PINX:UNISZ Unilife Corporation DR Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number 001-34540

 

 

UNILIFE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   27-1049354

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

250 Cross Farm Lane, York, Pennsylvania   17406
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (717) 384-3400

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share   The Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the common equity held by non-affiliates of the registrant as of December 31, 2011, the last business day of the registrant’s most recently completed second fiscal quarter was $211.0 million, computed by reference to the closing sale price of the Company’s common stock. For purposes of the foregoing calculation only, the registrant has assumed that all officers and directors of the registrant are affiliates.

As of September 5, 2012, there were 81,856,079 shares of registrant’s common stock outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2012 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended June 30, 2012.

 

 

 


Table of Contents

UNILIFE CORPORATION

FORM 10-K

FOR THE YEAR ENDED JUNE 30, 2012

TABLE OF CONTENTS

 

         Page  

PART I

  

Item 1.

 

Business

     4   

Item 1A.

 

Risk Factors

     18   

Item 1B.

 

Unresolved Staff Comments

     24   

Item 2.

 

Properties

     25   

Item 3.

 

Legal Proceedings

     25   

Item 4.

 

Mine Safety Disclosures

     25   

PART II

  

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     25   

Item 6.

 

Selected Financial Data

     27   

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27   

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     33   

Item 8.

 

Financial Statements and Supplementary Data

     34   

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     58   

Item 9A.

 

Controls and Procedures

     58   

Item 9B.

 

Other Information

     58   

PART III

  

Item 10.

 

Directors, Executive Officers and Corporate Governance

     58   

Item 11.

 

Executive Compensation

     58   

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     58   

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

     67   

Item 14.

 

Principal Accounting Fees and Services

     67   

PART IV

  

Item 15.

 

Exhibits and Financial Statement Schedules

     67   


Table of Contents

Presentation of Information

Unilife Corporation was incorporated in the State of Delaware on July 2, 2009. On January 27, 2010, Unilife Medical Solutions Limited, an Australian corporation (“UMSL”), completed a redomiciliation from Australia to the State of Delaware pursuant to which stockholders and option holders of UMSL exchanged their interests in UMSL for equivalent interests in Unilife Corporation, a Delaware corporation (“Unilife”) and Unilife became the parent company of UMSL and its subsidiaries. The redomiciliation was conducted by way of schemes of arrangement under Australian law. The issuance of Unilife common stock and stock options under the schemes of arrangement was exempt from registration under Section 3(a)(10) of the Securities Act of 1933, as amended. The redomiciliation was approved by the Australian Federal Court, and approved by the shareholders and option holders of UMSL.

In connection with the redomiciliation, holders of UMSL ordinary shares or share options received one share of Unilife common stock or an option to purchase one share of Unilife common stock, for every six UMSL ordinary shares or share options, respectively, held by such holders, unless the holder elected to receive in lieu of Unilife common stock, Chess Depositary Interests of Unilife, or CDIs (each representing one-sixth of one share of Unilife common stock), in which case such holder received one CDI for every UMSL ordinary share. All share and per share amounts in this Annual Report on Form 10-K have been restated to reflect the one for six share recapitalization effected in connection with the redomiciliation.

On February 16, 2010, Unilife’s common stock began trading on the Nasdaq Global Market under the symbol “UNIS.”

References to the “Company”, “we”, “our” or “us” include Unilife Corporation and its consolidated subsidiaries, including UMSL, unless the context otherwise requires. References to “Unilife” are references solely to Unilife Corporation.

Trademarks, Trade Names and Service Marks

Unilife®, Unitract® and Unifill® are registered trademarks of Unilife Corporation and its subsidiaries.

Cautionary Note Regarding Forward-Looking Information

This Annual Report on Form 10-K contains forward-looking statements. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements.

These forward-looking statements are based on management’s beliefs and assumptions and on information currently available to our management. However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events and developments to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K and those described from time to time in our future reports which we will file with the Securities and Exchange Commission. You should read this Annual Report on Form 10-K and the documents that we have filed as exhibits to this Annual Report on Form 10-K completely.

Currencies

Unless indicated otherwise in this Annual Report on Form 10-K, all references to $ or dollars refer to U.S. dollars. 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.

 

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PART I

 

Item 1. Business

Overview

We are a U.S. based developer and commercial supplier of injectable drug delivery systems. We build long-term collaborations with pharmaceutical and biotechnology companies seeking to utilize our innovative and highly differentiated devices to enable or enhance the clinical development, regulatory approval and lifecycle management of their injectable therapies. Our proprietary devices are designed for supply to pharmaceutical companies in a format where they can be integrated into the filling and packaging processes utilized for a target injectable drug or vaccine. Pharmaceutical companies are responsible for the final shipment of the drug-device combination product to healthcare workers or patients for safe, intuitive and convenient administration.

Proprietary Technology Platforms and Products

We have developed one of the most expansive, market-driven and differentiated portfolios of primary drug containers and advanced delivery systems in our industry for the administration of injectable therapies. Each of our device technologies has been developed in direct response to unmet or emerging market needs including the prevention of needlestick injuries, the efficient reconstitution of lyophilized drugs, the subcutaneous delivery of large volume doses, the intuitive self-injection of injectable therapies outside of healthcare facilities and the commercialization of novel pipeline drugs requiring specialized delivery systems. We can customize our device technology platforms to address specific customer, drug or patient requirements.

Our device portfolio is suitable for use with brand name, generic or biosimilar drugs and vaccines supplied in either a liquid stable or lyophilized format for delivery via administration routes including subcutaneous injection. Collaborations with pharmaceutical and biotechnology companies primarily relate to the use of our devices with late stage pipeline or marketed injectable therapies including biologics that are indicated, or being developed, for the treatment of a variety of acute and chronic conditions.

Our technology platforms cover the following device categories:

 

   

Prefilled Syringes with Integrated Needle Retraction

 

   

Auto-Injectors

 

   

Drug Reconstitution Delivery Systems

 

   

Bolus Injectors

 

   

Specialized Delivery Systems

Prefilled Syringes with Integrated Needle Retraction

A prefilled syringe (PFS) is a primary drug container and delivery system for the administration of an injectable therapy by a healthcare worker or patient. Prefilled syringes are typically supplied to pharmaceutical customers in a ready to fill format for easy integration into drug fill-finish lines. The primary container is comprised of components that are compliant with industry standards and pharmacopeias to ensure optimum protection of the drug formulation.

Over 60 drugs and vaccines are now available in a prefilled syringe format, with numerous additional pipeline drugs targeted for launch. The prefilled syringe market is valued at approximately $2 billion. With a forecast Compound Annual Growth Rates (CAGR) of 13.5%, it is projected that more than five billion prefilled syringes will be used globally by 2016. (Global Injectable Drug Delivery Market 2010; MarketsandMarkets).

To comply with needlestick prevention laws in the U.S., Europe and other regions, pharmaceutical companies have traditionally purchased ancillary safety devices that are attached on to a standard prefilled syringe by means of a secondary assembly operation after filling. In addition to the extra steps and costs associated with their secondary attachment, these devices lead to an increase in packaging, transport and storage costs by up to 60 to 70% due to the bulky size and weight of the final product. Prefilled syringes utilizing ancillary safety devices can require additional steps which may be non-intuitive to the end user. The similarities in currently marketed ancillary safety devices also limit the opportunities for a pharmaceutical company to differentiate their drug-device combination from that of their competitors, including generic and biosimilar molecules.

 

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Unilife has developed a comprehensive platform of prefilled syringes for the delivery of a broad range of liquid stable and lyophilized drugs and vaccines. We believe that the Unifill® portfolio of syringes represents the world’s first and only glass prefilled syringe systems with integrated retraction. All Unifill syringes are designed for simple, intuitive, one-handed use by healthcare workers or patients and include a unique and highly proprietary combination of features including:

 

   

Fully integrated needle retraction;

 

   

Audible, visible, and tactile indicators for activation of retraction and end of dose;

 

   

Easy and intuitive steps of use to maximize user acceptance and preference;

 

   

User controlled retraction to virtually eliminate the risk of aerosolization (splatter of medication or blood);

 

   

Seamless integration with drug fill-finish lines;

 

   

Pharmacopeia compliant materials within the drug fluid path; and

 

   

Complete sharps containment and lock-out to prevent re-use or re-exposure of the contaminated needle to minimize the risk of needlestick injury.

The Unifill portfolio consists of the following products:

Unifill Syringe: The Unifill syringe features a staked (fixed) retracting needle, and is designed primarily for use with liquid stable drugs. We currently have the capacity to manufacture up to 60 million units of the Unifill syringe per year on an automated assembly line that has been validated by us at our production facilities in York, PA. In July 2011, we commenced the initial supply of Unifill syringes to pharmaceutical companies. In June 2012, we signed the first supply agreement for the Unifill syringe. We continue to make new and recurring shipments to a number of pharmaceutical companies who are at various stages in the evaluation, stability study and fill-finish validation processes for the device. For commercial relationships relating to the Unifill syringe, please see page 9 below.

Unifill Select: The Unifill Select is the world’s first and only glass prefilled syringe to our knowledge that incorporates an attachable needle with integrated retraction. The device enables the user to choose from a selection of needle lengths for attachment to the syringe at the time of injection. The syringe may be filled with either a liquid stable drug or vaccine, or a diluent to reconstitute and deliver a lyophilized drug supplied in a vial. The Unifill Select is available for commercialization with pharmaceutical partners seeking to utilize the device with target injectable drugs and vaccines. Discussions with various pharmaceutical parties are ongoing regarding the customization of the device to address specific customer, drug formulation and patient requirements.

Auto-Injectors

Auto-injectors are utilized for the patient self-administration of injectable drugs outside of healthcare facilities. Various disposable and reusable auto-injectors are currently available on the market, or known to be in development. They are designed to allow operators to automatically deliver the contents of a prefilled syringe at the push of a button. The auto-injector market is one of the fastest-growing sectors of the device market, with an estimated of CAGR of 17.5% to 2016 (Global Injectable Drug Delivery Market 2010; MarketsandMarkets).

Traditional auto-injector devices are relatively large in size, as they must accommodate various mechanisms to enable the depression of the prefilled syringe for needle insertion into the body, the injection of the dose, and either the withdrawal of the syringe back into the device or the extension of a sleeve to cover the needle. The large size of some auto-injectors can restrict their portability, obstruct intuitive use and handling with some patients, and increase disposal volumes. They also lack true end-of-dose indicators to alert patients when the full dose has been delivered, potentially causing dose wastage or reducing therapy compliance rates.

 

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Unilife has developed a full platform of auto-injectors that are designed for use with the Unifill syringe. Our proprietary range of auto-injectors are compact in size, intuitive to use and can be customized to address specific customer, drug or patient needs. We believe that they are also the world’s first and only auto-injectors with true end-of-dose indicators. An audible, tactile click signals the delivery of the full dose and the retraction of the needle into the barrel of the Unifill syringe. The potential risk of a needlestick injury occurring after the use of the device is virtually eliminated.

Products developed within this portfolio include:

Rita Disposable Auto-Injector: Rita is a disposable auto-injector that is designed to inject the prefilled dose from a single Unifill syringe. Following the removal of the cap and the placement of the device against the skin, the operator pushes a single button to inject the dose. Rita is more compact in size than many other marketed auto-injectors for improved patient portability, intuitive handling and convenient disposal. In addition to there being no visible springs or mechanisms, the needle is hidden from view until the completion of the injection when it can be viewed in its retracted state through a window on the side of the barrel. The true end-of-dose indicators (audible, tactile click) associated with the Unifill syringe can also help to minimize potential drug wastage and optimize therapy compliance. The Rita Auto-Injector is available for commercialization with pharmaceutical partners seeking to utilize the device for use with their target injectable drugs and vaccines. Discussions with interested pharmaceutical parties are ongoing regarding the customization of the device to address specific customer, drug and patient requirements.

Lisa Reusable Auto-Injector: Lisa is a reusable and completely automated device with a single activation button. The device automates the removal of the needle shield and the speed of needle insertion and retraction. Operators can select the speed of dose delivery for their comfort. LED indicators inform the user during each stage of use. We believe it is the first and only known reusable auto-injector that protects the patient from the risk of needlestick injury when removing a used syringe from the device. The Lisa Reusable Auto-Injector is expected to be made available for commercialization with pharmaceutical partners seeking to utilize the device for use with their target injectable drugs and vaccines during fiscal year 2013. Discussions with interested pharmaceutical parties are ongoing regarding the customization of the device to address specific customer, drug and patient requirements.

Drug Reconstitution Delivery Systems

The supply of an injectable drug in a lyophilized (freeze dried) state can help to enable or fast-track its commercialization and approval. Many biologic drugs are unable to be prefilled in a liquid stable format due to their molecular complexity. As a result, an increasing number of novel drugs and vaccines are now being approved by regulatory agencies in a lyophilized format for reconstitution at the point of delivery. Some pharmaceutical companies are also developing injectable therapies that require mixing of two drugs at the point of delivery.

Lyophilized drugs and vaccines have traditionally been supplied in a vial or ampoule for reconstitution at the point of delivery. Reconstitution from a vial or ampoule can require approximately 14 steps of use, with the level of complexity required for this procedure making lyophilized drugs largely unsuitable for patient self-administration. In recent years, some pharmaceutical companies have begun to develop or market certain drugs for use in a dual-chamber prefilled syringe format. A dual-chamber prefilled syringe can contain either a lyophilized or liquid stable drug in one USP compliant container, and another liquid stable drug or diluent in a second container. Operators are required to undertake several steps to mix or reconstitute the drug combination so that the injectable therapy is ready for administration. The process of reconstitution using traditional dual-chamber prefilled syringes may compromise drug sterility or require the use of secondary vent filters.

EZMix Dual or Multi-Chamber Prefilled Syringe

Unilife has developed the EZMix dual or multi-chamber prefilled syringe to serve as a safe, simple and efficient system for the reconstitution and delivery of injectable therapies. An innovative and proprietary reconstitution technology allows healthcare workers or patients to intuitively mix together a combination of liquid or lyophilized drugs with minimal steps of use. The process of reconstitution can occur without compromising drug sterility or the use of secondary venting. The EZMix syringe utilizes the Unifill platform of fully integrated and automatic safety features to virtually eliminate the risk of needlestick injuries, prevent device reuse and encourage convenient, safer disposal. The device is expected to be made available for potential commercialization with interested pharmaceutical companies for potential use with their target injectable drugs and vaccines during fiscal year 2013. Discussions with interested pharmaceutical parties are ongoing regarding the customization of the device to address specific customer, drug and patient needs.

 

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Bolus Injectors

A significant number of drugs within the clinical pipeline of pharmaceutical companies are biologics, such as monoclonal antibodies, that are being targeted for subcutaneous administration. In many cases, the molecular complexity of these drugs makes them too viscous for formulation in dose volumes of 1mL or less that would typically be used for a prefilled syringe. Unilife has developed a portfolio of bolus injectors to meet the delivery needs of these large dose volume drugs. This family of wearable, disposable devices is suited to the subcutaneous delivery of drugs, that require dosages between 1mL and 30mL in volume. Unilife’s bolus injectors utilize a primary drug container made of standard materials and are capable of being filled in standard filling lines. The devices can be preset for the delivery of a dose over seconds, minutes or hours based upon the specific requirements of the pharmaceutical customer, their drug and the target patient. The Precision-Therapy™ range of bolus injectors is designed for use with bolus-based therapies that require short or long duration injections. The Flex-Therapy™ range of bolus injectors is designed for use with rate-based therapies that require infusion over a longer duration of time where the delivery rate is controlled for hours or days.

Unilife began to supply its bolus injectors to a number of interested pharmaceutical companies to evaluate their potential use with target injectable therapies during fiscal year 2012. Unilife has since been advised by one of these pharmaceutical companies that its Precision-Therapy bolus injectors have been selected to enter into the next phase of evaluations for potential use with a number of pipeline drugs. Upon successful completion of these evaluations, Unilife expects its products will be considered by the pharmaceutical customer for a number of long-term development and commercial supply agreements. Similar progress is also being made with other pharmaceutical companies with its Precision-Therapy and Flex-Therapy bolus injectors, with additional evaluations scheduled for a number of target drugs during fiscal year 2013.

Specialized Delivery Systems

There are many acute and chronic conditions with high prevalence but without effective treatment options. Many pharmaceutical companies have several early stage yet promising molecules in their clinical pipelines that have the potential to redefine treatment for these conditions. Examples include the localized delivery of injectable therapies targeting specific organs of the human body such as the eye, ear or brain. However in many cases, due to the novel nature of the therapy, application or procedure, these novel molecules can require a specialized delivery system to enable their commercialization and approval. There are also many approved drugs utilizing conventional device technologies that limit the drugs’ clinical efficacy and hence provide for sub-optimal clinical outcomes. Such therapies and drugs can significantly benefit from specialized delivery systems such as those that we anticipate being able to develop or customize.

We are developing a series of specialized device technology platforms that can help to enable or enhance administration of these therapies. Platforms include specialized devices for targeted organ delivery, low dose delivery systems and implant deployment systems. These devices include a novel device for targeted organ delivery, and a delivery system for the controlled deployment of an implantable drug via an intravitreal or intraocular injection.

In November 2011, Unilife announced the signing of a clinical development and supply agreement with a leading, global pharmaceutical company. Under the agreement, Unilife recognized $1.4 million in revenues during fiscal year 2012 to develop a novel device for targeted organ delivery. This device has been successfully developed by Unilife and is scheduled to be used by the customer in the clinical trial of a pipeline drug during fiscal year 2013.

Additional revenue streams may also be generated should we enter into agreements with pharmaceutical customers relating to the development, customization or supply of proprietary specialized devices.

Business Strategy

Our strategy is aligned around a series of converging market trends. We recognize that:

 

   

Biologics and other injectable therapies with specific delivery needs and highly targeted patient populations represent an increasingly large and commercially significant share of the pharmaceutical market;

 

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Pharmaceutical companies are increasingly seeking access to innovative delivery systems that can enable the clinical development and enhance the lifecycle management of their injectable therapies;

 

   

Healthcare workers and their patients are increasingly demanding the use of the safest, simplest drug delivery devices to help protect those at risk of harm and enhance overall quality of life;

 

   

Therapeutic classes are becoming increasingly competitive between brand name, generic and biosimilar drug rivals with similar performance claims. Pharmaceutical companies recognize that market-leading, proprietary devices can generate powerful brand differentiation to build or protect market share and increase revenues; and

 

   

Regulatory agencies are becoming more focused on the quality and reliability of the overall drug-device combination product, and its effective use by the target operator.

Our business strategy is fully aligned around these converging market trends. It is our goal to develop long-term partnerships with pharmaceutical companies who are seeking innovative, differentiated devices that can enable and enhance delivery of their injectable therapies. We do not intend to enter into any market sectors with devices that have equivalent features as conventional products. Our focus is to develop innovative, proprietary devices that address unmet or emerging market needs and have unique value added features over equivalent conventional products.

Through the pursuit of this strategy, our R&D investments have enabled us to develop a broad and expanding proprietary portfolio encompassing prefilled syringes with integrated safety features, drug reconstitution delivery systems, auto-injectors, wearable, disposable subcutaneous delivery systems and specialized devices for novel drug delivery. Together, we believe this integrated device platform can address the drug, marketing and patient requirements of many pharmaceutical companies that are developing or marketing injectable therapies. Through the pursuit of this strategy, we intend to become a centralized source for the integrated development and supply of injectable drug delivery systems for our pharmaceutical customers.

Unlike traditional manufacturers which in our opinion develop and market rigid commodity devices that can restrict customer choice, we have developed a flexible and streamlined business structure that is designed to serve pharmaceutical companies with speed, agility and reliability. Due to the increasing convergence between injectable drugs and devices, our business has also been structured to secure and maintain long-term relationships with pharmaceutical companies that can span the clinical development, regulatory approval and full commercial lifecycle of a combination product.

By working in collaboration with pharmaceutical companies to develop or customize each device to address specific drug or patient needs, we hope to better protect healthcare workers, optimize therapy compliance, improve quality of life and ultimately prevent disease. Most of all, we seek to create value for pharmaceutical customers whereby they can leverage the differentiation provided by our innovative devices to build or protect market share and maximize revenues.

We have developed a business model that is diversified in terms of customers, device markets, disease states and revenue sources. We target some of the fastest growing and most profitable sectors of the $12 billion injectable drug delivery device market (Global Injectable Drug Delivery Market 2010; MarketsandMarkets) where there are high barriers to entry and fragmented competition. We target a number of therapeutic classes and more than 100 disease states where we have identified significant unmet needs for injectable drug delivery. We are positioned to collaborate with pharmaceutical companies on many acute and chronic conditions, including autoimmune diseases, infectious diseases and cancer. We have a diversified and growing base of pharmaceutical companies in our commercial pipeline which we believe can help to reduce our reliance on any one particular customer or contract for revenues. We have also identified multiple stages for potential revenue generation including clinical development or device customization programs, the supply of devices for use in human clinical drug trials, long-term commercial supply contracts and exclusivity or royalty fees.

 

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Commercial Relationships

Sanofi

We started to collaborate with Sanofi in 2003 for the development of the Unifill syringe as a next-generation drug delivery safety device. Sanofi is a large, global pharmaceutical company, whose products span multiple therapeutic areas, including cardiovascular diseases, thrombosis, oncology, metabolic diseases, internal medicine and vaccines. We believe that Sanofi is currently the world’s largest purchaser of prefilled syringes.

We have signed an exclusive licensing agreement with Sanofi. Under the exclusive licensing agreement, we have granted Sanofi an exclusive license to certain of our intellectual property in order and solely to develop, in collaboration with us, the Unifill syringe for use in and sale to the prefilled syringe market within those therapeutic areas agreed upon between us, and a non-exclusive license outside those therapeutic areas that are exclusive to Sanofi or effective after the expiration of the exclusive license with Sanofi.

We and Sanofi have agreed on a list of therapeutic drug classes that are exclusive to Sanofi. These areas include the full therapeutic classes of antithrombotic agents and vaccines and an additional four smaller subgroups that fall within other therapeutic classes that we believe represent new market opportunities in the pharmaceutical use of prefilled syringes. Sanofi will retain the exclusive right to negotiate to purchase the product within these designated therapeutic drug classes until June 30, 2014, subject to the extension described below.

