UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

Commission File Number 001-34540

 

UNILIFE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Registrant’s telephone number, including area code (717) 938-9323

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

 

 

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 o     No þ

 

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 o     No þ

 

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 þ     No o

 

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 o     No o

 

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.  þ

 

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):

 

(Do not check if a 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 o     No þ

 

The aggregate market value of the common equity held by non-affiliates of the registrant as of December 31, 2009, the last business day of the registrant’s most recently completed second fiscal quarter was $255.8 million, computed by reference to the closing sale price of the ordinary shares of our predecessor, Unilife Medical Solutions Limited as of December 31, 2009, as reported on the Australian Securities Exchange. Our common stock was not listed in the United States as of December 31, 2009. For purposes of the foregoing calculation only, the registrant has assumed that all officers and directors of the registrant are affiliates.

 

As of September 15, 2010, there were 55,230,454 shares of registrant’s common stock outstanding.

 

 

UNILIFE CORPORATION

FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2010

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 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.”

 

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.

 

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.

 

 

Overview

 

We are a U.S. based medical device company focused on the design, development, manufacture and supply of a proprietary range of retractable syringes. Primary target customers for our products include pharmaceutical manufacturers, suppliers of medical equipment to healthcare facilities, and distributors to patients who self-administer prescription medication. All of our syringes incorporate automatic and fully-integrated safety features which are designed to protect those at risk of needlestick injuries and other unsafe injection practices. Our main product will be the Unifill ready-to-fill syringe, which is designed to be supplied to pharmaceutical manufacturers in a form that is ready for filling with an injectable drug or vaccine. We have a strategic partnership with sanofi-aventis, a large global pharmaceutical company, pursuant to which it has paid us a 10.0 million euro exclusivity fee (exclusive licensing agreement) and has paid us 15.0 million euros and committed to pay us up to an additional 2.0 million euros to fund our industrialization program for the Unifill syringe. Upon the scheduled completion of the industrialization program, we expect to commence the supply and sale of the Unifill syringe to sanofi-aventis. We are also in discussions with other pharmaceutical companies that are seeking to obtain access to the Unifill syringe. In addition, we manufacture and market our Unitract 1mL syringes at our FDA-registered manufacturing facility in Lewisberry, Pennsylvania.

 

In the United States and a number of other sophisticated healthcare markets, hospitals and other healthcare facilities, as well as pharmaceutical manufacturers who supply injectable drugs and vaccines in a prefilled syringe format, are increasingly required to comply with legislation aimed at protecting healthcare workers from the risk of acquiring blood-borne diseases such as HIV and hepatitis C via needlestick injuries. Our core portfolio of safety syringe products, including the Unifill syringe and the Unitract 1mL syringes, are primarily designed for supply to pharmaceutical manufacturers and healthcare facilities which are seeking to comply with these needlestick prevention laws. We expect our products will also be used by patients who self-administer prescription medication outside of the healthcare setting. The safety features incorporated into our products include an automatic needle retraction mechanism which allows operators to control the rate of needle withdrawal directly from the body into the barrel of the syringe, as well as an independent auto-disable mechanism to prevent product tampering or re-use. The integration of these safety features within the barrel is designed to make them intuitive to use and compact in size for convenient handling and disposal.

 

The Unifill syringe is targeted for use by pharmaceutical manufacturers who utilize pre-filled (ready-to-fill) syringes as a preferred drug delivery device for injectable drugs and vaccines. We are aware of more than 50 drug products used within healthcare facilities, or by patients who self-administer prescription medication, that are currently available in a prefilled syringe format. We have designed the Unifill syringe for integration into the manufacturing systems currently used by target pharmaceutical customers to fill and package equivalent standard prefilled syringes. To our knowledge, our Unifill product is the only known prefilled syringe with automatic safety features which are integrated inside the glass barrel.

 

Pursuant to the exclusive licensing agreement, we have negotiated a list of therapeutic drugs classes including antithrombotic agents and vaccines with respect to which sanofi-aventis has the exclusive right to the product until June 2014, during which sanofi-aventis would purchase the product exclusively from us. We have retained the right to negotiate other business arrangements with additional pharmaceutical companies seeking to market the product for use within therapeutic drug classes outside of those exclusive to sanofi-aventis, or after the expiration of the exclusive license with sanofi-aventis.

 

We have received payments of 15.0 million euros under the industrialization agreement from October 2008 through September 2010 following the completion of designed milestones under the industrialization program. Although we have received the exclusivity fee and industrialization payments from sanofi-aventis, to date we have not received any product revenues from sales of the Unifill syringe, and our revenues in respect of this product to date consist solely of the exclusivity fee and industrialization payments. We expect to be in a position to commence the commercial supply and sale of the Unifill syringe to pharmaceutical customers upon the completion of the industrialization program. We describe our arrangements with sanofi-aventis in more detail under “Strategic

Partnership with sanofi-aventis.” We are also aware of more than 20 other pharmaceutical companies that supply injectable drugs in a prefilled syringe format, and we have received interest in the Unifill syringe from a number of these companies.

 

Our Unitract 1mL syringes are designed primarily for use in healthcare facilities and by patients who self-administer prescription medication such as insulin. We have recently begun U.S. production of this syringe, which we expect to release commercially within various international territories where we have obtained regulatory clearance during 2010. During March 2010, we signed an exclusive five year agreement with Stason Pharmaceuticals, a U.S.-based pharmaceutical company, to market our Unitract 1mL syringe in Japan, China and Taiwan. Under the agreement, Stason is required to purchase a minimum of 1.0 million units of the Unitract 1mL syringe per year during the term of the contract. Other distribution agreements relating to the Unitract 1mL syringes have been signed with companies in India and Canada. We have received regulatory clearance for the marketing and sale of Unitract product variants including an insulin and tuberculin (TB) format in the United States, the European Union, Canada and Australia.

 

We have also filed patents for other clinical and prefilled safety syringe products that may incorporate certain aspects of our core technology for future commercialization. Our in-house team has fully designed, developed, built and validated, to the requirements of the U.S. Food and Drug Administration (FDA) and ISO 13485, the automated assembly system that we use to support production of our Unitract 1mL syringe at our FDA-registered manufacturing facility in Lewisberry, Pennsylvania. We consider our ability to design and develop highly sophisticated, innovative medical devices, and the automated assembly systems we use to manufacture them, to be a core business competency.

 

We also have an original equipment manufacturer relationship with B. Braun Medical, Inc., a multinational healthcare equipment company. We refer to this as our contract manufacturing business. Under our contract with B. Braun, we assemble a selection of their non-proprietary specialty syringes. We purchase the pre-manufactured syringe components from various third party suppliers. We then assemble the syringes on a build to order basis and perform the related quality inspections and then sell the assembled product to B. Braun. We ship the stock that we assemble to B. Braun for its own commercial use, in areas such as insertion into specialty procedural kits. During the year ended June 30, 2010, we recognized revenues of $2.5 million under our contact with B. Braun, which represented 22% of our total revenues during that year. The contract manufacturing business was historically operated by Integrated BioSciences, Inc. which we acquired in January 2007. We are currently concentrating substantially all of our commercial and operational efforts towards the commercialization of our proprietary range of safety syringes. We expect to complete contract manufacturing activities with B. Braun by December 2010.

 

Market Opportunity

 

The Syringe Market and the Increasing Use of Pre-Filled Syringes

 

According to the International Association of Safe Injection Technology, approximately 35 billion syringes are manufactured every year, half of which are used within sophisticated healthcare markets such as North America, Europe, Japan and Australia. The majority of therapeutic injections occur within healthcare facilities such as acute-care hospitals and long-term care centers. Other sectors of the global syringe market include patients who self-administer prescription medication such as insulin, government agencies which sponsor harm reduction programs, and non-government organizations which conduct vaccination programs.

 

Injectable drugs and vaccines have traditionally been supplied in a vial or ampoule, with the operator required to draw up a measured dose of medication into a conventional plastic syringe immediately prior to an injection. Prefilled syringes typically utilize a glass barrel and are filled by pharmaceutical manufacturers so that they are ready for use prior to shipment. While conventional syringes make up the vast majority of syringes used, prefilled syringes are becoming an increasingly popular method of drug delivery.

 

We are aware of more than 50 drugs and vaccines that are currently available in a prefilled syringe format from more than 20 pharmaceutical companies, and believe that a number of pipeline drugs are likely to be supplied in this format in the future. Greystone Associates, a medical and health care technology consulting firm, has estimated that approximately 2.54 billion prefilled syringes will be used globally in 2010, and that this number will increase

significantly in the coming years. Drugs that are currently supplied in a prefilled syringe format include anti-coagulants to prevent and treat thrombosis, anti-inflammatories to treat rheumatoid arthritis, anti-infectives to treat hepatitis B and C, hematological drugs to stimulate production of red or white blood cells to treat anemia or fight infection, and vaccines which seek to prevent a range of diseases. We expect that prefilled syringes will also be increasingly used in the coming years as a drug delivery device for other therapeutic drug classes including obstetrics, oncology, osteoporosis and human growth hormone treatment.

 

Prefilled syringes have a number of advantages over conventional plastic syringes. First, prefilled syringes help pharmaceutical companies improve manufacturing efficiencies through the elimination of drug wastage commonly associated with the overfilling of multi-use vials. Second, healthcare workers often prefer prefilled syringes because they can facilitate a relatively fast, accurate and convenient administration of a drug. Furthermore, a pre-measured dose of an injectable drug in a prefilled syringe can help reduce the risk of dosing errors. Finally, the relative ease-of-use by patients of prefilled syringes also makes them suitable for the self-administration of many types of prescription medication.

