Description

Unilife is up over 100% in the past few days on the CEO’s “back against the wall” promise of an upcoming transformational deal “in route” (never mind that they reported 50K total in customer receipts for the quarter). The company should be down to around one month left of cash given the firm’s $10mm+ quarterly cash burn.  We present the fundamental case for short below but also now like the timing. 

Unliife Corporation develops and manufactures injectable drug delivery systems.  The company is extremely promotional and has a long history of over promising and under delivering.  Earnings have been non-existent (they barely qualify as a “going concern”) and Alan Shortall, the CEO, has red flags all over.  We think this stock is worth close to $0 and after scraping the bottom of the barrel to raise money, has only a month’s worth of cash to survive on. 

History

Unilife frames itself as a company with a “differentiated” drug injectable syringe with a huge number of potential customers across multiple areas.  It’s hard to believe anything they say is true. 

Unilife was created through a reverse-merger after a “mineral exploration investment company” was delisted.  Since that fateful day, they have earned approximately negative ~$108MM in cash from operations, and have spent $70MM on CapEx.  The total of CFO + CapEx comes to ~$178MM, and coincidentally the company has issued ~$170MM+ since inception through 2012. 

Whereas the company earned no money, however, it has been a great source of wealth for Alan Shortall.  From 2009 to 2011 alone, 42% of revenue and 18% of total equity raised went towards Alan Shortall’s pay. 

Press releases from the company since inception have pretty much been all fluff with promises of “big announcements” followed by huge letdowns.  An announcement in July of 2008 stated that the company “commenced commercial sales” to China and 32 other countries.  In 2009, the company hit a high mark and earned $20MM in revenue and broke even on the EBITDA line.  By 2012, however, revenue was $5.5MM while EBITDA was negative $45MM.

A flurry of press releases have followed since the 2008 press release, all of them ending up with virtually no real impact on revenue.  A sampling is below:

Is this company viable and worth $350MM? 

The answer is no.  Retractable Technologies, a company with 5x the revenue of Unilife in 2011 and nearly breakeven EBITDA, was valued at $27MM.  Unlike Unilife, Retractable has legit sales. 

Retractable developed an extremely effective syringe years ago that was 100% effective as preventing the spread of germs.  Even with this efficiency, in its first two years on the market, they sold fewer than 20K unites, “mostly to one New York hospital.”  In a news article about their failure to penetrate the market, it said that “the company’s sales team can’t even get in the door to show their wares to purchasing agents” often.

If you’re wondering why Retractable failed, it’s because competition is ruthless.  Becton Dickinson has been the heavyweight for years and they have been estimated to control 70% of the syringe market.  Retractable ran into the BDX buzz saw after a deal was struck where all the major GPO’s were required to buy 90% of their syringes from BDX.  Retractable was effectively doomed from the start.

So now we have Unilife versus BDX – a company that is barely surviving versus a company that does $8B in sales and has $2.5B to battle challengers. 

Who is brave enough to challenge BDX?

Alan Shortall was brave enough to challenge BDX.  Given the lack of details on his prior experience on Unilife’s website (“Prior to the founding of Unilife, Alan successfully performed senior marketing and corporate leadership roles in his birthplace of Ireland and later Australia for a number of private and public clients in the international finance, manufacturing, consumer goods and IT industries”) we were forced to use other means to find out about him.  A search of “Alan Shortall Fraud” reveals why the lack of details. 

The second results, “Shooting up on hype”, has a lot of details from a skeptical Sydney Morning Herald article.  There you learn that Shortall “has been associated with three companies… which are now defunct.”  You also learn that the Herlald could not track down the major investor located in London that was said to own a huge amount of stock. 

One of the three defunct companies was “Formulab Neuronetics.”  If you thought he had a high ranking position there that would prepare him to run a healthcare company, you’d be wrong.  He was the “Personal Assistant” to the head of the company.  As the company was following apart, Shortall blames the press for the stock fall (“We’ve had some derogatory press”) and then said that “everything [is] positive” at the company.  Formulab would later be put into voluntary administration after not being able to pay its creditors.  At its peak it was worth over $400MM. 

In a bizarre move to, presumably, combat Google (?) and results like the one before, Shortall seems to randomly comment on news stories involving fraud, typically in the comment section.  Two examples are below:

The blurb above reads: “Scam artists that are the brains of this operation should be hunted down like a common low life.”

Shortall’s personal life seems bizarre as well.  In 2006 the courts found that Alan Shortall owed a former girlfriend $550K after “she lent him $47,000.”  The article in the Northern Star stated that Shortall “promised to secure Ms. White’s $47,00 against shares in the company, but later reneged on the understanding…. During their partnership, Ms. White lent Shortall $47,000 in seven instalments of various amounts which he promised to secure against 220,000 Unilife shares.” 

In the ruling, the judge also called into question Shortall’s relationship with the previously mentioned largest shareholder, “Roger Williamson.”  Ms. White’s “barristers suggested Williamson was an alias for Shortall” in the trial, but Shortall denied the allegations while under oath. 

