UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission file number 001-34540

UNILIFE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		27-1049354
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 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 during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes o No o

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o

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

As of February 9, 2011, 63,517,161 shares of the registrant’s common stock were outstanding.

 

 

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of December 31, 2010 and June 30, 2010			3
Unaudited Consolidated Statements of Operations for the three and six months ended December 31, 2010 and 2009			4
Unaudited Consolidated Statement of Stockholders’ Equity and Comprehensive Loss for the six months ended December 31, 2010			5
Unaudited Consolidated Statements of Cash Flows for the six months ended December 31, 2010 and 2009			6
Notes to Unaudited Consolidated Financial Statements			7
Report of Independent Registered Public Accounting Firm			17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			23
Item 4. Controls and Procedures			24
PART II. OTHER INFORMATION
Item 5. Other Information			24
Item 6. Exhibits			24
Signatures			25
Exhibit 10.5
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets
(unaudited)

		December 31, 2010				June 30, 2010
		(in thousands, except share data)
Assets
Current Assets:
Cash and cash equivalents		$	39,133			$	20,750
Restricted cash			2,400				—
Accounts receivable			451				1,556
Inventories			1,028				797
Prepaid expenses and other current assets			745				637
Total current assets			43,757				23,740
Property, plant and equipment, net			49,810				29,972
Goodwill			12,736				10,792
Intangible assets, net			44				40
Other assets			502				273
Total assets		$	106,849			$	64,817
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	3,671			$	6,044
Accrued expenses			3,571				2,911
Current portion of long-term debt			2,201				1,648
Deferred revenue			2,595				2,188
Total current liabilities			12,038				12,791
Long-term debt, less current portion			16,377				1,093
Deferred revenue			6,488				6,563
Total liabilities			34,903				20,447
Commitments and contingencies (Note 9)
Stockholders’ Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized as of December 31, 2010; none issued or outstanding as of December 31, 2010 and June 30, 2010			—				—
Common stock, $0.01 par value, 250,000,000 shares authorized as of December 31, 2010; 63,397,161 and 54,761,848 shares issued and outstanding as of December 31, 2010 and June 30, 2010, respectively			634				548
Additional paid-in-capital			164,597				122,397
Accumulated deficit			(97,254	)			(79,650	)
Accumulated other comprehensive income			3,969				1,075
Total stockholders’ equity			71,946				44,370
Total liabilities and stockholders’ equity		$	106,849			$	64,817

See accompanying notes to the consolidated financial statements.

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations
(unaudited)

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2010				2009				2010				2009
		(in thousands, except per share data)
Revenues:
Industrialization fees		$	—			$	2,088			$	1,350			$	3,833
Licensing fees			630				746				1,207				1,429
Product sales and other			1,132				411				2,748				1,091
Total revenues			1,762				3,245				5,305				6,353
Cost of product sales			824				474				1,999				1,303
Gross profit			938				2,771				3,306				5,050
Operating expenses:
Research and development			1,416				287				2,421				686
Selling, general and administrative			9,054				7,517				17,066				11,259
Depreciation and amortization			878				1,009				1,665				1,300
Total operating expenses			11,348				8,813				21,152				13,245
Operating loss			(10,410	)			(6,042	)			(17,846	)			(8,195	)
Interest expense			32				14				64				61
Interest income			(82	)			(252	)			(204	)			(257	)
Other (income) expense, net			(2	)			111				(102	)			(20	)
Net loss		$	(10,358	)		$	(5,915	)		$	(17,604	)		$	(7,979	)
Loss per share:
Basic loss per share		$	(0.19	)		$	(0.13	)		$	(0.32	)		$	(0.19	)
Diluted loss per share		$	(0.19	)		$	(0.13	)		$	(0.32	)		$	(0.19	)

See accompanying notes to the consolidated financial statements.

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
(unaudited)

																		Accumulated
										Additional-								Other
		Common Stock								Paid-In				Accumulated				Comprehensive
		Shares				Amount				Capital				Deficit				Income				Total
		(in thousands except share data)
Balance as of July 1, 2010			54,761,848			$	548			$	122,397			$	(79,650	)		$	1,075			$	44,370
Comprehensive loss:
Net loss			—				—				—				(17,604	)			—				(17,604	)
Foreign currency translation			—				—				—				—				2,894				2,894
Comprehensive loss																							(14,710	)
Issuance of options and warrants to purchase common stock			—				—				2,892				—				—				2,892
Issuance of restricted stock			100,000				1				3,114				—				—				3,115
Issuance of common stock in connection with private placement and share purchase plan, net of issuance costs			7,048,373				70				33,361				—				—				33,431
Issuance of common stock upon exercise of stock options			1,486,940				15				2,833				—				—				2,848
Balance as of December 31, 2010			63,397,161			$	634			$	164,597			$	(97,254	)		$	3,969			$	71,946

See accompanying notes to the consolidated financial statements.

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(unaudited)

		Six Months Ended
		December 31,
		2010				2009
		(in thousands)
Cash flows from operating activities:
Net loss		$	(17,604	)		$	(7,979	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			1,665				1,300
Share-based compensation expense			4,386				771
Loss on sale of property, plant and equipment			—				113
Changes in assets and liabilities:
Accounts receivable			1,301				5,470
Inventories			(225	)			(301	)
Prepaid expenses and other current assets			(100	)			(294	)
Other assets			(211	)			319
Accounts payable			(913	)			319
Accrued expenses			254				117
Deferred revenue			(1,207	)			(1,429	)
Net cash used in operating activities			(12,654	)			(1,594	)
Cash flows from investing activities:
Purchases of property, plant and equipment			(20,549	)			(7,562	)
Net cash used in investing activities			(20,549	)			(7,562	)
Cash flows from financing activities:
Proceeds from the issuance of common stock, net of issuance costs			33,431				47,117
Proceeds from the exercise of options to purchase common stock			2,848				1,817
Proceeds from the issuance of long-term debt			15,872				—
Principal payments on long-term debt and capital lease obligations			(225	)			(248	)
Proceeds from the issuance of note payable			6,900				—
Principal payments on note payable			(6,900	)			—
Increase in restricted cash			(2,400	)			—
Net cash provided by financing activities			49,526				48,686
Foreign currency exchange on cash			2,060				(1,803	)
Net increase in cash and cash equivalents			18,383				37,727
Cash and cash equivalents at beginning of period			20,750				3,627
Cash and cash equivalents at end of period		$	39,133			$	41,354
Supplemental disclosure of non-cash activities
Purchases of property, plant and equipment in accounts payable and accrued liabilities		$	1,096			$	—
Purchases of property, plant and equipment pursuant to capital lease agreements		$	190			$	—
Issuance of common stock to former shareholders of Unitract Syringe Pty Limited		$	—			$	5,070
Purchases of property, plant and equipment through the issuance of warrants		$	1,621			$	—

See accompanying notes to the consolidated financial statements.

