Notes to Unaudited Consolidated Financial Statements
1. Description of Business and Unaudited Financial Statements
Unilife Corporation (together with its subsidiaries, the Company) is a U.S. based designer, manufacturer and supplier of innovative
injectable drug delivery systems that can enhance and differentiate the injectable therapies of its pharmaceutical and biotechnology customers. The Company has a broad portfolio of proprietary product platforms, including pre-filled syringes,
wearable injectors, insulin delivery systems, disposable and reusable auto-injectors, drug reconstitution delivery systems, ocular delivery systems and other systems for the targeted delivery of injectable therapies. Products within each platform
are differentiated from competitors products with a series of innovative features designed to optimize the safe, simple and convenient administration of an injectable therapy. The majority of the Companys 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 health-care providers or patients. Other of our products, like
our reusable auto injectors and certain systems for targeted drug delivery, are designed to be sold to either pharmaceutical or biotechnology companies for use as combination products or to be sold directly by us to a healthcare provider or end user
without having the device prefilled by a pharmaceutical company. Products within each of the Companys platforms can be customized to address specific customer, therapy, patient and/or commercial requirements.
The Companys growing base of customers includes Sanofi, MedImmune, AbbVie, Novartis and Hikma. In addition to the filling, assembly
and/or packaging of our product with an injectable therapy, the Companys customers are also responsible for the regulatory approval, sale and marketing of their final drug-device combination product. With certain of our devices that we could
sell directly to healthcare providers or end users without having them pre-filled with a drug by a pharmaceutical company, we would be responsible for the regulatory approval, sale and marketing of the final device. In addition to product sales, the
Company can generate revenue and cash receipts from customization programs, upfront fees and exclusivity or royalty payments.
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 Companys audited consolidated financial statements and the notes thereto for the fiscal year ended June 30, 2015, or
fiscal 2015, contained in its Annual Report on Form 10-K.
2. Revisions to Financial Statements
The Company announced an investigation into violations of the
Companys policies and procedures and possible violations of law and regulation by the Companys 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 Companys Board of Directors (the Board) on August 24, 2015 (the Investigation). The Board established a Special Committee of independent members of the Board of Directors to oversee the
Investigation. Independent counsel conducted the Investigation with the assistance of an advisory firm with forensic accounting expertise.
The Investigation, which was completed on October 7, 2016, identified various related party transactions with officers and senior executives
during the three months ended September 30, 2015 and 2014 which were not properly recorded and/or disclosed in previously issued consolidated financial statements. In addition, the Investigation concluded that certain transactions represented loans
to officers that may constitute violations of Section 402 of the Sarbanes-Oxley Act of 2002 (SOX).
The transactions that
occurred during the three and six months ended December 31, 2015 and 2014 that were identified as a result of the Investigation were evaluated as immaterial misstatements to the financial statements and omissions of disclosures and are corrected in
these comparative financial statements:
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The operating section of the consolidated statement of cash flows was adjusted to record the disbursement of $2,264,475 (the Shortall Funds) and the corresponding amount due to related party; and
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Related Party Transactions footnote (see note 14) was revised to disclose the nature of the related party transactions, a description of the transactions and dollar amounts involved and any amounts due from or to as of
the date of each balance sheet presented and the terms and manner of settlement.
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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 Companys business, operations, cash flows and or financial condition. If any fines or penalties are assessed against the Company they may be material.
On May 13, 2016, pursuant to prior stockholder authorization, the
Company effected a reverse split of the Companys common stock, pursuant to which every ten (10) shares of common stock outstanding before the reverse split were converted into one (1) share of common stock after the reverse split.
All share and per share amounts, and exercise and conversion prices for all periods presented herein have been adjusted to reflect the reverse split as if it had occurred at the beginning of the first period presented. See notes 3, 5 and 10.
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3. Liquidity
The Company incurred recurring losses from operations as well as negative cash flows from operating activities during fiscal 2015, and the six
months ended December 31, 2015, 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 range of
injectable drug delivery systems to pharmaceutical and biotechnology customers. These factors raise substantial doubt about the Companys ability to continue as a going concern.
On October 13, 2015, Unilife Medical Solutions, Inc., a subsidiary of the Company (the Borrower) entered into a Third
Amendment to the Credit Agreement, dated March 12, 2014, by and between ROS Acquisition Offshore LP (the Lender), an affiliate of OrbiMed Advisors (OrbiMed), and the Borrower (the Credit Agreement, as amended
the Amended Credit Agreement or the OrbiMed Financing). Pursuant to and subject to the terms of the Third Amendment to the Credit Agreement, the Lender agreed to provide Borrower under the Amended Credit Agreement, up to an
aggregate additional principal amount of $10.0 million less fees and expenses. As of December 31, 2015, the Borrower had borrowed $10.0 million under the Third Amendment to the Credit Agreement. Under the Amended Credit Agreement,
Borrowers prepayments and repayments of any unpaid principal amount of the Loans (as defined below) shall include a 10.0% repayment premium (with certain enumerated exceptions). The Amended Credit Agreement contains customary representations
and warranties in favor of the Lender. The Amended Credit Agreement requires the Borrower to maintain a cash balance of $3.0 million, rather than $5.0 million, and also contains certain other covenants relating to financial performance,
cash revenue targets and liquidity targets, among others.
In connection with the Credit Agreement, the Borrower entered into a royalty
agreement (the Royalty Agreement, as amended the Amended Royalty Agreement) with Royalty Opportunities S.A.R.L. (ROS) which entitles ROS to receive royalty payments. Concurrent with the Third Amendment to the Credit
Agreement, the Borrower entered into a Second Amendment to the Royalty Agreement. Pursuant to and subject to the terms of the Amended Royalty Agreement, Borrower has agreed to pay ROS 4.52% on the first $50.0 million of net sales (on a cash
receipts basis as defined in the Amended Credit Agreement) 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. Borrower has the right to buy out the Amended Royalty Agreement at any time on or before March 12, 2018 at a reduced amount. The buy-out amount ranges from approximately $21.9 million up to a
maximum of approximately $37.2 million. The buy-out amount varies based on when the buy-out option is exercised in each case and would be reduced by amounts previously paid by Borrower to ROS pursuant to the Amended Royalty Agreement. In
connection with the Third Amendment to the Credit Agreement and the Second Amendment to the Royalty Agreement, the Borrower also issued an amended and restated promissory note to the Lender (the Amended and Restated Promissory Note). The
Amended and Restated Promissory Note reflects the Borrowers commitment to repay to the Lender all amounts owed under the Amended Credit Agreement, including the additional amounts contemplated by the Third Amendment to the Credit Agreement.
On November 6, 2015, the Borrower received a waiver from the Lender of the covenant in the Amended Credit Agreement that requires
the Borrower to generate $54.1 million in customer cash receipts from January 1, 2015 to December 31, 2015, subject to certain conditions that the Company satisfied. There were no other changes to the terms of the Amended Credit
Agreement or Amended Royalty Agreement in connection with the waiver.
On December 31, 2015, the Borrower entered into the Fourth
Amendment to the Credit Agreement with the Lender. Pursuant to and subject to the terms of the Fourth Amendment to the Credit Agreement, the Lender agreed to defer the due date for the December 31, 2015 interest payment (in the amount of
$1.7 million) (the Interest Payment) to February 5, 2016. Additionally, the Borrower agreed to pay interest on such deferred amount from December 31, 2015 at the rate set forth in the Amended Credit Agreement and to pay
all fees and expenses incurred by the Lender in connection with the Fourth Amendment to the Credit Agreement.
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On January 31, 2016, the Borrower entered into the Fifth Amendment to the Credit Agreement
with the Lender. Pursuant to and subject to the terms of the Fifth Amendment to the Credit Agreement, the Lender agreed to further defer the due date for the Interest Payment to Tuesday, February 9, 2016. Additionally, the Borrower agreed to
pay interest on such deferred amount from December 31, 2015 at the rate set forth in the Amended Credit Agreement and to pay all fees and expenses incurred by the Lender in connection with the Fifth Amendment to the Credit Agreement.
On January 31, 2016, the Company and the Borrower entered into the Third Amendment to the Royalty Agreement with ROS. The Third Amendment
to the Royalty Agreement became effective as of January 29, 2016. Pursuant to and subject to the terms of the Third Amendment to the Royalty Agreement, ROS agreed to defer the due date for (i) $0.1 million of the January 30, 2016
royalty payment to February 1, 2016, and (ii) $0.7 million of the January 30, 2016 royalty payment to February 9, 2016.
As previously disclosed, on September 14, 2015 the Company implemented a cost reduction and business realignment initiative pursuant to
which the Company reduced its headcount by approximately 50 employees, or 17% of its workforce at the time. In connection with this initiative, we recorded a charge of approximately $0.4 million to operating expenses in the three-month period
ended September 30, 2015. On October 14, 2015, the Company implemented a second initiative to further reduce costs and employee headcount. The second cost reduction initiative included the following: (i) a workforce reduction of
approximately 20 employees, or approximately 8% of the Companys workforce at the time; and (ii) significant salary reductions for several executives, effective commencing with the October 16th payroll through December 31, 2015,
including those described further below. The Company recorded a charge of approximately $0.1 million from severance costs related to the second cost reduction initiative during the month ended October 31, 2015. Both of these workforce
reductions are expected to reduce annual operating costs by approximately $5.7 million. The Company does not believe that these cost reduction initiatives will negatively impact its ability to serve its customers.
On October 13, 2015, the Companys Chief Executive Officer, Alan D. Shortall, entered into an amendment to his employment agreement
with the Company (the Shortall Amendment). Pursuant to the Shortall Amendment, Mr. Shortall agreed to a 100% reduction of his base salary and the elimination of Mr. Shortalls car allowance through December 31, 2015.
On October 13, 2015, the Companys Chief Financial Officer, David Hastings, the Companys President and Chief Operating
Officer, Ramin Mojdeh, the Companys General Counsel and Secretary, John Ryan, and the Companys Chief Accounting Officer and Treasurer, Dennis Pyers, each entered into amendments to their respective employment agreements with the Company
(the Executive Amendments). Pursuant to their respective Executive Amendments, Mr. Hastings, Dr. Modjeh, Mr. Ryan and Mr. Pyers agreed to a 50% reduction of their respective base salaries through December 31,
2015. Additionally, under their respective Executive Amendments, Mr. Hastings, Dr. Mojdeh and Mr. Ryan agreed to the elimination of Company-provided automobiles or automobile allowances through December 31, 2015, and
Dr. Mojdeh agreed to the elimination of temporary relocation housing payments by the Company through December 31, 2015.
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On November 9, 2015, the Company entered into and closed a Preferred Stock Purchase
Agreement (the Preferred Stock Purchase Agreement) with an institutional investor (the Fund). Pursuant to the Preferred Stock Purchase Agreement, the Company issued and sold to the Fund 790 shares of the Companys
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. The Series A Preferred Stock was convertible into shares of the Companys common stock, par value $0.01 per share (the 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 Companys shelf registration statement (File No. 333-197122), which was
declared effective by the United States Securities and Exchange Commission (the SEC) on October 3, 2014. See note 5 Equity Transactions and Share-Based Compensation for more information regarding the Preferred Stock
Purchase Agreement.
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. Through December 31, 2015, the
Company has issued 380,011 shares for net proceeds of $4.6 million under the New Sales Agreement.
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 Companys common stock through July 2017, subject to certain limitations and conditions set forth in the LPC Purchase Agreement. Through December 31, 2015, the Company issued 324,465 shares of common stock to LPC and received net
proceeds of approximately $4.8 million after expenses.
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.
On September 2, 2015, Unilife announced that in response to third-party initiated expressions of interest, the Companys Board of
Directors had engaged Morgan Stanley & Co. LLC to conduct a review of strategic alternatives to maximize shareholder value (the Strategic Process). As more fully set forth below, this process is continuing. There can be no
assurance that this exploration process will result in any initiatives, agreements or transactions that will enhance shareholder value.
On December 2, 2015, the Company received a written notice from the Listing Qualifications Department of The NASDAQ Stock Market LLC
(Nasdaq) indicating that, for the 30 consecutive business days ended December 1, 2015, the bid price for the Companys common stock had closed below the $1.00 per share minimum bid price requirement for continued listing on The
Nasdaq Global Market under Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided an initial period of 180 calendar days, or until May 31, 2016, to regain compliance. If at any time
before May 31, 2016, the closing bid price of the Companys common stock is at least $1.00 per share for a minimum of 10 consecutive business days, Nasdaq will provide the Company with written confirmation of compliance and the matter will
be closed.
If the Company does not regain compliance with Nasdaq Listing Rule 5550(a)(2) within the initial 180-calendar day compliance
period, the Company may be eligible for an additional 180-calendar day compliance period if it transfers the listing of its common stock to the NASDAQ Capital Market, provided that it meets the applicable market value of publicly held shares
requirement for continued listing and all other applicable requirements for initial listing on The Nasdaq Capital Market (except for the minimum bid price requirement) and provides written notice of its intention to cure the minimum bid price
deficiency during the additional 180-day compliance period. However, if it appears to the Nasdaq Staff that the Company will not be able to cure such deficiency, or if the Company is otherwise not eligible or does not submit an application
requesting the additional compliance period, the Nasdaq Staff would notify the Company that its securities would be subject to delisting.
The Company is actively monitoring its performance with respect to the listing standards and is currently considering available options to
resolve the deficiency and regain compliance with Nasdaq Listing Rule 5550(a)(2), including, without limitation, the Strategic Process.
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On December 31, 2015, the Company entered into an exclusivity agreement (the
Exclusivity Agreement) with Amgen Inc. (the Counterparty). The Exclusivity Agreement was entered into in connection with the previously announced Strategic Process by the Company of potential strategic alternatives, including
a strategic partnership with one or more parties or the licensing of some of the Companys proprietary technologies (a Potential Transaction). Pursuant to the Exclusivity Agreement, the Company agreed to negotiate a Potential
Transaction exclusively with the Counterparty until the earlier of January 31, 2016 or the Counterparty notifies the Company in writing that it has ceased to consider a Potential Transaction (the Exclusivity Period). Pursuant to the
Exclusivity Agreement, the Counterparty paid to the Company a non-refundable $15.0 million deposit (the Deposit) as consideration for non-exclusive and exclusive rights and licenses provided for in the Exclusivity Agreement. On
January 31, 2016, the Company entered into an amendment (the Exclusivity Amendment) to the Exclusivity Agreement. The Exclusivity Amendment extended the Exclusivity Period until 11:59 PM U.S. Pacific Time on Friday, February 5,
2016 while the parties continue in good faith to negotiate a definitive agreement. On February 5, 2016, the Company entered into a second amendment (the Second Exclusivity Amendment) to the Exclusivity Agreement with the
Counterparty. The Second Exclusivity Amendment extends the Exclusivity Period until 11:59 PM U.S. Pacific Time on Monday, February 15, 2016 while the parties continue in good faith to negotiate a definitive agreement.
As of February 5, 2016, the Companys cash balance was approximately $13.2 million, including restricted cash of
$2.3 million. The Company believes its cash and restricted cash will provide the Company with sufficient liquidity to fund the Companys operations only to March 31, 2016. However, the Company may raise additional capital through
other sources, including through the New Sales Agreement with Cantor Fitzgerald & Co and through the LPC Purchase Agreement. The Company is also pursuing the Strategic Process. If the Company is able to complete a strategic transaction, the
Company expects to have sufficient liquidity to operate the business through at least 12 months from the date of the consolidated financial statements included in this report. In addition, the Company may also pursue alternative sources of
financing. However, the Company does not have any guaranteed sources of financing and there can be no assurance that cash from customer agreements or proceeds from the LPC Purchase Agreement or the New Sales Agreement will be available when needed,
as such sources of liquidity are not entirely within its control. If it is unable to obtain additional financing or engage in a strategic transaction on acceptable terms and when needed, the Company may default under one or more of its debt
obligations. A breach of any of the covenants related to its 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, the Company would be unable to pay the obligations as it does not have existing facilities or sufficient cash on hand to satisfy these obligations. These factors, and the factors
described above, continue to raise substantial doubt about the Companys 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.
The Company continues to have discussions with
current and prospective customers for many active programs in its commercial pipeline and has executed several agreements featuring a combination of revenue streams and cash payments, including exclusivity fees, device customization programs and
product sales. Given the substantial size, complexity and long-term duration of many of these prospective agreements, some can take a significant time to negotiate and finalize.
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.
References to A$ mean the lawful currency of the Commonwealth of Australia.
References to or euros are to the lawful currency of the European Union.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying notes. The estimates are principally in the areas of revenue recognition, royalty liability valuation, preferred stock conversion liability (the Preferred Stock
Conversion) valuation, and share-based compensation expense. Management bases its estimates on historical experience and various assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those
estimates.
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Inventories
Inventories consist primarily of raw materials. Inventories are stated at the lower of cost or market, with cost determined using the first in,
first out method. The Company routinely reviews its inventory for obsolete, slow moving or otherwise impaired inventory and records estimated impairments in the periods in which they occur.
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. Revenue from industrialization
and development fees is recognized as services are rendered 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 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 Companys 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 Companys
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 interest
rates on these instruments are similar to those rates 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 not observable in the market, which require it to be reported as a Level 3 liability within the fair value hierarchy. The valuation uses a
methodology and assumptions that the Company believes would be made by a market participant. In particular, the valuation 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 the 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 815-40, Derivative and Hedging Contracts in
Entitys Own Equity. Instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The Preferred Stock Conversion valuation analysis uses the estimated dividend rate based on the volume-weighted average
price of the Companys common stock at the date the Preferred Stock Conversion is measured.
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.
Recently Issued Accounting Pronouncements
In May 2014, FASB issued ASU 2014-09 Revenue from Contracts with Customers. 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 not selected a transition method nor has it determined the
effect of the standard on its ongoing financial reporting.
In June 2014, FASB issued ASU 2014-12 Accounting for Share-Based
Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period which is part of ASC 718: Compensation-Stock Compensation. 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 beginning after
December 15, 2015. The guidance can be applied prospectively for all awards granted or modified after the effective date or retrospectively to all awards with performance targets outstanding as of the beginning of the earliest annual period
presented in the financial statements and to all new or modified awards thereafter. The Company does not expect a material impact on its financial condition, results of operations or cash flows from the adoption of this guidance.
In August 2014, FASB issued ASU 2014-15 Disclosure of Uncertainties about an Entitys 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 managements 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 Companys financial condition, results of operations and cash flows.
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In April 2015, FASB issued ASU 2015-03 Simplifying the Presentation for Debt Issuance
Costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The existing
recognition and measurement guidance for debt issue costs is not affected by the new guidance. In August 2015, the FASB issued a clarification that debt issue costs related to line-of-credit arrangements were not within the scope of the new guidance
and therefore should continue to be accounted for as deferred assets in the balance sheet, consistent with existing GAAP. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim
periods within those fiscal years. The Company is currently evaluating the impact this guidance will have on its financial statement presentation and any disclosures.
In July 2015, FASB issued ASU 2015-11 Simplifying the Measurement of Inventory. The guidance changes the measurement principle for
inventory from the lower of cost or market to lower of cost and net realizable value for entities that do not measure inventory using the last-in, first-out or retail inventory method. Net realizable value is defined as the estimated selling price
in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation, which is consistent with existing GAAP. The guidance is effective for fiscal years beginning after December 15, 2016 and is to be
applied prospectively. The Company is currently evaluating the impact this guidance will have on its financial statement presentation and any disclosures.
In November 2015, the FASB issued new guidance simplifying the balance sheet classification of deferred taxes. The new guidance requires that
deferred tax liabilities and 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 and 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 allowance 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.
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
$3.4 million and $2.8 million during the three months ended December 31, 2015 and 2014, respectively, and $7.0 million and $4.7 million during the six months ended December 31, 2015 and 2014, respectively.
Stock Options and Warrants
The Company has granted stock options to certain employees and directors under the Employee Share Option Plan (the Plan). The Plan
is designed to assist in the motivation and retention of employees and 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. Additionally, certain stock options vest upon the closing price
of the Companys common stock reaching certain minimum levels, as defined in the agreements. 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 November 2009, the Company adopted the 2009 Stock Incentive Plan (the Stock Incentive Plan). The Stock Incentive Plan initially
provided for a maximum of 600,000 shares of common stock to be reserved for the issuance of stock options and other stock-based awards. Commencing on January 1, 2012, and on each
January 1
st
thereafter, through January 1, 2014, the share reserve automatically adjusted so that it was equal to 17.5% of the weighted average number of shares of common stock
outstanding reduced by the sum of any shares of common stock issued under the Stock Incentive Plan and any shares of common stock subject to outstanding awards under the Stock Incentive Plan.
20
In November 2014 the Stock Incentive Plan was amended and restated (the Amended and
Restated 2009 Stock Incentive Plan or Amended Stock Plan) to change how the number of shares of common stock that may be issued under the Amended Stock Plan is calculated to increase the number of shares of common stock available
for issuance under the Amended Stock Plan by 10.0 million and to reapprove the Amended Stock Plan for purposes of refreshing the stockholder approval requirement.
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.
The following is a summary of activity related to stock options held
by employees and directors during the six months ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Outstanding as of July 1, 2015
|
|
|
250,817
|
|
|
$
|
37.82
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(12,083
|
)
|
|
|
32.85
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(8,000
|
)
|
|
|
61.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
|
|
230,734
|
|
|
|
37.25
|
|
|
|
6.1
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2015
|
|
|
179,234
|
|
|
$
|
37.36
|
|
|
|
6.0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015
|
|
|
105,000
|
|
|
$
|
42.01
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
90,000
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(60,000
|
)
|
|
|
53.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
|
|
135,000
|
|
|
$
|
15.79
|
|
|
|
4.2
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2015
|
|
|
45,000
|
|
|
$
|
27.37
|
|
|
|
1.9
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is defined as the difference between the market value of the Companys
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 three and six months ended December 31, 2015 and 2014, respectively.
There were no options granted during the three and six months ended December 31, 2015 and 2014, respectively.
Restricted Stock
The Company has granted shares of restricted stock to certain employees, directors and consultants under the Amended 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.
21
For employees, the fair value of restricted stock is measured on the date of grant using the
price of the Companys 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 restricted stock awards during the six months ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted
Stock Awards
|
|
|
Weighted Average
Grant Date Fair Value
|
|
Unvested as of July 1, 2015
|
|
|
1,073,185
|
|
|
$
|
28.83
|
|
Granted
|
|
|
128,500
|
|
|
|
10.43
|
|
Vested
|
|
|
(149,000
|
)
|
|
|
31.92
|
|
Cancelled
|
|
|
(35,449
|
)
|
|
|
34.52
|
|
|
|
|
|
|
|
|
|
|
Unvested as of December 31, 2015
|
|
|
1,017,236
|
|
|
$
|
25.86
|
|
|
|
|
|
|
|
|
|
|
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 an institutional investor (the Fund). Pursuant to the Preferred Stock Purchase Agreement, the Company issued and sold to the Fund 790 shares of the Companys 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 the Companys common stock, par value $0.01 per share (the 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 Companys
shelf registration statement (File No. 333-197122), which was declared effective by the SEC on October 3, 2014.
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 Companys Board of Directors. Dividends were paid either in cash or in shares of Common Stock at the Companys sole discretion and were valued at
(i) if there was no Trigger Event (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 other 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 the 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 Companys
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
22
shares of the Companys 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 1,025,496 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 Companys share price during the applicable Measurement Period. If the Companys 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 a
First Amendment (the First Amendment to the Preferred Stock Purchase Agreement) 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 the Companys 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. The Company agreed to notify its transfer agent
to issue the remaining 106,668 Shares immediately upon written request by the Fund.
Pursuant to the First Amendment to the Purchase
Agreement, upon the timely delivery of the remaining 106,668 Shares, the Company will have no further obligations to the Fund with respect to any of the Series A Preferred Stock, Conversion Notices (as defined in the Companys Certificate of
Designations of Preferences, Rights and Limitations of Series A Preferred Stock) or any of the transaction documents. Following the issuance of the remaining 106,668 Shares, the Company will have 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 Stock.
The First Amendment to the Preferred Stock Purchase Agreement contains a mutual release of claims between the Company and the Fund and
contains 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 Companys Common Stock upon conversion and the related Dividend should be classified as a liability at fair value. Therefore, the 490 shares of Series A
Preferred Stock outstanding at December 31, 2015 are not reflected as outstanding in the Stockholders Deficit Section of the consolidated balance sheet. Accordingly, the proceeds recorded as temporary equity for the Series A
Preferred Stock represents 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). The Company adjusted the fair value of the Preferred Stock Conversion and the redemption value of the Redeemable
Convertible Preferred Stock, Series A, at December 31, 2015 to $4.8 million and $2.5 million, respectively, based on the remaining 490 shares of Redeemable Convertible Preferred Stock.
23
6. Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
June 30,
2015
|
|
|
|
(in thousands)
|
|
Building
|
|
$
|
32,363
|
|
|
$
|
32,359
|
|
Machinery and equipment
|
|
|
29,270
|
|
|
|
27,530
|
|
Computer software
|
|
|
2,981
|
|
|
|
2,910
|
|
Furniture and fixtures
|
|
|
1,386
|
|
|
|
1,345
|
|
Construction in progress
|
|
|
34,053
|
|
|
|
17,601
|
|
Land
|
|
|
2,036
|
|
|
|
2,036
|
|
Leasehold improvements
|
|
|
437
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,526
|
|
|
|
84,051
|
|
Less: accumulated depreciation and amortization
|
|
|
(20,765
|
)
|
|
|
(17,903
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
81,761
|
|
|
$
|
66,148
|
|
|
|
|
|
|
|
|
|
|
Construction in progress as of December 31, 2015 consisted of amounts incurred in connection with
machinery and equipment and facility related costs, including capitalized interest. Interest capitalized during the three and six month periods ended December 31, 2015 was $0.7 million and $1.4 million, respectively.
The Company is past due with respect to certain billings from the general contractor and sub-contractors related to building and clean room
expansion activities for machinery and equipment accounted for as construction in progress as of December 31, 2015. The general contractor and certain sub-contractors have filed mechanics liens against the Companys property in connection
with the amounts past due in the amount of approximately $5.8 million.
7. Goodwill
The changes in the carrying amount of goodwill during the six months ended December 31, 2015 are as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Balance as of July 1, 2015
|
|
$
|
9,685
|
|
Foreign currency translation
|
|
|
(436
|
)
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
$
|
9,249
|
|
|
|
|
|
|
8. Accrued Expenses
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
June 30,
2015
|
|
|
|
(In thousands)
|
|
Accrued payroll and other employee related expenses
|
|
$
|
3,751
|
|
|
$
|
2,781
|
|
Accrued cost related to construction in process
|
|
|
12,127
|
|
|
|
314
|
|
Accrued other
|
|
|
2,264
|
|
|
|
1,979
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
18,142
|
|
|
$
|
5,074
|
|
|
|
|
|
|
|
|
|
|
24
9. Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
June 30,
2015
|
|
|
|
(In thousands)
|
|
10.25% Term loan, due March 2020
|
|
$
|
66,660
|
|
|
$
|
55,518
|
|
Royalty agreement liability
|
|
|
13,180
|
|
|
|
9,930
|
|
6.00% Mortgage loan, due December 2031
|
|
|
12,594
|
|
|
|
12,812
|
|
5.00% Commonwealth of Pennsylvania financing authority loan, due January 2021
|
|
|
2,006
|
|
|
|
2,033
|
|
Other
|
|
|
698
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,138
|
|
|
|
80,435
|
|
Less: current portion of long-term debt
|
|
|
1,949
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
93,189
|
|
|
$
|
79,660
|
|
|
|
|
|
|
|
|
|
|
Term Loan
On March 12, 2014, (the Closing Date), the Borrower entered into the Credit Agreement with the Lender. Pursuant to and subject
to the terms of the Credit Agreement, the Lender agreed to provide term loans to the Borrower in the aggregate principal amount of up to $60.0 million. A first tranche loan of $40.0 million was drawn on the Closing Date and a further two
tranches each of $10.0 million were committed by the Lender and were to be funded on each of December 15, 2014 and June 15, 2015, subject to and in accordance with the terms of the Credit Agreement. On September 30, 2014, the
Borrower entered into a First Amendment to the Credit Agreement to accelerate the funding of the two additional tranches pursuant to which it received the proceeds from the first $10.0 million tranche on October 1, 2014 and the proceeds
from the second $10.0 million tranche on November 10, 2014.
On October 13, 2015, the Company entered into the Third
Amendment to the Credit Agreement, pursuant to which the Lender agreed to provide Borrower under the Amended Credit Agreement, up to an aggregate additional principal amount of $10.0 million, less fees and expenses incurred in connection with
the Third Amendment to the Credit Agreement and the Second Amendment to the Royalty Agreement. Through December 31, 2015, the Company received the full amount of additional proceeds under the Amended Credit Agreement in the amount of
$10.0 million. The Third Amendment to the Credit Agreement also modified the Borrowers liquidity covenant whereby, under the Amended Credit Agreement, the Borrower is now required to maintain a cash balance of $3.0 million as of
October 13, 2015, rather than $5.0 million.
The Loan bears interest at 9.25% per annum plus the greater of three-month
LIBOR or 1.0%, payable in cash quarterly and as otherwise described in the Amended Credit Agreement. 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 (the Maturity Date).
Unless the loan
facility is otherwise terminated earlier pursuant to the terms of the Amended Credit Agreement, the Borrower is required to repay in full the unpaid principal amount of the Loans drawn down, together with all accrued and unpaid interest thereon plus
a 10.0% repayment premium on the Maturity Date. The Borrower can make voluntary repayments at any time of any unpaid principal amount of the Loans, plus a 10.0% repayment premium. The Borrower must make mandatory prepayments in certain prescribed
circumstances, including, without limitation, certain dispositions of assets and certain casualty events. In such events, the Borrower must prepay to Lender 100% of the net cash proceeds received.
The obligations of the Borrower 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 Borrower, the Company, Unilife Cross Farm LLC (Cross Farm), Unilife Medical Solutions Limited (USML) 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 the Borrower, the Company, Cross Farm, USML, 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, USML, and the Company in favor of the Lender, for itself and as agent of ROS.
25
The Amended Credit Agreement also contains certain customary covenants, as well as covenants
relating to achieving minimum cash revenue targets at the end of each calendar year, maintaining a minimum liquidity target of $3.0 million, and the execution of certain customer and employment agreements in form and substance satisfactory to
lender. In the event of default, Borrower must prepay to Lender any unpaid principal amount of the loans drawn down, together with all accrued and unpaid interest thereon plus a 10.0% repayment premium. An event of default could also result in the
Lender enforcing its security over the assets of Borrower, the Company, Cross Farm, UMSL and Unitract Syringe in accordance with the terms of the Amended Credit Agreement and the related security agreements. On June 30, 2015, the Company
entered into a Second Amendment to the Credit Agreement to remove the minimum cash revenue target for the six month period ended June 30, 2015. On November 6, 2015, the Borrower received a waiver from the Lender of the minimum cash revenue
target for the calendar year ending December 31, 2015. As of and for the six months ended December 31, 2015, the Company is in compliance with all the loan covenants set forth in the Amended Credit Agreement. However, there can be no
assurance that the Company will be able to maintain the minimum liquidity target during the 12-month period from December 31, 2015.
On October 13, 2015, the Borrower entered into the Second Amendment to the Royalty Agreement (the Amended Royalty Agreement)
with ROS, which will entitle ROS to receive royalty payments. Pursuant to and subject to the terms of the Second Amendment to the Royalty Agreement, Borrower 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, up from 3.875%, 1.50% and 0.375%,
respectively. Borrower continues to have the right to buy out the Amended Royalty Agreement at any time; however, under the Amended Royalty Agreement, the buy-out amounts have increased. To buy-out the Amended Royalty Agreement on or before
March 12, 2016, the Borrower would pay approximately $21.9 million under the Second Amendment to the Royalty Agreement rather than approximately $13.1 million under the First Amendment to the Royalty Agreement. Thereafter, the buy-out
amount increases on March 13 of each year up to a maximum of approximately $37.2 million under the Second Amendment to the Royalty Agreement, as compared to approximately $26.3 million under the First Amendment to the Credit
Agreement. 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 Borrower 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 the Closing Date and ending on the earlier of (i) the tenth anniversary of the Closing
Date and (ii) the date of payment of the purchase price pursuant to the exercise of a put option by the Lender or the exercise of a buy-out option by the Borrower. 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 December 31, 2015, the Borrower entered into a Fourth Amendment to the Credit Agreement with the Lender. Pursuant to and subject to
the terms of the Fourth Amendment to the Credit Agreement, the Lender agreed to defer the due date for the December 31, 2015 interest payment (in the amount of $1.7 million) (the Interest Payment) to February 5, 2016.
Additionally, the Borrower agreed to pay interest on such deferred amount from December 31, 2015 at the rate set forth in the Amended Credit Agreement and to pay all fees and expenses incurred by the Lender in connection with the Fourth
Amendment to the Credit Agreement.
On January 31, 2016, the Borrower entered into the Fifth Amendment to the Credit Agreement with
the Lender. Pursuant to and subject to the terms of the Fifth Amendment to the Credit Agreement, the Lender agreed to further defer the due date for the Interest Payment to Tuesday, February 9, 2016. Additionally, the Borrower agreed to pay
interest on such deferred amount from December 31, 2015 at the rate set forth in the Amended Credit Agreement and to pay all fees and expenses incurred by the Lender in connection with the Fifth Amendment to the Credit Agreement.
On January 31, 2016, the Borrower entered into the Third Amendment to the Royalty Agreement with ROS. The Third Amendment to the Royalty
Agreement became effective as of January 29, 2016. Pursuant to and subject to the terms of the Third Amendment to the Royalty Agreement, ROS agreed to defer the due date for (i) $0.1 million of the January 30, 2016 royalty
payment to February 1, 2016, and (ii) $0.7 million of the January 30, 2016 royalty payment to February 9, 2016.
The Company determined that the Amended Credit Agreement and the Amended Royalty Agreement should be accounted for as two separate units.
Accordingly, the Company allocated the proceeds from the Loans on a residual basis between the two units based on their relative fair values. As a result, on the Closing Date, the royalty liability was determined to have a fair value of
$7.0 million and the initial $40.0 million provided under the Credit Agreement was allocated the remaining proceeds of $33.0 million. The $20.0 million from the two additional tranches that were funded during the three months
ended December 31, 2014 and the $10.0 million received during the three months ended December 31, 2015 were reflected as incremental debt. The carrying value of the debt will be accreted to the face value over the loan term based on
the effective interest rate. The royalty liability will be adjusted to fair value on a quarterly basis. As of December 31, 2015, the fair value of the royalty liability was $13.2 million.
26
There are cross-defaults in the Amended Credit Agreement, Metro Bank loan (as described below)
and Keystone/CFA Loan (as described below), so that a default under one agreement could trigger a default under the others. Metro Bank, the Lender under the Amended Credit Agreement, Keystone Redevelopment Group, LLC and Commonwealth Financing
Authority are parties to an intercreditor agreement.
Mortgage Loan
In October 2010, Cross Farm entered into the Loan Agreement with Metro Bank, pursuant to which Metro 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 Companys 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 Metro 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 Metro
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 Metro 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 and for the six months ended December 31, 2015. 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,
2015. 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 Metro 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.
Loan from Mr. Shortall
On September 30, 2015, the Company obtained a loan in the amount of $0.6 million from Alan Shortall, the Companys Chairman and Chief
Executive Officer, which was payable on demand by Mr. Shortall (subject to the right of the Lender to consent to the repayment) and required the payment of interest to Mr. Shortall at the minimum applicable federal rate (0.54% at
September 30, 2015).
27
10. Net Loss Per Share
The Companys net loss per share is as follows:
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|
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|
|
|
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|
Three Months Ended
December 31,
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|
Six Months Ended
December 31,
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|
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2015
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2014
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|
2015
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|
|
2014
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|
(In thousands, except share and per share data)
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|
Numerator
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|
|
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|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,423
|
)
|
|
$
|
(19,387
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)
|
|
$
|
(51,287
|
)
|
|
$
|
(41,649
|
)
|
Deemed dividend on Series A Preferred Stock
|
|
|
(1,047
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)
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|
|
|
|
|
|
(1,047
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)
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|
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|
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Net loss attributable to common stockholders
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|
$
|
(26,470
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)
|
|
$
|
(19,387
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)
|
|
$
|
(52,334
|
)
|
|
$
|
(41,649
|
)
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|
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Denominator
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Weighted average number of shares used to compute basic net loss per share
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|
|
13,377,229
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|
|
|
10,757,745
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|
|
|
12,915,014
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|
|
|
10,631,486
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|
Effect of dilutive options to purchase common stock
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|
Weighted average number of shares used to compute diluted net loss per share
|
|
|
13,377,229
|
|
|
|
10,757,745
|
|
|
|
12,915,014
|
|
|
|
10,631,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(1.98
|
)
|
|
$
|
(1.80
|
)
|
|
$
|
(4.05
|
)
|
|
$
|
(3.92
|
)
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
Due to the Companys net losses, unvested shares of restricted stock (participating securities) totaling
1,007,211 and 550,158 were excluded from the calculation of basic and diluted net loss per share during the three months ended December 31, 2015 and 2014, respectively, and unvested shares of restricted stock (participating securities) totaling
1,035,368 and 395,182 were excluded from the calculation of basic and diluted net loss per share during the six months ended December 31, 2015 and 2014, respectively.
In addition, stock options and warrants (non-participating securities) totaling 333,189 and 366,341 during the three months ended
December 31, 2015 and 2014, respectively, were excluded from the calculation of diluted net loss per share and stock options (non-participating securities) totaling 319,929 and 366,341 during the six months ended December 31, 2015 and
2014, respectively, were excluded from the calculation of diluted net loss per share, as their effect would have been anti-dilutive. Certain of these stock options were excluded solely due to the Companys net loss position. Had the Company
reported net income during the three months ended December 31, 2015 and 2014, these shares would have had an effect of 0 and 9,961 diluted shares, respectively, for purposes of calculating diluted net income per share. Had the Company reported
net income during the six months ended December 31, 2015 and 2014, these shares would have had an effect of 0 and 7,381 diluted shares, respectively, for purposes of calculating diluted net income per share. The impact of the potential
conversion of the remaining preferred shares totaling 1,240,409 diluted shares were also excluded from the calculation for the three months ended December 31, 2015.