 

Increased Focus on Prevention of Needlestick Injuries

 

The World Health Organization estimates that 1.3 million people die each year as a result of unsafe injection practices, which can include syringe re-use and needlestick injuries. Unsafe injection practices can result in the transmission of a number of blood-borne diseases such as HIV/AIDS and hepatitis C. The U.S. Centers for Disease Control and Prevention estimates that 385,000 needlestick and other sharps-related injuries are sustained by U.S. hospital-based healthcare personnel each year. The U.S. Occupational Safety and Health Administration, or OSHA, estimates that when other secondary healthcare settings are also taken into account, there are as many as 800,000 needlestick injuries to U.S. healthcare workers each year. To help minimize the transmission of blood-borne pathogens caused by unsafe injection practices, many international healthcare and pharmaceutical markets are transitioning to the mandatory use of safety syringes.

 

In sophisticated healthcare markets, governments are focused on the mandatory use of safety devices within healthcare facilities to protect healthcare workers from the risk of acquiring blood-borne pathogens via needlestick injuries. The United States was the first nation to mandate the use of safety syringes and other safety-engineered medical devices within healthcare facilities, with the adoption of the Federal Needlestick Prevention Act in 2000, or FNSPA, and the subsequent revision to the Bloodborne Pathogens Standard (BPS). According to the International Healthcare Worker Safety Center Institute at the University of Virginia Health System, approximately one in five healthcare facilities that were inspected by OSHA between 2002 and 2007 have been issued with citations for non-compliance with the BPS.

 

The European Union also introduced a directive in March 2010 requiring member countries to introduce laws requiring the use of needlestick prevention products within healthcare facilities within three years. Other countries such as Canada and Australia have also taken steps to encourage the use of safety syringes. As a result of this existing and proposed legislation, safety syringes are now commonly used within the healthcare facilities in a number of countries.

 

The United States represents the largest and most mature market for safety syringes, with a substantial majority of hypodermic syringes and needles used within acute-care facilities featuring some type of needlestick prevention device. Notwithstanding the increased use of safety syringes, we believe that current safety syringe technologies are in several respects inadequate to fully protect healthcare workers from infection risk caused by needlestick injuries or other potential transmission modes. First, most products currently available require operators to manually slide an external plastic guard or sheath over the needle after use, or retract the needle into the barrel at a rapid, uncontrolled rate. Second, healthcare workers may choose to remove or not activate the safety feature of some types of safety syringe products. Moreover, activation of the needle retraction mechanism in the open air for some retractable syringes, rather than inside the body of the patient, may create the potential risk of infection via needlestick injuries or aerosol (splatter).

 

OSHA differentiates safety features in two primary ways. First, it differentiates passive safety features which “remain in effect before, during and after use” from active devices which “require the worker to activate the safety mechanism.” Second, OSHA regulations state that products with an “integrated safety design that is an integral part

of the device and cannot be removed” are usually preferred to those with an accessory safety device with safety features that are “external” and “dependent on employee compliance.” We believe the majority of safety syringe products used in U.S. healthcare facilities incorporate active safety features which are not fully integrated within the barrel of the syringe.

 

We are not aware of any prefilled syringe with passive safety features that are integrated within the glass barrel. To improve compliance with legislation such as the FNSPA, a number of pharmaceutical companies attach ancillary safety products onto standard prefilled syringes following dose filling and prior to packaging. We estimate that approximately half of the drugs currently available in prefilled syringe format are supplied by the pharmaceutical manufacturer with some type of ancillary safety device. The majority of these ancillary safety products slide an external plastic sheath or guard over the needle once the injection has been completed.

 

It is costly for pharmaceutical companies to purchase these ancillary safety products and the automated assembly systems required to attach them onto a standard prefilled syringe. The relatively large size of prefilled syringes supplied with an ancillary safety device can also significantly increase the shipment and packaging costs of pharmaceutical companies. Furthermore, some of these prefilled syringes supplied with an ancillary safety device require the removal of the safety device from the syringe prior to use, creating the risk of infection via needlestick injury or aerosol (splatter). Thus, we believe that there is a significant market opportunity for a prefilled syringe with passive and integrated safety features that is compatible with pharmaceutical companies’ drug filling systems.

 

We also believe there are significant market opportunities for the use of conventional and prefilled safety syringes outside of mainstream healthcare facilities. In addition to insulin, a range of other injectable drugs designed for the prevention and/or treatment of chronic or debilitating conditions such as arthritis, multiple sclerosis and osteoporosis and thrombosis are now available for self-administration. We believe the popularity of safety syringes among patients who self-administer prescription medication may increase due to their capacity to prevent needlestick injuries to family members and encourage safe, convenient disposal. When purchased with a prescription, a number of insurance providers in the U.S. now cover safety insulin syringes under the same tier level for reimbursement as standard insulin syringes.

 

We believe that another market which may in the future transition towards the mandatory use of non-reusable safety syringes is the harm reduction market, where governments provide free or subsidized syringes to injecting drug users, or IDUs. The reuse and sharing of syringes by IDUs has been identified as a prime accelerant in the transmission of blood-borne diseases and is responsible for one-third of new HIV infections outside sub-Saharan Africa. The governments of more than 60 countries worldwide now sponsor harm reduction programs which seek to minimize unsafe injection practices by IDUs. While these programs have proven largely effective in preventing or containing HIV epidemics, the continued sharing of standard syringes among IDUs has contributed to the continuation of national epidemics of the relatively more infectious hepatitis C. Furthermore, the unsafe disposal of syringes in public areas creates public concern regarding the risk of needlestick injury. Recognizing the scale of HIV and hepatitis C epidemics, and the substantial economic costs associated with their long-term treatment, many governments are considering the use of single use, safety syringes as a way to enforce safe injection practices among IDUs.

 

Our Solution

 

Our clinical and prefilled safety syringes incorporate automatic, also known as passive, safety features which are fully integrated within the barrel. They are designed to assist pharmaceutical manufacturers and healthcare facilities comply with needlestick prevention laws and to encourage single use and safe disposal practices outside of healthcare settings. We consider the following combination of core proprietary features available in our safety products to be unique within the marketplace:

 

 

 

We have utilized this core proprietary technology to design and develop a range of prefilled and clinical safety syringes. Furthermore, we are not aware of any other company that is manufacturing safety syringes with automatic, integrated safety features in both a prefilled (glass) and clinical (plastic) format which share the same common technology platform.

 

Key target markets for our products include pharmaceutical companies, healthcare facilities and patients who self-administer prescription medication. We believe that the majority of our products would be supplied, either directly or through pharmaceutical customers, for use within sophisticated healthcare markets such as North America, Western Europe and some Asia-Pacific countries that require or are transitioning toward the mandatory use of safety syringes.

 

Business Strategy

 

Our goal is to progressively move to the forefront of the international transition of healthcare and pharmaceutical markets to the mandatory use of prefilled and clinical safety syringes. We believe that the competitive strength of our proprietary technology puts us in a strong position to become an established and preferred supplier of “best-in-class” safety syringe products to pharmaceutical companies, healthcare facilities and patients who self-administer prescription medication.

 

Key elements of our business strategy are the development, production and sale of our patent-protected safety syringes, the continued expansion of our global operational and commercial presence and the establishment of long-term supply relationships with multinational pharmaceutical and healthcare equipment companies. We are committed to designing, developing and supplying innovative medical devices that can help to enhance and save lives. We plan to:

 

 

 

Our Products

 

Unifill syringe

 

The Unifill syringe is a primary drug container with automatic safety features that are fully integrated within the glass barrel. We believe it is the only ready-to-fill, or prefilled, syringe with such integrated safety features. It is supplied to pharmaceutical manufacturers as per standard handling processes, and designed for integration into the fill-finish systems used for equivalent ready-to-fill, or prefilled, syringes. The requirement to separately purchase and attach ancillary safety products onto a standard prefilled syringe after dose filling is eliminated. The Unifill syringe is also similar in size to an equivalent prefilled syringe and significantly smaller than those attached with an ancillary safety product to reduce packaging, transport and storage volumes.

 

As a primary container, all components within the fluid path utilize materials are USP compliant and will be sourced from established pharmaceutical suppliers. The handling and administration of the Unifill syringe is the same as injections undertaken with an equivalent prefilled syringe.

 

Upon the delivery of a full dose, a passive retraction mechanism is activated, whereupon operators may control the speed of needle withdrawal directly from the body into the barrel of the syringe to virtually eliminate the risk of needlestick injury or aerosolization (splatter). The plunger is then automatically disabled to prevent re-exposure, and to facilitate compact, convenient disposal.

 

The Unifill syringe has been designed for therapeutic drugs which are primarily administered via subcutaneous injection and considered to be suitable for use either by healthcare workers or patients that self-administer prescription medication outside of healthcare facilities.

 

We believe the use of the Unifill syringe by a pharmaceutical customer can facilitate compliance with needlestick prevention legislation and reduce production, packaging and transportation costs associated with the purchase and attachment of these ancillary safety devices. The compact size, intuitive use, functionality and automatic safety features of the Unifill syringe may also help pharmaceutical companies extend product lifecycles, increase levels of market differentiation in competitive therapeutic areas, and expand the marketability of some drugs for convenient self-administration by patients outside of the healthcare setting.

 

We intend to file a Type III Drug Master File for the product with relevant regulatory authorities such as the FDA, although it is the ultimate responsibility of the pharmaceutical customer to obtain final approval of the combination drug-delivery device. We expect that the commencement of product sales will coincide with the completion of the industrialization program.

 

Unitract 1mL syringes

 

The Unitract 1mL range of safety syringes is primarily designed for the subcutaneous injection of drugs within healthcare facilities and by patients who self-administer prescription medication such as insulin. In addition to

insulin and tuberculin, or TB, variants, the Unitract 1mL range also includes the Unitract Safe Syringe which is custom-designed for use by governments that utilize harm reduction (needle exchange) programs to prevent the reuse, sharing and unsafe disposal practices of IDUs. Unlike the Unifill ready-to-fill syringe, the Unitract 1mL syringes require healthcare workers or patients to draw up the dose from a vial or ampoule immediately prior to the injection.