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

1. Description of Business and Unaudited Financial Statements

Unilife Corporation (collectively with its consolidated subsidiaries, the “Company”) and subsidiaries is a medical device company focused on the design, development, manufacture and supply of a proprietary range of retractable syringes. The primary target customers for the Company’s products include pharmaceutical manufacturers and suppliers of medical equipment to healthcare facilities and distributors to patients who self-administer prescription medication.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited consolidated financial statements contain all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented as required by Rule 10-01 of Regulation S-X. Interim results may not be indicative of results for a full year. The consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and the notes thereto for the fiscal year ended June 30, 2010 contained in its Annual Report on Form 10-K.

2. Liquidity

The Company incurred losses from operations during both the year ended June 30, 2010 and the six months ended December 31, 2010 and anticipates incurring additional losses until such time that it can generate sufficient sales of its proprietary range of retractable syringes. Management estimates that cash and cash equivalents of $39.1 million as of December 31, 2010 are sufficient to sustain planned operations through the fourth quarter of fiscal 2011.

Additional funding will be needed by the Company to support its operations and capital expenditure requirements. Management has a range of short and long-term funding strategies available to it in this regard. In addition to the sale of its Unitract and Unifill syringe products to existing partners, the Company is also in discussions with additional pharmaceutical companies pertaining to the Unifill syringe and other pipeline products. Should the Company enter into commercial relationships relating to the industrialization, commercial supply or preferred use of a device within a particular therapeutic market, the Company may pursue additional funding or revenue streams. The Company may seek to raise additional funds through the sale of additional equity or debt securities.

During October 2010, the Company secured $18.0 million of external financing from a financial institution for the construction of its new corporate headquarters and manufacturing facility. The Company used $6.9 million of the proceeds to repay amounts outstanding under its Credit Agreement with Univest National Bank and Trust Co. (“Univest”).

During December 2010, the Company received $2.25 million from the Commonwealth of Pennsylvania in low-interest financing for land and the construction of its new corporate headquarters and manufacturing facility.

During December 2010, the Company issued 7,048,373 shares of common stock and 2,268,934 options to purchase common stock and raised an aggregate of A$34.1 million ($33.4 million), net of issuance costs, through an Australian private placement and a share purchase plan for the Company’s Australian and New Zealand stockholders. The Company intends to use the proceeds from the private placement and share purchase plan to purchase additional capital equipment and for general operations, including the development of additional pipeline products.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

3. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Unilife Corporation and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

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

Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

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

References to A$ mean the lawful currency of the Commonwealth of Australia. References to € or euros are to the lawful currency of the European Union.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The estimates are principally in the areas of revenue recognition and share-based compensation expense. Management bases its estimates on historical experience and various assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Inventories

Inventories consist primarily of plastic syringe components and include direct materials, direct labor and manufacturing overhead. Inventories are stated at the lower of cost or market, with cost determined using the first in, first out method. The Company routinely reviews its inventory for obsolete, slow moving or otherwise impaired inventory and records estimated impairments in the periods in which they occur. Inventories consist of the following:

		December 31, 2010				June 30, 2010
		(in thousands)
Raw materials		$	820			$	649
Work in process			151				148
Finished goods			57				—
Total inventories		$	1,028			$	797

Share-Based Compensation

The Company grants stock options, restricted stock and common stock as compensation to its employees, directors and consultants. Certain employee and director awards vest over stated vesting periods and others also require achievement of specific performance or market conditions. The Company expenses the grant-date fair value of awards to employees and directors over their respective vesting periods. To the extent that employee and director awards vest only upon the achievement of a specific performance condition, expense is recognized over the period from the date management determines that the performance condition is probable of achievement through the date they are expected to be met. Awards granted to consultants are sometimes granted for past services, in which case their fair value is expensed on their grant date, while other awards require future service, or the achievement of performance or market conditions. Timing of expense recognition for consultant awards is similar to that of employee and director awards; however, aggregate expense is re-measured each quarter-end based on the then fair value of the award through the vesting date of the award. The Company estimates the fair value of stock options using the Black-Scholes option-pricing model, with the exception of market-based grants, which are valued based on Barrier and Monte Carlo option pricing models. Option pricing methods require the input of highly subjective assumptions, including the expected stock price volatility. See Note 4 for additional information regarding share-based compensation.

Revenue Recognition

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

In June 2008, the Company entered into an exclusive licensing arrangement to allow its pharmaceutical partner to use certain of the Company’s intellectual property in order and solely to develop in collaboration with the Company, the Company’s Unifill syringe for use in and sale to the pre-filled syringe market. The 10.0 million euro up-front, non-refundable fee paid for this license is being amortized over the 5 year expected life of the related agreement. In late fiscal 2009, the Company entered into an industrialization agreement with its pharmaceutical partner, under which specific payment amounts and completion dates were established for achievement of certain pre-defined milestones in its 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 the Company has no future performance obligations related to previous milestone payments as each milestone payment is non-refundable when received.

Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

The Company recognizes revenue from sales of products at the time of shipment and when title passes to the customer. Product sales from B. Braun, a customer who accounted for 10% or more of the Company’s revenue, were $1.0 million and $0.4 million during the three months ended December 31, 2010 and 2009, respectively and $2.5 million and $1.1 million during the six months ended December 31, 2010 and 2009, respectively.

Reclassifications

Certain prior year amounts related to depreciation expense previously included in cost of product sales have been reclassified to conform to the current year presentation.