Former Employees

On Yahoo!, at least a few former employees have come out against Alan Shortall in the company in various message board posts and have mentioned threats and intimidation after posting negative thoughts on the company.  John Steck was on such employee who mentioned that “the emperor wears no clothes” and that he looked forward to seeing Shortall wearing “an orange jump suit someday.” 

Steck also references Dr. Masoud Samandi, a Unifill Senior Director listed in an old Unilife presentation, who posted on the same message board under numerous pseudonyms that he was “sick and tired of all #$%$ given to shareholders” and that Unilife “very accurately shot [itself] in the foot.” 

However, for whatever reason, Samandi would later come out and say that “his allegations were entirely false and fabricated and aimed at harming Unilife and its management.”  However, John Steck, who posted under his real name, not anonymously, said that he would not be “intimidated by [Shortall]” and that if they came after him, they best “come loaded for bear.”

Back to the business, the annual meetings and conference calls provide the best look at the overinflated overpromising the company has made.  Such as:  “target revenues to exceed $400MM beyond 2014” even though they only contract today consists of a “maximum” of $110MM over 15 years, Unilife sales and supply agreements by 2011 (there have been none), production commencing in March 2011 (didn’t happen), and the list goes on and on. 

Despite the broken promises, Alan Shortall, on a 2011 conference call, had “reviewed the potential of our Unifill that have actually walked away from those discussions, and we’re still in discussions with every one of them.”  This was either a lie, or they’ve been in discussions with “every one of them” for the last two years. 

So who would fund Shortall?

Over the last few years, Unilife has funded more and more raises at lower prices and dollar amounts. 

Nobody of note owns shares in the company and curiously, Unilife really scraped the bottom of the barrel in the most recent raise when they had Westor Capital place the shares.  The placement took place ~20 days after FINRA filed a cease and desist against Westor. 

The actual firm buying the shares was “Crede Capital,” run by Terren Peizer.  Who is Peizer and Crede?

The “good” on Peizer is that he has his own website, and has quotes of people saying he’s a “financial prodigy.”

The Bad on Peizer is that:

The New York Times article suggests Ponzi scheme connections:

He was the one who turned in and testified against Milken (and also said that, regarding Milken’s trades and their legality, “I didn’t really know why we were doing (any of it).  I didn’t have all the information.”):

Peizer firm, Socius, is associated with Michael Wachs, who “misappropriated $20,800,000” in proceeds by means of false and fraudulent pretenses, representations, and promises.” 

Socius is also connected to convicted felon Richard Josephberg:

So where are we today?

We think Unilife is at the edge of the event horizon.  On March 31, 2013, the company said they had $7.7MM in unrestricted cash on the balance sheet.  At the same time, cash burn has been ~$0.75MM/week.  At the time of the latest conference call, on May 9^th, which was ~5.7 weeks after March 31, we estimate UNIS had ~$3.5MM in cash.  This means they have ~4-5 weeks left to raise money, or they should be out of funds. 

On the call Thursday, Shortall mentioned that the company should be hitting the period of “hyper growth” and that they had another contract coming (of which they could not provide detail).  They also mentioned that they would not be diluting the stock and that they have completed a debt raise which they, strangely, cannot comment on.  The stock, in response to this, has traded up over 100%.  Note that the debt deal had already been announced last week and the production contract had been mentioned in the last annual meeting.  There is no way, in our view, that anyone would loan Unilife money straight up – given Unilife’s financial profile ($20MM in debt and no more hard assets to lend against, as well as ~$40MM cash burn per year) we are skeptical of their ability to issue debt.  If they don’t close this deal within the next month, they should be out of cash.  Also, in regards to the new contract, which will most likely be overhyped by management with an anonymous pharmaceutical partner, we believe that it will similar to past press releases over the past 10 years that have massively under-delivered.  Either way, we do not believe this is a viable long-term business. 

One last item - In the latest 10-K the company notes that an employee has filed an ethics violation (note below). In the 10-Q filed this last weekend, the company says they have now received an SEC Subpoena related to this event.

Legal Proceedings

On September 7, 2012, the Company received a letter from counsel for a former employee of the Company alleging that the employee was wrongly terminated in retaliation for filing an anonymous complaint on the Company's ethics hotline for which he claims he was the author. The Company is currently investigating the allegation. The former employee has not yet filed a lawsuit, but in the event the employee does bring legal action, the Company intends to defend itself vigorously.

Disclaimer: The information contained herein reflects the views of the author as of the date of publication. These views are subject to change without notice at any time subsequent to the date of issue. The author has an economic interest in the price movement of the securities discussed in this presentation, but the author’s economic interest is subject to change without notice. All information provided in this presentation is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. In addition, there can be no guarantee that any projection, forecast or opinion in this presentation will be realized. All trade names, trade marks, service marks, and logos herein are the property of their respective owners who retain all proprietary rights over their use. This presentation is confidential and may not be reproduced without prior written permission from the author.

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