 

We have received regulatory certification for the marketing and sale of various Unitract 1mL syringe products in the United States, Australia and Canada and have received CE Mark approval in the European Union. We commenced initial production of Unitract 1mL syringes in China during 2008 to support regulatory approval and marketing activities. In August 2009, we commenced production of the Unitract 1mL syringes at our Pennsylvania facility utilizing an automated assembly system that we designed and built in-house. During April 2010, we received clearance from the FDA to permit us to commence commercial sales of U.S. manufactured stock for our Unitract 1mL Insulin syringe. In September 2010, we received clearance from the FDA for our Unitract TB syringe.

 

Pipeline Products

 

We also hold additional syringe-related intellectual property for products which we intend to commercialize in the future. These pipeline products include a Unitract range of plastic clinical syringes to be developed in larger sizes such as 3mL and 5mL. We believe that commercialization of this pipeline range of larger clinical syringes would further improve our opportunities to market and sell our products within healthcare facilities such as acute-care hospitals. We have also designed and filed patents for a number of other safety syringe products that utilize our proprietary technology. We intend to continue to expand our competitive position within target pharmaceutical and healthcare markets through the commercialization of a number of these other pipeline products.

 

Strategic Partnership with sanofi-aventis

 

We started to collaborate with sanofi-aventis in 2003 for the development of the Unifill syringe as a next-generation drug delivery safety device. Sanofi-aventis 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-aventis is currently the world’s largest purchaser of prefilled syringes.

 

We have signed an exclusive licensing agreement with sanofi-aventis. Under the exclusive licensing agreement, we have granted sanofi-aventis 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-aventis or after the expiration of the exclusive license with sanofi-aventis.

 

We and sanofi-aventis have agreed on a list of therapeutic drug classes that are exclusive to sanofi-aventis. 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-aventis 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-aventis has paid to us a 10.0 million euro upfront one-time fee. The exclusive license granted thereunder has an initial term expiring on June 30, 2014. If, during the term of the exclusive license, sanofi-aventis has purchased the Unifill syringe for use with a particular drug product, sanofi-aventis will receive a ten-year extension of the term of the exclusive license, which extension will be reduced to five years if sanofi-aventis does not sell a minimum of 20 million units of the product in any 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-aventis, or after the expiration of the exclusive

license with sanofi-aventis. 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-aventis 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-aventis have totaled 10.0 million euros, following which we are required to pay 30% of such fees we receive through the end of the initial exclusivity period. We are also required to pay sanofi-aventis 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 euros in such royalty payments.

 

On June 30, 2009, we signed an industrialization agreement with sanofi-aventis. 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-aventis has agreed to provide up to 17.0 million euros in payments to us based on milestones we achieve in our industrialization program. The industrialization program began in July 2008. Upon the scheduled completion of the program, we expect to commerce commercial supply of the Unifill syringe to pharmaceutical customers in 2011. From October 2008 through September 2010, we have received payments of 15.0 million euros under the industrialization agreement. Key activities required to be accomplished prior to the completion of the industrialization program include the validation of the first commercial automated assembly system, being developed by Mikron, the completion of a new manufacturing facility in York, Pennsylvania and the establishment of a designated cleanroom for the installation of the automated assembly system.

 

The industrialization agreement provides that, subject to the full completion of the industrialization program, the parties will negotiate a supply agreement for the manufacture and purchase of the final product on a commercial scale. The supply agreement will provide that sanofi-aventis 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-aventis and its affiliates for the 12 months following the receipt of a purchase order. Any order of sanofi-aventis, together with its other orders, 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.

 

Pursuant to the industrialization agreement, if UMSL agrees to, or proposes to agree to, a change of control with a third party, UMSL must give a written notice to sanofi-aventis, 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, UMSL must accept the matching offer of sanofi-aventis. If UMSL receives an improved change of control offer from the third party, then UMSL must give a further notice to sanofi-aventis 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-aventis, or its affiliates, obtaining control of UMSL (i) is not recommended by UMSL’s board of directors, (ii) will cause harm to sanofi-aventis, 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-aventis will have the right to terminate the industrialization agreement within ten business days after receiving a notice from UMSL, 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 UMSL’s shares or the power to determine the majority composition of UMSL’s board of directors or any other event that UMSL’s board determines to be a change of control event.

 

Manufacturing

 

We have an FDA-registered, 50,000 square foot medical device production facility in Lewisberry, Pennsylvania. This facility has two class-eight clean rooms. The first clean room houses a fully automated assembly system used to manufacture our Unitract 1mL syringes. This automated assembly system, which has an optimum capacity of up to 40 million units per year, was fully designed, developed, built and qualified by our in-house team. The other clean room is used to assemble non-proprietary medical devices under contract with B. Braun. Other areas of our Lewisberry facilities are used for offices, product design and prototyping, engineering activities and the construction of automated assembly systems. Prior to the commencement of commercial production of the Unitract 1mL syringe at our Lewisberry facility, we utilized a medical device company in China to manufacture sufficient volumes of these products to obtain regulatory approvals and undertake preliminary

marketing activities. We intend to focus upon the domestic manufacture of our Unitract 1mL syringe in Pennsylvania in the foreseeable future.

 

To support our manufacturing plan for the high-volume production of the Unifill syringe, we are outsourcing the development and manufacture of automated assembly systems for this product to Mikron Assembly Technology, an established industry specialist. Mikron is developing and supplying an automated assembly system to support the commercial production of our Unifill syringe that will be installed into our new facility in York, Pennsylvania. We anticipate that this automated assembly system will have a target production capacity of approximately 60 million units per year. Additional assembly lines, which we expect to commission and operate beyond 2010, are targeted to have an annual manufacturing capacity of approximately 150 million units per year.

 

To support our business expansion activities, we are in the process of developing a new manufacturing facility close to our Lewisberry facility within York, Pennsylvania. We expect to transition the majority of our staff and manufacturing activities into the new manufacturing facility by late-2010. For more details regarding the development of the new manufacturing facility, please see “Item 2. Properties”.

 

We source our components and raw materials under written contracts with a variety of suppliers, all of which specialize in the medical device and pharmaceutical sectors. We have also entered into a number of relationships with other companies for the initial supply of components, raw materials and related services for the Unifill syringe. Due to an initial requirement for only limited production volumes of components which comprise the Unifill syringe, we currently receive a majority, or in some cases all, our components such as rubber seals and glass barrels from a single source supplier. To support the industrialization program for this product and further strengthen our supply chain in the long-term, we intend to establish, wherever feasible, a dual-source strategy for the production of key components, raw materials and related services. The companies we expect to appoint for the production and supply of items and related services pertaining to the Unifill syringe all have an established presence in the international drug delivery market, with the majority having facilities in North America and/or Europe.

 

Sales and Marketing

 

We expect that our primary customers will be pharmaceutical companies which utilize prefilled syringes as a primary container device for the administration of therapeutic drugs and vaccines. We intend to enter into supply agreements for the Unifill syringe with sanofi-aventis and some other pharmaceutical customers. The majority of these target pharmaceutical customers are multinational companies with headquarters located in either the United States or Europe.

 

We expect the pharmaceutical customer to be 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 customers in the development of documentation or marketing material pertaining to the recommended clinical use of the device with the contained drug or vaccine. We may also enter into agreements for the supply of the Unitract 1mL syringes directly to pharmaceutical companies for use with injectable drug products which are supplied in a vial and marketed in a kit format.

 

We also intend to distribute our Unitract 1mL syringes within the United States via distributors which specialize in target markets such as long-term and acute care healthcare facilities or the direct mail order of prescription medication and medical equipment to patients for self-administration. We will also examine opportunities to enter into relationships for our Unitract 1mL syringes with group purchasing organizations, or GPOs, which secure competitive pricing for commodity items such as syringes on behalf of members such as acute-care hospitals. Over the past decade, many GPOs have introduced programs that encourage the expedient evaluation and selection of innovative products developed by smaller companies. However, we do not expect to fully penetrate the acute-care hospital market until we have a complete range of clinical syringe sizes.

 

Outside of the United States, we have distributors to sell our Unitract 1mL syringes in Canada, India, China, Japan and Taiwan and expect to appoint other distributors within other international healthcare markets such as Western Europe and the Asia-Pacific region. Furthermore, we intend to review opportunities to collaborate with

governments seeking to examine the use of our Unitract 1mL syringes as a means of helping to prevent the re-use, sharing and unsafe disposal of non-sterile syringes by injecting drug users.

 

We have a small internal team to support the training of appointed distributors in the marketing and clinical use of our Unitract 1mL syringes. We intend to expand this team as we commence sales of our Unitract 1mL syringes, build relationships with pharmaceutical companies, and appoint additional distributors and commercialize our additional pipeline products.

 

Intellectual Property

 

We have established an intellectual property portfolio through which we seek to protect our products and technology. Our intellectual property portfolio includes 32 granted patents in 16 countries, with four issued patents each in Australia and two in the United States. We have filed a significant number of patent applications that are now pending in Australia, the United States, Europe, China, India and other countries covered under the Patent Cooperation Treaty. We also hold provisional patent applications in both the United States and Australia and several registered trademarks. Our patents expire at various dates between 2018 and 2028. Patents relating to the Unifill syringe are expected to expire by 2028. Trade secrets law in the United States and other jurisdictions provides additional protection. We also enter into non-disclosure agreements with certain vendors and customers. All active United States based employees have signed confidentiality, non-compete and intellectual property assignment agreements.