Pursuant to the exclusive licensing agreement, Sanofi paid us a €10.0 million upfront one-time fee in 2008. The exclusive license granted thereunder has an initial term expiring on June 30, 2014. If, during the term of the exclusive license, Sanofi has purchased the Unifill syringe for use with a particular drug product, Sanofi will receive a ten-year extension of the term of the exclusive license within the therapeutic sub-class in which that drug is marketed. The extension will be reduced to five years if Sanofi does not sell a minimum of 20 million units of the product in any year of the first five years of such ten-year extension period.

Under the exclusive licensing agreement, we are not precluded from using certain of our intellectual property to develop, license and sell any products in any market other than the ready-to-fill syringe market, or from entering into licensing or other business arrangements with other pharmaceutical companies for the ready-to-fill syringe market outside those therapeutic areas that are exclusive to Sanofi, or after the expiration of the exclusive license with Sanofi. If we grant a license to a third party in respect of the ready-to-fill syringe market, then we are required to pay Sanofi 70% of any access, license or other upfront fee received from such third party for access to purchase the products until our payments to Sanofi have totaled €10.0 million, following which we are required to pay 30% of such fees we receive through the end of the initial exclusivity period, June 29, 2014. We are also required to pay Sanofi an annual royalty payment of 5% of the revenue generated from any sale of the Unifill syringe to third parties, up to a maximum amount of €17.0 million in such royalty payments.

On June 30, 2009, we signed an industrialization agreement with Sanofi. The industrialization agreement sets forth the terms for the collaboration between the parties to design, develop, scale up and industrialize the Unifill syringe, including the timetable and milestones for the industrialization program. Under the industrialization agreement, Sanofi agreed to make payments of €17.0 million to us based on milestones we achieved in our industrialization program. The industrialization program began in July 2008 and was completed in June 2011, with the initial supply of the Unifill syringe to Sanofi in July 2011. The final payment for the successful completion of the industrialization agreement was received from Sanofi in September 2011.

The Industrialization Agreement further provides, “Subject to the full completion of the Industrialization of the product, the Parties will negotiate for the manufacture and purchase of the final product on a commercial scale (Supply Agreement).” The supply agreement, if completed, will provide that Sanofi and its affiliates will purchase the final product exclusively from us, and the industrialization agreement provides that we are not required to commit more than 30% of our expected installed production capacity to Sanofi and its affiliates for the 12 months following the receipt of a purchase order. Orders from Sanofi, that will exceed the 30% capacity limit will require up to a maximum of 24 months lead time before we are required to commence delivery of that order, though we may choose to deliver such orders earlier if our capacity restrictions allow.

Pursuant to the industrialization agreement, if we agree to, or propose to agree to, a change of control with a third party, we must give written notice to Sanofi, who will be entitled, within five business days, to make an offer on at least equivalent terms. In the absence of an improved change of control proposal, we must accept the matching offer of Sanofi, subject to shareholder approval. If we receive an improved change of control offer from the third party, then we must give further notice to Sanofi for it to make a further matching offer. In addition, if during the term of the industrialization agreement, a change of control that does not involve Sanofi, or its affiliates, obtaining control of the company (i) is not recommended by our board of directors, (ii) will cause harm to Sanofi, as defined in the agreement or (iii) under which Mr. Alan Shortall, our CEO and director, is not to continue in such capacities for at least two years after the change of control, then Sanofi will have the right to terminate the industrialization agreement within ten business days after receiving a notice from us, or after it otherwise becomes aware of the change of control. Pursuant to the industrialization agreement, a change of control means, in general terms, a change in the ownership of 50% or more of our shares or the power to determine the majority composition of our board of directors or any other event that our board determines to be a change of control event.

 

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Other Pharmaceutical Relationships

We are at various stages in the development of commercial relationships with a number of current and prospective pharmaceutical customers. For the Unifill syringe, we expect to secure commercial supply contracts with pharmaceutical and biotechnology companies regarding the supply and use of the device for use with injectable drugs that fall outside of those therapeutic classes and contract periods retained by Sanofi. These relationships may include the signing of commercial agreements relating to the sale of the Unifill syringe, or the provision of exclusive access to the device within designated therapeutic sub-classes in exchange for upfront fees or royalty payments.

We have begun to enter into commercial supply contracts with pharmaceutical customers for the Unifill syringe. The first supply contract is related to the planned launch of a generic equivalent of an approved auto-immune therapy that is currently available in a standard prefilled syringe format for use across several indications. Under the terms of this contract, Unilife has agreed to grant to the pharmaceutical customer an exclusive supply right for the Unifill syringe for a specific indication and Western European territory. The contract further provides that an exclusivity fee will be added onto the negotiated unit price of the Unifill syringe when agreed exclusivity conditions are met.

There are also active, ongoing discussions with pharmaceutical and biotechnology companies regarding the development and use of our other proprietary devices. We expect to enter into development programs with some of these pharmaceutical companies to develop, customize and supply our proprietary devices for use in scheduled human clinical drug trials for target pipeline drugs.

For example, in November 2011, we announced the signing of a clinical development and supply agreement with a global pharmaceutical company. Under the agreement, Unilife recognized $1.4 million in revenues during this fiscal year to develop a novel device for targeted organ delivery. This device has been successfully developed by Unilife and is scheduled to be used by the customer in the clinical trial of a pipeline drug during fiscal year 2013.

Subject to the successful clinical development and regulatory approval of these drug-device combination products, we anticipate entering into long-term supply agreements for the production and sale of these devices to the pharmaceutical company. These partnerships may also include the payment of exclusivity or access fees to enable the pharmaceutical company to generate brand differentiation within a therapeutic drug class against other brand-name, generic or biosimilar competitors.

Manufacturing

Our center of operations is a state-of-the-art manufacturing facility located in York, Pennsylvania. This FDA-registered facility serves as an integrated center for device innovation, bringing together the people, production systems, design expertise and quality processes necessary to design and develop best-in-class drug delivery systems. Designed by architects who have substantial experience in designing facilities used to develop, produce and supply medical devices, the facility plays a key role in ensuring that we comply with stringent internal and industry standards for quality and reliability.

Our 165,000 square-foot site includes eleven Class 7 and Class 8 clean rooms totaling 40,000 square feet in size. Environmental factors, including temperature, moisture and particulates, are tightly controlled. Additional features include a ‘Water for Injection’ system, bio-analytical and quality laboratories, a product development center, a machine shop and a 20,000-square-foot warehouse. The facility gives us the capacity to meet the immediate requirements of our pharmaceutical companies, and to progressively expand in line with the development and commercial launch of a series of drug-device combination products.

 

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Activities undertaken at the site include device design, rapid prototyping, pilot and commercial production, bio-analytical testing, packaging, quality assurance and supply chain. All activities at Unilife are guided by advanced business systems, such as SAP ERP, that complement those of pharmaceutical companies. Our Quality Management System is fully certified to ISO 13485 and operates in compliance with 21 CRF 210/211 for pharmaceuticals and 21 CFR 820 for medical devices.

We source the production of components and other raw materials utilized in the production of our proprietary devices under written contracts with a variety of suppliers, all of which specialize in the medical device and pharmaceutical sectors. These components are shipped to our York, Pennsylvania facility for quality review, assembly, qualification and packaging. All of our proprietary devices are assembled by us at our York, PA facility utilizing pilot or commercial assembly systems.

Sales and Marketing

The majority of the pharmaceutical and biotechnology companies with whom we are in active discussions are multinational companies with headquarters located in the United States, Europe or Asia. In the majority of cases, these pharmaceutical and biotechnology companies are large multinational organizations which are ranked as being among the top twenty in the world. The majority of these pharmaceutical companies specialize in the development of a range of brand-name or generic injectable drugs and vaccines.

Our pharmaceutical customers are primarily responsible for the sale, marketing and clinical use of the combination drug-delivery device to target government agencies, healthcare facilities or patients who self-administer prescription medication within indicated therapeutic drug classes. We expect to support pharmaceutical companies in the development of documentation or marketing material pertaining to the recommended clinical use of the device with the contained drug or vaccine.

We have a small internal team focused on the commercial development, strategic marketing, clinical support and sale of our proprietary devices to pharmaceutical and biotechnology companies. Many members of this team have strong industry expertise and deep relationships within the pharmaceutical market, which are utilized to generate and progress commercial discussions. In addition, we also receive direct inquiries or Request for Proposals from pharmaceutical companies regarding the potential use of our devices with their target drugs. In some instances, we expect to be approached by pharmaceutical companies with unmet needs for a drug delivery system, whereby we will develop and customize the device to address the specific molecular and patient requirement of the target drug. We also attend a number of industry events, trade shows and conferences, and advertise within selected industry media publications whereby we exhibit, network and promote our products and services to prospective customers.

Intellectual Property

Patents, trademarks and other proprietary rights are very important to our business. We hold numerous patents and patent applications covering our existing and future products and technologies. We also rely on a combination of trade secrets and manufacturing know-how to protect our intellectual property. We enter into non-disclosure agreements with certain vendors and suppliers to attempt to ensure the confidentiality of our technology. We also enter into non-disclosure agreements with certain customers. In addition, we require that all our employees sign confidentiality, non-compete and intellectual property assignment agreements. Our focus is to safeguard the intellectual property surrounding our devices, manufacturing processes, and other related technologies to protect not only our position and growth opportunities, but also that of our strategic partners and customers.

As of July 2012, we had approximately 60 issued patents relating to our safety syringe and primary drug container platforms across more than 20 worldwide jurisdictions, including the United States, Australia, Europe and China. Patents relating to our safety syringe technologies expire at various dates between 2018 and 2030, though patent applications covering relevant advancements in these technologies could extend well beyond that time period once granted. Recently granted U.S. Patent 8,167,837 relating to the Unifill® syringe provides patent exclusivity for Unilife and its licensed customers through 2026.

 

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We also have more than 100 additional patent applications pending examination with the USPTO and other international patent organizations which we expect to be granted as patents over the next two years. A significant number of other patent applications are expected to be filed with national and international patent organizations during fiscal year 2013. Unilife’s patent filings have more than doubled in the last two years and now cover products beyond our proprietary safety syringe technology. Unilife’s patent portfolio covers current and anticipated product offerings, as well as process improvements and other value-added innovations which streamline our customers’ assembly and drug filling processes.

Additionally, we have registered worldwide trademarks including Unilife® and Unifill®, and are pursuing trademark registration for our other proprietary device platforms in a number of key countries and regions including the United States.

Government Regulation

The development, manufacture, sale and distribution of medical devices are subject to comprehensive government regulation. Our medical devices and manufacturing operations are subject to regulation under the federal Food, Drug and Cosmetic Act, or the FDC Act, as implemented and enforced by the FDA and various other federal and state agencies and are also subject to regulation by foreign governmental agencies. These laws and regulations govern the development, testing, manufacturing, labeling, advertising, marketing and distribution and market surveillance of medical devices.

FDA’s Premarket Clearance and Approval Requirements

Unless an exemption applies, each medical device we wish to distribute commercially in the United States will require either prior 510(k) clearance or premarket approval from the FDA. The FDA classifies medical devices intended for human use into three classes: Class I, Class II and Class III. Class I or Class II devices require the manufacturer to submit to the FDA a premarket notification requesting permission to commercially distribute the device. This process is generally known as 510(k) clearance. Class III devices require premarket approval. Our clinical ranges of syringes, including our Unitract® 1mL syringe, are Class II devices. Our Unifill syringe does not require 510(k) clearance because it will be sold to drug manufacturers in its component parts for use as a primary packaging container.

There is a different regulatory process that will apply to our Unifill syringe because it will not be distributed as a device. It will be used as a primary container by drug manufacturers to provide drugs in a prefilled format. In the case of the Unifill syringe, it is the responsibility of the pharmaceutical company who will use the Unifill syringe for its drug to obtain final product approvals, either by submitting a new drug application or abbreviated new drug application. In order to support the pharmaceutical company’s application, we intend to create what is known as a Drug Master File (“DMF”). A DMF is a submission to the FDA that may be used to provide information about facilities, processes or articles used in the manufacturing, packaging and storing of one or more human drugs. The DMF will define the manufacturing and safety characteristics of the Unifill syringe while protecting proprietary information regarding its technical design.

510(k) Clearance Pathway

When applying for 510(k) clearance, we must submit a premarket notification demonstrating that our proposed device is substantially equivalent to another legally marketed product (i.e., that it has the same intended use and that it is as safe and effective as a legally marketed, or predicate device and does not raise different questions of safety or effectiveness than does a predicate device). According to FDA regulations, the FDA is required to clear or deny a 510(k) premarket notification within 90 days of submission of the application, or 30 days in the case of an abbreviated 510(k) application that may be filed for product line extensions. As a practical matter, 510(k) clearance often takes between three and twelve months.

Premarket Approval Pathway

A premarket approval application must be submitted to the FDA if the device cannot be cleared through the 510(k) process. A premarket approval application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. To the best of our knowledge, this process does not apply to our current range of products.

 

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Pervasive and Continuing Regulation

After a device is placed on the market, numerous regulatory requirements apply. These include, but are not limited to the following:

 

   

Quality System Regulations, or QSR, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;

 

   

Labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or “off label” uses;

 

   

Medical device reporting regulations, which require that manufacturers report to the FDA and other regulatory agencies that their device may have caused or contributed to the death or serious injury or malfunctioned in a way that would likely cause or contribute to the death or serious injury if the malfunction were to occur; and

 

   

Post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.

The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA to determine our compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities of our manufacturing subcontractors. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any or all of the following sanctions:

 

   

Fines, injunctions, consent decrees and civil penalties;

 

   

Recall or seizure of our products;

 

   

Operating restrictions, partial suspensions or total shutdown of production;

 

   

Refusing our requests for 510(k) clearance or premarket approval of new products or new intended uses;

 

   

Withdrawing 510(k) clearance or premarket approvals that are already granted; and

 

   

Criminal prosecution.

Regulation in the European Union and Australia

The European Union has adopted numerous directives regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of the relevant directive will be entitled to bear CE conformity marking, indicating that the device conforms with the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout the member states of the European Union. The method of assessing conformity varies depending on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third party assessment by a “Notified Body” which is an independent and neutral institution appointed by a country to conduct the conformity assessment. This third-party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s device. An assessment by a Notified Body in one member state of the European Union is required in order for a manufacturer to commercially distribute the product throughout these countries. ISO 9001 and ISO 13845 are voluntary harmonized standards. In July 2009, we received our ISO 13485:2003 quality system certification. Our certification includes the design, development, production and distribution of safety syringes, ready to fill syringe components and drug delivery devices.

In Australia, the Therapeutic Goods Administration, or TGA, is responsible for administering the Australian Therapeutics Goods Act. The Office of Devices, Blood and Tissues is the department within the TGA responsible for medical devices. The Australian Register of Therapeutic Goods, or ARTG, controls the legal supply of therapeutic goods in Australia. The ARTG is the register of information about therapeutic goods for human use that may be imported, supplied in, or exported from Australia. Any use of an unapproved medical device in humans, even in pilot trials, requires an exemption from the requirement for inclusion on the ARTG. US manufacturers seeking to market product in Australia must acquire CE certification and lodge manufacturer evidence, including the CE certificate and a Declaration of Conformity to Australian Requirements, with the TGA. The lodging of this information with the TGA is completed by an Australian sponsor, with the assistance/support of the manufacturer. Upon TGA acceptance of the manufacturer evidence, the Australian sponsor/manufacturer must create a medical device inclusion in the ARTG and only is then able to release USA-manufactured product in Australia.

 

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With regard to the regulatory process in the European Union and Australia for the Unifill syringe, as in the case of the U.S., it is the responsibility of the pharmaceutical company who will use the Unifill syringe for its drug to obtain final product approvals.

Other Regulations

We are also subject to various federal, state and local laws and regulations, both in the United States and other international territories where we conduct business, relating to such matters as safe working conditions, laboratory and manufacturing practices and the use, handling and disposal of hazardous or potentially hazardous substances used in connection with our research and development work. Although we believe we are in compliance with these laws and regulations in all material respects, we cannot provide assurance that we will not be required to incur significant costs to comply with environmental laws or regulations in the future.

We are subject to various federal, state and local laws in the United States targeting fraud and abuse in the healthcare industry, which generally prohibit us from soliciting, offering, receiving or paying any remuneration in order to induce the ordering or purchasing of items or services that are in any way paid for by Medicare, Medicaid or other government-sponsored healthcare programs. Healthcare costs have been and continue to be a subject of study, investigation and regulation by governmental agencies and legislative bodies around the world. The U.S. federal government continues to scrutinize potentially fraudulent practices affecting Medicare, Medicaid and other government healthcare programs. Payers have become more influential in the marketplace and increasingly are focused on drug and medical device pricing, appropriate drug and medical device utilization and the quality and costs of healthcare. Violations of fraud and abuse-related laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in healthcare programs such as Medicare and Medicaid and health programs outside the United States.

Competition

The healthcare equipment, pharmaceutical and medical device industry sectors in which we operate are highly competitive. We compete with many companies, both public and private, that range in size from small, highly focused businesses to large diversified multinational manufacturers of healthcare and pharmaceutical equipment, as more fully described below. Some of the large and established companies we are aware of which are active in the injectable drug delivery device market include Becton Dickinson (“BD”), SCHOTT forma vitrum AG (“Schott”), Baxter Biopharma, B. Braun, Gerresheimer Bünde GmbH (“Gerresheimer”), Terumo, West Pharma, Ypsomed and Owen Mumford. We believe that collectively, these companies represent the significant majority of total revenues for this market, with BD having the largest share. Most of these companies are larger and better-capitalized than we are and have an extensive base of pharmaceutical companies. However, we are aware of very few, if any, other companies, that have developed a broad and diversified portfolio of primary drug containers and other injectable drug delivery systems that are suitable for drugs and vaccines supplied in either a liquid stable or reconstitution form for injection as Unilife’s.

Ready-to-Fill (Prefilled Syringes)

We do not believe there are any other companies that offer a ready-to-fill syringe with safety features which are fully integrated within the glass barrel. However there is a highly concentrated market for the production of standard ready-to-fill syringes for supply to pharmaceutical manufacturers. We are aware of five companies which specialize in the production and supply of glass ready-to-fill syringes. These companies are BD, Gerresheimer, MGlas AG, Schott and Nuova Ompi. We estimate the market concentration rate for these five companies to be approximately 95%. We believe BD’s market share to be in excess of 50%, as it has supply relationships with most pharmaceutical companies and contract manufacturing organizations. Of these five aforementioned companies, we believe that BD is the only one which also markets and supplies ancillary safety products for attachment onto standard prefilled syringes to assist pharmaceutical companies in their compliance with needle stick prevention laws. We are aware of another specialist supplier of ancillary safety products, Safety Syringes Inc, which has contracts with a number of pharmaceutical manufacturers.

 

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Auto-Injectors

The global market for patient self-injection devices such as auto-injectors is relatively consolidated, with BD and a handful of other companies including Ypsomed, Owen Mumford and SHL Group holding the majority of market share.

Subcutaneous Pump Infusion Systems

The global market for subcutaneous drug infusion systems targeted for the administration of large volume, highly viscous biologics (outside of the diabetes class) is emerging. We are not aware of any company that commercially markets these systems in a volume size of 5mL or larger. Companies which are active in the more general market for patch pump infusion systems targeted for use with insulin include large established companies such as BD and Medtronic, as well as smaller companies such as Insulet.

Research and Development

During the fiscal years ended June 30, 2012, 2011 and 2010, we invested approximately $23.1 million, $9.6 million and $10.9 million, respectively, on research and development of our technologies. Research and development costs include activities related to the research, development, design, testing, and manufacturing of prototypes of our products. They also include clinical activities and regulatory costs as well as expenses associated with certain consultants engaged in research and development activities along with a portion of the overhead costs we incur to operate our manufacturing facility. The increase in research and development activities largely related to the expansion of the company’s portfolio of injectable drug delivery systems.

Employees

As of September 5, 2012, we had 128 employees and associates, of whom 96 are engaged in operations activities including research and development, quality assurance and manufacturing activities, 3 are engaged in sales, marketing and clinical activities and 29 are engaged in finance, legal and other administrative functions. Most of our employees and all of our executive officers are located at our York, Pennsylvania facility. A small number of our employees, mainly focused on research and development, are located in Radnor, Pennsylvania and Australia. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relations with our employees to be good.

Corporate History

Unilife Corporation was incorporated in Delaware on July 2, 2009 as a wholly-owned subsidiary of UMSL. As we describe in more detail under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Redomiciliation.”, on January 27, 2010, Unilife Corporation became the parent company of UMSL upon completion of the redomiciliation and UMSL’s shareholders and option holders exchanged their interests in UMSL for equivalent interests in Unilife Corporation. Our principal executive offices are located at 250 Cross Farm Lane, York, Pennsylvania 17406. Our telephone number is +1 717 384 3400.

UMSL was incorporated on June 28, 1985, in South Australia, Australia. The registered office of UMSL is located at 1 Chifley Square, Sydney NSW 2000. Originally known as Musgrave Block Holdings Limited, UMSL acquired all of the issued shares of Unitract Pty Limited in November 2002, and changed its name to Unitract Limited (now Unilife Medical Solutions Limited), listed on the Australian Securities Exchange, or ASX under the ticker “UNI” and continued the business operations of Unitract Pty Limited and the development of Unitract Pty Limited’s retractable syringe project. In January 2007, in order to obtain a manufacturing presence in the United States, UMSL acquired all the stock of Integrated BioSciences, Inc., a Pennsylvania-based company, which in February 2009 changed its corporate name to Unilife Medical Solutions, Inc. At the time of its acquisition by UMSL, Integrated BioSciences, Inc. was in the business of contract manufacturing of syringes for third parties and developing automated assembly equipment.

Financial Information about Geographical Areas

See Note 3 to our consolidated financial statements for information regarding our revenues by geographic area.

 

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Available Information

We maintain an internet website at www.unilife.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the “Investor Relations” portion of our website, as soon as reasonably practicable after they are filed with the Securities and Exchange Commission. The information posted on our website is not incorporated into this Annual Report on Form 10-K.

Directors and Executive Officers

The following table sets forth the name, age and position of each of our directors and executive officers.