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 ™ 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 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. The Company adopted ASU 2009-13 on July 1, 2010 and its adoption did not have a material impact on its 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. The Company does not believe that the adoption of ASU 2010-06 will have a material impact on its 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. The Company adopted ASU 2010-17 on July 1, 2010 and its adoption did not have a material impact on its consolidated financial statements.

4. Equity Transactions and Share-Based Compensation

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

Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

The Company recognized share-based compensation expense related to stock options and grants of restricted stock to employees, directors and consultants of $1.8 million and $0.2 million during the three months ended December 31, 2010 and 2009, respectively and $4.4 million and $0.8 million during the six months ended December 31, 2010 and 2009, respectively.

Stock Options

The Company has granted stock options to certain employees and directors under the Employee Share Option Plan (the “Plan”). The Plan is designed to assist in the motivation and retention of employees and to recognize the importance of employees to the long-term performance and success of the Company. The Company has also granted stock options to certain consultants outside of the Plan. The majority of the options to purchase common stock vest on the anniversary of the date of grant, which ranges from one to three years. Additionally, certain stock options vest upon the closing price of the Company’s common stock reaching certain minimum levels, as defined in the agreements. Share-based compensation expense related to options granted to employees is recognized on a straight-line basis over the related vesting term. Share-based compensation expense related to options granted to consultants is recognized ratably over each vesting tranche of the options.

In November 2009, the Company adopted the 2009 Stock Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan provides for a maximum of 6,000,000 shares of common stock to be reserved for the issuance of stock options and other stock-based awards. Commencing on January 1, 2011, and on each January 1st thereafter, through January 1, 2019, the share reserve will automatically adjust so that it will equal 12.5% of the weighted average number of shares of common stock outstanding reduced by the sum of any shares of common stock issued under the Stock Incentive Plan and any shares of common stock subject to outstanding awards under the Stock Incentive Plan.

In January 2010, the Company issued 1,000,000 options to purchase common stock to a consultant under the Stock Incentive Plan in consideration for various services to be performed for the Company. The options to purchase common stock are exercisable at A$6.33 per share and vest upon the trading price of the Company’s CDIs reaching certain minimum levels on the Australian Securities Exchange, which range from A$1.75 to A$3.22 per share. The options are re-measured each reporting date and as of December 31, 2010 were valued at $2.83 per option, which is being expensed ratably over the vesting period of each tranche, which ranges from 1.2 years to 2.0 years. The options will be re-valued on a quarterly basis and marked to market until exercised.

In December 2010, the Company issued 375,000 warrants to Keystone Redevelopment Group, LLC (“Keystone’) and 225,000 warrants to L2 Architecture (“L2”) outside of both the Plan and the Stock Incentive Plan. The warrants issued to Keystone were in partial consideration for managing the development of the Company’s new headquarters and manufacturing facility and the warrants issued to L2 were in partial consideration for the custom design of the facility. The warrants issued to both Keystone and L2 are exercisable at $5.30 per warrant vested immediately upon issuance and were valued at $2.70 per warrant. The aggregate fair value of the warrants of $1.6 million has been capitalized and included as a component of the cost of the building.

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

During the six months ended December 31, 2010, the Company granted 628,000 options to purchase common stock to certain employees and directors under the Stock Incentive Plan. The weighted average exercise price of the options was $5.97 per share. The majority of the options vest over a period of three years, with the exception of 60,000 options, which vest upon meeting certain performance targets, as defined in the agreement. The weighted average grant date fair value of the options was $2.60 per share.

The following is a summary of stock option and warrant activity during the six months ended December 31, 2010:

										Weighted
										Average
						Weighted				Remaining
		Number of				Average				Contractual				Aggregate Intrinsic
		Options				Exercise Price				Life (in years)				Value
														(in thousands)
Outstanding as of July 1, 2010			10,414,343			$	5.60
Granted			3,496,934				8.41
Exercised			(1,486,940	)			2.02
Cancelled			(83,333	)			2.01
Outstanding as of December 31, 2010			12,341,004			$	6.85				3.0			$	9,417
Exercisable as of December 31, 2010			8,719,003			$	7.36				2.5			$	7,280

Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

The aggregate intrinsic value is defined as the difference between the market value of the Company’s common stock as of the end of the period and the exercise price of the in-the-money stock options. The total intrinsic value of stock options exercised during the three months ended December 31, 2010 and 2009 was $2.9 million and $3.6 million, respectively. The total intrinsic value of stock options exercised during the six months ended December 31, 2010 and 2009 was $5.4 million and $4.6 million, respectively. Of the 3,622,001 non-vested options, 1,000,000 are held by a consultant.

The Company used the following weighted average assumptions in calculating the fair value of options and warrants granted during the six months ended December 31, 2010 (the period subsequent to the Company’s redomiciliation), and the six months ended December 31, 2009 (the period prior to the Company’s redomiciliation):

		Six Months Ended December 31,
		2010				2009
Number of stock options and warrants granted			1,228,000				83,333
Expected dividend yield			0	%			0	%
Risk-free interest rate			1.51	%			4.78	%
Expected volatility			59	%			80	%
Expected life (in years)			4.7				3.0

The assumptions noted above do not include amounts related to the options issued in the December 2010 private placement as discussed above.

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

Prior to the Company’s redomiciliation, the fair value of each stock option was estimated at the grant date using the Black-Scholes option pricing model, with the exception of grants subject to market conditions which were valued based on a Barrier option pricing model. The Company has not historically paid dividends to its shareholders and, as a result, assumed a dividend yield of 0%. The risk free interest rate is based upon the rates of Australian bonds with a term equal to the expected term of the option. The expected volatility is based upon the historical share price of the Company’s common stock on the Australian Securities Exchange. The expected term of the stock options to purchase common stock is based upon the outstanding contractual term of the stock option on the date of grant.

Restricted Stock

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

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

During the six months ended December 31, 2010, the Company issued 100,000 shares of restricted stock to certain employees. The shares of restricted stock vest on certain anniversaries from the date of grant, ranging from one to three years. The weighted average grant date fair value of the restricted shares was $5.67 per share.

Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

As of December 31, 2010, 1,918,000 shares of restricted stock remain unvested.

5. Property, Plant and Equipment and Construction in Progress

Property, plant and equipment consist of the following:

		December 31, 2010				June 30, 2010
		(in thousands)
Building		$	28,743			$	—
Machinery and equipment			12,935				10,848
Furniture and fixtures			225				1,265
Construction in progress			9,997				18,560
Land			2,036				2,036
Leasehold improvements			—				1,026
			53,936				33,735
Less: accumulated depreciation and amortization			(4,126	)			(3,763	)
Property, plant and equipment, net		$	49,810			$	29,972

Construction in progress as of December 31, 2010 consists primarily of amounts incurred in connection with the machinery related to the lines for the Unifill syringe. Construction in progress as of June 30, 2010 consists primarily of amounts incurred in connection with the construction of the Company’s new manufacturing facility and the machinery related to the lines for the Unifill syringe.

6. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill during the six months ended December 31, 2010 are as follows:

		(in thousands)
Balance as of July 1, 2010		$	10,792
Foreign currency translation			1,944
Balance as of December 31, 2010		$	12,736

Intangible assets consist of patents acquired in a business acquisition of $80,000. Related accumulated amortization as of December 31, 2010 and June 30, 2010 was $44,000 and $40,000 respectively, and future amortization expense is scheduled to be $5,000 annually.

7. Long-Term Debt

Long-term debt consists of the following:

		December 31, 2010				June 30, 2010
		(in thousands)
Mortgage loans		$	13,622			$	—
Bank term loans			2,240				2,393
Commonwealth of Pennsylvania financing authority loan			2,250				—
Commonwealth of Pennsylvania assisted machinery loans			284				332
Other			182				16
			18,578				2,741
Less: current portion of long-term debt			2,201				1,648
Total long-term debt		$	16,377			$	1,093

Mortgage Loans

In October 2010, the Company entered into a loan agreement with Metro Bank (“Metro”), pursuant to which Metro agreed to provide the Company with two notes in the amounts of $14.25 million and $3.75 million. The proceeds received have been used to finance construction of the Company’s new corporate headquarters and manufacturing facility in York, Pennsylvania, including the repayment of its $6.9 million bridge construction loan with Univest. Under the loan agreement, the Company may borrow funds based upon the percentage of construction completed on the facility.

Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

The $14.25 million term note matures 20 years from completion of construction of the Company’s new corporate headquarters and manufacturing facility and the $3.75 million term note matures on October 20, 2020. During construction, the Company will pay only interest on both term notes at the Prime Rate plus 1.50% per annum, with a floor of 4.50% per annum. For a period of five years subsequent to construction, the Company will pay principal and interest on both term notes, with interest at a fixed rate based on the 5 year Treasury-bill plus 300 basis points per annum, with a floor of 6.0% per annum. Commencing five years subsequent to construction through the maturity dates for each term note, the Company will pay principal and interest on both term notes, with interest at a rate to be negotiated by the parties, or if no rate is negotiated, based upon the Prime Rate plus 1.0% per annum, with a floor not to exceed 250 basis points over the Prime Rate. The Company will also pay one final payment of principal and interest upon the maturity of each term note.

The loan agreement contains certain customary covenants, including the maintenance of a Debt Service Reserve Account in the amount of $2.4 million, classified as restricted cash on the consolidated balance sheet, which will remain in place until the Company and Metro agree on the financial covenants. The Company may prepay the loan, but will incur a prepayment penalty of 2.0% during the first three years. The U.S. Department of Agriculture has guaranteed $10.0 million of the loan.

As of December 31, 2010, $9.9 million was outstanding under the $14.25 million note and the Company was fully drawn on the $3.75 million note.

Bank Term Loans

Bank term loans consist of four term loans payable. The loans bear interest at a rate of prime (3.25% as of December 31, 2010) plus 1.50%. (4.75% as of December 31, 2010) per annum and mature on dates ranging from December 2010 through August 2021. The borrowings under the bank term loans are collateralized by the Company’s accounts receivable, inventories and certain machinery and equipment and are subject to certain financial covenants which require the Company’s tangible assets to equal at least 10% of the stockholder’s equity determined in accordance with GAAP. Under the term loan agreements, the Company is not permitted to pay cash dividends without the prior written consent of the lender. Certain of these bank term loans also have a minimum debt service ratio financial covenant, with which the Company was not in compliance as of December 31, 2010. The $1.2 million long-term portion outstanding as of December 31, 2010 under these bank term loans is classified in the current portion of long-term debt. During February 2011, the Company received a waiver from its lender for its previous non-compliance with this covenant.

Commonwealth of Pennsylvania Financing Authority Loan

In October 2009, the Company accepted a $5.45 million offer of assistance from the Commonwealth of Pennsylvania which included up to $2.25 million in low-interest financing for land and the construction of its new manufacturing facility. In December 2010, Unilife Cross Farm LLC, a subsidiary of the Company (“Cross Farm”), received the $2.25 million loan which bears interest at a rate of 5.0% per annum, matures in January 2021 and is secured by a third mortgage on its new facility. In connection with the loan agreement, Cross Farm entered into an intercreditor agreement by which the Commonwealth of Pennsylvania agreed that it would not exercise its rights in the event of a default by Cross Farm without the consent of Metro, who holds the first and second mortgages on its new facility.

Commonwealth of Pennsylvania Assisted Machinery Loans

The Company has qualified for two Commonwealth of Pennsylvania assisted loans for the purchase of specific machinery and equipment. These loans bear interest at rates ranging from 2.75% to 3.25% per annum and mature on dates ranging from July 2011 through July 2013. The borrowings under these loans are collateralized by the related equipment.

Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

8. Loss Per Share

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

		Three Months Ended December 31,								Six Months Ended December 31,
		2010				2009				2010				2009
		(in thousands, except share and per share data)
Numerator
Net loss		$	(10,358	)		$	(5,915	)		$	(17,604	)		$	(7,979	)
Denominator
Weighted average number of shares used to compute basic loss per share			55,193,753				45,554,930				54,191,898				41,158,391
Effect of dilutive options to purchase common stock			—				—				—				—
Weighted average number of shares used to compute diluted loss per share			55,193,753				45,554,930				54,191,898				41,158,391
Basic loss per share		$	(0.19	)		$	(0.13	)		$	(0.32	)		$	(0.19	)
Diluted loss per share		$	(0.19	)		$	(0.13	)		$	(0.32	)		$	(0.19	)

Due to the Company’s net losses, unvested shares of restricted stock (participating securities) totaling 1,914,957 and 1,888,979 were excluded from the calculation of basic and diluted loss per share during the three and six months ended December 31, 2010, respectively. There were no shares of restricted stock outstanding during the three or six months ended December 31, 2009.

In addition, stock options (non-participating securities) totaling 10,006,888 and 6,471,565 during the three months ended December 31, 2010 and 2009, respectively, were excluded from the calculation of diluted loss per share and stock options (non-participating securities) totaling 9,937,067 and 6,020,928 during the six months ended December 31, 2010 and 2009, respectively, were excluded from the calculation of diluted loss per share, as their effect would have been anti-dilutive. Certain of these stock options were excluded solely due to the Company’s net loss position. Had the Company reported net income during the three months ended December 31, 2010 and 2009, these shares would have had an effect of 1,860,867 and 2,334,471 diluted shares, respectively, for purposes of calculating diluted loss per share. Had the Company reported net income during the six months ended December 31, 2010 and 2009, these shares would have had an effect of 1,888,022 and 2,153,711 diluted shares, respectively, for purposes of calculating diluted loss per share.

9. Commitments and Contingencies

From time to time, the Company is involved in various legal proceedings, claims, suits and complaints arising out of the normal course of business. Based on the facts currently available to the Company, management believes that these claims, suits and complaints are adequately provided for, covered by insurance, without merit or not probable that an unfavorable outcome will result.

10. Business Alliances

sanofi-aventis

On June 30, 2008, the Company signed an exclusive licensing agreement with a pharmaceutical company, sanofi-aventis, which was amended in June 2009. Under the amended agreement, the Company has granted sanofi-aventis an exclusive license to certain of the Company’s intellectual property in order and solely to develop, in collaboration with the Company, the Unifill syringe for use in and sale in the pre-filled syringe market within those therapeutic areas to be agreed upon between the Company and sanofi-aventis 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. 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 20.0 million units of the product in any of the first five years of such ten-year extension period. Pursuant to the exclusive licensing agreement, sanofi-aventis has paid the Company a 10.0 million euro ($13.0 million) up front non-refundable one-time fee. During the year ended June 30, 2009, the Company recognized $2.5 million of this up-front payment as revenue and deferred $10.6 million which will be recognized on a straight-line basis over the remaining term of the agreement. During the three months ended December 31, 2010 and 2009, the Company recognized $0.6 million and $0.7 million of this up-front payment as revenue, respectively. During the six months ended December 31, 2010 and 2009, the Company recognized $1.2 million and $1.4 million of this up front payment as revenue, respectively.

Under the exclusive licensing agreement, the Company is not precluded from using certain of its 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 the Company grants a license to a third party in respect of the ready-to-fill syringe market, then the Company is 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 the Company is required to pay 30% of such fees it receives through the end of the initial exclusivity period. The Company is 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.

Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

Under a related industrialization agreement, signed on June 30, 2009, sanofi-aventis has agreed to pay the Company up to 17.0 million euros ($23.4 million) in milestone-based payments to fund the completion of the Company’s industrialization program for the Unifill syringe. The industrialization program began in July 2008 and is scheduled to be completed by the end of fiscal 2011. Unless terminated earlier, the industrialization agreement’s term extends to the completion of the industrialization program. As of December 31, 2010 there is one remaining milestone payment to be recognized under the industrialization agreement with sanofi-avenits. In order to recognize this revenue, the Company must complete its final milestone, which requires the production of commercially viable units of the Unifill syringe. During the three months ended December 31, 2009, the Company recognized $2.1 million in revenue related to the milestones achieved. During the six months ended December 31, 2010 and 2009, the Company recognized $1.4 million and $3.8 million in revenue related to the milestones achieved, respectively.

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 the Company, and the industrialization agreement provides that the Company is not required to commit more than 30% of its 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 the Company is required to commence delivery of that order.

On February 25, 2010, the Company and sanofi-aventis executed a letter agreement, pursuant to which the parties agreed on a list of therapeutic drug classes within which sanofi-aventis has the exclusive right to purchase the Unifill syringe. Pursuant to the letter agreement and the exclusive licensing agreement, sanofi-aventis has secured exclusivity for the Unifill syringe within the full therapeutic classes of antithrombotic agents and vaccines until June 30, 2014 and has also secured exclusivity in an additional six smaller subgroups that fall within other therapeutic classes that the Company believes represent new market opportunities in the pharmaceutical use of prefilled syringes.

Stason Pharmaceuticals

In March 2010, the Company signed an exclusive five year agreement with Stason Pharmaceuticals; a U.S. based pharmaceutical company to market its Unitract 1mL syringe in Japan, China and Taiwan. Under the agreement, Stason Pharmaceuticals is required to purchase a minimum of 1.0 million units of the Unitract 1 mL syringe per year during the term of the contract.

11. Financial Instruments

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

December 31, 2010

June 30, 2010

Carrying

Estimated

Carrying

Estimated

Amount

Fair Value

Amount

Fair Value

(in thousands)

Assets:

Cash equivalents — certificates of deposit

$

15,245

$

15,245

$

18,629

$

18,629

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

The Company categorizes its assets and liabilities measured at fair value into a fair value hierarchy that prioritizes the inputs used in pricing the asset or liability. The three levels of the fair value hierarchy are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Unilife Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The levels in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

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

		Fair Value Based On
		Quoted Market
		Prices in Active			Significant				Significant
		Markets for			Other				Unobservable			Total
		Identical Assets			Observable Inputs				Inputs			Fair Value
		(Level 1)			(Level 2)				(Level 3)			Measurements
		(in thousands)
Cash equivalents — certificates of deposit (December 31, 2010)		$	—		$	15,245			$	—		$	15,245
Cash equivalents — certificates of deposit (June 30, 2010)		$	—		$	18,629			$	—		$	18,629

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Unilife Corporation:

We have reviewed the consolidated balance sheet of Unilife Corporation and subsidiaries as of December 31, 2010, the related consolidated statements of operations for the three months and six months ended December 31, 2010, and the related consolidated statements of stockholders’ equity and comprehensive loss, and cash flows for the six months ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Unilife Corporation and subsidiaries 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 (not presented herein); and in our report dated September 28, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 2010, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Note 2 of Unilife Corporation’s audited consolidated financial statements as of June 30, 2010, and for the year then ended, discloses that the Company has incurred recurring losses from operations and has an accumulated deficit as of June 30, 2010. Our auditors’ report on those consolidated financial statements dated September 28, 2010, includes an explanatory paragraph referring to the matters in note 2 of those consolidated financial statements, and indicating that these matters raised substantial doubt about the Company’s ability to continue as a going concern. As indicated in note 2 of the Company’s unaudited interim consolidated financial statements as of December 31, 2010, and for the six months then ended, the Company has continued to incur operating losses. The accompanying interim financial information does not include any adjustments that might result from the outcome of this uncertainty.

/s/ KPMG LLP

Harrisburg, Pennsylvania
February 14, 2011

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Information

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 Quarterly Report on Form 10-Q. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of our 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.

Certain statements in this Quarterly Report on Form 10-Q may constitute forward looking statements. 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. Our management believes that these forward-looking statements are reasonable as and when made. 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” in our Annual Report on Form 10-K and those described from time to time in other reports which we file with the Securities and Exchange Commission.

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 Form 10-Q 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 16.0 million euros and committed to pay us up to an additional 1.0 million euros to fund our industrialization program for the Unifill syringe. We are also in discussions with other pharmaceutical companies that are seeking to obtain access to the Unifill syringe.

In addition, we have recently begun to manufacture our Unitract 1mL insulin syringes at our FDA-registered manufacturing facility in 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.

Business 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 fund 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 of the assistance for our current development project or otherwise.

In December 2010, we received the $2.25 million loan as discussed above from the Commonwealth of Pennsylvania. The loan bears interest at a rate of 5.0% per annum, matures in January 2021 and is secured by a third mortgage on our new facility. In connection with the loan agreement, we entered into an intercreditor agreement by which the Commonwealth of Pennsylvania agreed that it would not exercise its rights in the event of a default by us without the consent of Metro, who holds the first and second mortgages on our new facility.

Metro Loan Agreement

In October 2010, we entered into a loan agreement with Metro Bank (“Metro”), pursuant to which Metro agreed to provide us with two notes in the amounts of $14.25 million and $3.75 million. The proceeds have been used to finance construction of our new corporate headquarters and manufacturing facility in York, Pennsylvania, including the repayment of our $6.9 million bridge construction loan with Univest National Bank and Trust Co. (“Univest”). Under the loan agreement, we may borrow funds based on the percentage of construction completed on the facility.

The $14.25 million term note matures 20 years from completion of construction of our new corporate headquarters and manufacturing facility and the $3.75 million term note matures on October 20, 2020. During construction, we will pay only interest only on both term notes at a rate of prime plus 1.50% per annum, with a floor of 4.50% per annum. For a period of five years subsequent to construction, we will pay principal and interest on both term notes, with interest at a fixed rate based on the 5 year Treasury-bill plus 300 basis points per annum, with a floor of 6.0% per annum. Commencing five years subsequent to construction through the maturity dates for each term note, we will pay principal and interest on both term notes, with interest at a rate to be negotiated by the parties, or if no rate is negotiated, based upon the Prime Rate plus 1.0% per annum, with a floor not to exceed 250 basis points over the Prime Rate. We will also pay one final payment of principal and interest upon the maturity of each term note.

The loan agreement contains certain customary covenants, including the maintenance of a Debt Service Reserve Account in the amount of $2.4 million which is classified as restricted cash on our consolidated balance sheet and will remain in place until we and Metro agree on the financial covenants. We may prepay the loan, but will incur a prepayment penalty of 2.0% during the first three years. The U.S. Department of Agriculture has guaranteed $10.0 million of the loan.

Private Placement and Share Purchase Plan

In December 2010, we issued 7,048,373 shares of common stock and raised an aggregate of A$34.1 million ($33.4 million), net of issuance costs, through an Australian private placement and a share purchase plan for our Australian and New Zealand stockholders. We also issued options to purchase 2,268,934 shares of common stock for no additional consideration to the investors in the private placement. Of these options, 50% are exercisable at A$7.50 per share, and 50% are exercisable at A$12.00 per share. All of the options are immediately exercisable and will expire in December 2013.

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.

Our critical accounting policies and estimates are described in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” of our Annual Report on Form 10-K. There have been no changes in critical accounting policies in the current year from those described in our Annual Report on Form 10-K.

Results of Operations

The following table summarizes our results of operations for the three months ended December 31, 2010 and 2009 and the six months ended December 31, 2010 and 2009:

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2010				2009				2010				2009
		(in thousands, except per share data)
Revenues:
Industrialization fees		$	—			$	2,088			$	1,350			$	3,833
Licensing fees			630				746				1,207				1,429
Product sales and other			1,132				411				2,748				1,091
Total revenues			1,762				3,245				5.305				6,353
Cost of product sales			824				474				1,999				1,303
Gross profit			938				2,771				3,306				5,050
Operating expenses:
Research and development			1,416				287				2,421				686
Selling, general and administrative			9,054				7,517				17,066				11,259
Depreciation and amortization			878				1,009				1,665				1,300
Total operating expenses			11,348				8,813				21,152				13,245
Operating loss			(10,410	)			(6,042	)			(17,846	)			(8,195	)
Interest expense			32				14				64				61
Interest income			(82	)			(252	)			(204	)			(257	)
Other (income) expense, net			(2	)			111				(102	)			(20	)
Net loss		$	(10,358	)		$	(5,915	)		$	(17,604	)		$	(7,979	)
Loss per share:
Basic loss per share		$	(0.19	)		$	(0.13	)		$	(0.32	)		$	(0.19	)
Diluted loss per share		$	(0.19	)		$	(0.13	)		$	(0.32	)		$	(0.19	)

Three Months Ended December 31, 2010 Compared to Three Months Ended December 31, 2009