 

We classify our patents and patent applications as they relate to particular product categories including 1mL insulin and safe syringes with an attached needle; clinical syringes which include larger sizes and interchangeable luer needles; and our Unifill syringe. Many of the features claimed in the insulin and safe syringes patents, such as the mechanism allowing automatic and controlled needle retraction within an integrated medical device, also apply to our other safety syringe products, including the Unifill syringe. Some key patents covering countries such as Australia, the United States and Europe, as well as some of our international patent applications, are described below:

 

INSULIN AND SAFE SYRINGE (UNITRACT)

 

 

 

 

The patents listed above cover the following features of the insulin and safe syringe:

 

 

CLINICAL SYRINGE

 

 

 

 

The patents listed above cover the following features of the clinical syringe:

 

 

READY TO FILL SYRINGE (UNIFILL)

 

 

The patents listed above cover the following features of the Unifill syringe:

 

 

An issued patent, unlike a pending patent application, has been reviewed by the relevant national patent office and has met the legal requirements for patentability required by the law of that country. An issued patent can

therefore be enforced against infringers in the courts of the country where granted, although an issued patent does not guarantee that the company has freedom to operate and could still infringe upon the issued patent of another patent held by a third party.

 

In a number of key countries, we have registered trademarks including Unitract and have commenced applications to register trademarks for our company name, Unilife, as well as our ready-to-fill syringe brand name Unifill. Unitract is a registered trademark in the United States and is also filed under the Madrid Protocol Agreement for the international registration of marks in 25 countries, including France, Germany, Japan, China, Switzerland and the United Kingdom. Additionally, Unitract is a registered trademark in Australia, Mexico, New Zealand, Canada, India, Indonesia, South Africa, and Brazil. Unitract Safe Syringe is also a registered trademark in Australia.

 

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 range 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. None of our products require premarket approval.

 

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 customer 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 customer’s application, we intend to create what is known as a drug master file. A drug master file 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 drug master file will define the manufacturing and safety characteristics of the Unifill syringe while protecting proprietary information regarding its technical design.

 

510(k) Clearance Pathway

 

When obtaining a 510(k) clearance is required, 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.

 

We received 510(k) clearance for our Unitract 1mL insulin syringe in October 2008 that covered the production of the device by a contractor outside the United States. We received 510(k) clearance for the production of our Unitract 1mL insulin syringe at our Pennsylvania manufacturing facility in March 2010. We received 510(k) clearance for the production of our Unitract 1mL TB syringe at our Pennsylvania manufacturing facility in September 2010.

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. This process does not apply to our current range of products.

 

Pervasive and Continuing Regulation

 

After a device is placed on the market, numerous regulatory requirements apply. These include:

 

 

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 of the following sanctions:

 

 

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. Compliance establishes the presumption of conformity with the essential requirements for CE Marking. In July 2009, we received our ISO 13485:2003 quality system certification. Our certification includes the design, development, production and distribution or

sterile syringes and insulin syringes and the provision of contract manufacturing services to the medical device industry.

 

We have successfully completed a Notified Body audit to allow our Unitract syringes to bear the CE mark resulting in CE certification for our Unitract insulin and tuberculin 1mL syringes.

 

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. Our only product that is included on the ARTG is our Unitract 1mL syringe that was previously manufactured for us in China. During June 2010, we received our CE certification for U.S.-manufactured stock of this product. We are currently completing the necessary registration and listing documents for sale of this product in Australia.

 

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 customer 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.

 

While 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, 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 Becton, Dickinson and Company, or BD, Gerresheimer Bünde GmbH, MGlas AG, SCHOTT forma vitrum AG, and Nuova Ompi. All of these companies are larger and better capitalized than we are, and have an extensive base of pharmaceutical customers. 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 needlestick 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.

 

We have sought to strengthen our competitive position in this marketplace in a number of ways. For example, the design of the Unifill syringe incorporates the use of a glass barrel which requires shaping at only one end. As a result, the glass barrel for the Unifill syringe may be sourced from the many global suppliers of glass cartridges and not just the five specialty manufacturers mentioned above.

 

The global market for clinical (non-pre-filled) plastic syringes is highly competitive, with at least 50 manufacturers located across North America, Europe and the Asia-Pacific. The market for clinical safety syringes is relatively less competitive, yet highly concentrated. We believe BD is the largest global supplier of clinical safety syringes. Other companies which compete in this market sector include Retractable Technologies, Inc, Covidien and Smiths Medical. All of these companies offer a full range of clinical safety syringes, operate a strong sales, distribution and customer support network, and have existing supply relationships with major healthcare buying groups.

 

Research and Development

 

During the fiscal years ended June 30, 2010 and 2009, we incurred approximately $8.5 million and $1.0 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. It also includes clinical activities and regulatory costs. Research and development costs also include costs 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. We expect our research and development expenses to continue as we continue to develop other pipeline product variants of our technology such as the Unitract clinical range of larger syringe sizes.

 

Employees

 

As of September 15, 2010, we had 154 employees, of whom 129 are engaged in operations activities including research and development, quality assurance and manufacturing activities, 4 are engaged in marketing and clinical activities and 21 are engaged in finance, legal and other administrative functions. All but four of our employees and all of our executive officers are located at our facilities in Central Pennsylvania. All but two of our employees are full-time employees. 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.

 

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.

 

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 633 Lowther Road, Lewisberry, PA 17339. Our telephone number at this address is +1 717 938-9323.

 

UMSL was incorporated on June 28, 1985, in South Australia, Australia. The registered office of UMSL is located at Suite 3, Level 11, 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 changed its corporate name to Unilife Medical Solutions, Inc. in February 2009. 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.

 

 

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, together with the “Cautionary Note Regarding Forward-Looking Information” and the other information contained in this Annual Report on Form 10-K and the other documents that we file from time to time with the Securities and Exchange Commission.

 

Risks Relating to Our Business

 

We need additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our efforts in developing our new manufacturing facility and in our product development or commercialization programs.

 

We are in the process of developing a new manufacturing facility in central Pennsylvania. We estimate the total cost to be approximately $31.0 million, including approved change orders through September 15, 2010. We intend to secure external financing for up to approximately $20.2 million from a commercial bank or other lending institution in the U.S. and/or from the Commonwealth of Pennsylvania or other federal and state bodies and fund the balance through existing cash reserves. Although we currently believe that our current cash resources, together with our anticipated cash flows, will be sufficient to fund our operations (other than the development of the new manufacturing facility which we expect to finance in part with the proceeds of external financing) through at least the second quarter of fiscal 2011, we may obtain additional funding in the future for our product development programs and commercialization efforts. The remaining funding as agreed under the industrialization agreement with sanofi-aventis to complete the industrialization program for the Unifill syringe is $2.6 million. Upon the completion of this program, we may need to obtain additional funding. In addition to potential anticipated sales to sanofi-aventis, we are also engaged in ongoing discussions with additional pharmaceutical companies regarding the sale of the product in areas where sanofi-aventis has not retained exclusive rights. These discussions could lead to arrangements to provide additional funding for the further development of our products.

 

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, our shares of common stock may suffer dilution. If we are unable to secure additional funding, if needed, our ability to develop or maintain the new manufacturing facility and continue in our product development and commercialization programs would be delayed, reduced or eliminated.

We have received an audit report with a going concern disclosure on our consolidated financial statements.

 

The continuation of our Company as a going concern is dependent upon our Company 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, 2010, 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 the liquidity condition of the Company. As a result of this uncertainly we may have a more difficult time obtaining necessary financing

 

Our success depends in large part on our ability to complete the industrialization program for our primary product, the Unifill syringe, and achieve substantial commercial sales of this product to customers. If we experience problems or delays in completing our industrialization program or 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.

 

We commenced the industrialization program for the Unifill syringe in July 2008. Upon the scheduled completion of this program, as well as the development and qualification of production systems to support the manufacture and commercial sale of the Unifill syringe, we expect to commence commercial supply of the Unifill syringe to pharmaceutical customers during 2011. Since the Unifill syringe is our primary product, any failure or significant delay in completing these activities could materially harm our business and our ability to generate any significant amount of revenues for the foreseeable future. Even if we successfully complete our industrialization program for the Unifill syringe, our ability to generate significant revenues will depend on our ability to negotiate successfully one or more supply agreements for the Unifill syringe with sanofi-aventis and/or other pharmaceutical companies and to begin supplying substantial quantities of the product under such agreements. We cannot predict with certainty if and when we will be able to enter into any supply agreements for the Unifill syringe or what the terms of any such agreements will be. If we are unable to secure favorable supply agreements for the Unifill syringe in a timely manner, our ability to generate significant revenues will be materially and adversely affected.

 

Our business is substantially dependent on our relationship with our strategic partner, sanofi-aventis.

 

To date, we have derived a substantial majority of our revenues from our exclusive licensing and industrialization agreements with sanofi-aventis. For the years ended June 30, 2010 and 2009, our revenues from these agreements were $8.9 million and $16.1 million, respectively, which represented 78% and 81% of our revenues for the periods, respectively. We expect that revenues from sanofi-aventis will continue to account for a substantial majority of our revenues at least through the end of calendar 2010. Even if we are able to enter into supply agreements and commence commercial sales to companies other than sanofi-aventis, we expect that sanofi-aventis will be our most significant customer, at least until its exclusive period terminates, and that revenues from sanofi-aventis will continue to account for a substantial majority of our revenues and cash flows from operations. Any termination or material breach of the existing agreements between sanofi-aventis and us, any failure to successfully negotiate a supply agreement with sanofi-aventis, or any failure to perform under any supply agreement that we do negotiate, would be likely to materially and adversely affect our business.

 

Our research and development and other operating expenses are significant and we do not expect to be profitable unless and until we complete our industrialization program, negotiate a supply agreement with sanofi-aventis or other pharmaceutical companies and begin commercial sale of the Unifill syringe.

