Unilife (UNIFF) 10-Q 2014 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2014

OR

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

For the transition period from                    to                    

Commission file number 001-34540

UNILIFE CORPORATION

(Exact name of registrant as specified in its charter)

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

250 Cross Farm Lane, York, Pennsylvania 17406

(Address of principal executive offices)

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  x    No  ¨

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

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	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨

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

As of May 8, 2014, 102,798,512 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 March 31, 2014 and June 30, 2013		3
	Unaudited Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended March 31, 2014 and 2013		4
	Unaudited Consolidated Statement of Stockholders’ Equity for the nine months ended March 31, 2014		5
	Unaudited Consolidated Statements of Cash Flows for the nine months ended March 31, 2014 and 2013		6
	Notes to Unaudited Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21
Item 4.	Controls and Procedures		21
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		22
Item 6.	Exhibits		23
	Signatures		24

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited)

	March 31, 2014			June 30, 2013
	(in thousands, except share data)
Assets
Current Assets:
Cash and cash equivalents	$	37,719		$	5,736
Restricted cash		2,008			2,400
Accounts receivable		1,550			654
Inventories		63			71
Prepaid expenses and other current assets		675			409
Total current assets		42,015			9,270
Property, plant and equipment, net		46,686			46,106
Goodwill		11,625			11,498
Intangible assets, net		20			23
Other assets		1,424			1,504
Total assets	$	101,770		$	68,401
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	3,299		$	3,428
Accrued expenses		4,597			2,444
Current portion of long-term debt		645			3,826
Deferred revenue		—			3,010
Total current liabilities		8,541			12,708
Long-term debt, less current portion		55,111			20,045
Deferred revenue		18,358			50
Total liabilities		82,010			32,803
Contingencies (Note 9)
Stockholders’ Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized as of March 31, 2014; none issued or outstanding as of March 31, 2014 and June 30, 2013		—			—
Common stock, $0.01 par value, 250,000,000 shares authorized as of March 31, 2014; 102,827,182 and 95,602,558 shares issued, and 102,798,512 and 95,573,888 shares outstanding as of March 31, 2014 and June 30, 2013, respectively		1,028			956
Additional paid-in-capital		294,736			268,157
Accumulated deficit		(278,468	)		(235,832	)
Accumulated other comprehensive income		2,604			2,457
Treasury stock, at cost, 28,670 shares as of March 31, 2014 and June 30, 2013, respectively		(140	)		(140	)
Total stockholders’ equity		19,760			35,598
Total liabilities and stockholders’ equity	$	101,770		$	68,401

See accompanying notes to the consolidated financial statements.

3

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2014			2013			2014			2013
	(in thousands, except per share data)
Revenue	$	1,383		$	685		$	8,143		$	2,076
Cost of product sales		—			46			—			127
Research and development		8,018			5,472			22,224			15,204
Selling, general and administrative		6,649			7,255			19,872			22,159
Depreciation and amortization		1,026			1,415			3,068			4,003
Total operating expenses		15,693			14,188			45,164			41,493
Operating loss		(14,310	)		(13,503	)		(37,021	)		(39,417	)
Interest expense		809			591			5,640			1,852
Interest income		(6	)		(10	)		(17	)		(48	)
Other income		(4	)		—			(8	)		—
Net loss		(15,109	)		(14,084	)		(42,636	)		(41,221	)
Other comprehensive loss
Foreign currency translation		(429	)		(49	)		(147	)		(217	)
Comprehensive loss	$	(14,680	)	$	(14,035	)	$	(42,489	)	$	(41,004	)
Net loss per share:
Basic and diluted net loss per share	$	(0.15	)	$	(0.17	)	$	(0.44	)	$	(0.52	)

See accompanying notes to the consolidated financial statements.

4

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

(unaudited)

	Common Stock				Additional Paid-In		Accumulated			Accumulated Other Comprehensive		Treasury Stock			Total
	Shares		Amount		Capital		Deficit			Income
	(In thousands, except share data)
Balance as of July 1, 2013		95,602,558	$	956	$	268,157	$	(235,832	)	$	2,457	$	(140	)	$	35,598
Net loss		—		—		—		(42,636	)		—		—			(42,636	)
Foreign currency translation		—		—		—		—			147		—			147
Share-based compensation expense		803,000		8		6,867		—			—		—			6,875
Issuance of common stock from public offerings, net of issuance costs		5,012,153		50		16,806		—			—		—			16,856
Issuance of common stock upon exercise of stock options		1,409,471		14		2,906		—			—		—			2,920
Balance as of March 31, 2014		102,827,182	$	1,028	$	294,736	$	(278,468	)	$	2,604	$	(140	)	$	19,760

See accompanying notes to the consolidated financial statements.

5

UNILIFE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended March 31,
	2014			2013
	(in thousands)
Cash flows from operating activities:
Net loss	$	(42,636	)	$	(41,221	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,068			4,003
Share-based compensation expense		6,875			7,198
Recognition of deferred revenue		(3,187	)		(1,939	)
Non-cash interest expense		3,610			—
Changes in assets and liabilities:
Accounts receivable		137			965
Inventories		8			137
Prepaid expenses and other current assets		(268	)		(44	)
Other assets		(355	)		7
Accounts payable		781			(213	)
Accrued expenses		1,485			200
Deferred revenue		17,500			—
Net cash used in operating activities		(12,982	)		(30,907	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(3,377	)		(1,931	)
Net cash used in investing activities		(3,377	)		(1,931	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		40,000			—
Principal payments on long-term debt and capital lease obligations		(11,061	)		(3,686	)
Proceeds from the issuance of common stock and warrants, net of issuance costs		16,856			32,162
Proceeds from the exercise of options to purchase common stock		2,534			171
Decrease in restricted cash		392			434
Payments of financing costs		(487	)		—
Net cash provided by financing activities		48,234			29,081
Effect of exchange rate changes on cash		108			18
Net increase (decrease) in cash and cash equivalents		31,983			(3,739	)
Cash and cash equivalents at beginning of period		5,736			11,410
Cash and cash equivalents at end of period	$	37,719		$	7,671
Supplemental disclosure of non-cash activities
Purchases of property, plant and equipment in accounts payable and accrued expenses	$	893		$	203
Purchases of property, plant and equipment pursuant to capital lease agreements	$	—		$	74

See accompanying notes to the consolidated financial statements.

6

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

1. Description of Business and Unaudited Financial Statements

Unilife Corporation and subsidiaries (the “Company”) is a U.S. based manufacturer and supplier of injectable drug delivery systems. The Company’s customers are biotechnology companies who seek to leverage its innovative, differentiated and customizable devices to enable or enhance the clinical development, regulatory approval and commercial lifecycles of its injectable biologics, drugs and vaccines. The Company manufactures and supplies its proprietary devices to pharmaceutical companies in a format where they can be filled and packaged with an injectable therapy prior to its shipment to the end-user for safe, simple and convenient administration.