Revenues. Revenues decreased by $1.5 million or 46%. During the three months ended December 31, 2010, we did not recognize any revenue under our industrialization agreement with sanofi-aventis. As of December 31, 2010, there is one remaining milestone payment to be recognized, the recognition of which is dependent upon the production of commercially viable units of our Unifill syringe. Revenues from our industrialization agreement with sanofi-aventis were $2.1 million during the three months ended December 31, 2009. Revenues from our exclusive licensing agreement with sanofi-aventis decreased from $0.7 million to $0.6 million. We have recognized and will continue to recognize revenue from the exclusive licensing agreement on a straight-line basis over the remaining term of the agreement. Since these revenues are based in euros, the $0.1 million decrease resulted from fluctuations in foreign currency translation rates. Revenues from product sales of our contract manufacturing business increased from $0.4 million to $1.1 million, primarily as a result of increased sales to B. Braun, our most significant contract manufacturing customer. We discontinued contract manufacturing activities in December 2010 in order to focus our efforts on the Unifill syringe. As a result, we increased production during the three months ended December 31, 2010 to ensure that we fulfill our obligation under our contract with B. Braun.

Cost of product sales. Cost of product sales increased by $0.4 million, or 74%, which was attributable to a higher level of product sales under our contract manufacturing sales activity.

Research and development expenses. Research and development expenses increased by $1.1 million, primarily as a result of additional expenditures incurred to finalize the product specifications of our Unifill syringe.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $1.5 million or 20%. During the three months ended December 31, 2010, we recorded $1.8 million of share-based compensation expense, an increase of $1.6 million compared to the same period last year. Our share-based compensation expense during the three months ended December 31, 2010 relates primarily to restricted stock and stock options issued to employees, directors and consultants during the second half of fiscal 2010 and the first half of fiscal 2011. Additionally, during fiscal 2010, and continuing into fiscal 2011, we increased the workforce at our York, Pennsylvania manufacturing facility, and as a result, we incurred payroll expenses and recruiting fees during the three months ended December 31, 2010 of $4.0 million, an increase of $0.9 million compared to the same period last year. Finally, during the three months ended December 31, 2010, we incurred expenses of $0.3 million in connection with the relocation to our new headquarters and manufacturing facility. These amounts were partially offset by a decrease of $1.6 million in legal and consulting fees due to significant costs incurred during the three months ended December 31, 2009 in connection with our redomiciliation to the United States.

Depreciation and amortization expense. Depreciation and amortization expense decreased by $0.1 million or 13%. 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 was $32,000 and $14,000 during the three months ended December 31, 2010 and 2009, respectively. We expect that our interest expense will increase significantly in the future since we have recently secured $18.0 million in debt financing for the construction of our new headquarters and manufacturing facility.

Interest income. Interest income decreased by $0.2 million, primarily as a result of higher cash balances during the three months ended December 31, 2009.

Net loss and loss per share. Net loss during the three months ended December 31, 2010 and 2009 was $10.4 million and $5.9 million, respectively. Basic and diluted loss per share was $0.19 and $0.13, respectively, on weighted average shares outstanding of 55,193,753 and 45,554,930, respectively. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with both our October 2009 and December 2010 equity financings.

Six Months Ended December 31, 2010 Compared to Six Months Ended December 31, 2009

Revenues. Revenues decreased by $1.0 million or 17% Revenues from our industrialization agreement with sanofi-aventis decreased from $3.8 million to $1.4 million due to the nature and timing of milestones achieved during the six months ended December 31, 2010. As of December 31, 2010, there is one remaining milestone payment to be recognized, the recognition of which is dependent upon the production of commercially viable units of our Unifill syringe. Revenues from our exclusive licensing agreement with sanofi-aventis decreased from $1.4 million to $1.2 million. We have recognized and will continue to recognize revenue from the exclusive licensing agreement on a straight-line basis over the remaining term of the agreement. Since these revenues are based in euros, the $0.2 million decrease resulted from fluctuations in foreign currency translation rates. Revenues from product sales of our contract manufacturing business increased from $1.1 million to $2.7 million, primarily as a result of increased sales to B. Braun, our most significant contract manufacturing customer. We discontinued contract manufacturing activities in December 2010 in order to focus our efforts on the Unifill syringe. As a result, we increased production during the six months ended December 31, 2010 to ensure that we fulfill our obligation under our contract with B. Braun.

Cost of product sales. Cost of product sales increased by $0.7 million, or 53%, which was attributable to a higher level of product sales under our contract manufacturing sales activity.

Research and development expenses. Research and development expenses increased by $1.7 million, primarily as a result of additional expenditures incurred to finalize the product specifications of our Unifill syringe.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $5.8 million or 52%. During the six months ended December 31, 2010, we recorded $4.4 million of share-based compensation expense, an increase of $3.6 million compared to the same period last year. Our share-based compensation expense during the six months ended December 31, 2010 relates primarily to restricted stock and stock options issued to employees, directors and consultants during the second half of fiscal 2010 and the first half of fiscal 2011. Additionally, during fiscal 2010 and continuing into fiscal 2011, we increased the workforce at our York, Pennsylvania manufacturing facility, and as a result, we incurred payroll expenses and recruiting fees during the six months ended December 31, 2010 of $7.1 million, an increase of $2.4 million compared to the same period last year. Finally, during the six months ended December 31, 2010, we incurred expenses of $0.3 million in connection with the relocation to our new headquarters and manufacturing facility. These amounts were partially offset by a decrease of $1.5 million in legal and consulting fees due to significant costs incurred during the six months ended December 31, 2009 in connection with our redomiciliation to the United States.

Depreciation and amortization expense. Depreciation and amortization expense increased by $0.4 million or 28% which was primarily attributable to $4.0 million of machinery placed into service during October 2009 relating to our 1mL syringe. 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 was $64,000 and $61,000 during the six months ended December 31, 2010 and 2009, respectively. We expect that our interest expense will increase significantly in the future since we have recently secured $18.0 million in debt financing for the construction of our new headquarters and manufacturing facility.

Interest income. Interest income decreased by $0.1 million, primarily as a result of higher cash balances during the six months ended December 31, 2009.