 

We have incurred and will continue to incur significant research and development expenses for the completion of the industrialization program for the Unifill syringe, as well as for the development of other product variants of our technology. 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 unless we are successful in developing and commercializing the Unifill syringe and other new products, obtaining regulatory approvals, and manufacturing, marketing and selling commercial products.

The Unifill syringe has been designed to be compatible with the drug manufacturing systems currently utilized by sanofi-aventis, 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-aventis. 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-aventis. 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.

 

Our ability to successfully market and sell our safety syringes outside of the pharmaceutical market may be impaired until we are able to offer a full range of safety syringes in sizes commonly used in acute-care facilities.

 

In addition to the Unifill syringe, our product portfolio also includes the Unitract 1mL syringe, a plastic syringe which we refer to as a clinical syringe. Acute-care hospitals are the largest single healthcare market for clinical syringes. These facilities use a range of clinical syringes, including 1mL, 3mL and 5mL sizes, for the subcutaneous and intramuscular administration of therapeutic drugs and vaccines. We have completed development and secured regulatory approvals only for the marketing and sale of our Unitract 1mL syringe. While we intend to market the Unitract 1mL syringe to other healthcare sectors in addition to acute-care facilities, our ability to market and sell our safety syringes successfully may be impaired until we are able to offer clinical syringes in a full range of sizes.

 

Our success will depend on the full commercialization of our current products, and the development and commercialization of other pipeline products. There can be no assurance that we will be successful in these efforts.

 

A significant element of our strategy focuses on developing products that deliver greater benefits to pharmaceutical companies, healthcare workers and patients. The development of these products requires significant research and development, clinical evaluations and regulatory approvals. 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 attained 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.

 

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

 

We expect to expand our operations and grow our research and development, product development, regulatory, manufacturing, sales, marketing and administrative operations. 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, we will be required to improve existing, and implement new, operational and financial systems, procedures and controls and expand, train and manage our growing employee base. In addition, we will need to manage relationships with various manufacturers, suppliers, customers and other organizations. Our ability to manage our operations and growth will require us to improve our operational, financial and management controls, as well as our internal reporting systems and controls. We may not be able to implement such improvements to our management information, disclosure controls and procedures and internal control systems in an efficient and timely manner and may discover deficiencies in existing systems and controls. Our failure to accomplish any of these tasks could materially harm our business.

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, to provide strategic direction, manage our operations and maintain a cohesive and stable environment. Although we have employment agreements with Mr. Shortall and other key personnel, 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. In addition, we have a limited history of operations under our current officers and directors. Our officers have not worked together for an extensive length of time. If for any reason our management members cannot work efficiently as a team, our business will be adversely affected.

 

We will incur increased costs as a result of being a reporting company in both Australia and the United States and we have limited experience as a US reporting company.

 

We became subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, on February 11, 2010 when our registration statement on Form 10 became effective. Our shares of common stock are also listed on the ASX in the form of CDIs, and we are therefore required to file financial information and make certain other filings with the ASX. Our status as a reporting company in both Australia and the United States makes some activities more time-consuming and costly and causes us to incur additional legal, accounting and other expenses that we had not previously incurred, including costs related to compliance with the requirements of the Sarbanes-Oxley Act of 2002.

 

If our internal control over financial reporting or our disclosure controls and procedures are found not to be effective by management or by an independent registered public accounting firm or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls, investors could lose confidence in our financial reports, the price of our shares of common stock may decline, and we may be subject to increased risks and liabilities.

 

We became a U.S. reporting company on February 11, 2010 and are subject to the Sarbanes-Oxley Act of 2002 and applicable rules and regulations thereunder. Section 404 of the Sarbanes-Oxley Act will require that we include a report of our management on our internal control over financial reporting and a report of our independent registered public accounting firm on the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K beginning with our annual report for the fiscal year ending June 30, 2011. We will also have to include quarterly reports and certifications of our management regarding the effectiveness of our disclosure controls and procedures. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent review, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our internal controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from the way we interpret them. Our management may also conclude that our disclosure controls and procedures are not effective.

 

If we fail to achieve and maintain an effective internal control environment and disclosure controls and procedures, we could suffer material misstatements in our financial statements and other information we report and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial and other information. This could lead to a decline in the trading price of our shares of common stock. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from Nasdaq, regulatory investigations and civil or criminal sanctions.

We have limited sales, marketing and distribution experience.

 

We have a small internal team to support the training of appointed distributors in the marketing and clinical use of our Unitract 1mL syringes. Although we intend to expand this team as we commence sales of our Unitract 1mL syringes, appoint additional distributors and commercialize our larger-sized clinical syringes, we will have to devote significant financial and management resources to this effort. In developing our sales, marketing and distribution functions, we could face a number of risks, including:

 

 

We have outsourced the development of automated assembly systems for our Unifill syringe to Mikron Assembly Technology, a third-party contractor. Our ability to commercialize the Unifill syringe will be dependent on the ability of this contractor to provide these systems according to specifications and in a timely manner.

 

We have outsourced the development of automated assembly systems for our Unifill syringe to Mikron Assembly Technology, a third party equipment manufacturer. The development of a pilot system with a target production capacity of approximately 60 million units per year began in December 2009 with completion and installation scheduled during the fourth quarter of calendar 2010. Additional assembly lines with higher annual manufacturing capacity are expected to commission and operate beyond 2010. The failure of this company to supply these automated assembly systems to us which meet contracted specifications in a timely manner will significantly impair our business activities and the completion of the industrialization program.

 

If we experience delays in developing our new manufacturing facility, our ability to produce our Unifill syringe in commercial quantities would be impaired, which would harm our business. In addition, all of our current commercial and production activity takes place in one facility which subjects us to risk if we were to experience a catastrophic event at this facility.

 

We have a 50,000 square foot FDA-registered, medical device production facility in Lewisberry, Pennsylvania, for the production of the Unilife 1mL syringes and for the medical device contract manufacturing activities. However, we will need to expand our manufacturing capabilities in order to produce Unifill syringes and our other products in the quantities that may be necessary to meet anticipated market demand. We are in the process of developing additional manufacturing facilities in central Pennsylvania in conjunction with Keystone Redevelopment Group LLC, a Pennsylvania-based real estate company. We may not successfully complete the development of the new manufacturing facility in a timely manner, or at all. If we are unable to do so, we may not be able to produce our products in sufficient quantities to meet the requirements for the launch of the products or to meet future demand, if at all.

 

In addition, because all of our operations are currently conducted out of our Lewisberry facility, a catastrophic event, such as fire, natural disaster, pandemic, war, terrorism, labor disruption or governmental actions taken in response to such an event, could severely disrupt our business activities and adversely affect our results of operations and financial condition.

 

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.

 

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 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.

 

We may be adversely impacted by next generation drug delivery technologies.

 

Much of our potential sales and potential profitability depends to a large extent on the sale of drug products delivered by subcutaneous or intramuscular injection. Other device companies, and pharmaceutical companies, are

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. The development of new or improved products, processes or technologies by other companies may render our products or proposed products obsolete or less competitive. If the products developed in the future by our customers or potential customers use another delivery system, our sales and potential profitability could suffer. Furthermore, we will be largely reliant upon the receipt of revenues from the sale of the Unifill syringe and the Unilife 1mL syringe and will not have the benefit of diversification.

 

We are subject to extensive regulation.

 

We are subject to extensive regulation by the FDA pursuant to the FDC Act, by comparable agencies in other countries, and by other regulatory agencies and governing bodies. Our products must receive clearance or approval from the FDA or counterpart non-U.S. regulatory agencies before they can be marketed or sold. 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.

 

Future changes, if any, to 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 prior 510(k) clearance or premarket approval from the FDA, unless an exemption exists. Either process can be expensive and lengthy. We have received 510(k) clearance that covered the production of our Unitract 1mL insulin syringe 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 premarket approval process does not apply to our current range of products. 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 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.

 

We are subject to 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 regulation by governmental authorities in the United States, Europe and other countries, including the FDA. 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.

 

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’ injectable 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.

 

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 not be able to effectively protect our intellectual property rights which could have an adverse effect on our business, financial condition or results of operations.

 

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 intellectual property portfolio includes, in addition to trademarks and trade secrets, 26 granted patents in 14 countries, a significant number of patent applications pending in the United States, Australia and the countries covered under the Patent Cooperation Treaty. Our patents expire at various dates between 2018 and 2028. 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. Even if issued, existing or 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.

 

Intellectual property litigation could be costly and disruptive to us.

 

The retractable syringe product lines in which we compete are relatively new inventions with numerous companies having patents. In recent years, there have been several patent infringement suits involving other industry participants. To-date, we have not been subject to any such patent infringement suits and also hold freedom to operate reports which we believe indicate that our technology and associated products are substantially different from other known patents. There is no assurance, however, that third parties will not assert any patent, copyright, trademark and other intellectual property rights to technologies used in our business. 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:

 

 

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, 2010, we have $10.8 million of goodwill, which represents 17% of our total assets recorded as a result of our 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.

 

Currently, the majority of our revenues are derived from payments under our industrialization agreement with sanofi-aventis which provides that sanofi-aventis will pay us in euros, while we incur most of our operating expenses in U.S. dollars or Australian dollars. 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.

 

Risk Factors Related to Our Shares of Common Stock

 

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

 

Our common stock has been listed on the Nasdaq since February 2010 and on the ASX in the form of CDIs since January 2010. 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:

 

 

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

 

As of September 15, 2010, we had 55,230,454 shares of common stock issued and outstanding. All of those shares of common stock other than 4,735,314 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. If our stockholders sell a large number of shares of common stock or the public market perceives that our stockholders might sell a large number of shares, the prices at which our common stock trades could decline significantly.