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 accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the fiscal year ended June 30, 2013 contained in its Annual Report on Form 10-K.

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.

2. Liquidity

The Company has incurred recurring losses from operations during the year ended June 30, 2013, and the nine months ended March 31, 2014, and anticipates incurring additional losses until such time that it can generate sufficient revenue from the sale, customization, or exclusive use and licensing of its proprietary range of injectable drug delivery systems to pharmaceutical and biotechnology customers. Management has taken such steps delineated below to address its cash requirements.

On March 12, 2014 (the “Closing Date”), Unilife Medical Solutions, Inc. (the “Borrower”), a wholly owned subsidiary of the Company, entered into a credit agreement (the “Credit Agreement”) with ROS Acquisition Offshore LP (together with its affiliates, successors, transferees and assignees, the “Lender”), an affiliate of OrbiMed Advisors. Pursuant to and subject to the terms of the Credit Agreement, the Lender agreed to provide term loans to the Borrower in the aggregate principal amount of up to $60.0 million. A first tranche loan of $40.0 million was drawn on the Closing Date and a further two tranches each of $10.0 million (collectively, the “Loans”) have been committed by the Lender and will be funded on each of December 15, 2014 and June 15, 2015, subject to and in accordance with the terms of the Credit Agreement.

In October 2012, the Company entered into a Controlled Equity Offering Sales Agreement, (the “Sales Agreement”) pursuant to which the Company may, from time to time, issue and sell shares of common stock having an aggregate offering price of up to $45.0 million. During the nine months ended March 31, 2014, the Company issued 5,012,153 shares of common stock and raised approximately $16.9 million under the Sales Agreement. The Company is not obligated to make any additional sales of shares under the Sales Agreement. As of March 31, 2014, there was approximately $13.0 million available under the Sales Agreement.

The Company continues to have discussions with current and prospective customers for many active programs in its commercial pipeline and has executed several agreements featuring a combination of revenue streams including exclusivity fees, device customization programs and supply contracts that have begun to generate cash payments to the Company during fiscal year 2014. The Company expects to continue to execute agreements and generate additional cash payments during the remainder of calendar year 2014. Given the substantial size, complexity and long-term duration of many of these prospective agreements, some can take a significant time to negotiate and finalize.

The proceeds from the term loans under the Credit Agreement combined with anticipated cash to be generated from new and existing customer agreements are expected to provide the Company with sufficient liquidity. However, there can be no assurance that such cash from customer agreements will be available when needed. These factors continue to raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of

7

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

liabilities in the ordinary course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

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.

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, royalty liability valuation 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 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.

Share-Based Compensation

The Company grants equity awards to its employees, directors, consultants and service providers. 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 and service providers are sometimes granted for past services, in which case their fair value is expensed on their grant date, while other awards require future service, or the achievement of performance or market conditions. Timing of expense recognition for consultant awards is similar to that of employee and director awards; however, aggregate expense is re-measured each quarter-end based on the then fair value of the award through the vesting date of the award. The Company estimates the fair value of stock options using the Black-Scholes option-pricing model, with the exception of market-based grants, which are valued based on the Monte Carlo option pricing model. Option pricing methods require the input of highly subjective assumptions, including the expected stock price volatility.

Revenue Recognition

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

The Company recognizes revenue from sales of products at the time of shipment when title passes to the customer. The Company recognizes up front, non-refundable fees ratably over the expected life of the related agreement. Revenue from industrialization and development fees is recognized upon achievement of the “at risk” milestone events, which represent the culmination of the earnings process related to such events. Milestones can include specific phases of projects such as product design, prototype availability, user tests, manufacturing proof of principle and the various steps to complete the industrialization of the product. The terms of these contracts provide for customer payments to be made to the Company as services are rendered or milestones are achieved. Payment terms are considered to be standard commercial terms. Revenue is recognized when each substantive milestone has been achieved and the Company has no future performance obligations related to the milestone. Fees for completed milestones which are dependent upon customer acceptance for non-refundable payment or, if paid, are refundable pending customer acceptance are recognized upon customer acceptance and the termination of refund rights.

8

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

The Company recognized $0.4 million and $2.9 million of revenue during the three and nine months ended March 31, 2014, respectively on the milestone basis as follows:

The Company recognized $0.1 million and $1.3 million of revenue during the three and nine months ended March 31, 2014, respectively, pursuant to a clinical supply agreement with a customer related to milestones that were completed during the period. This agreement provides for the customization of a drug delivery system to be used in combination with the customer’s product candidate in a clinical trial. This agreement provides for payments to be made upon the completion of agreed-upon milestones.

The Company recognized $0 and $0.8 million of revenue during the three and nine months ended March 31, 2014, respectively, pursuant to a customization and commercial supply agreement with a customer related to milestones that were completed during the period. This agreement provides for the development and future supply of customized component parts for the customer to use in a drug-device combination product. This agreement provides for payments to be made during the development period based on completion of agreed-upon milestones.

The Company recognized $0.2 million and $0.7 million of revenue during the three and nine months ended March 31, 2014, respectively, pursuant to a materials transfer agreement with a customer related to milestones that were completed during the period. This agreement provides for certain materials and related services to the customer as determined under the agreement. This agreement expires upon completion of the services and provides for payments to be made upon completion of agreed-upon milestones.

The Company recognized $0.1 million and $0.1 million of revenue during the three and nine months ended March 31, 2014, respectively, pursuant to a collaborative research agreement with a customer related to milestones that were completed during the period. This agreement provides for certain materials and related services to the customer as determined under the agreement. This agreement expires upon completion of the services and provides for payments to be made upon completion of agreed-upon milestones.

Fair Value Measurements

In accordance with ASC 820,Fair Value Measurements and Disclosures, the Company measures fair value based on a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unoberservable inputs by requiring that observable inputs be used when available. The fair value hierarchy is broken down into three levels based on the source of inputs.

The Company has elected to measure its royalty liability at fair value in accordance with ASC 825,Financial Instruments. The fair value of the royalty liability is based on significant inputs not observable in the market, which require it to be reported as a Level 3 liability within the fair value hierarchy. The valuation uses a methodology and assumptions the Company believes would be made by a market participant. In particular, the valuation analysis used a discounted cash flow methodology under the income approach based on the present value sum of payments to be made in the future. The fair value of the royalty liability is estimated by applying a risk adjusted discount rate to the adjusted royalty revenue stream. These fair value estimates are most sensitive to changes in the payment stream.

Reclassifications

Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.

