fiscal year 2014. Fiscal Year 2013 Compared to Fiscal Year 2012 Revenue. Revenue decreased by $2.8 million or 50.0% during fiscal year 2013 compared to fiscal year 2012. During fiscal years 2013 and 2012, we recognized revenue from a former development agreement with Sanofi in the amount of $2.6 million and $0.1 million from other sales, respectively. In addition, during fiscal year 2012, we recognized $1.4 million related to the achievement of the last milestone under our industrialization agreement with Sanofi and $1.4 million related to the clinical development and supply of a novel drug device for targeted organ delivery. Research and development expenses. Research and development expenses decreased in fiscal year 2013 by $1.4 million or 6.0% compared to fiscal year 2012 due to lower materials costs of $2.8 million and lower third party consulting fees of $0.2 million, which were partially offset by increased payroll costs of $1.0 million and increased research and development share-based compensation expense of $0.6 million. Selling, general and administrative expenses. Selling, general and administrative expenses increased in fiscal year 2013 by $4.8 million or 17.0% compared to fiscal year 2012, primarily due to an increase in our non-research and development share-based compensation expense. Depreciation and amortization expense. Depreciation and amortization expense increased in fiscal year 2013 by $4.9 million or 107.0% compared to fiscal year 2012, primarily as a result of a $4.1 million loss on the disposal of equipment used to manufacture the discontinued Unitract product line during fiscal year 2013 and the additional machinery and equipment placed into service during fiscal year 2013. Interest expense. Interest expense increased in fiscal year 2013 by $0.3 million or 13.0% compared to fiscal year 2012, primarily resulting from debt incurred during August 2011 in relation to a former secured lending facility for production equipment for the Unifill syringe. Interest income. Interest income decreased in fiscal year 2013 by $0.1 million or 56.0% compared to fiscal year 2012, primarily as a result of lower cash balances. Net loss and loss per share. Net loss during fiscal years 2013 and 2012 was $63.2 million and $52.3 million, respectively. Basic and diluted net loss per share was $0.78, on weighted average shares 41-------------------------------------------------------------------------------- Table of Contents outstanding of 81,165,773 and 67,449,286 during fiscal years 2013 and 2012, respectively. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with our July 2012, October 2012 and February 2013 equity financings. Liquidity and Capital Resources To date, we have funded our operations primarily from a combination of term loans, equity issuances, borrowings under our bank mortgages, and payments from various customers. We have incurred recurring losses from operations during fiscal years 2014 and 2013, and anticipate incurring additional losses until such time that we can generate sufficient revenue from the sale, customization, or exclusive use and licensing of our injectable drug delivery systems to our customers. As of June 30, 2014, cash and cash equivalents were $8.4 million, restricted cash was $2.4 million and our long-term debt was $55.4 million. As of June 30, 2013, cash and cash equivalents were $5.7 million, restricted cash was $2.4 million and our long-term debt was $23.9 million. The $2.4 million of restricted cash relates to amounts that must remain in cash deposits under the Metro Bank Loan. On March 12, 2014, or the Closing Date, the Borrower entered into the OrbiMed Credit Agreement with the Lender. Under the terms of the OrbiMed Credit Agreement, the Lender agreed to provide term loans to the Borrower in the aggregate principal amount of up to $60.0 million. A first tranche loan of $40.0 million was drawn on the Closing Date and a further two tranches each of $10.0 million have been committed by the Lender and will be funded on each of December 15, 2014 and June 15, 2015, subject to and in accordance with the terms of the OrbiMed Credit Agreement. The term of the OrbiMed Credit Agreement is until March 12, 2020. Unless the loan facility is otherwise terminated earlier pursuant to the terms of the OrbiMed Credit Agreement, Borrower is required to repay in full the unpaid principal amount of the loans drawn down, together with all accrued and unpaid interest thereon plus a 6.0% repayment premium on March 12, 2020. The loans bear interest at 9.25% per annum plus LIBOR or 1.0% (whichever is greater), payable in cash quarterly in arrears, and as otherwise described in the OrbiMed Credit Agreement. A default interest rate of 14.25% per annum plus LIBOR or 1.0% (whichever is greater) shall apply during the existence of a default under the OrbiMed Credit