 

In addition, as of September 15, 2010, 10,129,404 shares of our common stock are subject to outstanding stock options. We have filed a registration statement on Form S-8 to cover the issuance of 9,151,667 shares of our common stock that are issuable upon the exercise of outstanding options. During June 2010, our registration statement on Form S-1 was declared effective to cover the resale of 5,444,633 shares of our common stock that are issuable upon the exercise of options not eligible for inclusion in our registration statement on Form S-8. The exercise of those options may have a dilutive effect on current stockholders and if those parties exercising their options choose to sell their shares, it could have an adverse effect on the market price for our shares.

 

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 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-aventis 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 662/3% 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-aventis provides to sanofi-aventis 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 — Strategic Partnership with sanofi-aventis”. 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.

 

 

None.

 

 

We currently lease approximately 50,000 square feet of a building in Lewisberry, Pennsylvania under an operating lease expiring in August 2012 of which approximately 6,000 square feet are being used as our executive offices and the remaining 44,000 square feet are being used as our manufacturing facility and warehouse. The manufacturing facility is an FDA-registered medical device production facility. This facility has two class-eight clean rooms. The first clean room houses a fully automated assembly system used to manufacture our Unitract 1mL syringes. The other clean room is used to assemble non-proprietary medical devices under contract for outsourcing customers. Other areas of the manufacturing facility are used for offices, product design and prototyping, engineering activities and the construction of automated assembly systems.

 

We have also entered into a short-term lease for a small office building near our main facility. This office building is used for engineering and product development.

 

We also occupy an office of 1,100 square feet in Sydney, Australia under a lease expiring in November 2010. This office space is used for certain finance and administrative operations in Australia.

 

Development of New Global Headquarters and Manufacturing Facility

 

To support our business expansion activities, we are in the process of developing a new global headquarters and manufacturing facility in Pennsylvania in order to accommodate our projected demand for the Unifill syringe. We, through our subsidiary Unilife Cross Farm, LLC, or Unilife CF, purchased a 38 acre block of land in York County, Pennsylvania from Greenspring Partners, LP in November 2009. The site is located approximately 9.5 miles from our current premises in Lewisberry, Pennsylvania. On the property, we are developing an approximately 165,000 square foot office, manufacturing, warehousing and distribution facility. The new facility is initially intended to accommodate Unifill automated assembly lines with a combined annual capacity of 360 million units per year, as well as the Unitract 1mL automated assembly line and other contract manufacturing systems currently

situated at our Lewisberry facility. The new facility will also include a 54,000 square foot office section that will function as our global headquarters and support administrative, marketing, new product development, quality laboratories and other operational functions. The new facility has been designed to allow for an additional 100,000 square feet of contiguous production space to be constructed when required at a later date by us. Upon this additional expansion occurring, it will provide us with the space required to produce up to one billion syringes annually via the installation of additional Unifill assembly lines. Although this additional expansion of the new facility forms part of the current planning approvals that have been received by us, it is not part of the current development activity.

 

We have retained Keystone Redevelopment Group LLC, or Keystone, a Pennsylvania-based real estate company specializing in large scale redevelopment and complex economic development projects, as the developer for the new facility. Keystone is assisting us in securing financing for the new facility and providing us with certain related consulting and other services. We have retained HSC Builders & Construction Managers (HSC) of Pennsylvania, a Pennsylvania-based company that specializes in building custom-designed facilities for biotech, academic, healthcare, pharmaceutical and technology companies, as the construction manager and constructor of the new facility. We have retained L2 Architecture, or L2, a Philadelphia-based architectural and engineering design firm that specializes in the pharmaceutical and medical device sector, to provide architectural design and structural, mechanical and electrical engineering services for the new facility.

 

We estimate the total cost for developing the new facility to be approximately $31.0 million, including approved change orders through September 15, 2010. We intend to secure external financing for up to approximately $20.2 million from a commercial bank or other lending institution in the U.S. and/or from the Commonwealth of Pennsylvania or other federal and state bodies and fund the balance through existing cash reserves.

 

The projected timetable for the construction of the new facility to be undertaken by HSC is as follows:

 

 

 

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.

 

 

 

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”.

The following table sets forth, for the periods indicated, the high and low closing prices for our common stock on the Nasdaq Global Market (commencing February 16, 2010), the high and low closing prices for our CDIs on the ASX (from January 18, 2010 through February 15, 2010) and the high and low closing prices for the ordinary shares of UMSL (prior to January 18, 2010). The prices of our CDIs (and previously ordinary shares of UMSL) have been adjusted to give effect to the six for one exchange ratio and have been converted to U.S. dollars using the exchange rate on the last day of each respective quarter.

 

 

Holders

 

As of September 15, 2010, we had 55,230,454 shares of common stock issued and outstanding, and there were 171 holders of record of our common stock, including Chess Depositary Nominees which held shares of our common stock on behalf of 8,226 CDI holders. The closing sales price for our common stock on September 15, 2010 was $5.59 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.

Equity Compensation Plan Information

 

The following table provides information as of June 30, 2010 with respect to our equity compensation plans. See Note 4 to our consolidated financial statements included elsewhere is this Annual Report on Form 10-K for further information.

 

 

 

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 2010 year ended June 30, 2010. 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.

 

 

ASX-Required Disclosure

 

Corporations Act 2001 (Cth) and Repurchases of Securities

 

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

 

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 shareholder 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, 2010. 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.

 

 

Distribution of Equity Security Holders as of September 15, 2010

 

 

The number of shareholders holding less than a marketable parcel of shares was 645 as of September 15, 2010.

 

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

 

General Information

 

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

 

The address of the principal registered office in Australia is Suite 3, Level 11, 1 Chifley Square, Sydney NSW 2000. 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).

 

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.

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 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 shareholder meetings unless one of the above steps is undertaken.

 

Proxy forms and details of these alternatives will be included in each notice of meeting sent to CDI holders by Unilife.

 

Holders of options 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).

 

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

 

This Annual Report on Form 10-K includes extensive discussions in relation to the mechanics concerning the evaluation of performance of the Company’s senior executives, including relevant benchmarking activities. Information regarding executive compensation for the fiscal year ended June 30, 2010, as required by Item 11, is included in this report, including the information set forth under the captions “Executive Compensation,” “Compensation of Directors” and “Compensation Committee Interlocks and Insider Participation.”

 

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, 2010.

 

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.

 

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, 2010.

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

 

Reporting Requirement

 

The Company is at the early-stage of industrialization for its Unifill syringe. As such, the Company has not undertaken a formal review of the performance of the Board, its committees or individual directors. The Company has not therefore complied with Recommendation 2.5 during the fiscal year ended June 30, 2010.

 

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

 

Reporting Requirement

 

Information regarding Directors, including biographical information, as required by Item 10, and “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” as required by Item 12 are included in this Annual Report on Form 10-K.

 

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 trading in Company securities by directors, senior executives and employees and disclose it

 

The Company has adopted an Insider Trading Policy which is available on the corporate governance section of the Company’s website.

 

Recommendation 3.3 — Disclosure of information under Principle 3 of the ASX Governance Recommendations

 

Reporting Requirement

 

The Company fully complied with Recommendation 3.1 to 3.3 during the fiscal year ended June 30, 2010.

 

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, 2010.

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

 

Reporting Requirement

 

In Item 10 of this Annual Report on Form 10-K, the Company has disclosed information regarding the skills, experience and expertise of directors, including audit committee members, in accordance with U.S. disclosure requirements.

 

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, 2010.

 

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, 2010.

 

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 2010 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, 2010.

 

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.

 

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:

 

 

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, 2010.

 

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 not complied with Recommendation 7.3 for the fiscal year ended June 30, 2010.

 

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, 2010.

 

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.

 

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 30,2010.

 

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

 

The following table presents our selected historical financial data as of and for each of the years in the five year period ended June 30, 2010. The statement of operations data for the years ended June 30, 2010, 2009 and 2008 and the balance sheet data as of June 30, 2010 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this report. 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 statement of operations data for the years ended June 30, 2007 and 2006 and the balance sheet data as of June 30, 2008, 2007 and 2006 have been derived from our consolidated financial statements not included in this Annual Report on Form 10-K.

 

 

 

 

 

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.”

 

Overview

 

We are a U.S.-based medical device company focused on the design, development, manufacture and supply of a proprietary range of retractable syringes. Primary target customers for our products include pharmaceutical manufacturers and suppliers of medical equipment to healthcare facilities and distributors to patients who self-administer prescription medication. All of our syringes incorporate automatic and fully-integrated safety features which are designed to protect those at risk of needlestick injuries and other unsafe injection practices.

 

Our main 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 partnership with sanofi-aventis, a large global pharmaceutical company, pursuant to which sanofi-aventis has paid us a 10.0 million euro exclusivity fee and has paid us 15.0 million euros and committed to pay us up to an additional 2.0 million euros to fund our industrialization program for the Unifill syringe. Upon the scheduled completion of the industrialization program in late 2010, we expect to commence the supply and sale of the Unifill syringe to sanofi-aventis. We are also in discussions with other pharmaceutical companies that are seeking to obtain access to the Unifill syringe.

 

In addition, we have recently begun to manufacture our Unitract 1mL insulin syringes at our FDA-registered manufacturing facility in Lewisberry, Pennsylvania which we released during July 2010. Our Unitract 1mL syringes are designed primarily for use in healthcare facilities and by patients who self-administer prescription medication such as insulin.