Recently Issued Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). The new guidance requires an entity to disclose in a single location the effects of reclassifications out of accumulated other comprehensive income (“AOCI”). For items reclassified out of AOCI and into net income in their entirety, entities must disclose the effect of the reclassification on each affected net income item. For AOCI reclassification items that are not

9

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

reclassified in their entirety into net income, entities must provide a cross reference to other required U.S. GAAP disclosures. The standard does not change the items which must be reported in other comprehensive income. ASU 2013-02 is effective for annual and interim periods for fiscal years beginning after December 15, 2012. Since this guidance impacts presentation only, it has had no effect on the Company’s financial condition.

In July 2013, the FASB issued ASC 2013-11, “Income Taxes — Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”) which is part of Accounting Standards Codification (“ASC”) 740: Income Taxes. The new guidance requires an entity to present an unrecognized tax benefit and an NOL carryforward, a similar tax loss, or a tax credit carryforward on a net basis as part of a deferred tax asset, unless the unrecognized tax benefit is not available to reduce the deferred tax asset component or would not be utilized for that purpose, then a liability would be recognized. ASU 2013-11 is effective for annual and interim periods for fiscal years beginning after December 15, 2013. The Company is currently evaluating the impact of the July 1, 2014 adoption of this guidance on its financial statements.

4. Equity Transactions and Share-Based Compensation

The Company recognized share-based compensation expense related to equity awards to employees, directors, consultants and service providers of $1.6 million and $2.7 million during the three months ended March 31, 2014 and 2013, respectively and $6.9 million and $7.2 million during the nine months ended March 31, 2014 and 2013, respectively.

During the nine months ended March 31, 2014 the Company granted certain directors 227,500 shares of common stock which may not be sold or transferred until such time as the director leaves the board for any reason, including a change in control, or other permitted circumstances. The weighted average grant date fair value of the shares was $3.95 per share.

Stock Options and Warrants

The Company has granted stock options to certain employees and directors under the Employee Share Option Plan (the “Plan”). The Plan is designed to assist in the motivation and retention of employees and to recognize the importance of employees to the long-term performance and success of the Company. The Company has also granted stock options to certain consultants and service providers 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 and service providers is recognized ratably over each vesting tranche of the options.

In November 2009, the Company adopted the 2009 Stock Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan initially provided for a maximum of 6,000,000 shares of common stock to be reserved for the issuance of stock options and other stock-based awards. Commencing on January 1, 2012, and on each January 1^st thereafter, through January 1, 2019, the share reserve automatically adjusts so that it equals 17.5% of the weighted average number of shares of common stock outstanding reduced by the sum of any shares of common stock issued under the Stock Incentive Plan and any shares of common stock subject to outstanding awards under the Stock Incentive Plan.

In January 2010, the Company issued 1,000,000 options to purchase common stock to a consultant under the Stock Incentive Plan in consideration for various services to be performed for the Company. The options to purchase common stock are exercisable at A$6.33 per share and vest upon the trading price of the Company’s CHESS Depositary Interests 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 March 31, 2014 were valued at $0.31 per option, which is being expensed ratably over the vesting period of each tranche, which ranges from 0.57 years to 0.69 years. The options will be re-valued on a quarterly basis and marked to market until exercised.

10

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

The following is a summary of activity related to stock options held by employees and directors during the nine months ended March 31, 2014:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
								(in thousands)
Outstanding as of July 1, 2013		5,121,807		$	4.09
Cancelled		(74,396	)		5.55
Exercised		(1,250,000	)		1.83
Outstanding as of March 31, 2014		3,797,411		$	4.81		5.2	$	1,571
Exercisable as of March 31, 2014		2,042,157		$	4.61		5.8	$	806

The following is a summary of activity related to stock options and warrants held by persons other than employees and directors during the nine months ended March 31, 2014:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
								(in thousands)
Outstanding as of July 1, 2013		4,258,937		$	7.15
Granted		300,000			3.11
Exercised		(240,000	)		2.65
Expired		(2,268,934	)		9.02
Outstanding as of March 31, 2014		2,050,003		$	5.02		1.7	$	600
Exercisable as of March 31, 2014		1,050,003		$	4.20		2.5	$	600

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 March 31, 2014 and 2013 was $0.1 million and $0 respectively. The total intrinsic value of stock options exercised during the nine months ended March 31, 2014 and 2013 was $1.9 million and $0.1 million, respectively.

The Company used the following weighted average assumptions in calculating the fair value of options granted during the nine months ended March 31, 2014 and 2013:

	Nine Months Ended March 31,
	2014			2013
Number of stock options granted		300,000			660,000
Expected dividend yield		0	%		0	%
Risk-free interest rate		1.54	%		0.94	%
Expected volatility		55	%		55	%
Expected life (in years)		5.0			6.0

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

11

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

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 and service providers is based on the contractual term of the awards.

Restricted Stock

The Company has granted shares of restricted stock to certain employees’ consultants and service providers 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 and service providers, the fair value of the awards is re-valued on a quarterly basis and marked to market until vested. Share-based compensation expense for restricted stock issued to consultants and service providers is recognized ratably over each vesting tranche.

The following is a summary of activity related to restricted stock awards during the nine months ended March 31, 2014:

	Number of Restricted Stock Awards			Weighted Average Grant Date Fair Value
Unvested as of July 1, 2013		3,254,403		$	3.31
Granted		530,000			4.41
Vested		(1,400,892	)		3.18
Cancelled		(4,500	)		3.46
Unvested as of March 31, 2014		2,379,011		$	3.63

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

Property, plant and equipment consist of the following:

	March 31, 2014			June 30, 2013
	(in thousands)
Building	$	32,188		$	32,188
Machinery and equipment		19,338			21,682
Computer software		2,661			2,653
Furniture and fixtures		598			374
Construction in progress		2,135			91
Land		2,036			2,036
Leasehold improvements		166			88
		59,122			59,112
Less: accumulated depreciation and amortization		(12,436	)		(13,006	)
Property, plant and equipment, net	$	46,686		$	46,106

The Company has purchase commitments totaling $2.9 million related to expansion of its manufacturing space.

12

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

6. Goodwill

The changes in the carrying amount of goodwill during the nine months ended March 31, 2014 are as follows:

	(in thousands)
Balance as of July 1, 2013	$	11,498
Foreign currency translation		127
Balance as of March 31, 2014	$	11,625

7. Long-Term Debt

Long-term debt consists of the following:

	March 31, 2014		June 30, 2013
	(In thousands)
10.25% Term loan, due March 2020	$	33,000	$	—
Royalty agreement liability		7,000		—
6.00% Mortgage loan, due December 2031		13,347		13,677
6.00% Mortgage loan, due October 2020		—		3,322
14.00% Secured lending facility, due December 2014		—		2,586
4.75% Bank term loans, due January 2021 through August 2021		—		1,701
5.00% Commonwealth of Pennsylvania financing authority loan, due January 2021		2,096		2,133
Other		313		452
		55,756		23,871
Less: current portion of long-term debt		645		3,826
Total long-term debt	$	55,111	$	20,045

Term Loan

On March 12, 2014 the Borrower entered into the Credit Agreement with the Lender. Pursuant to and subject to the terms of the Credit Agreement, the Lender agreed to provide term loans to the Borrower in the aggregate principal amount of up to $60.0 million. A first tranche loan of $40.0 million was drawn on the Closing Date and a further two tranches each of $10.0 million have been committed by the Lender and will be funded on each of December 15, 2014 and June 15, 2015, subject to and in accordance with the terms of the Credit Agreement.

