| Liquidity | 3. Liquidity
The Company has incurred recurring losses from operations as well
as negative cash flows from operating activities during the fiscal
year ended June 30, 2015, and the three months ended
September 30, 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 Company’s ability
to continue as a going concern.
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 September 30, 2015, the Company has issued 362,832
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 “Purchase Agreement”) with Lincoln Park
Capital Fund, LLC (“LPC”), pursuant to which the
Company may sell, from time to time, to LPC up to $45.0 million in
shares of the Company’s common stock through July 2017,
subject to certain limitations and conditions set forth in the
Purchase Agreement. Through September 30, 2015, the Company
issued 324,465 shares of common stock to LPC and received net
proceeds of approximately $4.8 million after expenses. The Company
is precluded from selling additional shares of common stock to LPC
as a result of the Stock Purchase Agreement with the Fund, as
described below, unless and until we receive shareholder approval
on November 16, 2015 of Proposal No. 4 set forth in our
definitive proxy statement dated October 2, 2015 (the
“LPC Shareholder Approval”).
Under the terms of the LPC Purchase Agreement, the Company was
required to obtain the consent of LPC prior to completing the Stock
Purchase Agreement with the Fund. 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.
On September 2, 2015, Unilife announced that in response to
third-party initiated expressions of interest, the Company’s
Board of Directors had engaged Morgan Stanley & Co. LLC to
conduct a review of strategic alternatives to maximize shareholder
value (the “Strategic Process”). This process is
continuing and we have received interest from several parties.
There can be no assurance that this exploration process will result
in any initiatives, agreements or transactions that will enhance
shareholder value.
On March 12, 2014 (the “Closing Date”), Unilife
Medical Solutions, Inc. (the “Borrower”), a wholly
owned subsidiary of the Company, entered into a credit agreement
(the “Credit Agreement”) with ROS Acquisition Offshore
LP, (the “Lender” or “ROS”), as amended by
the First Amendment to the Credit Agreement, dated
September 30, 2014, the Second Amendment to the Credit
Agreement, dated June 30, 2015, and the Third Amendment to the
Credit Agreement dated October 13, 2015 (collectively referred
to as the “Amended Credit Agreement”). 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 of
$10.0 million each (collectively, the “Loans”) were
committed by the Lender.
On September 30, 2014 the Borrower entered into a First
Amendment to the Credit Agreement pursuant to which it received
$10.0 million in proceeds from the second tranche on
October 1, 2014 and $10.0 million in proceeds from the third
tranche on November 10, 2014. On June 30, 2015, the
Borrower 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 October 13, 2015, the Borrower entered into a Third
Amendment to the Credit Agreement. 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, to be funded in tranches. Under the terms of the
Amended Credit Agreement, the Borrower will be required to make
funding requests and the Lender will not be obligated to fund such
request unless the Borrower satisfies certain customary conditions
precedent and the Lender agrees, in its discretion, to fund such
request. As of November 6, 2015, the Borrower had borrowed
$6.9 million under the Third Amendment to the Credit Agreement and
has up to $3.1 million remaining. Under the Amended Credit
Agreement, Borrower’s prepayments and repayments of any
unpaid principal amount of the Loans 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”) with ROS
which will entitle ROS to receive royalty payments. Concurrent with
the First Amendment to the Credit Agreement, the Borrower entered
into a First Amendment to the Royalty Agreement and concurrent with
the Third Amendment to the Credit Agreement, the Borrower entered
into a Second Amendment to the Royalty Agreement (collectively with
the Royalty Agreement, the “Amended 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 buyout amount varies based on when
the buy-out option is exercised and the amounts disclosed assume
that the full $10.0 million under the Amended Credit Agreement
contemplated by the Third Amendment to the Credit Agreement is
funded and would, in each case, 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 (together, the
“Recent Amendments”), 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 Borrower’s
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 the Lender’s receipt of the fully executed the
Fund Purchase Agreement, as described below, and related
transaction documents as well as evidence of Borrower’s
subsequent receipt of $7.5 million in gross proceeds from the Fund.
There were no other changes to the terms of the Amended Credit
Agreement or Amended Royalty Agreement in connection with the
waiver.
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 ending 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
Company’s 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 Company’s 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. Shortall’s car allowance through
December 31, 2015.
On October 13, 2015, the Company’s Chief Financial
Officer, David Hastings, the Company’s President and Chief
Operating Officer, Ramin Mojdeh, the Company’s General
Counsel and Secretary, John Ryan, and the Company’s 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.