 

Recent Developments

 

Pennsylvania Economic Development Assistance

 

In October 2009, we accepted a $5.45 million offer of assistance from the Commonwealth of Pennsylvania. The offer includes $2.0 million for debt service related to the acquisition of land for our new global headquarters and manufacturing facility as well as up to $2.25 million in low-interest financing loans for land, building and acquisition costs. The offer also includes a $0.5 million opportunity grant as well as $0.5 million in tax credits. Finally, the offer includes up to $0.2 million for the reimbursement of eligible job training costs. The offer is based on our proposed project being expected to create more than 240 new full-time jobs by December 31, 2012, to retain our 87 existing employees and to have a total cost of $86.0 million and is contingent upon us submitting complete applications for each of these programs. As the offer of assistance requires us to make formal applications for these programs, there may be a number of contingencies relating to the amount, if any, of funds that we may receive, the period over which we may receive those funds and our right to retain any funds that we do receive. We may have obligations under the programs that we may be unable to fulfill. We expect that these contingencies and our obligations under the programs will be more clearly identified during the application process. As a result, at this time, we cannot assure you that we will receive or have the right to retain all or any of the assistance for our current development project or otherwise.

 

Development of New Global Headquarters and Manufacturing Facility

 

In November 2009, we acquired 38 acres of land in York County, Pennsylvania for $2.0 million and entered into a development agreement with Keystone Redevelopment Group, LLC (“Keystone’) to develop our new 165,000 square foot office, manufacturing, warehousing and distribution facility. In accordance with the agreement, Keystone is assisting us with the selection of, as well as the review and management of, architects, engineers, designers, contractors and other experts and consultants engaged to assist in the development of the new facility. Additionally, Keystone is assisting us in obtaining financing for the facility. Under the terms of the agreement, we will pay Keystone a total of $0.8 million.

We have also entered into a construction agreement for the new facility for a total of 1.25% of the cost of work, which is estimated to be $0.3 million, and an agreement with an architectural firm for design and structural, mechanical, and electrical engineering services for the new facility for a total cost of $1.6 million.

 

We estimate the cost of the facility to be approximately $31.0 million, including approved change orders through September 15, 2010. This includes the projected construction costs, the projected manufacturing facility fit out costs and the fees described above. We intend to secure external financing for up to approximately $20.2 million from a commercial bank or other lending institution in the U.S. and/or from the Commonwealth of Pennsylvania or other federal and state bodies and fund the balance through existing cash reserves.

 

We began construction of our new facility in November 2009.

 

During the year ended June 30, 2010, we incurred $5.5 million in costs for equipment related to production capacity in the new facility. We have commitments in the amount of $4.8 million which we expect to fulfill during the year ended June 30, 2011.

 

Univest Credit Agreement

 

On August 13, 2010, we entered into a Credit Agreement with Univest National Bank and Trust Co. (“Univest”) pursuant to which Univest agreed to provide us with a loan in an amount not to exceed $7.0 million. We intend to use the proceeds to provide short-term financing for the construction of our new manufacturing facility. Borrowings under the Credit Agreement bear interest, payable monthly, at a rate equal to the greater of the prime rate plus 0.5% or 3.75% and are collateralized by a $7.0 million cash deposit. The Credit Agreement expires on February 13, 2011.

 

FDA Clearance

 

In August 2010, we received 501(k) market clearance from the FDA for the sale of our Unitract 1 mL Tuberculin syringe in the United States.

 

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 2010, 2009 or 2008.

 

The Company currently has one reporting unit. The reporting unit is comprised of our developing Unitract and Unifill syringe business, the base technology 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 the Company’s fiscal 2010 impairment assessment, management compared the carrying value of our reporting unit to our market capitalization as of June 30, 2010, which is our annual impairment testing date. Market capitalization of $318.7 million, based on the quoted stock price on the Nasdaq was well in excess of our stockholders’ equity of $44.4 million. Management also considered that market capitalization through early September 2010 continued to be in excess of the carrying value.

Share-Based Compensation

 

We grant stock options, restricted stock and common stock as compensation 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 Barrier and Monte Carlo option-pricing models. Option pricing methods require the input of highly subjective assumptions, including the expected stock price volatility.

 

Revenue Recognition

 

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

 

In June 2008, we entered into an exclusive licensing arrangement to allow our pharmaceutical partner to use certain of our intellectual property in order and solely to develop in collaboration with us, our Unifill syringe for use in and sale to the pre-filled syringe market. The up-front, non-refundable fee paid for this license is being amortized over the expected life of the related agreement. In late fiscal 2009, we entered into an industrialization agreement with our pharmaceutical partner, under which specific payment amounts and completion dates were established for achievement of certain pre-defined milestones in our development of the Unifill syringe. Revenue 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 the project 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, 2010, 2009 and 2008:

 

 

Fiscal Year 2010 Compared to Fiscal Year 2009

 

Revenues.  Revenues decreased by $8.6 million or 42.8%. Revenues from our industrialization agreement with sanofi-aventis decreased from $13.6 million to $6.3 million due to the nature and timing of milestones achieved during the year ended June 30, 2010. Revenues from our exclusive licensing agreement with sanofi-aventis increased from $2.5 million to $2.6 million. We have recognized and will continue to recognize the revenue from the exclusive licensing agreement on a straight-line basis over the remaining term of the agreement. Since these revenues are based in Australian dollars, the $0.1 million variation in revenues from the exclusive licensing agreement between the year ended June 30, 2010 results from fluctuations in foreign currency translation rates. Revenues from product sales of our contract manufacturing business decreased from $3.9 million to $2.5 million principally because most of our efforts have been devoted to the development of the Unifill syringe in fiscal 2010.

 

Cost of sales.  Cost of sales decreased by $1.0 million or 27.9%. The decrease was attributable to a reduction in product sales under our contract manufacturing sales activity.

 

Research and development expenses.  Research and development expenses increased by $7.4 million, primarily as a result of $4.3 million incurred 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. The increase was also a result of additional expenditures to finalize the product specifications of our Unifill syringe.

 

Selling, general and administrative expenses.  Selling, general and administrative expenses increased by $13.8 million or 92.1%. During fiscal 2010, we increased the workforce at our Lewisberry, Pennsylvania facility,

and as a result, we incurred payroll expenses and recruiting fees during the year ended June 30, 2010 of $10.2 million, an increase of $5.3 million compared to fiscal 2009. Additionally, during the year ended June 30, 2010, we incurred legal and consulting fees of $6.4 million, an increase of $3.4 million compared to fiscal 2009. The increase was due primarily to expenses we incurred related to our redomiciliation and Nasdaq listing. Additionally, during fiscal 2010, we recorded $5.7 million in share-based compensation expense, an increase of $2.7 million compared to fiscal 2009. Our share-based compensation expense during fiscal 2010 relates primarily to restricted stock and stock options issued to employees and consultants during the year. Our share-based compensation expense during fiscal 2009 included $1.5 million recorded in December 2008 for the issuance of 1.7 million shares of common stock to our Chief Executive Officer.

 

Depreciation and amortization expense.  Depreciation and amortization expense increased by $1.4 million or 152.9% which was primarily attributable to $1.0 million of property plant and equipment additions placed in service during the year ended June 30, 2010. Additionally, during October 2009, we placed $4.0 million of machinery to manufacture our 1mL syringe in service. We expect our depreciation and amortization expense to increase in the future as a result of the construction of our new headquarters and manufacturing facility and significant investments we have made and will continue to make to develop the facility, which includes the purchase of machinery for the Unifill syringe.

 

Interest expense.  Interest expense decreased by $0.1 million, primarily as a result of our lower levels of outstanding debt. We expect that our interest expense will increase significantly in the future as we are seeking to obtain approximately $20.2 million in debt financing for the construction of our new headquarters and manufacturing facility.

 

Interest income.  Interest income increased by $0.7 million, primarily as a result of higher cash balances during the year ended June 30, 2010.

 

Other expense.  Other expense decreased by $0.1 million primarily due to lower foreign exchange losses as a result of the appreciation of the U.S. dollar against the Australian dollar.

 

Net loss and loss per share.  Net loss for the fiscal years ended June 30, 2010 and 2009 was $29.7 million and $0.5 million, respectively. Basic and diluted loss per share was $0.64 and $0.02, respectively, on weighted average shares outstanding of 46,837,066 and 34,426,353, respectively. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with our October 2009 equity financing.

 

Fiscal Year 2009 Compared to Fiscal Year 2008

 

Revenues.  Revenues increased by $16.5 million or 470.7%. The increase was primarily attributable to $13.6 million in revenue recognized under our industrialization agreement with sanofi-aventis based on milestones achieved during fiscal 2009. Additionally, we recognized $2.5 million in revenue under our exclusive licensing agreement with sanofi-aventis based on amortizing over the term of the related agreement the up front, non-refundable intellectual property licensing fee we received. Revenues from our contract manufacturing business decreased by $0.7 million in fiscal 2009.

 

Cost of sales.  Cost of sales increased by $1.1 million or 44.9%. The increase was primarily attributable to an increase in the cost of plastics and commodities we use to assemble certain of our products within our contract business line and to higher payroll-related expenses resulting from hiring additional manufacturing personnel.

 

Research and development expenses.  Research and development expenses increased by $0.5 million, or 97.0% primarily as a result of additional expenditures related to the product specifications of our Unifill syringe.

 

Selling, general and administrative expenses.  Selling, general and administrative expenses increased by $6.7 million or 82.0%. During fiscal 2009, we significantly increased our workforce at our Lewisberry, Pennsylvania headquarters and manufacturing facility, which included hiring over ten management-level personnel for our operational, regulatory affairs and finance departments. As a result of these hires, we incurred $2.5 million in additional payroll, employee-related expenses and recruiting fees. In addition, we incurred $1.0 million in legal, consulting and professional fees, primarily related to our anticipated Nasdaq listing. Finally, during fiscal 2009, our share-based compensation expense, included in selling general and administrative expense, increased by

$2.2 million. Of this increase, $1.5 million is due to the issuance of 1.7 million shares of common stock to our Chief Executive Officer in December 2008 and $0.7 million is due to additional expense resulting from significant issuances of stock options to employees, directors and consultants during fiscal 2009.