The Loans bear interest at 9.25% per annum plus the greater of three-month LIBOR or 1.0%, payable in cash quarterly in arrears, and as otherwise described in the Credit Agreement. A default interest rate of 14.25% per annum plus the greater of three-month LIBOR or 1.0% shall apply during the existence of a default under the Credit Agreement. The Loans will be interest-only until March 12, 2020 (“the Maturity Date”).

Unless the loan facility is otherwise terminated earlier pursuant to the terms of the Credit Agreement, the Borrower is required to repay in full the unpaid principal amount of the Loans drawn down, together with all accrued and unpaid interest thereon plus a 6.0% repayment premium on Maturity Date. The Borrower can make voluntary repayments at any time of any unpaid principal amount of the Loans, plus a 6.0% repayment premium. The Borrower must make mandatory prepayments in certain prescribed circumstances, including, without limitation, certain dispositions of assets and certain casualty events. In such events, the Borrower must prepay to Lender 100% of the net cash proceeds received.

The obligations of the Borrower under the Credit Agreement are guaranteed by the Company and each of its subsidiaries and the Credit Agreement is secured by the assets of the Company and its subsidiaries. The security interests granted by Borrower, the Company, Unilife Cross Farm LLC (“Cross Farm”), Unilife Medical Solutions Limited (“USML”) and Unitract Syringe Pty Limited (“Unitract Syringe”) are evidenced by, among other things, the Pledge and Security Agreement, dated as of March 14, 2014, by the Borrower, the Company, Cross Farm, USML, and Unitract Syringe in favor of Lender, for itself and as agent for Royalty Opportunities S.A.R.L. (“ROS”), the Mortgage and Security Agreement, dated March 12, 2014, by and between Cross Farm and Lender, for itself and as agent of ROS, and the General Security Deed, dated as of March 12, 2014, by Unitract Syringe, USML, and the Company in favor of the Lender, for itself and as agent of ROS. The Credit Agreement also contains certain customary covenants, as well as, covenants relating to achieving minimum cash revenue targets at the end of each calendar year, maintaining minimum liquidity targets, the execution of certain customer agreements in form and substance satisfactory to lender within 90 days of closing and the retention of certain members of management.

13

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

The Borrower received net proceeds of approximately $31.4 million following repayment of certain of our existing debt and certain fees and expenses of the Lender in connection with the Loans. In addition, the Borrower incurred approximately $0.4 million in other expenses in connection with the Loans.

In connection with the Credit Agreement, the Borrower entered into a royalty agreement (the “Royalty Agreement”) with ROS which will entitle ROS to receive royalty payments. Pursuant to and subject to the terms of the Royalty Agreement, the borrower has agreed to pay 2.75% on the first $50.0 million of net sales (on a cash receipts basis as defined in the Credit Agreement) in each fiscal year, plus 1.0% of net sales in excess of $50.0 million and up to and including $100.0 million in each fiscal year, plus 0.25% of net sales in excess of $100.0 million in each fiscal year. Borrower has the right to buyout the Royalty Agreement at any time on or before the fourth anniversary of the agreement at a reduced amount. The buy-out amount ranges from $6.5 million, on or prior to the first anniversary of the agreement and up to $21.0 million, after the fourth anniversary of the agreement (such amount depending on when the buy-out option is exercised), less amounts previously paid by the Borrower to lender pursuant to the Royalty Agreement.

The Company determined that the Credit Agreement and the Royalty Agreement should be accounted for as two separate units. Accordingly, the Company allocated the proceeds from the Loans on a prorated basis between the two units based on their relative fair values. As a result, on the Closing Date, the Loan was determined to have a fair value of $33.0 million and the Royalty Agreement was determined to have a fair value of $7.0 million. The Loan will be accreted to the face value over the loan term based on an effective interest rate of 17.5%. The Royalty Agreement will be adjusted to fair value on a quarterly basis.

On the Closing Date, Cross Farm, the Borrower and the Company also entered into an Omnibus Waiver and Amendment (the “Metro Bank Amendment”), to that certain Loan Agreement dated as of October 20, 2010 by, among others, Cross Farm and Metro Bank and the other loan documents relating thereto (collectively, the “Original Metro Bank Loan Documents”) whereby Metro Bank was paid the amount of $40 thousand, in order to permit Unilife’s execution of the Credit Agreement and related documents and to extend its obligations to Lender thereunder, while remaining in compliance with the Original Metro Bank Loan Documents.

Mortgage Loans

In October 2010, Cross Farm entered into a loan agreement with Metro Bank, pursuant to which Metro Bank provided Cross Farm with two mortgage loans in the amounts of $14.25 million and $3.75 million. The proceeds received were used to finance the purchase of land and construction of the Company’s corporate headquarters and manufacturing facility in York, Pennsylvania.

During construction, Cross Farm paid only interest on both mortgage loans at the Prime Rate plus 1.50% per annum, with a floor of 4.50% per annum. Subsequent to construction, Cross Farm is paying principal and interest on both mortgage loans, with interest at a fixed rate of 6.00%. The weighted average interest rate on both mortgage loans was 6.00% during the nine months ended March 31, 2014 and the year ended June 30, 2013. In connection with the two mortgage loans and other bank term loans, the Company has given Metro Bank a lien on substantially all of the Company’s assets except for the Company’s intellectual property and certain other assets that are subject to other third party liens.

The Original Metro Loan Document contains certain customary covenants, including the maintenance of a Debt Service Reserve Account in the amount of $2.4 million, classified as restricted cash on the consolidated balance sheet, which will remain in place until Cross Farm and Metro agree on the financial covenants. The terms of the Original Metro Loan Documents allow the Company to use the Debt Service Reserve Account to pay monthly debt service on the mortgage loans, so long as the balance in the account is at least $1.6 million and is replenished to $2.4 million every six months. The Company was in compliance with its debt covenants as of March 31, 2014. However, there can be no assurance that the Company will be able to maintain the Debt Service Reserve Account balance for a period of 12 months from March 31, 2014. Cross Farm may prepay the loan without penalty. The U.S. Department of Agriculture has guaranteed $8.0 million of the mortgage loan due December 2031.