The impact of the implementation of these cost reduction and
business realignment initiatives during September and October 2015
is expected to result in a decrease in R&D expense by
approximately 30% in fiscal 2016 and selling, general and
administrative expense by approximately 20% in fiscal 2016, when
compared to the annualized run rate for operating expenses in the
fourth quarter of 2015. These percentage decreases exclude share
based compensation and depreciation expense.
On November 9, 2015, the Company entered into and closed a
Stock Purchase Agreement (the “Fund Purchase
Agreement”) with an institutional investor (the
“Fund”). Pursuant to the Fund Purchase Agreement, the
Company issued and sold to the Fund 790 shares of the
Company’s newly designated Series A Redeemable Convertible
Preferred Stock of the Company, par value $0.01 per share (the
“Series A Preferred Stock”), at a 5% original issue
discount and at a purchase price of $10,000 per share for total
gross proceeds to the Company of $7.5 million. The Series A
Preferred Stock is convertible into shares of the Company’s
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 Company’s 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.
From the date of issuance, each share of Series A Preferred Stock
will accrue 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 Company’s Board of
Directors. Dividends are payable either in cash or in shares of
Common Stock at the Company’s sole discretion and are valued
at (i) if there is 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 (“Issuance Date’) 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 will adjust (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 rises 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 falls below $7.00, up to a maximum of 15.0%. In
addition, the dividend rate will adjust upward by 10.0% upon any
Trigger Event.
The Company will have the right, in its sole and absolute
discretion, to redeem for cash all or any portion of the shares of
Series A Preferred Stock then outstanding by paying the holder the
following with respect to such shares: (i) if the redemption
takes place on or after the seven-year anniversary of issuance (the
“Dividend Maturity Date”), the Face Value; or
(ii) if the redemption takes place prior to the Dividend
Maturity Date, at an early redemption price equal to the Face Value
plus any Conversion Premium (as defined below) minus any dividends
paid. The “Conversion Premium” for each share of Series
A Preferred Stock means the Face Value multiplied by the product of
(A) the applicable Dividend Rate and (B) the number of
whole years between the issuance date and the Dividend Maturity
Date. The Company has the right to early redemption under certain
circumstances, including upon a strategic transaction.
Each share of Series A Preferred Stock will be convertible into
such number of shares of Common Stock equal to the Face Value
divided by the Conversion Price. The Fund may convert its shares of
Series A Preferred Stock at any time, and the Company may effect a
conversion if there has been a minimum of $20 million, or 5 times
the Face Value of Series A Preferred Stock being converted,
whichever is lower, in aggregate trading volume in the prior 20
Trading Days, subject at all times to the Issuance Limitation (as
defined below), the volume weighted price of a share of Common
Stock is at least $5.00 and certain other conditions set forth in
the Certificate of Designations (collectively, the “Equity
Conditions”). Shares of Series A Preferred Stock shall mature
seven years following the issuance date, at which time such shares
will automatically convert into shares of Common Stock. However, we
may redeem in cash at maturity, at our option, an amount per share
equal to 100% of the liquidation value for the shares being
redeemed. Upon any conversion, the Company will be required to
issue Common Stock at the Conversion Price and pay the Dividend and
Conversion Premium (in cash or, assuming the Equity Conditions are
met, in stock at the Company’s discretion).
Upon any liquidation, dissolution or winding up of the Company
(including by Deemed Liquidation Events as set forth in the
Certificate of Designations, the holders of Series A Preferred
Stock will be entitled to be paid out of our assets available for
distribution to our stockholders, pari passu with holders of our
preferred stock and common stock an amount equals to $10,000, plus
any accrued but unpaid dividends thereon.
The holder of the Series A Preferred Stock will be prohibited from
converting shares of Series A Preferred Stock into shares of our
common stock if, as a result of the conversion, the holder,
together with its affiliates, would beneficially own more than
4.99% of the total number of shares of our 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 Fund Purchase Agreement also contains representations,
warranties and covenants customary for transactions of this
type.
As of November 6, 2015, the Company’s cash balance was
approximately $6.6 million, including restricted cash of $2.0
million. This cash balance does not include proceeds from the Fund
Purchase Agreement. The remaining funding under the Amended Credit
Agreement and proceeds from the Fund Purchase Agreement along with
the Company’s cash and restricted cash will provide the
Company with sufficient liquidity to fund the Company’s
operations only to December 31, 2015. However, the Company
intends to raise additional capital through other sources,
including through and the New Sales Agreement with Cantor
Fitzgerald & Co and, if we obtain the LPC Shareholder
Approval, 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 the Amended Credit Agreement, 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 Company’s
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. |