 

Name

   Age     

Position

Slavko James Joseph Bosnjak

     63       Chairman and Director

Alan Shortall

     58       Director and Chief Executive Officer

John Lund

     46       Director

William Galle

     72       Director

Jeff Carter

     54       Director

Mary Katherine Wold

     59       Director

Marc S. Firestone

     52       Director

Ramin Mojdeh

     50       Chief Operating Officer and Executive Vice President

R. Richard Wieland II

     67       Chief Financial Officer and Executive Vice President

Mark V. Iampietro

     59       Vice President of Quality and Regulatory Affairs

J. Christopher Naftzger

     45       Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer

Biographical Summaries

Slavko James Joseph Bosnjak. Mr. Bosnjak has served as our director since February 2003 and as chairman of our board since April 2006. Mr. Bosnjak has been a co-owner and director of the Le Meridien Lav Hotel in Split, Croatia since 2002 and is chairman and co-founder of Ultimate Outdoor Ltd., an Australian outdoor advertising company. Mr. Bosnjak is chairman of Chiron Commercial Vehicles Pty Ltd., a Malaysian company which manufactures bus bodies for export to Australia. He has also held positions on Commonwealth and New South Wales government advisory bodies, including the Greater Western Sydney Economic Development Board, and the GROW Employment Council. Mr. Bosnjak also served as the Chairman of the Tourism Council of Australia and Bus 2000 Ltd, which coordinated bus services for the Sydney 2000 Olympic Games. Mr. Bosnjak was awarded an Order of Australia Medal in 1994 for his services to transport and the community, and also holds an honorary doctorate from the University of Western Sydney for his services related to employment growth and economic development.

Alan Shortall. Mr. Shortall has served as our Chief Executive Officer since September 2002. Mr. Shortall founded Unilife in July 2002 and has guided the growth of Unilife since then. In 2008, the trade magazine Medical Device and Diagnostic Industry named him as one of 100 Notable People in the medical device industry worldwide.

John Lund. Mr. Lund has served as our director since November 2009. Mr. Lund is also managing partner of M&A Holdings, LLC, a private consulting company since July 2003, and Upstart CFO, LLC since December 2010. Mr. Lund was Vice President of Finance and Controller of E-rewards, Inc., an internet market research company from February 2009 to March 2011, Vice President and Controller of Nexstar Broadcasting Group, Inc., a Nasdaq listed television broadcasting company, from March 2008 to November 2008, Vice President of Finance and Corporate Controller of LQ Management, LLC (LaQuinta) from November 2006 to March 2008, and Corporate Controller of ExcellerateHRO, a Hewlett Packard Company from January 2005 to October 2006. Prior to that, Mr. Lund held Chief Financial Officer and Controller positions for various public and private companies and was a Manager at KPMG. Mr. Lund received the Certificate of Director Education from the National Association of Corporate Directors (NACD) and completed various corporate governance courses at Harvard during 2010. Mr. Lund, a certified public accountant, graduated from the University of North Texas in 1991 and received his MBA from the Kellogg Graduate School of Management, Northwestern University in 2012. Mr. Lund is actively involved in the NACD, Financial Executive Institute, American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants.

William Galle. Mr. Galle has served as our director since June 2008. Since 2009, Mr. Galle has been affiliated as an investment banker with Bradley Woods, a 40 year-old New York City-based independent research and investment banking firm specializing in federal regulatory and legislative developments impacting substantial investor portfolios. Since 1993, Mr. Galle has been President of Diversified Portfolio Strategies LLC (DPS) in Washington D.C., which provides alternative investment advisory services for institutions and substantial investors. DPS clients have included public and private retirement plans and Fortune 500 companies. Prior thereto, he was Vice President of Pension Services and consultant for Smith Barney, Harris Upham. He also held the position of Director at NASDAQ Corporate Services for the National Association of Securities Dealers, Inc. in Washington D.C. Mr. Galle is a graduate of Columbia University, Rutgers University, and the New York Institute of Finance.

 

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Jeff Carter. Mr. Carter has served as our director since April 2006. From February 2005 until January 2009, Mr. Carter served as Chief Financial Officer of UMSL. He has also served as Company Secretary of UMSL from March 2007 to July 2010. Mr. Carter is a chartered accountant and holds a master’s degree in applied finance from Macquarie University. Mr. Carter was a Chief Financial Officer of various publicly listed healthcare companies prior to joining UMSL in February 2005. Prior to entering the healthcare industry, Mr. Carter held Senior Management positions with Coca-Cola, Santos, Canadian Imperial Bank of Commerce and Touche Ross. Mr. Carter has in excess of 30 years of experience in professional accounting, investment banking, corporate finance and commercial/strategic planning roles.

Mary Katherine Wold. Ms. Wold has served as our director since May 2010. Ms. Wold serves as Chief Executive Officer of the Church Pension Fund, which oversees defined benefit and defined contribution pension plans for clergy and lay employees of the Episcopal Church. Prior to her position at the Church Pension Fund, Ms. Wold served as Senior Vice President of Finance from 2007 to 2009, Senior Vice President of Tax and Treasury from 2005 to 2007 and Vice President of Tax from 2002 to 2005, of Wyeth, a NYSE-listed pharmaceutical company, which was acquired by Pfizer in October 2009. Prior thereto, Ms. Wold spent 17 years with the international law firm of Shearman & Sterling based in New York, specializing in international tax planning for multinational corporations and in the tax aspects of mergers and acquisitions, capital markets and private equity transactions. Ms. Wold received her law degree from the University of Michigan and her Bachelor of Arts degree from Hamline University.

Marc S. Firestone. Mr. Firestone has served as our director since July 2010. Mr. Firestone is Senior Vice President and General Counsel of Phillip Morris International, a Fortune 100 company. Prior to joining Phillip Morris International, Mr. Firestone served as Executive Vice President of Corporate and Legal Affairs and General Counsel for Kraft Foods, Inc. Prior to his position with Kraft, Mr. Firestone held several senior executive positions at Philip Morris Companies and its subsidiaries, including as Senior Vice President and General Counsel, Philip Morris International, and Senior Vice President of Regulatory Affairs, Phillip Morris Companies. Mr. Firestone started his legal career as an attorney with the law firm of Arnold & Porter. He holds a juris doctorate from Tulane University School of Law and a bachelor’s degree from Washington & Lee University. He received the International Law Office/Association of Corporate Counsel “General Counsel of the Year” award in 2011.

Ramin Mojdeh. Dr. Mojdeh has served as Chief Operating Officer and Executive Vice President since February 2011. Dr. Mojdeh served as Vice President and General Manager of BD Pharmaceutical Systems, North America between 2008 and 2010 and Worldwide Vice President of Research and Development, BD Medical between 2002 and 2008. Dr. Mojdeh received a Ph.D. in Computer Science from the University of Minnesota, Minneapolis, MN and his MBA from the Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois.

R. Richard Wieland II. Mr. Wieland has served as Chief Financial Officer and Executive Vice President since June 2010. Mr. Wieland served as Chief Financial Officer of Cytochroma Inc., a privately-held specialty pharmaceutical company, from May 2008 to May 2009 and served as Executive Vice President and Chief Financial Officer of Advanced Life Sciences Holdings, Inc., a Nasdaq listed clinical-stage biopharmaceutical company, from June 2004 to April 2008. Mr. Wieland obtained his B.A. in Accounting and Economics from Monmouth College and his MBA from Washington University.

Mark V. Iampietro. Mr. Iampietro has served as Vice President of Quality and Regulatory Affairs of UMSL since October 2008 and of Unilife Corporation since November 2009. From May 2002 to July 2008, Mr. Iampietro was Vice President of Quality, Regulatory and Clinical Operations at Spherics, Inc., a pharmaceutical manufacturer, where he managed various phases of quality, regulatory, and clinical programs. Mr. Iampietro holds American Society for Quality certifications as both a quality and reliability engineer and holds a Bachelor of Science degree in life sciences with a minor in engineering from Worcester Polytechnic Institute.

J. Christopher Naftzger. Mr. Naftzger has served as Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer of Unilife Corporation since July 2010. Mr. Naftzger served as Assistant General Counsel and Assistant Secretary of Chesapeake Corporation, a NYSE traded packaging company for the pharmaceutical and healthcare industries, from July 2007 to May 2009 and served as Senior Counsel of Koch Industries, Inc., the second largest privately held company in the U.S., from June 2006 to June 2007. Prior to joining Koch, Mr. Naftzger was a partner at Blank Rome LLP, an international Am Law 100 firm. Mr. Naftzger obtained his B.A. in History and Political Science from Hampden-Sydney College and his J.D. from the Willamette University College of Law.

 

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Item 1A. Risk Factors

Our business faces many risks. We believe the risks described below are the material risks facing the Company. However, the risks described below may not be the only risks we face. Additional unknown risks or risks that we currently consider immaterial may also impair our business operations. If any of the events or circumstances described below actually occurs, our business, financial condition or results of operations could suffer, and the trading price of our shares of common stock could decline significantly. Investors should consider the specific risk factors discussed below, and the other information contained or incorporated by reference herein and the other documents that we file from time to time with the Securities and Exchange Commission.

Risks Relating to Our Business

We may need additional funding to meet our capital needs. Such funding may not be available on favorable terms, if at all, and may be dilutive to our existing stockholders.

We may need to obtain additional funding for our product development programs and commercialization efforts. We cannot provide assurance that we will be able to raise additional funding, if needed, on terms favorable to us, or at all. If we raise additional funds from debt financing, we may be obligated to abide by restrictive covenants contained in the debt financing agreements, which may make it more difficult for us to operate our business. If we raise additional funds through the issuance of equity securities, the percentage ownership of our existing shareholders will be reduced, our shareholders may experience additional dilution in net book value, and such equity securities may have rights, preferences or privileges senior to those of our existing shareholders. If we are unable to secure additional funding, our ability to continue our product development and commercialization programs would be delayed, reduced or eliminated.

We have received an audit report that includes an explanatory paragraph stating that our recurring losses from operations raise substantial doubt about our ability to continue as a going concern on our fiscal 2012 consolidated financial statements.

The continuation of our Company as a going concern is dependent upon our attaining and maintaining profitable operations and/or raising additional capital. Our independent registered public accounting firm included, in their audit report on our consolidated financial statements for the year ended June 30, 2012, an explanatory paragraph regarding the substantial doubt about our ability to continue as a going concern. Our consolidated financial statements contain additional note disclosures describing our liquidity. As a result of this uncertainty, we may have a more difficult time obtaining necessary financing.

Our success depends in large part on our ability to achieve substantial commercial sales of the Unifill syringe to customers. If we experience problems or delays in securing favorable agreements to supply the Unifill syringe to customers, our business, including our ability to generate significant revenues, will be materially and adversely affected.

The Unifill syringe is our primary product and, to date, we have derived substantially all of our revenues from our exclusive licensing and industrialization agreements with Sanofi related to its development. However, we have completed the industrialization program and have executed a supply agreement for the Unifill syringe with one pharmaceutical company, but our ability to generate significant revenues will depend on our ability to negotiate successfully additional supply agreements for the Unifill syringe with Sanofi and/or other pharmaceutical companies and to begin supplying substantial quantities of the product under such agreements. We cannot assure you if or when we will be able to enter into any additional supply agreements for the Unifill syringe or what the terms of any such agreements will be. If we are unable to secure additional supply agreements for the Unifill syringe in a timely manner, our ability to generate significant revenues will be materially and adversely affected.

We have recently devoted significant attention and resources towards the development of other injectable drug delivery systems. We cannot give any assurance that we will be able to complete the development and successfully commercialize these systems.

A significant element of our strategy focuses on developing a broad portfolio of injectable drug delivery systems that deliver greater benefits to pharmaceutical companies, healthcare workers and patients. These new injectable drug delivery systems are a response to changes in drug technologies, industry standards and the emerging needs of pharmaceutical companies. Other device companies, and pharmaceutical companies, are also attempting to develop alternative therapies or drug administration systems such as needle-free or intradermal injection technology for the treatment or prevention of various diseases. Our success will depend on developing and commercializing new injectable drug delivery systems in order to meet the changing conditions of the marketplace. The development of these injectable drug delivery systems requires significant research and development, clinical evaluations, regulatory approvals and expenditures of capital. The results of our product development efforts may be affected by a number of factors, including our ability to innovate, develop and manufacture new products, complete clinical trials, obtain regulatory approvals and secure customer orders for these products. In addition, patents obtained by others can preclude or delay our commercialization of a product. There can be no assurance that any products now in development, or that we may seek to develop in the future, will achieve technological feasibility, obtain regulatory approval or gain market acceptance. The development of new or improved products, processes or technologies by other companies may render our products or proposed products obsolete or less competitive.

 

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We do not expect to be profitable unless, and until, we achieve commercial scale production and sales of the Unifill syringe and/or generate revenues from other propriety devices.

We have incurred, and will continue to incur, significant R&D expenses related to the development and expansion of our proprietary portfolio of injectable drug delivery systems. We will also incur general and administrative expenses related to increasing our manufacturing operations, expanding our sales and marketing capabilities, seeking regulatory approvals, and complying with the requirements related to being a public company in both the United States and Australia. We will not be profitable until we are successful in achieving commercial scale production and sales of the Unifill syringe and/or are generating revenues from other proprietary devices such as clinical development programs, industrialization programs, commercial supply contracts, or exclusivity or royalty fees.

The Unifill syringe has been designed to be compatible with the drug manufacturing systems currently utilized by Sanofi, which may hinder our ability to sell the product to other pharmaceutical customers whose manufacturing processes may not be compatible with our current product designs.

The Unifill syringe has been designed to be compatible with the drug filling and packaging systems of Sanofi. To our knowledge, the majority of fill-finish lines are designed and operated in a similar way. However, while the standard glass barrels to be used for the Unifill syringe are also currently utilized by most pharmaceutical companies, the specific processes used by other pharmaceutical companies to fill, manufacture or package prefilled syringes with an injectable drug product may vary from those of Sanofi. Furthermore, pharmaceutical companies may in some cases require the use of materials which are biocompatible with a particular drug compound and to which we do not have access. Such events may require design, material or process changes to our product, or restrict our ability to enter into supply relationships with other pharmaceutical companies and accordingly, may have a material adverse effect on our results of operations and financial condition.

We may encounter difficulties managing our growth, which could materially harm our business.

We have rapidly expanded our operations, including our research and development, product development, regulatory, manufacturing, sales, marketing and administrative functions. This expansion has placed, and is expected to continue to place, a significant strain on our management, operational and financial resources. To manage our growth and to develop and commercialize our products will require continued investment in procedures and systems relating to operational, financial and quality control processes, and continue to expand, train and manage our employee base. In addition, we will need to manage relationships with various manufacturers, suppliers, customers and other organizations. Our failure to accomplish any of these tasks could materially harm our business.

We will continue to incur significant costs as a result of being a public company in both the United States and Australia.

We are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Being a public reporting company in the United States entails significant expense, including costs required for us to comply with the Sarbanes-Oxley Act of 2002. In addition, because our shares of common stock are also listed on the Australian Securities Exchange (“ASX”) in the form of CDIs, we are also required to file financial information and make certain other filings with the ASX. Our status as a reporting company in both the United States and Australia makes some activities more time-consuming and costly and causes us to incur legal, accounting and other expenses that are higher than those that are typically incurred by companies that are subject to reporting requirements in only one jurisdiction.

 

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Our manufacturing facilities and the manufacturing facilities of our suppliers must comply with applicable regulatory requirements. If we or they fail to achieve or maintain regulatory approval for these manufacturing facilities, our business and our results of operations would be harmed.

Commercialization of our products requires access to, or the development of, manufacturing facilities that meet applicable regulatory standards to manufacture a sufficient supply of our products. In addition, the FDA must approve facilities that manufacture our products for US commercial purposes, as well as the manufacturing processes and specifications for the product. Suppliers of components of, and products used to manufacture, our products must also comply with FDA and foreign regulatory requirements, which often require significant time, money and record-keeping and quality assurance efforts and subject us and our suppliers to potential regulatory inspections and stoppages. We and our suppliers may not satisfy these requirements. If we or our suppliers do not achieve or maintain required regulatory approval for our manufacturing operations, our commercialization efforts could be delayed, which would harm our business and our results of operations.

If we experience interruptions in our manufacturing operations, our business will suffer.

We currently manufacture our products at our York, Pennsylvania facility, with no alternate facilities available. If we were to experience a manufacturing disruption as a result of damage or destruction of the building, equipment failure, acts of God or other force majeure events, our ability to satisfy our obligations to our customers would be adversely affected, which would harm our business and our results of operations.

The costs of raw materials have a significant impact on the level of expenses that we incur. If the prices of raw materials and related factors such as energy prices increase, and we cannot pass those price increases on to our customers, our results of operations and financial condition would suffer.

We use a number of raw materials including polymer plastics. The prices of many of these raw materials, such as those sourced from petroleum-based raw materials, are cyclical and volatile. While we would generally attempt to pass along increased costs to our customers in the form of sales price increases, we might not be able to do so, for competitive or contract-related reasons or otherwise. If we could not set our prices to reflect the costs of our raw materials, our results of operations and our financial condition would suffer.

Disruptions in the supply of key raw materials and difficulties in the supplier qualification process could adversely impact our operations.

We employ a supply chain management strategy which seeks to source components and materials from a number of established third party companies. Where possible, we seek to establish dual contracts for the supply of particular components or services. However, there is a risk that our supply lines may be interrupted in the event of a supplier production problem, material recall or financial difficulties. If one of our suppliers is unable to supply materials required for production of our products or our strategies for managing these risks are unsuccessful, we may be unable to complete the production of sufficient quantities of product to fulfill customer orders, or complete the qualification of new replacement materials for some programs in time to meet future production requirements. Prolonged disruptions in the supply of any of our key raw materials, difficulty in completing qualification of new sources of supply, or in implementing the use of replacement materials or new sources of supply, could have a material adverse effect on our results of operations, our financial condition or cash flows.

Some companies we may utilize for the supply of components are also competitors, and they could elect to cease supply relationships with us in the future for competitive reasons.

Some companies we may utilize for the supply of components for the Unifill syringe also develop and market their own safety products which can be attached onto standard prefilled syringes. These companies may elect to cease supply relationships with us in the future for competitive reasons. This may disrupt our supply chain, cause difficulties in the qualification of new sources of supply and impair our ability to supply customer orders. Such events may have a material adverse effect on our results of operations, our financial condition and/or cash flows.

The medical device industry is very competitive.

Competition in the medical device industry is intense. We face this competition from a wide range of companies. These include large medical device companies, most of which have greater financial and human resources, distribution channels and sales and marketing capabilities than we do. Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their products. Factors affecting our competitive position include, for example, product design and performance, product safety, sales, marketing and distribution capabilities, success and timing of new product development and introductions and intellectual property protection.

 

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We are subject to extensive regulation by governments around the world, and if these regulations are not complied with, existing and future operations may be curtailed, and we could be subject to liability.

The design, development, manufacturing, marketing and labeling of our products are subject to extensive regulation by governmental authorities in the United States, Europe and other countries, including the FDA. Our products must receive clearance or approval from the FDA or its non-U.S. counterparts before they can be marketed or sold. The regulatory process can result in required modification or withdrawal of existing products and a substantial delay in the introduction of new products. Also, it is possible that regulatory approval may not be obtained for a new product. Our business may be adversely affected by changes in the regulation of drug products and medical devices.

The process for obtaining marketing approval or clearance may take a significant period of time and require the expenditure of substantial resources. The process may also require changes to our products or result in limitations on the indicated uses of the products. As a result, our expectations with respect to marketing approval or clearance may prove to be inaccurate and we may not be able to obtain marketing approval or clearance in a timely manner or at all. In addition, regulatory requirements outside the U.S. change frequently, requiring prompt action to maintain compliance, particularly when product modifications are required. Following the introduction of a product, these agencies also periodically review our manufacturing processes and product performance. Our failure to comply with the applicable good manufacturing practices, adverse event reporting, clinical trial and other requirements of these agencies could delay or prevent the production, marketing or sale of our products and result in fines, delays or suspensions of regulatory clearances, closure of manufacturing sites, seizures or recalls of products and damage to our reputation.

Our target pharmaceutical customers are also subject to government regulations for the manufacturing, approval, marketing and labeling of therapeutic drug products. An effect of the governmental regulation of our customers’ drug products and manufacturing processes is that compliance with regulations makes it costly and time consuming to transition to the use of our devices for existing products, or to secure approval for pipeline products targeted for use with our devices. If regulation of our customers’ products incorporating our devices increases over time, it is likely that this would adversely affect our sales and profitability.

The FDA 510(k) clearance or premarket approval processes may impact our ability to market and sell our products.

Before a new medical device, or a significant change involving a new use of or claim for an existing medical device, can be distributed commercially in the United States, it must receive either 510(k) clearance or premarket approval from the FDA, unless an exemption exists. Either process can be expensive and lengthy. We have previously received 510(k) clearances for proprietary devices by a contractor outside the United States as well as at our Pennsylvania manufacturing facility. Our Unifill syringe does not require 510(k) clearance because it will be sold to drug manufacturers for use as drug packaging. The FDA may, however, revise existing regulations or adopt additional regulations, each of which could prevent or delay 510(k) clearance or premarket approval of our new or modified devices, or could impact our ability to market our currently cleared devices. The FDA, for example, has recently announced its intention to review the 510(k) process and consider enhancements that could impact future 510(k) submissions. It has also encouraged manufacturers to consult with the FDA as to the appropriate 510(k) clearance process for any new product. Such changes could result in additional scrutiny by the FDA of 510(k) applications that we will submit for our new or modified devices and could result in delays and increased costs in obtaining FDA clearances, which could materially impact our business, financial condition and results of operations.

We also may be required to obtain either 510(k) clearance or premarket approval from the FDA for some of our new injectable drug delivery systems. Obtaining such FDA clearances could result in delays in bringing these new injectable drug delivery systems to market and could materially impact our business, financial condition and results of operations.

We may face significant uncertainty in the industry due to government healthcare reform.

The healthcare industry in the United States is subject to fundamental changes due to the ongoing healthcare reform and the political, economic and regulatory influences. In March 2010, comprehensive healthcare reform legislation was signed into law in the United States through the passage of the Patient Protection and Affordable Health Care Act and the Health Care and Education Reconciliation Act. Among other initiatives, the legislation provides for a 2.3% annual excise tax on the sales of certain medical devices in the United States, commencing in January 2013. This enacted excise tax may adversely affect our operating expenses and results of operations. In addition, various healthcare reform proposals have also emerged at the state level. We cannot predict with certainty what healthcare initiatives, if any, will be implemented at the state level, or what ultimate effect of federal healthcare reform or any future legislation or regulation may have on us or on our customers’ purchasing decisions regarding our products and services.

 

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Product defects could adversely affect the results of our operations.