In connection with the Credit Agreement, the Company entered into the Metro Bank Amendment pursuant to which the 6.0% Mortgage due October 2020 and the 4.75% term loans due January through August 2021 were repaid. The Company used proceeds from the March 12, 2014 Credit Agreement of $4.9 million to repay the mortgage and the term loans which included $0.1 million in fees and expenses paid to Metro bank. In addition the Company wrote-off approximately $0.1 million in unamortized deferred financing costs related to the mortgage. The total amount recognized during the three months ended

14

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

March 31, 2014 as loss on early extinguishment of debt was $0.2 million. In exchange for the repayment of the mortgage and loans, Metro Bank agreed to release, effective March 12, 2014, the liens on substantially all of the Company’s assets except for the lien on the building and real estate in connection with the remaining mortgage and the debt service reserve account.

Secured Lending Facility

In August 2011, the Company entered into a Master Lease Agreement (the “Lease Agreement”) with Varilease Finance, Inc. (“Varilease”) for up to $10.0 million of secured financing for production equipment for its Unifill syringe. Based on the Company’s continuing involvement throughout the term of the agreement and the integral nature of the production equipment, the transaction is being accounted for as a financing. Over the term of the Lease Agreement, the Company made 27 monthly installments based upon the amount drawn. This facility had an effective interest rate of 14.00%. The secured lending facility contained covenants and provisions for events of default customarily found in lease agreements.

As previously disclosed on September 30, 2013, Varilease and CCA Financial LLC (collectively, the “Lessors”) filed an action in the State of Michigan in the Circuit Court for the County of Oakland, Case No. 2013-136458-CK seeking a judgment confirming the terms of the lease. The Company removed the action to the U.S. District Court for the Eastern District of Michigan, Case No. 2:13-CV-14238-SFC-LJM, on October 4, 2013. Under the Lease Agreement, Lessors and the Company were to negotiate a buyout rate at the end of the two-year lease term, which Lessors represented to the Company during the lease negotiations would be 15% of the amount financed. When the Company notified Lessors that it wanted to exercise the buyout of the equipment, Lessors claimed a buyout rate significantly higher than 15%. Under the terms of the lease, if the parties are unable to agree on a buyout rate by the end of the lease term, the lease will automatically renew for an additional 12-month period and the Company would be responsible for another year of lease payments. Lessor’s action in Michigan state court asked the court to confirm that the parties have been unable to agree on a buyout rate and therefore under the terms of the lease the lease is automatically extended for one year.

As previously disclosed, the Company also filed suit on September 30, 2013 against Lessors in the U.S. District Court for the Eastern District of Michigan, Case No. 2:13-cv-14174-SFC-LJM alleging, among other things, that Lessors fraudulently induced the Company into entering the lease by making misrepresentations about the buyout rate. The Company sought, among other things, to have the federal court enforce a 15% buyout rate and to enjoin Lessors from declaring a default under the lease and taking possession of the equipment for which the Company would have to impair the carrying value of assets. On October 17, 2013, in a stipulated order, the U.S. District Court ordered that the Company continue to make the same monthly payments under the lease, that as long as the Company makes timely payments, Lessors shall not declare a default, and that Lessors is required to provide advance notice of a default.

As previously disclosed, the Company entered into a Confidential Mutual Release and Settlement Agreement (the “Definitive Settlement Agreement”), effective December 30, 2013, with the Lessors. The Definitive Settlement Agreement provides that it will obtain title to all equipment under the equipment lease upon the payment to the Lessors of approximately $4.8 million over the next twelve months. In addition, under the Definitive Settlement Agreement the Company and the Lessors released each other from any and all claims related to the companion lawsuits, as well as dismissed such lawsuits. In connection with the Definitive Settlement Agreement, during the nine months ended March 31, 2014, the Company recognized $3.6 million of interest expense representing the difference between the carrying value of the debt and the present value of the settlement amount.

During the three months ended March 31, 2014, the Company paid $4.7 million (including $3.5 million with proceeds from the March 12, 2014 Credit Agreement) to the Lessors in satisfaction of the remaining obligation under the Definitive Settlement Agreement. Effective March 12, 2014 the Lessors released all liens and security interest in all of the Company’s assets subject to the Lease Agreement.

Commonwealth of Pennsylvania Financing Authority Loan

In December 2010, Cross Farm received a $2.25 million loan from the Commonwealth of Pennsylvania for land and the construction of its current manufacturing facility. The loan bears interest at a rate of 5.00% per annum, matures in January 2021 and is secured by a third mortgage on the facility. In connection with the loan agreement, Cross Farm entered into an intercreditor agreement by which the Commonwealth of Pennsylvania agreed that it would not exercise its rights in the event of a default by Cross Farm without the consent of Metro Bank, which holds the mortgage on the facility.

15

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

8. Net Loss Per Share

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

	Three Months Ended March 31,						Nine Months Ended March 31,
	2014			2013			2014			2013
	(In thousands, except share and per share data)
Numerator
Net loss	$	(15,109	)	$	(14,084	)	$	(42,636	)	$	(41,221	)
Denominator
Weighted average number of shares used to compute basic net loss per share		100,007,135			81,595,444			97,135,688			78,830,613
Effect of dilutive options to purchase common stock		—			—			—			—
Weighted average number of shares used to compute diluted net loss per share		100,007,135			81,595,444			97,135,688			78,830,613
Basic and diluted net loss per share	$	(0.15	)	$	(0.17	)	$	(0.44	)	$	(0.52	)

Due to the Company’s net losses, unvested shares of restricted stock (participating securities) totaling 2,564,631 and 5,666,495 were excluded from the calculation of basic and diluted net loss per share during the three months ended March 31, 2014 and 2013, respectively and unvested shares of restricted stock (participating securities) totaling 2,774,977 and 5,200,496 were excluded from the calculation of basic and diluted net loss per share during the nine months ended March 31, 2014 and 2013, respectively.

In addition, stock options (non-participating securities) totaling 3,429,685 and 7,032,057 during the three months ended March 31, 2014 and 2013, respectively, were excluded from the calculation of diluted net loss per share and stock options (non-participating securities) totaling 4,985,648 and 8,504,634 during the nine months ended March 31, 2014 and 2013, respectively, were excluded from the calculation of diluted net 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 March 31, 2014 and 2013, these shares would have had an effect of 493,490 and 914,744 diluted shares, respectively, for purposes of calculating diluted net loss per share. Had the Company reported net income during the nine months ended March 31, 2014 and 2013, these shares would have had an effect of 398,727 and 592,309 diluted shares, respectively, for purposes of calculating diluted net loss per share.

9. 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.

As previously disclosed, on September 7, 2012, the Company received a letter from counsel for Talbot (Todd) Smith, a former employee, alleging that Mr. Smith was wrongly terminated. Mr. Smith, who was terminated “for cause” by the Company, filed a complaint with the Occupational Safety & Health Administration (“OSHA”) in November 2012. The Company and various third parties have investigated the allegations made by Mr. Smith and have determined that the allegations are without merit. The Company believes the allegations made by Mr. Smith against the Company are in retaliation for his “for cause” termination and has been defending itself vigorously in the OSHA matter. Because OSHA did not make a final determination on Mr. Smith’s complaint within 180 days, Mr. Smith filed a complaint with the U.S. District Court for the Eastern District of Pennsylvania (the “USDC”) on August 30, 2013 and an amended complaint on March 5, 2014. The USDC amended complaint makes the same allegations made by Mr. Smith in the OSHA complaint and also includes a defamation claim,

16

Unilife Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

To the extent that the allegations made by Mr. Smith in the USDC complaint are nearly identical to those made in his OSHA complaint, the Company and various third parties have investigated the allegations previously and have determined that the allegations are without merit, and the Company will defend itself vigorously in court. The case is currently in discovery. Given that Mr. Smith filed the complaint with the USDC, OSHA dismissed the OSHA matter without a final determination.

As previously disclosed, subsequent to the filing of the OSHA complaint by Mr. Smith on February 12, 2013, the Company received a subpoena from the staff of the U.S. Securities and Exchange Commission (the “Staff”) requesting the Company to provide certain information to the Staff, which is generally consistent with the meritless allegations made by Mr. Smith in his OSHA complaint. In the USDC complaint, Mr. Smith states that he provided the Staff with information about his allegations in July and August 2012. The Company responded to that subpoena and received additional subpoenas from the Staff, requesting additional information consistent with the first subpoena. The Company is cooperating fully with the Staff and is providing the requested information.

On January 8, 2014, the Company was served with a derivative complaint filed in the Delaware Chancery Court by Cambridge Retirement System, a purported shareholder of the Company, against the Company’s Board of Directors to recover allegedly “excessive and wasteful” compensation paid to the non-executive directors since 2010. The Company believes that these allegations are baseless and without merit given that the Company has received favorable say-on-pay votes at the last three annual shareholders meetings and the shareholders previously have voted in favor of the equity grants to the directors, which is required under ASX listing rules, as recently as November 2013. The Company and the directors are defending themselves vigorously in this matter. The Company filed a motion to dismiss in lieu of an answer in February 2014 and expects that the court will hear oral arguments on the Company’s motion in June 2014.

The Company does not believe there will be any material impact to the Company or its business as a result of these matters.

10. Sanofi Agreements

The Company signed an exclusivity agreement and an industrialization agreement with Sanofi, a multinational pharmaceutical company, between June 2008 and July 2009. Under the terms of these agreements, Sanofi had agreed to pay the Company an aggregate of approximately $36.4 million in exclusivity fees and industrialization milestone payments for the exclusive right to negotiate the purchase of the Unifill ready-to-fill (prefilled) syringe (Unifill syringe or product) which was developed pursuant to the agreements. Sanofi had paid the Company a €10.0 million ($13.0 million) up front non-refundable one-time fee which the Company was recognizing as revenue over the expected term of the agreement.

On September 3, 2013, the Company and Sanofi entered into a supply agreement and terminated both the exclusivity agreement and the industrialization agreement. As a result, the Company has recognized the remaining unamortized revenue of $2.3 million during the nine months ended March 31, 2014. Under the terms of the supply agreement, the Company has granted Sanofi the exclusive use of the Unifill Finesse with anti-thrombotic drugs during the contract period. Following a four year ramp-up period after market entry, exclusivity will be maintained, subject to Sanofi purchasing a minimum of 150 million units of the Unifill Finesse or other Unifill syringes per year. The Company can supply its Unifill syringes, including the Unifill Finesse, to additional customers in all other therapeutic classes outside of anti-thrombotics. In addition to future revenue from the sale of Unifill Finesse syringes, the Company may receive up to $15 million from Sanofi in milestone-based payments with $5.0 million of these payments received in October 2013. This supply contract replaces and supersedes all other agreements previously signed between both parties regarding the Unifill syringe platform.

17

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.

Overview

We are a U.S.-based developer, manufacturer and supplier of injectable drug delivery systems. Our customers are pharmaceutical and biotechnology companies who seek to leverage our innovative, differentiated and customizable devices to enable or enhance the clinical development, regulatory approval and commercial lifecycles of their injectable biologics, drugs and vaccines. We manufacture and supply our proprietary devices to pharmaceutical companies in a format where they can be filled and packaged with an injectable therapy prior to its shipment to the end-user for safe, simple and convenient administration.

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.

18

Results of Operations

The following table summarizes our results of operations for the three and nine months ended March 31, 2014 and 2013:

	Three Months Ended March 31,						Nine Months Ended March 31,
	2014			2013			2014			2013
	(in thousands, except per share data)
Revenue	$	1,383		$	685		$	8,143		$	2,076
Cost of product sales		—			46			—			127
Research and development		8,018			5,472			22,224			15,204
Selling, general and administrative		6,649			7,255			19,872			22,159
Depreciation and amortization		1,026			1,415			3,068			4,003
Total operating expenses		15,693			14,188			45,164			41,493
Operating loss		(14,310	)		(13,503	)		(37,021	)		(39,417	)
Interest expense		809			591			5,640			1,852
Interest income		(6	)		(10	)		(17	)		(48	)
Other income		(4	)		—			(8	)		—
Net loss	$	(15,109	)	$	(14,084	)	$	(42,636	)	$	(41,221	)
Net loss per share:
Basic and diluted net loss per share	$	(0.15	)	$	(0.17	)	$	(0.44	)	$	(0.52	)

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Revenue. Revenue increased by $0.7 million or 102% due to additional revenue recognized related to development activities for various customers. During the three months ended March 31, 2014, we recognized approximately $0.8 million of revenue related to a master development and supply agreement, approximately $0.2 million of revenue related to a material transfer agreement and approximately $0.4 million of revenue related to other customer agreements. During the three month period ended March 31, 2013, we recognized $0.7 million of revenue related to our exclusivity agreement with Sanofi. We expect to continue to recognize revenue related to current customer agreements as services are rendered and milestones are achieved as well as from additional customer agreements we expect to enter into in future periods.

Research and development expenses. Research and development expenses increased by $2.5 million or 47% primarily due to increased payroll costs of $0.9 million and increased material and tooling costs of $0.9 million related to customer programs.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $0.6 million or 8% primarily due to decreased share-based compensation expense of $1.2 million, partially offset by increased payroll and other administrative costs of $0.6 million.

Depreciation and amortization expense. Depreciation and amortization expense decreased by $0.4 million or 27% primarily as a result of the disposal of certain pieces of equipment during fiscal 2013.

Interest expense. Interest expense increased by $0.2 million or 37% primarily as a result of amounts paid in connection with the term loan which we entered into during March 2014.

Net loss and net loss per share. Net loss during the three months ended March 31, 2014 and 2013 was $15.1 million and $14.1 million, respectively. Basic and diluted net loss per share was $0.15 and $0.17, respectively, on weighted average shares outstanding of 100,007,135 and 81,595,444. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with our February 2013 equity financing as well as shares issued under the Sales Agreement during calendar 2013.

Nine Months Ended March 31, 2014 Compared to Nine Months Ended March 31, 2013

Revenue. Revenue increased by $6.1 million or 292% due to additional revenue recognized related to development activities for various customers. During the nine months ended March 31, 2014, we recognized approximately $2.6 million of revenue related to a master development and supply agreement, approximately $1.2 million of revenue related to a clinical supply agreement, approximately $0.8 million of revenue related to a customization and commercial supply agreement, approximately $0.8 million of revenue related to a material transfer agreement and approximately $0.4 million of revenue related to other customer agreements. We also we recognized the remaining unamortized revenue of $2.3 million related to our exclusivity agreement with Sanofi. During the nine months ended March 31, 2013, we recognized $2.1 million of revenue related to our exclusivity agreement with Sanofi.

Research and development expenses. Research and development expenses increased by $7.0 million or 46% primarily due to increased payroll costs of $2.7 million, increased research and development share-based compensation expense of $1.7 million and increased material and tooling costs of $1.6 million related to customer programs.

19

Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $2.3 million or 10% primarily due to decreased share-based compensation expense.

Depreciation and amortization expense. Depreciation and amortization expense decreased by $0.9 million or 23% primarily as a result of the disposal of certain pieces of equipment during fiscal 2013.

Interest expense. Interest expense increased by $3.8 million or 205% primarily as a result of additional amounts paid in connection with our equipment financing with Varilease.

Net loss and net loss per share. Net loss during the nine months ended March 31, 2014 and 2013 was $42.6 million and $41.2 million, respectively. Basic and diluted net loss per share was $0.44 and $0.52, respectively, on weighted average shares outstanding of 97,135,688 and 78,830,613. The increase in the weighted average shares outstanding was primarily due to the issuance of common stock in connection with our October 2012 and February 2013 equity financings as well as shares issued under the Sales Agreement during calendar 2013.

Liquidity and Capital Resources

To date, we have funded our operations primarily from a combination of term loans, equity issuances, borrowings under our bank mortgages, and payments from various customers. As of March 31, 2014, cash and cash equivalents were $37.7 million, restricted cash was $2.0 million and our long-term debt was $55.8 million. As of June 30, 2013, cash and cash equivalents were $5.7 million, restricted cash was $2.4 million and our long-term debt was $23.9 million. The $2.0 million of restricted cash relates to amounts that must remain in cash deposits under our loan agreement with Metro Bank.

On March 12, 2014, we entered into the Credit Agreement with an affiliate of OrbiMed Advisors. Under the terms of the credit agreement, the Lender agreed to provide term loans to us in the aggregate principal amount of up to $60.0 million. A first tranche loan of $40.0 million was drawn on the Closing Date and a further two tranches each of $10.0 million have been committed by the Lender and will be funded on each of December 15, 2014 and June 15, 2015, subject to and in accordance with the terms of the Credit Agreement.

During October 2012, we entered into the Sales Agreement, pursuant to which we may, from time to time, issue and sell shares of common stock having an aggregate offering price of up to $45.0 million. During the nine months ended March 31, 2014, we issued 5,012,153 shares of common stock and raised approximately $16.9 million under the Sales Agreement. We are not obligated to make any additional sales of shares under the Sales Agreement. As of March 31, 2014, there was approximately $13.0 million available under the Sales Agreement.

We have incurred losses from operations during the year ended June 30, 2013 and nine months ended March 31, 2014 and anticipate incurring additional losses until such time that we can generate sufficient revenue from the sale, customization or exclusive use and licensing of our proprietary range of injectable drug delivery systems to pharmaceutical and biotechnology customers. We estimate that our cash and cash equivalents of $39.7 million as of March 31, 2014, which includes $2.0 million of restricted cash, together with the cash receipts from customers is sufficient to sustain planned operations through the third quarter of fiscal 2015.

We continue to have discussions with current and prospective customers for many active programs in our commercial pipeline and have executed several agreements featuring a combination of revenue streams, including exclusivity fees, device customization programs and supply contracts that have begun to generate cash payments during fiscal year 2014. We expect to continue to execute agreements and generate additional cash payments during the remainder of fiscal year 2014. Given the substantial size, complexity and long-term duration of many of these prospective agreements, some can take a significant time to negotiate and finalize. The proceeds from the term loans under the Credit Agreement received to date and, subject to the terms of the Credit Agreement, the additional tranches of $10 million each that are available in December 2014 and June 2015 combined with anticipated cash to be generated from new and existing customer agreements are expected to provide us with sufficient liquidity.

The following table summarizes our cash flows during the nine months ended March 31, 2014 and 2013:

	Nine Months Ended March 31,
	2014			2013
	(in thousands)
Net cash provided by (used in):
Operating activities	$	(12,982	)	$	(30,907	)
Investing activities		(3,377	)		(1,931	)
Financing activities		48,234			29,081

Net Cash Used In Operating Activities

Net cash used in operating activities during the nine months ended March 31, 2014 was $13.0 million compared to $30.9 million during the nine months ended March 31, 2013. The decrease in net cash used in operating activities was primarily due to cash receipts from customers which was recorded as deferred revenue.

20

Net Cash Used in Investing Activities

Net cash used in investing activities during the nine months ended March 31, 2014 and 2013 was $3.4 million and $1.9 million respectively. This increase was primarily as a result of costs incurred in connection with the purchase of machinery and related equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the nine months ended March 31, 2014 was $48.2 million compared to $29.1 million during the nine months ended March 31, 2013. During the nine months ended March 31, 2014, we received $40.0 million from our March 2014 term loan, $16.9 million in connection with our public offering of common stock under the Sales Agreement and $2.5 million upon the exercise of stock options. These amounts were partially offset by principal debt payments of $11.1 million. During the nine months ended March 31, 2013, we received $32.2 million in connection with the issuance of common stock and warrants, partially offset by principal debt payments of $3.7 million

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

Certain of our revenues are derived from payments under our exclusive 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 Principal Executive Officer and Principal Financial Officer, with the participation of our management, has evaluated the effectiveness of our disclosure controls and procedures (pursuant to Rule 13a-15(e) and 15d-(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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) and15d-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.

21

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

As previously disclosed, on September 7, 2012, we received a letter from counsel for Talbot (Todd) Smith, a former employee, alleging that Mr. Smith was wrongly terminated. Mr. Smith, who was terminated “for cause” by us, filed a complaint with OSHA in November 2012. We and various third parties have investigated the allegations made by Mr. Smith and have determined that the allegations are without merit. We believe the allegations made by Mr. Smith against us are in retaliation for his “for cause” termination and have been defending ourself vigorously in the OSHA matter. Because OSHA did not make a final determination on Mr. Smith’s complaint within 180 days, Mr. Smith filed a complaint with the USDC on August 30, 2013 and an amended complaint on March 5, 2014. The USDC amended complaint makes the same allegations made by Mr. Smith in the OSHA complaint and also includes a defamation claim. To the extent that the allegations made by Mr. Smith in the USDC complaint are nearly identical to those made in his OSHA complaint, we and various third parties have investigated the allegations previously and have determined that the allegations are without merit, and we will defend ourself vigorously in court. The case is currently in discovery. Given that Mr. Smith filed the complaint with the USDC, OSHA dismissed the OSHA matter without a final determination.

As previously disclosed, on September 30, 2013, Varilease and CCA Financial LLC (collectively, the “Lessors”) filed an action in the State of Michigan in the Circuit Court for the County of Oakland, Case No. 2013-136458-CK seeking a judgment confirming the terms of the lease. We removed the action to the U.S. District Court for the Eastern District of Michigan, Case No. 2:13-CV-14238-SFC-LJM, on October 4, 2013. Under the Lease Agreement, Lessors and us were to negotiate a buyout rate at the end of the two-year lease term, which Lessors represented to us during the lease negotiations would be 15% of the amount financed. When we notified Lessors that we wanted to exercise the buyout of the equipment, Lessors claimed a buyout rate significantly higher than 15%. Under the terms of the lease, if the parties are unable to agree on a buyout rate by the end of the lease term, the lease will automatically renew for an additional 12-month period and we would be responsible for another year of lease payments. Lessors’ action in Michigan state court asked the court to confirm that the parties have been unable to agree on a buyout rate and therefore under the terms of the lease the lease is automatically extended for one year.

As previously disclosed, we also filed suit on September 30, 2013 against Lessors in the U.S. District Court for the Eastern District of Michigan, Case No. 2:13-cv-14174-SFC-LJM alleging, among other things, that Lessors fraudulently induced us into entering the lease by making misrepresentations about the buyout rate. We seek, among things, to have the federal court enforce a 15% buyout rate and to enjoin Lessors from declaring a default under the lease and taking possession of the equipment for which we would have to impair the carrying value of assets. On October 17, 2013, in a stipulated order, the U.S. District Court ordered that we continue to make the same monthly payments under the lease, that as long as we make timely payments, Lessors shall not declare a default, and that Lessors are required to provide advance notice of a default.

As previously reported, we entered into a Confidential Mutual Release and Settlement Agreement (the “Definitive Settlement Agreement”), effective December 30, 2013, with the Lessors. The Definitive Settlement Agreement provides that we will obtain title to all equipment under the equipment lease upon the payment to the Lessors of approximately $4.8 million over the next twelve months. In addition, under the Definitive Settlement Agreement the Company and the Lessors released each other from any and all claims related to the companion lawsuits, as well as dismissed such lawsuits.

On January 8, 2014, we were served with a derivative complaint filed in the Delaware Chancery Court by Cambridge Retirement System, a purported shareholder of the Company, against our Board of Directors to recover allegedly “excessive and wasteful” compensation paid to the non-executive directors since 2010. We believe that these allegations are baseless and without merit given that the we have received favorable say-on-pay votes at the last three annual shareholders meetings and the shareholders previously have voted in favor of the equity grants to the directors, which is required under ASX listing rules, as recently as November 2013. We and the directors are defending ourselves vigorously in this matter and we filed a motion to dismiss in lieu of an answer in February 2014 and expects that the court will hear oral arguments on our motion in June 2014. We do not believe there will be any material impact to us or our business.

22

Item 6. Exhibits

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

Exhibit No.	Description of Exhibit	Included Herewith
10.1*	Credit Agreement, dated as of March 12, 2014, by and between Unilife Medical Solutions, Inc. and ROS Acquisition Offshore LP.		X
10.2*	Royalty Agreement, dated as of March 12, 2014, by and between Royalty Opportunities S.A.R.L. and Unilife Medical Solutions, Inc.		X
10.3	General Security Deed, dated as of March 12, 2014, by Unitract Syringe Pty Limited, Unilife Medical Solutions Limited and Unilife Corporation in favor of ROS Acquisition Offshore LP		X
10.4	Omnibus Waiver and Amendment, dated as of March 12, 2014, by and among Unilife Cross Farm LLC, Unilife Medical Solutions, Inc., Unilife Corporation and Metro Bank.		X
10.5	Separation Agreement and General Release, dated March 18, 2014, by and between Unilife Corporation and R. Richard Wieland II.		X
10.6	Promissory Note, dated as of March 12, 2014, for up to $60,000,000 by Unilife Medical Solutions, Inc. in favor of ROS Acquisition Offshore LP.		X
10.7	Guarantee, dated as of March 12, 2014, by Unilife Corporation, Unilife Cross Farms LLC, Unilife Medical Solutions Limited and Unitract Syringe Pty Limited in favor of ROS Acquisition Offshore LP and Royalty Opportunities S.A.R.L.		X
10.8*	Pledge and Security Agreement, dated as of March 12, 2014, by Unilife Medical Solutions, Inc., Unilife Cross Farms LLC, Unilife Medical Solutions Limited and Unitract Syringe Pty Limited in favor of ROS Acquisition Offshore LP.		X
10.9	Open-End Commercial Mortgage and Security Agreement, dated as of March 12, 2014, by and between Unilife Cross Farms LLC and ROS Acquisition Offshore LP, for itself and as agent for Royalty Opportunities S.A.R.L.		X
31.1	Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer		X
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer		X
32.1	Section 1350 Certification		X
32.2	Section 1350 Certification		X
101.INS	XBRL Instance Document		X
101.SCH	XBRL Taxonomy Extension Schema		X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase		X
101.LAB	XBRL Taxonomy Extension Label Linkbase		X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase		X
101.DEF	XBRL Taxonomy Extension Definition Linkbase		X

* Confidential treatment has been requested for certain provisions of this Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

23

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.

Date: May 12, 2014	UNILIFE CORPORATION
	By:	/s/ Dennis P. Pyers
		Dennis P. Pyers
		Interim Chief Financial Officer (Duly Authorized Officer & Principal Financial Officer)

24