Net loss and loss per share. Net loss during the six months ended December 31, 2010 and 2009 was $17.6 million and $8.0 million, respectively. Basic and diluted loss per share was $0.32 and $0.19, respectively, on weighted average shares outstanding of 54,191,898 and 41,158,391, respectively. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with both our October 2009 and December 2010 equity financings.

Liquidity and Capital Resources

To date, we have funded our operations primarily from a combination of equity issuances, borrowings under our bank term loans and payments from sanofi-aventis under our exclusive licensing and industrialization agreements. As of December 31, 2010, cash and cash equivalents were $39.1 million, restricted cash was $2.4 million and our long-term debt was $18.6 million. The $2.4 million of restricted cash relates to amounts that must remain in cash deposits under our loan agreement with Metro. As of June 30, 2010, cash and cash equivalents were $20.8 million and our long-term debt was $2.7 million. We expect to receive $3.2 million in assistance from the Commonwealth of Pennsylvania as described under “Business Developments” and 1.0 million euros of additional milestone-based payments from sanofi-aventis under the industrialization agreement during the remainder of fiscal 2011.

During October 2010, we secured $18.0 million of external financing from Metro for the construction of our new manufacturing facility. We used $6.9 million of the proceeds to repay amounts borrowed in August 2010 under our credit agreement with Univest.

During December 2010, we received $2.25 million from the Commonwealth of Pennsylvania in low-interest financing for land and the construction of our new corporate headquarters and manufacturing facility.

During December 2010 we raised $33.4 million, net of issuance costs, through a private placement and share purchase plan for our Australian and New Zealand stockholders.

We believe that our cash on hand will be sufficient to sustain operations through the fourth quarter of fiscal 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 from 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 December 31, 2010. The $1.2 million long-term portion outstanding as of December 31, 2010 under these bank term loans has been reclassified to the current portion of long-term debt. In February 2011 we received a waiver from our lender for our previous non-compliance with this covenant.

The following table summarizes our cash flows during the six months ended December 31, 2010 and 2009:

		Six Months Ended December 31,
		2010				2009
		(in thousands)
Net cash provided by (used in):
Operating activities		$	(12,654	)		$	(1,594	)
Investing activities			(20,549	)			(7,562	)
Financing activities			49,526				48,686

Net Cash Used In Operating Activities

Net cash used in operating activities during the six months ended December 31, 2010 was $12.7 million compared to net cash used in operating activities of $1.6 million during the six months ended December 31, 2009. The decrease in cash flow was primarily due to $5.6 million of higher net loss after adding back depreciation and amortization and share-based compensation expense. The decrease was also attributable to the change in accounts receivable as a result of the nature and timing of amounts due from sanofi-aventis as well as the timing of accounts payable.

Net Cash Used in Investing Activities

Net cash used in investing activities was $20.5 million during the six months ended December 31, 2010, primarily as a result of construction costs incurred in connection with our new headquarters and manufacturing facility as well as costs incurred in connection with the purchase of machinery related to the lines for our Unifill syringe.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the six months ended December 31, 2010 was $49.5 million compared to $48.7 million during the six months ended December 31, 2009. During the six months ended December 31, 2010, we received $33.4 million in connection with our December 2010 private placement and share purchase plan, as well as $2.8 million upon the exercise of stock options. Additionally, during the six months ended December 31, 2010 we received $15.9 million in aggregate proceeds from our external financing from Metro and the Commonwealth of Pennsylvania. During the six months ended December 31, 2009, we received $47.1 million in connection with our October 2009 private placement and share purchase plan, as well as $1.8 million upon the exercise of stock options.

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

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

Foreign Currency Exchange Rate Fluctuations

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

Item 4.		Controls and Procedures

Disclosure Controls and Procedures

Our management with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such terms is defined in Rules 13a-15(e) under the Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control

There has not been any change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 5.		Other Information

On February 10, 2011, Unilife Corporation (“UC”) and Unilife Medical Solutions, Inc (“UMSI”) entered into certain amendments (the “Amendments”) to three business loan agreements between UMSI and Metro Bank (the “Business Loan Agreements”). The Business Loan Agreements, in the original aggregate principal amount of $3.18 million, were entered into by Metro and Integrated Biosciences, Inc. (“IBS”), the predecessor of UMSI, between the period of December 2005 and August 2006, and were guaranteed by Edward J. Paukovits, Jr., the former majority shareholder of IBS. The Business Loan Agreements were assumed by UMSI in connection with the acquisition of UMSI. Under the terms of the Amendments, Metro agreed to release Mr. Paukovits as a guarantor under the Business Loan Agreements and to substitute UC as guarantor of UMSI’s obligations under the Business Loan Agreements. The Amendments also made certain changes to the covenants and debt ratios contained in the Business Loan Agreements to make such provisions consistent with the provisions of the Loan Agreement dated as of October 20, 2010 between Metro and Unilife Cross Farm LLC relating to the financing of the Company’s new facility in York Pennsylvania, which loan is guaranteed by both UC and UMSI.

Item 6.		Exhibits

The exhibits to this report are listed in the Exhibit Index below.

Exhibit

Included

Incorporated by Reference Herein

No.

Description of Exhibit

Herewith

Form

Exhibit

Filing Date

10.1

Form of Subscription Agreement (the Company entered into separate Subscription Agreements with the investors in substantially the same fore set forth in Exhibit 10.1)

8-K

10.1

December 2, 2010

10.2

Form of Option Agreement (the Company entered into separate Option Agreements with the investors in substantially the same form set forth in Exhibit 10.2)

8-K

10.2

December 2, 2010

10.3

Form of Warrant issued to Keystone Redevelopment Group, LLC and L2 Architecture on December 2, 2010

POS AM

10.58

December 10, 2010

10.4

2010 Unilife Share Purchase Plan Terms and Conditions

8-K

10.1

January 6, 2011

10.5

Separation Agreement and General Release between Unilife Corporation and Bernhard Opitz

X

10.6

Employment Agreement between Unilife Corporation and Ramin Mojdehbakhsh, Ph.D.

8-K

10.1

February 7, 2011

31.1

Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer

X

31.2

Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer

X

32.1

Section 1350 Certification

X

32.2

Section 1350 Certification

X

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.