The design, manufacture and marketing of medical devices involve certain inherent risks. Manufacturing or design defects, unanticipated use of our products, or inadequate disclosure of risks relating to the use of the product can lead to injury or other adverse events. These events could lead to recalls or safety alerts relating to our products (either voluntary or required by the FDA or similar governmental authorities in other countries), and could result, in certain cases, in the removal of a product from the market. Any recall could result in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products. Personal injuries relating to the use of our products can also result in product liability claims being brought against us. In some circumstances, such adverse events could also cause delays in new product approvals.

We may be sued for product liability, which could adversely affect our business.

The design, manufacture and marketing of medical devices carries a significant risk of product liability claims. We may be held liable if any product we develop and commercialize causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or consumer use. In addition, the safety studies we must perform and the regulatory approvals required to commercialize our medical safety products will not protect us from any such liability. We carry product liability insurance. However, if there were to be product liability claims against us, our insurance may be insufficient to cover the expense of defending against such claims, or may be insufficient to pay or settle such claims. Furthermore, we may be unable to obtain adequate product liability insurance coverage for commercial sales of any of our approved products. If such insurance is insufficient to protect us, our results of operations will suffer. If any product liability claim is made against us, our reputation and future sales will be damaged, even if we have adequate insurance coverage. We also intend to seek product liability insurance for any approved products that we may develop or acquire in the future. There is no guarantee that such coverage will be available when we seek it or at a reasonable cost to us.

We may be unable to protect our intellectual property rights or may infringe on the intellectual property rights of others.

Our success depends in part on our ability to obtain and maintain protection in the United States and other countries of the intellectual property relating to or incorporated into our technology and products. Our issued patents expire at various dates between 2018 and 2030. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will provide us with any competitive advantage or adequate protection. In particular, the injectable drug delivery systems which we are developing and for which we have filed patent applications are relatively new inventions, and we cannot be sure that we will be able to obtain patents on these inventions. Our issued and future patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of terms of patent protection we may have for our products. Changes in patent laws or their interpretation in the United States and other countries could also diminish the value of our intellectual property or narrow the scope of our patent protection. In addition, the legal systems of certain countries do not favor the aggressive enforcement of patents, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. In order to preserve and enforce our patent and other intellectual property rights, we may need to make claims or file lawsuits against third parties. This can entail significant costs to us and divert our management’s attention from developing and commercializing our products.

There also can be no assurance that third parties will not assert that our products infringe their patent or other intellectual property rights. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel or require us to pay substantial damages. If we are unsuccessful in defending ourselves against these types of claims, we may be required to do one or more of the following:

 

   

stop, delay or abandon our ongoing or planned commercialization of the product that is the subject of the suit;

 

   

attempt to obtain a license to sell or use the relevant technology or substitute technology, which license may not be available on reasonable terms or at all;

 

   

redesign those products that use the relevant technology; or

 

   

pay substantial damages which could adversely impact our financial condition and ability to execute our business plan and operations.

 

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If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how. We generally seek to protect this information by confidentiality agreements with our employees, consultants, scientific advisors and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

Impairment of our goodwill, which represents a significant portion of our total assets, would adversely affect our operating results and we may never realize the full value of our goodwill.

As of June 30, 2012, we had $12.7 million of goodwill on our balance sheet, which represented 15% of our total assets. We recorded this goodwill primarily from our historical acquisition activities. Goodwill is subject to, at a minimum, an annual impairment assessment of its carrying value. Any material impairment of our goodwill would likely have a material adverse impact on our results of operations.

Fluctuations in foreign currency exchange rates could adversely affect our financial condition and results of operations.

Changes in foreign currency exchange rates can affect the value of our assets and liabilities, and the amount of our revenues and expenses. We do not currently try to mitigate our exposure to currency exchange rate risks by using hedging transactions. We cannot predict future changes in foreign currency exchange rates, and as a result, we may suffer losses as a result of future fluctuations.

We depend on our executive officers and key personnel and the loss of them could adversely affect our business.

Our success depends upon the efforts and abilities of our executive officers and other key personnel, particularly Mr. Alan Shortall, our Chief Executive Officer, and Dr. Ramin Mojdeh, our Chief Operating Officer, to provide strategic direction, manage our operations and maintain a cohesive and stable environment. Although we have employment agreements with Mr. Shortall and Dr. Mojdeh, as well as incentive compensation plans that provide various economic incentives for them to remain with us, these agreements and incentives may not be sufficient to retain them. Our ability to operate successfully and manage our potential future growth also depends significantly upon our ability to attract, retain and motivate highly skilled and qualified research, technical, clinical, regulatory, sales, marketing, managerial and financial personnel. We face intense competition for such personnel, and we may not be able to attract, retain and motivate these individuals. The loss of our executive officers or other key personnel for any reason or our inability to hire, retain and motivate additional qualified personnel in the future could prevent us from sustaining or growing our business.

Risk Factors Related to Our Shares of Common Stock

The trading price of our shares of common stock may fluctuate significantly.

The price of our shares of common stock may be volatile, which means that it could decline substantially within a short period of time. The trading price of the shares may fluctuate, and investors may experience a decrease in the value of the shares that they hold, sometimes regardless of our operating performance or prospects. The trading price of our common stock could fluctuate significantly for many reasons, including the following:

 

  future announcements concerning our business and that of our competitors including in particular, the progress of our commercial sales for the Unifill syringe and the development programs for the other injectable drug delivery systems;

 

  regulatory developments, enforcement actions bearing on advertising, marketing or sales of our current or pipeline products;

 

  quarterly variations in operating results;

 

  introduction of new products or changes in product pricing policies by us or our competitors;

 

  acquisition or loss of significant customers, distributors or suppliers;

 

  business acquisitions or divestitures;

 

  changes in third party reimbursement practices;

 

  fluctuations of investor interest in the medical device sector; and

 

  fluctuations in the economy, world political events or general market conditions.

 

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If there are substantial sales of our shares of common stock, our share price could decline.

As of September 5, 2012, we had 81,856,079 shares of common stock outstanding. All of those shares of common stock other than 7,894,391 shares held by our affiliates are freely tradable under the Securities Act. Shares held by our affiliates are eligible for resale pursuant to Rule 144. As of June 30, 2012, approximately 35% of our common stock outstanding was held by U.S. institutions. Of the 79 registered institutional holders at that time, seven had disclosed holdings of between one million and 5.6 million shares of common stock each. We also had a declared short interest in our common stock of 9.7 million shares as of July 31, 2012. If our stockholders sell a large number of shares of common stock, or the short interest position increases significantly, the market may perceive that our stockholders might sell a large number of shares, which could cause the price of our common stock to decline significantly.

In addition, as of September 5, 2012, 12,962,592 shares of our common stock are subject to outstanding stock options and warrants. We have registered the shares issuable upon the exercise of options granted under our 2009 Stock Incentive Plan. In addition, we have effective registration statements covering the resale of shares of our common stock that are issuable upon the exercise of our remaining options and warrants. If these options and warrants are exercised and the holders choose to sell their shares, such sales could have an adverse effect on the market price of our common stock.

We do not intend to pay cash dividends in the foreseeable future.

For the foreseeable future, we do not intend to declare or pay any dividends on our common stock. We intend to retain our earnings, if any, to finance the development and expansion of our business and product lines. Any future decision to declare or pay dividends will be made by our board of directors and will depend upon a number of factors including our financial condition and results of operations. In addition, under our current bank financing agreements, we are not permitted to pay cash dividends without the prior written consent of the lender.

We may be subject to arbitrage risks.

Investors may seek to profit by exploiting the difference, if any, in the price of our shares of common stock on the NASDAQ and our CDIs on the ASX. Such arbitrage activities could cause our stock price in the market with the higher value to decrease to the price set by the market with the lower value.

Our certificate of incorporation, bylaws, the Delaware General Corporation Law and the terms of our industrialization agreement with Sanofi may delay or deter a change of control transaction.

Certain provisions of our certificate of incorporation and bylaws may have the effect of deterring takeovers, such as those provisions authorizing our board of directors to issue, from time to time, any series of preferred stock and fix the designation, powers, preferences and rights of the shares of such series of preferred stock; prohibiting stockholders from acting by written consent in lieu of a meeting; requiring advance notice of stockholder intention to put forth director nominees or bring up other business at a stockholders’ meeting; prohibiting stockholders from calling a special meeting of stockholders; requiring a 66 2/3% majority stockholder approval in order for stockholders to amend our bylaws or adopt new bylaws; and providing that, subject to the rights of preferred shares, the number of directors is to be fixed exclusively by our board of directors. Section 203 of the Delaware General Corporation Law, from which we did not elect to opt out, provides that if a holder acquires 15% or more of our stock without prior approval of our board of directors, that holder will be subject to certain restrictions on its ability to acquire us within three years. In addition, our industrialization agreement with Sanofi provides to Sanofi the right to match a change of control proposal and to terminate the industrialization agreement under certain circumstances of a change of control event. See “Business — Commercial Relationships — Sanofi.” These provisions may delay or deter a change of control of us, and could limit the price that investors might be willing to pay in the future for shares of our common stock.

 

Item 1B. Unresolved Staff Comments

None.

 

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Item 2. Properties

Our 165,000 square foot global headquarters and manufacturing facility is located on 38 acres of land in York, Pennsylvania. The facility includes 110,000 square feet of production space and 54,000 square feet of office space. The property is subject to a mortgage held by a local bank.

We also have a lease for office space in Radnor, Pennsylvania to support our research and development activities.

We also lease 1,100 square feet of office space in Sydney, Australia which is used for certain finance and administrative operations.

 

Item 3. Legal Proceedings

In the ordinary course of our business, we may be subject to various claims, pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. We are not aware of any material pending legal proceedings to which we or any of our subsidiaries is a party or of which any of our properties is the subject.

 

Item 4. Mine Safety Disclosures

Not applicable

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Commencing February 16, 2010, our shares of common stock began trading on the Nasdaq Global Market under the symbol “UNIS”. Our shares of common stock have also traded in the form of CHESS Depositary Interests (“CDIs”), each CDI representing one-sixth of a share of our common stock, on the Australian Securities Exchange (“ASX”) under the symbol “UNS” since January 18, 2010. Prior to that date, the ordinary shares of our predecessor Unilife Medical Solutions Limited (“UMSL”) were traded on the ASX under the symbol “UNI”.

 

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The following table sets forth, for the periods indicated, the high and low closing prices for our common stock on the Nasdaq Global Market:

 

Period

   High      Low  

Fiscal Year 2012:

     

First Quarter

     5.25         3.37   

Second Quarter

     5.30         2.95   

Third Quarter

     4.23         3.24   

Fourth Quarter

     4.85         3.38   

Fiscal Year 2011:

     

First Quarter

     6.30         4.61   

Second Quarter

     6.25         5.24   

Third Quarter

     5.89         4.15   

Fourth Quarter

     5.86         4.24   

Holders

As of September 5, 2012, we had 81,856,079 shares of common stock outstanding, and there were 263 holders of record of our common stock, including CHESS Depositary Nominees which held shares of our common stock on behalf of 7,945 CDI holders. The closing sales price for our common stock on September 5, 2012 was $3.17 as reported by the Nasdaq Global Market.

Dividends

We currently intend to retain any earnings to finance research and development and the operation and expansion of our business and do not anticipate paying any cash dividends for the foreseeable future. The declaration and payment of any dividends in the future by us will be subject to the sole discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, capital requirements of our operating subsidiaries, covenants associated with certain of our debt obligations, legal requirements, regulatory constraints and other factors deemed relevant by our board of directors. Moreover, if we determine to pay any dividend in the future, there can be no assurance that we will continue to pay such dividends. In addition, under our bank financing agreements, we are not permitted to pay cash dividends without the prior written consent of the lender.

Performance Graph

The performance graph shown below compares the change in cumulative total shareholder return on shares of common stock with the Nasdaq Stock Market Index (US) and the Nasdaq Health Care Index (US) from February 16, 2010, our first day of trading on the Nasdaq Global Market, through our fiscal year ended June 30, 2012. The graph sets the beginning value of shares of common stock and the indices at $100, and assumes that all quarterly dividends were reinvested at the time of payment. This graph does not forecast future performance of shares of common stock.

 

LOGO

 

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Item 6. Selected Financial Data

The following table presents our selected consolidated financial data as of and for each of the years in the five year period ended June 30, 2012. The statements of operations data for the years ended June 30, 2012, 2011 and 2010 and the balance sheet data as of June 30, 2012 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. All such data should be read in conjunction with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes thereto included elsewhere in this report. The statements of operations data for the years ended June 30, 2009 and 2008 and the balance sheet data as of June 30, 2010, 2009 and 2008 have been derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results to be expected in the future.

 

     Year Ended June 30,  
     2012     2011     2010     2009     2008  
     (In thousands, except share data)  

Statements of Operations Data:

          

Revenues(a)

   $ 5,519      $ 6,650      $ 11,422      $ 19,976      $ 3,500   

Net loss

     (52,302     (40,682     (29,748     (517     (8,537

Basic and diluted loss per share

     (0.78     (0.70     (0.64     (0.02     (0.26

Balance Sheet Data:

          

Total assets

   $ 82,308      $ 89,478      $ 64,817      $ 32,212      $ 18,499   

Long-term debt, including current portion

     28,765        22,687        2,741        3,133        7,209   

 

(a) Includes $4.1 million, $3.9 million, $8.9 million and $16.1 million in connection with our exclusive licensing agreement and our industrialization agreement with Sanofi in the years ended June 30, 2012, 2011, 2010 and 2009, respectively.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See “Cautionary Note Regarding Forward-Looking Information” at the beginning of this report. References to our fiscal year refer to the fiscal year ending June 30.

Redomiciliation

On January 27, 2010, Unilife Medical Solutions Limited, an Australian corporation (“UMSL”), completed a redomiciliation from Australia to the State of Delaware pursuant to which stockholders and option holders of UMSL exchanged their interests in UMSL for equivalent interests in Unilife Corporation, a Delaware corporation (“Unilife”) and Unilife became the parent company of UMSL and its subsidiaries. The redomiciliation was conducted by way of schemes of arrangement under Australian law. The issuance of Unilife common stock and stock options under the schemes of arrangement was exempt from registration under Section 3(a)(10) of the Securities Act of 1933, as amended. The redomiciliation was approved by the Australian Federal Court, and approved by UMSL shareholders and option holders.

In connection with the redomiciliation, holders of UMSL ordinary shares or share options received one share of Unilife common stock or an option to purchase one share of Unilife common stock, for every six UMSL ordinary shares or share options, respectively, held by such holders, unless the holder elected to receive in lieu of Unilife common stock, Chess Depositary Interests of Unilife, or CDIs (each representing one-sixth of one share of Unilife common stock), in which case such holder received one CDI for every UMSL ordinary share. All share and per share amounts in this Annual Report on Form 10-K have been restated to reflect the one for six share recapitalization effected in connection with the redomiciliation.

On February 16, 2010, Unilife’s common stock began trading on the Nasdaq Global Market under the symbol “UNIS.”

 

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Overview

We are a U.S. based developer and commercial supplier of injectable drug delivery systems. We build long-term collaborations with pharmaceutical and biotechnology companies seeking to utilize our innovative and highly differentiated devices to enable or enhance the clinical development, regulatory approval and lifecycle management of their injectable therapies. Our proprietary devices are designed for supply to pharmaceutical companies in a format where they can be integrated into the filling and packaging processes utilized for a target injectable drug or vaccine. Pharmaceutical companies are responsible for the final shipment of the drug-device combination product to healthcare workers or patients for safe, intuitive and convenient administration.

Our lead product is the Unifill ready-to-fill syringe, which is designed to be supplied to pharmaceutical manufacturers in a form that is ready for filling with their injectable drugs and vaccines. We have a strategic alliance with Sanofi, a large global pharmaceutical company, pursuant to which Sanofi has paid us a €10.0 million exclusivity fee and has paid us €17.0 million to fund our industrialization program for the Unifill syringe. We are also in discussions with other pharmaceutical companies that are seeking to obtain access to the Unifill syringe, or other proprietary devices within our diversified portfolio.

In addition, we manufacture our Unitract 1mL insulin syringes at our FDA-registered manufacturing facility in Pennsylvania, which are designed for primarily for use in healthcare facilities and by patients who self-administer prescription medication such as insulin.

Recent Developments

In July 2012, we issued 6,154,000 shares of common stock and raised $18.8 million, net of issuance costs, through an underwritten registered public offering. We intend to use the net proceeds from the public offering to fund the continued development and supply of our diversified portfolio of injectable drug delivery systems, to purchase and operate capital equipment, to expand production and for working capital and other general corporate purposes.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. This requires management to make certain estimates, judgments and assumptions that could affect the amounts reported in the consolidated financial statements and accompanying notes. The following accounting policies require significant estimates, judgments and assumptions.

Goodwill

Goodwill is the excess of purchase price over the fair value of net assets acquired in business acquisitions. Goodwill is subject to, at a minimum, an annual impairment assessment of its carrying value. Additional impairment assessments would be performed if events and circumstances warranted such additional assessments during the year. Goodwill impairment is deemed to exist if the net book value of our reporting unit exceeds its estimated fair value. Estimated fair value of our reporting unit is determined utilizing the value implied by our year end quoted stock price. We did not record any goodwill impairments during fiscal 2012, 2011 or 2010.

We have one reporting unit. The reporting unit includes our product lines, the base technology for which we obtained as part of our November 2002 acquisition of Unitract Syringe Pty Limited and the manufacturing capability which we obtained in our January 2007 acquisition of Integrated BioSciences, Inc.

In estimating the reporting unit’s fair value for purposes of our fiscal 2012 impairment assessment, management compared the carrying value of our reporting unit to our market capitalization as of June 30, 2012, which is our annual impairment testing date. Our market capitalization of $256.3 million, based on the quoted stock price on the Nasdaq was in excess of our stockholders’ equity of $43.7 million. Management also considered that market capitalization through early September 2012 continued to be in excess of the carrying value.

 

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Share-Based Compensation

We grant equity awards to our employees, directors and consultants. Certain employee and director awards vest over stated vesting periods and others also require achievement of specific performance or market conditions. We expense the grant-date fair value of awards to employees and directors over their respective vesting periods. To the extent that employee and director awards vest only upon the achievement of a specific performance condition, expense is recognized over the period from the date management determines that the performance condition is probable of achievement through the date they are expected to be met. Awards granted to consultants 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. We estimate the fair value of stock options using the Black-Scholes option-pricing model, with the exception of market-based grants, which are valued based on the Monte Carlo option-pricing model. Option pricing methods require the input of highly subjective assumptions, including the expected stock price volatility.

Revenue Recognition

We recognize revenue from industrialization and development fees, licensing fees and products sales.

We recognize up front, non-refundable licensing fees ratably over the expected life of the related agreement. Revenue from industrialization and development fees is recognized upon achievement of the ‘at risk” milestone events, which represents the culmination of the earnings process related to such events. Milestones include specific phases of projects, such as product design, prototype availability, user tests, manufacturing proof of principle and the various steps to complete the industrialization of the product. Revenue recognized is commensurate with the milestones achieved and we have no future performance obligations related to previous milestone payments as each milestone payment is non-refundable when received.

We recognize revenue from sales of products at the time of shipment and when title passes to the customer.

Results of Operations

The following table summarizes our results of operations for the fiscal years ended June 30, 2012, 2011 and 2010:

 

     Year Ended June 30,  
     2012     2011     2010  
     (in thousands, except per share data)  

Revenues:

      

Industrialization and development fees

   $ 2,820      $ 1,350      $ 6,318   

Licensing fees

     2,638        2,527        2,566   

Product sales and other

     61        2,773        2,538   
  

 

 

   

 

 

   

 

 

 

Total revenues

     5,519        6,650        11,422   

Cost of product sales

     584        2,597        2,471   
  

 

 

   

 

 

   

 

 

 

Gross profit

     4,935        4,053        8,951   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development

     23,137        9,631        10,934   

Selling, general and administrative

     27,685        31,571        26,257   

Depreciation and amortization

     4,582        4,009        2,314   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     55,404        45,211        39,505   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (50,469     (41,158     (30,554

Interest expense

     2,120        511        125   

Interest income

     (124     (399     (1,066

Other (income) expense, net

     (163     (588     135   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (52,302   $ (40,682   $ (29,748
  

 

 

   

 

 

   

 

 

 

Loss per share:

      

Basic and diluted loss per share

   $ (0.78   $ (0.70   $ (0.64
  

 

 

   

 

 

   

 

 

 

Fiscal Year 2012 Compared to Fiscal Year 2011

Revenues. Revenues decreased by $1.1 million or 17%. During both fiscal 2012 and 2011, we recognized $1.4 million related to the achievement of one milestone under our industrialization agreement with Sanofi. The milestone met during fiscal 2012 was the last remaining milestone under the agreement. During fiscal 2012, we also recognized $1.4 million related to the clinical development and supply of a novel drug device for targeted organ delivery. Revenues from our exclusive licensing agreement with Sanofi increased from $2.5 million to $2.6 million. We have recognized and will continue to recognize revenue from the exclusive licensing agreement on a straight-line basis over the remaining term of the agreement. Since these revenues are based in euros, the $0.1 million increase resulted from fluctuations in foreign currency translation rates. Revenues from product sales decreased by $2.7 million, as we ceased our contract manufacturing activities in December 2010 in order to focus our efforts on the Unifill syringe and our portfolio of injectable drug delivery devices.

 

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Cost of product sales. Cost of product sales decreased by $2.0 million or 78%, primarily as a result of the associated decrease in our contract manufacturing revenue.

Research and development expenses. Research and development expenses increased by $13.5 million due to additional payroll costs and expenditures related to the development of our portfolio of injectable drug delivery systems.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $3.9 million or 12%. During fiscal 2012, we recorded $7.1 million of share-based compensation expense, a decrease of $1.9 million compared to fiscal 2011. Additionally, during fiscal 2012 our non-research and development payroll expenses and recruitment fees declined $1.9 million, primarily as a result of amounts incurred to recruit and relocate certain members of our management team during fiscal 2011, which did not occur during fiscal 2012. Finally, during fiscal 2011, we incurred expenses of $0.3 million in connection with the relocation to our current headquarters and manufacturing facility.

Depreciation and amortization expense. Depreciation and amortization expense increased by $0.6 million or 14%, primarily as a result of the completion of construction of our current headquarters and manufacturing facility, as well as equipment placed into service during fiscal 2012.