 

Depreciation and amortization expense.  Depreciation and amortization expense increased by $0.2 million or 25.9%, which was primarily attributable to $2.9 million we spent to purchase additional property, plant and equipment.

 

Interest expense.  Interest expense decreased by $0.2 million, primarily as a result of lower levels of outstanding debt during the prior year.

 

Interest income.  Interest income increased by $0.2 million during fiscal 2009 primarily as a result of higher interest rates.

 

Other expense (income).  Other expense during fiscal 2009 was $0.3 million compared to other income of $0.1 million during fiscal 2008, primarily due to higher foreign exchange losses as a result of the depreciation of the U.S. dollar against Australian dollar.

 

Net loss and loss per share Net loss for the years ended June 30, 2009 and 2008 were $0.5 million and $8.5 million, respectively. Basic and diluted loss per share was $0.02 and $0.26, respectively, on weighted average shares outstanding of 34,426,353 and 32,938,477 respectively. The increase in weighted average shares outstanding is primarily due to 1.7 million shares of common stock issued to our Chief Executive Officer in November 2008.

 

Liquidity and Capital Resources

 

To date, we have funded our operations primarily from a combination of equity issuances by UMSL prior to the redomiciliation, borrowings under our bank term loans and payments from sanofi-aventis under our exclusive licensing and industrialization agreements. As of June 30, 2010, cash and cash equivalents were $20.8 million and our long-term debt was $2.7 million. As of June 30, 2009, cash and cash equivalents were $3.6 million and our long-term debt was $3.1 million. Since July 1, 2009, we have raised approximately A$50.9 million ($47.1 million), net of issuance costs in equity financing. We also expect to receive $5.45 million in assistance from the Commonwealth of Pennsylvania as described under “Recent Business Developments” and 2.0 million Euros of additional milestone-based payments from sanofi-aventis under the industrialization agreement during fiscal 2011. We have also entered into a credit agreement with a financial institution to provide us with a loan of up to $7.0 million for the construction of our new manufacturing facility, which must be collateralized by equal amounts of cash deposits.

 

We are in the process of developing a new manufacturing facility in central Pennsylvania. We estimate the total cost of the development to be approximately $31.0 million, including approved change orders through September 15, 2010. We intend to secure external financing for up to $20.2 million from a commercial bank or other lending institution in the U.S. and/or from the Commonwealth of Pennsylvania or other federal and state bodies and fund the balance through existing cash reserves.

 

We believe that our cash on hand will be sufficient to sustain planned operations through the second quarter of fiscal year 2011.

 

Our recurring losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. We anticipate incurring additional losses until such time that we can generate significant sales and other potential sources of revenue pertaining to our propriety range of retractable syringes.

 

Certain bank loans secured by a subsidiary company also had a minimum debt service ratio financial covenant, with which we were not in compliance as of June 30, 2010. The $1.3 million long-term portion outstanding as of June 30, 2010 under these bank term loans has been reclassified to the current portion of long-term debt. In September 2010 we received a waiver from our lender for our previous non-compliance with this covenant.

 

We funded the costs of the redomiciliation through cash from operations and cash on hand. These expenditures have been expensed as incurred.

The following table summarizes our cash flows during the fiscal years ended June 30, 2010, 2009 and 2008:

 

 

Fiscal Year 2010 Compared to Fiscal Year 2009

 

Net Cash (Used in) Provided by Operating Activities

 

Net cash used in operating activities during fiscal 2010 was $12.4 million compared to net cash provided by operating activities of $6.8 million during fiscal 2009. The decrease in cash flow was primarily due to $20.8 million of lower net income after adding back depreciation and amortization and share-based compensation expense.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities was $18.1 million during fiscal 2010, primarily as a result of $17.6 million of costs incurred in connection with the purchase of machinery related to the lines for our Unifill syringe as well as the purchase of the land and construction costs in connection with our new headquarters and manufacturing facility.

 

Net Cash Provided by (Used in) Financing Activities

 

Net cash provided by financing activities during fiscal 2010 was $49.5 million compared to net cash used in financing activities of $3.3 million during fiscal 2009. During fiscal 2010, we received $47.1 million from the issuance of common stock related to our private placement and share purchase plan, and $2.3 million upon the exercise of stock options. During fiscal 2009, we elected to terminate a licensing agreement that we determined was no longer consistent with our business strategies, and, as a final settlement, we repaid $2.3 million of the $3.0 million that we had originally received in 2008 under the licensing agreement, while retaining $0.7 million to cover related legal fees.

 

Fiscal Year 2009 Compared to Fiscal Year 2008

 

Net Cash Provided by (Used in) Operating Activities

 

Net cash provided by operating activities during fiscal 2009 was $6.8 million compared to net cash used in operating activities of $7.6 million during fiscal 2008. The increase in cash flow was primarily due to $10.4 million of higher net income after adding back depreciation and amortization and share-based compensation expense. The increase was also attributable to $9.8 million of deferred revenue recorded in connection with our exclusivity agreement with sanofi-aventis, which was partially offset by amounts due from sanofi-aventis under our industrialization agreement. Theses agreements were entered into during fiscal 2009.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities increased by $2.3 million, primarily due to costs incurred in connection with the production of machinery used in the manufacturing of our Unitract 1 mL Syringe. Additionally, during fiscal 2009, we incurred significant leasehold improvement costs at our Lewisberry, Pennsylvania headquarters and manufacturing facility.

 

Net Cash (Used in) Provided by Financing Activities

 

Net cash used in financing activities was $3.3 million during fiscal 2009 compared to net cash provided by financing activities of $7.9 million during fiscal 2008. During fiscal 2009, we elected to terminate a licensing agreement that we determined was no longer consistent with our business strategies, and, as a final settlement, we

repaid $2.3 million of the $3.0 million that we had originally received in 2008 under the licensing agreement, while retaining $0.7 million to cover related legal fees. During fiscal 2008, we received $2.8 million from the issuance of common stock and $1.9 million from the issuance of convertible debt.

 

Contractual Obligations

 

The following table provides information regarding our contractual obligations as of June 30, 2010:

 

 

Our term loans bear interest at a rate of prime plus 1.50%. The future contractual obligations for interest is based upon 4.75%, which is the prime rate as of June 30, 2010 (3.25%) plus 1.50%.

 

Off-Balance Sheet Arrangements

 

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

 

Recently Issued Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification^tm and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 represents the last numbered standard issued by the FASB under the old (pre-codification) numbering system, and amends the Generally Accepted Accounting Principles (“GAAP”) hierarchy. On July 1, 2009, the FASB launched its new codification (i.e. the FASB Accounting Standards Codification — “ASC”). The codification supersedes existing GAAP for nongovernmental entities.

 

In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13 provides amendments to the criteria in Subtopic 605-24 for separating consideration in multiple-deliverable revenue arrangements. It establishes a hierarchy of selling prices to determine the selling price of each specific deliverable which includes vendor-specific objective evidence (if available), third-party evidence (if vendor-specific evidence is not available) or estimated selling price if neither of the first two are available. ASU 2009-13 also eliminates the residual method for allocating revenue between the elements of an arrangement and requires that arrangement consideration be allocated at the inception of the arrangement. Finally, ASU 2009-13 expands the disclosure requirements regarding a vendor’s multiple-deliverable revenue arrangements. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are evaluating the impact the adoption of ASU 2009-13 will have on our consolidated financial statements.

 

In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” which amends ASC Topic 820 (“ASU 2010-06”). ASU 2010-06 amends the ASC to require disclosure of transfers into and out of Level 1 and Level 2 fair value measurements, and also requires more detailed disclosure about the activity within Level 3 fair value measurements. The changes to the ASC as a result of this update are effective for annual and interim reporting periods beginning after December 15, 2009 except for requirements related to Level 3 disclosures, which are effective for annual and interim periods beginning after December 15, 2010. We do not believe that the adoption of ASU 2010-06 will have a material impact on our consolidated financial statements.

In March 2010, the FASB issued ASU 2010-17, “Milestone Method of Revenue Recognition, a consensus of the FASB Emerging Issues Task Force (Issue No. 08-9).” (“ASU 2010-17”). ASU 2010-17 provides guidance about the criteria that must be met to use the milestone method of revenue recognition. This ASU is effective for milestones achieved in fiscal years and interim periods within those years, beginning after June 15, 2010. We are evaluating the impact the adoption of ASU 2010-17 will have on our consolidated financial statements.

 

 

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 is 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

 

The majority 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 substantial 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 forwards 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.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

The Board of Directors and Stockholders

Unilife Corporation:

 

We have audited the accompanying consolidated balance sheet of Unilife Corporation and subsidiaries (the Company) as of June 30, 2010, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for the year then ended. 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 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 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 audit provides 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, 2010, and the results of their operations and their cash flows for the year then ended 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 an accumulated deficit that 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.

 

 

Harrisburg, Pennsylvania

September 28, 2010

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

Unilife Corporation

Lewisberry, Pennsylvania

 

We have audited the accompanying consolidated balance sheets of Unilife Corporation and subsidiaries as of June 30, 2009 and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the two years in the period ended June 30, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 at June 30, 2009, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2009, in conformity with accounting principles generally accepted in the United States of America.

 

 

Perth, Western Australia

November 11, 2009

UNILIFE CORPORATION AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

 

See accompanying notes to the consolidated financial statements.

UNILIFE CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Operations

 

 

See accompanying notes to the consolidated financial statements.

UNILIFE CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Loss

 

 

See accompanying notes to the consolidated financial statements.

UNILIFE CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows