Notes to Unaudited Consolidated Financial Statements
1. Description of Business and Unaudited Financial Statements
Unilife Corporation (together with its subsidiaries, the “Company”) was incorporated under the laws of the State of Delaware in 2009 and is based in the Commonwealth of Pennsylvania. The Company began operations in Australia in 2002.
The Company is a designer, manufacturer, and supplier of innovative injectable drug delivery systems that can enhance and differentiate the injectable products of our pharmaceutical and biotechnology customers. While the Company has a broad portfolio of proprietary product platforms, the Company has focused the business on the Company’s wearable injector products. The Company believes its products are differentiated from conventional products, with innovative features and functionality designed to optimize the safe, simple, and convenient administration of injectable therapies. The majority of the Company’s products are designed for sale directly to pharmaceutical and biotechnology companies who are expected to supply them as drug-device combination products, pre-filled and ready for administration by end-users, such as patients or health-care providers. The Company customizes products within each of its platforms to address specific customer, therapy, patient and/or commercial requirements.
The Company is focusing primarily on active and new customer programs in its portfolio of wearable injector products, which the Company expects will improve operating efficiencies and better position the Company to take advantage of commercial opportunities within the fast-growing market for wearable injectors. The Company’s wearable injector customers include Amgen Inc., MedImmune LLC (“MedImmune”), and Sanofi S.A. (“Sanofi”).
In addition to the filling, assembly and/or packaging of the Company’s products with injectable therapies, the Company’s customers are also, with respect to most of its products, responsible for the regulatory approval, sale and marketing of their final drug-device combination products. While at this point the Company’s products have not been sold to end users with the Company’s customers’ injectable therapies, the Company can generate revenue from customization programs, upfront fees, licensing fees, device and development materials, and exclusivity fees.
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, 2016, or fiscal 2016, contained in its Annual Report on Form 10-K.
2. Internal Investigation and Listed Exchange Update
On May 8, 2016, the Company announced an investigation into violations of the Company’s policies and procedures and possible violations of laws and regulations by the Company’s former Chief Executive Officer, Alan Shortall, whose employment with the Company ceased on March 11, 2016, and its former Chairman, Jim Bosnjak, who resigned from the Company’s Board of Directors (the “Board”) on August 24, 2015 (the “Investigation”). The Board established a Special Committee to oversee the Investigation. Independent counsel conducted the Investigation with the assistance of an advisory firm with forensic accounting expertise. The Investigation was completed on October 7, 2016 and did not identify any material financial loss.
The filing of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2016 (the “March 2016 10-Q”) and the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016 (the “2016 10-K”) were delayed as a result of the Investigation.
In addition, the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015 and the Company’s Form 10-Q’s for the first and second quarters of the fiscal year 2016 were amended to correct immaterial misstatements to the financial statements and omissions of related party disclosures. As a result of such delay, on May 17, 2016 and September 19, 2016, the Company received notices from the Listing Qualifications department of The NASDAQ Stock Market LLC (“NASDAQ”) stating that, because the Company had not yet filed the March 2016 10-Q and the 2016 10-K, respectively, the Company was no longer in compliance with NASDAQ Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports with the U.S. Securities and Exchange Commission (the “SEC”). On September 8, 2016, NASDAQ granted the Company an exception until November 7, 2016 to regain compliance with NASDAQ Listing Rule 5250(c)(1). The Company filed the March 2016 10-Q and the 2016 10-K on October 24, 2016. On October 27, 2016, the Company received a notice from the Listing Qualifications department of NASDAQ stating that the Company is now in compliance with NASDAQ Listing Rule 5250(c)(1).
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On October 17, 2016, the Company received a notice from the Listing Qualifications department of NASDAQ stating that, becau
se the Company did not maintain a minimum Market Value of Listed Securities (“MVLS”) of $50.0 million for the last 30 consecutive business days, the Company was no longer in compliance with NASDAQ Listing Rule 5450(b)(2)(A).
The Company has been provided a period of 180 calendar days, or until April 17, 2017, to regain compliance with the minimum MVLS listing requirement. If at any time on or before April 17, 2017, the MVLS of the Company’s common stock, par value $0.01 per share (“common stock”), closes at $50.0 million or more for a minimum of 10 consecutive business days, NASDAQ will provide the Company with written confirmation that the Company has achieved compliance with the minimum MVLS listing requirement and the matter will be closed.
In the event that the Company does not regain compliance with the minimum MVLS listing requirement on or before April 17, 2017, NASDAQ will provide the Company with written notification that its securities are subject to delisting. At that time, the Company would be permitted to appeal the delisting determination to a NASDAQ Hearings Panel or apply to transfer its common stock to The NASDAQ Capital Market (provided that it satisfied the requirement for continued listing on that market).
A transfer of the Company’s common stock to The NASDAQ Capital Market may impact the ability of certain stockholders to retain their holdings in the Company.
3. Liquidity
As of December 31, 2016, the Company’s cash and cash equivalents were $9.3 million, restricted cash was $2.7 million and the book value of the Company’s debt was $126.1 million. As of December 31, 2016, the Company also had a working capital deficit of $3.1 million. Under the Company’s debt facilities, the Company was required to have a cash and restricted cash balance of $5.4 million at December 31, 2016.
The Company incurred recurring losses from operations as well as negative cash flows from operating activities during fiscal year 2016 and the six months ended December 31, 2016, and anticipates incurring additional losses and negative cash flows until such time that it can generate sufficient revenue from the sale, customization, or exclusive use and licensing of its proprietary injectable drug delivery systems to pharmaceutical and biotechnology customers. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company has taken or intends to take the steps delineated below to address its cash requirements, the success of which is largely beyond the Company’s control.
The Company expects to generate cash receipts from wearable injector customers during fiscal year 2017 and the Company continues to have business development discussions with current and prospective wearable injector customers. The Company does not expect these receipts to be sufficient to materially improve the Company’s liquidity position and is unable to predict the amount, if any, or the timing of such receipts or any proceeds from these business development discussions.
The Company has also engaged a financial advisory firm to further assist with fundraising efforts. This process could result in any number of alternatives, which are likely to be highly dilutive to Company stockholders. There is no assurance that the Company will be successful in these efforts or, if successful, that the Company will be able to obtain favorable terms.
In February 2016, the Company and Unilife Medical Solutions, Inc., a wholly owned subsidiary of the Company (“Unilife Medical Solutions”) and, together with the Company, (the “Company Parties”) entered into a Securities Purchase Agreement (the “Counterparty SPA”) with Amgen Inc. (the “Counterparty”), pursuant to which the Counterparty agreed to purchase from the Company Parties a new series of 6% Senior Secured Convertible Notes Due 2023 in the aggregate original principal amount of up to $55.0 million (the “Notes”). Pursuant to the Counterparty SPA, the Notes were to be issuable in up to three separate closings. The Company issued to Counterparty the first Note in the aggregate original principal amount of $30.0 million on February 22, 2016, and Counterparty paid to the Company $30.0 million in exchange therefor (“February 2016 Convertible Note”). Pursuant to the Counterparty SPA, the Counterparty originally was entitled to purchase two additional Notes in January 2017 (the “2017 Convertible Note”) and January 2018 (the “2018 Convertible Note”) in the amounts of $15.0 million and $10.0 million respectively.
Each of
the Notes is convertible at the Counterparty’s election into shares of common stock at any time prior to February 22, 2023, at a price per share that is 90% of the volume weighted average price of such shares during the 20 trading days preceding the applicable conversion date (the “Discounted Sale Price”), subject to a floor price of $12.50 per share (the “Conversion Rate Floor Price”). The Conversion Rate Floor Price under each of the Notes is subject to customary adjustments for certain capital events.
On October 24, 2016, the Company Parties and the Counterparty entered into a letter agreement (the “October Counterparty Letter Agreement”), pursuant to which the Company Parties agreed to issue to the Counterparty on October 24, 2016, in accordance with the terms and conditions of the Counterparty SPA and the October Counterparty Letter Agreement, a portion of the 2017 Convertible Note (the “Accelerated Convertible Note”) in the initial principal amount of $10.0 million plus a $0.6 million financing
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fee (the “Financing Fee”), for an aggregate initial principal amount of $10.6 million. In consideration for issuing the Accelerated Convertible Note, the Counterparty paid to the Company $10.0 million on October 24, 2016.
On December 20, 2016, the Company issued the remaining portion of the 2017 Convertible Note in the aggregate principal amount of $5.0 million (the “December 2016 Convertible Note”) and the Counterparty paid to the Company $5.0 million in exchange therefor. The terms of the December 2016 Convertible Note are substantially the same as those of the February 2016 Convertible Note and the Accelerated Convertible Note.
In connection with the issuance of the December 2016 Convertible Note, the Lender (as defined below) consented to the issuance of the December 2016 Convertible Note and the Company agreed to obtain the Lender’s written consent prior to closing on a transaction to sell Company securities to a third party other than the Counterparty or any employee of the Company or Unilife Medical Solutions during the four-month period commencing January 1, 2017 and ending April 30, 2017.
The 2018 Convertible Note will continue to be issuable in January 2018 by the Company Parties to the Counterparty in accordance with the terms and conditions of the Counterparty SPA. There can be no assurance as to when or if the Counterparty will purchase all or any part of the 2018 Convertible Note
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As previously announced, the Company has focused the business primarily on active and new customer programs in its portfolio of wearable injector systems. In connection with this new focus, the Company has been evaluating the prospects of its non-wearable injector customer programs and attempting to negotiate terminations of certain non-wearable injector customer contracts. The Company has separate contracts with one customer for its prefilled syringes and wearable injectors. In connection with the prefilled syringe contract with such customer, the Company previously received $10.0 million which may be refundable to the customer, including for termination for certain events and is therefore recorded in long-term deferred revenue. Although this $10.0 million is not yet refundable, the Company and the customer are amicably negotiating the potential termination of the contract and the potential repayment to the customer of all or a portion of the $10.0 million potentially through a long-term financial instrument. The outcome of these negotiations is still uncertain.
The Company’s ability to raise capital is limited and there can be no assurance that financing will be available when needed. The Company will not be able to obtain financing through offerings of its securities registered under the Securities Act of 1933, as amended (the “Securities Act”), until the Company can prepare, file with the SEC, and cause to become effective a registration statement on Form S-1. We are not currently eligible to register the offer and sale of our securities using a registration statement on Form S-3, cannot use our existing Form S-3 and will not become eligible to use Form S-3 until we have timely filed certain periodic reports required under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) for 12 consecutive calendar months.
The Company believes its existing cash at December 31, 2016 will provide the Company with sufficient liquidity to fund the Company’s operations into March 2017 without falling below its minimum cash balance requirement under the Company’s debt facilities of $5.1 million. The Company believes that any potential proceeds from fundraising efforts, the potential issuance of the 2018 Convertible Note, potential customer cash receipts, and potential proceeds from business development discussions will provide the Company with enough liquidity to fund its operations for the next twelve months. However, there can be no assurance that any cash from fundraising efforts, if successful, the potential issuance of the 2018 Convertible Note, potential customer cash receipts, and potential proceeds from business development discussions will be available when needed, as such sources of liquidity largely are beyond the Company’s control. If we are unable to obtain financing when needed, we may be in default under one or more of our debt obligations unless we are able to obtain waivers from our lenders. A breach of any of the covenants related to our debt instruments could result in a higher rate of interest to be paid or the lenders could elect to declare all amounts outstanding under the applicable agreements to be immediately due and payable. If the lenders were to make such a demand for repayment, we would be unable to pay the obligations as we do not have existing facilities or sufficient cash on hand to satisfy these obligations. Under the circumstances, we also would be unable to pay our other obligations as they come due, which could prompt our creditors to pursue other remedies. These factors continue to raise substantial doubt about our ability to continue as a going concern. The accompanying 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.
4. 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.
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Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company’s 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, royalty liability valuation, derivative liability valuation, warrant liability valuation, preferred stock conversion liability (the “Preferred Stock Conversion”) valuation, share-based compensation expense, restructuring obligations, contingencies, recoverability of goodwill, long-lived assets and useful lives of property, plant and equipment. 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.
Property, Plant and Equipment
Property, plant and equipment, including significant improvements, are recorded at cost, net of accumulated depreciation and amortization. Repairs and maintenance are expensed as incurred.
Depreciation and amortization expense is recorded on a straight-line method over the estimated useful life of the asset as listed below:
Asset Category
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Useful Lives
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Building
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40 years
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Machinery and equipment
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2 to 15 years
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Computer software
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3 to 7 years
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Furniture and fixtures
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3 to 7 years
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Leasehold improvements
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Shorter of leasehold improvement life or remaining term of lease
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Interest cost incurred in connection with the development and construction of significant new machinery and equipment, as well as facility related costs have been capitalized as one of the elements of cost and are being amortized over the asset’s respective useful life.
The Company evaluates 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, the Company develops projections of undiscounted future cash flows of the asset or asset group. The 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 the impairment analysis are based on customer-specific information as well as market estimates relating to the anticipated drugs and therapies being targeted for use with the Company’s 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 biological-based drugs in the pharmaceutical industry development pipeline. The Company’s future sales could also be impacted by factors such as its ability to obtain new and retain existing customers, the timing and extent of the customers’ drug development activities as well as the regulatory approval process, drug efficacy and industry acceptance of injectable therapies. If the Company’s future sales or its projections of future sales are impacted by any one or more of the preceding factors, it 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.
In connection with the Company’s focus on wearable injector products, the Company evaluated the prospects of its non-wearable injector customer and supplier programs in fiscal year 2016. As a result of negotiations related to those supplier and customer programs and the Company’s evaluation of those programs and potential disposition of certain assets, the Company determined that certain of its long lived-assets were impaired and the Company incurred a $26.6 million non-cash asset impairment charge primarily related to machinery and equipment and construction in process in the third quarter of fiscal 2016.
There were no asset impairment charges for the three and six months ended December 31, 2016 and 2015.
Goodwill and Intangible Assets
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 at the reporting unit level. Additional impairment
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assessments would be p
erformed if events and circumstances warranted such additional assessments during the year. The Company has one reporting unit which includes its product lines, the base technology which it obtained as part of its November 2002 acquisition of Unitract Syri
nge Pty Limited, and the manufacturing capability which it obtained in its January 2007 acquisition of Integrated BioSciences, Inc.
As required under GAAP, the Company is required to evaluate goodwill for impairment at least annually and more frequently if certain trigger events occur. The Company determined that the continuing losses incurred by the Company and its negative equity, and the decline in the Company’s stock price constituted trigger events that occurred in the six months ended December 31, 2016 requiring an evaluation of the carrying value of the Company’s goodwill. Potential impairment of goodwill is identified by comparing the fair value with its carrying value.
The Company performed a goodwill valuation during the interim period as of September 30, 2016 using a combination of the market approach and a discounted cash flow method under the income approach. The Company determined an overall business enterprise value (determined by the fair of equity plus the fair value of debt) by taking a weighted average from the results of the discounted cash flow under the income approach (40%) and the market approach based on the Company’s market capitalization (60%). Under the income approach, the Company calculates the fair value of its reporting unit based on the present value of estimated future cash flows. Management judgment is necessary to evaluate the impact of operating and external market changes and to estimate the future cash flows used to measure fair value. The Company’s estimate of cash flows considers past performance, current and anticipated market conditions, and internal projections and operating plans which incorporate estimates for sales growth, profitability and capital spending. Additional assumptions include forecasted growth rates and estimated discount rates which are risk adjusted for current market conditions. The Company believes such assumptions reflect current and anticipated market conditions and are consistent with those that would be used by other marketplace participants for similar purposes but are subject to change due to changing conditions. The weighting of the results of each method to assess the overall business enterprise value was considered reasonable as greater weight was given to the market capitalization based on the quoted stock price as this is considered more reliable information as it is publicly available and not subject to management judgment or estimate, whereas, discounted cash flow under the income approach is subject to management estimates and judgments.
Although based on the results of the business enterprise value calculation there was no indication of impairment of goodwill, the Company determined as a result of the continuing losses incurred by the Company and its negative equity, and other indicators of impairment and the decline in the Company’s stock price, that an additional step 2 analysis was warranted under generally accepted accounting principles.
The Company performed a Step 2 valuation of goodwill by valuing certain intangible assets (primarily patents, trademarks and tradenames). The Company considered the impact of all assets and liabilities in allocating the fair value of the Company to determine the fair value of goodwill and whether any impairment is indicated. The Company believes these intangible assets would generate the most significant difference between implied fair value and book value as part of completing a Step 2 purchase price allocation for the purpose of determining the value of goodwill for impairment. The valuation of intangible assets was performed using the relief from royalty method under the income approach. This method utilizes the Company’s revenue projections and assigns values based on determination of appropriate royalty rates considering relevant industry information. The Company then utilized the fair value of its intangible assets along with the estimated fair value of its other assets and liabilities to determine the implied goodwill compared to the carrying value of goodwill. The residual fair value based on the results of the Step 2 valuation indicated there was no impairment of goodwill.
The Company performed a qualitative review through December 31, 2016 and no events occurred or circumstances changed that would more likely than not reduce the fair value of the goodwill below its carrying value. The Company considered that the results of the valuation of goodwill indicated there was no impairment of goodwill and also indicated significant cushion between the implied fair value of goodwill and its carrying value and, therefore, the Company has concluded that no goodwill impairment existed as of December 31, 2016.
Definite-lived intangible assets include patents which are amortized on a straight-line method over their estimated useful lives of 15 years and are included in other assets. The Company reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When factors indicate a possible impairment, if the sum of the estimated undiscounted future cash flows expected to result from the use and eventual disposition of an asset is less than the carrying amount of the asset, an impairment may be recognized. Measurement of an impairment loss is based on the excess of the carrying value of the asset over its fair value. Definite-lived intangible assets were less than $0.1 million as of December 31, 2016 and June 30, 2016 and are recorded in other assets on the consolidated balance sheet. There were no impairments recorded on intangible assets during the three and six months ended December 31, 2016 and 2015.
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Share-Based Compensation
The Company grants equity awards to its 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. 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 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 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 the Monte Carlo option pricing model. Option pricing methods require the input of highly subjective assumptions, including the expected stock price volatility.
Revenue Recognition
The Company recognizes revenue from industrialization and development fees, licensing fees and product sales. The Company recognizes revenue from sales of products at the time of shipment when title passes to the customer. The Company recognizes up front, non-refundable fees ratably over the expected life of the related agreement. The Company recognizes license revenue over the life of the patents of the products relating to the license. Revenue from industrialization and development fees is recognized as services are rendered, under the completed contract method, under the proportional performance method or upon achievement of the “at risk” substantive milestone events, which represent the culmination of the earnings process related to such events. Substantive milestones can include specific deliverables 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 these contracts provide for customer payments to be made as services are rendered or when substantive milestones are achieved. The Company considers whether a milestone is substantive at the inception of the agreement. The consideration earned from the achievement of a milestone must meet all of the following criteria to be considered substantive:
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It is commensurate with either of the Company’s performance to achieve the milestone, or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone;
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It relates solely to past performance; and
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It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.
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Payment terms are considered to be standard commercial terms. Revenue is recognized when each substantive milestone has been achieved and the Company has no future performance obligations related to the substantive milestone. Fees for completed, substantive milestones, which are dependent upon customer acceptance for non-refundable payment or, if paid, are refundable pending customer acceptance are recognized upon customer acceptance or the termination of refund rights.
Fair Value Measurements
In accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, the Company measures 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.
The carrying value of financial instruments such as accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items. The Company believes that the current carrying amount of its long-term debt approximates fair value because the terms on these instruments are similar to those terms that the Company would currently be able to receive for similar instruments of comparable maturity.
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The Company has elected to measure its royalty agreement liability at fair value in accordance with ASC 825, Financial Instruments. The fair value of the royalty liability is based on significant inputs no
t 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 the Company believes would be made by a market participant. In particular, the valuati
on analysis uses 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 agreement liability is estimated by applying a risk adjusted discount rate to t
he adjusted royalty revenue stream. These fair value estimates are most sensitive to changes in the payment stream.
The Company accounts for derivative financial instruments in accordance with ASC 815, Derivative and Hedging — Contracts in Entity’s Own Equity. Instruments which do not have fixed settlement provisions are deemed to be derivative instruments and are valued based on an average of a Monte Carlo and lattice model. The Preferred Stock Conversion valuation analysis used the estimated dividend rate based on the volume-weighted average price of the Company’s common stock at the date the Preferred Stock Conversion is measured. The warrant liability is valued using a Black-Scholes option-pricing model.
Interest Expense
The Company recognizes interest expense in the consolidated statements of operations and comprehensive loss 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 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, the Company estimates cash flows considering all contractual terms of the financial instrument, including fees for early redemption and all other premiums and discounts.
New Accounting Pronouncements Effective During the Period
In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. The 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 not be reflected in the estimate of the grant-date fair value of the award. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The guidance became effective July 1, 2016 and the Company elected to apply the guidance prospectively for all awards granted or modified after the effective date. The adoption of the new guidance did not have a material impact on the Company’s financial condition, results of operations or cash flows.
New Accounting Pronouncements Not Yet Adopted
In May 2014, FASB issued ASU 2014-09 “Revenue from Contracts with Customers” and amended by ASU 2016-08 “Principle versus Agent Considerations”, ASU 2016-10 “Identifying Performance Obligations and Licensing”, and ASU 2016-12 “Narrow-Scope Improvements and Practical Expedients”. The 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. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers” which deferred the effective date of ASU 2014-09 for all entities by one year to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early application is permitted only as of annual periods beginning after December 15, 2016, including interim reporting periods within that reporting period. With the deferral, the new standard is effective for the Company, on July 1, 2018, with early adoption permitted one year prior. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has reviewed the new standards and has begun to consider the impact of the standard on its ongoing financial reporting, but has not yet made any conclusions.
In August 2014, FASB issued ASU 2014-15 “Disclosure of Uncertainties about an 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. The Company is currently evaluating the impact this guidance will have on its financial disclosures; however, as the guidance only impacts disclosure, the adoption of this guidance is not expected to have any impact on the Company’s financial condition, results of operations and cash flows.
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In November 2015, the FASB issued new guidance simplifying the balance sheet classification of deferred taxes. The new guidance requires that deferred tax liabilities an
d assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the
new guidance. The new guidance is effective for the Company on July 1, 2017, with early adoption permitted as of the beginning of an interim or annual reporting period. The new guidance may be applied either prospectively to all deferred tax liabilities an
d assets or retrospectively to all periods presented. The Company is evaluating the impact that the new guidance will have on its consolidated financial statements and related disclosures; however, at the present time the Company has recorded a valuation a
llowance against its deferred tax assets based on the history of losses incurred.
In January 2016, the FASB issued new guidance related to the recognition and measurement of financial assets and liabilities. The new guidance makes targeted improvements to GAAP impacting equity investments (other than those accounted for under the equity method or consolidated), financial liabilities accounted for under the fair value election, and presentation and disclosure requirements for financial instruments, among other changes. The new guidance is effective for the Company on July 1, 2018, with early adoption prohibited other than for certain provisions. The Company is evaluating the impact that the new guidance will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued guidance that will change the requirements for accounting for leases. The principal change under the new accounting guidance is that lessees under leases classified as operating leases will recognize a right-of-use asset and a corresponding lease liability. Current lease accounting does not require lessees to recognize assets and liabilities arising under operating leases on the balance sheet. Under the new guidance, lessees (including lessees under leases classified as finance leases and operating leases) will recognize a right-to-use asset and a lease liability on the balance sheet, initially measured as the present value of lease payments under the lease. Expense recognition and cash flow presentation guidance will be based upon whether the lease is classified as an operating lease or a finance lease (the classification criteria for distinguishing between finance leases and operating leases is substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current guidance). The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements; the guidance provides certain practical expedients. The Company has reviewed the new standard, has begun to identify its contracts that might be impacted by the standard, and has begun to consider the impact of the standard on its ongoing financial reporting, but has not yet made any conclusions.
In March 2016, the FASB issued new guidance designed to simplify several aspects of the accounting for share-based payment transactions, including guidance relating to accounting for income taxes with respect to share-based payment awards; providing generally that excess tax benefits related to share-based awards should be recorded as a reduction to income tax expense (currently, excess tax benefits generally are recorded to additional-paid-in-capital); providing generally that excess tax benefits related to share-based awards should be classified along with other income tax cash flows as an operating activity (currently, excess tax benefits generally are separated from other income tax cash flows and classified as a financing activity); providing that an entity may make an accounting policy election either to base compensation cost accruals on the number of awards expected to vest (as required by current guidance) or to account for forfeitures when they occur; modifying the current exception to liability classification such that partial cash settlement of an award for tax withholding purposes would not result, by itself, in liability classification of the award if the amount withheld does not exceed the maximum statutory tax rate in the employees' applicable jurisdictions (currently, an award cannot qualify for equity classification, rather than liability classification, if the amount withheld exceeds the minimum statutory withholding requirements); and providing that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity on the statement of cash flows (currently there is no authoritative guidance addressing this classification issue). The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted (if early adoption occurs in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period). Depending on the particular issue addressed by the guidance, application of the guidance will be made prospectively, retrospectively or subject to a retrospective transition method. The Company is currently evaluating the potential impact of adopting this guidance on the Company's results of operations, cash flows and financial position.
In August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows, Clarification of Certain Cash Receipts and Cash Payments”, which provides guidance on the presentation and classification of eight specific cash flow issues. Those issues are cash payment for debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instrument or other debt instrument with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; cash received from settlement of corporate-owned life insurance policies; distribution received from equity method investees; beneficial interest in securitization transactions; and classification of cash receipts and payments that have aspect of more than one class of cash flows. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
14
In November 2016, the FASB issued ASU No. 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash”. The amendments in this Update require that a statement of cash flows explain the change during the pe
riod in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and inte
rim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company is currently evaluati
ng the impact this guidance will have on its financial disclosures; however, as the guidance only impacts disclosure
and cash flows
, the adoption of this guidance is not expected to have any impact on the Company’s financial condition,
and
results of opera
tions.
In January 2017, the FASB issued ASU No. 2017-04 “Simplifying the Test for Goodwill Impairment”. The amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. For public entities, the amendments in this Update are effective on a prospective basis for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Upon adoption, the Company will be required to disclose the nature of and reason for the change in accounting principle upon transition and that disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments. The Company is currently evaluating the impact of these amendments; however, the adoption of this guidance is not expected to have any impact on the Company’s financial condition, results of operations and cash flows.
5. Equity Transactions and Share-Based Compensation
The Company recognized share-based compensation expense related to equity awards to employees, directors, consultants and service providers of $1.2 million and $3.4 million during the three months ended December 31, 2016 and 2015, respectively, and $2.2 million and $7.0 million during the six months ended December 31, 2016 and 2015, respectively.
On July 29, 2015, the Company entered into a Controlled Equity Offering Sales Agreement (the “New Sales Agreement”) with Cantor Fitzgerald & Co., pursuant to which the Company may, from time to time, issue and sell shares of common stock, having an aggregate offering price of up to $25.0 million. The Company issued 380,011 shares for net proceeds of $4.6 million under the New Sales Agreement during the six months ended December 31, 2015. The Company used the proceeds for working capital needs and other general corporate purposes. The Company did not utilize this facility during the six months ended December 31, 2016.
On July 29, 2015, the Company entered into an equity purchase agreement (the “LPC Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which the Company may sell, from time to time, to LPC up to $45.0 million in shares of the Company’s common stock through July 2017, subject to certain limitations and conditions set forth in the LPC Purchase Agreement. The Company issued 324,465 shares of common stock to LPC and received net proceeds of $4.8 million under the LPC Purchase Agreement during the six months ended December 31, 2015. The Company used the proceeds for working capital needs and other general corporate purposes. The Company did not utilize this facility during the six months ended December 31, 2016.
We are not currently eligible to register the offer and sale of our securities using a registration statement on Form S-3, cannot use our existing Form S-3 and will not become eligible to use Form S-3 until we have timely filed certain periodic reports required under the Exchange Act for 12 consecutive calendar months. As a result, the Company will not be able to obtain financing under the New Sales Agreement or LPC Purchase Agreement at least until the Company is eligible to register the offer and sale of our securities using a registration statement on Form S-3.
15
Stock Options and Warrants
The Company has granted stock options to certain employees and directors under the Employee Share Option Plan (the “Plan”). The Plan is designed to assist in the motivation and retention of employees and directors and to recognize the importance of employees and directors to the long-term performance and success of the Company. The Company has also granted stock options to certain service providers 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. Share-based compensation expense related to options granted to employees and directors is recognized on a straight-line method over the related vesting term. Share-based compensation expense related to options granted to service providers is recognized ratably over each vesting tranche of the options.
In December 2016, the Company amended its Amended and Restated 2009 Stock Incentive Plan or “Amended Stock Plan” to increase the number of shares of common stock available for issuance under the Amended Stock Plan by approximately 2.4 million shares. In January 2017, the Company granted 1,100,000 stock options and 791,173 restricted stock units at fair market value to its employees.
Under the terms of the LPC Purchase Agreement, the Company was required to obtain the consent of LPC prior to completing the Preferred Stock Purchase Agreement. The Company obtained such consent on November 9, 2015 and contemporaneously issued a five-year warrant to purchase 90,000 shares of common stock to LPC at an exercise price of $10.00 per share. The Company performed a Black-Scholes valuation on the warrant and valued the warrant at $5.40 per share of common stock. Accordingly, the Company recorded $0.5 million during the three months ended December 31, 2015 associated with the issuance of the warrant as a component of redeemable convertible preferred stock issuance cost. LPC has not exercised any warrants as of December 31, 2016. On December 31, 2016,
t
he Company performed a Black-Scholes valuation on the warrant liability to revalue the warrant and valued the warrant at $0.79 per share of common stock. The warrant liability was revalued to $0.1 million at December 31, 2016.
On February 22, 2016, in connection with entering into the Eighth Amendment to the Credit Agreement (as defined below) and the Sixth Amendment to the Royalty Agreement (as defined below), the Company issued to ROS (as defined below) warrants to purchase 1,673,981 shares of common stock, with an exercise price of $12.50 per share, subject to adjustment for certain events, which may be exercised at any time and from time to time until February 22, 2026.
ROS has not exercised any warrants as of
December 31, 2016. Upon issuance, t
he Company performed a Black-Scholes valuation on the warrant and valued the warrant at $7.20 per share of common stock. Accordingly, the Company recorded a $12.1 million warrant liability during the three months ended March 31, 2016 associated with the issuance of the warrant. On December 31, 2016,
t
he Company performed a Black-Scholes valuation on the warrant liability to revalue the warrant and valued the warrant at $1.24 per share of common stock. The warrant liability was revalued to $2.1 million at December 31, 2016.
The following is a summary of activity related to stock options held by employees and directors during the six months ended December 31, 2016:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Outstanding as of July 1, 2016
|
|
|
102,552
|
|
|
$
|
40.10
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(8,686
|
)
|
|
|
49.25
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
93,866
|
|
|
|
39.25
|
|
|
|
5.5
|
|
|
$
|
0
|
|
Exercisable as of December 31, 2016
|
|
|
78,366
|
|
|
$
|
39.79
|
|
|
|
5.3
|
|
|
$
|
0
|
|
16
The following is a summary of activity related to stock options and warrants held by persons other than employees and directors during the six months ended December 31, 2016:
|
|
Number of
Options &
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Outstanding as of July 1, 2016
|
|
|
1,793,981
|
|
|
$
|
12.68
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
1,793,981
|
|
|
$
|
12.68
|
|
|
|
8.8
|
|
|
$
|
—
|
|
Exercisable as of December 31, 2016
|
|
|
1,793,981
|
|
|
$
|
12.68
|
|
|
|
8.8
|
|
|
$
|
—
|
|
The aggregate intrinsic value is defined as the difference between the market value of the Company’s common stock as of the end of the period and the exercise price of the in-the-money stock options. There were no options exercised during the six months ended December 31, 2016 and 2015, respectively.
There were no options granted during the three and six months ended December 31, 2016 and 2015, respectively.
Restricted Stock Awards and Units
The Company has granted shares of restricted stock to certain employees, directors and consultants under the Amended and Restated 2009 Stock Incentive Plan. During the period prior to vesting, the holder of the non-vested restricted stock will have the right to vote and the right to receive all dividends and other distributions declared. All non-vested shares of restricted stock are reflected as outstanding; however, they have been excluded from the calculation of basic earnings per share.
For employees, the fair value of restricted stock is measured on the date of grant using the price of the Company’s common stock on that date. Share-based compensation expense for restricted stock issued to employees is recognized on a straight-line basis over the requisite service period, which is generally the longest vesting period. For restricted stock granted to consultants, the fair value of the awards will be re-valued on a quarterly basis and marked to market until vested. Share-based compensation expense for restricted stock issued to consultants is recognized ratably over each vesting tranche.
The following is a summary of activity related to awards of restricted stock and restricted stock units during the six months ended December 31, 2016:
|
|
Number of
Restricted
Stock Awards
and Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested as of July 1, 2016
|
|
|
882,948
|
|
|
$
|
15.41
|
|
Granted
|
|
|
313
|
|
|
|
2.78
|
|
Vested
|
|
|
(103,087
|
)
|
|
|
29.33
|
|
Cancelled
|
|
|
(94,159
|
)
|
|
|
7.33
|
|
Unvested as of December 31, 2016
|
|
|
686,015
|
|
|
$
|
14.42
|
|
Preferred Stock Purchase Agreement
On November 9, 2015, the Company entered into and closed a Preferred Stock Purchase Agreement (the “Preferred Stock Purchase Agreement”) with a fund (the “Fund”). Pursuant to the Preferred Stock Purchase Agreement, the Company issued and sold to the Fund 790 shares of the Company’s newly designated Series A Redeemable Convertible Preferred Stock of the Company, par value $0.01 per share (the “Series A Preferred Stock”), at a 5% original issue discount and at a purchase price of $10,000 per share for total gross proceeds to the Company of $7.5 million. Prior to the full conversion of the Series A Preferred stock (as more fully discussed below), the Series A Preferred Stock was convertible into shares of common stock at a fixed conversion price of $10.00 per share (the “Conversion Price”). The shares of Series A Preferred Stock were offered and sold in a registered direct offering (the “Offering”) pursuant to the Company’s shelf registration statement (File No. 333-197122), which was declared effective by the SEC on October 3, 2014.
17
From the date of issuance, each share of Series A Preferred Stock accrued dividends at a rate of 8.0% per annum (the “Dividend Rate”), subject to adjustment as discussed below, on its face value of $10,000 (the “Face Value”
), payable upon conversion or redemption of such share and when, as and if otherwise declared by the Board. Dividends were paid either in cash or in shares of common stock at the Company’s sole discretion and were valued at (i) if there was no Trigger Even
t (as defined below), (A) 95.0% of the average of the 5 lowest individual daily volume weighted average prices of the common stock on the Trading Market during the applicable Measurement Period, which may be non-consecutive, less $0.50 per share of common
stock, not to exceed (B) 100% of the lowest sales price on the last day of such Measurement Period less $0.50 per share of common stock or (ii) following any Trigger Event, (A) 80.0% of the lowest daily volume weighted average price during any Measurement
Period for any conversion by Holder, less $1.00 per share of common stock, not to exceed (B) 80.0% of the lowest sales price on the last day of any Measurement Period, less $1.00 per share of common stock. “Trigger Event” is defined as including, among oth
er events, our breach of the Certificate of Designations and any transaction documents, the occurrence of certain defaults under our material agreements, the suspension of our NASDAQ listing, bankruptcy, the appointment of a receiver, our failure to timely
file any report under the Exchange Act or the unenforceability of any material provision of the Certificate of Designations. “Trading Market” is defined as the principal trading exchange or market for the common stock. “Measurement Period” is defined as t
he period beginning on the date of issuance of any such shares of Series A Preferred Stock and ending, if no Trigger Event has occurred 3 trading days, and if a Trigger Event has occurred 30 trading days, after the number of shares have been delivered with
respect to a conversion notice.
The Dividend Rate was adjusted (i) downward by an amount equal to 100 basis points for each amount, if any, equal to $0.50 per share of common stock that the volume weighted average price of our common stock on any trading day rose above $15.00, down to a minimum of 0.0%; and (ii) upward by an amount equal to 150 basis points for each amount, if any, equal to $0.50 per share of common stock that volume weighted average price of our common stock on any trading day fell below $7.00, up to a maximum of 15.0%. In addition, the Dividend Rate was adjusted upward by 10.0% upon any Trigger Event.
Each share of Series A Preferred Stock was convertible into such number of shares of common stock equal to the Face Value divided by the Conversion Price. Upon any conversion, the Company issued common stock at the Conversion Price and paid the dividend and conversion premium (“Dividend”) (in one instance in cash and the remaining instances in stock at the Company’s discretion). The Company was prohibited from issuing shares of common stock upon conversion of the Series A Preferred Stock if, as a result of the conversion, the holder, together with its affiliates, would beneficially own more than 4.99% of the total number of shares of the Company’s common stock then issued and outstanding, subject to adjustment up to 9.99% upon 61 days’ notice from the investor, which is referred to herein as the “Beneficial Ownership Limitation”. The Preferred Stock Purchase Agreement also contains representations, warranties and covenants customary for transactions of this type.
In November 2015 and December 2015, the Fund delivered to the Company notices of conversion totaling an aggregate of 300 shares of Series A Preferred Stock (the “Initial Conversion Notices”) and the Company issued an aggregate of 1,025,499 shares of common stock and paid $0.3 million in cash to satisfy the Initial Conversion Notices. Calculations in the Initial Conversion Notices were based upon the occurrence of a Trigger Event.
As described above, the amount of any Dividend varied based on the Company’s share price during the applicable Measurement Period. If the Company’s share price declined during the Measurement Period with respect to a conversion notice, the number of shares owed to the Fund pursuant to such conversion notice would have changed and the Company was then required to issue the additional shares owed. During December 2015, the Company issued an additional 518,784 shares of common stock as additional Dividend with respect to the Conversion Notices as a result of a decline in the share price during the applicable Measurement Periods.
On January 4, 2016, the Fund delivered to the Company a notice of conversion for 40 shares of Series A Preferred Stock (the “January 4
th
Conversion Notice” and together with the Initial Conversion Notices, the “Conversion Notices”) and the Company issued the Fund 246,036 shares of common stock. During January 2016, the Company issued an additional 162,706 shares of common stock as additional Dividend with respect to the Conversion Notices as a result of a decline in the share price during the applicable Measurement Periods.
On February 3, 2016, Company entered into the First Amendment to the Preferred Stock Purchase Agreement with the Fund. Pursuant to the First Amendment to the Preferred Stock Purchase Agreement, the Company acknowledged that the Fund had at all times fully and completely complied with all of its obligations under the Preferred Stock Purchase Agreement. The Fund has converted all of the Preferred Shares, and the parties entered into the First Amendment to the Preferred Stock Purchase Agreement to resolve the final and total of number shares of common stock to be delivered by the Company to the Fund as a result of the conversion.
Pursuant to the First Amendment to the Purchase Agreement, in full accord and satisfaction of all obligations under the Purchase Agreement and the remaining transaction documents (as defined in the Preferred Stock Purchase Agreement), the Company agreed to issue to the Fund an additional 831,668 shares (collectively, the “Shares”) of common stock, the approximate amount that may be issued under Nasdaq Listing Rule 5635(d) without shareholder approval which the Company did not obtain. On February 3, 2016, the Company issued and delivered to the Fund 725,000 of the Shares. On February 11, 2016, the Company issued and delivered to the Fund the remaining 106,668 Shares.
18
Pursuant to the First Amendment to the Purchase Agreement, the Company has no further obligat
ions to the Fund with respect to any of the Series A Preferred Stock, Conversion Notices (as defined in the Company’s Certificate of Designations of Preferences, Rights and Limitations of Series A Preferred Stock) or any of the transaction documents. The C
ompany issued 2,784,693 shares of common stock to the Fund in connection with the Preferred Stock Purchase Agreement, as amended by the First Amendment to the Preferred Stock Purchase Agreement. The Fund is no longer the holder of any Series A Preferred St
ock.
The First Amendment to the Preferred Stock Purchase Agreement contained a mutual release of claims between the Company and the Fund and contained customary representations and warranties made by such parties. The Company also agreed to provide the Fund with indemnification for breaches of the First Amendment to the Preferred Stock Purchase Agreement and for certain third-party claims, and the Fund agreed to continue the same activity restrictions provided for in the Preferred Stock Purchase Agreement.
The Company accounted for the Series A Preferred Stock and the related Dividend as two separate units, i.e. Series A Preferred Stock and Preferred Stock Conversion. The Company determined that the Series A Preferred Stock should be classified as temporary equity based on the requirement to provide registered shares of the Company’s common stock upon conversion and the related Dividend should be classified as a liability at fair value. Accordingly, the proceeds recorded as temporary equity for the Series A Preferred Stock represented the proceeds from the issuance less initial fair value of Preferred Stock Conversion and related issuance costs. As a result, on November 9, 2015, the Company recorded the net proceeds of $7.2 million between the Series A Preferred Stock ($2.8 million) and the initial Preferred Stock Conversion at its fair value ($4.4 million). After accounting for all Conversion Notices and First Amendment to the Preferred Stock Purchase Agreement, the Redeemable Convertible Preferred Stock, Series A, was reclassed from temporary equity to permanent equity and was valued at $0.0 million at March 31, 2016 and no further accounting was needed. The Preferred Stock Conversion was remeasured quarterly, and at March 31, 2016, the Preferred Stock Conversion was valued at $0.0 and no further accounting was needed .
6. Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
December 31,
2016
|
|
|
June 30,
2016
|
|
|
|
(in thousands)
|
|
Building
|
|
$
|
32,362
|
|
|
$
|
32,362
|
|
Machinery and equipment
|
|
|
20,090
|
|
|
|
19,537
|
|
Computer software
|
|
|
2,986
|
|
|
|
2,986
|
|
Furniture and fixtures
|
|
|
792
|
|
|
|
1,386
|
|
Construction in progress
|
|
|
13,385
|
|
|
|
13,870
|
|
Land
|
|
|
2,036
|
|
|
|
2,036
|
|
Leasehold improvements
|
|
|
349
|
|
|
|
437
|
|
|
|
|
72,000
|
|
|
|
72,614
|
|
Less: accumulated depreciation and amortization
|
|
|
(19,691
|
)
|
|
|
(17,841
|
)
|
Property, plant and equipment, net
|
|
$
|
52,309
|
|
|
$
|
54,773
|
|
Under
ASC 360 Property, Plant, and Equipment
, the Company is required to evaluate the recoverability of the carrying amount of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In February 2016, the Company completed its review of strategic alternatives and announced the formation of a strategic collaboration centered upon the use of the Company’s portfolio of prefilled, customizable wearable injectors. In connection with this focus, the Company has been evaluating the prospects of its non-wearable injector customer and supplier programs. As a result of negotiations related to those supplier and customer programs and the Company’s evaluation of those programs and potential disposition of certain assets, the Company determined that certain of its long lived-assets were impaired during the third quarter of fiscal year 2016 and an impairment charge was recorded during that period. There were no impairment charges incurred for the three and six months ended December 31, 2016 and 2015.
Construction in progress as of December 31, 2016 consisted of amounts incurred in connection with machinery and equipment and facility related costs, including capitalized interest. Interest capitalized during the three and six months ended December 31, 2016 and 2015 was $0.0 million and $0.7 million; and $0.0 million and $1.4 million respectively.
Depreciation on property, plant and equipment during the three and six months ended December 31, 2016 and 2015 was $1.0 million and $2.7 million; and $1.4 million and $3.0 million, respectively.
19
In December 2016, the Company announced that it
had
listed its York,
Pennsylvania
facility for sale due to unused capacity as a result of
the Company’s
focusing on its wearable injector products.
Under
AS
C 360 Property, Plant, and
Equipment
, t
he
York facility does not yet meet the criteria to be held for sale
which would require classification to current assets
and
be
recorded at its fair value less costs to sell. The Company reviewed the facility for imp
airment and determined that it is not impaired. Therefore, it continues to be recorded as an asset held for use.
7. Goodwill
The changes in the carrying amount of goodwill during the six months ended December 31, 2016 are as follows:
|
|
(in thousands)
|
|
Balance as of July 1, 2016
|
|
$
|
9,423
|
|
Foreign currency translation
|
|
|
(287
|
)
|
Balance as of December 31, 2016
|
|
$
|
9,136
|
|
8. Accrued Expenses
Accrued expenses consist of the following:
|
|
December 31,
2016
|
|
|
June 30,
2016
|
|
|
|
(In thousands)
|
|
Accrued payroll and other employee related expenses
|
|
$
|
3,109
|
|
|
$
|
2,755
|
|
Accrued cost related to equipment
|
|
|
1,320
|
|
|
|
2,623
|
|
Accrued transaction costs
|
|
|
4,000
|
|
|
|
5,000
|
|
Accrued professional fees
|
|
|
964
|
|
|
|
2,010
|
|
Accrued other
|
|
|
6,501
|
|
|
|
1,322
|
|
Total accrued expenses
|
|
$
|
15,894
|
|
|
$
|
13,710
|
|
Accrued transaction costs relate to the Company’s review of strategic alternatives incurred in fiscal 2016. Accrued other includes the $5.0 million liability related to the settlement of the two putative class actions and the derivative complaints. See note 11 “Contingencies” for additional discussion related to these matters.
9. Long-Term Debt
Long-term debt consists of the following:
|
|
December 31,
2016
|
|
|
June 30,
2016
|
|
|
|
(In thousands)
|
|
10.25% Term loan, due March 2020
|
|
$
|
64,303
|
|
|
$
|
57,227
|
|
Royalty agreement liability
|
|
|
5,464
|
|
|
|
5,120
|
|
6.00% Senior secured convertible note, due February 2023
|
|
|
43,428
|
|
|
|
29,066
|
|
6.00% Mortgage loan, due December 2031
|
|
|
12,139
|
|
|
|
12,370
|
|
5.00% Commonwealth of Pennsylvania financing
authority loan, due January 2021
|
|
|
1,948
|
|
|
|
1,977
|
|
|
|
|
127,282
|
|
|
|
105,760
|
|
Less: unamortized debt discounts and issuance costs
|
|
|
(1,177
|
)
|
|
|
(646
|
)
|
|
|
|
126,105
|
|
|
|
105,114
|
|
Less: current portion of long-term debt
|
|
|
(702
|
)
|
|
|
(669
|
)
|
Total long-term debt
|
|
$
|
125,403
|
|
|
$
|
104,445
|
|
Term Loan
On March 12, 2014, Unilife Medical Solutions entered into a Credit Agreement with ROS Acquisition Offshore LP (the “Lender”), an affiliate of OrbiMed Advisors (“OrbiMed”) (the “Credit Agreement,” and, as amended the “Amended Credit Agreement” or the “OrbiMed Financing”). Pursuant to and subject to the terms of the Amended Credit Agreement, the Company has
20
fully utilized the capacity and borrowed principal amounts totaling $70.0 million (the “Loans”). Under the Amended Credit Agreement,
Unilife Medical Solutions
is required to maintain a minimum cash balance of $3.0 million
and comply with certain other customary covenants.
The Loans bear interest at 9.25% per annum plus the greater of three-month LIBOR or 1.0%. Lender agreed to defer all obligations of Unilife Medical Solutions to pay interest to the Lender for the period from January 1, 2016 through February 22, 2018 at the rate specified in the Amended Credit Agreement, which interest will be added to the outstanding principal amount of the Loans on the last day of each interest period. A default interest rate of 14.25% per annum plus the greater of three-month LIBOR or 1.0% shall apply during the existence of a default under the Amended Credit Agreement. The Loans are interest-only until March 12, 2020.
Unless the loan facility is otherwise terminated earlier pursuant to the terms of the Amended Credit Agreement, Unilife Medical Solutions 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 10.0% repayment premium on March 12, 2020. Unilife Medical Solutions can make voluntary repayments at any time of any unpaid principal amount of the Loans, plus a 10.0% repayment premium. Unilife Medical Solutions must make mandatory prepayments in certain prescribed circumstances, including, without limitation, certain dispositions of assets and certain casualty events. In such events, Unilife Medical Solutions must prepay to Lender 100% of the net cash proceeds received.
The obligations of Unilife Medical Solutions under the Amended Credit Agreement are guaranteed by the Company and each of its subsidiaries and the Amended Credit Agreement is secured by the assets of the Company and its subsidiaries. The security interests granted by Unilife Medical Solutions, the Company, Unilife Cross Farm LLC (“Cross Farm”), Unilife Medical Solutions Limited (“UMSL”) and Unitract Syringe Pty Limited (“Unitract Syringe”) are evidenced by, among other things, the Pledge and Security Agreement, dated as of March 14, 2014, by Unilife Medical Solutions, the Company, Cross Farm, UMSL, and Unitract Syringe in favor of Lender, for itself and as agent for Royalty Opportunities S.A.R.L. (“ROS”), the Mortgage and Security Agreement, dated March 12, 2014, by and between Cross Farm and Lender, for itself and as agent of ROS, and the General Security Deed, dated as of March 12, 2014, by Unitract Syringe, UMSL, and the Company in favor of the Lender, for itself and as agent of ROS.
In connection with entering into the Eighth Amendment to the Amended Credit Agreement and the Sixth Amendment to the Royalty Agreement on February 22, 2016, the Company issued to ROS a warrant to purchase 1,673,981 shares of common stock, with an exercise price of $12.50 per share, subject to adjustment for certain events, which may be exercised at any time and from time to time until February 22, 2026. In respect to the consideration provided to ROS in the form of the warrant and the terms of the Eighth Amendment to the Credit Agreement and the Sixth Amendment to the Royalty Agreement, the Company evaluated whether the debt was modified or extinguished pursuant to ASC 470-50, Debt – Modifications and Extinguishments. The Company determined that the previous debt was extinguished and recorded the modified debt at fair value ($51.3 million). The Company recorded a gain on debt extinguishment for the quarter ended March 31, 2016 of $2.9 million which consisted of
the remeasurement of the debt at fair value offset by
the value of the warrant as of the Counterparty Effective Date and the deferred financing costs previously associated with the term loan. The debt will be accreted to face value
over the loan term based on the effective interest rate
.
In connection with the entering into of the October Counterparty Letter Agreement, on October 24, 2016, the Company Parties and certain of the Company’s other subsidiaries entered into the Ninth Amendment (the “Ninth Amendment to the Credit Agreement”) to the Amended Credit Agreement with the Lender. Pursuant to the Ninth Amendment to the Credit Agreement, the Lender agreed to waive (i) compliance with Section 8.9 of the Amended Credit Agreement solely to permit the entering into of the October Counterparty Letter Agreement, and (ii) any event of default that would occur under Section 9.1(c) of the Amended Credit Agreement solely with respect to the October Counterparty Letter Agreement. In addition, the Ninth Amendment to the Credit Agreement amended the Amended Credit Agreement to provide for the issuance of the Accelerated Convertible Note and the execution of the October Counterparty Letter Agreement.
In connection with the issuance of the December 2016 Convertible Note, on December 20, 2016, the Company Parties and certain of the Company’s other subsidiaries entered into the Tenth Amendment (the “Tenth Amendment to the Credit Agreement”) to the Amended Credit Agreement with the Lender. Pursuant to the Tenth Amendment to the Credit Agreement, the Lender consented to the issuance of the December 2016 Convertible Note and the Company agreed to obtain the Lender’s written consent prior to closing on a transaction to sell Company securities to a third party other than the Counterparty or any employee of the Company or Unilife Medical Solutions during the four-month period commencing January 1, 2017 and ending April 30, 2017.
There are cross-default provisions in the Amended Credit Agreement, First National Bank loan (as described below), Keystone/CFA Loan (as described below), and the Outstanding Counterparty Notes (as described below), so that a default under one agreement could trigger a default under the others. First National Bank, the Lender under the Amended Credit Agreement, Keystone Redevelopment Group, LLC and Commonwealth Financing Authority are parties to an intercreditor agreement. The Counterparty and the Lender are also parties to an intercreditor agreement.
21
Royalty Agreement
In connection with entering into the Credit Agreement, Unilife Medical Solutions entered into a Royalty Agreement with ROS (the “Royalty Agreement”) and, as amended the “Amended Royalty Agreement”, which entitles ROS to receive royalty payments.
Unilife Medical Solutions has agreed to pay ROS 4.52% on the first $50.0 million of net sales in each fiscal year, plus 1.75% of net sales in excess of $50.0 million and up to and including $100.0 million in each fiscal year, plus 0.438% of net sales in excess of $100.0 million in each fiscal year. Unilife Medical Solutions has the right to buy out the Amended Royalty Agreement at any time on or before March 12, 2018 at a reduced amount. As of December 31, 2016, the buy-out amount was approximately $27.7 million, on March 13, 2017, the buy-out amount increases to approximately $33.5 million, and on March 13, 2018, the buy-out amount increases up to a maximum of approximately $37.2 million. The buy-out amount varies based on when the buy-out option is exercised and would, in each case, be reduced by amounts previously paid by Unilife Medical Solutions to ROS pursuant to the Amended Royalty Agreement. In the event of default under the Amended Credit Agreement, OrbiMed will have a put option that will make the royalty amounts due immediately. The Amended Royalty Agreement has a term commencing on March 12, 2014 and ending on the earlier of (i) March 12, 2024 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 Unilife Medical Solutions. As the Company has elected to value the Amended Royalty Agreement at fair value, the put option feature does not meet the criterion of ASC 815-15-25-1b and thus is not separated from the host contract and accounted for as a derivative instrument.
On February 22, 2016, Unilife Medical Solutions entered into the Sixth Amendment to the Royalty Agreement with ROS. Pursuant to and subject to the terms of the Sixth Amendment to the Royalty Agreement,
ROS agreed to waive any rights to royalty payments otherwise payable as a result of the License Fee and the proceeds of the Notes, and to defer royalty payments payable on revenues received by the
Unilife Medical Solutions
from the Counterparty until after the end of the first fiscal quarter in which the
Unilife Medical Solutions
sells a commercial quantity of devices developed for the Counterparty.
At inception, the royalty liability was determined to have a fair value of $7.0 million. The royalty liability will be adjusted to fair value on a quarterly basis. As of December 31, 2016, the fair value of the royalty liability was $5.5 million.
Senior Secured Convertible Notes
On February 22, 2016, the Company and Unilife Medical Solutions entered into a Securities Purchase Agreement (the “Counterparty SPA”) with Amgen Inc. (the “Counterparty”), pursuant to which Counterparty agreed to purchase from the Company a new series of 6% Senior Secured Convertible Notes Due 2023 in the aggregate original principal amount of up to $55.0 million (the “Notes”). The Notes originally were to be issued in up to three separate closings. The Company issued to the Counterparty the first Note in the aggregate original principal amount of $30.0 million on February 22, 2016 (the “February 2016 Convertible Note”) and Counterparty paid to the Company $30.0 million in exchange therefor
. Pursuant to the Counterparty SPA, the Counterparty originally was entitled to purchase two additional Notes in January 2017 (the “2017 Convertible Note”) and January 2018 (the “2018 Convertible Note”) in the amounts of $15.0 million and $10.0 million, respectively.
On October 24, 2016, the Company Parties and the Counterparty entered into the October Counterparty Letter Agreement, pursuant to which the Company Parties agreed to issue to the Counterparty on October 24, 2016, in accordance with the terms and conditions of the Counterparty SPA and the October Counterparty Letter Agreement, a portion of the 2017 Convertible Note (the “Accelerated Convertible Note”) in the initial principal amount of $10.0 million plus the $0.6 million financing fee (the “Financing Fee”), for an aggregate initial principal amount of $10.6 million. In consideration for issuing the Accelerated Convertible Note, the Counterparty paid to the Company $10.0 million on October 24, 2016.
On December 20, 2016, the Company issued the remaining portion of the 2017 Convertible Note in the aggregate principal amount of $5.0 million (the “December 2016 Convertible Note”) and the Counterparty paid to the Company $5.0 million in exchange therefor. The terms of the December 2016 Convertible Note are substantially the same as those of the February 2016 Convertible Note and the Accelerated Convertible Note
.
The 2018 Convertible Note will continue to be issuable in January 2018 by the Company Parties to the Counterparty in accordance with the terms and conditions of the Counterparty SPA.
There can be no assurance as to when or if the Counterparty will purchase all or any part of the 2018 Convertible Note.
Interest under each of the February 2016 Convertible Note, the Accelerated Convertible Note, and the December 2016 Convertible Note (together, the “Outstanding Counterparty Notes”) accrues at a rate of 6% per year and will be paid quarterly in arrears through the addition of the amount of such interest to the then outstanding principal amount. All or part of the principal and
22
accrued interest on each of the Outstanding Counterparty Notes will be repaid through
(i) discounted pricing on purchases by the Counterparty of the Company’s products, (ii) credits taken by the Counterparty against development and customization fees for devices, and (iii) credits against per-unit royalties otherwise payable to the Company
for the manufacture and sale of the Company’s products. Any repayment will be applied to the Outstanding Counterparty Notes in the order of their issuance. In addition, pursuant to each of the Outstanding Counterparty Notes, the Company has the right to p
repay in cash all or part of the principal and accrued interest at any time upon 15 business days’ prior notice, subject to the Counterparty’s conversion right with respect to the contemplated prepayment amount. The Company is required to pay in cash any a
mounts of principal and accrued interest outstanding at the maturity date of each of the Outstanding Counterparty Notes, which is February 22, 2023 in both instances
.
During the six months ended December 31, 2016, the Company made non-cash repayments totaling $2.3 million towards the balance of the Outstanding Counterparty Notes. The repayments were for credits relating to development and customization fees.
Each of
the Outstanding Counterparty Notes is convertible at the Counterparty’s election into shares of common stock at any time prior to February 22, 2023, at
the Discounted Sale Price, subject to
the Conversion Rate Floor Price. The Conversion Rate Floor Price under each of the Outstanding Counterparty Notes is subject to customary adjustments for certain capital events.
The Counterparty may cause the redemption of the Outstanding Counterparty Notes upon any event of default by the Company. Events of default under the Outstanding Counterparty Notes include, among others, a failure by the Company to convert the applicable note upon proper notice by the Counterparty or pay principal and interest on the applicable note when due; an acceleration of any other indebtedness under the Amended Credit Agreement or other indebtedness of the Company in excess of $1.0 million; a bankruptcy of the Company; a judgment against the Company in excess of $1.0 million; a representation or warranty made in the Counterparty SPA and the related transaction documents is materially false or misleading when made; a material breach by the Company of a covenant or other term or condition in the Counterparty SPA and the related transaction documents; the Counterparty SPA and the related transaction documents cease to be effective; the termination or amendment of the Eighth Amendment to the Credit Agreement or the Sixth Amendment to the Royalty Agreement; and the incurrence of a lien on collateral that is not a permitted lien. The Company is required to redeem for cash each of the Outstanding Counterparty Notes upon a change of control of the Company in an amount equal to 101% of the aggregate principal and accrued interest outstanding as of the change of control.
Each of the Outstanding Counterparty Notes also provides the Counterparty with certain rights to acquire additional shares of common stock or other securities or assets of the Company, as applicable, in the event: (i) the Company grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the holders of common stock; or (ii) the Company makes certain other distributions to Company stockholders such that, in the case of (i) or (ii), the Counterparty receives, in addition to the shares of common stock otherwise issuable upon conversion of the Outstanding Counterparty Notes, the shares of common stock or other securities or assets, as applicable, that the Counterparty would have been entitled to receive if the Counterparty had converted the Outstanding Counterparty Notes into common stock immediately prior to such event.
The Outstanding Counterparty Notes are secured by certain inventory and intellectual property assets related to a specific device being licensed to the Counterparty. The Counterparty has agreed to preserve license rights granted to other customers for any license rights granted prior to a foreclosure. The terms and conditions of the 2018 Counterparty Note, if purchased by the Counterparty, are substantially the same as the terms and conditions of the Outstanding Counterparty Notes, except that the “Conversion Rate Floor Price” of the 2018 Counterparty Note will be the greatest of (x) $12.50, (y) the closing sale price of the common stock on the trading day preceding the issuance date, and (z) the book value per share of common stock on the trading day immediately preceding the issuance date.
The Company determined that the conversion feature should be accounted for as a stock put option and would be bifurcated from the value of the Outstanding Counterparty Notes and treated as a derivative liability. The initial fair value of the derivative liability of the February 2016 Convertible Note, the Accelerated Convertible Note, and the December 2016 Convertible Note was determined to be $1.7 million, $0.1 million, and less than $0.1 million, respectively. The Outstanding Counterparty Notes will be accreted to their face value over the life of
the Note term based on the effective interest rate.
The fair value of this derivative liability will be adjusted to fair market value on a recurring basis. As of December 31, 2016, the fair market value of the derivative liability was determined to be $0.5 million.
23
On September 29, 2016, the Company and the Counterparty entered into a letter agreement (the “September Counterparty Letter
Agreement”). Pursuant to the September Counterparty Letter Agreement, the Counterparty agreed (i) until 11:59 p.m. New York City time on July 1, 2017, to waive any and all rights whatsoever that the Counterparty has or may have under
the
Counterparty
SPA
and certain related transaction documents to declare an “Event of Default” under the
February
2016 Convertible Note as a result of the Company’s failure to timely file the March 2016 10-Q or the 2016 10-K (together, the “Exchange Act Filings”); and (ii) th
at the filing by the Company of the Securities Filings with the SEC will cure any breach of Section 6.3 of the
Counterparty
SPA as a result of the Company’s failure to timely file the Securities Filings with the SEC. As noted above, the Company filed the E
xchange Act Filings with the SEC on October 24, 2016.
On July 28, 2016, the Company and the Counterparty entered into two letter agreements. Pursuant to the first letter agreement, the Counterparty agreed to not convert the Notes into shares of the Company’s common stock to the extent that such conversion would cause the Counterparty to beneficially own 10% or more of the outstanding shares of the common stock immediately following such conversion (the “Conversion Limit”). Pursuant to such letter agreement, the Counterparty has the right to terminate the Conversion Limit at any time with 75 days’ prior written notice to the Company. Pursuant to the second letter agreement, the Counterparty agreed (i) to waive, until 11:59 p.m. New York City time on November 7, 2016, any and all rights whatsoever that the Counterparty had to declare an “Event of Default” under the
February
2016 Convertible Note as a result of the Company’s failure to timely file the March 2016 10-Q; and (ii) that the Company’s filing of the March 2016 10-Q with the SEC will cure any breach of Section 6.3(i) of the SPA , as a result of the Company’s failure to timely file the March 2016 10-Q with the SEC.
As noted above, the Company filed the
March 2016 10-Q
with the SEC on October 24, 2016.
Under section 6.3 of the Counterparty SPA, the Company is required to, until the date on which the Counterparty has sold all the shares of the Company’s common stock into which the Notes are convertible (the “Conversion Shares”) and none of the Notes are outstanding, (i) timely file all reports required to be filed with the SEC pursuant to the Exchange Act or the rules and regulations thereunder and (ii) not take any action or file any document (whether or not permitted by the Securities Act or the rules promulgated thereunder) to terminate or suspend the Company’s reporting and filing obligations under the Exchange Act or Securities Act, (iii) take all actions necessary to maintain the Company’s eligibility to register the Conversion Shares for resale by the Counterparty on Form S-3, and (iv) use its commercially reasonable efforts to take all action as may be required as a condition to the availability of Rule 144 under the Securities Act with respect to the Company’s common stock.
Mortgage Loan
In October 2010, Cross Farm entered into the Loan Agreement with First National Bank (formerly known as Metro Bank), pursuant to which First National Bank provided Cross Farm with two mortgage loans in the amounts of $14.25 million (“First Mortgage”) and $3.75 million (“Second Mortgage”). The proceeds received were used to finance the purchase of land and construction of the Company’s corporate headquarters and manufacturing facility in York, Pennsylvania. In connection with the credit agreement, the Company entered into the Metro Bank Amendment pursuant to which the Second Mortgage due October 2020 was repaid. Cross Farm is paying principal and interest on the First Mortgage, with interest at a fixed rate of 6.00%.
The original First National Bank loan documents contain 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 sheets, which will remain in place until Cross Farm and First National Bank agree on the financial covenants. In addition the Company is required to maintain a cash balance of $5.0 million inclusive of the $2.4 million reserve account. The terms of the original First National Bank loan documents allow the Company to use the debt service reserve account to pay monthly debt service on the mortgage loans, so long as the balance in the account is at least $1.6 million and is replenished to $2.4 million every six months. The Company is in compliance with its debt covenants as of December 31, 2016. However, there can be no assurance that the Company will be able to maintain the debt service reserve account balance for a period of 12 months from December 31, 2016. Cross Farm may prepay the loan without penalty. The U.S. Department of Agriculture has guaranteed $8.0 million of the mortgage loan due December 2031. In connection with the First Mortgage, the Company has given First National Bank a lien on the building and real estate and the debt service reserve account.
Commonwealth of Pennsylvania Financing Authority Loan
In December 2010, Cross Farm received a $2.25 million loan from Keystone Redevelopment Group, LLC (“Keystone”) for land and the construction of its current manufacturing facility. The loan bears interest at a rate of 5.00% per annum, matures in January 2021 and is secured by a third mortgage on the facility. Keystone assigned the loan and mortgage (the “Keystone/CFA Loan”) to the Commonwealth of Pennsylvania Financing Authority. In connection with the Keystone/CFA Loan, 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 Bank, which holds the first mortgage on the facility.
24
Loan from our Former CEO
On September 30, 2015, the Company obtained a loan in the amount of $0.6 million from Alan Shortall, the Company’s former Chairman and Chief Executive Officer. During February 2016, the loan was repaid in full including payment of interest to Mr. Shortall at the minimum applicable federal rate, which interest was less than $0.1 million.
10. Net Loss Per Share
The Company’s net loss per share is as follows:
|
|
Three Months Ended
December 31,
|
|
Six Months Ended
December 31,
|
|
|
|
2016
|
|
|
|
|
2015
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands, except share and
per share data)
|
|
(In thousands, except share and
per share data)
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,309
|
)
|
|
|
|
$
|
(25,423
|
)
|
$
|
(33,282
|
)
|
|
$
|
(51,287
|
)
|
Deemed dividend on Series A Preferred Stock
|
|
|
—
|
|
|
|
|
|
(1,047
|
)
|
|
—
|
|
|
|
(1,047
|
)
|
Net loss attributable to common stock holders
|
|
$
|
(15,309
|
)
|
|
|
|
$
|
(26,470
|
)
|
$
|
(33,282
|
)
|
|
$
|
(52,334
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used to compute basic
net loss per share
|
|
|
16,698,329
|
|
|
|
|
|
13,377,229
|
|
|
16,672,595
|
|
|
|
12,915,014
|
|
Effect of dilutive options to purchase common stock
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Weighted average number of shares used to compute diluted
net loss per share
|
|
|
16,698,329
|
|
|
|
|
|
13,377,229
|
|
|
16,672,595
|
|
|
|
12,915,014
|
|
Basic and diluted net loss per share
|
|
$
|
(0.92
|
)
|
|
|
|
$
|
(1.98
|
)
|
$
|
(2.00
|
)
|
|
$
|
(4.05
|
)
|
Due to the Company’s net losses, unvested shares of restricted stock (participating securities) totaling 729,434 and 1,007,211 were excluded from the calculation of basic and diluted net loss per share during the three months ended December 31, 2016 and 2015, respectively; and unvested shares of restricted stock (participating securities) totaling 789,889 and 1,035,368 were excluded from the calculation of basic and diluted net loss per share during the six months ended December 31, 2016 and 2015, respectively.
In addition, stock options and warrants (non-participating securities) totaling 1,887,797 and 333,189 during the three months ended December 31, 2016 and 2015, respectively, were excluded from the calculation of diluted net loss per share, as their effect would have been anti-dilutive; and stock options and warrants (non-participating securities) totaling 1,887,797 and 319,929 during the six months ended December 31, 2016 and 2015, respectively, were excluded from the calculation of diluted net loss per share, as their effect would have been anti-dilutive. All 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 December 31, 2016 and 2015, these shares would have had an effect of 0 and 0 diluted shares, respectively; and had the Company reported net income during the six months ended December 31, 2016 and 2015, these shares would have had an effect of 0 and 0 diluted shares, respectively, for purposes of calculating diluted net income per share. The impact of the potential conversion of outstanding Convertible Notes of 3,605,069 diluted shares as of December 31, 2016 were also excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive.
11. 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 that it is not probable that an unfavorable outcome will result.
In addition, the Company is or was involved in the following legal proceedings:
A former employee, Talbot Smith, who was terminated for cause by the Company, filed a civil complaint in the United States District Court of the Eastern District of Pennsylvania on August 30, 2013, and an amended complaint on March 5, 2014, alleging that he was wrongly terminated in retaliation for making allegations about the Company’s compliance practices. Following the discovery process, Mr. Smith dismissed his claims against the Company with prejudice. In connection with the resolution and dismissal of the
25
action, Mr. Smith agreed to make a payment to the Company to settle counter claims the Company had brought against him. Mr. Smith received no payment as part of the resolution and dismissal of his claims against the Company, his attor
ney received a reduced portion of her fees from the Company’s insurer, and the matter is now concluded.
As previously disclosed, subsequent to the filing of an OSHA complaint by Mr. Smith, we received a subpoena from the staff of the SEC (the “Staff”) requesting the Company to provide certain information to the Staff, which is generally consistent with the meritless allegations made by Mr. Smith in his OSHA complaint. In his complaint filed in the United States District Court for the Eastern District of Pennsylvania, Mr. Smith stated that he provided the Staff with information about his allegations in July and August 2012. The Company responded to that subpoena and has received additional subpoenas and requests for information from the Staff, requesting additional information consistent with the first subpoena. The Staff has also requested information about public statements made by the Company’s former Chief Executive Officer. The Company has provided the requested information to the Staff.
On May 8, 2016, the Company announced an investigation into violations of the Company’s policies and procedures and possible violations of laws and regulations by the Company’s former Chief Executive Officer, Alan Shortall, whose employment with the Company ceased on March 11, 2016, and its former Chairman, Jim Bosnjak, who
resigned from the Board on August 24, 2015
(the “Investigation”). The Investigation was completed on October 7, 2016, and
the Company has reported to the SEC on the Company’s findings from the Investigation, has responded to questions from the Staff regarding the findings, and is cooperating fully with the Staff.
To date, the SEC has not indicated whether any fines or penalties will be assessed against the Company in relation to these matters. The Company is unable to predict
what action the SEC or other regulatory authority may take, if any, in relation to these matters or the impact, if any, of any such action on the Company’s business, operations, cash flows and/or financial condition. If any fines or penalties are assessed against the Company, they may be material.
On September 14, 2015, Unilife Medical Solutions was served with a complaint filed in the Superior Court of the State of Connecticut by Biodel, Inc. (“Biodel”) seeking (1) to temporarily enjoin Unilife Medical Solutions from entering into a transaction that would jeopardize the Company’s ability to perform its obligations under the Customization and Commercial Supply Agreement effective April 8, 2013 (as amended, the “First Biodel Agreement”) between Biodel and Unilife Medical Solutions; and (2) damages under the Connecticut Unfair Trade Practices Act. Biodel alleged that Unilife Medical Solutions had engaged in unfair and deceptive trade practices by purportedly misrepresenting its ability and willingness to satisfy its obligations under the First Biodel Agreement and requesting additional payments from Biodel to satisfy the Company’s obligations. Additionally, Biodel filed a demand for arbitration with the American Arbitration Association (AAA) asserting that Unilife Medical Solutions had breached its obligations relating to the timing and scope of its performance under the First Biodel Agreement. The Company filed counterclaims in the arbitration for commercial disparagement and breach of the confidentiality provisions of the agreement.
On September 2, 2016, Biodel, the Company and Unilife Medical Solutions entered into an Asset Purchase and License Agreement (the “Second Biodel Agreement”) which provides: (a) for the termination of the First Biodel Agreement; (b) for the grant of an exclusive license for a six-month term to the intellectual property rights related to the Unilife mixing device; (c) a six-month term during which Biodel can exercise an option (the “Option”) to purchase certain assets associated with the First Biodel Agreement for $1.5 million (the “Potential Asset Sale”) and extend Biodel’s license, for fees based on intellectual prosecution and maintenance costs determined on an annual basis; (c) dismissal, with prejudice, of all active proceedings in connection with the litigation and arbitration proceedings pending between Biodel and Unilife Medical Solutions. Under the Second Biodel Agreement, each party also released the other party of all liability, waived all claims with prejudice, and forever holds the other party harmless from any damages arising out of relating to the First Biodel Agreement. Biodel and Unilife Medical Solutions each paid their respective attorneys’ fees and Unilife Medical Solutions paid no monetary amount to Biodel in connection with this resolution. To date, Biodel has not exercised the Option.
On March 24, 2016, Edward Fine filed a complaint against the Company and Unilife Medical Solutions Limited (“UMSL”) in the Superior Court of New Jersey. The complaint alleges that the Company and UMSL are in breach of contract and have been unjustly enriched as a result of UMSL’s failure to pay certain required payments under a consultancy agreement between Mr. Fine and UMSL. Pursuant to the complaint, Mr. Fine is seeking monetary damages in the amount of $288,000 in the aggregate. The Company believes that Mr. Fine’s claims and demands for relief are wholly without merit and the Company is vigorously defending the action. On August 15, 2016, we filed an Answer, Affirmative Defenses and Counterclaims, wherein we asserted counterclaims against Mr. Fine for fraud, civil conspiracy, unjust enrichment, breach of contract, and breach of the implied covenant of good faith and fair dealing arising out of Mr. Fine’s role in certain previously disclosed transactions involving Mr. Fine and Jim Bosnjak, the Company’s former Chairman of the Board. On September 23, 2016, Mr. Fine filed an Answer and Affirmative Defenses to the Company’s counterclaims. This action is currently in a 450-day discovery period which commenced on July 29, 2016.
26
On May 26 and 27, 2016, two putative class actions were filed in the United States District Court for the Southern District of New York alleging that in violation of Rule 10b-5
and Section 20(a) of the Exchange Act, the Company and six individual defendants made false and/or misleading statements and/or failed to disclose: (1) that the Company’s former CEO and former Chairman of the Board of Directors had violated the Company’s p
olicies and procedures and had engaged in violations of law and regulations; (2) that the Company lacked adequate internal controls over accounting and financial reporting; (3) that, as a result, the Company would be unable to file its Quarterly Report on
Form 10-Q for the period ended March 31, 2016 by the prescribed filing deadline; and (4) that, as a result of the foregoing, the Company’s financial statements, as well as its statements about the Company’s business, operations, and prospects, were false a
nd misleading and/or lacked a reasonable basis. The putative class actions were brought on behalf of purchasers of the Company’s securities between February 3, 2014 and May 23, 2016. On August 24, 2016, the Court consolidated the two actions, appointed l
ead plaintiffs and lead counsel, and set a deadline of October 24, 2016 for Plaintiffs to file an amended complaint. The
plaintiffs filed an amended complaint on October 24, 2016 expanding the class to purchasers of the Company’s securities between Novembe
r 9, 2011 and July 28, 2016, dropping three of the original individual defendants as named defendants and making additional allegations related to matters the Company disclosed in connection with the Investigation.
In accordance with a scheduling order iss
ued by the Court on December 12, 2016, Plaintiffs filed a second amended complaint on December 14, 2016 that, among other things, included allegations relating to the Company’s October 24, 2016 and November 14, 2016 SEC filings.
In February 2017, the parti
es reached an agreement-in-principle to fully resolve all claims that were asserted or could have been asserted in the lawsuit. An insurer for the Company has agreed to pay the full amount of the proposed settlement. The proposed settlement is subject to
definitive documentation and court approval. If the proposed settlement is not consummated, the Company intends to vigorously contest this lawsuit.
The Company has recorded a receivable from its insurance carrier and a liability to the claimants for $4.4
million, which is included in prepaid and other current assets and accrued expenses on the consolidated balance sheet at December 31, 2016 related to this matter.
On July 11, July 28, and August 1, 2016, respectively, derivative complaints were filed in the Court of Common Pleas in York County, Pennsylvania against 11 current or former directors and/or officers, alleging (i) breach of their fiduciary duties, (ii) unjust enrichment, (iii) abuse of control, (iv) gross mismanagement, and (v) corporate waste. The complaints allege, among other things, that the individual defendants breached the fiduciary duties they owed to the Company by (1) grossly mismanaging the Company and perpetuating a variety of self-serving schemes to benefit themselves and other interested parties and (2) making and/or causing the Company to make false/misleading statements or omissions of fact in its public disclosures. The complaints further allege that as a result of this alleged conduct, the Company will lose and expend millions of dollars. On January 11, 2017, a derivative complaint was filed in the United States District Court for the Southern District of New York against 11 current or former directors and/or officers that makes similar allegations to those asserted in the previously-filed derivative complaints. In February 2017, the parties reached an agreement-in-principle to fully resolve all claims that were asserted or could have been asserted in these lawsuits which includes the Company’s agreement to make certain modifications to its corporate governance and also a payment to plaintiffs’ attorneys’ for their fees, which an insurer for the Company has agreed to pay. The proposed settlement is subject to definitive documentation and court approval. If the proposed settlement is not consummated, the Company intends to vigorously contest these lawsuits. The Company has recorded a receivable from its insurance carrier and a liability to the claimants for $0.6 million, which is included in prepaid and other current assets and accrued expenses on the consolidated balance sheet at December 31, 2016 related to this matter.
On August 17, 2016, Kahle Automation, S.r.l. (“Kahle”) filed a complaint against Unilife Medical Solutions in the United States District Court for the District of New Jersey. The complaint alleges that Unilife Medical Solutions breached contracts with Kahle for Kahle’s supply of automation systems for Unilife Medical Solutions’ Nexus and Finesse product lines. Kahle seeks monetary damages of $4.2 million which includes alleged damages that we believe are not recoverable, such as $0.9 million for bank fees, and $0.8 million for lost profits. Kahle also seeks injunctive relief enjoining Unilife Medical Solutions from using the Nexus System and requiring Unilife Medical Solutions to take delivery of work in process related to the Finesse System. Unilife Medical Solutions disputes Kahle’s allegations that Unilife Medical Solutions terminated its agreement with Kahle for the Finesse System. We intend to defend ourselves vigorously against these claims.
The Company received an assessment for approximately $0.3 million for sales and use taxes as a result of an audit by the Commonwealth of Pennsylvania. The Company has appealed the assessment and in connection with the appeal the Commonwealth of Pennsylvania required the Company to post a surety bond in December 2016 in the amount of the assessment. The Company transferred $0.3 million into a restricted cash account as collateral, which is included in restricted cash on the consolidated balance sheet as of December 31, 2016, to support the issuance of the surety bond by a highly rated insurance company.
The Company believes that depending on the outcome, certain of these matters may have a material impact to the Company or its business.
27
12. Revenue
The Company recognized $2.3 million and $4.5 million of revenue during the three months ended December 31, 2016 and 2015, respectively. The Company recognized $4.1 million and $7.7 million of revenue during the six months ended December 31, 2016 and 2015, respectively.
During the three months ended December 31, 2016, four customers accounted for 41%, 37%, 12% and 10% of consolidated revenue, respectively. During the three months ended December 31, 2015, three customers accounted for 39%, 30% and 25% of consolidated revenue, respectively. During the six months ended December 31, 2016 three customers accounted for 41%, 28%, and 24% of consolidated revenue, respectively. During the six months ended December 31, 2015 four customers accounted for 32%, 28%, 25% and 11% of consolidated revenue, respectively.
2016
During the three and six months months ended December 31, 2016, the Company recognized $0.6 million and $1.0 million of revenue, respectively, related to substantive milestones, as follows:
The Company recognized $0.6 million and $1.0 million of revenue during the three and six months ended December 31, 2016 pursuant to a master services and supply agreement with a customer related to substantive milestones that were completed and accepted. This agreement provides for certain customization and development activities for a drug delivery system to be performed for the customer and provides for payments to be made upon the completion of agreed-upon substantive milestones. An initial up-front payment of $1.1 million was determined to be non-substantive and is being recognized on a straight-line basis over the expected term of the agreement. The remaining milestones were determined to be substantive at the time the agreement was entered into. Substantive milestones that were achieved during the six months ended December 31, 2016 are as follows:
|
•
|
$0.4 million for development and delivery of components for a human factor study;
|
|
•
|
$0.4 million for completion of testing of assembly equipment; and
|
|
•
|
$0.3 million for completion of filling process of clinical devices;
|
The remaining substantive milestones as of December 31, 2016 are as follows:
|
•
|
$0.4 million for delivery of containers for the filling process; and
|
|
•
|
$0.3 million for delivery of devices for clinical studies.
|
During the three and six months ended December 31, 2016, the Company recognized $1.5 million and $2.7 million in revenue related to services rendered on a time and materials basis, proportional performance method, the completed contract method and/or straight line basis over the requisite service period pursuant to customer agreements to provide various customization and development services.
28
On December 31, 2015, the Company entered into an exclusivity agreement (the “Exclusivity Agreement”) with Amgen Inc. (the “Counterparty”). Pursuan
t to the Exclusivity Agreement, the Counterparty paid to the Company a non-refundable $15.0 million license fee (the “First License Fee”).
The Company and the Counterparty then entered into a License Agreement on February 5, 2016 (the “First License Agreem
ent”) to further define the license rights set forth in the Exclusivity Agreement
. Furthermore on February 22, 2016,
the Company granted the Counterparty exclusive rights to the Company’s wearable injectors within select drug classes for use with certain a
ssets, while preserving rights the Company previously granted to other customers. The Company has also granted to the Counterparty non-exclusive rights to all of the Company’s proprietary delivery systems within the therapeutic areas of oncology, inflammat
ion, bone health, nephrology, cardiovascular and neuroscience. The Counterparty paid to the Company an additional non-refundable $20.0 million fee (the “Second License Fee”) in consideration for such licenses.
During the 2017 fiscal year, the Company began
development work
on wearable injector devices related to the First License Agreement,
and recognized $0.2 million and $0.3 million
in license revenue relating to the First License Fee for the three and six months ended December 31, 2016. The Company will
recognize the First License Fee ratably over the life of patents relating to the Company’s wearable injectors
, which is expected to be through 2032
.