Interest expense. Interest expense increased by $1.6 million, primarily resulting from debt incurred in relation to our secured lending facility for production equipment for the Unifill syringe during August 2011. Additionally, interest on our debt financing obtained for our current headquarters and manufacturing facility was capitalized during construction through December 2010, while recorded as expense during fiscal 2012.

Interest income. Interest income decreased by $0.3 million, primarily as a result of fluctuations in interest rates.

Other income. Other income decreased $0.4 million, primarily as a result of fiscal 2011 including the receipt of a $0.5 million opportunity grant from the Commonwealth of Pennsylvania.

Net loss and loss per share. Net loss during fiscal 2012 and 2011 was $52.3 million and $40.7 million, respectively. Basic and diluted loss per share was $0.78 and $0.70, respectively, on weighted average shares outstanding of 67,449,286 and 57,891,024, respectively. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with our December 2010 and November 2011 equity financings.

Fiscal Year 2011 Compared to Fiscal Year 2010

Revenues. Revenues decreased by $4.8 million or 42%. Revenues from our industrialization agreement with Sanofi decreased from $6.3 million to $1.4 million due to the achievement of a majority of the related milestones during fiscal 2010. As of June 30, 2011, there was one remaining milestone payment to be recognized which was dependent upon the production of commercially viable units of our Unifill syringe. This remaining milestone was achieved during July 2011 and we received the related €1.0 million during September 2011. Revenues from our exclusive licensing agreement with Sanofi decreased from $2.6 million to $2.5 million. We have recognized and will continue to recognize revenue from the exclusive licensing agreement on a straight-line basis over the remaining term of the agreement. Since these revenues are based in euros, the $0.1 million decrease resulted from fluctuations in foreign currency translation rates. Revenues from product sales of our contract manufacturing business increased from $2.5 million to $2.8 million, primarily as a result of increased sales to one of our most significant contract manufacturing customers during the first and second quarters of fiscal 2011. We discontinued contract manufacturing activities in December 2010 in order to focus our efforts on the Unifill syringe and our additional drug delivery devices.

Cost of product sales. Cost of product sales increased by $0.1 million or 5%, which was attributable to a higher level of product sales under our contract manufacturing sales activity. Our cost of product sales during fiscal 2011 includes amounts related to the write-off of obsolete inventory.

Research and development expenses. Research and development expenses decreased by $1.3 million. During fiscal 2010, we incurred a charge of $4.3 million in connection with the issuance of 833,333 fully-vested shares of common stock to certain employees in consideration of their transfer to us of certain intellectual property rights. This decrease was partially offset by an increase in expenditures incurred to finalize the product specifications of our Unifill syringe and develop our additional drug delivery devices.

 

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Selling, general and administrative expenses. Selling, general and administrative expenses increased by $5.3 million or 20%. During fiscal 2011, we recorded $9.0 million of share-based compensation expense, an increase of $3.3 million compared to fiscal 2010. Our share-based compensation expense during fiscal 2011 relates primarily to restricted stock and stock options issued to new employees, directors and consultants under our 2009 Stock Incentive Plan. Additionally, during fiscal 2010 and the first half of fiscal 2011, we increased the workforce at our York, Pennsylvania facility, and as a result, we incurred payroll expenses and recruiting fees during the fiscal 2011 of $11.0 million, an increase of $3.2 million compared to fiscal 2010. These amounts were partially offset by a decrease of $2.7 million in legal and consulting fees due to significant costs incurred during fiscal 2010 in connection with our redomiciliation to the United States.

Depreciation and amortization expense. Depreciation and amortization expense increased by $1.7 million or 73% which was attributable to $4.0 million of machinery placed into service during October 2009 relating to our 1mL syringe and the completion of construction of our current headquarters and manufacturing facility. Included in this amount is a $0.5 million loss on the disposal of certain pieces of equipment during fiscal 2011.

Interest expense. Interest expense increased by $0.4 million, primarily as a result of interest related to our $18.0 million in debt financing obtained in October 2010 for the construction of our current headquarters and manufacturing facility.

Interest income. Interest income decreased by $0.7 million, primarily as a result of lower cash balances and lower interest rates during fiscal 2011.

Other (income) expense. Other income during fiscal 2011 includes the receipt of a $0.5 million opportunity grant from the Commonwealth of Pennsylvania.

Net loss and loss per share. Net loss for fiscal 2011 and 2010 was $40.7 million and $29.7 million, respectively. Basic and diluted loss per share was $0.70 and $0.64, respectively, on weighted average shares outstanding of 57,891,024 and 46,837,066, respectively. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with our October 2009 and December 2010 equity financings.

Liquidity and Capital Resources

To date, we have funded our operations primarily from a combination of equity issuances, borrowings under our bank mortgage, term loans, an external secured financing and payments from Sanofi under our exclusive licensing and industrialization agreements. As of June 30, 2012, cash and cash equivalents were $11.4 million, restricted cash was $2.4 million and our long-term debt was $28.8 million. As of June 30, 2011, cash and cash equivalents were $17.9 million, restricted cash was $2.4 million and our long-term debt was $22.7 million. The $2.4 million of restricted cash relates to amounts that must remain in cash deposits under our loan agreement with Metro Bank (“Metro”).

During August 2011, we entered into an equipment lease which provided for up to $10.0 million of external financing.

During November 2011, we raised $33.8 million, net of issuance costs, through the issuance of 8,250,000 shares of common stock through an underwritten registered public offering.

During July 2012, we raised $18.8 million, net of issuance costs, through the issuance of 6,154,000 shares of common stock through an underwritten registered public offering.

We have incurred recurring losses from operations during the year ended June 30, 2012 and anticipate incurring additional losses until such time that we can generate sufficient sales of our proprietary range of injectable drug delivery systems. We estimate that our cash and cash equivalents as of June 30, 2012, together with the net proceeds from the July 2012 public offering are sufficient to sustain planned operations through the third quarter of fiscal 2013.

The following table summarizes our cash flows during the fiscal years ended June 30, 2012, 2011 and 2010:

 

     Year Ended June 30,  
     2012     2011     2010  
     (In thousands)  

Net cash provided by (used in):

      

Operating activities

   $ (43,217   $ (28,521   $ (12,390

Investing activities

     (4,000     (30,037     (18,132

Financing activities

     40,742        53,838        49,488   

 

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Fiscal Year 2012 Compared to Fiscal Year 2011

Net Cash Used in Operating Activities

Net cash used in operating activities during fiscal 2012 was $43.2 million compared to $28.5 million during fiscal 2011. The increase in net cash used in operations was primarily due to increased operating expenses leading to $12.2 million of higher net loss after adding back depreciation and amortization, loss on disposal of property, plant and equipment and share-based compensation expense.

Net Cash Used in Investing Activities

Net cash used in investing activities during fiscal 2012 was $4.0 million, primarily as a result of costs incurred in connection with the purchase of machinery and equipment, compared to $30.0 million during fiscal 2011, primarily resulting from construction costs incurred in connection with our current headquarters and manufacturing facility.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during fiscal 2012 was $40.7 million compared to $53.8 million during fiscal 2011. During fiscal 2012, we received $33.8 million in connection with our public offering of common stock and $9.9 million in proceeds from the issuance of long-term debt, partially offset by principal debt payments of $4.1 million. During fiscal 2011, we received $33.4 million in connection with our issuance of common stock related to our December 2010 private placement and share purchase plan, as well as $3.2 million upon the exercise of stock options. Additionally, during fiscal 2011, we received $20.2 million in aggregate proceeds from our external financing from Metro and the Commonwealth of Pennsylvania.

Fiscal Year 2011 Compared to Fiscal Year 2010

Net Cash Used in Operating Activities

Net cash used in operating activities during fiscal 2011 was $28.5 million compared to $12.4 million during fiscal 2010. The decrease in cash flow was primarily due to $10.3 million of higher net loss after adding back depreciation and amortization, loss on disposal of property, plant and equipment and share-based compensation expense.

Net Cash Used in Investing Activities

Net cash used in investing activities during fiscal 2011 was $30.0 million, primarily as a result of construction costs incurred in connection with our current headquarters and manufacturing facility, as well as costs incurred in connection with the purchase of machinery and related equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during fiscal 2011 was $53.8 million compared to $49.5 million during fiscal 2010. During fiscal 2011, we received $33.4 million from the issuance of common stock in connection with our December 2010 private placement and share purchase plan, as well as $3.2 million upon the exercise of stock options. Additionally, during fiscal 2011, we received $20.2 million in aggregate proceeds from our external financing from Metro and the Commonwealth of Pennsylvania. During fiscal 2010, we received $47.1 million in connection with our October 2009 private placement and share purchase plan, as well as $2.3 million upon the exercise of stock options.

Contractual Obligations

The following table provides information regarding our contractual obligations as of June 30, 2012:

 

     Payments Due by Period  
     Total      Less Than
1  Year
     1-3 Years      3-5 Years      More Than
5  Years
 
     (In thousands)  

Long-term debt and related interest

   $ 41,566       $ 7,483       $ 6,655       $ 4,305       $ 23,123   

Operating leases

     699         286         411         2         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 42,265       $ 7,769       $ 7,066       $ 4,307       $ 23,123   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as such term is defined in the SEC rules.

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.

Recently Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 removes certain presentation options and requires entities to report components of net income and comprehensive income in either one continuous statement of comprehensive income or two separate but consecutive statements. There is no change to the items that are reported in other comprehensive income. ASU 2011-05 is effective for annual and interim periods for fiscal years beginning after December 15, 2011. Other than additional presentation of other comprehensive loss outside of the statements of stockholders’ equity and comprehensive loss, the adoption of ASU 2011-05 will not have an impact on our consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”). ASU 2011-08 allows for assessment of qualitative factors to determine if it is more likely than not that goodwill might be impaired and whether or it is necessary to perform the two-step goodwill impairment test required under current accounting standards. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We do not believe that the adoption of ASU 2011-08 will have a material impact on our consolidated financial statements.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in interest rates and foreign currency exchange rates. Changes in these factors could cause fluctuations in our results of operations and cash flows.

Interest Rate Risk

Our exposure to interest rate risk is limited to our cash and cash equivalents that are invested in money market funds with highly liquid short term investments and our variable interest rate term loans. We currently do not utilize derivative instruments to mitigate changes in interest rates.

Foreign Currency Exchange Rate Fluctuations

Certain of our revenues are derived from payments under our industrialization agreement received in euros while we incur most of our expenses in U.S. dollars and Australian dollars. In addition, a portion of our cash and cash equivalents and investments are held at Australian banking institutions and are denominated in Australian dollars. We are exposed to foreign currency exchange rate risks on these amounts. We currently do not utilize options or forward contracts to mitigate changes in foreign currency exchange rates. For U.S. reporting purposes, we translate all assets and liabilities of our non-U.S. entities into U.S. dollars using the exchange rate as of the end of the related period and we translate all revenues and expenses of our non-U.S. entities using the average exchange rate during the applicable period.

 

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Audited Consolidated Financial Statements

  

Management’s Report on Internal Control Over Financial Reporting

     35   

Reports of Independent Registered Public Accounting Firm

     36   

Consolidated Balance Sheets as of June 30, 2012 and 2011

     38   

Consolidated Statements of Operations for the years ended June 30, 2012, 2011 and 2010

     39   

Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the years ended June  30, 2012, 2011 and 2010

     40   

Consolidated Statements of Cash Flows for the years ended June 30, 2012, 2011 and 2010

     41   

Notes to Consolidated Financial Statements

     42   

 

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Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting was designed to provide reasonable assurance to management and our Board of Directors regarding the reliability of financial reporting and the fair presentation of our consolidated financial statements.

With the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of June 30, 2012 to provide reasonable assurance regarding the reliability of financial reporting and the fair presentation of our consolidated financial statements.

KPMG LLP, an independent registered public accounting firm, audited our internal control over financial reporting as of June 30, 2012. Their audit report can be found on page 36.

 

/s/ Alan Shortall
Alan Shortall
Chief Executive Officer
/s/ R. Richard Wieland II
R. Richard Wieland II
Executive Vice President and Chief Financial Officer
/s/ Dennis P. Pyers
Dennis P. Pyers
Vice President, Controller and Chief Accounting Officer
September 13, 2012

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Unilife Corporation:

We have audited Unilife Corporation and subsidiaries (the Company) internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Unilife Corporation as of June 30, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for the each of the years in the three-year period ended June 30, 2012 and our report dated September 13, 2012 expressed an unqualified opinion on those consolidated financial statements. Our report dated September 13, 2012 contains an explanatory paragraph that states there is substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty.

 

/s/ KPMG LLP
Harrisburg, Pennsylvania
September 13, 2012

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Unilife Corporation:

We have audited the accompanying consolidated balance sheets of Unilife Corporation and subsidiaries (the Company) as of June 30, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for each of the years in the three-year period ended June 30, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Unilife Corporation and subsidiaries as of June 30, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2012 in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2 to the consolidated financial statements, the Company has incurred recurring losses from operations and has limited cash resources, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 13, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/ KPMG LLP

Harrisburg, Pennsylvania

September 13, 2012

 

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Consolidated Balance Sheets

 

     June 30,  
     2012     2011  
     (In thousands, except
share data)
 
ASSETS   

Current Assets:

    

Cash and cash equivalents

   $ 11,410      $ 17,910   

Restricted cash

     2,400        2,400   

Accounts receivable

     1,042        13   

Inventories

     212        626   

Prepaid expenses and other current assets

     676        381   
  

 

 

   

 

 

 

Total current assets

     15,740        21,330   

Property, plant and equipment, net

     52,514        54,020   

Goodwill

     12,734        13,265   

Intangible assets, net

     34        42   

Other assets

     1,286        821   
  

 

 

   

 

 

 

Total assets

   $ 82,308      $ 89,478   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current Liabilities:

    

Accounts payable

   $ 2,399      $ 2,405   

Accrued expenses

     2,209        2,696   

Current portion of long-term debt

     5,655        2,274   

Deferred revenue

     2,595        2,706   
  

 

 

   

 

 

 

Total current liabilities

     12,858        10,081   

Long-term debt, less current portion

     23,110        20,413   

Deferred revenue

     2,595        5,412   
  

 

 

   

 

 

 

Total liabilities

     38,563        35,906   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 8)

    

Stockholders’ Equity:

    

Preferred stock, $0.01 par value, 50,000,000 shares authorized as of June 30, 2012; none issued or outstanding as of June 30, 2012 and 2011

     —          —     

Common stock, $0.01 par value, 250,000,000 shares authorized as of June 30, 2012; 75,849,439 and 63,924,403 shares issued, and 75,820,769 and 63,905,053 shares outstanding as of June 30, 2012 and 2011, respectively

     758        639   

Additional paid-in-capital

     212,326        169,590   

Accumulated deficit

     (172,634     (120,332

Accumulated other comprehensive income

     3,435        3,775   

Treasury stock, at cost, 28,670 shares and 19,350 shares as of June 30, 2012 and 2011

     (140     (100
  

 

 

   

 

 

 

Total stockholders’ equity

     43,745        53,572   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 82,308      $ 89,478   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Consolidated Statements of Operations

 

     Year Ended June 30,  
     2012     2011     2010  
     (In thousands, except share data)  

Revenues:

      

Industrialization and development fees

   $ 2,820      $ 1,350      $ 6,318   

Licensing fees

     2,638        2,527        2,566   

Product sales and other

     61        2,773        2,538   
  

 

 

   

 

 

   

 

 

 

Total revenues

     5,519        6,650        11,422   

Cost of product sales

     584        2,597        2,471   
  

 

 

   

 

 

   

 

 

 

Gross profit

     4,935        4,053        8,951   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development

     23,137        9,631        10,934   

Selling, general and administrative

     27,685        31,571        26,257   

Depreciation and amortization

     4,582        4,009        2,314   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     55,404        45,211        39,505   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (50,469     (41,158     (30,554

Interest expense

     2,120        511        125   

Interest income

     (124     (399     (1,066

Other (income) expense, net

     (163     (588     135   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (52,302   $ (40,682   $ (29,748
  

 

 

   

 

 

   

 

 

 

Loss per share:

      

Basic and diluted loss per share

   $ (0.78   $ (0.70   $ (0.64
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Consolidated Statements of Stockholders’ Equity and Comprehensive Loss

 

                            Accumulated              
                Additional-           Other              
    Common Stock     Paid-In     Accumulated     Comprehensive     Treasury        
    Shares     Amount     Capital     Deficit     Income     Stock     Total  
    (In thousands, except share data)  

Balance as of July 1, 2009

    36,625,802      $ 366      $ 57,987      $ (49,902   $ 2,860      $ —        $ 11,311   

Comprehensive loss:

             

Net loss

    —          —          —          (29,748     —          —          (29,748

Foreign currency translation

    —          —          —          —          (1,785     —          (1,785
             

 

 

 

Comprehensive loss

                (31,533

Issuance of options and warrants to purchase common stock

    —          —          3,463        —          —          —          3,463   

Issuance of restricted stock

    1,818,000        18        2,236        —          —          —          2,254   

Issuance of common stock to employees

    833,333        8        4,331        —          —          —          4,339   

Issuance of common stock to former shareholders of Unitract Syringe Pty Limited

    3,333,333        33        5,037        —          —          —          5,070   

Issuance of common stock in connection with private placement and share purchase plan, net of issuance costs

    10,544,961        106        47,011        —          —          —          47,117   

Issuance of common stock upon exercise of stock options

    1,606,419        17        2,332        —          —          —          2,349   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2010

    54,761,848        548        122,397        (79,650     1,075        —          44,370   

Comprehensive loss:

             

Net loss

    —          —          —          (40,682     —          —          (40,682

Foreign currency translation

    —          —          —          —          2,700        —          2,700   
             

 

 

 

Comprehensive loss

                (37,982

Issuance of options and warrants to purchase common stock

    —          —          4,071        —          —          —          4,071   

Issuance of restricted stock, net of forfeitures

    420,000        4        6,442        —          —          —          6,446   

Issuance of common stock to employees

    23,184        —          126        —          —          —          126   

Issuance of common stock in connection with private placement and share purchase plan, net of issuance costs

    7,048,373        70        33,361        —          —          —          33,431   

Issuance of common stock upon exercise of stock options

    1,670,998        17        3,193        —          —          —          3,210   

Purchase of treasury stock

    —          —          —          —          —          (100     (100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2011

    63,924,403        639        169,590        (120,332     3,775        (100     53,572   

Comprehensive loss:

             

Net loss

    —          —          —          (52,302     —          —          (52,302

Foreign currency translation

    —          —          —          —          (340     —          (340
             

 

 

 

Comprehensive loss

                (52,642

Issuance of options to purchase common stock

    —          —          2,406        —          —          —          2,406   

Issuance of restricted stock, net of forfeitures

    2,790,665        28        4,675        —          —          —          4,703   

Issuance of common stock to directors

    180,000        2        657        —          —          —          659   

Issuance of common stock to employees

    36,462        —          118        —          —          —          118   

Issuance of common stock from public offering, net of issuance costs

    8,250,000        83        33,681        —          —          —          33,764   

Issuance of common stock upon exercise of stock options

    667,909        6        1,199        —          —          —          1,205   

Purchase of treasury stock

    —          —          —          —          —          (40     (40
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

    75,849,439      $ 758      $ 212,326      $ (172,634   $ 3,435      $ (140   $ 43,745   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

 

     Year Ended June 30,  
     2012     2011     2010  
     (In thousands, except share data)  

Cash flows from operating activities:

      

Net loss

   $ (52,302   $ (40,682   $ (29,748

Adjustments to reconcile net loss to net cash used in operating activities:

      

Depreciation and amortization

     4,582        3,482        2,314   

Loss on disposal of property, plant and equipment

     —          527        —     

Share-based compensation expense

     7,886        9,022        10,056   

Changes in assets and liabilities:

      

Accounts receivable

     (1,029     1,739        5,852   

Inventories

     414        176        302   

Prepaid expenses and other current assets

     (295     266        (385

Other assets

     (473     (552     270   

Accounts payable

     844        (515     863   

Accrued expenses

     (206     543        656   

Deferred revenue

     (2,638     (2,527     (2,570
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (43,217     (28,521     (12,390

Cash flows from investing activities:

      

Purchases of property, plant and equipment

     (4,000     (30,037     (17,562

Purchases of certificates of deposit

     —          —          (9,106

Proceeds from the redemption of certificates of deposit

     —          —          8,536   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (4,000     (30,037     (18,132

Cash flows from financing activities:

      

Proceeds from the issuance of long-term debt

     9,885        20,190        —     

Principal payments on long-term debt and capital lease agreements

     (4,072     (493     (411

Proceeds from the issuance of note payable

     —          6,900        —     

Principal payments on note payable

     —          (6,900     —     

Proceeds from the issuance of common stock, net of issuance costs

     33,764        33,431        47,117   

Proceeds from the exercise of options to purchase common stock

     1,205        3,210        2,349   

Purchase of treasury stock

     (40     (100     —     

(Increase) decrease in restricted cash

     —          (2,400     433   
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     40,742        53,838        49,488   

Effect of exchange rate changes on cash

     (25     1,880        (1,843
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (6,500     (2,840     17,123   

Cash and cash equivalents at beginning of year

     17,910        20,750        3,627   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 11,410      $ 17,910      $ 20,750   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information

      

Cash paid for interest

   $ 2,036      $ 514      $ 135   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of non-cash activities

      

Purchases of property, plant and equipment in accounts payable and accrued expenses

   $ 12      $ 1,143      $ 5,051   
  

 

 

   

 

 

   

 

 

 

Purchases of property, plant and equipment pursuant to capital lease agreements

   $ 320      $ 249      $ —     
  

 

 

   

 

 

   

 

 

 

Issuance of common stock to former shareholders of Unitract Syringe Pty Limited

   $ —        $ —        $ 5,070   
  

 

 

   

 

 

   

 

 

 

Purchases of property, plant and equipment through the issuance of warrants

   $ —        $ 1,621      $ —     
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. Description of Business

Unilife Corporation and subsidiaries (“the Company”) is a U.S. based developer and commercial supplier of injectable drug delivery systems. The Company builds long-term collaborations with pharmaceutical and biotechnology companies seeking to utilize its innovative and highly differentiated devices to enable or enhance the clinical development, regulatory approval and lifecycle management of their injectable therapies. The Company’s proprietary devices are designed for supply to pharmaceutical companies in a format where they can be integrated into the filling and packaging processes utilized for a target injectable drug or vaccine.

2. Liquidity

The Company has incurred recurring losses from operations in each of the years in the three-year period ended June 30, 2012 and anticipates incurring additional losses until such time that it can generate sufficient sales of its proprietary range of injectable drug delivery systems. Management estimates that cash and cash equivalents of $13.8 million as of June 30, 2012, which includes $2.4 million of restricted cash, together with the net proceeds of $18.8 million from the July 2012 public offering as noted below are sufficient to sustain planned operations through the third quarter of fiscal 2013.

The Company will need additional funding in the future to support its operations and capital expenditure requirements. Management has identified several possible funding strategies, which may or may not be available. In addition to sales of its Unitract and Unifill syringe products to pharmaceutical companies with which the Company has existing commercial relationships, the Company is also in discussions with additional pharmaceutical companies pertaining to the Unifill syringe and other pipeline products. Should the Company enter into commercial relationships relating to the industrialization, commercial supply or preferred use of a device within a particular therapeutic market, the Company may receive additional funding or revenue streams. The Company may also seek to raise additional funds through the sale of additional debt or equity securities. There can be no assurance that any such funding will be available when needed or on acceptable terms. These various factors 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.

In July 2012, the Company issued 6,154,000 shares of common stock and raised $18.8 million, net of issuance costs, through an underwritten registered public offering. The Company intends to use the proceeds from the public offering to fund the continued development and supply of its diversified portfolio of injectable drug delivery systems, to purchase and operate capital equipment to expand production and for working capital and other general corporate purposes.

3. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Unilife Corporation and its wholly-owned subsidiaries. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP.”) All significant intercompany accounts and transactions have been eliminated in consolidation.

On September 1, 2009, Unilife Medical Solutions Limited, an Australian Corporation (“UMSL”), entered into a Merger Implementation Agreement with Unilife Corporation, a newly-formed Delaware subsidiary of UMSL, pursuant to which stockholders and option holders of UMSL would exchange their existing interests in UMSL for equivalent interests in Unilife Corporation and Unilife Corporation would become the parent or ultimate parent of UMSL and its subsidiaries. The redomiciliation transaction was approved by the Australian Federal Court and the stockholders and option holders of UMSL and was completed on January 27, 2010. In the redomiciliation each holder of UMSL ordinary shares or share options received one share of common stock or one stock option of Unilife Corporation for every six UMSL ordinary shares or share options, respectively, held by such holder, unless a holder of UMSL ordinary shares elected to receive, in lieu of common stock, Chess Depository Interests, or CDIs of Unilife (each representing one-sixth of a share of Unilife common stock) in which case such holder received one CDI of Unilife for each ordinary share of UMSL. All share and per share data have been retroactively restated to reflect the one for six share recapitalization.

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

References to the “Company” include Unilife Corporation and its consolidated subsidiaries, including UMSL, unless the context otherwise requires. References to “Unilife” are references solely to Unilife Corporation.

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 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.

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of cash on hand, deposits at banks and other short-term highly liquid investments with original maturities of three months or less. Cash equivalents are stated at cost, which approximates fair value.

Accounts Receivable

Accounts receivable are stated at amounts due from customers, which also represents the net realizable amount. The Company evaluates the collectability of its accounts receivable on a periodic basis and has historically not recorded an allowance for doubtful accounts. In instances in which management becomes aware of circumstances that may impair a particular customer’s ability to meet its obligation, the related receivable would be written off.

Inventories

Inventories consist primarily of syringe components and include direct materials, direct labor and manufacturing overhead. 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. Inventories consist of the following:

 

     June 30,  
     2012      2011  
     (In thousands)  

Raw materials

   $ 58       $ 387   

Work in process

     143         210   

Finished goods

     11         29   
  

 

 

    

 

 

 

Total inventories

   $ 212       $ 626   
  

 

 

    

 

 

 

Property, Plant and Equipment

Property, plant and equipment, including significant improvements, are recorded at cost, net of accumulated depreciation and amortization. Repairs and maintenance are expensed as incurred.

Depreciation and amortization expense is recorded on a straight-line basis over the estimated useful life of the asset as listed below:

 

Asset Category

  

Useful Lives

Building

   40 years

Machinery and equipment

   2 to 15 years

Computer software

   3 to 7 years

Furniture and fixtures

   7 years

Leasehold improvements

   Shorter of leasehold improvement life or remaining term of lease

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

Interest expense incurred during the construction of the new headquarters and manufacturing facility has been capitalized as one of the elements of cost and is being amortized over the useful life of the building. Interest capitalized during the year ended June 30, 2011 was $0.3 million with no such capitalized interest during the years ended June 30, 2012 or 2010.

The Company reviews the carrying value of the long-lived assets periodically to determine if facts and circumstances exist that would suggest that assets might be impaired or that the useful lives should be modified. Among the factors the Company considers in making the evaluation are changes in market position and profitability. If facts and circumstances exist which may indicate impairment, the Company will prepare a projection of the undiscounted cash flows of the asset group and determine if the long-lived assets are recoverable based on these undiscounted cash flows. If impairment is indicated, an adjustment will be made to reduce the carrying amount of these assets to their fair value.

Goodwill and Intangible Assets

Goodwill is the excess of purchase price over the fair value of net assets acquired in business acquisitions. Goodwill is subject to, at a minimum, an annual impairment assessment of its carrying value. Additional impairment assessments would be performed if events and circumstances warranted such additional assessments during the year. Goodwill impairment is deemed to exist if the net book value of the Company’s reporting unit exceeds its estimated fair value. Estimated fair value of the Company’s reporting unit is determined utilizing the value implied by the Company’s year-end quoted stock price. The Company performs its annual impairment test at the end of its fiscal year. There were no impairments recorded on goodwill during the years ended June 30, 2012, 2011 or 2010.

Definite-lived intangible assets include patents which are amortized on a straight-line basis over their estimated useful lives of 15 years. The Company reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When factors indicate a possible impairment, if the sum of the estimated undiscounted future cash flows expected to result from the use and eventual disposition of an asset is less than the carrying amount of the asset, an impairment may be recognized. Measurement of an impairment loss is based on the excess of the carrying value of the asset over its fair value. There were no impairments recorded on intangible assets during the years ended June 30, 2012, 2011 or 2010.

Deferred Financing Costs

Deferred financing costs are included in other assets on the consolidated balance sheets and consist of costs incurred in connection with debt financings. These costs are amortized over the term of the related debt using the effective interest rate method.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are recorded to the extent the Company believes they will more likely than not be realized. In making such determinations, the Company considers all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected more likely than not to be realized.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company’s policy is to include interest and penalties related to uncertain tax positions within the provision (benefit) for income taxes within the Company’s consolidated statements of operations.

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

Fair Value of Financial Instruments

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.

Share-Based Compensation

The Company grants equity awards to its employees, directors and consultants. 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 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. See Note 4 for additional information regarding share-based compensation.

Foreign Currency Translation

The Australian dollar is the functional currency for the Company’s Australian operations. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the rate of exchange existing at the end of the period. Revenues and expenses are translated at the average exchange rates during the applicable period. Adjustments resulting from these translations are recorded in accumulated other comprehensive income within the Company’s consolidated balance sheets and will be included in income upon sale or liquidation of the foreign investment. Gains and losses from foreign currency transactions, denominated in a currency other than the functional currency, are recorded in other (income) expense within the Company’s consolidated statements of operations and aggregated less than $0.1 million, $0.1 million and $0.1 million during the years ended June 30, 2012, 2011 and 2010, respectively.

Comprehensive Loss

Comprehensive loss includes net loss and other comprehensive loss. The Company’s other comprehensive loss consists only of foreign currency translation adjustments.

Revenue Recognition

The Company recognizes revenue from industrialization and development fees, licensing fees and product sales.

The Company recognizes up front, non-refundable licensing fees ratably over the expected life of the related agreement. Revenue from industrialization and development fees is recognized upon achievement of the “at risk” milestone events, which represents the culmination of the earnings process related to such events. Milestones include specific phases of projects such as product design, prototype availability, user tests, manufacturing proof of principle and the various steps to complete the industrialization of the product. Revenue recognized is commensurate with the milestones achieved and the Company has no future performance obligations related to previous milestone payments as each milestone payment is non-refundable when received.

The Company recognizes revenue from sales of products at the time of shipment and when title passes to the customer. Product sales from B. Braun, a customer who accounted for 10% or more of the Company’s revenue, were $2.5 million, during both the years ended June 30, 2011 and 2010.

Advertising Costs

Advertising costs are expensed in the period incurred. The Company incurred total advertising costs of $0.4 million, $0.6 million and $0.5 million during the years ended June 30, 2012, 2011 and 2010, respectively.

 

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

Research and Development Costs

Research and development costs, which primarily consist of salaries, benefits, contracted services, design work and prototype development are expensed as incurred.

Loss Per Share

Basic loss per share is computed as net loss divided by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur from common shares issued through common stock equivalents. The dilutive effect of potential common shares, consisting of non-participating restricted stock and outstanding options to purchase common stock, is calculated using the treasury stock method.

Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are considered participating securities and are included in the computation of loss per share according to the two class method if the impact is dilutive. Shares of the Company’s unvested restricted stock are considered participating securities. However, in the event of a net loss, participating securities are excluded from the calculation of both basic and diluted loss per share.

Business Segments

The Company operates in one reportable segment, which includes the design, development and manufacture of injectable drug delivery systems. Revenues by geographic location based on location of customer are as follows:

 

     Years Ended June 30,  
     2012      2011      2010  
     (In thousands)  

Domestic

   $ 61       $ 2,773       $ 2,538   

International

     5,458         3,877         8,884   
  

 

 

    

 

 

    

 

 

 
   $ 5,519       $ 6,650       $ 11,422   
  

 

 

    

 

 

    

 

 

 

Recently Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 removes certain presentation options and requires entities to report components of net income and comprehensive income in either one continuous statement of comprehensive income or two separate but consecutive statements. There is no change to the items that are reported in other comprehensive income. ASU 2011-05 is effective for annual and interim periods for fiscal years beginning after December 15, 2011. Other than additional presentation of other comprehensive loss outside of the statements of stockholders’ equity and comprehensive loss, the adoption of ASU 2011-05 will not have an impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”). ASU 2011-08 allows for assessment of qualitative factors to determine if it is more likely than not that goodwill might be impaired and whether or it is necessary to perform the two-step goodwill impairment test required under current accounting standards. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not believe that the adoption of ASU 2011-08 will have a material impact on its consolidated financial statements.

4. Equity Transactions and Share-Based Compensation

In October and November 2009, the Company issued 10,544,961 shares of common stock and 3,145,767 options to purchase common stock for aggregate proceeds of A$50.9 million ($47.1 million), net of issuance costs, through a combination of a U.S. and Australian private placement and a share purchase plan for the Company’s Australian and New Zealand stockholders. Of these options, 50% are exercisable at A$7.50 per share, and 50% are exercisable at A$12.00 per share. The Company also issued 497,662 options to purchase common stock to certain brokers as consideration for their services in connection with the private placement, which are exercisable at A$5.10 per share. All of the options described above are immediately exercisable and will expire in November 2012.

 

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

In November 2009, the Company issued 3,333,333 shares of common stock to the former stockholders of Unitract Syringe Pty Limited. These shares were issued in full satisfaction of the Company’s obligation for the purchase of that business which had been accrued for on the date of purchase.

In January 2010, the Company issued 833,333 fully vested shares of common stock to certain employees in consideration of their transfer to the Company of certain intellectual property rights and recognized $4.3 million of share-based compensation expense classified in research and development expense.

In December 2010, the Company issued 7,048,373 shares of common stock and 2,268,934 options to purchase common stock for aggregate proceeds of A$34.1 million ($33.4 million), net of issuance costs, through an Australian private placement and a share purchase plan for the Company’s Australian and New Zealand stockholders. Of these options, 50% are exercisable at A$7.50 per share, and 50% are exercisable at A$12.00 per share. The options became exercisable in June 2011 and will expire in December 2013.

In November 2011, the Company issued 8,250,000 shares of common stock and raised $33.8 million, net of issuance costs, through an underwritten registered public offering.

During the year ended June 30, 2012, the Company granted certain directors 180,000 shares of common stock that were vested upon issuance, of which 120,000 shares may not be sold or transferred until such time as the director leaves the board for any reason, including a change in control. The weighted-average grant date fair value of the shares was $3.66 per share.

The Company recognized share-based compensation expense related to equity awards to employees, directors and consultants of $7.9 million, $9.0 million and $10.1 million during the years ended June 30, 2012, 2011 and 2010, respectively.

As of June 30, 2012, the total compensation cost related to all non-vested awards not yet recognized is $14.6 million. This amount is expected to be recognized over a remaining weighted average period of 1.51 years.

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 to recognize the importance of employees to the long-term performance and success of the Company. The Company has also granted stock options to certain consultants 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 Company’s common stock reaching certain minimum levels, as defined in the agreements. Share-based compensation expense related to options granted to employees is recognized on a straight-line basis over the related vesting term. Share-based compensation expense related to options granted to consultants 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 6,000,000 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 1st thereafter, through January 1, 2019, the share reserve automatically adjusts so that it equals 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.

In January 2010, the Company issued 1,000,000 options to purchase common stock to a consultant under the Stock Incentive Plan in consideration for various services to be performed for the Company. The options to purchase common stock are exercisable at A$6.33 per share and vest upon the trading price of the Company’s CDIs reaching certain minimum levels on the Australian Securities Exchange, which range from A$1.75 to A$3.22 per share. The options are re-measured each reporting date and as of June 30, 2012 were valued at $0.44 per option, which is being expensed ratably over the vesting period of each tranche, which ranges from 1.7 years to 2.0 years. The options will be re-valued on a quarterly basis and marked to market until exercised.

 

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

During the year ended June 30, 2010, the Company granted a total of 383,333 options to purchase common stock under the Plan and an additional 1,144,000 options to purchase common stock under the Stock Incentive Plan with a weighted average exercise price of $6.03 per share. A total of 834,000 of the options vest upon the Company’s common stock reaching certain minimum levels on Nasdaq, which range from $9.45 to $17.82 per share. A total of 240,000 of the options vest upon the market capitalization of the Company reaching certain minimum levels, ranging from $500.0 million to $1,500.0 million. The remaining options vest over a period of three years. The weighted average grant date fair value of the options was $2.76 per share.

During the year ended June 30, 2010, the Company granted 3,643,429 options to purchase common stock outside of both the Plan and the Stock Incentive Plan in connection with the Company’s November 2009 private placement as discussed above.

During the year ended June 30, 2011, the Company granted a total of 1,493,517 options to purchase common stock under the Stock Incentive Plan with a weighted average exercise price of $5.57 per share. A total of 660,000 options vest upon meeting certain performance targets, as defined in the agreements. The remaining options vest over a period of three years. The weighted average grant date fair value of the options was $2.78 per share.

During the year ended June 30, 2011, the Company issued warrants to purchase 375,000 shares of common stock to Keystone Redevelopment Group, LLC (“Keystone’) and warrants to purchase 225,000 shares of common stock to L2 Architecture (“L2”) outside of both the Plan and the Stock Incentive Plan. The warrants issued to Keystone were in partial consideration for managing the development of the Company’s new headquarters and manufacturing facility and the warrants issued to L2 were in partial consideration for the custom design of the facility. The warrants issued to both Keystone and L2 are exercisable at $5.30 per share vested immediately upon issuance and were valued at $2.70 per share. The aggregate fair value of the warrants of $1.6 million has been capitalized and included as a component of the cost of the building.

During the year ended June 30, 2011, the Company issued 2,268,934 options to purchase common stock outside of both the Plan and the Stock Incentive Plan in connection with the Company’s December 2010 private placement as discussed above.

The following is a summary of activity related to stock options held by employees and directors during the year ended June 30, 2012:

 

     Number of
Options
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual Life
(In Years)
     Aggregate
Intrinsic
Value
 
                         (In thousands)  

Outstanding as of July 1, 2011

     4,699,211      $ 4.42         

Granted

     1,540,000        3.87         

Exercised

     (299,999     1.94         

Cancelled

     (361,253     4.53         
  

 

 

   

 

 

       

Outstanding as of June 30, 2012

     5,577,959      $ 4.39         4.9       $ 3,404   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable as of June 30, 2012

     2,084,379      $ 3.21         2.2       $ 3,299   
  

 

 

   

 

 

    

 

 

    

 

 

 

The following is a summary of activity related to stock options and warrants held by persons other than employees and directors during the year ended June 30, 2012:

 

     Number of
Options and
Warrants
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual Life
(In Years)
     Aggregate
Intrinsic
Value
 
                         (In thousands)  

Outstanding as of July 1, 2011

     8,126,609      $ 8.25         

Exercised

     (367,910     1.71         
  

 

 

   

 

 

       

Outstanding as of June 30, 2012

     7,758,699      $ 8.56         1.2       $ 466   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable as of June 30, 2012

     6,758,699      $ 8.87         1.0       $ 466   
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value is defined as the difference between the market value of the Company’s common stock as of the end of the period and the exercise price of the in-the-money stock options. The total intrinsic value of stock options exercised during the years ended June 30, 2012, 2011 and 2010 was $1.5 million, $6.0 million and $5.8 million respectively. Of the 4,493,580 non vested options, 1,000,000 are held by a consultant.

 

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

The Company currently uses authorized and unissued shares to satisfy stock option exercises.

The weighted average fair value of stock options granted during the years ended June 30, 2012, 2011 and 2010 was $1.86, $2.65 and $3.13 per share, respectively. The weighted average fair value of $2.65 per share during the year ended June 30, 2011 does not include the weighted average fair value of the stock options granted in connection with the Company’s 2010 private placement of $1.26 per share. The weighted average fair value of $3.13 per share during the year ended June 30, 2010 does not include the weighted average fair value of the stock options granted in connection with the Company’s 2009 private placement of $2.49 per share.

The following is a summary of outstanding and exercisable stock options held by employees and directors as of June 30, 2012:

 

     Outstanding Options      Exercisable Options  

Range of Exercise Prices

   Outstanding
as of
June 30,
2012
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Life (In Years)
     Exercisable
as of
June 30,
2012
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Life (In Years)
 

$0.00 — $2.10

     1,416,666       $ 2.01         1.2         1,416,666       $ 2.01         1.2   

$2.11 — $5.00

     1,826,667         3.87         8.8         139,167         3.07         3.3   

$5.01 — $7.63

     2,334,626         6.25         4.2         528,546         6.45         4.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     5,577,959       $ 4.39         4.9         2,084,379       $ 3.21         2.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of outstanding and exercisable stock options held by persons other than employees and directors as of June 30, 2012:

 

     Outstanding Options      Exercisable Options  

Range of Exercise Prices

   Outstanding
as of
June 30,
2012
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Life (In Years)
     Exercisable
as of
June 30,
2012
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Life (In Years)
 

$0.00 — $2.10

     167,335       $ 2.01         0.8         167,335       $ 2.01         0.8   

$2.11 — $6.71

     2,176,662         5.71         2.3         1,176,662         5.09         2.0   

$6.72 — $12.72

     5,414,702         9.91         0.8         5,414,702         9.90         0.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     7,758,699       $ 8.56         1.2         6,758,699       $ 8.87         1.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company used the following weighted average assumptions in calculating the fair value of options and warrants granted during the year ended June 30, 2012, June 30, 2011, the period from January 27, 2010 to June 30, 2010 (the period subsequent to the Company’s redomiciliation) and the period from July 1, 2009 to January 26, 2010 (the period prior to the Company’s redomiciliation):

 

     Year Ended
June  30,
2012
    Year Ended
June  30,
2011
    Period From
January 27, 2010 to
June 30, 2010
    Period From
July  1, 2009 to
January 26, 2010
 

Number of stock options granted

     1,540,000        2,093,517        1,144,000        1,383,333   

Expected dividend yield

     0     0     0     0

Risk-free interest rate

     1.23     1.96     2.35     4.10

Expected volatility

     55     59     60     79

Expected life (in years)

     6.0        5.15        3.99        4.23   

The assumptions noted above for the year ended June 30, 2011 do not include amounts related to the 2,268,934 options issued in the Company’s December 2010 private placement as discussed above. The assumptions noted above for the period from July 1, 2009 to January 26, 2010 do not include amounts related to the 3,643,429 options issued in the Company’s October 2009 private placement, as discussed above.

 

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

Subsequent to the Company’s redomiciliation, the fair value of each stock option was estimated at the grant date using the Black-Scholes option pricing model, with the exception of grants subject to market conditions, which were valued using a Monte Carlo option pricing model. The Company has not historically paid dividends to its stockholders and, as a result, assumed a dividend yield of 0%. The risk free interest rate is based upon the rates of U.S. Treasury bonds with a term equal to the expected term of the option. Due to the Company’s limited Nasdaq trading history, the expected volatility used to value options granted after January 27, 2010 is based upon a blended rate of the historical share price of the Company’s stock on the Australian Securities Exchange and the volatility of peer companies traded on U.S. exchanges operating in the same industry as the Company. The expected term of the options to purchase common stock issued to employees and directors is based upon the simplified method, which is the mid-point between the vesting date of the option and its contractual term unless a reasonable alternate term is estimated by management. The expected term of the options to purchase common stock issued to consultants is based on the contractual term of the awards.

Restricted Stock

The Company has granted shares of restricted stock to certain employees and consultants under the Stock Incentive Plan. During the period prior to vesting, the holder of the non-vested restricted stock will have the right to vote and the right to receive all dividends and other distributions declared. All non-vested shares of restricted stock are reflected as outstanding; however, they have been excluded from the calculation of basic earnings per share.

For employees, the fair value of restricted stock is measured on the date of grant using the price of the Company’s common stock on that date. Share-based compensation expense for restricted stock issued to employees is recognized on a straight-line basis over the requisite service period, which is generally the longest vesting period. For restricted stock granted to consultants, the fair value of the awards will be re-valued on a quarterly basis and marked to market until vested. Share-based compensation expense for restricted stock issued to consultants is recognized ratably over each vesting tranche.

The Company committed to issue its Chief Executive Officer a total of 1,166,000 shares of restricted stock and 750,000 options to purchase common stock in connection with the execution of his employment agreement dated October 1, 2011. The issuance of the shares of restricted stock and options to purchase common stock were subject to the approval of shareholders, which was obtained on December 1, 2011. For accounting purposes, 273,338 shares of restricted stock were considered granted on December 1, 2011. The remaining 892,662 shares of restricted stock and 750,000 options to purchase common stock were granted January 3, 2012, when sufficient shares under the Stock Incentive Plan became available for grant. The grant date fair value of the restricted stock on December 1, 2011 was $3.93 per share and on January 3, 2012 was $3.24 per share. The grant date fair value of the options to purchase common stock was $1.69 per share.

The following is a summary of activity related to restricted stock awards during the year ended June 30, 2012:

 

     Number of
Restricted Stock
Awards
    Weighted Average
Grant Date Fair
Value
 

Unvested as of July 1, 2011

     1,957,000      $ 6.19   

Granted

     2,845,415        3.99   

Vested

     (236,000     5.46   

Forfeited

     (54,750     4.72   
  

 

 

   

 

 

 

Unvested as of June 30 2012

     4,511,665      $ 4.86   
  

 

 

   

 

 

 

Grants of Common Stock to Employees

During the year ended June 30, 2011, the Company granted 23,184 shares of common stock to certain employees. The Company recorded a charge to operations of $0.1 million related to the issuance of these shares.

During the year ended June 30, 2012, the Company granted 36,462 shares of common stock to certain employees. The Company recorded a charge to operations of $0.1 million related to the issuance of these shares.

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

5. Property, Plant and Equipment and Construction-in-Progress

Property, plant and equipment consist of the following:

 

     June 30,  
     2012     2011  
     (In thousands)  

Building

   $ 32,182      $ 31,866   

Machinery and equipment

     18,356        16,130   

Computer software

     2,544        2,457   

Furniture and fixtures

     374        323   

Construction in progress

     5,615        5,734   

Land

     2,036        2,036   

Leasehold improvements

     32        —     
  

 

 

   

 

 

 
     61,139        58,546   

Less: accumulated depreciation and amortization

     (8,625     (4,526
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 52,514      $ 54,020   
  

 

 

   

 

 

 

Construction in progress as of June 30, 2012 and 2011 consisted primarily of amounts incurred in connection with machinery and equipment.

6. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill during the years ended June 30, 2011 and 2012 are as follows:

 

     (In thousands)  

Balance as of July 1, 2010

   $ 10,792   

Foreign currency translation

     2,473   
  

 

 

 

Balance as of June 30, 2011

     13,265   

Foreign currency translation

     (531
  

 

 

 

Balance as of June 30, 2012

   $ 12,734   
  

 

 

 

Intangible assets consist of patents acquired in a business acquisition of $0.1 million. Related accumulated amortization as of both June 30, 2012 and 2011 was $0.1 million. Future amortization expense is scheduled to be $7,000 annually, excluding the impact of foreign currency exchange.

7. Accrued Expenses

Accrued expenses consist of the following:

 

     June 30,  
     2012      2011  
     (In thousands)  

Accrued payroll and other employee related expenses

   $ 1,411       $ 1,737   

Accrued machinery and equipment costs

     —           231   

Accrued other

     798         728   
  

 

 

    

 

 

 

Total accrued expenses

   $ 2,209       $ 2,696   
  

 

 

    

 

 

 

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

8. Commitments and Contingencies

The Company leases certain facilities, office equipment and automobiles under non-cancellable operating leases. The future minimum lease payments related to the Company’s non-cancellable operating lease commitments as of June 30, 2012 were as follows:

 

For the Year Ending June 30,

   (In thousands)  

2013

   $ 286   

2014

     269   

2015

     142   

2016

     2   
  

 

 

 
   $ 699   
  

 

 

 

Rental expenses under operating leases during the years ended June 30, 2012, 2011 and 2010 was $0.2 million, $0.7 million and $0.6 million, respectively.

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 not probable that an unfavorable outcome will result.

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.

9. Long-Term Debt

Long-term debt consists of the following:

 

     June 30,  
     2012      2011  
     (In thousands)  

6.00% Mortgage loans, due December 2031

   $ 14,033       $ 14,190   

6.00% Mortgage loans, due October 2020

     3,588         3,750   

12.85% Secured lending facility, due 2013

     6,420         —     

4.75% Bank term loans, due January 2021 through August 2021

     1,874         2,048   

5.00% Commonwealth of Pennsylvania financing authority loan, due January 2021

     2,182         2,227   

Other

     668         472   
  

 

 

    

 

 

 
     28,765         22,687   

Less: current portion of long-term debt

     5,655         2,274   
  

 

 

    

 

 

 

Total long-term debt

   $ 23,110       $ 20,413   
  

 

 

    

 

 

 

Mortgage Loans

In October 2010, Unilife Cross Farm LLC, a wholly owned subsidiary of the Company, (“Cross Farm”) entered into a loan agreement with Metro Bank (“Metro”), pursuant to which Metro agreed to provide Cross Farm with two loans in the amounts of $14.25 million and $3.75 million. The proceeds received were used to finance the purchase of land and construction of the Company’s current corporate headquarters and manufacturing facility in York, Pennsylvania.

During construction, Cross Farm paid only interest on both term loans at the Prime Rate plus 1.50% per annum, with a floor of 4.50% per annum. Subsequent to construction, Cross Farm is paying principal and interest on both term loans, with interest at a fixed rate of 6.00%. The weighted average interest rate on both term notes was 5.38% and 4.75% during the years ended June 30, 2012 and 2011, respectively.

The loan agreement contains 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 sheet, which will remain in place until Cross Farm and Metro agree on the financial covenants. The Company was in compliance with its debt covenants as of June 30, 2012. 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 June 30, 2012. Cross Farm may prepay the loan, but would incur a prepayment penalty of 2.0% if it does so before October 2013. The U.S. Department of Agriculture has guaranteed $10.0 million of the loan.

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

Secured Lending Facility

In August 2011, the Company entered into a Master Lease Agreement with Varilease Finance, Inc. (“Varilease”) for up to $10.0 million of secured financing for production equipment for the Unifill syringe. Based on the Company’s continuing involvement throughout the term of the agreement and the integral nature of the production equipment, the transaction is being accounted for under the financing method. Over the term of the agreement, the Company will make 24 monthly installments based upon the amount drawn. This facility has an effective interest rate of 12.85%. At the end of the 24 month initial term, the Company has the option to (i) return the equipment; (ii) extend the term for 12 months followed by optional 6 month extensions terminable by either party; or (iii) repurchase the equipment for a price to be agreed upon by both lessor and lessee. The secured lending facility contains covenants and provisions for events of default customarily found in lease agreements.

Commonwealth of Pennsylvania Financing Authority Loan

In October 2009, the Company accepted a $5.45 million offer of assistance from the Commonwealth of Pennsylvania which included up to $2.25 million in financing for land and the construction of its current manufacturing facility. In December 2010, Cross Farm received the $2.25 million loan which bears interest at a rate of 5.00% per annum, matures in January 2021 and is secured by a third mortgage on the facility. In connection with the loan agreement, 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, which holds the first and second mortgages on the facility.

As of June 30, 2012, aggregate maturities of long-term obligations are as follows:

 

For the Year Ending June 30,

   (In thousands)  

2013

   $ 5,655   

2014

     3,169   

2015

     1,125   

2016

     1,099   

2017

     1,140   

Thereafter

     16,577   
  

 

 

 
   $ 28,765   
  

 

 

 

10. Loss Per Share

The Company’s net loss per share is as follows:

 

     Year Ended June 30,  
     2012     2011     2010  
     (In thousands, except share and per share data)  

Numerator

      

Net loss

   $ (52,302   $ (40,682   $ (29,748

Denominator

      

Weighted average number of shares used to compute basic loss per share

     67,449,286        57,891,024        46,837,066   

Effect of dilutive options to purchase common stock

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Weighted average number of shares used to compute diluted loss per share

     67,449,286        57,891,024        46,837,066   
  

 

 

   

 

 

   

 

 

 

Basic and diluted loss per share

   $ (0.78   $ (0.70   $ (0.64
  

 

 

   

 

 

   

 

 

 

Due to the Company’s net losses, unvested shares of restricted stock (participating securities) totaling 2,715,897, 1,959,288 and 489,178 were excluded from the calculation of basic and diluted loss per share during the years ended June 30, 2012, 2011 and 2010, respectively.

In addition, stock options (non-participating securities) totaling 10,145,641, 8,998,164, and 8,234,060 during the years ended June 30, 2012, 2011 and 2010, respectively, were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive. Certain of these stock options were excluded solely due to the Company’s net loss position. Had the Company reported net income during the years ended June 30, 2012, 2011 and 2010, these shares would have had an effect of 1,100,720, 1,861,935, and 2,316,360 diluted shares, respectively, for purposes of calculating diluted loss per share.

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

11. Income Taxes

For the years ended June 30, 2012, 2011 and 2010, income (loss) before income taxes consists of the following:

 

     Years Ended June 30,  
     2012     2011     2010  
     (In thousands)  

Domestic

   $ (56,873   $ (41,529   $ (26,773

International

     4,571        847        (2,975
  

 

 

   

 

 

   

 

 

 
   $ (52,302   $ (40,682   $ (29,748
  

 

 

   

 

 

   

 

 

 

Tax Rate Reconciliation

Income tax expense (benefit) is as follows:

 

     Year Ended June 30,  
     2012     2011     2010  
     Current      Deferred     Total     Current      Deferred     Total     Current      Deferred     Total  
     (In thousands)  

U.S. Federal

   $ —         $ (19,065   $ (19,065   $ —         $ (13,907   $ (13,907   $ —         $ (8,692   $ (8,692

State

     —           (5,602     (5,602     —           (4,086     (4,086     —           (2,554     (2,554

International

     —           586        586        —           279        279        —           553        553   

Changes in valuation allowance

     —           24,081        24,081        —           17,714        17,714        —           10,693        10,693   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income tax provision

   $ —         $ —        $ —        $ —         $ —        $ —        $ —         $ —        $ —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income tax expense (benefit) was $0 for the years ended June 30, 2012, 2011 and 2010 and differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:

 

     Year Ended June 30,  
     2012     2011     2010  

Tax at U.S. statutory rate

     (35 )%      (35 )%      (35 )% 

State taxes, net of federal benefit

     (10 )%      (10 )%      (9 )% 

Non-deductible and non-taxable items

     1     1     7

Change in valuation allowance

     44     44     37
  

 

 

   

 

 

   

 

 

 
     0     0     0
  

 

 

   

 

 

   

 

 

 

Significant Components of Deferred Taxes

The tax effects of temporary differences and net operating losses that give rise to significant portions of deferred tax assets (liabilities) at June 30, 2012 and 2011 are presented below:

 

     June 30,  
     2012     2011  
     (In thousands)  

Net operating loss carryforwards

   $ 54,978      $ 31,572   

Share-based compensation expense

     8,413        5,984   

Deferred revenue

     1,557        2,435   

Depreciation differences

     (5,379     (677

Valuation allowance

     (59,569     (39,314
  

 

 

   

 

 

 

Net deferred taxes

   $ —        $ —     
  

 

 

   

 

 

 

 

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

The valuation allowance for deferred tax assets as of June 30, 2012 and 2011 was $59.6 million and $39.3 million, respectively. The net change in the total valuation allowance was an increase of $20.3 million. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or prior to the expiration of the net operating loss carryforwards. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making the assessment as to the realizability of deferred tax assets. Based upon the level of historical taxable income and uncertainty regarding projections for future taxable income over the periods in which the deferred tax assets are deductible or can be utilized, management does not believe it is more likely than not that the Company will realize the benefits of these net operating losses and deductible temporary differences, as of June 30, 2012 and 2011. Therefore, a full valuation allowance has been provided as of June 30, 2012 and 2011. The amount of the net deferred tax assets considered realizable; however, could change if estimates of future taxable income during the carryforward period are increased.

As of June 30, 2012, the Company had net operating loss carryforwards for U.S federal, state and Australian income tax purposes of approximately $109.9 million, $109.9 million and $22.1 million, respectively, which are available to offset future taxable income. The U.S. federal and state net operating loss carryforwards begin to expire in 2023. The Australian net operating losses do not expire.

The Australian net operating loss carryforwards of approximately $22.1 million as of June 30, 2012 are subject to either the continuity of ownership or same business test (as defined under Australian tax law) that could limit or substantially eliminate the Company’s ability to use these carryforwards. If there have been or will be changes in the Company’s ownership or Australian business operations before these net operating loss carryforwards are utilized, they may be unavailable to reduce taxable income in the future. Further, under provision of the Internal Revenue Code, the utilization of a U.S corporation’s federal and state net operating loss carryforwards may be significantly limited following a change in ownership of greater than 50% within a three-year period. The Company’s federal and state net operating loss carryforwards may, therefore, be subject to an annual limitation. In addition, state net operating loss carryforwards may be further limited in Pennsylvania, which has a limitation equal to the greater of 20% of taxable income after modifications and apportionment, or $3.0 million on state net operating losses utilized in any one year.

The Company has adopted the provisions included in ASC Subtopic 740-10. Management has evaluated the tax positions taken and has concluded that no liability for unrecognized tax benefits was required to be recorded for the years ended June 30, 2012, 2011 and 2010.

The Company files Australian, U.S. federal and state income tax returns. The Company is not subject to examination in any jurisdiction at this time. As a result of the net operating losses in prior years, the statute of limitations will remain open for a period following any utilization of net operating loss carryforwards and as such these periods remain subject to examination.

12. Employee Benefit Plan

The Company has a retirement savings 401(k) plan covering all U.S. employees (the “Plan”). Participating employees may contribute up to 100% of their pre-tax earnings, subject to the statutory limits. Effective January 1, 2012, the Company began a discretionary match to participant contributions into the Plan. The Company contributes fifty cents for each dollar a participant contributes, with a maximum of 3% of a participants’ eligible earnings. The contributions made by the Company vest 50% upon two years of service and 100% upon three years of service. During the year ended June 30, 2012, the Company paid $0.1 million to match employee contributions. During the years ended June 30, 2011 and 2010, the Company did not match any employee contributions.

13. Business Alliances

Sanofi

The Company signed an exclusive licensing agreement and an industrialization agreement with Sanofi, a multinational pharmaceutical company, between June 2008 and July 2009. Under the terms of these agreements, Sanofi had agreed to pay the Company an aggregate of approximately $36.4 million in exclusivity fees and industrialization milestone payments for the exclusive right to negotiate the purchase of the Unifill ready-to-fill (prefilled) syringe (Unifill syringe or product).

Pursuant to the exclusive licensing agreement, Sanofi had paid the Company a €10.0 million ($13.0 million) up front non-refundable one-time fee. During the year ended June 30, 2009, the Company recognized $2.5 million of this up-front payment as revenue and deferred $10.6 million, which is being recognized on a straight-line basis over the remaining term of the agreement.

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

Pursuant to the industrialization agreement, Sanofi agreed to pay the Company up to €17.0 million in milestone-based payments to fund the completion of the Company’s industrialization program for the Unifill syringe. During the year ended June 30, 2012 the Company received and recognized as revenue the final €1.0 million milestone payment under the industrialization agreement.

This exclusive right for Sanofi to negotiate for the purchase of the Unifill syringe is limited to the therapeutic drug classes of anti-thrombotic agents, vaccines and four confidential sub-classes until June 30, 2014 (exclusivity list). The Company is able to negotiate with other pharmaceutical companies seeking to utilize the Unifill syringe with drugs targeted for use in therapeutic drug classes outside of those retained by Sanofi under its exclusivity list. Upon mutual agreement by both parties, Sanofi may add additional therapeutic sub-classes to the exclusivity list for the Unifill syringe provided the Company has not previously signed exclusive terms for the product to a third party. The Company is not obligated to sell more than 30% of its annual production capacity for the Unifill syringe to Sanofi without written notification up to two years in advance.

14. Financial Instruments

The Company does not hold or issue financial instruments for trading purposes. The estimated fair values of the Company’s financial instruments are as follows:

 

     June 30, 2012      June 30, 2011  
     Carrying
Amount
     Estimated
Fair  Value
     Carrying
Amount
     Estimated
Fair  Value
 
     (In thousands)  

Assets:

           

Cash equivalents — certificates of deposit

   $ 1,003       $ 1,003       $ 1,000       $ 1,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

The carrying amount of the Company’s cash equivalents, which includes certificates of deposit, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short term maturities of these items. The estimated fair value of the Company’s debt approximates its carrying value based upon the rates that the Company would currently be able to receive for similar instruments of comparable maturity.

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.

The following table presents the Company’s assets that are measured at fair value on a recurring basis for the periods presented:

 

     Fair Value Based On  
     Quoted Market
Prices in  Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total
Fair Value
Measurements
 
     (In thousands)  

Cash equivalents — certificates of deposit (June 30, 2012)

   $ —         $ 1,003       $ —         $ 1,003   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash equivalents — certificates of deposit (June 30, 2011)

   $ —         $ 1,000       $ —         $ 1,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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UNILIFE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

 

15. Related Party Transactions

The Company has an agreement with a consulting firm, of which a member of the Company’s board of directors is the principal. Under the terms of the agreement, the Company pays a commercial arm’s length fee for finance, accounting and secretarial consulting services within Australia to be performed. Amounts paid to the consulting entity during the years ending June 30, 2012, 2011 and 2010 were $0.2 million, $0.3 million and $0.4 million, respectively.

16. Quarterly Results (unaudited)

 

     Quarter Ended
September  30, 2011
    Quarter Ended
December  31, 2011
    Quarter Ended
March 31,  2012
    Quarter Ended
June 30, 2012
 
     (In thousands, except per share data)  

Year Ended June 30, 2012

        

Revenues

   $ 2,130      $ 912      $ 1,251      $ 1,226   

Gross profit

     2,056        896        1,233        750   

Net loss

     (9,705     (12,850     (14,886     (14,861

Basic and diluted loss per share

   $ (0.16   $ (0.19   $ (0.21   $ (0.21

 

     Quarter Ended
September  30, 2010
    Quarter Ended
December  31, 2010
    Quarter Ended
March 31,  2011
    Quarter Ended
June 30, 2011
 
     (In thousands, except per share data)  

Year Ended June 30, 2011

        

Revenues

   $ 3,543      $ 1,762      $ 650      $ 695   

Gross profit

     2,368        938        200        547   

Net loss

     (7,246     (10,358     (12,533     (10,545

Basic and diluted loss per share

   $ (0.14   $ (0.19   $ (0.20   $ (0.17

Per share amounts for the quarters may not add to the annual amount due to differences in the weighted average common shares outstanding during the periods.

17. Subsequent Events

In July 2012, the Company issued 6,154,000 shares of common stock and raised $18.8 million, net of issuance costs, through an underwritten registered public offering. The Company intends to use the proceeds from the public offering to fund the continued development and supply of its diversified portfolio of injectable drug delivery systems, to purchase and operate capital equipment, to expand production and for working capital and other general corporate purposes.

 

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”)) as of the end of the period covered by this Annual Report on Form 10-K. Our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective insofar as they are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and they include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm is included in Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control

There has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d — 15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

None.

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item 10 regarding directors and corporate governance is incorporated by reference to our definitive proxy statement for our 2012 Annual Meeting of Stockholders (the “2012 Proxy Statement”) under the headings “Election of Directors” and “Information on our Board of Directors and Corporate Governance”. Information regarding directors and executive officers is set forth in Item 1 of Part I of this Report under the caption “Directors and Executive Officers.”

 

Item 11. Executive Compensation

The information required by this Item 11 is incorporated by reference to the 2012 Proxy Statement under the headings of “Executive Compensation” and “Director Compensation”.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Except as set forth below, the information required by Item 12 is incorporated by reference to the 2012 Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management,” and “Equity Compensation Plan Information.”

 

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Table of Contents

ASX-Required Disclosure

Corporations Act 2001 (Cth)

We are not subject to Chapters 6, 6A, 6B and 6C of the Corporations Act dealing with the acquisition of our shares (in particular, relating to substantial shareholdings and takeovers).

Under the Delaware General Corporation Law, we are generally permitted to purchase or redeem our outstanding shares out of funds legally available for that purpose without obtaining stockholder approval, provided that (i) our capital is not impaired; (ii) such purchase or redemption would not cause our capital to become impaired; (iii) the purchase price does not exceed the price at which the shares are redeemable at our option and (iv) immediately following any such redemption, we shall have outstanding one or more shares of one or more classes or series of stock, which shares shall have full voting powers. Our certificate of incorporation does not create any further limitation on our purchase or redemption of our shares.

Australian Disclosure Requirements

In addition to our primary listing on Nasdaq, our shares of common stock are also quoted in the form CHESS Depositary Interests (CDIs) on the Australian Securities Exchange (ASX) and trade under the symbol “UNS”. As part of our ASX listing, we are required to comply with various disclosure requirements as set out under the ASX Listing Rules. The following information is intended to comply with the ASX Listing Rules and is not intended to fulfill information required by this Annual Report on
Form 10-K.

Comparative Performance Graph

The performance graph shown below compares the change in cumulative total stockholder return of Unilife Corporation’s Chess Depository Interest (CDI), the ASX All Ordinaries Index and the S&P/ASX 200 Health Care Index for the five year period ended June 30, 2012. The graph sets the beginning value of shares of CDIs and the indices at $100, and assumes that all quarterly dividends were reinvested at the time of payment. This graph does not forecast future performance of shares of the Company’s common stock or CDIs.

 

LOGO

 

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Distribution of Common Stock and CDI Holders as of September 5, 2012

 

     Common Stock      CDIs  
            Number of         
     Number of      Shares of      Number of      Number of  
     Holders      Common Stock      Holders      CDIs  

1 — 1,000

     151         61,697         1,381         721,312   

1,001 — 5,000

     61         136,791         2,376         6,897,076   

5,001 — 10,000

     17         112,376         1,180         9,401,256   

10,001 — 100,000

     29         1,055,777         2,552         82,779,901   

100,001 — and over

     5         80,489,438         456         153,597,225   
  

 

 

    

 

 

    

 

 

    

 

 

 
     263         81,856,079         7,945         253,396,770   
  

 

 

    

 

 

    

 

 

    

 

 

 

The number of stockholders holding less than a marketable parcel of shares was 1,011 as of September 5, 2012.

There is no current on-market buy-back of the Company’s securities.