Agreement. The loans will be interest-only until March 12, 2020. Borrower can make voluntary repayments at any time of any unpaid principal amount of the loans, plus a 6.0% repayment premium. Borrower must make mandatory prepayments in certain prescribed circumstances, including, without limitation, certain dispositions of assets and certain casualty events. In such events, Borrower must prepay to Lender 100% of the net cash proceeds received. The OrbiMed Credit Agreement is secured by the assets of the Company and its subsidiaries. The Company, Cross Farm, Unilife Medical Solutions Limited, or UMSL, and Unitract Syringe have guaranteed the performance by Borrower of its obligations under the OrbiMed Credit Agreement. The security interests granted by Borrower, the Company, Cross Farm, UMSL and Unitract Syringe are evidenced by, among other things, a Pledge and Security Agreement, dated March 12, 2014, by Borrower, the Company, Cross Farm LLC, UMSL and Unitract Syringe in favor of Lender, for itself and as agent for ROS, an Open-End Commercial Mortgage and Security Agreement, dated March 12, 2014, by and between Cross Farm and Lender, for itself and as agent for ROS, and a General Security Deed, dated March 12, 2014, by Unitract Syringe, UMSL and the Company in favor of the Lender, for itself and as agent for ROS. The OrbiMed Credit Agreement contains customary representations and warranties in favor of the Lender. The OrbiMed Credit Agreement also contains certain covenants, including among other things, covenants relating to financial performance, liquidity targets and the retention of certain members of management. In the event of default, Borrower must prepay to Lender any unpaid principal amount of the loans drawn down, together with all accrued and unpaid interest thereon plus a 6.0% repayment premium. An event of default could also result in the Lender enforcing its security over the assets of Borrower, the Company, Cross Farm, UMSL and Unitract Syringe in accordance with the terms of the OrbiMed Credit Agreement and the related security agreements. 42-------------------------------------------------------------------------------- Table of Contents We are in compliance with all the loan covenants set forth in the OrbiMed Credit Agreement. In connection with the OrbiMed Credit Agreement, the Borrower entered into a royalty agreement, or the Royalty Agreement, with Royalty Opportunities S.A.R.L., or ROS, which entitles ROS to receive royalty payments. Pursuant to and subject to the terms of the Royalty Agreement, the Borrower has agreed to pay 2.75% on the first $50.0 million of net sales (on a cash receipts basis as defined in the OrbiMed Credit Agreement) in each fiscal year, plus 1.0% of net sales in excess of $50.0 million and up to and including $100.0 million in each fiscal year, plus 0.25% of net sales in excess of $100.0 million in each fiscal year. Borrower has the right to buyout the Royalty Agreement at any time on or before the fourth anniversary of the agreement at a reduced amount. The buy-out amount ranges from $6.5 million, on or prior to the first anniversary of the Royalty Agreement and up to $21.0 million, after the fourth anniversary of the Royalty Agreement (such amount depending on when the buy-out option is exercised), less amounts previously paid by the Borrower to Lender pursuant to the Royalty Agreement. The Royalty Agreement has a term commencing on the Closing Date and ending on the earlier of (i) the tenth anniversary of the Closing Date and (ii) the date of payment of the purchase price pursuant to the exercise of a put option by the Lender or the exercise of a buy-out option by the Borrower. During October 2012, we entered into the Sales Agreement, pursuant to which we, from time to time, issued and sold shares of common stock having an aggregate offering price of up to $45.0 million. During fiscal year 2014, we issued 5,012,153 shares of common stock and raised approximately $16.9 million under the Sales Agreement. As of June 30, 2014, there was approximately $12.4 million available under the Sales Agreement. On August 1, 2014, we issued 5,808,800 shares of common stock and raised $12.4 million under the Sales Agreement, which is the full remaining amount available for sale under the Sales Agreement. As a result, we have completed use of the full facility available under the Sales Agreement. We have completed a reconfiguration of our existing cleanrooms at our production facility to accommodate new assembly lines for our Unifill products and wearable injectors that will support planned customer demand during fiscal year 2015. We are also installing additional clean room manufacturing space within the existing footprint of our York facility that will accommodate additional assembly lines and related activities. Accordingly, we have secured pre-approval from