2015
During the three and six months ended December 31, 2015, the Company recognized $2.1 million and $3.9 million of revenue related to substantive milestones, respectively, as follows:
The Company recognized $1.2 million and $1.7 million of revenue during the three and six months ended December 31, 2015 pursuant to a feasibility agreement with a customer related to substantive milestones that were completed and accepted. This agreement provides for certain customization and development activities for a drug delivery system to be performed for the customer and provides for payments to be made upon the completion of agreed-upon substantive milestones. An initial up-front payment of $0.1 million was determined to be non-substantive and is being recognized on a straight line basis over the expected term of the agreement. The remaining milestones were determined to be substantive at the time the agreement was entered into. Substantive milestones that were achieved during the six months ended December 31, 2015 are as follows:
|
•
|
$0.5 million for development and delivery of additional human factor stimuli and a report on updated product requirements; and
|
|
•
|
$1.2 million for development and delivery of semi-functional prototypes and related feasibility, product requirement, and risk management reports.
|
The Company recognized $0.9 million and $1.5 million of revenue during the three and six months ended December 31, 2015 pursuant to a master services and supply agreement with a customer related to substantive milestones that were completed and accepted. This agreement provides for certain customization and development activities for a drug delivery system to be performed for the customer and provides for payments to be made upon the completion of agreed-upon substantive milestones. An initial up-front payment of $1.1million was determined to be non-substantive and is being recognized on a straight-line basis over the expected term of the agreement. The remaining milestones were determined to be substantive at the time the agreement was entered into. Substantive milestones that were achieved during the six months ended December 31, 2015 are as follows:
|
•
|
$0.6 million for development and delivery of a complete system layout;
|
|
•
|
$0.3 million for development and delivery of components for a human factor study; and
|
|
•
|
$0.6 million for development and delivery of feasibility devices for testing;
|
The remaining substantive milestones as of December 31, 2015 are as follows:
|
•
|
$0.6 million for development and delivery of a clinical production process;
|
|
•
|
$0.4 million for development and delivery of components for a human factor study;
|
|
•
|
$0.4 million for completion of testing of assembly equipment;
|
|
•
|
$0.3 million for completion of filling process of clinical devices;
|
|
•
|
$0.4 million for delivery of containers for the filling process; and
|
|
•
|
$0.3 million for delivery of devices for clinical studies.
|
The Company recognized $0.0 million and $0.3 million of revenue during the three and six months ended December 31, 2015 pursuant to a feasibility agreement with a customer related to substantive milestones that were completed and accepted. This
29
agreement provides for certain customization and development activities for a drug delivery system to be performed for the customer and provides for payments to be made upon the completi
on of agreed-upon milestones. An initial up-front payment of $0.5 million was determined to be non-substantive and is being recognized on a straight-line basis over the expected term of the agreement. The remaining milestones were determined to be substant
ive at the time the agreement was entered into. Substantive milestones that were achieved during the six months ended December 31, 2015 are as follows:
|
•
|
$0.3 million for development and delivery of a summary report related to testing and documentation activities.
|
There are no remaining substantive milestones under this agreement.
The Company recognized $0.0 million and $0.4 million of revenue during the three and six months ended December 31, 2015 pursuant to a master services and supply agreement with a customer related to substantive milestones that were completed and accepted. This agreement provides for certain customization and development activities for a drug delivery system to be performed for the customer and provides for payments to be made upon the completion of agreed-upon substantive milestones. An initial up-front payment of $1.0 million was determined to be non-substantive and is being recognized on a straight-line basis over the expected term of the agreement. The remaining milestones were determined to be substantive at the time the agreement was entered into. Substantive milestones that were achieved during the six months months ended December 31, 2015 are as follows:
|
•
|
$0.4 million for development and delivery of feasibility devices for testing;
|
The remaining substantive milestones as of December 31, 2015 are as follows:
|
•
|
$0.6 million for delivery of design transfer for the Device and the related filling equipment and fixtures; and
|
|
•
|
$0.3 million for commissioning of the pilot line.
|
During the three and six months ended December 31, 2015, the Company recognized $2.4 million and $3.8 million in revenue related to services rendered on a time and materials basis, proportional performance method and/or straight line basis over the requisite service period pursuant to customer agreements to provide various customization and development services.
13. Changes in Board of Directors
On October 28, 2016 the Board appointed Rosemary A. Crane and Duane DeSisto to serve as members of the Board.
William Galle did not seek re-appointment to the Board at the Company’s 2016 annual meeting of stockholders and therefore resigned from the Board effective as of December 15, 2016.
14. Fair Value Measurements
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.
30
The following table presents the Company’s liabilities that are measured at fair value on a recurring basis for the periods prese
nted:
|
|
|
|
|
|
Basis of Fair Value Measurement
|
|
|
|
Total Fair
Value
Measurements
|
|
|
Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
(In thousands)
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty agreement liability
|
|
$
|
5,464
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,464
|
|
Warrant liability
|
|
|
2,147
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,147
|
|
Derivative liability
|
|
|
457
|
|
|
|
—
|
|
|
|
—
|
|
|
|
457
|
|
June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty agreement liability
|
|
$
|
5,120
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,120
|
|
Warrant liability
|
|
|
3,351
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,351
|
|
Derivative liability
|
|
|
347
|
|
|
|
—
|
|
|
|
—
|
|
|
|
347
|
|
The following table presents the changes in the fair value of the level 3 financial instruments for the six months ended December 31, 2016.
|
|
Royalty
Agreement
liability
|
|
|
Warrant
Liability
|
|
|
Derivative
Liability
|
|
June 30, 2016
|
|
$
|
5,120
|
|
|
$
|
3,351
|
|
|
$
|
347
|
|
Cash payments
|
|
|
(41
|
)
|
|
|
—
|
|
|
|
—
|
|
Liability recognized on new debt issued during period
|
|
|
—
|
|
|
|
—
|
|
|
|
172
|
|
Increase (decrease) in liability
|
|
|
385
|
|
|
|
(1,204
|
)
|
|
|
(62
|
)
|
December 31, 2016
|
|
$
|
5,464
|
|
|
$
|
2,147
|
|
|
$
|
457
|
|
Following is a description of the valuation methodologies used to measure the royalty agreement liability, the warrant liability, and the derivative liability. There have been no changes in the methodology used during the six months ended December 31, 2016.
The fair value of the royalty agreement liability is based on a discounted cash flow methodology under the income approach based on the present value sum of payments expected to be made in the future. The fair value is estimated by applying a risk adjusted discount rate to the expected royalty payment stream. These fair value estimates are most sensitive to changes in the payment stream and royalty rates.
The fair value of the warrant liability is based on a Black-Scholes valuation. The fair value estimates are most sensitive to changes in the Company’s share price.
The fair value of the derivative liability is based on the average of a Monte Carlo model and a lattice model. The fair value estimates are most sensitive to changes in the Company’s share price.
Other Financial Instruments
The carrying amount of the Company’s cash equivalents, which includes certificates of deposit, accounts receivable, accounts payable and accrued expenses approximate 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 terms that the Company would currently be able to receive for similar instruments of comparable maturity.
31
1
5
. Sublease
In June 2016, we subleased a portion (the “Subleased Portion”) of our King of Prussia offices. During the term of the sublease, which commenced on October 1, 2016 and will end on March 31, 2019, the Company will receive an aggregate of approximately $1.3 million in rent with respect to the Subleased Portion. During the same time period, the Company will be obligated under the Company’s lease agreement relating to our King of Prussia offices to pay an aggregate of approximately $1.9 million in rent with respect to the Subleased Portion. Assuming the sublessee exercises its renewal option, the Company will receive approximately an additional $1.9 million over the renewal term of April 1, 2019 through June 30, 2022 and the Company will be obligated under the Company’s lease agreement relating to the King of Prussia Facility to pay an aggregate of approximately $2.5 million over the same time period. The Company ceased using the Subleased Portion as of July 20, 2016.
The Company recognized a liability associated with the subleased portion under a cease-use date approach since the subleased portion did not have any future economic benefit to the Company. The liability was measured and recognized at fair value at cease-use date and the fair value was determined based on the present value of the remaining lease obligations, adjusted for the effects of deferred items recognized under the lease, and reduced by sublease rentals as noted above. In determining the fair value of the liability, the Company assumed that the renewal term would be exercised by the sublessee. The amount of the non-cash charge recorded to record the fair value of the liability was $0.7 million. The expected cash flows used to estimate the fair value of the liability was discounted using an interest rate that equates to a risk-free rate adjusted for the effect of the Company’s credit standing. The fair value measurement was categorized as Level 3 based on the fair value hierarchy under ASC Topic 820 – F
air Value Measurements and Disclosures
. Additionally, the Company evaluated certain fixed assets related to Subleased Portion and determined that the remaining useful life to the Company had changed and accelerated all remaining depreciation to these assets. This expense of $0.6 million was recorded in depreciation and amortization. The Company expensed all other costs related to the sublease as incurred.
Over the life of the expected term of the sublease, the Company expects to incur approximately $0.3 million in expense to accrete the value of the liability based on the difference between the net cash flows and present value of these cash flows.
The charges, except as noted above, were included in selling, general and administrative expenses. The following table summarizes the liability and costs paid or settled in connection with the sublease, along with total charges expected to be incurred and cumulative charges incurred to date:
|
|
Sublease
Costs
|
|
|
|
(In thousands)
|
|
Liability balance as of June 30, 2016
|
|
$
|
—
|
|
Initial liability measurement
|
|
|
909
|
|
Costs incurred and charges to expenses
|
|
|
17
|
|
Costs paid or settled
|
|
|
(206
|
)
|
Liability balance as of December 31, 2016
|
|
$
|
720
|
|
Total charges expected to be incurred
|
|
$
|
1,599
|
|
Cumulative charges incurred to date
|
|
$
|
1,310
|
|
16. Related Party Transactions
Loan from Mr. Shortall
On September 30, 2015, the Company obtained a loan in the amount of $600,000 from Alan Shortall, the Company’s former Chairman and Chief Executive Officer. During February 2016, the loan was repaid in full including payment of interest to Mr. Shortall at the minimum applicable federal rate, which interest was less than $2,000.
Bosnjak Mortgage Correspondence
In July 2015, Mr. Shortall and Mr. Bosnjak, without authorization from or knowledge of the Company or its Board, caused to be transmitted to a mortgage broker for Mr. Shortall from Mr. Bosnjak correspondence that contained inaccurate statements about the Company’s financial support for Mr. Shortall’s purchase of and relocation to a new home. The investigation into the matters described in this paragraph did not identify any financial loss to the Company and the Company has corrected the inaccurate statements to the mortgage broker.
32
Shortall Fund Transfers
Mr. Shortall deposited $2,264,475 of his own funds into the Company’s bank account on June 29, 2015 and then caused the Company to disburse from the Shortall Funds $1,351,553 to third parties to complete Mr. Shortall’s purchase of his new home on July 23, 2015, and the remainder back to himself on July 28, 2015.
For the six months ended December 31, 2015, under Mr. Shortall’s direction, the Company accepted a check from Mr. Shortall in the aggregate amount of approximately $6,000 and disbursed the same amount of funds to Mr. Shortall’s designee but did not deposit such check from Mr. Shortall until nineteen days after the Company’s disbursement of the funds. The Company believes such transaction constituted a loan from the Company to Mr. Shortall. There were no such transactions for the three and six month periods ended December 31, 2016, or for the three months period ended December 31, 2015.
Bosnjak Loan Payments and Unreimbursed Personal Expenses
For the six months ended December 31 2015, Mr. Shortall caused approximately
$
12,000 in Company funds to be transmitted to a third party on behalf of Mr. Bosnjak which had no business purpose for the Company. The Company believes that these payments constituted loans from the Company to Mr. Bosnjak, and the Company is evaluating potential actions to recover these funds. The collection of such amounts was uncertain and the Company recorded approximately $12,000, as Selling, General and Administrative Expense in the six months ended December 31, 2015.
There were no such transactions for the three and six month periods ended December 31, 2016, or for the three month period ended December 31, 2015.
For the three and six months ended December 31, 2015, Mr. Shortall caused the Company to pay for personal expenses of which approximately $200 and $600, respectively were
not repaid to the Company (the “Unreimbursed Personal Expenses”). The Company believes the Unreimbursed Personal Expenses constituted loans from the Company to Mr. Shortall, and the Company has demanded repayment of the Unreimbursed Personal Expenses. The collection of such amounts was uncertain and the Company recorded approximately
$200 and $600 as Selling, General and Administrative Expense in the three and six months ended December 31, 2015.
There were no such transactions for the three and six month periods ended December 31 2016.
Advanced Withholding Payments
In July 2015, in connection with the vesting of restricted shares of the Company’s common stock, the Company paid associated withholding taxes on behalf of two executive officers, its Vice President of Quality and Regulatory Affairs and Chief Compliance Officer and its former President and Chief Operating Officer, in an aggregate amount of approximately $126,000 prior to being reimbursed by such executive officers. Such executive officers repaid the Company in full within a range of 18 to 28 days from the date of the withholding payment and before September 30, 2015. The Company believes such advances constituted loans. There were no such loans during the three and six months ended December 31, 2016.
33