Twenty Largest CDI Holders as of September 5, 2012

 

Rank

 

Name

   Number of
CDIs Held
     % of CDIs
Outstanding
 
1.   National Nominees Limited      5,206,544         2.05   
2.   Penila Investments Pty Ltd <Hornung Superannuation A/C>      3,941,912         1.56   
3.   Joseph Kaal      3,532,059         1.39   
4.   Admark Investments Pty Ltd <JS Pinto Super Fund A/C>      3,466,099         1.37   
5.   JP Morgan Nominees Australia Limited      3,424,030         1.35   
6.   Mr. Bradley Gavin Downes      3,034,169         1.20   
7.   Torsby Pty Ltd <Bosnjak Family S/F A/C>      2,746,230         1.08   
8.   Thorley Management Pty Ltd <Thorley Investment A/C>      2,270,897         0.90   
9.   Omah Nominees Pty Ltd <The PJH A/C>      2,017,645         0.80   
10.   Mr. Peter Marcus Barr + Mrs Kay Ellen Barr <Regnal Super Fund A/C>      1,971,000         0.78   
11.   RBC Investor Services Australia Nominees Pty Limited <GSAM A/C>      1,950,734         0.77   
12.   JP Morgan Nominees Australia Limited <Cash Income A/C>      1,873,475         0.74   
13.   Mr. Dennis John Banks <The Banks Family A/C>      1,714,571         0.68   
14.   UBS Nominees Pty Ltd      1,668,414         0.66   
15.   J & N Kaal Pty Ltd <Kaal Superfund A/C>      1,585,365         0.63   
16.   Mr. Alan Shortall      1,420,560         0.56   
17.   Mr. Dennis Banks + Mrs. Janine Banks <Banks Super Fund A/C>      1,413,034         0.56   
18.   Hertogs Investments Pty Limited      1,400,000         0.55   
19.   KAS Investments & Development Pty Ltd <KAS Investments S/F A/C>      1,208,740         0.48   
20.   Citicorp Nominees Pty Limited      1,172,881         0.46   
    

 

 

    

 

 

 

Total

     47,018,359         18.57   
    

 

 

    

 

 

 

General Information

The name of the Company Secretary is Mr. J. Christopher Naftzger.

The complete mailing address, including zip code, of our principal executive offices is 250 Cross Farm Lane, York, Pennsylvania 17406.

The address of the principal registered office in Australia is 1 Chifley Square, Sydney NSW 2000 and our telephone number there is +61 2 8346 6500. The ASX Liaison Officer is Mr. Jeff Carter.

Registers of securities are held at Computershare Investor Services Pty Limited, Level 2, 45 St Georges Terrace Perth WA 6000 Australia, Investor Enquiries +61 8 9323 2000 (within Australia) +61 3 9415 4677 (outside Australia).

 

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Voting Rights

Unilife’s by-laws provide that each stockholder has one vote for every share of common stock entitled to vote held of record by such stockholder and a proportionate vote for each fractional share of stock entitled to vote so held, unless otherwise provided by Delaware General Corporation Law or in the certificate of incorporation. Holders of restricted stock awards have the same voting rights as holders of shares of common stock.

If holders of CDIs wish to attend Unilife’s general meetings, they will be able to do so. Under the ASX Listing Rules, Unilife, as an issuer of CDIs, must allow CDI holders to attend any meeting of the holders of the underlying securities unless relevant U.S. law at the time of the meeting prevents CDI holders from attending those meetings.

In order to vote at such meetings, CDI holders have the following options:

(a) instructing CDN, as the legal owner, to vote the Unilife Shares underlying their CDIs in a particular manner. The instruction form must be completed and returned to Unilife’s share registry prior to the meeting;

(b) informing Unilife that they wish to nominate themselves or another person to be appointed as CDN’s proxy for the purposes of attending and voting at the general meeting;

(c) converting their CDIs into a holding of Unilife shares prior to the record date for the meeting and voting these at the meeting (however, if thereafter the former CDI holder wishes to sell their investment on ASX, it would be necessary to convert Unilife Shares back to CDIs).

As holders of CDIs will not appear on Unilife’s share register as the legal holders of Unilife Shares, they will not be entitled to vote at a Unilife stockholder meetings unless one of the above steps is undertaken.

CDI Voting Instruction Forms and details of these alternatives will be included in each notice of meeting sent to CDI holders by Unilife.

Holders of options and phantom stock units are not entitled to vote.

Australian Corporate Governance Statement

The Board of Directors and employees of Unilife Corporation (“Unilife” or the “Company”) are committed to developing, promoting and maintaining a strong culture of good corporate governance and ethical conduct.

The Board of Directors confirms that the Company’s corporate governance framework is generally consistent with the Australian Securities Exchange’s (“ASX”) Corporate Governance Council’s “Corporate Governance Principles and Recommendations (2nd Edition)” (“ASX Governance Recommendations”), other than as set out below. To this end, the Company provides below a review of its governance framework using the same numbering as adopted for the Principles as set out in the ASX Governance Recommendations.

Copies of the Company’s charters, codes and policies may be downloaded from the corporate governance section of the Unilife website (www.unilife.com).

The Company redomiciled to the United States in January 2010 and listed on Nasdaq in February 2010. As a result and to meet Nasdaq listing requirements, the policies and practices adopted by the Company are predominantly “U.S.-focused”.

Principle 1 — Lay solid foundations for management and oversight

Recommendation 1.1 — Establish the functions reserved to the board and those delegated to senior executives and disclose those functions

The primary responsibility of:

(a) the Board of Directors is to exercise their business judgment to act in what they reasonably believe to be in the best interests of the Company and its stockholders; and

(b) the Chief Executive Officer is to oversee the day-to-day performance of Unilife (pursuant to Board delegated powers).

 

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The Board’s responsibilities are recognized and documented on an aggregated basis via the Charter of the Board of Directors, which is available on the corporate governance section of the Company’s website.

While day-to-day management has been delegated to the Chief Executive Officer, it is noted that the following matters are specifically reserved for the attention of the Board:

(a) providing input into and final approval of management’s development of corporate strategy and performance objectives;

(b) reviewing, ratifying and monitoring systems of risk management and internal control, codes of conduct, and legal compliance;

(c) ensuring appropriate resources are available to senior executives;

(d) approving and monitoring the progress of major capital expenditure, capital management and acquisitions and divestments; and

(e) approving and monitoring financial and other reporting.

Recommendation 1.2 — Disclose the process for evaluating the performance of senior executives

Information regarding executive compensation required by Item 11 of Form 10-K, including a discussion in relation to the mechanics concerning the evaluation of performance of the Company’s senior executives, including relevant benchmarking activities, will be contained in the 2012 Proxy Statement under the caption “Executive Compensation,” and is incorporated by reference.

Recommendation 1.3 — Disclosure of information under Principle 1 of the ASX Governance Recommendations

Reporting Requirement

The Company fully complied with Recommendation 1.1 to 1.3 during the fiscal year ended June 30, 2012.

Principle 2 — Structure the Board to add value

Recommendation 2.1 — A majority of the board should be independent directors

Recommendation 2.2 — The chair should be an independent director

Recommendation 2.3 — The roles of Chairman and Chief Executive Officer should not be exercised by the same individual

The Board of Directors is currently comprised of seven directors. The seven directors include six non-executive directors (including the Chairman of the Board) and one executive director (being the Chief Executive Officer) with the role of Chairman and Chief Executive Officer being exercised by different individuals. Five of the six non-executive directors are “independent” as defined in the Nasdaq listing rules.

At the Company’s expense, the Board collectively or directors (acting as individuals) are entitled to seek advice from independent external advisers in relation to any matter which is considered necessary to fulfill their relevant duties and responsibilities. Individual directors seeking such advice must obtain the approval of the Chairman. Any advice so obtained will be made available to the Board.

 

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Recommendation 2.4 — The board should establish a nomination committee

The Company has established a Nominating and Corporate Governance Committee which consists of all independent directors (including the Chairman of the Nominating and Corporate Governance Committee).The members of the Nominating and Corporate Governance Committee are Mr. Bosnjak, Mr. Lund, Mr. Galle and Mr. Firestone (Chair). A copy of the Nominating and Corporate Governance Committee Charter is available on the corporate governance section of the Company’s website.

Reporting Requirement

The Company fully complied with Recommendation 2.1 to 2.4 during the fiscal year ended June 30, 2012.

Recommendation 2.5 — Disclose the process for evaluating the performance of the Board, its committees and individual directors

Reporting Requirement

In connection with its upcoming 2012 Proxy Statement, the Corporate Governance & Nominating Committee has undertaken a formal review of the performance of the Board, its committees and individual directors, which will be completed prior to the nomination of the slate of the board of directors for the upcoming proxy.

Recommendation 2.6 — Disclosure of information under Principle 2 of the ASX Governance Recommendations

Reporting Requirement

Information regarding our directors, including biographical information and share ownership information required by Items 10 and 12 of Form 10-K will be included in the 2012 Proxy Statement under the captions “Election of Directors” and “Security Ownership of Certain Beneficial Owners and Management.”

Principle 3 — Promote ethical and responsible decision-making

Recommendation 3.1 — Establish a Code of Conduct and disclose it.

The Company has adopted a Code of Business Conduct and Ethics which is available on the corporate governance section of the Company’s website.

Recommendation 3.2 — Establish a policy concerning diversity and disclose it. The policy should include requirements for the Board to establish measurable objectives for achieving gender diversity and for the Board to assess annually both the objectives and progress in achieving them.

The Board of Directors has adopted a Diversity Policy which includes the responsibility to establish appropriate and measurable diversity objectives and for the Board to assess regularly the overall effectiveness of the objectives and annually review the progress in achieving the diversity objectives.

Recommendation 3.3 — Disclosure of measurable objectives for achieving gender diversity set by the Board in accordance with the Diversity Policy and progress towards achieving them.

During the year ended June 30, 2012, the Board of Directors adopted a Diversity Policy. Diversity at Unilife signifies not only a blend of races, genders, ages, ethnicities, religions, cultural backgrounds, languages, social backgrounds and military service but also a range of experiences, perspectives, skill sets, capabilities and thought. The Board, with the assistance of the Nominating and Governance Committee and management, intends to use 2012 data as a baseline to establish and measure diversity objectives for 2013 and beyond.

Recommendation 3.4 — Disclosure of the proportion of women employees in the whole organization, women in senior executive positions and women on the Board

Unilife is committed to driving diversity across all levels of the Company. As of June 30, 2012, women represented approximately 37% (47 of 127) of the total employee base, 18% (3 of 17) of the executive management and 14% (1 out of 7) of the Board of Directors.

 

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Recommendation 3.5 — Disclosure of information under Principle 3 of the ASX Governance Recommendations

Reporting Requirement

The Company fully complied with Recommendation 3.1 to 3.5 during the fiscal year ended June 30, 2012.

Principle 4 — Safeguard integrity in financial reporting

Recommendation 4.1 — The Board should establish an Audit Committee

Recommendation 4.2 — The Audit Committee should: (a) consist of non-executive directors only; (b) consist of a majority of independent directors; (c) be chaired by an independent chair who is not chair of the Board; and (d) have at least three members

Recommendation 4.3 — The Audit Committee should have a formal charter

The Company has established an Audit Committee which consists only of non-executive directors all of whom are independent (including the Chairman of the Audit Committee). The members of the Audit Committee are Mr. Bosnjak, Mr. Lund (Chair) and Ms. Wold.

The Audit Committee Charter is available on the corporate governance section of the Company’s website.

Reporting Requirement

The Company fully complied with Recommendation 4.1 to 4.3 during the fiscal year ended June 30, 2012.

Recommendation 4.4 — Disclosure of information under Principle 4 of the ASX Governance Recommendations

Reporting Requirement

Information regarding the skills, experience and expertise of directors, including audit committee members in accordance with U.S disclosure requirements, will be included in the 2012 Proxy Statement.

In Item 9A of this Annual Report on Form 10-K, we have disclosed information regarding the Company’s Controls and Procedures, including management’s evaluation of the effectiveness of our disclosure controls and procedures and management’s evaluation of the effectiveness of our internal control over financial reporting.

Principle 5 — Make timely and balanced disclosure

Recommendation 5.1 — Establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies

Recommendation 5.2 — Disclosure of information under Principle 5 of the ASX Governance Recommendations

Unilife is committed to providing timely and balanced disclosure to the market and, in consequence, to meeting its continuous disclosure requirements. The Company established a Disclosure Committee for the purpose of ensuring significant matters requiring public disclosure are communicated to management and disclosed in a timely manner.

In accordance with its commitment to fully comply with its continuous disclosure requirements, the Company has adopted a Continuous Disclosure Policy, together with other internal mechanisms and reporting requirements.

Reporting Requirement

The Company fully complied with Recommendation 5.1 and 5.2 during the fiscal year ended June 30, 2012.

 

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Principle 6 — Respect the rights of shareholders

Recommendation 6.1 — Design a communications policy for promoting effective communication with shareholders and encourage their participation at stockholder’s meetings and disclose those policies

Recommendation 6.2 — Disclosure of information under Principle 6 of the ASX Governance Recommendations

While the Company has not adopted a formal communications policy as recommended under Recommendation 6.1, the Company communicates information to shareholders through a range of media including annual reports, public (ASX and SEC) announcements and via the Company’s website. Key financial information and stock performance are also available on the Company’s website. Shareholders can raise questions with the Company by contacting the Company via telephone, facsimile, post or email, with relevant contact details being available on the Company’s website.

All shareholders are invited to attend the Company’s Annual Meeting of Stockholders, either in person or by proxy. The Board regards the Annual Meeting as an excellent forum in which to discuss issues relevant to the Company and thereby encourages full participation by shareholders. Shareholders have an opportunity to submit questions to the Board and the Company’s auditors. The meeting is also webcast to provide access to those shareholders who are unable to attend the Annual Meeting.

Reporting requirement

Save as set out above, the Company fully complied with Recommendation 6.1 and 6.2 for the fiscal year ended June 30, 2012.

Principle 7 — Recognize and manage risk

Recommendation 7.1 — Establish policies for the oversight and management of material business risks and disclose it

The risks that the Company faces are continually changing in line with the development of the Company. The primary risks faced by the Company during the fiscal year ended June 30, 2012 included liquidity or funding risk and operational risks associated with the finalization of the Company’s industrialization of its Unifill syringe.

The Company operates in an environment where it is required to actively manage fundamental risks such as the integrity of the Company’s intellectual property portfolio, disaster management, exchange rate risk and the risk of losing key management personnel.

In simple terms, risk is inherent in all business activities undertaken by Unilife. Unfortunately, many of these risks are beyond the control of the Company and, as such, it is important that risk be mitigated on a continuous basis, particularly if the Company is to preserve shareholder value.

The Board of Directors has approved a Risk Management Policy, which is designed to ensure that risks including, amongst others, technology risks, economic risks, financial risks and other operational risks are identified, evaluated and mitigated to enable the achievement of the Company’s goals.

Reporting requirement

The Company fully complied with Recommendation 7.1 for the fiscal year ended June 30, 2012.

Recommendation 7.2 — Require management to design and implement the risk management and internal control system to manage the Company’s material business risks and report to it whether those risks are being managed effectively (and makes disclosures therein); Disclose that management has reported to the Board as to the effectiveness of the Company’s management of its material business risks

Management provides the Board with frequent (i.e. generally monthly) updates on the state of the Company’s business, including the risks that the Company faces from time-to-time. This update includes up-to-date financial information, operational activity, clinical status and competitor updates. These updates are founded on internal communications that are fostered internally through weekly management meetings and other internal communications. These processes operate in addition to the Company’s Quality System, complaint handling processes, employee policies and standard operating procedures.

 

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The Risk Management Policy also requires that, the Chief Executive Officer and the Chief Financial Officer will, at least on an annual basis, provide written assurances to the Board in writing that:

 

   

all assurances given by management in respect of the integrity of financial statements are founded on sound systems of risk management and internal compliance and control which implements the policies adopted by the Board; and

 

   

the Company’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects.

In addition, the Board of Directors holds regular meetings for the purposes of discussing and reviewing operational developments.

The Company fully complied with Recommendation 7.2 for the fiscal year ended June 30, 2012.

Recommendation 7.3 — Disclose whether the Board has received assurance from the Chief Executive Officer and the Chief Financial Officer that the declaration under Section 295A of the Corporations Act is founded on a sound system of risk management and internal control and is operating effectively in all material respects in relation to financial reporting risks

Reporting requirement

As the Company prepares and files its financial statements under U.S. accounting practices and laws, management is required to provide representations to the Board on a wide range of issues, including in relation to the effectiveness of the Company’s disclosure controls and procedures as well as the design or operation of internal control over financial reporting. However, as the Company is incorporated in the US and is not bound by certain financial reporting provisions under the Australian Corporations Act 2001 (Cth) no declaration is required under Section 295A of the Corporations Act. To this end, shareholders’ attention is drawn to Item 9A. of this Annual Report on Form 10-K and the certifications provided by the Chief Executive Officer and the Chief Financial Officer at the end of the Form 10-K. As stated above, Item 9A of this Annual Report on Form 10-K discloses information regarding the Company’s controls and procedures, including management’s evaluation of the effectiveness of our disclosure controls and procedures and management’s evaluation of the effectiveness of our internal control over financial reporting.

For the reasons stated above, the Company has complied with Recommendation 7.3 for the fiscal year ended June 30, 2012.

Recommendation 7.4 — Disclosure of information under Principle 7 of the ASX Governance Recommendations

Reporting requirement

Except as disclosed above, the Company believes that the aforementioned reporting meets, or exceeds, the requirements of Recommendation 7.2 to 7.4 for the fiscal year ended June 30, 2012.

Principle 8 — Remunerate fairly and responsibly

Recommendation 8.1 — Establish a Remuneration Committee

The Company has established a Compensation Committee which consists of solely independent directors (including the Chairman of the Compensation Committee). The members of the Compensation Committee are Mr. Bosnjak (Chair), Mr. Galle and Mr. Lund. A copy of the Compensation Committee Charter is available on the corporate governance section of the Company’s website.

Recommendation 8.2 — Clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives

As noted above in the discussion regarding Recommendation 1.2, Item 11 of this Annual Report on Form 10-K includes disclosure relating to the structure of non-executive director’s, executive director’s and senior executives remuneration practices and policies, including its annual performance review process, its external benchmarking review and its meritorious approach to employee performance.

 

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Reporting requirement

As previously disclosed no review or other form of assessment has been undertaken in relation to the directors.

Recommendation 8.3 — Disclosure of information under Principle 8 of the ASX Governance Recommendations

With the exception noted above, the Company complied with the Recommendation 8.1 to 8.3 during the year ended June 30, 2012.

This report is made in accordance with a resolution of the Board of Directors.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item 13 is incorporated by reference to the 2012 Proxy Statement under the headings “Information on our Board of Directors and Corporate Governance” and “Certain Relationships and Related Party Transactions.”

 

Item 14. Principal Accounting Fees and Services

The information required by this Item 14 is incorporated into this report by reference to the 2012 Proxy Statement under the heading “Ratification of Appointment of the Independent Registered Public Accounting Firm.”

PART IV

 

Item 15. Exhibits and Financial Statement Schedules

(a) Documents filed as part of this report:

(1) Financial Statements

The financial statements required by this Item 15 are set forth in Part II, Item 8 of this report.

(b) Exhibits. The following Exhibits are filed as a part of this report:

 

Exhibit         Included    Incorporated by Reference Herein

No.

  

Description of Exhibit

   Herewith    Form    Exhibit    Filing Date
2.1    Amended and Restated Merger Implementation Agreement dated as of September 1, 2009 between Unilife Medical Solutions Limited and Unilife Corporation       10    2.1    February 11, 2010
2.2    Share Purchase Agreement among Unilife Medical Solutions Limited, Edward Paukovits, Jr., Keith Bocchicchio, and Daniel Adlon dated as of October 25, 2006 and amended as of September 26, 2007       10    2.2    January 6, 2010
3.1    Certificate of Incorporation of Unilife Corporation       10    3.1    November 12, 2009
3.2    Amended and Restated Bylaws of Unilife Corporation       8-K    3.1    August 17, 2010
4.1    Form of Common Stock Certificate       10    4.1    November 12, 2009
10.1    Exclusive Agreement dated as of June 30, 2008 between Unilife Medical Solutions Limited and Sanofi Winthrop Industrie       10    10.1    November 12, 2009
10.2*    First Amendment dated as of June 29, 2009 to Exclusive Agreement dated as of June 30, 2008 between Unilife Medical Solutions Limited and Sanofi Winthrop Industrie       10    10.2    November 12, 2009
10.3*    Industrialization Agreement dated as of June 30, 2009 between Unilife Medical Solutions Limited and Sanofi Winthrop Industrie       10    10.3    February 6, 2010

 

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Exhibit         Included    Incorporated by Reference Herein

No.

  

Description of Exhibit

   Herewith    Form    Exhibit    Filing Date
10.4    Business Lease, dated as of August 17, 2005, between Integrated BioSciences, Inc. and AMC Delancey Heartland Partners, L.P.       10    10.4    November 12, 2009
10.5    Agreement dated as of September 15, 2003 between Integrated BioSciences, Inc. and B. Braun Medical, Inc. and amendments thereto       10    10.5    February 1, 2010
10.6    Promissory Note, dated as of December 30, 2005 between Integrated BioSciences, Inc. and Commerce Bank       10    10.6    November 12, 2009
10.7    Promissory Note, dated as of August 25, 2006 between Integrated BioSciences, Inc. and Commerce Bank       10    10.7    November 12, 2009
10.8    Employment Agreement, dated as of October 26, 2008 between Unilife Medical Solutions Limited and Alan Shortall       10    10.8    November 12, 2009
10.9    Employment Agreement, dated as of February 15, 2005 between Unilife Medical Solutions Limited and Jeff Carter       10    10.9    November 12, 2009
10.10    Employment Agreement, dated as of November 10, 2009 between Unilife Medical Solutions, Inc. and Daniel Calvert       10    10.10    November 12, 2009
10.11    Employment Agreement, dated as of November 10, 2009 between Unilife Medical Solutions, Inc. and Bernhard Opitz       10    10.11    November 12, 2009
10.12    Employment Agreement, dated as of November 10, 2009 between Unilife Medical Solutions, Inc. and Mark Iampietro       10    10.12    November 12, 2009
10.13    Employment Agreement, dated as of November 10, 2009 between Unilife Medical Solutions, Inc. and Stephen Allan       10    10.13    November 12, 2009
10.14    Employment Agreement, dated as of November 10, 2009 between Unilife Medical Solutions, Inc. and Eugene Shortall       10    10.14    November 12, 2009
10.15    Consulting Agreement, dated as of January 22, 2009 between Unilife Medical Solutions Limited and Joblak Pty Ltd       10    10.15    November 12, 2009
10.16    Deed of Mutual Release, dated January 12, 2009 between Unilife Medical Solutions Limited and Jeff Carter       10    10.16    November 12, 2009
10.17    Unilife Corporation Employee Stock Option Plan       10    10.17    November 12, 2009