York County, Pennsylvania to construct an additional 100,000 square foot of production space at our York facility. As we take receipt of additional assembly lines where we have made large up-front payments, we may secure capital equipment financing, where appropriate, to support the continued scale-up of our production capabilities. We have incurred recurring losses from operations during each of the fiscal years in the three-year period ended June 30, 2014 and anticipate incurring additional losses until such time that we can generate sufficient revenue from the sale, customization or exclusive use and licensing of our proprietary range of injectable drug delivery systems to our customers. We continue to have discussions with existing and prospective customers for many active programs in our commercial pipeline and have executed several agreements featuring a combination of revenue streams, including exclusivity fees, device customization programs and supply contracts that have begun to generate cash payments during fiscal year 2014. We expect to continue to execute agreements and generate additional cash payments during fiscal year 2015. Given the substantial size, complexity and long-term duration of many of these prospective agreements, some can take a significant time to negotiate and finalize. We estimate that our cash and cash equivalents of $10.8 million as of June 30, 2014, which includes $2.4 million of restricted cash, together with the additional tranches under the OrbiMed Credit Agreement of $10 million each that are available in December 2014 and June 2015, subject to the terms of the OrbiMed Credit Agreement, combined with proceeds from the sale of common stock under the Sales Agreement of $12.4 million received in August 2014 and anticipated cash to be generated from new and existing customer agreements are expected to provide us with sufficient liquidity through the third quarter of fiscal year 2015. However, there can be no assurance that such 43-------------------------------------------------------------------------------- Table of Contents cash from customer agreements will be available when needed. These factors continue to raise substantial doubt about our ability to continue as a going concern. The accompanying audited 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 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. The following table summarizes our cash flows during the fiscal years 2014, 2013 and 2012: Fiscal Year Ended June 30, 2014 2013 2012 (In thousands) Net cash provided by (used in): Operating activities $ (36,601 ) $ (41,333 ) $ (43,217 ) Investing activities (12,149 ) (2,240 ) (4,000 ) Financing activities 51,287 37,909 40,742 Fiscal Year 2014 Compared to Fiscal Year 2013 Net Cash Used in Operating Activities Net cash used in operating activities during fiscal year 2014 was $36.6 million compared to $41.3 million during fiscal year 2013. The decrease in net cash used in operating activities was primarily due to cash receipts from customers of $23.7 million partially offset by increased research and development costs of $10.7 million, selling, general and administrative expenses of $2.2 million and interest expense of $4.9 million (exclusive of noncash expenses). Net Cash Used in Investing Activities Net cash used in investing activities during fiscal year 2014 and fiscal year 2013 was $12.1 million and $2.2 million, respectively. This increase was primarily as a result of costs incurred in connection with the purchase of machinery and related equipment, facility expansion and cleanroom reconfiguration. Net Cash Provided by Financing Activities Net cash provided by financing activities during fiscal year 2014 was $51.3 million compared to $37.9 million during fiscal year 2013. During fiscal year 2014, we received $40.0 million from our March 2014 term loan, $16.9 million in connection with our public offering of common stock under the Sales Agreement and $2.5 million upon the exercise of stock options. These amounts were partially offset by principal debt payments and financing costs of $8.1 million. During fiscal year 2013, we received $42.7 million in connection with the issuance of common stock and warrants, partially offset by principal debt repayments of $5.0 million. Contractual Obligations and Commitments The following table provides information regarding our contractual obligations as of June 30, 2014: Payments Due by Period Less Than More Than Total 1 Year 1-3 Years 3-5 Years 5 Years (In thousands) Long-term debt and related interest $ 89,965 $ 5,608 $ 11,063 $ 11,015 $ 62,279 Operating leases 8,805 635 2,434 2,484 3,252 Purchase obligations 15,164 15,164 - - - Total contractual obligations $ 113,934 $ 21,407 $ 13,497 $ 13,499 $ 65,531 44 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as such term is defined in the SEC rules. |