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 Unilife, 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 Companys 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 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 attorney received a reduced portion of her fees from the Companys insurer, and the matter is now concluded.
28
As previously disclosed, subsequent to the filing of an OSHA complaint by Mr. Smith, we
received a subpoena from the staff of the U.S. Securities and Exchange Commission (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 from the Staff, requesting additional information consistent with the first subpoena. The Company is cooperating fully with the Staff and has provided the requested
information.
On January 8, 2014, the Company was served with a derivative complaint filed in the Delaware Chancery Court by
Cambridge Retirement System, a purported stockholder of the Company, against its Board of Directors to recover allegedly excessive and wasteful compensation paid to the non-executive directors since 2010. The Company believes that these
allegations are baseless and without merit and the Company and the directors are defending themselves vigorously. In February 2014, the Company filed a motion to dismiss the complaint in lieu of an answer. On June 26, 2014, the Court granted
the Companys motion to dismiss with respect to the directors equity grants, but denied the motion with respect to their cash compensation. The Company filed an answer to the remaining claims on July 11,
2014. On June 4, 2015, the parties entered into a Memorandum of Understanding agreeing to the basic terms of a non-monetary settlement of the action. The parties are negotiating the final terms of a stipulated settlement to be
submitted to the Court for approval.
On September 14, 2015, the Company was served with a complaint filed in the Superior Court of
the State of Connecticut by Biodel, Inc. (Biodel) seeking (1) to temporarily enjoin the Company from entering into a transaction that will jeopardize the Companys ability to perform its obligations under its agreement with
Biodel and (2) damages under the Connecticut Unfair Trade Practices Act. Biodel alleged that the Company had engaged in unfair and deceptive trade practices purportedly misrepresenting its ability and willingness to satisfy its obligation under
the parties agreement and requesting additional payments from Biodel to satisfy the Companys obligations. The Company believes that Biodels claims and demands for relief are wholly without merit and the Company is vigorously
defending the action and the matter is currently in discovery. Additionally, Biodel filed a demand for arbitration with the American Arbitration Association (AAA) asserting that the Company had breached its obligations relating to the timing and
scope of its performance under the parties contract. The Company believes that Biodels claims and demands with the AAA are wholly without merit and will vigorously arbitrate the contractual dispute.
The Company does not believe there will be any material impact to the Company or its business as a result of any of these matters.
12. Revenue
The Company recognized
$4.5 million and $5.4 million of revenue during the three months ended December 31, 2015 and 2014, respectively. The Company recognized $7.7 million and $6.8 million of revenue during the six months ended December 31, 2015
and 2014, respectively.
During the three months ended December 31, 2015 three customers accounted for 39%, 30% and 25% of
consolidated revenue, respectively. During the three months ended December 31, 2014 two customers accounted for 60% and 28% 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. During the six months ended December 31, 2014 two customers accounted for 48% and 34% of consolidated revenue, respectively.
During the three and six months ended December 31, 2015, the Company recognized $2.1 million and $3.9 million of revenue,
respectively, related to substantive milestones, as follows:
The Company recognized $1.2 million and $1.7 million of revenue
during the three and six months ended December 31, 2015, respectively, 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 was 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:
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|
$0.5 million for development and delivery of additional human factor stimuli and a report on updated product requirements; and
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|
|
$1.2 million for development and delivery of semi-functional prototypes and related feasibility, product requirement, and risk management reports.
|
29
There are no remaining substantive milestones under this agreement.
The Company recognized $0.9 million and $1.5 million of revenue during the three and six months ended December 31, 2015,
respectively, 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, 2015 are as follows:
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|
|
$0.6 million for development and delivery of a complete system layout;
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|
|
$0.3 million for development and delivery of components for a human factor study; and
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|
|
|
$0.6 million for development and delivery of feasibility devices for testing;
|
The
remaining substantive milestones as of December 31, 2015 are as follows:
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|
|
$0.6 million for development and delivery of a clinical production process;
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|
|
|
$0.4 million for development and delivery of components for a human factor study;
|
|
|
|
$0.4 million for completion of testing of assembly equipment;
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|
|
|
$0.3 million for completion of filling process of clinical devices;
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|
|
|
$0.4 million for delivery of containers for the filling process; and
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|
|
|
$0.3 million for delivery of devices for clinical studies.
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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 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 milestones. An initial up-front payment of
$0.5 million was determined to be non-substantive and was 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:
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|
|
$0.3 million for development and delivery of a summary report related to testing and documentation activities.
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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 was 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:
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|
|
$0.4 million for development and delivery of feasibility devices for testing;
|
The
remaining substantive milestones as of December 31, 2015 are as follows:
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|
|
$0.6 million for delivery of design transfer for the Device and the related filling equipment and fixtures; and
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|
|
|
$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, respectively, 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.
30
On December 31, 2015, the Company entered into an exclusivity agreement (the
Exclusivity Agreement) with Amgen Inc. (the Counterparty). The Agreement was entered into in connection with the previously announced Strategic Process by the Company of potential strategic alternatives, including a strategic
partnership with one or more parties or the licensing of some of the Companys proprietary technologies (a Potential Transaction). Pursuant to the Agreement, the Company agreed to negotiate a Potential Transaction exclusively with
the Counterparty until the earlier of January 31, 2016 (which has been extended to February 15, 2016) or the Counterparty notifies the Company in writing that it has ceased to consider a Potential Transaction (the Exclusivity
Period). Pursuant to the Agreement, the Counterparty paid to the Company a non-refundable $15.0 million deposit (the Deposit), which was recorded in long-term deferred revenue as of December 31, 2015, as consideration for
the following non-exclusive and exclusive rights and licenses provided for in the Agreement:
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The Company granted to the Counterparty a perpetual, worldwide non-exclusive license under the patents, know-how and technology of the Company for the Company to develop, manufacture and supply wearable injector devices
existing as of the closing (including any improvements or modified versions) for use with certain large volume drug products of the Counterparty. In addition, the Company granted to the Counterparty a perpetual, worldwide exclusive license under the
patents, know-how and technology of the Company for the Company to develop, manufacture and supply the Companys 1mL wearable injector existing as of the closing (including any improvements or modified version to the same) for use with certain
small volume drug products. Except as discussed below, the wearable injector devices will be developed and manufactured by the Company. The Counterparty will be required to pay the Company an amount for each device manufactured by the Company, based
on annual volumes and device features.
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In addition to the Agreement, the Company has a pre-existing Master Feasibility and
Customization Agreement with the Counterparty entered into in the ordinary course of our business on December 2, 2015.
During the
three and six months ended December 31, 2014, the Company recognized $3.0 million and $3.2 million, respectively, of revenue related to substantive milestones, as follows:
The Company recognized $2.3 million and $2.3 million of revenue during the three and six months ended December 31, 2014,
respectively, pursuant to a feasibility agreement with a customer related to substantive milestones that were completed and accepted during the year. 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 three and six months ended
December 31, 2014 were as follows:
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|
|
$0.4 million for development and delivery of a detailed project plan and a failure mode and effects analysis report;
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|
|
|
$0.4 million for development and delivery of a report on preliminary product requirements and a risk management plan; and
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|
|
|
$1.5 million for development and delivery of human factor stimuli and related supporting documents.
|
The remaining substantive milestones as of December 31, 2014 were as follows:
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|
|
$0.4 million for development and delivery of additional human factor stimuli;
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|
|
|
$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 $0.5 million and $0.5 million of revenue during the three and six months ended December 31, 2014,
respectively, pursuant to a feasibility agreement with a customer related to substantive milestones that were completed and accepted during the year. 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 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 substantive at the time the agreement was entered into. Substantive milestones that were achieved during the three and six months ended
December 31, 2014 were as follows:
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|
|
$0.5 million for development and delivery of a report on device design options as well as potential manufacturing and assembly processes;
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31
The remaining substantive milestones as of December 31, 2014 were as follows:
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|
|
$0.4 million for development and delivery of product samples and related supporting documents; and
|
|
|
|
$0.2 million for development and delivery of a summary report related to testing and documentation activities.
|
The Company recognized $0.2 million and $0.2 million of revenue during the three and six months ended December 31, 2014,
respectively, pursuant to a feasibility agreement with a customer related to substantive milestones that were completed and accepted during the year. 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 milestones. The milestones were determined to be substantive at the time the agreement was entered into. Substantive milestones that were
achieved during the three and six months ended December 31, 2014 were as follows:
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|
$0.1 million for development and delivery of a report related to human factor studies and quality requirements; and
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|
|
|
$0.1 million for development and delivery of devices for compatibility and stability functional testing and related reporting;
|
The remaining substantive milestone as of December 31, 2014 was as follows:
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|
|
$0.1 million for development and delivery of devices for human factor study and related reporting.
|
The Company recognized $0.0 million and $0.2 million of revenue during the three and six months ended December 31, 2014,
respectively, 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 milestones. The milestones were determined to be substantive at the time the agreement was entered into. Substantive milestones that were achieved
during the three and six months ended December 31, 2014 were as follows:
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|
|
$0.1 million for development of customized devices for testing; and
|
|
|
|
$0.1 million for development and delivery of testing activities and related reporting.
|
There are no remaining substantive milestones under this agreement.
During the three and six months ended December 31, 2014, the Company recognized $2.4 million and $3.6 million, respectively, 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. 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.
32
The following table presents the Companys liabilities that are measured at fair value on a
recurring basis for the periods presented:
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Basis of Fair Value Measurement
|
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|
|
Total Fair
Value
Measurements
|
|
|
Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
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Significant
Other
Observable Inputs
(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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(In thousands)
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December 31, 2015:
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Royalty agreement liability
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$
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13,180
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|
|
$
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|
|
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$
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|
|
|
$
|
13,180
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|
Preferred stock conversion liability
|
|
|
4,802
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|
|
|
|
|
|
|
|
|
|
|
4,802
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|
|
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|
June 30, 2015:
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Royalty agreement liability
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|
$
|
9,930
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|
|
$
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|
|
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$
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|
|
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$
|
9,930
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|
The following table presents the changes in the fair value of the level 3 financial instruments for the six
months ended December 31, 2015.
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Royalty
Agreement
liability
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Preferred
Stock
Conversion
Liability
|
|
June 30, 2015
|
|
$
|
9,930
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|
|
$
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|
|
Initial measurement
|
|
|
|
|
|
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4,424
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|
Cash payments
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|
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(309
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)
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(280
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)
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Non-cash conversions
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|
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(3,710
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)
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Increase in liability
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3,559
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|
|
|
4,368
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|
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|
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December 31, 2015
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|
$
|
13,180
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|
|
$
|
4,802
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|
|
|
|
|
|
|
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Following is a description of the valuation methodologies used to measure the royalty agreement liability and
the Preferred Stock Conversion at fair value. There have been no changes in the methodology used during the six months ended December 31, 2015:
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 Preferred Stock Conversion is based on the estimated dividend rate which is based on the volume-weighted average price of the Companys common stock at the date the Preferred Stock Conversion is
measured. These fair value estimates are most sensitive to changes in the market price of the Companys common stock.
Other Financial
Instruments
The carrying amount of the Companys 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 Companys debt approximates its carrying value based upon the rates that the Company would
currently be able to receive for similar instruments of comparable maturity.
14. 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 Companys former Chairman and Chief Executive Officer, which was payable on demand by Mr. Shortall (subject to the right of the Lender to consent to the
repayment) and required the payment of interest to Mr. Shortall at the minimum applicable federal rate (0.54% at September 30, 2015).
33
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 Companys financial support for Mr. Shortalls 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.
Shortall Fund Transfers
Mr. Shortall deposited
$2,264,475 of his own funds into the Companys 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. Shortalls 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. Shortalls
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. Shortalls designee but did not deposit such check from Mr. Shortall until nineteen days
after the Companys 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 month period ended December 31, 2015 or for the three or six
month periods ended December 31, 2014.
The investigation into the matters described in this section entitled Shortall Fund Transfers did not
identify any financial loss to the Company.
Bosnjak Loan Payments and Unreimbursed Personal Expenses
For the three and six months ended December 31, 2015 and 2014, Mr. Shortall caused approximately $0 and $12,000, and $24,000 and $37,000, respectively 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 is uncertain and the Company has recorded approximately $0 and $12,000, and $24,000 and $37,000 as Selling, General and Administrative Expense in the three and six months ended
December 31, 2015 and 2014, respectively.
For the three and six months ended December 31, 2015 and 2014, Mr. Shortall caused the Company to pay for
personal expenses of which approximately $200 and $600, and $16,000 and $23,000, 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 is uncertain and the Company has recorded approximately $200 and $600, and $16,000 and $23,000 as Selling,
General and Administrative Expense in the three and six months ended December 31, 2015 and 2014, respectively.
Advanced Withholding Payments
In July 2015, in connection with the vesting of restricted shares of the Companys 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. The Company believes such advances constituted loans.
34